Important New Book: The Case Against 2 Per Cent Inflation

Important New Book: The Case Against 2 Per Cent Inflation

09/04/2018Mises Institute

Our regular readers are by now familiar with the work of economist Brendan Brown who offers some of the most detailed analysis of investment and monetary trends at

Now, Dr. Brown has finished a new book, The Case Against 2 Per Cent Inflation: From Negative Interest Rates to a 21st Century Gold Standard published by Palgrave Macmillan. and available at Amazon. 

Joseph Salerno writes: "With this book, Brendan Brown joins the ranks of our leading monetary policy experts. His acute and learned analysis and critique of the failed fiat-money regimes since 1914 and the fatal flaws in the current 2-percent inflation standard constitute the definitive treatment of an approach to monetary policy that is rapidly approaching its end."

The Case Against 2 Per Cent Inflation analyses the controversial and critical issue of 2% inflation targeting, currently practiced by central banks in the US, Japan, and Europe. Where did the 2% target inflation originate, and why?

Brown's book presents a novel theoretical perspectives, intertwined with historical and market understanding, and features analysis that draws on monetary theory (including Austrian school), behavioral finance, and finance theory.

And finally, the book explores how the 2% global inflation standard could collapse and what would ideally follow its demise, including a new look at the role of gold.



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The Answer to Suicide Isn't a Gun Lock

7 hours agoAlan Mosley

While enjoying some Saturday afternoon college football, I was treated to about a dozen reruns of a commercial produced by the Department of Veteran Affairs (VA). Let me paint the scene for you.

A lone figure rests upon his pickup truck beside a lone oak upon a ridge in an otherwise rolling green prairie. The sky is a canvas of orange and purple as the sun sets on a peaceful day in the foothills of rural America. Suddenly, the imagery fades to a small silver case: a gun case for a pistol. Notably unloaded, the hands of the otherwise off-screen figure emerge to affix a lock to his sidearm, as even the case and separated magazine weren’t enough to keep this soldier safe.

But safe from what? The voice-over then chimes in:

A simple lock puts space between the thought and the trigger. Learn how securing your firearms can prevent suicide.

Look, I get it. The message they’re trying to convey is most suicides are an act of impulse. A veteran’s life may be saved if a little patience and deliberation is introduced into the equation. But it’s really hard to receive this advert as anything but a hollow gesture when the prescription provided by the VA is a gun lock, without an ounce of reflection on the root cause of the crisis.

According to estimates, a little over seven thousand soldiers have died during military operations since the start of the “war on terror” following the attacks of September 11. Meanwhile, suicides among both active duty personnel and veterans of those conflicts have exploded to over thirty thousand, or more than four times the number lost in combat. While these numbers are sobering, and possibly even err on the conservative side, the real focus should be on what is driving the dilemma and how best to put an end to it. With the war on terror now exceeding two decades, experts’ reasoning for the cause of the veteran suicide epidemic has evolved just as the wars themselves have evolved over those twenty-plus years. The most avid participants in regime apologism blame the diminishing public support for the terror wars for the rise in veteran mental health issues. While it’s true that Americans’ appetites for forever war are reaching all-time lows, as evidenced by the support for withdrawal from Afghanistan, no matter how mismanaged, this explanation lacks an ounce of self-awareness for how long and costly the wars have been. Others have put forth that a rash of sexual assaults among personnel and a culture of “toxic masculinity” has led to increased mental health issues among service members. Nearly one in four servicewomen have reported cases of sexual assault, an embarrassment and a disgrace to the institution. The “boys club” may be to blame in equal parts for betraying its sisters in arms and for convincing its brothers that they are weak to feel ill at ease. However, the weakest and most deceitful reason suggested may be that veterans are at severe risk of suicide because of their access to firearms. The rate of suicidal persons electing to turn to a firearm to commit the act has been used as fodder by gun prohibition advocates to attack the Second Amendment. This tactic not only belies an agenda totally divorced from concern for military veterans, but it also implies veterans are among the least qualified to possess firearms for personal use rather than among the most qualified.

There’s another explanation worth considering, and it was perfectly illustrated right as the American occupation of Afghanistan was coming to a close. In an attempt to straddle the fence between bringing the war in Afghanistan to a long-overdue end and appeasing hawks who consider “withdrawal” to be synonymous with “surrender,” President Joe Biden signed off on a drone strike against an alleged ISIS-K target. The unfortunate victims of said drone missile were not militants, but rather one Zamarai Ahmadi and his children, as even US military officials have openly admitted. Despite this admittance, no disciplinary action is expected, as senior officials continue to “stand by the intel leading to the strike.” This is quite a callous and remorseless defense of “the intel” that ultimately concluded that Ahmadi, an aid worker who helped Americans during the occupation, deserved to die for the crime of loading his white sedan with jugs of water for his family. This incident is merely a microcosm of the role unmanned combat aerial vehicles (UCAV) have played in the war on terror. According to a recent report, upwards of 90 percent of the people killed in drone strikes in Afghanistan, Pakistan, Yemen, and Somalia were “not the intended targets.” In other words, nearly nine out of ten people executed by the American government were likely innocent civilians. Service members returning home are being confronted with reports of American atrocities and war crimes; actions that they may have been party to. For some, the guilt of being responsible for creating terror abroad when they believed themselves to be in a war to end terror is overwhelming.

