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Columnist George Will puts recent research into the adverse consequences of the welfare state into words that we all can understand. However, I do not think that he gets to the heart of the problem. The welfare state grows because there is no clear line (and there can be no clear line) between those who are supposedly “entitled” to benefits and those who are not. There will always be those who fall just fractionally outside the needs-based entitlement. So the entitlement line gradually gets moved to include more and more recipients. The real issue is how state welfare can be justified in a society based on the rule of law that ensures individual liberty. Welfare entitlements are a “taking” from Peter to give to Paul at the point of a supposedly legal gun. But how is state confiscation any different or more just than private robbery? That amorphous entity called the state decides that it will shirk its duty to protect our property and do exactly the opposite. No majority can make such an unjust act legal through the legislative process.
Your analysis of the likely effect of the European Central Bank’s proposed massive quantitative easing program is full of economic fallacies that, unfortunately, masquerade as conventional wisdom. One often stated fallacy is your statement that “…the initial market reaction was favorable.” The nature of the ECB intervention is to buy assets above their current market prices with money that it will create out of thin air. Of course market prices will rise! But one can hardly characterize such a market response as favorable.
I predict that the Fed will start charging negative interest rates on bank reserve accounts, which will ripple through the markets and result in negative interest rates on savings at banks. I make this prediction only because it is the logical action of the Keynesian managers of our economy and monetary policy. Our exporters will scream that they can’t sell goods overseas, due to the stronger dollar. So, what is the Fed’s option? Follow the lead of Switzerland and Denmark and impose negative interest rates in order to drive down the foreign exchange rate of the dollar.
It is the final tool in the war on savings and wealth in order to spur the Keynesian goal of increasing “aggregate demand”. If savers won’t spend their money, the government will take it from them.
Oh. You didn’t know that Switzerland was part of the European Monetary Union? You thought that the Swiss used their own currency, the Swiss franc? In a definitional sense only, you are correct. Within its monopolized currency area, the political boundaries of Switzerland, the Swiss franc is legal tender. But for approximately three years the Swiss National Bank has maintained a Swiss franc to euro ratio of 1.2 francs per euro. The usual suspects, exporters, were the driving political force behind the SNB’s policy. They feared fewer sales to eurozone countries should the franc cost more in euro terms. This policy made the European Central Bank (ECB) the determinant of monetary policy in Switzerland and relegated the Swiss National Bank to the mechanical role of currency board. When the Swiss franc started to appreciate against the euro, meaning that buyers were willing to accept fewer than 1.2 francs per euro, the Swiss National Bank printed francs and bought euros. Over the last three years as demand for Swiss francs from euro holders increased, the SNB’s balance sheet exploded with new euro reserves. However, as the world now knows, in a surprise move the SNB abandoned its currency peg policy. Today the franc exchanges approximately one for one with the euro, meaning that the franc has appreciated by approximately twenty percent against the euro.
As far as I know the SNB has made no official announcement of the reason for its surprise move. I suspect that the Swiss people had made themselves heard that they feared inflation from the ECB’s imminent quantitative easing policy. The Swiss gold referendum on November 30 would have required their central bank to hold a fixed percent of reserves in the form of gold. It was defeated only after the major political parties and the SNB amounted a concerted anti-referendum blitz. Still in control of their own currency, it was a relatively simple matter for Switzerland, in effect, to veto the ECB’s proposed policy by abandoning the currency peg. This shows the rest of Europe that at least one nation does not fear returning to full control of its currency nor does it fear the consequences of a temporary drop in exports. (The drop will be temporary, because Swiss import prices will fall and eurozone users will be awash with depreciated euros and willing to pay more for the Swiss franc.)
The lesson is clear. If Switzerland can retake control of its money, so can any eurozone nation. The process may take longer, as the country reissues is own currency and re-denominates its bank accounts in local currency terms, but it can be done. Already there are reports that the Danish central bank is contemplating abandoning its currency peg of approximately 7.5 krone per euro. If the sky does not fall on Switzerland and Denmark, other nations may follow. Does anyone know how to say deutsche mark?
From today’s Open Europe news summary:
Irish Finance Minister Michael Noonan said yesterday that he would not dismiss the idea of a European conference to discuss a possible debt write-down for crisis-hit Eurozone countries such as Greece, Ireland and Spain.
So, the Irish Finance Minister just might be persuaded to allow investors to write down his own country’s debt! Did he say this with a straight face?
From today’s Open Europe news summary:
Bank of France Governor Christian Noyer told Handelsblatt that, if the ECB were to buy government bonds, he would favour “a cap” in terms of percentage of the market which the ECB can buy.Le Figaro reports that the European Commission will today unveil a communication detailing the “exceptional circumstances” under which Eurozone countries can be granted more flexibility on the achievement of their deficit and debt reduction targets.
