Author Archive for Joseph Salerno – Page 3

Plundering The Provinces

While incomes and living standards in the rest of the U.S. have been declining since the beginning of the new millennium thanks to the ever-increasing depredations of Big Government, Central Banking  and Crony Capitalists on productive Americans, things have been going just swimmingly in the Imperial City of Washington, D.C. According to the Census Bureau’s American Community Survey, average household (inflation-adjusted) income has jumped by 23.3% to $66,583 in D.C. between 2000 and 2012. During the same period median household income for the rest of the country has fallen by 6.6%, from $55,030 to $51,371. Disaggregating the data for the rest of the U.S., only 4 states enjoyed gains while 35 states suffered declines in real income.

When we expand the survey area a bit to include the D.C. suburbs in Maryland, Virginia, and West Virginia, where most of the high-level Federal bureaucrats, government contractors, and lobbyists working in D.C. reside, median household income leaps to $88,233. This puts the D.C. metro area at the very top of the list of the 25 most populous metro areas in the U.S. in terms of median household income, revealing an even more glaring and growing income disparity between the political predators and their cronies on the one hand and the private producers of wealth on the other.

The establishment media and many economists and other social scientists continually bemoan the varying income differences generated by voluntary and ever changing consumer choices on the market. In fact, these differences are not a problem at all,  but rather the necessary and benign outcome of a dynamically efficient market economy, which rewards all market participants according to their productivity in serving consumer wants. Furthermore, the obsession with “income inequality” obscures the enormity and the very existence of the real problem, which is ”income plundering” of the productive class by the political class. The latter class is composed of politicians, bureaucrats and their allied special interests in the private sector. In the U.S., the political class regularly and forcibly extracts a massive amount of income from productive workers, investors, and entrepreneurs via taxation and money creation (“quantitative easing” and “zero interest-rate policies”) and funnels these stolen funds into its own pockets and those of privileged financial institutions, giant agribusiness corporations, government military contractors, construction unions, etc. Recently, in the U.S. this plundering of productive incomes has grown to an enormous scale, enabled by the huge Federal budget deficits financed by the Fed’s money printing. Plutocratic exploitation, therefore, and not any kind of market failure, is the explanation of the impoverishment of the productive middle class which has been manifested so dramatically in the past decade.

Surprise, Surprise: Consumers Do Not Believe the Fed’s Inflation Projections

University of Michigan Survey Research Center surveys consumers monthly.  The Index of Consumer Expectations is one of two indexes compiled from consumer answers to these questions.  One of the routine questions posed relates to expected inflation for next year and for 5 to 10 years from now.  Judging by the average response to this question recent consumers clearly do not believe that the Fed either is aiming at or is capable of hitting its announced inflation target of 2 percent.  For one year out, the index of inflation expectations has averaged 3.2 percent over the past year and 3.1 over the past 5 years.  Consumer expectations of long-term inflation are roughly the same, averaging 2.9  percent over the past year and 3.0 percent over the past 5 years.

Caroline Baum of Bloomberg addresses the question of why consumers have ignored the Fed’s widely ballyhooed inflation target of 2 percent  and the fact that CPI inflation has averaged only 1.5 percent over the past five years.   Her answer is enlightening:

Consumers either don’t listen, don’t care or derive their expectations from their own shopping cart. Food and gas comprise a big part of the household budget, and energy prices, at least, have been rising much faster than inflation. Just as consumers vote their pocketbook, they use their pocketbook to make judgments on where inflation is today and where prices are headed.

This is exactly correct.  In a classic passage written in 1949 (Human Action, pp. 23-24), Ludwig von Mises made this point and emphasized that consumers’ rough and ready assessments of the prevailing  inflation situation are just as “scientific” as the arbitrary statistical constructs contrived by government economists to “measure” inflation.  Wrote Mises:

The pretentious solemnity which statisticians and statistical bureaus display in computing indexes of purchasing power and cost of living is out of place.  These index numbers are at best rather crude and inaccurate illustrations of changes which have occurred.  In periods of slow alterations in the relation between the supply of and the demand for money they do not convey any information at all. In periods of inflation and consequently of sharp price changes they provide a rough image of events which every individual experiences in his daily life.  A judicious housewife knows much more about price changes as far as they affect her own household than the statistical averages can tell.  She has little use for computations disregarding changes both in quality and in the amount of goods which she is able or permitted to buy at the prices entering into the computation.  If she “measures” the changes for her personal appreciation by taking the prices of  only two or three commodities as a yardstick, she is no less “scientific” and no more arbitrary than the sophisticated mathematicians in choosing their methods for the manipulation of the data of the market. . . . In practical life nobody lets himself be fooled by index numbers.

