It doesn’t get any more pathetic than this. The Fed cuts the absurdly low money market rate by another 50 basis points at 10AM and before noon the Donald is banging the podium for more. 

So if you ever needed a final warning to get out of the casino, today’s back-to-back eruption of financial insanity from the two most powerful economic actors on the planet should be it. 

Even then, we might be inclined to give the Donald a tad bit of slack. After all, he’s an absolute dunderhead on economics and spent a lifetime as a leveraged real estate speculator, where, in fact, lower rates are always, but always, to be welcomed when you’re rolling the dice with other people’s money. 

Still, it doesn’t get any more primitive or dangerous than the Donald’s current conviction that the price of money should be graduated lower based on the current year international league tables of GDP growth or the level of presidential braggadocio, as the case may be. 
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Effectively, however, the tiny posse of fools who run the ECB and the BOJ are burning down the financial foundations of their own economies. So the Donald insists we burn down ours, too. 

Folks, that’s the sum, substance and full extent of his “thinking”: 

“As usual, Jay Powell and the Federal Reserve are slow to act. Germany and others are pumping money into their economies. Other Central Banks are much more aggressive,” Trump said, referring to the Fed chairman. 
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“The Federal Reserve is cutting but must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve to LEAD. More easing and cutting!”

By contrast, the empty suite and sniveling coward who announced today’s emergency 50 basis point cut deserves no quarter whatsoever. The man is so petrified of a hissy fit by the boys, girls and robo-machines in the trading pits that he has just plain abandoned any pretense of rational financial thought. 
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In fact, you could dismiss his meandering comments at the post-announcement presser as risible drivel and be done with it.

Except, except….Powell and his merry band are so drunk with financial power that they now believe any ragged, threadbare, illogical excuse to display their muscle and placate the crybabies and bullies of Wall Street is all that’s required. That is, there are no trade- offs, no risks—just cut and print, rinse and repeat. 
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Thus, spake Pusillanimous Powell, averring that the central bank’s action would provide– 

“….a meaningful boost to the economy” by loosening financial conditions and shoring up business and household confidence.

“We saw a risk to the outlook for the economy and chose to act,” Powell said, noting the impact on tourism and travel and on company supply chains. “I do know that the U.S. economy is strong…I fully expect that we will return to solid growth and a solid labor market as well.”

“We do recognize that a rate cut will not reduce the rate of infection, it won’t fix a broken supply chain; we get that, we don’t think we have all the answers,” Powell said. Still, he said, it will help support “overall economic activity.”

Needless to say, this is group think run amuck. There is apparently no longer a single Fed head who understands that interest rates are not merely one-way control dials, which exist solely to enable the FOMC to fine-tune the path of the nation’s $22 trillion GDP. 

Somewhere over the last decades of Keynesian central banking, the truth that savers are being harmed every time the Fed pleasures Wall Street speculators with another rate cut has been lost completely. So has the notion that rate signals intended to encourage homeowners to buy a house or businesses to build a plant also foster ever more carry trade speculation on Wall Street and reward C-suites for investing in Wall Street pleasing buybacks and M&A deals, not productive investment in plant, equipment, technology, intellectual capital and human resources. 

Accordingly, we have now reached the point were the Fed is no longer even in the business of safeguarding sound money and financial system efficiency and stability. Instead, it’s morphed into a grand macroeconomic underwriter, purporting to insure the US economy against any and all bumps in the road, regardless of their origin. 

We already had them insuring against the Donald’s Trade War madness with 3 rate cuts last summer. Then with their repo facility madness in the fall, they were essentially insuring against the adverse rate and growth impacts of Washington’s borrowing binge. 

And now they are throwing the untoward impacts of plagues and flood onto their underwriter’s table. So presumably anything could be next—even a mass outbreak of hangnails and toe fungus.

In fact, the true nature of central bank intervention in financial markets is just the opposite. To wit, tampering with asset prices is the most dangerous and potentially destructive thing any agency of the state could undertake because it fuels greed, recklessness, speculation, malinvestment and economic errors throughout the length and breadth of the system; and, to paraphrase Keynes’ famous observation about inflation, in ways that not one in a million could possibly comprehend. 

In other words, what was announced this morning had nothing to do with central banking by any even loose historical definition of the term. It was actually another, even more over-the-top exercise in monetary central planning of the GDP and all that is subsumed under its $22 trillion girth. 

But why in the world would anyone—even arrogant, self-regarding Fed heads—believe they can comprehend the infinite complexities and feedback loops of the GDP? That is, the $22 trillion here and the $85 trillion worldwide economy in which it is intricately and intimately intermeshed. 

Yet if you presume to know that a 1.05% money market rate rather than a 1.55% rate will produce optimum economic outcomes under the shadow of Covid-19 uncertainty and disruption, then you positively do need to comprehend all the highways and bi-ways weaving through $22 trillion of input/output tables that only crudely comprehend the blooming, buzzing mass of activity which is actually the US economy. 

Self-evidently, the Fed heads no longer even try to explain the macroeconomics of rate-cutting when they are cheek-by-jowl with the zero bound. They just assert ex cathedra that it will do some good—and not even from the actual quantitative flow economics that the Fed historically avowed. 

That is, back in the day, if credit was not flowing to homeowners because high rates made borrowing prohibitive, it turned the rate dials lower in order to reduce bank disintermediation and thereby give S&Ls the means to lend, home-buyers the incentive to borrow and home-builders a boost to their order books. 

And, by contrast, if rates got so low as to cause building activity to skyrocket, thereby fueling rampant wage, lumber and building lot inflation, they proceeded to dial up rates to cool things down. 

We think the powers of the free market were always up to the task of credit flow regulation on their own: Freely mobilized interest rates always clear markets and bring forth more savings if needed, and more credit demand where economics require. 

So central bank regulation of credit flows was never really necessary, but here’s the thing: In the present regime of massively subsidized and mispriced capital which the world’s central banks have fostered, there simply isn’t any credit flow channel to regulate. 

Debt capital has become virtually unlimited and tantamount to free so there simply are no interest rate or credit supply barriers to spending and investment. 

Likewise, the world economy has become so over-invested and malinvested in physical production capacity that the old-fashioned “demand-pull’” inflation just doesn’t happen. Or at least until now it hasn’t because the subsistence rice paddies and villages of the developing world had not yet been drained of cheap labor. 

That’s why today’s monetary central planners don’t even talk about credit flows to the main street economy any more. There is no problem there for their ministrations to solve. 

Instead, they talk about “easing financial conditions” and “supporting financial confidence”. That is to say, monetary policy is no longer even about money or credit; it’s an exercise in state-directed psy-ops. 
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And when you look into the real purpose of Fed psy-ops, which was the explicitly acknowledged purpose of today’s emergency rate cut, you quickly come to understand why Wall Street has morphed into a casino and the Fed its dutiful handmaid. 

To wit, “easier” financial conditions mean low credit spreads and high stock prices or “risk on”. By contrast,”tighter” financial conditions are defined by widening credit spreads and falling stock prices and PE multiples and “risk off”. 

Needless to say, in today’s debt-entombed main street economy, the Fed’s psy-ops with respect to “financial conditions” are neither here nor there. No wannabe homebuyer is influenced by the Fed’s psy-ops and no businessman stocks or destocks inventories or adds or subtracts from CapEx budgets based on whether the casino has been coaxed into a temporary risk-on or risk off mood by the Fed heads. 

Stated differently, Fed policy is now almost exclusively about keeping stock prices high and rising, and nipping any even half-assed effort at correction in the bud, and violently so. 

Self-evidently, today’s grand exercise in psy-ops failed spectacularly and like never before. The casino shifted by 1200 Dow Points between the post-cut announcement high and the intra-day low. And in the wrong direction! 

Moreover, that bust comes on top of the 4800 Dow point plunge from the February 19th high to the February 28th intra-day low, which was followed by a 2000 point rise from last Friday’s low to Monday’s insane closing high. 

In other words, the Fed long ago exited the sound money business. After the great financial crisis and its balance sheet pumping spree thereafter it also existed the credit flow control business. 

And with today’s monumental error, it has now, apparently, euthanized its psy-ops tool, as well. 

