The Housing Boom Returns

For the last decade (or more), Canadians have been ebullient about their home-grown housing boom. Home prices in Toronto have grown by leaps and bounds over the past decade. New homeowners have rushed in to take advantage of what seems like a surefire path to riches.

Unfortunately while your home might be an asset if you own it outright, for the vast majority increasing housing prices have meant higher mortgage or rent payments. Associated home-ownership fees have also risen steeply. Property taxes are a percentage of assessed value, so they have also risen over the boom. Utility expenses have gone up, as have general maintenance costs. In short, it’s not cheap owning a home.

Apparently Canadians now spend more income on housing then almost anywhere else on the planet. The average Canadian can expect to roughly 43 cents of every dollar earned to housing expenses (rent, utilities, etc.). Americans aren’t far behind at 42 cents, and us North Americans are only “beaten” out by the Swedes and the Dutch (45 and 51 cents of each krona and euro).

For Canadians, according to a BlackRock survey, this leaves just 13% of their income available to be saved, and 10% to be invested. These are the lowest rates in the world.

Many think that this savings rate is low because, 1) housing is a form of savings, and as long as that market remains robust their will be no problem, or 2) high housing prices have squeezed the amount of savings available (i.e., savings is a residual or sorts).

The problem with these interpretations is that it treats the expenditure categories as separate of one another. Actually savings are low and housing prices high for the same reason – they are both interest-rate sensitive and an extended period of record low interest rates at the hands of the Bank of Canada has caused both results. Since most houses are bought on credit and over an extended period of time, low interest rates have fostered the housing boom. And since interest is a component of what you earn on savings, lower interest rates discourage savings (and encourage spending, which also contributes to the housing boom).

Canada’s housing boom isn’t a positive development, and Canadians are now getting a glimpse of why not. Like any inflationary process, the immediate effects seem positive as people feel wealthier given their early purchase of an asset that later goes up in value. As all prices start to rise the effect is reversed, and inflation slowly (or quickly in some cases) impoverishes the country. Add to these rising prices the fact that we’ll have lower growth rates due to an extended period without savings and you can probably foresee that this isn’t just a problem in the present but one that will persist for some time.

(Cross posted at Mises Canada.)

Mark Thornton on the European Debt Crisis

PressTV Reports:

Over the past several years, most of the attention of the eurozone debt crisis has been focused on the economic struggles of Greece, Spain and Portugal and without a doubt things will continue to get even worse in those nations.

However, the predictions have been that in 2014 and 2015, Italy and France will start to take center stage in eurozone debt crisis. France has the fifth largest economy on the planet, and Italy has the 9th largest economy on the planet, and at this point both of those economies are rapidly contracting.

See Mark’s analysis at the 12:12 mark and again at the 20:45 mark.


Amity Shlaes: Blame the Economists

John_Maynard_KeynesReading the news, one could be forgiven for coming to the conclusion that virtually all economists work for the government or the Fed, and that few of them have real (i.e., private sector) jobs. Of course, there are many practitioners of microeconomics who do an enormous amount of good in society for private clients. Austrian economists have long focused on microeconomics because only microeconomics focuses on the only unit that matters in economic action: the individual. The amount of sound, practical microeconomic wisdom found in Mises’s Bureaucracy, for example, is impressive.

In this article in the Wall Street Journal, Amity Shlaes examines the role of economists in the private sector, and the good many of them do. Macroeconomists, on the other hand, are another story. The macroeconomists, Shlaes notes, are guilty of “guildthink.” That is, macroeconomists in Washington exist in a closed system of like-thinking ideologues who shut out dissenting opinion:

When it comes to Washington policy, macroeconomists shut out innovative colleagues, some even of the sort Mr. Litan celebrates. The ruling macro-theorists, for instance, demonstrate an annihilating contempt for the Austrian School, which focuses more on individuals than aggregates. The same contempt is directed at Public Choice Theory, which predicts that governments will take advantage of market crises to expand in nonmarket sectors. Scholars from these schools do not win top positions at the Fed or at major universities and firms.

