Author Archive for Joseph Salerno

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).


Larry White’s Baffling Interview on the Gold Standard

Lawrence H. White speaking at the Mises Institute's Capitol hill Gold Standard Conference, November 1983

Lawrence H. White speaking at the Mises Institute’s Capitol Hill Gold Standard Conference, November 1983

In his recent three-part interview (here, here and here) on the gold standard, Larry White perplexes almost as much as he enlightens.  Let’s critically review  his responses to a few of the interviewer’s questions.

First, when queried about the evolution of the discussion of the gold standard among classical liberals including Austrian economists as well as in academia more broadly, the general literature, and policy institutes, White expresses general optimism.  He concludes his answer with some observations about policy institutes:

Among the policy think tanks, the Cato Institute’s annual monetary conference has kept the fundamental issues alive for more than thirty years. I see their efforts expanding and reaching a wider audience.  The Heritage Foundation is now showing some interest.  The Atlas Network is now championing sound money. The Gold Standard Institute is growing in visibility.

A glaring omission in White’s answer is, of course, the Mises Institute, which held its first conference on the gold standard over 30 years ago.  Since that time it has campaigned tirelessly for the gold standard, devoting many of its conferences and publications to sound money.  Its associated academic economists and other scholars have published thousands of pages on the subject.  The Mises Institute has also served as the main intellectual support for Ron Paul, surely one of the most popular and influential  defenders of sound money as a U.S. Congressman and now as a public intellectual.  The Mises Institute continues to shape the debate on the gold standard.  In fact just today. RealClearMarkets, a website owned by Steve Forbes, published a response by economist and Arthur Laffer disciple Marc Miles to a critical review of Steve Forbes and Elizabeth Ames’ book Money: How the Destruction of the Dollar Threatens the Global Economy - and What We Can Do About It  written by Mises Institute scholar David Gordon.

Remarkably, while ignoring the Mises institute, White finds it fitting to recognize the obscure Gold Standard Institute.

The Gold Standard Institute was founded and is presided over by Keith Weiner, a principal in a for-profit gold fund business.  Weiner received a PhD from the New Austrian School of Economics (NASE), a non-accredited institution founded by Dr. Antal Fekete, a mathematician and a proponent of the gold standard based on the  long discredited real-bills doctrine.

Moving on, when asked if he was familiar with Nathan Lewis’s Gold, The Monetary Polaris, a book he commented on at a Cato monetary conference, White answers:

I offered a few academic quibbles, but the book does a good job marshalling historical evidence to demonstrate the chief merits of a gold standard.

White’s response here is another head scratcher.  It is true that Lewis’s book does provide a valuable historical discussion of different monetary regimes involving gold.  However the analytical part of the book is a mess.  Lewis is not in favor of a gold standard in any meaningful sense of the term and does not even have a clear idea of what the gold standard actually is.  He  treats the “gold standard” as a deliberate invention of government policy, what he calls a “a fixed-value system with gold as the policy target.” For Lewis,  all historical varieties of the gold standard are simply price-fixing schemes in which the monetary authority targets the currency price of gold that it has chosen as the parity .  Indeed under Lewis’s so-called  ”no gold” gold standard, the money manager neither buys or sells gold at the parity price nor  holds any gold reserves.  Rather it “targets” the price of gold by buying and selling bonds.  It may even buy or sell “fine art” to target the gold price.  Furthermore,  Lewis does not view the gold standard as supplying an inherently scarce commodity money.  Rather he sees the gold standard as a clever device for constraining the  ”currency manager” to ensure that the supply of currency, i.e., “banknotes with no intrinsic value,” remains artificially scarce and therefore valuable.  Of course, Lewis’s view is preposterous because it puts the cart before the horse.   A thing could never become money in the first place unless it was an item that was already scarce, valuable, and had a price in terms of other goods and services against which it was actively traded.  Thus bank notes could never come into existence except as claims to an existing , scarce commodity like gold.  No governmental bureaucracy is needed to ensure that money remains scarce.

Lewis also maintains that gold possesses an intrinsic, constant value and therefore serves as an absolutely fixed  ”measure” of value for other goods and services.  Lewis pushes this absurd view to its logical conclusion by calculating “the equivalent gold value of labor,” which he believes more accurately reflects the variation of real wages over time than conventional indexes of real wages based on the fiat dollar.  His calculations using gold as an alleged unit of constant value indicate that annual real wages declined by 86% between 1970 and 2010!  Lewis’s views on money and banking are just as bizarre.  Thus he asserts:

U.S. banks today don’t actually ‘create money’ or ‘reduce money’. . . . They create and reduce credit.  ’Credit’ just means a loan of some sort.

I could go on, but given the gross misrepresentation of the nature and function of the gold standard and of money in general that one finds in Lewis’s book , it is hard   to imagine that White could only summon up “academic quibbles” with it.