In the days ahead we will elaborate on the truly dangerous new financial world that now exists in the wake of the Fed’s self-defenestration. But in the meanwhile, Gary Kaltbaum captured the madness now loose in the land in his trenchant commentary issued immediately after the Fed’s announcement:

Powell lowered rates in the past few minutes because the market was heading lower today. He wasn’t going to make the move today until he saw the DOW down 300 early. This is not about a virus. This is not about an economy. This is about the markets…AGAIN! This is about the Bernanke, Yellen, Powell, Kuroda, Carney, Draghi, LaGarde markets that have made markets addicted to their easier money moves with an unaccountable and limitless amount of conjured up money. Do you not think he sees what we have reported to you? That like a well-trained dog, markets react to his every whim?

So what did Powell just do…or at least try to do: He screwed Aunt Mary and Uncle Bob…AGAIN! Yes…how dare you want risk-less income investments! How dare you want a decent money market rate! Screw you Mr. and Mrs. Saver.

The continuation of the asset bubble. (SEE A CHART OF ANY INDEX PAST 11 YEARS) A widening of the wealth gap. Yes…all these politicians complaining about the wealth gap? Look no further. The continuation of the distorting or price and yield in bond markets.

BOTTOM LINE: Another in a long line of moves to stanch any bleeding in the markets. Mr. Powell is easily Mr. Obvious. By the way, do you know how pundits and futures markets give percentage chances of rate cuts in the future? Since we have nailed these rate cuts all the way down, here is our latest.

WE GIVE IT A 100% CHANCE THAT WE WILL NOT ONLY EVENTUALLY BE BACK AT 0% BUT WE WILL EVENTUALLY DO THE NEGATIVE RATE DANCE. BOOK IT NOW!

LASTLY: If we ever get to the day where markets do indeed shoot the middle finger back at these market interlopers…head for the hills. If we ever get to the day where the markets see these moves as desperation…head for the hills. Initial reaction…rally 700 points in minutes…drop 600 points in minutes…rally back 300 points in minutes. Welcome to your central bank markets. He got that last bit right. It may well have happened within minutes after he hit the send button.

Reprinted from The Ron Paul Institute for Peace and Prosperity.

We often hear people referred to as “Hamiltonians.” But that term always makes me wonder, which Hamilton do you mean?

I recently had the opportunity to speak to a class at the West Virginia University School of Law. The subject was the constitutionality of federal marijuana prohibition.

As I told the class, this is an open and shut case. It’s clearly unconstitutional. If you doubt me, ask yourself why alcohol prohibition required a constitutional amendment.

The simple fact is there is no delegated power for the feds to regulate marijuana within the borders of a state.

But over the years, federal courts have reinterpreted various clauses in the Constitution to “authorize” the federal government to do all kinds of things it was never intended to do. As Justice Clarence Thomas said in his dissent in the Raich medical marijuana case, if the federal government can regulate six plants in a woman’s back yard, the federal government has “no meaningful limits.”

And that’s where we are today  – at least according to federal judges and politicians.

As the professor of the class I spoke to put it, this is the Hamiltonian legacy.

During the class, she divided the students up between “Hamiltonians and Madisonians” for a debate. I couldn’t help but interject and ask, “Which Hamilton are you talking about?”

During the ratifying debates, Hamilton was every bit as Madisonian and Madison. He sold the Constitution as a document that gave the federal government only a few limited powers just like all the other supporters of the document. In fact, I use quite a few Hamilton quotes in my book Constitution – Owner’s Manual to explain the limited scope of various constitutional clauses.

But once the Constitution was ratified, he did a complete 180. He became an apologist for a national, centralized government with sweeping federal power – a vision of government that the ratifying conventions would have resoundingly rejected. This is precisely why Hamilton had to make limited government arguments during ratification. It was the only way the Constitution would have ever been adopted.

Consider the general welfare clause. Opponents of the Constitution worried that this phrase would open the door for the federal government to wield almost unlimited power. But in Federalist #83, Hamilton argued that their worry was misplaced because the general welfare clause was strictly limited to the enumerated powers that followed and was not a grant of general authority.

“This specification of particulars [the 18 enumerated powers of Article I, Section 8] evidently excludes all pretension to a general legislative authority, because an affirmative grant of special powers would be absurd as well as useless if a general authority was intended.”

But just seven years after the Constitution was ratified, Hamilton reversed course and argued for an expansive reading of the clause in his Report on Manufactures.

The National Legislature has express authority “To lay and Collect taxes, duties, imposts and excises, to pay the debts and provide for the Common defence and general welfare” with no other qualifications than that “all duties, imposts and excises, shall be uniform throughout the United states, that no capitation or other direct tax shall be laid unless in proportion to numbers ascertained by a census or enumeration taken on the principles prescribed in the Constitution, and that “no tax or duty shall be laid on articles exported from any state.” These three qualifications excepted, the power to raise money is plenary, and indefinite; and the objects to which it may be appropriated are no less comprehensive, than the payment of the public debts and the providing for the common defence and “general Welfare.” The terms “general Welfare” were doubtless intended to signify more than was expressed or imported in those which Preceded; otherwise numerous exigencies incident to the affairs of a Nation would have been left without a provision. The phrase is as comprehensive as any that could have been used; because it was not fit that the constitutional authority of the Union, to appropriate its revenues shou’d have been restricted within narrower limits than the “General Welfare” and because this necessarily embraces a vast variety of particulars, which are susceptible neither of specification nor of definition.

It is therefore of necessity left to the discretion of the National Legislature, to pronounce, upon the objects, which concern the general Welfare, and for which under that description, an appropriation of money is requisite and proper.

According to post-ratification Hamilton, the term “general welfare” did imply a “general authority” after the pre-ratification Hamilton emphatically rejected this reading.

Hamilton made a similar flip-flop on the necessary and proper clause. In Federalist 33, He asserted that the necessary and proper clause (along with the supremacy clause) merely stated a truism and gave no additional power to the federal government.

It may be affirmed with perfect confidence that the constitutional operation of the intended government would be precisely the same, if these clauses were entirely obliterated, as if they were repeated in every article. They are only declaratory of a truth which would have resulted by necessary and unavoidable implication from the very act of constituting a federal government, and vesting it with certain specified powers. [Emphasis added]

Hamilton went on to explain that the act of delegating a power logically implies the authority to “pass all laws NECESSARY and PROPER for the execution of that power,” but it doesn’t authorize the exercise of any additional powers. Hamilton wrote, “If there is any thing exceptionable, it must be sought for in the specific powers upon which this general declaration is predicated. The declaration itself, though it may be chargeable with tautology or redundancy, is at least perfectly harmless.” [Emphasis added]

But again, Hamiton changed his tune just a few years later and claimed the necessary and proper clause gave Congress the authority to charter a national bank, a power nowhere delegated to Congress by the Constitution.

In fact, during the Philadelphia Convention, James Madison proposed a provision “to grant charters of incorporation where the interest of the U. S. might require & the legislative provisions of individual States may be incompetent.” It was voted down 8-3.

Without an explicit constitutional authorization to charter corporations, Hamilton turned to the “perfectly harmless” necessary and proper clause to justify his bank. He rested his argument on the existence of “implied powers,” writing, “It is not denied that there are implied well as express powers, and that the former are as effectually delegated as the latter.”

Of course, this very notion contradicts his ratification-era argument that Congress was limited to its enumerated powers. He went on to argue that Congress is authorized to create a corporation because this implied power is necessary and proper.

“It is conceded that implied powers are to be considered as delegated equally with express ones. Then it follows, that as a power of erecting a corporation may as well be implied as any other thing, it may as well be employed as an instrument or mean of carrying into execution any of the specified powers, as any other instrument or mean whatever. The only question must be in this, as in every other case, whether the mean to be employed or in this instance, the corporation to be erected, has a natural relation to any of the acknowledged objects or lawful ends of the government.”

Hamilton drove his point home insisting the word necessary doesn’t literally mean “necessary,” but can simply mean needful, requisite, or even just incidental, useful, or conducive.

By Hamilton’s definition, the word necessary becomes so expansive as to include virtually anything the government wants to do. This was precisely the construction the anti-federalists objected to during the ratification debates leading Hamilton to accuse them of “exaggerated colors of misrepresentation as the pernicious engines by which their local governments were to be destroyed and their liberties exterminated.”

These two examples demonstrate how Hamilton drastically shifted from the limited federal power perspective taken by all of the supporters of the Constitution during the ratification process to a nationalist pushing for virtually unlimited federal authority. He did a classic bait-and-switch. Hamilton was a duplicitous bastard (literally a bastard.) And we should give his post-ratification pontification about the Constitution no credence.

