Archive for April 2012 – Page 2

Principle of Economics, an online course with Robert Murphy, starts tomorrow

Article on the course here.

For details and to sign up, click here.

The War on Speculators Continues

President Obama thinks he knows how to soothe everyone’s pain at the pump.  The White House will unveil a $52 million proposal Tuesday at the White House, where he will be joined by Attorney General Eric Holder.  According to the Associated Press,

the proposal said it aims to detect and deter illegal manipulation by energy speculators, the type of practices that many Democrats blame for the high cost of gasoline. The officials spoke on the condition of anonymity to discuss the plan ahead of Obama’s announcement.

The President’s $52 million proposal will reportedly “curtail the ability of speculators to take unlawful advantage of oil price volatility.”

The Obama plan will, again, according to the AP,

— Increase six-fold the surveillance and enforcement staff of the Commodity Futures Trading Commission to better deter oil market manipulation.

— Increase spending on technology to provide better oversight and surveillance of energy markets.

— Increase civil and criminal penalties against firms that engage in market manipulation from $1 million to $10 million.

— Give the Commodity Futures Trading Commission authority to increase the amount of money that a trader must put up to back a trading position. The administration officials said such authority could help limit disruptions in energy markets.

And if all that isn’t enough, the President will turn the White House Council of Economic Advisers loose on the CFTC’s data.

Speculators are convenient scapegoats for all governments.  In August 1971, President Nixon told the nation that he was “temporarily”  closing the gold window. The amount of gold held in Fort Knox as a percentage of outstanding paper dollar claims against it — had declined from 55% to 22% — leaving the Treasury desperately close to default.  So the Nixon Treasury either had to quit borrowing and quit printing money, or snip the dollar’s link to gold.

Of course, the conservative Nixon couldn’t admit that his big-spending policies were wrecking the dollar.  No, it was those speculators, he claimed.

In the past seven years, there has been an average of one international monetary crisis every year. Now who gains from these crises? Not the workingman; not the investor; not the real producers of wealth. The gainers are the international money speculators. Because they thrive on crises, they help to create them.

In other speculator bashing news today, The Zimbabwe Mail reports that the Zimbabwe government is ordering 109 companies to make new applications for mineral titles.

The order follows the ministry of mines’ decision in January to hike pre-exploration fees for most minerals by as much as 8,000 percent in a move the ministry said was meant to curb the speculative holding of mine titles.

The Ministry of the Mines is requiring companies and individuals to use the titles or lose them, and a number of titles have been surrendered to the Ministry.

Despite the policy, Ministry officials believe there will be a nearly 16% growth in registering titles this year.

“The new mining fees are not meant to discourage indigenous players, rather they seek to do away with the speculative tendencies in the mining sector. Over the past few months, we have seen a number of claims being surrendered to the Ministry following the adoption of the policy as well as the implementation of the Use It or Lose It Policy,” said Dr Obert Mpofu, Mines and Mining Development Minister.

Despite the directive, it’s hard to imagine miners lining up to register for mining titles in Zimbabwe, and, as for Obama’s plan, Zero Hedge is  “100% confident that just like every failed attempt at central planning, all Obama will achieve is another spike in crude prices, just in time for the next global reliquification cycle, just in time for 2012′s debt ceiling scandal, and just in time for the reelection.”

Rediscovered Audio: Mises on Inflation

This was just found in the LvMI archives: Ludwig von Mises speaking on “The Problems of Inflation” at FEE in 1968.

At 41:34, Mises says, “What the individual American… has to realize is that  the policy of inflation… makes it impossible for him to organize his working, earning, spending, and saving in such a way that he could provide for the future of his family.  This is why inflationary policy is the most radical revolutionary institution in the world.”

At 1:02:03, Mises recommends reading Murray Rothbard’s America’s Great Depression to understand how credit expansion causes the business cycle.

UPDATE: Thanks to Nielsio for putting it on YouTube!

Free Market Environmentalism

Join Walter Block on Friday, May 4 at 7pm Eastern for a private webinar on Free Market Environmentalism.

