Power & Market
What Did the Democrat Say to the Republican?
If cringeworthy were a letter, read what Ohio Senator Sherrod Brown (D) wrote to Federal Reserve Chair Jerome Powell (R). In my opinion, everything contained in the letter comes from a place of selfishness, entitlement, and employs little use of reason. The demagogue thrives on appeals to emotions and the use of ill defined or hollow economic verbiage, regardless of political party.
Written on the letterhead of the United States Senate Committee on Banking, Housing, and Urban Affairs, he begins by reminding Powell of the Fed’s dual mandate:
As you know, the Federal Reserve is charged with the dual mandate of promoting maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.
Titled dual mandate, yet at some point became tri-part, where the Fed is additionally tasked with “moderating” interest rates. Senator Brown follows:
It is your job to combat inflation, but at the same time, you must not lose sight of your responsibility to ensure that we have full employment.
On one hand, Jerome Powell is supposed to create (money and price) inflation. On the other, he must aim to control prices once they exceed a metric in which he deems unacceptable while also ensuring that “maximum employment,” a bizarre negative right, is reached.
Their method to lower prices is explained:
The Federal Reserve’s tools work to lower inflation by reducing demand for economic activities sensitive to interest rates.
What exactly these sensitive economic activities are, or how they are measured, is not detailed. There is also a noticeable tactic of acknowledging problems, then looking past rational solutions in favor of something less sophisticated, per below:
Upper-income households are better able to protect their wealth during economic downturns … lower income families have fewer resources to mitigate unemployment and less wealth to accumulate assets and realize gains during an economic recovery. Due to this disparity, inflation and recessionary job losses increase the gap between upper- and lower-income households…
It is true that wealthier individuals are better insulated from currency debasement. They have more assets. Artificial booms created by the Fed benefit those with a higher net worth since, traditionally, they have cheaper and easier access to the new monetary inflation. The ability to access credit for the purpose of business loans or placing leveraged stock market bets is much easier for those in the “upper-income” bracket than for “lower-income” households. Yet the Senator doesn’t seem to fathom the idea that it is the Fed’s monetary creation causing widespread price increases, recessions, and economic booms.
At last, it’s declared:
We must stay focused on addressing the root causes of inflation without putting workers’ livelihoods at risk.
As explained:
…the United States and the world are still feeling the effects of a supply and demand imbalance from the pandemic. Russia’s illegal invasion of Ukraine has driven energy costs up, affecting food, transportation, and other sectors. Big corporations in concentrated industries have exploited this inflationary environment, increasing consumer costs and earning higher profit margins than before.
He mentions the Inflation Reduction Act, which in his own words “initiates fiscal action to strengthen the economy,” by way of various market interventions including new tax credits. Then he concludes by reminding Powell to continue following the dual mandate.
Reading a letter like this illustrates how far from reason, dignity, and honesty society has strayed. In this case, we find a senator seemingly not embracing any capitalism writing a letter to the head of an organization whose sole existence is anti-capitalistic. When everything goes predictably wrong, expect more socialist policies. They will never arrive at the answers society needs. Only a free and unhampered market can offer the best and most fair solutions to our economic woes.
Risking Nuclear War for Ukraine? Why?
The Bureau of Democracy, Human Rights and Labor (a branch within the US State Department) releases annual ‘Human Rights Reports’ on 194 different countries around the globe. Their 2021 report for Ukraine was released in April of this year. Despite its relevance to whether US intervention in the RU-UA war is merited, the report received zero media coverage.
The report highlights “serious abuses” in the Donbas region citing multiple sources: “International organizations and NGOs, including Amnesty International, Human Rights Watch, and the HRMMU, issued periodic reports documenting abuses committed in the Donbas region on both sides of the line of contact.”
Notable examples of ‘significant human rights issues’ listed by the bureau include “extrajudicial killings by the government or its agents,” “violence against journalists,” “serious acts of government corruption,” and “violence motivated by anti-Semitism.”
Corroborating the State Department’s classifications is the Heritage Foundation, a pro-interventionist conservative think tank founded in 1973. For nearly three decades, the foundation has maintained its Index of Economic Freedom which defines economic freedom as the “fundamental right of every human to control his or her own labor and property”. For the 2021 index, not only does Ukraine rank 35 spaces below Russia at #127 on the leaderboard, it’s in another category. Russia’s economy is deemed to be “moderately free”, a category shared by first world nations like Italy, France, and Spain, while Ukraine’s economy falls within the “mostly unfree” bracket.