Such guildthink is what proved fatal just before 2008 and after. There were no Public Choice School theorists at the White House or powerful institutions to warn that there might be a housing bubble if government expanded its presence in the housing sector. Few elite economists warned that the administration might use a financial crisis to undermine bankruptcy precedent or socialize health care. Ironically, analysis by economists demonstrates the inefficiency of guilds, yet these scholars perpetuate their own. Until that changes, go ahead and blame the economists.

Book Review: Rothbard’s Making Economic Sense

B575Ben Kramer-Miller writes at Seeking Alpha:


  • A series of newsletter articles and shorter essays designed for the layperson interested in libertarian ideas and free market thought.
  • The book is highly entertaining and extremely accessible to people of all backgrounds.
  • Rothbard’s bluntness is appreciated in our sanitized, “PC” collective consciousness.
  • *Note that this book has been made available for free by the Mises Institute. You can find it here.

    Those who are looking for an introduction to Rothbard’s work and Austrian economics more generally should probably look at What Has Government Done To Our Money (also available at the Mises Institute) and discussed by yours truly here. But those who are interested in an informal, layman’s explanation of various economic (and political/social) phenomena as well as a work designed to be – in most places – anything but pedantic should consider reading through Making Economic Sense.

    Read the full article.

    Judge Napolitano Versus Forced Quarantines

    NNSA-NSO-1189One can make the case that in a thoroughly decentralized and anarchistic society, persons may find themselves in a state of practical near-quarantine because private owners of airlines, airports, lodging facilities, and even communities with private security may refuse entry or passage to persons suspected of being contagious. In such cases, persons would be restricted to places owned by themselves or by those who will agree to allow the person on the premises. Thus, in such a situation, a “quarantine,” practically speaking, is less like imprisonment and more like house arrest depending on negotiations with numerous private owners. In modern states, on the other hand, the widespread nature of “public goods” and prohibitions of discrimination by private owners often means that quarantine becomes a function of the central state and often ends up being little better than a jail sentence where the person in question is locked inside some official facility for a period of time.

    Thus, quarantines (of a sort) can arise within a totally (or mostly) privatized society, but how they look and are carried out in practical terms can vary significantly.

    For an example of the arbitrary, slipshod, and due-process-less way that American governments deal with such issues, we need only look to the case of the nurse in New Jersey who was being confined in spite of the fact that she had been proven to be Ebola-free. (Note: she has now returned to Maine, where the State of Maine promises to confine her although she continues to be symptom-free.)

    In the US, travelers are subject to the arbitrary edicts of politicians who can imprison people with the stroke of a pen,with  no prior warning, and no due process. As Napolitano explains in this video, US governments have known about the Ebola outbreak since March, yet did not warn healthcare workers traveling to west Africa that they could be subject to quarantine upon return. Any responsible government body would have done so. When such persons returned, no steps had been taken (at least not in New Jersey) to administer a quarantine in any way that might be described as humane. As Napolitano notes, when they quarantined the NJ nurse in question, they “put her in a tent in a parking lot” and “gave her a porta potty and a granola bar.” It seems the government intended to keep her in these conditions for 21 days.

    Read More→

    Forbes Takes Another Look Through the Austrian Lens

    Michael Pollaro writing at reexamines the implilcations of the ending of Quantitative Easing policy by the Federal Reserve: “The lion’s share of the supposed economic strength we see today is both artificial and unsustainable because it is built on malinvestments born out of the monetary largesse underwritten by the Federal Reserve’s policies. Normalize those policies; i.e., end QE and raise interest rates, and sooner or later those malinvestments will be liquidated. The supposed economic boom will turn to economic bust, and with that, a bust in the publicly traded equities that lay claim to those malinvestments.”

    Looking through the lens of ABCT, the dynamics here can be explained thus… For the past five-plus years, emboldened by the near zero interest (discount) rates fostered by the Federal Reserves, continually cashed-up investors and speculators have been bidding up the price/value of all financial assets, driving a wedge between the value of those assets as priced in their respective markets and their true value based on properly discounted, expected future cash flows.