Whether or not the Fed is pursuing a blatantly political agenda by manipulating inflation statistics is wholly besides the point, which is that inflation is a multi-dimensional phenomenon including systematic changes in: relative prices;  the qualities of goods and services;  the structure of interest rates; and temperatures on various asset markets.   Even if we focus (too) narrowly on markets for goods and services, as mainstream economists do, there is no such thing as a uniform  ”price level”  moving up and down.  There are only individual money prices changing at varying rates, at different times, and even in different directions.  As long as mainstream macroeconomists and central bankers fail to understand this lesson, we will continue to have recurrent booms and bubbles inevitably followed by financial meltdowns and grinding recessions.


Poverty Just Ain’t What It Used To Be

A newly released report by the U.S. Census Bureau indicates that most Americans  living below the bureaucratically designated “poverty line” enjoy most modern conveniences.  For example more than 80 percent of U.S. households below the poverty line have a: refrigerator (97.8%); stove  (96.6%); television (96.1%); microwave oven (93.1%); air conditioner (83.4%); VCR/DVD player (83.2%); and cell phone (80.9%).  In addition, more than half of  households beneath the poverty level also have a:  clothes washer (68.7%); clothes dryer (65.3%);  computer (58.2%); and landline telephone (54.9).  Now, when we use these figures as a standard of comparison, most middle-class Americans families in, say, 1960, were living well below the poverty line.  But this comparison obscures the important point that capitalism long ago solved the problem of poverty in a meaningful sense and in doing so radically transformed the very concept of poverty.

In order to understand the original idea of  poverty, we need to go back to the era before the  economic and social system of capitalism produced the much maligned  ”Industrial Revolution” that began to  transform Western Europe in the late 18th and early 19th centuries.   Writing in the mid-20 century, Ludwig von Mises vividly described the plight of the true poor in the era prior to the emergence of industrial capitalism.  According to Mises, in the allegedly paradisiacal pre-modern agricultural society with a growing population:

[T]he outcome is the emergence of a huge mass of landless proletarians.  Then a wide gap separates the disinherited paupers from the fortunate farmers.  They are a class of pariahs whose very existence presents society with an insoluble problem.  They search in vain for a livelihood.  Society has no use for them.  They are destitute.

When in the ages preceding the rise of modern capitalism the statesman, the philosophers, and laws referred to the poor and to the problems of poverty, they meant these supernumerary wretches.  Laissez-faire and its offshoot, industrialism, converted the employable poor into wage earners.  In the unhampered market society there are people with higher and people with lower incomes.   There are no longer men who, although able and ready to work, cannot find regular jobs because there is no room left for them in the social system of production.  But [laissez-faire] liberalism and capitalism were even in their heyday limited to comparatively small areas of Western and Central Europe, North America, and Australia.  In the rest of the world hundreds of millions still vegetate on the verge of starvation.  They are poor or paupers in the old sense of the term, supernumerary and superfluous . . . .

Thus before modern capitalism one could not be living “below the poverty line,” because poverty was an absolute and irremediable condition  in which the pauper  had no regular income and no prospects of ever earning one.   In order to keep body and soul together,  the pauper had to subsist on alms or on robbery.  It was capitalism that put paid to the universal belief that the poor would always be with us–and permitted a vacuous idea like the “poverty line” to gain currency.

Planet Ponzi

“The quantitative easing program is like a giant roach motel with a big welcome sign.”  So says fund manager Mark Feierstein, author of Planet Ponzi, in this short video interview. Although no Austrian, Feierstein has insightful things to say about the U.S. government’s lying statistics and the dire prospects for a world awash in Fed-generated debt. He also is not afraid to use the “D” word, as in Italy and Spain, with negative economic growth and 28% and 55% youth unemployment respectively, are in a depression.

The Impending Collapse of the Global “Bernanke Bubble”

The flood of dollar-denominated debt has risen in Turkey, Brazil, India, and South Korea since Bernanke turned on the monetary spigot in 2009. Now it appears, according to a perceptive article by Landon Thomas, Jr. in the New York Times, that the end of the boom may be in sight as rumors swirl that the Fed will soon be tightening money. As Tim Lee of Pi Economics remarked: “What we are witnessing is a huge bubble, a Bernanke bubble if you will.” And he believes that it is nearing it bursting point.

In recent days nervous investors have begun to pull funds out of developing Asian economies in anticipation, jolting stock and currency markets in India, Indonesia, and Thailand. In the pst few months, the Turkish lira has depreciated by 4.5% against the dollar, while Turkey’s dollar-denominated debt stands at $172 billion or 22% of its GDP. Goldman Sachs forecasts a further 15% fall in the Turkish lira, spurring a financial crisis as it becomes more and more expensive to buy dollars to service these loans, most of which are short term. Other previously fast-growing economies with large accumulations of dollar-denominated debt such as Brazil, India, and South Korea are also struggling right now and will likely be caught up in the impending financial crisis.

