Power & Market
A day after Bill Gross called bonds a bear market, reports are out that the Chinese government is considering slowing our halting US Treasury purchases. While it's easy to connect the dots between this potential change and anti-trade rhetoric from President Trump - which, to date, has thankfully been more bark than bite - the larger issue is central banks are slowly backing away from policies that have inflated bond markets. It's a good time to re-vist an article by Thornton Polleit titled "The Super Bubble Is in Trouble":
First and foremost, the US economy appears to be addicted to cheap money. The latest economic recovery has been orchestrated, in particular, through a hefty dose of easy monetary policy. It is therefore fair to assume that market agents will have a hard time coping with higher interest rates. For instance, corporations, consumers, and mortgage borrowers, in general, will face higher credit costs and a less favorable access to funding if and when interest rates edge higher.
In particular, higher interest rates could send the inflated prices of stocks, bonds, and housing southward. For instance, expected future cash flows would be discounted at a higher interest rate, deflating their present values and thus market prices. The deflation of asset markets would hit borrowers hard: Their asset values would nosedive, while nominal debt would remain unchanged so that equity capital is wiped out — a scenario most investors might assume to be undesirable from the viewpoint of central banks.
Moreover, the yield curve has become flatter and flatter in recent years. This, in turn, suggests that banks' profit opportunities from lending have been shrinking, potentially dampening the inflow of new credit into the economic system. A further decline of the yield spread could bring real trouble: In the past, a flat or even inverted yield curve has been accompanied by a significant economic downturn or even a stock market crash.
That said, investors might expect that central banks find it hard to bring interest rates back up, especially back to a level where real interest rates are positive. This holds true for the Fed as well as for all other central banks, including the ECB. This is because the monetary policy of increasing borrowing rates by a significant margin would most likely prick the “Super-Bubble” which has been inflated and nurtured by central banks’ monetary policies over the last decades.
However, it wouldn’t be surprising if, again, central banks, the monopolist producers of fiat money, turn out to be the major course of trouble. After many years of exceptionally low interest rates, central banks may well underestimate the disruptive consequences an increase in borrowing rates has on growth, employment, and the entire fiat money system. In any case, the artificial boom created by central banks must at some point turn into bust, as the Austrian business cycle theory informs us.
The boom turns into bust either by central banks taking away the punchbowl of low interest rates and generous liquidity generation; or the commercial banks, in view of financially overstretched borrowers, stop extending credit; or ever greater quantities of fiat money need be issued by central banks to keep the boom going, inflating prices so that ultimately people start fleeing out of cash. In such an extreme case, the demand for money collapses, and then a Super-Super-Bubble pops.
As Troy Vincent, a market analyst and Mises Wire contributed, offered an additional note this morning on Facebook:
The fact that Bitcoin didn't get bid up in response to this news, while treasury yields and physical gold did, is pretty interesting.
Congratulations to former Mises Research Fellow Karl-Friedrich Israel for successfully defending his thesis at the University of Angers in France.
Dr. Israel's academic research has largely focused on monetary policy, monetary theory, and the history of macroeconomics.
At AERC in 2016, he presented a fascinating paper on the history of econometrics and how the concept has changed over the years. In it he highlights that the originator of the term, Pawel Ciompa, considered it a way of illustrating accounting, as a opposed to a means of developing economic theory. The paper can be read on the University of Angers website.
Dr. Israel has also written several articles for the Mises Wire, including:
He has joined Jeff Deist twice on Mises Weekends:
As Bitcoin continues to soar to new heights, Washington seems to be preparing to follow countries like Russia and China in preparing to increase their influence on cryptocurrency.
Today outgoing New York Federal Reserve head William Dudley revealed that the Federal Reserve is investigating its own "digital currency", though it would be "premature" to suggest that we will see a "crypto-dollar" anytime in the near future.
Far more important is Congress looking into updating its Anti-Money Laundering laws to include crypto-currencies. The Senate Judiciary committee held a hearing yesterday on the topic, as it continues to consider S.1241, a bill that would explicitly apply "digital currency" to Federal scrutiny. It also requires Federal law enforcement to create a " strategy to interdict and detect prepaid access devices, digital currencies, or other similar instruments, at border crossings and other ports of entry for the United States."
While the very nature of cryptocurrency may shield savvy users from enforcement, it would be interesting to see how such legislation would impact such laws would have on crypto-exchanges, as well as public demand for Bitcoin and other cryptocurrencies.
As I noted a few months ago, the more governments and central banks view cryptocurrency as a threat, the more likely we are to see them try to tighten their control of exchanges as part of a large goal of replacing private cryptocurrency with their own state-controlled tokens.
The Austrian Economics Research Conference is the international, interdisciplinary meeting of the Austrian school, bringing together leading scholars doing research in this vibrant and influential intellectual tradition. The conference is hosted by the Mises Institute at its campus in Auburn, Alabama, and directed by Joseph Salerno, professor of economics at Pace University and academic vice president of the Mises Institute.