What he said during ratification – now that matters. Because it was on that basis that the people agreed to approve the Constitution. As Thomas Jefferson said, “On every question of construction let us carry ourselves back to the time when the Constitution was adopted, recollect the spirit manifested in the debates, and instead of trying what meaning may be squeezed out of the text, or intended against it, conform to the probable one in which it was passed.”

Reprinted from the Tenth Amendment Center.

In response to the potential economic downturn in the economy arising from the spread of the Coronavirus, the Federal Reserve dropped the federal funds rate by half a point — to a range of 1% to 1.25%. Ironically, after the Fed’s announcement, the stock market dropped 786 points or 2.9%.

The Fed’s aim is to stimulate economic activity. By lowering interest rates, the idea is to get businesses to expand operations with more loans and to get consumers to go deeper into debt by purchasing more items. 

The result of the Fed’s artificial economic “boost” will be the same as it has been since the Fed was established in 1913: a bubble of malinvestment and consumer loan defaults that will end up plunging the country in a bubble-bursting recession or even depression.

That’s because genuine prosperity in a country cannot be generated by central bank manipulations. If that were the case, every country on earth would be characterized by ever-growing standards of living. In fact, a central bank does the exact opposite — it lowers a nation’s standard of living through its artificial manipulations of interest rates and its expansion and contraction of the money supply.

The never-ending cycle of monetary crises and chaos shouldn’t surprise anyone. The Federal Reserve is a socialist institution, in that it is based on the socialist concept of central planning. A central bank consists of a board of government commissars who have the responsibility of planning the monetary affairs of hundreds of millions of people.

It cannot be done. Socialism is an inherently defective economic system. It produces monetary crises and chaos, which is what we have seen in  the United States since the Fed was established in 1913.

The Fed’s monetary destruction

The United States once had the finest monetary system in the world, one based on gold coins and silver coins. That was the system the Constitution brought into existence. The Constitution expressly states that the federal government would possess the power to coin money, not print it. It also expressly states that no state shall make anything but gold and silver coins legal tender.

As Milton Friedman and the Austrian school of economic thought have shown, the Fed’s manipulations produced the 1929 stock market crash, which U.S. officials falsely blamed on “free enterprise” rather than on the Fed. That led to the Great Depression, which President Franklin Roosevelt used as the excuse for converting America’s gold-coin, silver-coin system to one based on irredeemable Federal Reserve paper notes. 

The FDR regime made it felony for any American to possess gold coins. Everyone was required to deliver his gold coins to the U.S. government, which gave people irredeemable paper promissory notes in exchange, which FDR then quickly devalued, wiping out a large portion of peoples savings. 

It’s worth mentioning that the FDR regime nationalized gold without even the semblance of a constitutional amendment. 

Then, decade after decade, the Fed inflated the paper money supply to finance the ever-burgeoning expenses of the U.S. welfare-warfare state that came into existence in the FDR regime. At the same time, the Fed continued its monetary manipulations as part of its efforts to “plan” economic growth.

The result has been nothing but a series of monetary crises and chaos. Booms and busts, bubbles and bursting bubbles. And a never-ending devaluation of people’s money, to such an extent that silver coins, which FDR, for some reason, had not made a felony to possess, were ultimately driven out of circulation by all the bad money that the Fed was flooding into the economy every decade since 1913.

Ending the Fed

Nonetheless, many Americans have come to believe that the Fed must remain a permanent fixture in American life. Despite the monetary chaos the Fed has produced for the past 100 years, and the manner in which it has plundered and looted people through inflationary expansion of the money supply, the idea of dismantling the Fed scares such Americans to death.

But dismantling the Fed is the only way to restore a society that is based on genuine economic prosperity, one based on capital accumulation and free trade. There are no short cuts to genuine prosperity. Resorting to a central bank to “stabilize” or “boost” the economy through monetary manipulation is a fool’s errand. 

Among the best things that Americans could ever do is dismantle the Fed and establish a free-market monetary system, one in which government plays no role whatsoever. The ideal is to separate money and the state, just as our ancestors separated church and state. That would be a major step in the direction of liberty and genuine economic prosperity.

Reprinted from the Future of Freedom Foundation.

The Federal Reserve moved to an enact an emergency interest rate cut after officials saw the coronavirus having a material impact on the economic outlook, Chairman Jerome Powell said Tuesday.

Powell held a news conference following the central bank’s decision to cut overnight interest rates by half a percentage point. He said the Fed “saw a risk to the economy and chose to act” in a cut announced at 10 am ET.

“The magnitude and persistence of the overall effect on the U.S. economy remain highly uncertain and the situation remains a fluid one,” he said. “Against this background, the committee judged that the risks to the U.S. outlook have changed materially. In response, we have eased the stance of monetary policy to provide some more support to the economy.”

With this change, the target rate now is back down to 1.25 percent. The target rate was last at this level during mid-to-late 2017, in the midst of several rate hikes as the Fed dared to allow rates to climb. During that period, the Fed repeatedly declared the US economy to be “moderately strong” or “strong,” although it proceeded with extreme caution even then.

Since July 2019, however, the Fed has returned to cutting the target rate, fearing that the economy is weakening. Then in August 2019, it began pumping liquidity into the repo market in an effort to shore up hedge funds and banks.

All the while we’ve been assured everything is fine.

Today’s rate cut of 50 basis points, however, is the largest rate cut since December 2008, in the midst of the aftermath of the financial crisis.

This Is Fine!

The Fed’s announcement comes only days after Powell announced on Friday that “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.”

But if fundamentals are so strong, why the need to enact the biggest rate cut in more than a decade?

This is the usual flip-flopping we’ve been witnessing for years from the Fed. The Fed announces that the economy is stable and strong, but then it refuses to raise the target rate. Or the Fed may even cut the target rate, just as “a precaution.”

Those with particularly astute memories may recall the unfortunate similarity between Powell’s statement and John McCain’s declaration in September 2008 that “The fundamentals of our economy are strong, but these are very, very difficult times.”

In cases like this, it may be prudent to completely ignore the first part of the sentence about economic strength. The only information of importance lies in the second part of the sentence—the part about “difficult times” or “evolving risks.” The similarity between these two patronizing statements, of course, does not mean that Powell will be proven wrong in the same time frame as McCain. The Fed has become quite adept at creating new bubbles when old ones appear to weaken and at propping up market confidence with new bailouts, such as we saw with 2019 rescue of the repo markets.

So, the fact that we’re seeing some downturns now does now necessarily mean a full blown recession is right around the corner. Although the coronavirus outbreak presents serious problems in terms of the supply chain, the problems in Asia could actually drive more capital to the safety of the US and the dollar, postponing the economic reckoning in the US into the future yet again.

After all, other aspects of Fed policy show that the days of stimulus are far from over. The Fed is now nearly back to peak levels in terms of its portfolio, signaling that it is not at all willing to let the market have its head in terms of pricing Treasurys and a variety of other assets. The Fed knows there’s just not enough demand out there to soak it all up. As Doug French recently pointed out, after all, the private banks still haven’t shed all their shadow inventory, even in this booming economy.

But yet again we’re left with the question: if the Fed is slashing interest rates while “fundamentals are strong,” what must it do when things aren’t so “strong”? Negative rates and QE seem to be the logical next step.

On the other hand, the Fed has apparently not yet hit the panic button when it comes to interest paid on excess reserves (IOER). Today, it announced a cut to “the interest rate paid on required and excess reserve balances” down to 1.10 percent. The IOER is another tool the Fed uses to manage how much money leaves bank reserves, thus entering the real economy. The higher the IOER rate paid, the lower the opportunity cost banks face in keeping reserves locked up in reserves. In January, the interest paid on these reserves was up to 1.60 percent. The gap between the target federal funds rate and the IOER rate can be interpreted as an indicator of how badly the Fed wants to push reserves out the door of the banking system. In late 2019, the gap had been 20 basis points. But since late January, the Fed has narrowed this gap to 15 basis points, suggesting less urgency in the need for liquidity. Today’s cut to 1.10 percent keeps that gap at 15 basis points. This is a more moderate position than if the Fed had cut the IOER rate even more than than fed funds rate.

Reprinted from the Mises Institute.

Throughout the nineteenth century, economic socialism was given its intellectual foundations by the Utopian Socialists such as Charles Fourier and Robert Owen, and by the ‘Scientific’ Socialists Karl Marx and Friedrich Engels. Austrian economics was only founded in 1873, with the publication of Carl Menger’s Principles of Economics. So while the greatest economic theory was still finding its legs, the task of refuting socialism fell into the laps of the classical economists. 