I encourage readers to read the full list at the end of page 1 of the report and compare it to the State Department’s report on Russia. The assessments are nearly identical. It’s worth asking, if our own State Department classifies these two nations as equally abysmal defenders of basic human rights, why on Earth should we care about who governs their disputed territories?
The only material differences between the two reports are related to Russia’s unfair elections, an issue the department does not attribute to Ukraine despite the Obama Administration’s interventions into their elections in 2014. That said, there is no question that Russian elections are less-than-legitimate. Despite Putin’s popular support (which has been cited in numerous western outlets), he certainly shapes the system to his advantage - whether it’s extending his legal term limit, imprisoning opponents, or outlawing online speech that demonstrates “disrespect” towards “state authorities”.
However, even granting that Ukrainian elections are likely freer and fairer than those in Russia, if our goal is to defend democracy, why have we refused for almost a decade to recognize the secession of Crimea?
Months after the widely disputed Crimean referendum to join Russia which passed in early 2014, Gallup, one of the oldest and most respected polling institutions in the US, in partnership with the Broadcasting Board of Governors, a US federal agency whose stated mission is to “promote freedom and democracy and to enhance understanding by broadcasting accurate, objective, and balanced news and information”, polled Crimean residents on whether the referendum reflected their views. Not only did 82.8% of the population confirm that it was, but 68.4% of ethnic Ukrainians did as well.
The following year, GfK, a German-based data and analytics behemoth, conducted a follow-up poll asking Crimean residents “Do you endorse Russia’s annexation of Crimea?” to which 82% responded “yes, definitely” with only 2% answering with a definitive “no”. One cannot claim to be defending democracy while aiding and abetting the Ukrainian government’s ongoing incursions into Crimea. David Sacks sums it up best:’
Ok, so if not protecting democracy or improving the quality of life, what are we doing? Can we simply not tolerate an infringement on sovereign borders?
If that were the case, why then does the US not only allow but actively support the United Arab Emirates and Saudi-backed invasion of Yemen that began in 2018 and continues today? Regardless of the origins behind this war, it was not sanctioned by the Yemeni government and thus an infringement on their sovereignty. It’s the Middle East so it doesn’t matter?
The real reason we are involved in Ukraine is not to help their civilians. It is not to preserve democracy. It is not to preserve national sovereignty. It is what US officials like Defense Secretary Lloyd Austin and Congressman Dan Crenshaw have both admitted. The true purpose is to ‘weaken Russia’. A goal in direct contradiction to “Standing with Ukraine”. This goal uses their home as our playground. It uses civilian lives as our propaganda. It does nothing for the ordinary Ukrainian whose life would experience no material difference if Russia were to govern Crimea (as it has done for nearly a decade with the approval of its inhabitants) or the Donbas (which has been mired in civil war for years with atrocities on “both sides”).
Oh yeah… and this goal also runs the risk of annihilating humanity.
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Some Economic Lessons Learned from Britain's "Inglorious Coup"
British school children learn about the Glorious Revolution of 1688 which installed without bloodshed a new bill-of-rights respecting monarchy (William and Mary) on the throne in the place of the autocratic short-reigning King James. The Protestant elites feared his dismantling of restrictions on Catholics and his geo-political rapprochement with France under Louis XIV. They opted for Dutch King William.
Now there is a new lesson: the inglorious coup against PM Liz Truss in office just 7 weeks.
What was the aim of this coup led by plotting centrist parliamentarians within the Conservative Party1? It was to abort her free-market capitalist agenda – the first time a Conservative Government led by a PM from the right-wing of the Party had embarked on this since the 1980s under Margaret Thatcher. Geopolitics was not a factor; outwardly at least there is no dissent in Parliament about Britain’s prominent role in supporting Ukraine and joining in the US-led proxy war against Russia.
The pretext of the coup-organizers was to stem a market crisis ostensibly triggered by the government’s early budget decisions.
Many fellow conservative MPs (members of parliament) were anxious that the crisis would be the catalyst to the opposition Labour party gaining a landslide victory at the next General Election (due at latest by end 2024); wild swings in the opinion polls fanned the alarm. A leading concern was that the jump in interest rates would unsettle swathes of traditional conservative voters with large mortgages outstanding on homes bought at notoriously high prices fanned by monetary inflation.
