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NJ Political Heavyweights Debate Gold Standard

599px-1857_gold_dollar_obverseDuring the past two weeks, James Florio, a former Democratic governor of New Jersey, and Steve Lonegan, the 2013 Republican nominee for U.S. Senate  wrote opposing op ed pieces on the gold standard for New Jersey’s leading newspaper.   That the gold standard is now being seriously debated by state-level pols in a mainstream media outlet is a remarkable and welcome development.

The piece by Florio–whose signature act as  governor was significantly raising State taxes during the throes of the 1990-91 recession–is predictably inane, reiterating the tired old litany of misconceptions about the gold standard.  Florio even conjures up two new ones.  He bemoans  unspecified “environmental harm”  associated with seeking new gold supplies and cites the potential health hazards in disposing of arsenic trioxide, a  toxic byproduct of the gold-mining process.  Florio does not tell us if we should discontinue the large-scale use of this chemical compound in forestry products, colorless glass production, and electronics.  Nor does he call for rescinding the FDA’s approval in 2000 of the use of  arsenic trioxide (Trisenox) for treating certain forms of acute leukemia.

In his response , Mr. Lonegan does a good job of rebutting Florio’s spurious charges against the gold standard.  Unfortunately, Lonegan gets himself into difficulties by his failure to recognize the difference between the pre-1914 genuine “classical” gold standard and the post-World War 2 Bretton Woods system, which was an intergovernmental price-fixing scheme masquerading as a gold standard.  Lonegan laments the collapse of the Bretton Woods phony gold standard  in 1971, which was inevitable and long foretold by leading advocates of the classical gold standard like Jacques Rueff, Henry Hazlitt, Michael Heilperin, and Ludwig von Mises.  Even more worrisome is the fact that Lonegan accepts the view promoted by proponents  of restoring a Bretton Woods-type monetary system like Nathan Lewis and Steve Forbes that a mystical property of gold somehow ensures a stable value of money without limiting its supply.  Writes Lonegan:

 The gold standard insures the quality, i.e. buying power, of the dollar. It doesn’t limit the quantity of money. As economist Nathan Lewis has calculated, from 1775 to 1900 the money supply increased by 163 times while gold reserves rose only 3.4 times. The gold standard defines, rather than restricts, money.

In fact, it is precisely by  strictly limiting the supply of money that governments and central banks were able to create  that the classical gold standard enabled the value of money to increase, i.e., the level of prices to gently decline,  for over a century leading up to World War 1.  This deflation of prices , especially after the Civil War,  was a necessary complement to the tremendous growth in productivity and living standards that occurred in the U.S.  This experience directly contradicts the alarmist contentions of Lewis, Forbes et al.  that falling prices lead to depression and unemployment.

For those who are interested in a critique of the monetary doctrines of the advocates of fixing or “targeting’ the price of gold while maintaining our current fiat dollar,  I have recently written two short pieces on the topic (here and here).

 

My Upcoming Speech at Columbia University

imagesTopic:

Adam Smith, F.A. Hayek, Ludwig von Mises.

Smith, Hayek and Mises are not only important figures in economics, but in ethics and political philosophy too. The former would have won the Nobel Prize in economics, if this award were given during his lifetime. The middle mentioned one actually did have this honor bestowed upon him, in 1974. The latter should have won this too, but, scandalously, did not. These three are very important for students in that modern economics courses, and economists, tend to ignore all of them, particularly the latter two, who were members of the Austrian School of economics. Block’s lecture will attempt to right this imbalance.

Speaker:

Dr. Walter Block
Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics
Joseph A. Butt, S.J. College of Business, Loyola University New Orleans

Time and Location:

Monday, November 10, 2014, 7:30pm.
702 Hamilton Hall, Columbia University (entrance at 116th and Broadway or Amsterdam)
Free and open to the public

Hosted by the Columbia College Libertarians (libertarians@columbia.edu)

More Politics Means More Conflict

kids2Mises Daily Tuesday by Ryan McMaken:

A recent study shows that one’s political views are now the most widespread source of discrimination and conflict in American society. Politics is now more important than ever because the state is now more powerful than ever.