It’s certainly a welcome change to acknowledge the suicide epidemic among American service members. But acknowledgement of the problem without any meaningful introspection on the cause signals that the US government is more concerned with its PR problem than with stemming the creation of more psychologically damaged veterans. There may be several reasonable explanations for the trauma American troops are experiencing, but no list is complete without a willingness to confront the damage that US forces have caused, as well as the damage they have received. Regardless of your position on the cause of the crisis, or of America’s foreign policy generally, it is disrespectful and offensive to the nation’s veterans to recommend that their best foot forward against depression is to secure their firearms.

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The Sovereign State of Florida

10/18/2021Andrew Walter

There comes a time in the course of human history when political systems, having failed to uphold the responsibilities and limitations given to them by their creators, and having exceeded those by such a margin as to violate the innate rights of those under such system, should and must be dissolved for the general benefit and justice of all those under its influence.

Such is the case regarding the federal government of the United States of America, and especially in regards to its relation to the State of Florida. For, contrary to what is generally taught in the American school system, the forming of the United States of America through creation of its Constitution did not create a top-down federal government in which the States were made subordinate to its whims. In fact, ratification of the constitution only occurred after several of its signers were reassured of this. The concern was so high from delegates of certain States, including New York, that the 10th amendment was added to clearly define the powers of the federal government and leave all others to the states.

The Constitution, being a voluntary compact of the States, where each State in the union was party to the Constitution of its own accord, allows for States to nullify acts of congress or leave the union at any time, was understood to be true by not only the founding fathers but also by those in the generations prior to the southern state secession of the 1860s. Dissenting groups in the North such as the Essex Junto in 1803 and the Hartford Convention in 1814 both supported secession of Northern states far in advance of the civil war. The members of the Hartford Convention made this clear when they declared “in cases of palpable infractions of the Constitution, affecting the sovereignty of a State, and liberties of the people; it is not only the right but the duty of such a State to interpose its authority for their protection, in the manner best calculated to secure that end”. Not until the civil war did the idea of secession become taboo and it made clear, by those in positions of power and influence, that the United States was “one nation under God, indivisible” and not a voluntary contract between sovereign States to benefit each in matters of commerce and defense, etc., while recognizing each State’s right of self-governance.

Let’s turn now as to to why, over 150 years later, we should open our minds to founding principles of self-government, and recognize, as the founding generation did, the sovereign nature of the States and their subsequent right to separate from the union when it no longer benefits the welfare and liberties of their people. The cultural makeup of modern America, and the differences in values, beliefs and practices between many of the States is so great as to cause continual strife among both their people and legislators, and to every two, four and six years create a battle over whose ideas will win out and yield congressional and executive power to implement those ideas over the other. Constitutional delegate from New York Robert Yates foresaw this problem in 1787 when he observed that “In a republic, the manners, sentiments, and interests of the people should be similar. If this is not the case, there will be a constant clashing of opinions; and the representatives of one part will be continually striving against those of the other”. 

245 years after the revolutionary war and 232 years after the ratification of the constitution, Americans are more divided than ever before. The political spectrum is wide and contentious, with many on the left and on the right hating each other, with no real understanding of their views or will to collaborate and work together. Politics in the U.S. has become a pendulum where every few years we swing more to the left or right with the result being only more division. This is exacerbated by the power that the federal government, and especially the executive branch, now hold due to both the size and scope of government, as well as the relinquishing of duties by both the U.S. Congress and the States themselves. Increasingly, congress is too timid to perform duties such as declaring war or balancing the budget, and merely acts as the support and funding arm of the executive branch, which has found it can wield the power of the pen to pass executive edicts at its whim and implement its chosen programs through congress or unelected bureaucratic agencies if need be. Congressmen are more apt to serve lobbyists and donors before their constituents, and most lack principles or lose them when they enter office.

After the last year and a half, it should be clear to most people that federal government overreach is no longer an abstraction pointed to by far right conspiracists. When people can be forced home, businesses closed, economies halted, and personal health decisions tied to employment at the whim of one man, the people have given up far too much power. It doesn’t have to be this way. If people in a certain State feel one way about government and the people of their neighboring State feels otherwise, each should not be made to impose those views on the other. Each State is entitled by its own sovereignty to govern itself how it sees fit, by such local means which give people more influence over those that represent them. It is time to end this eternal fighting over control and come together as Floridians first, to do what’s best for each other and our posterity.

To this end, a group of individuals from across the State of Florida have formed the Flexit political committee to bring awareness to the issue of State sovereignty and the right of the State of Florida and other States to peacefully exit the union of the United States of America and ultimately to pass, by referendum of the people, the following amendment to the State Constitution of Florida:

Article I Section 26. Union with the States of the United States of America. 

The State of Florida is a free, sovereign, and independent State. The foundational principle that guided the several States of America to declare independence from the State of Great Britain is that government derives its just powers solely from the consent of the governed and that it is the right of the people to alter or abolish their government. The people may institute new government, laying its foundation on such principles, and organizing its powers in such form, as to them shall seem most likely to affect their safety and happiness. Therefore, it is the right of the people of the State of Florida, via referendum or through their elected representatives, to withdraw their consent to the present union among the State of Florida and the other States of the United States of America and to establish itself as a republic independent of such States and of the United States of America, possessing all the rights and privileges of a sovereign State.

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Inflation Celebration

10/14/2021Robert Aro

As reported by Reuters on Wednesday:

Yes, inflation is back, and you should probably be relieved if not outright happy.

