Money-Supply Growth Near a Ten-Year Low As Lending Slows

Money-Supply Growth Near a Ten-Year Low As Lending Slows

01/16/2018Ryan McMaken

Growth in the supply of US dollars remained near a multi-year low in December, growing 2.9 percent, year over year.

ams_1.png

In November, year-over-year growth in the money supply fell to a 129-month low, growing 2.7 percent. The last time the money supply grew at a smaller rate than November 2017's rate was during March 2007 — at a rate of 2.1 percent. 

The money-supply metric used here — an "Austrian money supply" measure — is the metric developed by Murray Rothbard and Joseph Salerno, and is designed to provide a better measure than M2. The Mises Institute now offers regular updates on this metric and its growth.

The "Austrian" measure of the money supply differs from M2 in that it includes treasury deposits at the Fed (and excludes short time deposits, traveler's checks, and retail money funds). 

M2 growth also slowed in October 2017, falling to 3.0 percent.

Money supply growth can often be a helpful measure of economic activity. During periods of economic boom, money supply tends to grow quickly as banks make more loans. Recessions, on the other hand, tend to be preceded by periods of falling money-supply growth. 

One factor behind slowing money-supply growth is likely a slowing in new loans being made by commercial banks. As we can see in the latest data from the Fed, commercial and industrial loans were up only 0.9 percent in November 2017, compared to November 2016. That's the smallest growth rate recorded since April 2011. The overall trend in loans growth is similar to what we saw in 2009, during the last recession. 

oans_1.png

(Thanks to the intervention of central banks, of course, money supply growth in recent decades has never gone into negative territory.) 

Nevertheless, as we can see in the graph of money supply growth above, significant dips in growth rates show up in years prior to a economic bust or financial crisis. The current trend is an unusual one in which growth in AMS is smaller than it is in M2. In the past this situation has often pointed toward a recession. 

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

Searching for the Creature on Jekyll Island

I spent a little time at Jekyll Island, Georgia, the weekend before last. I looked hard, but I didn’t find the mythical creature from Jekyll Island. From what I hear, it’s taken up permanent residence in Washington, DC. But I did locate its birthplace.

If you don’t get the reference, I’m referring to the Federal Reserve.

The central bank was conceived during a secret meeting at a private club on Jekyll Island. According to an NPR article, Sen. Nelson Aldrich, chairman of the Senate Finance Committee, organized the clandestine meeting.

“He told a handful of New York bankers to go on a given night, one by one, to a train station in New Jersey. There they would find a private rail car hitched to the back of a southbound train. To conceal their identities, Aldrich told the bankers to come dressed as duck hunters and to address each other only by first name.”

No. That’s not sketchy at all.

Anyway, the rest, as they say, is history. The plan drawn up during that secret meeting was put into action and today the Fed is running off dollar bills at a dizzying pace in the basement of the Eccles Building.

OK. Not literally. But basically, that’s what’s happening.

At any rate, I wasn’t at a secret meeting on Jekyll Island to hatch a plan to control the world’s financial system. I was hanging out with a bunch of libertarians who would prefer to concoct a plan just to leave you alone.

The Mises Institute held its annual supporters’ summit there.

Given the location, you won’t be shocked to know that there was a lot of discussion about the central bank and its pernicious effects. As I have written, the Fed is the engine that powers the most powerful government in the history of the world.

But the event wasn’t just about the Fed. The broader theme was the danger of centralizing government.

Historian and author Amity Shlaes kicked things off with a talk about Arthur Burns. He was the Federal Reserve chairman appointed by President Richard Nixon. He was supposed to be one of the “good guys.” He was an advocate for free markets, sound money, and the gold standard. But over time, Nixon badgered and bullied him into artificially lowering interest rates and signing off on economic “reforms” that included severing the dollar from its last connection to the gold standard. Burns cared more about maintaining his reputation and popularity among the ruling elite than his principles. His position went to his head.

The lesson here is that we aren’t going to fix things by putting “good people” in positions of power. Power corrupts. The problem is a system that places too much power in the hands of corruptible individuals. The solution is to decentralize and limit the power, not vain attempts to find the right guy to fill certain positions.