Proposals for Papers
Proposals for individual papers, complete paper sessions or symposia, and interactive workshops are encouraged. Papers should be well developed, but at a stage where they can still benefit from the group’s discussion. Preference will be given to recent papers that have not been presented at major conferences. All topics related to Austrian economics, broadly conceived, and related social-science disciplines and business disciplines such as management, strategy, and entrepreneurship are appropriate for the conference. Proposals from junior faculty and PhD students are especially encouraged. The Grant Aldrich Prize of $1,000 will be awarded to the best graduate student paper. Abstracts should be limited to 750 words. All proposals are peer reviewed by the AERC Program Committee. Additional information is here.
Submit your proposal to email@example.com by January 29, 2018. Proposals after the deadline will be considered as space permits. Decisions will be communicated by February 5.
Besides paper sessions and symposia, the conference includes five named keynote lectures and the awarding of three cash prizes: the Lawrence W. Fertig Prize in Austrian Economics, the O.P. Alford III Prize in Political Economy, and the Grant Aldrich Prize for Best Graduate Student Essay.
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In the wake of Bitcoin hitting multiple all time highs there is no shortage of media coverage of Bitcoin. In this interview on Power Trading Radio we took a different tack and discussed the most important reasons to celebrate Bitcoin.
The Catalan regional parliament today declared independence (on a vote of 70-10) from Spain, following threats by the central government in Madrid to abolish the region's political autonomy.
At this point, it appears the Madrid government will employ physical violence to impose direct rule from Madrid on the region.
For more on this here at mises.org, see:
- Mises, Rothbard, and Catalonia by David Gordon
- Let Catalonia Decide by Jeff Deist
- A Spanish Libertarian on Catalonia by Daniel LaCalle
- Europe's Secession Problems Aren't Going Away by Ryan McMaken
Additionally, in my column "If the Majority Votes to Secede — What About the Minority?" I pick apart the claim — using California as an example — that no region or municipality should be allowed to secede unless the separatists are libertarians.
Indeed, in his Tuesday article on the Catalonia situation, Alvaro Vargas Llosa takes the postition that no, Catalan secession must be quashed because the new regime would be insufficiently libertarian. Llosa concludes with:
Perhaps the day will come when individual self-determination will be feasible (and Mises’s “technical” problems can be overcome). But for the moment it is unrealistic to think that the Catalan nationalist movement will turn into a Misesian movement in favor of individual self-determination. For now, a better cause for libertarians to rally around than Catalan nationalism is replacement of the Spanish welfare state with a liberal order and decentralizing the financial system underpinning the system of autonomous communities much more.
There are a couple of assertions that must be corrected here. First of all, not even Mises himself — whom Llosa quotes repeatedly in favor of his own position — demanded that secessionist movements be "Misesian" to justify secession. When Mises specifically supported Catalan secession in his own lifetime, nowhere does he suggest that he was under the illusion that the Catalan government would be — unlike all the rest of Europe at the time — devoted to free markets. On the contrary, Mises supported secession as a prudential matter and a recognition that peace is better secured for minority groups through separation rather than secession.
Secondly, Llosa mistakenly seems to think that supporting a more restrained welfare state in Spain is a goal that is mutually exclusive from that of supporting the right of secession. When Llosa states that "a better cause for libertarians to rally around than Catalan nationalism is replacement of the Spanish welfare state" he appears to imply that this is an either/or choice, as if one could not support both at the same time. It is unclear why this should be so.
Moreover, it is entirely plausible that Catalan independence can be a catalyst to a smaller welfare state in Spain. If Catalonia is so hard left, as its detractors say it is, then Catalonias exit from Spain would enable the remaining Spanish state to further curtail welfare spending. Moreover, a Catalan exist may also highlight the benefits of political decentralization. After all, if the Spanish model were more decentralist, and followed more of a Swiss model, it's unlikely that Catalonians would care much about secession at all. The net effect of secession for Spaniards — with with a California exit in America — would be a net gain for freedom.
And finally, the Llosa prediction that Catalan would become an even more interventionist state after secession assumes Catalonia could project its power as well as a small independent state than as part of a large nation-state like Spain. This is not at all clear, since as a small state, Catalonia would be under greater pressure to compromise with large employers to provide a hospitable business environment an openness to foreign investment. After all, under the status quo, any business that functions in Catalonia today has automatic and total access to the entirety of the Spanish market, which includes the 39 million Spaniards who live outside Catalonia. If Catalonia decides to impose a hard-left regime (all of Spain is anti-business by American standards, of course, but let's assume Catalonia is even worse) why would any business choose to remain there for the sake of hacing access to Catalonia's mere 7 million residents? Yes, Catalonia has a relatively high concentration of capital at the moment, but by taking a hard left turn, the regime would only drive capital across the border back into Spain.
To facilitate this, of course, the Spanish state need do nothing more than grant open borders to any Spaniard or business that wishes to secure access to the larger Spanish market. So, it doesn't make much sense to assume that the current status quo would persist in Catalonia even after independence. This would be equally true of California, for example, were it to secede. In order to make up for the trouble of now gaining access to American markets, California would need to embrace more openness toward global business in order to maintain a comparable standard of living.