Power & Market
Former president Barack Obama is back. He kicked off a series of campaign appearances last week with a blistering attack on the Trump administration and said the Republican Party had “embraced a rising absolutism.” President Donald Trump deserves plenty of harsh criticism, but Obama’s indictment is akin to the kid who killed his parents and then sought mercy from the judge because he was an orphan.
Obama declared that“the biggest threat to our democracy is cynicism.” He also called for “a restoration of honesty and decency and lawfulness in our government.” But his eight years as president fueled the distrust of Washington that Obama now condemns.....
When Obama took office, the United States had the 20th-most-free press in the world, according to the Reporters Without Borders’ World Press Freedom Index. By 2016, it had fallen to 41st — worse than South Africa and barely ahead of Botswana. Obama appointees severely undermined the Freedom of Information Act.
“It should not be a partisan issue to say that we do not pressure the attorney general or the FBI to use the criminal justice system as a cudgel,” the former president said. Trump’s declarations about federal prosecutions are appalling. But while the FBI was investigating the legality of Hillary Clinton’s private email server, Obama repeatedly publicly declared that she had committed no crime.
The Inspector General report released in June revealed that, after a half-hearted probe, the FBI planned to absolve Clinton unless she openly confessed to wrongdoing when FBI agents finally talked to her. The stifled investigation of her email shenanigans helped assure her the Democratic Party presidential nomination and, indirectly, paved the way to a Trump presidency.
Read the full article at USA Today
President Trump recently imposed sanctions on Turkey to protest the Turkish government’s detention of an American pastor. Turkey has responded by increasing tariffs on US exports. The trade war is being blamed for the collapse of Turkey’s currency, the lira. While the sanctions may have played a role, Turkey’s currency crisis is rooted in the Turkish government’s fiscal and (especially) monetary policies.
In the past seven years, Turkey’s central bank has tripled the money supply and pushed interest rates down to 4.5 percent. While Turkey’s government did not adopt Ben Bernanke’s proposal to drop money from helicopters, Turkish politicians have taken advantage of easy money policies to increase subsidies for key voting blocs and special interests.
The results of the Turkish government’s inflation-fueled spending binge are not surprising to anyone familiar with Austrian economics or economic history. Turkey is now plagued with huge deficits, a collapsing currency, and a looming economic crisis, making it the next candidate for a European Union or Federal Reserve bailout.
Turkey’s combination of low interest rates, money creation, and massive government spending to “stimulate” the economy parallels the policies the US government has pursued for the past ten years. Without drastic changes in fiscal and monetary policies, economic trouble in America is around the corner.
The very large and growing federal debt will cause a major crisis as the government’s debt burden will be unsustainable. Instead of cutting spending or raising taxes, politicians can be expected to pressure the Federal Reserve to do their dirty work for them via inflation. We may even see the Fed “experiment” with negative interest rates, which would punish Americans for saving. The monetization of the federal debt will erode the dollar’s purchasing power and decimate middle-and-working-class Americans who are already seeing any gains in their incomes eaten away by inflation.
If we are lucky, the next Fed-caused downturn will cause only a resurgence of 1970s-style stagflation. The more likely scenario is the type of widespread economic chaos not seen in America since the Great Depression. The growth of cultural Marxism, the widespread entitlement mentality, and the willingness of partisans of various sides to use force against their political opponents suggests that this economic crisis will result in civil unrest that will be used to justify new crackdowns on individual liberty.
Those who understand the causes of, and cures for, our current predicament have two responsibilities. First, prepare a plan to protect your family when the crisis occurs. Second, do all you can to spread the truth in hopes the liberty movement reaches critical mass so it can force Congress to make the changes necessary to avert disaster.
Since the crisis will result in a rejection of the dollar’s world reserve currency status, individuals should consider alternatives such as gold and other precious metals. Restoring a free-market monetary system should be a priority for the liberty movement. Other priorities include ending our interventionist foreign policy, cutting spending in all areas, rolling back the surveillance state, protecting all civil liberties, and auditing (and ending) the Federal Reserve. If we do our jobs, we can build a society of peace, prosperity, and liberty atop the ashes of the welfare-warfare state.
