Power & Market

Can the Fed's Portfolio Ever Return to Normal?

06/02/2021Robert Aro

They call it “easy money.”  We live in a world where the flick of a switch or click of a mouse can create billions to trillions of dollars which are then loaned out to certain members of our society. That said, paying back that money is not as easy…

In the case of the Fed’s $7.9 trillion balance sheet, when will this get repaid? Where will that money come from?

The Federal Reserve buys approximately $80 billion US Treasury and $40 billion Mortgage-Backed Securities (MBS) a month. These “temporary” purchases are claimed to provide market liquidity during times of crisis to help correct for errors caused by the free market.

Over the last week, we were given hints of things to come. In Monday’s publication of the Open Market Operations During 2020 report, by the Federal Reserve Bank of New York much was said about the System Open Market Account (SOMA), the portfolio which includes both domestic and foreign assets. Per projections in the report:

Treasury and agency MBS purchases continue at the current pace through 2021 before gradually reducing to zero at the end of 2022.

If reducing purchases of treasuries and MBS to NIL at the end of 2022, after hitting $9 trillion in assets seems unbelievable, understand it doesn’t end there. More details of the plan are provided:

By the end of the projection horizon, the size of the portfolio could be as low as $6.6 trillion or as high as $9.0 trillion…

They included a chart showing the high and low ranges in the shaded region below:

ra

The notion of tightening the balance sheet continues to gain in popularity among prominent central bankers. Even Vice Chair Richard Clarida gave an interview to Yahoo Finance saying:

There will come a time in upcoming meetings where we’ll be at the point where we can begin to discuss scaling back the pace of asset purchases…

The Philadelphia Fed President, Patrick Harker, was more descriptive suggesting a discussion regarding tapering should happen:

sooner rather than later.

How soon is “sooner” and how late is “later?” Everyone knows the Fed cannot continue to buy assets indefinitely; yet, it’s difficult to picture a world where the Fed does not buy assets indefinitely. The effects on various markets, such as stock, bonds, or housing seem unfathomable.

Without the Fed buying bonds, interest rates will likely go up... unless another entity such as another central bank or the public steps in to fill the void. Considering an ever-growing government debt and stimulus programs now seemingly permanent, few could imagine where this easy money would be without the help of the Fed.

As for the stock market, higher rates change valuations and investment decisions, as well as the cost of borrowing. But this goes beyond rates. The Fed’s $7.9 trillion balance sheet, or portfolio holding, as mentioned before is really an account receivable balance. The existing $7.9 trillion means someone owes the Fed this money. By 2023, should the Fed decide to “taper,” i.e. shrink its balance sheet by $2 trillion until 2030, this money will have to be withdrawn from the system...somehow.

Whether from reserves held at the Fed, bank institution balance sheets, or the stock market itself remains to be seen. As of May 25, the total reserves of depository institutions, i.e., money banks held at the Federal Reserve, stood at a whopping $3.89 trillion!

ra

Untangling which entities have money parked at the Fed and who has a claim on the funds would take deciphering, if even possible for the public to ever know. But the point is: to reduce the Fed’s balance sheet by $2 trillion requires $2 trillion to come from somewhere; yet, there are only so many places a few trillion dollars can be housed. If funds are not withdrawn from Fed deposits to pay back the Fed, it must be withdrawn from other markets, such as stocks or bonds. When, if ever, the debt is called to be repaid, we can expect to see some “interesting changes” to all financial markets… and that’s putting it mildly.

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

Charlie Munger's Oddly Desperate Attack on Bitcoin

05/06/2021Connor Mortell

Recently, Berkshire Hathaway vice chairman Charlie Munger spoke vehemently against bitcoin and other cryptocurrency, claiming, “I don’t welcome a currency that’s so useful to kidnappers and extortionists and so forth, nor do I like just shuffling out of your extra billions of billions of dollars to somebody who just invented a new financial product out of thin air.” This sentence, right off the bat, both summarizes his issues with cryptocurrency and contains the major flaws that make his criticisms wrong.

First and foremost is the obvious hypocrisy of the first half of that claim. The US dollar is almost equally useful to kidnappers and extortionists. “Satoshi Nakamoto” created bitcoin only as recently as 2009, and last I checked, kidnapping and extortion existed long before that. Arguments can be made on either side about bitcoin’s actual privacy. Realistically, the fact that it operates on an open source ledger makes it significantly less private than many believe it to be, especially when compared to other more privacy-targeted cryptocurrencies—most popularly monero. However, bitcoin not being as private as is sometimes assumed in and of itself does not inherently discredit Munger’s point, because it is still true that bitcoin can be and is used it in an increasingly private manner. He is correct that it is used by criminals. But while it is true that bitcoin’s privacy shortcomings don’t inherently discredit his claims, it is also true that bitcoin's use by criminals does not inherently prove that it is worth condemning on those grounds. This is because it is just as common—if not overwhelmingly more common—for criminals to operate in cash. Munger is missing the vital lesson that Hazlitt so famously taught us: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy.” If Munger were to have his wish come true and the success of bitcoin failed because it was too useful to kidnappers and extortionists, he would be correct in that the immediate effect would be that kidnappers and extortionists would have to cease using cryptocurrency. But what is step two in that process? It is not that kidnapping and extortion would simply end. They would continue just as they always have, operating in cash. The only difference would be that now all the decentralizing benefits of crypto currency to the average person would also disappear.

