Is Austrian Economics Ideological?
Is Austrian Economics Ideological?
A common critique, if not outright dismissal of Austrian economics, is that it is "ideological." The connotation is that it is not a reliable framework for analysis, but rather a consistently slanted worldview. What is ideological cannot be a science, because it is by definition anything but neutral to the facts.
This critique always struck me as odd considering the history and theorizing of Austrian economics.
Historically Austrian economics was one of several main streams of economic thought that emanated from the marginalist revolution in the 1870s. While Austrian economists prominently took part in or even instigated important debates in economic theory on the viability of socialism, the role and nature of capital, and on business cycles and unemployment, their arguments were taken seriously by economists and social thinkers who had different views.
Consider, for instance, how Oskar Lange, the prominent market socialist, begins his "On the Economic Theory of Socialism":
Socialists have certainly good reason to be grateful to Professor Mises, the great advocatus diaboli of their cause. For it was his powerful challenge that forced the socialists to recognise the importance of an adequate system of economic accounting to guide the allocation of resources in a socialist economy. Even more, it was chiefly due to Professor Mises' challenge that many socialists became aware of the very existence of such a problem.
If Mises's argument that socialism is not economically viable had been simply "ideological," why would Lange refer to it as a "powerful challenge"? He obviously would not, since ideological rhetoric is not an actual argument. There would have been no reason to take it seriously, even less to think of it as a challenge.
As for the theory, I want to address two separate issues. One is that Austrian economic theory is free market economics. Many misunderstand this as an ideological label, but it is in reality only descriptive of the approach. In order to study the real economy, including the impact of regulations, one must first have a theory of the economy qua economy. That is, a theory of how the market, unhampered by those effects that are to be studied, would work.
The other is the nature of Austrian economic theorizing, which was formalized by Mises as praxeology. In stark contrast to modern inductive approaches, but well in line with how economic theorizing has traditionally been approached, Austrian economics is a purely deductive framework. This means that there are only two ways in which the theory can be deemed inaccurate (or ideological): either the starting point, the action axiom, is an ideological rather than true construct, or the logical derivation from it is consistently slanted to produce ideological rather than true theory.
What this means is that those claiming that Austrian economics is ideological should be able to easily show that (and how) this is the case. Either they must argue that (and how) the action axiom—that human action is purposeful—is not an accurate and true representation of the concept but, in fact, an ideological construct. Or they must point out how and where Austrians' reasoning is flawed, and specifically that the logic is abandoned for ideological reasons. Neither has, to my knowledge, been done (or even attempted).
Substantiating critique of a deductive theory is straightforward. Had Austrian economics been an inductive approach, then there would be a million ways Austrians could let their ideological biases slip into the analyses. It would be easier to do and harder to prove. But since this is not the case, and the inductive method in fact is explicitly rejected by Austrians, critics should find it easy to prove their claims.
That they have not done so suggests they are not able to.
A Voluntaryist's Addition to the State Capitalist Tradition
State capitalism is typically viewed as anathema to the voluntaryist tradition. However, there are takeaways from the idea that might prove useful for our tradition. Particularly, I am concerned with our inability to counter certain critiques coming from the “libertarian” left. In this article, I am proposing a new system of governance that would address these critiques.
Well, first let us start with what critiques need discarding. Among those to discard, parents who sell their young into labor and being underpaid or worked overtime. We should not dignify these questions; they detract from one major critique- that our society might empower a business entity to act and serve as a de facto government.
Now if there is no state, there is no rent seeking, and we very frequently point this out to our detractors. However, political ecosystems are organic and that makes self-interest a bending will in anarchy too. So, what is the alternative?
First, imagine there is a charter in the proposed society. A charter is a document that grants rights to the public, to individual constituents of that society. It is essentially a constitution for all intents and purposes. Now, this charter establishes a company. So, a chartered company does not define any limitation or minimum as to its size, but it does establish an unchangeable structure with its board of directors.
This chartered company would be classified as “the government.” It is where the semantics kill, as “the government” would be forbidden from obtaining and exercising police powers, taxation or anything else that implies infringement. It is in essence, a nominal government and placeholder at that. It is a placeholder, to preclude another company from acting as substitute authority and nothing more.
This is important, particularly as it pertains to a lack of power to tax. Why? Not only is taxation theft, but it also means a lack of fiscal responsibility or general merit. If the state can extort to cover its shortcomings, it isn’t incentivized to check itself. So, this problem is averted. This is averted, that matters because "the government" here will be operating like a business.
Why then define “the government” in my proposed system as a chartered company? If it is simply a state without a social contract, that question probably runs through your mind. Easy, it operates as a business does in the way it will sell its services. Think of welfare as a private good that competes with its competition on the market. If it has no power to extort to cover its losses, it must appeal to the consumer.