Dr. Block writes:

All too often free enterprise is blamed for environmental problems. I will demonstrate that the real problem is statist takeovers of private enterprise and violation of private property rights. Examples to be discussed: air pollution, species extinction, global warming, plastic bags, environmental racism, deforestation (emphasis on Brazilian rain forest disappearance), and, during the discussion period, any other environmental issue anyone wants to bring up.

Austrian Pie

Over at the Beacon blog, Misesian Robert Higgs has posted a delightful and poignant retrospective on the development of modern Austrian economics in the artfully modified lyrics of Don McLean’s pop classic, American Pie .

Mises in Germany’s no. 1 business weekly

Germany’s Wirtschaftswoche just published a major story on Mises’s life and works, stressing his contributions to business cycle theory. The “intransigent visionary” provided the theoretical framework for analysing, understanding, and correcting our present financial quagmire.

Hazlitt in the Wall Street Journal

In case anyone missed it.

Raico and Hoppe

Robert Wenzel reviews Ralph Raico’s new book, Classical Liberalism and the Austrian School,  a a masterful summary and synthesis of Raico’s lifetime work. The book reflects not only Raico’s erudition and keen intellect, but also his wisdom and dry wit. Notes Wenzel: “in addition to the wit of Raico that keeps you turning the pages for more, I consider Raico a Grand Master quotesmith. He is a master at the demolition of  incorrect ideas by placing a well selected quote at the exact spot where it will cause a bad idea to come crumbling down at freefall speed.”

Also, here’s Andy Duncan talking about Hans Hoppe’s Democracy: The God that Failed, the book Alberto Mingardi calls “[t]he ultimate account of what democracy really amounts to.”

Baum v. Krugman, Mankiw, Bernanke and Company

How many eminent macroeconomists is one clear-thinking and literate economic journalist worth?  Well if the journalist is Caroline Baum of  Bloomberg.com, the answer is at least  five.  In a column this week, Ms. Baum, channeling Henry Hazlitt, demolishes the argument put forth by  the IMF’s Olivier Blanchard,  Ivy League Professors Ken Rogoff, Greg Mankiw, and Paul Krugman and Fed Chairman Bernanke that an acceleration of the inflation rate is the panacea for the still ailing U.S. economy.   The gist of the argument of these luminaries of modern macroeconomics is that an increase in the inflation rate, say to 3 to 4 percent,  will stimulate the economy in two ways.  First, higher inflation will “help the process of deleveraging” by eroding the real value of debt, thereby reducing the  burden of debt payments and encouraging spending. And second, an increase in the inflation rate will arouse expectations of future depreciation of the dollar and thus panic businesses and households into spending their hoarded cash.  This argument is rooted in what might be called the “spending illusion,” the simplistic and deeply fallacious doctrine that the spending of money drives the economy.  This doctrine originated in the writings of John Law, the notorious early eightenth century gambler, financial schemer–and central banker.  Law’s doctrine inspired the monetary cranks of the nineteenth century as well as the founders of modern macroeconomics in the twentieth century, Irving Fisher and John Maynard Keynes.  It remains deeply entrenched in the macroeconomic thought of the twenty-first century.

But Baum will have none of it.  As she pointedly comments:

There is something fundamentally wrong when government prescribes the same policies that got us into this mess as the solution. The U.S. lives beyond its means. The federal government is running a trillion-dollar deficit for the fourth consecutive year, compounding its inability to make good on promises it has made to future retirees. Consumers binged on credit because home ownership was touted as a reliable piggy bank. All the postmortems on the financial crisis emphasized the need to save more, consume less. . . .  If we need to save more, both individually and as a nation, the Fed shouldn’t encourage us to spend, spend, spend. And some economists want to introduce higher inflation into this toxic mix?

You would think that the increasingly evident failure of China’s inflationary monetary policy would give our own inflationists pause.  China’s plan to promote consumption spending involved the building of spectacular new cities and shopping malls  based on the belief that  ”if you build them, they will come–and spend.”  An arresting visual representation of this enormous malinvestment of capital and profligate waste  of resources is captured in these eerie photos of completely empty Chinese shopping malls.