Next, comes the simple but vital point that there is no greater kidnapper or extortionist than the federal government. I don’t have to explain to a Mises Wire reader that taxation is in and of itself extortion. As for kidnapping, the American criminal justice system holds almost 2.3 million people in prison. Of those imprisoned, 46.4 percent of inmates are in for largely victimless drug offenses. While many in agreement with the status quo can perform the necessary mental gymnastics to justify this, we can also turn to Rothbard’s For a New Liberty:

The distinctive feature of libertarians is that they coolly and uncompromisingly apply the general moral law to people acting in their roles as members of the State apparatus. Libertarians make no exceptions. For centuries, the State (or more strictly, individuals acting in their roles as “members of the government”) has cloaked its criminal activity in high sounding rhetoric…. In fact, if you wish to know how libertarians regard the State and any of its acts, simply think of the State as a criminal band, and all of the libertarian attitudes will logically fall into place.

The state as a criminal band raises two important issues with Munger’s point: first is that if he is to oppose a currency that is useful to extorters and kidnappers, then he must vehemently oppose the currency that is completely controlled and designed to benefit the largest of all violent criminal organizations. Next is that if Munger is correct to claim that bitcoin is useful to the criminals he named, then, reductio ad absurdum, it must also be true that it is useful also to those committing the victimless crimes that make up such a staggering amount of the US prison system. So even if Munger is correct in claiming this, it is not a foregone conclusion that the tradeoff is less aggressive and violent acts.

Additionally, Munger claimed that “nor do I like just shuffling out of your extra billions of billions of dollars to somebody who just invented a new financial product out of thin air.” But if anyone is to be considered the enemy based on such a sentence, it is not the average bitcoiner mining in his basement. It is the Federal Reserve. Munger is completely correct to find issue with the creation of wealth out of a new financial product being created out of thin air. To understand this we can turn to Richard Cantillon; for brevity’s sake, I’ll only quote the abstract of chapter 7 of An Essay on Economic Theory:

When there is an increase in the quantity of money, prices will increase depending on how the new money holders decide to spend their money. The price changes will also be affected by such things as regulations on trade and the perishability of the products that are traded. In other words the simple quantity theory of money is naïve in proposing that a doubling of the quantity of money would double all prices equally. Changes in the quantity of money will change relative prices and have real effects on the economy, a phenomenon now known as the Cantillon Effects.

Simply put, when there is an increase in the money supply, those who benefit most are those who first have access to it, as the money slowly loses value each step of the way as the effects of the inflationary policies hit. Presently, the banks are the first recipients of the new money, and the consumers are the ones who have value stolen. Munger is not completely wrong to point to bitcoin in its own way as a tool for such an effect. The major difference between the Federal Reserve and bitcoin is that for the first time in modern history, cryptocurrency offers these Cantillon effects in favor of the common man and at the expense of elites such as Munger, which I suspect is one of the most pressing reasons he is truly against cryptocurrency.

But the last piece that Munger gets mostly wrong is that he misunderstands his role. As George Selgin said in Less Than Zero “Economists should not smuggle ethical judgments into what purports to be a discussion of positive requirements for an efficient use of resources.” Bitcoin is a technology. Money in and of itself is a technology. It is true that these technologies may be used in negative ways. But it is also true that they may be used in positive ways. Cryptocurrency is an empty vessel, and for Munger to describe it as “disgusting and contrary to the interests of civilization” is for him to misunderstand his place as an economist.

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

Cops Beat Up an Old Lady and Then Laughed about It. Where Were the "Good Cops"?

05/04/2021Ryan McMaken

Last month, I mentioned the case of Karen Garner, a seventy-three-year-old, eighty-pound woman with dementia who was beaten by police for “resisting” arrest in June 2020. At the time, Garner was allegedly guilty of almost stealing thirteen dollars' worth of merchandise at Walmart after apparently forgetting to pay. When confronted by store workers, Garner attempted to pay but was thrown out of the store by Walmart staff.

Garner, who was apparently confused at the time of arrest, was soon confronted by Loveland, Colorado, police officer Austin Hopp while Garner slowly walked home. Within seconds—with the help of fellow officer Daria Jalali—Hopp threw the elderly, disabled woman to the ground, breaking her arm, and dislocated her shoulder.

The officers then threw Garner in a jail cell, denying her any medical treatment, for six hours.

But the story doesn’t end there.

Lest anyone think these officers made a well-meaning error in judgment or were unaware of Garner’s injuries, we can turn to video recorded at the Loveland Police Department facility following Garner’s arrest.

