Power & Market

How Big Will These Federal Programs Get? No One Knows.

05/06/2020Robert Aro

When was the last time the government delivered both on time and under budget? In the case of public bailouts, it seems every week brings more program expansions. We can only speculate as to how big the Main Street Lending Program (MSLP) and the Paycheck Protection Program (PPP) will be by the time we get out of the Great Lockdown.

Last Thursday, after reviewing 2,200 public comments regarding the MSLP, the Fed decided to lower the minimum loan amount from $1 million to $500,000, allowed lenders to retain a 15 percent rather than 5 percent share for certain loans, and increased eligibility to companies with an annual revenue of up to $5 billion instead of $2.5 billion. The $600 billion facility still has yet to open. But when it does, and if it gets fully funded, it will expand the Fed’s balance sheet by approximately 10 percent.

The PPP could also expand the balance sheet by this amount, considering that the program started at $349 billion and has already grown to $670 billion. The same day as the MSLP release, it was announced that the PPP would expand to work with smaller nonbanks such as those in the farm credit system and community development institutions. The April 27 to May 1 US Small Business Administration Report showed that in the second round of funding there were over 2 million applications approved for $175 billion. This means that there is still a couple hundred billion dollars left which should be exhausted shortly. Given the number of approvals for these forgivable loans, would anyone be surprised if the program were expanded for a third time?

We can only wonder. But as a CNN interview with Larry Kudlow revealed, the top economic advisor to the president said that they might consider getting additional money for the PPP since:

This has been an extremely popular and effective program, no question about it. You know, keeping folks on the payroll is so important….we will be looking at that.

The Fed’s most recent balance sheet update shows that only $19 billion from the PPP Liquidity Facility has been utilized thus far; therefore, we will continue to monitor this amount. Unfortunately, it could reach $600 billion in the months ahead. Both programs are unique because the public will be able to directly participate compared to other programs, in which most cannot, such as various Fed asset purchases, lending, and bond programs.

However, a third program might include Main Street as well. This too has been expanded as of last week: the $500 billion Municipal Lending Facility (MLF). The population requirements were lowered to accept cities with 250,000 residents (formerly 1 million) and counties with 500,000 residents (formerly 2 million). This may spawn more grant programs and other “investments” that could sweep the country and trickle down to members of the public.

Between the maximum capacity of these three programs, the Fed may contribute a $1.7 trillion increase to the money supply. How big the balance sheet will be by the time life returns to normal is anyone’s guess. Also keep in mind that the effect of the banks later pyramiding this money is rarely ever discussed. Nevertheless, all this debt raises another interesting question: How will we pay this money back?

The Wall Street Journal recently posed a similar question to St. Louis Fed president James Bullard. When asked about “the inevitable day of reckoning,” he replied:

We’re borrowing and we’re gonna have to pay that back in the future, so our future tax burden is that much higher. But can we handle it as a nation? I think we can.

Should we take the advice of one of the most respected central bankers in the country? After all, we’ve been told that it was the Fed that brought us out of the last financial crisis. Surely, they can do the same thing again, only this time on a much larger scale…

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How a Bad Economy Could Be Good for Stocks

05/04/2020Frank Shostak

What matters for the stock market is not the state of the real economy as such, but the state of monetary liquidity. In fact, bad economic conditions can actually be good for stocks. This is because monetary liquidity is determined by the interaction between the demand for money and the supply of money, the latter of which is associated with a looser monetary stance during crises.

As economic activity slows down, the demand for the services that the medium of exchange provides in the real economy declines. As a result, for a given pool of money a surplus of money emerges. As a rule, this surplus is put to work in financial markets, including the stock market.

Consequently, the prices of financial assets and stocks are pushed higher. (A deep economic slump also tends to be associated with a strong loosening in the central bank’s monetary stance, which further supports the growth momentum of the money supply.)

This was observed in the 1970s. The yearly growth rate of industrial production fell from 3.5 percent in January 1974 to –12.4 percent in May 1975. The yearly growth rate of the Consumer Price Index (CPI) declined from 12.3 percent in December 1974 to 9.4 percent by June of the following year.