It seems strange to start a news article with the above sentence. When they talk of inflation, they’re talking about price increases as measured through various inflation calculations. For a news source, supposedly unbiased, they seem unaware of or purposely ignore the loss of dollar purchasing power and currency debasement. What they’re celebrating is an increase in the cost of living for everyone, hurting those at the lowest level of the income bracket the most.

As one of the most trusted news sources in the world explains:

That is the verdict of the world's top central banks, who hope they have hit the sweetspot where healthy economies see prices gently rising—but not spiralling out of control.

Notice the use of euphemism or vague term sweet spot that the marriage between mainstream media and mainstream economics uses to explain concepts that cannot be conveyed. It happens frequently:

Backed by vast government spending, central bankers unleashed unprecedented monetary firepower in recent years to get this result. Indeed, anything less would suggest the biggest experiment in central banking in the modern era had failed. 

A large part of this government spending was thanks to central banks, while the monetary firepower just means expansion of the money supply, also called inflation, coupled with historically low interest rates. The word experiment is often used; this is unfortunate because those in charge of this experiment are among the richest and most powerful people in the world. It’s easy for them to experiment because they will never suffer the consequences of failure, unlike the rest of society, who do.

The possibility of repeating 1970s stagflation was dismissed as quickly as it was mentioned:

The current inflation rise is not without risk, of course, but comparisons with 1970s style stagflation—a period of high inflation and unemployment combined with little to no growth—appear unfounded.

Despite noting that:

On first look, current inflation rates do indeed look troubling. Price growth is already over 5% in the United States … well above policy targets and at levels not seen in well over a decade.

But according to the author the price increases we’re seeing are only temporary and due to the reopening of the economy, acceptable because an expert from the European Central Banks is quoted as having said:

The current inflationary spike can be compared to a sneeze: the economy’s reaction to dust being kicked up in the wake of the pandemic and the ensuing recovery.

Over half a dozen other central bankers are said to be relieved that "price pressures are finally building and policy normalisation, a taboo subject for years, is back on the agenda," while one policymaker who asked to be left nameless said that "[i]f inflation doesn't rise now, it never will…. These are the perfect conditions, this is what we worked for."

For all the meetings, planning, review of data, and deliberation, at last central bankers of the world are rejoicing over what they have done with our money. Debt levels, money supply, interest rates, and prices are in territories some thought were unimaginable. The theory or model behind any of this is still not explained by our planners.

Where some see victory, others see a time bomb. It would have been nice if Reuters had mentioned some of the problems associated with inflationism as economic policy. But who wants to put a damper on things? For now, it’s a celebration of central planners and how they brought their long sought after inflation back to the West, with the hope that the years that follow will similarly go according to plan, lest they’re forced to intervene again.

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Does the Fed Need More Progressives?

10/11/2021Robert Aro

The Federal Reserve System will need people to fill the gap left by the retirement of the regional presidents for Dallas and Boston, both stepping down after public disclosure of trading activities. Fed vice chair Richard Clarida is also under scrutiny over several millions of dollars' worth of trades. The Fed could be hiring, or promoting people, in the not-too-distant future.

If past experience is an indication of future outcomes, then someone who doesn’t ask too many questions, yet has an interest in climate change, could be a good candidate. The name that keeps coming up in news headlines looks to be Fed governor Lael Brainard. CNBC reports:

Federal Reserve Governor Lael Brainard's increased influence ahead likely means substantial changes and challenges for the nation’s banking system.

Considered a progressive who favors tighter reins on financial institutions, particularly the Wall Street powerhouses …

Progressive. Much like someone calling themselves a liberal, or socialist, a progressive is one of those self-identifiers that can include a long range of beliefs, many or most of them requiring the threat of violence, theft, or coercion.

The article supports the idea of a Federal Reserve looking for such traits. Ed Yardeni from the research firm which bears his name speaks of Brainard as someone who can move up even higher in the ranks at the Fed:

Everybody can see that the Fed has been moving toward a more progressive stance, and it wouldn’t be a big shock to see that she gets more power either as Fed chair or as vice chair for regulation.

Since it’s not enough to set a nation’s monetary policy, the Fed also monitors and directs the entire US banking system. As Yardeni explains:

To the extent that the Fed’s always more focused on monetary policy than regulation, now one of its new mandates from the progressives is to pay more attention to regulating the banks.

All this talk about being progressive, yet no one has explained where these ideas come from nor where they lead. They might sound progressive to voters and the public at large, but very rarely is it explained how this ideology is beneficial.

Here’s an example of this in action. A few days ago Lael Brainard gave a speech on climate change. She noted that:

Current voluntary climate-related disclosures are an important first step in closing data gaps, but they are prone to inconsistent quality and incompleteness. 

Sounds reasonable. Should a financial institution or any other company voluntarily wish to partake in climate-related disclosures or calculations, there’s certainly nothing wrong with this.

But now, let’s see the progressive in action. Notice the key word as she continues:

Consistent, comparable, and, ultimately, mandatory disclosures are likely to be vital to enable market participants to measure, monitor, and manage climate risks on a consistent basis across firms.

Mandatory. This is the tool of the progressive, the socialist, the liberal, and many of those considered to be on the left or right; the state can impose actions which are mandatory, or forced on whomever it pleases.

The affairs at the Fed have yet to be sorted. But one thing is clear. No matter the name of the ideology, it will limit individual freedom and support the collective, operating under the pretense that it is for the greater good, but in reality is beneficial for only those at the top. From the Fed chair on down, this is the way of the state.

