Power & Market
Round 2: Reading the Fed’s Balance Sheet
Yesterday we reviewed the Fed’s Statement of Operations finding many peculiarities such as: a $16 billion capitalized loss, $2 billion spent by the Board of Governors, and $1.2 billion paid as a dividend to the banks. It also illustrated how the Fed receives money from the government, pays banks and administration fees, thereby grinding down income, only to remit far less money back to the government than it took in.
As for the balance sheet, readers should be familiar with the chart, as of yesterday’s release it stood at $8.593 billion, per below:
Further details are on page 6 of the financial statements, showing a year-end 2022 balance sheet, only four months ago, of $8.569 billion.
The brunt of the Fed’s assets are US Treasuries (UST) of $5.729 trillion and Mortgage-Backed Securities (MBS) of $2.697 trillion, accounting for 98% of the total.
But what does it mean to say the Fed owns (rounding down) $8 trillion in UST and MBS?
Consider it as an IOU the Fed holds, literally pieces of electronic paper that says the United States Government and countless mortgage holders owe the Fed $8 trillion plus interest.
The balance sheet is primarily an accounts receivable balance, perhaps the world’s largest, which is to say that the Fed owns debt, obtained by creating $8 trillion out of thin air and loaning it out. This $8 trillion manifests itself as an increase to the money supply since money must go somewhere and is always held by someone.
A large part of this money has gone into fighting endless wars on terror, drugs, and poverty. It has even gone on to fight proxy wars, funded drone strikes across the globe, as well as post-secondary education. Rather than alleviate poverty, it creates it, due to the inflation of the money supply and the currency debasement that follows. The boom-and-bust cycle it creates, and the asset bubbles it inflates can also be attributed to this $8 trillion.
On the other, seldom talked about side of the balance sheet, are the liabilities:
The liabilities primarily consist of money the Fed owes to others.
We see $2.889 trillion in repurchase agreements, i.e., money owed to financial institutions and $2.684 trillion owed to depository institutions, which the Fed pays interest on. Only $446 billion was held in the Treasury’s general account.
One head scratcher is that there were only $2.258 trillion in Federal Reserve notes outstanding, which Note 3k explains as the “currency circulating of the United States." When this $2 trillion is contrasted against the M2 money supply of $21 trillion, it’s safe to say that our money has never been in the bank.
The balance sheet invokes many things, one of which is the realization that even though the Fed is not a bank, like a bank, it barely has any money of its own. But it makes sense because anyone having the ability to create trillions of dollars on demand probably wouldn’t keep trillions of dollars in a secured vault either. Most of the money the Fed creates is used to buy assets, which typically means buying debt. This is done in a roundabout way using intermediaries, but in effect the Fed finances the US government and mortgages by increasing the supply of money and credit. Conversely, it’s odd then that the Fed borrows from and pays interest to banks.
One can only hope that the exorbitant costs, both measurable and immeasurable, will one day be understood by the public. If the income statement shows how money is funneled out of the public purse, then the balance sheet shows the malicious monetary technique that turned counterfeiting into a public good. Truly, there would be a revolution before tomorrow morning if everyone understood what government has done to our money.
Review of Taxes Have Consequences: An Income Tax History of the United States
Taxes Have Consequences: An Income Tax History of the United States,
By Arthur B. Laffer, Brian Domitrovic, and Jeanne Cairns Sinquefield
Post Hill Press, 2022; 440 pp.
Calls to raise taxes on the rich are constant among today’s progressive activists. Progressives argue that increased tax rates would only impact those in the top one percent, without hurting the economy. In Taxes Have Consequences, economists Laffer, Sinquefield & historian Domitrovic partner to destroy this progressive myth with facts and logic. The book provides an in-depth historical account of the United States tax system and its impact on economic performance over the years.