As a result, the yearly growth rate of surplus money climbed from –7.7 percent in March 1974 to 7.6 percent in May 1975. In response to the increase in liquidity—i.e., the surplus money—the S&P500 climbed from 68.6 in December 1974 to 95.2 by June 1975—an increase of 38.8 percent.

Now if the pool of real savings is declining, it is possible that this increase in surplus money will not be employed in the stock market. Instead, investors may prefer to put it in safer assets such as Treasury bonds. This is something that was observed during the Great Depression.

For instance, the yearly growth rate of industrial production fell from 15.3 percent in January 1929 to –24.6 percent in October 1930. The yearly growth rate of the CPI also fell significantly, from –1.2 percent in January 1929 to –6.4 percent in December 1930.

In response to these large declines, the yearly growth rate of surplus money increased from –16.6 percent in May 1929 to 25.5 percent by November 1930.

Despite this strong increase in monetary liquidity, the S&P500 fell from 24.15 in October 1929 to 15.34 by December 1930—a fall of 36.5 percent. The index in fact continued to slide, falling to 4.4 by June 1932—an overall decline of 81.8 percent from October 1929.

I attribute the ineffectiveness of the increase in liquidity in strengthening the stock market between May 1929 and November 1930 to the possibility that the pool of real savings had declined significantly. The ensuing depression and massive unemployment forced people to stay out of any form of investment in stocks. As a result, the increase in liquidity was directed toward assets such as US Treasurys rather than stocks. During this period, the yield on the ten-year Treasury bond fell, from 3.71 percent in August 1929 to 3.19 percent by November 1930.

What is the current US economic background? Economic activity in terms of industrial production growth currently shows a visible weakening. After closing at 5.4 percent per annum in September 2018, the yearly growth rate fell to –1 percent in January 2020. The annual growth rate of the CPI, after having settled at 1.5 percent in February 2019, had climbed to 2.5 percent by January 2020.

The growth momentum of liquidity has shown a visible strengthening since August 2019. The yearly growth rate climbed from –2.7 percent to 4.2 percent by February 2020. The S&P500, however, after closing at 3,231 in December 2019, had plunged by 20 percent by March 2020, closing at 2,585.

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How the Private Sector Is Fighting the Pandemic

In the race to develop a cure and treat COVID-19, many consider the state and its subsidiaries as the only institutions capable of adapting our current system to suit the epidemic. On the other hand, phrases such as “the private sector has no interest in humanitarian goals! It only seeks profit!” are uttered as justification for more state action.

To illustrate that the private sector can work for the common good, here are some initiatives that "greedy" capitalists have created to help with the fight against the novel coronavirus (and if they profit along the way, who can blame them?).

[RELATED: "The FDA Continues to Actively Undermine America’s Response," by Tho Bishop]

Turning Whiskey Into Hand Sanitizer

An item which has been highly demanded is hand sanitizer, and due to panic purchasing its price has risen a great deal or it has disappeared from shelves altogether in places where laws prevent vendors from raising prices.

However, in those places where prices have increased, this has pushed makers to increase production and supply the market with more of the product. Moreover, it has encouraged others to shift their production toward alcohol and hand sanitizer.

This is the case with distilleries. Instead of crafting bourbon and vodka, many are changing their schedules to produce hand sanitizer. They are giving it away for free to the local communities or selling it at a lower price, which helps them hold the fort during these difficult times. Even Bacardi, a famous rum producer, is allocating alcohol to the production of more than 1.7 million ten-ounce units of hand sanitizer.

Companies that make perfume are also entering the business. LVMH (LVMH Moët Hennessy – Louis Vuitton SE​) announced that it is going to convert its cosmetic factories to hand sanitizer production and distribute the product to thirty-nine hospitals in France.

Free Services

Special efforts are being made to guarantee that businesses and schools can continue their activities—at least in part. Google has made available features of Google Hangouts that were previously paid, such as video meetings of up to 250 participants and the ability to record calls and save them to Google Drive.

Likewise Coursera has made its program Coursera for Campus available at no cost for universities whose activities were affected by COVID-19. It can be used to enroll students in more than 3,800 online courses from prestigious colleges and universities.

