Power & Market

Time to Go Back to That 70s Show

05/18/2022Fran Rodriguez

Unless you are living under a rock, you know by now that current times are nowhere near economic stability. In fact, there has not been such “stability” (regardless of what politicians and central bankers say) since the ending of the Bretton Woods agreement in 1971. What did ending the Bretton Woods agreement mean to the world? Since I am no expert on the topic, I suggest reading this article by the CATO Institute. According to historical data and using the year 1913 as the base year, we find out that the total rise in prices is roughly 2920 percent ($1 in 1913 needs $29.20 today to buy the same). From 1913 to 1971, the index grew by 400 percent or 4 points, meaning prices multiplied by 4 in 58 years. Now, comparing from 1971 to 2019 we see that the index rose 21.73 points or 2173 percent in a similar year span. It is almost a 6-time difference.

Many Keynesian economists (and some “free-marketer” monetarists) argue that it is thanks to inflation -as Austrian thinkers, we refer to inflation as the increase in monetary supply, but for easier-reading-and-writing purposes, the general conception of inflation is the general rise in prices will be used- that wages grow with it. But is this true? In 1971, according to the SSA, the average wage index was $6,497.08, while in 2019 it was $54,099.99, a 732.68 percent increase. Yes, wages grow, but 3 times less than prices do, which turns into much lower purchasing power. According to the same data from the SSA, the average wage in 1951 was $2,799.16, which means wages grew 132.11 percent from that year until 1971. How much did prices grow? 55.77 percent, meaning workers acquired more than 2 times more purchasing power, a big difference compared to what happened after abandoning the imperfect sound money system we had. The average inflation rate during that time was 2.24 percent, while from 1971 until 2019 it was 3.91 percent.

This itself should serve as enough proof to go back to a commodity-backed system, but more facts can be brought up to make the argument even more solid. According to Fed data, median home prices have risen from $25,800 in the last quarter before leaving Bretton Woods to $327,100 in 2019, a 1167.83 percent increase (1561.63 percent until 2022), with growth in wages sitting far behind. Cars cost an average of $2,700 in 1971, and we got the news that the average price now sits at around $47,000, or 1640.74 percent, and again, wages far behind prices. It is not only the rise in prices that matters. US federal debt was 35 percent of the GDP in 1971 and never went above 90 percent with the WWII (including post-war) exception, and since 1950 it never surpassed 74 percent, again being an exception and following a downtrend until 1971. Debt has been above 100 percent for 8 years and will continue to do so for at least a few more since it’s sitting at almost 125 percent currently. This table shows perfectly the trend before and after 1971.

Now the economic and historical case has been made, we need to focus on the philosophical case. There are four main points for libertarians to be against a central bank or any similar institution and not in favor of sound money. First, ever since 1971, central banking gained tremendous power, and with it, so did the government. We know that economic power will always be abused. We are opposed to the government having more power than it should, so we cannot be in favor of a central bank. Second, the central bank sets interest rates, which is a form of central planning, and we believe it only brings misery, and therefore we favor market-driven rates, which instead bring prosperity and growth since they follow a non-artificial, imposed rate, and today is proof of it. Third, we know thanks to Murray Rothbard’s perfect explanation in his classic, America’s Great Depression, that printing money and expanding artificial credit to enterprises leads to what is known as the business cycle theory, which always ends up in recessions as we have seen in the past. And fourth, we believe in a free market, and most of the economic interventions are used to bail out banks, which was seen in 2008. This goes against the principle of free competition in a non-regulated market.

Academic papers can -and will soon- be written on the topic, but this overall, non-technical and easy-to-understand analysis and these arguments will serve as a good basis to be against the current power-abusing, out-of-control system we live in and favor a commodity-based one. It will be with commodity-backed money that we will have a true free-market economy and we will prosper. Until then, we will continue to go downhill and we will see prices rise 3 times, or even faster than wages do, making us poorer and more dependent on the government every day.

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The Goldback: An Alt-Currency That Combines Sound Money with Modern Technology

05/17/2022Samuel Peterson

Sound money is now more portable than ever! Paper banknotes were originally created and issued by private banks as receipts for their depositor’s gold. Said receipts were then used by the customers as currency, being traded between themselves and businesses to avoid the burden of transporting gold. Over time, these privately issued notes were eventually replaced by the Federal Reserve’s own paper bills. Dollar bills were entirely severed from their gold backing when the Nixon Administration decided to go off the gold standard. Now, however, technology has advanced to the point that allows gold to be transported more easily than ever before, even in a wallet. While some may be thinking that this advancement comes in the form of coin minting, as it turns out the market’s answer to solving gold’s transportability issues lies in between two thin sheets of plastic.

Enter the Goldback.

Created in 2019, Goldbacks are privately funded currency notes with gold embedded in the note. Resembling Federal Reserve issued currency, the Goldback has various designs, serial numbers, and denominations. These denominations range from 1/1000th to 1/20th of a Troy ounce of gold. Currently, the States of New Hampshire, Nevada, and Utah all have privately issued sets printed and available on the market for purchase. Goldbacks combine sound money with modern technology through a process called vacuum deposition. Goldback’s company website describes this process:

“The designs are printed on a sheet of polymer that is then bombarded with the correct amount of atomized gold particles in a vacuum chamber. This gold is then sealed inside by a second protective barrier of polymer, thus creating a beautiful negative image.”

The company that manufactures Goldbacks, Valaurum, has also produced gold-embedded-bills for the Republic of Ghana, the Republic of Cameroon, and various private organizations.

The drawbacks of the Goldback are very apparent. Namely, they’re spotting at more than double the current price of gold. This high premium is a result of its expensive crafting and limited supply. Both factors create difficulties in the currency becoming a widely accepted medium of exchange at this time.