These economists argued that under centralized control of the means of production and provision of consumer goods to each person “according to his needs,” workers would have no incentive to be productive. Absent the dangling carrot that is the profit motive, no one would put effort into his duties. John Stuart Mill wrote: “Competition may not be the best conceivable stimulus, but it is at present a necessary one, and no one can foresee the time when it will not be indispensable to progress.” The socialists responded that there would be a “New Socialist Man” who would work to the benefit of the community and hence would not require monetary profit in the first place. 

These classical economists implicitly conceded that if the so-called incentive problem could be solved, then a socialist economy could be as productive and allow as much wealth creation as could a capitalist one. There was no principled argument against coercive government takeover of vast swathes of the economy. The best that the intellectual descendants of Adam Smith could do was argue that such a society would be ‘unrealistic’. But unrealistic is a far stretch from impossible, especially to the socialist, we’ll-mold-man-according-to-our-vision, thinker.

Exactly one-hundred years ago, the Austrian economist Ludwig von Mises went beyond those classical rebuttals to socialism and shattered the very foundations on which socialism rested (that an Austrian economist took the baton from his classical forebears and peered deeper into the nature of economics is rather common in the history of ideas). In a 1920 article, Economic Calculation in the Socialist Commonwealth, Mises explained the so-called economic calculation problem, one of the greatest intellectual achievements of the twentieth century.

In a monetary economy, consumers bid for various goods, the prices of which are determined by the consumers’ demand for and the producers’ (entrepreneurs or their associates) supply of them. These producers don’t necessarily transform raw materials into their final consumer products: a restaurant owner might purchase utensils from a firm that specializes in the production of forks and knives. This firm, in turn, might buy the raw materials that are required in order to create utensils in the first place. For example, maybe they buy stainless steel from an owner of land who mines minerals solely in order to sell them. Physically, the production process of this example runs according to the following recipe: minerals are extracted from the earth by the landowner, then the fork-and-knife firm transforms the minerals into utensils, then the restaurant owner ‘transforms’ them into a presentable meal, and finally the patron of the restaurant ‘consumes’ the presentable meal (part of which is the utensils). Economically, however, this entire production process flows backwards from the consumers’ demand for consumer goods: the more patrons the restaurant owner serves, the more he, in turn, demands utensils from the fork-and-knife firm, which then demands more minerals from the landowner. This is what is meant when economists say that ‘consumer is king’.

But the restaurant owner is not the only entrepreneur bidding for utensils—he is competing with homeowners, collectors, other restaurant owners, and speculators. Just as prices emerge on the consumer goods market between consumers and the entrepreneurs selling such goods, so too does a producer goods market between entrepreneurs and sellers of producer goods generate prices of producer goods. This is true for all stages of production, and again, this entire network of prices is ultimately driven by the consumers’ demand for consumer goods.

When the entrepreneur sells a good to a consumer, the price of that consumer good is his revenue. In our example, this would be the restaurant owner selling a steak dinner to a patron for twenty dollars. But entrepreneurs do not pursue revenue, but rather profit. In order to calculate whether or not he’s earned a profit, the restaurant owner must subtract the cost of producing the meal from the price at which he sold the meal. But what is that cost? It is the price of the producer goods that he purchased in order to create the meal in the first place—in our example, this includes not only the abovementioned utensils, but also whatever other producer goods went into the production of the meal. So, if the price of the sum of the producer goods exceeds the price of the final consumer good, the entrepreneur has incurred a loss. If the reverse is true, he’s earned a profit.

Under voluntary conditions (a free market), profits and losses are signals—a profit indicates that the entrepreneur is satisfying consumers in transforming producer goods into consumer good that they demand. A loss indicates consumer dissatisfaction with that particular line of production^*. In either case, the entrepreneur may adjust his activities. In the first, he might demand more producer goods in order to try to earn even greater profits, while in the second, he might abandon his project in order to cut his losses. No matter what the entrepreneur does next, his decision will take in knowledge about what consumers want, and then transmit this knowledge ‘backwards’ to owners of producer goods. Without the ability to calculate his profit/loss, the entrepreneur cannot know what to do next in order to better satisfy consumers. 

Prices emerge on the producer goods market precisely because 1) these producer goods are privately owned, 2) entrepreneurs bid for them according to what they think consumers demand of their (the entrepreneurs’) final consumer products, and 3) money is sound^**. Under centralized control of the means of production, there is no producer goods market. So the socialist institution has no idea what the prices of these producer goods are, and therefore has no profit/loss mechanism. Economic waste, such as shortages, surpluses, inefficient choices of which particular producer goods to employ in the creation of consumer goods, and reduction in total wealth (called economic regression) are all inevitable under a socialist order.

No matter how superhuman the “New Socialist Man” might be, no matter how selfless and communitarian, he will never overcome this calculation problem. The knowledge encoded in the profit/loss system that emerges in a free market cannot be recovered by a socialist Leviathan. Counterintuitively, it is centralized, coercive planning that causes destructive economic chaos, rather than an unplanned, voluntary system.

But is that really true? Had Mises shown that, following deductively from first principles, collective ownership of producer goods forces the socialist institution to provide consumer goods in wildly erroneous proportions relative to its decentralized, free market counterpart? The socialistic institution could always get lucky, and provide exactly what would’ve been provided in a free market. But then, a cow could similarly ‘get lucky’ and appear spontaneously in deep space. In neither case would we have a good explanation for why these seem to be regularities of nature.

A physical transformation is impossible if, no matter how much knowledge is brought to bear, it cannot be achieved. For example, building a generic spaceship out of raw materials is evidently possible, given that it has happened. However, building a particular spaceship that can travel faster than the speed of light is impossible in principle, since the laws of Einstein’s special relativity forbid any massive object from traveling at such a speed. No matter how much more knowledge civilization acquires, we will never be able to violate the laws of nature.

The converse is also true—if no law of nature explicitly forbids a particular transformation from being achievable, then people are capable of causing said transformation, given the requisite knowledge. This implies that what we intuitively think of as wealth is more fundamentally about knowledge than about the particular resources a person owns. For example, a farmer who owns the raw materials of land and seeds is capable of transforming them into edible crops, while a professor of history may not know what to do with those same resources. Furthermore, a person can grow wealthier without acquiring any new resources by instead acquiring more knowledge. The value of land with oil reserves only shot up in value after people learned how they could employ oil to their advantage, and not a moment before that. So the set of all possible transformations that the same scarce resources may undergo depends on what their owner knows what to do with them.  

An economy is a particular way that knowledge is arranged in the universe, distributed across the minds of creative people. As we’ve seen, this knowledge can grow (or shrink, as when civilization regresses), causing a concomitant increase in economic wealth. Can we express this more exactly? Are there laws of nature that govern, constrain, and explain changes in the growth of knowledge and wealth?

A new fundamental theory in physics, constructor theory, seems to be able to express all other laws of physics in terms of possible and impossible transformations. This is a deeper mode of explanation than the so-called prevailing conception of physics, which had held that theories are to be expressed in terms of ‘initial conditions plus laws of motion’. That mode of explanation worked in explaining domains of reality in which exact predictions of what will happen is possible, such as when Newton accurately predicted the future speed and position of moving objects with his theory of classical mechanics. 

But there are aspects of reality that are unpredictable, even in principle. One of those is the growth of knowledge, and therefore all economic phenomena. Despite the mockery they’ve received, Austrian economists have long understood that predictions cannot help in understanding, or criticizing, the principles of economics. The theorems and explanations of Austrian economics are not expressed in terms of predicting exactly what will happen, as would be required by the prevailing conception, but what can possibly happen, and what cannot happen in principle^***. At long last, physics has caught up to them.

If socialism is truly impossible in principle, then it must be forbidden by some law of nature. Specifically, the impossibility of economic calculation under socialism should be manifest in (or be deducible from) physical laws that govern the possible ways knowledge can be arranged and its relationship to the growth of wealth. Constructor theory provides the mathematical formalism necessary for precisely these kinds of laws—principles of nature that don’t predict what will happen, but that express what can be caused to happen, and what cannot be caused to happen. 

Here, we reach the boundary of present scientific understanding, and so I have reached the limits of my precision. I don’t know what transformations, exactly, will be shown to be impossible, nor do I know how the arguments will even be stated in their constructor theoretic form. While constructor theory has solved some problems in physics and elsewhere already, a constructor theory of knowledge has not yet been created, and hence a constructor theory of economics is even further from our present vantage point. But I am optimistic. If laws of nature come to show, via the formalism of constructor theory, that economic calculation is physically impossible in principle under socialism, then denial of what Mises had shown one-hundred years ago will carry the same logic as denial of the existence of dinosaurs, or of the roundness of the earth. 

