"Transitory Inflation" Is the New Buzz Phrase at the Fed

"Transitory Inflation" Is the New Buzz Phrase at the Fed

04/27/2021Robert Aro

With April’s Federal Open Market Committee (FOMC) and Wednesday’s press conference to follow, we can anticipate some of the key words we will hear from the Fed. The first, gaining in popularity, is “transitory inflation,” or the idea some price increases are only temporary in nature…

Last month the word came up after the March FOMC meeting. On Friday CNBC wrote about the impermanence of inflation, anticipating:

the Fed is expected to defend its policy of letting inflation run hot, while assuring markets it sees the pick-up in prices as only temporary.

If inflation calculations show increases in the foreseeable future (or if more people become aware of their loss in purchasing power and increases to cost of living), talk of the temporariness of inflation may continue. The only way temporary “across the board” price increases make sense is if they are followed by a period of “transitory deflation,” reversing prices. If prices spike up, then quickly spike down, price increases were, in fact, temporary in nature; however, given the Fed’s aversion to deflation and proclivity for the printing press, it’s safe to say price decreases are not to what they are referring.

Without price reductions, the word “permanent” would better suffice. Instead, what the Fed could mean is that we’ll learn to live with (permanent) price increases, possibly aided by the highly nebulous: “wages will adjust” idea.

Consider the scenario of widespread price increases for just one year. For each subsequent year, even if prices don’t increase much, there still exists a compounding effect of the initial price inflation, which would be anything but temporary. To illustrate, if the price of lumber increases by 300% in year one, then only increases at a rate of 1% a year the following five years, lumber is still 300% higher than it was at the start of the first year, even if we call the inflation transient.

CNBC continues:

Powell is also expected to once more explain that the Fed will let inflation rise above its 2% target for a period of time before it raises rates so that the economy can have more time to heal.

Long has existed an idea about how the Fed controls inflation. In this instance, their power lets inflation rise above its 2% target so the economy can somehow strengthen. However, it leads to another word to watch for: this idea of “tightening” monetary policy.

As the Wall Street Journal said on Sunday:

The process of ending the Fed’s giant bond-buying program, and subsequently raising interest rates, will take years unless inflation unexpectedly surges.

Undoubtedly, talk of the Fed’s unwinding balance sheet should continue to be a discussion point as it nears ever closer to $8 trillion, persistent all-time highs. Putting together the idea of inflation and tightening, we are taken to a world difficult to imagine.

It is only after prices increase at a pace which has not been seen in decades, the Fed will look to raise interest rates and reduce buying of government debt. Unless the Fed’s reduction in government debt buying is taken up by private investors, we can expect further increases to interest rates. As for the $28 trillion government debt, all-time high in the stock market, and the heating up of the real-estate market, perhaps, like inflation, those too will be transient in nature… unless wages really do adjust?

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Municipalities Also Are Culpable in Human Smuggling

If anyone doubts that human trafficking is a problem, the events of the last couple weeks here in south Texas should disabuse them of the notion. By now we know of the fifty-three migrants who lost their lives in a boiling-hot 18-wheeler here in San Antonio. A few days later, there was a fatal crash in “an attempted human smuggling” operation just this side of Laredo.

Apparently, it seems like citizens are more in touch with this issue than local authorities. 

The week prior to the tragedies, I attended a “Crime on the Northside” townhall at a local synagogue with my locally-focused, non-partisan group InfuseSA. It featured two San Antonio City Councilmen, the chief of police, and the Bexar County District Attorney. 

In addition to the DA’s routine, misguided scapegoating of the “pandemic” for the problems of the last couple years, the crowd of a hundred-plus also grumbled when he expressed surprise that the number one criminal concern amongst them was “human trafficking.”

“We don’t have a high number of human trafficking cases that have been filed in our office.”

