Power & Market
One of the most powerful men in the world, Chairman of the Federal Reserve Jerome Powell, appeared on 60 Minutes over the weekend. The interview did not mention Austrian economics, a return to the gold standard, or a new laissez-faire stance by the Fed. But there are some thought-provoking sound bites.
When asked if the Fed had simply flooded the system with money, Powell responded, “Yes. We did.” When asked where the money came from, he replied:
We print it digitally. So as a central bank, we have the ability to create money digitally. And we do that by buying Treasury bills or bonds for other government-guaranteed securities. And that actually increases the money supply.
Although true (and completely ludicrous) it’s nothing new, as central bankers seem to have no problem supporting inflationism. However, his follow-up sentence was patently false:
We also print actual currency and we distribute that through the Federal Reserve banks.
It is in fact the US Treasury that prints every Federal Reserve note and gives it to the Fed, which then distributes to banks. Why does the world even need the Federal Reserve? And why doesn’t the US Treasury cut out the middleman and print its own currency? The interview continued with the usual fawning over central bankers. Scott Pelley couldn’t help mention how:
Some of the best economic analysts in the world report to you.
One can only wonder how many Austrian economists work at the Fed and what types of analysis could be provided when analyzing trillions of dollars of “stimulus” required to fight a “liquidity crisis.”
Assurances to the market and hopes for future debtors to the Fed were also included:
I will say that we're not out of ammunition by a long shot. No, there's really no limit to what we can do with these lending programs.
Is this not the most alluring trait of money created out of thin air and backed by nothing? Having no limit on the amount which can be generated? Most of the Fed facilities haven’t even opened up yet, and Congress is already cooking up another trillion-dollar spending bill. We can only guess how much money will be “printed” by the time the crisis is over. If the Fed’s balance sheet doubled by this time next year, would anyone really be surprised?
Oddly enough, the chairman mentioned something that was entirely honest:
We don't have oversight over Congress. Quite the reverse, actually. We're a creature of Congress. And they have oversight over us.
Congress created the Fed. Contrary to what we’ve been told, the it cannot save the world by creating more money. It hasn’t worked before, and it won’t work now. In terms of oversight, if Congress wants more transparency, it can simply demand it, repealing any privacy that the Fed has. America survives not because of the Fed, but despite it. Just as an act of Congress created it, an act of Congress can end the Fed.
In recent weeks, we've been keeping an eye on weekly total deaths as they are reported by the Centers for Disease Control and Prevention (CDC). Weekly deaths—as opposed to COVID-19 death totals—provide some needed context. This is important, since we now know that doctors and health administrators are encouraged to be—in the words of Deborah Birx—"liberal" with counting COVID-19 deaths.
This week I'm looking at week 16 (the week ending April 18). The CDC says that week 17 data is "100% complete" but experience suggests that it will still be a week or two before we have 90 percent or so of the total.
Even week 16 will continue to adjust upward, but further large adjustments are unlikely at this point. These numbers are CDC estimates.
Looking at the data we do have, there were 67,059 total deaths in the US during the week ending April 18 (week 16). That's up 24 percent (or 13,206 deaths) over the week 16 average (53,852) for 2017–19. Using the average for 2017–19 as the baseline, "excess deaths" number about 13,000 or 0.004 percent of the US population. Interestingly, so far this year, only week 15 (the week ending April 11) has exceeded the total mortality for week 2 of 2018, which was 67,295. The 2017–18 season was a very bad flu year according to the CDC (week 1 is on the left in blue and week 16 is on the right in yellow for each year):
A large portion of this continues to come from New York State. In New York, the week 16 total was 4,056 deaths, which was 2,083 above the 2017–19 average of 1,972. So, about one-sixth of all excess death in week 16 came from New York. Deaths were up 105 percent over the average for week 16, with excess deaths at more than 2,000 for week 16:
Week 15 (the week ending April 11) may have been the peak week, if we assume COVID-19 was the driving factor in total deaths that week. Worldometer data suggests that COVID-19 deaths peaked the week ending April 11 and have fallen since then.
To offer an example of another large state, we can also look at Florida. Florida has not seen nearly the surge in total deaths that we've seen in New York or nationwide.