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Wisdom from Piketty

10/11/2021David Gordon

The famous French socialist economist Thomas Piketty thinks we aren't  moving toward equality fast enough.  In his Long Live Socialism!, he says this to illustrate how much work remains to be done: "The poorest 50% of the world's population is still the poorest 50% of the world's population" (p.13 of the Amazon Kindle edition).

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Canada’s 2021 Election: Trudeau’s Miscalculation

10/11/2021Lee Friday

Justin Trudeau was widely criticized for calling an election during a pandemic, but he thought that his oppressive covid policies would play well with the voting public, which would then reward his minority Liberal government with enough additional seats to give them majority status. He was wrong. The Liberals won the election, but they did not achieve majority status. So much for reading the minds of the voters.

The Conservative (in name only) Party repeated their 2019 performance by winning the popular vote and finishing in second place. Which brings us to the surprise of the election: the People’s Party of Canada (PPC).

In 2017, Maxime Bernier narrowly lost the Conservative Party leadership convention—or it was stolen from him—because of his opposition to Canada’s socialistic supply management system that forces consumers to pay artificially high prices for eggs, dairy, and poultry products. In 2018, Bernier left the Conservative Party and founded the PPC because of his dissatisfaction with the Conservative Party platform, which he described as “intellectually and morally corrupt.”

In the 2019 election, the PPC, which has a distinct libertarian flavor, received 1.6 percent of the popular vote. In contrast, it took the Green Party twenty years and six elections to garner 1.6 percent of the popular vote. In the September 20, 2021, election, the PPC did not win any seats, but they increased their share of the popular vote to 5 percent (the Greens got 2.3 percent), which is a remarkable and unexpected achievement for a party that is barely three years old.

The PPC distinguished themselves with a platform that stood in stark contrast to the platforms of the Liberals and Conservatives. More importantly for this particular election, it is likely that the PPC’s opposition to authoritarian pandemic policies was the primary catalyst for their impressive performance.

So Trudeau’s decision to call an election backfired on him because he did not get the majority control that he wanted. But it also backfired on him because it gave many people an opportunity to express their dissatisfaction with his authoritarian pandemic policies by voting for the PPC. Thus, his failed attempt to secure a majority government has strengthened the profile of the PPC. Bernier should send Trudeau a thank-you note.

None of this is to suggest that the PPC is a white knight for freedom-loving Canadians. When it comes to politics, a healthy dose of skepticism is always advisable. Political parties come and go, and are often co-opted. Would Bernier keep his promises if he won an election? We don’t know.

What we do know is that Canada’s three main national political parties (Liberals, Conservatives, and the New Democratic Party [NDP]), all leftist, are concerned that the three-year-old PPC increased its share of the popular vote by more than threefold in just twenty-three months. They should be concerned. A rising PPC on the right may not bode well for Canada’s bipartisan leftist politics, because Bernier, who is not a rookie, is well versed in libertarianism.

In a recent interview with Jordan Peterson, Bernier provided a few examples of his libertarian leanings. He decries the woke culture. He opposes business subsidies and favors free market incentives. He acknowledges the contributions of Mises, Rothbard, and Hayek as he blames the central bank for the business cycle. He wants to reduce the Bank of Canada’s inflation target from 2 percent to 0 percent. He understands that consumers’ purchasing power is reduced by the inflation tax. Thus, he opposes fiat currency, and supports the gold standard. He likes cryptocurrency because he favors money competition. He favors radical decentralization at the federal level, thereby increasing the level of provincial autonomy, which brings government closer to the people in the various regions. This includes healthcare, where he wants to eliminate the federal government’s role.

Trudeau gift wrapped a higher public profile to the PPC, but it remains to be seen whether Bernier seizes this opportunity to explain the PPC’s libertarian ideas to many more Canadians before Trudeau—or his replacement—announces the next election. More to the point, if he wins an election, will Bernier stay true to his libertarian principles, or will his name be added to Canada’s long list of political sellouts? Only time will tell.

However, the Liberals and Conservatives—for whom integrity has no meaning—are worried that Bernier will actually stick to his principles, and use his extensive libertarian knowledge to explain to Canadians the myriad ways in which big brother government is detrimental to their well-being.

We don’t know if the PPC is the real deal, but for now, politicians on the left are rightfully nervous. At the very least, after a year and a half of pandemic lockdowns and restrictions, a healthy dose of entertainment is a welcome relief—and it’s always fun to watch politicians squirm.

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The Magic of the Keynesian Multiplier

10/10/2021Frank Shostak

By popular thinking, the key driver of economic growth is increases in the total demand for goods and services. It is also held that the overall economy’s output increases by a multiple of the change in expenditure by government, consumers and businesses. The popularizer of this way of thinking John Maynard Keynes, wrote,

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course by tendering for leases of the note-bearing territory), there need be no more unemployment and with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.1

An example will illustrate how an initial spending increase raises the overall output by a multiple of this increase. Let us assume that out of an additional dollar received individuals spend $0.9 and save $0.1. Also, let us assume that consumers have increased their expenditure by $100 million. Because of this, retailers' revenue rises by $100 million. Retailers in response to the increase in their income consume 90 percent of the $100 million, i.e., they raise expenditure on goods and services by $90 million. The recipients of these $90 million in turn spend 90 percent of the $90 million, i.e., $81 million. Then the recipients of the $81 million spend 90 percent of this sum, which is $72.9 million and so on. Note that the key in this way of thinking is that expenditure by one person becomes the income of another person.