That theme carried over through the rest of the event and a number of speakers touched on this subject. Peter Klein talked about the expansion of government during crises, noting that, “The New Deal is a logical extension of policies that came about in World War I.” Tom Woods carried that idea forward in his talk about government shutdowns of the economy in response to covid-19. Judge Napolitano talked about the constitutionality of a central bank, taking the discussion all the way back to the establishment of the First Bank of the United States over the constitutional objections of James Madison and Thomas Jefferson. His narrative reinforced the sad reality that power often corrupts even those with the best of intentions.

Mises Institute president Jeff Deist tied everything together in his talk about decentralization. He noted that centralized authority leads to never-ending fights over control of the power levers, pointing out that “politically vanquished people never really go away.” The only real solution is to split into smaller units and let different groups of people do their own thing. As Deist said, “Political arrangements exist to serve us, not the other way around.”

This captures the essence of the American constitutional system. It was intended to be decentralized with very little power vested in the general government. Most decision-making was intended to happen at the state and local level.

The Constitution serves as a starting point for decentralization.

This post originally appeared here.

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

The Fed Says the Federal Budget Is Unsustainable

10/16/2020Robert Aro

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

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

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

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

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

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

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

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

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

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

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

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

But it gets worse:

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

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

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

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

A reporter summed it up the best with one question:

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

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

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

An IMF Official Describes the "Long Ascent" Ahead

10/16/2020Robert Aro

The ascent refers to the difficult climb nations face as they “come back from the depths of crisis.” It promises to be “long, uneven and uncertain,” as explained by the International Monetary Fund (IMF) Managing Director Kristalina Georgieva, at an event hosted by the London School of Economics (LSE). This “path forward” for the 189 member countries serves as a precursor to the IMF’s 2020 Annual Meetings which commenced this week. A great deal of effort has gone into these economic plans, yet the question remains: Is this actually economics?

According to the director, the “whatever it takes” approach by advanced economies greatly helped the situation and “put a floor under the world economy.” As she tells it :

We have reached this point, largely because of extraordinary policy measures that put a floor under the world economy. Governments have provided around $12 trillion in fiscal support to households and firms.

A $12 trillion “floor” laid by government cannot be substantiated. We don’t know whether the floor would have been there if the government support did not take place. Nor can the various pernicious effects, such as loss in purchasing power, increase in cost of living, and greater world reliance on debt can be factored into the cost of said floor.

Even though she praises the increase to the money supply, she notes that risk remains high due to rising bankruptcies and stretched valuations in financial markets. She goes on to say many countries have become vulnerable and:

We estimate that global public debt will reach a record-high of about 100 percent of GDP in 2020.

While implied world debt levels are concerning, debt levels have long taken a back seat to central planners, especially in times of crisis. This is fortunate because heavy debt-laden/ inflationist policies underline the IMF’s four priorities:

First, defend people’s health.

This includes coordinated vaccine efforts, distribution and contact tracing. It seems out of scope for the IMF considering it’s an economic, not a health organization. This would be akin to the World Health Organization discussing the need for central banks to reign in their balance sheet!

Second, avoid premature withdrawal.

They agree “tax deferrals, credit guarantees, cash transfers, and wage subsidies,” should be given to firms and workers. This may sound promising but the sheer allocation of resources is beyond comprehension. These interventions could initially help, yet the government would never know if the positive effects of the program outweighs the negatives. If a wage subsidy, for example, leads to higher consumer prices and a higher national debt level, the government would have no basis to know if the effort and various trade-offs were worthwhile.

But it doesn’t stop on the fiscal side as the IMF notes the equal importance of “continued monetary accommodation and liquidity measures to ensure the flow of credit, especially to small and medium-sized firms.” Unfortunately, this too is problematic. Any notion of the optimal level of liquidity cannot be measured and immeasurable goals are normally difficult to achieve.

Third, flexible and forward-leaning fiscal policy.

This explicitly calls for governments to reallocate capital and labor to support the transition, requiring both “stimuli for job creation, especially in green investment,” as well as measures such as expanded unemployment insurance. This follows the pattern of governments using money to take action which cannot be reasonably calculated or justified, but acceptable since it’s perceived preferable than to “do nothing.”

Fourth, deal with debt.

