Power & Market
It is with a sad heart that we note the passing of Axel Leijonhufvud on May 2. He wasn't an Austrian (but rather, as a good Swede, a Wicksellian), nor did he like pigeonholes, but he leaves a large legacy that is relevant to the Austrian school. He, much like Roger Garrison, knew more about what Keynes said than most any other scholar, past or present. His dissertation On Keynesian Economics and the Economics of Keynes argued that Keynes's General Theory didn't actually deal with sticky wages and prices, but instead with inter-temporal coordination failures. He was more interested in out-of-equilibrium processes than in mathematical models of equilibrium, and this led to his advising some of the former republics of the Soviet Union (notably, Kazakhstan) on how to transition to a market economy. He was a gentleman, and a true friend to those who knew him. He will be missed.
Tough talk and strong predictions were made by Federal Reserve Chair Jerome Powell this week. CNBC reports that the Fed will continue raising rates until inflation returns to a “healthy level.” In his own words:
We will go until we feel we’re at a place where we can say financial conditions are in an appropriate place, we see inflation coming down. We’ll go to that point. There won’t be any hesitation about that.
He doesn’t note any tangible targets such as what an “appropriate place” is, what barometer is used to gauge the success of bringing prices down, or how long it will take. The Fed will decide when the goal is reached.
Taken literally, if a Federal Funds Rate of 18% is required in order to lower prices to a healthy level, no matter the consequences, much pain lies ahead. Surely there must be a limit on how high the Fed would allow rates to soar. Yet this is not the first time he mentioned this. Last week, CNBC noted Powell warned that increasing interest rates will:
...include some pain...
Whether one is vehemently against central banking’s interventions or, like most people, don’t understand how central banking is truly against the public’s interest, we should all take note.
Afterall, he’s in charge of the money supply and interest rates. His organization is primarily responsible for the inflation we are suffering. It’s an unfortunate realization and it need not be this way. But the Fed serves a dual function of being both the cause and solution to our monetary problems.
A scan across more CNBC news headlines show a similar theme of doom and gloom:
Dow drops 1,100 points for its biggest decline since 2020 as the sell-off this year on Wall Street intensifies
The article addresses that this was the fifth time this year the Dow fell more than 800 points.
But that’s just stock market news. The food situation overseas is something we must also closely monitor, as headlines from the UK reveal:
Skipping meals and shrinking portions — Brits are being warned of ‘apocalyptic’ food price rises
Between higher prices, smaller portions and/or food shortages, we can only hope such “apocalyptic” pain will not come to our shores. So far, other than the shortage of infant formula recently seen in America, food shortages are something most Americans have never experienced.
Should things not go according to plan, perhaps we can learn from those in the UK whose inflation crisis seems more advanced than ours:
A quarter of Britons have resorted to skipping meals as inflationary pressures and a worsening food crisis conflate…
When Powell warns of pain ahead, as much as we may want to, now is not the time to doubt.
It’s difficult to say what the most painful outcome would be. But a future with high rates concurrent with high inflation could be one of the worst. There will be no easy way out of this.
The following policies would result is a more peaceful and equitable society:
-- Federal legislators are limited to one term each, with much reduced pay. Senatorial terms are cut from 6 years to 4. These changes would make Congress less responsive to constituent demands, inducing people to meet more of their needs in the private sector. After the government incurs a deficit, the remuneration of legislators and administrators is reduced during the year that follows. Judges are limited to ten-year terms.
-- The government is isolationist. The U.S. State Department and its embassies are abolished. The U.S. leaves the United Nations and requires the United Nations to leave the United States. The U.S. defends the nation from military and electronic incursions only from Mexico, Canada, the sea, the air, and from space. Its navy stops patrolling the world’s oceans.
-- Private-sector Americans, including those engaged in trade, tourism, and private foreign aid, may be as interventionist as they please. Military weapons owned by private parties may be stored in America for use by them elsewhere. The U.S. government does not ensure the safety of its citizens abroad.
-- The Federal Reserve Bank is abolished. Attempts by anyone, never mind a government agency, to regulate the economy cannot help but make things worse. The Fed has greatly increased economic volatility, making life especially hard on the poor during downturns. Keeping interest rates low increases the value of assets. Since most assets are owned by the prosperous, wealth has become ever more unequal. The government’s monopoly over the dollar is removed. Anything may serve as a currency. Currencies are freely exchangeable, allowing the people to choose which ones are most convenient and best hold their value.
-- The Civil Service System is abolished. The former spoils system did little damage and created far less incentive to expand government.
-- The premiums for health insurance are low, since policyholders pay all of their medical costs up to the year’s substantial deductible. Policyholders thereby become familiar with healthcare costs, and competition between suppliers drives the costs way down. After a person’s deductible is spent, the insurance company covers all health costs. Younger people leave most of their deductibles unspent.