But not every worker can work from home. This is the case for those who work in a variety of services and specific types of shops. "Social distancing" places an enormous economic burden on such enterprises.

To help with this problem, Facebook has started a fund of $100 million to aid small businesses affected by the epidemic. Up to thirty thousand businesses in over thirty countries are eligible to receive help with rent costs, operational costs, and maintaining their workforces. Surely this will be a relief for many entrepreneurs.

The Private Sector Works for Both Private Gain and the Common Good

So far, we have only noted some cases of capitalists around the globe helping their communities and other nations with resources to fight the epidemic. However, we have set aside all the theoretical discussion involving the question of whether we should have a totally private healthcare system or a socialized one.

A case can be made—implicit in some parts of this article—that the state disturbs the workings of the healthcare industry. Government regulations have limited the supply of critical goods such as hand sanitizer, masks, and even food. Government-funded services do not scramble to supply goods and services the way that market firms do. After all, speed and service are the lifeblood of a private firm. This is why even if we abandoned the healthcare sector to the pursuit of profit the whole population would benefit. For any profit to be made, businessmen have to provide a valuable service to their customers. This even drives firms to lower prices while embracing innovation and research with an enthusiasm that government agencies lack.

Unfortunately, the role of private markets is becoming harder to see as government expands into more and more sectors. Everywhere, for example, states dominate the healthcare sector. Even in the US, considered by many the embodiment of capitalism, healthcare has ceased to be primarily a market endeavor. Yet even as government attempts to further crowd out the private sector, the social benefits of markets remain.

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How to Make Hand Sanitizer Reappear on Store Shelves

04/03/2020David Cusimano

As grappling with COVID-19 has required rapid and difficult decisions by world leaders to protect the public, it has been easy to overlook some of the lessons basic economics can teach us about prices. I taught economics for several years, and this topic that we covered in the first few sessions of each semester comes to mind as I watch today’s events unfold.

Prices serve a far more important role than simply telling us how much cash we need to part with in order to receive a good or service. They form the backbone of the entire market system. Individual market actors deliver critical products around the world more effectively than any third party–directed effort ever could. And they can do that only because of prices.

Prices act as signals to entrepreneurs of what value society is placing on particular resources at any given time. So, if society wants more iPhones, then the prices of the inputs to make iPhones will increase, thereby allowing the raw materials required to be directed to that purpose. Industries creating products with less value to society can’t pay as much for those raw materials, and thus they don’t get them. In times of crisis, our focus shifts from studying how prices direct resources to iPhone production to the more critical function of rationing—who does and doesn’t get food, fuel, and medical supplies.

The political consensus is that prices should be prevented from fluctuating in times of crisis. Although these policies are often well intentioned, they remove the critical signals needed by those on both the supply side and the demand side to make decisions in the best interest of society.

Consider hand sanitizer, the price of which has been increasingly scrutinized during this crisis. People around the world have been hoarding it, making it difficult or impossible to find in some areas. Nervous citizens quite naturally understand the importance of this product and want to make sure they have plenty of it. With prices forced to remain low, those who can get to the stores fastest have little economic incentive to not stock up. Those who aren’t as swift (who coincidentally make up a large portion of those who would be most at risk should they contract COVID-19) are left with empty store shelves. Once hand sanitizer is out of stock, those who really need it can’t purchase it—at any price. Even if a desperate person deems fifty dollars per bottle a lower cost than the cost of contracting the virus, they have no options. Our well-intentioned anti-price-gouging policies have left them with nothing.

And because producers who might currently be supplying ethyl alcohol for other, less needed uses (such as alcoholic beverages) aren’t able to be compensated for the expense of converting their plants or abandoning their existing customers, many of them aren’t able to shift gears—even if they might like to in the name of helping society in a critical time.

The inevitable outcome is the emergence of a black market as desperate buyers and sellers attempt to skirt the rules and transact anyway. A basic supply and demand graph shows us that black market prices are higher than those the market would have arrived at. Our attorney generals then run around making criminals out of people who were attempting to serve the needs of the community, and no one wins.