The Colorado Civil Rights Commission is at it again. It's going after Masterpiece Cake Shop owner Jack Phillips for refusing to "make a cake with a pink inside and a blue outside, celebrating a gender transition from male to female."
This comes only months after the US Supreme Court ruled against the Commission's regulatory attack on Phillips for not baking a cake for a gay wedding.
Although the Supreme Court ruled in Favor of Phillips, it nevertheless took a very narrow view.
Instead of criticizing the very existence of laws that trample on property rights by mandating that people be forced — under threat of state violence — to provide services for certain privileged groups, the Court only took issue with the reasoning employed by the Colorado Civil Rights Commission when it ruled against Phillips.
When the ruling came down, I commented on the specifics of the Court's narrow ruling:
The US Supreme Court today ruled 7-2 in favor of a Denver small business owner who has been threatened, sanctioned, and ultimately driven out of business by the Colorado Civil Rights Commission. The controversy arose when the cake shop owner, Jack Phillips of Masterpiece Cakeshop, refused to bake a cake for a gay wedding, claiming to be motivated by religious beliefs.
The cake shop was hauled up before the Colorado Civil Rights Commission where the commission ruled that the shop must "change its company policies, provide 'comprehensive staff training' regarding public accommodations discrimination, and provide quarterly reports for the next two years regarding steps it has taken to come into compliance and whether it has turned away any prospective customers."
Justices Kennedy, Roberts, Alito, Breyer, Kagan, Gorsuch and Thomas all voted to overturn the earlier appeals court's decision to uphold the Commission's ruling against Phillips. Only Ginsburg and Sotomayor dissented.
In the decision , authored by Justice Kennedy, much of the reasoning centered on the fact that the Colorado Civil Rights Commission had demonstrated an apparently obvious bias against religious people, even though "neutrality" is legally required in such cases. The ruling states:
As the record shows, some of the commissioners at the Commission’s formal, public hearings endorsed the view that religious beliefs cannot legitimately be carried into the public sphere or commercial domain, disparaged Phillips’ faith as despicable and characterized it as merely rhetorical, and compared his invocation of his sincerely held religious beliefs to defenses of slavery and the Holocaust.
The SCOTUS ruling also noted that both the Commission and the appeals court largely ignored and glossed over the fact that the Commission had on three prior occasions ruled in favor of bakers who had refused to bake cakes with anti-gay slogans on them. There was an enormous double standard at work.
As Kagan notes in her concurring opinion, the Civil Rights Commission was abandoning neutrality in favor of making decisions “based on the government’s own assessment of offensiveness.”
In other words, the Commission was deciding, based on the members' own personal prejudices and biases, who shall be forced to bake cakes, and who shall not.
With this ruling, the court took a small step in the right direction by taking exception to the Commission's claim that freedom of religion doesn't exist. As noted by Justice Kennedy, the Commission essentially dismissed the very idea that religious conviction could be a valid reason to claim an exemption from the Commissions rules and regulations.
The Court came back and slapped down this reasoning, but it left the Commission plenty of leeway to rule against Phillips using different reasoning.
Thus, as long as the Commission can manufacture a different rationale for ruining Phillip's business, it is free to do, as far as the US Supreme Court is concerned.
The court's limited approach here illustrates the problem with the Court's strategy on the matter of anti-discrimination law has always been problematic.
By limiting Philipp's free use of his property only to cases in which he can prove some sort of religious conviction, the Court — and the law in general — relies essentially on mind reading in determining whether or not Phillips should be allowed to use his property as he sees fit:
This has led to a number of absurd legal and legislative acrobatics in which property owners must prove that their business decisions are motivated by artistic choices or religious conviction, but not by some other motivating factor. Thus, government commissions and courts are required to read the minds of business owners and determine whether or not their internal feelings and religious views fall under some government-approved motivation for refusing some sort of business service.
Proving or disproving internal motivations, of course, has always been an extremely sketchy way of doing things. After all, the Colorado Civil Rights Commission concluded that Phillips was using his religious views to justify unlawful discrimination. This, of course, requires that the commission members somehow have certain knowledge about the thoughts in Phillips's head.