Furthermore — and not at all surprisingly — the real assets created by these loans were malinvestments that will not lead to sustainable growth and prosperity in the recipient economies and therefore will not generate a sufficient flow of income to service the loans. As Mr. Thomas points out,

Some of the biggest beneficiaries of the Fed’s largess were . . . among the politically connected elite in emerging nations like Turkey, where vanity towers, glitzy shopping malls and even grander projects to come — a third bridge across the Bosporus and a vast new airport — have become representative of the nation’s new dynamism, economic as well as geopolitical.

The silver lining in all this doom and gloom is that another global financial meltdown will deal a heavy, and possibly fatal, blow to both the Fed and the credibility of Ben Bernanke’s work on crises and depressions which has become the centerpiece of modern macroeconomic orthodoxy. This will clear the field for the return to prominence of the Austrian theory of the business cycle of Mises, Hayek and Rothbard.

Nonsense on Religion and Monetary Policy

Mark Gongloff of the Huffington Post responded to a surpassingly silly post of Christopher T. Mahoney’s, former vice chairman of Moody’s. Unfortunately, Gongloff’s post is almost as silly as Mahoney’s.

According to Mahoney, Protestants stink at monetary policy, you know, because of the whole Protestant work ethic thing that if you get something for nothing then it must be sinful. Thus Protestants believe that expansionary monetary policy and “reflation” are sinful precisely because they can costlessly cure depression and unemployment. Mahoney concludes therefore, “The only people who understand monetary policy are Jews and Catholics.” But instead of challenging Mahoney’s ludicrous premise that inflation is the miracle cure for what ails the U.S. economy, Gongloff offers as counterexamples Friedrich A. Hayek, who was born a Roman Catholic, and his Jewish mentor, Ludwig von Mises, whose valiant fight for complete separation of money from the control of politicians was also presumably driven by a theological aversion to inflation. But the narrow-minded dogmatists are not, of course, Mises and Hayek, but those like Gongloff and Mahoney who insist against all reason and experience that the creation of money miraculously begets real goods and services and ushers in an earthly paradise of plenty.

Plunging Stock Prices Reveal Shaky Recovery

On Thursday, stocks suffered their largest tumble since June due in large part to a so-called “spike” in the yield on 10-year government bonds, which rose by a measly 11 basis points, from 2.712% to 2.82%. This is further evidence of the very shallow and extremely shaky foundations of the current economic recovery, as anemic as it is, which is based on the Fed once again artificially pumping up household net worth in financial assets and housing prices by relentlessly beating down the interest rate below its natural rate. But the Fed is playing a game that it can never win. Once confidence vanishes that the Fed is able to maintain its inflationary QE and zero interest-rate policies, the jig will be up and equity and real estate markets will come tumbling down pulling the still shaky financial system with it.

What Is Money?: The Congressional Lecture Series

You can now enjoy a three-part lecture series on the basic principles of money from an Austrian perspective. The series was sponsored by Congressman Ron Paul and presented exclusively to Congressional staffers. The lecturers were myself, Constitutional lawyer Edmund Vieira, and investor, author, and financial commentator Peter Schiff.

Top Hackers Value Anonymity–So They Pay Cash

DEF CON is the premier annual convention of the hardcore hacking community. It began yesterday and runs until August 4 and is being held at the Rio Hotel in Las Vegas. One of the popular events at DEF CON is a game that is similar to “capture the flag” in which contestants vie to mine information from the websites of large companies like AT&T, Fed Ex, and Target as well as profiles on LinkedIn. No personal data are stolen and the larger aim is to demonstrate the vulnerabilities of the target companies. Last year the winner of the contest demonstrated on stage how he was able to hack into WalMart in twenty minutes.

By the way, the fee to attend is $180–payable in cash only. The following statement appears on the DEF CON website

DEF CON 21 costs $180 USD cash. Do we take credit cards? Are you JOKING? No, we only accept cash – no checks, no money orders, no travelers checks. We don’t want to be a target of any State or Federal fishing expeditions.

Hmmm, I wonder why there’s no mention of payment in Bitcoin?