Shortly after Garner’s arrest, while Garner sat ten feet away in agony in her jail cell, officers Hopp, Jalali, and police staffer Tyler Blackett proceeded to review the body cam video from Garner’s arrest.

During this period of fun and revelry—captured on the station’s video cameras, and surely occurring “on the clock”—Hopp joked about dislocating Garner’s arm and declared, “I love it!” when he heard “the pop” that was apparently audible when Hopp wrenched Garner’s arm from its socket.

Hopp, Jalali, and Blackett proceeded to enjoy several minutes of hilarity as Hopp delighted in his torture of Garner and as Jalali and Blackett giggled and looked on.

Hopp and Jalali then when on to “fist bump” to congratulate themselves for Garner’s arrest.

Clearly, Hopp, Jalali, and Blackett were quite comfortable with amusing themselves with the suffering of others, and did not appear at all concerned that they might be disciplined for refusing medical attention to a woman in their custody who was clearly known to at least one of the officers to be injured. The dislocated shoulder, of course, was in addition to Garner’s bloodied face, which had earlier been observed and commented upon by police personnel in the body cam video itself.

And it seems the officers had little reason to suspect there might be any repercussions for their sadistic and unprofessional behavior. Although these officers’ little video party took place right in the middle of the police station, and right under the nose of supervisor Philip Metzler—who can be seen walking by Hopp and Jalali as they discussed the arrest—the Loveland Police department completely ignored the incident. The video suggests no other officers questioned this behavior or regarded it as untoward in any way. Certainly, Jalali and Hopp were not going to report on each other. We now know they were in a sexual relationship at the time of Garner's arrest

It was only eight months later, when Garner’s attorney sued the Loveland Police Department, that the department was forced to acknowledge the video, the arrest, and its officers’ behavior. But even now, the department is hard at work sweeping the matter under the rug. The three officers most closely involved with the incident—Hopp, Jalali, and Blackett—were all allowed to resign rather than be fired. This presumably will allow these officers to retain their pension benefits and pursue work as police officers in other departments.

The chief himself has offered no sign that he will accept any responsibility for what is apparently considered acceptable behavior in his department.

Bizarrely, in the midst of all this, the arresting officers still have their defenders. For example, last week, when some Loveland residents turned out to protest, some heavily armed locals turned out to shout at protestors who were allegedly guilty of insufficiently “backing the blue.”

Of course, the taxpayers already "back the blue" every day. The police budget is well funded to the tune of approximately $25 million per year in the small, virtually crime-free suburban town of Loveland. The idea that taxpayers—taxpayers like Karen Garner—ought to be harangued for a lack of police support should boggle the mind. For generations, Loveland police officers have been well paid to police a peaceful town where rarely does any officer deal with anything resembling a gangland slaying. Countless Loveland officers retire with generous benefits. Loveland citizens have financially backed the blue to the hilt for decades.

Two Important Reforms

The Loveland case also illustrates the need for other reforms we've discussed here at mises.org in the past. The first needed reform is abolishing police unions—and all public sector unions, for that matter. It is likely that a central reason the police department has avoided any real disciplinary action against Hopp et al. is because it is known the police union would provide legal services to the police officers and would fight tooth and nail to keep these officers in their positions. Police unions are one of the primary institutions most responsible for keeping abusive police officers on the payroll.

Second, legal immunity for police must be ended. Fortunately, in Colorado, this is already the case, and police can be found personally liable for up to $25,000 for abusive behavior. However, this new legislation did not take effect until after Garner's arrest. 

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

Class Harmony, Not Class War

03/08/2021George Reisman

Listen to the Audio Mises Wire version of this article.

The discontent and unrest that followed the 2020 presidential election was, at least in major part, one of the innumerable destructive consequences of an almost 250-year-old error in economic theory made by Adam Smith: namely, the belief that profits are a deduction from wages. (See the first eight paragraphs of chap. 8 , bk. I of The Wealth of Nations.)

This error is the basis of the Marxian exploitation theory, which holds that profits are stolen from wage earners by a comparative handful of capitalist exploiters who, under a system of unhampered, full-bodied, laissez-faire capitalism, reap enormous profits by compelling the masses of wage earners to toil eighteen hours a day for subsistence wages under brutal and dangerous working conditions that apply even to the labor of small children, whose work is necessitated by the insufficiency of the earnings of their parents. It is present, at least implicitly, in practically all debates about tax, spending, and labor and social legislation. (All references to Marx are to vol. I of Das Kapital.)

This view of things is the foundation of demands for the “expropriation of the expropriators” and the establishment of socialism, which will allegedly give back to the wage earners what the capitalists have stolen from them and continue to steal from them.

This view has been the foundation of most of the major policies of the Democratic Party at least since the time of Woodrow Wilson and the “Progressive” movement, with progress being understood as movement toward socialism. Today, it is prominent as never before in the far-left agenda of the Biden administration. Its influence has become so great that it permeates the thinking even of the alleged capitalist exploiters themselves, many of whom apparently seek redemption by pouring fortunes into the financing of far-left causes and so present the spectacle of capitalist “exploiters” themselves acting as veritable communists, following in the footsteps of Friedrich Engels, the wealthy capitalist who was both the collaborator and the financial patron of Marx.

