Power & Market

Rising Interest Rates Are Revealing the True Damage Done by the Fed

06/16/2022Tho Bishop
Listen to the Audio Mises Wire version of this article.

On May 4, Jerome Powell dismissed the possibility of the Federal Reserve hiking the federal funds rate by three-quarters of a percent.

On June 15, he announced that America’s central bank was doing just that, a reminder that the Fed continues to give itself more power over the economy, even as it repeatedly demonstrates an inability to predict inflation, economic growth, or even its own policy.

Markets were already reacting to the move days in advance after a deliberate leak of the Fed’s decision to the Wall Street Journal this past weekend. The result is tens of millions of Americans watching their net worth collapse with stocks, cryptocurrencies, and other financial asset prices as investors pull capital away from investments and into cash and other safe harbors.

Of course, the demand for these investments that are now being devastated by rate hikes was itself a deliberate policy goal of the Federal Reserve. Low interest rates maintained by aggressive quantitative easing and other new Fed tools were designed to discourage Americans from saving in traditional banks and low-risk financial assets. The Fed subsidized risk, and risk is what we have.

While panic over America’s economic environment is starting to make its way into the pages of the corporate press, savvy Fed watchers have been warning about this self-made trap for years. On the Mises Wire, Austrian analysts like Daniel Lacalle, Thorsten Polleit, and Brendan Brown have warned about the damage a decade of monetary hedonism has done to the financial health of the global economy. The lingering question has been whether central banks' concern over price inflation would trigger the policy corrections necessary to pop what Lacalle has called "the bubble of everything." 

The Fed seems to be trying. We will see how other central bankers respond.

The fight against inflation should illuminate one of the most important, but often overlooked, parts of the Austrian understanding of business cycles. While a lot of the online conversation about Fed policy will often focus on the dollar's declining purchasing power or concerns about hyperinflationary environments due to central bank mismanagement, the more pressing insight is the true costs of the malinvestment that occurs in a low interest rate environment.

Artificial credit expansion means capital is invested in firms and industries that would not appear profitable without the intervention of central banks. One way we can see this manifested is in the form of zombie companies, which are firms whose operations are not profitable and that depend upon cheap debt to survive.

As Joshua Konstantinos noted on the Mises Wire in 2019:

Following the Great Recession, zombie companies became a worldwide phenomenon. Even with today’s very low interest rates; more and more companies are unable to pay the interest on their debts out of profits. According to the BIS, the share of zombie companies in the US doubled between 2007 and 2015, rising to around 10 percent of all public companies. And counterintuitively, as interest rates have fallen lower and lower the number of zombie companies has increased.

These numbers, of course, do not consider the financial frenzy that was created as a result of covid-related policies after the article was written.

An additional consequence of the Fed’s subsidization of risk in the financial system is damage done to important institutional investors. Pension funds and insurance companies, for example, have been forced to manage investment portfolios at a time when government bonds and other historically low-risk investments are yielding little. In such an environment, these institutions can either reduce payouts in the future or adjust their investments to higher-yield assets. If an aggressive increase in interest rates ends up taking down a large portion of these zombie companies, this could secondarily impact millions of Americans who never benefitted from the stock market.

It is precisely these deeper consequences to the busting of financial bubbles that inspired Ludwig von Mises to spend so much effort in trying to illustrate the consequences of central bank–fueled malinvestment. As he notes in Economic Policy:

Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.

The question going forward is how truly dedicated the Fed is to its campaign against price inflation. The purpose of its severe move, the largest single move in forty years, is to demonstrate a willingness to act boldly in the future—the Powell Fed has enjoyed a reputation for being willing to bring out "a bazooka," nerd speak for engaging in aggressive monetary policy. This was also an act of political necessity: $5 gas and double-digit increases in food costs is the sort of kitchen table issue to get Americans very angry at politicians and their bankers.

Will those calculations change with Americans seeing their 401(k)s draining away? Data from the Atlanta Fed is now signaling an official recession in the coming months. Will Jerome Powell be willing to increase rates with those head winds?

Only time will tell.

What we can be confident about is that the damage the Federal Reserve has done to the economy is only now being exposed. Unfortunately, the institution responsible is as blind and powerful as it has ever been.

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Rate Hike Incoming

06/10/2022Robert Aro

The near certainty of another 50-bps rate hike at the Federal Open Market Committee (FOMC) next week forces us to consider the monetary system in which we find ourselves; whereby currency debasement is a useful economic tool, that is until it becomes detrimental, which according to the Fed, can only be cured by rate increases.

Let’s see what the planners have been saying regarding next Wednesday's announcement. CNBC reports that Cleveland Fed President Loretta Mester claims:

…she doesn’t see ample evidence that inflation has peaked and thus is on board with supporting a series of aggressive interest rate increases.

 Clearly, more pain lies ahead. Elaborating on this, she provides the following quote:

I don’t want to declare victory on inflation before I see really compelling evidence that our actions are beginning to do the work in bringing down demand in better balance with aggregate supply.

According to her, the June, July, and September meetings could see a 50-bps rate hike and that a pause on rate hikes is unlikely.

Not alone in that sentiment, San Francisco Fed President Mary Daly supports diligently raising rates until “inflation comes down to a reasonable level,” going to say:

We need to do that expeditiously, and I see a couple of 50 basis point hikes immediately in the next couple of meetings to get there… Then we need to look around and see what else is going on.

