Archive for Frank Hollenbeck

Confusing Capitalism with Fractional Reserve Banking

vault2Mises Daily Wednesday by Frank Hollenbeck:

Low interest rates combined with high-risk fractional reserve banking creates a powder keg on which we’re sitting today. It’s a government- and central bank-created problem, but capitalism gets the blame.

 

Why Timid Reforms of Central Banks Won’t Work

Euro banknotes with chain and padlock on white backgroundMises Daily Monday by Frank Hollenbeck:

Those who are calling for small reforms like changes to the Fed’s dual mandate are wrong. It is now clear that the Fed and the European Central Bank are hard-wired to inflate the money supply while encouraging banks to make excessively risky loans. Radical changes are needed

The European Central Bank’s House of Cards

6777Mises Daily Wednesday by Frank Hollenbeck:

The European Central Bank’s recent move to negative interest rates is a sign that the ECB is hitting the panic button.

Europe and Deflation Paranoia

European Central Bank in frankfurt.Frank Hollenbeck writes in today’s Mises Daily:

There is a current incessant flow of articles warning us of the certain economic calamity ifdeflation is allowed to show its nose for even the briefest period of time. This ogre of deflation, we are told, must be defeated with the printing presses at all costs. Of course, the real objective of this fear mongering is to enable continued government theft through debasement. Every dollar printed is a government tax on cash balances.

There are two main sources of deflation

Why Keynesian Economists Don’t Understand Inflation

putting the coinsFrank Hollenbeck writes in today’s Mises Daily

Unnoticed by many mainstream economists is the fact that we are actually having the inflation everyone was so worried about back in 2009. It is simply showing up in asset prices instead of consumer prices. For some reason we consider higher food prices as bad and something to be avoided, while higher home prices are viewed as a good thing and something to be cheered. But they are both a reduction of your purchasing power. Today, home prices outpace wage growth significantly in many markets, and remain at high bubble-like levels, pricing homes out of reach of many young couples. Their incomes have less purchasing power: the money can buy less of a house, just like it can buy less of a hamburger.

By setting an inflation target, the FED did not let deflation run its course after the crash of 2008, and that was a big mistake. During the 2001-2007 boom years, housing prices shot up. This speculative bubble led to massive overbuilding of both private homes and commercial properties.

Video: Hollenbeck on Exchange Rates and the Big Mac Index

Frank Hollenbeck sends along this video explaining in further detail his discussion from the weekend’s Mises Daily.

The Euro Is Not Overvalued (Nor Is Any Other Currency)

Change your moneyFrank Hollenbeck writes in today’s Mises Daily: 

The Economist magazine publishes twice yearly the Big Mac Index (video) which measures the “over- or undervaluation of a currency. Of course, the price of a hamburger has more to do with the cost of labor and rent than with the cost of the bun, meat, or pickles in a Big Mac. It is also a non-traded good, so we should not expect arbitrage to force uniformity in prices across countries or regions. The Economist is trying to sell magazines, so it is justified in being less than precise. However, professional economists should not be using this index, or any index, to identify a currency as undervalued or overvalued. In reality, such statements are total nonsense.

The value of a currency, as reflected in the exchange rate, is determined by supply and demand. The price of rice is not overvalued nor is the price of apples undervalued. Such a statement would be considered idiotic for rice or apples, but is considered justified for exchange rates. Equilibrium exists where the quantity demanded is equal to the quantity supplied. No one is overpaying or underpaying. To suggest that someone is indeed “overpaying” implies the buyer is irrational.

Video: Hollenbeck on Income Inequality

Frank Hollenbeck discusses income inequality and central banks. This video supplements today’s Mises Daily article.

 

How Central Banks Cause Income Inequality

6653Frank Hollenbeck writes in this weekend’s Mises Daily:

This brings us to the second undesirable and unjustified source of income inequalities, i.e., the creation of money out of thin air, or legal counterfeiting, by central banks. It should be no surprise the growing gap in income inequalities has coincided with the adoption of fiat currencies worldwide. Every dollar the central bank creates benefits the early recipients of the money—the government and the banking sector — at the expense of the late recipients of the money, the wage earners, and the poor. Since the creation of a fiat currency system in 1971, the dollar has lost 82 percent of its value while the banking sector has gone from 4 percent of GDP to well over 10 percent today.

The central bank does not create anything real; neither resources nor goods and services. When it creates money it causes the price of transactions to increase. The original quantity theory of money clearly related money to the price of anything money can buy, including assets. When the central bank creates money, traders, hedge funds and banks — being first in line — benefit from the increased variability and upward trend in asset prices. Also, future contracts and other derivative products on exchange rates or interest rates were unnecessary prior to 1971, since hedging activity was mostly unnecessary. The central bank is responsible for this added risk, variability, and surge in asset prices unjustified by fundamentals.

Why Central Bankers Should Not Tinker with Aggregate Prices

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Frank Hollenbeck writes in today’s Mises Daily:

In other words, a little inflation is good for some economists because it allows entrepreneurs who made bad decisions, today and probably tomorrow, to see another day. It is surprising to see free-market economists support such logic, however. Capitalism is a system of profits and losses where entrepreneurs who survive are those best able to meet society’s needs. Losses are actually more important than profits since they prune out those who do not serve consumers as well, allowing resources to be channeled to where they are most needed. The movement of prices relative to each other in an economy can doom some business owners, but relative prices, and not aggregate prices, are a key to understanding the economy.

After the Taper: The Fed’s Non-Plan Is Unchanged

6621Frank Hollenbeck writes in today’s Mises Daily:

Since 2008, the central bank has reduced interest rates to almost zero with little to show for it. You can bring a horse to water in a trough, pond, or lake, but you cannot make him drink. Most of the added liquidity has found its way into excess reserves. Banks are not lending because they have few creditworthy customers who want to borrow. The household sector is still deleveraging and has less appetite for more debt, and the business sector is careful about making future investments in a financial and economic environment on unstable footing. Businesses are keenly aware of the malinvestments never cleaned up after the last bubble and of the price distortions of current monetary policy. Why would businesses stick their necks out if they suspect a painful adjustment is around the corner?

Since the first channel has failed, only the second channel remains. Economists are generally in agreement, however, that there is no long-run trade-off between inflation and unemployment. The Keynesians and monetarists believe that there may be a short-run trade-off. If people have adaptive expectations, (based on the recent past) then monetary policy that creates inflation will reduce unemployment by lowering a worker’s real wages. Of course, once a worker realizes he has been fooled, he will demand an increase in nominal wages to bring his real wages back up to previous levels. The gain in employment is only temporary. If, instead, people base their expectations rationally and are not fooled, the neo-classical position, there is no short- or long-run trade-offs between inflation and unemployment.