*More technically, a profit signals that the entrepreneur is engaged in a line of production of which consumers approve, and a loss signals a corresponding disapproval.

**I won’t expound on sound money in this essay.

***Many of these theorems are counterfactual in nature (so-called ceteris paribus arguments), and constructor theory has already demonstrated an ability to handle other regularities that require reference to counterfactuals, such as those of information. 

Listening to the howls from Democrats and the applause from Republicans, one would think President Trump’s proposed fiscal year 2021 budget is a radical assault on the welfare state. The truth is that the budget contains some minor spending cuts, most of which are not even real cuts. Instead they are reductions in the “projected rate of growth.” This is the equivalent of saying you are sticking to your diet because you ate five chocolate chip cookies when you wanted to eat ten.

President Trump’s plan reduces the Department of Education’s budget by nearly 8 percent, leaving the department with “only” $66.6 billion. Cuts to other departments are similarly small, while reductions in entitlement spending consist mostly of reforms that will not affect most of those dependent on these programs.

President Trump deserves credit for proposing an $11.6 billion cut in funding for the Department of State and the US Agency for International Development (USAID). Foreign aid does little to help impoverished people overseas. Instead, it benefits foreign government officials willing to do the US government’s bidding. The State Department and USAID are extensively involved in US intervention abroad, including efforts to overthrow governments.

President Trump’s budget proposes a number of increases in spending. For example, his budget spends around 900 million additional dollars on vocational education. It also includes additional spending on items including infrastructure and childcare.

Few in DC have expressed concern over the fact that President Trump’s $4.8 trillion budget proposal is the largest budget in American history. There is also little outcry from supposedly antiwar progressive Democrats over Trump’s proposal to spend hundreds of billions of dollars on militarism. This is not surprising, as many progressives are happy to support increased warfare spending as long as conservatives go along with increased welfare spending. Similarly, many conservatives are happy to support increased welfare spending as long as it means that progressives will vote for increased warfare spending. So, Congress is unlikely to approve any of President Trump’s spending cuts, but Congress will gleefully agree to all of his spending increases.

Even if Congress agrees to all of President Trump’s cuts, federal deficits will still be over $1 trillion for the next several years. However, President Trump claims that the budget will balance in fifteen years. In order to show a balanced budget by 2035, the administration assumes 3 percent economic growth for most of the next decade. This level of growth is unlikely to come to pass. Instead, the current boom will likely end soon, and the economy will experience another major recession. Signs that we are on the verge of a downturn include rising homelessness and the Federal Reserve’s bailout of the repurchasing market.

The current economic boom is built on debt, and the debt-based economy is facilitated by the Federal Reserve’s easy money policies. The massive amount of debt held by consumers, businesses, and especially government is the main reason the Fed feels compelled to maintain historically low interest rates. If rates were to increase to market levels, government interest payments would be unstable. This would cause the government debt bubble to burst, leading to a major crisis. However, continuing on the current path of low interest rates will inevitably lead to a dollar crisis and the collapse of the welfare-warfare Keynesian system.

Continuing to waste billions on wars abroad and failed programs at home while pretending that we can avoid a crisis via phony cuts and Fed-fueled growth will only make the inevitable collapse more painful. The only way to avoid economic disaster is to cut spending and audit, then end, the Federal Reserve.

Reprinted from the Ron Paul Institute for Peace and Prosperity.

The Trump administration posted another massive budget deficit to start out calendar-year 2020.

According to the latest data released by the U.S. Treasury Department, Uncle Sam spent $32.6 billion more than it took in last month. That compares with an $8.7 billion surplus in January 2019. Analysts had projected an $11.5 billion shortfall in January.

That brings the total deficit in FY2020 to $389.2 billion. So far, the deficit in fiscal 2020 is about $79 billion bigger than it was at this point in FY2019, a 25 percent gain.

According to the Congressional Budget Office, the federal budget shortfall will hit $1.02 trillion in FY 2020 and rise into the foreseeable future.  The CBO warns that the ballooning national debt poses a “significant risk” to the economy and financial system.

Overspending continues to drive the ever-widening deficits. The federal government took in $372 billion in January. That was a 10 percent increase in revenue compared with January 2019. But spending was up $405 billion. That represents a 22 percent increase year-on-year.

Through just the first four months of FY2020, Trump and company have already spent nearly $1.5 trillion.

These are the kind of budget deficits one would expect to see during a major economic downturn. The federal government has only run deficits over $1 trillion in four fiscal years, all during the Great Recession. We’re approaching that number today, despite having what Trump keeps calling “the greatest economy in the history of America.”

Generally, during economic expansions, government spending on social programs shrinks and tax revenues climb with increased economic activity. Revenues have increased over the last year, even with the Republican tax cuts, but they haven’t kept pace with the increase in government spending.

President Trump didn’t even mention the growing national debt during his State of the Union address. As Peter Schiff noted in a tweet, “During his 90-minute #SOTU address President Trump did not urge Congress to cut one dime of government spending, or eliminate one government agency or department, even as the national debt is soaring by record amounts during an economy he claims is booming.”

Much has been made in cuts to social programs in Trump’s proposed 2021 budget. But there are spending increases in other areas and the overall spending plan comes in at $4.8 trillion compared to $4.4 trillion in actual outlays during FY2019.

Republicans argue that economic growth will ultimately fix the national debt. The Trump plan claims to balance the budget in 15 years. But this scenario depends on 3 percent GDP growth every year and no recession. Last year, GDP growth was 2.3 percent.

The CBO warns that the growing “debt would dampen economic output over time.”

In fact, studies have shown that GDP growth decreases by an average of about 30 percent when government debt exceeds 90% of an economy. Total U.S. debt already stands at around 106.9 percent of GDP. Ever since the US national debt exceeded 90 percent of GDP in 2010, inflation-adjusted average GDP growth has been 33 percent below the average from 1960–2009, a period that included eight recessions.

Europe’s spending binge serves as a prime example of the impact of debt on economic growth.

The reality is America’s fiscal condition is circling the drain. The bottom line is that the spending trajectory is unsustainable. If the U.S. government is running $1 trillion deficits now, what will the country’s financial situation look like when the next recession hits?

Reprinted from the Tenth Amendment Center.

[From chapter 23 of The Case Against the Fed.]

Having examined the nature of fractional reserve and of central banking, and having seen how the questionable blessings of Central Banking were fastened upon America, it is time to see precisely how the Fed, as presently constituted, carries out its systemic inflation and its control of the American monetary system.

Pursuant to its essence as a post-Peel Act Central Bank, the Federal Reserve enjoys a monopoly of the issue of all bank notes. The U. S. Treasury, which issued paper money as Greenbacks during the Civil War, continued to issue one-dollar “Silver Certificates” redeemable in silver bullion or coin at the Treasury until August 16, 1968. The Treasury has now abandoned any note issue, leaving all the country’s paper notes, or “cash,” to be emitted by the Federal Reserve. Not only that; since the U.S. abandonment of the gold standard in 1933, Federal Reserve Notes have been legal tender for all monetary debts, public or private.

Federal Reserve Notes, the legal monopoly of cash or “standard,” money, now serves as the base of two inverted pyramids determining the supply of money in the country. More precisely, the assets of the Federal Reserve Banks consist largely of two central items. One is the gold originally confiscated from the public and later amassed by the Fed. Interestingly enough, while Fed liabilities are no longer redeemable in gold, the Fed safeguards its gold by depositing it in the Treasury, which issues “gold certificates” guaranteed to be backed by no less than 100 percent in gold bullion buried in Fort Knox and other Treasury depositories. It is surely fitting that the only honest warehousing left in the monetary system is between two different agencies of the federal government: the Fed makes sure that its receipts at the Treasury are backed 100 percent in the Treasury vaults, whereas the Fed does not accord any of its creditors that high privilege.

The other major asset possessed by the Fed is the total of U.S. government securities it has purchased and amassed over the decades. On the liability side, there are also two major figures: Demand deposits held by the commercial banks, which constitute the reserves of those banks; and Federal Reserve Notes, cash emitted by the Fed. The Fed is in the rare and enviable position of having its liabilities in the form of Federal Reserve Notes constitute the legal tender of the country. In short, its liabilities — Federal Reserve Notes — are standard money. Moreover, its other form of liability — demand deposits — are redeemable by deposit-holders (i.e., banks, who constitute the depositors, or “customers,” of the Fed) in these Notes, which, of course, the Fed can print at will. Unlike the days of the gold standard, it is impossible for the Federal Reserve to go bankrupt; it holds the legal monopoly of counterfeiting (of creating money out of thin air) in the entire country.