At each stage in the spending chain, people spend 90 percent of the additional income they receive. This process eventually ends, so it is held, with total output higher by $1 billion (10*$100 million) than it was before consumers had increased their initial expenditure by $100 million.

Observe that the more that is being spent from each dollar, the greater the multiplier is and therefore the impact of the initial spending on overall output will be larger. For instance, if people change their habits and spend 95 percent from each dollar the multiplier will become 20. Conversely, if they decide to spend only 80 percent and save 20 percent then the multiplier will be 5. All this means that the less that is being saved the larger is the impact of an increase in overall demand on overall output. Note that on this way of thinking an increase in savings weakens the pace of economic activity. Following this way of thinking it is not surprising that most economists today are of the view that by means of fiscal and monetary stimulus it is possible to prevent the US economy falling into a recession.

Is the multiplier a real thing?

Are increases in savings bad for the economy, as the multiplier model indicates? Take for instance Bob the farmer who has produced twenty tomatoes and consumes five tomatoes. What is left at his disposal is fifteen saved tomatoes, which are his savings. With the help of the saved fifteen tomatoes, Bob can now secure various other goods. For instance, he secures one loaf of bread from John the baker by paying for the loaf of bread with five tomatoes. Bob also buys a pair of shoes from Paul the shoemaker by paying for the shoes with ten tomatoes. Note that savings at his disposal limit the amount of consumer goods that Bob can secure for himself. Bob’s purchasing power is constrained by the amount of savings i.e. tomatoes at his disposal, all other things being equal. Now, if John the baker produced ten loaves of bread and consumed two loaves his savings are eight loaves of bread. Equally, if out of the production of two pair of shoes Paul uses one pair for himself then his saving is one pair of shoes.

When Bob the farmer exercises his demand for one loaf of bread and one pair of shoes he is transferring five tomatoes to John the baker and ten tomatoes to Paul the shoemaker. Bob's saved tomatoes maintain and enhance the life and wellbeing of the baker and the shoemaker. Likewise, the saved loaf of bread and the saved pair of shoes maintain the life and wellbeing of Bob the farmer. Note that it is saved final consumer goods, which sustain the baker, the farmer and the shoemaker, that makes it possible to keep the flow of production going. Now, the owners of final consumer goods, rather than exchanging them for other consumer goods, could decide to use them to secure better tools and machinery. With better tools and machinery, a greater output and a better quality of consumer goods can be produced some time in the future.

Note that by exchanging a portion of their saved consumer goods for tools and machinery the owners of consumer goods are in fact transferring their savings to individuals that specialize in making these tools and machinery. Savings sustain these individuals whilst they are busy making these tools and machinery. Once these tools and machinery are built this permits an increase in the production of consumer goods. As the flow of production expands this permits more savings all other things being equal, which in turn permits a further increase in the production of tools and machinery. This in turn makes it possible to lift further the production of consumer goods. So contrary to popular thinking, more savings actually expands and not contracts the production flow of consumer goods.

Can an increase in the demand for consumer goods lead to an increase in the overall output by the multiple of the increase in demand? To be able to accommodate the increase in his demand for goods the baker must have means of payment i.e. bread to pay for goods and services that he desires. Note again that the baker secures five tomatoes by paying for them with a loaf of bread. Likewise, the shoemaker supports his demand for ten tomatoes with a pair of shoes. The tomato farmer supports his demand for bread and shoes with his saved fifteen tomatoes. The baker’s increase in the production of bread permits him to increase demand for other goods. In this sense, the increase in the production of goods gives rise to demand for goods. People are engaged in production in order to be able to exercise demand for goods to maintain their life and wellbeing.

Note that what enables the expansion in the supply of final consumer goods is the increase in capital goods or tools and machinery. Savings in turn enables the increase in tools and machinery. We can thus infer that the increase in consumption must be in line with the increase in production. From this, we can also deduce that consumption does not cause the production to increase by a multiple of the increase in consumption. The increase in production is in accordance with what the pool of savings permits and is not constrained by consumers’ demand as such. Production cannot expand without the support from the pool of savings i.e. something cannot emerge out of nothing.

Let us examine the effect of an increase in the government's demand on an economy's overall output. In an economy, which is comprised of a baker, a shoemaker and a tomato grower, another individual enters the scene. This individual is an enforcer who is exercising his demand for goods by means of force. Can such demand give rise to more output as the popular thinking has it? On the contrary, it will impoverish the producers. The baker, the shoemaker, and the farmer will be forced to part with their product in an exchange for nothing and this in turn will weaken the flow of production of final consumer goods. Not only does the increase in government outlays not raise overall output by a positive multiple, but on the contrary this leads to the weakening in the process of wealth generation in general. According to Mises,

[T]here is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity.

Murray Rothbard in his Man, Economy, and State discussed the absurdity of the Keynesian multiplier.

The theory of the “investment multiplier” runs somewhat as follows:

Social Income = Consumption + Investment

Consumption is a stable function of income, as revealed by statistical correlation, etc. Let us say, for the sake of simplicity, that

Consumption will always be .80 (Income).

In that case, Income = .80 (Income) + Investment.

.20 (Income) = Investment;

 or Income = 5 (Investment).

The “5” is the “investment multiplier.” It is then obvious that all we need to increase social money income by a desired amount is to increase investment by 1/5 of that amount; and the multiplier magic will do the rest….

The following is offered as a far more potent “multiplier,” on Keynesian grounds even more potent and effective than the investment multiplier, and on Keynesian grounds there can be no objection to it. It is a reductio ad absurdum, but it is not simply a parody, for it is in keeping with the Keynesian method.

