The Cost of Lockdowns in Human Health and Human Lives Is Becoming Increasingly Clear

The Cost of Lockdowns in Human Health and Human Lives Is Becoming Increasingly Clear

05/27/2020Ryan McMaken

Listen to the Audio Mises Wire version of this article.

The cost of destroying the economy in the name of saving lives from COVID-19 is becoming increasingly apparent, and the details of just how costly the "lockdown" strategy will be for countless human beings continue to emerge.

In the past, we've examined the long-term cost of unemployment on mental health, physical health, and long-term earnings. In short: unemployment kills.

Stay-at-home orders and other sorts of police-enforced social distancing create conditions that lead to more child abuse, domestic abuse, suicide, drug abuse, and even stress-related death through ailments like heart disease.

Consequently, the shortsighted efforts at locking down entire populations by biologists, epidemiologists, and other "experts"—who apparently have little or no knowledge at all about the physical, social, and psychological effects of wealth destruction on human beings—have set the stage for the impoverishment of millions in the United States alone. (The effects in the developing world will be far worse.)

On Monday, for example, physician Scott W. Atlas and economists John R. Birge, Ralph L. Keeney, and Alexander Lipton noted in The Hill that efforts to brand the downside of shutdowns as purely economic problems gravely misinterpret the reality of wealth destruction. The authors write:

The policies have created the greatest global economic disruption in history, with trillions of dollars of lost economic output. These financial losses have been falsely portrayed as purely economic. To the contrary, using numerous National Institutes of Health Public Access publications, Centers for Disease Control and Prevention (CDC) and Bureau of Labor Statistics data, and various actuarial tables, we calculate that these policies will cause devastating non-economic consequences that will total millions of accumulated years of life lost in the United States, far beyond what the virus itself has caused.

Statistically, every $10 million to $24 million lost in U.S. incomes results in one additional death. One portion of this effect is through unemployment, which leads to an average increase in mortality of at least 60 percent. That translates into 7,200 lives lost per month among the 36 million newly unemployed Americans, over 40 percent of whom are not expected to regain their jobs. In addition, many small business owners are near financial collapse, creating lost wealth that results in mortality increases of 50 percent. With an average estimate of one additional lost life per $17 million income loss, that would translate to 65,000 lives lost in the U.S. for each month because of the economic shutdown.

In addition to lives lost because of lost income, lives also are lost due to delayed or foregone health care imposed by the shutdown and the fear it creates among patients. From personal communications with neurosurgery colleagues, about half of their patients have not appeared for treatment of disease which, left untreated, risks brain hemorrhage, paralysis or death.

Similarly, the New York Post reported yesterday that chemist Michael Levitt has concluded that the lockdowns saved no lives at all:

“I think lockdown saved no lives. I think it may have cost lives,” Levitt, who is not an epidemiologist, told the publication.

“There is no doubt that you can stop an epidemic with lockdown, but it’s a very blunt and very medieval weapon and the epidemic could have been stopped just as effectively with other sensible measures (such as masks and other forms of social distancing),” he added.

Levitt attributed the additional lives lost to other dangers from the fallout of the lockdowns, such as domestic abuse and fewer people seeking health care for ailments other than the virus.

“It will have saved a few road accident lives, things like that, but social damage—domestic abuse, divorces, alcoholism—has been extreme. And then you have those who were not treated for other conditions,” Levitt told the newspaper.

Supporters of lockdowns may be quick to claim that these commentators are not epidemiologists. Yet the epidemiologists—at least the ones at the "official" government offices—have shown little insight in recent months. Their models have consistently been wrong. Nor do the epidemiologists appear to have any idea of the lethality of the COVID-19 virus. After insisting for months that the virus was perhaps more than ten times as deadly as the flu, the CDC has now slashed the fatality rate to a mere fraction of previous estimates. The epidemiologists' only tool has been to order healthy people to stay home, even as demand at food banks triples as families queue in order to avoid starvation.

Now, Anthony Fauci, who in April was insisting that it would be impossible to even relax stay-at-home orders until there is a vaccine or until there are "no new cases, no deaths for a period of time," has totally abandoned this position. Fauci now admits that his "lockdown until vaccine" position would cause irreparable damage:

We can't stay locked down for such a considerable period of time that you might do irreparable damage and have unintended consequences including consequences for health. And it's for that reason why the guidelines are being put forth so that the states and the cities can start to reenter and reopen.

Of course, anyone who deals in interacting with the real world (i.e., not lifelong bureaucrats like Fauci, who needs not exhibit any actual competence to collect his $400,000 paycheck) always understands that preserving and augmenting wealth is key in enhancing health and the quality of life.

Not surprisingly, this has already been seen in the empirical evidence. As M. Harvey Brenner has noted in the International Journal of Epidemiology,

the large and growing literature on unemployment and health is highly consistent in demonstrating elevated morbidity and mortality associated with unemployment and withdrawal from the labour force….Economic growth, cumulatively over at least a decade, is the central factor in mortality rate decline in the US over the 20th century. (emphasis added)

In other words, to reduce mortality, we need to protect the creation and preservation of wealth. Bureaucrats and social democrats may sneer that this puts GDP growth before saving lives, but the reality is that economic growth translates into saving lives. The lockdown advocates may refuse to admit this, but the evidence is abundant.