That is not irrelevant in the system I propose, because there are private businesses all around “the government.” “The government” does not have a monopoly, the way other forms of state capitalism do. So, it is certainly competing inside the marketplace, now it hopes to make a profit. These profits are a substitute for taxation. Profits, not taxation, make sure “the government” stays in-business.So for instance, one of the products that "the government" wants to sell is healthcare. It must do better than Aetna or Blue Cross, that is earn a bigger profit by catering to its audience and double-checking any loose expenses.
Simple enough, right? Aside from establishing “the government,” this charter document establishes a protocol for its own nationalization. Here, nationalization of “the government” means the assumption of direct democratic control over itself. The common public would oversee and operate for each transaction or managerial decision in “the government” by referendum, in other words. The protocol is this- a popular referendum may be called by any citizen, should “the government” fail in keeping its finances from bankruptcy.
This nationalization could only happen at that point. Further, any direct democratic control would be forbidden from changing the terms in the charter document. Purely, it gives them control over its operations and employment but nothing else. It is here, the fun begins as it is not meant to check against power. Rather, it is expected that nationalization could only reinforce a cyclical bankruptcy that empowers a growth of private competitors to outcompete “the government.”
Most important in all of this might be that it gives the “libertarian” leftist a sense of control with which to keep himself comfortable. Further, its "nationalization" protocol ensures that any demand that a state be invented should operate wholly within a controlled paradigm. Because any scandal or failure is easily exploited to that end, it is time that this be planned for.
U.S. Treasury Bailouts Aren’t What They Used to Be
United States citizens are watching a deteriorating tango between banks and the federal government. Bank depositors have been losing confidence in the value of their bank deposits, while credible market signals flag higher concerns about the credit quality of the United States Treasury.
In recent months, credit default swap spreads for Treasury debt have risen significantly. They are based on financial instruments that yield information about the implied probability of default. For the U.S. Treasury, that implied probability remains low, but it has been climbing to recent-record-high levels.
In the latest collection of market information reported at “WorldGovernmentBonds.com,” the United States ranked 16th among 25 countries in terms of the implied probability of default on their sovereign debt. In May 2020, after the market (and credit rating agencies) had begun to digest the implications of the COVID pandemic for economic and government finances, the United States ranked fourth on that list.
Appraisals of the probability, value, and wider implications of future bank bailouts have to consider the decline in confidence in US Treasury credit quality, both in absolute as well as relative terms, in the last few years.
Granted, the recent concerns have been driven in part by a rancorous but possibly temporary debt “ceiling” negotiation process. But these intensified tensions owe no small debt to the real deterioration in the federal government’s financial condition in recent decades.
Can we rely on still-high credit ratings for the US for comfort? Perhaps the wise sages in the credit rating agencies do a good job of “looking through” short-term political considerations in their appraisals of longer-term credit quality. But a careful look at historical experience suggests market signals lead credit ratings, not vice versa. And in the last three years, the distribution of rankings of countries based on the CDS market data did a much better job of anticipating the rankings for current country credit ratings than the three-year-old ratings rankings did in anticipating current rankings on CDS data.
For uninsured bank depositors in a bailout, getting par value may be better than not getting a bailout. But getting paid back “par” value in dollars that aren’t worth what they used to be generates real economic losses – for depositors as well as all of us.
How Much Did They Print?
The story goes something like: In the last few years, the Federal Reserve printed up to 80% of all bills that were ever in circulation. While Austrian economists have long recognized the superfluousness of central banking and understand the benefits of a decentralized monetary system, it's important not to give in to false ideas, even if they appear to support honest ones.
It starts by recognizing the existence of various money supply measures. Perhaps the most shocking is the M1 chart:
In April 2020, the M1 figure stood at $4.79 trillion, then it skyrocketed to $16.24 trillion the following month. To clarify, this surge was primarily a result of the Fed's revised definition of the money supply, without restating the prior amount before May 2020.
This topic was discussed in the article: Why Prices Have Gone Up, published last year. In a Technical Q & A, the Fed explains:
Recognizing savings deposits as a transaction account as of May 2020 will cause a series break in the M1 monetary aggregate. Beginning with the May 2020 observation, M1 will increase by the size of the industry total of savings deposits, which amounted to approximately $11.2 trillion. M2 will remain unchanged.
Meaning, from May 2020 (M1 of $16.24 trillion) to its peak in March 2022 (M1 of $20.66 trillion), the balance sheet grew by approximately $4.42 trillion, representing a growth of nearly 30%. While this may appear significant, it is still far from 80%.
On the same Q & A, the Fed includes a graph illustrating the changes to the M1 money supply, specifically highlighting the revision made in May 2020:
With no revision made to the M2 money supply, it provides a clearer interpretation. Taking the March 2022 peak of $21.70 trillion and going back to February 2020, to coincide with the beginning of the official recession, we have an initial starting point of $15.45 trillion. This two-year period represents an extraordinary increase in the money supply of around 40%. See below:
It may also cause confusion when the term "printed" is used to describe the money supply. The Fed or commercial banks do not physically print dollar bills. Instead, the money supply is increased through the creation of credit (debt), and the production of notes and coins is handled by the Treasury.