The book is laid out in chronological order. The first three chapters lay out the theory behind the relationship between tax rates and tax revenues. The authors discuss the various means by which those with high incomes can shelter their earnings from taxation. This includes methods such as paying executives with deductible non-cash compensation like luxurious offices and expensive, fancy lunches, as well as tax-free interest income on municipal bonds. A whole chapter is also devoted to defending the Laffer curve - the concept that as the government raises tax rates from zero, revenue will rise, however, at a point, tax revenue will fall because the incentive to earn has been reduced sufficiently enough that it outweighs the increased percentage of earnings taxed. The rest of the book reads like a historical account covering the time period from the ratification of the 16th Amendment in 1913 to the Trump tax cuts of 2017. The chapters are broken up into periods of either tax cuts and growth, and periods of tax hikes and stagnation. The income tax era has seen five periods of tax cuts and economic growth and four periods of high taxes and economic stagnation.
The first of these were the tax cuts of the 1920’s following the end of World War I and the winding down of massive military spending. The top income tax rate was cut by more than half, resulting in high rates of economic growth as well as an increase in tax revenues collected from those who are subject to the tax rate. This period was followed immediately by the Great Depression. Laffer et al lay the Great Depression at the feet of bad tax policy. They claim that the initial decline in GDP was triggered by tax increases, starting with the passage of the Smoot-Hawley Tariff in 1930—the largest peace-time tariff in American history. Adding insult to the economic injury brought by the high tariffs, Presidents Hoover and Roosevelt both presided over significant hikes in income tax rates, ultimately bringing the top income tax rate above 70 percent, a level not seen since World War I.
Following American entry into World War II Congress hiked tax rates again, this time pushing top marginal rates to 94 percent. However, after the war, tax rates were lowered below their pre-war level due to changes in the tax code that allowed for married couples to file jointly. This effectively reduced most high earners rates by as much as 30 percent in 1948. However, tax rates began to creep back up, with the top marginal tax rate reaching again into the 90 percent range by the late 1950s. These high tax rates contributed to a turbulent business cycle, causing frequent recessions. President Kennedy ended this cycle when he moved to cut the top income tax rate down to the 70 percent range. While this tax cut was not enacted until after his death, Kennedy’s tax cut package, which also included tariff reductions and enhanced investment incentives, led to the booming economy of the 1960’s.
A similar series of events occurred in the 1980’s with the Reagan tax cuts. Throughout the 1970’s the economy remained in a constant state of stagflation. With the economy in such a poor state, supply-side economists, including Laffer, started to push for lower taxes as part of a pro-growth agenda. In the 1980’s, President Reagan signed into law a series of tax cuts that resulted in rapid economic growth. In strikingly bipartisan fashion, Congress cut tax rates throughout the decade, finally reaching what Laffer identifies as “nearly a flat tax” in the late 1980s, with just two income tax brackets: 15 percent and 28 percent. In addition, tax brackets were indexed for inflation and capital gains and estate tax rates were significantly cut as well. The result was a long economic boom that persisted with minimal interruption until the Great Recession of 2008-2009.
For a history book, yet alone an economic history book, Taxes Have Consequences is surprisingly readable. Each chapter is broken down into segments, each with their own subheading. This makes for a much easier reading experience. The authors avoid jargon and technical terms so the average layman can easily follow and understand the text.
While the authors are effective at making their case that good tax policy is fundamental to economic success, they overstate their case. Yes, taxes matter; but they are not the only thing that matters. While a book about taxes cannot be expected to also cover all the various factors of growth, there is almost no homage to the idea that anything else might influence growth. For example, Laffer lays the economic stagflation of the 1970’s firmly on the high tax rates of that period, without mentioning the regulatory and monetary factors that surely played a part. During the 1970’s, the United States saw the creation of no fewer than 20 new regulatory agencies, such as OSHA and the EPA. Furthermore, the Federal Reserve’s excessive money creation was inarguably culpable for the sky-high rates of inflation that plagued the US through the early 1980s. The bad regulatory and monetary policy environment surely bears some responsibility for the stagflation. On the flipside, the strong economy of the 1980s was rooted in more than just low tax rates. As Federal Reserve chairman, Paul Volcker quashed double-digit inflation with painful interest rates hikes through 1982.Congress had started to make bold moves to deregulate trucking, airlines, and telecommunications before Reagan was sworn in as president. Lower taxes helped spur growth in the 80s, but so did sound monetary and regulatory reform. Laffer’s focus on taxes can come off as monomaniacal and provides insufficient recognition of other important aspects of the overall policy mix.
