Power & Market
Tough talk and strong predictions were made by Federal Reserve Chair Jerome Powell this week. CNBC reports that the Fed will continue raising rates until inflation returns to a “healthy level.” In his own words:
We will go until we feel we’re at a place where we can say financial conditions are in an appropriate place, we see inflation coming down. We’ll go to that point. There won’t be any hesitation about that.
He doesn’t note any tangible targets such as what an “appropriate place” is, what barometer is used to gauge the success of bringing prices down, or how long it will take. The Fed will decide when the goal is reached.
Taken literally, if a Federal Funds Rate of 18% is required in order to lower prices to a healthy level, no matter the consequences, much pain lies ahead. Surely there must be a limit on how high the Fed would allow rates to soar. Yet this is not the first time he mentioned this. Last week, CNBC noted Powell warned that increasing interest rates will:
...include some pain...
Whether one is vehemently against central banking’s interventions or, like most people, don’t understand how central banking is truly against the public’s interest, we should all take note.
Afterall, he’s in charge of the money supply and interest rates. His organization is primarily responsible for the inflation we are suffering. It’s an unfortunate realization and it need not be this way. But the Fed serves a dual function of being both the cause and solution to our monetary problems.
A scan across more CNBC news headlines show a similar theme of doom and gloom:
Dow drops 1,100 points for its biggest decline since 2020 as the sell-off this year on Wall Street intensifies
The article addresses that this was the fifth time this year the Dow fell more than 800 points.
But that’s just stock market news. The food situation overseas is something we must also closely monitor, as headlines from the UK reveal:
Skipping meals and shrinking portions — Brits are being warned of ‘apocalyptic’ food price rises
Between higher prices, smaller portions and/or food shortages, we can only hope such “apocalyptic” pain will not come to our shores. So far, other than the shortage of infant formula recently seen in America, food shortages are something most Americans have never experienced.
Should things not go according to plan, perhaps we can learn from those in the UK whose inflation crisis seems more advanced than ours:
A quarter of Britons have resorted to skipping meals as inflationary pressures and a worsening food crisis conflate…
When Powell warns of pain ahead, as much as we may want to, now is not the time to doubt.
It’s difficult to say what the most painful outcome would be. But a future with high rates concurrent with high inflation could be one of the worst. There will be no easy way out of this.
One of the most important days on the calendar is little more than a week away: May 4. Next Wednesday, Federal Reserve Chair Jerome Powell may very well deliver a Keynesianesque double-feature, announcing various asset bubbles will be popped and a nail in the coffin is to be delivered into the economy, courtesy the Fed.
This economic one-two punch would come in the form of another rate hike followed by reducing the $9 trillion balance sheet by up to $95 billion a month.
From Powell’s mouth to our own ears, last week he said:
Fifty basis points will be on the table for the May meeting.
Until it’s officially announced, don’t assume anything from the Fed; but a Fed’s Fund Rate approaching 1% is noteworthy. With US Debt over $30.4 trillion, raising rates increase interest costs of the nation's debt obligation as well as rate sensitive products like mortgage, auto, business and margin loans. Share buybacks may also start looking less attractive.
Raising rates is one thing; draining money out of the market is another. Still, the Fed has made it abundantly clear, according to the latest meeting minutes that:
Officials “generally agreed” that a maximum of $60 billion in Treasurys and $35 billion in mortgage-backed securities would be allowed to roll off, phased in over three months and likely starting in May.
Should all go according to plan, the Fed will remove $95 billion a month from the system. To make matters more interesting, CNBC tells us:
Markets expect the Fed to increase rates a total of 250 basis points this year.
Should the Fed combine a 50-bps hike along with a $95 billion reduction of the balance sheet, then (after successive rate hikes and asset reductions) this time next year, interest rates will be close to 3% and over $1 trillion will be removed from the system.
A quick napkin calculation shows interest payment on the US debt would approach $1 trillion annually. Yet, the Fed only holds $5.8 trillion of the outstanding $30.4 trillion debt. Contrary to popular platitudes, we don’t owe the debt to ourselves. As for shrinking the balance sheet by over $1 trillion in one year, this carries a heavy consequence. Since Fed asset purchases suppress rates, what will this mean for the bond market and interest rates? Consider the stock and housing markets which benefit from the Fed’s Miraculous Monetary Tampering that made credit both abundant and cheap.
What planners call “Quantitative Tightening” (QT) is nothing new. The Austrian Business Cycle explains how credit expansion eventually leads to the boom-and-bust cycle. Even if the data shows the economy is strong and unemployment low, the mere cessation of the Fed’s easy money policies are enough to cause a bust. Without support from the central bank, all the supposed strength in the economy will whittle away. When the Fed engages in credit contraction, it only exacerbates the inevitable crash.