It’s unclear what she means by “what else is going on,” but it could be a recession, stock market crash, or a housing market collapse…

The Fed’s second in command also gave insight on what our future holds. Fed Vice Chair Lael Brainard said it’s unlikely the Fed will break its rate hiking cycle “anytime soon.” Strangely confident about the state of the economy, she was quoted:

We’re certainly going to do what is necessary to bring inflation back down… That’s our No. 1 challenge right now. We are starting from a position of strength. The economy has a lot of momentum.

Between the three of them and the latest FOMC minutes, which echoed similar sentiment, the world is expecting more rate hikes for the foreseeable future. Of course, it’s not without its challenges. Talk of a recession has been aggressively making headlines. As CNBC explains, data from the Atlanta Fed showed this could be “the second quarter of negative growth,” the official marker of a recession. Reiterating:

…the economy doesn’t have much further to go before it slides into what many consider a recession.

However, CNBC was quick to explain that:

To be sure, while the notion of two consecutive negative GDP quarters is often considered a recession, that’s not necessarily true… However, there has never been a period with consecutive negative-growth quarters that did not entail a recession, according to data going back to 1947.

Where the members of the Fed see strength, others see great weakness. With rates raising next week and the balance sheet finally set to shrink this month, it will be interesting to see how the markets and GDP figures fare in the months ahead.

With today’s Consumer Price Index (CPI) reaching 8.6% for the month of May, we must also wonder just how high will they raise rates to fight inflation readings, and how many rate increases can this so-called strong economy take before it implodes?

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Realism, Liberalism, and Constructivism: A Primer on International Relations Theory

04/26/2022Scott Duryea

University of Chicago professor John Mearsheimer gave a lecture to a group of university alumni in 2014 entitled “Why is Ukraine the West’s Fault,” essentially predicting the Russo-Ukrainian war. The lecture has over 24 million views. Even though he’s been accused of pro-Putin sympathies, Mearsheimer approached the topic of NATO encroachment and Russian security concerns from a dispassionate perspective, using international relations theory to see the situation from the Russian side. 

Much how Misesians search for the “regularity in the concatenation and succession of events,” international relations theory tries to observe regularities in the way states behave. By understanding the operation of the international system of states, strategists and policymakers can generalize and hopefully predict global events, like incursions. Just like in economics, theory models empirical reality. For IR scholars, that reality is the relationships among states in the international system. Ultimately, the field of international relations offers three broad lenses through which observers can view the world: realism, liberalism, and constructivism.


John Mearsheimer is among the foremost experts in international relations who view the world through a realist lens. Realism focuses on the absence of an overarching global government that can harness the behavior of state and non-state actors. In other words, the world lives under a state of international anarchy. As a result, states pursue security above other concerns. Distrust of other states means that they can only truly rely on themselves to protect their national interests, a principle known as self-help.

Thucydides’ History of the Peloponnesian War in the fifth century BCE first formulated the basic assumptions of realism. First, the state is the primary actor in international politics. Second, the state is a unitary actor. Third, the state is a rational actor: it weighs costs and benefits, seeking to maximize utility in the decisions it makes. Fourth, the state focuses on security from both foreign and domestic threats. To the methodological individualist, these assumptions that states take on the characteristics of subjective and acting human beings seem exaggerated. As the state can be defined as that institution that enjoys the monopoly on the legitimate use of violence within a given territory, it stands to reason that states would also project that violence outward in the name of self-preservation.

Hans Morgenthau and Kenneth Waltz applied realism to the modern international state system, which began after the Peace of Westphalia in 1648. Morgenthau (1948) argued that states struggle against each other for both military and economic power, leading to an acute focus on relative—rather than absolute—gains compared to other states. A feature of this struggle for relative gains is the security dilemma, a situation in which one country responds to an increase in the capabilities of another country with a counter increase in capabilities. A tit-for-tat increase in capabilities ensues, leading all sides into a state of tension where no side has an incentive to back down.

Kenneth Waltz (1979) developed neorealism, also known as structural realism, positing that the structure of the international system explains international politics better than any inherent and universal characteristic of states. His Theory of International Politics theorizes that the distribution of power in the world determines peace and war. In particular, the world can be unipolar, bipolar, or multipolar. Bipolarity and multipolarity represent more distributed balances of power than the current “unipolar moment” that the United States enjoys today. It is an open question—and one that theorists actively debate over—whether unipolarity, bipolarity, or multipolarity leads to greater global peace.


Liberalism states are more cooperative, challenging the realist assumption that states are primarily in conflict with one another. Through trade, treaties, norms, diplomacy, and international institutions, states emphasize peaceful transaction over zero-sum power projection. Although this IR theory of liberalism derives from Enlightenment thinkers, it is not a prescriptive ideology like classical liberalism. Remember that IR theories try to formulate a generalized model about how states operate in the international system. Accordingly, IR liberalism views states as rational individuals are, cooperating and transacting for mutual benefit. 

Mutual benefits can accrue when states create institutions to enforce rules that govern behavior, to allow states to communicate, and to mediate disputes. Collective security arrangements provide security guarantees to member states if one should be aggressed against by an outside actor. This collective defense provides an initial deterrent to would-be aggressors. Likewise, liberals do not ignore security as a concern. Rather, they see cooperation as an observable way that states reckon with international anarchy.

