Will someone please stop this man before he hurts himself?

From today’s Open Europe news summary:

Juncker unveils his €315bn investment package for Europe
Speaking to the European Parliament this morning, European Commission President Jean-Claude Juncker unveiled his plan for a €315bn investment fund – backed by €8bn from the EU budget (underpinning €16bn in guarantees) and €5bn from the European Investment Bank (EIB). The rest of the funding will come from the private sector with the public funds acting as first loss protection for riskier investments. Juncker also called on member states to commit further funds, promising that, for each public €1 given, €15 of investment would be created. Juncker added, “If Member States chip in capital to the [investment] fund, we will not take these contributions into account in our assessments” of countries’ deficit and debt under EU fiscal rules.
This summary of EU Commissioner Juncker’s so-called “investment plan” would be worthy of discussion in an Austrian economics class. One could have the class point out all the fallacious, embedded assumptions, such as whether third parties have any insight into the real economic needs of Europe. As Ludwig von Mises pointed out a hundred years ago in his Economic Calculation in the Socialist Commonwealth, no economic calculation is possible in the absence of property rights. Since EU bureaucrats do not own the property that they will put at risk, they have no way of rationally establishing ordinal preferences. In other words, the EU will not know if it is investing to satisfy the highest needs of the market. But this is just one problem and probably not even the most onerous. There is the problem of creating money out of thin air, which ignores the importance of time preference in determining the real wishes of property owners to save more or save less and, thus, provide real savings to the loanable funds market. The problems go on and on, yet one expects that Commissioner Juncker will proceed undeterred by the few lone voices of dissent in Brussels. Patrick Barron
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The Path to the Perfect Reserve Currency

Much has been written lately, including by me, about the coming rejection of the dollar as the primary reserve currency of the world’s most important central banks. My prediction is based upon two things: one, that the Federal Reserve is controlled by inflationist politicians whose main goal is to monetize the federal government’s vast annual budget deficits; and, two, that the rest of the world is getting fed up with holding ever more fiat dollars of decreasing purchasing power. In the first instance, as long as the Fed can get away with printing dollars that ultimately are used to purchase federal government debt, there is no reason for it to cease federal debt monetization or for the federal government itself to balance its budget by reducing the welfare/warfare state. In the second instance, it is in the self interest of the rest of the world to find an alternative to being robbed by loss of the dollar’s purchasing power. In short, if the Fed does not stop debasing the dollar, its status as a reserve currency will continue to erode. If the Fed wants the dollar to remain the world’s reserve currency of choice, it must raise interest rates rather than print more money and the government must slash its spending to avoid imposing higher taxes. If it chooses neither of these, or in such small increments as to make little difference, then I fear the dollar is doomed as the world’s primary reserve currency.

 

The Definition of the Best Reserve Currency

 

Central banks hold reserves in order to facilitate international trade. Individuals and companies within a monopolized currency area (either an individual nation or some region, such as the euro zone) must exchange their local currency for some other nation’s currency in order to import goods and services. Likewise, individuals and companies within a monopolized currency area must convert foreign currency to  local currency in order to pay their local suppliers for producing goods and services that are sold abroad and for which they were paid in foreign currency. They do this through the central bank. Alternatively, individuals and companies may decide to conduct these exchanges in a third currency, one that is accepted in most of the world. Since the end of World War II the US dollar has performed this role, meaning that the world is willing to hold dollars (or dollar denominated assets, such as US Treasury bonds), that circulate outside the borders of the US. Thusly was developed over time the eurodollar and the petrodollar markets, for example.

 

But simply saying that the world has preferred to hold US dollars does not explain why it preferred to do so. We have lost sight of the fact that there were real reasons for the eurodollar and petrodollar markets, which transcended some mystical faith in the dollar and the US. The world simply had recognized that the dollar was the most marketable currency to hold, I believe mainly for both geopolitical (think a VERY strong military) and economic (think the most free) reasons. But now those reasons are evaporating, creating an opening for some other, better currency.