This oversight notwithstanding, I would highly recommend Taxes Have Consequences. For such a dry subject as taxes, it is very digestible. While taxes are not the only relevant factor in a nation’s prosperity—as the authors sometimes seem to suggest—the book provides an excellent case that tax rates (even those solely on the rich) have major ramifications. Raising taxes on those with the highest incomes will not lead to a better standard of living for the middle class. Laffer et al don’t make the case that there should be no taxes on the wealthy, but that attempting to extract large sums of money from them through high taxes is misguided and economically destructive.
Recession Coming to the UK
A house of cards. A sandcastle. Dominoes. Lots of imagery available to describe our global, socialist economic system. Waiting for a crisis is one thing, considering a way out is another. Watching news from other countries provides signs of things to come which helps diagnose the worldwide problem. From CNBC:
The U.K. economy contracted by 0.2% in the third quarter of 2022, signaling what could be the start of a long recession.
Even in other countries, we see the same will they or won’t they statistical revision game being played, as explained:
The contraction does not yet represent a technical recession — characterized by two straight quarters of negative growth — after the second quarter’s 0.1% contraction was revised up to a 0.2% increase.
If it weren’t for the revision of the Q2 data, the UK would be in a technical recession. What does it matter? Recession or no recession, anecdotally, it’s fair to say few are confident about the state of their nation or economy.
The learning opportunity comes from seeing how life in the UK mirrors life in America, with financial experts and planners offering few solutions (that stem from the 80’s) to monetary problems.
The country faces a historic cost of living crisis, fueled by a squeeze on real incomes from surging energy and tradable goods prices. The central bank recently imposed its largest hike to interest rates since 1989 as policymakers attempt to tame double-digit inflation.
In addition to rate hikes:
U.K. Finance Minister Jeremy Hunt will next week announce a new fiscal policy agenda, which is expected to include substantial tax rises and spending cuts. Prime Minister Rishi Sunak has warned that “difficult decisions” will need to be made in order to stabilize the country’s economy.
One economist was also cited saying:
...the sharp rise in mortgage rates, and the very early signs of house price declines, point to weaker building activity through next year.
In response to rising prices, we’re offered rising rates, rising taxes and spending cuts, with falling home prices as one of the many side effects. It must be mentioned that these economic problems cannot be fixed by a magical combination of the best tax policy coupled with a mythical optimal interest rate.
Those who seem ignorant of the Austrian Business Cycle Theory, like those in the mainstream media, always leave something to be desired, i.e. an explanation for these periods of inexplicable economic booms followed by periods of inexplicable economic bust.
They normally blame price increases on some exogenous shock, as CNBC blames the problem on an increase in “surging energy and tradable goods prices,” yet this lacks depth and honesty. To them, for some unknown reason, all prices just randomly increased.
It compounds, as to solve the mystery, central banks must then raise rates. With little proof of past successes nor assurances of future successes, we’re told that some time, normally around 30 to 40 years ago it worked swimmingly.
There probably is a technical recession in the UK already, as there probably is one in America. That statisticians play these games to avoid giving the title of recession is not surprising. What is surprising is just how long this game has been played. Ultimately, few remedies are available. Either we change the system from within, or remove ourselves from the system entirely; if not by internal change or external flight, eventually we’ll be consumed by it.
Risking Nuclear War for Ukraine? Why?
The Bureau of Democracy, Human Rights and Labor (a branch within the US State Department) releases annual ‘Human Rights Reports’ on 194 different countries around the globe. Their 2021 report for Ukraine was released in April of this year. Despite its relevance to whether US intervention in the RU-UA war is merited, the report received zero media coverage.
The report highlights “serious abuses” in the Donbas region citing multiple sources: “International organizations and NGOs, including Amnesty International, Human Rights Watch, and the HRMMU, issued periodic reports documenting abuses committed in the Donbas region on both sides of the line of contact.”
Notable examples of ‘significant human rights issues’ listed by the bureau include “extrajudicial killings by the government or its agents,” “violence against journalists,” “serious acts of government corruption,” and “violence motivated by anti-Semitism.”
