As if any more evidence were needed (see my CB post earlier this week) that the Fed has succeeded, either through ignorance or design, in igniting new asset bubbles throughout the economy, the Federal Reserve Bank of Kansas City just released a survey of bankers that confirms a continuing rise in U.S. farmland prices. The following chart shows the stratospheric year-over-year rise in non-irrigated cropland prices for 3Q 2012.

As reported by The Blaze, one analyst noted, “If this trend continues . . . these agricultural areas may very well become ‘New Manhattans’ (as far as wealth is concerned).” The chart below from the report by the Kansas City Fed puts this stunning trend in temporal perspective and reveals that it extends across all farmland, including irrigated cropland and ranchland.

While Keynesians continue to sing that lame old song about insufficient aggregate demand stimulus and the horrors of austerity and “market” monetarists prattle on about deficient growth in nominal GDP, the signs of an incipient asset bubble become more evident every day. In fact it would not be overstating the case to say that the Fed is deliberately aiming at recreating an asset bubble as a means of rekindling the historically unprecedented consumption booms of the latter half of the 1990s and the first part of last decade. These consumption manias were driven by the “wealth” or “net worth” effect, pithily described in the metaphor “using one’s home as an ATM machine.” As the following graphs show, Fed monetary policy is succeeding in pumping up total net worth, which consists mainly of financial assets plus real estate owned by households (and nonprofit organizations) minus household debt.

What the above graph shows is that total net worth peaked at $67.3 trillion in Q3 2007 and fell precipitously to $51.1 trillion in Q1 2009. This $16.1 trillion decline in U.S. household wealth exceeded the combined annual GDP of Great Britain, Germany, and Japan. The Fed has since succeeded in pumping up net worth, to $64.8 trillion by Q3 2012, which is only $2.5 trillion below its level at the peak of the bubble. Although the value of household real estate remained $5.5 trillion below its bubble peak for Q3 2012 and has been slowly increasing, the Fed has been wildly successful in pushing up the value of U.S. financial assets. This is revealed in the the Wilshire 5000 Total Market Index. This index tracks the total dollar value of all U.S.-headquartered equity securities with readily available price data and includes more than 6,000 firms.

Note in the graph above that the index reached its peak of 15,244 in December 2007 then went crashing to its trough of 6,800 by March 2009. By January 2013 the Fed’s inflationary policies drove it past its previous peak, reflating the index by 2,000 points in 2012 alone. But perhaps the most telling graph is the ratio of household net worth to GDP.

This graph shows that for over forty years, from 1952 until the dot-com boom began in mid-1990s, the household net worth to GDP ratio fluctuated in a band between 300 percent and 350 percent. After falling back toward this range after the recession of 2001, the Fed’s monetary expansion interrupted the correction and sharply drove the ratio up by 100 percentage points in a matter of three years. The financial crisis set another needed asset price readjustment in train, but it was once again reversed by the Fed, which was desperate to re-inflate asset prices in order to first prevent a financial collapse and then to start another consumption boom. The ratio now sits at 400 percent–a level it first reached midway through the dot-com bubble–and is headed inexorably upward. Once housing markets in general begin to follow the lead of New York City’s and Washington, D.C.’s overheated residential real estate markets, we will be well on our way to another unsustainable asset bubble.

Although I am not a fan of the flat tax, this short video is well worth viewing. The look on President Obama’s face is priceless as pediatric neurosurgeon Benjamin Carson criticizes the punitive thrust of progressive income taxation at the National Prayer Breakfast.

Of course the so-called “flat tax” is not really a flat tax at all because it extracts a much higher dollar amount from those earning higher incomes than from those who earn low incomes. For example, if everyone is taxed at the same flat rate of, say, 10 percent, then the individual earning $1 million per year must pay taxes of $100,000 whereas the individual earning an annual income of $50,000 pays only $5,000. The former is thus forced to pay a price twenty times higher than the latter has to pay for the same rotten government services. How is this not a punitive tax?