Finally, when asked about the critics of fractional reserve banking, White responds by falsely implying that all critics of fractional-reserve banking want it outlawed.  By doing so, he deftly side steps the serious criticisms of the economics of fractional-reserve banking by those advocates of free banking, such as Ludwig von Mises, Guido Huelsmann, myself, etc., who are in favor of freeing banks from all political regulations while denying them government bailouts and insurance.  These latter critics believe that a completely free market in banking will lead to the natural suppression of “fiduciary media”, i.e., bank notes and deposits unbacked by the money commodity.  But  White cannot be bothered with addressing such nuanced  arguments when there are  polemical points to be scored with a gratuitously nasty gibe:

 I’ll just say that those who want to outlaw modern intermediation (and by modern I mean post-Dark-Ages), and build our payment system instead on literal gold warehousing . . . It’s a kind of financial Luddism.

I should have thought that such a well versed economic historian like White would be familiar with the Dutch Golden Age, which occurred long after the Dark Ages.  The Dutch had the most prosperous economy and the highest standard of living in Europe from 1600 to 1820.  And they accomplished this feat without “modern intermediation,” by which White means the creation of notes and deposits by commercial banks.  Dutch financial and monetary institutions were strictly separate.  Merchants,and businesses obtained finance via bills of exchange and by selling shares and bonds on the Amsterdam Bourse, the oldest formal securities market in the world.  Deposit keeping, payments, and foreign exchange services were provided by the 100-percent reserve Bank of Amsterdam.  Finance did not create money and money creation did not dissemble as finance

As for financial Luddism, I would think that charge is better leveled at someone who forecasts that a hybrid monetary/financial arrangement which might have thrived in circumstances peculiar to 18-century Scotland would just happen to be the type of arrangement that entrepreneurs in the 21st century would rediscover and implement when modern money and finance is completely separated from government.

Bizarro-World Kirzner Awarded the 2014 Nobel Prize in Economics

KONICA MINOLTA DIGITAL CAMERAHere’s a real shocker:  The 2014 Nobel Prize in Economics was not awarded to Israel Kirzner, as many Austrians fervently hoped.  Instead the prize was given to Jean Tirole, a French engineer, mathematician and economist for advancing “The Science of Taming Powerful Firms,”  Tirole for all his technical proficiency and inventiveness is a garden variety neoclassical economist whose views on competition, efficiency and economic welfare are worlds apart from Kirzner’s.

Plus ça change, plus c’est la même chose.

Tirole won the prize for his work in devising new methods to improve regulation of industries dominated by a few large firms with “market power.”  Tirole uncritically accepts the long entrenched neoclassical view that “oligopolistic” firms commit the unpardonable sin against economic efficiency of being able to “influence the prices, volume and quality” of products in the markets in which they operate while planning production on the basis of expectations of each other’s decisions.   In other words they do not operate according to the assumptions of perfect competition under which each firm is infinitesimally small and unable to vary the price or quality dimensions of its product one iota from that of its equally teeeny-weeny competitors, whose actions it does not take account of in its own production decisions.

Compounding the ”market failure” of oligopoly is the fact that dominant  firms know more about the product that they are selling than the regulatory authority.   This is  a species of the  problem of “asymmetric information” in which each entrepreneur is, heaven forfend, more intimately familiar with the attributes of the product he is producing and selling than consumers of his product.

In any case, using game and contract theories, Tirole was able to contrive “a clever set of production contracts” between the regulator and dominant firms that solve the problem of asymmetric information while giving the firms an incentive to produce and cut costs while draining away “excessive profits—a bad thing for society. “

So, Tirole was awarded the Nobel prize for concocting complex technical solutions to what Austrians have long known and taught to be pseudo-problems for a dynamic market economy driven by rivalrous competition among entrepreneurs eager to earn profits by anticipating and serving ever-changing consumer demands.

Regarding oligopoly, Murray Rothbard in 1962 incisively clarified the phenomenon and showed that it was tractable to general economic analysis, which oligopoly theorists had long denied.  Furthermore, Rothbard demonstrated that game theory was inapplicable to oligopoly, at a time when game theory was still an arcane discipline in its infancy and a plaything of a handful of mathematical economists.  Thus Rothbard (pp. 725-26)  argued:

The relevant consideration is not the fewness of the firms or the state of hostility or friendship existing among firms. Those writers who discuss oligopoly in terms applicable to games of poker or to military warfare are entirely in error. The fundamental business of production is service to the consumers for monetary gain, and not some sort of “game” or “warfare” or any other sort of struggle between producers.  The jockeying and raising and lowering of prices that takes place in“oligopolistic” industries is not some mysterious form of warfare,but the visible process of attempting to find market equilibrium. . . . The same process, indeed, takes place in any market, such as the “nonoligopolistic” wheat or strawberry markets. In the latter markets the process seems to the viewer more “impersonal,” because the actions of any one individual or firm are not as important or as strikingly visible as in the more. “oligopolistic” industries. . . . And, in oligopoly situations, the rivalries, the feelings of one producer toward his competitors, may be historically dramatic, but they are unimportant for economic analysis.