Image source:
When commenting, please post a concise, civil, and informative comment. Full comment policy here

Prepare for What’s Coming

07/03/2022Robert Aro

In 1944 Mises wrote: Omnipotent Government: The Rise of Total State and Total War. He provided a first-hand account of the horrors of government, something America’s founding fathers were familiar with all too well.

How bad it will get does not have an easy answer. It depends on the time frame, context being highly subjective. The freedom-liberty crowd  prepares with home security, firearms safety training, purchasing hard assets, buying the dip, homesteading etc. Rather than write a prescriptive list of ways to prepare for the potential outcomes, it may be more fruitful to explain the trajectory of things to come under global socialism and the anti-capitalist central banking system.

News headlines prepare us for what’s ahead. On Wednesday, Reuters reported subtle, but grim news from the latest European Central Bank meeting:

The era of ultra low inflation that preceded the pandemic is unlikely to return and central banks need to adjust to significantly higher price growth expectations…

Price and monetary inflation are within control of central banks and world governments. Stop increasing the money supply and this “inflation problem” would correct itself. Yet that is not on anyone’s agenda. When they say the unpreceded “era of ultra low inflation” is coming to an end, we should assume this means forever. 

From the same European forum, Fox News reported a quote of Federal Reserve Chair Jerome Powell admitting:

I think we now understand better how little we understand about inflation… No, honestly, this was unpredictable.

Further:

The U.S. economy is actually in pretty good shape.

Quite outlandish, especially with headlines two weeks ago from media outlets like Newsweek reporting:

The U.S. is Already in Recession—If The Atlanta Fed Is Right

How to prepare is up to each individual. The certainty ahead lies in the motivation of our central planners, who, whether pretending to not understand, or are intentionally being deceptive, the outcome will be the same.

Whether inflation lowers to 2%, or stays elevated, nothing changes. They have a definite play book they will stick to until the bitter end.

Should CPI or PCE inflation miraculously reach 2%, the Fed will use this opportunity to expand the balance sheet once a recession or market crash hits. Should inflation readings never get this low, a new narrative will be used, perhaps that we’re in a recession so they must stimulate the economy no matter the cost.

Economic truth, the long-run, or the “good of society” doesn’t matter to the central planner. They are too well insulated to be significantly impacted by any of their decisions. The path of the Fed’s balance sheet, US debt, money supply, and prices can only increase with time. Despite new highs in the stock and housing market, society will be worse off than the years prior. As time moves forward, dollar purchasing power will weaken.

Central banks/governments have been destroying purchasing power, currency debasement, for as long as they’ve been in existence. It’s not new, nor inventive. The recurring pattern of destruction is evidenced throughout all of history.

We can hope for a better tomorrow; however, it won’t be possible as long as the Federal Reserve exists. Either society must step up to stop the Fed, or one day, there will no longer be a society.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Croatia May Become the 20th Member of the Eurozone in 2023: What Does this Mean to the Euro?

06/30/2022André Marques

The European Central Bank (ECB) informed, in June, that Croatia fulfills the requirements and can join the euro on January 1st, 2023. If this happens, Croatia will be the 20th member of the European Union (EU) to be part of the single currency.

The European Commission also recommended Croatia's entry into the eurozone to the Council, stating that the country meets the conditions to do so. Plus, the Eurogroup recommended Croatia’s adhesion to the euro as well.

The European commission also stated that

…the Council [Ecofin] will take the final decisions on Croatia’s adoption of the euro in the first half of July, after discussions in the Eurogroup and the European Council, and after the European Parliament and the European Central Bank have delivered their opinions.

According to the ECB's assessment, Croatia fulfills the convergence criteria (price stability, budget deficit and public debt to GDP ratios, exchange rate and long-term interest rate) and its legislation fully complies with the requirements of the Treaty on the Functioning of the European Union and the statutes of the European System of Central Banks and the ECB:

Price Stability:

In April 2022, the 12-month average rate of consumer price inflation by the Harmonized Index of Consumer Prices (HICP) was 4.7 percent in Croatia, below the reference value of 4.9 percent. However, considering the 10.7 percent annual consumer price inflation for Croatia in May, the ECB stated that the sustainability of inflation convergence in Croatia in the long run is a concern.

Budget Deficit and Public Debt to GDP Ratios:

Croatia's public deficit at the end of 2021 was just below the 3 percent of GDP reference value, while public debt was above the 60 percent of GDP reference value (but it was lower than in the previous year). The budget deficit was 2.9 percent of GDP in 2021, which meets the deficit criteria. The public debt was 79.8 percent of GDP in 2021, which represents a reduction from the maximum value of 87 percent of GDP recorded in 2020.

Exchange rate:

The Croatian kuna was included in the ERM II on July 10th, 2020 at a central rate of 7.53450 kuna per euro with a normal fluctuation band of ±15 percent. In the two-year reference period (May 26th,2020 to May 25th, 2022), the kuna exchange rate had a lower degree of volatility and the currency traded close to its central rate.

Long-Term Interest Rate:

In the reference period from May 2021 to April 2022, long-term interest rates in Croatia averaged 0.8 percent (below the reference value of 2.6 percent for the interest rate convergence criteria). Long-term interest rates in Croatia have fallen since 2012, with the 12-month average rates falling from a value slightly below seven percent to a value below 1 percent.

In addition to Croatia, there are six countries that have not yet joined the euro but should do so once the requirements are met: Bulgaria, the Czech Republic, Hungary, Poland, Romania, and Sweden.