If, however, we allow the price to fluctuate freely, two good things happen. Those who are able bodied and make it to the stores first will have some challenging decisions to make. When faced with hand sanitizer at twenty dollars per bottle that was previously only two dollars, they will be a lot less likely to clean the shelves out. They will be much more likely to grab only the amount their families need, thereby leaving additional supply for those who come behind them.

In addition, producers of alcoholic beverages will quickly notice that prices of hand sanitizer are rising. They will find it more profitable to supply hand sanitizer than beverages and rapidly convert their production. This increase in production will not only increase the amount of hand sanitizer available in the world, but also mitigate the rise in prices. Even enterprising suppliers who might appear to be exploiting the situation at the consumer’s expense are sending vital signals to other suppliers that they need to start ramping up production.

The phenomenon has been proven time and again over many generations, and no product or service to date has been exempt—no matter how urgent the crisis. The invisible hand is still at work. Markets provide more products than any other delivery method and the most just form of determining who gets them. In a time of crisis, instead of abandoning their most beneficial feature, perhaps we should lean on them more.

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How Minimum Wage Laws Have Made the Job Search Worse for So Many

04/02/2020Jacob Maichel

Generally I think people who advocate for minimum wage laws mean well but likely have a fundamental misunderstanding of the topic. Pleas for a living wage are not new by any means. Saint Thomas Aquinas believed that commodities (farm products) should demand a fair price and that workers should be paid a sufficient income to support themselves. In his time period, however, this was unachievable, as the majority of people lived very minimally and often survived on their own food production. The idea of a "just wage" or "living wage" really saw a resurgence of popularity during the Industrial Revolution. Social reformers of the time believed that it would be more beneficial for children to be in school, rather than working for low wages in dangerous conditions. This belief led to the creation of the first minimum wage laws in the country.

Minimum Wage Laws as a Limit on Total Labor

In 1912 Massachusetts passed the first minimum wage laws the US had ever seen, although it was only pertinent to women and children. The law was passed largely in response to a fear that unskilled workers who were paid low wages were taking the jobs of adult men. The idea behind the law was that by forcing employers to pay unskilled workers similar wages to skilled ones employers would opt for the latter, protecting the working man from competition. Many states followed Massachusetts's example, but these laws were short lived as the United States Supreme Court ruled them unconstitutional for violating the principle of freedom of contract. The repeal of these laws was largely ignored as the country prospered in the 1920s. High demand for workers, coupled with tightened immigration restrictions, allowed for competition within the market to allow wages and working conditions to naturally improve with no coercion from outside forces.

In 1929 the unemployment rate in the US was roughly 3.14 percent compared to 24.75 percent in 1933. As wages across the nation began to decrease, the desire for a guaranteed minimum wage again resurged. Unfortunately, the underlying justification for the laws seemed to shift from getting children out of the workforce to instead guaranteeing a "living wage" to those who were employed. What is misunderstood about this situation is that even though many with jobs were making less, if wages had remained where they had been in the 1920s many more people would have been without a job. In 1933 the New Deal's National Industrial Recovery Act (NIRA) promised a minimum wage. This was largely a failure, as it only increased the wages of unskilled workers, who already struggled to find gainful employment, not the wages of skilled workers, who already were paid above the minimum wage. Rather than stimulating recovery, it appears to have made it harder for unskilled laborers to find work. The NIRA lasted only two years before it was deemed unconstitutional as well, in 1935. It was replaced by the Fair Labor Standards Act in 1938. and since then the US has had a minimum wage.

The Fair Labor Standards Act did not immediately impact the labor market in a significant manner. Once the US began to militarize in the 1940s, the wartime economy increased wages far above the minimum. It remained this way until 1956, when Congress significantly increased the minimum wage and authorized the US Department of Labor to conduct surveys to increase employer compliance. Teenagers have always had a higher unemployment rate than adults, but after 1956 there was an incredible proliferation of teen unemployment, illustrated in the graph below.


Teenagers typically have the least marketable skills other than the unique value they possess as low-wage workers. Without this advantage, many lost their jobs to more skilled laborers in the short term and the long-term impact of automation is has started to be realized more and more.