Corroborating the State Department’s classifications is the Heritage Foundation, a pro-interventionist conservative think tank founded in 1973. For nearly three decades, the foundation has maintained its Index of Economic Freedom which defines economic freedom as the “fundamental right of every human to control his or her own labor and property”. For the 2021 index, not only does Ukraine rank 35 spaces below Russia at #127 on the leaderboard, it’s in another category. Russia’s economy is deemed to be “moderately free”, a category shared by first world nations like Italy, France, and Spain, while Ukraine’s economy falls within the “mostly unfree” bracket.
I encourage readers to read the full list at the end of page 1 of the report and compare it to the State Department’s report on Russia. The assessments are nearly identical. It’s worth asking, if our own State Department classifies these two nations as equally abysmal defenders of basic human rights, why on Earth should we care about who governs their disputed territories?
The only material differences between the two reports are related to Russia’s unfair elections, an issue the department does not attribute to Ukraine despite the Obama Administration’s interventions into their elections in 2014. That said, there is no question that Russian elections are less-than-legitimate. Despite Putin’s popular support (which has been cited in numerous western outlets), he certainly shapes the system to his advantage - whether it’s extending his legal term limit, imprisoning opponents, or outlawing online speech that demonstrates “disrespect” towards “state authorities”.
However, even granting that Ukrainian elections are likely freer and fairer than those in Russia, if our goal is to defend democracy, why have we refused for almost a decade to recognize the secession of Crimea?
Months after the widely disputed Crimean referendum to join Russia which passed in early 2014, Gallup, one of the oldest and most respected polling institutions in the US, in partnership with the Broadcasting Board of Governors, a US federal agency whose stated mission is to “promote freedom and democracy and to enhance understanding by broadcasting accurate, objective, and balanced news and information”, polled Crimean residents on whether the referendum reflected their views. Not only did 82.8% of the population confirm that it was, but 68.4% of ethnic Ukrainians did as well.
The following year, GfK, a German-based data and analytics behemoth, conducted a follow-up poll asking Crimean residents “Do you endorse Russia’s annexation of Crimea?” to which 82% responded “yes, definitely” with only 2% answering with a definitive “no”. One cannot claim to be defending democracy while aiding and abetting the Ukrainian government’s ongoing incursions into Crimea. David Sacks sums it up best:’
Ok, so if not protecting democracy or improving the quality of life, what are we doing? Can we simply not tolerate an infringement on sovereign borders?
If that were the case, why then does the US not only allow but actively support the United Arab Emirates and Saudi-backed invasion of Yemen that began in 2018 and continues today? Regardless of the origins behind this war, it was not sanctioned by the Yemeni government and thus an infringement on their sovereignty. It’s the Middle East so it doesn’t matter?
The real reason we are involved in Ukraine is not to help their civilians. It is not to preserve democracy. It is not to preserve national sovereignty. It is what US officials like Defense Secretary Lloyd Austin and Congressman Dan Crenshaw have both admitted. The true purpose is to ‘weaken Russia’. A goal in direct contradiction to “Standing with Ukraine”. This goal uses their home as our playground. It uses civilian lives as our propaganda. It does nothing for the ordinary Ukrainian whose life would experience no material difference if Russia were to govern Crimea (as it has done for nearly a decade with the approval of its inhabitants) or the Donbas (which has been mired in civil war for years with atrocities on “both sides”).
Oh yeah… and this goal also runs the risk of annihilating humanity.
Radley Balko Fired
Radley Balko, a defender of liberty best known for his book Rise of the Warrior Cop: The Militarization of America's Police Forces, has been fired by the Washington Post. Balko writes: "So after nine years, I'm being let go by the Washington Post. This is disappointing but not surprising. In recent years, the Opinion leadership has made it increasingly difficult to do the reporting & in-depth analysis I was hired to do -- in favor of short, hot takes."
Reflections on Last Friday’s Jobs Report: The News Still is Bad
Stocks reacted positively to the jobs report released Friday morning before selling off sharply that afternoon on geopolitical fears. The report, which showed non-farm payrolls increased by 315,000 for the month of August, was largely in line with the expectations of market watchers, with major surveys held in the run-up to the release of the report yielding predictions of roughly 300,000.