 

Definition of the perfect reserve currency

 

The market wants a currency which retains its purchasing power and can be exchanged readily for the most varied real goods, services, and assets. As long as nations issue fiat currencies, only a nation with a large internal market will find that its currency is accepted as one of many reserve currencies. If no one else will accept that currency, it always will be accepted in the monopolized currency zone of the central bank that issued it. For example, it is possible that the eurodollar and petrodollar markets could end, forcing holders of US dollars to exchange them for goods and services in the one part of the world that MUST accept dollars–the US. Holders of dollars know that they can exchange their holdings for American assets, products, and services. The American market is huge, offering lots of choice; whereas, a smaller market, such as Singapore or Russia, would have fewer assets, goods, and services for exchange against the Singapore dollar or the Russian ruble. Much has been written of late that Russia, whose economy is one tenth the size of the US,  wants to end what it calls the dollar’s “special privilege”. But there is a natural limit on the demand by central banks to hold Russian rubles, because Russia exports mainly commodities and few goods or services. Furthermore, property rights in Russian companies and other assets are not seen by the market to be as secure as those in Western countries. China’s yuan might fare better than the ruble, because China exports many more goods to the West than Russia; thus, holders of yuan would have somewhat more confidence that they could find readily marketable goods in exchange for yuan.

 

Gold backing adds to a currency’s marketability

 

But there is one step that small market countries or those with questionable dedication to defending property rights could take that would enable them to make their currencies attractive to hold nonetheless. They could tie their currencies to gold. Gold backing provides two important assurances to potential holders. One, gold cannot be inflated at the stroke of a key on a central bank computer; therefore, the currency could not be debased and would retain its purchasing power. And, two, gold is acceptable intrinsically anywhere in the world. The holder of a gold backed currency can look beyond ultimately exchanging his currency in the issuer’s monopolized currency zone; he can exchange the currency for gold and spend it on real assets, goods, and services anywhere in the world.

 

Guaranteed gold redemption provides even greater currency marketability

 

But the risk to a holder of gold backed currency has not yet been completely removed. Two further hurdles need to be crossed. One, the holder needs to know that the issuer of the gold backed currency is not secretly issuing currency that is not backed by the commodity, what Mises calls “fiduciary media”. At the Bretton Woods Conference  in 1944 the US promised to maintain a dollar to gold ounce ratio of thirty-five to one. The International Monetary Fund was established at the same Bretton Woods Conference and charged with ensuring that the US honored the agreement, but it failed to do so. The US issued so much unbacked (fiduciary) media that the Fed suffered a run on its gold reserves as the US’s trading partners scrambled to redeem US dollars for gold at the promised price. Therefore, an issuer of a gold backed currency needs to open its books to periodic and random independent audits.

 

But even independent audits are not completely sufficient. Complete confidence in a currency requires that the holder be able to take possession of the actual specie without incurring undue cost. For example, the gold might be held in a remote or possibly dangerous location, such as Moscow or Tehran. Worse yet, the currency issuer might refuse to redeem its currency for specie upon demand even though it had honored its promise not to issue fiduciary media. For example, holders of rubles might not be allowed to take possession of the physical gold in Moscow, even though independent auditors had established that the ruble had not been debased by the Russian central bank. This risk could be mitigated by the currency issuer establishing gold redemption centers in many, convenient places around the world. These redemption centers would promise to surrender specie upon demand for any issuer willing to contract with it to do so and by the currency issuer moving sufficient specie there to reassure the market.

 

Sound money conveys no special privilege on the issuer

 

Sound money–i.e., money that is backed one hundred percent by specie and for which provisions have been made for safe and dependable redemption–actually conveys no special privilege upon the issuer but, rather, an obligation. The “special privilege” that critics of the dollar have expressed  refers to the Fed’s ability to debase its currency. Were it not allowed to do so, the Fed would become simply another market participant producing a good or service desired by the market. In a sound money environment, If the market discovered that the Fed had debased the dollar, demand to hold dollars would quickly erode. The market’s demand to hold dollars would fall and its demand to hold other, sounder currencies would rise. Once found to be issuing fraudulent, fiduciary media–i.e., media not backed one hundred percent by specie–international demand to hold dollars might never return, because the Fed’s reputation for honesty had been destroyed. I fear that the dollar’s reputation has been destroyed. It is no secret that base money in the US has risen tremendously, from $569 billion in March 2000 to $4,083 billion in September 2014. In that time the Fed’s inventory of gold has remained the same at 261.5 million ounces. This abuse of the market has opened the door for others. If any country could convince the market that its currency was sound, by following the principles outlined above, international demand to hold that currency would rise, supplanting the dollar as the world’s primary reserve currency. Furthermore, it would be doing all international market participants a favor. Remember, providing a sound currency conveys an obligation to the issuer to honor its promises; it does not convey a privilege to cheat the market by printing unbacked currency.