As if following from the same script, the local mainstream media reported that “crimes of concern among attendees … seemed to be break-ins, or burglaries.” Attributing one of our Infusiasts’ jaw-drop reaction to merely a “statement made by” the DA highlighted the disconnect. 

Hopefully this attitude changes. In the meantime, there are some obstacles to overcome.

Our police chief offered a take that he’s expressed before, that “leading a high-risk lifestyle, including drug use or prostitution, puts people at risk of violent crimes.” 

Though he reaffirmed to me in a follow-up phone call that he (wisely) tries to stay out of politics, it does come into play here. A reconciliation between the predominant political approaches is in order. 

After taking a step forward a few years ago, the Texas GOP backtracked at their convention recently when they included opposition to marijuana decriminalization in their platform. Our DA, a democrat, is to be commended for going in the other direction, de-prioritizing the prosecution of such activities that involve voluntary and/or consenting parties.

Such acts do not however, include theft, vandalism or the like. Blatant aggressions by one party against another deserve a night or more in the pokey, depending on the severity of the violation.

Properly differentiating between real crimes and fake crimes is the duty of elected representatives. The latter distract law enforcement from the former, needlessly increasing their workload. Unfortunately, politicians are too busy creating magnets for more. 

San Antonio Mayor Ron Nirenberg, while lamenting the smuggling tragedy on our southwest side, noted how we “depend on migrant labor in the midst of a labor shortage.” 

However, if that’s worth mentioning here, why are he and city council discouraging San Antonians from filling the gap? 

They call it “emergency funding” for “wraparound services” for enrollees in their “Ready to Work” program. But when you increase handouts to people, you lessen their incentive to search for work. 

Moreover, when you target “undocumented immigrants” as a beneficiary of a recently-passed “affordable housing” bond, you enhance the appeal of their trek here, even if it means risking their own lives.

All this gives the impression that the city would rather see foreigners plug employment holes while they sideline San Antonians by coddling them along the way. It’s counterproductive at best, condescending at worst.

As the mayor indicated, immigration is largely a federal responsibility. But that doesn’t mean their actions, like convincing voters to approve such initiatives, are not susceptible to the laws of nature and economics.

States and municipalities that conduct business in such a way can’t totally wash their hands of problems like this. 

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Recession Is Priced In. Stagflation Is Not

07/06/2022Liam Cosgrove

The market is betting on recession and subsequent Fed pivot. A sound bet… but there is one flawed assumption.

Dec 22 and Mar 23 Eurodollar futures have inverted. In layman’s terms, the market is predicting a Fed rate cut in Q1 of 2023:

Yet neither CPI nor PCE have declined to any meaningful degree:

The market expects a return to easy money but NOT because the Fed has reduced inflation and instead due to troubling economic projections:

Atlanta Fed predicts Q2 GDP growth to be -2.1% (a technical recession)


This is textbook Stagflation:

Unemployment has yet to budge. When that moves (possibly tomorrow’s JOLTS release), the cake is baked.

Gold ought to be a preferred Stagflation asset as its demand is less tethered to real economic activity than virtually all other commodities. Yet, gold mining stocks have taken quite the beating:

GDXJ making new 52-week lows on a day when ARKK rallies 9%:


Today’s ARKK action may be partially attributed to profit taking by the shorts. However, the current zeitgeist is that bad economic news = good market news and an assumption that unprofitable tech names ought to rally hardest given they took the biggest beating. This assumption is bogus.

When the Fed does pivot, if inflation has not yet been reigned in, while the drop in Treasury yields will elevate ALL asset prices, consumers will not have the disposable income to spend on services offered by most big growth names - They will not be purchasing the $121k Tesla (an ARKK holding) Model X and instead opt for the comparable Mercedes GLC at $54k. They will trim down entertainment subscriptions like Netflix, Hulu, Roku (an ARKK holding), Disney+, etc. They will spend less time shopping online, reducing the need for services like Square (an ARKK holding) - Too much income will be required for food, gas, shelter, and clothing. I know these names don’t rely on earnings and instead on “total addressable market” and “network effects”, but these metrics ultimately require ample economic activity to justify.

