Time to Go Back to That 70s Show

Time to Go Back to That 70s Show

05/18/2022Fran Rodriguez

Unless you are living under a rock, you know by now that current times are nowhere near economic stability. In fact, there has not been such “stability” (regardless of what politicians and central bankers say) since the ending of the Bretton Woods agreement in 1971. What did ending the Bretton Woods agreement mean to the world? Since I am no expert on the topic, I suggest reading this article by the CATO Institute. According to historical data and using the year 1913 as the base year, we find out that the total rise in prices is roughly 2920 percent ($1 in 1913 needs $29.20 today to buy the same). From 1913 to 1971, the index grew by 400 percent or 4 points, meaning prices multiplied by 4 in 58 years. Now, comparing from 1971 to 2019 we see that the index rose 21.73 points or 2173 percent in a similar year span. It is almost a 6-time difference.

Many Keynesian economists (and some “free-marketer” monetarists) argue that it is thanks to inflation -as Austrian thinkers, we refer to inflation as the increase in monetary supply, but for easier-reading-and-writing purposes, the general conception of inflation is the general rise in prices will be used- that wages grow with it. But is this true? In 1971, according to the SSA, the average wage index was $6,497.08, while in 2019 it was $54,099.99, a 732.68 percent increase. Yes, wages grow, but 3 times less than prices do, which turns into much lower purchasing power. According to the same data from the SSA, the average wage in 1951 was $2,799.16, which means wages grew 132.11 percent from that year until 1971. How much did prices grow? 55.77 percent, meaning workers acquired more than 2 times more purchasing power, a big difference compared to what happened after abandoning the imperfect sound money system we had. The average inflation rate during that time was 2.24 percent, while from 1971 until 2019 it was 3.91 percent.

This itself should serve as enough proof to go back to a commodity-backed system, but more facts can be brought up to make the argument even more solid. According to Fed data, median home prices have risen from $25,800 in the last quarter before leaving Bretton Woods to $327,100 in 2019, a 1167.83 percent increase (1561.63 percent until 2022), with growth in wages sitting far behind. Cars cost an average of $2,700 in 1971, and we got the news that the average price now sits at around $47,000, or 1640.74 percent, and again, wages far behind prices. It is not only the rise in prices that matters. US federal debt was 35 percent of the GDP in 1971 and never went above 90 percent with the WWII (including post-war) exception, and since 1950 it never surpassed 74 percent, again being an exception and following a downtrend until 1971. Debt has been above 100 percent for 8 years and will continue to do so for at least a few more since it’s sitting at almost 125 percent currently. This table shows perfectly the trend before and after 1971.

Now the economic and historical case has been made, we need to focus on the philosophical case. There are four main points for libertarians to be against a central bank or any similar institution and not in favor of sound money. First, ever since 1971, central banking gained tremendous power, and with it, so did the government. We know that economic power will always be abused. We are opposed to the government having more power than it should, so we cannot be in favor of a central bank. Second, the central bank sets interest rates, which is a form of central planning, and we believe it only brings misery, and therefore we favor market-driven rates, which instead bring prosperity and growth since they follow a non-artificial, imposed rate, and today is proof of it. Third, we know thanks to Murray Rothbard’s perfect explanation in his classic, America’s Great Depression, that printing money and expanding artificial credit to enterprises leads to what is known as the business cycle theory, which always ends up in recessions as we have seen in the past. And fourth, we believe in a free market, and most of the economic interventions are used to bail out banks, which was seen in 2008. This goes against the principle of free competition in a non-regulated market.

Academic papers can -and will soon- be written on the topic, but this overall, non-technical and easy-to-understand analysis and these arguments will serve as a good basis to be against the current power-abusing, out-of-control system we live in and favor a commodity-based one. It will be with commodity-backed money that we will have a true free-market economy and we will prosper. Until then, we will continue to go downhill and we will see prices rise 3 times, or even faster than wages do, making us poorer and more dependent on the government every day.

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Is Joe Biden the Future or the End of the Democratic Party?

For reasons familiar to any economist, American politics is a permanent duopoly in which neither party can gain a sustainable long-term advantage over the other, but that does not suggest or imply that neither party can collapse; it only implies that any collapsing party will soon be replaced. As we know, American parties come and go – not often, but not never either. The Federalists gave us several presidents, but they vanished; the Whigs the same; are the Democrats next?

Let’s begin by dismissing the most obvious objection: The Democratic Party is too old to disappear. If I told you that my one-hundred-year-old grandma hadn’t died in a century, and, therefore, she won’t die this year, would you believe me or marvel at my stupidity? Let’s face it: the death of the Democratic Party is overdue, so its age, if anything, works against it.

Now, let’s talk about the warning signs. If you were dying, would your base be shrinking geographically or growing? Well, do the Democrats rule – to the extent they rule – by relying on a handful of cities or are they geographically diversified? Is that trend accelerating or slowing down? Is their strength amongst Latinos growing or shrinking? How about Asians? How about African-Americans? Trying to find a group – any group – in which the Democrats are growing is pretty difficult; they win – to the extent they win – by squeezing more and more out of their diminishing base. It’s not like they’re doing better amongst African-American voters; instead, they’ve got to turn out more African-Americans to offset their declining margins, and that’s not a sustainable strategy over the long-term. To put it another way, 2020 was likely the best their current coalition could ever manage, and they scarcely won – the decline and rot hidden by a moment of victory, but unmistakable nonetheless.

