The Fed Says the Federal Budget Is Unsustainable

The Fed Says the Federal Budget Is Unsustainable

10/16/2020Robert Aro

Tuesday’s speech by Fed Chair Jerome Powell began with the usual nod to the pandemic for making life difficult for the masses, followed by the various pats on the back for the central bankers and what they have done in fighting the problems caused by COVID. Powell even praised the government, noting “the fiscal response was truly extraordinary,” thanks to the $3 Trillion of “economic support” under the CARES Act as well as several other lesser known bills.

The Paycheck Protection Program (PPP), was also mentioned, which, according to the Chair, “partly forestalled an expected wave of bankruptcies and lessened permanent layoffs.”

A few weeks ago the cost was noted by Randal Quarles, Vice Chair for Supervision:

The PPP disbursed $525 billion in loans to businesses through August 8, most of which will be forgiven…

As of August 8, there was still another $134 Billion of forgivable loans remaining in the program.

Powell continued, explaining that the market appeared to be normal again and praised “highly accommodative” monetary policy. Yet despite the self-congratulations, things took a bit of a turn when he re-visited the fiscal side of central planning, saying the “expansion is still far from complete,” and that :

Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth. By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste.

He concluded that both monetary and fiscal policy should be used “side by side” until, again, in his own words, the economy is “clearly out of the woods.” Yet it’s difficult to know just how long getting out of the woods will take. Whether it requires a forced vaccination or an inflation rate sufficient to satisfy central bankers remains to be seen.

While the continual push for fiscal support from the Fed is concerning, it was the Q and A which delivered the final blow:

So at least I guess I would start by saying that the U.S. Federal budget is on an unsustainable path, has been for some time.

It appears Powell read the Congressional Budget Office (CBO) on September 2, the budget outlook to 2030 which predicts a:

federal budget deficit of $3.3 trillion in 2020, more than triple the shortfall recorded in 2019, mostly because of the economic disruption caused by the 2020 coronavirus pandemic and the enactment of legislation in response.

But it gets worse:

CBO now projects a cumulative deficit over the 2021–2030 period of $13.0 trillion…

Keep in mind the US National Debt has recently passed the $27 Trillion mark, which puts the 2030 National Debt prediction closer to $40 Trillion by 2030. Of course, the kneejerk response should be that this 10-year budget projection is well off the mark.

Consider that in March of this year, the CBO underestimated the 2020 budget by $2.2 Trillion. Now we’re being asked to believe they can project a decade into the future, with the assumption that for the next 10 years the deficit will “only” amount to a little over $1 Trillion a year. That’s a tough sell!

Concerned citizens should begin to wonder how well the CBO can predict the outcome of COVID-19, future pandemics, wars, market downturns, unfunded liabilities, and all the other unforeseen events which cannot be reasonably factored into a decade long budget model. Additionally, we’ve been given little to no assurance that the Fed or the US Government ever intend to stop these short-term lending programs and stimulus checks, ever again.

A reporter summed it up the best with one question:

If we look back 10 years from now at the policy that has just been implemented, what would be signs of success?

Powell addressed the issues of providing stability and relief, supporting the expansion, and avoiding long run damage to the economy; however, we know that looking back 10 years from now, if nothing is done to limit the powers of the Federal Reserve and the US Government, we will be in a world of pain. The US Debt will be much higher than $40 Trillion. Stocks, bonds and real estate prices will be making new highs. Yet, most people will find they are no better off than they were a decade ago.

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Trump or Biden: Who Will Be Better for the US Economy?

Here are my thoughts on which presidential candidate will do less harm to the US economy and why Dwight D. Eisenhower was the best president of the postwar era.


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Don't Confuse Gold Futures with Gold

10/06/2020Robert Aro

The gold price manipulation conspiracy received validation in August when Reuters reported:

Scotiabank to pay over $127 million for precious metals price manipulation.

One of Canada’s largest banks earned itself a proverbial black eye for “spoofing” the gold price, something precious metal traders have cried foul on for years.

Spoofing involves placing trade orders with an intent to cancel them before they are executed, typically in connection with an effort to manipulate prices.

And just how long has this manipulation persisted?

Authorities said that over more than eight years, four Scotiabank traders placed thousands of unlawful orders for gold, silver and other metals futures contracts to deceive other traders and benefit their employer.

Almost a decade of practice, and it was only four rogue traders who managed to manipulate the price of precious metals? Doubtful.

But wait, there’s more! Reuters reported on September 23:

JP Morgan set to pay nearly $1 billion in spoofing penalty.