In such an atmosphere, Demand for a true inflation hedge will manifest. Crypto is superior to gold at subverting authority (something I write about here) but it's no safe haven, and folks struggling financially will not be able to stomach the volatility. Crypto outflows may be another boon for gold.

I’m not sure when the market will come to this realization. The prevailing assumption seems to be that the recession will cure inflation, but again, the recent Eurodollar pivot has been driven by economic output data - not inflation (which remains at 40 year highs). This said, it may take another elevated CPI print for this to set in.

I took out some call options on GDXJ. Historically, July is a good month for stocks so the timing was hard to pass up. Then again, the Fed may “break something” in the meantime so I’m maintaining majority cash.

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Dear Zimbabwe

07/06/2022Robert Aro

Zimbabwe’s hyperinflation problems are the stuff of economic legend. No matter how bad our inflation problem gets here, one can bet theirs will be a lot worse. Just last week, CNBC had a headline still beyond comprehension for most Americans:

Zimbabwe hikes key interest rate to 200% from 80% amid runaway inflation

To clarify, it does not say 200 basis points (i.e., 2%), rather 200 percent!

This is the destruction of a currency and the abandonment of free market principles. It is theft, socialism, and capital destruction. Given all that Austrian economists have offered when writing about inflation, it is absolutely unnecessary for any country to endure this Keynesian perpetual state of boom.

And what prompts a central bank to hike interest rates to 200%? Naturally, the country’s:

Annual inflation rate has been in triple digits for two straight months, rising to 191.6 percent in June from 131.7 percent in previous month.

The Zimbabwe dollar is also in freefall as it:

…has dropped 69 percent to $361 per US dollar.

Contrary to popular economic myth, a weak dollar doesn’t necessarily make exports more attractive. If that were the case, Zimbabwe would be one of the largest exporters in the world. Consider other problems such as how unattractive currency debasement is to anyone wanting to do a long-dated project, the unworkability of sky-high interest rates, and general uncertainty for multinational companies, foreign investors, or entrepreneurs wishing to do business in Zimbabwe…

Making matters worse, the Russian/COVID narrative rears its ugly head:

Surging commodity prices stemming from disrupted supply chains because of the Russia-Ukraine conflict and the lingering effects of COVID-19 lockdowns have compounded pressure on the local currency of Zimbabwe.

We’re even offered a glimpse of past government/reserve bank interventions:

Previous attempts to prevent the Zimbabwean currency’s collapse have included a 10-day ban on bank lending, restrictions on trades on the Zimbabwe Stock Exchange, allowing companies to pay taxes in the local unit and introduction of a new interbank rate.

It was then announced by finance minister Mthuli Ncube that they are going to “legalize” the use of US Dollars for the next five years in order to “steady” the Zimbabwe currency. What should be evident by now is that there really is little difference between the Reserve Bank of Zimbabwe and America’s Federal Reserve. They both seem to draw from the same textbooks, raising rates to fight inflation, ignoring the money supply and Austrian economists. Things are working better in America not because of monetary policies, but despite monetary policies.

If this still does not resonate, then take a look at their M2 money supply:

The denomination isn’t as important as trying to fathom the exponential growth from 2020 to 2022 the money supply went through during that period.

Their belief that raising rates will cure inflation, or hyperinflation, is analogous to pouring a cup of water on a burning barn to put out a fire. Rates are important in many ways; but the secret behind Zimbabwe’s currency destruction lies in their ability to expand their money supply in unimaginable ways, not unlike America’s central bank which created $5 trillion (doubling of the balance sheet) in the same two-year period.