    Now, in our minds, nowhere is this wedge greater than in the equity market. You might say wait a minute. Where’s the wedge? Don’t most broad-based market PE multiples – like the roughly 16 handle on the 12-month forward multiple of the S&P 500 – say otherwise? Have not company per share earnings been growing, especially recently, right along with equity share prices? Yes, but what strikes us is the reason for a good portion of that earnings growth; namely, it’s a function of the same swathe of money that has inflated equity share prices. We point to the unprecedented deluge of financial engineering programs orchestrated by company CEOs – refinancing tactics, stock buybacks, dividend hikes and of course M&A – financed off the back of the Federal Reserve’s QE purchases and ZIRP policies.

    So, when might this wedge in the equity markets be filled? Well, in accordance with ABCT, it will begin when the monetary largesse that is currently feeding the equity market boom (and financial engineering boom) abates. Could that be when the last vestiges of QE3 work their way through the financial markets? Or will it have to wait until the Federal Reserve begins raising rates? Perhaps the banking system will fill the void being left by the Federal Reserve with its own swathe of money creation? Maybe some cross-border capital flows coming from European investors could help fill that void too? Indeed, could the Federal Reserve fill the void itself with QE4. These are tough questions, ones we will be examining in future posts.

    Poland to German Taxpayers: Subsidize our National Defense!

    gimmeComing in Monday’s Mises Daily, Patrick Barron will explore the moral hazard that often plagues collective security organizations like NATO. Why be careful, responsible, and restrained with your own defense when you can get the taxpayers in a foreign country to pay for it?

    Today, the news from Europe illustrates this well. From today’s Open Europe news summary:

    Die Welt reports that “Poland is worried about the weakness of the German army”, citing Polish Defence Minister Tomasz Siemoniak, during a meeting with his German counterpart in Berlin yesterday, as saying that, “We need a strong German army which does not shy away from the responsibility of defending their allies.”

    Now, I can certainly understand that old nationalistic tensions mean that many Poles may still feel that Germany owes them something big time. But every German who actually invaded Poland is either dead or will soon be dead. And they’re certainly not paying much in the way of taxes. That burden falls to much younger workers, and it’s unclear how a foreign government’s demands for more loot will help German-Polish relations in the long run. Meanwhile, NATO is simply providing the means to further stoke such tensions.

    The Economist Discovers the Entrepreneur

    Source: 'The Economist'

    Source: The Economist

    Sean Corrigan writes: 

    The Economist Discovers the Entrepreneur.

    In its latest edition, in a piece entitled ‘Monetary Policy: Tight, Loose, Irrelevant’, the ineffably dire Ekonomista considers the work of three members of the Sloan School of Management who conducted a study of the factors which – according to their rendering of the testimony of the 60-odd years of data which they analysed in their paper, “The behaviour of aggregate corporate investment” – have historically exerted the most influence on the propensity for American businesses to ‘invest’.

    The article itself starts by deploying that unfailingly patronising, ‘it’s economics 101′ cliché by which we should really have long ago learned to expect some weary truism will soon be rehashed as fresh journalistic wisdom.

    It may be only partly an exaggeration to say that the weekly then adopts a breathless, teen-hysterical approach to a set of results which, with all due respect to the worthies who compiled them, should have been instantly apparent to anyone devoting a moment’s thought to the issue (and if that’s too big a task for the average Ekonomista writer, perhaps they could pause to ask one of those grubby-sleeved artisans who actually RUNS a business what it is exactly that they get up to, down there at the coalface of international capitalism). Far from being a Statement of the Bleedin’ Obvious, our fearless expositors of the Fourth Estate instead seem to regard what appears to be a tediously positivist exercise in data mining as some combination of the elucidation of the nature of the genetic code and the first exposition of the uncertainty principle. This in itself is a telling indictment of the mindset at work.

    For can you even imagine what it was that our trio of geniuses ‘discovered’? Only that firms tend to invest more eagerly if they are profitable and if those profits (or their prospect) are being suitably rewarded with a rising share price – i.e. if their actions are contributing to capital formation, realised or expected, and hence to the credible promise of a maintained, increased, lengthened or accelerated schedule of income flows – that latter condition being one which also means the firms concerned can issue equity on advantageous terms, where necessary, in the furtherance of their aims.