Plutocracy in Action

Those who still believe the hogwash that the the United States is a two-party, representative democracy should ponder the following. On Wednesday, the amendment to the Defense Appropriations Act of 2014 proposed by libertarian-leaning Rep. Justin Amash (R-Michigan) was narrowly defeated in the House by a vote of 217-205. The amendment would have ended the authority for the unconstitutional, police-state metadata-phone call spy program carried out by the NSA whose existence was leaked by the heroic whistleblower Edward Snowden last month. Interestingly, the amendment had bipartisan support, with 99 Republicans and 111 Democrats voting for it. Its opponents included the leadership of both parties, as both House Speaker John Boehner (R-Ohio) and House Minority Leader Nancy Pelosi (D-California) voted against it. This seeming paradox is easily unraveled if one follows the money. According to an analysis commissioned by Wired, over the past two years those representatives who opposed the amendment and supported the spy program received more than twice the amount of cash contributions from defense and intelligence firms (e.g., Lockheed Martin, Boeing, United Technologies, Honeywell International, etc.) as those who did not. On average, House members who voted to uphold the domestic spy program received an average of $41,635 whereas those who voted to revoke authority for the program averaged $18,765. By the way, the leaders of the two “opposing” parties in the House, Boehner and Pelosi received $131,000 and $47,000, respectively, from the defense-intelligence establishment.

This is just another reminder of the thesis of the great Italian sociologist and classical liberal Vilfredo Pareto (1848-1923) that every democracy is inevitably transformed into a “demogogic plutocracy” that is run by a ruling elite of “fox-like” politicians and their corporate capitalist cronies.

HT to Wolf von Laer.

Man Has Home Ransacked by Police for Paying Cash

Of the many crimes that have been committed by governments against their citizens in their global war on cash (also here), perhaps this is the most bizarre. Here is the story

It all started one Saturday morning when Jarl Syvertsen, a 59-year-old disabled Norwegian man, purchased a PC, TVs, and washing machines for 80,000 kroner (roughly US$13,000) which he paid in cash. The store immediately alerted the police about the large cash payment. On Sunday a male and a female police officer appeared on Mr Syvertsen’s doorstep. Upon seeing them, Mr. Syvertsen at first feared that something may have happened to his mother, who is 86 years old and resides in a nursing home. But the police were there with a warrant to search his home, charging that the cash he had spent was money that “came from a criminal offense.” In fact, the money was actually part of an approximately one-million dollar advance on an inheritance he had received. Mr. Syvertsen attempted several times to explain to the officers where the money had come from and to show them a letter confirming that fact, but they would have none of it and proceeded to invade his home and his privacy. Eventually the police realized their error and left his home.

Although the police now admit that they investigated Mr. Syvertsen prior to the warrant being issued and found that he had never been implicated in any criminal activity, they insist that “there were reasonable grounds to suspect” criminal activity given the “sum of the information available,” that is,  the large cash payment. As Mr. Syvertsen points out, however, had the police waited until Monday, the matter could have been resolved “in a single phone call to the bank.” But the police are unrepentant and have the unmitigated gall to lecture law abiding citizens against carrying large sums of cash on their persons for their own safety–against private thugs, not police thugs of course. According to acting station commander Jarle Kolstad:

It is far safer to pay such large amounts [with] cards than to go with 80,000 [kroner] in cash on the body. Not because you risk getting the police at the door [really?], but because it is safer to use the cards. . . .

Mr Syvertsen’s reply to such self-serving nonsense?

It’s not stamped on my forehead that I have 80,000 [kroner] on the inside pocket, so I judge [it] as quite safe. Besides, I have previously experienced not [being able to] pay because payment terminals are down. Therefore, I chose to pay with cash, and there is no prohibition [against it] in Norwegian law. . . .

In the aftermath of this egregious home invasion, Mr. Syvertsen is suing the police for compensation. In the meantime, his experience with such lawless and arbitrary police conduct makes him feel unsafe in his own home and leaves him wondering “How low the threshold is supposed to be for police to intrude into private homes”? Well Mr. Syvertsen,as in the case of any government war against its own people (e.g., the War on Drugs, the War on Terror etc.) the threshold is very low indeed.

HT to Vegard Notnaes.

Debunking Governments’ “Lying Statistics” About Inflation

Steve Hanke is a maverick free-market economist who for decades has tirelessly advised de-socializing and developing countries against following the disastrous monetary and fiscal policies foisted on them in exchange for bailouts by international bureaucracies like the IMF and World Bank. Hanke’s latest efforts have been directed toward debunking inflation statistics fabricated by governments of developing countries that are trying to cover up the consequences of their highly inflationary or even hyper-inflationary monetary policies. Such official statistics, of course, are accepted and parroted by the media and the aforementioned international bureaucracies. Hanke gives the following example:

In many cases, governments fabricate inflation statistics to hide their economic problems. In the extreme, countries simply stop reporting inflation data. This was the case in Zimbabwe, a country that recorded the world’s second-highest hyperinflation. Results of research determined that Zimbabwe’s hyperinflation peaked in mid-November 2008, at a monthly rate of 7.96 × 1010% — roughly 8 followed by 10 zeros.

But, the Mugabe government stopped reporting inflation data in July 2008, when the peak monthly inflation rate was “only” 2,600%. Unfortunately, these official July 2008 data are still used in press reports and by venerable institutions like the International Monetary Fund. There is, of course, a “little” problem. The hyperinflation actually peaked at monthly rate 30 million times higher than the official peak inflation rate. The true peak of Zimbabwe’s hyperinflation occurred 3.5 months after the government’s last release of official inflation data.

Many countries have followed this course — failing to report any usable monetary data and neglecting to report inflation data in a timely and replicable manner. Those data that are reported are often deceptive, if not completely fabricated. Yes, official economic data from countries with troubled currencies often amount to nothing more than “lying statistics” and should be treated as such.

To address this problem Hanke has started The Troubled Currencies Project under the joint auspices of the Cato Institute and Johns Hopkins University. The project collects data on black market exchange rates and then applies the purchasing power parity theory, which links exchange rates with price levels, to more accurately estimate rates of inflation for troubled currencies. The project currently includes Argentina, Iran, North Korea, Syria, and Venezuela and will update the data and estimates on a regular basis. In the current chart that appears on its site, Syria reports an official annual inflation rate of 36.43% while the rate estimated from the movement of black market exchange rates is 336.50%; the respective inflation rates for Venezuela are 35.24% and 240.10%.


Never has a political song over four decades old applied so well to contemporary events as the song “Monster” recorded in 1969 by the rock group Steppenwolf, best known for its anthemic hard rock masterpiece “Born to Be Wild.” The lyrics are printed below and a YouTube video that vividly illustrates their application to our current situation is here (be sure not to miss the visual references to the Fed and the fiat dollar).


(Words and music by John Kay, Jerry Edmonton, Nick St. Nicholas and Larry Byrom)

Once the religious, the hunted and weary
Chasing the promise of freedom and hope
Came to this country to build a new vision
Far from the reaches of kingdom and pope
Like good Christians, some would burn the witches
Later some got slaves to gather riches

But still from near and far to seek America
They came by thousands to court the wild
But she just patiently smiled and bore a child
To be their spirit and guiding light

And once the ties with the crown had been broken
Westward in saddle and wagon it went
And ’til the railroad linked ocean to ocean
Many the lives which had come to an end
While we bullied, stole and bought our homeland
We began the slaughter of the red man

But still from near and far to seek America
They came by thousands to court the wild
But she just patiently smiled and bore a child
To be their spirit and guiding light Read More→

“Banish Fractional Reserve Banking for Real Reform”

. . . says Thomas Mayer, a former IMF economist and former Chief Economist of Deutsche Bank Group and Head of DB Research, and now a Deutcshe Bank Senior Advisor. In a letter today to the Financial Times, Mayer writes:

But no reform can make banking really safe as long as the industry operates within a fractional reserve system, where banks create “inside” money (for example sight deposits) by extending credit and promise to exchange this against “outside” money at any time on demand.

Mayer goes on to cite Austrian monetary and business-cycle theorist Jesus Huerta de Soto on the causal connection between fractional reserves and banking crises throughout history. He points out: “Since there is no single state in the eurozone able to bail out banks in a systemic crisis, a banking regime without state backing is needed.” He concludes his letter with a four-step plan for “comprehensive” banking reform that would implement just such a regime:

First, define as safe an asset that can be converted any time and under any circumstances at face value into legal tender. Second, create safe (“insured”) deposits by requiring banks to back them fully with reserves at the central bank. Third, create a cascade of loss-absorbing bank liabilities, starting starting with bank equity and ending with investor deposits (not subject to the 100 percent reserve holding). Fourth, make banks treat eurozone government bonds as assets that can default and help them to reduce their holding of these bonds.

Mayer discusses his proposal for 100 percent reserves in more detail in a policy paper published by the Centre for European Policies Studies.

HT to Toby Baxendale.

Who Says the Market Cannot Supply Its Own Money?

I just arrived back from lecturing at the week-long Free State Project’s Tenth Annual Porcupine Freedom Festival, a huge gathering of libertarians of all stripes from all over the U.S. in the beautiful White Mountains of New Hampshire. As you can see by browsing the schedule, the festival was chock full of educational and social events as well as commercial activities of the “grey market” (and perhaps  darker) variety. Many of the vendors accepted an array of payments media. I was particularly struck by the sign on one stall which read: “Bitcoin, silver coins, Shire Silver, ammo and even Federal Reserve notes accepted.”