Perhaps more alarming is the power that these minimum wage laws grant employers to discriminate in hiring. As wages increase and businesses reduce their workforces, this creates a surplus of individuals looking for employment. Economist Thomas Hall in Aftermath: The Unintended Consequences of Public Policies explains very clearly that discrimination is very difficult when the amount of applicants is similar to the amount of job vacancies in the market. As this surplus increases, it empowers employers to increasingly choose employees based on personal preferences, including race. Historically, black teens have had a higher unemployment than their white counterparts, but after the 1956 wage increases it became much worse. This can be seen in the following graph depicting the difference in unemployment rates among black and white teenagers before and after the 1956 wage increases.


It's ironic that labor unions and politicians that call for higher minimum wage laws forget why they were enacted in the first place: to force unskilled laborers (largely children) out of the workplace. This has greatly impacted the most vulnerable groups of workers, namely teenagers, and steals valuable experience that they need to be successful in gaining future work. Although many people who support these laws have good motives, the road to hell is surely paved with good intentions. Supporting these laws seems good in theory; in practice they not only promote a slew of dangerous outcomes, but can explicitly allow racist hiring behavior.

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How Government Price Controls Are Keeping Toilet Paper off the Market

03/31/2020Ryan McMaken

A reader, A.B. Sterner, writes:

Toilet paper, for reasons I still can’t grasp, is experiencing a severe (in store) shortage in a lot of areas of the country. Yet in some areas price ceilings—in the form of "anti-gouging" laws—have been put in place to keep those prices artificially low, despite the unprecedented increase in demand.

Our family is one who gets a predetermined order of paper and other products delivered by Amazon monthly, through their subscribe and save feature. One of the items we receive monthly is toilet paper. This last delivery, Amazon was unable to fill the order. Thanks to our overestimation and failure to adjust our previous orders, we have been unintentionally hoarding toilet paper for years. When set up initially, we assumed we would use a package equivalent to 56 “regular” rolls of toilet paper each month. As it turns out, we have used an estimated average of 38 regular rolls of toilet paper per month. So even as we did not receive our shipment this month, we still had plenty of stock on hand, the equivalent of nearly 500 rolls, or enough to easily supply our family for at least a year.

We are now faced with a far larger than needed inventory of toilet paper. Our first thought is we should hold onto it, given the uncertainty of when we will be able to purchase more. Given we have more than a year’s supply, there isn’t a likely scenario where this would be necessary. It's a sunk cost, we have the room to store it without sacrificing the storage of other items. The do-nothing approach is the most appealing option right now. But what if we were to try and sell it? We paid roughly $0.30 for each regular roll. It’s $150.00 worth of inventory we are currently carrying. Our subjective value of this toilet paper is at least what our costs were, as of now. As laws to prevent price gouging are in effect, and if we were to try to sell any of our inventory for more than $0.30 per roll would be considered illegal, there is no incentive to let go of our current inventory.

As of now, our subjective value of each roll is probably $0.50, a 67% premium over what we paid for them. If we could receive more than $0.50 per roll, instead of hoarding them, we would put at least a couple of cases up for sale. If we could get $1.00 [per] roll, we would likely put most of my inventory up for sale. If we could get $5.00 per roll, we would sell every last roll and either purchase a bidet or two, or maybe even use warm wash cloths and do quite a bit of unpleasant laundry every day.

I’m sure plenty are thinking that we should do the “right” thing and just donate them to others less fortunate. The problem with this is prices have remained unchanged, thanks to price ceilings put into place by the government. You may not think this would have any effect on our willingness to donate our inventory, but it has a large impact. Donations to a qualified non-profit carry tax benefits. Our $150.00 inventory, if donated, would generate a tax deduction of no more than $150.00, since this is the current artificial price. The actual tax savings to us would be less than $50.00, well below what we paid and far below our subjective value per roll. The incentive isn’t there. If we could deduct $500.00 or $1,000.00 worth of income by donating our excess inventory, because prices were not artificially restricted, there would be an incentive to donate our extra to those in need.