    Read the whole thing.

    GDP Up 3.5%

    Gross Domestic Product has been reported to be an unexpectedly high 3.5% in the third quarter (on an annual basis). However the growth was led by a “surprisingly” high increase in defense spending and a reduction in the trade deficit (which accounts for 2% of the 3.5%). The last time defense spending had a surprising increase was the third quarter of 2012 (also a quarter leading up to an election) there was a sharp fall off in defense spending the next quarter. The GDP deflator was 1.3% for the quarter on an annual basis.

    Roy Cordato Explains Obamacare

    6839833657_c7b0ecf372_bRoy Cordato has written an insightful piece on Obamacare at the Carolina Journaldemonstrating that the “right” to health care granted by Obamacare is really a “legal obligation” to purchase health care insurance:

    For decades pundits have been debating whether people have a “right” to health care. The notion of rights that is typically invoked is distinct from the question of whether people have a right to enter the market for health care services and engage in exchange activity in order to obtain health care.

    “Rights,” in the view of the president and those who believe in a specific “right to health care,” imply a guarantee that the right holder can obtain health care services either without charge or at prices that are “affordable,” hence the official title of Obamacare: the Affordable Care Act. (See this previous “Economics & Environment Update” newsletter for a more detailed discussion of different conceptions of rights.)

    This notion of rights therefore implies an obligation on the part of others. There are two possibilities. The first, typically not invoked, is that health care providers have an obligation either to provide their services for free or to adjust the prices of their services according to the incomes of their clients. There is a reason why this kind of obligation is not advocated by anyone, although Medicaid reimbursement schemes do attempt to invoke this approach to a limited extent. It is a form of price control that would dramatically curtail the supply of heath care services, as occurs in the Medicaid system.

    The other, and more typical, scenario is that the obligation to sustain this right falls on taxpayers. That is, the cost of health care to the health care rights holder is made affordable through taxpayer subsidies. This is the single-payer model in which the government, within limits defined by the government, picks up everyone’s health care tab.

    So how does Obamacre fit into this picture? The fact is, it doesn’t. The centerpiece of Obamacare is not a universal right to health care but a universal obligation to obtain health insurance. Because of this, it does not recognize or grant rights of any kind but denies them while mischaracterizing obligations as rights.

    What distinguishes all rights from obligations is the ability to refuse to exercise the right. If someone is not legally allowed to refrain from engaging in an activity, then there is no right, only an obligation.

    Allegedly Obamacare guarantees a right to access health care by guaranteeing a right to obtain health insurance, either by purchasing a plan through the Obamacare exchanges, through an employer plan, or, if income-qualified, through Medicaid. But since it is illegal to refuse to exercise this so-called right, it is not a right at all but a legal obligation.

    It cannot be both. The right to say no is an implication of the right to say yes.

    In examining Obamacare’s so-called right to health insurance, the farce of using the language of rights can be exposed easily. This point is made quite obvious with the individual mandate, which imposes a fine on any person who does not purchase a government-approved health insurance policy. Obamacare guarantees a right to health insurance only in the way that the draft guarantees a right to serve in the military.

    Read the full article. 

    Image credit. 

    Yellen Wants Austrians on Fed’s Board

    6269797026_7936c8edc9_bAccording to a Wall Street Journal article posted online this morning, the Federal Reserve chair(wo)man Janet Yellen expressed that the “economics profession … could benefit from a more diverse range of views.” Delivering introductory remarks at a conference, Yellen stated:

    Did the economics profession recruit and promote the individuals best able to bring the energy, the fresh insights, and the renewal that every field and every body of knowledge needs to remain healthy?

    Her answer to the rhetorical question is “no.” The Federal Reserve suffers from a discussion that lacks dissenting views. In fact, she specifically noted how the Fed would benefit from a “range of views and perspectives”:

    There has been a fair amount of public debate in recent years about the health of the economics profession, prompted in part by the failure of many economists to comprehend the dire threats and foresee the damage of the financial crisis.

