Power & Market

Happy Birthday, Murray!

03/02/2021David Gordon

Today would have been Murray Rothbard’s ninety-fifth 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. As I think about him today, another story comes to mind. He would stay up very late and also get up late. Once at a conference, I stayed up until 1:30 in the morning listening to him talk to a group of people. When I told him I had to leave, he said, "The night is still young!" His support for me was never failing, and I owe him everything. If only he were still here now, to guide and instruct us!

When commenting, please post a concise, civil, and informative comment. Full comment policy here

How to Join the Alt-Tech Exodus

01/22/2021Horea Christian

Listen to the Audio Mises Wire version of this article.

So, you've heard that big tech companies have transcended the niggling free market and reached the lofty heights of partisan politics—and act accordingly. Unlike prominent political figures, you might not make the top of the purge list, but it's no secret that censorship is surging. Both to protect your freedom and to stop providing resources to those who would undermine it, it makes sense to jump ship. Now, when everybody else is also doing it. But how?

Freedom Is a Skill

In the world of technology the reeds are tall, and you only get as much freedom as your choices afford you. The taint of political virtue signaling has sadly not left the liberty-minded untouched, and there's plenty of snake-oil salesmen looking for your business. So it's paramount to know how censorship can reliably be stymied.

Freedom by Design Beats Freedom by Convention

Have you heard of this or that new platform whose board has “a strong commitment to free speech”? Well, wouldn't you know it, so did “Big Tech” until there was power to be gained by doing the opposite. A more “virtuous” platform, or a partisan platform “from your side” will not sustainably support your liberty. A platform designed with freedom in mind will.

The Core Concept of Free Design Is Decentralization over Centralization

There are two tiers for decentralized design. The first and highest standard is P2P (peer-to-peer), which connects users directly and relies on no centralized infrastructure. Sadly, not all content can feasibly be shared P2P (yet), so—in a wonderful analogy to the offline world—there is a second tier, federation. Federated services use a common protocol via which anybody can distribute content as long as they have the resources to maintain a server. Everybody could technically run their own server, but more often, a few hundred people maintain servers via which they make access to the protocol easily available to casual users. The emergent framework prevents influence (in the form of a large user base) from coagulating in one instance. Users can easily switch to a new provider (often keeping their data), and competition weeds out of abusive providers.

Tell Me What to Use Already

No. The best I can do is share with you the choices I made and provide an example rationale in light of the common priority of sustainable free speech. Your choices might be different.

Text Messaging

Text messaging fortunately is very lightweight, and P2P approaches are feasible. Tox is a protocol which allows you and all of your contacts to chat based solely on an open-source client which you can install on your device. There is no middleman who can censor you, no centralized server that can be taken down by malicious actors, and no one company which can go bankrupt or have a change of heart regarding this whole free speech thing. Yes, it also supports video and audio chat.

The Way This Works

You simply pick a client, install it, get an ID, share it with someone, and you're good. Forever.

Social Media

This is a bit more tricky, as the content requirements do not lend themselves to P2P. The biggest federated social network is known as the “fediverse.” You might never have heard of it, but you might have heard of software which uses the protocol (i.e., what an admin would run on his “instance,” i.e., his server), such as Pleroma or Mastodon. Alternatively, you might have heard of the biggest instance on the fediverse, Gab. That sadly doesn't cover it all, since the choice of an instance remains very important. To protect users from spam, or unwanted content (such as pornography) on their feed, the protocol allows instance administrators to block other instances, i.e., refuse to federate with them. While this fulfills the stated purpose, many admins also choose to block “problematic” instances. Instances generally publish a block list, though. You should check the “about” page of an instance you're considering, either for a statement that they don't block any other instance, or to ascertain that the block list is compatible with your preferences. I am looking to host my own instance, but barring that, I am considering FSE and liberdon—good free-speech instances which maintain no block list. You can also give an instance a try on a whim and switch later, though.

The Way This Works

Find an instance you like (via web search), and register an account.