-- Government has nothing to do with education. Many government schools are poor, especially in low-income areas, and universities are replete with idiotic notions. All schools are owned privately, for profit or non-profit. With taxes lowered, the prosperous would likely compete as to who can provide the most help to central-city schools.
-- Government stops gathering statistics, because the statistics induce the government to try to solve problems, and most such solutions make things worse. Statistics are collected and paid for by the private sector.
-- Bank deposit insurance is terminated. The guarantees have caused depositors to care about the rate of interest and the convenience, but not the money’s safety – a partial cause of the nation’s enormous expansion of debt.
-- Government zoning impedes free markets and is abolished.
-- Federal laws that support unions are repealed. The interaction between employees and employers is none of the government’s business. Workers can unionize, but without government backing.
-- Government’s flood insurance with excessively low premiums is terminated. When floods occur, the costs are spread among all the people or added to the debt. The benefits to the few seacoast dwellers are substantial and obvious. The per-capita costs to the many Americans are small and hidden.
-- The Jones Act restricts American shipping and imposes significant costs on Americans. It is abolished.
-- The government stops paying farmers for staple commodities, especially corn. The subsidies have lowered consumer costs of staple commodities and contributed to widespread obesity.
-- Drug testing is not performed by the government. Bureaucrats avoid blame by keeping effective drugs off the market longer than necessary. More lives are lost from the delays than are saved by ensuring the drugs are safe.
-- Government funding of scientific developments has politicized science and is terminated. Scientific development is funded exclusively by the private sector, partly in concert with the military.
-- All tariffs and impediments to trade are repealed. Nations that do not impede international trade are more prosperous and more equitable.
-- Gun controls prevent good people from owning guns. Bad people obtain them anyway. Gun controls therefore make things worse and are abolished.
-- Government does nothing about viruses. Corrective measures, if any, are taken within the private sector.
-- The forfeiture of privately-owned assets to benefit police departments is terminated.
Dynamics of Government
Like everyone else, government bureaucrats act in their own best interests. Having no profits, they measure their self-worth by expanding their budgets, avoiding blame, and increasing their power over others. They generally avoid actually solving problems, because doing so would render their jobs unnecessary. Government’s principal objective is to expand its reach and power. With few exceptions, government is the worst and most expensive way to do anything.
With big government, the rich gain wealth faster than the poor, because legislators reward the rich for their campaign gifts. With small government, the poor gain wealth faster than the rich, probably because they’re willing to work harder.
Media stories about government are newsworthy. But unless wrongdoing or sex is involved, stories about individuals going about their private affairs are not newsworthy, since they usually affect only the individual involved. The media’s natural inclination to favor government is a danger to society and is partly corrected by education.
Providing the following provisions are first enacted, the funding of police departments is much reduced:
-- Members of the public may carry weapons, hidden or not, without licenses. The public would largely police itself, as occurred successfully in the 19th Century. Trying to prevent unbalanced people from owning guns is the job of the private sector, not government.
-- The disastrous war against drugs is terminated. Drugs are treated as medical problems, not crimes, and information about drugs is taught in schools.
-- Prostitution is legalized. What people choose to do with their bodies is none of the government’s business.
-- Since unions try to prevent bad cops from being fired, police departments may not unionize.
-- Businesses that fail to obtain suitable property and casualty insurance cannot obtain financing. Insurance companies coordinate with banks and finance companies to determine the proper conditions.
-- Cameras at intersections are operated by a consortium of insurers. If a car has not stopped appropriately, the owner is automatically sent a ticket and notified that his auto insurance premiums have been raised.
The Federal Debt
The default of at least a portion of the federal debt is closer than people realize. If the cost of carrying the debt rises even to the current rate of inflation, it would crowd out current expenses and force at least a partial government default.
The federal government owns 28% of the nation’s land and almost $5 billion of gold. It should transfer these assets to private parties in return for their accepting portions of the nation’s debts. Rivers, inland waterways, lakes, swamps, aquifers, mountains, forests, prairies, deserts, tundra, roads, highways, bridges, dams, reservoirs, the national parks, and the 12-mile band of ocean that rings the nation could all be exchanged for debt relief. Amtrak, urban transportation, airports, and the postal service should all be privatized.
The owners of the Mississippi and Missouri Rivers, for example, could earn money from those who use the waters for irrigation, transportation, manufacturing, fishing, drinking, and recreation. After Congress decides the extent of liability by the owners for floods, the values of these rivers would be sky-high.
Policies that Especially Hurt the Poor
The following government policies make life more difficult and more expensive for the poor and are terminated:
-- Government lotteries are advertised heavily in poor areas, encouraging people to treat them as investments, not entertainment. The lotteries create gambling addictions and breed poverty.