Both of these actions–European Central Bank purchases of sovereign debt and allowing some countries to exceed their national deficit limits–are violations of the Maastricht Treaty, supposedly the founding legal basis of the European Union and the European Monetary Union (eurozone). This should be a warning to all nations who foolishly believe that they can give up their sovereignty to supranational organizations that will abide by their founding law. These supranational governments will behave no differently than national governments; i.e., they will take whatever power they can regardless of the law. But unlike the potential remedies to restrain those who violate national constitutions, supranational governments that violate their constitutions are restrained only by threats that members will leave. The EU and EMU governing boards act with impunity because they believe that lingering war guilt will keep Germany as a member even though it is against German national interest.
From today’s Open Europe news summary:
Preliminary estimates by the Italian national statistics office ISTAT show that Italy’s unemployment rate went up to 13.4% in November, with youth unemployment soaring to 43.9% – a new record high.
Maybe Italy should take the lead from the US and raise its minimum wage.
(That’s what is known as sarcasm, folks!)
From today’s Open Europe news summary:
Draghi: ECB ready to initiate QE to counter low inflation
In an interview with Handelsblatt, ECB President Mario Draghi warned that persistently low inflation in the Eurozone meant that “the risk that we do not fulfill our mandate of price stability is higher than six months ago”. Draghi reiterated that the ECB was ready to step in with a programme of Quantitative Easing, noting that “We are in technical preparations to adjust the scope, speed and composition of our measures for early 2015.”
ECB President Mario Draghi’s latest statement is full of Keynesian fallacies, to wit:
1. That price stability is a worthy goal. No, monetary stability is essential, so that prices may reflect the true preferences and productive limitations of the market in order to allocate scarce resources to their most important purposes as dictated by the market.
2. That low inflation or even deflation is harmful. No, in a economy with increasing productivity prices will fall, benefiting all of society. Preventing prices from falling or, as ECB President Draghi desires, encouraging price inflation, causes the Cantillon Effect, whereby early receivers of the new money benefit at the expense of later receivers. Continuing monetary expansion will cause the Austrian Business Cycle.
3. That GDP is a good measure of an economy’s success. if this were the case, then Zimbabwe would be a huge success story. GDP simply adds up the monetary prices of goods sold, so higher prices on the same or even slightly lower volume of sales necessarily will be interpreted by Keynesian economists as success.
4. That monetary expansion can spur an economy to greater prosperity. If this were the case, then counterfeiters would be doing all of us a big favor. Monetary expansion distorts the structure of production, sending more resources to the expansion of enterprises further removed from final consumption. This malinvestment eventually will be revealed by losses in these industries. The current collapse of commodity prices and anticipated bankruptcies in commodity production industries are a good illustration of this process and are attributable to massive monetary expansion by central banks since the 2008 great recession.
The basic unit of all economic activity is the un-coerced, free exchange of one economic good for another based upon the ordinally ranked subjective preferences of each party to the exchange. To achieve maximum satisfaction from the exchange each party must have full ownership and control of the good that he wishes to exchange and may dispose of his property without interference from a third party, such as government. The exchange will take place when each party values the good to be received higher than the good that he gives up. The expected, but by no means guaranteed, result is a total higher satisfaction for both parties. Any subsequent satisfaction or dissatisfaction with the exchange must accrue completely to the parties involved. The expected higher satisfaction that one or each expects may not be dependent upon harming a third party in the process.
Several observations can be deduced from the above explanation. It is not possible for a third party to direct this exchange in order to create a more satisfactory outcome. No third party has ownership of the goods to be exchanged; therefore, no third party can hold a legitimate subjective preference upon which to base an evaluation as to the higher satisfaction to be gained. Furthermore, the higher satisfaction of any exchange cannot be quantified in any cardinal way, for each party’s subjective preference is ordinal only. This rules out all utilitarian measurements of satisfaction upon which interventions may be based. Each exchange is an economic world unto itself. Compiling statistics of the number and dollar amounts of many exchanges is meaningless for other than historical purposes, both because the dollars involved are not representative of the preferences and satisfactions of others not involved in the exchange and because the volume and dollar amounts of future exchanges are independent of past exchanges.
Let us examine a recent, typical exchange that violates our definition of a true exchange yet is justified by government interventionists today–subsidized, protected, and mandated use of ethanol. Number one, the use of ethanol is coerced; i.e., the government requires its mixture into gasoline. Government does not own the ethanol, so it cannot possibly hold a valid subjective preference. The parties forced to buy ethanol actually receive some dissatisfaction. Had they desired to purchase ethanol, no mandate would have been required. Therefore, including the dollar value of ethanol sales in statistics purporting to measure the societal value of goods exchanged in our economy is meaningless. This is just one egregious example of many such measurements that are included in our GDP statistics purporting to convince us that we have “never had it so good”.