This sort of reasoning also has the habit of working against business owners who hold views that are held only by small minority or otherwise might be considered especially idiosyncratic. One might argue that one is religiously opposed to providing some sort of service. But unless those views are recognizable to judges and bureaucrats as part of a known religious movement, the business owner is likely to be accused of simply making up an ad hoc religion to "mask" unlawful discrimination.
Ultimately, this sort of subjectivity invites just the sort of corruption and bigotry we see on the Colorado Civil Rights Commission.
There's a far less complicated way of protecting rights in these cases, however, we should stop talking about "freedom of religion," and focus on ordinary property rights instead. In practice, freedom of religion can only be truly protected by protecting property rights overall. After all, all rights — including freedom of speech and freedom of religion — depend on the ability to exercise control of one's own body and property.
As Murray Rothbard has demonstrated, rights to religious expression and speech are simply types of property rights. Consequently, religious liberty and free speech can be protected with a more general respect for property rights. By saying that Phillips ought to be forced to bake a cake, the Commission is asserting that Philipps does not enjoy ownership over his own body, or the shop and tools he acquired by using his body to perform labor.
Having refused to acknowledge these property rights, though, the Supreme Court has empowered the Colorado Civil Rights Commission to continue its war against small-time bakery owners who are no threat to anyone and impose their views on no one. The Commission already knows how it's going to rule. Its hostility to Phillips is apparent, and there's not reason to believe the Commission will stop until it has succeeded in ruining him. The challenge the Commission faces, however, is in reverse engineering a ruling that can survive a legal challenge. I'm sure that with the help of a sufficient number of taxpayer-funded lawyers, the commission can succeed in this endeavor.
McDonalds has announced that they will be releasing MacCoins in celebration of the 50th anniversary of the Big Mac. While crypto-related gimmicks have proven to be profitable, there is no blockchain involved, instead customers will receive a physical coin whenever they purchase a Big Mac. CNN Money reports that McDonalds has 6.2 million MacCoins ready for distribution.On social media, I've seen conversations about whether MacCoins, at 1:1 part with a Big Mac, would be a more effective store of value than a traditional Federal Reserve dollar. If the chain was willing to honor MacCoins indefinitely in the future, the answer would appear to be yes. Looking at the Big Mac Price index, a measure The Economist uses to track Purchasing Power Parity between foreign currencies, the price of a Big Mac has risen over 300% in the past 32 years. In fact, as D. H. Taylor has noted, the Big Mac is an American staple that has seen its price rise dramatically more than official CPI numbers. Unfortunately Ronald McNixon will close the Big Mac window at the end of the year, rendering the MacCoins to simply nominal value. Of course, if we had a system of competing currencies — as Ron Paul has long championed — it would be fun to see what sort of experiments would emerge in money. Senator Rand Paul openly discussed currency backed by private stocks during his presidential campaign, while the rise of cryptomania has even smalltime pizza companies looking at ways to provide additional value to workers.
Eliminate taxes on alternative currencies and ending legal tender laws would not only open the doors to monetary innovation but help empower Americans to new ways to protect their savings. Because at the end of the day, I would much rather trust the Hamburglar than those currently in charge with the Fed.
In today's New York Times, Walter Block employs some excellently Rothbardian logic in exposing just how absurd is the argument that protectionism increases wealth. In this case, Block notes that if protectionism helps to increase the living standards of people in American states who import from other states, then New York would surely benefit from slapping tariffs on imports from Iowa:
As an illustration, assume Mr. Trump is the governor of New York. He is devoted to making the Empire State “great again.” Right now, both New Yorkers and Iowans raise pigs — but Iowa produces far more than New York. So Governor Trump sets up a protective tariff against the importation of Iowa-raised pork. Will this make New York great again?
Hardly. There is a very good reason the Empire State does not produce a huge amount of this product: economic efficiency, the true path toward economic greatness. Of course, pork product jobs will increase in New York thanks to the Trump tariffs. But this is the way to ruin the state’s economy.
Surely, New Yorkers would be far better off continuing to produce goods and services in which they have a comparative advantage (Broadway shows, dairy products, financial services, jewelry, maybe even newspapers) and trading them for pork, rather than trying to grow more of it locally. Ditto for the Iowans. They, too, would be well advised to stick to what they do best and trade for what they want.