-- Used automobiles are bargains. The prosperous pay heavily to buy new cars. The non-prosperous underpay to buy them subsequently. This substantial, non-governmental, income-transfer program operates now because government interferes relatively little with automobile marketing. But land-use, building, banking, environmental, farming, mining, water, tax, and who knows what other laws interfere with real estate sales, preventing a much larger income-transfer program from operating with housing.
-- Occupational licenses require fees and long periods of training, restricting the number of people in the professions. The resulting shortage of workers elevates the prices of their products. The poor can’t afford the fees and expensive training to join the professions, but they pay the higher prices when they buy the products.
-- Rent control enables older, relatively prosperous tenants whose lives are stable to enjoy low rents. But after they vacate the apartments, the rents are raised. The higher rents are paid by younger, less prosperous people who move frequently.
-- Many small businesses are exempt from paying minimum wages. After government requires larger companies to raise minimum wages, the number of employees who begin being paid below the minimum greatly outnumber those who enjoy the higher minimum wages.
-- Regulations often raise child-care costs beyond the reach of lower-income parents, preventing them from obtaining jobs.
-- The Social Security system transfers money from workers to retirees and holds no investment reserves. With the number of retirees growing faster than the number of workers, the system is certain to fail.
-- The life expectancy of black men is shorter than that of white women. Since Social Security benefits terminate when a person dies, the FICA taxes paid by black men support white women, but not the other way around.
-- Anti-gouging laws force down the prices of products during emergencies, reducing the supply of the products, especially in poor areas.
-- Taxing the rich at high tax rates hurts the poor, because the rich have less money available to create jobs.
Without government holding them down, the poor would pull themselves out of poverty. Any social safety net that’s necessary would be supplied by the private sector.
Government’s Proper Duties
The long-term results of the following government duties are beneficial:
-- The federal government defends the nation and sets and enforces immigration policies.
-- The states set and enforce election laws.
-- Local and state governments enact basic laws, keeping people from hurting others by force or fraud. They are backed by the police, the armed citizenry, and the courts. The owners of roads and other infrastructures furnish their own police forces.
-- The enforcement of contracts and adjudication of lawsuits are discharged by the courts to the extent those issues are not resolved by mediators.
Most laws and government regulations cause long-term harm. The government sector therefore constitutes less than 5% of the GDP.
Since the government sector has grown during most of the years since 1900, the long term has come home to roost, making the nation more and more dysfunctional. Government’s increasing use of force induces increasing violence among the people.
The private sector creates a solution whenever there’s a purchase and sale – literally billions of times a day. On all such occasions, the buyers and the sellers feel that they benefit.
Transactions expected to be beneficial may of course turn out to be mistakes. Some people make more mistakes than others. The only solution is the individual’s effort and learning.
Since government resists change, the only solution for its mistakes is to make government much, much smaller.
The use of symbols and language to spread ideologies have been practiced for thousands of years. The first symbols to represent ideas were religious ones and were used to spread the teachings of deities. During the 19th century political symbols started to emerge and today almost every political party and ideology has its own. Symbols share the same advantage as pictures - namely, they are worth a thousand words. It is through repeated viewing that symbols serve their purpose.
It does not matter whether the viewers know what the symbols represent or not. Should they know the meaning of a symbol and agree with what it represents it would most likely fortify their beliefs. For those who do not agree with what the symbol represents it could change their minds or at least make them getting used to it. If the viewers are not familiar with a particular symbol, then in some cases it can awaken a certain curiosity which ultimately could change their minds. So, symbols are very much like company logos; they are used for marketing.
The development of language is derived from human action and has been influenced by various cultures. Each culture has developed their own type of language as a reflection of that culture. The relationship between culture and language goes both ways: culture affects the use of language and vice versa. Language and the use of words have a powerful impact on our lives and perception of the natural and social world around us.
Historical and Present Day Usage
Some of the most familiar political symbols is the swastika. It originates from Asia and is used as a symbol for luck or for the sun. In the West we know the 45° rotated version of it as a symbol for National Socialism (Nazism). What many people don't know, is that the Nazis also took control over the German language using euphemisms and slogans. A mass-murder operation, for instance, was called aktion meaning 'action'.
Though the political agenda has swung and mass murder of certain people is no longer on the agenda, we see the same things happening today on a whole new level. In Sweden, where I live, left wing egalitarians started to take control over the use of Swedish during the early 2010s. The rainbow flag and female gender symbol were heavily adopted during this period and are increasing in popularity.