For week 16, total deaths in Florida were only up 8.4 percent (or 331 deaths) over the 2017–19 average for the week.
Murray Rothbard once stunned me by saying that he thought the greatest economist in history was Eugen von Böhm-Bawerk. The reason he gave, to the best of my recollection, was: “Böhm-Bawerk created a mighty system of economic theory and then successfully defended it against all comers.” Noticing that I was startled, he asked who I thought was the greatest economist. I replied, “Ludwig von Mises,” Rothbard’s revered mentor, whom I thought would have been his choice. Rothbard acknowledged that an excellent case could also be made for Mises.
It was only many years later that I came to understand why Rothbard gave Böhm-Bawerk an edge over Mises. Böhm-Bawerk’s magnum opus, The Positive Theory of Capital, published in 1889, almost immediately began to elicit comments and critiques from the greatest economists of his age throughout Europe and the United States. The stream of commentary on his work continued unabated for twenty-five years until his death in 1914. During this controversy, Böhm-Bawerk defended and further developed his theoretical system with acute insight and superb dialectical and expositional skills that far outclassed those of all but a few of his critics. In contrast, Mises was never able to engage the greatest economic minds of his age. His brilliant magnum opus, Human Action, published in 1949, barely caused a ripple of acknowledgement in the increasingly positivistic postwar economics profession, which was rushing headlong into macroeconomics, econometrics, and mathematical economics.
Whether or not one agrees with Rothbard about the ranking of Mises and his mentor, Böhm-Bawerk certainly merits a place in the pantheon of the greatest economic theorists.
The Österreichische Mediathek, an Austrian archive for sound recordings and videos on cultural and contemporary history, has published a very short clip titled "Vienna Economics" featuring the voice of Eugen von Böhm-Bawerk. The 26-second clip, dated 1905, is in German, but it allows listeners the rare treat of listening to one of the greatest economists of the twentieth century.
A translation of the page offers this description of the clip:
Unfortunately, the great economist, Professor Eugen von Böhm-Bawerk (1851 to 1914), does not speak about his subject in this sound recording, which was recorded in the Vienna Phonogram Archive on December 20, 1905, but rather mentally talks about the then quite new recording machine, the phonograph. - Böhm-Bawerk, who was also twice Minister of Finance (in the Gautsch and Koerber cabinets), along with Carl Menger, Eugen von Philippovich and Friedrich von Wieser, is one of the main representatives of the Viennese School of Economics, which extends well beyond Austria and beyond.
Transcript: I don't know what future ages would like to learn from us. I would know what I would like to learn from future ages. Unfortunately, the phonogram post, to which I could entrust my curious questions, does not provide a response.
As Guido Hülsmann notes in the magnificent Mises: The Last Knight of Liberalism, 1905 was the year Böhm-Bawerk was the year he obtained a full chair as a professor at the University of Vienna, a victory of profound importance for the history of the Austrian school.
[Carl] Menger was successful not only in developing the continental tradition of economic science, but also in establishing a network of like-minded young thinkers within the confines of Austria-Hungary. He only failed to get Böhm-Bawerk a chair at the University of Vienna. His favorite disciple applied twice,in 1887 and 1889, but each time the Ministry of Education chose a different candidate. They argued that Böhm-Bawerk represented the same abstract and purely theoretical school as the other chairholder (Menger) and that it was necessary to also have a representative of the new historical school fromGermany. Even this did not prove to be a decisive obstacle. In the fall of 1889, Böhm-Bawerk went to Vienna to join the Ministry of Finance and became an adjunct professor at the University of Vienna; in 1905 he obtained a full chair. Hence, in distinct contrast to all other modern (marginalist) schools of economic thought, the Austrian School quickly reached a position of power, protected by intellectual tradition and political patronage. Under the leadership of the next generation, it would obtain a position of unparalleled influence.
Böhm-Bawerk would end up being publishing important works advancing the Austrian theory of capital and interest, as well one of the most potent takedowns of Karl Marx ever written. His students at the University of Vienna included Ludwig von Mises and Joseph Schumpeter.