    [...] I believe decisions by the Federal Reserve Board and the Federal Open Market Committee are better because of the range of views and perspectives brought to the table by my fellow policymakers, and I have encouraged this approach to decision making at all levels and throughout the Fed system.

    It seems the system is about to change. So when will we see Austrians take place on the Federal Reserve Board? Not any time soon, the “range of views and perspectives” Ms. Yellen calls for is not “views” or “perspectives” at all – but gender. She is simply working hard to find female Keynesians to take place on the Board. How that could possibly change anything is not entirely clear.

    QE’s Seeds are Already Sown

    rsz_badseedThe Federal Reserve has finally ended its quantitative easing programs. Since the financial crisis of 2008, the Fed has pursued what seemed like an endless policy of asset purchases. As recently as September 2008 the monetary base in the US was just a hair over $800 bn. Today this figure is just shy of $4.2 trillion, for a total increase of 425%.

    For its part Janet Yellen and her gang of Fed economists are probably pretty pleased with themselves. Unemployment is down, headline inflation remains muted, and the word on Wall Street is that a worse crisis has been averted. The stock market is at record highs, and banks (and bankers) are back to their pre-crisis eminence.

    One of the true marks of a great economist is an ability to see past the obvious outcomes and into the veiled results of policies. Friedrich Bastiat’s great essay on “that which is seen, and that which is not seen” provides a cautionary parable that disastrous analyses result when people don’t bother looking further than the immediate results of an action.

    Nowhere is this lesson more instructive than with the Fed’s QE policies of the past 6 years.

    Consider the Austrian business cycle theory. The nub of the theory is that changes in the money market have broader results on the greater economy. In its most succinct form, when a central bank pushes interest rates lower than they should be (by buying assets, for example), the greater economy gets distorted. Some of these distortions are immediately apparent, as consumers buy more goods and everyone takes on more debt as a result of lower interest rates. Some of the distortions are not immediately apparent. The investment decision of firms gets skewed as interest rates no longer reflect savings preferences, and the whole economy becomes fragile over time as erroneous investments add up (what Mises’ coined “malinvestments”).

    When a financial crisis or economic recession hits, it’s almost never because of some event that apparently happened at the same time. The crisis of 2008 did not occur because of the collapse of Lehman Brothers. It happened because the whole financial system and greater economy were fragile following years of cheap credit at the hands of the Greenspan Fed. If anything, Lehman was a result of this and a great (if unfortunate) example of the type of bad business decisions firms are lured into by loose money. It wasn’t the cause of the troubles but a result of them. And if Lehman didn’t go under to spark the credit crunch, some other fragile financial institution would have.

    The Great Depression is a similar case in point. It wasn’t the stock market crash in 1929 that “created” the Great Depression. It was a decade of loose money policies by the Fed that created a shaky economy. Again, if anything the stock market crash was the result of stock prices being too buoyant and in need of a repricing to reflect economic fundamentals. Just like today, stocks rose to such storied heights as a result of cheap credit, not because of the seemingly “great” investments funded by it.

    The Fed has lowered interest rates since July 2006. We have just come off the the period with the most rapid and extreme increase in the money supply ever recorded in American history. The seeds of the next Austrian business cycle have been sown. In fact, they are probably especially fertile seeds when one considers that the monetary policy has been so loose by historical standards. Just as cheap credit of the 1920s beget the Great Depression, that of the 1990s beget the dot-com bust and that of the mid-2000s beget the crisis of 2008, this most recent period will also give birth to a financial crisis.

    When the next crisis comes there will no doubt be economists and commentators who blame it on some proximal event, like the failure of a large important financial institution. Don’t be fooled. The seeds of the next crisis are already sown. Fed policy under Ben Bernanke and Janet Yellen has distorted the economy in a way that makes it precariously fragile, and susceptible to collapse.

    (Cross posted at Mises Canada.)