Too Low Too Long – It’s back

“Too low too long” Fed Policy; It’s back!

In a previous post, (http://bastiat.mises.org/2012/04/rules-discretion-or-no-central-bank/ ), I argued John Taylor would be better able to defend his criticism that the Fed kept rates too low for too long prior to the crisis if he used Mises-HayekAxel Leijonhufvud, in 2008 (“Keynes and the Crisis.” Center for Economic Policy Research Policy Insight No. 23, May ) made such an argument, “Operating an interest-targeting regime keying on the CPI, the FED was lured into keeping rates far too low far too long. The result was inflation of asset prices combined with a general deterioration of credit quality. This, of course, does not make a Keynesian story. It is rather a variation on the Austrian overinvestment theme.”

Leijonhufvud, with a nod to Mises and Hayek, makes the claim again with the additional argument,  “We are now trying to cure the consequences by maintaining still lower interest rates for a lengthy periodsupplemented with the note,”Ludwig Mises and Friedrich Hayek would have told us that this is not a good idea.”

HT to Greg Ransom at Taking Hayek Seriously. See: http://hayekcenter.org/?p=5299

Axel Leijonhufvud’s INET Berlin paper  at “The Unstable Web of Contracts”.

Riding the Tiger

Appropos of my recent blog earlier this week on the causes of China’s inflation, it has just been reported that March saw a surge in internal (yuan) currency loans by Chinese banks of 1.01 trillion yuan (equal to $160.1 billion)  far above the 710.7 billion yuan lent in February.  More significantly, this was the biggest deviation of actual from forecast loans in more than a year.  New yuan lending clocked in at 21 percent above the median estimate of 797.5 billion yuan calculated from a Bloomberg survey of 28 economists.  This is no accident since the Chinese government began loosening restrictions on lending capacity for three of its four biggest banks last month in an effort to preempt the  fall of the economy’s growth rate in the last quarter, which is expected to be announced today  as  8.4 percent, the lowest in  eleven quarters.   The government has also committed to cutting the reserve/deposit ratio of lenders by an additional 50 basis points this month, further loosening its monetary policy that caused a 13.4 percent year-over-year growth in the money supply in March.  This latest news makes it likely that the People’s Bank of China will exceed its broad money growth target of 14 percent for this year.

It has now become clear that the Chinese government has made its choice to avoid a “hard landing” by attempting to ride the unloosed inflationary tiger for as long as it can.   But its  strategy of massviely expanding fictitious  bank credit unbacked by real savings will cause added  distortions and exacerbate unsustainable imbalances in China’s real economy.  As the Austrian theory of the business cycle teaches, this will only postpone the needed recession-adjustment process and will precipitate  a “crash landing” that may well shatter China’s burgeoning market economy.  This would be a tragedy of the first order for the entire global economy.

The Spurious Grocer Philosophy

Mises’s English-language writings are clear and direct, but he was not a gifted prose stylist like Schumpeter, Hazlitt, or Rothbard (or, for that matter, Keynes, who used sonorous phrasing to conceal murky thinking). Still, some characteristic Misesian expressions — “exploding the fallacy,” for instance — stick in the memory.

One of my favorites is from the 1953 addendum to The Theory of Money and Credit. In “The Principle of Sound Money,” Mises contrasts the competent economist’s view of depression and unemployment with the layman’s:

Business is bad, says the grocer, because my customers or prospective customers do not have enough money to expand their purchases. So far he is right. But when he adds that what is needed to render his business more prosperous is to increase the quantity of money in circulation, he is mistaken. What he really has in mind is an increase of the amount of money in the pockets of his customers and prospective customers while the amount of money in the hands of other people remains unchanged. He asks for a specific kind of [monetary]  inflation; namely, an inflation in which the additional new money first flows into the cash holdings of a definite group of people, his customers, and thus permits him to reap inflation gains. Of course, everybody who advocates inflation does it because he infers that he will belong to those who are favored by the fact that the prices of the commodities and services they sell will rise at an earlier date and to a higher point than the prices of those commodities and services they buy. Nobody advocates an inflation in which he would be on the losing side.