There are good reasons the United States is such a prosperous country, one of which is this: The country is a gigantic free-trade zone among the states. Yes, every once in a while a state legislature will get in the way. Wisconsin may try to reduce the importation of wine from California. But this only interferes with the specialization and the division of labor that maximizes output. Happily, the Supreme Court has typically given the back of its collective hand to all such attempted interferences with interstate economic freedom. ... Maybe we should be happy that the president hasn’t yet kicked Hawaii out of the union and imposed a tariff on pineapples to strengthen the weak pineapple industry in other states. Absurd, yes, but hardly less bizarre than thinking tariffs on foreign goods will make the American economy great again.
Any Brazilian libertarian gets the same questions: What the heck is happening there? How come you have people with “Menos Marx, Mais Mises” signs down the streets? Aren’t you some kind of left-libs? Isn’t Lula, now jailed for corruption, ‘Obama’s man’?
Every time people ask me about it, I tend to respond in a somewhat different manner, and I tend to forget stuff. So here I want to tell you what I think about the whole thing.
Usually I divide my explanation into three parts:
1. Eight years of hard interventionism (2008-2016 under Lula da Silva and Roussef) pushed the country to the limits. There was no way out, either more libertarian ideas would enter in the common discussion or we would be heading to full blown real-life communism, Venezuela style;
2. Internet, social networks, and bottom up organization via ‘apolitical’ movements; and
3. A weak but vigorous intellectual environment is slowly forming for libertarian (or what Americans might call "conservative") ideas. (See, for example, Olavo de Carvalho.
#1: There are more than 30 political parties down here. Only one, the NOVO labels itself as "classical liberal/libertarian." There are more than ten communist/socialist parties. The so called ‘conservative’ candidate for the forthcoming presidential election had to strike an agreement with a lib-left party to get his way into the candidacy.
Since redemocratization in the late 1980’s/early 1990’s, Brazil has had five presidents, two of them communists. Lula da Silva and Roussef. There was one social-democrat: Cardoso. These presidents served 22 years in total. The current president, Temer, belongs to a center party that has never been anti-establishment in the last 35 years. Our system gives way too much power to the executive branch, which lead to growing interventionism. The government represents 40% of the GDP and has been growing in the last 20 years.
On the practical side, the last relevant libertarian politician in Brazil, Roberto Campos, passed away 30 years ago. There was nobody defending libertarian ideas in the political world, which was a reflection of the cultural and academic environment. Statism, empirically represented by the expenditures with the soccer stadiums for the 2014 World Cup, lead the country to the biggest economic crisis in its history. The GDP decreased by more than 3% in two consecutive years, 2015 and 2016. In 2017, there was no growth.
#2. Another new development was the Brazilian Mises Institute (Instituto Mises Brasil - IMB), inspired by the MI. It emerged in the mid 2000’s, and was founded by Hélio Beltrão with the academic support of Prof. Ubiratã Iorio. From the beginning, the institute distributed a lot of free material online and used social media to spread the ideas, some facts on that:
There was no libertarian movement in Brazil in 2010 (I’m writing that in 2018!), people had started talking about it, but there was nothing organized. Nowadays, there are around 40 thousand visits to mises.org.br every day, in 2008 the number was 13 times lower. There are 300,000 likes on Facebook. The Institute has a podcast running for 5+ years with more than 300 episodes. 1 million books have been downloaded. Since 2013, "Mises" has more Google searches than "Keynes."
Well, here is where the story gets complicated and this is where we get to #3.
In my view there are two complementary responsible for the intellectual change: Olavo de Carvalho and Instituto Mises Brasil.
Olavo is a Brazilian philosopher, he became known in the late 1990’s, but gained traction in the mid 2000’s with a weekly web-radio show where he presented his conservative positions and waged cultural war on widespread communist ideology in Brazilian culture, universities, and the media. With his attack on the centralization of power, he always mentioned the calculation debate and has used methodological individualism in his political analysis.