A modern variant of liberalism is neoliberal institutionalism, which argues that states cooperate most of the time through what Robert Keohane and Joseph Nye (1977) termed complex interdependence. States interact through multiple channels, in addition to formal diplomacy, and have a range of issues through which agreement can be derived. Military force then moves increasingly farther down the preference scale of states the more they interact and depend on each other. Repeated interaction among states helps them find common interests and reduces their incentive to exploit each other’s weaknesses through military force. International governmental organizations, or IGOs, facilitate these interactions to generate mutual benefit.


A third and less unified theory of international relations called constructivism focuses on norms and identities for explanations of global politics. States derive their identities from individuals, cultures, and norms and thus view international anarchy to be interpreted differently by each state. Consequently, states with opposing identities might have divergent interests in international politics.

Alexander Wendt (1992) stated that “anarchy is what states make of it,” expressing the common postmodernist critique of reality as being socially constructed. States view the world in terms of their elites’ beliefs, identities, and social norms. Where realists will point to states as being primarily security-oriented, constructivists will counter that security, and national interests for that matter, has no single objective meaning that can be applied to all states. In addition, what constitutes as an identity or norm evolves over time, rendering blanket assumptions of state behavior inert.

The power of ideas is important to constructivists. Diffusion of ideas, culture, and language through internationalization, socialization, or hybridity become ways in which identities can be shaped. Constructivism does not contribute an overarching theory about states, as realism and liberalism attempt to do, and it is often thought to be more of a critical theory like Marxism or feminism. Its value in interpreting international politics is in recommending to analysts that they should study the individual cultures, histories, values, and norms each country carries with it to the international scene.

Applying These Perspectives to the Real World

The most visible international event currently is the Russo-Ukrainian War. Russia was powerless to halt the NATO enlargements of 1999 and 2004, which incorporated many of the former Soviet and Soviet-bloc countries of Eastern Europe and the Baltic Sea coast. NATO moved into Russia’s historical sphere of influence and abutted Russia’s western border. NATO sought further encroachment: in 2008, it declared its support for eventual Georgian and Ukrainian accession to the alliance. Vladimir Putin pushed back, calling it a direct threat to Russia. Like NATO, the European Union simultaneously sought eastern integration with its Eastern Partnership proposal to bring Ukraine gradually into its economic orbit. 

Ukrainian domestic politics further exacerbated the tensions. American-backed protests in 2014 culminated in the ouster of Ukrainian president Viktor Yanukovych and the installing of a pro-Western regime in Kyiv. Shortly after, pro-Russian Ukrainians and ethnic Russians in Crimea occupied government buildings, and Russia annexed the peninsula after a secession referendum. NATO war games in the Baltic, American arming and training of Ukrainian troops, and an evolving de facto integration of Ukraine into NATO and the EU sphere of influence preceded a Russian invasion of Ukraine in late February 2022.

Realists, liberals, and constructivists view this situation in different ways. Realists center their analysis on the security interests of states and power distribution. Western influence created a security threat to Russia and a relative power imbalance in favor of the West. Russia’s actions reflect a protection against Western encroachment to protect its security interests. 

Liberals emphasize domestic politics and the role of international institutions in the conflict. The coup in 2014 that brought into power a pro-Western government prompted Russia to undertake actions that would destabilize the country and pull Ukraine back into its trade orbit. A pro-Western population within Ukraine saw in NATO and the EU a way to advance their interests, reducing Ukrainian economic dependence on Russia.

Constructivists look more at diverging identities in the conflict. The attraction of pro-democratic Western identity stood in stark contrast to the authoritarianism of Putin’s Russia. Patriotic rhetoric from the Kremlin emphasized Russian identity and justified Crimean annexation as a reterritorialization of a historical Russian land.

International relations scholars view these main theories as both complementary and distinct ways of looking at the world. While staunch realists like Mearsheimer predicted the Russian reaction to NATO encroachment, many observers view these theories as tools in a toolbox of perspectives to consider when interpreting world events. Accordingly, it is important to understand that IR theories provide lenses for interpretation rather than a set of public policies that should be pursued. In other words, IR theory is value-free, seeking to understand how the world works. This outlook stands in contrast to ideologies of domestic politics or foreign policy, which are methods for achieving ends.

Foreign policy prescriptions may, however, follow from viewing the world through one of these theories. Offensive realism argues that international anarchy requires states to seek opportunities constantly to improve their relative power positions against other states. Defensive realism sees this strategy as misguided. Instead, states should enact foreign policies of restraint to avoid provoking other countries into belligerence. Liberals generally see economic interdependence, democracy, and international institutions as peacebuilding. As a result, liberals seek to expand democracy, trade relations, and international institutions on the global system and among other countries. They see liberal values as mutually beneficial for the United States as well as the target countries. Some, however, like Woodrow Wilson, George W. Bush, or Hillary Clinton, might like to impose these institutions and relationships by force. Like IR theory generally, these approaches can overlap and do not correspond to ideologies on the political spectrum or compass. IR theory is to foreign policy as economic theory is to economic policy. Both try to understand the world as it is and then derive policy that would best achieve ends sought. 


Koehane, Robert O. and Joseph S. Nye. Power and Interdependence: World Politics in Transition. Boston: Little, Brown and Company, 1977.

Morgenthau, Hans J. Politics Among Nations: The Struggle for Power and Peace. New York: Alfred A. Knopf, 1948.