Of course, polls and outcomes vary all the time; consequently, such evidence can’t prove anything one way or another, so why do I think this time is different? 

Think about what the Federalists were designed to do: they were designed to share power between New England and Virginia at a time that elections were not open to all white male voters; once elections were open to all male voters, Federalists couldn’t hope to win. Sure, they managed one last hurrah, with John Quincy Adams, but they were doomed by a larger change that shattered their coalition and eliminated their potential for victory.

Or think about what the Whigs were designed to do: they were intended to unite anti-Jacksonian voters in the North, many of whom despised slavery, with anti-Jacksonian voters in the South, who wanted to protect slavery. Once Polk’s annexation of Mexico’s territories put slavery expansion on the national agenda, there was no way for the Whigs to hold their coalition together.

Let’s turn, then, to the Democrats. They are designed to unite voters who want to spend government’s largesse on themselves and their pet causes to voters who want to profit from the government largesse via the implied put-on financial assets that the Fed is able to offer via its enormous balance sheet. The problem is that policy of unlimited federal spending coupled to unlimited federal debts is no longer tenable. One can debate how it will end or precisely when it will end, but everyone agrees it’s over. The only question now is how to reverse and decrease government spending, which means some members of the Democratic coalition will be pushed out.

You can raise taxes on the rich, chasing rich people out as they no longer benefit from the Fed’s support of financial assets. Or you can cut spending, chasing those beneficiaries out of the party, but there’s no way to put the coalition back together. For every Democrat who loved Build Back Better, there’s some Democrat somewhere who hated it, which is why Democrats like Manchin and Sinema ultimately defeated it. There’s literally no potential coalition that could elect the Democrats; from now on, it’s just about how many they’ll former Democrats they’ll lose because they used to be able to run against Trump on the promise of unlimited spending, but now they can’t promise unlimited spending, and they simply don’t have the margin to surrender.

Like the Federalists and the Whigs before them, they no longer have any reason to exist. Occasionally, a business finds new life after its reason to exist ceases, but, mostly, they just disappear in the process economists call “creative destruction.” I suspect that’s what we’re seeing now – the creative destruction of the Republican Party’s opposition.

In short, I struggle to believe that the Democrats can find a new reason to exist after spending decades running on how to spend the limitless sums of government money that they believed they could spend. Are they going to abandon Social Security? Medicare? Obamacare? If they don’t cut, they’ll lose their sacred cows and, thus, their voters; if they do, they’ll lose their voters. If they raise taxes, they’ll lose their donors (and voters). There are no good options; their current business model simply doesn’t work.

But the most damning proof of their impending demise is their own conduct: do you think they elected Biden because they wanted to hamstring themselves? Maybe you think their focus on pronouns and other divisive social issues is a sign of strength? They’re trying to squeeze the last vote out of their declining base precisely because they know there’s no way to grow their base; their current strategies are simply the best of their bad options. Like any declining business, they’re doubling down, rather than pivoting, because that’s what people typically do when their businesses are dying. In theory, word processing manufacturers like Wang can start making computers, but they don’t; instead, they tend to “improve” their product even as its market is vanishing. How many typewriting or word processing manufacturers made the leap to computers? That’s how many politicians will survive – the real winners will join whatever comes next first; they won’t try to save this version of the Democrats.

One suspects that the coming disaster of 2024 will be the moment the Democratic Party’s death becomes apparent, but I think we’re already hearing the proverbial aria that signals the end. It’s simple economics: a party built to spend America’s unlimited wealth cannot survive the end of that delusion.

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The Fed Loves Friedman! Hayek? Not So Much

06/28/2022Robert Aro

It’s rare to see a central banker discuss Austrian economics. Yet, the Federal Reserve Bank of Richmond did exactly that in a recently published paper called: A Historical Perspective on Digital Currencies where they give their opinion on past literature as it pertains to the use of private currency.

The three authors, all PhD holders, one from the University of Chicago, compare the views of a Hayek (Austrian School) to Friedman (Chicago School) to conclude that market intervention is preferred to a free market choice in currency. Here’s part of the abstract:

This perspective suggests that government interventions have a critical role in creating a well-functioning money and payments system.

Government intervention and a well-functioning anything are hardly compatible. But let’s see how they arrived at this idea, and why a currency monopoly (managed by seven people) is their preferred choice.

They give credit where it’s due, admitting private currency has been debated “in the economics literature for a long time.” Noting:

In fact, the intellectual roots of cryptocurrencies such as bitcoin can be traced back to the Austrian school of economics and its criticism of the government monopoly over fiat money.

So far so good.

They then cite Hayek’s 1976 book Denationalisation of Money: The Argument Refined where he explained:

…instead of a national government issuing a unique currency and imposing legal tender laws, private businesses should be allowed to issue their own forms of currencies. That is, currency issuance should be open to competition.

No refutations of Hayek’s ideas are mentioned. This continues a long standing tradition of ignoring free market principles since forming a coherent argument against capitalism in favor of socialism is no easy task. Therefore, rather than explaining the problem of Hayek’s ideas, they appeal to popularity by citing a book written by Friedman 16 years prior to Hayek’s, which unapologetically championed interventionism. The authors write:

Hayek's ideas, however, have not been broadly adopted. Rather, in his 1960 book "A Program for Monetary Stability," Milton Friedman pointed out that "monetary arrangements have seldom been left entirely to the market, even in societies following a thoroughly liberal policy in other respects, and there are good reasons why this should have been the case." 