Despite these drawbacks, the future holds great potential for the goldback. As technology develops, competing producers could have a Goldback-like product manufactured more efficiently, increasing the supply and thus lowering the cost to consumers. This is the beauty of the market. As time progresses, profit incentives draw in entrepreneurs who create higher quality products at lower costs. The computer serves as a great example. In an article published by The American Enterprise Institute, Mark Perry explores the market development of the computer:

 “Compared to today’s desktops, mainframe computers were 128 times slower, more than 8,000 [times] as expensive, and were more than 1 million times as expensive in terms of cost per MHz.”

Logically, the same principle would apply to Goldbacks, especially when more competitors join the market. The process of having less expensive gold-embedded bills on the market could be expedited further if larger banks decide to print their own Goldback-like currency. However, this is highly unlikely to happen in the foreseeable future due to the Federal Reserve’s policy of easy money that benefits its member banks.

Today, individuals face soaring prices at the gas pump and grocery store. Due to the Federal Reserve creating trillions and trillions of dollars since the beginning of the Covid-19 Pandemic, inflation is causing devastating pain all throughout the market. Because of this, finding hedges against inflation, such as precious metals, is more important than ever before. If the dollar ever reaches a point of Weimar or Venezuela-style hyperinflation, low income and fixed income households, savers, and retirees will be the most harmed. Luckily, this is an area where the Goldback can potentially ease the pain of inflation. Rather than needing large amounts of capital to purchase gold, a Goldback can be bought for less than the cost of a typical lunch. This is an especially promising development for teenagers and college students, like myself, who do not have the capital to buy large quantities of gold.

Ludwig von Mises famously remarked, “[The] first precondition of any monetary reform is to halt the printing press.” If stopping the Fed from printing more money is not an option (which seems to be the case), then arguably the next best step for monetary reform is to divest from state-provided currency and invest in private alternatives. The Goldback is one such option. Although it is unlikely that this currency will be accepted in your grocery store anytime soon, the technology behind it certainly makes for a hopeful future where individuals can use privately provided sound money in the form of gold, rather than the State’s unstable, debased fiat currency.

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The Fed: Just Doing My Job

05/13/2022Robert Aro

Last week Federal Reserve Governor Christopher J. Waller wrote: Reflections on Monetary Policy in 2021, where he discussed whether or not the Fed fell behind the curve. In Fedspeak, the Fed did not raise rates fast enough to “fight inflation.”

With April’s producer price index announcement of 11%, it’s likely someone at the Fed thought it best to give the public an explanation. The Governor begins by preparing listeners for the excuses to follow:

First, the Fed was not alone in underestimating the strength of inflation that revealed itself in late 2021. 

Then he explains that policy errors might not actually be policy errors:

…setting policy in real time can create what appear to be policy errors after the fact due to data revisions.

When referring to the dual mandate of maximum employment and price stability, he notes that:

Whether you believe this is the appropriate mandate or not, it is the law of the land, and it is our job to pursue both objectives.

Unfortunately, history is rife with instances where regular people were just doing their jobs, leading to countless atrocities.

Not only is the Governor just doing his job, but he doesn’t act alone. In a nation of over 300 million people, he explains:

…policy is set by a large committee of up to 12 voting members and a total of 19 participants in our discussions.

As per recent decisions made by the committee, on December 2020:

We said that we would "aim to achieve inflation moderately above 2 percent for some time"…

Meaning, the Fed wanted to increase the rate at which our currency debases year over year.

It’s also alarming when those in charge, whose job it is to make predictions about the future, always seem so wildly inaccurate. In the case of the 19 participants who weigh in on the fate of the US dollar:

With regard to future inflation, 13 participants projected inflation in 2022 would be at or below our 2 percent target. In the March 2021 SEP, no Committee member expected inflation to be over 3 percent for 2021.

This gets excused by claiming the Fed’s forecast was “consistent with private-sector economic forecasts.”

He concludes with questioning whether the central bank fell behind the curve and if they should have hiked rates sooner. However:

Even though we did not actually move the policy rate in 2021, we used forward guidance to start raising market rates…

Since the 2-year Treasury yield went from 25 basis points in September to 75 basis points by December 2021, then:

That is the equivalent, in my mind, of two 25 basis point policy rate hikes for impacting the financial markets.


That is the equivalent, in my mind, of two 25 basis point policy rate hikes for impacting the financial markets. When looked at this way, how far behind the curve could we have possibly been if, using forward guidance, one views rate hikes effectively beginning in September 2021?

One must wonder what exactly the 19 Federal Reserve participants do for a living. If rates can rise without the Fed, and if the private sector can forecast without the Fed, then the necessity of having the Fed should be questioned. Yet, according to the Governor, it really doesn’t matter what anyone thinks, or how detrimental the outcomes of the Fed become, as explained: “it is the law of the land,” and he’s just doing his job.

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This Colorado Cop Is Learning a Lesson about Proportionality

05/10/2022Ryan McMaken

Loveland, Colorado police officer Austin Hopp was sentenced this week to prison time for attacking an elderly woman with dementia in June 2020. After pleading guilty to second-degree assault and other crimes, Hopp reached a plea agreement with the county and was sentenced to five years in prison plus three years probation.

Hopp was “enforcing the law” when he threw victim Karen Garner to the ground, broke her arm, and dislocated her shoulder. The 80-pound, 73-year-old woman had allegedly attempted to walk out of a local Walmart with $13.88 worth of merchandise. When confronted, Garner left the merchandise in the store and walked home.