Waltz, Kenneth N. Theory of International Politics. Boston: McGraw-Hill, 1979.

Wendt, Alexander. “Anarchy is What States Make of It: The Social Construction of Power Politics.” International Organization 46, no. 2 (Spring 1992): 391-425.

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Russia's Invasion of Ukraine Is Creating a Financial World War

04/08/2022Tho Bishop

Over a month after Russia invaded Ukraine, the military conflict has remained a regional conflict. While Russia has been able to fortify its claim in eastern Ukraine and has made advances in the south, recent counteroffenses by the Ukrainians have pushed Vladimir Putin’s military away from Kyiv. Meanwhile, allegations of war crimes committed by Russian forces during the conflict have given Ukrainian president Volodymyr Zelenskyy new ammo in his campaign to increase pressure from the international community against the Russian Federation.

The situation on the ground has fueled a narrative popular in America and Europe that Putin vastly underestimated the difficulty of conflict with Ukraine and that the Russian regime is suffering from the “authoritarian trap” of government bureaucrats prioritizing placating their president over accurately reporting the state of Russia’s military affairs. While any degree to which Russian military failures push the countries to a ceasefire is a cause of celebration, overestimating Russian weakness could serve to undermine peace negotiations. Hopefully, the United States and the North Atlantic Treaty Organization’s analysis of this conflict is better than it has been in other situations in recent history.

Putin’s aspirations, however, go well beyond territorial conquest in former Soviet nations. At its core, the aim of the Russian regime is to challenge the post–Cold War order of a unipolar America-dominated global order.

On that front, Russia’s actions—and the West’s response—have now sparked a global conflict.

Since the 1970s, the dollar has been as vital a tool for American global supremacy as any military weapon. America’s war on terror not only transformed the Middle East into the main theater of US foreign policy but fueled Washington’s desire to militarize the American financial sector. What began as debanking al-Qaeda conspirators evolved into the primary tool used against rogue nations such as Iran and North Korea. In recent years, Western nations have also wielded these tools against domestic political dissidents.

In response to Putin’s aggression against Ukraine, America and the West have responded with some of the most extreme sanctions yet deployed. While these measures have forced severe financial pain on Russian oligarchs, who had become used to a certain quality of life outside of their homeland, Russia’s own counteroffensive is revealing the limits to Washington’s favorite weapons.

Global demand for Russian energy, food, and other vital resources has allowed Putin’s regime to provide support to the ruble by demanding purchases be made in Russia’s currency—Putin’s investments in various European “green” causes were well made. The result has been the value of the ruble returning to its postwar standing and stabilizing a financial sector bearing the brunt of Western sanctions.

What should concern the Washington regime the most, however, has been the geopolitical response to the West’s actions. The Russian government has created a list of “friendly” and “unfriendly” countries, leveraging access to its commodities in exchange for neutrality over the Ukrainian conflict. The Kremlin’s response has been supported by the West’s own increasingly aggressive positions towards countries willing to prioritize the interests of Ukraine over that of their own people. The result has been an increasing number of significant, non-European countries refusing to submit to the demands of the Biden regime.

Countries like Mexico, Brazil, and India—all led by nationalist political leaders—have refused to sanction Russia, providing economic support to Putin beyond his handshake agreement with the Chinese Communist Party. In fact, opposition to Washington’s demand for these nations to sacrifice their economic ties with Russia in order to morally condemn Russia has succeeded in bridging geopolitical rivals. Pakistani prime minister Imran Khan praised President Narendra Modi for the India’s “independent” foreign policy.

As a Pakistani news site reported:

"They (India) are saying they will import Russian oil because it is better for their people despite the sanctions [on Russia]."

[Kahn] said he had the "same problem".

As Ryan McMaken noted recently on the Wire, Washington’s military adventurism over the past two decades has greatly eroded America’s claims to a moral high ground. The same is true of Washington’s increasingly aggressive abuse of the privilege of having the global reserve currency. A prominent central banker warned that the US’s continual weaponization of the dollar demonstrates a need for the global community to find something new.

This call came not from the Bank of Russia or the Bank of China, but the Bank of England—one of Washington’s closest allies. In the past month, we’ve seen a historical alternative, gold, enjoy renewed attention as a strategic asset.

The new phase of the West’s financial war is succeeding in bringing together a new coalition of global powers—many with long-standing historical disagreements—who are unified in their opposition to submitting to the edicts of Washington. Additionally, the economic impact of global economic disruption—currently being felt in gas and fertilizer prices and to be felt in the future with food shortages—is now causing social unrest. Politically, the nation of Hungary overwhelmingly reelected nationalist Viktor Orbán against the demands of the European Union and the Biden administration, while polling shows France’s Emmanuel Macron now trailing EU-skeptic Marine Le Pen.

Over a month into the conflict, it remains to be seen whether or not Vladimir Putin will achieve his military goals in Ukraine.

Increasingly, however, it appears he may have achieved his larger aim of overthrowing the unipolar world. Yet another failure of Washington’s technocratic class.

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Raise Rates to Fight Inflation?

03/17/2022Robert Aro

The Fed has finally raised its benchmark interest rate in order to fight (price) inflation.

If this strategy makes sense, it’s reasonable to ask: Are low interest rates the cause of currency debasement?