Speaking of alternative payments media, I was very impressed with the panel on Bitcoin’s Future featuring Darren Tapp, Jay Best, Josh Harvey,and Teresa Warmke. It was very informative and the panelists avoided the usual hysteria common among Bitcoin supporters in favor of a serious and sober discussion of the advantages and disadvantages of holding and using Bitcoin and the various technological and political  factors that may affect its future value and developments as an anonymous means of transferring money payments.

shire silver photo

I was also delighted to discover that privately minted gold and silver money were circulating at the festival in the form of the aforementioned Shire Silver. This consisted of flat strips and wire strands of silver or gold of various weights embedded in plastic cards and denominated in various weight units from .05 grams to 1.0 grams. These were widely accepted as media of exchange by vendors and paid out in change. Pictured on the left are .5 grams of silver with a purchasing power of $1.00 and .05 grams of gold with a purchasing power of $4.00.


Is Russia’s New Central Bank Head an Austrian?

Well not quite, but Elvira Sakhipzadovna Nabiullina, a surprise choice of President Putin to head the Central Bank of the Russian Federation, describes herself as “a liberal economist with no hint of radicalism.” She cites books by Austrian economic historian Robert Higgs and by Keynes disciple Joan Robinson as influential in her education.

Yippee! More Bank Runs in Our Future

Robert Lenzner of Forbes advises that you and I will be blindsided by the next financial crisis. Lenzner bases his reasoning on Yale economist Gary Gorton’s recent book Misunderstanding Financial Crises, Why We Don’t See Them Coming . According to Gorton the old-fashioned bank run is back, only in a different form. The recent financial crisis was different from earlier ones in that it was not initiated by bank depositors scrambling to withdraw their funds. Rather it was precipitated by a “run” among short-term lenders who had purchased banks’ commercial paper or lent money to banks through “repos” (repurchase agreements). When these lenders suddenly tried to liquidate these assets by selling them or not renewing the loans, their actions deprived banks of the short-term funds that the banks had been using to finance their long-term lending and investments.

As Lenzner describes the evolution of the crisis:

What transpired in 2007-08 “resembled the bank runs of the pre-Federal Reserve era. These were primitive expressions of panic by people trying desperately to sell assets, driving the price of those assets down, and causing other people to panic as well and try to get out at the same time. The panic spread from short-term instruments like repos and commercial paper to bonds and stocks and commodities and real estate. The wave of fear sweeps from short-term investments to longer term obligations. [There is an open quotation mark in this passage before "resembling" but no closed quotation mark to indicate where the quotation from Gorton ends.]

Lenzner goes on to warn:

The playbook in the next crisis will be the same as it was in past crises from 2008 to 1987, 1929, 1907, 1893, 1857 and so on. The run on the banks becomes systemic as no one institution is spared. Credit markets freeze, the economy goes south, millions lose their jobs, and other millions have their savings decimated. It happened time and time again in the 19th century before there was a central bank, and panics didn’t stop after the Fed appeared in 1913. . . .

Expect it to happen again. Gorton warns clearly that “there is no mechanism for determining when there actually is a crisis.” In fact, there was no panic by depositors in Citibank, BankAmerica, Wells Fargo that would have alerted the nation. It required the Fed to realize how over-leveraged, under-capitalized and insolvent major banks had become before it acted to rescue them with huge monetary bailouts.

So, in other words, federal deposit insurance no longer works to discourage or mitigate bank runs, because it does not cover short-term lenders. It will take massive money creation and bailouts by the Fed to defend against and cope with future bank runs by skittish investors.

All this is a great source of worry to Lenzner who pessimistically concludes:

We cannot afford for the market to lose confidence and for lenders (not depositors) to pull all their funds from one or more banks. Without the steady substantial continuation of short term funds the major banks cannot meet their longer term liabilities, and you could very well have another crisis begin. The unavoidable conclusion is that we have to focus on the continued stability of funding for the banks as much as strengthening their capital resources.

This is welcome news, indeed, to those advocates of free banking like myself who see the ever-present threat of bank runs as the one and only effective means of discouraging fractional-reserve banks from issuing un-backed deposits, or “fiduciary media,” and systematically mismatching the maturity profiles of their liabilities and assets (“borrowing short and lending long”). It is the creation and lending of fiduciary media that falsifies the interest rate and thereby causes the recurrence of booms and busts. If the Fed and the financial elites are unable to figure out a way of ensuring “stability of funding for the banks,” the scam will be up and the turbulent and destructive era of fractional-reserve banking will come to a rapid and well-deserved close.