Hopp and his partner, Officer Daria Jalali, quickly caught up with Garner, who was picking wildflowers along the road. Hopp proceeded to assault Garner with the help of Jalali. [See video.] Hopp’s manhandling of the tiny woman was so aggressive that a local bystander even stopped—thinking Hopp was abusing a small child—and asked “do you have to use that much aggression?”

The sergeant on site, Philip Metzler, was quick to dismiss the bystanders’ concerns and shouted down the citizen, declaring Hopp “didn’t do anything wrong.” Metzler also invented a false narrative about how Garner “ran from the store” and “resisted arrest.”

Soon thereafter, Garner was taken to the local lockup where she was refused medical attention, even though she had a broken arm. While Garner while crying in pain in her holding cell, Hopp, Jalali, and Community Service Officer Tyler Blackett viewed the body cam footage from the incident. Video from the police station shows the three officers laughing and joking about Garner’s arrest and her broken arm. Hopp announced that he was “proud” and “super excited” that he had the opportunity to use hobble restraints on the elderly woman. Jalali and Hopp shared a fist bump over the arrest with Hopp declaring that the arrest “went great” and “we crushed it.”

But then nothing happened. As is so often the case with police assaults on members of the public, the leadership in the police department took no exception to Hopp’s assault or the fact that Garner was denied medical attention. The laugh-fest following Garner’s arrest was not seen as anything to worry about. Loveland's assistant chief of police Ray Butler, after viewing Hopp's video, concluded Hopp's felony assault was "necessary, reasonable, and within policy." 

It was only in April of the following year that Garner’s daughter was finally able to get information on her mother’s violent arrest. Thanks to their skilled attorney, bodycam videos of the incident were made public, as was the video from the police station. Only after a public outcry over the contents of the video did the police department’s leadership take any significant action. Hopp, Jalali, and Metzler were given paid vacations—also known as “administrative leave”—pending investigation.

Hopp, Jalali, and Blackett finally resigned—i.e., were not fired—in late April. It was not until more than a year after the incident, in September 2021, that Metzler resigned. Metzler, of course, had signed off on Hopp’s report, and—according to Garner’s attorney—deliberately mislabeled his own bodycam files so as to hide evidence. The other sergeant that  approved Hopp’s report, Sergeant Antolina Hill, remains employed by the department.

Now, nearly two years later—and certainly no thanks to the police department that employed and protected him—Austin Hopp is in prison. His partner Jalali is awaiting trial in June.

Do Police Understand the Concept of Proportionality? 

But this leaves us with an important question: what sort of thinking convinces a police officer to conclude it is laudable, or even acceptable, to rough up an old lady in this manner?

We can already guess the narrative that the police were telling themselves, given the words of Metzler: in their minds, Garner was apparently a “criminal” who resisted arrest and ran from the scene of a crime. Perhaps in their minds, this exaggerated version of events justified breaking an old woman’s arm and throwing her in a jail cell.

Most reasonable people, however, understand there is a problem of proportionality here. Garner didn’t actually steal anything, but even if she had stolen something, was the proper response to beat her up? Moreover, in Garner’s case, the value of the goods she had in hand amounted to under 14 dollars. This must all be viewed in light of the basic premise of proportionality which is that “[T]here should be a proportion between the severity of the crime and the severity of the punishment.”

So, here we have a woman who had not actually stolen anything, but police were acting as if she were a hardened criminal, deserving of harsh treatment. Moreover, as Murray Rothbard was always careful to note, when a suspect is in the process of being apprehended, guilt has not even been determined yet. In other words, all force taken against a suspect may ultimately prove to be against a party who is completely innocent.

Thus, in the Garner case, we witness police breaking an old woman’s arm in a case where:

  • Guilt has not been established.
  • The suspect has not actually stolen anything.
  • The suspect is a small elderly person and presents no threat to the community.

The public, on some level, understood all of this, which is likely why the public’s reaction to the police in Garner’s case was one of near-universal revulsion. Had Hopp arrested the local 200-pound ne’er-do-well in a similar fashion for stealing a pack of cigarettes, Hopp would almost certainly not be in prison today.

Reasonable people understand that not all cases of theft (or attempted theft) are created equal and do not call for the same response. Indeed, in many cases, proportionality and basic decency suggest no arrest at all is the most prudent course of action. Garner’s case is just such a case.

The "Arrest and Jail" Model for Minor Infractions Is a Modern, State-Centered Invention

“Law and order” types, however, often have problems understanding proportionality and the fact that arresting people is not necessarily the solution to every legal infraction. For many olaw-and-order advocates, even very minor infractions require forceful intervention, jailing, and arrest. Those suspects who don’t immediately and docilely submit to arrest? Those people—regardless of their alleged infraction—are “resisting arrest” and therefore must be made to comply by any means necessary

As the Garner case has demonstrated, however, this is a ghoulish position and out of touch with the real world.

For example, in the case of Garner, how might the situation have been handled differently? It was apparent to any decent person—i.e., not the personnel of the Loveland Police Department—that it is would not have been appropriate to use violence against someone in Garner’s situation. For one, the supermarket could protect itself from Garner in the future by simply banning her from the premises. This is common in the case of shoplifters. If the police were hell bent on establishing Garner’s identity—and if she refused to provide a name—they could simply have followed her the additional half mile home. Then they could have issued a summons to appear in court.

This almost certainly would have been less time-consuming and costly than arresting the woman and putting her in jail. The summons approach definitely would have been less costly than the $3 million settlement paid out to the victim’s family in the Garner case.