In a 2002 Quarterly Journal of Austrian Economics article, George Reisman, a student of Mises himself, noted that it's "entirely conceivable to me that Mises might have described Böhm Bawerk as the most important Austrian economist."
For readers who are excited to find this neat historical gem, consider checking out the Ludwig von Mises (Audio) Archives available here on the site.
Does anyone remember, during the last financial crisis, the “evil bankers” who almost collapsed the entire financial system? Then, in order to save the world, the Fed provided loans and bailouts to those same bankers?
Considering the relatively “small size” of the TALF (Term Asset-Backed Securities Loan Facility) and how most living on main street are not in the business of granting loans, it didn’t garner much attention when the updated TALF term sheet was announced this week. Still, after looking further into the program some may discover, or remember, TALF is not new. It was implemented during the Great Recession over a decade ago. During that time, Matt Taibbi wrote an article in Rolling Stone called The Real Housewives of Wall Street which discussed the original TALF program. Per the article, the wife of then Chairman of Morgan Stanley and the widow of another high-ranking Morgan Stanley employee started a company with close to $15 million, borrowing nine loans for $220 million under the TALF. With these low-interest loans they bought student loans and commercial mortgages. At the time of writing, he noted roughly $150 million had yet to be paid back to the Fed. The public didn’t know how much money the borrowers earned from their dealings, as there was no accountability. But the loans were structured such that 100% of the gains would go to the recipients while 90% of the losses would go to the treasury. Understanding the article was written in an entertainment magazine, and not with Austrian economics in mind, he did capture a very important detail:
Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment.
Without comparing the previous TALF to the current, and assuming control issues have been ameliorated by the Fed, the underlying problem with these programs remains the same. They all require money be created then lent to certain members of society for the supposed purpose of saving society in time of need. If the loans are successful, the gains go to the borrower. When the loans are not repaid or forgiven, the newly created money and its accompanying debt will exist as a cost to be paid by future generations. To the masses, these loans seem palpable when the borrower is not considered “rich.” However, the problem persists regardless of the borrower’s income bracket.
The new TALF follows the same Special Purpose Vehicle (SPV) and US Government equity stake to which we’ve now become accustomed. Under the program, the treasury is only making an initial $10 billion equity investment with a maximum lending limit, thus far of only $100 billion. Eligible borrowers can make loans to the public, then use those loans as collateral to borrow from the SPV. In this program, eligible loans include: auto and student loans, credit card receivables, equipment and floorplan loans, leveraged loans, and commercial mortgages to name a few. Even though the TALF may be smaller than the other Fed programs, the anti-capitalist nature and prior history warrants attention.
The day after the updated term sheet was announced, Chairman Powell gave a speech where he stated:
At the Fed, we will continue to use our tools to their fullest until the crisis has passed and the economic recovery is well under way.
At the week’s end, the Fed’s balance sheet hit a record $6.9 Trillion. With many programs still yet to open, central bankers remain convinced their inflationary tools and ability to judge who needs money most far outweighs the life, liberty and happiness of the many. The programs may be larger, but the narrative and risk to the public remains the same.
The surge in unemployment isn't over. New jobless claims data released today by the US Department of Labor showed that total claims surged again in the week ending May 9, exceeding 2 million for the eighth week in a row.
Last week there were 2.6 million new claims for unemployment insurance. That was down from 2.8 million the previous week, and down from the peak of 6.2 million on the week of April 4.
Since claims began to surge on the week of March 21, 33.3 million new claims have been filed.
Last week the Department of Labor released monthly data estimating that 20 million jobs have been lost in recent months. That means nearly all the job gains of the last twenty years are gone.
This drove the unemployment rate above 14 percent, although Chicago Fed economists suggest that it may really be above 25 percent.
It's unclear how many of these workers will make an effort to return to the workforce. Many potential workers will simply leave the workforce and not return for many years as they wait for the economy to recover. Many older workers may never return.
In April, labor force participation in the 25–54 age group plummeted to a 37-year low, dropping to 79 percent. That's the lowest since 1983. (Keep in mind that we're looking only at workers in the 25–54 age range. We're avoiding the issue of students staying in school longer and Baby Boomers retiring.)