The quote fails to explain the alleged shortcomings of the market. But they follow with ideas on how society benefits through central bank/government support:

According to Friedman, those good reasons are:

  • The high resource costs of issuing currency
  • The difficulty of enforcing contracts and preventing fraud
  • The difficulty with limiting the amount issued
  • Possible externalities on other parties

The four points are hollow, relying on a simple opinion as to how difficult something is, rather than using any form of reasoning or a priori knowledge. However reading Hayek’s book noted above, or his aptly titled book: Choice in Currency: A Way To Stop Inflation should convince anyone that a voluntary system is superior to an involuntary one. As the saying goes: “Good ideas don’t require force.”  

Consider Friedman’s “difficulty with limiting the amount issued” bullet point. 62 years after his book, the Fed has a $9 trillion balance sheet and created almost $5 trillion of US dollars in the last two years. US debt is still at $30.5 trillion, and despite the Fed finally shrinking the balance sheet, it’s only a matter of time until Quantitative Easing returns. Naturally, a central bank creates way too much power to be left in the hands of a few individuals. 

The quantity of hamburgers, running shoes or cell phones in America are not regulated by a planning committee. However, we live in a society where billions of dollars in salaries supports a system that decides the national interest rate and quantity of money. History shows central banks and unbacked fiat currency inevitably lead to hyperinflation, while the military industrial complex and many more evils are supported by this system. Concluding that money is too important to be left in the hands of hundreds of millions of people blatantly denies human history, current reality, and Austrian economics.

With the advent of central bank digital currencies, anyone who champions liberty, freedom, privacy, and purchasing power should be concerned. Fedcoin will be another way central bankers can inflate the money supply. Whether the new money is sent to big banks or the poorest members of society first, it will cause currency debasement. They do not want digital currency for the purpose of stopping money creation; the whole purpose is to streamline money creation, on their terms.

If you think prices are high now, wait until the Fed sends money directly to your digital wallet! We can only guess what Hayek and Friedman would say to that.

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Countdown to Crisis

06/27/2022Liam Cosgrove

If you’re into finance, you may have seen this chart:

Fed hiking cycles end in crisis - every time. The chart also illustrates that, since the 1980s, the Fed has been unable to achieve a Fed Funds Rate (FFR) at or above the peak of the preceding tightening cycle. 

It’s not a mystery why this happens: lower-for-longer rates allow for greater debt accumulation and create an ever-increasing dependency on cheap rollover costs.

While the above chart isn’t a very large data set, it appears that crises manifest when FFR reaches 50 percent to 80 percent of the immediately preceding FFR peak. Given today’s effective FFR has been jacked up from nearly 0 to 66 percent of the 2018 peak in a matter of four months (for reference it took over 3 years for the previous cycle to cover the same relative ground), the likelihood of “something breaking” seems high.

Before gobbling up VIX futures, it’s important to check the thesis.

Many are pointing to the huge sums parked the Fed’s Reverse Repo (RRP) facility, excess cash earning overnight yield from the Fed, as one reason why “things may be different this time”. Translation: there’s too much cash for a liquidity crisis. 

First, the majority (88 percent) of RRP participants are Money Mutual Funds. This is A LOT of cash that would otherwise be chasing T bills, commercial paper, or lent in the repo market. This means an inter-bank lending crisis is unlikely.

That is not to say we will not see “something break”' in the private sector - in the form of margin calls, mass layoffs, or bankruptcies - due to the rapid uptick in costs of capital. Ironically, the high RRP balance may be giving false confidence to FOMC members that further tightening can be sustained.

Let’s look more broadly at money supply:

The interesting thing to note here is the vastly greater increase in money supply (both nominal and percentage wise) post-GFC as compared to post-Dot Com. When comparing the “success” of each hiking cycle that concluded these two eras (see below), it appears that money supply and economic robustness are inversely correlated. This is especially odd given that post-GFC was supposedly when regulators cleaned up the financial system with stricter collateral and lending criteria.

So, the suggestion that excessive liquidity will save us from a crisis is not supported by the data (and in fact the opposite may be true).

I know the recession-will-force-a-Fed-pivot trade is becoming popular now, but I would be careful. The pace of this tightening cycle dwarfs those of the last three bubble bursts shown above, and our economy is more dependent on cheap debt than ever before. Short duration debt (< 1 year) has also seen an unprecedented surge during the COVID era - meaning our countdown-to-crisis could be much shorter than previous cycles. Something may break before the Fed even has time to pivot. 

Or, let’s say the Fed cautiously pauses hikes. The markets would undoubtedly smell blood and rally on Fed capitulation. But we’re forgetting that our economy has been nursing at the test of 0 percent rates for roughly a decade - we can’t even handle 2 percent! Maybe David Hunter will finally be right and such a scenario will be the catalyst for his melt-up and subsequent crash.

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Inflation and the Rule of 72

06/27/2022Connor Mortell

In the world of investing, there is a well-known concept referred to as the Rule of 72. It states that because of compound interest, 72 divided by your rate of return will always yield the number of years necessary to double your initial investment. The simplest math to do it with would be that it takes 10 years to double your investment at a 7.2% interest rate (72 / 7.2 = 10). However, below is an excel sheet drawing out the rule with rates of one through ten percent.