To accept this idea, one must accept that low rates caused the increases in the price of gas, groceries, cars, drugs and college tuition. The boom in commodity prices such as gold, palladium, wheat, sugar and oil would also be attributed to low interest rates. Yet when one looks at the history of interest rates and prices, there is no long-term correlation between the two. Even if there was, it wouldn’t prove causation as other variables, like the money supply, would have to be factored in the equation.

Hyperinflation and currency collapse are historically the result of increases to the money supply. Venezuela has an interest rate at 57.99%. Turkey’s rate is 14% and Brazil is at 11.75%. They’ve been struggling with high inflation or hyperinflation for quite some time.

Then there’s Zimbabwe, which provides a great opportunity for everyone to learn about inflation:

Zimbabwe’s annual inflation rate peaked in November 2008, reaching 89.7 sextillion (10^21) percent.

The country currently has an interest rate of 60%. Over a decade after their central bank destroyed its currency, they continue to have sky-high interest rates to fight price increases, apparently learning nothing from past mistakes.

It’s worse when you read comments from their central bank. Bloomberg quoted Reserve Bank of Zimbabwe Governor John Mangudya, just last month, who said:

If we see inflation going up in February and in March, brace up for very high interest rates… There is a trade off between inflation and high interest rates, all central banks are tightening monetary policies so that we can get out of high inflation.

Is it hilarious or just plain sad that comments from the head of Zimbabwe’s central bank are indistinguishable from comments from Fed Chair Powell; or does Zimbabwe take its cue from the Fed? Powell raised interest rates today, citing a similar reason, saying:

The economy is very strong, and against the backdrop of an extremely tight labor market and high inflation, the Committee anticipates that ongoing increases in the target range for the federal funds rate will be appropriate.

CNBC also ignores the problem with inflationism as public policy, noting that the Fed’s:

…main tool to battle inflation is interest rates.

It’s inexcusable that when it comes to fighting currency debasement, the quick fix is to make debt more expensive, paying little attention to the money creation mechanism.

Imagine, living in Zimbabwe, seeing a money supply chart that looks like this then learning the central bank will raise rates to fight inflation:

Yet here we are. Of course, rates matter. They influence prices, but countless factors influence prices. Ultimately, when the cost of living perpetually increases year over year and then one day a currency collapses, there is only one factor to blame, and it’s not interest rates. The cost of living is up in America because the Federal Reserve created nearly $5 trillion in the last two years while M2 increased by nearly $7 trillion in the same amount of time. There really is no mystery to inflation; there are only stories that central bankers tell.

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Recommitting To a Much Older Resolution

12/21/2021Gary Galles

As Americans transition into 2022, many people will consider making New Year’s resolutions. If history is any guide, however, little of their focus will be on addressing the cognitive dissonance between personal resolutions to be good and do good for others and the many political resolutions to harm others to feather one’s own nest that always attract substantial support. Such reflection might benefit us by improving both our personal and political behavior. So perhaps what we could use are new years’ resolutions to recommit ourselves to wisdom we seem to have forgotten.

A good example comes from Leonard Read’s “To Each His Own,” written over a half century ago in his Accent on the Right. Its focus was that the biggest problems that arise with government, as well as some of the biggest problems we face as individuals, trace back to violating the commandments not to covet and not to steal, because coveting provides the impetus for seeking to benefit ourselves at others’ expense and stealing is the action triggered by that covetousness. 

The prevention of such violations is a central task of government, which can advance the general welfare by more effectively protecting all of our property from invasions by others, which better enables all the voluntary relationships property rights make possible. This is illustrated by the few enumerated functions of our federal government (e.g., national defense is protection of you and your property from foreigners), as well as the traditional functions of state and local governments (e.g., police, courts and prisons provide similar protection from your neighbors’ violations). But unfortunately, government has become a supposedly “respectable” way to violate what its job is to defend.

Consider Leonard Read’s insights into the importance of those two commandments for the existence of, or advances in, real civilization.

THOU shalt not steal! To know that stealing is wrong…implies knowledge of an alternative that is right…to each his own, usually referred to as private ownership. The ancient taboo against stealing presupposes that an individual has a right to the fruits of his own labor.

Recognizing as evil the taking of that which belongs to another certainly antedated The Decalogue by many centuries.

There is every reason to believe that the observance of this taboo, this respect for the principle of private ownership, marked the dawn of civilization. Whether this thou-shalt-not is honored or breached primarily determines the rise or fall of civilization.

True, “thou shalt not covet” is even more basic than “thou shalt not steal”; if no one coveted the possessions of another, there would be no thievery.

To refrain from stealing is the genesis of civilizations!...First, civilizations rise and fall with the rise and fall of individual freedom. Second, individual freedom rises and falls to the degree that private ownership--the absence of stealing--is respected and adhered to. Individual freedom is out of the question wherever and whenever private ownership does not prevail!

Creative outbursts--the mark of civilization--bear a direct correlation with increase in individual freedom.

This private ownership thesis rests, fundamentally, on [the] assumption…that one person has as much right to his life as any other. If an individual has a right to his life, it logically follows that he has an equal right to sustain his life, the sustenance of life being the fruit of one’s own labor or what can be obtained for it in peaceful exchange.

Not to steal is to respect life; it is to endorse and to hold sacrosanct the institution of private ownership.

No civilization could be born without the observance of this taboo. The institution of private ownership--to each his own--has spawned all civilizations!