The overall effect, of this, of course, is that workers and entrepreneurs are producing far less than they were a few months ago. This presents a serious inflation risk, since the money supply has continued to increase at breakneck speed. Consumer price inflation is mitigated by gains in productivity. But that's certainly not where we are right now, and we have many more dollars competing for a shrinking pool of available goods and services.
Not surprisingly, grocery prices shot up last month at the fastest clip in forty-five years. Whether this lasts, however, depends in part on how well markets adjust to the new demand patterns that have emerged as a result of the COVID-19 panic. Food purchases have shifted dramatically away from restaurants and toward grocery stores. If markets are allowed the freedom to adjust as needed, price inflation will be mitigated in this regard, although it's unclear to what extent, and depends also on how many more rounds of helicopter money (i.e., the $1,200 per person stimulus checks) are implemented.
Did you know that Switzerland’s central bank, called the Swiss National Bank (SNB), owns approximately $94 billion of publicly traded US equities such as Facebook, Apple, Amazon, Netflix, and Google? Its top holding is in Apple, with over $4 billion worth of shares in the company. The SNB’s filing statement was released on Friday, showing ownership of 2,480 holdings as of its quarter end.
The SNB provides insight into the possible future of central banking while also illustrating a failure in economic policies. The bank, similar to the Federal Reserve, has been partaking in expansionist monetary policies in attempts to best manage the economy but differs in its reasons for doing so. According to a statement made by SNB chairman Thomas Jordan:
We must counteract increased upward pressure on the Swiss franc. We have therefore decided to scale up our foreign exchange market interventions—a tried-and-tested instrument—to shield the Swiss economy.
Per the bank, its expansionist monetary policies are important to provide downward pressure on the value of the franc. The chairman continued his stance with a speech over the weekend, Reuters reported:
The appreciation on the franc as a safe haven has become enormous. Without the SNB’s monetary policy we would see a completely different franc exchange rate in the current situation.
The mainstream media and academic community provide little explanation for this, as Professor Michael Graff from the Swiss Economic Institute was quoted by the Financial Times:
The SNB is one of the sacred cows of Switzerland. You don’t criticise the SNB.
Central banking is important to maintain economic order. Without these bankers, who are mostly economists, the world would be much worse. Or would it? The SNB has a mandate of price stability and focuses largely on controlling the exchange value of the franc, while the Federal Reserve seeks to promote maximum employment and stable prices. Neither mandate is much different than the “sacred cow” statement above and perhaps both are intentionally vague; however, they are the mandates central bankers use to justify their actions.
SNB fears the Swiss franc would appreciate “too much” and that this would be bad for the economy. Economists often cite how exports will hurt, yet no one asks about imports, the rise of purchasing power, lowered consumer prices, the cost of living, increases in savings, or positive interest rates. Instead, we hear of the importance of embarking on expansionary policies to save a nation from the dangers of a strong currency. Thus, to avoid danger, the Swiss are “forced” to inflate their currency. But, they must invest this money somewhere. So why not purchase ownership in dividend-paying companies in the USA?
At what point in time, this crisis or the next, will interest rates go negative? And what happens if the US dollar becomes “too high” or another crisis emerges requiring a new Fed intervention such as buying equities? Issues around sovereignty also arise: What happens if a central bank owns enough shares in a publicly traded company to start voting in, or making a hostile bid for, publicly traded companies?
Or maybe it's best not to ask such things. Perhaps the sacred cow is no different than the gift horse and it’s probably best not to look it in the mouth. Sadly, when it comes to inflationary monetary policies, they never actually work. It just takes time for everyone to notice.
Could the COVID-19 panic lead to a generational shift in culture comparable to those resulting from the Great Depression or the advent of the personal computer?