As of today, this is conjecture. Next week it may be fact. Fortunately the entrepreneur thrives in a world of uncertainty, placing calculated bets where possible, being rewarded when successful. It’s difficult to imagine a painless finale to all of this. Prepare accordingly. And if possible, capitalize on any opportunities.
Thank goodness for memes! A witty, well-placed caption on a still frame from a movie, cartoon, etc. provides welcome comic relief amidst the steady drip of stressful news these last few years.
The latest templates are rich celebrities and bureaucrats who are basically telling us to suck it up, or buy an electric car to counter spiking gas prices in the wake of the Russian invasion of Ukraine.
Now the press is vying for some of the meme mockery.
A recent editorial in the San Antonio Express-News tells us that it’s “a small price to pay to help save Ukrainian lives and cripple Russia’s invasion.” What about the “already high fuel and oil prices” they mention in the next breath?
In any case, all of which can be summed up in three words: a weak dollar.
After the chaos that ensued from President Nixon severing its link to gold, both Presidents Reagan and Clinton came out explicitly for a strong dollar. Remember how much it cost to fill-up then?
Probably not, because it was negligible.
Oil more clearly reflected the commodity that it is: one that is in abundant supply (we’re on “Peak Oil 3” by my count), and nearly identical from one producer to another. That kind of perfectly competitive setting keeps a natural lid on prices.
At the dawn of the 21st century however, our leaders’ support for the dollar started to flag. With its subsequent devaluation, it took more to buy the black gold. Hence, its price soared to almost $140 a barrel in mid-2008 before bottoming-out at $31.
We know what else was happening then: the so-called Great Recession. Incidentally, the mortgage crisis that precipitated that can also trace its roots to the beaten-down greenback.
When the dollar is destabilized, investors start parking more of their resources in established assets, where returns are more certain. In addition to gold, the traditional hedge against dollar volatility, housing is another such asset.
All this seem eerily familiar right now?
Multiple rounds of “quantitative easing,” two more weak-dollar presidents, and another crash (2014-2016) later, owners of energy companies had had enough. No longer interested in simply financing growth, they started demanding more fiscal discipline.
As so often happens, bankruptcies and consolidations followed. Some organizations have emerged in private hands, which might help them avoid a new headwind: ESG limitations.
The environmental, social and governance movement dictates that investment flow only to politically correct ventures. Needless to say, that doesn’t include oil and gas firms.
That’s ironic given that it has been them, via the deluge of natural gas unlocked by hydraulic fracturing, that have been as responsible for the steep drop in emissions as any other energy source.
Unsurprisingly, that gets as little attention in the mainstream media as does the fallout from a weak currency, which has only gotten more flaccid since the Fed floored the printing press in response to the dictatorial government shutdowns.
Now we have politicians in self-preservation mode calling for a suspension of the federal gas tax, and naïve bureaucrats imploring the industry to produce “more right now.” No doubt that includes from the “9,000 approved, but unused, drilling permits on federal land.”
Nevermind that many of those have little potential, or how long it would take to bring product to market from the others.
It’s especially disingenuous after they, buttressed by their media cheerleaders, have erected all manner of regulatory hurdles to push the fossil fuel industry toward extinction.
Supply and demand fundamentals are not out of whack here. The price at the pump has actually gone down by a dime in my neighborhood recently. And though it is inexplicable that we’d court the likes of Venezuela and Iran for their oil, it would matter little.
When the conflict in Ukraine subsides, will these elites start to explain the (near-)doubling of energy prices of the last year or so? Will they put aside political spin, and instead consult facts, figures and history, and level-up with citizens?
Or are we just supposed to accept it like the unnecessarily heavy-handed government response to the coronavirus?
We’re being set up for another economic crash, and those don’t make for funny memes.
Today would have been Murray Rothbard’s ninety-sixth birthday. He was an unforgettable friend whose immense knowledge of many different fields was unsurpassed, in my experience. In a lecture on the Austrian theory of the business cycle, he mentioned the common objection that the expansion of bank credit might have no effect if investors anticipated trouble. After the lecture, I asked whether Mises had answered this point. He said, “See his response to Lachmann in Economica, 1943.” I often went to used bookstores with him, in both Palo Alto and Manhattan, and listened to him as he commented on nearly every book on the shelves. When he was a student at Columbia, he admired the philosopher Ernest Nagel, who he said would always encourage students to do new work. Murray was like this himself. He constantly encouraged students to work on Austrian and libertarian topics. His support for me was never failing, and I owe him everything. If only he were still here now, to guide and instruct us!