Of itself, the rally was somewhat unexpected since the report seemed to back the hawkish stance reiterated by Federal Reserve Chair Jerome Powell at Jackson Hole last week. At the meeting he restated the Fed’s commitment to further tightening. The implied probability of Fed futures data has shifted accordingly, with oddsmakers having raised the possibility of a further .75 point hike to 75 percent.
With various indicators suggesting inflation might be peaking or slowing, many over the summer had come to hope such data would convince the Fed to signal a readiness to ease up on tightening credit conditions. After all, the economy was slowing. For example, while the figures reported on Friday were in line with estimates, they were still well short of July’s half a million. At the same time, unemployment increased from 3.5 to 3.7 percent.
And, frankly, there are reasons to look askance at these numbers. For one thing, they are likely to be revised, with like reports over the past two decades seeing an eventual average adjustment of plus or minus 55,000. If the report was “just right,” not too hot to stoke inflation, not too cold to stall the economy, such a regular adjustment would be problematic. In addition, there are large discrepancies between federally withheld taxes and purported hiring, and between the Labor Department’s household survey and the Census Bureau’s employer survey used in headline unemployment numbers – both of which suggest the labor market is actually much weaker than the headline numbers make out.
For example, the Census Bureau’s unemployment figure does not include those who after becoming unemployed eventually give up looking for work and drop out of the labor market.
As the above figure illustrates, the Great Financial Crisis and pandemic-era have led to serious declines in overall labor force participation rates. Millions of workers never returned following the shuttering of the economy in response to COVID, amplifying what was already predestined to be a period of demographically induced labor market tightness. As the legions of America’s baby boomers retired, economists had predicted much of the current labor market predicament decades ago.
A shortage of workers, continuing supply chain disruptions, and epic monetary mismanagement having coincided, it is little wonder retail sales and housing are slowing; critical commodities, such as copper and oil, are trading down; and consumer confidence is just up from its lowest level in 70 years of measurement.
With signs pointing increasingly negative, talk of a “soft landing” is going the way of “transitory” inflation. Seemingly determined not to back down, to regain price stability, a “growth recession” is now the target. Far from backing off rate-hikes for fear of impending recession, as it did in 1974, Fed officials now openly admit that tightening may continue into 2023, with rates being held at that level for some time after.
With the chances of a decrease in the size of September’s rate hike, from .75 bps to .50 bps, getting smaller, and stocks still expensive by historical standards, as measured by the price to earnings ratio, a sell-off on the jobs report Friday would have seemed more in line with the broader macroeconomic conditions.
But whereas job numbers can be massaged or spun, the response of markets to word that gas supplies to Germany from Russia were going to be suspended for an indefinite period just hours after the G7 announced their price capping strategy, was a reminder that some news is just unambiguously bad.
As the war in Ukraine grinds on and the global economy weakens, we can expect more such news.
Rothbard was Right about Water Fluoridation
Water fluoridation was pushed in the United States as a public health policy for interventionist gain. The medical and environmental research has since shown that the alleged dental benefits to water fluoridation are outweighed by negative effects on other systems in the body. This compulsory measure has not only violated the rights of consumers, but it is also antithetical to human health.
Murray Rothbard in his 1992 essay Fluoridation Revisited uses his training as a historian to weave an engaging yet accurate narrative of who did what for who's benefit in the push for water fluoridation in the mid-20th century.
Of particular interest to me is the role the Mellon Institute, ALCOA's research lab in my home of Pittsburgh, played in bringing about compulsory water fluoridation:
In 1931, the PHS sent a dentist named H. Trendley Dean to the West to study the effect of concentrations of naturally fluoridated water on people’s teeth. Dean found that towns high in natural fluoride seemed to have fewer cavities. This news galvanized various Mellon scientists into action. In particular, the Mellon Institute, ALCOA’s research lab in Pittsburgh, sponsored a study in which biochemist Gerald J. Cox fluoridated some lab rats, decided that cavities in those rats had been reduced, and immediately concluded that “the case [that fluoride reduces cavities] should be regarded as proved.”