The new era we are entering could set up a new generation of people ready to obey orders. After all, “stay at home,” “shelter in place,” and “social distance” sound to many like commands that ought to succeed. Therefore, governors and mayors, even the president, as well as heads of state around the globe, have issued them under the misguided assumption that free people will not avoid contact during a pandemic without the application of force. Nevermind that voluntary isolation and the use of masks began trending as early as January 2020 among certain communities as knowledge increased, i.e., voluntary precautions preceded their mandates. Taking advantage of, and feeding, the panic, politicians have promulgated executive orders with the force of law. No public input, nor any cognition of the constitutional balance of powers, mitigated the rapid development of such decrees from the exalted ones. Any denizen can be fined, arrested, imprisoned, or manhandled for violations of these novel controls. Technocrats operating under the orders of both elected and nonelected officials demanding immediate results lack the time, expertise, or, frankly, the interest to research the consequences of their actions. With all deliberate hubris, they simply love adopting the guise of “savior” and its attendant popularity. Contrary to their claims, hastily cobbled together rules lead to interminable deprivations for individuals, families, and entire communities. Aside from the oft-considered effects on the food chain, the financial well-being of the citizenry, the threats against the survival of businesses, and pervasive bankruptcies likely to come, these effects extend into areas of mental health. Discussions have appeared regarding depression and suicide.
The ill-conceived new rules subject people to unacknowledged hazards. Imprisonment or assault by the obsessed constabulary in response to the coronavirus panic, could, through irrational rules, inflict enormous suffering on innocent citizens. Police departments from several municipalities have been observed, and photographed, issuing tickets to persons sheltering in their cars at drive-in church services and at sunsets. Persons sheltering in their cars are, by definition, isolated. In terms of effective quarantine, the shield provided by one’s automobile amounts to as effective a seclusion as would find in one’s house. Besides, in this era of price inflation in housing, the vehicle may be the only home for a growing cadre of victims. They meet the physical requirements for stopping or slowing the spread of the disease. Other instances have shown folks who were socially distant (at least six feet) attacked or manhandled by officers in blue. Such assaults result from nonsensical, vague, and contradictory restrictions imposed inconsistently and with inadequate notice, but with the force of law.
The misapplication of force is predicable, for law enforcement hopes to cash in and collect more lucre to fill the state's coffers while claiming to keep people safe and projecting themselves as tough on crime. Many of the victims of this oppression are poor people who cannot afford to pay fines. These represent a jackpot for the government because it can then issue follow up levies and collect interest on unpaid penalties for months or years to come.
The question this article asks is whether the current panic, administrative overreach, and personal isolation represents a generation-defining event? Will children ages six months (or younger) to approximately twelve years (or older), have a sense of foreboding permanently imprinted on their personalities like those who grew up during the Great Depression? This in no way intends to disparage today’s youngsters, but examines a potential unintended and unrecognized consequence of state-imposed stay-at-home orders. The Silent Generation of the 1930s, which also fought during World War II, had a lot going for it, as illustrated by Time magazine description of them as having an optimistic outlook. Members of this time regiment must be credited both metaphorically and literally for bringing recovery to societies the world over after the devastation and ashes wrought by a decade and a half, or more, of economic deprivation and military conflict. So, the generation is not to be denigrated. Although tense times spawned fear that nuclear Armageddon could occur imminently and introduced MAD (mutual assured destruction) as the default foreign policy, this age group led civilization out of the upheaval intact and avoided annihilation by World War III.
As a result of the pervasive fear foisted on all by politicians, could Gen Alpha and the latter part of iGen now become the Covid Gen? If so, the state fearmongering described above might lead this generation to bear some similarities to the Silent Generation. Defining common traits of this cohort would include obsessive cleanliness, only feeling comfortable outdoors when wearing a mask, looking askance at anyone not wearing personal protective equipment (PPE), a rapport-crushing desire to keep distant from others, avoidance of intimacy, and a strong desire to stay at home and only communicate electronically. Should, as is likely, a new serious inflationary depression start, hoarding and frugality would constitute more common traits. Although admitting that no two generations have identical traits, certain of these qualities resemble those of the Silents.
