Oh, no! Not lower prices!

From today’s Open Europe news summary:

Italian Finance Minister Pier Carlo Padoan has said in an interview that the ECB “has to be consistent and bring [eurozone] inflation close to 2%…which is very far from current levels.” Separately, Handelsblatt reports that the Deflation Risk-Indicator (DRI), an early deflation warning system for the eurozone, currently stands on 0.47 with a score of 0.5 marking the point at which risk of deflation becomes acute.
For someone like me–who lived through the terrible stagflation (high unemployment plus high inflation) years of the 1970’s–to understand that anyone could wish for higher inflation.  Inflation devastated American manufacturing by effectively taxing capital: i.e., highly capitalized industries like autos and steel could deduct only historically low capital costs from their tax bills and did not have the funds to replace them at higher prices.  The very fact that there is a “Deflation Risk-Indicator (DRI)” is itself astoundingly dangerous and indicates the total triumph of the radical Keynesians in the halls of governments and central banks.
Patrick Barron
Posted in News/ Lessons | Leave a comment

Germany cannot carry Europe any longer

From today’s Open Europe news summary:

Persson: Eurozone still an awfully long way from becoming a healthy and vibrant economic bloc
In the Sunday Telegraph, Mats Persson argued that while the risk of a euro breakup has subsided, “the currency zone is still an awfully long way from becoming a healthy and vibrant economic bloc.” He notes that Germany is unlikely to be able to carry the Eurozone in the long-term: “Bear in mind that at the moment, Berlin seems to be doing its utmost to lose its competitive edge: the current coalition has introduced a high minimum wage, lowered the retirement age and is sticking to a commitment to eliminate nuclear power in favour of renewables, raising costs for everyone.”
When the German economy fails, the EU and the euro fail. Germany has subsidized Europe for years without beneficial effect, and now its own economy is ailing.  Furthermore, its own politicians seem determined to weaken it even more.  Philipp Bagus‘ prescient analysis of the inherent flaws in the euro are coming true.
Patrick Barron
Posted in News/ Lessons | Leave a comment

I’ll punish you by starving my own people

Re: Russia bans food imports from US and EU

Putin has banned food imports from the US, EU, Canada, and Japan.  He is waging war against his own people in the misguided view that it is money that people desire and not the goods and services that money will buy.  Those who remember the dark days of the Soviet Union know that the Russian people of that era had plenty of money; there simply was nothing to buy.  So Putin is proving to be a product of Soviet era economic ignorance.
Patrick Barron

 

Posted in News/ Lessons | Leave a comment

Trade does not need to be “managed”

From today’s Open Europe news summary:

Writing in the Telegraph, London Mayor Boris Johnson argues that “It is clear that 25 years ago we made a miscalculation about one of the consequences of EU enlargement. We were right to want to expand the EU… But I think many of us naively and vaguely believed that this enormous expansion would have a beneficial effect on the Brussels imperium… we thought a wider Europe would be looser and shallower – more of a confederal free-trade zone. That is emphatically not what has happened.”
There is nothing that a nation can gain from belonging to the the EU that it could not gain by unilaterally adopting free trade. Why is a supra national organization required in order to trade freely with the world? There are no rules required via international agreements in order to “manage” trade.  The market manages trade.  The beneficial consequences of the British repeal of its “Corn Laws” in the mid nineteenth century should have settled this issue for all time.  Patrick Barron
Posted in News/ Lessons | Leave a comment

My letter to USA Today re: John Waggoner’s Sleight-of-Hand

Dear Sirs:

John Waggoner perpetrates a sleight-of-hand on his readers when he equates investing with gambling in regard to Paul Singer demanding repayment of his Argentine bonds.  Investing is ruled by law, and Mr. Singer is demanding that the law be upheld.  In the long run even the Argentinians may thank Mr. Singer, although I doubt it.  Perhaps future governments will not be as irresponsible as past ones, knowing that they cannot easily renege on their contracts.  Patrick Barron
Posted in News/ Lessons | Leave a comment

London’s press jumps on QE bandwagon

First the Financial Times and now the Economist have jumped on the quantitative easing (QE) bandwagon and called for the European Central Bank to embark on a policy of buying assets in the open market at above market prices–with printed money, of course.  What a disappointment for once great publications located in what was once the heart of financial probity.  Patrick Barron

Posted in News/ Lessons | Leave a comment

I’ll punish you by starving myself!