Looking at the currency in circulation, which reached its highest point last month at $2.32 trillion, and comparing it to February 2020, when it stood at $1.80 trillion, we see a growth rate of approximately 30%.
In the last several years there has been a significant increase in the money supply. While it’s far from the 80% figure seen on social media, it still appears to be substantial. It’s also important to remember, there is no optimal or ideal amount of money that should be created, and this highlights the inherent flaws of an unsustainable monetary system that has long since drifted away from sound economics.
A few days ago, Frank Shostak reminded us:
Because the present monetary system is fundamentally unstable, there cannot be a “correct” money supply growth rate … Whether the central bank injects money in accordance with economic activity or fixes the money supply growth rate, it continuously destabilizes the system.
However, it ultimately traces back to the Fed. During the same period from 2020 to 2022, the Fed’s balance sheet expanded from approximately $4 trillion to nearly $9 trillion. However, this is $9 trillion too much, and unless the Federal Reserve is completely abolished or prevented from interfering in the free market, we will continue to experience the roller coaster ride known as the boom-and-bust cycle.
The noteworthy headline should read that during the previous recession, the Fed doubled its balance sheet, and if a similar approach is taken in the upcoming recession, then the current high prices of today would pale in comparison to the price inflation that would inevitably follow.
Powell: We Made Mistakes
The formal recession has yet to be declared, and Powell is already offering apologies. Following last week's rate hike amid the ongoing banking turmoil, during the Q & A session, the Fed Chair offered a sort of apology for recent events:
… I've been Chair of the Board for five plus years now, and I fully recognize that we made mistakes. I think we've learned some new things, as well, and we need to do better.
Herein lies just one of the features of the system: it demands expertise to accomplish the impossible, be it an unworkable calculation or striving to obtain unattainable knowledge. Powell and the Fed not only fail to achieve their intended goals but also exacerbate the situation through their meddling in the market.
Given that the problem is inherent to the existence of both the Fed and the fractional reserve banking system, and since a significant part of the issue revolves around customer bank withdrawals, other than lending more money to banks, there are few viable solutions the Fed could do to prevent a banking crisis. Powell doesn’t provide many recommendations beyond apologizing and promising a better future.
He continues to rely on hope as a guide, but his words don’t exude confidence:
So I think that -- I think it's still possible. I -- you know, I think, you know, the case of avoiding a recession is, in my view, more likely than that of having a recession. But it's not -- it's not that the case of having a recession is -- I don't rule that out, either. It's possible that we will have what I hope would be a mild recession.
More hope is offered as a viable alternative to sound economic advice, as seen by the never-ending quest to bring (price) inflation metrics back down to 2 percent. According to the Chair:
We have a goal of getting to 2 percent. We think it's going to take some time. We don't think it'll be a smooth process. And, you know, I think we're going to - - we're going to need to stay at this for a while.
And so, the notion of implementing rate cuts is easily dismissed:
So we -- on the Committee, have a view that inflation is going to come down, not so quickly, but it'll take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates, and we won't cut rates.
Beyond his optimistic forecasts, he also commented on the issue of the debt ceiling, even though it falls outside of his job description:
I would just say this: It's essential that the debt ceiling be raised in a timely way so that the US government can pay all of its bills when they're due.
It’s worth noting that raising the debt ceiling effectively undermines the purpose of having a debt ceiling in the first place, yet this is often overlooked by central planners.
With a new banking crisis almost every week, Powell's optimism about a brighter future seems increasingly disconnected from reality. For now, pursuing the inflation target remains a top priority, so the idea of rate cuts is still not on the table. However, we must keep in mind that priorities can and will change at a moment’s notice. Making an apology this early doesn’t bode well, and we should expect many mistakes and apologies to come.
Seditious Conspiracy Is Not a Real Crime
Last Thursday, Enrique Tarrio, a reputed national leader of the Proud Boys organization was convicted in federal court of seditious conspiracy along with three-co-defendants. This conviction in a District of Columbia court represents a victory for the Justice Department which has now charged more than a thousand people with "crimes" related to the January 6 riot at the US capitol. Most of the charges related to the riot have been for small-time offenses that amount to vandalism and trespassing. A handful of those allegedly involved in the riot, however, have been convicted of seditious conspiracy.
Notably, Tarrio wasn't even in Washington, DC on the day of the riot, and thus could not have engaged in any violent acts against Capitol personnel. Yet, he has nonetheless been convicted on grounds that he was involved in some sort of "agreement" to "hinder" federal laws, and thus is guilty of saying things that allegedly led to the riot. The Tarrio case is an excellent example of how federal "crimes" can be spun by federal prosecutors from actions that are neither violence, nor fraud, nor any other act that a normal person would recognize as a real crime.