Meanwhile, the IMB provided materials and events on economics and political science and spread the ideas to a wider and more libertarian, less conservative, audience.
So, what is ahead?
In October there will be national elections in Brazil, including races for congress and the senate, new governors and houses in the states, and a new national president.
There is likely to be be somewhere between 20-25 libertarian representatives, a huge jump from the zero of the last 30 years. Maybe some senators and numerous state representatives.
But, we have got to keep fighting the ideological war.
The Brazilian experience can be an inspiration to other movements elsewhere in the globe, and those lessons could be a starting point to those that want to do something about it.
The June 29th edition of Grant’s Interest Rate Observer led with, “Time Warner, Inc. was put on this earth not to produce Game of Thrones but to punctuate the cycles of investment enthusiasm.” Grant’s reminds the forgetful that a few bubbles ago Time Warner and AOL merged and that “announcement in 2000 rang down the curtain on the dot-com era.”
The Time Warner — American Online (AOL) merger was a colossal $111 billion deal. A blink in time later, May 2009, the CEO of Time Warner, Jeff Bewkes, announced the two companies were separating, the merger was but a brief hookup instead of a marriage.
Now Time-Warner is making merger with AT&T, and Grant’s wonders if the deal “may epitomize the post-2008 corporate-credit boom.”
“The new AT&T is a kind of triptych,” writes Grant’s, “one-third wireless, one-third wireline and one-third entertainment.”
Of course, anything can work on paper if the guys and gals in the corner office want it to. In a 2011 piece for mises.org , I wrote,
A former director of Coopers & Lybrand told author Mark Sirower, "Lotus is the culprit in failed acquisitions. It is too easy to assume anything you want in perpetuity without any understanding of the economics of an industry, and package it in a beautiful report."
In his book The Synergy Trap , Sirower says valuation models turn on three things: free-cash-flow forecasts, residual value, and a discount rate.
The cost of capital is integral to making these assumptions. The lower the assumed interest rate or cost of capital, the higher the price for the acquisition that the models will justify.
And if anyone is assuming today's Fed-induced microscopic interests rates will last forever, well, now would be the time to be selling instead of buying. Once interest rates go up, these valuation models will be blown up along with the government-employee pension-plan assumptions.
It's hard to make something work out economically if you overpay in the first place. And that is most often what happens. Companies overpay for the firms they acquire.
It’s the rare business combination that works out. I mentioned,
according to Max Landsberg and Dr. Thomas Kell at the consulting firm Heidrick & Struggles, 74 percent of mergers fail. "Two-thirds of the newly formed companies perform well below the industry average," according to the Harvard Management Update. Although "up to 70 percent [of mergers] failed to create value, it seems clear that the end is not yet in sight," claims Financial Executive. And the Journal of Property Management says "60 percent to 80 percent of all business combinations undergo a slow, painful demise."
In the AT&T/Time Warner merger there is the additional problem of the debt load. “If pro forma AT&T were a country,” Craig Moffett tells Grant’s, “it would place 32nd on the list of highest total debt burdens, between Indonesia (at $335 billion) and the UAB ($220 billion). Pro forma leverage, on an adjusted basis, will now be 3.9 times EBITDA,”
“M&A is now — arguably, always has been — a leap in the dark,” Grant’s writes. The primary problem is size itself. Ludwig von Mises explained that socialism doesn’t work because there was no market to determine prices and thus calculate how resources should be used. Behemoth companies are no more immune than government bureaucracies.
Murray Rothbard explained,
Economic calculation becomes ever more important as the market economy develops and progresses, as the stages and the complexities of type and variety of capital goods increase. Ever more important for the maintenance of an advanced economy, then, is the preservation of markets for all the capital and other producers' goods.
Professor Peter Klein furthers the point in his book The Capitalist and the Entrepreneur,
as soon as the firm expands to the point where at least one external market has disappeared, however, the calculation problem exists. The difficulties become worse and worse as more and more external markets disappear, as [quoting Rothbard] "islands of non calculable chaos swell to the proportions of masses and continents. As the area of incalculability increases, the degrees of irrationality, misallocation, loss, impoverishment, etc, become greater.