Our flawed view that governments can improve satisfaction caused us to misjudge the military threat of the Soviet Union for decades. Our CIA placed western dollar values on Soviet production data to arrive at the conclusion that its economy was growing faster than that of the US and would surpass US GDP at some point in the not too distant future. Except for very small exceptions, all economic production resources in the Soviet Union were owned by the state. This does not necessarily mean that it was possible for the state to hold a valid subjective preferences, for those who occupied important offices in the state held them at the sufferance of what can only be described as gang lords, who themselves held office very tentatively. State ownership is not real ownership. Those in positions of power with responsibility over resources hold their offices for a given period of time and have little or no ability to pass their office on to their heirs. Thus, the resources eventually succumb to the law of the tragedy of the commons and are plundered to extinction. Nevertheless the squandering of the Soviet Union’s commonly held resources was tallied by our CIA as meeting legitimate demand.
Professor Yuri Maltsev saw first-hand the total destruction of the Soviet economy. In Requiem for Marx he gives a heartbreaking portrayal of the suffering of the Russian populace through state directed, irrational central planning that did not come close to meeting the people’s legitimate needs, while our CIA continued to crank out bogus statistics of the supposed strength of the Soviet economy upon which the Reagan administration based its unprecedented peacetime military expansion. Maltsev, an Austrian economist, was unable to convince Gorbachev’s government to allow private ownership of the nation’s resources. Without private ownership of production resources, there could be no true ordinally held subjective preferences for their rational allocation. Gorbachev’s other reforms were half-hearted and mis-implemented. They were insufficient to prevent the imminent collapse of the Soviet economy.
With the proviso that no exchange may harm another, as explained so well in Dr. Thomas Patrick Burke’s book No Harm: Ethical Principles for a Free Market, we are led to the conclusion that no outside agency can create greater economic satisfaction than can a free and un-coerced exchange. The statistics that support such interventions are meaningless, because they cannot reflect the satisfaction obtained from true ordinally held subjective preferences. Once this understanding is acknowledged and embraced, the consequences for the improvement of our total satisfaction are tremendous. Our economy can be unshackled from government directed economic exchanges and regulations. The “no harm” principle can be enforced by normal commercial and criminal law. For example, since one may not pollute the waters that are used by others, normal tort law, which is based primarily upon precedence, would replace costly EPA compliance regulations, which are based primarily upon statute law and bureaucratic regulation. All labor laws can be scrapped, which would reduce the cost that businesses must bear to support extensive human resources departments, which have become little more than arms of government agencies. Freedom to engage in any economic exchange that causes “no harm” would extend internationally, too. All trade restrictions would be seen to be illogical and unnecessary. Satisfaction increases with greater opportunities for un-coerced exchanges; therefore, international trade restrictions are counter-productive. The revival of the free trade movement would benefit world peace and result in fewer scarce resources directed to national defense.
In conclusion we see the consequences that can accrue from a better understanding of the true nature of economic exchange. Be on your guard for those who claim to be able to improve our satisfaction and protect us from harm through expansion of government coercion in the market.
From Zero Hedge: Russia Shocks With Emergency Rate Hike
The move by the Bank of Russia to drastically raise rates is the first break by a major central bank in the worldwide Keynesian dogma that lower rates are required to cure almost any financial or economic problem. Paul Volcker knew better. During the waning days of the Carter administration and the beginning of the Reagan era, Fed Chairman Paul Volcker ordered the Fed to cease monetizing US Treasury debt. Interest rates peaked a just over twenty percent! The economy went into recession as twenty years of malinvestment, made possible by central bank interest rate manipulation, was purged from the economy. Folk lore tells us that Volcker raised interest rates. He did no such thing. He stopped manipulating interest rates by refusing to buy US Treasury debt with printed money, what is euphemistically called debt monetization, and interest rates rose to the level required to fund the debt markets at that time.
Volcker understood that the real economy needed savings, not more spending. Real savings must come from deferred consumer spending. Deferred spending feeds real liquidity to the loanable funds market, where capital is replenished and which leads to improved productivity via expanded specialization of labor. Prices actually fall!
Sound money was just one part of the Reagan/Bush platform of economic recovery. The other three were deregulation, lower government spending, and lower taxes, which the Reagan administration accomplished to some extent. The rest is history. The US entered into a period of rapid growth and falling inflation. Regrettably, this was the last time that the US was blessed with a Fed chairman of independence and integrity. All subsequent recessions have been “fought” with monetary stimulus, increased regulation, increased taxes, and increased government spending. Today’s Keynesian charlatans actually desire inflation, all the better to rob savers and allow the government to fund its out-of-control debt with debased money.
Apparently Russia is buying none of this nonsense of competitive currency devaluation to solve the financial attack by the West upon its economy that followed its annexation of Crimea. Putting the geopolitical issues to the side, Russia needs to tighten its financial belt, so to speak, in order to retain investment capital and increase savings. If it were really serious, it would stop interest pegging altogether, per Paul Volcker, and allow rates to rise to whatever level is commanded by the market. Does anyone want to guess to what level interest rates would rise in the US, if the Fed stopped monetizing Treasury debt? I doubt that twenty percent would be high enough. Patrick Barron