As for “asymmetric information,” Ludwig von Mises and F.A. Hayek showed long ago that, far from a “market failure,” this phenomenon is one of the fundamental conditions for the very existence of markets.  The Mises-Hayek point was emphatically and eloquently expressed in  a recent article by Tom DiLorenzo (p. 252)

 Consider these questions: Who knows more about home building—home builders or home buyers? Who knows more about supplying grocery stores with fresh meat—ranchers and farmers, or average consumers? Who knows more about manufacturing automobiles—automotive engineers employed by automobile manufacturers, or car purchasers? Who knows more about producing and marketing articles of clothing—clothing manufacturers and distributors or clothing shoppers?

The point . . . is that all information about all products and services is asymmetrical in successful, capitalist economies because of the division of knowledge (and labor) in society. If we all had symmetrical information about all of the above tasks, none of the above-mentioned businesses and occupations would exist. It is neither desirable nor possible for everyone to have symmetrical information.  To paraphrase Mises, what distinguishes man from animals is the insight into the advantages that can be derived from cooperation under the existence of asymmetric information and the division of knowledge in society. . . . Indeed, differences in information—and different interpretations of the meaning and importance of information to each individual—is the sole cause of trade and exchange.

When Will the Bubble Burst?

Woolworth BuildingAs I exit Pace University in Lower Manhattan where I teach, I can look across City Hall Park to the west side of Broadway to see the terra-cotta Woolworth Building, an early skyscraper  built in 1913  If I gaze upward, there atop the building I can view the iconic green tower  containing the nine-story penthouse that is now on the market for $110 million.  But that is not the most expensive piece of residential  real estate currently on the booming Manhattan market.  That honor goes to the triplex penthouse condo at 520 Park Avenue on the toney Upper East Side, which is still under construction and lists for $130 million.  The 30 one- and two-floor condos in the same tower list for between $16.2 and $67 million.  And it is not just the very high end of the market that is a-bubbling.  It was reported that in the second quarter, the average amount of time that a property remained on the market was 96 days, down 46% from a year ago, despite the fact that the number of properties on the market was up 18% year over year.  The buyers were largely foreign, especially Chinese.

More evidence that the bubble is expanding can be found in the global art market.  In the year ending July 2014, sales of contemporary art at public auctions reached  $2.046 billion, a 40% increase over the previous year.  China surpassed the U.S. to take in 40% of the total sales proceeds.

Not surprisingly, the number of financial commentators issuing dire warnings of an imminent  collapse of the real estate and stock market bubbles increases every day.  Unfortunately, most are unable to articulate a coherent case for the their forecasts because they are unacquainted with the Austrian theory of the business cycle. A notable exception is  Michael Pollaro, who  bases his forecast  of an increased risk of economic collapse on the sharp deceleration of the TMS monetary aggregate (formulated by  Murray Rothbard and myself).  Pollaro points out that the year-over-year rate of growth of TMS–or what he labels TMS2–was 7.9% in August, which is down  780 basis points or 50%  from its August 2011 high.  According to Pollaro:

The data support what the Austrians teach – monetary inflations create booms which result in deflationary busts once the rate of monetary [growth] turns down in a significant and sustained manner. The 1995 to 1999 monetary surge, then subsequent monetary deceleration gave us the Technology Boom-Bust.  The 2000 to 2006 monetary surge then ensuing monetary deceleration gave us the Housing Boom-Bust turn Credit Bust turn Great Recession.

And what of the latest monetary extravaganza which began in earnest in August/September 2008, the one that has given us new all-time highs in the S&P 500. . . . Well, that monetary surge has in fact rolled over and is clearly heading down.

While arguing  that growth of the money supply is   “the foundational starting point to consider when determining the downside of a monetary induced boom-bust cycle,”  Pollaro recognizes that it is not the only factor one needs to consider.  Thus Pollaro concludes

Equally important (and often discussed) are things like the level of debt in the economy, the level of leverage in the financial markets and the amount of government intrusions in the economy and markets, not to mention the amount of as yet unresolved economic malinvestments caused by prior boom-bust cycles.  All of these things serve to increase the fragility of the economy and markets. Unfortunately (or fortunately depending on your bullish/bearish view of the economy and markets), all of these things are arguably worse than in previous two boom-bust cycles.  And that suggests a bust could very well ensue at a higher rate of monetary inflation.

How much higher?  No one really knows, not even the Austrians.

The First Carl Menger Prize Awarded!

220px-CarlMengerThe Verein für Socialpolitik is currently the largest association of German-speaking economists in the world.  It was founded in 1873 by economists of the German historical school and was chaired for many years by their leader Gustav Schmoller, who was a bitter opponent of Carl Menger  and the nascent Austrian school.  Well times have certainly changed. At its latest meeting a few weeks ago, the Verein awarded its first Carl-Menger-Prize to Hélène Rey, Professor of Economics in the London Business School.  The newly established Menger Prize is co-sponsored by the German, Austrian, and Swiss central banks and is awarded every two years to an economist no older than 45 “in recognition of excellent research into monetary macroeconomics, monetary policy and foreign exchange policy.”