Yet, we continue to hear from the “always comply” crowd that any minor infraction requires a response of overwhelming force followed by violent escalation. But what if Garner had somehow managed to get free of the police officer and was able to run away? If we believe that compliance is of paramount importance, then we must conclude that it would be justifiable to use all types of force, up and including deadly force, on people in Garner's situation. In other words, we end up supporting the idea that death is somehow a proportional "punishment" for petty (attempted) theft.  Cleary, there is something very wrong with this position. 

Moreover, from a public-policy view, police resources are wasted on cases such as these. If Loveland is like most communities of its size and demographics, there are many unsolved, never-prosecuted car thefts, assaults, and burglaries. Anyone who has been a victim of a burglary, for example, knows that the police do next to nothing in terms of finding stolen property. Police often lie that they "must enforce every law" but this is obviously not the case. Police choose each and every day how to distribute police resources and what crimes to investigate and address. This is reflected in the fact that police devote very few resources to homicides, but large amounts of resources to more lucrative and easy investigations of illegal drugs

So why did two police officers and their sergeant decide to double down on arresting Karen Garner? Because it was the easy thing to do. Also, Garner presented no threat whatsoever to the personal safety of police officers. This made her an even easier target. Tracking down dangerous criminals, on the other hand, requires actual work and risk.

In the end, it would have been best to do nothing from the standpoint of police. If Walmart wanted to insist on punishing Garner somehow for her petty non-theft, Walmart could sue her in court. This, of course, would be the course of action recommended by Rothbard in his chapter on proportionality in The Ethics of Liberty. But even then, the penalty inflicted on Garner would still have to be proportional, since, as Rothbard notes

The victim [i.e., Walmart], then, has the right to exact punishment up to the proportional amount as determined by the extent of the crime, but he is also free either to allow the aggressor to buy his way out of punishment, or to forgive the aggressor partially or altogether. The proportionate level of punishment sets the right of the victim, the permissible upper bound of punishment; but how much or whether the victim decides to exercise that right is up to him.

In Garner's case, Walmart could pursue maybe 20 bucks for restitution for the time spent by store employees on reclaiming property from Garner. Or Walmart could simply decide it's not worth the trouble. Anything more than a few bucks restitution in this case is disproportional to the severity of the crime.  A broken arm is beyond the pale of reasonable responses. On the other hand, a doctrinaire commitment to police-enforced “law and order” simply depends on an imaginary version of reality in which every minor infraction can be addressed through government intervention. 

Such thinking is purely modern. Historically, prosecution for such offenses has generally been a matter of private civil law. The idea that police ought to be sent out to round up every low-grade thief is a product of big-government twentieth-century thinking, and it leads to a “cure worse than the disease.” 

That was clearly the case in the Garner situation. Fortunately, the court recognized this, and Hopp will have a few years in a prison cell to help him understand. Let's hope his partner Jalali will soon have the same opportunity. 

Image source:
Larimer County Sheriff's Office
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Taxes: The Barbarous Relic of the 21st Century

05/09/2022Andrew Packer

Ah, spring. That magical time of year when every productive American’s fancy turns to thoughts of how to legally reduce their income tax obligations.

This year, filing an extension and waiting to pay as long as possible has been the ideal tax strategy, thanks in part to the official inflation rate that just hit 8.9%.1

But while trading tax tips is useful (at least in March and into early April), the real key observation \is that taxes have become the true “barbarous relic” of our time.

That’s right, taxes, particularly income taxes, are simply not needed anymore!

That’s just in time too, given the rising complexity of the tax code. Systems that get as complex as the tax code tend to end up collapsing. Barbarous relic, indeed!

That term first originated by economist John Maynard Keynes, in reference to the use of gold as money. 98 years ago, he stated, “In truth, gold is already a barbarous relic.”

Keynes, as usual, was wrong.2

That’s because the decision to use gold as money was determined by many objective measures through centuries of use. Gold has durability, divisibility, and portability, among other qualities.

And it was only found in small proportions globally, at least in terms of what’s been easy and inexpensive to mine given the technology of the time.

As Ludwig von Mises details in Human Action:

“Men have chosen the precious metals gold and silver for the money service on account of their mineralogical, physical, and chemical features. The use of money in a market economy is a praxeologically necessary fact. That gold — and not something else — is used as money is merely a historical fact and as such cannot be conceived by catallactics.”3

In short, people chose gold.

Governments didn’t. But they did create a monopoly on determining weights and measures, the creation of coinage, and through centuries of beguilement, managed to weaken the global gold standard until a fully-fiat regime was born with the US closed the “gold window” in 1971.

But having replaced gold with a fiat currency, governments also found that they can “progress” in other areas as well.

Unfortunately, taxation is one such area.

Individual human beings have entered into governments for a number of purposes, notably collective self-defense and for the ability to redress differences through agreed-upon arbiters.

The use of taxation has historically been to support and pay for government services. However, government has, unlike the gold standard, often had far more flexibility in how taxes are raised.

In the United States, tax revenue was often generated through tariffs. Only during the “emergency” of the Civil War was the first attempt made to tax the income of American citizens. And taxation was limited because the amount of money in the system was limited by the amount of gold in circulation.

While initially struck down as unconstitutional, those who supported the early income tax did something that would be unthinkable today: They changed the Constitution.

This provision came at the end of the gold standard era, and conveniently, at the same time of the third central bank in US history, the Federal Reserve. One can’t help but wonder if the two events are intertwined.

The end of the gold standard led to a substantial rise in incomes, at least measured in fiat, non-gold-backed dollars. As income rose, more and more found themselves trapped into having to pay an income tax, as well as the less-discussed payroll tax.

Thus, what was initially proposed as an income tax on only the wealthiest Americans became an annual financial exam that nearly all have to complete today – even if it’s only to get a refund for overpayment.

