Author Archive for Mark Thornton

Newsflash: Central Banks Elevate Asset Prices

220px-BankIntZahlungsausgleichThe Bank of International Settlements has issued a warning that central bank monetary policy has elevated asset prices and reduced market volatility to abnormally low levels.

In its quarterly review, the BIS said financial market volatility spiked higher in August on the back of geopolitical concerns and worries over economic growth, but quickly returned to “exceptional lows” across most asset classes.

“By fostering risk-taking and the search for yield, accommodative monetary policies thus continued to contribute to an environment of elevated asset price valuations and exceptionally subdued volatility,” the BIS said.

From the BIS website:

The mission of the Bank for International Settlements (BIS) is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.

In broad outline, the BIS pursues its mission by:

* promoting discussion and facilitating collaboration among central banks;
* supporting dialogue with other authorities that are responsible for promoting financial stability;
* conducting research on policy issues confronting central banks and financial supervisory authorities;
* acting as a prime counterparty for central banks in their financial transactions; and
* serving as an agent or trustee in connection with international financial operations.

The head office is in Basel, Switzerland and there are two representative offices: in the Hong Kong Special Administrative Region of the People’s Republic of China and in Mexico City.

Another Excuse for More ZIRP and QE?

The August jobs report is out and its not pretty. Instead of a faster pace of jobs growth the report was disappointing and past reports were revised downward. This is just the ammunition that Janet Yellen and the Fed need to possibly extend Quantitative Easing and their Zero Interest Rate Policy.

The liberal Center for Economic and Policy Research that regularly comments on the jobs reports concludes:

The remarkably weak GDP growth in this recovery is consistent with the extraordinarily weak job growth. While many have tried to explain the weakness on demographics, even if we restrict the focus to prime age men, employment is performing far worse than in prior recoveries.

Could it be that the “remarkable” weakness has something to do with the “remarkable” policies of the Fed and the Central government?

Trouble at Jackson Hole

Central bankers and their economists had their annual retreat to Jackson Hole Wyoming this past week. Given all of their self-proclaimed success in curing the economic crisis with their Zero Interest Rate Policy (ZIRP) and Quantitative Easing (QE). You would think that the event would have been a big celebration.

However, as we got closer and closer to the Fed’s target unemployment rate of 6.5% the more we have been hearing from Janet Yellen about “labor market imperfections.” She has changed her tune and instead of touting the decreases in the unemployment rate, she is talking about all the people working part-time when they would prefer to work full time and the decline in the labor participation rate. In truth the Fed did not fix the economy. In other words, she is searching for a justification to continue the money printing if the bubbles start leaking again. Several papers were presented about the problems of labor markets.

In contrast, others were concerned about the emerging price inflation:

• Martin Feldstein, Harvard economics professor, chairman of the Council of Economic Advisers under President Ronald Reagan:

“I wish the Fed would be more explicit about being concerned about inflation. They were slow to communicate about inflation. Yellen gave a speech at the (International Monetary Fund) a few weeks ago in which she acknowledged that there were risks of financial instabilities but said that’s not going to change our monetary policy.

“My sense is there’s probably more inflation in the pipeline and closer (than Yellen thinks).

MORE: Yellen talks labor market slack at Jackson Hole

“Her eyes are on the underutilized labor resources. She’d like to be able to continue to bring that down.

“We may see inflation sooner than she thinks we’re going to see, and I think if that happens, then I think they’ll move the date (to raise rates) forward.”

Others, like Yellen, were less concerned with price inflation and more concerned with unemployment:

• William Spriggs, chief economist for the AFL-CIO, Howard University economics professor, former assistant labor secretary under President Barack Obama:

“I think (the Fed is) still thinking too much in the framework of, ‘We’re waiting for inflation.’ I think they have to re-configure this. The cost of unemployment has gone up, and so in making that choice between whether I raise interest rates to stir the economy or whether I pursue full employment, we just have to say: ‘You know what? Inflation doesn’t cost as much as unemployment.’