The obsessive cleanliness would stem from the repeated exhortations, even lectures, to wash hands frequently for fear of contracting a deadly disease. Think of the effect of pervasive societal paranoia on a young mind: “Wash your hands or DIE.” Surfaces must be kept immaculate and smell of chlorine. Face and extremities must remain chapped from the effects of soap and must reek of alcohol. The obsessive fear of germs, or more properly virions, would lead to a discomfort when away from home that would only be poorly assuaged by wearing face coverings. For the rest of their lives, persons with this anxiety could be expected to look askance at strangers not wearing PPE. To recognize the potential similarities to the Silent Generation, consider the latter’s ideals for housekeeping and decorating. In those days, a sort of zenlike image was valued: clean, straight lines, narrow neckties, straight A-line or pencil skirts, and long, low jetlike automobiles. Idyllic Spic and Span was iconic. Rogers and Hammerstein’s Flower Drum Song, especially the songs “I Enjoy Being and Girl” and “Sunday” typified the image in the art of the times. For further evidence of artistic simplicity, ponder the 1953 unnamed painting of Clyfford Still: an almost solid canvass of blue with only the barest of accents.
More characteristics would include the irresistible desire to keep distant from others and avoid intimacy. Again, this is suggestive, at least superficially, of the antiseptic environment revered in the 1950s. Diverging from that cohort's traits could be expected the aforementioned urge to stay at home and communicate electronically. However, should a new serious inflation and depression start, hoarding and frugality would constitute other common traits shared with the Silents. Although the 1950s may appear to the casual observer as an epoch of conspicuous consumption, emblematic of that supposed acquisitiveness were small, modest houses; low-end Fords, Chevys, and hot rods; spare furnishings; low-cost simple performances, movies, and television; and drive-up hamburger stands replacing sit-in diners. (It was not until the 1960s of the Baby Boomers that wealth and debt-based consumption returned. Only in the 1960s were folks rich enough to take time for protest marches and sit-ins.) The Silent Generation was too busy rebuilding the world.
Are today’s politicians setting civilization up for a new era of nose-to-the-grindstone silence, unquestioned obedience, and submissiveness to authority? Will a second Great “Recession,” deeper and more tenacious than the last one, a mere decade ago, require twenty years of hard work for recovery? Only time will tell, but the overlords certainly relish the idea of exercising their power and taking credit for “saving the world.”
Four weeks ago I participated in a debate moderated by Bernardo Ferrero with Walter Block on the coronavirus quarantine. It is in English, but with the option of Spanish subtitles. (Which is why it took a while to upload.)
"Unfortunately, no one listens to economists."
~Gustave de Molinari(1852)
I have written some short essays on the following topics. The idea is to dip into the past to see what I can find that is relevant to things that are going on today.
- Jeremy Bentham on rule by “disinterested experts” or “the fallacy of authority” (1824)
- Herbert Spencer on the state and “Sanitary Supervision” (1851)
- Gustave de Molinari on economists as the bookkeepers of politics: “Unfortunately, no one listens to economists” (1852)
Jeremy Bentham (1748–1832) reminds us that bad things can happen when so-called experts are able to get the ear of the government. They are not disinterested parties as they often claim to be and sometimes do much harm in the name of promoting the “greater happiness of the greatest number.” How to make this calculation has always been a problem for utilitarian administrators: Whose “happiness” (or rights to life, liberty, and property) is sacrificed for the “greater good”? Over what time frame is this “greatest happiness” calculated, short term or long term? The “argument from authority” is one of the many “political fallacies” used by politicians to bamboozle the voters which Bentham discusses.
There is also the question of which are the best or most appropriate experts to use. It strikes me as not a coincidence that governments choose experts whose advice usually leads to increasing the power of the state and the prestige of the politicians who run those states. Cui bono? It is also not surprising that these experts usually do not include someone like a Frédéric Bastiat (1801–50) who would want to know about “the unseen” consequences of this advice, what the tradeoffs are, what the unintended consequences are, and who the vested interests who might benefit from this presumably “disinterested” advice are?
Herbert Spencer (1820–1903) raises many of these concerns in his piece, which was written soon after the cholera epidemic of 1849 swept through London and Paris. He also focuses on the incompetence of government authorities charged with public health and the impediments which government regulations place in the way of private and voluntary solutions to these problems. So what else is new?
Perhaps in the end it doesn’t really matter if economists like Bastiat do advise governments. According to Gustave de Molinari there are very good reasons why governments and the public ignore their advice anyway. It is not what they want to hear; they usually do not understand the economic principles at work; and the “tax eaters” who run the country have no reason to want to give up their privileges and benefits.