The fact is that capitalists do not deduct profits from wages or “exploit” wage earners. Capitalists do not create the phenomenon of profit. The existence of profit is logically prior to the existence of capitalists. Indeed, if there were no capitalists but only manual workers producing and selling products, as Smith and Marx claimed was the case in their respective imaginary constructions of “the original state of things” and “simple circulation,” the rate of profit would be infinite. The truth is that the existence of capitalists serves to reduce the rate of profit. Indeed, their saving and the expenditure of their savings in the form of wage payments and expenditure for capital goods has served in the industrial countries of the world both to reduce the rate of profit to just a few percent and progressively to raise the standard of living of the average wage earner to a level far surpassing that of kings and emperors of past ages.

However ironic this may be, a good way to understand the truth about profits is by using the distinction Marx makes between simple circulation and “capitalist circulation.” Simple circulation refers to conditions in which workers produce commodities, “C,” which they sell for money, “M,” that they then use to buy other commodities, “C.” Marx describes this sequence as “C-M-C.” Under capitalist circulation, in contrast, the starting point is not the production of commodities by workers, but the outlay of money by capitalists, who pay for the construction of factories, for the machinery that fills them, for supplies of materials, and the wages of workers while the commodities later to be sold are in the process of being produced. Marx describes this sequence, that constitutes capitalist circulation, as “M-C-M.”

As I say, what the capitalists are responsible for is not the phenomenon of profit but the first “M” in Marx’s “M-C-M” sequence, that is, for expenditures for capital goods and wage payments. These expenditures all show up, sooner or later, as costs of production that are deducted from the second “M” in Marx’s sequence representing capitalist circulation.

Now this second “M” is equally present in simple circulation. In both types of circulation, it is the money for which the commodities produced are sold. It is sales revenues.

In simple circulation, while there are sales revenues, there are no monetary costs of production to deduct from those sales revenues, because there have been no prior outlays of money to bring in the sales revenues, costs being the reflection of such outlays.

Thus, Marx’s simple circulation is a situation in which 100 percent of the sales revenues are profit. There is also no accumulated capital in the form of a monetary book value of land, plant, equipment, or inventory, for no such assets have been purchased. (Their purchase would require capitalist circulation, which is precluded by the requirements of simple circulation.) Thus, we have a further situation, in which not only do profits equal 100 percent of sales revenues, but also the rate of profit is determined by the division of that amount of profit by a zero amount of capital invested. Division by zero, of course, results in infinity.

In simple circulation, only workers receive incomes, but the incomes they receive are profits, not wages. In simple circulation, there are no wages paid in the production of products for sale. Such wages, and the expenditure for capital goods, come into being only under capitalist circulation. And as capitalist circulation intensifies, something which can be expressed by dividing the first “M” by the second in Marx’s sequence for capitalist circulation, the economy-wide profit margin declines. This is because as the result of its increase the costs of production emanating from the first “M” grow relative to the second “M,” which is sales revenues. And, of course, the economy-wide average rate of profit on capital invested declines even further as a larger first “M” in Marx’s sequence results in a book value of capital assets that is greater than sales revenues.

In conclusion, what capitalists are responsible for is not the phenomenon of profit, but the expenditures that include wage payments and that show up as costs of production to be deducted from sales revenues and correspondingly reduce the proportion of sales revenues that is profit. The capitalists’ expenditures are also responsible for the accumulation of the monetary value of property, plant, equipment, and inventory/work in progress, which serves further to reduce the average rate of profit, as a smaller economy-wide profit margin is divided by a larger capital base.

A further point: the capital accumulated by the capitalists is not used to fill their bellies, as commonly alleged in cartoon depictions of capitalists as men who are very fat. On the contrary, the capital of the capitalists is the source of the supply of products that everyone buys, including, for the far greater part, noncapitalists, and is also by far the main source of the demand for the labor that noncapitalists sell. In other words, the capitalists’ capital is the source of enormous general economic benefit. A classic example of this is Henry Ford’s accumulation of a vast personal fortune, which served to enable millions of ordinary people to have automobiles and tens of thousands to have gainful employment in producing them. Again, the capitalists’ capital is the source of the supply of products that noncapitalists buy and of the demand for the labor that noncapitalists sell.

And one last point: capitalists work. Their ranks include the primary workers in the economic system: those who supply guiding, directing intelligence at the highest level in firms. This work is a labor of thinking, planning, and decision-making, rather than manual labor. As such, their income tends to vary with the size of the capital they employ. Just as a worker digging a hole with a steam shovel is still the party who digs his hole, which is vastly larger than that of a worker using a conventional shovel, because it is he who supplies guiding, directing intelligence to the steam shovel, so a capitalist with $10 billion of capital may produce ten times the output as one who has just $1 billion of capital. In both instances it is the capitalist who is the party who supplies the guiding, directing intelligence at the highest level. Thus, just as one says, it was Columbus rather than his crew members who discovered America (or did say this in the days when people identified with the ideas, values, and perspective of Western civilization rather than the racial membership of their ancestors), so it is capitalists like Ford, Rockefeller, and their contemporary counterparts who should be named as the producers of their companies’ products. The employees are to be regarded as their helpers (the “help”) in producing their, the capitalists’, products.