For low-income countries especially, the goal is to create “more grants, concessional credit and debt relief, combined with better debt management and transparency.” This includes restructuring of sovereign debt. As many countries continually struggle with national bankruptcy because of debt, it’s ironic more debt would be a solution.

Piecing it together, we find there may be a long ascent after all; not the struggle of having the IMF corral the world to embrace more anti-capitalist policies, but the struggle required to build a future where the IMF ceases to exist. While a tall order, it seems justified considering the economic methods employed by the IMF appear devoid of economic explanation.

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

Can the Fed End Racism?

10/15/2020Ron Paul

House financial services chair Maxine Waters and Senator Elizabeth Warren have introduced the Federal Reserve Racial and Economic Equity Act. This legislation directs the Federal Reserve to eliminate racial disparities in income, employment, wealth, and access to credit.

Eliminating racial disparities in access to credit is code for forcing banks and other financial institutions to approve loans based on the applicants’ race, instead of based on their income and credit history. Overlooking poor credit history or income below what would normally be required to qualify for a loan results in individuals ending up with ruinous debt. These individuals will end up losing their homes, cars, or businesses, because banks disregarded sound lending practices in an effort to show they are meeting race-based requirements.

Forcing banks to make loans based on political considerations damages the economy by misallocating resources. This reduces economic growth and inflicts more pain on lower-income Americans.

The Carter-era Community Reinvestment Act has already shown what happens when the government forces banks to give loans to unqualified borrowers. This law played a significant role in the housing boom and subsequent economic meltdown. The Federal Reserve Racial and Economic Equity Act will be the Community Reinvestment Act on steroids.

This legislation also requires the Fed to shape monetary policy with an eye toward eliminating racial disparities. This adds a third mandate to the Fed’s current “dual mandate” of promoting a stable dollar and full employment.

Federal Reserve chair Jerome Powell has already publicly committed to using racial disparities as an excuse to continue the Fed’s current policy of perpetual money creation. Since inflation occurs whenever the Fed creates new money, Powell and his supporters want a policy of never-ending inflation.

Supporters of this scheme say that inflation raises wages and creates new job opportunities for those at the bottom of the economic ladder. However, these wage gains are illusory, as wages rarely, if ever, increase as much as prices. So, workers’ real standard of living declines even as their nominal income increases. By contrast, those at the top of the income ladder tend to benefit from inflation, as they receive the new money—and thus an increase in purchasing power—before the Fed’s actions cause a general rise in the price level. The damage done by inflation is hidden and regressive, which is part of why the inflation tax is the most insidious of all taxes.

When the Fed creates new money, it distorts the market signals sent by interest rates, which are the price of money. This leads to a bubble. Many people who find well-paying jobs in bubble industries will lose those jobs when the bubble inevitably bursts. Many of these workers, and others, will struggle because of debt they incurred because they listened to “experts” who said the boom would never end.

The Federal Reserve’s manipulation of the money supply lowers the dollar’s value, creates a boom-and-bust business cycle, facilitates the rise of the welfare-warfare state, and enriches the elites, while impoverishing people in the middle and lower classes. Progressives who want to advance the well-being of people in the middle and lower classes should stop attacking free markets and join libertarians in seeking to restore a sound monetary policy, The first step is to let the people know the full truth about the central bank by passing the Audit the Fed Bill. Once the truth about the Fed is exposed, a critical mass of people will join the liberty movement and force Congress to end the Fed’s money monopoly.

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

Three Cheers for the Mises Institute

10/13/2020Trevor Daher

Austrian economics puts forth the axiom of human action—a nonfalsifiable, self-evident truth. From this axiom, it derives logical conclusions—truths—about individual human behavior, social order, and cooperation, i.e., markets. The conclusions drawn by this logical analysis are such that the optimal allocation of resources, the optimal modes of production and consumption, etc. each can only emerge—and therefore only be known—as the result of the free choice and voluntary actions of individuals. In fact, the only meaningful definition of “optimal” market conditions or outcomes in this framework are those that would best serve to satisfy the wants and preferences of individuals under conditions of scarcity. These wants and preferences themselves can only be known as they are demonstrated through free choice and voluntary action.

The Austrian conception of economic science, and its adherents, commits an egregious heresy against the modern religion—whatever it may be called in any particular time or place—for they so often embrace a political and legal philosophy which permits this free exercise of choice and voluntary action on the part of the individual, constrained only by the rights of other individuals.