Were [thievery] the general practice, we would quickly descend into another dark age. A resort to law would be useless; the gendarmerie also would be thieves!

While the institution of private ownership has been given lip service over the centuries, by the people and governments alike, actual observance has been more of form than of substance.

Few among us understand that private ownership can be universally endorsed in principle and completely obliterated in practice. Nor is it widely understood that the forcible taking of income, beyond that required for the principled functions of government, has the same eroding effects on private ownership as stealing. Legalizing the compulsory transfer of control still amounts to the destruction of private ownership.

Realize that individual freedom and, thus, the flowering of civilization are possible only where private ownership prevails. Merely imagine owning absolutely nothing required for your own livelihood. Your life would be in the hands of others.

Leonard Read saw the twin sins of coveting and theft as the greatest threats to real civilization. The latter, motivated by the former, undermines the fundamental basis of the voluntary arrangements that create civilization--private property. As a result, he recognized that the essential function of government was to maintain the principle of “to each his own,” and that any time government fails to defend that principle from others’ invasions, or itself commits such infringements, it impedes rather than advances civilization. That is “a fundamental maxim for civilized men,” reflected in the unalienable rights of our Declaration of Independence, a “new world” resolution that was to define American government. Supporting that far older resolution, increasingly violated rather than followed, would make an excellent resolution for the new year.

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Report from Zurich: Covid "Certificates" Are an Attack on Christmas

12/17/2021Jovana Diković

Zurich people like city lights, candles, and the enchanting smell of mulled wine with a pinch of cinnamon. Just one sip of it and it takes you to divine places, makes you feel happier and content, and peaceful. All worries seem to go away at least during this short time when in Zurich and elsewhere people are welcoming and celebrating Christmas together at traditional Christmas markets. The secret is not the cinnamon, however, but the holy spirit that arises around the end of the year.

"Now the God of hope fill you with all joy and peace in believing that ye may abound in hope, through the power of the Holy Ghost" (Romans 15:13).

But the verses of love and hope seem to now lead us to a closed door. The world today is not the one it was before yesterday. Not even the Romans, or later Ottomans, succeeded in ruining Christmas, but the European measures against the covid-19 pandemic hundreds of years later look like they may succeed. 

An unprecedented event occurred in Europe perhaps for the first time in its modern history: people now need a special vaccine "certificate" or ticket to celebrate Christmas in open public places. Even Jesus Christ himself would be completely powerless to enter. He would need the ticket to enter the public market that celebrates his birth.

The Christmas markets in the open public space have been converted into private clubs, resembling small "states" reserved only for those with the ticket. The space of joy, mulled wine, delicious street foods, and the enchanting smell of cinnamon have become a special privilege. These small states—the Christmas markets—are visually separated and confined from the rest of the open public space with metal fences. Elsewhere they have been protected with nice-looking but high wooden walls and wooden doors with kind gatekeepers who admit visitors after checking the validity of their tickets. Like every state, the Christmas markets have their bodyguards, some armed with machine guns like in Germany and others equipped with corpulent arm muscles enough to scare and chase away any potential transgressor like in Switzerland.

While wandering around Zurich I passed by several Christmas markets and wondered who hatched the idea to gate the festive open public space and make it reserved for those with the covid certificates.

"I appeal to you, brothers, to watch out for those who cause divisions and create obstacles contrary to the doctrine that you have been taught; avoid them. For such persons do not serve our Lord Christ, but their own appetites, and by smooth talk and flattery they deceive the hearts of the naive." (Romans 16:17–18).

When the idea of closing off these public spaces through covid certificates first emerged in September 2021 in Switzerland, the crisis managers already knew that introduction of certificates was built upon deceptive claims. The public was fed assurances that the certificates would slow down the transmission of the virus and, most importantly, would prevent the outbreak of new infections that might overwhelm hospitals well before Christmas and winter holidays. Yet, nothing of this sort has happened, as the current situation vividly demonstrates. And there's no evidence the closed-off Christmas markets are the reason. 

In any case, these new "tickets to freedom," as many call covid certificates, will likely ruin not only Christmas but the very idea of the public space and its meaning. By converting long-cherished public gatherings into private state-controlled activities subject to the approval of chief medical crisis managers, we deprive people of what countless Swiss have long considered intrinsic to living in an open society: the right to Christmas, joy, happiness, and breathing the open air.

The Christmas bells will ring soon, and we ought to ask ourselves whether everything—including the most precious and holy elements of life—will eventually be subjected to the provisions and whims of the emergency state in times to come.

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Rational Markets, Irrational Politics

“Government is that great fiction, through which everybody seeks to live at the expense of everyone else.”

~ Frederic Bastiat

If everyone was irrational all of the time we would be in big trouble. You’d never know when someone was suddenly going to swerve off the road for no apparent reason and drive into a building, or start babbling to you in tongues over the phone when all you wanted to do was order a pizza.

(I will define, for our purposes, rational as: having and acting upon beliefs that are in accordance with reality.)1

That being said – people are irrational enough of the time, that behavioral economists are never done telling us that they are not suitable for a market economy and need regulations to “nudge” them in the right direction. They illustrate the point with examples such as the fact that if you want to motivate someone to run you are better off giving them $105 dollars a week and fining them $15 a day every day they don’t run, than rewarding them with $15 a day every day they do run — even though these things essentially amount to the same thing. So, naturally, we need policymakers to save us from ourselves and make us do the right thing. The irony of this position is that it presupposes that people are rational enough to respond to the incentives the behavioral economists want to mete out to them. Meanwhile, entrepreneurs have been going more to devise apps that interphase with human psychology and help them adopt better habits than governments ever have! After all, it was the market that gave us Fitbit, mindfulness apps, nicotine gum, calendar apps with built-in alarms to make sure we don’t forget appointments; the list goes on and is ever increasing.

