Power & Market
Given covid, the mutation, lockdowns, BLM protests and riots, the storming of the Capitol, impeachment and the first Biden stimulus bill on the horizon, it’s easy to miss headlines from the Federal Reserve. On Monday, the Fed released Reserve Bank income and expense data transfers to the Treasury for 2020. This is the central bank’s preliminary income statement and remittance figures for 2020, the headline number starting at:
$88.5 billion of their estimated 2020 net income to the U.S. Treasury.
Meaning, the Fed is to send $88.5 billion to “the people” via the US Treasury. However, more context and figures are required to reach a better understanding as to what this means.
Net income for 2020 was derived primarily from $100 billion in interest income on securities acquired through open market operations…
The Fed’s income primarily comes from owning US Treasurys and mortgage-backed securities (MBS), which makes sense because the Fed now owns $4.7 trillion and $2.0 trillion of these securities, respectively. This means $6.7 trillion was created and lent to the world. They can now receive over $100 billion a year in return (interest revenue) as compensation for their lending service.
Interest income on US Treasurys and MBS is hardly new. But this line item is:
The Federal Reserve Banks realized net income of $405 million from facilities established in response to the COVID-19 pandemic.
This might sound like a lot of money to most people, but is a relative drop in the bucket given the aforementioned $100 billion the Fed made off buying the nation’s debt.
As for the expenses, the largest cost to the Fed is the interest it pays to depository institutions (banks). This is interest paid to banks in order to compensate them for holding money at the Fed.
The Federal Reserve Banks had interest expense of $7.9 billion primarily associated with reserve balances held by depository institutions.
If this wasn’t confusing enough, it gets better:
We find operating expenses (mostly salaries and benefits) for $4.5 billion, plus $831 million for “producing, issuing, and retiring currency,” and $947 million for “Board expenditures.”
In what may come as surprise to most, the US Treasury is not the only entity the Fed is beholden to; this year the Fed paid:
$517 million to fund the operations of the Consumer Financial Protection Bureau.
And the payout to banks:
Statutory dividends totaled $386 million in 2020.
Numerous questions should come from this:
These numbers are preliminary. We won’t have the finalized figures until March. But so far, the $88.5 billion remitted to the Treasury seems to be “pretty good” given the low interest environment and when compared to the last decade of remittances.
Of course, something doesn’t seem quite right. In order for the Treasury to get a remittance from the Fed, the Fed must expand the balance sheet and money supply, therefore buying interest-bearing assets. The interest income earned by the Fed pays for expenses such as billions of dollars in salaries and interest payments to banks. This gets reduced even more after payouts to another government agency and dividends to banks. What’s left gets sent to the Treasury. Keep in mind the US Treasury does the actual “money printing.” In effect, a significant cost associated with the Fed is paying for their knowledge, allowing them to manage the money supply.
It’s a system implemented well over a century ago, a system in dire need of repair if not abolishment. An entity which can legally create money runs the risk of eventually owning the assets of an entire nation, being insensitive to prices and immune to bankruptcy. This, as well as other pernicious effects such as causing the boom-and-bust cycle, increasing malinvestment, price distortions, and asset bubbles all make it strange to think that society pays billions of dollars for this knowledge-based service. Central banking is a service so slanted toward the banks and government, and against society, that it’s no wonder the general public isn’t meant to understand its inner workings.
The latest data from the Bureau of Labor Statistics shows twelve-month food prices climbing at a 3.9 percent annualized rate for 2020.
Overall price inflation for the same period, as measured by the government's Consumer Price Index, rose 1.4 percent.
Bottom line: the goods people are buying during this lockdown period such as food are soaring.
The advance in food prices was pretty much across the board.All subcategories from cereals to fruit showed gains far in excess of the Federal Reserve's "target" inflation of 2 percent. But, hey, if you don't eat, price inflation is not as high.
In the EPJ Daily Alert, I am warning that as the lockdowns ease, price inflation across the board will rise to meet the advance in prices we are seeing in food prices.
Hug your gold coins.
Reprinted from EconomicPolicyJournal.com.
For most fields of study, the goal is to progress ideas and seek truth. This doesn’t seem to be the case in economics.