For over a century, numerous authors have written about this. Dating back to antiquity we’ve seen the problem of expanding the money supply. The Mises Institute has countless resources and books to read free online, such as What You Should Know About Inflation, The Mystery of Banking, and of course, The Theory of Money and Credit. A list of 100 books could easily be compiled, but those are some of my personal favorites. Just one of them should suffice to cure Zimbabwe’s lingering problem of hyperinflation.

The consequences that come from stopping the money creation process pales in comparison to the currency collapse that comes from continuing the money creation process. In the former scenario, there is short term pain, but the country will eventually be able to move forward due to having an honest currency; while in the latter, the country will never be able to.

I’m going to email this article to the Reserve Bank of Zimbabwe at info@rbz.co.zw. Hopefully someone there will look to the free market to solve their problem rather than rely on more intervention and more money creation.

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On the Interoperability of Ideology

07/05/2022Jason Morgan

Many are dismayed that the American military and intelligence complex has gone woke.

“White supremacy” brainwashing at West Point, “white rage” handwringing by the Chair of the Joint Chiefs of Staff, “cisgender millennial” CIA agents with anxiety disorders, and a “rainbow bullets” recruiting ad from the United States Marine Corps.

What happened to good old freedom and democracy? When did the American ideology switch from Uncle Sam to Drag Queen Story Hours?

There’s no need for dismay. Nothing has really changed. In the end, all ideology is interoperable. Apple pie, “Over There,” Rolling Thunder, shock and awe—there is no difference between these statist slogans and the seventy-two genders on Facebook. Ideology is ideology is ideology. The state will co-opt whatever will convince the greatest number of people to keep paying taxes and, when necessary, to die to protect the statists in their “undisclosed locations.”

There is no particularly American ideology, after all. The state takes whatever is available and twists it into a justification for its ongoing existence. Rainbow flags are not a replacement for the red, white, and blue. For the state, all emblems are, fundamentally, the same. All ideology can be switched out for all other ideology. Ideology is interoperable.

Austrians know perfectly well that the state is parasitic on the economy. The same logic applies in all other areas of human existence. The state appropriates everything it touches. The state renders the various aspects of a society in ways that maximize the state’s power. Even that which is not ideology—family, religion, human dignity, bare life—the state takes up and regulates as though it had standing in even the most intimate areas of human existence.

The officially atheistic Chinese Communist Party, for example, arrogates to itself the right to appoint Catholic bishops and to approve (or deny) the transmigration of the soul of the Dalai Lama. This is not at all strange. The state ideologizes all things. It takes whatever exists under its sway and builds a bureaucratic Faraday cage around it. No outside force can affect what the state has taken over. The state uses all things for statism, even metempsychosis and apostolic succession.

The Chinese Communist Party persecutes religious believers, but it will go to war to prevent outside states from attenuating its Buddhist and Christian prerogatives. Ideology is its own justification. Power knows no contradictions, only threats and subjugation.

States not always had this power, although they have always had this tendency. In the distant past, culture was prior to the state. A thousand years ago, only a mad tyrant would have dreamed of imposing “gay marriage” by fiat. And even then, nobody would have heeded him.

In the United States, too, cultural norms and civilizational expectations (including respect for hard work and private property, civic responsibility, and delayed gratification) lay outside the reach of the state. Personal freedom was the norm. Thomas Jefferson would have burned his vax pass with glee.

It was the rise of the nation-state and the “iron cage” of absolutist bureaucracy that turned human beings into subjects of pure ideology. In today’s America, ideology rules. Entrepreneurs serve Leviathan: Google’s contracts with the federal government are the Panopticon multiplied by Plato’s Republic. Entertainers are co-opted, too: Kim Kardashian and Lady Gaga tweet traffic information for the Los Angeles Police Department.

Newspapers offer themselves like prostitutes to politicians: a “journalist” named Franklin Foer sent a draft of his “news story” to Fusion GPS so the Clinton team could edit it for him before publication. The state has captured a myriad of other “journalists,” too.