Seditious Conspiracy Was Invented to Get Around Limitations on Treason Prosecutions
Seditious conspiracy must not be confused with the act of treason legally defined in the US Constitution, however. Generally speaking, while treason requires an overt act of some kind, seditious conspiracy is a charge that a person has said things designed to undermine government authority. In other words, it is a “crime” of intent as interpreted by state authorities. This is fundamentally different from picking up a weapon and using it against agents of a government.
Of course, as we’ve noted here at mises.org before, the very idea of treason is itself problematic, since it assumes that violence against a government agent is somehow worse than a crime against a private citizen. Governments love this double standard because it reinforces the idea that the regime is more important than the voluntary private sector. Ultimately, however, violence against a person or property should be prosecuted as exactly that, and not as some separate category of crime against the “special” human beings who work for a regime.
Seditious conspiracy suffers from this same problem but is even more problematic because it relies primarily on circumstantial evidence to “prove” that a person was saying things in favor of obstructing or overthrowing a government. Indeed, the supposed necessity of such a “crime” is belied by the fact that no such crime existed even in federal law between the repeal of the hated Alien and Sedition Acts and the advent of the Civil War. Nor did seditious conspiracy laws play an important role in the US regime’s military success against the Southern secessionists.
Instead, what we find is that seditious conspiracy is a crime that is both prone to abuse by state authorities and unnecessary in terms of preventing violence to life and property. In cases such as the January 6 riot, crimes against persons and property ought to simply be considered violent crimes and property crimes of the usual sort. Seditious conspiracy, in contrast, is merely a type of “thought crime.”
The Origins of Seditious Conspiracy
The framers of the Constitution defined treason in very specific and limiting terms:
Treason against the United States, shall consist only in levying War against them, or in adhering to their Enemies, giving them Aid and Comfort. No Person shall be convicted of Treason unless on the testimony of two Witnesses to the same overt Act, or on Confession in open Court.
Note the use of the word “only” to specify that the definition of treason shall not be construed as something more broad than what is in the text. As with much of what we now find in the Bill of Rights, this language stems from fears that the US federal government would indulge in some of the same abuses that had occurred under the English crown, especially in the days of the Stuart monarchs. Kings had often construed “treason” to mean acts, thoughts, and “conspiracies” far beyond the act of actually taking up arms against the state. By contrast, in the US Constitution, the only flexibility given to Congress is in determining the punishment for treason.
Naturally, those who favored greater federal power chafed at these limitations and sought more federal laws that would punish alleged crimes against the state. It only took the Federalists ten years to come up with the Alien and Sedition Acts, which stated:
That if any persons shall unlawfully combine or conspire together, with intent to oppose any measure or measures of the government of the United States, which are or shall be directed by proper authority, or to impede the operation of any law of the United States, or to intimidate or prevent any person holding a place or office in or under the government of the United States, from undertaking, performing or executing his trust or duty, and if any person or persons, with intent as aforesaid, shall counsel, advise or attempt to procure any insurrection, riot, unlawful assembly, or combination, whether such conspiracy, threatening, counsel, advice, or attempt shall have the proposed effect or not, he or they shall be deemed guilty of a high misdemeanor.
Note the references to “intent,” “counsel,” and “advise” as criminal acts so long as these types of speech are employed in a presumed effort to obstruct government officials. This part of the act, however, was never used by the regime. Those prosecuted under the Alien and Sedition Acts were charged under the section on seditious libel, which was heartily opposed for being obviously and blatantly against basic rights of free expression. Nonetheless, the Sedition Act was allowed to expire, thanks to the election of Thomas Jefferson and the Republicans (later known as Democrats).
For sixty years, the United States government had no laws addressing sedition on the books. But the heart of the 1798 Sedition Act would be revived. As passed on July 1861, the new Seditious Conspiracy statute stated
that if two or more persons within any State or Territory of the United States shall conspire together to overthrow, or to put down, or to destroy by force, the Government of the United States, or to oppose by force the authority of the Government of the United States; or by force to prevent, hinder, or delay the execution of any law of the United States; or by force to seize, take, or possess any property of the United States against the will or contrary to the authority of the United States; or by force, or intimidation, or threat to prevent any person from accepting or holding any office, or trust, or place of confidence, under the United States. . . . Shall be guilty of a high crime.
Given the timing of the legislation—i.e., in 1861, following the secession of several Southern states—it is assumed that the legislation originated to address alleged Confederate treason. This is not quite the case. The legislation did enjoy considerable support from those who were especially militant in their opposition to the Confederacy. For example, Rep. Clement Vallandigham of Ohio—who would later be exiled to the Confederacy for opposing the war—supported the bill precisely because he thought it would help punish those engaged in “conspiracies to resist the fugitive slave law.” But the Congress had initially become serious about punishing “conspiracies” not in response to Southern secession, but in response to John Brown’s 1859 raid at Harper’s Ferry.