It’s not just the Fed; it’s the entire global community. The Central Bank of Sweden recently shared a press release showing they have similar concerns to the Fed and want to facilitate the “supply of credit” while striving to hold market rates down. The bank further stated the difficulties faced with interpreting its inflation statistics during times of pandemic, noting:
For one thing, prices have been lacking for certain goods and services, as these have not been consumed, and for another thing the actual consumption by Swedes during the pandemic does not correspond to the weights in the consumer price index. Quite simply, the Swedish people have bought more toilet paper and fewer trips abroad than the weights in the consumer price index imply.
The problem with measuring “inflation” has also been expressed by the Bank of Canada. It’s not just the relative weights which are problematic, but also the volatility of the data that impacts the “inflationary experience” of the Consumer Price Index sample size, making interpretation difficult:
in any given month, the CPI can be quite volatile and not reflect its long-term trend. That’s because prices of items such as fresh fruit and vegetables or gasoline can jump around a lot, affecting the CPI.
Especially since “these aren’t normal times,”
Canadians are spending much less on gasoline and air travel, and more on food purchased from stores. And until very recently, they weren’t spending anything on haircuts. The implication is that the CPI isn’t fully reflecting people’s current inflationary experience.
In formulating an arbitrary basket of goods to include items such as gasoline, fruits, vegetables, and toilet paper and then assigning an arbitrary weight of relative importance to these items, central bankers obsess over consumer prices while ignoring asset prices such as those of stocks, bonds, and real estate.
The Fed claims they are “accountable to the public and the U.S. Congress.” But what good is accountability if the public and Congress have little understanding of what the Fed does? Even worse, if no one has the power to stop the inflationary actions of the Fed, what good are the accountability measures in place?
This week, Chair Jerome Powell addressed Congress and provided the June Monetary Policy Report. The process of testifying before Congress is very much farcical, because what the Fed says has no bearing on what the Fed does. We can assume that few members of Congress actually understand monetary economics. But what if many of them did, as well as the general public? Could the Fed really get away with all of this?
Reviewing the chair’s testimony to Congress reveals how little the Fed and Congress know about economics and illustrates how ineffective testimony before Congress really is.
In his speech, Powell lists many of the lending programs (Paycheck Protection Program, Main Street Lending Program, and Term Asset-Backed Securities Loan Program), but when it came to corporate bond–buying programs, all he offered was:
To support the employment and spending of investment-grade businesses, we established two corporate credit facilities.
Like a teenager trying to hide purchases made on a parent’s credit card, he did not explicitly list the Primary and Secondary Corporate Credit Facilities by name. He only said “two corporate credit facilities,” the only two the Fed has. How issuing debt to corporations or trading their bonds on the stock exchange supports employment or spending is anyone’s guess. What does it matter, anyway? Even if he said that $750 billion may go to buy corporate bonds, who would stop them?
He moved from vagueness to deception quickly with the statement:
The tools that the Federal Reserve is using under its 13(3) authority are appropriately reserved for times of emergency. When this crisis is behind us, we will put them away.
What will the Fed say ten years from now, when “the crisis” is long behind us but the Fed is still using these emergency lending facilities? Or is the crisis not meant to end?
Powell then cited the economic report:
As described in the June Monetary Policy Report, these purchases have helped restore orderly market conditions and have fostered more accommodative financial conditions. As market functioning has improved since the strains experienced in March, we have gradually reduced the pace of these purchases.
We have yet to get details on an “orderly market” or “accommodative financial conditions,” but it’s safe to say that neither the Fed nor Congress really knows what this means.
Chair Powell is not the only central banker who seems to have never read Mises. Vice Chair Richard Clarida also discussed monetary policy this week in a speech, noting:
To me, price stability requires that inflation expectations remain well anchored at our 2 percent objective, and I will place a high priority on advocating policies that will be directed at achieving not only maximum employment, but also well-anchored inflation expectations consistent with our 2 percent objective.
Of course, unpacking the issue with a “2% inflation” and “maximum employment” objective would require effort to understand and refute. We can only imagine how few members of society have actually done this.
Just like his boss, the vice chair also stressed how temporary the new programs will be:
these are, after all, emergency facilities, and someday—hopefully soon—the emergency will pass.