This phony flat tax contrasts sharply with the situation on the market where all individuals, regardless of income, pay exactly the same price for any given good like bread, tablet computers, Cadillacs, movie tickets and all of the other privately produced goods and services they buy. Now imagine if everyone were forced to pay a price in proportion to his income for everything he purchased on the market? A higher money income would no longer mean command over more goods and services. Hence, no one would have any incentive to earn a higher income by excelling at producing things consumers desired, and, as a result, productivity and the economy would come crashing down. If people truly wanted to avoid the discriminatory and punitive aspects of taxation then they would favor a “flat, flat” tax, that is an old-fashioned “capitation” or “head” tax in which everyone paid the exact same dollar amount to the government. Not only would this not penalize more productive people but, much more important, it would have to be very, very low in order to ensure that even the lowest-income people are able to afford it. I think 200 bucks a person per year sounds about right. To the bleeding hearts out there worried about the poor, I am more than willing to entertain proposals of 100 bucks, or better yet, zero.

Last week the FOMC announced that it would continue unchanged its policies of open-ended quantitative easing to the tune of $85 billion per month and targeting a zero interest rate for as long as the unemployment rate remains above 6.5 percent and (CPI) inflation does not exceed 2.5 percent. The FOMC polices should thrill Scott Sumner, a leader of the relatively new school of macro policy known as “market monetarism” and ranked 15th jointly with Fed Chairman Bernanke by Foreign Policy magazine on its list of 100 top global thinkers in 2012.

Market monetarism has experienced an amazingly rapid ascent in the past two years, especially in the blogonomics sphere and among economists toiling at small teaching colleges. Sumner and his fellow market monetarists advise the Fed to target nominal GDP, that is aggregate demand or total spending on goods and services in the economy. Briefly, they argue that because velocity is unpredictable, the Fed should manipulate the money supply so as to offset fluctuations in velocity and maintain a fixed rate of growth in the level of aggregate demand. Successfully doing so, they maintain, would considerably mitigate demand-side macroeconomic fluctuations.

Sumner was interviewed by Bloomberg columnist Caroline Baum the week prior to the latest FOMC meeting. Referring to the policy announced after the December FOMC meeting, Sumner characterized the Fed’s commitment to a zero interest-rate target as “a backdoor way of nominal GDP level targeting. The Fed would like a catch-up in growth before it starts tightening.” In other words, the Fed was implementing the Sumnerite market monetarist policy, even if it has gone far beyond reflating nominal GDP to its level at the peak of the bubble. Well, let’s see what that looks like.

The chart shows that nominal GDP has been inflated to $15.829 trillion, almost 10 percent above its bubble peak of $14.416 trillion in early 2008. What kind of “catch-up” is this? Well for Sumner et al., in normal times the Fed should target a 3-5 percent increase in the level of nominal GDP. Since early 2010, nominal GDP has been growing at a rate slightly above 4 percent. During the high bubble years of 2003-2006, the growth rate was around 6.5 percent. Yet, despite target growth, the recent run-up in nominal GDP has gone hand-in-hand with massive price inflation in asset and commodity markets. As economist Mark Thornton has recently shown nascent bubbles are forming throughout the economy. The producer price index for commodities has hit record levels. The gold price has set new records and is fluctuating between 60 and 80 percent above its peak during the bubble while oil prices have risen to over $100 per barrel again. Stocks have been reflated back to near their record high during the bubble, with the Dow Jones Industrial Average breaching the 14,000 mark last week. Real estate markets in Manhattan and Washington, D.C. are at all-time highs as are Midwestern farmland prices.