Given the proliferation of taxes, it’s clear that the abandonment of the gold standard account the world has contributed to making taxation a barbarous relic today. As the monetary unit is further debased, “cost of living” rises in wages lead to higher tax burdens, which don’t change as often in nominal terms.

But it doesn’t have to be this way. Governments can now simply create as much of their preferred monetary unit as needed.

That’s because the monetary alternative to the gold standard, a fiat system, is known for its elasticity. Or, in other terms, the ability by governments to print as much of the monetary unit with only political restrictions (if any) to consider.

Or, in meme speak, “money printer go brrr.”

The Covid 19 pandemic was a golden age for printing money hand over fist. In the US alone, 80% of all dollars in existence were created, going from $4 trillion in January 2020 to over $20 trillion in late 2021.4

But if the government can print money to hand out in “stimulus payments,” or in forgivable loan programs to businesses, the real question is, why make anyone pay taxes at all?

Why even worry about issuing more government debt, if the money can simply be printed instead? Why should the government issue a bond that it has to repay, when it can simply print cash?

All told, it’s clear that taxes are a barbarous relic in our modern age, especially given the money printing of the past two years and its inflationary effects.

Even holding off on collecting taxes for a few years wouldn’t permanently make anyone whole for the destroyed purchasing power of their currency through inflation, but it would go a long way.

But, there’s still more reasons why taxes are truly barbarous. That’s because there’s more than just a monetary cost to paying taxes.

The IRS estimates that it takes around 15 hours5 to prepare their return. Again, taxpayers receive no compensation for their time, so that’s lost economic value creation by millions of man hours per year.

The tax code is complicated. How complicated? People can’t even agree on how long the tax code is.

One estimate is as little as 2,600 pages. Or as high as 75,000 pages.6 That’s a sizeable discrepancy. It’s also going to add a lot to your tax prep time to read and understand it all first.

And even with a written code, many provisions are open to interpretation. Asking 100 different IRS agents to review your tax returns will likely come up with at least 100 different solutions.

Simply put, the US income tax is a series of rules, exceptions to rules, and an overall structure that creates one of the most complex systems in human history.

However, for all the complexity of the tax code, studies have shown that the US has been pretty consistent about collecting 15-20% of GDP through taxes since the end of World War II.7

In other words, it doesn’t matter what the top rate is. It doesn’t matter what exceptions or carve-outs are made. Those who have proposed a “flat tax” that strips out the complexity of the tax code are on to something, and can point to the relative consistency of how much is collected.

But, again, the world has changed. Perhaps tax policy should too. If the government has been pretty good about collecting 15-20% of GDP every year via taxes, they could just scrap taxes and print the money instead.

The best benefit of this policy is that it would greatly slow down the money creation of the past two years!

To some extent, the notion of taxes being outdated is hardly new. Nor unique to the Austrian school.

According to the “modern monetary theory” or MMT, we now live in a more enlightened world. It’s one where monetary policy has become a magical wand capable of addressing things as previously un-economic as systemic racism8 and climate change.9

Given that we now live in a world where all problems can be solved by simply printing money, why not print what’s needed and save taxpayers 15 hours of prep time per year?

More importantly, by printing the money needed for taxes, former taxpayers would suddenly have more money on hand.

That would certainly come in hand to offset the inflation of pure money printing, but every new economic omelet has to break a few eggs.

But MMT is so far into printing money to solve problems that it, sadly, makes paying taxes look responsible.

There’s only so much in taxes that people will want to pay before a taxpayer revolt. It’s hardly a gold standard, which offers limited increases based on mining, but it’s at least a limit.

However, by the time inflation shifted to hyperinflation, MMT would implode too late to stave off a general collapse. Or it would simply encourage its proponents to simply try on a bigger scale next time.10

So with this tax season now behind us (unless you filed an extension) … it’s time to think about how to best scrap the outdated, barbaric system we’re in.

Beyond the complexity, limited effectiveness, and frustrations of the current tax regime, it still doesn’t meet the needs of today’s “do everything” state.

Alternatively, the economy should fare better by rapidly scaling back the amount of taxes collected, while also decreasing the size and scope of government by an even greater amount.

And, by removing a government-backed central bank diluting the currency either “quickly or less quickly,” we could have a more stable monetary unit and a better and more accurate measure of real economic growth as a result.

But such a discussion will likely leave the one proposing those changes as the one advocating for barbarous relics like gold as a standard of value.11

With the status quo being questioned in so many ways right now, it’s time to consider how to best shift the world towards a more reasonable way of taxing its citizens, combined with a discussion of how much government is really needed in their lives.

In truth, taxation is already a barbarous relic. As is the fiat currency regime that’s allowed it to spiral into a complicated morass sucking time and talent out of the productive, real economy.

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The Passive Behemoths Have Yet to Awaken: You don't Want to be in Markets when Vanguard, BlackRock, and State Street Flip from Bid to Ask.

05/02/2022Liam Cosgrove

The go-to bullish indicators highlighted by pundits these days are the high levels of sidelined mutual fund cash and the AAII investor sentiment survey hitting its highest bearish reading since 2009:

Traditionally, these signals suggest that most of the carnage is priced into markets, indicating that it might be time to buy. However, these data sets only illustrate ACTIVE investor sentiment. Given that passive funds, by definition, do not strategically manage their cash levels nor do index fund patrons pay $40 per year to participate in the AAII survey, these figures give us little insight into the passive investing world. In stark contrast, Vanguard has reported net inflows to their passive vehicles of $400 million for the month of March (i.e. one behemoth is still buying). More evidence that passive investors remain all-in can be found in the lack of redemptions world-wide:

While the markets have seen considerable selling in certain sectors as active managers have rebalanced their weightings, capital is not being withdrawn from markets at any meaningful scale. These are strategic moves by fund managers, not necessity-driven liquidations. If they were, one could expect them to originate from two places: low-income earners paying their bills and/or margin calls. 