Ancient civilizations now belong to the statists as well. The Supreme Court recently expanded the government’s control over Native American tribes. There is nothing, after all, outside the state. Ideology and the state go together. They are, in fact, the same thing.

When I was young, I learned that George Washington could not tell a lie. Now I am old, and I am learning that Anthony Fauci cannot tell a lie, either. Tearing down Washington’s statues is how the American state survives today. Yesterday’s heroes are tomorrow’s scapegoats. There is a Black Lives Matter Plaza in the nation’s capital, where once paraded the Ku Klux Klan. All ideologies the state will ingest. In-Q-Tel, Mockingbird.

I fully expect that by the end of my life there will be a military guard standing watch outside the Tomb of the Unknown Stonewall Rioter. The head of the Department of Drag Queen Affairs will lay an absolutely fabulous wreath there. The state feeds on all cultural movements, without exception.

Even the pro-life movement, I’m very sorry to say, has been taken over by the state to a large degree. Roe vs. Wade was how the state captured the emerging zeitgeist and made itself the center of questions about children in the womb (thereby turning even gestation into part of the statist oeuvre).

Dobbs vs. Jackson was how the state wrested back control of a debate that was threatening to go beyond the bounds of statist oversight. Nothing substantial changes post-Dobbs. As before, Americans are going to be fighting about abortion as a political problem. We will now be “voting” about whether the taking of innocent life is legal.

So it shall be forever. Statists condemn to the gallows. Statists wave their hands in magnanimous pardon. Prisoners seek clemency from governors. Everyone knows who runs the show.

Christ alone did not flatter Pilate. Pilate, flummoxed, washed his hands of the matter. ‘He who will not beg for my mercy is no concern of mine.’ All else is ideology. The state has taken everything and made it its own.

Even Antifa reflects the state’s power back to itself. “Anarchists” with black flags and pink hair firebomb federal court buildings and take over police precincts. What better reminder could there be of who is really in control of things? Like pilgrims around the Kaaba, Antifa circle the source and focus of their existence.

The state feeds on Antifa, in truth. It makes even so-called revolutionaries instruments of its survival. “Defund the police” campaigns look more than a little silly in the shadow of a base system spanning the globe and a military fomenting and funding wars on an ongoing, planetary basis.

This is what the state does and is. Rainbow flag, black flag, Old Glory—the state is draped in all symbols, it wears all badges, it owns all measures of resistance. This is what they mean by “Be all that you can be.”

In ten years, I wager half the current Antifa crop will be working for the CIA. That’s where the real anti-civilizational work gets done. Why piddle with Molotov cocktails when you can drone-strike Yemeni peasants?

Hippies became yuppies. Rome became Christian. Ramzan Kadyrov is Putin’s Hessian now. Many stranger things have happened. And will in the future. Because all ideology is interoperable. The state takes all of human life and makes it into raw material for endless statist expansion.

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The Real Battle is Between the Market and State Control

There already exists literature dealing with common objections to anarcho-capitalism (a society with private ownership of everything) such as who will build the roads, how security and national defense would be produced, etc. (see specially the works of Hans-Hermann Hoppe on security/defense and Walter Block on privatization of everything).

In my view, however, what hasn’t been emphasized enough are the errors of minarchists (people who believe in a minimal state with only security and national defense) when defending their minimal state position. Since the state is clearly an organization different than other enterprises, minarchists, classical liberals and regular libertarians should have the burden of proof of explaining their positions.

Many of those errors are also shared with more prominent state worshippers such as socialists and communists. Minarchists share many of those errors in small scale which they probably don’t realize. In this essay I will point out some of those errors and defend the free society from some objections.

Redistribution and knowledge

Most classical liberals, libertarians and minarchists declare that they’re against redistribution of wealth, yet they still offer redistribution, in a reduced form, in a night-watch state wealth is still being redistributed from the private sector to the public sector. This means that wealth is being taken from their optimal destination (that means what people want to do with that) to uses decided by government bureaucrats.