The ECB concludes that only Croatia and Sweden meet the price stability criteria. And all other EU members mentioned above meet the public finances (budget deficit and public debt to GDP) criteria, with the exception of Romania, which is currently the only member subject to an excessive deficit procedure (Romania's budget deficit was 7.1 percent of GDP at the end of 2021, while Croatia's was 2.9 percent of GDP).

According to the ECB's assessment, Bulgaria and Croatia meet the exchange rate criteria. The long-term interest rate criterion is met by Bulgaria, Croatia, the Czech Republic and Sweden.

What Can Joining the Euro Mean for Croatia and the Rest of the Eurozone?

As Philipp Bagus explained in The Tragedy of the Euro, the mechanism behind the euro produces an incentive for its members to get into debt over time. Yes, there are periods when most countries decrease their indebtedness (albeit very slowly). But eventually they increase it to an even higher level (so, in the long run, indebtedness increases).

At first, Croatia's adhesion to the euro should be beneficial to the country's inhabitants, as the euro is stronger than the kuna (1 euro has fluctuated between 7.1 and 7.7 kuna since 2004). If Croatia joins the euro, its inhabitants will have greater purchasing power than they do today, even though the euro is devaluing at a greater intensity, leading to the highest consumer price inflation in the history of the euro. Croatians will be able to import more (and better quality) goods. And long-term investments will be more possible than they were with kuna. This can improve the standard of living of Croatia's inhabitants.

On the other hand, joining the euro can also bring problems. Like other eurozone governments, Croatia's government may become larger (increase its spending and indebtedness) over time. It may increase intensely (as happened with Portugal, Spain, Italy and Greece) or at a lower intensity (as in Germany and Luxembourg, which despite being countries with more frugal governments, their indebtedness increased in the long run).

In any case, it is likely that, by joining the euro, Croatia will increase its indebtedness (which means that the government will absorb more resources from society, decreasing the productive investments in the country). Furthermore, if Croatia goes down the higher debt path, it will be yet another major source of debt issuance that the ECB should eventually buy (yes, the ECB announced it will cease its Asset Purchase Program in July, but this halt will hardly be permanent). If this happens, Croatia's indebtedness would be another major source of inflation for the euro, further decreasing its purchasing power over time. Everything will depend on how the Croatian government behaves in the years following its adhesion to the euro.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Is Joe Biden the Future or the End of the Democratic Party?

For reasons familiar to any economist, American politics is a permanent duopoly in which neither party can gain a sustainable long-term advantage over the other, but that does not suggest or imply that neither party can collapse; it only implies that any collapsing party will soon be replaced. As we know, American parties come and go – not often, but not never either. The Federalists gave us several presidents, but they vanished; the Whigs the same; are the Democrats next?

Let’s begin by dismissing the most obvious objection: The Democratic Party is too old to disappear. If I told you that my one-hundred-year-old grandma hadn’t died in a century, and, therefore, she won’t die this year, would you believe me or marvel at my stupidity? Let’s face it: the death of the Democratic Party is overdue, so its age, if anything, works against it.

Now, let’s talk about the warning signs. If you were dying, would your base be shrinking geographically or growing? Well, do the Democrats rule – to the extent they rule – by relying on a handful of cities or are they geographically diversified? Is that trend accelerating or slowing down? Is their strength amongst Latinos growing or shrinking? How about Asians? How about African-Americans? Trying to find a group – any group – in which the Democrats are growing is pretty difficult; they win – to the extent they win – by squeezing more and more out of their diminishing base. It’s not like they’re doing better amongst African-American voters; instead, they’ve got to turn out more African-Americans to offset their declining margins, and that’s not a sustainable strategy over the long-term. To put it another way, 2020 was likely the best their current coalition could ever manage, and they scarcely won – the decline and rot hidden by a moment of victory, but unmistakable nonetheless.

Of course, polls and outcomes vary all the time; consequently, such evidence can’t prove anything one way or another, so why do I think this time is different? 

Think about what the Federalists were designed to do: they were designed to share power between New England and Virginia at a time that elections were not open to all white male voters; once elections were open to all male voters, Federalists couldn’t hope to win. Sure, they managed one last hurrah, with John Quincy Adams, but they were doomed by a larger change that shattered their coalition and eliminated their potential for victory.

Or think about what the Whigs were designed to do: they were intended to unite anti-Jacksonian voters in the North, many of whom despised slavery, with anti-Jacksonian voters in the South, who wanted to protect slavery. Once Polk’s annexation of Mexico’s territories put slavery expansion on the national agenda, there was no way for the Whigs to hold their coalition together.

Let’s turn, then, to the Democrats. They are designed to unite voters who want to spend government’s largesse on themselves and their pet causes to voters who want to profit from the government largesse via the implied put-on financial assets that the Fed is able to offer via its enormous balance sheet. The problem is that policy of unlimited federal spending coupled to unlimited federal debts is no longer tenable. One can debate how it will end or precisely when it will end, but everyone agrees it’s over. The only question now is how to reverse and decrease government spending, which means some members of the Democratic coalition will be pushed out.

You can raise taxes on the rich, chasing rich people out as they no longer benefit from the Fed’s support of financial assets. Or you can cut spending, chasing those beneficiaries out of the party, but there’s no way to put the coalition back together. For every Democrat who loved Build Back Better, there’s some Democrat somewhere who hated it, which is why Democrats like Manchin and Sinema ultimately defeated it. There’s literally no potential coalition that could elect the Democrats; from now on, it’s just about how many they’ll former Democrats they’ll lose because they used to be able to run against Trump on the promise of unlimited spending, but now they can’t promise unlimited spending, and they simply don’t have the margin to surrender.