Southern secession and fears of rebellion helped enlarge the coalition in favor of a new sedition law. The new sedition law represented a significant expansion of the idea of “crimes against the state” in that the sedition law did not require overt acts against the government, but merely “conspiring,” vaguely defined. Stephen Douglas understood this perfectly well, explaining the benefits of his bill as such:
You must punish the conspiracy, the combination with intent to do the act, and then you will suppress it in advance. There is no principle more familiar to the legal profession than that whenever it is proper to declare an act to be a crime, it is proper to punish a conspiracy or combination with intent to perpetrate the act. . . . If it be unlawful and illegal to invade a State, and run off fugitive slaves, why not make it unlawful to form conspiracies and combinations in the several States with intent to do the act?
Others were more suspicious of expanding federal power in this way, however. Sen. Lazarus Powell and eight other Democrats presented a statement opposing the passage of the bill. Specifically, Powell and his allies believed the new seditious conspiracy law would be a de facto move in the direction of allowing the federal government to effectively expand the definition of treason offered by the federal constitution. The statement read:
The creation of an offense, resting in intention alone, without overt act, would render nugatory the provision last quoted, [i.e., the treason definition in the Constitution] and the door would be opened for those similar oppressions and cruelties which, under the excitement of political struggles, have so often disgraced the past history of the world.
Even worse, the new legislation would provide to the federal government “the utmost latitude to prosecutions founded on personal enmity and political animosity and the suspicions as to intention which they inevitably engender.”
Seditious conspiracy legislation gives the federal government far greater leeway to punish political opponents. Certainly, such legislation could have been used against opponents of the fugitive slave acts, as well as against opponents of federal conscription. After all, opponents of both the Civil War draft and the Vietnam War draft “conspired” to destroy government property—as with the heroic draft-card burnings of the Catonsville Nine, for example. It would be far harder to prove in court that such acts constituted treason. Unfortunately, the new legislation was ultimately approved in 1861, and the United States government had its first permanent laws against seditious conspiracy.
We now have the same reasons to fear seditious conspiracy laws as Powell did in 1861. Such measures allow the federal government to construct laws addressing intent, thoughts, and words, rather than overt acts. This greatly expands federal power and allows for prosecution of mere inflammatory rhetoric against the federal government.
As a practical matter, seditious conspiracy laws are simply unnecessary. A commonsense foundation for addressing violence in the Capitol building would be to simply prosecute those who engaged in actual violence and trespass. It is clear, however, that gaining convictions for seditious conspiracy has been an important goal for the administration because it furthers the narrative that Donald Trump’s supporters attempted some sort of coup.
Unfortunately, these sorts of political prosecutions are just the sort of thing we’ve come to expect from the Justice Department. The FBI can’t be bothered with investigating sex criminals such as Larry Nassar, but they’ll pull out all the stops to prosecute hundreds of those who entered the Capitol on January 6, many of whom simply stood around gawking at the scenery. But when Congress gives the FBI a near carte blanche, as it has done with seditious conspiracy laws, we should expect as much.
Another Week, Another Crisis
To no one’s surprise, there was another banking crisis over the weekend. The Federal Reserve and other large institutions stepped in to allegedly save the day, in what could be considered a highly accretive investment for some very wealthy individuals. As CNBC explains:
JPMorgan acquired all of First Republic’s deposits and a “substantial majority of assets.”
…and that was Monday.
Two days later the Fed raised rates again, moving the target federal funds rate into the 5 to 5 1/4 percent range. With the rise in the Fed's fund rate, America’s central bank will lose even more money as it also increased the interest rate paid on the nearly $3 trillion reserve balance. As explained:
The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 5.15 percent, effective May 4, 2023.
They didn’t have to do this. Just one day prior the Fed was paying 4.90% to banks. Surely if the Fed decided to keep this rate at 4.90% rather than 5.15%, the banking system could hardly be said to be worse off, and it would save the Fed a few billion dollars over the course of a year. Not only did this not happen but it will only further the $52 billion remittances due to the Treasury.
One would think interest rates this high would be great for the banking sector. Yet, CNBC reminds us this was the third banking failure since March, and given the trajectory, there will be more failures to come.
Take a moment to consider the current state of the economy: There is a national debt of $31.7 billion with interest rates higher than few could ever imagine. The Fed is taking losses each week paying more interest out to banks than interest earned from the public. On top of that, war drums in DC are getting louder while the role of the US dollar in international trade is getting smaller. No one has time to consider longer-term issues, which the Wall Street Journal noted last year, such as the $100 trillion in unfunded liabilities that must be paid eventually.
Yet talk of the debt ceiling continues to dominate headlines. Paul Krugman extols the virtues of the $1 trillion platinum coin, per Business Insider:
But as I said, people who really should know better constantly get this wrong, and imagine that the coin would be inflationary.