This spurious grocer philosophy was once and for all exploded by Adam Smith and Jean-Baptiste Say. In our day it has been revived by Lord Keynes.

Keynesian economics, despite its obvious failure in theory and practice, is a kind of beast that won’t die. Careful, painstaking analysis and refutation is always needed, but sometimes a little ridicule helps stir the pot. Krugman likes to talk about the “Hangover Theory,” so let’s respond by reminding readers what’s wrong with the Spurious Grocer Philosophy.

The Uncompromising Rothbard Lives On

Murray Rothbard’s influence and reputation keeps growing larger more than fifteen years after his untimely passing.  His passion for truth, his clear thinking and writing, and his uncompromising libertarian message  continues to set new people afire for the cause of liberty.  But even the most devoted Rothbardians were caught by surprise when  ABC News cited Rothbard’s comparison of taxation to “highway robbery” alongside a wonderful photo of him.

Tiger By The Tail

Well, well, well, the Chinese economy is experiencing inflation. Overall consumer prices rose by 3.6 percent in March 2012, year-over-year, including an upsurge in food prices of 7.5 percent. Even the prices of venerable Chinese herbal medicines took an upward leap of 8.3 percent. According to a CNNMoney report, inflation is “the price of prosperity.” The report goes on to fatuously instruct us, “While inflation poses challenges for consumers, it is the byproduct of one of the most robust economies in the world.” A comparison of China’s 9.2 percent real GDP growth in 2011 with the paltry 1.2 percent growth rate for U.S. real GDP in the same year is thrown in as supposed proof of this statement.

But this is utter nonsense and one of the most deeply entrenched myths in both academic economics and media commentary. Basic economic theory demonstrates that “economic growth,” which is nothing but  an increase in the supplies of various goods and services, is in and of itself deflationary. An increase in the supply of any good (or service), with the supply of money and all other factors fixed, results in a fall in its price and a growth in its sales, as the excess supply of the good drives the equilibrium price down and expands the quantity demanded. This irrefutable economic truth has been illustrated time and again since the late 1970s by sharp declines in the prices of items like personal computers, video game systems, HDTVs, digital cameras, and cell phones and of (uninsured) medical procedures like Lasik eye surgery and cosmetic surgery. Furthermore, this fall in prices has not caused stagnation in these industries but has instead coincided with their rapid expansion. I have explained this phenomenon of  “growth deflation” in more depth elsewhere.

What then is the cause of the accelerating Chinese inflation? We need look no further than the money supply. The broad measure of the Chinese money supply, M2, which includes currency in circulation and all bank deposits, increased by 13.6 percent in 2011, although the People’s Bank of China had targeted a 16 percent increase. The PBOC has announced that it will set the money supply growth rate at 14 percent for 2012. This inflation targeting policy, so beloved by contemporary macroeconomists, augurs more rapid price inflation for Chinese consumers for years to come. More important,  China’s long-standing super-loose monetary policy means that inflationary credit expansion has fueled a great part of the rapid growth of the Chinese economy, which is therefore unsustainable and doomed to collapse. Indeed, the pace of Chinese economic growth has already begun to falter in the last two quarters. In response, the PBOC has already cut reserve requirements twice in the last three months.

Having allowed the inflation tiger out of its cage, the Chinese government is now desperately hanging on to its tail. It must either cage the tiger forthwith  and confront the damage it has already wreaked in the form of a collapse in its economic growth rate; or it must inevitably lose its grip and permit its burgeoning market economy to be devoured by the beast in an inflationary breakdown and reimposition of direct controls.

The Realistic Path

In his Bloomberg View column today, Economists Have a Lot to Learn from the Weather, Mark Buchanan chides economists for clinging to their neoclassical general equilibrium models in the wake of their spectacular failure to track the financial crisis. A theoretical physicist, Buchanan advises economists to follow the example of atmospheric scientists who supplanted equilibrium models with computer simulations using equations of fluid dynamics in the 1950s in their attempts to track atmospheric flows. That “there’s no stable balance, but ceaseless change” in atmospheric flows because of baroclinic instability leads Buchanan to wonder “if a similar mechanism might be driving financial crises and business cycles that typify the economic ‘weather’ we’ve experienced over the centuries.” He laments that “the mental inertia of theoretical economists” prevents them from abandoning their general equilibrium ways “to develop more realistic alternatives.”