The inglorious coup, unlike the glorious revolution, brings no new freedoms. Rather a rapid return journey looms into the status quo where Big Government, Big Finance, and crony capitalism thrive. The brooms of de-regulation and market-determined interest rates to which the Truss Government had opened the door are now firmly back in the cupboard.
The new PM, Rishi Sunak was selected under rules for a conservative party vote stitched up overnight by the coup plotters, and duly rubber-stamped by the so-called “1922 committee”. The requirement for any eligible candidate to have 100 MP sponsors to go forward into an election process meant Sunak would be the only name on a ballot. Hence no election necessary, whether amongst parliamentarians or rank and file conservative party members.
Within a few days of Liz Truss’s resignation announcement came the anointment as PM of ex-Finance Minister Sunak who had presided over the Big Government and highly inflationary economic program of the Boris Johnson administration through the pandemic years. As such he had perfectly toed the line to the beliefs and preferences of the status quo whether at Davos, the global central bankers’ club, or “the City”.
The success of this coup is sad for anyone who believed that Britain had a real prospect of shaking off the fetters of a high tax Big Government and reaping the benefits of freedom and prosperity from a new competitive capitalism under sound money.
Deriving and learning the lessons about how the coup succeeded will not help undo the sombre outcome for the UK. The process, however, should be of huge consequence for the US and indeed the rest of the world. Hopes for a renaissance of capitalism and freedom should gain new substance from those lessons as its advocates in the political arena are better prepared in consequence when their opportunity comes.
The biggest lesson will surely be one going all the way back to Adam Smith, repeated by J.S. Mill and Milton Friedman.
The essential foundation of competitive capitalism and freedom is sound money. The ill-fated ex PM Truss came into office with no coherent let alone compelling program for monetary reform – how to overturn the actual bad money regime, the so-called “2 per cent inflation standard”.
As a practical matter it is only possible to pursue supply side tax reform which transitorily widens the budget deficit if indeed there is a monetary regime in place which enjoys confidence about its money being good. Tax cuts delivered up front can be matched then by credible programs of public spending reduction. If the economic reformers leave the bad money regime in place, then any serious widening of the budget deficit becomes a catalyst to an intensification of inflationary fears. These can short-circuit in currency and bond market collapse.
President Reagan and PM Thatcher understood those interdependencies in the early 80s. They accompanied supply side tax cuts with their endorsement of the “monetarist experiment”. Reagan gave political support to the Volcker Fed’s blunder-buss rate rises through 1981-2 to end high inflation: Thatcher supported tough monetarist medicine, ostensibly taking advice from internationally renowned professors.
Of course, the applied forms of practical monetarism had flaws. Both leaders came under intense political pressure later to abandon monetarism, which they did. The wider free market crusades in Britain and the US bore the consequences of that failure to persevere with monetary reform in the direction of good money.
By contrast ex-PM Truss led the charge for a new low tax competitive capitalism whilst leaving the old regime under inflation-maker Bank of England Chief Bailey in full command. His institution announced only a tame 50bp rise of its policy rate to 2.25% on the eve of a bold unveiling of Truss’s tax-cutting plan, despite year-on-year CPI inflation already moving in double digits. No wonder the markets (the pound and gilts) reacted in scare.
Glaringly PM Truss had totally failed to make any popular appeal about creating a new hard money and slaying the scourge of high inflation.
Is there not a way to sell the benefits of a good money to the public, whether in the US or Europe, in a way which would be a powerful vote winner?
After all we have the example in Germany where the Social Democrats and Liberals won the 1969 elections on the promise of a strong currency and breaking with the inflationary dollar. They allied themselves with the monetarist pioneers within the Bundesbank, The hard DM became the most popular German institution.
Is it out of the question, especially in present high inflation circumstances, for a mainstream British or US or German political party to find the same route to victory?
Obviously the big and most important sell is that a hard currency wins advantages of prosperity and freedom and soothes the widespread deep anxiety at this time of widespread serious loss of wealth in real terms.
Symbolism can be important here.
Perhaps in time a Truss government if it had survived would have embraced the idea of launching a 100-pound note (at present the maximum denomination is 50 pounds, much lower than the maximum 100 in dollars, 200 in euros, and 1000 in Swiss francs) with the head of the new King on it. The new notes could have born a promise saying we (the Bank of England) will be faithful to our duty to maintain the soundness of this money.