Social Income = Income of (insert name of any person, say the reader) + Income of everyone else. Let us use symbols:

Social income = Y

Income of the Reader = R

Income of everyone else = V

Let us say the equation arrived at is: V = .99999 Y

Then, Y = .99999 Y + R

.00001 Y = R

Y = 100,000 R

This is the reader’s own personal multiplier, a far more powerful one than the investment multiplier. To increase social income and thereby cure depression and unemployment, it is only necessary for the government to print a certain number of dollars and give them to the reader of these lines. The reader’s spending will prime the pump of a 100,000-fold increase in the national income.

Does the introduction of money make the multiplier possible?

The introduction of money does not alter our conclusions. Money only helps to facilitate trade among producers— it does not generate any real stuff. Paraphrasing Jean Baptiste Say Mises wrote that,

Commodities, says Say, are ultimately paid for not by money, but by other commodities. Money is merely the commonly used medium of exchange; it plays only an intermediary role. What the seller wants ultimately to receive in exchange for the commodities sold is other commodities.2

When an individual increases his spending by $100 all it means is that he has lowered his demand for money by $100. The seller of goods has now acquired $100, which he can employ when deemed necessary. We can also say that the seller's demand for money has increased by $100. Likewise, if the seller will now spend 90 percent of $100 all that we will have here is a situation wherein his demand for money has fallen by $90 whilst somebody else's demand for money has now risen by $90. In addition, all other things being equal, if individuals have increased their expenditure on some goods then they will be forced to spend less on other goods. This means that the overall spending in an economy remains unchanged. Only if the amount of money in the economy increases, all other things being equal, spending in money terms will follow suit. However, also in this case the increase is not because of some multiplier but because of the increase in money supply. The increase in monetary expenditure because of an increase in money supply cannot however produce the expansion in real output as the popular story has it.

All that it will generate is a reshuffling of the existent pool of savings. It will enrich the early receivers of the new money at the expense of last receivers or no receivers at all. Obviously then, a loose monetary policy which is aimed at boosting consumers' demand cannot boost real output by a multiple of the initial increase in consumer demand. Not only will loose money policy not lift production, but on the contrary it will impoverish wealth generators in exactly the same way as the enforcer in our previous example.

Summary and Conclusion

John Maynard Keynes's writings remain as influential today as they were eighty-five years ago. His ideas remain the driving force of economic policy makers at the Fed and Government institutions. These ideas permeate the thinking and writings of the most influential economists on Wall Street and in academia. The heart of the Keynesian philosophy is that what drives the economy is demand for goods. Economic recessions are predominantly the result of insufficient demand. In the Keynesian framework, an increase in demand not only lifts overall output but that output increases by a multiple of the initial increase in demand. Within this framework, something can be created out of nothing.

  • 1. J.M. Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1964), p. 129.
  • 2. Ludwig von Mises, "Lord Keynes and Say's Law," in The Critics of Keynesian Economics, edited by Henry Hazlitt (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), p. 316.
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Change for a Trillion

10/07/2021Robert Aro

Could a $1 trillion platinum coin be the answer to our problems? Or is this just another bad idea on the never-ending list of bad economic takes?

If history is any indication of the past, then everyone knows how the debt ceiling debate ends. As the deadline approaches, government officials will come together, extend the ceiling, more money will be printed, and, as we’ve been told, calamity will be averted.

A trillion-dollar coin sounds absurd from the outset. But consider its implications first. Pass judgement after. ABC News explains:

Legislation enacted in 2001 allows the treasury to mint platinum coins of any value without congressional approval. Under that law, the coin's value could be anything, but it would have to be platinum, not gold or silver, nickel, bronze or copper, which are under Congress' control.

Per the Constitution, only Congress has the power to “coin money.” But should this money be backed by a platinum coin, it allows the president to bypass Congress. As for the Federal Reserve, they are not mentioned in the Constitution … 

Giving money creation powers to a president can be dangerous; however, the law can be amended to include congressional approval. And there’s a more important aspect here:

President Joe Biden could order Treasury Secretary Janet Yellen to have a coin with the value of $1 trillion be minted and deposited into the Treasury.

Money creation with an ironic twist may bode well for the free market. But think about the central bankers: Where does this leave the Federal Reserve? Have they not been cut out as the intermediary?

Understand, the Federal Reserve does not physically print money. That is the job of the US Treasury. Unintentionally, the very essence of the trillion-dollar coin calls into question the role of the Federal Reserve and should make people wonder why their bills are marked Federal Reserve Notes. Through bypassing the Fed and existing without debt creation, the trillion-dollar coin has the propensity to make the Fed obsolete.

Choose one of the two (simplified) scenarios, where $1 trillion is being physically printed:

The Treasury mints a platinum coin granting them the authority to print $1 trillion and deposit it in the USA’s bank account; this is money creation without a debt burden and without the Fed.

Or we maintain the status quo. The Treasury prints $1 trillion and gives it to the Federal Reserve. The Fed literally does nothing except send the money back to the Treasury, which then deposits it in the USA’s bank account; same money creation as the previous scenario, except now the money is owned by the Fed.

The difference is clear, as the Fed provides no value-added activity in the money creation process. Under free enterprise, there is no market for the Federal Reserve. It only exists due to a government-granted monopoly on the US dollar.

It leads us to consider whether money should even carry an unpayable debt. Gold, or bitcoin for example, carry no debt. But when the Fed is involved, our money is debt based and the benefit to society can scarcely be defended.