I have certainly not answered in these few paragraphs every possible question concerning the justice and fairness of the profits earned by capitalists, but I believe I do so in my book Capitalism: A Treatise on Economics (see, in particular, pp. 473–500 and 603–73.) So, I will simply stop here and hope that the reader will turn to those pages and read and study them. If enough people do so, that will be the end of Marxism and all of its destructive consequences resulting from its doctrines of exploitation and class conflict, for people will then realize that there is no exploitation of labor and no class conflict under capitalism and its economic freedom but rather a profound class harmony between capitalists and wage earners.

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

CNBC Does Black History Month

02/23/2021Robert Aro

As a black man, this bothers me, and I hope anyone who loves freedom and liberty feels the same.

Last week, in celebration of Black History Month CNBC continued with its “Invest in You” series:

featuring weekly stories from CNBC contributors and members of the Financial Wellness Council, including the lessons they’ve learned growing up, their advice to Black youth, their inspirations and how they are working to close the racial wealth gap.

The definition of the “racial wealth gap” is not provided, but they share a stat from a Federal Reserve study to provide an idea:

The median wealth for a White family was $188,200 in 2019, compared to $24,100 for Black families and $36,100 for Hispanic families.

No one can reasonably say what median wealth should be. However, we can say the median wealth of white families is many more times the median wealth of black families. We are offered solutions as to how to bridge the gap, recommended by several African Americans, presumably experts, whose opinion we should listen to because they are either famous or rich:

Quoting Akbar Gbajabiamila, former NFL Player turned cohost of American Ninja Warrior, who believes financial literacy can help lessen the gap. His solution is:

People in power need to step up and help open up financial advising for everyone.

Higher up the wealth bracket we hear from the first black billionaire, Robert Johnson, who sold Black Entertainment Television (BET) in 2001. He believes powerful business people should be called upon to help black Americans advance. It’s unclear if he means powerful blacks or all powerful people. Either way, the successful people “achieved their success by having opportunity.” He goes on to say that these powerful people should tell black Americans:

“We’re gonna give you equal opportunity that we had, we’re gonna give you access to capital that we had, and we’re gonna ensure that you have a chance and a fair shot at participating in the American dream.”

There were even more people who weighed in on the issue. But the flavor of the article should be apparent by now. Time after time, whether from the mainstream media, politicians, or central bankers, we are told that the answer to our economic problems is for those in power to simply take the right action to help those in need. According to the quote above, if powerful people simply decided to grant more opportunities to those in need, it would allow the marginalized to get their fair shot, therefore achieving The American Dream…

Unfortunately, the opportunity to provide something useful to the black community and anyone else experiencing hardship is lost on CNBC. When we talk of opportunity, many forget it is the government and their central banks that are at the forefront of limiting our ability to succeed. Consider the effect of regulations, free market intervention, and inflationism and refraining from them would help better close this gap between all races.

Regulations. The list is long: the war on drugs, prohibitions on selling goods and/or services, import tariffs, minimum wage laws… to name a few. There are countless rules which govern our lives. Yet these rules are involuntary restrictions placed by the powerful over the masses. Society could find positive economic outcomes if we simply removed laws which limit economic freedom.

Interventionism. Remember, it is the Fed that creates over $100 billion a month to buy government debt, tinkers with interest rates, and creates special programs to assist certain members of society at the expense of other members of society. The powerful tell us these programs are for our own good and that if it weren’t for them society would be much worse.

Inflationism. The long-standing fallacy of money creation for the purpose of wealth creation. However, the same money supply expansion benefits the most powerful members of society first. Ironic how so many people turn to those same powerful people for help when their priority is to preserve their own advantages.

This month, many were given a chance to talk about issues facing African Americans. Sadly, without understanding ideas of liberty and freedom, those who would benefit most from capitalism will continually seek socialism. When most people talk about opportunity, it’s often in the context of getting a handout or a leg up from another. Perhaps the best opportunity is to not limit someone’s opportunity from the start.

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

Clown World Finance

The recent blowup of GameStop shares has revealed, if anyone was still doubting, that the center of clown world is not Washington, DC, nor Silicon Valley—but Wall Street. To be clear, this is not meant to refer to the gallant band of redditors from r/wallstreetbets—those few, those happy few, that band of brothers who, as of this writing, may very well be poised to force several hedge funds into bankruptcy. Rather, the clowns are those hedge funds and all those other institutional investors who have been propped up by central bank intervention for decades while congratulating themselves that their seven-figure earnings were all due to their own financial brilliance.

What Happened?