Those of us in the causal-realist tradition share Buchanan’s lament and the more cynical among us would entertain the suggestion that more than merely mental inertia lies behind the refusal of neoclassical economists to seriously reconsider their paradigm. But a more realistic account of the economy cannot be found by accelerating down the wrong path. Adopting more sophisticated mathematical techniques to handle the complexities of tracking billions of people interacting through voluntary exchange and a division of labor to better satisfy their preferences misses the fundamental point.

As Ludwig von Mises saw it, the limitations of human knowledge force economists to accept methodological dualism. “Reason and experience show us two separate realms: the external world of physical, chemical, and physiological phenomena and the internal world of thought, feeling, valuation, and purposeful action. No bridge connects—as far as we can see today—these two spheres (Human Action, p. 18).”

Murray Rothbard was more emphatic claiming human beings are fundamentally different than other entities. “Stones, molecules, planets cannot choose their courses; their behavior is strictly and mechanically determined for them. Only human beings possess free will and consciousness: for they are conscious, and they can, and indeed must, choose their course of action. To ignore this primordial fact about the nature of man—to ignore his volition, his free will—is to misconstrue the facts of reality and therefore to be profoundly and radically unscientific (The Logic of Action One, p. 3).”

From either view, the understanding of human action is the one offered by Carl Menger. The human mind integrates all aspects of action into a harmonious system for the satisfaction of its preferences. The mind values ends, perceives the causal connections between means and ends and among consumer and producer goods, imputes value from the ends to the means, anticipates the realization of ends from different courses of action, etc. Since the knowledge, judgments, and foresight of the mind are not constant with respect to the different aspects of action, functional analysis of human action, no matter how sophisticated, is inappropriate. The realistic path to understanding the economy lies in the trail blazed by Menger, Mises, and Rothbard.

Rules, Discretion, or No Central Bank

Recent discussions in the econ blog world on whether the Fed keeping interest rates too low for too long from 2003-2005 was a significant factor in the most recent boom-bust episode, triggered by John B. Taylor’s March 31, “Policy Failure and the Great Recession,” reinforces how important and useful Austrian insights are for properly interpreting causes of the current crisis and guiding discussions of appropriate reforms in monetary institutions.

In his post, Taylor used his interpretation of Robert Hetzel’s in his new book, The Great Recession: Market Failure or Policy Failure?  as platform to attempt to bolster his positions that 1. Rules are preferred to discretion and 2. Excessive discretion allowed the monetary authorities led to two significant policy errors during the Greenspan/Bernanke watch; interest rates were too low for too long in 2003-05 leading to a boom and a necessary consequent bust and 3. The bust was compounded and/or triggered by interest rates being too high in 2007-08. While point 3 does not appear to be controversial among defenders of Central Bankers, many commentators, especially supporters of nominal GNP targeting and market monetarism, reacted defensively relative point 2.  The general impression one gets from these criticisms of Taylor is essentially if a Central bank policy did not lead to significant price inflation or increases in inflationary expectations, loose monetary policy generates no problems for the economy. Problems for the economy due to policy errors are Friedman plucks which pull the economy below its potential. Taylor, who has the elements essentially correct, rates were too low for too long, but working from a highly aggregated model, has no really adequate response to his critics except to argue that while Hetzel in his book defends Fed policy in 2003-05, gives away the “too easy policy” when later in the book he (Hetzel) argues, “In 2003-2004, the Greenspan FOMC did make a decision that would later have enormous implications. At this time, The FOMC backed off its long-run objective  of returning to price stability and instead adopted an ill-defined objective of positive inflation.” To Taylor, given this interpretation of policy circa 2003-2005, “there is a clear connection between the ‘go’ and the ‘stop’ in a ‘go-stop’ monetary policy, which those who warn of too much discretion warn about. Read More→

The Gift That Stops Giving

If you drive a car , I’ll tax the street.