The following year, 1939, Cox, the ALCOA scientist working for a company beset by fluoride damage claims, made the first public proposal for mandatory fluoridation of water. Cox proceeded to stump the country urging fluoridation. Meanwhile, other ALCOA-funded scientists trumpeted the alleged safety of fluorides, in particular the Kettering Laboratory of the University of Cincinnati.
During World War II, damage claims for fluoride emissions piled up as expected, in proportion to the great expansion of aluminum production during the war. But attention from these claims was diverted when, just before the end of the war, the PHS began to push hard for compulsory fluoridation of water. Thus the drive for compulsory fluoridation of water accomplished two goals in one shot: It transformed the image of fluoride from a curse to a blessing that will strengthen every kid’s teeth, and it provided a steady and substantial monetary demand for fluorides to dump annually into the nation’s water.
One interesting footnote to this story is that whereas fluorine in naturally fluoridated water comes in the form of calcium fluoride, the substance dumped into every locality is instead sodium fluoride. The Establishment defense that “fluoride is fluoride” becomes unconvincing when we consider two points: (a) calcium is notoriously good for bones and teeth, so the anti-cavity effect in naturally fluoridated water might well be due to the calcium and not the fluorine; and (b) sodium fluoride happens to be the major by-product of the manufacture of aluminum.
30 Years Later
As it turned out, the research has shown that the nondental effects of water fluoridation in humans is harmful, according to health literature. Professor Philippe Grandjean published a 2019 meta-analysis on the subject titled Developmental Fluoride Neurotoxicity: An Updated Review in the Journal of Environmental Health. Multiple large studies have shown that fluoride in early development “can result in IQ deficits that may be considerable.”
As for the prevention of dental cavities, Grandjean and others propose topical use of fluoride for that purpose, rather than systemic ingestion of fluoride.
Calculating the Yearly Population Level IQ Loss in Newborns due to Water Fluoridation in the United States
Here I will attempt to calculate a rough estimate for the net IQ loss in Newborns in 2020 in the United States, using the causal research combined with population figures and data on overall water fluoridation levels in the United States. Perhaps of more interest to curious readers would be a similar calculation for your local municipality that fluoridates its water.
About 3.6 million babies were born in the US year 2020, and 73 percent of the US population "receive water that has the optimum level of fluoride recommended for preventing tooth decay." And that "optimum level" per the CDC is 0.7mg/L which is equal to 0.7 parts per million. And in prenatal urine the benchmark concentration level (BMCL) to cause a 1 IQ point drop for children is 0.2mg/L (at a confidence level of 95 percent). [A big thank you to Professor Philippe Grandjean who pointed me to this article after I read his 2019 meta-analysis on the topic.] And we can assume this relationship is linear above the BMCL, as that best approximates the current data. There is a 1:1 relationship of water concentration to urinary concentration of fluoride. Therefore, pre-natal IQ loss from fluoride is 3.5 points per child whose mother drinks primarily fluoridated water at "optimum levels".
If that 73 percent of the US population's water has the "optimum level" of fluoride, translates to 73 percent of Pregnant women getting the "optimum level" of fluoride. Then 73 percent of newborns each year are experiencing this 3.5-point IQ deficit, with 73 percent of the 3.6 million babies born in the US in 2019 being 2.628 million.
2.628 million newborns with an unrealized IQ potential of 3.5 points each means that: 9.198 million IQ points of newborns were lost due to water fluoridation in one year in the US.
Not only that, but this number also undercounts the total newborn loss of IQ due to water fluoridation because the water fluoridation in some areas is higher than the "optimum amount" of 0.7mg/L. In some areas it is lower than that "optimum amount" yet still higher than the BMCL (benchmark concentration level bound) for 1 point of IQ loss, which is equal to 0.2mg/L. However, we are only counting the 73 percent of the US population that receives water at that “optimum level” per the CDC of 0.7mg/L.
The ongoing newborn population IQ loss due to water fluoridation is a public health disaster. Not only is it harmful, but it also violates the Nuremberg Code of Medical Ethics. It is imperative that local authorities cease the fluoridation of municipal water supplies and leave medical decisions between individuals and doctors that have earned their trust.