Like the Federalists and the Whigs before them, they no longer have any reason to exist. Occasionally, a business finds new life after its reason to exist ceases, but, mostly, they just disappear in the process economists call “creative destruction.” I suspect that’s what we’re seeing now – the creative destruction of the Republican Party’s opposition.

In short, I struggle to believe that the Democrats can find a new reason to exist after spending decades running on how to spend the limitless sums of government money that they believed they could spend. Are they going to abandon Social Security? Medicare? Obamacare? If they don’t cut, they’ll lose their sacred cows and, thus, their voters; if they do, they’ll lose their voters. If they raise taxes, they’ll lose their donors (and voters). There are no good options; their current business model simply doesn’t work.

But the most damning proof of their impending demise is their own conduct: do you think they elected Biden because they wanted to hamstring themselves? Maybe you think their focus on pronouns and other divisive social issues is a sign of strength? They’re trying to squeeze the last vote out of their declining base precisely because they know there’s no way to grow their base; their current strategies are simply the best of their bad options. Like any declining business, they’re doubling down, rather than pivoting, because that’s what people typically do when their businesses are dying. In theory, word processing manufacturers like Wang can start making computers, but they don’t; instead, they tend to “improve” their product even as its market is vanishing. How many typewriting or word processing manufacturers made the leap to computers? That’s how many politicians will survive – the real winners will join whatever comes next first; they won’t try to save this version of the Democrats.

One suspects that the coming disaster of 2024 will be the moment the Democratic Party’s death becomes apparent, but I think we’re already hearing the proverbial aria that signals the end. It’s simple economics: a party built to spend America’s unlimited wealth cannot survive the end of that delusion.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

The Fed Loves Friedman! Hayek? Not So Much

06/28/2022Robert Aro

It’s rare to see a central banker discuss Austrian economics. Yet, the Federal Reserve Bank of Richmond did exactly that in a recently published paper called: A Historical Perspective on Digital Currencies where they give their opinion on past literature as it pertains to the use of private currency.

The three authors, all PhD holders, one from the University of Chicago, compare the views of a Hayek (Austrian School) to Friedman (Chicago School) to conclude that market intervention is preferred to a free market choice in currency. Here’s part of the abstract:

This perspective suggests that government interventions have a critical role in creating a well-functioning money and payments system.

Government intervention and a well-functioning anything are hardly compatible. But let’s see how they arrived at this idea, and why a currency monopoly (managed by seven people) is their preferred choice.

They give credit where it’s due, admitting private currency has been debated “in the economics literature for a long time.” Noting:

In fact, the intellectual roots of cryptocurrencies such as bitcoin can be traced back to the Austrian school of economics and its criticism of the government monopoly over fiat money.

So far so good.

They then cite Hayek’s 1976 book Denationalisation of Money: The Argument Refined where he explained:

…instead of a national government issuing a unique currency and imposing legal tender laws, private businesses should be allowed to issue their own forms of currencies. That is, currency issuance should be open to competition.

No refutations of Hayek’s ideas are mentioned. This continues a long standing tradition of ignoring free market principles since forming a coherent argument against capitalism in favor of socialism is no easy task. Therefore, rather than explaining the problem of Hayek’s ideas, they appeal to popularity by citing a book written by Friedman 16 years prior to Hayek’s, which unapologetically championed interventionism. The authors write:

Hayek's ideas, however, have not been broadly adopted. Rather, in his 1960 book "A Program for Monetary Stability," Milton Friedman pointed out that "monetary arrangements have seldom been left entirely to the market, even in societies following a thoroughly liberal policy in other respects, and there are good reasons why this should have been the case." 

The quote fails to explain the alleged shortcomings of the market. But they follow with ideas on how society benefits through central bank/government support:

According to Friedman, those good reasons are:

  • The high resource costs of issuing currency
  • The difficulty of enforcing contracts and preventing fraud
  • The difficulty with limiting the amount issued
  • Possible externalities on other parties

The four points are hollow, relying on a simple opinion as to how difficult something is, rather than using any form of reasoning or a priori knowledge. However reading Hayek’s book noted above, or his aptly titled book: Choice in Currency: A Way To Stop Inflation should convince anyone that a voluntary system is superior to an involuntary one. As the saying goes: “Good ideas don’t require force.”  

Consider Friedman’s “difficulty with limiting the amount issued” bullet point. 62 years after his book, the Fed has a $9 trillion balance sheet and created almost $5 trillion of US dollars in the last two years. US debt is still at $30.5 trillion, and despite the Fed finally shrinking the balance sheet, it’s only a matter of time until Quantitative Easing returns. Naturally, a central bank creates way too much power to be left in the hands of a few individuals. 

The quantity of hamburgers, running shoes or cell phones in America are not regulated by a planning committee. However, we live in a society where billions of dollars in salaries supports a system that decides the national interest rate and quantity of money. History shows central banks and unbacked fiat currency inevitably lead to hyperinflation, while the military industrial complex and many more evils are supported by this system. Concluding that money is too important to be left in the hands of hundreds of millions of people blatantly denies human history, current reality, and Austrian economics.