Unfortunately, whether “emergency” or not, we can be sure of one thing: the Fed’s balance sheet can never decrease again, as it will lead to “liquidity” and other unbecoming issues of a nonfunctioning market—stock market decline, a decrease in the price of bonds, rising interesting rates, etc. We’ve crossed the rubicon.
Accountability means nothing if those you are accountable to have little understanding of what you say or the ability to affect the outcome. Few elected officials, or anyone in a position of power, have either of the two.
There are many reasons why socialism fails everywhere and every time it is tried. One primary reason is the propensity of socialists to confuse the cause and effect relationship. Due to this confusion, the remedies put forth by socialists and Keynesians try to solve the effect instead of tackling the cause. It is analogous to treating symptoms instead of the disease.
In this article, I will highlight this tendency with a few examples and show how government does damage to society through misguided actions arising out of this confusion between cause and effect.
One: Economic Growth Is Stimulated By Increasing the Circulation of Money
In a healthy economy, more money circulates in the economy because consumers buy more products and businesses invest more to produce new products and services.
Cause = healthy economy
Effect = higher circulation of money
Keynesians, however, assume the relationship holds in reverse. That is, they think that higher rates of economic growth can be generated by promoting faster circulation of money. Thus follows the misguided Keynesian prescriptions of ultralow interest rates, quantitative easing, capital injections, bailouts, and deficit spending to combat recessions.
Two: Eliminating Cash Transactions Leads to Higher Economic Growth
Recently, the government of India imposed on its people a misguided policy called “demonetization” in an effort to promote a “cashless economy.” The logic is as follows: in developed nations, people mostly use electronic monetary transactions with relatively few cash transactions. Therefore, eliminating cash transactions and forcing people to use electronic transactions will lead to healthier economic conditions similar to those of developed nations.
In truth, in poor nations people predominantly use cash because monetary transactions are too low in value to justify investment in infrastructure to support electronic transactions. As an economy grows and people get wealthier, the average cash transaction will be high enough to justify electronic transactions. So, the relationship is the other way around. Higher economic growth leads to elimination of cash transactions.
The misguided policy of the Indian government is leading to disastrous economic consequences for poor people in India, who rely on small cash transactions in their daily lives.
Three: Deadly Diseases Lead to Poor Economic Growth and Higher Poverty Rates
In what regions of the world are people least affected by diseases like malaria, dengue and cholera? Developed nations. Even in nations with high poverty rates, people who are well off are less susceptible to these diseases, because they can afford medicines, hospital care, and prevention measures such as mosquito repellents and environments free of stagnant water, where mosquitos can breed.
Eliminating diseases does not lead to economic growth. Many deadly diseases such as smallpox and polio have been eliminated. Many charitable organizations invest in disease prevention and health improvement initiatives. The Gates Foundation invests heavily in reducing infant mortality in India. Jimmy Carter has been successful in raising billions of dollars for health education and disease prevention in Africa. Yet these initiatives and billions of dollars make little difference in improving the macroeconomic conditions in poor nations.
What Africa and India need are conditions that stimulate rapid economic growth. As people become richer they can afford better medical care and better living conditions that help them fight diseases and stay healthier.
Diseases do not cause poverty. Poverty is the reason for the higher prevalence of deadly diseases.
Four: Proliferation of Small Firearms is Impeding Economic Development in Africa
Peter Thum, an American entrepreneur and “humanitarian,” was so appalled by the proliferation of guns and other small firearms in Africa that he started a company called Founderie 47 to tackle the problem. His company buys small firearms from Africans, destroys them, and uses the recycled parts to make high-end designer watches and jewelry that sell at prices ranging from $25,000 to $200,000. The funds thus obtained help in the procurement and destruction of thousands more weapons.
Behind Thum’s venture is the assumption that the proliferation of firearms is causing the youth of Africa to participate in destructive civil wars instead of engaging in economic activity that will improve the well-being of Africans.
Brilliant idea? Not so fast! Peter Thum’s got it backwards. The reason the youth of Africa are picking up firearms is because they don’t have jobs. In other words, lack of economic development is the reason for the proliferation of firearms, not the other way around.