In one of her more influential papers, Professor  Rey advocates stricter macroprudential regulations, tighter leverage ratios and, in certain cases, capital controls.  She does however, recognize a powerful global financial cycle in capital flows, credit creation, and assets prices, although she seems to connect this with fluctuations in  uncertainty and risk aversion rather than central bank monetary policies. Despite some reservations about her scientific analysis and policy advice,  congratulations are in order to Professor Rey on her award.   Contemporary Austrians also owe a debt of gratitude to the Verein für Socialpolitik for so generously drawing attention to Menger’s legacy by naming a scientific prize in his honor.


The Basic Economics of Bank Robberies

FBI statistics reveal that over the eight years concluding with 2011, the number of bank robberies in the U.S.  fell dramatically, declining from 7,500 in 2004 to 5,000 in 2011. During the same period the total cash haul from bank robberies dropped even more precipitously from $78 million to $37 million. The sharply downward trend appears to be continuing. In 2012, 3,870 banks were robbed, down from 9,400 in 1991. One causal factor in the decline is the increase in the costs of robbing a bank including better bank security, bullet proof barriers at teller stations, exterior cameras, and more severe criminal penalties. Meanwhile, the benefits of bank robbery have  decreased–thanks in some measure to inflation. According to the FBI a bank robbery averaged a take of $4,000 in 2009, which may not have been sufficient to yield the thieves a positive return on their enterprise. You see, at today’s prices, the robbers would need to expend $4,442 for the guns, bullets, and masks used in a typical bank robbery.

Lamenting the Decline of Labor Unions?

Not Morgan Reynolds.  The eminent labor economist has  an insightful and unsentimental  review of sociologist Jake Rosenfeld’s lament about diminishing union power in Barron’s. (Scroll down to find article.)

The War on Cash: Latin American Front

In the latest episode in the global War on Cash, Uruguay will ban all cash transactions for more than US$5,000.  The law is set to take effect May 2015 and also mandates that all taxes, no matter how small the sum owed, must be paid electronically.

HT to Nick G

The Ethanol Industry: An Engine of Economic Destruction

2350617176_2c11c1cb08_bIn his recent Mises Daily, Dave Albin admirably elucidates the tangle of unseen, long-run consequences that has resulted from uncoordinated government subsidies to the sugar, corn and ethanol industries.   But if we narrow our focus to the ethanol industry itself, there is a more fundamental  point to be made.  For the ethanol industry  is a “fiat” industry created not by consumer demand but by the Federal Renewable Fuel Standard (RFS) program established by the Energy Policy Act of 2005 and expanded by the Energy Independence and Security Act of 2007.  The RFS mandates that all transportation fuel sold in the U.S. (gasoline, diesel fuel) contains a certain minimum percentage–currently 10%–of renewable fuels like ethanol.  This program is nothing but a massive scam run for the benefit of corn growers including gigantic agribusiness firms like Monsanto.  As one writer summed up the RFS program:

Federal crop subsidies and ethanol mandates shower tax and household dollars on corn growers and ethanol refiners to produce a product we are forced to purchase, that increases fuel prices, provides less energy for our money, adds water to our gas tanks, raises food prices, and degrades the environment.

The extent of economic distortion and wealth destruction that is caused by the very existence of the ethanol industry is substantial.  Indeed, the Renewable Fuels Association, the lobbying group for the ethanol industry, quantifies and publicizes the destructive and impoverishing effects of the ethanol industry as if they were benefits to the U.S. economy.  Here are some of the “Ethanol Facts” proudly touted by the organization:

  1. In 2013 there were 86,504 workers employed directly  in renewable fuel production and agriculture in the U.S. Another 300,277 people were employed in jobs indirectly related to ethanol production.  On a market free of government mandates, everyone of these workers would have been employed in alternative industries producing a variety of  goods  to meet the voluntary demands of consumers.  Thus, the 13,3 billion gallons of ethanol  that these workers in conjunction with capital goods produced in 2013  represented  a sheer waste of scarce resources.
  2. In 2013, the U.S. ethanol industry (allegedly)  added $44 billion to the nation’s Gross Domestic Product (GDP) and  helped raise  household income by $30.7 billion.  This is nonsense on stilts.  Since the production of  ethanol was utter waste from the point of view of consumers, the industry did not add a single dollar to GDP.  In fact the $36.1 billion that the industry spent on raw materials, other inputs, and goods and services (it paid $8 billion in taxes)  should not be added to   GDP because those resources were diverted from uses of much greater value  (than zero) to consumers. Furthermore, the supposed increase in household income of $30.7 derived from the ethanol industry  was not the result of productive activities but of  the redistribution of income from  genuinely productive households, which were forced to pay higher prices for fuel and food.  In fact a strong case can be made that the total expenditures on ethanol and the household incomes of those involved in the production of this waste product should not only not be added to but rather deducted from the levels of aggregate output and income generated by the private sector of the economy.  The reason is that beneficiaries of the increased household incomes from ethanol were capitalists, workers, and government bureaucrats who squandered resources and produced nothing of value.  In subsequently spending their incomes. these unproductive households imposed  a  second burden on the private economy by siphoning  off valuable goods and services and leaving even less product remaining for productive entrepreneurs and workers to purchase thus further diminishing their real incomes.
  3. In 2013, 46% of the workers in the ethanol industry reported earning salaries of more than $75,000 per year, and another 45%  reported salaries between $40,000 and $74,999.  96% of respondents had health insurance and 92% had retirement plans.  But the  salaries and benefits of those employed in the ethanol industry  do not reflect the value to consumers of the goods and services actually produced by these employees, as they do in private industries; instead they  reveal their “opportunity costs,” that is, the value of other goods and services actually demanded by consumers that would have been produced had these workers not been enticed away from productive employment by the government-mandated  ethanol industry.