    Nobel Winner Jean Tirole’s Faulty Views on Monopoly

    6942Mises Daily Wednesday by Frank Shostak:

    Economics Nobel Prize winner Jean Tirole still clings to the old neoclassical model “perfect competition” and monopoly, in which there is no place for entrepreneurship, and which fails to grasp that consumers benefit more from a diversity of goods than a diversity of firms.

    Regulation through taxation

    Hungary_-_Location_Map_(2013)_-_HUN_-_UNOCHA.svgOne lesson from the United States’ Obamacare debacle has been that if Congress can’t get its way through regulation, it can always resort to taxes. At least that’s the Supreme Court’s view, after it declared the Affordable Care Act constitutional because it amounted to a tax, something that falls under the domain (apparently) of Congress.

    So now why all the commotion with Hungary using the same tack with the internet?

    The Eastern European country has just implemented a new tax on bandwidth. Roughly 60 cents will be charged per gigabyte of internet transfers. The tax comes at a time when the government of Hungarian Prime Minister Viktor Oban has been cracking down on the media. Since the internet is now the most popular platform for information sharing, I’m sure the new tax will serve to limit the competitive capabilities of alternative news sources – bloggers, for example!

    (Cross posted at Mises Canada.)

    NJ Political Heavyweights Debate Gold Standard

    599px-1857_gold_dollar_obverseDuring the past two weeks, James Florio, a former Democratic governor of New Jersey, and Steve Lonegan, the 2013 Republican nominee for U.S. Senate  wrote opposing op ed pieces on the gold standard for New Jersey’s leading newspaper.   That the gold standard is now being seriously debated by state-level pols in a mainstream media outlet is a remarkable and welcome development.

    The piece by Florio–whose signature act as  governor was significantly raising State taxes during the throes of the 1990-91 recession–is predictably inane, reiterating the tired old litany of misconceptions about the gold standard.  Florio even conjures up two new ones.  He bemoans  unspecified “environmental harm”  associated with seeking new gold supplies and cites the potential health hazards in disposing of arsenic trioxide, a  toxic byproduct of the gold-mining process.  Florio does not tell us if we should discontinue the large-scale use of this chemical compound in forestry products, colorless glass production, and electronics.  Nor does he call for rescinding the FDA’s approval in 2000 of the use of  arsenic trioxide (Trisenox) for treating certain forms of acute leukemia.

    In his response , Mr. Lonegan does a good job of rebutting Florio’s spurious charges against the gold standard.  Unfortunately, Lonegan gets himself into difficulties by his failure to recognize the difference between the pre-1914 genuine “classical” gold standard and the post-World War 2 Bretton Woods system, which was an intergovernmental price-fixing scheme masquerading as a gold standard.  Lonegan laments the collapse of the Bretton Woods phony gold standard  in 1971, which was inevitable and long foretold by leading advocates of the classical gold standard like Jacques Rueff, Henry Hazlitt, Michael Heilperin, and Ludwig von Mises.  Even more worrisome is the fact that Lonegan accepts the view promoted by proponents  of restoring a Bretton Woods-type monetary system like Nathan Lewis and Steve Forbes that a mystical property of gold somehow ensures a stable value of money without limiting its supply.  Writes Lonegan:

     The gold standard insures the quality, i.e. buying power, of the dollar. It doesn’t limit the quantity of money. As economist Nathan Lewis has calculated, from 1775 to 1900 the money supply increased by 163 times while gold reserves rose only 3.4 times. The gold standard defines, rather than restricts, money.

    In fact, it is precisely by  strictly limiting the supply of money that governments and central banks were able to create  that the classical gold standard enabled the value of money to increase, i.e., the level of prices to gently decline,  for over a century leading up to World War 1.  This deflation of prices , especially after the Civil War,  was a necessary complement to the tremendous growth in productivity and living standards that occurred in the U.S.  This experience directly contradicts the alarmist contentions of Lewis, Forbes et al.  that falling prices lead to depression and unemployment.

    For those who are interested in a critique of the monetary doctrines of the advocates of fixing or “targeting’ the price of gold while maintaining our current fiat dollar,  I have recently written two short pieces on the topic (here and here).


    My Upcoming Speech at Columbia University


    Adam Smith, F.A. Hayek, Ludwig von Mises.