Grant’s closed the AT&T analysis with, “There is nothing certain about the new Time Warner corporate marriage, only the time-honored tendencies of governments to inflate, investment bankers to promote, corporate CEOs to deal — and ground-hugging interest rates to addle the brain.”
In the end, this latest corporate knot-tying will crumble and destroy capital.
To travel from the Pacific Northwest all the way to College Station, Texas, without experiencing more of the "Lone Star State" was not an option.
So, after driving from Austin eastward to College Station (where I was hosted by two exceptional young, Southern gentlemen), I headed south-west to San Antonio. There I lingered long enough to conclude:
The Republic of Texas is a civilization apart.
Ordinary Texans—from my brief travels—tend to be sunny, kind and warmhearted. Not once did I encounter rude on my Texas junket.
On the Pacific Coast, however, kindness and congeniality don't come naturally. Washington-State statists are generally aloof, opprobrious, insular. And, frankly, dour.
Southern historian Dr. Clyde N. Wilson tells of receiving "a package containing a chamber pot labeled 'Robert E. Lee's Soup Tureen.'"
It came from … Portland, Maine.
Unkind cuts are an everyday occurrence around here, where the busybody mentality prevails.
Stand still long enough, and they'll tell you how to live. They'll even give chase to deliver that "corrective" sermon. A helmeted cyclist once chased me down along a suburban running trail.
My sin? I had fed the poor juncos in the dead of winter. (Still do).
Having caught up with me, SS Cyclist got on his soap box and in my face about my unforgivable, rule-bending. Wasn't I familiar with the laws governing his pristine environmental utopia?
Didn't I know that only the fittest deserved to survive? That’s the natural world, according to these ruthless, radical progressive puritans.
Yes, mea culpa for having an exceedingly soft spot for God's plucky little creatures.
When a Washington statist gets wind of your core beliefs—why, even if your use of the English language irks His Highness—he will take it upon himself to fix your "flaws," try to make you over in his sorry image.
For the distinct cluster of characteristics just described, Dr. Wilson aforementioned uses the term Yankee.
The professor, whose métier is American intellectual history, was described by Eugene Genovese as "an exemplary historian who displays formidable talent." Another stellar scholar, Thomas Landess, lauded Wilson as "a mind as precise and expansive as an encyclopedia."
Duly, Dr. Wilson makes the following abundantly clear: By "Yankee," he does not mean "everybody from north of the Potomac and Ohio.”
“The firemen who died in the World Trade Center on September 11 were Americans. The politicians and TV personalities who stood around telling us what we are to think about it are Yankees."
"Yankee" as a designation belongs to "a peculiar ethnic group descended from New Englanders, who can be easily recognized by their arrogance, hypocrisy, greed, lack of congeniality, and a penchant for ordering other people around."
"A perversity of character," said Thomas Jefferson succinctly of the Yankee character.
Indeed, "Puritans long ago abandoned anything that might be good about their religion but have never given up the notion that they are the chosen saints whose mission is to make America, and the world, into the perfection of their own image."
The cover of Wilson's "The Yankee Problem: An American Dilemma" is bedecked with the quintessential Yankee mugs of Hillary Clinton, George W. Bush and John Brown, each a murderer in his or her own right. The one butchered with his bare hands. The other two killed by proxy.
The contemporary face of the fanaticism alluded to here is pundit Richard Painter, who is the spitting image of Brown. A Republican until Trump, Painter is now a member of the anti-Trump high-command at MSNBC.
In zealotry, Painter could pass for the terrifying Radical Republican Thaddeus Stevens.
A broader truth hit me in the solar plexus during the sojourn from the American Deep North to The South. On hand to better contextualize it is my friend, Clyde Wilson:
“Texas is still a Red State, despite a large number of minorities. That is because Texas, as you observed, Ilana, has a real culture. That means that there is a reality there that minorities can identify with and assimilate to. Unlike, say, Chicago or New Jersey or L.A., where they simply become aggrieved ‘victims,’ clamoring for special benefits, that being the only culture present."
"The peculiar character of the Yankee was observed by Tocqueville in the 19th century and Solzhenitsyn in the 20th. The first great American novelist, James Fenimore Cooper, wrote a whole series of books about the New England Yankees who spread into and destroyed the unique culture of his home country of Upstate New York.”