Austerity for Whom?

Steve Hanke points out that the anti-austerity faction in the EU led by Italy,  France, and Spain is hypocritical when it claims  that “there is nothing left to cut” in their budgets.  Senior civil servants in Italy get paid over 12 times the national average salary.  In France the ratio of senior civil service pay to the national average salary  is over 6 and in Spain about 4.

Guido Hülsmann’s “Revolutionary Essay” on Fractional-Reserve Banking

US_$5_1923_Silver_CertificateIn a must-read post on Zero-Hedge, Tyler Durden highlights Guido Hülsmann’s neglected 2003 article “Has Fractional-Reserve Banking Really Passed the Market Test?”  Durden lauds the article and predicts that it “may prove to be the most revolutionary essay in the history of monetary economics and banking, if only it  receives the level of appraisal and promotion it deserves.”

The central–and brilliant–insight of Hülsmann’s article is that in a market completely free of legal restrictions on money production, money certificates, that is, genuine titles to money actually on deposit,  would drive fractional reserve bank (FRB) notes and deposits out of monetary circulation.  The reason is that the latter are not titles to present money but credit instruments that “promise to pay” money at some point in the future on demand.  In the case of a title to money, the holder of the deposit title, whether in the form of a note or checking account, retains ownership of the money and therefore the depository institution is legally obligated to maintain the full amount of the deposit in storage.  In contrast, under a credit or financial contract, the ownership of the money legally passes to the debtor for the length of time specified in the contract.  Thus, for example, a FRB  is free to lend out or invest the money as it pleases, given any constraints specified in the contract.  The only legal obligation is that it have the money available at the moment that the “depositor” demands it.

Now as Hülsmann points out, under these arrangements in an informationally-efficent market, default risk would be priced into the FRB financial instruments and they would therefore circulate at a discount to genuine money titles.  Furthermore, in the absence of  deposit insurance and a central bank operating as a “lender of last resort,” FRB notes and deposits would be dehomogenized and recognized as distinct brands of their issuing institutions.  Thus the discounts of the different brands of  FRB credit instruments against money certificates would vary according to the reputation of the issuing institution, its reserve ratio, the perceived riskiness of its asset portfolio, and the degree of the maturity mismatching between its liabilities (notes and deposits) and its assets (loans, investments and reserves).   Furthermore these discounts  would fluctuate unpredictably over time as  a result of alterations in reserve ratios, the risk and average maturity of asset portfolios, etc.  The constantly fluctuating exchange rates between each brand of FRB notes and deposits and all other brands and the standard money  would make economic calculation all but impossible.  For these reasons, Hülsmann concludes that FRB financial notes and deposits would lose out to money certificates in the competition to serve as a general medium of exchange on a truly free market, although they may still be demanded as a highly liquid component of one’s financial portfolio.

Why Did Krugman and Princeton Part Ways?

Forbes columnist Ralph Benko offers interesting speculation on this question.

Academic Fraud and the Peer Review Process

10.coverThe so-called “peer review process” is supposed to be the unimpeachable  guarantee that publications in academic journals have been chosen in accordance with the highest standards of  scientific integrity and quality.  The number of papers that an academic publishes in peer-reviewed journals and the number of times his or her articles are cited in other peer-reviewed articles are the main factors determining whether or not he or she  is promoted and awarded tenure.  Recently there occurred a particularly egregious abuse of the process.

The Journal of Vibration and Control (JVC) is  a respected scientific  journal in the highly technical field of acoustics and a part of the reputable SAGE Group of academic publications.   JVC has recently retracted 60 published articles after uncovering the operation of a “peer review ring” among its authors and reviewers (“referees”)  Although is is not exactly clear how the scam worked, it appears to have been run by Peter Chen of the National Pingtung University of Education (NPUE) in Taiwan and probably involved other scientists at NPUE.   As best as can be determined, the ring posted up to 130 fabricated  names and fake email addresses on an online reviewing system called SAGE Track.  These bogus identities were used by the members of the ring to write  favorable reviews of one another’s submissions and send them to Ali H. Nayfeh, the Editor-in-Chief of JVC.   In at least one instance, it is believed, Peter Chen reviewed one of his own papers under an alias.

In May NPUE informed SAGE and JVC that Peter Chen had resigned from its faculty in February.  In the same month JVC announced that Nayfeh had “retired” as editor of the journal.  Nayfeh had initiated investigation of the ring in 2013.  A full report on the incident including the titles of all the retracted articles can be found here.