 

Could the ‘Taylor Rule’ Have Prevented the Housing Bubble?

broken measureMises Daily Tuesday:

Tom Woods and Mateusz Machaj discuss the problem with John Taylor’s rule for monetary policy.

Sweden Hits the Zero Bound

NeutroisThe Swedish central bank Riksbanken has just lowered the interest rate to zero (yes, zero) percent, which was reported at a press conference in Stockholm today. This is a response to a couple of months of deflation, and with it enormous pressure from both politicians and Keynesian know-it-alls to quickly and massively lower interest rates. Of course, the interest rate was already very low and at zero it can get no lower. In other words, we’ve reached the zero bound. Why? Depression phobia.

According to the Riksbanken, they do not expect to raise the interest rate until mid 2016. The decision means, according to media reports, that the central bank now “pays” a negative 0.75 % on banks’ funds held at Riksbanken.

The immediate effect in the financial and money markets was an expected fall of the krona’s (the Swedish currency) exchange rate. To the central banksters, journalists, and pundits this is great news, since this means a booming export sector, more expensive exports, and therefore price inflation to relieve the country from the horror of a possible deflation spiral.

I guess we’ll see. Sweden has a history of manipulating its currency, a standard “solution” in the 1970s and 1980s that led to the country suffering a depression in 1992. During the past two decades, there has been political consensus around cutting down expenditure through rolling back the welfare state, paying back public debt, and lowering taxes – partly to regain the lost confidence. Today’s decision by the Riksbanken is not an outright devaluation of the krona, the preferred measure of “old” Sweden, but has a similar effect.

Update: In an official statement, the Riksbanken notes that the Swedish economy is “relatively strong” and that the economic outlook is “improving,” but that inflation is “too low” (the central bank’s target is 2% price inflation). The only major potential problem is the public’s debt level, which is too high. (Especially mortgages, in a real estate market that is generally considered to be a bubble.) The debt level will not, of course, get lower with lower interest rates. For this reason, many “experts” expect a legal amortization requirement on mortgages in the near future to lower the public’s debt as well as “cool off” the real estate market.

Update 2: In the Q&A following the press conference, Riksbanken chairman Stefan Ingves makes it very clear that there are “no technical limitations” to lowering the interest rate (way) below zero. But this is not necessary at present and is not a measure included in the central bank’s prognosis. It is possible and may be a preferred course of action should the economic situation deteriorate, states Ingves.

The Great Deformation Is Now in Polish

299486-352x500David Stockman’s huge volume on the background of the 2008 financial crisis, and on the role of the fed and government bailouts in the continuing crisis, is now available in Polish.

The Polish edition, Wielka deformacja, czyli jak skorumpowano amerykański kapitalizm, appears to be available for purchase at Amazon.fr. It’s also available directly from the publisher.

We’ve covered the English version of the book extensively here at Mises.org. Here is a Q and A with David Stockman about it, and Stockman’s author page features several selections from the book.

Robert Wenzel has posted the introduction from the new book (in English.)

Be Sure to Tune In for Mises Circle November 8

The West Coast Regional Mises Circle in Costa Mesa is sold out, but be sure and mark your calendars so you can join us live via Mises.org. On November 8 —one week from Saturday— we’ll be broadcasting all the lectures and speeches from Costa Mesa. I’ll provide you exact links as the event draws nearer.