“You do not have the right to parade through the public streets or to obstruct public thoroughfares. You have the right of assembly, yes, on your own property, and on the property of your adherents or your friends. But nobody has the ‘right’ to clog the streets.” –Ayn Rand
I encountered this quote recently on one of the social media sites. To me, the statement includes an obvious logical error and also an obvious reason for this error, so I responded simply: “No one individual is what clogs a street.”
The idea was to point out that the obvious—but dishonest—shift in the level of analysis that Rand is guilty of. She is obviously talking about individual rights yet says that individuals (plural) do not have the right to assemble in such a way as to clog the street. The problem here is that each individual indeed has the right to be in the street because it is a public throughfare. A single individual, I assume, would not amount to “clogging.” Would two? Or three? Four?
Even so, the individuals qua individuals would have equal right to be in the street but their assembly (group) would not. That’s the issue.
Let’s say it takes a dozen people to properly “clog” the street and that this is, per Rand, not allowed. This means eleven individuals have the right to be in the street, but the twelfth individual does not have that right—not because it is not their individual right, but because there are now sufficiently many individuals to clog the street. The first eleven have a right that the twelfth (and up) does not by virtue of the eleven already being there.
The same thing applies in the opposite case. Suppose there are twelve individuals already in the street. They properly “clog” the street, which is disallowed. In other words, neither one of them has the right to be there—and nobody else has the right to enter the street. But if one leaves, then they all magically gain the right to be there.
Consequently, Rand’s objectivist view, as expressed in the quote above, is one of individual rights that are contingent on how many others exercise their equal right. You have a right as an individual to be in the street, but this right only exists for as long as other individuals exercising the same right are not too many (that is, they cannot be so many that they “clog” the street).
This raises questions about what responsibility individuals have in this situation. If there are eleven individuals enjoying their time in the street, as is their right, does the entry of a twelfth person, which makes their being there unlawful, violate the eleven’s rights? They did nothing differently. Their rights changed because of another person. Or is it the other way around, that the eleven by exercising their right violate the twelfth individual because they no longer has the right to be in the street?
The quote raises many questions such as these, but these issues—seemingly arbitrary rights and apparent contradictions—arise for a specific reason: we are talking about public property. Had the street been private, then there would have been no problem. Rand says so herself: you have the right of assembly (whether or not “clogging” occurs) “on your own property.” Indeed, private property solves problems.
The arbitrariness of the situation is the assumption that the street is public. That arbitrariness is obvious from Miss Rand’s reliance on the vague, if at all defined, word “clog” as determinant of when otherwise rightful action suddenly becomes unlawful.
To take this one step further, this arbitrariness is the source of the state’s power and people’s desperate interest in wielding it. This interest is partly in self-defense because if the wrong people get to set the rules, then this may impose a cost on me (I either cannot be in the street or I cannot use the street because it is clogged).
Considering the substantial risk of a “wrong” person making up the wrong arbitrary rules for a piece of public property that they care about, many will realize that they are better off trying to nip the problem in the bud. Better yet, they can step ahead of it and impose rules of their own. So they engage in politics to get the “right” people in office.
It is public property that causes the problems of politics and the power that it has. The solution should be obvious: remove the cause.
Is this really the future we have to look forward to?
CNBC has a headline that reads:
As inflation hits another record, here are 5 steps you can take to protect your money
They could have written about what causes all prices of goods and services to inexplicably rise. They could have explained how handing out stimulus checks to the general public, or any other monetary scheme from the Fed, has a way of increasing poverty and inequality. However, economic theory being ignored, they took advice from wealth managers.
The number one suggestion the experts recommend is to “stay invested in equities,” as explained:
The reason for that is that stocks have a strong track record. Over more than 90 years, equities have had returns in excess of inflation…
Unfortunately, past performance is not indicative of future results. It’s a phrase all financial experts should be aware. Even if the last 90 years of equities had returns in excess of inflation, that says little about stock market returns for this year or the near future. This also ignores the fact inflation calculations are dubious at best.
The 2nd suggestion is to “adjust your spending.”
A recommendation for those on fixed income is to cut back on “variable expenses,” such as entertainment. However, surely the vast majority of those on fixed incomes, like retirees, are not struggling because they spend too much money on Netflix. Even if entertainment is removed from a retiree’s budget, there exists far more important and costlier expenses that continue increasing in price such as medical, groceries, and rent.