Is it any wonder, then, why this great liberal intellectual tradition emerged in the time and the place that it did? Some argue that it was an accident of history, a coincidence. I, like so many others before me, believe that these ideas emerged in the West precisely because they are accordant with the Judeo-Christian understanding of the inherent value and dignity of the human person. Our ideological opponents, in more ways than one, seek to replace the invisible hand with the iron fist.

The Mises Institute is one of precious few institutions where scholars still possess the knowledge necessary to teach the principles of the free market, and the political and legal philosophy which engendered it. Fewer still possess the courage to profess and defend these ideas in our Jacobin age.

I myself have been a great beneficiary of the immense wealth of educational materials which the Mises Institute has provided to the public for free. The Institute counts among its scholars the very man who first introduced me (impersonally, of course) to the true histories of the United States, the Catholic Church, and Western civilization. It counts among its board members the greatest living American statesman and champion of liberty.

It is for this reason that I write this article: to express my profound gratitude to the Mises Institute, its board, its faculty, its supporters, and all of the individuals who have contributed to its mission of scholarship and education. The contributions and the individuals number too many to list them all. It is nigh time that I made a small contribution of my own.

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

A Note on 2020 Conferences

10/13/2020Jeff Deist

The Mises Institute continues to hold live, in-person events this year. We did cancel our March research conference, because so many faculty presenters were forbidden to travel by their respective universities. Since then, however, we have held our summer Mises University in Auburn with a great group of kids, events in Birmingham and Orlando, and our annual gala this past weekend on Jekyll Island (which was remarkable). Next month we return to Texas for a postelection symposium with Dr. Ron Paul, which is sure to draw a great crowd. You can join us in Texas and wish Dr. Paul well after his recent (minor) health issue by registering here.

All of these events have been safe, social, and more meaningful than ever in a time of government lockdowns and deep economic malaise.

As always, our goal is to lead people to a deeper understanding of economics and the peaceful organization of society. Commentary on the news of the day is mostly useless unless it sparks an interest in real learning and reading. Clickbait, listicles, millennial pandering, and craven submission to the zeitgeist won't produce what the US desperately needs, which is smart and responsible young people ready to rebuild some semblance of a lawful society. The future requires unwavering, principled, cerebral leaders who understand markets, property, and peace. This is a long-term project.

As an aside, most conferences are "pay to play," which explains why you see the same old tired Beltway speakers and organizations year after year—they pay to sponsor events and effectively buy speaking slots. It also explains why there are so many "students" at some conferences—their flights and hotels are paid for by the conference organizer. Mises Institute events are not artificial; our attendees want to be there.

Politicians and bureaucrats get more aggressive by the day, while young people riot in the street in support of socialism. We cannot shrink from this battle if we hope to leave our children and grandchildren any semblance of a free society. Please attend our events, support the Mises Institute, and stay engaged with us via mises.org, Facebook, YouTube, and Twitter.

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

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

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

 

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

Don't Confuse Gold Futures with Gold

10/06/2020Robert Aro

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

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

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

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

And just how long has this manipulation persisted?

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

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

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

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

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

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

TO THE DEALERS' EXPECTATIONS, WILL BE THE FORMATION OF A SIZABLE GOLD FUTURES MARKET. EACH OF THE DEALERS EXPRESSED THE BELIEF THAT THE FUTURES MARKET WOULD BE OF SIGNIFICANT PROPORTION AND PHYSICAL TRADING WOULD BE MINISCULE BY COMPARISON. ALSO EXPRESSED WAS THE EXPECTATION THAT LARGE VOLUME FUTURES DEALING WOULD CREATE A HIGHLY VOLATILE MARKET. IN TURN, THE VOLATILE PRICE MOVEMENTS WOULD DIMINISH THE INITIAL DEMAND FOR PHYSICAL HOLDING AND MOST LIKELY NEGATE LONG-TERM HOARDING BY U.S. CITIZENS.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10/02/2020Robert Aro

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why Democracy Cannot Protect Our Freedoms

10/01/2020Gary Galles

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

When commenting, please post a concise, civil, and informative comment. Full comment policy here
Shield icon power-market-v2