Because inflation detracts from your return, the most accurate way to find how often the real value of your investment doubles is to actually measure 72 divided by rate of return minus the inflation rate. Forty years ago, to achieve a fairly large real rate was fairly feasible even in the face of what was considered fairly high inflation. In 1982, exactly forty years ago, the average CD was a little over 14%. So even though inflation was over 6%, all it took to earn an 8% real return was a simple short term CD. At that difference of about 8%, it would only take 9 years to double your money!

Times have changed. Inflation today is right about 8.6%. However, artificial interest rates being held low by the federal reserve has led to the average CD rate sitting below one percent. As a result the real return is between negative seven and eight percent! Which means that it would take between nine and ten years not for your money to double, but rather it would take less than a decade for your investment to cut in half!

Even this is only telling part of the story. This is because between 1982 and today, we’ve also changed the way in which inflation was measured. By the old metric, inflation would actually be sitting at about seventeen percent. Plugging that into the Rule of 72 would give us 72 / (0.73 - 17), which tells us that it will take under five years for your investment to be cut in half!

Realistically speaking, it’d be all but impossible to maintain this 8.6% (or 17% by the old metric) inflation for ten years or even five years. Such prolonged inflation would either have to snap into a recession or snowball into hyperinflation as Americans gave up all faith in the dollar. However, it is an important lesson in just how impactful inflation really is. It’s not always the most exciting, front page topic, but inflation is so much worse than the brutal gas and home prices we are dealing with - though those are already crippling. It is on a high speed track to crippling and most literally halving the real return of your savings.

No matter what we’re facing, inflation like this is never worth it. As Ludwig von Mises has said:

No emergency can justify a return to inflation. Inflation can provide neither the weapons a nation needs to defend its independence nor the capital goods required for any project. It does not cure unsatisfactory conditions. It merely helps the rulers whose policies brought about the catastrophe to exculpate themselves.

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All Inflation Is Government-Caused

06/25/2022Jason Morgan

On June 19, 2022, geopolitical analyst Ian Bremmer posted the following on Twitter:

us: left govt, high inflation
uk: right govt, high inflation
germany: centrist govt, high inflation
italy: everyone in govt, high inflation

wild guess it’s not the govt

— ian bremmer (@ianbremmer) June 19, 2022

In a follow-up tweet the next day, Bremmer wrote:

1 - independent central banks:
printing like crazy

(powell: the one man trump and biden agree on)

2 - pandemic causing massive swings in supply and demand

3 - russia war disrupting supply chains

— ian bremmer (@ianbremmer) June 20, 2022

It’s possible that Bremmer is being sarcastic. In which case, I would like to be the first to welcome him to the Austrian Club.

But my reading of Bremmer’s tweets is that he’s quite serious. If I’m right to read Bremmer straight here, then it’s worth pointing out that the premise of just about everything Bremmer wrote in these two short bursts is wrong.

Let’s take the first tweet first. Bremmer apparently wants to say that all kinds of governments exist, and there is inflation everywhere, so clearly it’s not the government that’s causing inflation. This is fallacious on its face. Logic just doesn’t work this way. “All x are doing y, therefore x is not the cause of y,” is, well, silly.

That’s hardly the only problem. As some of the people replying to Bremmer’s weird logic also indicated, the “left-right-center-everyone” mapping which Bremmer applies is bogus. Government is government is government, and it doesn’t matter which slogans get slapped onto which campaigns. On that narrowcast reading alone, Bremmer’s assertions don’t hold water. The globalist Boris Johnson is a rightist? That’s comical, but one has to suspend disbelief on this score to make Bremmer’s tweet work even on this low level.

We can strip the phony politics away and go even deeper, however. Indeed, the reason why all governments are alike is where we get to the heart of Bremmer’s fallacy. Take a look at the first claim in his second tweet. Bremmer thinks that central banks are “independent.” His proffered reasoning is that Federal Reserve Chair Jerome Powell is “the one-man Trump and Biden agree on.” Ergo, for Bremmer, Powell must be an “independent”—he serves two masters in a way pleasing to both. It can’t be government that’s causing prices to skyrocket. Must be something else.

But Bremmer raises a question. And in doing so he sets up a tautology. That tautology is precisely the reason why Bremmer (if he’s being serious) is wrong that governments don’t cause inflation.

The implied question is: Does Powell’s being “the one-man Trump and Biden agree on” make him independent, or does it make the government monolithic? The answer is behind door number two. Powell is not independent. He’s just one head of a Hydra with a Georgetown address. Powell without government, and government without Powell—neither is possible. There’s your tautology.

The central bank of the United States (and the same is true in every country) is a purely political institution. Powell isn’t some monastic who stumbles in from his desert retreat to soothsay the economic future. He’s neck deep in the Washington swamp. He just happens to be very good at what he does, which is why he still has his leather chair in the Fed building. Like all Fed chairmen, Powell is a paid alchemist who transmogrifies, with magical economics-sounding incantations, the usually stupid ideas of politicians into seemingly de-politicized policy positions. Powell is good at reading a room and coming up with a number pleasing to his boss (and it makes zero difference whether the boss is with Team R or Team D). He’s like the oracle at Delphi. Or like Dylan. He doesn’t need a weatherman to know which way the wind blows.