The three remaining pieces of advice are equally superficial: negotiating debts, rethinking gas consumption, and bundling purchases. Divesting out of the US dollar into gold, silver, crypto, or buying hard assets is never offered as an alternative to cope with the perpetual loss of dollar purchasing power.
Even worse, the usual pandemic conditions and supply chain issues are used as the cause of price increases, with no consideration given towards the Fed’s culpability in creating these issues. Absolutely nothing was mentioned in reference to the trillions of dollars created during the pandemic to pay for various stimulus programs that did nothing to strengthen the US dollar.
Maybe Chair Powell was right after all? Could it be that some people are just “prone to suffer,” as he stated last week:
And so inflation right away, right away forces people like that to make very difficult decisions. So that's really the point. I don't -- I'm not aware of, you know, inflation literally falling more on different socioeconomic groups. It's -- that's not the point. The point is some people are just really in -- prone to suffer more.
Imagine working your entire life only to find that near the end of it, your savings, like your currency, has been inflated away. Or being a young person, knowing the country you’re inheriting is one that forces you to chase yield to beat ever increasing inflation, all while requiring you to pay interest on trillions of dollars of debt to fund a system antithetical to life, liberty and the pursuit of happiness.
It’s painful. Hundreds of millions of Americans are affected by the actions of such a small group of individuals who unapologetically lack care for those outside their immediate circle. If Powell is right about one thing, it’s that inflationism, as a monetary policy, forces people to make difficult decisions due to no fault of their own. Maybe some people are really just prone to suffer (at the hands of central bankers), after all?
[Mr. Grant studied under Mises at NYU in the early 1960s and became a friend of Rothbard’s some years thereafter.]
If you were to ask me, many years after I last spoke with Murray Rothbard, what was the first thing that comes to mind when I think about Murray now—I'm skipping for the moment the extraordinary brainpower, the powerful books and essays, and the infectious personality—then it would be his cackle. It was not the timbre of the cackle, nor its loudness, nor its length; indeed, it was not a particularly unusual cackle at all. What made Murray's cackle noteworthy to me was its frequency. Predicting precisely when Murray would cackle was not necessarily easy; what was easy, though, was predicting that it would surely emerge from him very often.
When I think about Murray's cackle, I am reminded of the title of a long essay he wrote about one of our mutual heroes, the journalist H.L. Mencken. The headline for Murray's piece called Mencken a "joyous libertarian." Anyone who spent time with Murray and had frequent exposure to his cackle realized pretty quickly that the mantle "joyous libertarian" had switched easily from Mencken to Murray. (When I attended the Mises seminar in the early Sixties, by contrast, I found Mises anything but joyous. He appeared extremely dour. Of course, this may have something to do with the fact that I was still a teenager, while Mises was over 80; such an age difference can be quite intimidating!)
But back to Murray. How did I first meet him? I became interested in the conservative movement after, as a high school student, I heard a speech by an unknown Senator named Barry Goldwater (l can even now hear Murray shouting "fascist!" at the mere mention of Goldwater's name) at Hunter College in May of 1960; he was introduced by Bill Buckley, by the way. I was piqued enough by Goldwater's passionate speech to buy Conscience of a Conservative.
This was also the time when I was thinking about college. Just about when I first encountered Goldwater, and I was trying to figure out what to major in, an uncle of mine suggested economics; as a journalist, my instinct was to major in English, but my uncle told me that economics might be more practical for me.
That decision, and my natural curiosity about economics matters, gradually led me to the names of Mises, Hazlitt and Hayek.
My childhood friend Larry Moss and I started to attend the Mises seminar at New York University. At some point around that time, someone mentioned the name Murray Rothbard to me. I don't think I had ever heard of him. I remember well that he was described to me as—I am not joking!—"an anarchist dwarf." And so, of course, I thought that this guy Rothbard must be some kind of wacko, and I hardly gave him another thought. (Once I got to know Murray, of course, I discounted the noun—but not the word preceding it.)
As I delved more and more into Austrian economics, I began to wonder about this fellow Rothbard. At some point someone (l cannot recall who) suggested a meeting with him. And so Larry and I trudged to 215 West 88th Street (sometimes the memory is good; even now, decades later, I still recall the phone number at his apartment: SC-4-1606) for what turned out to be the first of many memorable evenings.
Often those evenings stretched to 3 a.m.; in those days (the early Sixties), New Yorkers did not worry about taking the "A" train back to Queens at such forbidden hours. Larry and I met many memorable people at Murray's and (his wife) Joey's apartment, including Edith Efron and Leonard Liggio.