Three JP Morgan employees as well as eight unnamed coconspirators were involved. CNBC noted that this is a record fine for spoofing, which was made illegal in 2008. “Gold price manipulation” can no longer be relegated to conspiracy theory. But were these just instances of traders behaving badly, or is there a global effort to distort gold’s price? Perhaps it’s best to share several key facets of the gold industry and allow readers to decide:

A 1974 cable published by WikiLeaks reveals a message from London gold dealers to the US secretary of state explaining how the futures market controls supply and demand:


The gold futures market remains one of the most volatile markets due to the use of leveraged “contracts,” as explained by the Chicago Mercantile Exchange (CME). For example, if you have $10,000 and you want exposure, you can buy one

Gold futures contract, which represents 100 oz. If initial margins are $4,400 you can buy two Gold futures contracts. You will have exposure to the equivalent of 200 oz. of gold.

With gold at $1,900 per ounce, one could have trading exposure of $380,000! And that is no secret, per the CME:

It is clear that the amount of precious metal traded on the world’s markets is many times the amount produced from mining and recycling activities.

On August 11 the exchange reported a record trading day of 1.55 million contracts for all precious metals. This supports the leaked report, because “physical trading would be miniscule” in comparison to what can be traded on the futures market. Now imagine price discovery when the world’s bullion banks use highly leveraged contracts to spoof gold’s price!

Beyond futures, there are exchange-traded funds (ETFs) like SPDR Gold Shares (ticker GLD, approximately $180 per share), which claims to hold 1,275 tons of gold, more than most central banks in the world. If a trader wanted to redeem shares for physical gold, the prospectus states that they need a minimum requirement of 100,000 shares or nearly $20 million! Needless to say, most people redeem with dollars instead of gold.

As for Fort Knox, CNN released grainy black and white photos of Secretary Mnuchin in what appears to be a small room, surrounded by a pile of bars in the background. After the visit he declared: “Glad the gold is safe!”

Other than Mnuchin, few, if any, have ever claimed to even have seen the gold at Fort Knox.

To add one last wrinkle, where there appears to be tons of gold located in a safe, how can we know it’s not “fake”?

Reuters recently reported that China’s largest 24-karat gold jewelry company, Kingold Jewelry, secured $2.83 billion dollars on 83 tons of gold, some of which was actually tungsten-filled bars. For every ton of gold held in a large vault, how much could be tungsten?

Between the futures market, ETFs, and mammoth-sized vaults, we see peculiar traits to this market. Through the futures, we’ve seen bullion banks manipulate prices in the very market that sets the spot price. The world’s largest vaults can hardly be accessed, and the gold in them is not exactly being audited by reliable third parties. 

At best, the paper market could seem unfair, at worst, highly fraudulent. On the other hand, if people demand paper gold instead of physical, then paper demand will continually be met with paper supply.

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The ECB Is Still Looking for Ways to Create More Price Inflation

10/02/2020Robert Aro

There’s nothing wrong with one central bank implementing the policies of another central bank. However, we can only promote such when the action equates to “less interventionism,” bringing us closer to free market solutions. If it requires more, as the European Central Bank (ECB) has demonstrated with an introduction to its new framework on Wednesday, it is a bad move.

The Fed last updated its framework in 2012. Yet the ECB has not conducted a strategy review since 2003. In her presentation of the “preliminary considerations” of her policy review, the president of the ECB, Christine Lagarde noted concerns of persistently “low inflation,” citing that “annual inflation averaged 2.3%” between 1999 to 2008, “but only 1.2%” a year between then and 2019. It seems Europe has not had the highly sought-after increase in the cost of goods and services for over a decade either. Given the low inflation environment and change in consensus, which governs monetary policy worldwide, Lagarde believes it’s the appropriate time to similarly update the ECB framework.

Naturally, this was not without some forethought. Like the Fed who did multiple Fed Listens events in advance to consider ideas from a broad range of groups, the ECB launched an ECB Listens program to

hear from a wide variety of stakeholders – including citizens, academics, parliamentarians and civil society organisations – about how they perceive our goals and actions.

These “listening tours” by policymakers—and not just central bankers—usually have the stench of insincerity about them, and it's a fairly safe bet that all this listening won't include much listening to those who champion the free market or voice opinions in opposition to the general zeitgeit at central banks.

Meanwhile, however, we were offered some direction as to where the ECB intends to push monetary policy this decade. Like the Fed, they may move toward an “inflation overshoot” objective:

The wider discussion today, however, is whether central banks should commit to explicitly make up for inflation misses when they have spent quite some time below their inflation goals.

The notion of inflation overshoot seems to have come out of the proverbial left field. It is still very new. So she proceeds with caution:

If credible, such a strategy can strengthen the capacity of monetary policy to stabilise the economy when faced with the lower bound. This is because the promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates.