The story of what happened (so far) is briefly told. It was revealed that GameStop was one of the most shorted shares in Wall Street, with the fund Melvin Capital taking the lead in shorting it. While this may or may not be a sound position based on market fundamentals—I have not investigated and think it’s a mug’s game to waste time on fundamentals these days—people did not take kindly to the revelation. Specifically, redditors at the subreddit Wallstreetbets saw that the short sellers were vulnerable, and they organized a campaign to drive them into the ground. Suddenly, retail investors flooded the market, bought up shares and drove GameStop shares, which had been trading below $20, into the stratosphere, topping $365 Wednesday morning (January 27). Melvin Capital suffered huge losses, up to 30 percent, and had to be saved by an infusion of $2.75 billion Tuesday afternoon.

That’s Not the Whole Story, Though…

In a sane market, where market fundamentals actually determine prices, this would not have happened. Short selling would simply be a way of quickly and efficiently determining the market price of stocks, and there would be no special profit to be had from this practice, beyond the arbitrage gain (in the case that the short sellers were correct). Similarly, investors angry at the short sellers could not have driven stock prices sky-high in defiance of reality. Both practices are only possible in a market flooded with ever-increasing amounts of new money freshly printed by the Federal Reserve.

For decades the central banks of the world—chief among them the US Federal Reserve—have had really only one mission: interest rates cannot ever be allowed to rise and everything must be done to prevent even the mildest of corrections in financial markets. They were able to get away with it clandestinely, so to speak—who now remembers the good ol’ days of the Greenspan put?—but after the financial crisis of ‘08 they had to come out into the open. Interest rates were forced lower and lower and markets were flooded with a tsunami of credit. Stocks and bonds responded, as could be expected, by reaching new all-time highs year after year. Of course, there were always economists ready with ever more whacky theories as to why this bare-faced inflationism was really sound policy dictated by the science of modern economics, but the result for anyone to see is financial markets that are completely divorced from reality and whose only purpose seems to be securing cheap funding for the US government and enormous earnings for the financial elites.

Then, of course, came corona, and the government, in its wisdom, chose to destroy the economy. To placate the plebs they offered them a few handouts—first $1,200, then $600—all financed by that incredible machine, the central bank printing press. According to Keynesian orthodoxy, this should have stimulated the economy to no end, ensuring a rapid recovery. Unfortunately, since most of the world was shut down, there were precious few opportunities for people to actually spend their money, and since the man in the street is wiser than most government-employed economists, he probably understood that an unprecedented shutdown of all society is not the best time to engage in a bonanza of consumer spending. So, he saved and invested his money, which thanks to the advances in modern technology he could now do directly, without going through savings banks or brokers.

Yet inflation is still inflation, even if it does not show up in government statistics, and the infusion of such an ocean of liquidity naturally drove stocks, bonds, bitcoin, and now GameStop sky-high. The beneficiaries this time were not the banks or Wall Street investors, however, but the many retail investors who now ganged up on Melvin Capital and the other “sharks” of Wall Street. It is all animal spirits, or rather, it is driven by the desire of those who feel themselves shortchanged to see the high lords of finance come crashing down. This latest round of inflation gave them the means to bring about just that.

Is This the End?

It’s impossible to tell what will happen next. Maybe the flood of liquidity is spent and Wall Street will weather the storm; maybe the Fed will again step in with new credit lines to save them, which seems most likely—again, the prime directive of the Fed has always been to save the big shots in finance. It is possible that financial markets are now so broken, central bank officials so worried about the effects of their money printing, that nothing will be done and we are now seeing the beginning of the end of the Big Bubble of 1980–2020. However, if recent history and mainstream economic orthodoxy are any guide, the Fed will stop at literally nothing to “save” the markets.

As Zero Hedge remarked on Twitter, “What is remarkable is how many people are “surprised” by what is going on in the “market” You throw $20 trillion stimulus at it, you nationalize the bond market, you break all links between price and fundamentals…what do you think happens.” Indeed. It would be wholly fitting in clown world, however, if the Great Stock Market Crash of 2021 were begun by day-trading teenagers, flush with helicopter money (thanks, Uncle Milty!) and with nothing else to do, forming a mob on reddit in order to break a hedge fund.

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

Critiquing the Dollar-a-Day Idea of Poverty

The first year of this decade has given us time to pause and think about how the world stands in terms of global development. One widely used statistic to examine development, which shall be called the “dollar-a-day” idea, measures the idea of poverty in an all too narrow manner. For this article, we will examine the limitations of this metric, as well as implications of a theoretical notion by John Maynard Keynes that predicted poverty would end by 2030.

A Brief History

In an online lecture series based on his book, The Age of Sustainable Development, author Jeffrey Sachs puts forth the idea that poverty could be a thing of the past by 2030. For this, he draws upon a musing from John Maynard Keynes, where the father of modern macroeconomic theory wrote in 1930 about how poverty would end in the span of a hundred years. This view of poverty is associated with material wealth: John Maynard Keynes was, after all, a privileged Englishman in his day.