If you try to sit , I’ll tax your seat.

If you get too cold , I’ll tax the heat.

If you take a walk , I’ll tax your feet.

. . .  And if you don’t use your gift cards within two years, I’ll seize them all.

(With apologies to the Beatles)

Pursuant to a law passed two years ago, the New Jersey Department of the Treasury will soon compel sellers to obtain the ZIP code of every buyer of a gift card in order to enable the state to expropriate the value of the unused card as “unclaimed property” after two years.  The  law also applies to unused travelers’ checks and money orders in addition to gift cards

In 2011  the state seized $79 million of such “unclaimed property”  under the law.  There was huge outcry and a lawsuit quickly followed that resulted in an injunction against the collection of ZIP codes.  But this injunction has just been lifted, although the case has not yet been resolved.  American Express has responded by pulling its gift cards from pharmacies, supermarkets and convenience stores.  Two third-party providers of  gift cards to malls, convenience stores and grocery stores, Blackhawk Network and InComm, have followed Amex’s lead and announced that they will stop doing business in New Jersey in June.  The reason is that it is impossible to ensure compliance with the ZIP code mandate when the cards are sold by other parties.

Unlike gift cards issued by retailers, network-branded cards like American Express  and Visa gift cards have no expiration date, require no fees after purchase, and are acceptable in exchange virtually everywhere.  They operate as what Mises would call “secondary media of exchange.”   People therefore are willing to hold them for extended periods of time as (imperfect) substitutes for cash.  Thus, based on the same reasoning, the state could declare that cash balances–in the form of currency and demand deposits–that an individual accumulates over a two year period are also “unclaimed property” and subject to seizure.    Sound far-fetched?  Well think again–the tax devouring politicians of New Jersey have already thought of that.  The same law mandates that banks transfer to the state all funds in New Jersey resident accounts that have been “inactive” for more than two years.  Of course you can appeal to the state to reclaim your “unclaimed property” but you must fill out a blizzard of forms and jump through bureaucratic hoops.  Good luck with that.

But there is occasionally  a silver lining to government’s never-ending effort to mulct the taxpayers of more and more of their income and wealth.  Sometimes a law is so egregious and   tyrannical that it  causes the  carefully fabricated curtain concealing the nature of government to momentarily fly back  to reveal the greedy, money-grubbing little men frantically operating the levers of power for their own benefit.   Then, the legitimacy of the state suddenly and magnificently dissolves and the public perceives government  for what it is and always was: a band of thieves.   This appears to be happening now in New Jersey, judging by the comments on the latest money grab.  Here is a small sample:

“These criminals belong in jail.”

“Wow, you pay for a gift card, don’t use it then NJ comes along and claims your money. Isn’t that stealing?”

“This is insane… how can they possibly justify something like this?”

“What is the matter if someone uses their gift card in 10 years or 6 months? It is their money (gift card).”

“Yet another example of New Jersey’s big government stealing $$$$$ whenever and wherever it can.”

 

When Bubbles Pop

In the Tulipmania crash the common Witte Croonen bulb, that rose in price twenty-six times in January 1637, fell to one-twentieth of its peak price a week later

From 1717 to 1720, shares of John Law’s Mississippi Company were bid up by frenzied Frenchmen from 500 livres to a high of 10,100 livres, before Law was run out of France and the shares crashed along with the value of Law’s banknotes.

In the late 1980’s, golf memberships in Japan were bid as high as $4 million apiece.  The Nihon Keizai daily even came up with a golf membership price index that was followed as closely as stock tables.  But by 2003, the Keizai golf index had dropped by 95% and many course owners were bankrupted.

Japan’s  Nikkei 225 hit its all-time high of 38,957.44 on December 29, 1989, after increasing sixfold during the decade. After the crash, it lost nearly all these gains, closing at 7,054.98 on March 10, 2009—81.9% below its peak twenty years earlier.

The NASDAQ composite index poked its head above 5,000 at the end of 1999 and feel to almost 1,000 two years later.