All this would have indicated a radical change from the Elizabethan pound; notes as first issued with the Queen’s image on one side in 1960 had lost (through the course of several exchanges) almost 96% of their purchasing power by the time of that monarch’s death.
Now pie in the sky.
The simple lesson repeated ad nausea in the media from all this is the need to reduce fiscal deficits. The argument is that in today’s world of permanently higher interest rates governments can no longer run large deficits and expect the tolerance of financial markets to do so.
That is a lesson to suit the monetary and economic status quo. The central banks are back to the age-old ploy of blaming the finance ministers for bad outcomes. No fault of the monetary regime!
The free-market competitive capitalist agenda will never win popular support based on good housekeeping as its main plank, though that will doubtless be incentivized by good money.
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One More Time
Everyone expects the Federal Reserve to increase rates next week. The CME Group assigns a probability of 97% that the Fed’s target rate will rise from 3.0-3.25% to 3.75-4.0%. With the Fed hiking for quite some time, and inflation maintaining a 40 year high, at least two things should now be apparent: Raising rates to fight (price) inflation does not work and the Fed will continue raising rates to fight inflation.
Just last week, CNBC wrote:
Philadelphia Federal Reserve President Patrick Harker on Thursday said higher interest rates have done little to keep inflation in check, so more increases will be needed.
Showing not even the slightest reservation with their policy, the Fed President was quotes as saying:
We are going to keep raising rates for a while... Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4% by the end of the year.
Incredible really, because so far, rate hiking has done next to nothing to “fight inflation.” Instead of examining their theory, the Fed decided to do more of the same in hopes it will somehow work… eventually.
According to our planners, prices have increased due to COVID, Putin, and anything else except the Fed’s $5 trillion monetary inflation. Their solution to lowering prices is to raise interest rates. While this has not worked so far; if rates reach above 4% by the end of the year, the prediction is that it will.
It’s comical but this is basically the narrative we’re told. There’s even more to the story:
The expectation is that the Federal Open Market Committee, of which Harker is a nonvoting member this year, will then take rates a bit higher in 2023 before settling in a range around 4.5%-4.75%.
And so, he claims:
At that point, I think we should hold at a restrictive rate for a while to let monetary policy do its work.
To recap: The Fed will stop raising rates sometime next year when rates are close to 5%. At this time, something will happen, and prices will go back down again. Or if they don’t want to call it deflation, the hope is that the CPI and other inflation calculators show a mere 2% inflation for the foreseeable future.
How or why any of this would be the case has never been explained by the most highly paid and decorated economists of our time. Nor has it been explained why raising rates to fight inflation will work in 2023 when it hasn’t worked in 2022. We must assume that on some level, everyone, including members of the Fed, know that inflation cannot be controlled like a water faucet. Surely, those in the Fed’s inner circle know their quantitative models are inherently flawed. For everyone outside the Fed, we must continue to take stock that whatever the Fed is doing, it’s economics in name only. Never forget what they’ve done to our money, our economy, and our future.
Barring any stock market catastrophe, rates will rise next week. If that doesn’t solve our inflation problem, expect rates to rise again. Of course, they cannot raise indefinitely because amongst other things, the world is drowning in debt. The rate cut will come eventually, irrespective of any inflation reading.
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Tom and I Talk Secession on The Tom Woods Show
I was on The Tom Woods Show on Friday, and the two of us talked about secession at all levels of government, plus some details about my new book, Breaking Away.
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Gold Is the Solution for Financial Crises, Not their Cause
The Great Depression, Great Inflation I, the Financial Crisis, and the unfolding Great Inflation II have all been caused and perpetuated by hyperactive Progressive government. In the past crises, holding gold would have conserved savings and provided added returns.
The Great Depression came about when the Progressives’ newly-spawned Fed, having first greatly increased the quantity of money throughout World War I, again increased the quantity of money throughout the 1920s, by 62 percent (for details on figures, see table below). There was considerable innovation-driven growth already, but this new money created out of thin air created an unsustainable boom.
Progressive regulation of utilities, which at the time were high-tech and high-growth, sparked a stock market crash. Projects failed, businesses failed, and banks failed, ruining borrowers. Both parties‘ politicians then blocked product prices and wages from being decreased in sync, which had been done throughout the remarkably-similar 1839-1843 crisis deflation and had allowed workers to keep working and investors to keep earning returns. Investors saw that the Progressive, newly-hyperactive government could eliminate their returns or confiscate their returns, so investors rationally held back on new projects. Tragically for individuals, the Progressive government controlled the price of gold and started treating it as illegal for unlicensed individuals to hold gold.