A quote from one of the news summaries found on Open Europe today:

“Russia also announced a ban on some fruit and vegetables imports from Poland, and is considering expanding the ban to the entire EU.”
I doubt that Putin will do without his fruits and vegetables and cares little for the plight of the common Russian citizen.  He must make his point and apparently this is the way he wants to make it.  Of course the US has “punished Cuba” for decades by denying American cigar smokers the pleasure of imbibing in the world’s finest cigars.  Patrick Barron
Posted in News/ Lessons | Leave a comment

Nothing has changed in over two hundred years

From Edmund Burke’s Reflections on the Revolution in France.

(Just substitute “dollar” for “assignats“.  Nothing has changed.  Patrick Barron)

Assignats.  Is a fleet to be fitted out?  Assignats.  If sixteen millions sterling of these assignats forced on the people leave the wants of the state as urgent as ever, Issue, says one, thirty millions sterling of assignats–says another, Issue fourscore millions more of assignats.  The only difference among their financial factions is on the greater or the lesser quantity of assignats to be imposed on the public sufferance.  They are all professors of assignats.  Even those whose natural good sense and knowledge of commerce, not obliterated by philosophy, furnish decisive arguments against this delusion, conclude their arguments by proposing the emission of assignats.  I suppose they must talk of assignats, as no other language would be understood.  All experience of their inefficacy does not in the least discourage them. Are the old assignats depreciated at market?  What is the remedy?  Issue newassignats.  The word is a trifle altered.  The Latin of your present doctors may be better than that of your old comedy; their wisdom and the variety of their resources are the same.  They have not more notes in their song than the cuckoo; though, far from the softness of that harbinger of summer and plenty, their voice is as harsh and as ominous as that of the raven.”

Posted in News/ Lessons | Leave a comment

Six Economic Myths and Realities

The following are six of the most prevalent economic myths that appear time and again in the mainstream media.  I will give a brief description of each and a brief description of the economic reality, as seen from an Austrian perspective.

Myth #1: Increased money leads to economic prosperity.

This Keynesian myth postulates that increasing aggregate demand through increasing the money supply will lead to more spending, higher employment, increased production, and a higher overall standard of living.

The reality is that an increase in money leads to malinvestment. The time structure of production is thrown into disequilibrium by encouraging investment in projects more remotely removed in time from final consumption.  There are insufficient resources in the economy for the profitable completion of all projects, since individual time preference is unchanged, meaning that there is no increase in savings.  When prices rise, due to this unchanged time preference, these projects will be liquidated, revealing the loss of capital.  Production will be lower than otherwise.  Unemployment will increase while workers adapt to economic reality.

Myth #2: Manipulating interest rates leads to economic prosperity.

This is a corollary of Myth #1 but deserves its own discussion.  In the Keynesian view lower interest rates always are beneficial; therefore, it is the proper role of the monetary authorities to drive down the interest rate via open market operations.

The reality is that interest rates are a product of the market, reflecting the interplay of the demand for loanable funds and the availability of loanable funds.  Historically high or low interest rates can have multiple causes, none of which are prima facie good or bad.  For example, rates can be high because entrepreneurs have highly profitable opportunities due to reduced regulation or a breakthrough in technology.  If time preference is unchanged and, therefore, savings is unchanged, the interest rate rises and allocates the scarce savings to the most highly desired ends.  Or, interest rates can be low due to a change in time preference that leads to increased savings.  If entrepreneurial opportunities are unchanged, interest rates will fall.  Likewise, demand for loans can be high while savings is high or vice versa.  Manipulating the interest rate truly is an act of fantasy by the monetary authorities, who believe that they can know the impact of billions of ever changing decisions affecting the supply of money and demand for money.

Myth #3: Lowering the foreign exchange rate of the currency, to give more local currency in exchange for foreign currency, will lead to an export driven economic recovery.

The reality is that no country can force another to subsidize its economy by manipulating its exchange rate.  Giving more local currency subsidizes foreign buyers in the near term, but it creates higher prices in the domestic economy later.  Early receivers of the new money–exporters, their employees, their suppliers, etc.–benefit by a transfer of wealth from later receivers of the new money.  But as the price level rises from the increase in the domestic money supply, the benefit to foreign buyers evaporates.  Then the exporters demand that the monetary authorities conduct another round of exchange rate interventions.  The big winners are foreign buyers.  Intermediate winners are exporters, but their advantage ends eventually.  The losers are non-exporters, especially retired people.