According to the Nobel Laureate, this monetary inflation would be neutralized if the Fed simply sold $1 trillion of its US Government bond holdings. Of course, the question to follow is: To whom and at what price?
Given that the Fed’s scheduled $60 billion roll off of US Treasuries per month has taken financial markets to the brink of extinction, the act of selling $1 trillion in bonds becomes next to impossible.
If that wasn’t enough to show the current state of affairs:
On Monday, Treasury Secretary Janet Yellen said the government could run out of money and trigger an economic crisis as soon as June 1.
It seems the only person with something good to say this week was Fed Chair Jerome Powell, who opened Wednesday’s press conference with unbelievably great news:
Conditions in that sector have broadly improved since early March, and the U.S banking system is sound and resilient. We will continue to monitor conditions in this sector. We are committed to learning the right lessons from this episode and will work to prevent events like these from happening again.
Between Powell, Yellen, Krugman, and the Austrian Business Cycle playing out right before our very eyes, the only certainty is that not all is well, and that the U.S. banking system is not sound and resilient. This week’s bailout will not be the last. And by the time you read this article, another banking bailout will already be in the works!
The Most Important Factor in The Economy Is Flashing A Huge Warning Sign
Since money is used in all transactions, including investments in physical goods and financial instruments, the supply of money is extremely important to the economy and financial markets.
Accelerating money supply growth typically leads to stronger economic activity and higher prices, while decelerating money supply growth (or decline) typically leads to weaker economic activity and lower prices.
However, the impact of changes in the money supply are always temporary. For example, if accelerating money supply growth always leads to a “stronger economy”, then why not always accelerate money supply growth? The short answer is because there is no such thing as a free lunch in economics.
As Ludwig von Mises, one of the greatest economists and monetary theorists in history noted about the mythical economic benefits of creating money out of thin air:
“If it were really possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world.”
And not only does creating money out of thin air not improve living standards, but it actually lowers living standards. This is because it causes the boom and bust business cycle, which wastes scarce resources that were used in failed investment projects undertaken due to artificially low interest rates.
Mises developed this Austrian Business Cycle Theory. As he summarized the problem caused by money creation out of thin air:
“The wavelike movement effecting the economic system, the recurrence of periods of boom which are followed by periods of depression is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion.”
Money Supply Is Now Falling Rapidly
As a result of the huge rise in interest rates over the past year or so, money supply growth is now falling at one of the fastest rates in history.
The best measure of money, called Austrian Money Supply (“AMS”), was down 9.7% year-over-year in March, the largest decline in over 35 years of available data, as shown below.
The next chart shows M2 money supply is down 4.1% year-over-year, the largest decline since the Great Depression, when M2 fell over 10%. Let me repeat that. M2 money supply is falling at the fastest rate since the GREAT DEPRESSION of the 1930s!
Source: thechartstore.com
With short-term interest rates on Treasury bills and money market funds now much higher than on bank deposits, many people have been pulling their money out of banks and investing it in Treasury bills and money market funds. As a result, bank deposits are now falling 5.4% year-over-year, the fastest decline in nearly five decades, as shown below.
In order to protect their balance sheets and limit their risk in the face of declining deposits and a coming recession, banks have cut way back on lending. The result is bank credit is now only growing 2.3%, the slowest pace in nearly 50 years, outside of the Great Recession, as shown below.
Implications Of Falling Money Supply
Money supply growth is the primary driver of the boom-and-bust business cycle and financial markets. With money supply now declining at one of the fastest rates since the Great Depression and the yield curve the most inverted in over 40 years following the steepest pace of Fed tightening since the early 1980s recessions, I believe there is an extremely high risk of a major recession coming this year, if it hasn’t already started. Forewarned is forearmed.
The Biden Administration Keeps Lying about US Government Defaults
If you have an actual life and important things to do, you probably haven't been paying attention to the latest debt-ceiling theater now going on in Congress. Congress is indeed at it again, however, and the leadership from the GOP and the Democrats are fighting over how federal tax dollars will be spent over the next year. Until an agreement is reached, the GOP leadership is refusing to sign off on any increase to the debt ceiling which permits the federal government to add to its 30-trillion-plus debt and keep the federal government humming using its usual debt-financed tricks.
In an effort to get the debt-ceiling increase sailing through without any opposition, the Biden administration in recent years has repeatedly claimed that the United States government has never ever defaulted. Janet Yellen has made this claim several times. For example, in a 2021 column for the Wall Street Journal, she repeatedly claims the US has never defaulted. “The US has always paid its bills on time,” she insists, and then repeats the claim in the next paragraph: “The US has never defaulted. Not once.”
Biden's handlers are still at it. On Tuesday, the Biden administration tweeted that
America is not a deadbeat nation. ... We have never, ever failed to pay our debt. But MAGA Republicans are engaged in reckless hostage-taking by threatening to force America into default. It’s dangerous and wrong
America is not a deadbeat nation.