What if a minarchist state is providing more national defense or courts than necessary? How would they possibly know what’s the right amount of any of those that has to be provided? That takes us to the second point, which is knowledge. The right amount and form of anything is discovered by the function of profit and loss, not from bureaucratic plans.


This point is similar to the last one. Classical liberals and minarchists although believing otherwise, think themselves as above society, in the sense that they think they can decide better than people doing voluntary transactions, what to do with their money. Again, what if people don’t want a road where the classical liberal government has decided to construct it, what if a neighborhood needs more security than other? Markets provide the optimal amount of everything through the process of profit and loss.

In defense of that state of affairs, proponents of a small state will spin out an arrange of arguments (public goods for example), all with the basic premise that regular people could not possibly manage any of those services or plan ahead of time. What makes them think that government officials could? Aren’t they just regular people too? The only answer proponents can give is that bureaucrats are special, above society. Frederic Bastiat in The Law already pointed out this problem when refuting socialism:

If the natural tendencies of mankind are so bad that it is not safe to permit people to be free, how is it that the tendencies of these organizers are always good? Do not the legislators and their appointed agents also belong to the human race? Or do they believe that they themselves are made of a finer clay than the rest of mankind?

The non-problem of evil

Many proponents of the state apparatus claim that in a private security society, people that do not commit crimes but who are capable of wrongdoing, necessitate regulations to stop them. This is a misunderstanding of libertarian theory; first, libertarianism is a political theory, not a mechanism to discover what is morally good or bad. Thus, it does not apply good or evil to social choices when judging them from a libertarian point of view.

In a free society people, that are “evil” would suffer losses if people regard their activities as such, but what if the “evil” people don’t care about losses? If that is the situation, they will have the living standard that such valuations confer.

Again, knowledge

As Jesus Huerta de Soto has pointed out, economic science has already proven that the state is not necessary for a functioning and prosperous society. For those who believe otherwise, I refer them to the scholarship of Ludwig Von Mises, Murray Rothbard, Hans Hermann Hoppe, Walter Block and the entire of works of the Austrian School of economics. (Even some mainstream economists such as David Friedman agree that the state is not necessary.)


To embrace secession is to accept anarcho-capitalism, since secession helps to bring about a free society. Minarchists and classical liberals reject secession or simply ignore it as a talking point. Secession is a right, since people own their bodies and property, and they are able to exercise to full extent their use of them as long as they don’t infringe on anyone else’s property. Secession does not infringe on anybody; therefore, it should be permitted.

Even from a consequentialist (a philosophy that regards good consequences as ultimate goals) point of view, it should be legal since it would lead to less government bureaucracy. The common objection to this is that if it is highly impractical to secede, what if then? It is highly impractical to do many things but still these things are done and accomplished, and in any case, it is a problem of the person or region who secedes.

No, ancaps (anarcho-capitalists) are not communists

This point should be obvious but there are still libertarians that anarcho-capitalists are one step below communists. People that think so fundamentally misunderstand or simply don’t know what anarcho-capitalism or what communism is. I will just say that communists are proponents of government ownership of everything, while ancaps offer private ownership of everything – a total contrast to communism. Communists worship the state, ancaps reject it entirely.

The Market vs the State

It is a matter of who decides what, either the market or the state, even though many believe that it actually is the state vs chaos. However, they forget that the market is an institution that can and does manage and protect itself. That’s why the state uses coercion to seize private assets in order to exist. Böhm-Bawerk’s essay could not have had a better name to describe this issue “Control or economic law.” We must never forget is that there is an underlying order in human cooperation, which we discover by studying economics and through understanding economic laws.

It might sound radical, but within the libertarian movement there is a struggle of capitalism vs socialism. A free society is a world of capitalism, while a minarchist or classical liberal one is world of minimal socialism. We have to decide whether we defend capitalism or socialism in a small scale? In any case we must not forget that liberty (or private property) is what orders society. The state, on the other hand, creates disorder.