If the price system were allowed to work, even though we would gain more profit from selling them outright, we would more likely donate our excess, because the monetary benefit would be equal to or more than our subjective value. In addition, we would also profit from the psychic benefits we would get, from knowing we were helping those who are in need during this time. So even if we had the opportunity to be selfish, uncaring capitalist dogs, we wouldn’t.We are not the only ones in this situation. Others are have inadvertently overordered their supply of toilet paper and have inventories such as ours. Even more have purchased well more than they need in the short term and have subjectively valued theirs at more than they have paid. If prices were allowed to work, ask yourself, how many of just these rolls of personal inventory would be put back out into the market? The answer is an easy one. It would be more than enough to satisfy the current needs of every American. As we established, there is no shortage of toilet paper out there, just a shortage of toilet paper in the marketplace because of the price ceilings put in place by our philosopher kings. 

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Happy Birthday, Murray!

03/02/2020David Gordon

Today would have been Murray Rothbard’s ninety-fourth birthday. He was an unforgettable friend, whose immense knowledge of many different fields was unsurpassed in my experience. In a lecture on the Austrian theory of the business cycle, he mentioned the common objection that the expansion of bank credit might have no effect if investors anticipated trouble. After the lecture, I asked whether Mises had answered this point. He said, “See his response to Lachmann in Economica 1943.” I often went to used bookstores with him, in both Palo Alto and Manhattan, and listened to him as he commented on nearly every book on the shelves. When he was a student at Columbia, he admired the philosopher Ernest Nagel, who he said would always encourage students to do new work. Murray was like this himself. He constantly encouraged students to work on Austrian and libertarian topics.  His support for me was never failing, and I owe him everything. If only he were still here now, to guide and instruct us!

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How Expansive Is FBI Spying?

01/22/2020Ron Paul

Cato Institute research fellow Patrick Eddington recently filed several Freedom of Information Act (FOIA) requests to find out if the Federal Bureau of Investigation ever conducted surveillance of several organizations dealing with government policy, including my Campaign for Liberty. Based on the FBI’s response, Campaign for Liberty and other organizations, including the Cato institute and the Reason Foundation, may have been subjected to FBI surveillance or other data collection.

I say “may have been,” because the FBI gave Mr. Eddington a “Glomar response” to his FOIA requests pertaining to these organizations. A Glomar response is where an agency says it can “neither confirm nor deny” involvement in a particular activity. Glomar was a salvage ship that the Central Intelligence Agency used to recover a sunken Soviet submarine in the 1970s. In response to a FOIA request by Rolling Stone magazine, the CIA claimed that just confirming or denying the Glomar’s involvement in the salvage operation would somehow damage national security. A federal court agreed with the agency, giving federal bureaucrats, and even local police departments, a new way to avoid giving direct answers.

The Glomar response means these organizations may have been, and may still be, subjected to federal surveillance. As Mr. Eddington told Reason magazine, “We know for a fact that Glomar invocations have been used to conceal actual, ongoing activities, and we also know that they’re not passing out Glomars like candy.”

Protecting the right of individuals to join together in groups to influence government policy is at the very heart of the First Amendment. Therefore, the FBI subjecting such groups to surveillance can violate the constitutional rights of everyone involved with the groups.

The FBI has a long history of targeting Americans whose political beliefs and activities threaten the its power or the power of influential politicians. The then named Bureau of Investigation participated in the crackdown on people suspected of being communists in the post-World War I “Red Scare.” The anticommunist crackdown was headed by a young agent named J. Edgar Hoover, who went on to become FBI director, a position he held until his death. Hoover kept and expanded his power by using the FBI to collect blackmail material on people, including politicians.

In the 1930s and 1940s, the FBI spied on supporters of the America First movement, including several Congress members. Two of the most famous examples of the FBI targeting individuals based on their political activities are the harassment of Martin Luther King Jr. and the COINTELPRO program. COINTELPRO was an organized effort to spy on and actively disrupt “subversive” organizations, including antiwar groups

COINTELPRO officially ended in the 1970s. However, the FBI still targets individuals and organizations it considers “subversive,” including antiwar groups and citizen militias.

Congress must hold hearings to determine if the FBI is currently using unconstitutional methods to “monitor” any organizations based on their beliefs. Congress must then take whatever steps necessary to ensure that no Americans are ever again targeted for surveillance because of their political beliefs and activities.