Great Inflation I came about when the Fed increased the quantity of money in the 1960s and 1970s by 176 percent. Starting in the 1970s, both parties’ politicians significantly blocked corresponding increases in prices and wages. Investors again saw that the Progressive government could eliminate their returns, so investors rationally flocked to savings-conserving assets, including gold from 1975 on, once conservatives in government again started honoring it as legal for unlicensed individuals to hold gold. Sadly, Progressives in government meanwhile started treating the inflation-driven increases in the dollar prices of gold not as holdings of constitutional money or as conserved savings but instead as taxable capital gains.
The Financial Crisis came about when the Fed increased the quantity of money from 1995 to 2007 by 128 percent. The Progressive government also leaned on its financial cronies to lend mortgages to crony voters who were at serious risk of defaulting, and then bailed out almost all of its financial cronies. The initial increase in consumer prices was echoed and outpaced by the increase in the price of gold.
Great Inflation II has been started by unprecedented increases in the quantity of money by 303 percent, of which the portion that has come only recently, in the time of covid, has been 120 percent. Stock prices first were inflated and now have begun to decrease. Consumer prices have started to increase. (Consumer prices change quickly for quickly-processed products but as a whole don’t become stable for 8 to 16 years or more; so if the average is 12 years and the fastest changes come in the middle, then after the money-quantity changes, the most-substantial consumer-price changes would turn up in 6 years.) The price of gold has so far only decreased.
These crises’ superficial differences mask these crises’ deeper commonality. Each crisis is caused by a boom during which the quantity of government money is greatly increased, followed by a bust during which governments further disrupt workers, customers, and investors from healing themselves. Throughout the boom and the bust, governments treat taxpayers and money-holders as a commons resource—like land owned in common by everyone, which gets overgrazed and depleted. Various groups in government each grab as many resources as they can until the taxpayers and money-holders are depleted in resources and need significant time to rebuild. Although the Fed enables these depletions and has a fiduciary duty to not be the enabler, the root cause is always the politicians’ choices to borrow on the backs of taxpayers and to spend and regulate to favor business cronies and activist cronies.
The table below summarizes these crises’ booms in the quantity of money, the resulting busts in the prices of consumer products and stocks, and the resulting changes in the price of gold.
Table. Four Crises Summarized.
Booms in money quantity,
resulting busts in urban-consumer and stock prices,
and resulting changes in gold price.
1 The money quantity TMS2, often referred to as TMS, for the USA.
2 Murray Rothbard’s calculation.
3 Author’s calculation by Griggs and Murphy method.
4 Consumer-price index for urban consumers in the USA, as listed on InflationData.com.
5 Widely-used index of 500 leading large-cap USA equities, covering approximately 80 percent of available market capitalization, as listed on macrotrends.net.
6 Gold bullion price in USA dollars, as listed on macrotrends.net, deselecting “inflation-adjusted.”
7 Holding of gold by unlicensed individuals was treated as illegal from 5/33 through 12/74.
The boom money-quantity increases of the Great Depression, Great Inflation I, and the Financial Crisis were fractions of the boom money-quantity increase in Great Inflation II so far: only 0.20x, 0.58x, and 0.42x as much.
The consumer-price decreases of the Great Depression would be drowned out by today’s modern-monetary-theory Fed. The consumer-price increases of the Great Inflation I and the Financial Crisis were sizable fractions of the money-price increases: 1.11x and 0.23x. The consumer-price increase of Great Inflation II so far has been a much-smaller fraction of the money-price increase: only 0.08x.
The gold-price increases of the Great Depression, Great Inflation I, and the Financial Crisis were multiples of the money-quantity increases: 1.1x. 4.8x, and 1.2x. The gold-price increase of the Great Inflation II so far has been a negative fraction of the money-quantity increase: -0.1x. All in all, gold’s downside potential is small and gold’s upside potential is very large.
USA governments have a long history of largely respecting the glaringly-obvious right to own property. Political pressures have prevented gold from ever having been confiscated outright. The same political pressures remain in play now. In fact, the holding and voluntary pricing of gold may well be as protected now as they have been at any time under majority-Progressive rule.