Here’s the schedule:

Tentative Schedule (all times Pacific)
Grand Ballroom

10:20 a.m. Welcome
10:30 a.m. Jeff Deist “The Case for Optimism”
10:50 a.m. David Gordon “Thinkers Who Challenged the State”
11:10 a.m. Lew Rockwell “Against the State”
11:30 a.m. Presentation of the 2014 Mises Entrepreneurship Award to Louis E. Carabini
11:40 a.m. – 1:00 p.m. Lunch and discussion, bookstore open
1:00 p.m. Judge Andrew P. Napolitano “The Natural Law as a Restraint Against Tyranny”
1:30 p.m. Ron Paul “Freedom Doesn’t Come from Government”
2:00 p.m. break, bookstore open (final opportunity to purchase books for speakers to autograph)
2:20 p.m. Speaker Panel Q&A
3:00 p.m. Closing remarks
3:10 p.m. Adjourn

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The Many Ways the State Taxes the Poor

6938Mises Daily Monday by Julian Adorney:

Contrary to the political myth, poor people do indeed pay taxes, and they pay into a system that robs them of control over how they can spend, save, or invest their own property. In addition, the poor are taxed by a perverse incentive structure that punishes their financial success

Why People Trade

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Obamacare Is Not a Revolution, It Is Mere Evolution

healthMises Daily Weekend by Roger McKinney

Liberty-loving people are right to be appalled by the Patient Protection and Affordable Care Act. However, just about every evil in the legislation has already been inflicted on the market through 50 years of state destruction of the healthcare market.

Looking for Introductory Materials on Austrian Business Cycle Theory?

SS466Michael Pollaro, Mark Thornton, and I went looking for some good introductory materials to help newcomers understand Austrian Business Cycle Theory.

Pollaro posted this helpful article over at Forbes, noting:

Indeed, we would say that without ABCT investors are at a competitive disadvantage, for it is only through ABCT that one can truly understand what is underpinning the economies and financial markets of today.

And he links to several resources including this journal article by Joseph Salerno, and this very easy breakdown by John Cochran.

There are many other resources, Mark and I might point you to as well.

For starters, there is Rothbard’s Economic Depressions: Their Cause and Cure, and Richard Ebeling’s collection of essays, including works by Hayek, Mises and Garrison.

Other resources include:

This survey of ABCT on the Mises Wiki.

Manipulating the Interest Rate: a Recipe for Disaster by Thorsten Polleit

Austrian Business Cycle Theory: A Brief Explanation by Dan Mahoney.

Explaining Malinvestment and Overinvestment by Larry J. Sechrest.

And several videos including:

Read More→

Why Money Doesn’t Measure Value

gold2Mises Daily Friday by Robert Murphy:

Robert Murphy, contra Real Clear Markets and Forbes, explains why money is not like a ruler and doesn’t measure value.

 

Patrick Barron: The End of the US Dollar Imperium

Jeff Deist and Patrick Barron address the issue of monetary imperialism. How does the US use the dollar as a weapon of economic and cultural power? How long can it last? What might the unprecedented collapse of a worldwide reserve currency look like? And how do the BRIC nations and Asian central banks fight back?

Patrick Barron is a private consultant in the banking industry. He teaches in the Graduate School of Banking at the University of Wisconsin, Madison, and teaches Austrian economics at the University of Iowa, in Iowa City, where he lives with his wife of 40 years.

Also available at Stitcher and Mises.org.

Public Accommodation and Social Engineering

6936Mises Daily Friday by Nicholas Freiling:

Public accommodation laws that prohibit discrimination render property rights moot and create a legal system designed to force agreement with the state’s official moral code.

Legal Victory for the IRS

160px-IRS.svgWith the IRS scandals of early 2014 all but a distant memory, some closure is coming to the groups that the long arm of the tax law harassed. Unfortunately the verdicts aren´t going the way the affected would like.

The IRS may have inadvertently figured out how to win its legal battles against aggrieved tea party groups: Give them what they wanted in the first place — tax-exempt status.

That was a major reason a Republican-appointed federal judge on Thursday threw out two lawsuits brought by more than 40 conservative groups seeking remedies for being singled out in the tea party targeting scandal, a victory for the IRS.