Regarding the use of language, there are lots of words in the Swedish language which have been almost banned to fit the egalitarian view. The Swedish spelling dictionary Svenska Akademiens Ordlista (SAOL) is gaining new egalitarian words to its glossary each year and losing older "less including" and "negative" words. The most discussed new word in Swedish is the gender-neutral personal pronoun hen. Up until recently, we would use han, meaning 'he', and hon, meaning 'she'. Even though Swedes still use the words for 'he' and 'she' the gender-neutral hen is being used more frequently. Especially in mainstream media and woke circles.
What Libertarians Can Learn
Symbols and words are proven to be powerful tools and I strongly advocate that libertarians use these as well. Unfortunately, libertarianism does not have a specific symbol. Although, not originally a libertarian symbol, the Gadsden flag has been adopted by many libertarians and is perhaps the most used and recognized symbol for libertarianism.
Like any other political ideology, libertarianism has its different types. Thus, the anarcho-capitalist flag and the agorist a3 symbol may also be used. The question is, does libertarianism need its own symbol or should we stick to the good old Gadsden flag? Since the Gadsden flag is already associated with libertarianism, it has an advantage over a potential new symbol. However, the Gadsden flag is a rather complex symbol to either draw by hand or make jewelry, such as pendants out of. A new symbol, therefore, could come in handy.
As of language and semantics, I think libertarians should brush up their vocabulary and call things for what they are. I will present a few suggestions for what libertarians can do to improve their rhetoric and everyday speech.
First of all, there is no private sector existing other than in the black markets. The private sector as most people know it, is merely pseudo-private since it is heavily regulated and taxed.
Second, a proper use of the term ownership is needed to make non-libertarians understand the meaning of true ownership. Libertarians share a sound understanding of what ownership is. Thus, we recognize that there is no such thing as common ownership. Again, call it by its name; common utilization. Our public enemy number one, the state, deserves a more suitable name like the mob or the monopoly on violence/force.
Lastly, I want to challenge libertarians and Austrians to avoid using the term capitalism. Over the years, the term has gotten so misinterpretated and negatively used that there is no gain in using it. We must also recognize that we live in a mixed economy, and that there is no true capitalism in any country at this day. I propose using the terms free market, laissez-faire or voluntary exchange (market) when talking about true capitalism.
There has been a lot of buzz going on about nudges ever since Thaler and Sunstein popularized the concept in their book “Nudge: Improving Decisions About Health, Wealth, and Happiness” published in 2008. Nudges are basically subtle suggestions or motivations devised to change people’s behavior without denying them the freedom to make own decisions. Thaler and Sunstein define nudges as:
Any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting the fruit at eye level counts as a nudge. Banning junk food does not.
In the absence of evidence-based treatments and vaccines, behavioral nudges were expected to help in encouraging people to maintain social distance, wearing masks, debunking conspiracy theories at the start of the pandemic. Many governments and independent organizations funded projects to devise and study nudges that could bring in a desirable behavior.
Several studies have been conducted across the world to assess the effectiveness of nudges in a pandemic situation. Many of them reported that nudges were not as effective as expected in bringing out a desirable behavior. Informational nudges like pamphlets, text messages etc. seemed to have increased the hand washing habits of people by two percent and the willingness to wear masks by three percent in countries like Columbia and Brazil. Framing messages in loss or gain frame did not seem to have a major impact on deciding the need for and the length of lockdowns in the UK. Similar results were found in a study conducted in the Netherlands to motivate people to maintain hand hygiene in shopping streets. The study concluded as follows:
Our results suggest that stores, and governments, should look for other measures than the tested nudges to improve hand hygiene in the shopping street during the COVID-19 pandemic, either combining different nudges and/or using less subtle methods.
Keeping aside the ‘replication crisis’ in the fields of psychology and economics, there are several reasons why nudges don’t work. One major reason could be attributed to the psychological barriers created by the cultural and contextual features of different countries, locations, and groups. Generalizing the results of studies without ‘context reconnaissance’1 would yield bad results.
It is almost impossible to devise umbrella nudges or interventions that would fit everywhere. To put this into perspective, consider the reasons for vaccine hesitancy in Africa. Years of war and Ebola outbreaks increased the distrust in the products from the west. Along with this, local health beliefs that differ from region to region play a major role in increasing vaccine hesitancy. A single nudge would not be of much help here. This necessitates the need for customized or rather tailor-made interventions that are region specific; homogeneous groups or at least groups with similar traits must be identified. Generalizing the application of nudges or interventions for regions with similar characteristics may also not work. It is quite possible that we overlook the underlying heterogeneity in the groups considered. After all, many social phenomena are inseparably intertwined.