This  incident should not be surprising, however.  Knowledge that the peer review process is gravely flawed and easily abused is well known.  Richard Smith, the former editor of the respected British Medical Journal (BMJ), the Journal of the Royal Society of Medicine, characterized the “classic” peer review system as follows:

The editor looks at the title of the paper and sends it to two friends whom the editor thinks know something about the subject. If both advise publication the editor sends it to the printers. If both advise against publication the editor rejects the paper. If the reviewers disagree the editor sends it to a third reviewer and does whatever he or she advises. This pastiche—which is not far from systems I have seen used—is little better than tossing a coin,

But one would think that peer review would at least be useful for detecting fraud and major error.  Not so, says Smith:

Peer review might also be useful for detecting errors or fraud. At the BMJ we did several studies where we inserted major errors into papers that we then sent to many reviewers.  Nobody ever spotted all of the errors. Some reviewers did not spot any, and most reviewers spotted only about a quarter. Peer review sometimes picks up fraud by chance, but generally it is not a reliable method for detecting fraud because it works on trust.

Now if this is the case in a “hard science” like medical research whose experimental results can, at least in principle be checked, imagine the situation in  an  social science like economics where controlled experiments are impossible and most “researchers” have strong ideological predispositions.   Smith concludes that, despite its many defects, the peer review process

is likely to remain central to science and journals because there is no obvious alternative, and scientists and editors have a continuing belief in peer review. How odd that science should be rooted in belief.

Certainly we should rethink the public funding of an institution that depends so heavily on such a defective process for discovering scientific truth.

The Growing Bubble–In Everything

Bubble_3Even the New York Times believes that there may be a bubble a-brewin’.  As NYT columnist Neil Irwin writes:

Welcome to the Everything Boom — and, quite possibly, the Everything Bubble. Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors.

Signs of an incipient bubble abound.  The Art Deco office tower in Manhattan, assessed at $466 million by an industry publication three month earlier, sold for $585 million in May.  Spain, which suffered a debt crisis two years ago, recently sold bonds a the lowest interest rates since 1789.  In the largest junk bond deal in history, a French television company just borrowed $11 billion dollars at 4.875%.  Based on the S&P stock index, investments in American stocks average a return of 5.5 cents on the dollar, down from 7.4 cents just two years ago, while investments in Manhattan office buildings yield a rental return net of  expenses of 4.4 percent, lower than the rate  of return at the height of the last bubble in 2007.

In the meantime, ex-Fed Chair Ben Bernanke, now comfortably ensconced at the left-leaning Brookings Institution, has confided that he has changed his mind in assigning blame for the last bubble to a “global savings glut.”  In a recent interview, Bernanke explained:

I may have made a mistake in trying to assign a name.  A glut means more than is wanted. But it doesn’t necessarily arise because people want to save more. It can be because they invest less.  It’s entirely possible that if you look at the world, you have slow-growing advanced economies, China cutting back on capital investments, that the rate of return is just going to be low.

So once again Bernanke stands ready to blame market failure–this time, the failure to generate sufficient investment opportunities–for the devastating financial crisis that looms just ahead and whose actual cause is the Fed’s policy of recklessly expanding money and credit.

“The Better Than Cash Alliance”: Escalating the War on Cash

1280px-American_CashIn recent years, national governments, especially in developed countries, have aggressively intensified their war on cash.  I have written a number of articles and blog posts (herehere, here, and here) charting the progress of this war and demonstrating that it is in fact a  despotic attack by the ruling elites on the personal privacy and liberties of their citizens.   Now,  international organizations, tax-exempt billion-dollar foundations, and crony capitalist businesses and banks have banded  together in an unholy alliance with national governments and their central banks in the drive toward a “cashless society.”  Initiated and funded by the left-leaning Ford Foundation in 2012, the alliance calls itself “The Better Than Cash Alliance.”  Even more ludicrous and misleading than its name is the statement of purpose that appears on its website according to which it “ provides expertise in the transition to digital payments to achieve the goals of empowering people and growing emerging economies.”

In addition to the powerful Ford Foundation, the Alliance involves the following “partners”:  the U.S. Agency for International Development (USAID); the Bill and Melinda Gates Foundation; and (surprise, surprise!) the failed and bailed -out Citi as well as credit card companies Mastercard  and Visa.  The United Nations is also involved, with the UN Capital Development Fund serving as the alliance’s secretariat. Among other  UN agencies participating are the World Food Program and the United Nations Development Program.  Other alliance members include several government agencies in developing countries and  a number of private aid agencies such as Catholic Relief Services.

One of the key initiatives promoted by the Alliance is to induce governments of developing countries to deliver welfare electronically.  Thus according to the Alliance’s website, “When using cash, shifting humanitarian aid and emergency relief to electronic payments creates lasting benefits for people, communities and economies and is more transparent and efficient.”    Currently featured on the Alliance’s website is a blog entry entitled “Is Cash the Enemy of Financial Inclusion” as well as a webinar recording  ”E-payments Deliver 15% Greater Costs Efficiencies in Kenya – Is This The Future of Food Assistance? plan ”  This initiative seems to be making headway in the developing world.  In 2012 Nigeria began phasing in a plan to go completely cashless.  On July 1, 2014  the final phase of the plan was implemented.  According to one report, this plan–

seeking to slash the amount of physical currency in circulation —went into effect in another 30 states. Under the scheme, cash withdrawals from banks for individuals and businesses are being severely limited. Huge fees to use cash are also going into effect.