With the advent of central bank digital currencies, anyone who champions liberty, freedom, privacy, and purchasing power should be concerned. Fedcoin will be another way central bankers can inflate the money supply. Whether the new money is sent to big banks or the poorest members of society first, it will cause currency debasement. They do not want digital currency for the purpose of stopping money creation; the whole purpose is to streamline money creation, on their terms.

If you think prices are high now, wait until the Fed sends money directly to your digital wallet! We can only guess what Hayek and Friedman would say to that.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Countdown to Crisis

06/27/2022Liam Cosgrove

If you’re into finance, you may have seen this chart:

Fed hiking cycles end in crisis - every time. The chart also illustrates that, since the 1980s, the Fed has been unable to achieve a Fed Funds Rate (FFR) at or above the peak of the preceding tightening cycle. 

It’s not a mystery why this happens: lower-for-longer rates allow for greater debt accumulation and create an ever-increasing dependency on cheap rollover costs.

While the above chart isn’t a very large data set, it appears that crises manifest when FFR reaches 50 percent to 80 percent of the immediately preceding FFR peak. Given today’s effective FFR has been jacked up from nearly 0 to 66 percent of the 2018 peak in a matter of four months (for reference it took over 3 years for the previous cycle to cover the same relative ground), the likelihood of “something breaking” seems high.

Before gobbling up VIX futures, it’s important to check the thesis.

Many are pointing to the huge sums parked the Fed’s Reverse Repo (RRP) facility, excess cash earning overnight yield from the Fed, as one reason why “things may be different this time”. Translation: there’s too much cash for a liquidity crisis. 

First, the majority (88 percent) of RRP participants are Money Mutual Funds. This is A LOT of cash that would otherwise be chasing T bills, commercial paper, or lent in the repo market. This means an inter-bank lending crisis is unlikely.

That is not to say we will not see “something break”' in the private sector - in the form of margin calls, mass layoffs, or bankruptcies - due to the rapid uptick in costs of capital. Ironically, the high RRP balance may be giving false confidence to FOMC members that further tightening can be sustained.

Let’s look more broadly at money supply:

The interesting thing to note here is the vastly greater increase in money supply (both nominal and percentage wise) post-GFC as compared to post-Dot Com. When comparing the “success” of each hiking cycle that concluded these two eras (see below), it appears that money supply and economic robustness are inversely correlated. This is especially odd given that post-GFC was supposedly when regulators cleaned up the financial system with stricter collateral and lending criteria.

So, the suggestion that excessive liquidity will save us from a crisis is not supported by the data (and in fact the opposite may be true).

I know the recession-will-force-a-Fed-pivot trade is becoming popular now, but I would be careful. The pace of this tightening cycle dwarfs those of the last three bubble bursts shown above, and our economy is more dependent on cheap debt than ever before. Short duration debt (< 1 year) has also seen an unprecedented surge during the COVID era - meaning our countdown-to-crisis could be much shorter than previous cycles. Something may break before the Fed even has time to pivot. 

Or, let’s say the Fed cautiously pauses hikes. The markets would undoubtedly smell blood and rally on Fed capitulation. But we’re forgetting that our economy has been nursing at the test of 0 percent rates for roughly a decade - we can’t even handle 2 percent! Maybe David Hunter will finally be right and such a scenario will be the catalyst for his melt-up and subsequent crash.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Inflation and the Rule of 72

06/27/2022Connor Mortell

In the world of investing, there is a well-known concept referred to as the Rule of 72. It states that because of compound interest, 72 divided by your rate of return will always yield the number of years necessary to double your initial investment. The simplest math to do it with would be that it takes 10 years to double your investment at a 7.2% interest rate (72 / 7.2 = 10). However, below is an excel sheet drawing out the rule with rates of one through ten percent.

Because inflation detracts from your return, the most accurate way to find how often the real value of your investment doubles is to actually measure 72 divided by rate of return minus the inflation rate. Forty years ago, to achieve a fairly large real rate was fairly feasible even in the face of what was considered fairly high inflation. In 1982, exactly forty years ago, the average CD was a little over 14%. So even though inflation was over 6%, all it took to earn an 8% real return was a simple short term CD. At that difference of about 8%, it would only take 9 years to double your money!

Times have changed. Inflation today is right about 8.6%. However, artificial interest rates being held low by the federal reserve has led to the average CD rate sitting below one percent. As a result the real return is between negative seven and eight percent! Which means that it would take between nine and ten years not for your money to double, but rather it would take less than a decade for your investment to cut in half!

Even this is only telling part of the story. This is because between 1982 and today, we’ve also changed the way in which inflation was measured. By the old metric, inflation would actually be sitting at about seventeen percent. Plugging that into the Rule of 72 would give us 72 / (0.73 - 17), which tells us that it will take under five years for your investment to be cut in half!

Realistically speaking, it’d be all but impossible to maintain this 8.6% (or 17% by the old metric) inflation for ten years or even five years. Such prolonged inflation would either have to snap into a recession or snowball into hyperinflation as Americans gave up all faith in the dollar. However, it is an important lesson in just how impactful inflation really is. It’s not always the most exciting, front page topic, but inflation is so much worse than the brutal gas and home prices we are dealing with - though those are already crippling. It is on a high speed track to crippling and most literally halving the real return of your savings.