Watch carefully to see what inflationists and the debt-doesn’t-matter crowd have to say. Janet Yellen exposes many errors:

The platinum coin is equivalent to asking the Federal Reserve to print money to cover deficits that Congress is unwilling to cover by issuing debt, it compromises the independence of the Fed conflating monetary and fiscal policy, and instead of showing that Congress and the administration can be trusted to pay, to pay the country’s bills, it really does the opposite.

Someone should inform Yellen that the government's deficits are already covered by money printing. While Fed independence is a red herring, monetary/fiscal policy was compromised long ago.

More analysis is required. But with absolute certainty, $1 trillion will be printed by the Treasury in the not-too-distant future. This process does not require the Federal Reserve. The question for now is whether or not we want the Fed to get their cut. Or should we strive to live in a country not shackled down by central banking?

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Debunking the Tulip Bubble

What asset price bubbles are is fairly uncontroversial, even if a fast and hard definition is elusive. At their most basic, bubbles are said to exist when a sharp upward departure in the price of an asset, from its historic or otherwise reasonably expected value, occurs over a relatively brief period of time, however defined. These dramatic, often parabolic, rises can be driven by rushes into new sectors, like dotcoms, new tech, or cryptocurrencies—while some economists consider their occurrence completely random.

Whatever the case, it almost invariably happens that when talking of bubbles in this or that asset class someone brings up the Dutch tulip bubble. Despite its predictable regularity, a closer look at what occurred in Holland around the mid-1630s casts serious doubt on the comparison, for, as will be outlined, the sudden brief spike in the prices of certain tulips wasn’t due to any change in the underlying assets, emergence of new assets, or the preferences of buyers, but rather innovations in how tulips were briefly bought and sold.

By the seventeenth century Holland was the most advanced economy in Europe, with a recognizable and relatively sophisticated stock market. In 1602, for example, the Dutch East India Company was founded as a joint stock company, generally recognized as the first of its kind. As for tulips, they had begun to make their way to Europe via trade with the Ottoman Empire a century prior. As it happened, women’s fashion by the early seventeenth century had come to incorporate flowers, tulips specifically. Even more specifically, certain tulips, called “broken bulbs,” were highly sought after and came to command hundreds, even thousands of guilders each from European elites.1

The tulip market in 1630s Holland, then, was multitiered, with select broken bulbs being traded for many hundreds, even thousands, of times the value of ordinary tulip bulbs—until, that is, the two months spanning late 1636 and early 1637, which saw twenty- to thirtyfold increases in the price of standard tulips, which had traded weeks before at the equivalent of tenths of a cent per handful.

Let’s take a closer look at the mechanics that caused this to happen, and see why there is little to nothing to be gained by comparing what happened during “tulipmania” to asset price bubbles in the modern context.

As already stated, the Dutch stock market was the most sophisticated in Europe in the mid-seventeenth century, and already had a brisk futures trade. Similar to today’s futures trading, most Dutch traders at the time weren’t actually interested in owning the underlying asset. Rather, it was a simple bet on the future price of the asset. If the price went down, the seller got paid the difference, and vice versa for the buyer of the future if the prices went up.

Importantly, because of moral strictures much of this futures trading was done informally—contracting to sell something you didn’t yet own seeming an activity close to, if not indistinguishable from, gambling. And it was in late 1636 that informal futures markets for standard tulips began sprouting up. Because it was outside the existing market framework, these informal markets had their own rules but no real means of enforcing them; and it is here, in the structure and rules governing these emerging tulip futures markets, that we find the origins of the actual bubble of tulipmania.

First, everyone involved had to bid on every lot of tulips; second, new buyers were prohibited from immediately selling; third, all buying was fractional, with only one-fortieth of the price of the contract due down; fourth, there was a maximum cap of three guilders down, no matter how large the contract; and finally, while social exclusion would follow for anyone who reneged on what they owed, the contracts were technically unenforceable in Holland’s courts.

Reading over these conditions, it isn’t difficult to imagine how a bunch of bored Dutch traders with little else to do in the middle of a northern European winter, blew up and then popped an enormous bubble in the lower-tiered tulip market in just a few weeks: contracts were cheap; you might make some money; and if things somehow got out of hand, the contracts weren’t enforceable, anyway. Of course, no one wanted to have their name come under opprobrium, which is why virtually no one apparently reneged—at least at first. It also helps to explain why the bubble burst so quickly after forming. A lot of standard tulip bulbs worth only a guilder or two per bucketful quickly rose to hundreds of guilders in value. This was a huge sum, and no one wanted to risk being on the end of it.

Recognizing the mess they’d gotten themselves in, virtually everyone involved agreed to rip up the contracts and walk away. No damage was done to the Dutch economy, the price of ordinary tulips almost immediately returned to what it had been, and the value of high-tier broken bulbs, like the Semper Augusta continued to steadily appreciate.2

In short, the Dutch tulip bubble, or tulipmania, had virtually nothing in common with modern bubbles, though it is an interesting episode of economic history to be sure.