But, of course, it was the anarchist dwarf himself who was the engine, the soul and the heart of those evenings. He seemed to love being a host and observing the give-and-take of his guests. Nor was he ever shy; if he ever lacked an opinion about anything, I certainly can't recall such a moment!
One of the most (of many) notable things about Murray was his reaction when you asked him a question or raised a topic for discussion. His attitude always seemed open and, charmingly, quizzical—I say ''charmingly" because Murray was of course quite fixed in his opinions, and yet he didn't always seem so.
This was quite unlike Mises, from whom Larry and I learned the word ''apodictic"; Mises not only loved (and used) that word, but he lived that word himself. But not Murray. Let me make up an example, because I can only recall the general phenomenon, rather than a particular instance: I say to Murray something that 99% of Americans would accept, such as "Well, of course, we had to get into World War II." Murray cocks his head, looks puzzled (NOT angry, not upset, not a hint that he might even slightly disagree) and says, good-naturedly, ''Really? Why do you say, that?" It was exactly as if I had said something completely uncontroversial and of little importance that was rarely discussed in one's living room, such as, "Well, of course, Washington is the capital of the United States," or if l said my eyes are brown or Frank Sinatra had recorded "All The Way."
In other words, one could say things in the presence of Murray with which (in retrospect) he furiously (and apodictically!) disagreed, and yet often his reaction would be the kind of mild response your grandmother might give you if you asked her what kind of flowers she liked.
In contrast, Murray could excoriate like few others. One of his favorite nouns was surely "fascist" and he used it very liberally indeed. Forget about Hitler; Murray lambasted as ''fascist" people from Barry Goldwater to a dear friend of mine—a libertarian who is active in Cato, mind you!—who had had the temerity to disagree with Murray on some minor doctrinal point.
Typically the evenings at Murray's and Joey's apartment were long (l don't recall his ever asking me and Larry to leave, and the conversations were lively). The talk was almost always fascinating, with much back-and-forth debating and a great deal of humor and, of course, many cackles.
Joey, Murray's wife, was a charming hostess. She seemed so sweet that I found it difficult to believe it when a mutual acquaintance told me after Joey died in the late 90s that she was in fact much tougher and meaner than Murray. I don't recall that side of her.
My chief recollection of the apartment itself was the seemingly never-ending array of bookcases—row upon row upon row of bookcases that seemed 40 feet high and topped off mere inches from the ceiling.
In addition to those enjoyable evenings with Murray and Joey, I have of course spent countless hours immersed in his books and articles. The first one I read was probably Man, Economy, and State; I have read it 2 1/2 times altogether.
While often provocative, Murray's opinions were indeed apodictic. This is most obvious, of course, in his theoretical tomes. In some cases, such as The Ethics of Liberty, I find him frequently unpersuasive. Even in such cases, however, he rarely fails to provoke; consider, for example, his distinction between copyright and patent (with which Mises disagreed) and his thoughts on what he called "Kid Lib." And of course he could be delightfully un–politically correct, such as when speaking of certain feminists.
Clearly, a lot of research went into his non-theoretical works, such as America's Great Depression and his delightful two-volume history of economic thought. Someone wrote somewhere that Murray seemed to have read EVERYTHING ever published about EVERYTHING; as one picks through his extensive footnotes, one can believe it.
Generally speaking, I find Murray's rebuttal of Keynesian and other fallacies much more thorough and convincing than Mises's. Firstly, Mises rarely addressed Keynes's arguments directly (in class at NYU, he pronounced the adjective Kuh-NAY-zee-un). Secondly, Mises's references to Keynes and others with whom he disagreed were all too often mere castigations. (By the way, I named my public relations firm after Mises; the firm is called "LVM Group," and our clients—3M, Channel 13, the Empire State Building, and others—have no idea what the name stands for.)
As a former journalist myself, I do not agree with many of the kind words others have said about Murray's writing. While there is no denying that he was an extraordinarily passionate and knowledgeable writer, I thought his writing too often pedestrian, cliché-ridden and uninspired. Someone once compared Murray's writing to our hero Mencken's, but Mencken was a WRITER; Murray was a writer, and not a great one. By contrast, while many have lambasted Mises for what they considered his dry writing, I have always found it well thought out, lucid, un-cliché-ish [I grant you that's not a word] and [I confess] often dry. But Murray did exhibit at least one good trait lacking in Mises; Murray's writing is lively.
Both in person and in his writings, Murray was one of the most exciting and inspiring people I ever met in my life. I'm glad I had the chance to know him.