 

The benefits that accrue to issuers of sound money are all ancillary. For example, the British pound represented more than the fact that it was backed by specie redeemable upon demand. The convertible British pound was representative of a nation that honored the rule of law, fair dealing, honesty, and prudence. British law was exported to the world, as was its form of government, because the world recognized that these institutions were part and parcel of its financial and economic success. British bankers, lawyers, and businessmen gained in statue and real wealth because they upheld these values. The redeemable British pound was a daily verification of trust in everything British. In other words, Britain led by example, and the example was the British pound.

 

But we’re not at the perfect reserve currency yet!

 

So far we have assumed that only central banks can issue money that would be accepted by international traders as a reserve currency. But there still is one risk to holders even of fully redeemable, gold backed currency–the risk of sovereign suspension of gold redemption by all (or most) of the major central banks. This is exactly what happened at the start of World War I. Regardless of the reason for suspension of gold redemption, a central bank would be protected from court action by its national government. National governments hold the monopoly of coercive force within their sovereign area, so holders of the currency could be denied redemption there, although they might have access to partial redemption of gold held at remote locations. However, a private issuer of a redeemable gold backed currency would have no such protection and national governments would have little incentive to provide it. Courts in many countries could attach the assets of the currency issuer and even bring criminal charges of fraud against the principals, a risk that central bank bureaucrats need not face. Therefore, the  ultimate reserve currency is one that is issued by private institutions, such as international banks.

 

Conclusion

 

The world needs honest money founded in law to which men everywhere can seek justice in the protection of their trade, property, and wealth. Honest, sound money is representative of an entire society’s dedication to the rule of law, fair dealing, prudence, and reliability. There is no secret to sound money, only dedication to providing its ready and convenient redemption. The nation that adopts these principles will thrive.

Patrick Barron

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Planning begins for a euro-free Europe

From today’s Open Europe news summary:

In an interview with RTL, Dutch Finance Minister Jeroen Dijsselbloem admitted that the Dutch government looked at what would happen if plans to save the euro “didn’t succeed”. His predecessor Jan Kees de Jager added separately that the Netherlands had worked on the issue with Germany and that teams of experts looked at how the Guilder could be reintroduced.
Notice that the Dutch are consulting with Germany in planning for the demise of the euro. In my opinion the Dutch would not reintroduce the guilder; they would decide to become a deutsche mark country, as would many other European countries…perhaps all of Europe eventually. This would herald the beginning of the end of worldwide monetary inflation by central banks. If the US, Britain, China, and Japan did not stop debasing their currencies, demand to hold these currencies as central bank reserves would fall precipitously because international companies would want to settle their trades in the best currency available; i.e., the deutsche mark.  Patrick Barron
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Tax Avoidance is NOT Tax Evasion

From today’s Open Europe news summary:

The Telegraph reports that David Cameron is expected to use the G20 gathering of world leaders this weekend to press for greater sharing of tax information to crackdown on avoidance. Open Europe’s Raoul Ruparel is quoted in City AM discussing Luxembourg’s tax agreements with multinationals – the details of which were leaked – and the implications for European Commission President Jean-Claude Juncker.
The G20 nations are determined to harmonize taxes the world over at a high rate and allow no legal escape anywhere. British prime minister David Cameron is the latest world leader to succumbed to the siren call of being able to milk his people for an even greater share of the fruits of their toil without fear that they will seek legal protection elsewhere. What these parasites on the people’s wealth have in common is a fear of tax competition. They give lip service to the benefits of competition in the private sector, and most countries have criminal laws against economic collusion, yet they fear competition for themselves in the realm of taxes and law.  Patrick Barron

 

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Europe 25 years after the fall of the iron curtain

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Added on 11/12/14
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Many thanks to my friend Dr. Philip Bagus for forwarding the link to me. In addition to the address by former Czech president Vaclav Klaus, there were excellent presentations by Dr. Bagus of King Juan Carlos University in Madrid, Mr. Mach of the Czech Republic, and Richard Sulik of Slovakia.