Video Content

Creators who have been banned or demonetized by YouTube have congregated around a host of alternative platforms. Most of these platforms, however, are simply imitations of the YouTube model, often with cryptocurrency tacked on for futuristic appeal. There exists however a federated video-sharing protocol, PeerTube. Much of what was said about the fediverse applies here as well, other than it being less common for PeerTube instances to federate with everybody. I enjoy using QOTO and there are even a few search engines which look up all instances for content (e.g., PeerTube Index and Sepia Search).

The Way This Works

As a content consumer, you can use one of the aforementioned search engines to look for content you want to watch. No need to even register unless you want to keep track of favorites on somebody else's server. If so, you can use web search or this page to find interesting instances. Ideally, check how many instances they “follow” (more means access to more content) or how many total videos they give you access to (you can rank instances by either of these metrics here), and you're done.

Web Search

Believe it or not, there is such a thing as P2P web search: YaCy. YaCy is fairly easy to run on your own personal computer, and does not require you to maintain a server. In a sort of combination between a P2P or federated model, you can run your own YaCy (which is the recommended approach), or use somebody else's as far as they make it available (e.g., noisytoot). Your mileage may vary, and sadly it will never be as fast as centralized web search, though it could be similarly fast if you install it on your own computer and have a good internet connection.

The Way This Works

You can just download and install YaCy, and you're set up to search the web on your own. There are very very many configuration options, but you don't have to use them.

Email

Email is already federated, as it turns out. This might also help you grasp the concept of federation. That the text following “@” differs from contact to contact, is a dead giveaway for federation (social media accounts look similar on the fediverse). That most people still go for large-scale providers with questionable involvements in nonmarket processes is simply a symptom of good marketing and herd mentality. Many email providers will offer you more censorship-robust services. I particularly enjoy smaller providers, as they tend to have low running costs and can actually finance the service fully through donations. Further, you can host your own email server, as I do.

The Way This Works

If you are concerned about your current provider, you can simply run a web search for alternative providers; the process is much the same.

Some of These Options Look Daunting

Apathy and comfort are the enemies of freedom and very good bait to incentivize you to give it up. After all, that's how we got here. On a more gentle note, you don't have to go for all of the above, but if there is one particular service—such as social media or messaging—where you feel the cold breath of censorship down your back, it would be a good idea to give that a very serious try right now. None of these options require any particular expertise in technology, though, so it's rather a question of stepping out of your comfort zone than of studying anything at any great length. Not least of all, people are happy to help. Most of these technologies have support chats linked on their websites, and their support is considerably better than what you might have become used to from your current provider's help desk. Though it may not be overt or partisan, the spirit of freedom runs deep in the world of alt-tech, and people are more interested in empowering human action than in corralling you into their service. Be wary of “alternatives” which behave otherwise.

Image source:
Getty
When commenting, please post a concise, civil, and informative comment. Full comment policy here

How Austrian Economics Can Be Used in Managing Organizations and Businesses

12/15/2020Peter G. Klein

Professor Peter Klein of Mises.org and Yousif Almoayyed, a contributor to Economics for Entrepreneurs, joined Financial Repression Authority's YouTube channel to discuss how insights from Austrian economics can help with business management and organization. 

Click here to watch.

For more content like this, check out Economics for Entrepreneurs.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

How the Left Seized Higher Education

09/20/2020Atilla Sulker

[Originally published by Townhall.com, 7/9/20.]

We thought it was only the humanities department that was run by leftists.

Time to think again. Before we know it , the same will be said of the math and engineering departments.

None of this should be surprising. The leftist takeover of academia is nothing new.

But how did the university debate stage fall into the hands of a concentrated and uniform consortium of individuals? The root of this problem lies in the way Americans have been conditioned to think about higher education.  

Americans have fundamentally forgotten the place of the university in the societal fabric, allowing a small group of left-wing academics to take control. The Panglossian view that everybody must receive a college degree has created indifference to an integral part of higher education – the unabashed exchange of ideas.

In many ways, college is a “choose your adventure” with two main choices: 1. Become well versed in a skill that is in high demand; 2. Pursue a career in academia and make a living via debating ideas.

Nowadays, universities churn out so many students with grim employment prospects. One study found that only 55% of college graduates are in careers closely related to their field of study. The remaining 45% in mismatched careers earn less, on average.