Myth #4: Money expansion will not cause higher prices.

Currently the U.S. government is engaged in a propaganda campaign to convince us that it can both monetize the government’s debt and engage in quantitative easing without causing a rising price level.

The reality is that there is no escaping the fundamentals of economic law in the monetary sphere.  Ludwig von Mises and many excellent Austrian economists since, such as Murray N. Rothbard, have explained that the relationship between an increase in money and an increase in the price level is not a mechanical one.  Nevertheless, even Mises explained that the basis of all monetary theory is the “Quantity Theory of Money”, that states that there is a positive relationship between the money supply and the price level.  In other words, more money eventually leads to higher prices and vice versa.  What causes all the confusion is that the price level actually can fall even when the money supply expands, if all of the new money plus some of the existing money stock are hoarded.  Mises call this the first stage of the three stages of inflation.  The public expects prices to remain the same or even fall, so they do not increase their spending even when the money supply expands. Eventually, though, the public comes to understand that the money supply will keep increasing and that prices will not return to some previous golden age.  At this point the public will begin to increase spending to buy at lower prices today rather than higher prices tomorrow.  The price level will rise even if the money supply shrinks, because the public spends previously hoarded money faster.  This is Mises’ phase two of inflation.  In the final stage money loses its value, as the public spends it as fast as possible.  This is Mises’ stage three, the “crackup boom”.

Myth #5: More, better, and more vigorously enforced regulations can prevent loan and investment losses.

The politicians and their regulatory agencies believe that prior monetary crises were caused by a combination of stupidity, greed, and criminality by bankers and sellers of investments.

The reality is that no army of regulators armed with the most modern analytical tools and the most powerful means of regulatory enforcement can prevent malinvestment from money supply expansion.  The monetary expansion encourages longer term projects for which the cost of money is a major factor in forecasting success.  But without an increase in real savings, insufficient resources will ensure that many of these projects will never earn a profit and must be liquidated.  Bank and investor losses are inescapable.

Myth #6: Government can prevent hyperinflation.

This is a corollary of Myth #4.  If our monetary masters believe that money expansion will not cause higher prices, then they believe that they can prevent hyperinflation; i.e., the total destruction of the monetary unit as a universal medium of exchange.

The reality is that hyperinflation is cause by a loss of confidence in the money unit, which the monetary authorities may be incapable of preventing.  Once the panic starts, the demand by the public to hold money falls to zero.  Prices skyrocket.  Even if the monetary authorities got religion at this point and froze the money supply, the panic will run its course.  No one will want to be the last holding worthless paper.  More likely, though, the monetary authorities will aid and abet the panic, even if unwittingly, due to political pressure to increase payments to powerful domestic constituencies, such as retirees, the military, the public safety sector, government contractors, etc.  This was the case in Revolutionary France, Weimar Germany, and modern day Zimbabwe.  The mindset of today’s money masters seems little more advanced.

Conclusion

I encourage Austrian economists to point out these common myths whenever encountered.  I have had success writing letters-to-the-editor of major newspapers.  Their editors often seem genuinely pleased to receive a polite letter pointing out the Austrian view.  Perhaps it is simply  a case of controversy selling newspapers.  Furthermore, much business writing often has imbedded Keynesian assumptions that drive the narrative toward government intervention.  Most business reporters have no economic training, so Austrians should politely point out these errors, too.

Patrick Barron

Posted in News/ Lessons | Leave a comment

I’m Shocked! Shocked!

From today’s Open Europe news summary:

In its quarterly report, the Greek Parliament’s State Budget Office has warned that Greece will require a third bailout package to avoid a default, and that despite capital injections, the problems of the country’s banks has not been resolved yet, reports Kathimerini.
Greece will “need” a third bailout, and a fourth bailout, and a fifth bailout, ad infinitum until the EU has had enough.  As long as Greece can get more money from the EU, it will never adopt the reforms needed to stand on its own. Such are the wages of socialism everywhere, whether pertaining to the individual or entire nations.
Patrick Barron
Posted in News/ Lessons | Leave a comment