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Hans Hoppe in Arabic

01/21/2020David Gordon

Admirers of the work of Hans-Hermann Hoppe will be pleased by some news from our friend Youssif Almoayyed, an outstanding supporter of the Mises Institute who lives in Bahrain. Youssif informs us that books by Hans have been translated into Arabic and are selling very well.  His A Short History of Man was brought out by a small Iraqi publisher from Mutanabbi Street, a historic center in Baghdad for paper making, book binding and bookselling, now known as an intellectual center. The book sold very well in Iraq and has already covered its costs, even though the publisher hasn’t engaged very actively in distributing it. Youssif notes that complete freedom of the press now prevails in Iraq, with no government censorship, although publishers of controversial books risk physical attacks from offended private citizens or groups.

Hans’s more famous book Democracy: The God That Failed sold half its print run within two months and a pirated edition is already available. When the book was released in Bahrain at a book exhibition, the first day of which was marked by a solar eclipse, it was a hit, in part owing to the endorsement of a noted Bahraini intellectual and historian. Some who saw the word “God” in the title feared the book was blasphemous, but readers soon discovered that Hans meant by it only his intention to denounce democracy as idolatrous. The book has no quarrel with Allah, fortunately for its fate in the Arab world.

Arabic readers now have a chance to study the thought of this most provocative and insightful libertarian theorist. It only remains to add, though Youssif is too modest to say so, that he himself has done a great deal to bring the libertarian message of Hans Hoppe, as well as that of Mises and Rothbard, to Bahrain and the wider Arabic world. For that he deserves our profound gratitude.

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How the US Wages War to Prop up the Dollar

01/08/2020Ryan McMaken

At Counterpunch, Michael Hudson has penned an important article that outlines the important connections between US foreign policy, oil, and the US dollar.

In short, US foreign policy is geared very much toward controlling oil resources as part of a larger strategy to prop up the US dollar. Hudson writes:

The assassination was intended to escalate America’s presence in Iraq to keep control of the region’s oil reserves, and to back Saudi Arabia’s Wahabi troops (Isis, Al Quaeda in Iraq, Al Nusra and other divisions of what are actually America’s foreign legion) to support U.S. control of Near Eastern oil as a buttress of the U.S. dollar. That remains the key to understanding this policy, and why it is in the process of escalating, not dying down.

The actual context for the neocon’s action was the balance of payments, and the role of oil and energy as a long-term lever of American diplomacy.

Basically, the US's propensity for driving up massive budget deficits has created a need for immense amounts of deficit spending. This can be handled through selling lots of government debt, or through monetizing the debt. But what if there isn't enough global demand for US debt? That would mean the US would have to pay more interest on its debt. Or, the US could monetize the debt through the central bank. But that might cause the value of the dollar to crash. So, the US regime realized that it must find ways to prevent the glut of dollars and debt from actually destroying the value of the dollar. Fortunately for the regime, this can be partly managed, it turns out, through foreign policy. Hudson continues:

The solution [to the problem of maintaining the demand for dollars] turned out to be to replace gold with U.S. Treasury securities (IOUs) as the basis of foreign central bank reserves. After 1971, foreign central banks had little option for what to do with their continuing dollar inflows except to recycle them to the U.S. economy by buying U.S. Treasury securities. The effect of U.S. foreign military spending thus did not undercut the dollar’s exchange rate, and did not even force the Treasury and Federal Reserve to raise interest rates to attract foreign exchange to offset the dollar outflows on military account. In fact, U.S. foreign military spending helped finance the domestic U.S. federal budget deficit.

An important piece of this strategy has been a continued alliance with Saudi Arabia. Saudi Arabia maintains the world's largest capacity for oil production, and it was the largest single producer of crude for most of the period from the mid-1970s to 2018, when the US surpassed both Saudi Arabia and Russia.

But Saudi Arabia remains under the US thumb:

what Saudi Arabia does not save in dollarized assets with its oil-export earnings is spent on buying hundreds of billion of dollars of U.S. arms exports. This locks them into dependence on U.S. supply [of] replacement parts and repairs, and enables the United States to turn off Saudi military hardware at any point of time, in the event that the Saudis may try to act independently of U.S. foreign policy.