You have “elections.” You have a clueless citizenry. You make it all work out, and you do so with a look of high-economic gravitas, as though the gods had ordained the chicanery you are peddling. That’s what makes you the Fed chair.

And it isn’t just that central banks are not independent of governments. It’s that, much more consequentially, governments are not independent of central banks. Governments as we know them in the twenty-first century would not, could not, exist without central banks. Without the “printing like crazy” phenomenon that Bremmer bemoans, there would not only be no inflation. There would be no fiat money, period. No fiat money, no government. No government, no Powell. Can it be that Bremmer truly doesn’t understand this?

Bottom line: Government spending doesn’t “cause” inflation. Government spending isn’t to inflation what, say, reading in low light is to ruined eyesight. It isn’t as though, over time, whoops, all that government spending caught up with you and, dang, you’ve got some inflation. Government spending under modern monetary theory (fiat money) regimes is inflation. There is no difference. It’s total identity. A is A. When a government prints fake cash, that’s inflation. From the get-go. There is no non-Ponzi Scheme way to understand the mechanism.

This is why governments can do nothing but make inflation worse and worse. The more cash an “independent” central bank prints (and on whose behalf does a central bank print cash if not the government’s? —even in the case of Fed, which is a private cartel designed to enrich globalist bankers, the get-out-of-jail-free card for counterfeiting American currency comes from the government), the more inflation chokes us. You can’t get something out of nothing. But that’s just what governments do—all of them.

Of course, governments can play with systems and inflate asset prices (with more fake money) to keep the downstream effects of inflation from biting for a time. But there’s only so high you can build a dam. One day, whoosh. And then Joe Sixpack can’t afford to fill up his truck.

That’s when politicians start blaming everyone but themselves.

Now, armed with these insights, we can handily dismantle claims 2 and 3 from Bremmer’s second tweet. The pandemic? Who owned the Wuhan lab where the virus was made, pray tell? Was it a private-citizen mad scientist cooking up superbugs in his spare time? Of course not. It was the Chinese Communist Party, a government institution if there ever was one. Statism on creatine, the CCP is. The Wuhan virus is the Wuhan virus because it came from a Communist-owned and -operated government lab in Wuhan.

And who paid for the Wuhan bug? Why, we did. Our taxes—siphoned out of our phony-currency bank accounts by the same rapacious government which can’t control its own spending in the first place and so needs to go on April Viking raids every year—were sent to Wuhan so a real mad scientist (with a New York accent) could skirt American laws and concoct a virus to fulfill his statist overlords’ dream: a lockdown. Under a lockdown, everyone begs the government to print more money. Everyone clamors for a “stimulus.” The people ask for inflation.

And, boy, do the politicians give it to them. Only too happy to oblige. It almost got Trump re-elected. (He wasn’t counting on another kind of inflation—ballot inflation. But that’s a story for a different day.)

Finally, Russia? That’s the least swallow-able excuse of them all. It asks us to assume a hundred years of history that just isn’t true. Has the United States of America been minding its own business all this time, not getting caught up in useless foreign wars and not, say, pushing a neo-imperialist Cold War Museum relic right up to a distant country’s doorstep? Um, no. After years of warnings about that old Cold War stunt, the distant country’s leader had enough and pushed back. Supply chains disrupted. What did Washington expect—that Putin would destroy the wavefront of NATO politely, perhaps with a strongly worded letter to the UN?

And anyway, for a century Washington has been pouring money into idiot crusades in the Middle East and Central Asia, in Africa, in Europe, in Latin America. In Southeast Asia, if you’ll recall. All of that cost buckets of fake money. To the best of my knowledge, Gerald Ford didn’t blame inflation in the 1970s on the Viet Cong. Then again, apparently Americans five decades ago weren’t quite as gullible as we are now.

Today, there seem to be geopolitical analysts who seriously believe that none of the above has any bearing on the price of sweet tea in Alabama. That “independent” central banks are to blame for printing all those dag-blasted hundred-dollar bills. That no one can afford a steak dinner anymore and it must be—yet again, for the eleventy-seventieth time—Vladimir Putin’s fault.

How I wish Ludwig von Mises and Murray Rothbard were alive today. I would love to see what they would have written on Ian Bremmer’s Twitter page.

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Our No-Win "Kobayashi Maru" Economy

It's time to reprogram the conditions of the economy to serve the many rather than the few.

Star Trek's Kobayashi Maru training exercise tests officer candidates' response to a no-win scenario: any attempt to rescue the crippled ship's crew results in the destruction of the candidate's ship, while standing by and taking no action results in the loss of the Kobayashi Maru's crew.

Captain Kirk famously defeated this no-win scenario by reprogramming the simulation to "change the conditions of the test." This can be viewed as either cheating or as creative problem-solving via "thinking outside the box."

The Kobayashi Maru is a very apt description of both the U.S. and the global economies, which are currently running a real-world no-win scenario called "Profits, Infinite Growth, Low Inflation, Full Employment." (PIGLIFE). To win in the PIGLIFE scenario, you need permanent expansion of GDP, consumption, profits and employment and a permanently low limit on inflation. Anything less and you lose.

Central banks and political leaders have managed to "win" the PIGLIFE scenario for decades, but at a cost that can no longer be cloaked by happy-happy statistics. The economy has been fatally hollowed out into a fragile shell of monopolies and cartels profiting from hyper-financialization and hyper-globalization, a system in which the only possible outcome is hyper-inequality and hyper-self-exploitation as the immense profits enable the purchase / capture of political and regulatory power.