Believe it or not, given a choice between a decent job and joining a group of militants, almost all people will choose jobs.
Five: Illiteracy leads to Poverty
What is the most important thing that India needs to eliminate poverty? “Education,” replied a friend of mine. By “education” he meant formal school and college education.
Most people in India believe that lack of education is why poor people are unable to escape poverty. So, the Indian government, which is always dominated by socialists regardless of which party is in the majority, allocates billions of rupees towards providing schooling and college education at a highly subsidized cost. As people get better education, they can get jobs and thus escape poverty. Right?
Wrong! Take Cuba and Nicaragua, for example. The communist governments of these countries launched massive campaigns to eliminate illiteracy. They were successful in almost eliminating illiteracy decades ago. Yet, Cuba and Nicaragua today are among the poorest nations in the world, with per capita GDP rankings of 128 and 165.
This is another example of socialists confusing the cause and effect relationship. Illiteracy in Cuba and Nicaragua was high because of poverty. As people's economic conditions improve, they prefer to obtain better education for their children. This is what happened in the four Asian tigers—Korea, Taiwan, Hong Kong and Singapore—over the latter half of the twentieth century.
Treat the Disease, Not the Symptoms
Illiteracy, the prevalence of deadly diseases, violent civil wars, and uncontrolled population growth are all effects of poverty, which stems from low economic growth. They are not the causes of low economic growth. All of them can be eliminated by creating conditions for rapid economic growth.
The easiest and fastest way to achieve high economic growth rates is through free enterprise systems and free markets. Let’s create free market conditions, such as less centralized government control (democratic and dictatorial), and more free trade. Good things will follow.
I write this on March 18, now having watched a 180-degree reversal of how we think about contagious disease. Formerly, we would put sick people in quarantine and respect the right of healthy people to go about their lives. Now we are on the brink of martial law. In our zeal to fight the coronavirus, we are shutting down travel, public gatherings, restaurants, etc.
This is what a mass panic looks like.
Not to mention that it is already wreaking massive economic damage. The economy was already faltering. The false boom stimulated by a decade of monetary meth was likely turning to bust even before the virus. And then the government began to shut down whole industries: air travel, hotels, sports, bars, restaurants, etc. And likely more to come.
I write extensively at Monetary Metals about the risk of debt defaults cascading like dominoes, so I will not further address that here. I will only say that whole industries are laying off whole workforces in one giant dump (with much more to come). That is a lot of people who will suddenly experience hardship, not to mention stop spending on everything from clothes to computers, phones to tunes (nevermind restaurants and bars—they wouldn’t be allowed that even if they still had their paychecks). As always in a downturn, mainstream financial and economic analysis is useless. I think that right now they are predicting “slower growth.” Yeah, and if you slam the brakes in your car, it is “slower acceleration,” too.
Why this draconian response? There is now a new technical expression among the newly minted tens of millions of experts who inhabit social media platforms. They seek to “flatten the curve”: that is, it is inevitable that this virus will sweep the population. But if we can just slow its progress, then our healthcare system will be able to respond, there will be enough beds, ventilators, and healthcare professionals to care for the caseload. If we allow the virus to progress at full speed, then the hospitals will be overwhelmed, and America will look like Cuba.
If you think that the government must outlaw public gatherings, close the restaurants, and shut down half the economy…to “flatten the curve”…then you—yes, YOU—are attempting to be a central planner.
In capitalism, people and industries are resilient. The reason is simple. They are free to act on their reason and to seek a profit.
In socialism and central planning, there is no resiliency. The people starve if the crop yield is below quota, they drown if the tide rises, they suffer in darkness if an oil shipment is delayed. The reason is simple. They are not allowed to act, but must wait for orders from a central planner. And Mises proved that socialist planning is impossible, even if the planner is a wise, honest, caring genius.
If it is indeed true that American hospitals are soon to be overwhelmed by virus patients, it is not a recommendation for more central planning, enforced by redirecting scant law enforcement resources to enforcing martial law.
It is a damning indictment of just how socialist—and hence sclerotic, rigid, and brittle—our healthcare industry has been forced to become under the degree of socialized medicine that we already have. We are not fully socialist yet. Hence, we are not Cuba yet.