So maintaining the dollar as the world’s reserve currency became a mainstay of U.S. military spending. Foreign countries do not have to pay the Pentagon directly for this spending. They simply finance the U.S. Treasury and U.S. banking system.

However, any move away from this status quo tends to be met with paranoia and intervention from the US:

Fear of this development was a major reason why the United States moved against Libya, whose foreign reserves were held in gold, not dollars, and which was urging other African countries to follow suit in order to free themselves from “Dollar Diplomacy.” Hillary and Obama invaded, grabbed their gold supplies (we still have no idea who ended up with these billions of dollars' worth of gold) and destroyed Libya's government, its public education system, its public infrastructure …

But the role of oil-producing states goes beyond merely churning dollars and US debt to keep the dollar afloat. These countries also provide the foot soldiers for many US interventions in terms of terrorists and guerrilla fighters who can be used against US enemies. Hudson declares:

The Vietnam War showed that modern democracies cannot field armies for any major military conflict, because this would require a draft of its citizens. That would lead any government attempting such a draft to be voted out of power. And without troops, it is not possible to invade a country to take it over.

The corollary of this perception is that democracies have only two choices when it comes to military strategy: They can only wage airpower, bombing opponents; or they can create a foreign legion, that is, hire mercenaries or back foreign governments that provide this military service.

That is, the US regime can certainly get away with lots of bombing operations and other low-manpower operations. But anything that might require conscription is a political nonstarter. Hudson notes that Saudi Arabia, with its particularly rabid and extreme strain of Islam is quite useful:

Here once again Saudi Arabia plays a critical role, through its control of Wahabi Sunnis turned into terrorist jihadis willing to sabotage, bomb, assassinate, blow up and otherwise fight any target designated as an enemy of “Islam,” the euphemism for Saudi Arabia acting as U.S. client state. (Religion really is not the key; I know of no ISIS or similar Wahabi attack on Israeli targets.) The United States needs the Saudis to supply or finance Wahabi crazies. So in addition to playing a key role in the U.S. balance of payments by recycling its oil-export earnings into U.S. stocks, bonds and other investments, Saudi Arabia provides manpower by supporting the Wahabi members of America’s foreign legion, ISIS and Al-Nusra/Al-Qaeda. Terrorism has become the “democratic” mode of today's U.S. military policy.

Hudson also notes that the term "democracy," when used in the context of foreign policy, has very little to do with what a normal person would regard as democracy. Rather,

From the U.S. vantage point, what is a “democracy”? In today’s Orwellian vocabulary, it means any country supporting U.S. foreign policy. … The antonym to “democracy” is “terrorist.” That simply means a nation willing to fight to become independent from U.S. neoliberal democracy.

And this leads us to Iran. Hudson explains:

America’s hatred of Iran starts with its attempt to control its own oil production, exports and earnings. It goes back to 1953, when Mossadegh was overthrown because he wanted domestic sovereignty over Anglo-Persian oil. The CIA-MI6 coup replaced him with the pliant Shah, who imposed a police state to prevent Iranian independence from U.S. policy. The only physical places free from the police were the mosques. That made the Islamic Republic the path of least resistance to overthrowing the Shah and re-asserting Iranian sovereignty.

Thus, we got the Islamic revolution of 1979 which has led to forty years of Iran refusing to play ball in the US dollar maintenance regime that is demanded of other oil-producing nations in the Middle East.

The US is unlikely to let up on this effort so long as Iran continues to refuse to take orders from DC on these matters. It's true that the US can't do much about China and Russia. But Iran — unlike North Korea, which wisely secured nuclear arms for itself — remains an easy target because of its lack of nuclear capability.

Being a leftist, Hudson includes some unfortunate stuff about "neoliberalism," as if low taxes and freedom to trade were somehow driving global war. Hudson also concocts a theory about how this oil-dollar policy is driving global warming. That's a bit of a stretch, but the connection between foreign policy and the US dollar that he identifies is a key factor that tends to be almost universally ignored by the mainstream media. As China and Russia work ever harder to undermine the dollar and its geopolitical position, small countries like Iran will become even more important in the US's drive to maintain the dollar's status quo. But it remains to be seen how long the US can keep it going.

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