There is a circulating meme illustrating the mainstream media bias towards the current wave of (price) inflation. Inflation is first and foremost an economic issue. When it comes to unilaterally increasing the prices of all goods and services, and creating asset bubbles, increasing the money supply is the best way to achieve this. Yet the media shows little understanding here. Links to the articles are included below:
The Washington Post article positions the inflation narrative as a partisan issue, referring to the Republican party:
They’re citing the specter of “Bidenflation” to derail the progressive agenda.
When inflation is considered from an Austrian economic standpoint, no targeted amount of annual inflation is deemed necessary, no matter which political party is in power. The word Bidenflation could easily have been Trumpflation if Trump presided over the same inflationist policies. Currency debasement might mean one has more money in their pocket. But if that money buys less, it can hardly be called a sound economic policy.
The Forbes article uses quotes, stats and charts all geared towards telling us to not worry about inflation, saying:
The 2021 Inflation Scare is another in a series of false alarms going back several decades. It may not quite qualify as Fake News, but it is close.
Calling concerns over inflation as fake news also doesn’t qualify as an economic argument. Looking back several months later, the article turned out to be a bad prediction and was hardly informative.
CNBC didn’t make as bold of a prediction about inflation, but misunderstands it, making it sound like inflation is something the Fed controls at the push of a button:
The Fed likes to keep inflation around 2% but said it is willing to tolerate even higher readings if the longer-term average stays around that level and the economy has not yet achieved full and inclusive employment.
Citing the arbitrary 2% inflation target is one thing, but the second half of the quote delivers a barrage of talking points, referring to both inclusivity and the dual mandate trade-off (of inflation and unemployment). Strange because the St. Louis Fed noted there is no correlation between the two, calling it a: Cloud of Points.
The pinnacle of absurdity is achieved by MSNBC. The quote from the meme is taken from a tweet made for the article: How Covid became the unlikely hero of our inflation crisis.
FOX News covered the story, saying:
Critics blasted the column after MSNBC shared it on Twitter writing "Why the inflation we're seeing now is a good thing."
Understandably, MSNBC went on damage control, deleting the tweet and replacing it with this:
Despite the original tweet being deleted, the article offers an incredible display of mental gymnastics:
Even though millions of Americans lost their jobs, enhanced unemployment benefits and stimulus payments left many of them better off, not worse. And the stock market, after initially falling, boomed.
The result of all this was that Americans ended 2020 $13.5 trillion richer than they were at the beginning of the year. Most of that wealth increase went, of course, to the already wealthy. But lower-income households benefited, too.
It’s difficult to argue with someone who claims Covid is the unsung hero, or that Americans are better because of it. And even though MSNBC has since scrubbed the tweet from existence, its memory will continue to live on in cyberspace through a clown meme.
Unfortunately, the mainstream media continues to show lack of a basic understanding with the cause and effects of monetary expansion, spinning inflation to meet its narrative using fallacies or economic dogma. The meme is more clever than kitsch, but who are the real clowns? Or is the entire State apparatus just one big circus at this point?
Is the problem the Federal Reserve who puts these ideas in the minds of the people? Or is it the mainstream news outlets that employ authors who know very little about economics? The Fed says one thing. The media questions nothing. And mainstream academia stays silent on everything. Congress and Wall Street are all that’s left and they are laughing all the way to the bank.
The Reserve Bank of Australia (RBA) “doesn’t fight inflation, it manufactures and maintains it.” This is a quote from the 2011 book The Evil Princes of Martin Place which I used in my first public piece on the RBA and inflation. That was in July 2013 for the LNP’s policy magazine at the time called Dialogue and published by, then editor but now senator, Amanda Stoker. Interestingly, this piece was originally written for the IPA but was rejected by, then editor but now senator, James Paterson. (And by the way, the LNP didn’t change a word.) I have since written and spoken about inflation dozens of times, both in Australia and the USA including for Townhall, Good Sauce and LibertyWorks. Inflation was a problem then, but it is far worse now a decade later.
The ‘Aussie’ mainstream media…be it Murdoch, Fairfax or ABC or be it ‘print’, online or TV…rarely gets inflation right or even tries to. And the RBA’s central role in this is largely unknown or untouchable (unlike that of The Fed in the USA). That sadly also goes for the ‘right wing’ media ‘down under’, including Sky News Australia. To be fair to them, they tend to focus on the ‘culture wars’ and other non-economic ‘wars’ such as on borders, climate, Covid-19, etc. However, such ‘cold wars’, like ‘hot’ ones, are heavily funded and influenced by economics. As for Australia’s two leading think tanks on the ‘right’ of IPA and CIS, both to their credit were tackling the topic in recent years, albeit from nearly ‘polar opposite’ viewpoints, but not so much in 2021 when it is most needed.