I fear the kind of government that can shut down public gatherings and centrally plan healthcare and everything else. I fear it much more than a virus.
Reprinted from Keith Weiner Economics.
The 50-year US war on drugs has been a total failure, with hundreds of billions of dollars flushed down the drain and our civil liberties whittled away fighting a war that cannot be won. The 20 year “war on terror” has likewise been a gigantic US government disaster: hundreds of billions wasted, civil liberties scorched, and a world far more dangerous than when this war was launched after 9/11.
So what to do about two of the greatest policy failures in US history? According to President Trump and many in Washington, the answer is to combine them!
Last week Trump declared that, in light of an attack last month on US tourists in Mexico, he would be designating Mexican drug cartels as foreign terrorist organizations. Asked if he would send in drones to attack targets in Mexico, he responded, “I don't want to say what I'm going to do, but they will be designated.” The Mexican president was quick to pour cold water on the idea of US drones taking out Mexican targets, responding to Trump’s threats saying “cooperation, yes; interventionism, no.”
Trump is not alone in drawing the wrong conclusions from the increasing violence coming from the drug cartels south of the border. A group of US Senators sent a letter to Secretary of State Mike Pompeo urging that the US slap sanctions on the drug cartels in response to the killing of Americans.
Do these Senators really believe that facing US sanctions these drug cartels will close down and move into legitimate activities? Sanctions don’t work against countries and they sure won’t work against drug cartels.
A recent editorial in the conservative Federalist publication urges President Trump to launch “unilateral, no-permission special forces raids” into Mexico like the US did into Pakistan to fight ISIS and al-Qaeda!
I am sure the military-industrial complex loves this idea! Another big war to keep Washington rich at the expense of the rest of us. And the 2001 Authorization for the Use of Military Force can even be trotted out to fight this brand new “terror war”!
Perhaps unintentionally, however, this sudden push to look at the Mexican drug cartels as we did ISIS and al-Qaeda does make sense. After all, the rise of the drug cartels and the rise of the terror cartels have both been due to bad US policy. It was the US invasion of Iraq based on neocon lies that led to the creation of ISIS and expansion of al-Qaeda in the Middle East and it was the US war on drugs that led to the rise of the drug cartels in Mexico.
Here’s another suggestion: maybe instead of doing the same things that do not work we might look at the actual cause of the problems. The US war on drugs makes drugs enormously profitable to Mexican suppliers eager to satisfy a ravenous US market. A study last year by the CATO Institute found that with the steady decriminalization and legalization of marijuana across the United States, the average US Border Patrol agent seized 78 percent less marijuana in fiscal year 2018 than in FY 2013.
Instead of declaring war on Mexico, perhaps the answer to the drug cartel problem is to take away their incentives by ending the war on drugs. Why not try something that actually works?
For a variety of reasons, rich countries are more easily able to cut per capita carbon emissions. These include both better access to cleaner energy sources and the fact it is more politically feasible to cut emissions in a rich country than in a poor country. In poor and middle-income countries, voters and residents tend to live closer to subsistence levels and the cost of cutting emissions could be the difference between a steady food supply and malnutrition. It could mean a real cut to the availability of reliable medical services.
Proportionally speaking, a cut to carbon emissions in a wealthy country will rarely lead to such stark choices.
So, if we want to see where carbon emissions are likely to grow the most — or at least shrink the least — in coming decades we should be looking outside the wealthy West.
When it comes to total emissions, China has taken the top spot over the past decade, although as recently as 2000, China's total carbon emissions were lower than that of both the United States and the EU.
But Chinese carbon emissions are now double that of the US. As of 2014, China produced 10.2 billion metric tons, while the US produced 5.2 billion metric tons.
Source: CO2 emissions, (metric tons per capita) via the World Bank; totals calculated using population data via World Bank.
As astute readers are likely, to note, however, the US has far fewer people than does China. So, not surprisingly, we find that the US still leads in per capital carbon emissions:
Source: CO2 emissions, (metric tons per capita) via the World Bank.