Separately, the Nigerian central bank and commercial banks are also rolling out a massive new scheme to gather biometric data on customers. ‘We have launched the Bank Verification Number today, the timetable suggests that within 18 months, every customer would have been registered,’ said central bank boss Lamido Sanusi while unveiling the biometric registration plot. ‘This is a day that we would remember for many reasons, not for where we are but where we are likely to get from here. Nobody can steal this identity except he or she steals my fingers.’

Biometric tracking and data gathering by governments and its crony banks share the same objective as the war on cash: the abolition of financial and personal privacy.

Economists Across the Political Spectrum Agree . . .

“War Is Bad for the Economy.”  Of course, this is no surprise to those familiar with basic economics–but it may come as a surprise to Tyler Cowen and Paul Krugman, NYT columnists and “public intellectuals,” who have argued (here and here) that “major wars” promote economic stability and prosperity.

Tyler Cowen’s “Comical Memo”

B-2_spirit_bombingForbes’ columnist John Tamny executes an inspired and wonderfully savage critique of GMU economist Tyler Cowen’s dotty blog post touting the positive effects of war on economic growth.  Tamny takes his cue from Henry Hazlitt and writes in plain and muscular language.  Here is a juicy sampler that should whet your appetite for the full meal:

[T]o clarify Cowen’s views to readers, he writes that “the very possibility of war focuses the attention of governments on getting some basic decisions right – whether investing in science or simply liberalizing the economy.” His first example is laughable, and his second easily disprovable.

Government spending on science presumes that politicians can better allocate capital than can private actors operating under market discipline. To believe what Cowen is offering up, the lack of a war threat today is depriving Harry Reid, Mitch McConnell, Nancy Pelosi and John Boehner of the opportunity to expertly invest the money of others in the killing machines of the future; the knowledge gained from those investments eventually migrating to commercial ideas that would boost growth. You can’t make this up. Cowen is serious.

As for the notion that countries somehow need the threat of war to achieve great scientific advances, or better yet, liberalize their economies, apparently Switzerland, Hong Kong, and New Zealand (among many others) didn’t get Cowen’s comical memo. With all three, no credible voice in modern times has argued that either faced war or imminent attack that would have “focused” the attention of their politicians on the way to economy-boosting liberalization, or, if Cowen is to be believed, political advancement of “technological invention” and greater “internal social order” supposedly needed for major expansion.

Indeed, what all three remind us, and it’s something seemingly lost on Cowen, is that economic growth is really very simple. We all have myriad wants and needs, our production is our demand, so when governments remove the barriers to production, the individuals who comprise any economy tend to thrive. Thinking about the U.S. economy with the latter in mind, our economy is presently limp not because we lack some national, war-mongering purpose (apparently Cowen forgot all the national initiatives of the 20th century that robbed the world of well over 100 million people), but precisely because our political class has violated the four basics (taxes, regulation, trade, and money) to economic growth.


Hayek and the Intellectuals

hayek_postcardIn the past week there has been a hugely entertaining brouhaha on Peter Boettke’s Facebook page concerning the most fruitful approach to promoting libertarian social change. It seems to have been precipitated by an irritated Boettke hectoring youthful libertarian activists for adopting a populist “flattened structure of production” model of propagating libertarian ideas while ignoring Boettke’s preferred IHS model of an elitist, top-down “intellectual structure of production.” In the populist model, broadly libertarian ideas are directly absorbed by people in all professions and walks of life and directly “messaged” to their peers. In the IHS-elitist model the only libertarian ideas worthy of dissemination are those that are created and approved by scholars, invariably academics, at the pinnacle of the intellectual “pyramid of social change” and then carefully prepared for public consumption by the” lower-stage” intellectuals in libertarian-leaning think tanks, libertarian media “communicators,” and designated top-level activists or “actuators.”  The blueprint for this IHS model is commonly attributed to Friedrich A. Hayek, who purportedly developed it in his 1945 article, “The Intellectuals and Socialism.” As Boettke’s argues:

Hayek is pretty crystal clear in that essay in his desire to inspire a new generation of philosophical thinkers to explore the foundations of a free society…. If you have doubts let’s go to the text. Second-hand dealers are a by-product of philosophical thinkers and policy results when the climate of opinion shifts. Re-read the text carefully PLEASE.