Having said this, one should not exaggerate the effectiveness of nudges in a precarious pandemic situation like this. The effect sizes of the studies cited above indicate that nudges alone are not enough as in the case of organ donation or retirement plans where we observed significant changes. Many governments believe that instead of forcing people to exhibit a desirable behavior, they could just ‘nudge’ them. ‘What is considered as desirable behavior and who decides it’ will take us to the classic debate of libertarian paternalism and its oxymoronic nature.
Thaler himself suggested that the governments should opt for sterner measures like vaccine passports instead of solely relying upon nudges to get people vaccinated. We need the right mix of soft and hard interventions which Thaler calls ‘pushes and shoves’ to motivate people to take vaccines. The sheer simplicity and subtle nature of nudges may make them appear like magic potion to the politicians. It is high time that we realize the actual effectiveness of these interventions and use our limited resources judiciously. As a closing note, here is the conclusion of a paper published in Nature by a group of prominent behavioral scientists written in response to the overuse of half cooked behavioral interventions.
On balance, we hold the view that the social and behavioral sciences have the potential to help us better understand our world. However, we are less sanguine about whether many areas of social and behavioral sciences are mature enough to provide such understanding, particularly when considering life-and-death issues like a pandemic.
Positive results – framing: Nudges for COVID-19 voluntary vaccination: How to explain peer information?
Weijers, R. J., & de Koning, B. B. (2021). Nudging to increase hand hygiene during the COVID-19 pandemic: A field experiment. Canadian Journal of Behavioural Science / Revue canadienne des sciences du comportement, 53(3), 353-357. http://dx.doi.org/10.1037/cbs0000245
A megastudy of text-based nudges encouraging patients to get vaccinated at an upcoming doctor's appointment, https://www.pnas.org/doi/10.1073/pnas.2101165118
Use caution when applying behavioural science to policy - https://www.nature.com/articles/s41562-020-00990-w
How effective is nudging? A quantitative review on the effect sizes and limits of empirical nudging studies, https://www.sciencedirect.com/science/article/abs/pii/S2214804318303999
In 2008 Warren Buffett issued a public challenge to the industry he most despised: hedge funds. Charging its clients 2% of assets under management plus 20% of any profits, Buffett wagered none of them could beat the annual return of the S&P 500. That bet was accepted, and ten years later the token wager of one million dollars was duly paid to the charity of Buffett’s choice.
Below is a graph depicting the results of the participating funds against the returns of an S&P 500 Index:
While it is true that the period in question featured an historical bull market, reaching back into the data and the history of major market participants reveals that the same would have been true at almost any point in the last forty years. Only a handful of investors, a literal handful, have been able to beat the market for their clients in the long run after fees and transaction costs are considered. Buffett, himself on that list, is so confident in the superiority of investing in broad-based index funds that he is said to be leaving the majority of his estate in them for his wife.
Other wealthy investors have taken note, with the share of assets under hedge fund management falling over the past five years.
While the commissions and fees hedge funds charge are large, what explains the basic inability of the average fund, staffed by ivy league quants doing cutting edge analysis running state of the art software, to significantly beat the market over the long run?
The answer, at its core, is the Efficient Market Hypothesis.
In the words of its author, Chicago School economist Eugene Fama (1970), the Efficient Market Hypothesis (EMH) is the belief that “prices reflect all available market information.” The implication being that, if they didn’t, arbitrage opportunities would arise, and prices would be corrected by those large investors with the resources to identify and make such corrections. The focus of the theory, therefore, is on information and its impact on prices.
EMH makes four basic assumptions: rationality, risk aversion, responsiveness to new information, and some amount of randomly distributed error (aka Malkiel’s “Random Walk”). Further, it takes three generally accepted forms:
- Weak-Form Efficient: above market returns cannot be gained from past market data (aka: technical analysis), but can be had from some kinds of fundamental analysis.
- Semi-Strong-Form Efficient: prices reflect all publicly available information. Prices will only change with new information, the emergence of which is assumed to be more or less random (thereby negating any prospect of above market returns via fundamental analysis).
- Strong-form Efficient: even with access to insider information an investor cannot beat the market.
Immediately, one can see that the strong-form of the EMH cannot possibly be true. Insider trading is illegal for a reason, and deals like Berkshire’s recent purchase of a large stake in videogame company Activision immediately before it was announced the company would be acquired by Microsoft raise eyebrows.
Between the weak and semi-strong forms, however, there is a lot of gray area. And many economists since the 1980s, including the Yale’s Robert Shiller and Chicago’s Richard Thaler, have made arguably the largest contributions of their careers studying the various ways in which markets apparently misbehave according to the various forms of the EMH.