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Prepare for What’s Coming

07/03/2022Robert Aro

In 1944 Mises wrote: Omnipotent Government: The Rise of Total State and Total War. He provided a first-hand account of the horrors of government, something America’s founding fathers were familiar with all too well.

How bad it will get does not have an easy answer. It depends on the time frame, context being highly subjective. The freedom-liberty crowd  prepares with home security, firearms safety training, purchasing hard assets, buying the dip, homesteading etc. Rather than write a prescriptive list of ways to prepare for the potential outcomes, it may be more fruitful to explain the trajectory of things to come under global socialism and the anti-capitalist central banking system.

News headlines prepare us for what’s ahead. On Wednesday, Reuters reported subtle, but grim news from the latest European Central Bank meeting:

The era of ultra low inflation that preceded the pandemic is unlikely to return and central banks need to adjust to significantly higher price growth expectations…

Price and monetary inflation are within control of central banks and world governments. Stop increasing the money supply and this “inflation problem” would correct itself. Yet that is not on anyone’s agenda. When they say the unpreceded “era of ultra low inflation” is coming to an end, we should assume this means forever. 

From the same European forum, Fox News reported a quote of Federal Reserve Chair Jerome Powell admitting:

I think we now understand better how little we understand about inflation… No, honestly, this was unpredictable.


The U.S. economy is actually in pretty good shape.

Quite outlandish, especially with headlines two weeks ago from media outlets like Newsweek reporting:

The U.S. is Already in Recession—If The Atlanta Fed Is Right

How to prepare is up to each individual. The certainty ahead lies in the motivation of our central planners, who, whether pretending to not understand, or are intentionally being deceptive, the outcome will be the same.

Whether inflation lowers to 2%, or stays elevated, nothing changes. They have a definite play book they will stick to until the bitter end.

Should CPI or PCE inflation miraculously reach 2%, the Fed will use this opportunity to expand the balance sheet once a recession or market crash hits. Should inflation readings never get this low, a new narrative will be used, perhaps that we’re in a recession so they must stimulate the economy no matter the cost.

Economic truth, the long-run, or the “good of society” doesn’t matter to the central planner. They are too well insulated to be significantly impacted by any of their decisions. The path of the Fed’s balance sheet, US debt, money supply, and prices can only increase with time. Despite new highs in the stock and housing market, society will be worse off than the years prior. As time moves forward, dollar purchasing power will weaken.

Central banks/governments have been destroying purchasing power, currency debasement, for as long as they’ve been in existence. It’s not new, nor inventive. The recurring pattern of destruction is evidenced throughout all of history.

We can hope for a better tomorrow; however, it won’t be possible as long as the Federal Reserve exists. Either society must step up to stop the Fed, or one day, there will no longer be a society.

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Croatia May Become the 20th Member of the Eurozone in 2023: What Does this Mean to the Euro?

06/30/2022André Marques

The European Central Bank (ECB) informed, in June, that Croatia fulfills the requirements and can join the euro on January 1st, 2023. If this happens, Croatia will be the 20th member of the European Union (EU) to be part of the single currency.

The European Commission also recommended Croatia's entry into the eurozone to the Council, stating that the country meets the conditions to do so. Plus, the Eurogroup recommended Croatia’s adhesion to the euro as well.

The European commission also stated that

…the Council [Ecofin] will take the final decisions on Croatia’s adoption of the euro in the first half of July, after discussions in the Eurogroup and the European Council, and after the European Parliament and the European Central Bank have delivered their opinions.

According to the ECB's assessment, Croatia fulfills the convergence criteria (price stability, budget deficit and public debt to GDP ratios, exchange rate and long-term interest rate) and its legislation fully complies with the requirements of the Treaty on the Functioning of the European Union and the statutes of the European System of Central Banks and the ECB:

Price Stability:

In April 2022, the 12-month average rate of consumer price inflation by the Harmonized Index of Consumer Prices (HICP) was 4.7 percent in Croatia, below the reference value of 4.9 percent. However, considering the 10.7 percent annual consumer price inflation for Croatia in May, the ECB stated that the sustainability of inflation convergence in Croatia in the long run is a concern.