In this day and age, Jeffrey Sachs links this to the idea of extreme poverty being eradicated by ensuring that every person in the global population lives over the international poverty line, as dictated by the World Bank. This same poverty line was conceived in the 1990’s as a threshold of living off a dollar a day, or equivalent. There are, however, some problems with using this standard as the single benchmark for ending poverty within the next decade.

The Dangers of This Definition

The first problem is that the dollar-a-day measure is based on an idea that is now three decades old. It is pegged to the currency of one economy, and, as some would argue, is still too low to be contextually appropriate in all cases. Should we still take this measure at face value?

There have been attempts to continue adjusting and salvaging the metric to suit the needs of today, such as drawing other thresholds to factor in inflation at $1.25, $1.90, or even rounding up to $2 a day, or by calculating against purchasing power parity for local currencies.

That said, there have also been great strides made in development studies since the 1990s, especially in the qualitative sense, to get a better and more holistic idea of poverty than by simply having a dollar a day, two dollars a day, or whatever other variation of this idea is being used, to dictate definitions of poverty.

Speaking of simplicity, that is the second problem. One appeal of the basic income approach to development is that it allows for easy, though sometimes arbitrary, ways to set simple standards to determine if someone is in poverty or not, just by picking a threshold and looking at what they earn as income. For example, if you happen to be earning and living off $2.00 a day as your basic income, then you are not considered to be poor by the dollar-a-day metric, end of story.

This idea has also formed the basis for national governments to form and create other simple metrics to set their own standards of poverty, and to enact policies that attempt to raise the standard of living for their citizens. However, the actions of citizens, influenced by local culture, personal subjectivity, and other factors, often reveal to us that such policies are inadequate relative to what people actually perceive as in their needs in life, which necessarily include more than just having money.

As a metric, the dollar-a-day measure is, pardon the pun, quite poor: indeed, it is argued that poverty statistics do suffer from a certain poverty, as posited by Don Mathews. The whole experience of poverty, and even the value of human life itself, cannot simply be captured and depicted in numbers and statistics. This is the third danger of defining poverty in such a manner.

The temptation to define poverty solely by income ignores other, deeper, and more complex issues related to it, such as the need for freedom and inclusion in society. Does having a dollar a day also mean that one's personal rights and liberties are respected? Or that one is happier with life, and not in a fleeting sense, but in a sense of lasting happiness? If not, then one continues to be in poverty and unfree as well, even if the number imposed on them says that they are no longer poor.

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

Currency Competition May Save the Economy or Even Much More

01/19/2021Gavin Wax

A fifth of all US dollars ever created are just under one year old. In about the same time, bitcoin has quadrupled in value. Currency competition is here, but the blessing for consumers is seen as a serious threat by the oligarchical elite.

Just as our country is reaching a cultural and political crossroads, so too is there an economic rubicon to be crossed. Beyond any other social issue, however, Americans must take a greater interest in their money.

The reason is simply that fiat money systems have always ended up in the dustbin of history. Too often, it’s the same result for a civilization’s freedom and prosperity, even its claim to self-determination. What’s truly frightening is that the whole global economy is now under such a system of fiat, with the US dollar as the world’s reserve currency.

No one can precisely predict the future, but based on what occurred in 2020, the reign of the US dollar as the world’s reserve currency may not be long for this world.

Central banks and other behemoths of government and business have an interest in making any monetary transition as smooth as possible for themselves while also maintaining or increasing their current influence on markets. The solution is likely to be a central bank digital currency, known as a CBDC, portending a cashless future.

Thankfully, there are more free market-oriented innovations that serve the average American consumer’s best interests. Those would hedge against inflation, keep their purchasing power and storage of value long term, and also allow at least some privacy protection against traceability.

The most obvious recent example of the latter is bitcoin, which is not a fiat currency, meaning it is not decreed into existence by government or central bank officials. The cryptocurrency broke a new value record of $42,000 on January 8. Its rise over the last decade reflects deep concerns for the US dollar’s fate.

“Bitcoin definitely created a revolution,” said Daniela Cambone, editor at large and anchor with Stansberry Research, on a recent episode of the Ron Paul Liberty Report. “It is a protest against the US dollar and other currencies.”

“It is giving power back to the people,” Cambone added before noting that the covid-19 lockdowns have “caused a lot of people to have more time to reflect about their money.”

Now, Cambone is no bitcoin booster. She is unsure of its long-term value. However, the undeniable point is that bitcoin is becoming a perceived safe haven for value storage, at least in the short term.

That’s not thanks to any monetary dictator or board of expert economists. It’s a result of free and voluntary exchanges. That process should not only be allowed to continue, but should be further expanded into a truly unhampered market for currency competition.

When he was a congressman, Dr. Ron Paul introduced legislation to legalize currency competition. Paul sought the repeal of legal tender laws, which codify powers not authorized by the Constitution in the first place. His bill also called for a repeal of prohibitions on private mints and laws imposing capital gains and sales taxes on coins.