Now that the PIGLIFE economy has stripmined all the easy-to-exploit resources and workforces, scarcities are pushing inflation far above the "winning" low level. Oops, you lose. Now the real teeth in the Kobayashi Maru scenario are bared: if Central banks and political leaders close the spigots of "free money" that's been expanding GDP, consumption, profits and employment for decades, then all those slide from expansion into contraction.

But if they keep the spigots of "free money" wide open, inflation threatens to feed back in a self-reinforcing loop of expectations of higher inflation that push inflation higher, which then justifies the expectations which then push prices, wages, etc. higher.

Meanwhile, the two engines of the PIGLIFE expansion, hyper-financialization and hyper-globalization, have dived off the cliff of diminishing returns. Boosting debt, leverage and globalized supply chains aren't generating expansion, they're actively undermining whatever "growth" is still sluicing through the PIGLIFE economy.

So sorry, Central banks and political leaders, you lose. The way you've rigged the system, it goes into self-reinforcing contraction if you close the spigots of "free money" even modestly. But if you don't, the Klingon ships of inflation destroy you. The more you push hyper-financialization and hyper-globalization as "solutions," the greater the destruction.

Clearly, we need a new set of conditions for prosperity and well-being that do not rely solely on expanding GDP, profits, consumption and employment. Many economists, for example, Joseph Stiglitz, have proposed retiring GDP as a measure of prosperity and well-being and using more accurate and sustainable measures of well-being to inform policies.

If we've learned anything, we've learned that enriching the already super-rich so they have even greater means to distort democracy to serve their private interests undermines the prosperity of the many rather than increases it. It's time to reprogram the conditions of the economy to serve the many rather than the few, and enable a truly winnable scenario of sustainable prosperity and well-being by tossing the "waste is growth / Landfill Economy" PIGLIFE model into the toxic waste dump of failed, no-win scenarios.

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There’s No Guarantee (Gas) Tax Cut Savings Will Be Passed on To Consumers

06/24/2022Connor Mortell

On June 22, President Joe Biden called for a tax holiday for the next three months. As of this writing, it still has to be approved by congress. Many critics have come out in response to this. Among them, Nancy Pelosi has called it nothing more than “showbiz” as she doesn’t expect the 18 cents per gallon savings to be meaningful, Reason magazine has argued that it is taking away a tax for roads that was levied somewhat proportionally on individuals based on how much they drove, but perhaps most interestingly of all - at least from an economics standpoint - was this criticism brought by NPR:

Biden also called on state governments to take similar actions with their gas taxes. He wants oil refiners to boost their capacity so there’s more gasoline on the market - another way to bring down prices. But there’s no way to force those tax cuts to be passed through to the consumers.

In October 2021, I wrote almost the exact inverse of this point: Why Business Owners Can’t Just “Pass on'' Tax Costs to Consumers. Then White House press secretary Jen Psaki had claimed that American consumers would not stand for large companies passing on tax costs to consumers. I claimed that - while probably for the wrong reasons - she was right. The logic stemmed from Murray Rothbard’s Power and Market:

The most popular example of a tax supposedly shifted forward is the general sales tax. Surely, for example, if the government imposes a uniform 20-percent tax on all retail sales, and if we can make the simplifying assumption that the taxes can be equally well enforced everywhere, then business will simply “pass on” the 20 percent increase in all prices to consumers. In fact, however, there is no way for prices to increase at all! As in the case of one particular industry, prices were previously set, or approximately so, at the points of maximum net revenue for the firms. Stocks of goods or factors have not yet changed, and neither have demand schedules. How then could prices rise?

We now find ourselves in the opposite position. Can the removal of a tax drive down a price? The answer is a little more complicated. Rothbard explains above that taxes cannot be shifted forward to the consumer and goes on to explain that instead taxes are shifted backwards to the original factors of production. Less can be spent on them and thus - as Per Bylund has explained:

Entrepreneurs are forced to abandon some of their efforts to generate new value by satisfying customers, or to redirect their efforts into less value-producing channels. The potential output of their creativity goes Unrealized.

It is here that a tax holiday is able to help. Because less cost will be shifted backwards to original factors, original factors will be able to be better allocated to projects that will actually generate new value by satisfying customers.

As a result, to a very large extent, this specific criticism of the gas holiday is right. There is no guarantee that the savings from the holiday will be passed on to the consumers. This, however, does not ultimately discredit the tax holiday itself as the savings will still benefit consumers. Original factors could be better allocated in such a way that does in fact make gas prices cheaper as market competition drives prices down in the absence of these taxes in a very happy go lucky solution that ties this all up in a nice little bow as we look back on it.

But even if that is not the case, the original factors would still be put to a preferable use on the market when they are not hampered by the restrictions on their prices by the government. So, while it is correct that we may or may not see these savings passed on to the consumer, it is also undoubtedly correct that the removal of this tax would in face benefit the people.

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Central Banking: The Root of Economic Instability

06/24/2022Liam Cosgrove

 “An economic foundation that was built on cheap money and debt.”

Bond and equity markets have collectively seen one of their worst years on record. 

This may come as a shock to those who have followed mainstream financial outlets over the past two years, as everyday we were reminded of the “robust” recovery and “strong” labor market. 