The Indicators of Inflation (Part 1)
There is no shortage of indicators of inflation which get cited on a regular basis in the mainstream and financial media. One of the best online places to find such economic indicators is Trading Economics, where all sorts of graphs, over all sorts of time periods, from across the world, can be found and displayed in a plethora of different ways. Indirect indicators of ‘Aussie’ inflation and expectations include: government bonds; government debt; gold reserves; stock markets; and GDP (noting the latter is an essentially a price x quantity metric). More direct indicators include: interest rate; exchange rates; labour costs; PPI; and CPI. Yes, CPI is an indicator; not a measure of, nor itself, inflation as such.
The 3 to 10 year graphs of all these indicators show some very strange goings on the past two years. Of course, that does correlate with the appearance of, and (public) responses to, Covid-19. However, that also correlates with the appearance of, and (private) responses to, inflation. As is well known in statistics, correlation is a ‘necessary but not sufficient’ condition for trying to get at cause and effect (noting that the latter two can be multiple in nature as well as in one or both directions). CPI, for better or worse, is most associated with inflation. As can be seen in the left graph below of CPI as an annual percentage change, “[t]he annual inflation rate in Australia fell to 3.0% in Q3 2021 from a 12-1/2-year high of 3.8% in Q2”. Context always matters. As can be seen in the right graph below of CPI as a cumulative index, consumer price ‘inflation’ has been largely accumulating like compound interest since the mid-1970s but with a bit of a break of sorts around the 1990s (during a ‘golden’ era of policy).
The Economics of Inflation (Part 1)
Inflation is usually portrayed in the media, think tanks and even academia as simply, and only, a rise in prices. The focus is usually on consumer prices, but sometimes other prices are mentioned such as those of production, labour, borrowing, investment and trade. But for hundreds, if not thousands, of years inflation meant, and was only known as, inflation of the money supply. This clearly points to the cause behind the effect of a general and sustained rise in prices. Money is the cause; prices are the effect. The modern, or post WWII, portrayal of inflation is essentially saying that: “the rise in prices is caused by the rise in prices.” That is unhelpful at best; circular at worst.
But don’t just take my word for it. Let me quote three of the most influential economists of the 20th, or any, century. The first two are on the ‘right’ (Austrian and Chicago); the third on the ‘left’. They said:
- “What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation.” – Ludwig von Mises
- “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” – Milton Friedman
- “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.” – John Maynard Keynes
The Measures of Inflation (Part 2)
An inflation indicator is something that correlates as an effect. An inflation measure is something that correlates as a cause. The RBA, somewhat ironically, measures the cause, ie money supply, which they somewhat vaguely (and perhaps intentionally) call “monetary aggregates” or “financial aggregates”. These include the following three that can also be found on the Trading Economics website:
- M0 is “holdings of notes and coins by the private sector plus deposits of banks with the Reserve Bank and other Reserve Bank liabilities to the private non-bank sector”.
- M1 is M0 plus “transaction deposits with authorised deposit-taking institutions (ADIs)”.
- M3 is M1 plus “all other deposits at ADIs (including negotiable certificates of deposits) from the private non-ADI sector”.
As can be seen in the left graph below of M0 in annual billions of Aussie dollars, RBA money supply (which is more or less just printing money) has skyrocketed in the past two years almost four fold. Context still matters. As can be seen in the right graph below of M3 in annual billions of Aussie dollars, RBA plus Big Banks money supply (which is known as the legal fraud of Fractional Reserve Banking) has been a largely ignored and growing problem since the mid-2000s (post ‘golden’ era of policy).
The public policy justification for reckless money printing used to be Quantitative Easing (QE) in order to temporarily “stimulate the real economy of normal businesses and consumers, in the wake of the Global Financial Crisis (GFC)”. Nowadays it is Modern Monetary Theory (MMT) in order to neverendingly “stimulate the political economy of Woke corporations and activists, in the wake of” The Great Reset of not just culture, covid and climate but also even of nations, democracy and liberty themselves. "The revolution [may] not be televised", but it will need to be monetised.
Economics provides crucial, and obvious, insights into the real economy. It also provides no less crucial, but not so obvious, insights into the political economy. This is called Public Choice economics. It reminds us that politicians and bureaucrats are neither selfless nor omnipotent. It also points out that policy has a marketplace where concentrated special interests seek relatively large benefits for themselves at the relatively small costs to the dispersed masses. Unlike those in a free market: the overall benefits are smaller than the overall costs; and largely not created in a win-win way but transferred to the beneficiaries from the non-beneficiaries in a win-lose way. These benefits can be material and/or psychic. The beneficiaries are usually some combo of ‘bootleggers and baptists’, the former seeking the material (such as power and/or easy money) and the latter seeking the psychic (such as change and/or virtue signaling). All of this goes for the RBA’s unelected executives and permanent technocrats when it comes to inflation of the money supply.