It is not explained how the “promise” of an inflation overshoot raises inflation expectations, which in turn lowers real interest rates. Nor is the link very intuitive as it’s the central banks that openly manipulate interest rates through rate setting and bond-buying programs. This might be why she goes on to urge: “the usefulness of such approach should be examined,” considering that

make-up strategies may be less successful when people are not perfectly rational in their decisions.

Of course, inflation cannot be mentioned without a nod to the Phillips curve, the tradeoff between inflation and unemployment. According to the ECB, the Phillips curve still exists but is not working at the moment.

ECB research suggests that the empirical Phillips curve remains intact, but it may be rather flat.

The ideas expressed by Lagarde don’t appear to stray far from those of Powell, the main difference being that she is not entirely sold on the idea of inflation makeup strategies. She concludes by asserting central banks can only be credible if the general public understands what they are doing and why, and that they must talk to people whom they “do not normally reach.”

Perhaps there’s hope yet. After all, can a serious economic discussion about monetary policy truly be had with no mention of the benefits of unhampered markets or any future move away from interventionism? Any discussion devoid of this amounts to more policy to correct the problems of past policy, a strategy which only appears to cause a never-ending cycle of continuous policy interventions.

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Why Democracy Cannot Protect Our Freedoms

10/01/2020Gary Galles

As has become typical for years divisible by four, we are well into the high-intensity portion of the various "must vote" campaigns. Both parties push that as a bipartisan narrative, even though each side focuses their message mainly toward getting more of "their people" to vote. But while that pattern has become "same old, same old," there has been a change in the pitch. While "this is what democracy is all about" arguments once focused almost exclusively on getting out the vote, there has been a sharp rise in assertions that "we should also have democracy everywhere (that we think we would win)," that everything should be determined by some majority vote.

That complementary theme changes things considerably, as there is a big difference between choosing who will best do the job enumerated, and limited, by the Constitution, and turning everything over to current majority politics together with efforts to get out "our" vote on every front. For instance, the Bill of Rights was designed to protect Americans' rights from abuses by the government, but if those rights can be overturned by some transient political majority (especially when such a majority can be newly created by electoral "reforms"), one of the most important reasons for American greatness—that is, greatness in protecting Americans—would disappear.

However, this trend is not new, just accelerating, which means there may be earlier wisdom available on the topic. And we are fortunate that Foundation for Economic Education creator Leonard Read considered this issue in chapter 9 of his 1964 book Anything That's Peaceful.

Read began with The Columbia Encyclopedia's statement that "the existence of only two major parties…presupposes general public agreement on constitutional questions and on the aims of government." He highlighted that fact as "fundamental," because only under such circumstances can we rely on one of the two major parties to check the abuses of the other. Without that circumstance, one party need not check the others' abuses, and, in fact, government abuse can easily be bipartisan. It is worth following Read's argument.

The two-party system presupposes a general agreement on constitutional questions and the aims of government and aims at, if it does not presuppose, honest candidates contending for office within the framework of that constitution…each office seeker is supposed to present fairly his own capabilities as related to the agreed-upon framework, voting being for the purpose of deciding which candidate is more competent for that limited role.

Clearly, the theory as originally conceived did not intend that the positions of candidates should [concern]…the content or meaning of the constitution and the aims of government.

If there were "a general public agreement on constitutional questions and on the aims of government," and if candidates were vying with each other for office solely on their competency to perform within this framework, I would have no comment. But there is little contemporary agreement as to constitutional questions and the aims of government! Name a point that can now be presupposed.

[Politicians] no longer contend with each other as to their competence to serve within a generally accepted framework but, instead: (1) they compete to see which one can come up with the most popular alteration of the framework, and (2) they compete to see which one can get himself in front of the most popular voter grab bag in order to stand foursquare for some people's supposed right to other people's income.

[But] the role of the legislator is to secure our rights to life, liberty, and property," and such "Principles do not permit of compromise; they are either adhered to or surrendered."

Voting is deeply embedded in the democratic mores as a duty….Yet any person who is conscious of our rapid drift toward the omnipotent state can hardly escape the suspicion that there may be a fault in our habitual way of looking at things.

Government in the U.S.A. has been pushed far beyond its proper sphere. The Marxian tenet, "from each according to ability, to each according to need," backed by the armed force of the state, has become established policy….Within this kind of political framework, it is to be expected that one candidate will stand for the coercive expropriation of the earned income of all citizens, giving the funds thus gathered to those in groups A, B, and C. Nor need we be surprised that his opponent differs from him only in advocating that the loot be given to those in groups X, Y, and Z. Does responsible citizenship require casting a ballot for either of these political plunderers? The citizen has no significant moral choice but only an immoral choice in the event he has joined the unholy alliance himself and thinks that one of the candidates will deliver some of the largess to him or to a group he favors…the problem is not one of responsible citizenship but of irresponsible looting.