The Market Rewards Rationality

Meanwhile, for the main part, the market defends us against the consequences of the irrationality of others.  If someone was irrational at all times in all respects, they could not meet the demands of life or sustain themselves, therefore they would either be dead, under the care of others, in a mental institution, or in prison. So, while no one is rational all the time, most people are apparently at least rational enough of the time to exist within a society.

The great thing about the market is, as far as we are concerned, others only need to be rational upon the basis we deal with them. My mechanic might be a raving lunatic who drives his wife up the wall (no pun intended) with his crazy theories about the flat earth and interdimensional big foot people when he is at home, but so long as he is rational when it comes to the operations of fixing my car, it need not be any concern of mine. The pizza delivery guy could have views on race that most people find abhorrent, and I would never even know so long as he delivered it on time! The architect hired to design a bridge for a new highway might be a fanatical communist who thinks all property should be publicly owned, but as long as he is rational enough to follow the laws of physics when it comes to the blueprints, the bridge won’t be built upside down and will not collapse under the weight of the vehicles crossing over it. No one is remunerated on the market for doing irrational things, for example, bringing Squid Waffles to market. No one is interested in buying or eating Squid Waffles. Therefore, they don’t exist.

Political Institutions, Unlike Markets, Reward Irrationality

Now, need I point out, that none of this is the case when it comes to the alternative to the market, which is the political process. All of a sudden everyone’s crazy, irrational views that were none of my business become very real problems to me, because they are going to entre the voting booth and try and model a society that is fashioned based upon them. Someone might even lobby for a government subsidy to open up the first ever Squid Waffles diner! Sound crazy? Well how come the government both subsidizes and taxes tobacco at the same time? This is seemingly “irrational” but it makes sense when you understand that one lobbying block wants tobacco farmers to remain in business, and another wants people to smoke less.

While people’s performance on the market is tied to their rationality, ie., the fact that their views conform to reality and therefore they can deliver the desired results, there is no such failsafe at the ballot box. In fact, as the public choice theorists have been pointing out to us, it’s rational for voters to be ignorant about abstract topics like economics, political science, sociology, statecraft and basically anything necessary to cast a good vote, because learning the facts is time consuming and costly with very few payoffs.2

Typically, when you go into the world with irrational views that affect your day-to-day life you will be met with negative consequences. If you have irrational views about eating, you will get sick; if you have irrational views about how to treat your spouse, you will have unpleasant arguments or even a divorce; if you have irrational views about how to run a business, you will soon go bankrupt. In other words – reality provides a corrective against irrational views, or at least tries to!

The dirty secret about government is that replacing the market with its “democratic” control – be it public institutions or regulations – ends up removing this corrective mechanism and encouraging irrational behavior. No one wants to suffer the negative consequences of their own irrational behavior, whether it be an illness resulting from not having taken care of their health, or having a child they can’t support, or setting up a business to sell a line of products for which there is no demand. But democracy is inherently a system where people can make bad decisions and then vote to expropriate the consequences of those decisions to everyone else via the tax system. Those people who conform to reality by building products and providing services that meet the real needs of other people will essentially be punished for good behavior when the tax man comes around to expropriate their gains to pay for rent seekers and vagrants. This creates a tendency towards more costly, irrational behavior and less beneficial, rational behavior in society relative to what there would be on a free market. Over the long term, everyone will be disadvantaged on the whole, including those who seemingly profit from exporting the negative economic consequences of their actions to the body politic because the society they live in will be far less prosperous.

  • 1. I note that some economists, following Ludwig von Mises, take the position that people are always rational. What they mean by that is that all human behavior is goal-directed behavior and that when someone makes a choice they are choosing what they think will make them achieve that goal. (Mises: “A historian can say... In invading Poland Hitler and the Nazis made a mistake... All that another man can say about it is: I would have made a different choice.” – Theory and History) In my view that is a very specialized usage of the world rational, so I am going with the more commonly used understanding of the term. 
  • 2. See, for example, Caplan, B. (2007) “The Myth of the Rational Voter.”
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Robert Wenzel, RIP

05/27/2021David Gordon

I am sorry to have to report that Bob Wenzel has passed away. He was the editor and publisher of the popular websites Economic Policy Journal and Target Liberty and also published an investment newsletter. I met Bob many years ago at a Mises Institute conference and was immediately impressed by his enthusiasm for Austrian economics and libertarian theory.  He would throw himself into things with unmatched tenacity; he always wanted to find the inside story on events and usually succeeded in doing so. In my many conversations with him, his quick intelligence was apparent. His interests ranged from the fine points of the Non-aggression Principle to the fallacies of Modern Monetary Theory. He was one of the leading opponents of Covid-19 masks and of compulsory vaccinations.  In my last conversation with him, he mentioned a story he was pursuing about a well-known libertarian activist. His final words, “Wow, wow, wow!” echo in my ears. I will miss him.