The American banking system now comprises two sets of inverted pyramids, the commercial banks pyramiding loans and deposits on top of the base of reserves, which are mainly their demand deposits at the Federal Reserve. The Federal Reserve itself determines its own liabilities very simply: by buying or selling assets, which in turn increases or decreases bank reserves by the same amount.

At the base of the Fed pyramid, and therefore of the bank system’s creation of “money” in the sense of deposits, is the Fed’s power to print legal tender money. But the Fed tries its best not to print cash but rather to “print” or create demand deposits, checking deposits, out of thin air, since its demand deposits constitute the reserves on top of which the commercial banks can pyramid a multiple creation of bank deposits, or “checkbook money.”

Let us see how this process typically works. Suppose that the “money multiplier” — the multiple that commercial banks can pyramid on top of reserves, is 10:1. That multiple is the inverse of the Fed’s legally imposed minimum reserve requirement on different types of banks, a minimum which now approximates 10 percent. Almost always, if banks can expand 10:1 on top of their reserves, they will do so, since that is how they make their money. The counterfeiter, after all, will strongly tend to counterfeit as much as he can legally get away with. Suppose that the Fed decides it wishes to expand the nation’s total money supply by $10 billion. If the money multiplier is 10, then the Fed will choose to purchase $1 billion of assets, generally U.S. government securities, on the open market.

Figure 10 and 11 below demonstrates this process, which occurs in two steps. In the first step, the Fed directs its Open Market Agent in New York City to purchase $1 billion of U.S. government bonds. To purchase those securities, the Fed writes out a check for $1 billion on itself, the Federal Reserve Bank of New York. It then transfers that check to a government bond dealer, say Goldman, Sachs, in exchange for $1 billion of U.S. government bonds. Goldman, Sachs goes to its commercial bank — say Chase Manhattan — deposits the check on the Fed, and in exchange increases its demand deposits at the Chase by $1 billion.

Where did the Fed get the money to pay for the bonds? It created the money out of thin air, by simply writing out a check on itself. Neat trick if you can get away with it!

Chase Manhattan, delighted to get a check on the Fed, rushes down to the Fed’s New York branch and deposits it in its account, increasing its reserves by $1 billion. Figure 10 shows what has happened at the end of this Step One.

The nation’s total money supply at any one time is the total standard money (Federal Reserve Notes) plus deposits in the hands of the public. Note that the immediate result of the Fed’s purchase of a $1 billion government bond in the open market is to increase the nation’s total money supply by $1 billion.

But this is only the first, immediate step. Because we live under a system of fractional-reserve banking, other consequences quickly ensue. There are now $1 billion more in reserves in the banking system, and as a result, the banking system expands its money and credit, the expansion beginning with Chase and quickly spreading out to other banks in the financial system. In a brief period of time, about a couple of weeks, the entire banking system will have expanded credit and the money supply another $9 billion, up to an increased money stock of $10 billion. Hence, the leveraged, or “multiple,” effect of changes in bank reserves, and of the Fed’s purchases or sales of assets which determine those reserves. Figure 11, then, shows the consequences of the Fed purchase of $1 billion of government bonds after a few weeks.

Note that the Federal Reserve balance sheet after a few weeks is unchanged in the aggregate (even though the specific banks owning the bank deposits will change as individual banks expand credit, and reserves shift to other banks who then join in the common expansion.) The change in totals has taken place among the commercial banks, who have pyramided credits and deposits on top of their initial burst of reserves, to increase the nation’s total money supply by $10 billion.

It should be easy to see why the Fed pays for its assets with a check on itself rather than by printing Federal Reserve Notes. Only by using checks can it expand the money supply by ten-fold; it is the Fed’s demand deposits that serve as the base of the pyramiding by the commercial banks. The power to print money, on the other hand, is the essential base in which the Fed pledges to redeem its deposits. The Fed only issues paper money (Federal Reserve Notes) if the public demands cash for its bank accounts and the commercial banks then have to go to the Fed to draw down their deposits. The Fed wants people to use checks rather than cash as far as possible, so that it can generate bank credit inflation at a pace that it can control.

If the Fed purchases any asset, therefore, it will increase the nation’s money supply immediately by that amount; and, in a few weeks, by whatever multiple of that amount the banks are allowed to pyramid on top of their new reserves. f I it sells any asset (again, generally U.S. government bonds), the sale will have the symmetrically reverse effect. At first, the nation’s money supply will decrease by the precise amount of the sale of bonds; and in a few weeks, it will decline by a multiple, say ten times, that amount.

Thus, the major control instrument that the Fed exercises over the banks is “open market operations,” purchases or sale of assets, generally U.S. government bonds. Another powerful control instrument is the changing of legal reserve minima. If the banks have to keep no less than 10 percent of their deposits in the form of reserves, and then the Fed suddenly lowers that ratio to 5 percent, the nation’s money supply, that is of bank deposits, will suddenly and very rapidly double. And vice versa if the minimum ratio were suddenly raised to 20 percent; the nation’s money supply will be quickly cut in half. Ever since the Fed, after having expanded bank reserves in the 1930s, panicked at the inflationary potential and doubled the minimum reserve requirements to 20 percent in 1938, sending the economy into a tailspin of credit liquidation, the Fed has been very cautious about the degree of its changes in bank reserve requirements. The Fed, ever since that period, has changed bank reserve requirements fairly often, but in very small steps, by fractions of one percent. It should come as no surprise that the trend of the Fed’s change has been downward: ever lowering bank reserve requirements, and thereby increasing the multiples of bank credit inflation. Thus, before 1980, the average minimum reserve requirement was about 14 percent, then it was lowered to 10 percent and less, and the Fed now has the power to lower it to zero if it so wishes.

Thus, the Fed has the well-nigh absolute power to determine the money supply if it so wishes.1 Over the years, the thrust of its operations has been consistently inflationary. For not only has the trend of its reserve requirements on the banks been getting ever lower, but the amount of its amassed U.S. government bonds has consistently increased over the years, thereby imparting a continuing inflationary impetus to the economic system. Thus, the Federal Reserve, beginning with zero government bonds, had acquired about $400 million worth by 1921, and $2.4 billion by 1934. By the end of 1981 the Federal Reserve had amassed no less than $140 billion of U.S. government securities; by the middle of 1992, the total had reached $280 billion. There is no clearer portrayal of the inflationary impetus that the Federal Reserve has consistently given, and continues to give, to our economy.

• • 1. Traditionally, money and banking textbooks list three forms of Fed control over the reserves, and hence the credit, of the commercial banks: in addition to reserve requirements and open market operations, there is the Fed’s “discount” rate, interest rate charged on its loans to the banks. Always of far more symbolic than substantive importance, this control instrument has become trivial, now that banks almost never borrow from the Fed. Instead, they borrow reserves from each other in the overnight “federal funds” market.

Reprinted From Mises.org.

Given Alan Greenspan’s notorious reputation among libertarians as a Randian free-marketeer who became corrupted during his time in the Federal Reserve and ended up being largely responsible for the easy money policy that contributed to the Great Recession, I was curious as to how he would characterize particular events in the economic history of the United States, especially the financial crises. I’ll first present some praise and scrutiny to the discussions on the Great Depression and Great Recession, respectively, and then briefly summarize my thoughts on the other aspects of the book.

The Great Depression

I was positively surprised of how he and his co-author addressed the roots of the Great Depression, citing the trade barriers caused by Hoover signing the Smoot-Hawley tariff and retaliatory tariffs consequently being levied by other powers; admitting that malfeasance by the Fed was a relevant factor; and explaining that Hoover’s and Roosevelt’s interventions in the market largely only worsened the crisis. His negative descriptions of Roosevelt’s massive programs of National Industrial Recovery Act [NIRA] and the New Deal are worth quoting: “The NRA [National Recovery Administration],” Greenspan writes, “was responsible for implementing a vast process of government-sponsored cartelization: regulating production in entire industries and raising prices and wages according to government fiat,” and also explains that Roosevelt’s “stimulus package” of public sector jobs out-crowded private sector jobs after in the short-term seeming to help recover the economy during 1935-6 (serving as an empirical/historical example against the Keynesian advocacy for having the government trying to “stimulate” the economy).