The differences generally reflect the standard of living. For example, the US, Canada, and Australia, are among the countries with the highest number of vehicles per capita, and with the most living space per capita. The EU has noticeably lower carbon emissions because living standards are lower there, especially in Southern Europe and areas of central Europe that were once behind the Iron Curtain. Moreover, much of Europe has less extreme climate extremes as North America, meaning less of a need for cooling and heating.
However, because wealthier countries can more easily afford cleaner-burning fuels and alternative fuels, the largest decreases in carbon emissions (over this time frame) have come in the Wealthiest countries:
Source: CO2 emissions, (metric tons per capita) via the World Bank.
I should note, however, that the measures of decline in the rich world come out a little differently when we measure "decline from peak." In the US, emissions peaked in 1973 at 22.5 metric tons per capita. In Australia, emissions didn't peak until 2008 (at 18.2 per cap metric tons), and emissions have dropped 15 percent since then. In Canada, per cap emissions peaked in 2003 at 17.4 metric tons, and have fallen 12.3 percent since then. In the US, emissions peaked The EU's per cap emissions peaked in 1979 at 10.5, and have dropped 36 percent since then.
It a totally different story in the developing world, however, where carbon emissions increased 179 percent in China, and 77 percent in India.
As we saw above, because of its high population, China has already overtaken every other country in terms of total CO2 emissions. As a proportion of global carbon emissions, China is closing in on 30 percent of the global total, while the US has now dropped below fifteen percent:
Source: "Share of annual CO2 emissions" from Our World In Data.
Thus, the future is one in which talk about global-warming policy will only mean anything if it focuses on the developing world, and especially on China and India.
So far, however, these countries have shown little interest in abiding by the Rich World's proposed mandates for the developing world. China won't even talk about capping emissions before 2030, and as recently as 2015, India was saying it won't be cutting emissions for another thirty years. India has softened its predictions since then, but still refuses to commit to cutting use of coal, and won't accept legally-binding emissions goals.
The rich world has proposed sending the developing world huge subsidies for cutting emissions, but the developing world has learned from experience, and is unlikely to base national policy around a promise of future action from first-world regimes.
Thus, when asked about how to get China to commit to climate goals, activists like Michael Bloomberg appear to be at a loss .
.@MikeBloomberg tells @FiringLineShow that China's leader is addressing pollution to satisfy constituents & secure his political future.— Firing Line with Margaret Hoover (@FiringLineShow) September 27, 2019
"The Communist Party wants to stay in power in China and they listen to the public," he says. pic.twitter.com/B9SoAXJwrM
Bloomberg claims "the public" will demand changes, but as Foreign Policy magazine has recently reported: "There is almost no daily public concern about climate change in China. The issue is fairly muted in Chinese-language media beyond coverage of Beijing’s own programs, and there is little individual concern about electricity usage or air travel."
As mentioned by Bloomberg, the average Chinese person is concerned about air pollution in Chinese cities, which is quite bad by modern rich-world standards. The regime is more likely to take action in that regard, but that can be done with far less impact on total carbon emissions than the global climate planners would like to see.
But it's not nothing. After all, local concerns over air pollution do have a meaningful effect on carbon emissions over time, because cleaner burning fuel has the benefit of reducing the sort of "smog" that directly impacts daily lives.
The problem — from the climate activists' perspective — is that this is likely to take place over a time frame much longer than the next decade or so. This is because the Chinese also have to take into account the impact further environmental regulation has on standards of living. In China, where the standard of living is much lower, cuts to that standard of living are far painful than they are in the developed world.
Like everyone else, though, the Chinese and the Indians want a city skyline without smog, and they want clean rivers. But they also want abundant energy. The answer lies in technological progress, which also has the added benefit of bringing cleaner water and air.
But while standards of living in the developing world remain so far below those of the rich world, this is likely to pose a political problem for any efforts to impose emissions restrictions on countries that haven't yet had their chance to get rich, too.
The US Constitution never granted the federal government authority to create a central bank. The Founders, having lived through hyperinflation themselves, understood that government should never have a printing press at its disposal. But from the very beginning of America’s founding, the desire for a crony central bank was strong.