    Smith, Hayek and Mises are not only important figures in economics, but in ethics and political philosophy too. The former would have won the Nobel Prize in economics, if this award were given during his lifetime. The middle mentioned one actually did have this honor bestowed upon him, in 1974. The latter should have won this too, but, scandalously, did not. These three are very important for students in that modern economics courses, and economists, tend to ignore all of them, particularly the latter two, who were members of the Austrian School of economics. Block’s lecture will attempt to right this imbalance.


    Dr. Walter Block
    Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics
    Joseph A. Butt, S.J. College of Business, Loyola University New Orleans

    Time and Location:

    Monday, November 10, 2014, 7:30pm.
    702 Hamilton Hall, Columbia University (entrance at 116th and Broadway or Amsterdam)
    Free and open to the public

    Hosted by the Columbia College Libertarians (

    More Politics Means More Conflict

    kids2Mises Daily Tuesday by Ryan McMaken:

    A recent study shows that one’s political views are now the most widespread source of discrimination and conflict in American society. Politics is now more important than ever because the state is now more powerful than ever.


    Could the ‘Taylor Rule’ Have Prevented the Housing Bubble?

    broken measureMises Daily Tuesday:

    Tom Woods and Mateusz Machaj discuss the problem with John Taylor’s rule for monetary policy.

    Sweden Hits the Zero Bound

    NeutroisThe Swedish central bank Riksbanken has just lowered the interest rate to zero (yes, zero) percent, which was reported at a press conference in Stockholm today. This is a response to a couple of months of deflation, and with it enormous pressure from both politicians and Keynesian know-it-alls to quickly and massively lower interest rates. Of course, the interest rate was already very low and at zero it can get no lower. In other words, we’ve reached the zero bound. Why? Depression phobia.

    According to the Riksbanken, they do not expect to raise the interest rate until mid 2016. The decision means, according to media reports, that the central bank now “pays” a negative 0.75 % on banks’ funds held at Riksbanken.

    The immediate effect in the financial and money markets was an expected fall of the krona’s (the Swedish currency) exchange rate. To the central banksters, journalists, and pundits this is great news, since this means a booming export sector, more expensive exports, and therefore price inflation to relieve the country from the horror of a possible deflation spiral.

    I guess we’ll see. Sweden has a history of manipulating its currency, a standard “solution” in the 1970s and 1980s that led to the country suffering a depression in 1992. During the past two decades, there has been political consensus around cutting down expenditure through rolling back the welfare state, paying back public debt, and lowering taxes – partly to regain the lost confidence. Today’s decision by the Riksbanken is not an outright devaluation of the krona, the preferred measure of “old” Sweden, but has a similar effect.

    Update: In an official statement, the Riksbanken notes that the Swedish economy is “relatively strong” and that the economic outlook is “improving,” but that inflation is “too low” (the central bank’s target is 2% price inflation). The only major potential problem is the public’s debt level, which is too high. (Especially mortgages, in a real estate market that is generally considered to be a bubble.) The debt level will not, of course, get lower with lower interest rates. For this reason, many “experts” expect a legal amortization requirement on mortgages in the near future to lower the public’s debt as well as “cool off” the real estate market.

    Update 2: In the Q&A following the press conference, Riksbanken chairman Stefan Ingves makes it very clear that there are “no technical limitations” to lowering the interest rate (way) below zero. But this is not necessary at present and is not a measure included in the central bank’s prognosis. It is possible and may be a preferred course of action should the economic situation deteriorate, states Ingves.

    The Great Deformation Is Now in Polish

    299486-352x500David Stockman’s huge volume on the background of the 2008 financial crisis, and on the role of the fed and government bailouts in the continuing crisis, is now available in Polish.

    The Polish edition, Wielka deformacja, czyli jak skorumpowano amerykański kapitalizm, appears to be available for purchase at It’s also available directly from the publisher.

    We’ve covered the English version of the book extensively here at Here is a Q and A with David Stockman about it, and Stockman’s author page features several selections from the book.

    Robert Wenzel has posted the introduction from the new book (in English.)