No matter what we’re facing, inflation like this is never worth it. As Ludwig von Mises has said:

No emergency can justify a return to inflation. Inflation can provide neither the weapons a nation needs to defend its independence nor the capital goods required for any project. It does not cure unsatisfactory conditions. It merely helps the rulers whose policies brought about the catastrophe to exculpate themselves.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

All Inflation Is Government-Caused

06/25/2022Jason Morgan

On June 19, 2022, geopolitical analyst Ian Bremmer posted the following on Twitter:

us: left govt, high inflation
uk: right govt, high inflation
germany: centrist govt, high inflation
italy: everyone in govt, high inflation

wild guess it’s not the govt

— ian bremmer (@ianbremmer) June 19, 2022

In a follow-up tweet the next day, Bremmer wrote:

1 - independent central banks:
printing like crazy

(powell: the one man trump and biden agree on)

2 - pandemic causing massive swings in supply and demand

3 - russia war disrupting supply chains

— ian bremmer (@ianbremmer) June 20, 2022

It’s possible that Bremmer is being sarcastic. In which case, I would like to be the first to welcome him to the Austrian Club.

But my reading of Bremmer’s tweets is that he’s quite serious. If I’m right to read Bremmer straight here, then it’s worth pointing out that the premise of just about everything Bremmer wrote in these two short bursts is wrong.

Let’s take the first tweet first. Bremmer apparently wants to say that all kinds of governments exist, and there is inflation everywhere, so clearly it’s not the government that’s causing inflation. This is fallacious on its face. Logic just doesn’t work this way. “All x are doing y, therefore x is not the cause of y,” is, well, silly.

That’s hardly the only problem. As some of the people replying to Bremmer’s weird logic also indicated, the “left-right-center-everyone” mapping which Bremmer applies is bogus. Government is government is government, and it doesn’t matter which slogans get slapped onto which campaigns. On that narrowcast reading alone, Bremmer’s assertions don’t hold water. The globalist Boris Johnson is a rightist? That’s comical, but one has to suspend disbelief on this score to make Bremmer’s tweet work even on this low level.

We can strip the phony politics away and go even deeper, however. Indeed, the reason why all governments are alike is where we get to the heart of Bremmer’s fallacy. Take a look at the first claim in his second tweet. Bremmer thinks that central banks are “independent.” His proffered reasoning is that Federal Reserve Chair Jerome Powell is “the one-man Trump and Biden agree on.” Ergo, for Bremmer, Powell must be an “independent”—he serves two masters in a way pleasing to both. It can’t be government that’s causing prices to skyrocket. Must be something else.

But Bremmer raises a question. And in doing so he sets up a tautology. That tautology is precisely the reason why Bremmer (if he’s being serious) is wrong that governments don’t cause inflation.

The implied question is: Does Powell’s being “the one-man Trump and Biden agree on” make him independent, or does it make the government monolithic? The answer is behind door number two. Powell is not independent. He’s just one head of a Hydra with a Georgetown address. Powell without government, and government without Powell—neither is possible. There’s your tautology.

The central bank of the United States (and the same is true in every country) is a purely political institution. Powell isn’t some monastic who stumbles in from his desert retreat to soothsay the economic future. He’s neck deep in the Washington swamp. He just happens to be very good at what he does, which is why he still has his leather chair in the Fed building. Like all Fed chairmen, Powell is a paid alchemist who transmogrifies, with magical economics-sounding incantations, the usually stupid ideas of politicians into seemingly de-politicized policy positions. Powell is good at reading a room and coming up with a number pleasing to his boss (and it makes zero difference whether the boss is with Team R or Team D). He’s like the oracle at Delphi. Or like Dylan. He doesn’t need a weatherman to know which way the wind blows.

You have “elections.” You have a clueless citizenry. You make it all work out, and you do so with a look of high-economic gravitas, as though the gods had ordained the chicanery you are peddling. That’s what makes you the Fed chair.

And it isn’t just that central banks are not independent of governments. It’s that, much more consequentially, governments are not independent of central banks. Governments as we know them in the twenty-first century would not, could not, exist without central banks. Without the “printing like crazy” phenomenon that Bremmer bemoans, there would not only be no inflation. There would be no fiat money, period. No fiat money, no government. No government, no Powell. Can it be that Bremmer truly doesn’t understand this?

Bottom line: Government spending doesn’t “cause” inflation. Government spending isn’t to inflation what, say, reading in low light is to ruined eyesight. It isn’t as though, over time, whoops, all that government spending caught up with you and, dang, you’ve got some inflation. Government spending under modern monetary theory (fiat money) regimes is inflation. There is no difference. It’s total identity. A is A. When a government prints fake cash, that’s inflation. From the get-go. There is no non-Ponzi Scheme way to understand the mechanism.

This is why governments can do nothing but make inflation worse and worse. The more cash an “independent” central bank prints (and on whose behalf does a central bank print cash if not the government’s? —even in the case of Fed, which is a private cartel designed to enrich globalist bankers, the get-out-of-jail-free card for counterfeiting American currency comes from the government), the more inflation chokes us. You can’t get something out of nothing. But that’s just what governments do—all of them.

Of course, governments can play with systems and inflate asset prices (with more fake money) to keep the downstream effects of inflation from biting for a time. But there’s only so high you can build a dam. One day, whoosh. And then Joe Sixpack can’t afford to fill up his truck.

That’s when politicians start blaming everyone but themselves.

Now, armed with these insights, we can handily dismantle claims 2 and 3 from Bremmer’s second tweet. The pandemic? Who owned the Wuhan lab where the virus was made, pray tell? Was it a private-citizen mad scientist cooking up superbugs in his spare time? Of course not. It was the Chinese Communist Party, a government institution if there ever was one. Statism on creatine, the CCP is. The Wuhan virus is the Wuhan virus because it came from a Communist-owned and -operated government lab in Wuhan.

And who paid for the Wuhan bug? Why, we did. Our taxes—siphoned out of our phony-currency bank accounts by the same rapacious government which can’t control its own spending in the first place and so needs to go on April Viking raids every year—were sent to Wuhan so a real mad scientist (with a New York accent) could skirt American laws and concoct a virus to fulfill his statist overlords’ dream: a lockdown. Under a lockdown, everyone begs the government to print more money. Everyone clamors for a “stimulus.” The people ask for inflation.

And, boy, do the politicians give it to them. Only too happy to oblige. It almost got Trump re-elected. (He wasn’t counting on another kind of inflation—ballot inflation. But that’s a story for a different day.)

Finally, Russia? That’s the least swallow-able excuse of them all. It asks us to assume a hundred years of history that just isn’t true. Has the United States of America been minding its own business all this time, not getting caught up in useless foreign wars and not, say, pushing a neo-imperialist Cold War Museum relic right up to a distant country’s doorstep? Um, no. After years of warnings about that old Cold War stunt, the distant country’s leader had enough and pushed back. Supply chains disrupted. What did Washington expect—that Putin would destroy the wavefront of NATO politely, perhaps with a strongly worded letter to the UN?

And anyway, for a century Washington has been pouring money into idiot crusades in the Middle East and Central Asia, in Africa, in Europe, in Latin America. In Southeast Asia, if you’ll recall. All of that cost buckets of fake money. To the best of my knowledge, Gerald Ford didn’t blame inflation in the 1970s on the Viet Cong. Then again, apparently Americans five decades ago weren’t quite as gullible as we are now.

Today, there seem to be geopolitical analysts who seriously believe that none of the above has any bearing on the price of sweet tea in Alabama. That “independent” central banks are to blame for printing all those dag-blasted hundred-dollar bills. That no one can afford a steak dinner anymore and it must be—yet again, for the eleventy-seventieth time—Vladimir Putin’s fault.

How I wish Ludwig von Mises and Murray Rothbard were alive today. I would love to see what they would have written on Ian Bremmer’s Twitter page.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Our No-Win "Kobayashi Maru" Economy

It's time to reprogram the conditions of the economy to serve the many rather than the few.

Star Trek's Kobayashi Maru training exercise tests officer candidates' response to a no-win scenario: any attempt to rescue the crippled ship's crew results in the destruction of the candidate's ship, while standing by and taking no action results in the loss of the Kobayashi Maru's crew.

Captain Kirk famously defeated this no-win scenario by reprogramming the simulation to "change the conditions of the test." This can be viewed as either cheating or as creative problem-solving via "thinking outside the box."

The Kobayashi Maru is a very apt description of both the U.S. and the global economies, which are currently running a real-world no-win scenario called "Profits, Infinite Growth, Low Inflation, Full Employment." (PIGLIFE). To win in the PIGLIFE scenario, you need permanent expansion of GDP, consumption, profits and employment and a permanently low limit on inflation. Anything less and you lose.

Central banks and political leaders have managed to "win" the PIGLIFE scenario for decades, but at a cost that can no longer be cloaked by happy-happy statistics. The economy has been fatally hollowed out into a fragile shell of monopolies and cartels profiting from hyper-financialization and hyper-globalization, a system in which the only possible outcome is hyper-inequality and hyper-self-exploitation as the immense profits enable the purchase / capture of political and regulatory power.

Now that the PIGLIFE economy has stripmined all the easy-to-exploit resources and workforces, scarcities are pushing inflation far above the "winning" low level. Oops, you lose. Now the real teeth in the Kobayashi Maru scenario are bared: if Central banks and political leaders close the spigots of "free money" that's been expanding GDP, consumption, profits and employment for decades, then all those slide from expansion into contraction.

But if they keep the spigots of "free money" wide open, inflation threatens to feed back in a self-reinforcing loop of expectations of higher inflation that push inflation higher, which then justifies the expectations which then push prices, wages, etc. higher.

Meanwhile, the two engines of the PIGLIFE expansion, hyper-financialization and hyper-globalization, have dived off the cliff of diminishing returns. Boosting debt, leverage and globalized supply chains aren't generating expansion, they're actively undermining whatever "growth" is still sluicing through the PIGLIFE economy.

So sorry, Central banks and political leaders, you lose. The way you've rigged the system, it goes into self-reinforcing contraction if you close the spigots of "free money" even modestly. But if you don't, the Klingon ships of inflation destroy you. The more you push hyper-financialization and hyper-globalization as "solutions," the greater the destruction.

Clearly, we need a new set of conditions for prosperity and well-being that do not rely solely on expanding GDP, profits, consumption and employment. Many economists, for example, Joseph Stiglitz, have proposed retiring GDP as a measure of prosperity and well-being and using more accurate and sustainable measures of well-being to inform policies.

If we've learned anything, we've learned that enriching the already super-rich so they have even greater means to distort democracy to serve their private interests undermines the prosperity of the many rather than increases it. It's time to reprogram the conditions of the economy to serve the many rather than the few, and enable a truly winnable scenario of sustainable prosperity and well-being by tossing the "waste is growth / Landfill Economy" PIGLIFE model into the toxic waste dump of failed, no-win scenarios.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

There’s No Guarantee (Gas) Tax Cut Savings Will Be Passed on To Consumers

06/24/2022Connor Mortell

On June 22, President Joe Biden called for a tax holiday for the next three months. As of this writing, it still has to be approved by congress. Many critics have come out in response to this. Among them, Nancy Pelosi has called it nothing more than “showbiz” as she doesn’t expect the 18 cents per gallon savings to be meaningful, Reason magazine has argued that it is taking away a tax for roads that was levied somewhat proportionally on individuals based on how much they drove, but perhaps most interestingly of all - at least from an economics standpoint - was this criticism brought by NPR:

Biden also called on state governments to take similar actions with their gas taxes. He wants oil refiners to boost their capacity so there’s more gasoline on the market - another way to bring down prices. But there’s no way to force those tax cuts to be passed through to the consumers.

In October 2021, I wrote almost the exact inverse of this point: Why Business Owners Can’t Just “Pass on'' Tax Costs to Consumers. Then White House press secretary Jen Psaki had claimed that American consumers would not stand for large companies passing on tax costs to consumers. I claimed that - while probably for the wrong reasons - she was right. The logic stemmed from Murray Rothbard’s Power and Market:

The most popular example of a tax supposedly shifted forward is the general sales tax. Surely, for example, if the government imposes a uniform 20-percent tax on all retail sales, and if we can make the simplifying assumption that the taxes can be equally well enforced everywhere, then business will simply “pass on” the 20 percent increase in all prices to consumers. In fact, however, there is no way for prices to increase at all! As in the case of one particular industry, prices were previously set, or approximately so, at the points of maximum net revenue for the firms. Stocks of goods or factors have not yet changed, and neither have demand schedules. How then could prices rise?

We now find ourselves in the opposite position. Can the removal of a tax drive down a price? The answer is a little more complicated. Rothbard explains above that taxes cannot be shifted forward to the consumer and goes on to explain that instead taxes are shifted backwards to the original factors of production. Less can be spent on them and thus - as Per Bylund has explained:

Entrepreneurs are forced to abandon some of their efforts to generate new value by satisfying customers, or to redirect their efforts into less value-producing channels. The potential output of their creativity goes Unrealized.

It is here that a tax holiday is able to help. Because less cost will be shifted backwards to original factors, original factors will be able to be better allocated to projects that will actually generate new value by satisfying customers.

As a result, to a very large extent, this specific criticism of the gas holiday is right. There is no guarantee that the savings from the holiday will be passed on to the consumers. This, however, does not ultimately discredit the tax holiday itself as the savings will still benefit consumers. Original factors could be better allocated in such a way that does in fact make gas prices cheaper as market competition drives prices down in the absence of these taxes in a very happy go lucky solution that ties this all up in a nice little bow as we look back on it.

But even if that is not the case, the original factors would still be put to a preferable use on the market when they are not hampered by the restrictions on their prices by the government. So, while it is correct that we may or may not see these savings passed on to the consumer, it is also undoubtedly correct that the removal of this tax would in face benefit the people.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Central Banking: The Root of Economic Instability

06/24/2022Liam Cosgrove

 “An economic foundation that was built on cheap money and debt.”

Bond and equity markets have collectively seen one of their worst years on record. 

This may come as a shock to those who have followed mainstream financial outlets over the past two years, as everyday we were reminded of the “robust” recovery and “strong” labor market. 

But our economy is far too dependent on central bank policy. Peter Boockvar is a financial analyst with the Bleakly Financial Group. He sums the problem up succinctly: 

Markets and the economy… do well when the central banks are easing and cost of capital is cheap and the liquidity is flowing. But then it all reverses when they tighten monetary policy.

Boockvar adds that we are operating under “an economic foundation that was built on cheap money and debt.” Low interest rates, while incredibly stimulative for capital markets, have destroyed small/medium sized businesses and injured most banks. 

Smaller banks without access to cheap liquidity must earn the old fashioned way - lending out deposits and capturing the spread. In the falling interest rate environment of the last 40 years, these spreads have become increasingly thin, which might explain why the number of banks in the US fell by 80% from 1980 to 2020.

Another consequence from decades of accommodative monetary policy is, according to Boockvar, the exponential increase in economic fragility that results from each subsequent easing cycle. 

As interest rates remain low, businesses and households are able to borrow more. Then, when the Federal Reserve decides it is time to tighten, the large accumulation of debt means the economy cannot bear even moderately higher rates. 

This dynamic is clearly represented in the historical Fed Funds Rate chart:

We see that since the 1980’s, when Volcker aggressively tightened into recession to tame inflation, each subsequent Fed tightening cycle was unable to reach its previous height before triggering a recession (indicated by the gray vertical lines). 

This tightening cycle will be no different, and in fact may be worse. 

According to Boockvar, “We’re just getting a rerun of the same movie we’ve seen many times before… This is a sequel with scarier characteristics,” due to inflation and rapid pace of the central bank’s response.

The US has not seen serious inflation since the early 1980’s. Will the Fed tighten through a recession? Listen to more of Peter Boockvar’s insights in his full interview here:

When commenting, please post a concise, civil, and informative comment. Full comment policy here