But, unfortunately, a third attempt was successful and the Federal Reserve was unconstitutionally created by Congress in 1913. Americans have been living under a corrupt and immoral monetary system ever since. The Federal Reserve is the printing press that has financed the creation of the largest government to ever exist. Endless welfare and endless military spending are both made possible by the Federal Reserve. The Fed can just print the money for whatever the US establishment wants, so those of us who long for a Constitutional and limited government have few tools at our disposal.
Despite all the propaganda claiming “independence,” the Fed has always been a deeply political institution. Because the Fed is a government-created monopoly with key government-appointed employees, its so-called “independence” is a mere fiction. However, the US Congress created the Fed with legislation; it can also abolish the Fed with legislation.
Last week, the facade of Federal Reserve “independence” was dealt a severe blow. Ironically, the person who broadcast to the world that the Fed is anything but “independent” was ex-New York Fed President Bill Dudley. Dudley wrote that, “Trump’s re-election arguably presents a threat to the United States’ and global economy, and if the goal of monetary policy is to achieve the best long-term economic outcome, the Fed’s officials should consider how their decisions would affect the political outcome of 2020.”
The timing of Dudley’s threats to use Fed monetary policy to affect the outcome of a US election couldn’t come at a more striking time. After all, for more than two solid years Americans have been bombarded with fabricated stories about Russians rigging our elections. And yet here is a Federal Reserve official threatening to do the same exact thing - but this time for real!
Whether it’s the mainstream media, the CIA, the FBI, or now the Federal Reserve, more and more Americans are waking up to the fact that there is a Deep State in America and its interests have nothing to do with American liberty. In fact, our liberty is what the Deep State wants to abolish.
When it comes to the Federal Reserve, I stand firmly by my conviction that it needs to be audited and then ended as soon as possible.
Former Secretary of State George Schultz has an idea for dealing with increased immigration from the Northern Triangle region of Central America, which includes of El Salvador, Guatemala and Honduras: he wants to spend more money on foreign aid.
In yesterday's Wall Street Journal, Schultz writes that the countries of the Northern Triangle could "increase the 'supply' of good governance by us[ing] foreign aid to fund better policing, transparency and higher-quality services—and apply international pressure to root out corruption and encourage political reform."
And who could supply this foreign aid? According top Schultz, "the U.S. is the only nation with the economic, technological and political authority to lead," and "[t]he Inter-American Development Bank could do so by redirecting existing funds without new U.S. expenditures, and could get started with a phone call in Washington."
Schultz wisely doesn't mention any dollar amounts. How could he? His proposal is clearly meant to be a sort of trial balloon: demand more government spending now, and work out all the details in the back rooms later.
But we know how this sort of thing works. There is no real expectation that foreign aid would actually remake the economies of the Northern Triangle.
In reality, it will be yet another foreign aid boondoggle: friends of the US regime will receive funds. There will be little follow-up as to how the money is spent. The money may even go to fund despots who will use the funds to murder their enemies. George Schultz's personal friends and colleagues will no doubt get their cut. This is how the US foreign aid game is played.
It is interesting that Schultz doesn't mention something that does have the potential for revolutionizing the region's access to capital and its standard of living. It will do this while greatly lessening the incentive to emigrate from the region to the US: unrestricted trade with the United States.
To accomplish this, the US need not collect any new taxes. It need not impose any new regulations. It need not form any international "coalitions."
Instead, it only has to make the Northern Triangle a true Free Trade Zone with full access to US markets.
At this point, some observers may claims "the US already has a free trade agreement with Central America! In fact, the region is largely duty free!" But this objection helps to illustrate just how much the term "free trade" has been corrupted in the phrase "free trade agreement." In practice, only qualifying goods can be imported to the US from Central America duty free. In order to qualify, goods must meet a variety of bureaucratic requirements stemming from "rule of origin" requirements. These rules exist to prevent "trade diversion" and other types of trade in which a Central American country might import parts from outside the free trade zone, add only small amounts of value, and then export the finished product to the US. Thus, trade between Central America and the US is not really free, and the trade agreements specifically prevent Central American countries from becoming trade and shipping centers where goods and services can be freely imported and exported globally.1
If Central America had a true free trade agreement with the US, however, both US and foreign manufacturers would have an enormous incentive to set up shop in the region and produce goods there for the US market.