Stocks are ownership of the world’s productive assets, which makes them the source of the values of all other assets. Over sufficiently-long time periods, even periods that include crises, stocks are unmatched as investments. Gold is a store of existing value. Over sufficiently-short time periods of crisis, gold protects existing value from being rapidly destroyed by government assaults on productive actions. Gold is for crises.
From now until the Fed makes a lasting slowdown of its enabling of government spending, or puts an end to its enabling, gold looks like an obvious buy, and worth holding as Great Inflation II unfolds.
Like the 2018 midterms, the 2022 midterms have too-few competitive races to change the swing votes substantially and shift the congressional houses from Progressive big spenders to constitutionalist government-limiters. The most-rapid change in government response to this crisis would be to elect a more-constitutionalist executive. Expect to re-evaluate gold holdings depending on how administrations change in 2024, 2028, and 2032.
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Financial Innovation or Intrusion?
Central Bank Digital Currencies (CBDCs) are coming. History shows that technology has never been stopped, nor restrained, for a significant length of time.
Governor Christopher J. Waller commented on some of the risks and benefits that CBDCs can offer. He weighed ideas such as security concerns and how foreign and domestic CBDCs would impact the vital role the American dollar has on the world economy. It appears the Fed is trying to convey their careful consideration of its efficacy and usefulness. Per the Governor, in January of this year:
The Federal Reserve Board published a discussion paper on CBDCs to foster a broad and transparent public dialogue, including the potential benefits and risks of a U.S. CBDC. To date, no decisions have been made by the Board on whether to move forward with a CBDC.
He goes on to proclaim:
But my views are well known. As I have said before, I am highly skeptical of whether there is a compelling need for the Fed to create a digital currency.
Whether for show, pretending the Fed is still on the fence regarding CBDCs, or if he truly is skeptical is unclear. But governments and central planners have no limits when it comes to interfering with the economy and lives of others. When confronted with a technology that will only enhance the powers of the planner, we can be confident the planner will jump at the opportunity.
In his speech, he failed to mention other innovations that CBDCs could offer, such as the ability to track payments, block transactions at will, and set expiry dates on money itself.
If it sounds far fetched, read an excerpt from a paper published by the Bank of Canada last December:
An inconvenient aspect of physical cash is that it can be lost, and there is no way to recover it. We consider a potential feature to solve this problem for offline digital cash: an expiry date to automate personal loss recovery. With this feature enabled, digital cash could not be spent after its expiry date.
Naturally, they try justifying this by claiming:
Consumers whose digital cash expired would automatically receive the funds back into their online account without having to file a claim.
Notice the spin, that, unlike cash which can be lost, if you were to somehow lose your (presumably digital) wallet, then after a set amount of time the money expires and the individual receives the funds again.
Such situations could be useful; yet, there are two sides to every technology.
Consider the “weakening of consumer demand,” according to the Fed. It’s possible they will set expiry dates on CBDCs, forcing people to spend money by a set date in order to “stimulate the economy.” They wouldn’t admit this yet. But once the technology is in place, nightmare financial scenarios such as this could become reality, masquerading as short-term measures or necessary policy decisions.
Either way, once the wheels of progress, or devolution, are in motion, they won’t be stopped. Central banks of the world will continue publishing papers on the pros and cons of CBDCs, and then one day, we’ll wake up to find we’re living in a cashless society.
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Second Thoughts on the Circular Flow Diagram
The Circular Flow Diagram has dominated economic thought for over a century.
Yet, all along we’ve known its shortcomings: over-aggregation, static capital, instantaneous production, and homogeneous factors. It places consumption before production and supports a fantasy macro world where saving is destructive, deficits don’t matter, and MMT makes sense.
But the economy is just too complex to grasp without some sort of simple, realistic model. Attempts to build such models have floundered. Hayek’s Triangles, Böhm-Bawerk’s Concentric Circles, and the Physiocratic Tableau, all leave users perplexed. The obtuse Circular Flow Diagram has simply won by default.
And what a victory! Every high school and college econ text puts it front and center. Thus, countless millions have a cartoonish mental model of the economy and fall prey to the most blatant nonsense. No wonder we’re all Keynesians now!
But by using 3D graphics, we’ve built an Austrian-based model that’s simple, rigorous, and comprehensive. We call it LinKē.
The LinKē Model illustrates the stepwise conversion of natural resources into products via a network of businesses.