To take a few examples, seasonal effects defy even the weak form of the EMH. The so-called Santa Clause rally is perhaps the best known of these phenomenon. Regardless of the wider macroeconomic conditions, market momentum, or exogenous risks, investing strictly on the basis of calendar dates, from the last five trading days in December through the first of the new year, has yielded a return 75% of the time. From a statistical standpoint, this is improbable, though several rather mundane facts may explain the anomaly: equities are generally at a cyclically lower level to start December due to tax reasons, professional traders being on vacation makes for lighter volume and fewer short sellers, and purchases in anticipation of another observed historical tendency, the January Effect.
In his analysis of P/E ratios, Shiller provides possibly the strongest evidence against the semi-strong-form EMH:
What he found was that buying and holding companies with relatively lower P/E ratios over the long-term produced the highest returns over those periods – something fundamental analysis and projections of future earnings could contribute to optimizing.
As pioneers in behavioral and narrative economics, both Thaler and Shiller also believe that the stories we tell ourselves about the stock market matter – how much, they can’t quantify. So, too, that systemic biases in thinking, such as the herd effect and hot hand fallacy, can drive market action in ways EMH would not predict – such as the 1990s IPO tech bubble, the rise of the cryptoverse, the implosion of LTCM, or the London Whale.
As far as bubbles go, Shiller correctly forecast both the tech bust in the late 1990s and the ticking time bomb in the housing market in the mid-2000s. But it is worth noting that while in retrospect everyone admits prices of mortgage backed securities were mispriced in accordance with their actual level of risk for several years in the mid-2000s, it was impossible to convince anyone of that at the time. Indeed, Thaler admits that while bubbles exist, we can really only prove they were bubbles after the fact. Afterall, there were plenty of buyers in every case, and who was anyone to say for certain that the future wasn’t going to be radically different from the past? Or that buying equities whose prices were rising wasn’t rational and efficient, value being subjective? Afterall, what is the value of something if not what amount it trades for between informed market participants freely exchanging?
Under such circumstances, an investor who thought they had identified such an inefficiency in the market and sought to profit from it by going short might wind up running out of money before the market ran out of enthusiasm: as with George Soros in the 1990s and tech.
Shorting being both risky and expensive, in such circumstances the great irony is that the rational thing to do for the average participant from a game theoretical standpoint is to ape the market and go along for the ride – hopefully using their self-awareness of actual risk levels to jump ship at some point before the crash.
It seems clear that between a combination of momentum trading, innovative strategies, superior analysis, high frequency trading for momentary and infinitesimal price arbitraging opportunities, and guessing correctly at future trends, can lead some firms to obtain above market returns. However, once fees and expenses are considered, the actual return to investors has been below the market average. Furthermore, virtually no funds or managers are able to sustain above market returns over the long run.
There have, of course, been periods where this was not true. The first decade of the 2000s as well as the ten years between 1965-1975 would have seen buyers of the S&P 500 index suffer a slight loss, while investor at the most successful funds of their time would have shown a positive return.
All things considered, for the average person planning for retirement, assuming they have neither the time or training to do the level of due diligence and analysis required for making superior individual stock selections, they really have been best off buying and holding broad based index funds rather than trusting to expensive, and often wrong, “experts.”
Whether or not this will continue to be true over the next several years, only time will tell.
As George Bragues argued in the QJAE in 2014, the data clearly reveals markets behave irrationally at times with respect to prices, earnings, dividends, acquisitions, et cetera; however, the market is not irrational either in that it is gradually self-correcting, bubbles are difficult to spot, and even more difficult to time.
Building on Shostak’s critique of Markowitz’s Modern Portfolio Theory, what this means for the efficient Austrian portfolio will be the subject of another discussion.
In this video panel on central bank digital currencies (CBDCs), Mises Institute Senior Fellow Alex Pollock moderates a discussion on what CBDCs could mean for the banking sector and the monetary system overall. Panelists include:
- Bert Ely, Principal, Ely & Company, Inc.
- Chris Giancarlo, Senior Counsel, Willkie Digital Works LLP; Former Chairman, US Commodity Futures Trading Commission
- Greg Baer, President & Chief Executive Officer, Bank Policy Institute
Unless you are living under a rock, you know by now that current times are nowhere near economic stability. In fact, there has not been such “stability” (regardless of what politicians and central bankers say) since the ending of the Bretton Woods agreement in 1971. What did ending the Bretton Woods agreement mean to the world? Since I am no expert on the topic, I suggest reading this article by the CATO Institute. According to historical data and using the year 1913 as the base year, we find out that the total rise in prices is roughly 2920 percent ($1 in 1913 needs $29.20 today to buy the same). From 1913 to 1971, the index grew by 400 percent or 4 points, meaning prices multiplied by 4 in 58 years. Now, comparing from 1971 to 2019 we see that the index rose 21.73 points or 2173 percent in a similar year span. It is almost a 6-time difference.