Now my purpose is not to adjudicate between the claims of these competing positions. I wish only to correct some of the profound distortions of Hayek’s views embodied in the Boettke-IHS position. Boettke exhorts his young opponents to re-read Hayek’s article carefully. But when one does so, it is clear that Boettke has gotten Hayek’s position exactly reversed. The intellectuals, who Hayek refers to as the “secondhand dealers in ideas” are not a “by-product” of the scholars, experts, and scientists who originate and refine ideas. To the contrary, according to Hayek, the intellectuals are an independent and powerful class, who create or suppress the popular reputations of the scholars by “exercising their censorship function” in choosing which new ideas to present to the public. Read More→

The FTC Gives a “Quick Look” to a Merger

150px-US-FederalTradeCommission-Seal.svgThe  fearless protectors of consumers at the Federal Trade Commission finally approved the takeover  of men’s clothier Jos. A. Bank by Men’s Wearhouse last week. According  to the terms of the agreement concluded way back  on March 11, Men’s Wearhouse will pay $65.00 per share and a total of $1.8 billion for its smaller rival.  The merger will result in the fourth largest men’s apparel retailer in the U.S. with combined annual sales of $3.5 billion and 1,700 stores nationwide.  The combined company will retain the two separate brands and store chains.  On the date the agreement was concluded, the stock prices of both companies rose, Men’s Wearhouse’s by 4.7% and Jos. A. Bank’s by 3.9%.  Bank’s stock price rose 56 % from October 2013, when merger talks began,  to the date of the merger agreement.  The  company is expected to realize $100-$150 million of cost savings annually over the  next three years.  This merger was a clear win-win for stockholders and consumers from the get-go

It was evidently not so clear to the FTC, however, which  began its expedited  “quick look” investigation of the agreement almost immediately and elicited testimony from executives from both companies in the first two weeks of April.  In closing its investigation and permitting the merger to proceed more than two months later on May 30, the FTC bureaucrats issued the following statement:

Despite limited competition from the Internet, the transaction is not likely to harm consumers because of significant competition from other sources. As in all transactions, FTC staff examined which product markets were likely to be affected and what the competitive landscape looks like in those markets. There were two such markets in this matter: (1) the retail sale of men’s suits and (2) tuxedo rentals. With respect to men’s suits, there are numerous competitors that sell suits across the range of prices of the suits the merging parties offer, including Macy’s, Kohl’s, JC Penney’s, Nordstrom, and Brooks Brothers, among others. The two firms also have different product assortments that reflect their different customer bases. Men’s Wearhouse, which sells branded and private-label suits, has a younger, trendier customer set, while Jos. A. Bank, which sells private-label suits only, has an older, more traditional customer base.

With respect to tuxedo rentals, Jos. A. Bank has been a small player in the market since its entry in 2010. Further, the parties compete with numerous local and regional tuxedo rental firms. Although both parties have a national footprint, the information we obtained showed that having a national presence is not a distinguishing or important factor for most customers. Instead, price of the rental, quality of the tuxedo, and customer service typically drive customers’ choices. Finally, evidence gathered during the investigation indicates that entry into the tuxedo rental market is fairly easy and inexpensive.

Well, to this I say, “Thank you Captain Obvious.”  As a casual shopper at these and other men’s retailers and an infrequent renter of tuxedos, I could have told them all this in, oh, maybe 15 minutes.  What is not so obvious is why taxpayers need a bunch of highly paid government economists and lawyers to tell us this at all.


Janet, Joe, Lou, and the Babe

Babe_Ruth_&_Lou_Gehrig_at_West_Point_1927Our money-printer-in-chief, Janet Yellen, gave the commencement address at NYU’s graduation ceremony in Yankee Stadium. She advised the 8,000 assembled graduates that it is ”an unfortunate myth” that “something called ‘ability’” has much to do with success. (Ability being an innate characteristic, it would of course have been politically incorrect for her to have said otherwise.) Rather Yellen touted “grit,” perseverance, and passion for one’s work as the most important job skills.

Highlighting the importance of perseverance, Yellen stated:

Yankee Stadium is a natural venue for another lesson: You can’t succeed all the time. Even Ruth, Gehrig, and DiMaggio failed most of the time when they stepped to the plate. Finding the right path in life, more often than not, involves some missteps. My Federal Reserve colleagues and I experienced this as we struggled to address a financial crisis that threatened the global economy.

Now it is true that Ruth, Gehrig and DiMaggio were only successful in about one-third of their career at bats. But in its 100-year history the Fed has never succeeded in attaining its stated goal of providing sound money to the U.S. economy and abolishing business cycles. Its missteps have been legion and legendary, and committed in every decade of its existence. It orchestrated massive price inflation during and immediately after World War 1 and the Great Inflation of the 1970s (which began in the mid-1960s). During World War 2, the massive expansion of the money supply that it engineered in conjunction with draconian price controls caused the phenomenon of “repressed inflation” that featured a shortage of goods and coercive government rationing, not to mention the explosion of prices immediately after the war. The asset bubbles that it created in the 1920s, 1980s, 1990s and 2000s all culminated in financial crises and recessions/depressions of greater or lesser length and intensity. Its attempt to “reflate” the economy and prevent prices and wages from adjusting to market conditions after the Great Crash of 1929 was one of the factors that caused an agonizing prolongation of the Great Depression. Currently, we are confronted with signs of incipient bubbles in stocks and real estate as a result of the Bernanke/Yellen regime of quantitative easing and zero interest rate targeting.

Yes, Yellen and her predecessors have shown remarkable perseverance. But they have all persevered in a fool’s errand, which no one has the “ability” to accomplish: trying to centrally plan the supply and value of money. This is why the Fed will continue to bat exactly .000 until its total failure is at last widely recognized and it is dismantled.