But our economy is far too dependent on central bank policy. Peter Boockvar is a financial analyst with the Bleakly Financial Group. He sums the problem up succinctly: 

Markets and the economy… do well when the central banks are easing and cost of capital is cheap and the liquidity is flowing. But then it all reverses when they tighten monetary policy.

Boockvar adds that we are operating under “an economic foundation that was built on cheap money and debt.” Low interest rates, while incredibly stimulative for capital markets, have destroyed small/medium sized businesses and injured most banks. 

Smaller banks without access to cheap liquidity must earn the old fashioned way - lending out deposits and capturing the spread. In the falling interest rate environment of the last 40 years, these spreads have become increasingly thin, which might explain why the number of banks in the US fell by 80% from 1980 to 2020.

Another consequence from decades of accommodative monetary policy is, according to Boockvar, the exponential increase in economic fragility that results from each subsequent easing cycle. 

As interest rates remain low, businesses and households are able to borrow more. Then, when the Federal Reserve decides it is time to tighten, the large accumulation of debt means the economy cannot bear even moderately higher rates. 

This dynamic is clearly represented in the historical Fed Funds Rate chart:

We see that since the 1980’s, when Volcker aggressively tightened into recession to tame inflation, each subsequent Fed tightening cycle was unable to reach its previous height before triggering a recession (indicated by the gray vertical lines). 

This tightening cycle will be no different, and in fact may be worse. 

According to Boockvar, “We’re just getting a rerun of the same movie we’ve seen many times before… This is a sequel with scarier characteristics,” due to inflation and rapid pace of the central bank’s response.

The US has not seen serious inflation since the early 1980’s. Will the Fed tighten through a recession? Listen to more of Peter Boockvar’s insights in his full interview here:

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Why Prices Have Gone Up

06/22/2022Robert Aro

Central bank “stimulus” is a nonsensical policy approach which caused prices to surge over the last two years. Look at the charts below:

The Fed’s balance sheet is currently at $8.9 trillion:

Since January 2020 it has increased by nearly $5,000,000,000,000, meaning the central bank created 5 trillion dollars so the world could “buy more stuff.”  The $8.9 trillion balance is not money in the Fed’s bank account; rather, entities such as large banks and financial institutions owe this money to the Fed (i.e., accounts receivable). Typically, the new money raises the prices of stocks, bonds and real estate first.

Also consider M1 and M2, as they are the most commonly used measures of the money supply.

The above is the M1 money supply, currently at $20.6 trillion. Part of the large spike is due to a revision of the definition of M1 occurring in May 2020. However, since then, M1 increased by over $4 trillion dollars, still a large amount.

From January 2020, the M2 money supply increased by over $6 trillion, per below:

Included in these trillions of newly created dollars are various Fed/Government programs, such as the Paycheck Protection Program, which has forgiven over $700 billion of “loans” to business owners. As I wrote in April of 2020, they were literally “paying people not to work.”

There were also several stimulus check programs congress approved that approached $1 trillion.

It cannot be stressed enough, these trillions of dollars were created “out of thin air,” and given to people across the country. A large portion of the money went into the traditional inflationary channels such as big Wall Street firms to inflate asset prices, but several trillions of new dollars also went to pay individuals on Main Street. The money received by individuals could have been spent anywhere: crypto, gold, guns, gambling, drugs, alcohol, eating out at restaurants, clothes, or on Austrian economic books.

The thought of receiving “free money” from the government may initially sound appealing. But eventually the money mirage stops and society discovers these government giveaway programs carry grave consequences such as currency debasement, and therefore, more poverty. Ironic because the stated aim of these policies is to help society; yet the result is the exact opposite.

The COVID monetary relief schemes couldn't have been more poorly timed as large swaths of the economy were shut down in 2020. Imagine the unsurprising result: increasing the money supply (via stimulus checks) increases the cash balance for millions of people, enticing recipients to spend more money. But shutting down the economy decreases the amount of goods available to purchase. In such a world, prices invariably rise.

Removing the closure of the economy from the equation, the problem with central bank stimulus still exists. If the government gives $1,000 to enough people, this new money enters the economy, increasing demand for goods. One of the many factors mainstream economists fail to include in their models are the stages of production. In the real world, production takes time. It is not instantaneous. It also carries a cost. Even if the economy were running “smoothly,” entrepreneurs could not automatically increase the supply of goods to meet the new (monetary induced) demand. To increase production, they’d have to incur more upfront costs, drawing upon savings, credit or obtaining alternative financing methods.

Shutting down the economy while giving stimulus checks only added gasoline to the dumpster fire. Forget about Trump or Biden. The Powell era of central banking must stand as one of the worst, if not the absolute worst, eras of American economic history. Increasing a nation’s money supply to stimulate demand historically impoverishes nations. Yet, that is precisely what they did.

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Shining Path II? The Dangers of Andean Agrarian Socialism

Currently, a new cycle of protests involving the Ecuadorian indigenous peoples’ organization is happening, following another cycle that took place in October 2019 and paralyzed the country for two weeks, resulting in 8 people dead, various hundreds of other people injured, including law enforcement officers sent to diffuse the demonstrations. The Ecuadorian State comptroller building was burned and sacked, severely damaging the patrimonial buildings of the Spanish-style Historic District of the capital city of Quito, and overall costing the Ecuadorian economy almost $83 million in damages.