Does responsible citizenship require voting for irresponsible candidates? To ballot in favor of irresponsible candidates as though it were one's duty is to misconstrue the meaning of duty.

Americans…have some abhorrence of forcibly taking from the few and giving to the many without any sanction whatsoever. That would be raw dictatorship. But few people with this propensity feel any pangs of conscience if it can be demonstrated that "the people voted for it"….And, as government increases its plundering activities, more and more citizens "want in" on the popular say-so.

Read then turns to Frédéric Bastiat's The Law, for its insights into how the purposes governments pursue influence voting:

If law were restricted to protecting all persons, all liberties, and all properties; if law were nothing more than the organized combination of the individual's right to self-defense; if law were the obstacle, the check, the punisher of all oppressions and plunder—is it likely that we citizens would then argue much about the extent of the franchise?

Under these circumstances, is it likely that the extent of the right to vote would endanger that supreme good, the public peace?

If the law were confined to its proper functions, everyone's interest in the law would be the same. Is it not clear that, under these circumstances, those who voted could not inconvenience those who did not vote?

In summary, Read argues that the traditional defense of democratic voting in our constitutional republic is that it defends its principles, but instead "[Our] two-party, ballot-casting system…no longer presupposes any agreement on constitutional questions and the aims of government." And he provides us with and apt warning:

If it be conceded that the role of government is to secure "certain unalienable rights, that among them are the right to life, liberty, and the pursuit of happiness," by what stretch of the imagination can this he achieved when we vote for those who are openly committed to unsecuring these rights?

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There Really Is Nothing Smart about Joe Biden

09/30/2020Tho Bishop

The big winner of last night’s presidential debate may have been H.L. Mencken, as his opinion of democracy seemed to be embraced by Americans all across the nation.

On one side you had President Trump staying true to his WWE persona, unlike his milder first performance four years ago with President-Assumed Hillary Clinton. On the other, you had Joe Biden, whose combination of short temper and low energy makes him resemble a disappointing Chinese firecracker. In the middle, you had Chris Wallace reduced to begging the participants to follow the rules of the whole affair.

Nothing of real substance was discussed, of course. We still do not know if Joe Biden stands with the mainstream of his party when it comes to stacking the courts and eliminating the senate filibuster (though we can be confident that his opinion on the subject would matter, even if elected). We do not know if President Trump recognizes the fragility of the debt-fueled economic recovery, though in the eyes of Chris Wallace this is “free market ideology.” We do not know if anyone watching these debates is even capable of having their mind changed, or whether the goal is simply to not discourage any would-be supporter from mailing in a ballot (or two).

We do however know two things: people are recognizing the failures of American democracy, and there really is nothing smart about Joe Biden.

The first point is important. First of all, the act of “recognizing” a problem does not mean that the problem is a new one.

While the media will predictably spin last night’s circus as the latest example of Donald Trump embarrassing the presidency, the truth is that presidential debates have long been farces. The 2012 debates were defined by an inaccurate fact check by Serious Journalist Candy Crowley and the phrase “binders full of women” taken out of context. Prior to that, SNL skits ended up doing more for framing candidates than any debate performance (perhaps the decline of SNL is the real tragedy in American politics).

The superficial nature of presidential elections may not be a new phenomenon, but it is worth noting that this was not always the state of American politics. Once upon a time, party platforms offered substantive analysis of important issues and candidates were expected to have an operational understanding of serious questions. During the election of 1896, for example, the gold standard was such a prominent election issue that it was featured prominently in both campaign literature and candidate posters.

Unfortunately, there tends to be an inverse relationship between democratization and serious political campaigns. In much the same way that products intended for mass consumption on the marketplace tend to be of lesser quality than those of specialty niche stores, a political system based on who can convince simply the majority of American adults to vote for them can resemble an intellectual race to the bottom.

This is not true with every election, however. For example, the single issue of school choice was found to have had a decisive impact in Florida’s 2018 gubernatorial election. Studies found that Republican Ron DeSantis won 18 percent of the female black vote, even while running against what would have been the first black governor of the state. The recognition that Andrew Gillum’s defense of traditional state schooling would have a direct impact on the quality of their children’s education was enough to transcend a lot of the typical tribalist instincts that tend to shape national politics.

For those interested in improving governance in America, this is a strong argument in favor of decentralizing democracy. (For those not interested in improving governance, there is another option.)

The second point may seem petty, but it's also important—Joe Biden is an example of the sort of mediocre talent rewarded by the current political system. Prior to his 47-year career in elected office, he had a brief career as a lawyer with the ambitions of being elected senator and president. To achieve those ends, he falsified his resume to appear far more talented than he was.

His record in the Senate was significant, but he has spent most of his presidential campaign running against the positions he once had. Understandably so. His history of prior presidential runs did more for television comedians than his own legacy. His greatest asset was his relationship with Barack Obama, though much of the Democratic Party is far to the left of the former president. His instincts are so good that he picked for vice president someone who appears to be a true sociopath and is the elected Democrat who has made the most personal attacks on his record.

Of course, none of this matters to Biden true believers who seem to view the former vice president as a shortcut to reviving the nostalgia of the fictional West Wing. The alliance of former Bush and Obama administration officials wants voters to believe that Biden is a return to normalcy.

These are the very same people that mock red America for being gullible.

Image source:
Gage Skidmore | Flickr |
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Did the Fed Really Ask for Fiscal Support?

09/29/2020Robert Aro

In testimony before the US House of Representatives on Tuesday, Chair Powell noted economic challenges under covid, as well as supposed triumphs such as an increase in household spending “likely owing in part to federal stimulus payments and expanded unemployment benefits.”

That would be laudable if it weren’t free market interventionism:

We remain committed to using our tools to do what we can, for as long as it takes, to ensure that the recovery will be as strong as possible, and to limit lasting damage to the economy.

His reference to “tools” refers to his self-declared “forceful actions” since March, which “helped unlock more than $1 trillion of funding” by:

implementing a policy of near-zero rates, increasing asset holdings, and standing up 13 emergency lending facilities. We took these measures to support broader financial conditions and more directly support the flow of credit to households, businesses of all sizes, and state and local governments…

We can look past what he told Congress to see that since mid-March, the M2 money supply and the balance sheet have both increased by about $3 trillion to $18.58 trillion and $7.06 trillion, respectively. Powell also provided updates on various lending programs, noting around $2 billion for loans to the Main Street Lending Program, nearly $13 billion for the Secondary Market Corporate Credit Facility (corporate bond/ bond-ETF) buying program, and $250 million for the municipal bond purchase program. To clarify, all this money didn’t exist in February, it is literally “new money” credited to various bank accounts across the country.

He touched on the lesser-known Term Asset-Backed Securities Loan Facility (TALF), mentioning how nearly $100 billion can still be lent, but just under $3 billion has been utilized to date. Of course, these funds are not for Main Street since the three-year loans are reserved for:

certain triple A-rated ABS [asset-backed securities] backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.

So just who exactly has been receiving the nearly $3 billion in TALF support? Powell didn’t say. However, when we review the monthly reports to Congress under TALF’s September 8, 2020 transaction-specific disclosures, we see that the aptly named Mackay Shields TALF 2.0 Opportunities Master Fund LP received $571 million from thirty-two loans, with an interest rate from 0.76 to 1.30 percent. Per the company’s website, Mackay Shields is a firm of 210 employees managing $134 billion in assets. The collateral pledged to the loans was commercial mortgages, student loans, and several small business loans under SBA 504, which is a “loan program that offers small businesses another avenue for business financing” according to the Small Business Administration’s website.

Looking deeper into the data other names, large asset managers and some overseas firms are mentioned; only one question remains:

What about BlackRock? We know they helped the Fed launch its corporate bond buying program; surely by now we can expect Wall Street to receive more than Main Street.

Also included in the report, they received seven loans totaling $113 million, with the same favorable interest rate of the Mackay Shields loans for commercial mortgages and, naturally, small business loans.

Now imagine BlackRock, having $7.32 trillion in assets under management and getting small business loans from a central bank! Meanwhile the man responsible appears before elected US officials and isn’t met with so much as any scorn, ridicule, or calls to resign. Yet who dares ask of the long-term effects of stimulating a semi–shut down economy with a money machine? As usual, some on Main Street get breadcrumbs while the richest companies in America get entire loaves of bread!

Regardless of what the Fed does or Powell says, does any of it matter to Congress? If it did, one would think they would have ended the Fed, especially by now. As if to prove the point, Powell delivers the coup de grace at the very end, saying that, despite their efforts,

Many borrowers will benefit from these programs, as will the overall economy, but for others, a loan that could be difficult to repay might not be the answer. In these cases, direct fiscal support may be needed.

We know we’re in trouble when central bankers are asking for fiscal stimulus. Where does the Fed think Congress will get the money if not from the Fed? Not many, if any, elected officials understand the origins of money. But what’s Powell’s excuse?

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The Fed Has Decided the Phillips Curve Is Wrong after All

09/28/2020Robert Aro

Chairman Powell at the August 27 Jackson Hole symposium emphasized what he sees as the malleability of economic theory, noting that the apparent tradeoff between inflation and unemployment, known as the Phillips curve, hasn’t been working as once hypothesized. He alluded to an era when the curve allegedly worked better than it does now:

In earlier decades when the Phillips curve was steeper, inflation tended to rise noticeably in response to a strengthening labor market.

Strange, because for many decades Austrian economists raised concern about the theory, asserting that correlation does not equal causation. While Powell doesn’t acknowledge the efforts made by Austrians, he somewhat agrees. The framework used generations ago may no longer be relevant.

During the September 16 Federal Open Market Committee (FOMC) meeting, he noted the “new framework” and the move away from the unemployment/inflation tradeoff:

The good news is we think we can have quite low unemployment without raising troubling inflation.

This may sound new but Powell said almost the exact same words to Congress in July of last year:

I think we really have learned though that the economy can sustain much lower unemployment than we thought without troubling levels of inflation.

Vice Chair Clarida, in an August 31 statement, takes the idea one step further by appearing to rationalize the “flat curve” as reason to push for the importance of inflation expectations:

This is especially true in the world that prevails today, with flat Phillips curves in which the primary determinant of actual inflation is expected inflation.

Twentieth-century mainstream economists—until recently—have generally asserted that unemployment is a primary determinant of actual price inflation. But now that Fed economists have concluded the Phillips curve has flattened this can no longer be said. In our new era, “expected inflation” is the “primary determinant.” It's a vague term, but as Clarida explains, it can be “inferred from surveys, financial market data, and econometric models.” This approach hinges on the Fed influencing the market to instigate higher inflation which manifests itself into higher prices; a theory impossible to prove.

The following day Governor Lael Brainard similarly bent reality by referencing the “flat curve” to justify low interest rates:

With a flat Phillips curve and low inflation, the Committee would have to sustain the federal funds rate below the neutral rate for much longer in order to push inflation back to target sustainably.

At least she’s honest when affirming low rates are “conducive to increasing risk appetite, reach-for-yield behavior, and incentives for leverage” ultimately leading to more economic instability.

Finally, September 23 delivered the final nail in the coffin when Vice Chair for Supervision Randal K. Quarles stated:

This recent experience in the United States, which has also played out elsewhere, has led to a growing consensus in the economics profession that the relationship between unemployment and inflation—commonly known as the Phillips curve—has flattened.

It’s not that the Phillips curve, invented over sixty years ago, once worked and now inexplicably doesn’t. It never worked at all. A theory must work at all times to be considered credible, not just when it’s convenient. What’s worrisome is that the Fed’s mandate centers around inflation and unemployment. But with no tradeoff between the two, the Fed’s balancing act must be called into question.

[RELATED: "The Phillips Curve Myth" by Frank Shostak]

As for the Fed, we will never get a concise version of their stance. However, it appears they have come to terms with there being little, if any, tradeoff between inflation and unemployment. They won’t admit to implementing an obsolete theory. Therefore, it must be the curve that has changed.

This creates a new error. Rather than taking the opportunity to reflect on what went wrong, they, in effect, doubled down on their mistake. Using the unresponsiveness of the curve as an opportunity to be free of long-standing economic constraints, the Fed “freed” itself. Inflation expectations, low rates, and money supply expansion can continue indefinitely to help bolster job growth, all while seeing minimal effects of price inflation; only now, the flat curve can be incorporated into a new narrative, some unnamed theory, the equivalent of disabling a car’s onboard computer system to drive over a cliff at an even faster velocity.

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The US Economy Would Have Been Stronger Had the US Never Had Slavery

09/27/2020George Reisman

Ancient Rome, Greece, Babylon, Egypt, India, China, and Africa too, all had slavery. None of them created the Industrial Revolution. Great Britain and the United States did create the Industrial Revolution, on a foundation of economic freedom and respect for individual rights.

The great blemish of slavery played no greater positive role in the history of the US than it had played previously in the world, which is to say virtually none. Ignoring its overwhelming negatives, its utmost positive contribution here may have been a temporarily larger supply of raw cotton. But even that is probably not true. Free labor could have picked cotton. True, it would have had to be paid more than a wage equal to the price of a slave's minimum necessities, but it undoubtedly would have been less expensive per pound of cotton picked.