— Joe Biden (@JoeBiden) May 3, 2023
We have never, ever failed to pay our debt. But MAGA Republicans are engaged in reckless hostage-taking by threatening to force America into default. It’s dangerous and wrong.
This is a lie, whether Yellen says it or Biden says it. Here at mises.org, we've published several articles on this topic. Here are two of them:
- Link: A Short History of US Credit Defaults by John S. Chamberlain (July 2011)
- link: Yes, the US Government Has Defaulted Before by Ryan McMaken (February 2023)
These articles outline how the US government in the early years of the new federal government, and then again during the US Civil War, when the government refused to make good on its promises to repay its notes in gold. Further defaults followed, with the largest being the 1934 default on liberty bonds. The US had explicitly promised to pay back its debts in gold. It then refused to do so. Fortunately, the word is getting out. Shortly after the Biden administration posted its tweet lying about US defaults, Twitter users used the "community notes" feature to add additional context to the post.
_-_49415700288.jpg){kind=link}
As you can see, the added context contains a link to Chamberlain's article: This has produced tens of thousands of visitors to the article.
Moreover, another one of the articles posted is written by our own Senior Fellow Alex Pollock, and published in The Hill. Pollock adds two additional defaults: the time the US refused to make good on its silver certificates in 1968, and when Nixon closed the gold window in 1971, refusing to make good on its gold obligations under the Bretton Woods agreement.
These are all excellent examples of how the US cheats its creditors, and it's time for agents of the regime to stop pretending that the US government is not a "deadbeat" government.
The Fed's Difficult Position Is Its Own Fault
Fed officials are meeting today to discuss the central bank’s next course of action amidst bank failures and persistent inflation. The financial press is busy pumping out articles lamenting the tough position Fed officials find themselves in as they debate another rate hike. That’s true, it is a tough position. But the blame for that lies squarely on the Fed’s own shoulders.
This often goes unsaid because the way people think about central banking is wrong. Most seem to imagine the national economy as a hot air balloon trying to get from point A to point B. The Fed is like the pilot whose job is to keep the balloon stable and at a safe altitude. When conditions demand it, the pilot can either blow hot air into the balloon (monetary expansion) or vent the hot air out (monetary contraction) to increase or decrease buoyancy. If the Fed does its job well, the economy would be guided gently along with occasional monetary interventions to account for economic fluctuations—just as the balloon pilot gently corrects for changing atmospheric conditions.
The quest for a “soft landing” makes sense in this view. The “balloon” climbed too high (inflation), and venting hot air (rate hikes) has yet to bring the balloon back down to the target altitude (2% inflation). But continuing to vent air risks sending the balloon into an unrecoverable descent to the ground (recession). The analogy seems to work well because we’re inundated with central bank discourse that uses this framing. But the framing is wrong. The Fed is not a gentle guide keeping the economy stable; it’s the culprit behind the inflation and imminent recession we’re now forced to deal with.
Recessions don’t come out of the blue. They have a cause—malinvestment encouraged by central bank credit expansion. Artificially low interest rates send a false signal to investors and producers to start, or continue, producing things that either customers don’t actually want—at least not in the quantity now being produced—and/or are unable to be completed with available resources. At some point, often when rates come back up, the precarious nature of these production lines becomes impossible to ignore, and a painful period of correction takes place. That’s a recession.
So we can see the problem with the typical framing of the Fed’s situation. Besides falsely identifying the Fed as an essential part of the economy, it presents a recession as possible to avoid. Not only is it impossible to avoid, it was the Fed who caused it. They may still have room to delay the correction, but the malinvestment that needs correcting is already here.
A better analogy than the hot air balloon would be a false shortcut. Imagine you’re running on a trail in the woods. Say it’s the second half of a trail marathon. You’re exhausted and desperate to get to the finish line when you round a corner and see a steep hill up ahead that seems to go up forever. You stop, devastated. You don’t feel like you have the energy to get to the top, much less all the way to the finish. Then out pops a Race Official. He says he can tell you’re exhausted and points excitedly to a small trail to the left of the hill. He explains that it’s a shortcut that avoids the hill. You don’t believe him. A shortcut? In a race? That can’t be allowed. But he insists. He is an official, after all. This shortcut isn’t just allowed, he says, it’s encouraged.
He’s persistent, and eventually, you’re convinced. You start down the trail and immediately feel much better. It’s shady and has a slight downhill. Your pace increases, you stand taller, and you feel more energized. But above all, you feel grateful that the Race Official happened to find you at the base of that hill. However, what you don’t know yet but will eventually figure out is that you were fooled. There is no shortcut. You’re running off course. Every step you take brings you further and further from your goal. At some point, you will need to recognize this, turn around, and run all the way back up to the base of the first big hill you were misled into thinking you could skip. And because you’re now running downhill and every mile you run not only doesn’t count towards your race but will need to be re-run just to get back to where you initially went off course, correcting your mistake will be extremely painful. But it’s necessary. And the longer you refuse to face that, the worse the eventual correction will be.