It is reasonable to assume that the sheer number of unmotivated students in college – enrolled only due to societal pressures – is responsible for this deficit. Chances are, they’d be far better off going to trade school.

With so many people enrolled in college with little interest in academia or the attainment of complex skills such as engineering, it’s easy to see how no real opposition to the left exists.

But the epidemic of jaded students is a crisis the left would never waste. Parents would be in uproar if they saw loans going to waste. In response, leftist academics have created the illusion that they are casting otherwise mediocre students in the right direction.

Out of this illusion, a plethora of highly specialized, phony fields and courses have emerged – practically overnight. Being very loosely bound to market demand and protected by bureaucratic oversight, the ideas of these specialized academics are not only legitimized, but often forced upon students.

Harvard Professor of Government Harvey Mansfield notes : “If you look at a typical Harvard transcript, you see courses all over the place. Often on small subjects or policy questions, instead of meat and potatoes: history, economics, philosophy.” Referring to specialized gut courses, Mansfield says, “now there are a whole lot of such courses and it’s easy to waste your money on something that isn’t worth it.”

Perhaps the grossest miscalculation made by the American system was the belief that higher education is for everyone. It should be obvious that it never was. This myth was predicated on the notion that widening access to higher education would result in a net benefit on society, via extending every individual’s productive capacities.

With a little skepticism, this justification instantly crumbles.

Firstly, why assume that every individual becomes most productive after going through college? Why couldn’t they be equally or more productive by pursuing professional certification or vocational training?

Furthermore, the “net benefit” myth assumes that all degrees are of equal value. Good luck convincing anyone in the job market that a political science degree is equally as valuable as an engineering degree. If a net productivity increase is the goal, wouldn’t it make sense for government scholarship programs to only fund degrees associated with high job demand, such as those related to STEM (as if government funding were good to begin with)?

With both society and bureaucrats confused over the purpose of higher education, it’s no wonder that an advantageous group of academics has been able to enforce so much thought control. The last thing we need is to send off more unambitious students to be used as pawns by clever academics. They will never question what they are told. They will go along with it. This kind of tacit approval is the equivalent to saying “yes.”

The solution to this problem involves a serious reassessment of the role of the American university. Only then will a real battleground for ideas emerge.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Happy Birthday, Dr. Ron Paul!

08/20/2020David Gordon

Today is Dr. Ron Paul’s eighty-fifth birthday. He has always been a voice of wisdom, from the End the Fed campaign to his fight against the Iraq War to being a voice of sanity in the current covid-19 hysteria. He is a great American and one one of the foremost people ever to serve in Congress. Happy Birthday!

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Hunter Hastings on How Entrepreneurs Beat the State

08/09/2020Hunter Hastings

Jeff Deist recently argued the case for economics over politics in his talk "Markets vs. Mobs." I believe markets will prevail, and here's why.

Our resource is not "science" but knowledge. It accumulates, perhaps at an exponential rate. Mises.org is one of the great consolidators of knowledge, attracting many more people than ever before (620,000 unique visitors per month, 1.5 million page views per month). If we can multiply those numbers by ten times we might start to make a dent in the universe. 

Austrian or classical liberal knowledge has been associated with great advances in economics, higher average standards of living, and civilization, including enlightened government (Gladstone). But we don’t need to look backward; rather we need to market our ideas in a better fashion for the future. Jeff Deist talks about successful "2 percent movements." With 6 million mises.org visitors per month, we’d be in 2 percent territory. We don’t need great men, just a great knowledge repository with great communication and sharing.

Mises and Huerta de Soto say that socialism is an intellectual error. That means it is correctable, via superior ideas and the right knowledge. So far, we have spent most of our efforts fighting in the wrong channels—academia and politics—where we have already lost. Business is a new channel to try. Technology may be another—blockchain is one area of technology associated with liberty and individual sovereignty, and complex systems theory is a modern update of spontaneous order. Gaming could be another (so-called agent-based simulations rely on individual freedom of action for their "agents"). All of these fields have quite well-developed libertarian groups embedded in them.

And I will continue to believe that Austrian entrepreneurship can be one of our best vehicles. Professor Per Bylund and others have established the idea of the ethic of entrepreneurship. Contemporary researchers indicate that a belief in free markets and entrepreneurship is associated with meaning in life. De Soto calls entrepreneurship the most intimate and essential characteristic of man: his ability to act creatively. Society thrives when individuals pursue entrepreneurial creativity. Entrepreneurs resolve social maladjustment.

The changes required in institutions can be created entrepreneurially. Connor Boyack provides examples in the institution of education, and Robert Luddy pursues the same goal with his private academies. Kartik Gada of ATOM sees a future where technology rather than people is the source of tax revenues, which will change the relationship between people and government. 

Government (or what we call the state) is the great problem. But perhaps even that is vulnerable. In Eastern philosophy there is the concept of the eternal cycle, in which, when systems become overly bureaucratic or otherwise sclerotic, any crisis that comes along can result in a creative renewal that overturns the bureaucratic managers responsible for the sclerosis. Fund manager Mark Spitznagel refers to this in The Dao of Capital, using the analogy of the forest. When the forest floor becomes overgrown, and the wrong species have become dominant in the wrong parts of the forest, strangling new and creative growth, a crisis like a fire comes along, destroying the maladjusted species and the dead undergrowth, and releases the creativity of new growth among agile and adaptive species. In his analogy, the conifers wait patiently in the acid, rocky soils to which they have been pushed by the aggressive angiosperms, waiting patiently and adaptively for the fires that are sure to come: 

For the conifers, their roundabout strategy allows them to withdraw to inhospitable places, all the while producing innumerable pine cones loaded with seeds that can be expediently dispersed by the wind to other remote areas, giving rise to a phalanx of patient, long-living warriors awaiting the next rout in the ongoing battle between conifers and angiosperms. While conifers growing on the rocks may appear to be nature’s outcasts, theirs is truly the false humility of the Daoist manipulator-sage. They withdraw to where others cannot go and then act when conditions suddenly shift and an opportune moment arises, such as after a wildfire….fire is friend, not foe, to the patient conifer.

Spitznagel's analogy should give us confidence in the economic future of the West, despite the depredations of the state.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Hyperinflation in Civil War China

07/09/2020Matthew Tanous

I have recently been reading Helen Zia’s Last Boat out of Shanghai, which presents a narrative history of a handful of refugees who fled Shanghai as the Communist Party took control of China in the late 1940s. In framing this flight from the city, Zia details the experiences of the refugees during the Japanese occupation during the Sino-Japanese War, as well as just after the Chinese Civil War. Naturally, there is a lot of heart-wrenching suffering documented in these pages, from people of various backgrounds, but I found the experience of hyperinflation during the late 1940s to be particularly interesting as something I had not heard of before.

Zia first describes the experience of that hyperinflation from the view of the people trying to pay for what they need:

Everyone in Shanghai had had the unsettling experience of looking in a shopwindow as a clerk reached in to cross out one price and scrawl a new, much higher price, often x-ing out prices several times in a single day. Not even the belt-tightening inflation during the war had prepared them for costs that seemed to multiply by the minute. In June 1948, a sack of rice had cost 6.7 million yuan; within a few weeks the price had reached 63 million.

In response to the out-of-control inflation, the Nationalist government of Chiang Kai-shek did what most governments in history have done. Chiang Kai-shek appointed his son, Chiang Ching-kuo, finance minister and had him go after “hoarders” and “speculators.” Most egregiously, the younger Chiang ordered Chinese citizens to hand over all gold, silver, and foreign currency to the government, as well as outstanding yuan, for a new version of the yuan supposedly backed by gold. Zia quotes Chiang Ching-kuo as threatening, “Those who damage the new gold-based currency will have their heads chopped off!”

This policy did not last long, however. Chiang Ching-kuo made the mistake of arresting the wrong person for “speculation”:

Chiang Ching-kuo also arrested David Kung, the nephew of his stepmother, Madame Chiang. Upon learning that her favorite nephew was in jail, Madame Chiang stormed into her stepson’s office and slapped his face. Then she wired her husband, the generalissimo…

This severe loss of face put an end to Chiang Ching-kuo’s attempted currency reform process. Forced to abandon it, he released the “hoarders” and “speculators” from prison. The new version of the yuan failed spectacularly:

The newly issued currency collapsed, becoming instantly worth less than the paper it was printed on. Everyone who had obeyed the government’s orders to use the new currency lost everything; their assets of gold, silver, and foreign currency were now locked in Chiang Kai-shek’s treasury.

It is important to note that Zia is not an economist, and takes essentially for granted that the inflation was due to hoarding and speculation rather than the printing of money by the Nationalist government to fund their war efforts (though she does not explain why, if that is the case, foreign currency was still “better than gold against the collapsing new Chinese yuan”). There is, however, still a lot of value to be gleaned from this narrative history and it is worth examining in detail. I highly encourage the reader to consider purchasing this book for that alone.

Reprinted from Disinthrallment.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

How the Austrians Teach Economics

07/06/2020Joshua Schubert

Owen Holzbach recently wrote in Power and Market "How Public Schools Teach Economics." I had a similar experience in my high school macroeconomics class. As taught, Keynesian economics provides a "toolkit" for wannabe central planners.

After high school I attended Grove City College, where I am learning real economics. What my Austrian school professors do differently from their mainstream cousins is demonstrate the truth of their conclusions from the first principles of human action and the empirical reality of the world.

Every economics student, and many other GCC students, take Dr. Shawn Ritenour's class Foundations of Economics. This is the class that got me interested in economics. Following Mises, the class covers basic epistemology before starting with the action axiom, that is, purposeful behavior, and proceeding to carefully derive economics.

With a firm understanding of economic method, subjective preferences, cooperative vs. aggressive interaction, division of labor, the emergence of money, time preference, and entrepreneurship students receive a firm foundation in economic law.

Sprinkled in the class is discussion of ethics, consequences of policy, and the view of man. Students, for example, are introduced to (and shown the error in) the ideas of Gustav Schmoller on historicism, Milton Friedman on positivism, Marx on labor exploitation, and Malthus on population.

Some of my favorite advanced classes thus far are intermediate micro and intermediate macroeconomics. In both classes differing views are presented on their own terms. Students appreciate this level of intellectual honesty.

In intermediate macro, for example, Dr. Ritenour explains the capital structure and derives Austrian business cycle theory. But we also learn the Keynesian simple system, the IS-LM (investment-savings, liquidity preference–money supply) model, Friedman's plucking model, Real business cycle theory, and more.

In intermediate microeconomics, Dr. Caleb Fuller teaches the mainstream calculus-based approach to utility and welfare analysis. We learn and critique the perfect competition model as well as neoclassical consumer theory and cost-based producer theory.

Understanding the roots of ideas provides a grounding that many economists lack. This past spring, I took History of Economic Thought since 1870, where we concentrate on the Marginal Revolution as well as the economic thought of Keynes, Marshall, Friedman, Hayek, Mises, Böhm-Bawerk, Veblen, and much more. Both of the History of Economic Thought courses are now required for economics majors at the college.

For example, it is easy to take the Marginal Revolution for granted. However, there is a lot more to the story than three economists independently discovering the same idea. It turns out that the marginalism of Carl Menger is a bit different from that of William Stanley Jevons and that of Léon Walras.

For Walras, marginal utility is the key to complete his model for general equilibrium. Rather than moving from first principles, he starts with an idea of perfect competition and climbs down to marginal utility. This model is rigorously static and devoid of action. Instead, a timeless Walrasian auctioneer equilibrizes markets.

Jevons bases his marginal utility analysis on Jeremy Bentham's utilitarian calculus of pain and pleasure. This use of cardinal utility functions and assumption of infinitely divisible goods, as opposed to ordinal demonstrated preference, has led to neglect of qualitative aspects of human choice that are irreducible to a mathematical function.

Menger also takes the subjective value approach, but it is embedded in the structure of means and ends rather than a calculus of pain and pleasure. In his book Principles of Economics, Menger emphasizes the real-world process of action, as opposed to an equilibrium model that abstracts from action.

These differences, minor at the time, have borne out over the last 150 years to where mainstream economists, fixated on their perfect competition models, have advocated for government intervention in markets in to ensure competition. The reality is the opposite, that antitrust action to break up large firms harms consumers. It is not the number of firms itself, but the threat of both actual and potential competition that incentivizes firms to act competitively.

This is a microcosm of what I have learned from my "heterodox" Austrian school professors. The Austrians bring a lot more to the table in terms of intellectual honesty and curiosity, real-world relevance, depth of understanding, and solid first principles. I am graduating this December, and in spite of everything going on in the world right now, I must consider my education in causal-realist Austrian economics a success.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

How Public Schools Teach Economics

07/02/2020Owen Holzbach

It has long been said that the financial and economic education in the public school system is far from perfect. I, as a current high school student, can vouch for that claim. From promoting crazed statist ideologies to nonsensical Keynesian beliefs, the public school system is nothing short of a tool for the state to harness power.

In school, I was taught that the Federal Reserve was created in 1913 to manage prices and employment. Never once were we taught that the Fed’s mandate did not include anything about prices and employment until the Federal Reserve Act of 1977. It is likely that this was left out of the curriculum so that it would seem that the Federal Reserve has over one hundred years of experience in these matters, thus making them the so-called experts. However, the Federal Reserve’s mandate change was nowhere close to one hundred years ago and its experience has been far from perfect. Of course, its negative track record was left out of the teaching. Never once were we shown the drastic increase in prices and inequality since the mandate change.

In fact, we were told that the free market is the cause of inequality and that government intervention is the only way to fix it. Of course, we never learned about how perverse incentives, quantitative easing, and a fiat system are the forces that cause artificial inequality. It was for the promotion of the same idea—that government is the only answer—that we never learned about the vast inequality that blossomed after the dissolution of the Bretton Woods system.

The reality is that much inequality is the result of artificially high stock market prices due to easy money policies. Speaking of the stock market, I was taught in school that a stock market on the rise depicts a strong economy. Of course, this is not necessarily true. The stock markets of the Weimar Republic and Zimbabwe skyrocketed in their respective currencies as a result of their reckless counterfeiting policies, but surely you could not argue that hyperinflation is a sign of a strong economy. In fact, you do not even need to leave the United States for evidence. Recently, the stock market was at record highs before plunging into a recession and a sovereign debt crisis. COVID-19 was merely the catalyst, for the recession was coming anyway. It is hard to argue that a grossly overextended economy is somehow a strong economy simply because stocks were going up. But it was this type of thinking that made my fellow classmates think that since stocks had started to go back up after the mid-March sell-off that everything would be fine and there would be no recession. Sure, stocks may go up in nominal terms, but certainly not in real terms for the foreseeable future. This, of course, was never mentioned by any of my economics teachers. And it is this type of thinking that keeps the state in control. If the younger generation thinks that bailouts and intervention worked, why would they not vote for it in the future?

We were told that quantitative easing was a successful policy. But how is that we then needed multiple QEs after the one following the 2008 recession? If QE1 worked so well, why are we now on QE4? Surely, the dogmatic love of quantitative easing is a sign of insanity in its very essence. In addition to quantitative easing, we also learned about tightening policies and how the government attempts to limit its debt during economic booms. However, that is simply not true. The artificial market boom that took place during the Obama presidency and the first term of the Trump administration happened as the national debt ballooned up to catastrophic heights. Where exactly was the policy of quantitative tightening? Nonexistent. These unfortunate facts for the statists and their failed doctrines were completely left out of the curriculum.

It should be clear by now that the state-run schools cannot be trusted with teaching economics. To be sure, many of the teachers are simply teaching the curriculum mandated by the state and do not want to risk losing their jobs by teaching true economics. But the reality is that the only way to fix the problem is to abolish public schooling and state-mandated standards in exchange for private education—a cheaper and more efficient solution that eliminates the monopoly on schooling. Only then will the ideals of Ludwig von Mises and Rothbard be well understood and manifest into actual policies.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

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…

Image source:
When commenting, please post a concise, civil, and informative comment. Full comment policy here
Shield icon power-market-v2