Free labor would have done away with the cost of a system of overseers and the cost of acquiring slaves. It could easily have been accompanied by a system of piecework and thus eager competition among workers in picking more cotton and thereby earning more money. Free workers would also have been motivated to find brand new ways to increase production, because they would have financially greatly benefited from doing so. Thus, improvements in raw cotton production might have come generations sooner. People who believe that slavery is an efficient system of production are people who are ready to impose 100 percent marginal rates of taxation in the belief that doing so is economically harmless.

The alleged economic benefit of slavery is a core belief of the Left both in current politics and in the interpretation of economic history. It sees no connection between freedom and production and no difference between work for positive gain and work to avoid pain.

Fundamentally, the Left does not recognize the distinction between human beings and draft animals, in that it believes the value of human beings derives from their muscles rather than their motivated minds. So far is slavery from having been a source of gain in the United States that the actual truth is that had it never existed and had no African ever been involuntarily brought to the US, the effect would have been enormously positive economically, socially, and culturally. Incentives to produce and save would have been greatly increased. No portion of accumulated savings would have been constituted by the market value of human beings but only by that of physical assets, implying the accumulation of more physical assets. There would have been no need for a civil war to free the slaves, a war that killed six hundred thousand Americans. And today there would be no racial animosities traceable to slavery.

The US would be more the country that its fundamental principles have designed it to be: a country in which the material self-interests of men function harmoniously, to the benefit of all, because they deal with one another by means of voluntary trade, not physical force.

Slavery is as much an economic benefit as holding up gas stations. Not only does the gas station owner lose what the robber gains, but both his motivation to produce and his means of producing are reduced. A world of robbery, which is what slavery is, is a world of great poverty.

This is why the standard of living of even the kings and emperors of the preindustrial world was far below that of the average worker in any capitalist country today.

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What You Need to Know about Amy Coney Barrett's Jurisprudence

09/27/2020Robert Wenzel

Below is a look from a libertarian perspective at the statements and rulings of the likely Trump nominee for the Supreme Court, Amy Coney Barrett.

President Trump is expected to officially announce his choice for the Supreme Court on Saturday afternoon.

The good from a libertarian perspective:

  • Barrett wrote in 2017 that Chief Justice John Roberts pushed the Affordable Care Act beyond its plausible meaning in order to save it.

  • Barrett dissented when the appeals court upheld a decision restricting the Second Amendment rights of a felon convicted of mail fraud. She said nonviolent offenders should not lose their constitutional right to firearms possession.

  • In a dissent, Barrett defended the Trump administration's rule denying immigrants permanent residence if they become regular users of public assistance.

  • Barrett helped to block the US Equal Employment Opportunity Commission's effort to stop an employer from transferring Chicago-area employees based on their race or ethnicity. The agency had accused AutoZone of making the transfers to reflect area demographics.

  • Barrett ruled that the Age Discrimination in Employment Act does not apply when policies impact plaintiffs unintentionally. The ruling went against a 58-year-old job applicant who lost out to someone half his age when the company sought to hire a person with less than seven years' experience.

  • In the case Rainsberger v. Benner, Barrett authored an opinion in which she denied qualified immunity—a protection for government officials from being sued for judgment calls they make on the job—for a police officer who was alleged to have submitted a document "riddled with lies and undercut by the omission of exculpatory evidence" that led to a man being put in jail for two months.

  • "In a 2019 opinion…she concluded that Drug Enforcement Administration agents violated the Fourth Amendment when they searched a suspect's apartment based on the consent of a woman who answered the door but did not live there."

  • "In 2018, Barrett concluded that an anonymous tip did not provide reasonable suspicion for police to stop a car in which they found a man with a felony record who illegally possessed a gun. 'The anonymous tip did not justify an immediate stop because the caller's report was not sufficiently reliable,' she wrote for a unanimous three-judge panel. 'The caller used a borrowed phone, which would make it difficult to find him, and his sighting of guns did not describe a likely emergency or crime—he reported gun possession, which is lawful.'"

  • "Barrett has written several opinions overturning excessive federal sentences. In a 2019 case, she said that a methamphetamine dealer should not have received extra time because of prior convictions under a state truancy law. That same year, she concluded that a judge should not have imposed a four-level enhancement for possessing a gun in connection with a drug offense without citing any evidence of that connection."

The bad from a libertarian perspective:
  • "In a 2019 decision, two members of a three-judge panel said that Indiana courts and a federal district court had erred by rejecting a defendant's claim that prosecutors improperly withheld exculpatory evidence when they tried him for attempted murder. According to the Supreme Court's 1963 decision in Brady v. Maryland, the failure to disclose such information is a violation of due process….