Zooming in, we see that each business has specialized capital and workers to accomplish its particular task.
We have disaggregated the Circular Flow Diagram’s interchangeable “labor” into specialized workers operating specific capital.
Zooming back out, we see an economy with heterogeneous capital, specialized workers, and entrepreneurial organization, converting natural resources into products per consumer desires.
LinKē visually represents the traditional factors of production, but in a more granular and realistic way. It also demonstrates the element of time as material moves through the production process.
Then by taking away all but the capital, we see the capital structure with it’s various stages of heterogeneous capital.
Who could look at LinKē and imagine that arbitrarily shifting capital around might be a good idea?
Instead one wonders, “How does this amazing structure arise and what keeps it healthy?”
LinKē has many more tricks. Just as we illustrate the capital structure, we also clearly show the price structure, as well as how the price structure drives the capital structure across time.
Want to see the business cycle? No problem! LinKē videos dynamically show the misallocation of capital into a given sector, along with the migration of workers to that sector, only to be unemployed as the business cycle turns and businesses shrink during the recession.
And what about that “circular flow” of money?
We layer in streams of money going countercurrent to the products, and see price formation as well as the price structure.
Then we run the money through the banking system. LinKē illustrates traditional banking, fractional reserve banking, and central banking. In each case we turn various layers on and off to highlight the features of interest.
We also show price formation happening at the consumer level and propagating back to natural resources by way of the price structure. This allows us to clearly contrast the corresponding lack of consumer price formation in government services.
Want to see a socialist economy with a withered and distorted capital structure delivering scant and low quality products to consumers? Easy peasy.
LinKē is so clear and intuitive that we can teach capital structure, price structure, and business cycle theory to kids as young as ten.
LinKē provides the integrated framework, allowing young students to grasp all aspects of business and economics.
LinKē is at the core of Middle School MBA’s NextGen curriculum.
But static pictures simply don’t do LinKē justice. To truly appreciate LinKē you need to see him in action. Click here for a quick LinKē demo.
Or click here to see LinKē as part of our new video, Zero to Austrian in Twenty Minutes, which explains Austrian Business Cycle Theory to anyone in less than twenty minutes. We think of it as Economics in One Video.
It’s time to end the reign of the Circular Flow Diagram and put the Austrian perspective into everyone’s heads – not just academics or college grads, but every thinking human on the planet.
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Helicopter Ben
Every month we see the same headlines, (price) inflation through the roof, and each new month makes a new 40-year inflation high. CNBC shares the not unexpected details:
The consumer price index, a key inflation barometer, jumped by 8.2% in September relative to a year earlier. Economists had expected an 8.1% annual increase.
Per the news release, Public Transportation up 27%, Health Insurance up 28%, and Food at work or school up a mouth watering 91%!” Surely, we cannot blame Russia, China, or the reopening of the economy.
Anecdotally, discussing with friends, family, or acquaintances these price increases reveal no one has anything positive to say regarding currency debasement. It makes society worse off by increasing disparity. It hurts the middle to poor class most, leading to desperation and much worse. Inflationism as a monetary policy is a scourge on society. Anyone saying otherwise either has not truly considered the issue or is highly paid to mask it.
Allow me to illustrate the latter category: This week Nobel Prize Winner Ben Bernanke is being awarded the honor for his work in the 1980’s and his role in the Great Recession of 2007-09.
The Nobel committee doesn’t provide a link to a specific paper. But a very notable one goes into great detail describing how the system works and what the future holds. The infamous: Deflation - making sure "it" doesn’t happen here, courtesy of the Bank of International Settlements.
This short paper from 2002 is a must read! It is where the newly crowned Nobel Laureate discusses:
…the danger of deflation, or falling prices.
It is here, he famously wrote about the “printing press.” The paragraph presented in its entirety:
Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
The paper delves into intellectual absurdity, illustrating many factors wrong with the economic system in which we live. Luckily, the following year, Dr. Mark Thornton authored a paper titled Apoplithorismosphobia, or “the fear of deflation.” He introduces the paper:
Or, more correctly, the fear that an economy would “suffer” from falling prices, or a general decline in the prices of goods and services. It is a fear that has gripped some economists, journalists, and policymakers with a blinding strength as powerful as faith.