Considering most active wealth managers require a minimum investment of $50,000 while an index fund account with BlackRock only requires $1,000, it’s easy to see why low-to-middle-income earners opt for a passive plan. These investors add up, with total passive assets having overtaken active’s share in the $11.6 trillion US equity funds market, “driven largely by the growth of funds tracking the S&P 500”, according to Bloomberg (i.e. the S&P may be hit hardest in a true recession).

As the cost of living continues to rise and monetary tightening leads to higher mortgages, credit card APRs, and layoffs as zombie companies scramble to service their increasingly costly debt, it will be the low-income-index-fund-buyers who initiate mass redemptions out of necessity to fund their daily lives. This will flip the Big Three passive funds (or the “Giant Robot” as legendary short-seller Bill Fleckenstein refers to them) from bid to ask.

Passive capital flows dangerously close to negative territory (not including April which is beginning to see negative flows).

Those familiar with the work of Simplify Asset’s Michael Green into the effects of passive investing on equity markets will know: The Big Three are non-discretionary. When cash is flowing in, they hit buy. When it’s flowing out, they hit sell. Green believes passive’s distortions contribute to the more volatile price swings that have occurred during market downturns in recent decades.

He provided me with a research paper claiming the rise of passive has created “substantially more inelastic aggregate demand curves for individual stocks,” meaning equity prices have become more sensitive to relatively smaller shifts in demand. This, combined with the jarring reversal of the most accommodative monetary policy the world has ever seen, could result in devastation for markets. And the data indicate these behemoths are just barely waking up. With unemployment that can't go much lower and ominously depleting levels of personal savings, this is a powder keg set to blow:

Personal savings hit lows not seen since Dec 2013 while full employment continues to justify Fed tightening.

A few bonus thoughts: consider the now commonplace compensation trend by which executives of public companies are paid in stock that they then borrow against to fund expenditures. At what price level will we see executive-level margin calls and mass selling by the .001%-ers? This could be why many individual names are already down 70-80%.

It seems there are several phenomena that have acted as market boons in the past decade or so, which are now primed to reverse. Still, I suspect active managers will be “buying the dip” in the coming weeks (as Warren Buffet just did), and this ironically may give the Fed more confidence in tightening.

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The Student Loan Forbearance Extension Is Unnecessary and Wasteful

04/22/2022Aadi Golchha

In the spring of 2020, many politicians and economists were in agreement: the American public needed help shouldering the financial burden of COVID-19. The unemployment rate tripled from the fourth quarter of 2019 to the second quarter of 2020, sitting at a staggering thirteen percent. In response, there was near-unanimous bipartisan support for efforts to bring relief to U.S. citizens. Amongst a host of other fiscal actions was the deferment of federal student loan debt.

When introduced by President Donald Trump in March of 2020, the pause on student loan repayments for federal borrowers provided relief that allowed millions of Americans to continue to house and feed their families. But now, after its sixth extension that has spanned twenty-four months, it’s doing more harm than any presumed good. The argument for extending the forbearance is weak and contradictory.

President Biden said before announcing the extension that the economy was stronger than ever and able to shoulder the return to “normal routines.” Biden simultaneously cited research from the Federal Reserve that said once payments resume, delinquencies, and default among direct borrowers will experience a “meaningful rise.” Reinstating the payments could “threaten American’s financial stability,” the president said.

Since the unprecedented act of lowering interest rates to zero on direct federal student loans and automatically placing those loans into administrative forbearance, nearly thirty-seven million borrowers have not been required to make payments on their student loans over the past twenty-four months. According to the Committee for a Responsible Federal Budget, the loan pause has cost our government $100 billion, and the extension will add at least another $15 billion to that amount.

There is one group that is benefiting from the president’s decision to extend the student loan pause by an additional four months: high earners with graduate degrees. According to the CRFB, graduate degree holders with high amounts of debt have saved tens of thousands of dollars in interest thanks to higher-than-expected inflation, which erodes the value of current debts. A recent master’s degree graduate has received an average of $13,500 in debt relief, roughly three times as much as the average newly graduated bachelor’s degree recipient. And a new lawyer has received about $30,000 of debt cancellation during the pause. In effect, the student loan pause aimed at providing relief for low-income borrowers has instead created a windfall for folks who can generally afford to make their loan payments, at the expense of the American taxpayer.

It is important to consider the political ramifications of the student loan forbearance for the administration vis-à-vis election prospects. If President Biden had not extended the forbearance, repayment would have begun in May, in the middle of a midterm election season. Numerous polls show that student loan relief is a popular proposition amongst voters. There is undoubtedly pressure on the president to take meaningful action, as student loan forgiveness was a linchpin of his campaign.

The past five extensions on student loan forbearance were related to a new variant of COVID-19 or dire economic restraints. But this one is different—no major new variants are causing a spike in cases or closing businesses. Robert Kelchen, a professor at the University of Tennessee, told Fortune, “The pandemic is now in a much better state, so the extension is either due to concerns about the economic situation of borrowers or for primarily political reasons during an election year.” Unemployment rates for adults aged twenty-five and older who hold a bachelor’s degree or higher are at two percent as of March 2022, and nearly two-thirds of U.S. private-sector payroll workers saw wage increases of at least five percent from the second quarter of 2020 to the second quarter of 2021. In industries like information, management, and finance, those increases reached double digits. The data would indicate the vast majority of borrowers are no longer in a situation where restarting payments would create economic hardship.

