My letter to the Philly Inquirer re: Learn Economic Nonsense from the Fed

Re: Fed to help teachers learn finance

Dear Sirs:
Here is what the Fed will teach about money and finance:

Lesson #1: Print money
Lesson #2: Print more money
Lesson #3: Print even more money

Here is a quote from Mr. Bill Martin, a high school teacher who has taken many Fed classes:

“We hook the students with questions about the $100,000 bill,” he said: “Where does money come from? It’s created by lending. You take some of that $100,000 bill, lend it at an interest rate, say, to 100 people, and they grow a business and it becomes $200,000. That’s how wealth is created. Growth doesn’t happen unless lenders lend. You borrow to grow, and then pay it back with interest.”

It’s magic! (Or is it?) If banks can create $100,000 of wealth at the stroke a pen (by lending), why can’t you or I do the same thing? We print $100,000 on our personal copiers and lend it at interest. Voila! Instant wealth!

Pardon me if I do not believe this nonsense. Wealth is created by hard, smart work, plus saving to build capital. It is not created at the stroke of a pen or from the rollers of a printing press.

Patrick Barron

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Another socialist EU proposal to reward irresponsibility

From today’s Open Europe news summary:

Commission eyes jointly funded Eurozone deposit guarantee scheme

The Financial Times reports that, according to leaked documents seen by the paper, the Commission is planning to create a Eurozone Deposit Guarantee Scheme, which would initially support national schemes but eventually replace them with a fully mutualised system by 2024. The move is strongly opposed by Germany, which is currently the only Eurozone state to have a fully funded deposit guarantee scheme, as required by EU law.

Source: The Financial Times

Despite the fact that centralization of money and banking regulation at the EU has led to nothing more than an increase in member state transfer payments funded by debt, the EU Commission continues business as usual. It is blind to the consequences of its actions and desires a steady march toward a European super state.

Germany must leave the European Monetary Union before these new laws come into existence. Its national wealth is being stolen by back door policies such as this. Furthermore, it is not in Europe’s long term interest to have Germany’s wealth destroyed. Germany needs to regain control of its own economy and can do so only by regaining control of its own money and banking system. This is not abandoning Europe but saving Europe from itself. Without German guarantees the rest of Europe would be forced to abandon the worst of their socialist policies. The best role for Germany is to set a good fiscal and monetary example for the rest of the EU (plus the US and the rest of the world) to emulate.

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The logic of sovereignty and unilateral free trade

From today’s Open Europe news summary:

FT: UK pushing for ‘emergency brake’ on EU laws to safeguard rights of non-Eurozone countries

The Financial Times reports that the UK is seeking to obtain an ‘emergency brake’ on future EU proposals in order to protect the rights of non-Eurozone countries. This new ‘emergency brake’ could be based on the so-called ‘Ioannina-bis mechanism’ – which already exists in the EU Treaties – and could allow non-euro countries to delay a vote on new EU legislation if it threatened their interests or the integrity of the single market, triggering additional consultations at the level of EU leaders. The ‘emergency brake’ is reportedly part of a set of UK demands to reform the relations between euro ‘ins’ and ‘outs’. Other proposals include recognising the EU as a ‘multi-currency union’ and ensuring that non-Eurozone countries will no longer have to contribute to Eurozone bail-outs. Another provision would establish the principle that non-euro countries would not be forced to take part in initiatives – such as the banking union – that are driven by the Eurozone’s integration needs.
The paper cites Open Europe’s proposals to strengthen non-Eurozone states’ rights, published last month, which argued that if three non-Eurozone countries oppose an EU proposal, EU governments should aim for consensus. If this cannot be reached within six months, the proposal should either be dropped or only be pursued by a smaller group of member states.

Source: Open Europe Intelligence The Financial Times The Financial Times 2

The logic escapes me that the UK should remain in the EU yet opt out of policies that are unfavorable to its interests. EU policies are in constant flux, which would require a UK bureaucracy just to keep track of them and somehow decide which ones are favorable and which ones are not, no easy task. Sovereign nations with free market economies have no such problem. Each sovereign nation makes its own policies based upon its own internal political situation. Every business evaluates for itself whether or not it wants to satisfy requirements of foreign trading partners. Some may and some may not.

The longer this referendum is delayed the more likely it is that UK citizens will realize that there is nothing to gain from belonging to the EU (or any trade bloc) that it cannot achieve at zero cost by adopting unilateral free trade.

Patrick Barron

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My letter to the WSJ re: Two kinds of refugees, people and money

Underground banks in China

Dear Sirs:
Money will flee areas where it is repressed just as people will flee areas where they are repressed. Capital controls can be seen as the monetary analogy of the Berlin Wall. Capital controls are indications of a failed economic system that benefits the politically connected elite at the expense of the people.

Patrick Barron

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My letter to the NY Times re: My advice to the ECB and the Fed

Re: Skepticism Prevails on Preventing Crisis

Dear Sirs:
Mr. Binyamin Appelbaum’s report of the Fed’s conference in Boston over the weekend perfectly illustrates our central bankers’ incompetence. They wring their hands over what they do not know and beg the public to forgive them when the next financial crisis strikes, which surely it must. If the Fed wishes to prevent financial crises, it only needs to stop initiating them. The Fed’s hubris that it can fathom the proper interest rate for our vast and complex economy must rank among the greatest fallacies of all time. The Fed sees the world through the completely discredited Keynesian lens which posits that aggregate demand–what the rest of us know simply as spending–is the path to prosperity. Anyone who believes this nonsense need ask himself why he has not liquidated his own savings on frivolous consumption and why the citizens of countries like Zimbabwe, Venezuela, and others are not as rich as Midas. Please allow me to answer Mr. Luc Laeven’s question, posed to the conference attendees, to wit, “Do we have other policies?” Yes, Mr. Laeven, I do. Liquidate your central bank (the European Central Bank) and recommend similar action by the Fed. Scrap legal tender laws that prevent the market from choosing the best medium of indirect exchange. Outlaw fractional reserve banking as the fraud that it is. Subject banks to the same commercial code as all other businesses. There–problem solved! Now send everyone at the conference home to look for a real job.
Patrick Barron
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Strict defense of private property solves the economic fact of resource scarcity

Scarcity of resources exists in many forms and is THE problem in economics. If resources were not scarce, there would be no need to economize. The existence of scarcity is true of all resources (time, human energy, natural resources, etc.) It is not intuitive that allowing scarce resources to be owned privately is the solution to this problem. Socialists would like to ignore this reality of scarcity and have all resources owned collectively for the common good. By contrast, we Austrians know that private property solves the economic fact and economic problem of scarcity, as I will now discuss.


A society which spurns private property and throws all resources open to those who wish to take them will quickly learn the terrible lesson of the tragedy of the commons; i.e., that commonly held resources will be plundered to extinction.


If society spurns allowing private ownership of resources, it must find some other means to prevent the tragedy of the commons, and historically the means chosen is the use of force. Throughout history most of mankind has been divided into a hierarchical system of masters and slaves with some graduations between the two extremes, such as priestly or aristocratic classes. The masters (pharaohs, emperors, kings, sultans, warlords, etc.) devised complex rules-based systems for resource distribution that ultimately depended upon pure terror for enforcement.


But this so-called solution to the problem of scarcity–restricting the people’s liberty through the use of force–does not work. The gradual understanding of modern economics eventually ended thousands of years of subsistence existence for the masses in the West. Modern economics explained that without private ownership of resources, a man could not hold an ordinal preference. The term ordinal , of course, means that something is prioritize from highest to lowest. Without ordinal preferences, there is no rational means to economize for the betterment of society. In other words, the masters never really knew what to order the slaves to produce, what technical means to use, what alternative materials to use, the quality desired, or how much to produce. Thus, the Commissars of the Soviet Union ordered the production of inefficiently produced, shoddy goods. The Soviet empire collapsed, despite the fact that Russia is blessed with vast resources and an industrious population .


A second fatal problem with common ownership of all resources is that few such readily available, consumable resources actually exist. There are no resources on the planet that do not require at least a minimum of effort to transform into a consumable product. Even edible berries growing in the wild must be harvested, meaning that someone must transport himself to the berries’ location and pull them from the bush at just the proper time. The cost of doing so is the value one places on forfeiting his leisure. Of course, other natural resources require much more effort to convert to consumable products, passing through uncountable stages of production. For example, timber and minerals must be extracted, harvested, etc. and then molded into something that can be consumed. Consider a hiker lost in the wild. It matters not at all to him that great stands of timber lie within easy reach or that valuable minerals lie under foot. These natural resources require great effort over very long time periods to be converted into something consumable, such as a shelter or gasoline. A lost hiker does not have the knowledge, time, or previously produced means to convert these basic resources into consumable products to ensure his survival. All this is far beyond anyone’s autarkic abilities.


Now let us assume that someone did harvest trees by felling them, transporting them to a lumber mill, milling them, storing them in a ventilated and dry place for many months before kiln-drying them (all processes that are required to turn trees into useable lumber), advertising their availability to contractors, keeping sales records, sending out bills, collecting the bills, etc. only to have a socialist call him a plunderer and confiscate his lumber for free distribution to whomever the masters deemed to be politically advantageous to their continued privileged position. No one would ever harvest another tree. In other words, production of usable lumber would cease despite the fact that trees were readily available.


Now let us consider what would happen if the commissars did order slaves to harvest the trees. Great forests would be denuded in short order, because there would be no social mechanism to prevent what would amount to a tragedy of the commons by order of the state.


Proper harvesting of timber requires that its value be capitalized


Capitalization of timber requires that it be privately owned in order that its worth can take its proper place in the ordinal hierarchy of preferences. The consequences of ignoring this fact of economic science is most evident today in China’s ghost cities, where resources, both natural and human, have been expended for no  observable benefit except to advance the careers of politicians who can claim to have met the requirements of the latest Five Year Plan.


The opposite case of resource waste comes from special interest groups who capture the political (police) apparatus of the state and prohibit exploitation of resources by private individuals. In the name of protecting  Mother Gaia from being plundered, modern environmentalists have convinced the political class that most progress is unsustainable, dangerous to our health, or any number of other specious claims. Society is prevented from benefiting from their conversion to consumable products. Private ownership insures that resources will never be plundered to extinction, because their value will have been capitalized. The process of determining a resource’s capitalized value is impossible absent free market capitalism with strict defenses of property rights.


Despite both the theoretical and empirical evidence to the contrary, socialists tell us the opposite; i.e., that state ownership of all resources will prevent their plunder and ensure prosperity for all. As Ludwig von Mises explained, socialism is not an alternative economic system of production. It is a system of consumption only, and a system of economic ignorance and economic plunder.

Patrick Barron

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Three questions for Andrew Haldane, chief economist at the Bank of England


1. What exactly is wrong with price deflation?
2. In a world of increasing productivity, are not lower prices inevitable?
3. Are not lower prices beneficial, in that all society enjoys an increasing standard of living on the same money income?
Patrick Barron
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My letter to the Philadelphia Inquirer Re: the crude oil export ban

Dear Sirs:

The answer to your headline question on the front of Sunday’s business section is self-evident. The crude oil export ban cannot be justified on any economic or moral basis. It is an economic myth that there can be rational economic calculation under socialism and that private property may be violated to achieve a more important common good. First the economic calculation myth. Over one hundred years ago in Economic Calculation in the Socialist Commonwealth, Ludwig von Mises proved that private property is required for rational economic decision-making. Only owners of private property can hold rational preferences of how best to manage resources. One hardly needs to point out that appointed bureaucrats and elected officials are NOT owners of the property that they presumptuously deign to control for some more altruist purpose. Without true preferences derived from ownership, the titular managers of resources would  not know what to produce, how much to produce, what quality to produce, or what factors to use in the production process. As for the moral basis, in section 27 of his Second Treatise of Civil Government, John Locke explained that property accrues legally to “he who hath mixed his labor with, and joined to it something that is his own, and therefore makes it his property.” Austrian economists have labelled this the homesteading principle. Thereafter homesteaded property may be transferred only via social cooperation under the free market. All else is theft.
The owners, workers, and paid lobbyists of those American refineries who wish to maintain the crude oil export ban seek to employ the police power of the state to prevent consumers from improving their standard of living by purchasing similar goods from foreigners at lower prices. The weakness and vapidity of their argument is evident in their admission that American oil can be transported to foreign refineries, repatriated in the form of refined products, and still sold at lower prices on the US  market. Why must Americans be held hostage to inefficient, high cost domestic producers?


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My letter to the NY Times re: New icebreakers to the arctic for what purpose?

Re: Obama Calls for More Coast Guard Icebreakers to Gain Foothold in Arctic

Dear Sirs:
President Obama’s call for Congress to fund new icebreakers for the Arctic is troubling. Whereas, most nations of the world see the receding icecap as an opportunity to gain cheaper access to previously inaccessible natural resources and/or a shorter path to markets, President Obama worries about endangering the environment. In other words, most of nations want to build a better world for mankind, whereas President Obama wants to prevent anyone from doing so. A true statesman would see that the real threat to the Arctic comes from the lack of an international agreement over who may claim what resources. The Austrian economists have long had the answer. Property rights attach to those who “mix their labor” with the previously unused resource. It does not matter to the people of the world whether an American, a Russian, or an international consortium obtains title to resources that they secure as long as these resources are brought to market.
Patrick Barron
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The implications of a reduction of Chinese holdings of US government debt

Dear Readers,
Below is my response to a reader of my blog, who asked about the implications of China reducing its holdings of US treasury debt.
Pat Barron
Dear Lawrence,

I think that in the simplest terms, China is exiting the market for US Treasuries, which means that the US government must offer a larger yield in order to entice buyers who are still in the market to make up for the loss of Chinese demand. That means that US interest rates would have to rise, because the T Bill is the base upon which all other rates are set. Why would someone buy a corporate bond at a lower yield when he can buy a T Bill, which has less risk, for the same or even higher yield? Alternatively, the Fed could monetize the debt, which would cause US prices to rise (eventually) due to the increase in the money supply.
I have contended for some time that this event would lead to a crisis. When the world market eschews T Bills, the government is left with difficult choices. It can raise taxes to pay off the debt that it can’t roll over. It can cut spending to decrease the amount of debt that is required to fund all the government’s programs. It can increase interest rates to suck more money out of the private economy and into government bonds. Or it can monetize the whole thing. Of course, it could do a combination of all these things. My least favorite option is that the government monetizes the debt; i. e., prints more money. My favorite option is for government to drastically reduce its expenditures, but this is probably the most politically difficult option.
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