    "The defendant in the 7th Circuit case, Mack Sims, did not discover until after he was convicted that the victim, whose testimony was crucial in identifying Sims as the perpetrator, had undergone hypnosis prior to the trial, which may have tainted his recollection of the crime. Between the attack and the trial, 7th Circuit Judge William Bauer noted in an opinion joined by Judge David Hamilton, the victim's account changed, as did his confidence that Sims was the man who had shot him….In these circumstances, they concluded, the use of hypnosis was an important piece of information that could have affected the outcome of the trial.

    "In her dissent, Barrett said the majority had failed to give the Indiana Court of Appeals proper deference. 'Even though I think that the undisclosed evidence of [the victim's] hypnosis constitutes a Brady violation, it was neither contrary to, nor an unreasonable application of, clearly established federal law for the Indiana Court of Appeals to conclude otherwise,' she wrote. "If I were deciding the question de novo, I would agree with the majority that the suppressed evidence of hypnosis undermined confidence in the verdict. But because I can't say that the Indiana Court of Appeals' decision was "so lacking in justification that there was an error well understood and comprehended in existing law beyond any possibility for fairminded disagreement," I would affirm the district court's denial of Sims's habeas corpus petition.'"

  • She was part of a three-judge panel that rejected the state GOP’s request for a preliminary injunction against enforcement of the lockdown order issued by Gov. J.B. Pritzker. The appeals court also rejected the state GOP claim that Pritzker was selectively enforcing the political gatherings ban by allowing and even endorsing massive Black Lives Matter street protests while refusing to allow other political groups to assemble.

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The Fed Plans to "Overshoot" the Target for Max Employment

09/22/2020Robert Aro

Fed Chair Jerome Powell laid out our targets for our future at the September 16 Federal Open Market Committee meeting. “Accommodative stance” on monetary policy, up to 0.25 percent interest rates until maximum employment, plus a moderate overshoot of the 2 percent inflation target all must be met. Clearly, there is no plan to ever stop monetary stimulus.

He didn’t explicitly say this, nor would he. But, per his guidance and Q&A, conclusions can be made. Maximum employment for example:

We are assigned maximum employment. Now what does that mean? As I mentioned earlier, it doesn't mean a particular headline unemployment number. What it means is maximum employment.

Unemployment rate? Not much substance offered there:

I can't be precise about a particular number, but let me just say there was a lot to like about 3.5 percent unemployment. It's not a magic number. No one would say that number is the touchstone or that is, you know, maximum employment.

Touchstone? Curious what number that would be. Upon further questioning, he clarified that maximum employment is “not something which could be reduced to a number.” Apparently, the Fed will determine when that goal is reached. However, support does not end once employment is met.

Regarding that inflation target, Powell informs us:

Even after -- if we do lift off, we will keep policy accommodative until we actually have a moderate overshoot of inflation for some time.

Interesting to note the consensus in the Fed’s statement of economic projects: inflation won’t reach 2 percent until 2023; even then the highest projection made is 2.4 percent, hardly an overshoot. However, Powell remained steadfast:

In terms of inflation, you know, this is a Committee that is both confident and committed and determined to reach our goals. And the idea that we would look for the quickest way out is just not who we are….Okay, so just understand that, you know, we're strongly committed to achieving our goals and the overshoot.

How much more could be done to keep policy “accommodative?” Aren’t they out of ammunition? The Chair gives a definitive NO.

I certainly would not say that we're out of ammo, not at all. So first of all, we do have lots of tools. We've got the lending tools. We've got the balance sheet, and we've got forward guidance…

Translation: new Fed/Treasury bailouts, more bond buying, eventually equity purchases, and, of course, more statements extolling the virtues of maximum employment and inflation. But, it could also mean negative interest rates in the future.

Again, he will never outright say this, but accommodative monetary policy inevitability takes over nations. We are already seeing this across the globe. Why should the Fed be any different? These policies and goal settings carried out by central banks go by many names: interventionism, socialism, anticapitalism. They create asset bubbles and boom/bust cycles, but the Fed tells us their work is necessary to “provide relief” and “support recovery” as long as needed.

They have explicitly stated that interest rates will stay low for the next several years and this “accommodative stance” will continue at least until maximum employment is met with a consistent overshoot of inflation. Looking back on the last ten years, if price inflation was only around 1 percent, we could hardly imagine a decade of inflation being around two to five, seemingly the ballpark for which they are striving. As for maximum employment, it’s a target that cannot be measured nor particularly articulated. It appears nothing more than a carrot on a stick, intended to continue on a path which has a nearly unattainable end goal. But which is worse, the Fed somehow meeting their goals or continually falling short?

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