Editor's note: Mark Spitznagel is President and Chief Investment Officer for Universa Investments. He has written about risk mitigation and "tail hedging" in his books The Dao of Capital and Safe Haven. He is a well-read student of Austrian economics, and has applied the insights of Mises and others to his professional work. This editorial, originally published July 20 in the Financial Times here, provides compelling insights into Mr. Spiztnagel's view of "risk mitigation irony": as politicians and investors attempt to mitigate risk, they miss the "unseen," which Frédéric Bastiat admonished us to consider. For Spitznagel, both politicians and investors fail to understand the true (i.e., full) costs of their risk mitigation strategies—the former overcorrect for covid dangers, the latter overcorrect for crashes. For those interested in the distinction between uncertainty and risk in economics, see Frank Knight's Risk, Uncertainty, and Profit and Mises's Human Action, chap. 6.
From public policy to private investing, it is the central question of our time: how high a price should we pay to keep ourselves safe from harm?
And this begs even more fundamental questions: should risk mitigation come at a cost at all, or should it rather come with rewards? That is, shouldn’t risk mitigation be “cost-effective”? And if not, what is it good for?
Think of your life like an archer releasing just one single arrow at a target. Naturally, you want to make your one shot at life a good one—to hit your bullseye—and this is why you mitigate your risks: to improve your precision (or the tightness of the grouping of your potential arrows) as well as your accuracy (or the closeness of that potential grouping to your bullseye). We often lose sight of this: safety is instead perceived as improving precision (removing our bad potential arrows) at the expense of accuracy.
The fact is, safety from risk can be exceedingly costly. As a cure, it is often worse than the disease. And what’s worse, the costs are often hidden; they are errors of omission (the great shots that could have been), even as they mitigate errors of commission (the bad shots). The latter are the errors we easily notice; ignoring the former for the latter is a costly fallacy.
Of course, we expect politicians to commit this risk mitigation irony. Ours is the great age of government interventionism—from corporate bailouts to extraordinary levels of debt-fueled fiscal spending and central bank market manipulations. Fallaciously ignoring errors of omission to avoid errors of commission essentially is the job of politics, as every government programme involves hidden opportunity costs, with winners and losers on each side.
More surprising, even investors engage in risk mitigation irony as well. They strive to do something—anything—to mitigate risk, even if it impairs their portfolios and defeats the purpose. The vast majority of presumed risk mitigation strategies leave errors of omission in their wake (i.e. underperformance), all in the name of avoiding losses from falling markets.
Modern finance’s dogma of diversification is built around this very idea. Consider diversifying “haven” investments such as bonds or, God forbid, hedge funds. Over time, they exact a net cost on portfolios’ real wealth by lowering compound growth rates in the name of lower risk. They have thus done more harm than good.
The problem is, such safe havens simply do not provide very much (if any) portfolio protection when it matters; therefore, the only way for them to ever provide meaningful protection is by representing a very large allocation within a portfolio. This very large allocation will naturally create a cost burden, or drag, when times are good—or most of the time—and ultimately on average. Over time, your wealth would have been safer with no haven at all.
An overallocation to bonds and other risk mitigation strategies is the principal reason why public pensions remain underfunded today—an average funding ratio in the US of around 75 per cent—despite the greatest stock market bull run in history.
For instance, a simple 60/40 stocks/bonds portfolio underperformed the S&P 500 alone by over 250 per cent cumulatively over the past 25 years. What was the point of those bonds again? Cassandras typically and ironically lose more in their safety interventions than they would have lost to that which they seek safety from.
Most investor interventionism against looming market crashes ultimately leads to lower compound returns than those crashes would have cost them. Markets have scared us far more than they have harmed us.
While Cassandras may make great career politicians and market commentators, they have proven very costly in public policy and in investing. We know that times are fraught with uncertainty, and the financial markets have perhaps never been more vulnerable to a crash. But should we seek safety such that we are worse off regardless of what happens?
We should aim our arrows such that we mitigate our bad potential shots and, as a direct result, raise our chance of hitting our bullseye. Our risk mitigation must be cost-effective. This is far easier said than done. But by the simple act of recognizing the problem of the deceptive, long-term costs of risk mitigation, we can make headway. If history is any guide, this might just be the most valuable and profitable thing that any investor can focus on.