“(Yellen) is forcing them to be nuanced, so they can’t get out of talking about this in a more nuanced way.

“If, for a little while, you have 3% or 4% inflation or maybe even 4.5% inflation, that’s fine. Because we are so far away from full unemployment.

“But if you (raise interest rates), it’s going to be arbitrary. It’s going to be very broad. It’s going to hurt managers, it’s going to hurt professionals, it’s going to hurt everyone.”

“This is real damage to real people. You have to factor that cost. This is not free.”

It would seem that the rosy picture of the Fed fixing the economy does not look as rosy to central bankers themselves once they have supposedly fixed the economy!

As quotes in the USA Today.

Colorado’s Illegal Pot Market Thrives

Not unexpectedly, Colorado’s illegal marijuana market has been reported as thriving. The reasons for this are pretty straightforward. First, it is a new and highly regulated market making it difficult to supply products and keeping legal marijuana prices high. Also, steep taxes on legal marijuana exceeding 30% also are keeping prices high.

Camouflaged amid the legal medicinal and recreational marijuana market, the underground market thrives. Some in law enforcement and on the street say it may be as strong as it’s ever been, so great is the unmet local and visitor demand.

That the black market bustles in the emerging days of legalisation is not unexpected. By some reckonings, it will continue as long as residents of other states look to Colorado – and now Washington state – as the nation’s giant cannabis cookie jar. And, they add, as long as its legal retail competition keeps prices high and is taxed by state and local government at rates surpassing 30%.

Insanonomics Failing in Japan

Bush_Abe,_Camp_DavidAbenomics–the “new economic policy” in Japan is failing badly. It is a policy of inflation targeting, quantitative easing, government spending and higher taxes. Initially, it seemed to work in that the Japanese stock market rose significantly. However more recent reports find the real economy still stagnating and shrinking. The latest reports indicating the impact of the recent increase in the sales tax reducing production, consumption, and investment.

Japan is facing a crucial period as the government presses ahead with its much-ballyhooed Abenomics revival strategy.

The country has been mired in a malaise brought on by falling prices and a strong yen for years. But the economy’s prospects have brightened since Prime Minister Shinzo Abe announced fresh spending by the government and encouraged the central bank to unleash a wave of asset purchases.

Under his leadership, the yen has fallen sharply and stocks have risen dramatically. The IMF has endorsed the plan and Japan has largely avoided charges of currency manipulation.

Related: Japan debt tops 1 quadrillion yen

But the third pillar of the Abenomics plan — structural reforms — has been tougher to implement.

Abe’s government has proposed reforms that would make the labor market more flexible, encourage immigration, bring nuclear power plants back online and draw more Japanese women into the workforce.

Many of those proposals have foundered, or have been slow to develop.

Look for a new Mises Weekends show this Friday, with our guest Mark Abela in Tokyo discussing failed Abenomics and Japanese monetary policy- ed.  

HT: Mish’s GETA

The Costs of Unions

International_Broom_and_Whisk_Makers'_UnionThe economic performance of states that supports unions has lagged the economic performance of states with “Right to Work” laws. Over the last 10 years manufacturing output was stagnant in union states but increased by more than double digits in the Right to Work states, even when you exclude Michigan and Indiana which have recently passed Right to Work laws. Right to Work states continue to gain jobs and higher wages relative to union states.

A new report finds that unions cost individuals as much as $10,000 each in the strongest union states.

In “The Unintended Consequences of Collective Bargaining,” authors Lowell Gallaway and Jonathan Robe rank the states according to the negative impact unionization has had on each state’s economy over the last 50 years.

Similarly, when looking at overall state economies over this period, the authors show a reduction in state economic growth as high as 10-12 percentage points in some states.

The top five “worst” states were: Michigan, Alaska, Nevada, New York, and Hawaii. The five states that fared best were: South Carolina, North Carolina, Mississippi, South Dakota, and Texas.

Ron Paul Poll: Economics, Not Political

The Haven has posted the following poll question:

What do you think? Is Ron Paul right to think that a crash will be forthcoming? Or will the stock market continue to plow ahead as it has done since 2009?

“If Ron Paul Is Right, Then It’s Only A Matter Of Time Before This Happens… Again”

Paul is a student of the Austrian School of Economics, which contains Ludwig von Mises and Friedrich Hayek as a couple of its most brilliant thinkers. The Austrian School has long been critical of central banking; and Paul is no exception, having authored his own book called “End the Fed.” Dr. Paul thinks that the current interest rates are faulty and artificial, caused by the Fed. In turn, says Paul, investors make bad decisions based on the artificial interest rates, resulting in bubbles:

“One thing we have to remember is that when you get false information from artificially low interest rates, that mistakes are made, they’re inevitable. You make mistakes even when you have market rates of interest. But when the market rate of interest is so low for everybody, there’s a lot of mistakes, and that’s why you have the bubbles, and that’s why you go through the catastrophe we had in ’08 and ’09, and I think the conditions are every bit as bad as they were in ’08 and ’09.”
Paul remains steadfast in his belief that an America without a Federal Reserve would be a brighter America. He described the way investors are forced to hang on to every word of the Fed in the current environment:

Big Mac and the Dollar

Using McDonals’s Big Mac as the standard, the US Dollar looks relative firm compared to some other currencies. The chart below from The Economist looks at the purchasing power of currencies relative to the Big Mac in 2009 and 2014. A half dozen currencies have been relatively weak compared to the dollar and a half dozen have been in line with the dollar. Only the Norwegian Kroner and Swiss Franc have been relatively strong compared with the dollar over the time period. In a world currency war, most currencies, including the dollar could be losing purchasing power in an absolute sense.

Some central banks have helped their currencies slim down. The Swiss franc’s decline is thanks in part to the Swiss National Bank. It put a styrofoam lid on the franc’s value when capital began flowing in from panicked European investors, lest the rising cost of Swiss exports abroad drive Switzerland into recession. The Bank of Japan has also taken a bite out of the yen’s value. Its generous portion of quantitative easing has helped push the currency down from close to fair value to 24% below it.

The Chinese yuan, once the most undercooked currency in the index, is now only the 12th-most-undervalued, thanks to slow but steady appreciation in recent years. Yet because China’s economy has grown so quickly, it has piled on weight in the index, helping to push the average undervaluation even lower.

It is not on the whole surprising that currencies globally are looking a bit less supersized. A healthier American economy and reduced asset purchases by the Federal Reserve are a recipe for a stronger dollar. But American firms need to maintain their competitiveness. History suggests that even when Fed tightening is well done, it is rare that global credit conditions shift without a little scorching.

From the print edition: Finance and economics

The Subprime Auto Loan Bubble

A New York Times investigation has revealed another bubble, in this case, subprime loans on used cars. Of course this is not a surprise given the Federal Reserves ultra loose monetary policy and near zero percent interest rates that has forced banks, insurance companies, and just about everyone else to scamper to earn some return on their capital.

Auto loans to people with tarnished credit have risen more than 130 percent in the five years since the immediate aftermath of the financial crisis, with roughly one in four new auto loans last year going to borrowers considered subprime — people with credit scores at or below 640.

The explosive growth is being driven by some of the same dynamics that were at work in subprime mortgages. A wave of money is pouring into subprime autos, as the high rates and steady profits of the loans attract investors. Just as Wall Street stoked the boom in mortgages, some of the nation’s biggest banks and private equity firms are feeding the growth in subprime auto loans by investing in lenders and making money available for loans.

And, like subprime mortgages before the financial crisis, many subprime auto loans are bundled into complex bonds and sold as securities by banks to insurance companies, mutual funds and public pension funds — a process that creates ever-greater demand for loans.

Just another example of the surreptitious damage the Federal Reserve is inflicting on the economy in order to help the Big Banks.

Mises University Graduates

On my recent trip to the Oxford Union debate in the UK I had the good fortune to be able to attend a lecture by Ben Powell at the Adam Smith Institute in London. Ben attended Mises University in 1999 and 2000 and now teaches economics at Texas Tech University where he is also Director of the Free Market Institute. At his lecture I also saw David Skarbek who attended Mises University in 2004 and 2007. David now is a Lecturer in political economy at King’s College London. I also renewed my acquaintance with Sam Bowman. Sam attended the Mises University in 2009 and is now Director of Research at the Adam Smith Institute. Ben gave an outstanding lecture on the economics of sweatshops, but I was also immensely pleased to see all three outstanding graduates of Mises University and to learn of their ongoing accomplishments.


With Sam Bowman


With Ben Powell


With David Skarbek


“Something amiss…so it would seem”

The National Association of Credit Management issued its Credit Managers Index, calling it “less than impressive.” “It now appears that the economy contracted by far more than originally reported,” NACM economist Chris Kuehl said. “Add to this the latest data on durable goods and there is something amiss. Consumer confidence numbers have recovered to levels not seen since the start of the recession, but that renewed level of enthusiasm has not been enough to pull the economy forward, or so it would seem.” Most importantly the number of applications for credit increased, but so did the rejection rate. According to Kuehl. “When there are more applicants and more rejections, it is a signal that more companies in financial distress are seeking credit in the hopes that somebody will help them survive.”

Columbia, MD: June 30, 2014—This month’s Credit Managers’ Index (CMI) reading from the National Association of Credit Management (NACM) was 56.1—barely higher than it was in April, but falling well below May’s 56.8. The readings had been closing in on 60 (57.1 in November and 57.3 in January) and are still firmly in positive territory, but are now just not trending in the preferred direction. The services sector took the brunt of the impact, and the manufacturing sector did not budge, for the second month in a row.

After the readings last month, it was thought that the CMI would show continued progress, but the manufacturing sector was flat and the service sector experienced a very sharp decline—enough to drag the index down. “The drop was unexpected, which has suddenly become a common refrain as some other data releases are starting to show similar trends,” said NACM Economist Chris Kuehl, PhD. The economy is clearly not out of the woods just yet, and the latest revision of first quarter GDP came as a shock. “It now appears that the economy contracted by far more than originally reported,” Kuehl said. “Add to this the latest data on durable goods and there is something amiss. Consumer confidence numbers have recovered to levels not seen since the start of the recession, but that renewed level of enthusiasm has not been enough to pull the economy forward, or so it would seem.”

The damage was greater in the unfavorable categories although the favorable factors saw some decline as well. The combined index of favorable factors deteriorated slightly from 62.7 to 62.4, but that is still firmly in the 60 range. The biggest drop was in sales, which went from a several years’ high of 65.6 to 63.9. That is still a reading higher than at any point since November of last year, but after the surge last month, it was hoped the trend would accelerate. Dollar collections dropped out of the 60s, from 61.2 to 59.3 and amount of credit extended also slipped, from 65 to 64.8, but stayed very close to the record highs of late. New credit applications improved and that could be good or bad news. It is now over 60 for the first time since the recession, sitting at 61.5 after 58.9 last month. “The problem is that there were more rejections of credit applications as well,” Kuehl said. “When there are more applicants and more rejections, it is a signal that more companies in financial distress are seeking credit in the hopes that somebody will help them survive.”

The Perfect Debate?

Just prior to my debate at Oxford Union I asked the organizers; had there ever been an unanimous vote on any debate? They replied; oh no, that would be a very bad result because it meant that they had formulated a very poor proposition to be debated and/or that they had formed very unbalanced debating teams for and against the proposition. In my case I suppose you could declare it a perfect debate because it ended in a tie.

The Oxford Union Debate: This House Should Oppose the War on Drugs, Dr Huppart, MP for Cambridge standing

The Oxford Student reported this about the debate (paraphrased):

The case for the proposition was based on a political double standard as to how far the state could go with prohibition. The war on drugs created and gave power to drug dealers which causes crime and violence. The war on drugs is doomed to fail because the more it is advanced, the more money and power it provides organized crime.

The case for the opposition was based largely on the idea that drugs are dangerous and are otherwise useless. The “war” has really never been tried and has been too liberal, not too punitive. They argued that we must use “tough love” and that legalization would lead to an immense population of hardened drug addicts, crime, and death.

The verdict:

The debate ended in a draw and Union President Ben Sullivan had a casting vote, which meant that the opposition won.

Did Carl Menger Start WWI?

On the 100th anniversary of the start of WWI this unlikeliest of anecdotes comes to us from Forbes and Mark Hendrickson.

English: The arrest of Gavrilo Princip. (Photo credit: Wikipedia)

As we mark the 100th anniversary of the assassination of Archduke Franz Ferdinand and his wife, Sophie, and the eventual start of World War I later this summer, it is fascinating the way individuals affect history and history affects individuals.

Anecdote #1:

Here’s one that I doubt you’ve heard before: The founder of the Austrian school of economics, Carl Menger (1840-1921), might have altered the course of events in a way that made possible the double assassination in Sarajevo on June 28, 1914. Let me explain:

Franz Ferdinand might not have been the heir to the Hapsburg Empire in 1914 if his cousin, Crown Prince Rudolf, had lived to be 65. However, Rudolf had committed suicide at the age of 40 a quarter-century earlier. The reason for that suicide has been the subject of speculation ever since, and the Wikipedia entry on Rudolf lists 14 productions in film and theatre that have included Rudolf as a character. The most widely accepted explanation is that Rudolf was depressed because his father was insisting that the crown prince, who was married, end his relationship with a younger woman. However, there might have been another major cause for Rudolf’s depression.

I heard this from my mentor, the late Hans Sennholz, who in turn had heard it from his mentor, Ludwig von Mises, another Austrian economist whose lifespan overlapped Menger’s by nearly four decades, although whether Mises heard this directly from Menger or from their mutual colleague, Eugen von Böhm-Bawerk or a third party, I know not. The Emperor Franz Joseph I had appointed the brilliant Menger to be the crown prince’s private tutor/mentor accompanying Rudolf on extended travels across Europe. Menger was a visionary genius who foresaw a period of revolutions and wars that would involve the disintegration of the existing order. Understandably, Menger’s predictions depressed Rudolf, and perhaps contributed to his decision to end his life prematurely so as to avoid the approaching cataclysm that we know as World War I.

Seattle’s $15 Minimum Wage

4896456113_5fb4af117c_zThe City government of Seattle has voted unanimously to raise the minimum wage in the city to $15/hour to be done is a number of stages over the next few years. College students seem to realize that such increases could be a threat to current and longer term job prospects. According to the College Fix:

OPINION: Students and recent grads will take the back of the employment line under a steep wage increase

One of my professor’s favorite pieces of advice in “Intro to Politics,” designed for freshmen political science majors and those looking for a quick social science credit, is ominously relevant: “If you’re about to graduate, you had better take that job offer at that GAP back home.”

While no fresh graduate wants to end up back at home working at the GAP in the strip mall near the local elementary school, that’s the trajectory that the current job market is headed.

Given that the Seattle economy is highly dependent on large consumer product companies and Boeing, this could make an interesting case study of the effects of the minimum wage, especially if there is a large setback for those companies in the years ahead.

Germany Reneges on Request for its Gold

7361342500_a62d22db19_zGermany has now decided that its gold is safe in the hands of the Federal Reserve after all. The budget spokesman for Angela Merkel’s Christian Democratic Union party, Norbert Barthle, said “The Americans are taking good care of our gold.” Germany initially made the request in January of 2013 after attempts to inventory the gold in 2012 were rebuffed. Juergen Hardt, also from the Christian Democratic Union party told reporters in May that there was no concern that German gold in the New York Fed has been tampered with. “It’s my view that the gold reserves should be stored wherever they might be needed in an emergency.” Of course Germany has never seen or possessed its gold. It obtained the gold in exchange for its surplus dollars in international trade prior to the breakdown of the Bretton Woods system. So I guess there really is no cause for concern.

Green and Pink Skycrapers to turn out in the Red?

6764CNN reports today that in China they plan to build the world’s tallest skyscraper. It has been designed to be very environmentally friendly i.e. green, and will be in the color pink. In my paper “Skyscrapers and Business Cycles” I show that historically speaking there is a correlation between the building of the world’s tallest skycraper and world economic crisis. I also provide reasons related to the Austrian Business Cycle theory why the correlation might hold true. Because these record setting skyscrapers often open for business in the midst of a world economic crisis they typically fail as an investment and often operate “in the red” for many years to come. My guess is that the two Phoenix Towers planned for Wuhan, the capital of Hubei province in China will meet the same fate.

Rothbard’s Theory of the Great Depression featured in course at Prager University

Course Description: A new history of the Great Depression is emerging. One that acknowledges the role that government played in causing and prolonging it, and the constructive role that free enterprise could have played, if it were given the chance. In this video, UCLA economist Lee Ohanian explains how Herbert Hoover, widely misunderstood as a champion of the free market, actually turned what should have just been a recession into a depression due to his mistrust of the market.

Although Rothbard is not specifically mentioned in the video, Professor Ohanian does reference Murray Rothbard in his research published in academic journals. This “new” emerging theory of the Great Depression should be rightly labeled the Rothbardian theory. It has much to offer us today in terms of understanding the Housing Bubble, the financial crisis, and the failure of either “federal stimulus” or “quantitative easing.”

Hoover and the Great Depression Video

My Oxford Union Debate Team

At the Oxford Union, debates are carried out in teams. My team consisted (from left to right) of a Liberal Democrat Member of Parliament from Cambridge, Julian Huppert, myself, David Browne, the student member from Merton College, and Richard Cowan, the former Director of the National Organization for the Reform of Marijuana Laws (NORML). We were opposed by Joseph Miles from Wadham College, Kathy Gyngell fo the Centre for Policy Studies, Neil McKeganey, the Director of the Centre for Drugs Misuse Research, and Sarah Graham who is on the U.K. Advisory Council of the Misuse of Drugs. The Oxford Union is one of the oldest and most prestigious debating societies and is strongly committed to the principle of free speech. Past debate presenters include the Dali Lama, Mother Teresa, Albert Einstein, former US Presidents, UK Prime Ministers, and other leading politicians and diplomats, as well as leaders from the field of art and entertainment.

VLUU L110, M110  / Samsung L110, M110

Institute for Economic Affairs

On my way to Oxford to participate in the Oxford Union debate, I stopped off in London to tour the venerable Institute for Economic Affairs which has been promoting free market ideas for many decades. I had the great pleasure to contribute a chapter to one of their book publications — Prohibitions a few years back. I was given a great tour of the facilities and had a great conversation with Dr. Steve Davies about the economic crisis, current policies issues and the challenges and strategies of free market organizations.

Entrepreneurship in the Quarterly Journal of Austrian Economics

qjaeSamuel Bostaph provides an excellent overview, analysis, and criticism of theories of entrepreneurship including Mises, Schumpeter, and Kirzner in this article.

Christopher Brown and Mark Thornton show that Richard Cantillon’s theory of entrepreneurship (adopted later by Knight and Mises) was crucial for his discovery of economic theory in this article.

ABSTRACT: Richard Cantillon is credited with the discovery of economic theory and was the first to fully consider the critical role of entrepreneurship in the economy. Cantillon described entrepreneurship as pervasive and he casted the entrepreneur with a pivotal role in the economy. Using a sample of models from Cantillon’s Essai, we provide evidence that his theory of
entrepreneurship was the fundamental tool by which he constructed economic theory and that absent his theory of entrepreneurship his theoretical constructions fail. We believe this discovery both highlights the importance of entrepreneurship and contributes to our understanding of the nature of economic theory.

The entire issue of the Quarterly Journal of Austrian Economics can be found here.