  • 1. Unlike ordinary tulips, which are a single color—typically red, yellow, or pink—broken bulbs produce a range of multicolored, distinctly patterned petals. Smaller, slower-growing, and rare, botanists now know the flowers were actually infected with a mosaic virus, which stunted their growth and caused the erratic coloring.
  • 2. And this is a key part of the story, for while the tulip bubble is generally said to have occurred between 1633 and 1637, this claim is contradicted by both Peter Gerber and Connel Fullenkamp, economists who have gone back and searched for tulip sales made in the years preceding and following that period. Their research and writings reveal that broken bulbs had been seeing a steady, almost 10 percent rise in value for at least a decade prior. To take just one example, as early as 1626 a single broken bulb had sold for just over two thousand guilders (the equivalent of around a half million dollars priced in today’s dollars). And while 10 percent is certainly brisk growth, it’s nowhere near today’s bubble level—except perhaps in housing, though this bubble is of the Fed’s creation. Lastly, as Kindleberger points out in his Manias, Panics, and Crashes this steady appreciation in high-tier tulip bulbs was happening within the context of broader asset price inflation following the economic hard times during and after the War of Spanish Succession.
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The Evolution of Bank Runs

They can start with as little as a rumor; whether fact or fiction, some new information emerges that spooks depositors or investors, or otherwise convinces them that the institution to which they have entrusted their money isn’t going to be able to cover its debts or obligations. Predictably, those who had deposited or invested their money at the institution in question lose confidence, and this loss of confidence sparks a run on the bank.

The image that comes immediately to mind probably looks something like this: long lines of anxious depositors queued down the block, more frantically hustling from their jobs to join; inside, tellers issue bills at a plodding pace, counting out notes to those lucky depositors who got to the bank at the first news of trouble, while in back the bank manager paces and frets as the bank’s reserves run lower and lower. 

This scene, familiar to anyone who has seen the 1946 Frank Capra classic It’s a Wonderful Life or is otherwise familiar with the black-and-white photos in economic history textbooks, has virtually no bearing whatsoever on modern bank runs—Northern Rock standing as a notable exception. 

For one thing, in the case of most depositors the entirety of their bank balance is ensured by the Federal Deposit Insurance Corporation (FDIC); that is, whether the bank goes bust or not, they stand to get all the money they lost paid back to them by the government. Second, most money has been digitized; by the time Tom, Dick, and Harry get the news and start running for their cars to get downtown, it’s all over. Third, and most important for understanding systemic risk in modern finance and banking, is the short-term funding mechanisms institutions use to fund their balance sheets.

To highlight and examine the mechanics behind a modern bank run, the climax of the global financial crisis in the autumn of 2008 provides a textbook example, because it was precisely this third facet of modern bank runs that caused Lehman Brothers to collapse so abruptly. 

Banks borrow short to lend long; this is the basic premise of all modern banking, whether commercial, investment, or so-called shadow lending. In the classic case, and even, to an extent, under the early fractional reserve banking of the Federal Reserve System, banks’ biggest stock of capital came from their depositors. These depositors placed their money in the bank, thereby enabling it to make loans, open new locations, or branch out into other product services. The spread, the difference between the lower rate paid to depositors and the higher rate it charged borrowers, formed the basis of the bank’s profits.

This period of so-called 3–6–3 lending, borrow at 3 percent, lend at 6 percent, and be on the golf course by 3 o’clock, was primarily driven to extinction by the onset of high and persistent inflation caused by government overspending. Beginning in the late 1960s, and worsening in the following decade, the hitherto safe and stable banking system operating under the monetary auspices of the Bretton Woods system broke down. The high inflation rates ate away the bankers’ spread, making their former business of taking deposits and lending for thirty-year mortgages a money-losing venture.

So began thirty years of rapid financial innovation. One of these innovations, the repo (repurchase) market, is at the heart of modern bank runs.

Simply put, the repo market is a short-term funding mechanism allowing borrowers to access liquidity from willing lenders. This is done by way of repurchase agreements: contracts that allow a borrower to exchange a securitized asset for cash in exchange for a small premium, or implicit interest rate, to be repaid upon repurchase. These contracts can range as long as a month or three months but typically span just a single day. In the context of modern bank runs, then, it is best to think of these as short-term deposits: losing confidence in the institution into which they are “depositing” money daily, repo lenders pull back, refusing to renew the repo: the following day, shut out of short-term credit markets, the borrowing institution faces an immediate liquidity crisis.

Take the example of Bear Stearns, on the eve of the financial crisis one of the most profitable investment banks on Wall Street. It was regularly financing $70 billion each day through the repo market. This was far from ordinary. Bear Stearns just happened to be the first major Wall Street firm to get shut out of the repo market because of word that it was in trouble due to its exposure to subprime collateralized debt obligations (CDOs) and mortgage-backed securities (MBS). The same thing would happen to Lehman Brothers a week later.

Like deposit-based fractional reserve banks, these financial institutions don’t keep enough assets on hand to cover their obligations. When access to cheap credit dries up, or the value of the assets backing the commercial paper they issue drops suddenly, their hitherto profitable loan book becomes unserviceable. An attempt to sell assets by an institution facing such a sudden liquidity crisis can drastically drop the prices of a wide range of assets, thereby endangering the short-term financed balance sheets of similar institutions. This is why the Fed, following Lehman’s collapse, took the approach that any single failure could mean systemic failure.

Though the profits to be made by leveraging investments using short-term credit instruments were and are enormous, it is almost certain banks would think twice about engaging in such risky behavior were it not for the moral hazard built into the modern US financial system. Beginning in the late 1980s major institutions came to expect that if they got themselves into trouble the Fed or Treasury would bail them out—either directly or by forcing a deal on another bank to absorb their own failing enterprise.

It is a straight line from the savings and loan (S&L) bailout to Long-Term Capital Management to Bear Stearns.

But moral hazard in modern banking is another topic entirely. 

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