Budget Deficit and Public Debt to GDP Ratios:

Croatia's public deficit at the end of 2021 was just below the 3 percent of GDP reference value, while public debt was above the 60 percent of GDP reference value (but it was lower than in the previous year). The budget deficit was 2.9 percent of GDP in 2021, which meets the deficit criteria. The public debt was 79.8 percent of GDP in 2021, which represents a reduction from the maximum value of 87 percent of GDP recorded in 2020.

Exchange rate:

The Croatian kuna was included in the ERM II on July 10th, 2020 at a central rate of 7.53450 kuna per euro with a normal fluctuation band of ±15 percent. In the two-year reference period (May 26th,2020 to May 25th, 2022), the kuna exchange rate had a lower degree of volatility and the currency traded close to its central rate.

Long-Term Interest Rate:

In the reference period from May 2021 to April 2022, long-term interest rates in Croatia averaged 0.8 percent (below the reference value of 2.6 percent for the interest rate convergence criteria). Long-term interest rates in Croatia have fallen since 2012, with the 12-month average rates falling from a value slightly below seven percent to a value below 1 percent.

In addition to Croatia, there are six countries that have not yet joined the euro but should do so once the requirements are met: Bulgaria, the Czech Republic, Hungary, Poland, Romania, and Sweden.

The ECB concludes that only Croatia and Sweden meet the price stability criteria. And all other EU members mentioned above meet the public finances (budget deficit and public debt to GDP) criteria, with the exception of Romania, which is currently the only member subject to an excessive deficit procedure (Romania's budget deficit was 7.1 percent of GDP at the end of 2021, while Croatia's was 2.9 percent of GDP).

According to the ECB's assessment, Bulgaria and Croatia meet the exchange rate criteria. The long-term interest rate criterion is met by Bulgaria, Croatia, the Czech Republic and Sweden.

What Can Joining the Euro Mean for Croatia and the Rest of the Eurozone?

As Philipp Bagus explained in The Tragedy of the Euro, the mechanism behind the euro produces an incentive for its members to get into debt over time. Yes, there are periods when most countries decrease their indebtedness (albeit very slowly). But eventually they increase it to an even higher level (so, in the long run, indebtedness increases).

At first, Croatia's adhesion to the euro should be beneficial to the country's inhabitants, as the euro is stronger than the kuna (1 euro has fluctuated between 7.1 and 7.7 kuna since 2004). If Croatia joins the euro, its inhabitants will have greater purchasing power than they do today, even though the euro is devaluing at a greater intensity, leading to the highest consumer price inflation in the history of the euro. Croatians will be able to import more (and better quality) goods. And long-term investments will be more possible than they were with kuna. This can improve the standard of living of Croatia's inhabitants.

On the other hand, joining the euro can also bring problems. Like other eurozone governments, Croatia's government may become larger (increase its spending and indebtedness) over time. It may increase intensely (as happened with Portugal, Spain, Italy and Greece) or at a lower intensity (as in Germany and Luxembourg, which despite being countries with more frugal governments, their indebtedness increased in the long run).

In any case, it is likely that, by joining the euro, Croatia will increase its indebtedness (which means that the government will absorb more resources from society, decreasing the productive investments in the country). Furthermore, if Croatia goes down the higher debt path, it will be yet another major source of debt issuance that the ECB should eventually buy (yes, the ECB announced it will cease its Asset Purchase Program in July, but this halt will hardly be permanent). If this happens, Croatia's indebtedness would be another major source of inflation for the euro, further decreasing its purchasing power over time. Everything will depend on how the Croatian government behaves in the years following its adhesion to the euro.

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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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