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The Fed’s 2021 Financials

04/21/2022Robert Aro

Several weeks ago, with little to no press coverage, the Federal Reserve released its audited financial statements. Readers don’t need a background in finance to fathom the mind-boggling numbers required to operate America’s Central Bank. A highlight from the press release:

Operating expenses were $8.7 billion in 2021, including assessments of $2.6 billion for Board expenses, currency costs, and the operations of the Consumer Financial Protection Bureau.

It’s difficult to pinpoint the most egregious line item on the financial statements, but operating expenses are a contender. On page 4, line items reveal salaries and benefits of $3.792 billion followed by a pension cost of just under a billion. Given the Federal Reserve System employs over 20,000 people, that’s an average salary of $189,600. However, employee salaries are miniscule compared to the Board of Governors operating expenses and currency costs, which come in at $2 billion. How the seven-member Board spends two billion dollars is known to only a few, including the auditor KPMG. No disclosure notes or further explanations are in the statements regarding Board of Governors expenses. But there is absolutely no benefit to the public by keeping disclosure of the $2 billion confidential.

$628 million went to the Bureau of Consumer Financial Protection (BCFP), a government agency which claims dedication to ensuring consumers are treated fairly by banks, lenders and other financial institutions. The BCFP is hardly a household name, but in 2017, President Obama said:

This agency was Elizabeth’s idea, and through sheer force of will, intelligence, and a bottomless well of energy, she has made, and will continue to make, a profound and positive difference for our country.

According to Senator Elizabeth Warren’s website, she created the organization because:

In 2008, greedy financial institutions crashed our economy and working families all across this country paid the price.

Her website says nothing, however, of the Federal Reserve’s role in crashing the economy in 2008.

The statements disclosing the annual Dividends on Capital Stock came in at $583 million. This is questionable since it’s a dividend paid to the same commercial banks the Fed regulates. It's common for an industry to pay the regulator, not vice versa. Given the countless perks the financial sector receives from the Fed, scrapping the annual dividend would be more of a symbolic gesture since half a billion isn’t that much money considering the size of the Fed’s operations.

After all expenses have been paid:

Remittances to the U.S. Treasury were $109.0 billion in 2021, as compared to $86.9 billion in 2020.

The Fed’s gross income was $122.555 billion. Approximately $13 billion was spent on expenses such as salaries, dividends, interest to banks and other remittances.

$109 billion paid to the treasury should in no way constitute a win for the American people. Nearly 100% of the Fed’s income is derived from just two revenue sources: $92.610 billion from interest on US Treasuries and $29.619 billion on interest from Mortgage-Backed Securities (MBS).

Troubling to say the least, since the optimal amount of US Debt and MBS the Federal Reserve should own is zero. A more anti-capitalist story could never be written, even if written by Marx himself. Unfortunately, this is the price we are forced to pay living under a central banking system.

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The Left is Anti-War? Think Again

04/15/2022Peyton Gouzien

The Left is often assumed to be a major force against war and intervention to the point that many on the Right and Libertarians try to appeal to the left based on the agreement on the issue. This assumption ignores how the left’s opposition to war has mostly been when politically beneficial.

While leftists can point to a few left-wing idealogues who started Anti-War movements or protests and periods when there was a significant left-wing presence in the movements, leftists in actual positions of power have been at the forefront of warmongering U.S. foreign policy, particularly in the 20th century. 

Looking as far back as President William McKinley, the first Progressive Republican was a faux anti-imperialist who used revolutions in Latin America and southeast Asia as a pretext to expand American territories and resources which led to the Spanish-American War. This war is where the more left-wing Journalists and the State formed their relationship to provide ample justification in the eyes of the public which has since been titled “Yellow Journalism”

At the turn of the century, the left Liberal intellectuals, particularly in Britain, were a small minority that was drowned out within the left by those who supported British involvement in the First World War. In America, most pacifists and anti-war activists, despite being portrayed as communists, came from religious movements and far exceeded left-wingers in terms of those who did not support the war, as “their churches supplied many conscientious objectors…”.

President Woodrow Wilson drew more conservative and religious support in his re-election for keeping the country out of the war. This was certainly the case as his re-election campaign slogan ironically became “He Kept Us Out of War”. The quote becomes ironic when Wilson, a progressive politician, quickly joined war efforts after re-election in April 1917 when he called on Congress to declare war on Germany. 

He cited two incidents for this 180 in the policy. First was the sinking of the Lusitania in the English channel, which left the harbor despite warnings of attack from both the British government and German governments if it was to enter what was currently a war zone. The second was the Zimmerman Telegram which proposed an alliance between Mexico and Germany to attack the United States if the U.S. were to enter the war. 

Now both examples invoke some clear antagonism from Wilson and the U.S towards Germany. The first required the Lusitania to enter a war zone with a civilian ship, despite warnings from both sides that they would not be protected. Second, Germany does not propose a first strike on the U.S. but admits it intends to keep the U.S. out of the war and only proposes a “worst-case scenario” in which it tries to gain Mexico as an ally. Neither would be sufficient to claim America’s declaration of war was a defensive one. 

We see much of the same with the Second World War, largely caused by the terms of the Treaty of Versailles created by Wilson. President Franklin Delano Roosevelt, a progressive as well, also feigned a sense of neutrality at the start of the war. From supporting aggressive embargo policies and navy deployments in the pacific to combat Japan without “direct measures” to the “Lend-Lease” program which supplied the Allies before the official U.S. involvement, FDR acted despite the Neutrality Acts of the 1930s to provoke the Axis into attacking the U.S. by making the U.S. neutrality virtually untrue without an official declaration of war. 

The opposition to FDR’s warmongering was also not from the left, but from the right with the America First Committee’s campaign to keep the U.S. out of the war. Additionally, Congressional support for Neutrality was greatest among Republicans.