Dr. Bagus’ informed the audience that almost one hundred years ago Ludwig von Mises explained the impossibility of socialism in his Economic Calculation in the Socialist Commonwealth. If Europe had listened to Mises, think of the misery it would have avoided, including that of today. His talk starts at the 58 minute mark. Dr. Bagus is author of the very influential The Tragedy of the Euro, which explains that the euro is misconstructed and will suffer the same fate as any inadequately protected commonly held resource.  Patrick Barron
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Maastricht Treaty? We don’t need no stinkin’ Maastricht Treaty!

From today’s Open Europe news summary:

ECB Executive Board member Yves Mersch said yesterday that the ECB will begin purchasing Asset Backed Securities (ABS) next week. He added that, “should the situation deteriorate further”, purchases of sovereign debt remain an option.
Bloomberg Reuters
The European Central Bank is strictly prohibited by its founding Maastricht Treaty from buying sovereign debt, yet it plans to do so anyway.
Here is a direct quote from the Treaty:
21.1. In accordance with Article 104 of this Treaty, overdrafts or any other type of credit facility with the ECB or with the national central banks in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments. 
This should be a lesson to all who believe that people in positions of power somehow will behave differently once in office. Public Choice Theory tells us the opposite; i.e., that people in power are just as self-centered and likely to pursue their personal goals rather than the public ones which they are commissioned to uphold.
Remember Barron’s law (tongue in cheek!): An institution that CAN print money WILL print money.
Patrick Barron
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The EU’s anti-competitive tax policy

From today’s Open Europe new summary:

Following the release of thousands of secret documents detailing how Luxembourg helped companies avoid paying taxes, aFT leader argues, “For the sake of his own credibility – and that of the commission – [Jean-Claude Juncker] cannot afford to give anything but the most full-throated support to efforts to crack down on abuses of tax systems.” Open Europe’s Pieter Cleppe was interviewed by Danish daily Information discussing the issue.
Notice that Luxembourg is considered to be cheating somehow by helping its clients keep more of their hard-earned profits. The EU is a totalitarian and anti-competitive organization that wants to milk its people and its businesses with no means of escape. But I have news for the EU: people and businesses WILL find a way to escape.  They will leave.
Patrick Barron
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My interview on Mises.org re: The End of the US Dollar Imperium, Part 2

Patrick Barron: The End of the US Dollar Imperium, Part 2

Jeff Deist and Patrick Barron continue their discussion on monetary imperialism. They delve deeper into US dollar supremacy, and how it might end with a whimper instead of a bang; how the Bundesbank is a potential savior for the world monetary order, while the IMF is a paper tiger; how elites will have an increasingly hard time denying gold a role in the global monetary system, and how America’s fiat dollar corrupts cultures as well as economies.

From: Mises Weekends , Friday, October 31, 2014 by Jeff Deist & Patrick Barron

http://mises.org/media/8772/Mises-Weekends-gtgt-Patrick-Barron-The-End-of-the-US-Dollar-Imperium-Part-2

https://www.youtube.com/watch?v=QCDI30ljc1o&list=PLALopHfWkFlFTj__lkebZfUw5s-CWVuIt

http://www.stitcher.com/podcast/mises-weekends/e/35849543?autoplay=true

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My latest interview on Power Trading Radio re: European economic developments that may prove positive in the long run

Click below to hear my latest interview on Power Trading Radio. I discuss in more detail the various movements in Europe that I view as economically positive in the long run. The interview last approximately one half hour with two very short intermissions.

Patrick Barron

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Patrick Barron interview with Jeff Deist re: The End of the US Dollar Imperium-Part 1

Jeff Deist and Patrick Barron address the issue of monetary imperialism. How does the US use the dollar as a weapon of economic and cultural power? How long can it last? What might the unprecedented…
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Added on 10/24/14
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Patrick Barron: The End of the US Dollar Imperium

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

From: Mises Weekends , Thursday, October 23, 2014 by Jeff Deist & Patrick Barron

http://mises.org/media/8767/Mises-Weekends-gtgt-Patrick-Barron-The-End-of-the-US-Dollar-Imperium

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