In contrast, the real economy is still stagnating, with real GDP shrinking by 0.1 percent during the fourth quarter of 2012 and the unemployment rate for January ticking up from 7.8 to 7.9 percent. No doubt aware of the tepid performance of the real economy, and its failure to respond to the policy he advocates, Sumner stakes out an odd and silly fallback position. The U.S., he argues, like Japan and Europe, has entered a stage of permanently depressed growth. As Baum reports, Sumner believes “slow nominal and real growth and ultra-low interest rates are less a temporary phenomenon than the norm in developed nations with aging populations.” The U.S. economy, Sumner says, is experiencing “long- term secular decline in real interest rates, from 7 percent to negative 1 percent now, at the same time inflation has been trending down.” In other words, low interest rates are not mainly a result of the Fed’s actual inflationary monetary policy, but of some imaginary secular stagnation that Sumner has conjured up.

There is no surer sign that market monetarism is soon destined for the dustbin of failed economic doctrines than Sumner’s resort to the long-discredited “stagnation thesis” proposed by Keynesian Alvin Hansen in the late 1930s. It is somewhat ironic that the blogonomic phenomenon of market monetarism will barely survive the publication of the first Kindle book expounding the doctrine.

Malavika Nair, a former Mises Fellow and Ph.D. student of Austrian economist Ben Powell at Suffolk University, will be taking a position at Troy University in Fall 2013. There she will be joining the Economics Division and the Johnson Center for Political Economy as a tenure track faculty member. The Johnson Center features a distinguished group of young Austrian and free market faculty including its executive director Scott Beaulier, Daniel Smith, George Crowley, and Malavika’s husband G.P. Manish.

here.

N.B.: coarse language.

Ben Bernanke’s confided yesterday that he is unaware of any new method of stimulating economic growth. Spoke Bernanke: “As far as I’m aware, there’s no completely new method that we haven’t [already tapped].” So Helicopter Ben has run out of innovative and unconventional ways to create new money. Lest you be tempted to breathe a bit easier, however, rest assured that the now conventional method of quantitative easing, involving the Fed’s monthly purchase of $85 billion worth of mortgage-backed and U.S. government securities, seems to be working just fine according to Bernanke and he foresees its continuation. Noting the stubbornly high unemployment rate combined with the low inflation rate in the U.S. economy, Bernanke stated, “That is the case for being aggressive, which we are trying to do.” Although he is “cautiously optimistic,” he does promise to closely monitor the risks, efficacy, costs and benefits of this inflationary policy.

I guess the rapid asset price run-up in stock and commodities markets, which are nearly back to financial bubble levels, and booming farmland prices do not count in Bernanke’s benefit-cost calculus. More likely, Bernanke accounts them as a benefit, which, via the “wealth effect,” will induce another debt-driven consumption spree on the part of the American public that will stimulate economic growth, i.e. create another bubble economy.

In a speech in New Jersey last week, Philadelphia Federal Reserve Bank President Charles Plosser sounded an Austrian note in reportedly calling for the Fed to slow or halt its bond purchases in the near future because their benefits are “pretty meager” and they involve “lots of risks” including distorting the economy. Plosser also criticized the Fed’s zero interest-rate policy as counterproductive, stating:

Efforts to drive real rates more negative or promises to keep rates low for a long time may have frustrated households’ efforts to rebuild their balance sheets without stimulating aggregate demand or consumption . . . Monetary policy accommodation that lowers interest rates is unlikely to stimulate firms to hire and invest until a significant amount of the uncertainty has been resolved. Firms have the resources to invest and hire, but they are uncertain as to how to put those resources to their highest valued use.

President Plosser is to be applauded for his Austrian insight that rational entrepreneurial skittishness in the face of regime uncertainty–and not a shortage of money or Krugman’s mythical “liquidity trap”– is responsible for the U.S economy’s stagnant recovery. This insight needs to be taken to heart by those Austrians who argue that the panacea for what ails us is for the Fed to implement a policy targeting nominal GDP. In a recent article, Bloomberg journalist Caroline Baum criicized nominal GDP targeting, pointing out that nominal spending was still rebounding back to its pre-recession level from 2001 to 2003, yet the housing bubble was in full swing with housing prices rising 10.5 percent in 2003 alone.