Finally, looking at when the left’s “anti-war” convictions were greatest in the Vietnam War we can see that the timing of their protests seemed to coincide with the presidency of Nixon. While protests against the war in Vietnam existed before 1970, it was not until Nixon announced an invasion into Cambodia, a new offensive in the region, that the “New Left”’s protests became widespread. During Johnson’s presidency, the movement was substantially smaller. 

Again, we see that the real substantial opposition to the war came from the right, not the left, as Nixon himself in the 68 Election put a public face of condemnation for further involvement in Vietnam. Of course, as we know Nixon betrayed such trust and continued the war, despite the assurance to the Anti-War right that he was surrounded by the “right people”. Though this would ultimately be his administration that ended the war and had begun removing troops as early as 1969.

This is not to say that Nixon was anti-war, far from it, but it was not the left who were the ones ending Vietnam, but the right, as it had been in the previous wars of the 20th century. As Rothbard characterized during the 1992 election between George Bush Sr. and Bill Clinton that the right had a better history of keeping us out of conflicts than the left, even if marginal. His words remain true, even as Bush Jr. would enter us into two wars at the beginning of the 21st century. This is because his successor, Barack Obama, would go on to only escalate the conflicts and try to drag us into more even as he tapped into the “anti-war left”. 

The mask of “Anti War” leftism has completely fallen as the Ukraine/Russia conflict goes on. Democrats have consistently more likely to support aggressive foreign policy around the conflict than Republicans. This is especially true on the topic of No-Fly Zones, as more Democrats support them than Republicans. Though this does not mean the Republicans are completely against escalating this conflict as a Florida Republican in Congress said she supported a no-fly zone despite not knowing what it means. The numbers are still relatively high for Republicans, we can see that the bulk of opposition again is on the right, proving Rothbard’s point in 1992 right again. 

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The Immaculate Correlation

04/14/2022Robert Aro

Physicist John Stewart Bell said:

The scientific attitude is that correlations cry out for explanation.

Using the Federal Reserve's data, see the Consumer Price Index (blue line) left axis and M1 Money Supply (red line) right axis for the 14 month period of January 2021 to February 2022:

Regression statistics reveal a correlation coefficient of 0.989 and an R-Square of 0.979. This begs explanation.

For the last 14 months, the CPI and the M1 Money Supply moved in near perfect positive harmony, despite one being a price index and the other measured by the trillions. While near perfect correlation between two variables is noteworthy, it does not prove one variable caused the other. Even if the correlation coefficient was 1.0 rather than 0.99, it would still be insufficient to prove causation.

Frank Shostak writes on the limitations of quantitative economics. Recently, in his article Quantitative Methods Are Incomplete When Used for Economic Analysis he wrote:

Various quantitative methods are a way of describing but not explaining events.

Finding a correlation of 0.99 is immaculate. However, it only indicates what happened. It cannot explain why. A theory is needed on how this is possible and whether it is indicative of a causal relationship.

By showing the 0.99 correlation between CPI and M1 is not accidental, that A precedes B, and no other variable can explain this relationship, it’s possible to sufficiently prove causality.

To claim this near perfect correlation to be mere coincidence ignores the known relationship between money supply and prices. Austrians note currency debasement occurs when governments or central banks engage in pro-inflation policies, inevitably leading to currency collapse. CPI and M1 have limitations but attempt to quantify ideas including the loss of purchasing power of money. A highly positive correlation between the two is not surprising. It’s actually expected.

The existence of a temporal relationship can be proven through thought experiments utilizing the history of fiat currencies. We also need to consider what would happen if the M1 did not increase by $2.5 trillion in the last 14 months, being held constant. Could the CPI have risen to these new highs?

Lastly, the possibility there exists a third factor which is the cause of the CP1/M1 correlation must be ruled out. Yet no alternative factor or credible theory has been identified. To say COVID or a Putin Price Hike caused unilateral price increases is one thing, but explaining how the money supply miraculously followed suit for the last 14 months is another. This unidentified factor would have to explain the increases and co-movements between CPI and M1.

What started with blaming COVID, turned into transitory inflation, bottlenecks, supply shortages, entrenched inflation, blame COVID again, now blame Putin. Blame everything except the Federal Reserve who not only took part in expanding the money supply by many trillions of dollars in the last two years but allowed it.

The limitations in data are clear. The CPI attempts to measure the immeasurable. It cannot adequately measure the prices of all goods and services nor purchasing power; CPI exemplifies statistical bias at best.

M1 money supply, prone to changes, is just one of several money supply measures. As recently as May 2020, the Fed changed the definition of M1. The action “increases the M1 monetary aggregate significantly,” thus, the money supply is not consistent. With various definitions of money supply, the concept of what constitutes money continues to be contentious. (Articles on the True Money Supply (TMS) developed by Rothbard and Salerno can be found here and here).

It’s tempting to use past data to extrapolate the future. For example, a model could show that for every trillion dollars increase in the money supply, 8 points are expected to be added to the Consumer Price Index. This is a principle of Econometrics, holding the position that the past relationship continues indefinitely, contrary to human action. It’s interesting estimating such things, but it fails to recognize the difference between human behavior and mere objects, and could be dangerous if used as a government planning tool.

The purpose is not to use a model to predict inflation, rather, it’s to utilize data to describe and provide a visual aid of one of the most important, yet grossly neglected causal relationships in economics. Inflation is not necessary. It can and should be stopped because no amount of inflation can be considered beneficial to the public. As Mises said: Inflation is a policy. It’s a policy paid by the masses, allowing them to better serve the most powerful members of society.

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