Many Keynesian economists (and some “free-marketer” monetarists) argue that it is thanks to inflation -as Austrian thinkers, we refer to inflation as the increase in monetary supply, but for easier-reading-and-writing purposes, the general conception of inflation is the general rise in prices will be used- that wages grow with it. But is this true? In 1971, according to the SSA, the average wage index was $6,497.08, while in 2019 it was $54,099.99, a 732.68 percent increase. Yes, wages grow, but 3 times less than prices do, which turns into much lower purchasing power. According to the same data from the SSA, the average wage in 1951 was $2,799.16, which means wages grew 132.11 percent from that year until 1971. How much did prices grow? 55.77 percent, meaning workers acquired more than 2 times more purchasing power, a big difference compared to what happened after abandoning the imperfect sound money system we had. The average inflation rate during that time was 2.24 percent, while from 1971 until 2019 it was 3.91 percent.
This itself should serve as enough proof to go back to a commodity-backed system, but more facts can be brought up to make the argument even more solid. According to Fed data, median home prices have risen from $25,800 in the last quarter before leaving Bretton Woods to $327,100 in 2019, a 1167.83 percent increase (1561.63 percent until 2022), with growth in wages sitting far behind. Cars cost an average of $2,700 in 1971, and we got the news that the average price now sits at around $47,000, or 1640.74 percent, and again, wages far behind prices. It is not only the rise in prices that matters. US federal debt was 35 percent of the GDP in 1971 and never went above 90 percent with the WWII (including post-war) exception, and since 1950 it never surpassed 74 percent, again being an exception and following a downtrend until 1971. Debt has been above 100 percent for 8 years and will continue to do so for at least a few more since it’s sitting at almost 125 percent currently. This table shows perfectly the trend before and after 1971.
Now the economic and historical case has been made, we need to focus on the philosophical case. There are four main points for libertarians to be against a central bank or any similar institution and not in favor of sound money. First, ever since 1971, central banking gained tremendous power, and with it, so did the government. We know that economic power will always be abused. We are opposed to the government having more power than it should, so we cannot be in favor of a central bank. Second, the central bank sets interest rates, which is a form of central planning, and we believe it only brings misery, and therefore we favor market-driven rates, which instead bring prosperity and growth since they follow a non-artificial, imposed rate, and today is proof of it. Third, we know thanks to Murray Rothbard’s perfect explanation in his classic, America’s Great Depression, that printing money and expanding artificial credit to enterprises leads to what is known as the business cycle theory, which always ends up in recessions as we have seen in the past. And fourth, we believe in a free market, and most of the economic interventions are used to bail out banks, which was seen in 2008. This goes against the principle of free competition in a non-regulated market.
Academic papers can -and will soon- be written on the topic, but this overall, non-technical and easy-to-understand analysis and these arguments will serve as a good basis to be against the current power-abusing, out-of-control system we live in and favor a commodity-based one. It will be with commodity-backed money that we will have a true free-market economy and we will prosper. Until then, we will continue to go downhill and we will see prices rise 3 times, or even faster than wages do, making us poorer and more dependent on the government every day.
Sound money is now more portable than ever! Paper banknotes were originally created and issued by private banks as receipts for their depositor’s gold. Said receipts were then used by the customers as currency, being traded between themselves and businesses to avoid the burden of transporting gold. Over time, these privately issued notes were eventually replaced by the Federal Reserve’s own paper bills. Dollar bills were entirely severed from their gold backing when the Nixon Administration decided to go off the gold standard. Now, however, technology has advanced to the point that allows gold to be transported more easily than ever before, even in a wallet. While some may be thinking that this advancement comes in the form of coin minting, as it turns out the market’s answer to solving gold’s transportability issues lies in between two thin sheets of plastic.
Enter the Goldback.
Created in 2019, Goldbacks are privately funded currency notes with gold embedded in the note. Resembling Federal Reserve issued currency, the Goldback has various designs, serial numbers, and denominations. These denominations range from 1/1000th to 1/20th of a Troy ounce of gold. Currently, the States of New Hampshire, Nevada, and Utah all have privately issued sets printed and available on the market for purchase. Goldbacks combine sound money with modern technology through a process called vacuum deposition. Goldback’s company website describes this process:
“The designs are printed on a sheet of polymer that is then bombarded with the correct amount of atomized gold particles in a vacuum chamber. This gold is then sealed inside by a second protective barrier of polymer, thus creating a beautiful negative image.”
The company that manufactures Goldbacks, Valaurum, has also produced gold-embedded-bills for the Republic of Ghana, the Republic of Cameroon, and various private organizations.
The drawbacks of the Goldback are very apparent. Namely, they’re spotting at more than double the current price of gold. This high premium is a result of its expensive crafting and limited supply. Both factors create difficulties in the currency becoming a widely accepted medium of exchange at this time.