Over time, capital would flood into the region, greatly increasing the standard of living for Central Americans while providing new sources of goods and services for American entrepreneurs and consumers.
The success of such a plan, of course, is not guaranteed. The regimes of El Salvador, Guatemala, and Honduras could squander the opportunity. They could insist on high domestic taxes or an insecure legal environment in which private business owners would have reason to fear expropriation by the regime.
But when facing the possibility of true free trade with the US, the stakes would become very high indeed, and the regime could choose between guaranteed moderate levels of tax revenue, or the disastrous policies of expropriation.
But no matter how it turns out, the US taxpayer is not on the hook for anything. There is no risk of foreign aid flushed down the toilet. Instead, the upside is substantial: access to low-cost goods and services from American, Asian, and European firms all hungry to take advantage of this new "free trade zone" in the western hemisphere. American entrepreneurs would be able to provides goods and services at lower prices. They could hire more workers. They could invest more of their profits.
Moreover, the geo-political benefits would be substantial. The regimes of the Northern Triangle would become committed to maintaining friendly relations with the US, and the pressures of high levels of migration from the region would be lessened.
In his essay " The Case for Free Trade and Restricted Immigration ," Hans-Hermann Hoppe recognized the benefits of free trade in immigration policy:
The relationship between trade and migration is one of elastic substitutibility (rather than rigid exclusivity): the more (or less) you have of one, the less (or more) you need of the other . [Emphasis added.] Other things being equal, businesses move to low wage areas, and labor moves to high wage areas, thus effecting a tendency toward the equalization of wage rates (for the same kind of labor) as well as the optimal localization of capital. With political borders separating high- from low-wage areas, and with national (nation-wide) trade and immigration policies in effect, these normal tendencies—of immigration and capital export—are weakened with free trade and strengthened with protectionism. As long as Mexican products—the products of a low-wage area—can freely enter a high-wage area such as the U.S., the incentive for Mexican people to move to the U.S. is reduced. In contrast, if Mexican products are prevented from entering the American market, the attraction for Mexican workers to move to the U.S. is increased. Similarly, when U.S. producers are free to buy from and sell to Mexican producers and consumers, capital exports from the U.S. to Mexico will be reduced; however, when U.S. producers are prevented from doing so, the attraction of moving production from the U.S. to Mexico is increased.
Bizarrely, protectionists take the opposite self-defeating approach: they want to cut off trade with other nations, thus reducing the standard of living. This then increases the incentive for foreigners to emigrate to the United States. The protectionists then complain there's too much immigration and the government must intervene even more to control both trade and migration.
Not surprisingly, Ludwig von Mises saw the ridiculouslness of this position. As I noted in my article " If You Don't Like Immigration, You Should Love Free Trade ":
Opponents and proponents of immigration may argue endlessly about the potential downsides and upsides of immigration. (For an especially nuanced and insightful view of the downsides, see Ludwig von Mises's work on nationalism and immigration .)
With free trade, though, there is no downside, which is why Mises, who allowed for a number of caveats on immigration, made no exceptions for free trade.
For many modern protectionists, though, the desire to close off trade stems not just from economic ignorance, but from an emotional desire to actually harm other countries on nationalistic grounds. The economic implications of these policies then become secondary to other ideological agendas. Mises understood this well, and in Human Action concluded :
We may, for the sake of argument, disregard the fact that protectionism also hurts the interests of the nations which resort to it. But there can be no doubt that protectionism aims at damaging the interests of foreign peoples and really does damage them. ... The philosophy of protectionism is a philosophy of war.
George Schultz is correct in the sense that a prosperous Central America is a Central America with less incentive to send its workers and families to North America. But the real solution does not lie in throwing a few extra bucks at the central American regimes in hope they might build a couple of new highways. The real solution lies in expansion of trade, capital investment, and . Only then can a sustainable solution to the region's poverty be found.
- 1. It should also be noted that the burden of gaining "certification" for qualification under the free trade agreements place small companies at a relative disadvantage compared to larger companies. For more on how these rules affect trade flows, see: "Preferential Rules of Origin in Regional Trade Agreements." https://www.wto.org/english/res_e/reser_e/ersd201305_e.pdf