An Unpublished Nugget from Mises on Adam Smith

The following is a remark that Ludwig von Mises made in his famous NYU seminar, as recorded in the notes of seminar attendee Bettina Bien Greaves on September 26, 1957:

{A}uthors who are commonly considered friends of freedom–and they are certainly very sincere and fine economists–want to tell us again and again that even Adam Smith and some of his contemporaries were in favor of interventionism. Such a book was already written 60 years ago by the last, i.e., the youngest, student of Carl Menger, Richard Schueller. . . . Then 60 years after Schueller the same book was written by Lionel Robbins {The Theory of Economic Policy in English Classical Political Econoomy} and in between many [other] people wrote the same book. Their idea is, ‘Look how foolish you are, you anti-interventionists. Even Adam Smith was in favor of certain interventions. Why are you not? Do you want to be more orthodox than Adam Smith?’ To this I answer, ‘I am the liberal and not Adam Smith. The liberals are not some imitators of the heroes of the past. We have no scripture to interpret. The Wealth of Nations is not the bible of liberalism.’

N.B. Mrs Greaves’s interpolations are in brackets; my interpolations are in curly brackets.

A Reply to George Selgin on QE and NGDP targeting

George Selgin has written a response to my blog post criticizing his expression of support in a TV interview for quantitative easing (QE) and for a Fed target for nominal gross domestic product (NGDP). In it, he makes a number of fair points that deserve a reply. I will take these one at a time, placing his statements in quotation marks and then replying to each of them in turn.

1. “To say (1) that ‘a case existed for’ X is not to claim that X was in fact justified; (2) the case existed in 2008-2009, mainly before QE1 actually kicked in.”

The first clause involves impeccable logic and I happily concede the point. The second clause is a contention about a factual situation which is open to interpretation.

Let me explain. Total spending or NGDP began to shrink in Q2 2008 and continued to do so for a year through Q1 2009, falling during the period by roughly $500 billion from $14.415 to $13.885 trillion or by 3.67 percent. The Fed announced in March 2009 that the first round of QE would begin in June. By the end of Q1 2010, NGDP had recovered to its pre-crisis peak. So, in light of these data, is George saying that QE1 had no effect in bringing about this expansion in aggregate demand and that the expansion would have taken place anyway? And, if so, would he have advised the Fed against undertaking QE, despite the fact that the data available at the time of its announcement in March 2009 indicated that NGDP was continuing to shrink? Or would he have advised the Fed to abort the program in June 2009 after one quarter of growing NGDP that still left it far below its pre-crisis peak? However he might answer these questions, he is clearly saying that implementing QE1 earlier rather than later would have been a good idea.

As a footnote, in a blog posted on September 19, 2012, I wrote: “[Krugman] could care less about George’s support for fractional-reserve banking and would not bat an eye even if he knew that George supported QE1 and (maybe) QE2. . . .” Although George wrote two responses to my post (here and here), he never contested this characterization of his position.

2. “I’ve never actually endorsed any of the QEs in print; I have suggested that an ideal monetary system would stabilize NGDP or aggregate demand or something like it . . . . I’m also on record saying that the best way to get this outcome is with a free banking system–in my first book, and elsewhere.”

All of this is true and I never suggested otherwise in my post. But it is completely irrelevant to the point that I was making. George was being interviewed on a TV news show. It can be reasonably assumed that the vast majority of the audience were non-economists who were not conversant with George’s work and did not know exactly when QE1 was implemented. When George said, “Back in 2008 a case existed for quantitative easing because there really was a shrinkage of demand and the Fed needed to do something about it,” I am certain that his audience construed it as an expression of support for QE1. I would be astounded if a smart man like George could believe anything else now or when he originally made the statement.

3. “It is, by the way, silly to suggest that, if someone says, ‘The Fed screwed up because it should have done Z, but instead did Y’ that person is implicitly defending the institution of central banking or arguing that one ought to have a central bank so as to be able to have it do Z. That’s just not a logical implication of the argument.”

Right—which is why I never suggested such a thing. I focused narrowly on the topics that were covered in the interview. I suggest that if George is concerned about a lay audience misconstruing his statements about QE and an NGDP target as an endorsement of central banking—as he should be—he may want to articulate a disclaimer like the one above in the future.

5. “What’s more, when certain Austrian’s imagine that they are avoiding the implied endorsement by saying that, instead of doing either Z or Y, the Fed should have done nothing, or should have left M unchanged,” they deceive themselves. For “doing nothing” to M can also be understood as a policy action, and hence as an implicit endorsement of some Fed policy, and hence as implicitly endorsing the Fed itself.”

Right again, George . I have explicitly stated in interviews that the optimal response to the financial crisis was for the Fed basically to freeze the monetary base, allowing it to change only to the extent necessary to permit insured depositors to be paid off as their banks fail. I have also written two pieces (here and here) in the past year arguing that as long as we are stuck with the Fed it is far better to place it directly under the control of Congress rather than the un-elected and unaccountable Fed bureaucrats who now run it as a secretive and quasi-independent branch of government.