RIP Ronald Sider: The Man Who Was Ground Zero for Modern Politicized Evangelical Christianity
When the term “evangelical” is tossed into the modern public square, it usually is accompanied by words like “Trump,” “January 6,” “right-wing,” “Christian nationalist,” “racist,” and the like. Like others who have spent their entire lives in the American evangelical subculture, I cannot say I have welcomed this step into the political arena in which arguments that should be nuanced suddenly are labeled black and white, and that all too often, we are told that the entire fate of Christendom depends upon the election of Candidate X.
This situation was not part of the American scene for most of the nation’s existence. In my formative years, no evangelical (or even fundamentalist) pastor would have openly endorsed a candidate from the pulpit (although some Protestant pastors did wonder aloud what would happen if the Roman Catholic candidate John F. Kennedy were to be elected).
All of that changed in 1972 when the Democrats nominated George McGovern for president. McGovern campaigned far to the left not only in his anti-war views (which many libertarians, including Murray Rothbard, gladly endorsed) but also in his opinions about economics or, to be more specific, the role of the state in a nation’s economy. While evangelical pastors and laypersons certainly had opinions about both men, preaching a gospel of Nixon or McGovern would not have been popular in the congregations.
However, a professor at an evangelical college Ronald Sider, who passed away recently, formed a group called Evangelicals for McGovern in which he claimed that McGovern’s platform could be considered Biblical in its social outlook. Christianity Today, in an obituary for Sider, noted:
Sider also became more politically active. He campaigned for George McGovern, founding Evangelicals for McGovern to rally support for the anti-war senator from South Dakota who was maligned by his many opponents as the candidate for acid, amnesty, and abortion.
According to historian David Swartz, Evangelicals for McGovern was the first evangelical group after 1945 to support a presidential candidate. Religious Right groups such as the Moral Majority and Christian Coalition had not yet organized, and though many prominent leaders such as Billy Graham supported President Richard Nixon, evangelical politics at that moment seemed “up for grabs.” Sider, along with people like Tom Skinner, Jim Wallis, and Richard Mouw, wanted to grab it. They believed Christians who loved Jesus and hated sin should exert their political will to oppose the war in Vietnam, law-and-order politics, and economic policies that aggravated poverty.
A year later, Sider and a number of hard-left activists wrote the Chicago Declaration, which condemned private enterprise in the United States, blaming capitalism for most social ills and calling for a vast expansion of the welfare state. In Sider’s view, the only possible Biblical position that a Christian could legitimately own was one of anti-capitalism.
In 1977, Sider wrote the book for which he was most famous, Rich Christians in an Age of Hunger, which I mentioned in a previous article about Christians and economics. I wrote:
Sider’s book looked at poverty in the world at that time and concluded that the only reason that Third World countries were poor was because North America and Europe were relatively wealthy. These countries were gobbling up the world’s resources unjustly and leaving nothing for the starving masses. Capitalism was the culprit, Sider argued, and while he did not agitate for outright socialism, he did call for a central power in the world to oversee massive wealth transfers, a worldwide welfare state.
The book fed well into the evangelical mindset of seeing the world in black-and-white terms. It also provided evangelicals, who were likely to be ridiculed by elites in academe, politics, and the media for their faith, a way to be relevant and to try to earn favor with those same elites for their newfound compassion for the poor. The book itself presented a simple, black-and-white view of wealth and poverty; people who had wealth had stolen from the poor, and there could be no other explanation.
Sider’s central message was that unless Americans, Canadians, and Europeans gave up their wealthy lifestyles and agreed to adhere to a simple life—and stop using so many resources—poverty and starvation would expand throughout the planet and rates of poverty would accelerate. He even prophesied that unless this was done immediately, it would be maybe a decade before Third World countries like India that had nuclear weapons would use them to blackmail the West into giving up their wealth.
In Sider’s world, the economy was purely zero-sum in which any gain by one person meant someone else was to be made worse off. He told a story about himself in which he excoriated his own choice of purchasing a suit for $50 because that sum of money could have kept a child in India alive for a year. Toward the end of the book (ironically, in a footnote) he called for almost total deindustrialization of the West, claiming that without large scale manufacturing and transportation, people would not have to work as many hours and would have much more time for leisure and games, and that such a move would also eliminate hunger in the developing world.