The Great Recession

Though his take on the Great Depression may be commended, Greenspan was far more defensive when discussing the Great Recession. On the one side, he rightly mentioned Freddie Mac and Fannie Mae, as well as other government measures aggressively encouraging home ownership, as being important factors. However, while he mentions low interest rates as a factor, he blames this on a “savings excess” in emerging economies after the Asian economic crisis of 1997 that pressed global interest rates down and thus fueling a global bubble by boosting asset prices.

Even if this is true despite the savings rate in the US falling from 7.4% in 1998 to 2.5% in 2005 (see picture below, data from FRED) [1], one must recall that the interest rate nowadays isn’t naturally “pushed up” or “pressed down” by economic forces alone; central banks set a “discount rate”, meaning the interest rate they charge for loans to commercial banks and other financial institutions, and additionally “target” the market interest rate through purchasing securities like government bonds (though more recently, in quantitative easing, they’ve additionally started buying other assets like mortgage-backed securities).

The Austrian Business Cycle Theory (ABCT) explains that if the artificial interest rate set by the central bank is lower than the natural rate determined by the equilibrium between the supply and demand of loan-able funds, that the loan-market will be inaccurately reflected in the visible interest rate and create incentives to fuel an unsustainable bubble. Blaming a “savings excess” as a factor to the crisis thus suffers from the same fallacy as blaming “overproduction”, the symptom is treated as the root cause, while the real question is why the gap between supply and demand take a long time to close (i.e. if there are any barriers thereto).

Greenspan further outright denies that “easy money” policy by the Federal Reserve had anything to do with the crisis. This seems to be a logical extension of his previous claim of a savings excess, as he argues that this “global savings glut” limited “the Federal Reserve’s ability to influence interest rates through the federal funds rate (which is the only interest rate that the Fed controls)”. Furthermore, while he concedes that “the ‘easy money’ critics are right to argue that a low federal funds rate (at only 1 percent between mid-2003 and mid-2004) lowered interest rates for ARMs [Adjustable-Rate Mortgages],” he claims that this rate peaked two years before the crisis and accordingly, according to Greenspan, “Market demand obviously did not need ARM financing to elevate home prices during the last two years of the expanding bubble.”

A statistic further draws into question these claims of a “savings excess/glut” is that the effective federal funds rate rose from 4.07% in December 1998 to 6.62% in November 2000 (thereafter plummeting to 1.52% by December 2001), which may make us wonder why this “saving excess” took so long to affect this metric. In fact, we might wonder whether this is really just a scapegoat to cover for Greenspan & Co’s efforts to pull the economy out of the bust of the dot-com bubble at this time by cutting rates and in the process setting in motion what has come to be known as the housing bubble.

General Thoughts on the Book

Despite these heated disagreements on the nature of business cycles, I thought the book overall was enlightening and well-written. Greenspan and his co-author rightly emphasized the significance of creative destruction for economic development, and for the most part smoothly described how market trends, innovation, and government regulations interacted in the process. They illustrate well how damaging government taxes and regulations can be to the economy, particularly small businesses, and don’t adhere to Keynesian dogma in their economic theory, though, as illustrated, some obfuscation and common myths may have been used to deflect criticism from Greenspan’s involvement in causing the Great Recession.

With this in mind, I recommend those who want to learn more about economic history to check out this book. If you disregard (or read with scrutiny) the parts of the business cycle, much of the book has a lot of page-turning material drawing you into the beautiful process of people improving each others lives through the economic interactions throughout American history. If you only want to understand business cycles better, however, the following books are, in my opinion, more adequate:

• Boombustology: Spotting Financial Bubbles Before They Burst – Vikram Mansharamani
• The American Depression – Murray Rothbard
• Cause and Control of the Business Cycle – E.C. Harwood
• Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse – Thomas Woods

Reprinted from Mises Revived.

Metrics are created to establish quantifiable ways to determine certain trends, be they positive, negative, or neutral. As far as the metrics appropriately signal what they’re intended to represent, they may be quite useful to a certain extent, but unless one is conscious of their limitations, they can be “cheated” and accordingly become misleading indicators. Unless we are conscious of how they may be manipulated in this manner, we run the risk of acquiring a false understanding of both the theory and history involved.

Economic metrics are generally interpreted as more or less accurate ways to determine how the economy is going relative to previous times, and how the economy is going is by extent presumed to be in line with the well-being of the people. Gross Domestic Product (GDP), for instance, is the main metric analyzed to this end [1]; if it goes up, the economy is supposedly doing better, and if it goes down, it’s doing worse. This metric is said to be based on the five components

C (Consumer spending) + G (Government spending) + I (investment) + EX (exports) – IM (imports).

From this, it might be said that imports are bad for the economy and that an increase in any of the others is good for the economy, which has in recent years led to a quite unfortunate resurgence of Protectionism (i.e. establishing trade barriers like tariffs). Further mathematical manipulation of this equation also leads to what is called the “multiplier”, which, for instance, claims that an increase in government spending can create a sort of scattering effect adding more to the economy than what was taken from it through taxes. By this logic, it doesn’t matter what the government spends money on; just that in some way or another the economy will be “stimulated” by it. The deception here can, however, be broken through if we understand the limitations of the metric at hand.

Why would it, for instance, be considered a positive that people increase their consumption? If it was due to a decrease in poverty that led to less people dying of thirst and hunger it may indeed be a positive, but why should a Black Friday surge in consumption of things the buyers may end up not even getting much practical use of be treated the same way? How about a trend of increasing leisure and focus on minimalism in a given population? This would be represented negatively on various economic metrics, but should they really be condemned for making personal choices that make them happier just because of some collective metric claiming that the population “overall” is worse off for it? How about if government spending increases due to the government initiating a war? Are we to see that as a good thing only because an economic metric or two increases? Many more examples could be mentioned, but this will probably suffice for the point at hand.

In addition to these clear problems to the representation of underlying trends in social and economic metrics, even if they had accurately represented statistical trends in the past, it could still cease to be so if they were to be used as targets for policy, according to “Goodhart’s law“, named after Charles Goodhart, the former chief economic adviser to the bank of England. His brief explanation of the “law” is that “Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Robert Lucas has further explained that

Given that the structure of an econometric model consists of optimal decision rules of economic agents, and that optimal decision rules vary systematically with changes in the structure of series relevant to the decision maker, it follows that any change in policy will systematically alter the structure of econometric models.”

After all, it is the collective outcome of people’s individual actions that are represented in these metrics, and is it really worth it that we be coerced into doing something that supposedly increase them but actually makes us worse off? Living free and making personal decisions based on what we believe is the best for ourselves and others shouldn’t be tossed aside to satisfy some arbitrary numbers. The government may find it a convenient way to gather support for its policies, but we free minds can see through this propaganda, however subtle. Consider what is best for people as individuals, not as collectives based on some abstract model of speculative economic relationships.

“No action can be considered virtuous unless it is undertaken freely, by a person’s voluntary consent;” that is the libertarian creed – our creed. We find Austrian economics to be the tradition most appropriately analyzing economic phenomena by its individualistic and causal-realist methodology, standing as a preferable alternative to the collectivist and abstract mathematical approach to economics devised mainly by Leon Walras and John M. Keynes. We follow the Austrian tradition because it actually analyzes and describes people’s actions and its consequences, not just metrics spuriously representing them. The limits to growth is the extent to which a metric can be manipulated without eventual side effects; there’s no limit to individuals’ pursuit of bettering the conditions of themselves, their families, and their friends.

Reprinted from Mises Revived.

Following a federal lawsuit brought by the Institute for Justice, the City of Richland has ended its practice of unconstitutionally forcing homeowners to upgrade city streets as a condition of obtaining a building permit. As a result of that change, Linda Cameron is free to renovate her Richland home without first paying upwards of $60,000 to upgrade an adjacent city street.

“It is a shame that it took a federal lawsuit for the city to recognize that it was violating its citizen’s constitutional rights,” said IJ Senior Attorney Paul Avelar. “But with this change, Linda and other homeowners are free to renovate their property without having to pay a ransom to the city.”

Linda’s fight started in October 2018, when she decided it was time to renovate the modest one-bedroom, one-bathroom home she had lived in for more than 40 years. She hired a contractor, drew up plans for an additional bedroom and bathroom and submitted a permit application to the city. The city’s building inspector approved her permit as being structurally sound, but the Richland Public Works Department rejected it because it didn’t also include plans to renovate a public street that ran along the back of her property—a street that she didn’t even use to access her driveway. To get her home renovation permit, Richland’s municipal code said Linda also had to improve the city’s street. Linda would have to widen 400 feet of street; build curbs, gutters and streetlights; and add sidewalks that didn’t connect to any other sidewalks. An engineer estimated the changes Linda would have to make at $60,000.