The last such law proposed was the Free Competition in Currency Act of 2013, introduced by former Representative Paul Broun (R-GA). Hopefully another version of this bill emerges soon; the new Sound Money Caucus, led by Representative Warren Davidson (R-OH), was announced this past summer.

How urgent is this issue for Americans? Well, how stable does the country feel at the moment? In times of uncertainty or even great crisis, money alternatives are essential for many kinds of transactions, especially for politically marginal or oppressed groups.

Take a moment to review human rights activist Alex Gladstein’s Twitter thread documenting more than a dozen situations worldwide where Bitcoin is used to get around arbitrary government obstacles.

Americans are increasingly aware of the control over free speech online, and soon they may also learn of widespread denial of services such as payment processing for anyone deemed too politically incorrect. To protect against that, currency competition should be encouraged.

The takeaway here is not that bitcoin or silver or gold are destined to replace the dollar. They may or may not. No matter what, it should never be illegal to do honest business in America, even if that means a transaction isn’t denominated in US dollars.

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

Colorado Voters Vote for Democrats—and for Tax Cuts

11/05/2020Ryan McMaken

The Colorado Republican Party is the very definition of "sadsack." Over the past fifteen years or so, the party has repeatedly nominated candidates for office that were so inept and so uninspiring that even a population that wanted tax cuts couldn't bring itself to vote for the GOP. How do we know a majority of the voters want tax cuts, even if they keep voting for Democratic governors and legislators? We know this because even when a majority of the voters repeatedly vote Democrat, they simultaneously vote for statewide referenda that lower taxes. 

We saw this in 2016 when a majority of the voters cast ballots for Democrat Jared Polis while at the same time voting down proposals for new taxes and new regulations against businesses.

A similar thing happened this year. A majority of voters went with the Democratic candidate for the US Senate (John Hickenlooper) but simultaneously voted for a cut to the state's income tax. Voters also passed a new law requiring a vote on future attempts to raise fees for state "enterprises" like state parks.

The requirement for a statewide vote has proven to be a significant barrier. Voters in the state have overwhelmingly voted down attempts at raising statewide taxes. At the local level, taxpayers have proven much more tolerant, especially when new taxes are earmarked for specific purposes.  

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

Can Incumbent Trump Win with an Anti-establishment Message?

10/30/2020Alice Salles

Tuesday is the last chance for (most) Americans to cast their vote for president. What will make the difference in attaining victory? When it comes to messaging, Team Biden relies on elite news outlets for assurances of victory, while Team Trump’s preferred sources are blacklisted by social media and ignored by broadcast news organization.

But what does recent history tell us about which voice is most likely to prevail?

In 2016, Trump’s unusual and unrefined demeanor brought him closer to those who had long been left out of the political discourse.

But despite his apparent popular appeal, pundits and major cable news outlets all but gave former secretary of state Hillary Clinton the victory. On Election Day, however, things didn't go as the Democrats planned. Few predicted the outcome.

After four years, his anti-establishment rhetoric has continued to cause many to see him as the antipolitician candidate, even though he has ultimately failed to deliver on many of his promises.

Can the populist strategy work again?

Maybe. The lessons of 2016—taking a stand against the status quo—don’t seem to have stuck with Democratic activists. The party has remained energized by its long dedication to exploiting identity politics and pushing ideological concepts that often don’t resonate with its own base.

From promising to maintain the US's failed foreign policy strategy in the Middle East to pushing the already debunked “Russia did it” talking point to exhaustion, the Democrats have stuck with what has been used to shore up the base in recent years, while ignoring much of the center. Instead, they have chosen to double down, even threatening with physical violence those who oppose their message.

Consider Biden’s running mate, Kamala Harris, who went as far as promising that the violent riots that followed the death of George Floyd “were not going to stop” until “there are people in the system who are willing or pushing” to make a difference.

Biden, meanwhile has hurled threats at much of the population by promising “nationalization” of mask wearing and vaccine distribution. Presumably, such measures would require enforcement by armed agents of the state.

Many voters are likely to find Trump to be relatively laissez-faire in comparison. Yet that remains a low bar. Trump promises to downsize the US military’s presence in Afghanistan but has not done so. But in practice, his approach to fighting the pandemic has been far less reliant on mandates and state coercion than what Biden proposes.

When it comes down to the main differences between the two candidates, many voters may ultimately conclude it’s clear that Biden is the professional politician whereas Trump remains the loudmouthed, anti-establishment guy. This may help Trump with some voters. Moreover, although Trump is now an incumbent, he is nonetheless running against lifelong politicians like Biden. As Trump was careful to note during the first debate: “If I thought [Biden] did a good job, I never would have run.”

The other difference is that now, compared to 2016, Americans are likely to be even more weary of politics thanks to the coronavirus lockdowns, BLM riots, and the destruction of businesses by both the mob and state governments. Whatever the motivation, Trump stands to benefit so long as he can cultivate the image of being the candidate fighting against the madness while Biden and Harris stand stoically as the candidates willing to legitimize the mob.

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