The book was wildly popular among evangelicals, including the Christian college where my father (and later I) taught. Sider had struck a chord with students, encouraging them to embrace socialism and to see that even though the political left despised Christianity, it was the left that held to the True Faith when it came to dealing with people in poverty. At that time, the publisher of the book, InterVarsity Press, was moving leftward, along with its parent organization, InterVarsity Fellowship, which had a strong presence among American college students. (I was involved in our IVF chapter at the University of Tennessee in the early 1970s.)
In the various tributes to Sider, he is universally praised for his social activism and his vision of social justice. Likewise, his political activism in nearly every U.S. presidential election was expressed in his organizing a “Evangelicals for…” with the Democratic Party candidate filling in the blank. (He did make an exception in 2000, voting for George W. Bush, who then promptly launched the nation into ruinous warfare.)
While Rich Christians was wildly popular (the best-ever sales by IVP), Sider never had to pay a price with his peers for being woefully wrong about free-market economics. In his world at Eastern University, which has long been known for its leftism, Sider was a rock star and he never had to confront the fact that his book, as the late Gary North well put it, was an attempt to make American Christians feel guilty for being alive.
By all accounts, Sider was a humble person and someone who surely would have been a good neighbor. I’ve never heard anyone speak ill of him personally. However, by openly politicizing the Christian faith, and more specifically tying the Christian faith to the outcome of upcoming elections, Sider did untold damage that will not go away in our lifetimes.
Recession Is Priced In. Stagflation Is Not
The market is betting on recession and subsequent Fed pivot. A sound bet… but there is one flawed assumption.
Dec 22 and Mar 23 Eurodollar futures have inverted. In layman’s terms, the market is predicting a Fed rate cut in Q1 of 2023:
Yet neither CPI nor PCE have declined to any meaningful degree:
The market expects a return to easy money but NOT because the Fed has reduced inflation and instead due to troubling economic projections:
Atlanta Fed predicts Q2 GDP growth to be -2.1% (a technical recession)
This is textbook Stagflation:
Gold ought to be a preferred Stagflation asset as its demand is less tethered to real economic activity than virtually all other commodities. Yet, gold mining stocks have taken quite the beating:
GDXJ making new 52-week lows on a day when ARKK rallies 9%:
Today’s ARKK action may be partially attributed to profit taking by the shorts. However, the current zeitgeist is that bad economic news = good market news and an assumption that unprofitable tech names ought to rally hardest given they took the biggest beating. This assumption is bogus.
When the Fed does pivot, if inflation has not yet been reigned in, while the drop in Treasury yields will elevate ALL asset prices, consumers will not have the disposable income to spend on services offered by most big growth names - They will not be purchasing the $121k Tesla (an ARKK holding) Model X and instead opt for the comparable Mercedes GLC at $54k. They will trim down entertainment subscriptions like Netflix, Hulu, Roku (an ARKK holding), Disney+, etc. They will spend less time shopping online, reducing the need for services like Square (an ARKK holding) - Too much income will be required for food, gas, shelter, and clothing. I know these names don’t rely on earnings and instead on “total addressable market” and “network effects”, but these metrics ultimately require ample economic activity to justify.
In such an atmosphere, Demand for a true inflation hedge will manifest. Crypto is superior to gold at subverting authority (something I write about here) but it's no safe haven, and folks struggling financially will not be able to stomach the volatility. Crypto outflows may be another boon for gold.
I’m not sure when the market will come to this realization. The prevailing assumption seems to be that the recession will cure inflation, but again, the recent Eurodollar pivot has been driven by economic output data - not inflation (which remains at 40 year highs). This said, it may take another elevated CPI print for this to set in.
I took out some call options on GDXJ. Historically, July is a good month for stocks so the timing was hard to pass up. Then again, the Fed may “break something” in the meantime so I’m maintaining majority cash.
Rising Interest Rates Are Revealing the True Damage Done by the Fed
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.