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Restaurant Revitalization Fund: Government Remaking American Society

The Small Business Administration creation of the Restaurant Revitalization Fund (RFA) under the American Rescue Plan Act is another government program in response to the covid pandemic that has the potential for abuse and misuse, similar to the Paycheck Protection Program (PPP). However, what is even more troubling about the RFA is the increased politicization of the application process through the adding of eligibility criteria on race and gender in a bureaucratic overreach. The RFA is the next step in government re-creating American society in a new image, an image of division based on racial and gender group mentality.

The RFA provides funding to help restaurants and other eligible businesses keep their doors open. The program provides restaurants with funding equal to their pandemic-related revenue loss up to $10 million per business and recipients are not required to repay the funding as long as funds are used for eligible uses. The RFA is another example the “rescuer twice over” policy, in Hoppe’s words, of shutting down businesses over covid fear, saving the general public from the pandemic, while at the same time rescuing businesses from bankruptcy by giving away money at a cost to taxpayer. Even more concerning is the addition of new eligibility criteria based on racial and gender group. It is an attack on the core principle of equality when the restaurant revitalization fund states:

SBA will prioritize awarding funds to small businesses at least 51 percent owned and controlled by individuals who are women, veterans, and/or socially and economically disadvantaged individuals.

The focus of the RFA on prioritizing funding based on business characteristics that have nothing to do with the ability to serve customers is bizarre. How do businesses qualify for the RFA? An applicant must self-certify on the application that they meet eligibility requirements for a socially and economically disadvantaged businesses? According to the SBA website:

  • Socially disadvantaged individuals are those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities.
  • Economically disadvantaged individuals are those socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same business area who are not socially disadvantaged.

According to an article by Inc. the SBA received 266,000 applications requesting $65 billion. About 147,000 applications came directly from women, veterans, and socially and economically disadvantaged business owners, requesting $29 billion.

The core principle of equality is put ad absurdum when a government program creates a priority group for applicants with a clear preference for groups of society over other groups that have nothing to do with the ability to provide services to consumers.

Government officials in the Small Business Administration do not seem to understand competition in a market economy or the role of government should play in the market. Officials in the SBA should read what Mises wrote in Human Action on competition, which offers a clear answer on how the RFA eligibility criteria are counter to a free market. Mises attacks governments’ willingness to interfere in the market when he writes,

[C]atallactic competition is not open to everybody in the same way. The start is much more difficult for a poor boy than for the son of a wealthy man. But consumers are not concerned about the problem of whether or not the men who shall serve them start their careers under equal conditions. They only interest is to secure the best possible satisfaction of their needs. (p. 276)

Consumers only care for good food and good service when frequenting a restaurant or bar. Consumers generally do not care what the ownership structure of the business may or may not be, because as Mises writes about consumers:

They look at the matter from the point of view of social expediency and social welfare, not from the point of view of an alleged, imaginary, and unrealizable “natural” right of every individual to compete with equal opportunity.

In all fairness, the Restaurant Revitalization Program, grants “more fortunate” restaurants that have the misfortune to be owned by more than 50 percent “more fortunate” owners to apply for a grant after the first twenty-one days. So, for example, a restaurant owned by a recent female immigrant to this country that is backed by wealthy investors who strongly believe in her idea to fund her establishment is somehow less desirable than a restaurant owned by a majority of females. How do you even self-certify that you have been subjected to racial or ethnic prejudice or cultural bias or that you are a socially disadvantaged individual? Do government officials truly believe that by prioritizing certain businesses based on the ownership structure, consumers will be better served? By introducing of those eligibility criteria, government only serves political interests at the cost of less fortunate businesses with the “incorrect” ownership structure.

In Profit and Loss Mises attacks the idea of a government bureaucrat interfering in the production decision when he writes:

Entrance into the ranks of the entrepreneurs in a market society, not sabotaged by the interference of government or other agencies resorting to violence, is open to everybody.

But more importantly, Mises makes it clear that businesses providing goods and services demanded by consumers will not have issues with funding:

Those who know how to take advantage of any business opportunity cropping up will always find the capital required. For the market is always full of capitalists anxious to find the most promising employment for their funds and in search of the ingenious newcomers, in partnership with whom they could execute the most remunerative projects.

Bureaucrats at the SBA believe they are far better equipped to make decisions about what businesses should be funded than the market. However, Mises writes that:

The task of the entrepreneur is to select from the multitude of technologically feasible projects those which will satisfy the most urgent of the not yet satisfied needs of the public. Those projects for the execution of which the capital supply does not suffice must not be carried out.

The market is always crammed with visionaries who want to float such impracticable and unworkable schemes. It is these dreamers who always complain about the blindness of the capitalists who are too stupid to look after their own interests.

The SBA and government in general would be wise to follow Mises’s conclusion:

The consumer chooses what, as he thinks, satisfies him best. Nobody is called upon to determine what could make another man happier or less unhappy.

The only question remaining is: Why do government officials feel the need, the right, the obligation to interfere in the market? The answer may be found in Robert Higgs’s book Against Leviathan: Government Power and Free Society. Government bureaucrats have the tendency to take advantage of “emergencies,” in this case, the covid-19 pandemic, to consolidate and grab even more power. Power to reshape the American society to their liking and preconceived ideal world of justice. The Restaurant Revitalization Program may be the first step in the governments’ desire to force individuals and business into a “perfect” society.

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