Now imagine you realize your mistake. You turn around and start your painful climb back up to the trail when, again, out jumps the Race Official. He reassures you that you’re on the right path and should continue down this trail. The climb is painful, so you’re inclined to believe him. You keep on down the trail, occasionally turning around when your doubts return, only to have the Race Official again usher you back down his false shortcut.
By now, I hope it’s obvious what this analogy represents. The hill is the economic pain made inevitable by the lockdowns in 2020 and 2021. The Race Official is the Fed, and the false shortcut is the artificial boom and malinvestment caused by the $7 trillion created out of thin air and injected into the credit markets. I hope it’s also clear that the worst thing you, as the runner, could do would be to continue seeing the Race Official as a helpful guide. Correcting for malinvestment is always painful. But ignoring or aggravating it is worse.
We’re running off course. Don’t have pity for the people who got us here. And certainly don’t look to them to get us out.
First Republic Count Down
Citizens Financial Group Inc (CFG.N), PNC Financial Services Group (PNC.N), JPMorgan Chase & Co (JPM.N) and US Bancorp in NFL Draft parlance are “on the clock.” These banking white knights are thought to be among the bidders vying for the remaining carcass of First Republic Bank in an auction process being run by the Federal Deposit Insurance Corp, reports Reuters.
Reuters says, “A deal is expected to be announced on Sunday night before Asian markets open, with the regulator likely to say at the same time that it had seized the lender, three of the sources said. Bids are due by Sunday noon, one of the sources said.”
“Unclear to some involved in the process is whether regulators might use a bid for a so-called open-market solution that avoids formally declaring First Republic a failure and seizing it,” Bloomberg reports.
Bank analyst Chris Whalen tweets the hard facts. “Hello. Bid is zero with a loss share agreement @FDICgov Haircut loan book 15%. Equity number is negative…”
Yes, the taxpayers will be the unwitting holders of First Republic’s bad assets, while one of the FDIC’s favored bidders gets the good stuff at a discount. Jamie Dimon’s J.P. Morgan already has ten percent of the nation’s deposits making that bank ineligible to pick up First Republic but don’t be surprised if Jamie receives a “special government waiver” if he submits the winning bid.
Mr. Dimon has been viewed as the fair haired banker for decades. Ex-FDIC Chair Sheila Bair, in her book Bull By The Horns, called Dimon “deeply experienced” and related a story when she served on a panel with Bill Clinton and Dimon with the JP Morgan CEO calling the FDIC “creditworthy” and “would be happy to lend [the FDIC] money anytime.” Writing about the WaMu failure Bair said, “If Chase had not acted, the FDIC would have suffered tens of billions of dollars in losses.” The FDIC remembers.
James "Jim" Herbert founded First Republic in 1985. Merrill Lynch acquired the bank in 2007, but after Merrill was purchased by Bank of America in the throes of the great financial crisis, BoA sold First Republic and the bank blossomed by luring high-net-worth customers with preferential rates on mortgages and loans. What came with those low loan rate products was uninsured deposits amounting to 68% of the bank’s total deposits.
As was the case with Silicon Valley Bank, First Republic saw more than $100 billion in deposits fleeing in the first quarter, leaving it scrambling to raise money.
Mr. Dimon’s bank, PNC and 9 other big banks made a 120-day deposit at FRC totaling $30 billion in March. It’s unclear if that deposit is insured (why should they be insured? Asks ZeroHedge), uninsured or could be converted into equity as a part of a bailout. This writer can’t believe Mr. Dimon would put up that kind of money uninsured.
Former Treasury Secretary Lawrence Summers told Bloomberg Friday that he was “surprised and disappointed that this situation has continued to linger as long as it has.”
Sounding almost Rothbardian, Summers said “These are things like forest fires, it is much easier to prevent them than it is to contain them after they start to spread.”
Now First Republic is a political football: cover all the deposits or not. Jim Bianco tweets,
Don't bailout the uninsured depositors (who are also uninsured creditors) and most likely they take a loss. Yes, the 11 banks will lose, but so will any other uninsured depositor.
If so, sit back and watch 41% of the US deposit base that is not insured (mainly businesses with deposits greater than $250k) try and get their deposits out of their “not-too-big-to-fail” bank and into one that is too-big-to-fail. Chaos in banking because Yellen reneged about protecting uninsured depositors 5 weeks after her promise to protect them.”
"If no business firm can be insured," Murray Rothbard wrote,
then an industry consisting of hundreds of insolvent firms is surely the last institution about which anyone can mention "insurance" with a straight face. "Deposit insurance" is simply a fraudulent racket, and a cruel one at that, since it may plunder the life savings and the money stock of the entire public.
If Jamie Dimon wants the First Republic, he’ll get it, on his terms. And the fraudulent racket will continue.