There are those who understand economics and those who are paid to not. Upon reading both essays, the truth should become self-evident. Society is not better now that the cost of food has doubled in price this past year. Nor is it sincere to treat this as a matter of the Fed simply controlling inflation by mathematical formula. This idea of “positive inflation” as a public good continues to be a widely accepted idea. Thus, we must reiterate, as we have for over a century now, that it is not.
With inflation at 8.2%, we could actually use a little deflation right about now. If there is any justice in the world, it will come when an Austrian authors a paper titled: “Inflation - Making Sure It Doesn’t Happen Ever Again,” wins a Nobel prize for their work in stopping monetary destruction once and for all.
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The Alex Jones Verdict Shows the Danger of Defamation Laws
In the latest demonstration of the absurdity of defamation laws, radio show host Alex Jones has been ordered to pay $965 million to people who didn’t like things Jones said about the 2012 Sandy Hook massacre in Newtown, Connecticut.
In the years following the massacre, Jones repeatedly stated that he thinks the shootings were staged and that the purported parents were so-called crisis actors. (He has since said he thinks the shootings were real.) Some of Jones’s listeners chose to agree with Jones’s claims that the shootings did not occur, and this allegedly informed the decisions by some listeners to engage in the harassment of some of the parents of murdered children.
Essentially, Jones was found guilty of saying things that supposedly inspired other people to say cruel and disrespectful things to the parents of the Sandy Hook victims. The harassment allegedly also includes the desecration of the graves of victims.
Jones is being ordered to pay hundreds of millions of dollars because some other people—who were not acting under any orders from Jones—allegedly committed some crimes on their own. It’s difficult to see, then, how Jones actually inflicted any actual damages on his supposed “victims” in this case. If people have harassed the parents, of course, that’s a crime for which the actual harassers are responsible. The real guilty parties here are the people who have committed acts of harassment. But it appears that Jones has been convicted here of simply saying things that the jury and the plaintiffs found objectionable.
[Read More: “The Dangers of Defamation Laws” by Ryan McMaken]
In a free society, a private citizen saying things that other people are free to ignore is not punishable by law. In a society which does not respect free speech, however, merely saying words is apparently grounds of levying fines of hundreds of millions of dollars. (Actual threats of violence directed at specific persons are dangerous, but are not what we are talking about here, and that’s not what Jones has been accused of.)
The idea that Jones is somehow guilty for the acts of third parties he doesn’t even know follows from the basic twisted logic of defamation laws. The idea of defamation as a punishable legal matter is based on the notion that people do not have free will and are not responsible for their own actions.
For example, if a stranger tells me that my neighbor is a pedophile, I have no reason to automatically believe the accuser. Yet, this is what the logic of defamation assumes. If Person A says nasty things about Person B, we are supposed to assume that people do not have the freedom to reject the accusations and ignore them. Rather, we are to assume that people are robots who believe everything they are told. Similarly, there is no reason why anyone must believe the latest theories spun by Alex Jones.
Moreover, given that people are free to ignore the accusations of Person A, it is especially absurd to assume that Person A is somehow responsible if Person C then uses the opinion of Person A as a reason to inflict some kind of harm on Person B.
The reality is that people do have a choice and don’t have to believe every nasty thing some other person says. Nor are people being somehow forced to act in any particular way because someone said some cruel things about someone else.
The idea that people are responsible for their own actions apparently had no place in the court proceedings against Alex Jones, and the judgment against him is a standing threat to ordinary people who say unpopular things.
In an age when everyone who disagrees with official regime narratives is labeled a racist, a domestic terrorist, or worse, this is a dangerous development indeed. Governments have used defamation laws to silence critics, and the wealthy have long used threats of defamation suits to do the same. Naturally, Murray Rothbard opposed defamation laws and recognized they are a way for the powerful to silence the powerless:
The current system [which allows for defamation suits] discriminates against poorer people in another way; for their own speech is restricted, since they are less likely to disseminate true but derogatory knowledge about the wealthy for fear of having costly libel suits filed against them.
The Jones case is known and notable partly because he has the means to mount a sizable legal defense. Unpopular people of lesser means will fare even more poorly, and will much more easily and quickly be threatened into silence.
The answer to all this is total free speech in which people are explicitly expected to come to their own conclusions and be responsible for their own actions. As Rothbard noted: in a system of unrestricted free speech, “everyone would know that false stories are legal, there would be far more skepticism on the part of the reading or listening public, who would insist on far more proof and believe fewer derogatory stories than they do now.”
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