Despite these drawbacks, the future holds great potential for the goldback. As technology develops, competing producers could have a Goldback-like product manufactured more efficiently, increasing the supply and thus lowering the cost to consumers. This is the beauty of the market. As time progresses, profit incentives draw in entrepreneurs who create higher quality products at lower costs. The computer serves as a great example. In an article published by The American Enterprise Institute, Mark Perry explores the market development of the computer:
“Compared to today’s desktops, mainframe computers were 128 times slower, more than 8,000 [times] as expensive, and were more than 1 million times as expensive in terms of cost per MHz.”
Logically, the same principle would apply to Goldbacks, especially when more competitors join the market. The process of having less expensive gold-embedded bills on the market could be expedited further if larger banks decide to print their own Goldback-like currency. However, this is highly unlikely to happen in the foreseeable future due to the Federal Reserve’s policy of easy money that benefits its member banks.
Today, individuals face soaring prices at the gas pump and grocery store. Due to the Federal Reserve creating trillions and trillions of dollars since the beginning of the Covid-19 Pandemic, inflation is causing devastating pain all throughout the market. Because of this, finding hedges against inflation, such as precious metals, is more important than ever before. If the dollar ever reaches a point of Weimar or Venezuela-style hyperinflation, low income and fixed income households, savers, and retirees will be the most harmed. Luckily, this is an area where the Goldback can potentially ease the pain of inflation. Rather than needing large amounts of capital to purchase gold, a Goldback can be bought for less than the cost of a typical lunch. This is an especially promising development for teenagers and college students, like myself, who do not have the capital to buy large quantities of gold.
Ludwig von Mises famously remarked, “[The] first precondition of any monetary reform is to halt the printing press.” If stopping the Fed from printing more money is not an option (which seems to be the case), then arguably the next best step for monetary reform is to divest from state-provided currency and invest in private alternatives. The Goldback is one such option. Although it is unlikely that this currency will be accepted in your grocery store anytime soon, the technology behind it certainly makes for a hopeful future where individuals can use privately provided sound money in the form of gold, rather than the State’s unstable, debased fiat currency.
With the Federal Funds Target rate set between 0.75% and 1.0%, and the Fed’s promise to increase rates and reduce asset purchases in the coming months, some consideration should be paid to servicing the USA’s $30.5 trillion debt.
To get a better sense of the interest expense, TreasuryDirect provides the average interest rate, as of April of last month, being 1.659%. See below:
Borrowing $30 trillion at less than 1.659% may not seem all that bad; but because something works today, doesn’t mean it will continue working tomorrow. Notice on the chart, total marketable securities are borrowed at 1.528% and non-marketable securities at 2.123%. Marketable securities are more widely recognizable as they include treasury bills, notes and bonds traded in the secondary market. As of last month, approximately $23.3 trillion in debt was marketable, while only $7.1 trillion was non-marketable, per below.
The trouble ahead is easier to spot when the New York Fed explains the mechanism at which the Fed can buy or sell US debt:
The New York Fed's Open Market Trading Desk (the Desk) purchases Treasury securities in the secondary market and rolls over maturing Treasury security holdings…
Should all go as planned, next month it will be in the secondary market where the Fed will really show its influence again, this time reducing the number of treasuries holdings by up to $47.5 billion a month.
Unless other entities step up purchases to fill the void left by the Fed, it's expected rates will continue increasing. Maybe we’ll see wild fluctuations in interest rates in the not too distant future.
How high rates will go is anyone’s guess. But clearly there must be an interest rate that is simply too high. Carrying $30 trillion becomes progressively difficult when rates are rising, as each 1% increase in the average interest rate adds $300 billion more of an annual interest expense.
Maybe that’s why CNBC noted:
Federal Reserve Chairman Jerome Powell acknowledged that increasing interest rates will “include some pain,” but added that a far worse outcome would be for prices to continue spiking.
Chair Powell sees raising rates as the cure for increasing prices. We shall see how effective this strategy is in due time. But, no one has provided the strategy to cure our high debt level. Even at an average interest rate of 3 to 5%, normal, if not low, by historical standards, the interest payment on US debt seems crippling. And if the US government is borrowing at 3-5%, one can hardly imagine what the average consumer would borrow on a mortgage, or corporation on a bond.
Of course, there is one way to ensure rates stay lower for longer which involves the Fed purchasing more debt and increasing the money supply. Don’t ever discount this as a viable option according to the Fed; undoubtedly, no matter what the next crisis is, even if it’s rising prices or a collapsing currency, balance sheet expansion will be put forth as the solution. They’ll say it worked in the past, so it should work in the future.