“Plenty of Northerners, like Governor Horatio Seymour of New York and Governor Joel Parker of New Jersey, blamed the War between the States on New Englanders, and not the South, which simply wanted to be let alone."
"One cannot really grasp American history unless you understand how Yankees have dominated and distorted it since the late 18th century.”
Let interest rates rise. Better yet, let interest rates function in the marketplace, wholly independent of central bank attempts at rate-setting or targeting.
How? Not through a laughably small and slow process of Fed tapering, but through a wholesale and aggressive selloff of assets still polluting the Fed's balance sheet since it began aggressively those assets from commercial bank in 2008.
This was the critical point made by all three speakers at our event in Nashville this past weekend: interest rates need to rise before any true economic recovery can occur. The manipulation of interest rates by the Fed and other central banks causes untold distortions throughout the entire economy. Unless and until we address this problem, no fiscal or monetary policy changes will make much sense or have much salutary effect. Money and credit will continue to flow into less than optimal uses, investors will be forced to continue chasing yields in the casino equity markets, and Congress (plus other western legislatures) will continue to produce trillion dollar annual deficits without much worry about debt service.
Perhaps worst of all, the world will continue to believe a fairy tale: that the Fed effectively recapitalized US commercial banks in the 2008 crisis and through successive rounds of QE without pain or consequences. Are we really to believe the monetary base underpinning the world's reserve currency can be quadrupled in less than a decade without causing lasting damage? That gross overspending by Congress can be wished away simply by having the Fed provide a ready market for Treasury debt at miniscule interest rates? Or that interest rates should have no connection to the savings habits of society?
It all strains credulity, which is precisely why monetary policy relies so heavily on technocratic jargon and opaque processes: they want to confuse or bore us into not paying attention. And thus the can is kicked down the road, politically and policy-wise. That's how we became a high time preference society almost by stealth.
You can watch these engaging presentations by Dr. Robert Murphy, Carlos Lara, and myself here.
These excerpts from my talk attempt to remind the listener that none of this is normal, in fact quite the opposite. Not too long ago prosperous societies were based on the notion of capital accumulation, of producing more than they consumed, making the next generation better off in the process.
This is the fundamental and foundational change that has to occur. We need real, positive interest rates, meaning rates above inflation rates. We have to reward saving if we intend to have a growing or sustainable economy.
It is not exaggeration to say interest rates drive civilization.
They are the most important signals in an economy. Everything flows from them, because the cost of borrowing money effects the cost of almost everything.
This is the fundamental and inescapable starting point for building not only a real economy but a real culture. Every healthy society accumulates capital, every healthy society produces and saves more than it consumes and borrows. The human desire to leave something to future generations explains why all of us sit in splendor today, in this restaurant, enjoying conditions our great grandparents could not have imagined.
To do this you need actual real interest rates, market prices for money. Savers and borrowers, supply and demand, need to meet. We have a mechanism for this, it’s called the market. Without market prices you have socialism, the opposite of markets.
So why do so many otherwise free-market economists not object to monetary central planning?
The most important interest rate is the Federal Funds rate, the rate at which commercial banks borrow from each other overnight if they need to meet reserve requirements for their loans. The Fed controls this rate, or “targets” it, by manipulating the amount of reserves banks have in their accounts with the Fed. Banks with high reserves don’t much need to borrow from each other, so the Fed Funds rate stays low. And since 2008 commercial banks have received interest on excess reserves parked at the Fed, which encourages high balances and keeps rates low.
All commercial interest rates — e.g., the interest you pay on your mortgage — flow from the Fed Funds Rate on a cost-plus basis.
But when the Federal Reserve effectively keeps interest rates lower than they would be naturally, it creates a terrible disconnect between lenders and borrowers. And this disconnect causes unbelievable distortions throughout the economy. As David Stockman says, because of central banks there is no honest pricing of goods anywhere — we simply don’t know, for example, what a barrel of oil or a bushel of wheat or a Honda Accord should cost. The Fed has distorted the single most important price in the entire economy — the Federal Funds rate.