6. “As for my true opinion of the actual QEs, I am against them, because I am against any central bank money supply manipulations that are discretionary rather than rule-based. (My particular preference is for a monetary base freeze and free banking, with no barriers to the use of alternative base monies.)”

Why didn’t you say so in the interview, instead of advocating an NGDP target for the Fed? BTW, I am completely comfortable with your preferred program as a step in the transition process toward abolishing the Fed, as long as it is accompanied by the further condition that federal deposit insurance be phased out within a year for existing deposit accounts, and denied to all new deposit accounts beginning immediately.

7. “Finally, I wonder how long it will be before readers will see the Selgin bashing for what it is: yet another sign of that tendency, so common in religious contexts (but not in scholarly ones) to treat with disproportionate enmity and vehemence, not those ideas which pose the greatest threat of diverting people from the path of genuine understanding, but those appearing to be especially close, and therefore especially threatening, to one’s own.”

This statement is utterly astounding, given the ill treatment that its author routinely metes out to those who express the slightest disagreement with his views. I did not bash George nor did my post display enmity in any degree toward him. I simply disagreed with some (not all) of the views he expressed. Nor was my tone “vehement.” Now I can understand why my final paragraph may have nettled George. There I likened his position on hoarding to Bernanke’s and questioned whether he had learned the essential lesson of Say’s law. But these points were made without any enmity toward him and were not stated with particular vehemence. Instead of replying to these points, however, George chose to smear me as a religious fanatic. Unfortunately this seems to be a recurring pattern in George’s responses to those who disagree with him. The slightest criticism of his position elicits from George a thunder of personal denunciation impugning the critic’s integrity, scholarship, and motives. When last I ventured to challenge his views, George accused me of: being in an “integrity free-fall”; so “anxious to affirm my fidelity to a club” that I am unconcerned with truth; “a mountebank pretending to be [a] scholar” [plural suppressed]; making “idiotic statements”; and wallowing in “intellectual dishonesty.”

Unlike George, I do not think that “religious” is a synonym for “intolerant,” but surely such diatribes that George regularly unleashes against his critics marks him as beyond merely prickly or thin-skinned. I do not care to speculate on the motives or aims that underlie George’s egregiously ill-mannered and uncivil treatment of his critics, but such behavior lies beyond the pale of scholarly discourse.

George Selgin Defends Deflation–and Quantitative Easing

In an interview on CNBC’s European Closing Bell show, George Selgin presents an eloquent and compelling defense of deflation that is caused by increasing productivity in the economy. He refers to this as “good deflation.” Indeed, Selgin argues that such deflation is “desirable,” because any attempt by the Fed to offset it by monetary expansion will create asset bubbles.

Unfortunately, in the same interview, Selgin defends the first round of quantitative easing undertaken by the Fed in 2008 on the Keynesian grounds of the necessity of offsetting a fall in total spending or “aggregate demand.” In Selgin’s words:

Back in 2008 a case existed for quantitative easing because there really was a shrinkage of demand and the Fed needed to do something about it. . . . It [quantitative easing] is sometimes flawed and sometimes not depending on whether it is in response to falling demand that needs to be revived, where it can play a role in reviving it under the right circumstances. . . .

Furthermore, Selgin correctly points out that arguments for the Fed targeting a stable price level or an inflation rate of two percent “aren’t founded on anything really sound.” And yet Selgin goes on to call on the Fed to target a constant level of total spending or “nominal GDP” in order to achieve his own preferred rate of price change for the economy. “According to my theory,” says Selgin, “a healthy rate of deflation is one that looks like productivity growth.” But why is this rate of change in overall prices any less arbitrary than, for example, the 2.5 percent increase in prices that Bernanke prefers? Why must changes in overall prices reflecting the public’s changing relative valuations of cash holdings vis-a-vis consumer and producer goods be eternally suppressed by the Fed, particularly falling prices resulting from an increase in the demand for cash?

In fact Selgin expresses a profound solidarity with Keynesian macroeconomists like Bernanke when he states in his interview that a shrinkage in the demand for goods is undesirable and must be avoided, whether by quantitative easing or by mandating that the Fed target a constant level of nominal GDP in the long run. Like Bernanke et al. it seems that Selgin has not learned the first principle of business cycles, which was originally discovered by the classical economists and elaborated into a full theory by Mises, Hayek, and later Austrian economists. The classical economist David Ricardo gave this principle concise and elegant expression:

Men err in their productions, there is no deficiency of demand.