All this destruction just to force the government to reverse austerity measures decided by then President Lenin Moreno to end the government subsidies to lower gas prices, undertaken in a failed attempt to liberalize and stimulate the Ecuadorian economy.

Back then, as well as today, the protests were spearheaded by the Confederation of Indigenous Nationalities of Ecuador, known by its acronym in Spanish, CONAIE, the country’s largest indigenous organization, led by Leonidas Iza, an Andean Kichwa native, with well-known leftist sympathies and ideas, close to the thought of Peruvian agrarian socialist ideologue, José Carlos Mariátegi, whose ideas (along with those of China’s Mao Zedong) would inspire the activities of Shining Path, a communist terrorist group responsible for around 60,000 deaths in a conflict against the government of Perú that has lasted for four decades.

But back to Iza, only a little more than a year after the 2019 protests, he co-authored, with a couple of leftist academics aligned to his Marxist-indigenous cause, a book titled Estallido (a term that could be translated as outbreak) in which they outlined the steps in their revolution towards power. The first step calls for direct action against government institutions and capital structures and the second is defining their friend/enemy distinction between various local leftist groups, including worker unions, the indigenous peasantry and progressive allies in cities against what they consider to be a counterrevolutionary alliance of right-wing populists, banking conservatives, social-democratic technocrats, a bureaucratic bourgeoisie and modernizing liberals.

He and his co-authors continuously quote the work of Mariátegui, as well as of others Socialist intellectuals like George Sorel, who is particularly known for his advocacy of violence, and end their book with the battle cry of “Amerindian communism or barbarism,” as if the actions of their movement in the 2019 protests were not barbaric, and, on the contrary, the market structures of capitalism were the true oppressors.

Iza’s actions and his book were praised by many people in Ecuador, mostly urban intellectuals, looking to capitalize on the situation and get court positions in the potential new order under the Marxist-indigenous leader. The intellectuals, however, do not realize the danger his ideas represent for Ecuadorian society, because, in many senses, what Iza did, promotes and is trying to repeat right now, is just another chapter in the long and bloody history of the global left, from Marx to Hitler, as accounted by Erik von Kuehnelt-Leddihn.

However, Leonidas Iza and his “Amerindian communism” should not be just considered as another case of intellectual leftism that appeals to those “who dream of action but never act,” as described by Mises. Instead, he is an alarmingly latent Pol Pot wannabe, for whom his vision of an indigenous, fully agrarian socialist country has to be built from the ashes of a failing republic consumed by the fire of revolution, a view he has repeatedly advocated for by demeaning the majority mestizo ethnic group in Ecuador while protecting himself from accusations of racism by virtue-signaling his indigenous ethnicity.

By his actions, Iza’s movement and ideas prove, once again, that Mises was right by defining fascism in the same terms as socialism, that is, that:

    …the fundamental idea of these movements […] consists in the proposal to make use of the same unscrupulous methods […] to exterminate its adversaries and their ideas in the same         way that the hygienist strives to exterminate a pestilential bacillus; it considers itself in no way bound by the terms of any compact that it may conclude with opponents, and it deems any      crime, any lie, and any calumny permissible in carrying on its struggle.

Nevertheless, for a self-professed Marxist follower of Andean-style Maoism, Iza’s Amerindian communism tends to be closer to fascism than to Marxism itself, given that, as Roderick T. Long explained,

     …where Communist ideology tends to be cosmopolitan and internationalist, fascist ideology tends to be chauvinistically nationalist, stressing a particularistic allegiance to one's country,       culture, or ethnicity; along with this goes a suspicion of rationalism, a preference for economic autarky, and a view of life as one of inevitable but glorious struggle….

All of these elements are present in the direction CONAIE has been tacking under Iza’s leadership, given its close indigenous ethnic component, its fondness for direct action and local, backwards agrarianism, and its violent effort for political dominance. Of course, the agrarian socialism he promotes should be by itself another big red flag, pun intended, about his intentions, for which a number of logical inconsistencies become more and more apparent the moment one stops to think about them.

For instance, he has continuously given contradicting public statements calling for the end of the oil extraction industry in Ecuador and then shouting about keeping gas prices under government subsidies, arguing that artificially low prices are a necessity for the use of tractors in agriculture. This when tractors themselves are a capital good that almost no already poor Ecuadorian indigenous peasant could even try to afford under our highly intervened economy.

All of these incoherencies are then promoted under the wraps of a political discourse with heavy Ted Kaczynski undertones, which could only mean that if his brand of Amerindian communism ever gets applied, it would only mean a man-made Malthusian trap. His actions also speak for him, as for the times he has called for public demonstrations, private property has suffered the most, with businesses having to close for many days, going bankrupt, and looting becomes commonplace with the mere notice of his calls to action against the government.

Leonidas Iza is the kind of person that reminds us that we still have to fight the last wars against socialism, for his ideas and his actions would only bring even more ruin to a country like Ecuador., To simply defeat him, however, would mean nothing when ideas like his can be easily recycled by other socialist opportunists, for socialism, which appeals to envious people who crave for security and are afraid to make decisions for themselves, must vanish from the minds of reasonable human beings, as it impairs human dignity and crushes man utterly, a lesson learnt from both Austrian intellectual powerhouses, Mises and Kuehnelt-Leddihn.

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