In 2001, with the Federal Reserve stepping on the monetary gas, the average price of an acre of land in Las Vegas was $158,000.   By the fourth quarter of 2007, the average land price (excluding resort properties) peaked at $900,000 per acre.

According to Applied Analysis, Q4 2011 land sales in Sin City averaged $102,491 per acre, meaning Las Vegas land prices have now fallen nearly 90% from their peak in 2007.  There’s talk of Vegas coming back, but home builders already have too much dirt and vacancies in retail, office and industrial space remain high.

Hubble Smith writes for the LVRJ,

It’s worth noting that only 54 percent of land deed transfers during the fourth quarter were regular “arm’s-length” transactions between private parties that did not involve a lender, he said. Trustee deeds represented 32.6 percent of activity.

So most of the action for land is lenders seizing their collateral.

However, the greatest bubble in financial history is currently stretching its seams and has been for years.  The bubble in U.S. Treasury securities rivals any mania the world has ever seen.

Lending the U.S. government money yields all of 5 basis points for a 1-month loan.  For six months, 14 basis points.  For a year, 18bp. Two years 33bp, 10 years 2.22% and lending the U.S. government money for 30 years denominated in a currency the Federal Reserve constantly and systematically depreciates yields an investor all of 3.35%.

How on earth could this be?  The creditor in this case owes at a minimum $15+ trillion.   This operation is currently running an annual deficit of $1.4 trillion.  The management of the entity has problems controlling its spending, so the fiscal problems will persist.  Yet, Uncle Sam can borrow money essentially for free.

The largest holder of U.S. Treasuries is America’s central bank. This is not money that’s been saved and looking for the best return, but money conjured up conveniently from the ether for the express purpose of buying Treasury debt, because no other buyers exist that will pay the same price.

When the U.S. Treasury bubble pops, it’ll be a doozie.

Keynesians Need to Rethink How They Teach Economics

The New York Times opinion page recently ran a series of short pieces on Rethinking How We Teach Economics, making the point that we need to change our economics instruction to be able to account for the financial crisis. There are several articles in the “debate,” but I would like to consider Alan Blinder’s contribution. In addition to being a Princeton economist, Blinder was on President Clinton’s Council of Economic Advisors and he was also a member of the Board of Governors of the Federal Reserve, so his take on this is not surprising.

Blinder argues that we must change the way we teach economics. In his words,

We must now teach students how we got into the mess of the last five years and how we got partially out. For that reason, teaching elementary economics just got harder. Our teaching about monetary policy must be completely revamped. Specifically, students must now learn something about “unconventional” monetary policies.

And,

Remember “conventional” monetary policy? The Federal Reserve shortens recessions by creating more bank reserves (“printing money”), which fuels a multiple expansion of the money supply and credit because banks don’t want to hold excess reserves. So they get rid of them making more loans and deposits, which also lowers short-term interest rates. Compare that to current reality: Banks are content to hold over $1.6 trillion in excess reserves, short-term interest rates are stuck near zero, and Fed policy often works on long-term interest rates instead. No, this is not your father’s monetary policy, and the old ways of teaching about it simply won’t do.

Blinder is right in saying that many instructors should change the way they teach economics, but it’s not because of the crisis. The crisis has exposed some of the failures of mainstream economic theory, namely the failure to explain the cause of the business cycle.

Austrian theory fully explains how Federal Reserve policies triggered the financial crisis. Austrians understand that the Fed does not counter the business cycle and instead it should be blamed for creating this meltdown.

Some instructors do not need to revamp their teaching methods. Those who teach Austrian business cycle theory can use the current crisis as another example of the failure of “conventional” monetary policy. Instructors that use Austrian readings such as Murray Rothbard’s “The Mystery of Banking” to explain business cycle theory do not need to “rethink how we teach economics.”

 

Why This German Mini-Miracle?

What is “The Secret To Germany’s Low Youth Unemployment“?  Apprenticeship programs, says NPR.  Absolutely no mention of the fact that Germany has no statutory minimum wage as of yet (although Merkel wants one).