Linda attempted to negotiate with the city, but that was a dead end. The city manager said the law said what it said, so Linda would just have do as she was told. Instead, Linda partnered with the Institute for Justice and filed a federal lawsuit challenging Richland’s imposition of so-called “impact fees” as a condition of getting a building permit. Municipalities may legally charge fees to recoup the impact development has on public infrastructure, but, typically, these fees are imposed on developers to cover the real impacts of new property development. For example, if a developer wants to build a 100-home subdivision, a city could charge an impact fee to recoup the cost of installing new sewer lines or installing traffic signals for increases in traffic.

But when there is no impact, there can be no impact fee. The Supreme Court has explained that impact fees charged without impacts are unconstitutional; indeed, they are little more than extortion. Linda’s case demonstrates why. Linda just wanted to add a second bedroom to her one-bedroom home, but Richland said that before she could, she would have to spend tens of thousands of dollars widening a city street behind her house. It’s obvious that Linda’s second bedroom would not have an impact on the street. The city just wanted Linda to pay for a new street, so it wouldn’t have to.

“If cities want new streets or sidewalks, they can pay for those through normal channels. What they can’t do is force homeowners like Linda to pay for them by imposing unconstitutional conditions on building permits,” said IJ Attorney Patrick Jaicomo. “Thankfully, Richland has agreed to stop that practice. Under its new ordinance, homeowners will be able to once again use and enjoy their property without paying the city for the privilege.”

After the lawsuit was filed, Richland agreed to change its law to impose an impact fee only where there was an impact. After Richland changed its law, Linda’s application was granted without any conditions.  Now, she can get to work on renovating her home and other homeowner in Richland are free from similar treatment in the future. 

Reprinted from the Institute for Justice.

Former Labor Secretary Robert Reich’s latest video presentation attempts to explain to millennials why they are so broke. Disappointingly, millennials will be left wanting, as Reich never delves deeper than surface-level observations and conceals some inconvenient facts that may lead viewers to a very different conclusion than Reich would like them to reach.

Produced by his organization called “Inequality Media” and published at Salon.com, Reich’s latest commentary is entitled “Four reasons why millennials don’t have any money.”

Declaring that millennials are “working hard, starting families and trying to build wealth,” Reich laments “(B)ut as a generation, they’re way behind” older generations.

Millennials, Reich continues, are “deeper in debt, only half as likely to own a home, and more likely to live in poverty than their parents.

“If we want to address their problems, we need to understand those problems,” he concludes.

Closer inspection of his four main points, however, reveals that Reich himself either doesn’t understand the source of these problems, or is intentionally obscuring them.

“Number one: Stagnant wages”

With no explanation offered, Reich begins by informing viewers that “Median wages grew by an average of 0.3% per year between 2007 and 2017, including the Great Recession – just as millennials were beginning their careers. Before that, between the mid-1980s and mid-1990s, wages grew at three times that rate.”

No doubt, entering the workforce during the Great Recession was a very perilous task. Such a daunting labor market put many a millennial behind schedule in terms of financial advancement.

But the economy has been in recovery mode for about a decade now, so why the continued slow income growth?

A significant factor can be found right in the theme Reich is examining: age. As noted in this 2018 MarketWatch article: “But it’s worth noting that the aging of America’s workforce is having a downward impact on pay.

The median weekly earnings of 55-to-64 year old’s is 28% higher than that of 25-to-34 year old’s. That’s logical — pay improves as a worker’s career advances.”

With more experienced, higher-paid workers aging out of the workforce, median wages are bound to be dragged down. “The San Francisco Fed studied this issue in depth in March 2016,” the MarketWatch article continued. The study found that as baby boomers retire “the fraction of exits occurring from above the median wage has gotten larger,” which naturally drags down the median. 

Moreover, as the economy recovered, more low-wage workers that lost their jobs during the recession began to re-enter the workforce, applying more downward pressure on median wages.

“Second: As wages have stagnated, the costs of essentials like housing and education have been going through the roof”

Here, Reich points out how millennials own fewer homes, and further points out that, adjusted for inflation, “the average college education in 2018 cost nearly three times what it did in 1978.”

Like his first point, Reich offers no potential explanations for this phenomenon. 

In higher education, as with healthcare, a system increasingly reliant on third-party payers for the expenses has been a major driver of exploding tuition costs. As summed up in this College Board article “with third parties paying part or all of the bills (via government and private ‘scholarships,’ subsidized loans, and subsidies of institutions), schools can often raise fees without dire financial or academic consequences.”

In 2018-19, according to College Board, undergraduate and graduate students received a total of $246 billion in student aid in the form of grants, tax credits and loans.

Indeed, there’s been a stunning 416 percent rise in total federal, state and institutional student aid loans since 1989, adjusted for inflation. Pell Grants, the federal government’s largest college grant tuition assistance program nearly tripled in real terms during that time.

With billions in federal student aid, grants and below-market interest loans courtesy of the U.S. Department of Education artificially inflating demand for college, tuition prices were sure to explode. Why does Reich deprive millennial viewers of this vital information?

“Third: As a result of all of this, debt”  

Here Reich informs viewers that “the average graduate carries a whopping $28,000 in student loan debt,” and that as a generation, “millennials are more than one trillion dollars in the red.”

We already addressed a primary driver of rising tuition costs that Reich ignores. But here we can further note that the levels of student loan debt is so crushing because such a significant share of millennials are not earning enough to afford the debt payments. 

Young people are often drawn into college on the promise that a college degree is their only ticket to career success. 

But increasingly, it is not. As Ohio University economist Richard Vedder has written, “The Federal Reserve Bank of New York said that 41.4 percent of recent college graduates in December 2018 were ‘underemployed,’ doing jobs mostly held by those with lesser education.”

In other words, more than two-fifths of recent grads are in jobs that don’t require a college degree. As Vedder notes, this is because “(W)e actually have too many college graduates for the number of professional, managerial, and technical jobs available.”

With a glut of college graduates flooding the job market, there is little bargaining power for millennials entering the market, outside of those with degrees in highly technical areas. In too many cases, a college degree simply does not translate into earning power sufficient enough to pay off formidable student loans. 

And that glut can in no small part be attributed to the massive sums of money flowing from government programs, a fact Reich turns a blind eye to. 

“Fourth: Millennials are finding it harder than previous generations to save for the future” 

Harder, or less beneficial?

Historically-low interest rates for the past decade, which followed decades of a mostly low-interest environment, discourages savings. Why set money aside when there is virtually no financial gain to doing so?

For most of the millennial generation’s adult lives, the paltry interest on savings has been insufficient to keep up with inflation. 

Why won’t Reich mention the Federal Reserve’s role in keeping interest rates low, thus suppressing any returns to savings?

Reich further points out that employers are “replacing pensions with essentially ‘do-it-yourself’ savings plans; and that among Fortune 500 companies, “only 81 sponsored a pension plan in 2017, that’s down from 288 twenty years ago.”

Readers are just supposed to accept this as is, with no broader context.

What could be helpful to note is that perhaps corporate pension plans are being crowded out by rising healthcare costs. 

Research by the Peterson Center on Healthcare and Kaiser Family Foundation shows that large group employer coverage costs to employers more than doubled between 2003 and 2018.

This has escalated during a time of dramatically increasing government intervention into the healthcare market.

With so many more dollars going to paying employee health benefits, there’s little wonder that companies are cutting back on pension plans. 

Conclusion

Without further explanation for why millennials have no money, they will be more susceptible to accepting misguided policies claiming to ease them of their financial woes. 

Unsurprisingly, Reich lists several government interventionist policies to address the generational wealth gap, including “debt relief, accessible health insurance, paid family leave, affordable housing, and a more equitable tax code for renters.”

With the goal of selling government as the key to millennials’ financial security, it is hardly surprising that he would want to conceal vital facts about how government intervention is a primary cause of their financial struggles in the first place. 

Millennials: don’t just unquestioningly accept Reich’s recommendations. Do your homework and discover the underlying causes to this “generational wealth gap.” You just might find that the solution lies in less government, not more. 

Bradley Thomas is creator of the website Erasethestate.com and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics.

Follow him on twitter: Bradley Thomas @erasestate