More troubling than the apparent lack of justice (we wronged you, but then later made it up to you so we don´t need to be punished?!) is the reasoning behind the Federal Judge´s decision.
Judge Reggie Walton of the U.S. District Court of the District of Columbia dismissed almost all counts brought against the tax-collecting agency in two cases, ruling that both were essentially moot now that the IRS granted the groups their tax-exempt status that had been held up for years.Walton, a President George W. Bush-appointee, also said individual IRS officials could not be fined in their individual capacity for allowing such treatment because it could hurt future tax enforcement.
I guess I missed the memo where enforcement of the law included provisos to protect the ability of the law-breaker to further break the law in the future. I mean, wasn´t the original problem that the IRS was unduly harassing certain groups? If that´s the case, and the IRS is found guilty (which it was, just not punished), shouldn´t the law try to stop such harassment from happening again.
To use an analogy, let´s say I park in of my neighbour´s lane so he can´t leave to get to work in the morning. A couple days later I move my car, and the obstruction is gone. My neighbour takes me to court, and the court agrees that I unduly blocked him, but I´ve since moved my car so it´s a moot point. My neighbour says that´s ridiculous, and wants charges against me for trespassing on his property and stopping him from leaving. The court finishes by telling my neighbour that nothing can happen to me personally because that would dissuade me from parking in his lane in the future and blocking him in.

If you think that I´m getting off scot-free in the example above, I can only think of what you think of the IRS right now.

There Was No Contagion

Eurozone_2009.svgIf you use the word “contagion” these days, people are likely to think you’re talking about ebola. Backup five years ago, and contagion was the buzzword to describe the financial crisis.

The European government bond market was falling apart, and allegedly it had nothing to do with the precarious public finances they were built on. Instead the excuse was that  there were a couple bad apples (Greece, Ireland, and than Portugal), and these isolated cases were shaking investors’ nerves and causing them to be irrationally weary about supposedly “safe” countries, like France or Germany.

At the time I said it was a completely ridiculous use of the word contagion, as normally one would only use that if the person infected was not culpable in transmitting the disease.

The one common theme amongst European public finances was that they had high tax rates and even higher levels of expenditure. Deficits, extremely large in some cases (Ireland), were practically the norm. If countries were having a tough go issuing more debt, it wasn’t because of some vague cause like contagion, but because of years of bad political choices left them in terrible financial shape.

As it turns out, two NBER economists have drawn the same conclusion with a retrospective look at the Eurocrisis. Not only could they find only very small “spillover effects” (contagion) during the crisis, but investors didn’t seem that worried either.

Of course, if there was no contagion, and investors weren’t even erroneously acting like there was one, who was behind all the talk? As always, politicians searching for an excuse for their shoddy finances latched on to a notion and got the world worked up in a frenzy, giving them free reign to pass whatever policies they liked to keep their financial endgame going a little while longer.

(Cross posted at Mises Canada.)

Larry White’s Baffling Interview on the Gold Standard

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

No Bubble Here!

Back when I was an economist for a housing agency, I heard about a lot of pricey marketing gimmicks. This is a new one:

Writes Robert Wenzel:

Paging Mark Thornton: The Ultimate Sign of a Chinese Real Estate Bubble?

As part of a marketing campaign by a property developer in Nanjing, China, to entice people to view his apartments, the developer arranged for a group of people to have their lunch inside a glass dining room, suspended by a crane some 66 feet in the air.

Understanding “Quid Pro Quo”

6934Mises Daily Thursday by  Gary Galles:

The term “quid pro quo” has been twisted to now include government handouts and state-mandated exchanges, so long as the value of goods trading hands are deemed to be of “equal value.” True voluntary exchange, on the other hand, is something quite different.

The Index Card of Allowable Opinion

6935Mises Daily Thursday by Tom Woods:

Tom Woods explains the “unacceptable“ opinions behind freedom and free markets.

 

 

Check out Tom Woods’s interview about the book on Mises Weekends: