More illegality by the European Central Bank

From today’s Open Europe news summary:

Welt: ECB “trick” to help Portugal return to the markets
Die Welt reports that the ECB will use a “trick” to help Portugal to return to the markets, by once again adjusting its collateral rules. The change to the rules, released last month, will mean the ECB will continue to accept bonds with a lower rating from the agency DBRS as collateral for its lending operations. Previously, once Portugal had exited its bailout programme, its bonds would no longer have been eligible as collateral as they have low ratings from all four rating agencies. This would have reduced demand and made a return to the markets more difficult, the article argues.

The ECB will always find some rationale to justify giving more money to bankrupt members.  We common folk call this committing a crime, but no EU bureaucrat will ever go to jail for misappropriating billions of euros.

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A typical EU solution

From today’s Open Europe news summary:

Meanwhile, French Prime Minister Manuel Valls yesterday unveiled his plan to cut public deficit by €50bn between 2015 and 2017. The new leader of the party, Jean-Christophe Cambadélis, said this morning, “We need to change the Maastricht criteria [EU deficit and debt rules], which were elaborated before the crisis”, otherwise the French government’s planned budget cuts “will not be sufficient”. Separately, Martin Schulz MEP, President of the European Parliament, told Handelsblatt that, “We set the deficit criteria in the stability pact 22 years ago, and it must now adapt to the political reality.”
Les Echos: Montebourg La Tribune Le Figaro Le Figaro 2 Le Figaro 3 Le Monde Handelsblatt EUobserver EUobserver 2

This is a typical EU solution–if a country can’t satisfy the rule, change the rule. Problem solved.  Patrick Barron

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More Intimations by the European Central Bank of Currency Confiscation

From today’s Open Europe news summary:

Draghi suggests that the ECB could ease policy further to tackle strong euro
Speaking at the spring meetings of the IMF and World Bank over the weekend, ECB President Mario Draghi said that the further strengthening of the euro “requires further monetary stimulus”, with ECB officials suggesting that a negative deposit rate would be the most likely option if action was taken. Reuters reports that Austrian Central Bank Governor Ewald Nowotny has suggested any action is unlikely before June, when the next round of inflation forecasts will be released.

Separately, in an interview with Le Figaro, French Central Bank Governor Christian Noyer notes that the euro is “abnormally strong”, and argues, “The ECB’s monetary policy does not at all explain the euro’s current level…That said, the stronger the euro, the more accommodating the monetary policy needs to be.”
FT WSJ FT 2 FT 3 FT 4 Reuters Handelsblatt FAZ Le Figaro: Noyer La Tribune

The term “negative interest rates” means that your deposit will be charged rather than earn interest. The next step will be to restrict the amount of paper notes that people can hold, because that would be one way people could protect their hard-earned savings. When that doesn’t meet the ECB’s goals, the notes will be replaced with ones that carry expiration dates. It has happened elsewhere in the world and it will happen in Europe, if these inflationist policies are not abandoned.

The statement by M. Noyer that the euro is “abnormally strong” is preposterous. How does he know the proper exchange rate of the euro? An exchange rate today is a market phenomenon. In the past it was a legal promise by the central bank to exchange currency for gold at a certain ratio and vice versa. This made all currencies de facto substitutes for gold, and the world enjoyed FIXED exchange rates.  Patrick Barron

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The Source of Economic Progress–the Primacy of the Individual

Members of an Austrian school of economics forum to which I belong have been discussing the source of economic progress. It began with the usual elements of capital, technological development, and managerial expertise before getting more philosophical when a member suggested the acceptance of rationality in all things. I felt this was not a proper answer, because the definition of “rationality” is itself debatable and can be used by political authorities to suppress unpopular ideas. For example, in the Soviet Union to question the inevitable victory of communism and the ultimate transformation of man’s nature to communist man would land one in an insane asylum. If you didn’t believe all that communist propaganda, you must be crazy! I prefer Murray N. Rothbard’s definition of rationality as believing that one’s actions will bring about the result desired. Admittedly this is a narrow definition of the term and more suited to economics rather than psychology, but the Austrians are not big admirers of psychology anyway. Rothbard’s definition of rationality admits the possibility that rational men might disagree on the proper action to take to bring about the same goal, such as whether or not price fixing will bring about universal prosperity. Men who believe in price fixing are not irrational according to Rothbard; they are simply wrong and must be shown the error of their ways.

In my search for the answer to the question of the foundation of economic progress, I used Mises’ regression theory for my thought experiment. I started with the assumption that a completely unhampered free market produces the most prosperity. (If you do not agree, then stop right here.) The primary elements of such an economy would be capital accumulation, defense of property rights, and the rule of law. It would not include collectivism in an form, which elevates the group–rarely defined and a moving target when it is defined–above the individual. But collectivism sounds so enticing to many, so something must have happened to elevate the individual over the group. We are now on the right track, looking for some seminal event or idea that elevated the primacy of the individual, rather than some group, to position numero uno.

Man formed in the image of God

Immanuel Kant said that the recognition of man as an end and not as a means was the categorical imperative and that it could be discovered by reason alone. But what is the origin of reason? Enter religion. Kant claimed that the existence of reason itself is an intimation of the existence of God. All of ethics and, as it happens, all of economic progress flows from this one maxim. Christianity teaches that man is formed in the image of God. The implications of this have proven to be tremendous for economic progress. It has taken a long time, and the process can be reversed, which it may be doing right now, as Christianity has been abandoned by huge numbers in the West. Nevertheless, here’s the argument: If man is formed in the image of God, then all individual men are equal to one another in their rights, which derive from God and cannot be derived from other men. In the eyes of God, the lowest person on the social scale is equal in his God-given rights to the highest and most exalted anywhere in the world, whether he be captain of industry, king, or president. The concept of the rule of law emerged in the West to protect the individual’s natural rights by giving him equal protection under the law; i.e., equal with all other men, no matter how exalted. Other protections of the individual followed, such as the right to government by representatives elected by the people themselves and trial by a jury of one’s peers. Magna Carta is the best known example of this statement, for the king was forced to admit that all men had rights that could not be taken away, regardless of social rank.

The political liberation of man that stems from accepting that he is made in the image of God has gradually been extended to include economic liberation. In the West it gradually came to be accepted that economic rights were protected under the banner of political rights. This makes sense, since taking away a man’s economic rights cannot be justified without taking away his political rights. In communist Cuba all legal jobs are owned and controlled by the state. One of the ways the Cuban tyrants keep people in line is to place them on an economic blacklist, prohibiting their employment anywhere in the country. Since the state owns all businesses, such a penalty can be a death sentence. There is no way such an ostracized person can earn a living; he must become either a beggar who lives off the handouts of others or he starves.

It is no wonder that most communist regimes forbid organized religion. They must deny that man has any God-given rights, only state-given rights, which, of course, may be taken away at any time and for any reason, even for no reason at all but just to terrorize the populace into fearful submission. Some totalitarian regimes recognize state-controlled or state-authorized religion, in sometimes elevating the tyrant to god-like status. This is not real religion. The state uses such religions for purposes of internal control, outlets for their propaganda. The pharaoh was a god and the people were treated as beasts of burden. The “official” religions of the Middle Ages come to mind, too, proclaiming that the king was placed on his throne by “divine right” and to oppose him was to oppose God . In modern times Shinto Japan elevated the emperor to god-like status, which the Allies forced the Japanese to abandon at the end of the war. Today communist North Korea requires its population to worship the Kim family, and Red China forces Roman Catholics to take orders from its own Chinese Patriotic Catholic Association. These state religions do not elevate man to enjoying equal political and economic rights; they are used as a tool of the state to set up a privileged, parasitic class, whether one calls them aristocracy or vanguards of the proletariat.


In summary, in the West men believed that they were formed in the image of God, that they were equal at all other men as a result, that their rights were “natural rights” and not given to them by a king with divine rights, and that these natural rights included economic rights. It was an ethic of individual rather than group rights, so man had a right to the product of his labor and did not have to surrender it to a collective. This gave rise to capital formation by ordinary men, whose property was protected by the rule of law, which also was derived from natural law and was affirmed over the centuries by such documents as Magna Carta. Immanuel Kant explained in philosophical terms what had been increasingly accepted for fifteen hundred years by all strata of society, including the political elite; i.e., the primacy of the individual, who is formed in the image of God. This view led eventually to what Ludwig von Mises called modern economics, which led to the industrial revolution in the first country, England, that liberated the individual politically and economically. Whether the West and the rest of the world can remain economically liberated in the absence of a belief that man is made in God’s image remains to be seen. I have my doubts.

Patrick Barron

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My letter to the NY Times re: Ignoring the elephant in the room

Re: Cities Advance Their Fight Against Rising Inequality

Dear Sirs:
The latest assault on economic science is led by the usual suspects–politicians, labor unions, intellectuals, and not-for-profit advocacy groups–who clamor for raising Seattle’s minimum wage to fifteen dollars an hour. The irrefutable economic law of the marginal utility of labor explains that no wage can be paid above the value of one’s contribution to the business. To do so will destroy capital and lead to business failure. To avoid this outcome, firms will, to the best of their ability, replace workers with machines. If they cannot, they will go out of business. Of course, no where in your report is this elephant in the room even discussed as a possibility.

Patrick Barron

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The Greatest Economic Myth in the World Today

From today’s Open Europe news summary:

New French PM calls for greater ECB action and criticises strong euro
French Prime Minister Manuel Valls yesterday won a vote of confidence in the lower house of the French parliament by 306 to 239. In his keynote speech, Valls stressed that the exchange rate of the euro is “too high”, and that “the ECB carries out a less expansionary monetary policy than its American, English and Japanese counterparts”. He also announced €50bn of budget savings between 2015 and 2017, and a series of tax cuts aimed at reducing labour costs by €30bn by 2016.
FT WSJ Irish Times Reuters Independent Le Figaro Les Echos Le Monde Le Figaro 2 Libération

Monsieur Valls expresses his belief in the greatest economic myth in the world today–that debasing one’s own currency is the path to economic recovery and prosperity. I cannot say this often enough–no nation can force another, against its will, to pay for its economic recovery. Debasing one’s own currency leads to an external transfer of wealth to one’s trading partners and to an internal redistribution of wealth from the non-exporting sector of the economy to the exporting sector of the economy.  Patrick Barron

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No criticism of the Fed allowed

Re: Jeremy Stein to Resign From Fed Board to Return to Harvard

Now, no one would ever call Harvard professor Jeremy Stein an Austrian school economist, so it is illuminating how even his modest questioning of Quantitative Easy is not allowed in the hallowed halls of the almighty Federal Reserve. Consider Stein’s inflammatory statement that “Monetary policy should be less accommodative…”. Not much of a criticism, right? Maybe the Fed should mull that thought over for a moment or two, right? Not on your life, you free market radical! Can’t you see the smoke coming out of our shrine to John Maynard Keynes? Our god is angry! Throw out the heretic before he wreaks vengeance upon us!

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Re: E.U. Lawmakers Approve Tough ‘Net Neutrality’ Rules

Newspeak, the official language of George Orwell’s totalitarian nightmare regime in his novel Nineteen Eighty-Four, has come to Europe. Billed as a law to protect the consumer from high prices and ensure more access by internet content providers, this new “net neutrality” law is nothing more than a backdoor takeover of the internet by the state in order to reward politically connected constituents today at the expense of entrepreneurs who risk their own capital in order to bring us untold wonders in the future. In all-too-typical fashion, the parasitical state just could not keep its hands off the one engine of economic dynamism in the world–the burgeoning digital economy. Rather than encourage private companies to invest the billions necessary to bring the common people of Europe the full wonders of the digital economy, this legislation will discourage investment by making future profits problematic. Who will invest in something that may never return a profit due to government regulations and price fixing? While so-called consumer groups rejoice that formerly costly services MUST be provided now at no additional cost, Europe will stagnate while the rest of the world leaps ahead in digital services. Never has the analogy of eating one’s seed corn been more apt.

Patrick Barron

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The wages of a public control of the economy

From today’s Open Europe news summary:

German Energy Minister warns that there is “no reasonable alternative” to Russian gas
German Minister for Economic Affairs and Energy, Sigmar Gabriel, yesterday warned that there is “no reasonable alternative” to Russian gas imports, but suggested that “scaremongering” around a potential cut off was not warranted as Russia is likely to honour its contracts. His comments seem to run counter to German Chancellor Angela Merkel’s calls for a “new inspection” of Europe’s energy policy.

All nations seem to assume that a public energy policy will bring their citizens and industries cheaper and more stable energy. The opposite, of course, always happens. This is just the latest example of government meddling in a key sector of the economy. Germany’s government has chosen to close its nuclear plants. It subsidizes windmills. Germany’s green movement is very powerful and exerts a negative influence on Germany’s ability to exploit local energy sources through new techniques, such as fracking. As a result, energy prices in Germany are approximately double those of the US and it is dependent upon supplies from political dictatorships like Russia.

In a free market for energy firms would rush to fill energy orders when a rival supplier appeared to be unreliable. In a free market for energy a Russian cut off of natural gas would result in a permanent loss of customers to rival suppliers. The current situation is made worse by US law that prohibits exports of natural gas. In an unhampered market, US firms would be free to sell gas to the highest bidder and there is little doubt that Europe would negotiate alternative sources with a threatened Russian supply cutoff. A Russian embargo would permanently damage its natural gas industry by proving it to be an unreliable supplier, costing it the loss of business for many, many years.

Unfortunately, all nations use the economic output of their citizens and firms as weapons of national policy, even in the absence of war. The result is the opposite of their intentions, which should surprise no one.  Patrick Barron

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What can we expect from new Fed Chairman Janet Yellen?

No change.

Oh, you want more? Well, OK, I suppose I can give more of an explanation than that. Groucho Marx used to tell a joke on himself that “I wouldn’t want to belong to any club that would admit me as a member.” That pretty much sums up why we shouldn’t expect much from the new chairman of the Federal Reserve System. This administration and this congress will never admit anyone that is not of the Keynesian school of economics persuasion. As long as this mentality resides in the political halls of power, our nation will not get another Paul Volcker.

That means that we should anticipate a continuation of policies that assume that monetary expansion can spur economic growth. It cannot. Monetary expansion can spur phony economic growth; i.e., fooling entrepreneurs to invest capital in projects that will not return a profit. GDP may go up…temporarily. Employment may go up…temporarily. Janet Yellen and her fellow Keynesians believe that the Fed can print software engineers, doctors, nurses, steel mills…in other words, real resources. What nonsense, yet that is what they believe. They may couch this error in highfalutin terms, but that is what they mean on a fundamental level. In the end capital will be destroyed, resulting in an economic bust, and the nation will have wasted years and resources that it can never recover.

Now, Yellen may preside over a gradual “tapering” of the unprecedented “quantitative easing” program begun under Bernanke. But this does not mean that she is different. Remember, that program was unprecedented; everyone knew at its beginning that it could not continue forever. Whoever occupies the Fed chairmanship would have to end that program at some point…we hope. There is no guarantee, however. If rates start to rise, unemployment rises, and businesses start to go bust, the Fed could jump right back into the program, because that is all it knows how to do–print money. The real question is whether Yellen and her fellow travelers will accept a recession that most likely will occur as QE ends. The Fed likes to think of QE as a jump start, a one-time boost, a helping hand, etc. But these are false analogies. QE funds projects that cannot exist in its absence; therefore, when QE ends or even slows down, these projects will be revealed to be unprofitable. No amount of cost cutting will make them profitable. They were born of QE and they will die when QE ends. The only question is whether the Fed will accept the necessary recession or will jump right back into money printing. If it does the latter, we can expect an even greater bust in the future.

The Fed has painted itself into a corner. There is no way that the nation can avoid either a recession or the collapse of the value of the dollar. We should prefer the recession, then insist on an end to monetary expansion, regardless of the howls from the politicians that the government cannot continue its many programs otherwise. At bottom this is a political problem. Only a radical change in the mindset of government can end the monetary madness.  Patrick Barron

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