The war on cash in Sweden may be stalling. The anti-cash movement has been  vigorously promoted by major Swedish commercial banks as well as the Riksbank, the Swedish central bank. In fact, for  three of the four major Swedish banks combined, 530 of their 780 office no longer accept or pay out cash. In the case of the Nordea Bank, 200 of its 300 branches are now cashless, and three-quarters of Swedbank’s branches no longer handle cash. As Peter Borsos, a spokesman for Swedbank, freely admits, his bank is working “actively to reduce the [amount] of cash in society.” The reasons for this push toward a cashless society, of course, have nothing to do with pumping up earnings from bank card fees or, more important, freeing fractional-reserve banks from the constraints of bank runs. No, according to Borsos, the reasons are the environment, cost, and security: ”We ourselves emit 700 tons of carbon dioxide by cash transport. It costs society 11 billion per year. And cash helps robberies everywhere.” Hans Jacobson, head of Nordea Bank, argues similarly: “Our mission is to make people understand the point of cards, cards are more secure than cash.”

Fortunately, it seems that the Swedish people are not falling for the anti-cash propaganda spewed by private bankers and Riksbank officials and are resisting the trend toward a cashless economy. It is reported that last year the value of cash transactions in Sweden were 99 billion krona  which represented only a marginal decrease from ten years ago. And small shops continue to do one-third to one-half of their business in cash. Furthermore a study of bank customers satisfaction released by  the Swedish Quality Index in October 2012, indicated that the satisfaction index was pulled down among customers of Swedbank, Nordea and SEB by their policy of eliminating cash transactions at their bank branches. Even more heartening is the fact that Handelsbanken, the largest bank in Sweden, is committed to serving consumers who demand cash. As Kai Jokitulppo, head of private services at Handelsbanken, puts it:

“As long as we know that our customers are asking for cash, it is important that we as a bank [are] providing it. . . . We see places where other banks are taking other decisions, we get customers from them and positive response.”

Fewer then 10 of Handelsbanken’s 461 branches currently do not handle cash and the bank’s goal is to have cash in every branch by the first quarter of 2013.

HT to Per Bylund.

This year marks the fortieth anniversary of the publication of Dominick  Armentano’s The Myths of Antitrust, later revised and  published as Antitrust and Monopoly: Anatomy of a Policy Failure.  This is a classic work published at the outset of the modern revival of Austrian economics.  Indeed it was the first  book to be written by a member of the generation of younger Austrians that succeeded the generation of Murray Rothbard and Israel Kirzner, and it demonstrated that Austrian economics was a living body of analysis that could be applied to current policy issues.    The book was a favorite of Rothbard’s, who was bubbling over with anticipation when I joined him at a libertarian conference  in Philadelphia in the early 1970s  to meet and hear its young author speak for the first time.

In the book,  Armentano clearly and systematically sets out the Austrian approach to the theory of monopoly and competition.  Perhaps the greatest strength of the book, however, is the mountain of case evidence that Armentano marshals to demonstrate that the firms that were charged with violations in classic  antitrust cases were hardly “monopolizing” or “restricting trade” by any reasonable definition of those terms.  In fact, he shows that the trial records themselves provide indisputable evidence that these firms were expanding output, lowering costs and prices, and creating efficiencies, all to the benefit of consumers.  Also, unlike other critics of antitrust who want to moderate or more narrowly target the enforcement of antitrust laws,  Armentano makes the case that antitrust laws are completely inconsistent with free-market capitalism on both efficiency and ethical grounds.

The anniversary of the publication of Myths will be honored at the Austrian Economics Research Conference to held March 21-23 on the Mises Institute campus in Auburn, Alabama.  Professor Armentano will present a lecture and there will be a round table discussion of the enduring influence of his book by contemporary  Austrian scholars.  In the meantime I highly recommend a wonderful video in which Professor Armentano presents the case for repealing antitrust laws.