When the government pumps trillions of dollars into the economy, they’re not actually printing the money. It enters as digital entries in banks across the country. It’s made the system fast, responsive, and, unfortunately, vulnerable. Now our money is no longer something we hold in our hands, but something that exists on a very susceptible network.
The so-called recovery is only built on debt and printed cash declares our own Byron King. In the long term, the only option for the government to continue financing it's operations is to print too many dollars. Money printing has it's limits, however. It's Byron's opinion that at some point, perhaps very soon, the government will have to turn to more desperate measures. Namely, capital controls. In the following featured essay, Byron outlines 4 probably ways the government will take your cash and one play you can buy through your broker to prepare today. Read on...
Americans expatriate because they want to get out of the country. Corporations expatriate for similar reasons. Clem Chambers explains...
In a 2009 article, the Huffington Post went into considerable detail about the number of people with PhD degrees in economics employed by the Board of Governors of the Federal Reserve System. This is the government’s branch of the Federal Reserve. It is not one of the 12 regional Federal Reserve banks, all of which […]
The U.S. dollar is the dominant global reserve currency. All markets, including stocks, bonds, commodities, and foreign exchange are affected by the value of the dollar.The value of the dollar, in effect, its “price” is determined by interest rates. When the Federal Reserve manipulates interest rates, it is manipulating, and therefore distorting, every market in […]
The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance or the get-rich-quick adventurer. They will die poor.– Jesse Livermore, How to Trade in StocksThe trouble with capitalism’s guardians is that they have no […]
John Foust, a Democrat running for the 10th congressional seat in Northern Virginia, is — like Gov. Terry McAuliffe and other state Democrats — gung-ho to expand Medicaid. His wife’s position is, shall we say, a bit more nuanced.Foust has slammed his opponent, Republican Del. Barbara Comstock, for her opposition to expansion. He has spoken […]
The midterm election season is upon us, and it’s a tossup whether the Republicans will win the Senate, or if President Obama, seemingly oblivious as conflict flares up around the world, will, through his continuous campaigning, keep Harry Reid in his majority leader seat.The only thing we know for sure is that sociopaths will be […]
Alexander Hamilton was America’s first Secretary of Treasury under President George Washington. When he first entered office in 1789, America was an agricultural nation of just 4 million still broke from its financially costly victory over the British Empire in the Revolutionary War.The states had accumulated relatively massive debts to finance that war, which mostly […]
A great technology solves a problem that we didn’t know we had. It makes us aware of deprivations we didn’t know existed until we discover the new thing. Once discovered, we can’t go back.People in the 1950s, for example, never missed the smart phone. They were pleased to have a phone at all. But today, […]
Fifty years after the 1929 crash, a group of money managers and investment thinkers put together a collection of essays looking back at that experience. The result was a distillation of some pretty fine investment wisdom. Timely, I think, to review now.One of the contributors was Arthur Zeikel, then with Merrill Lynch. The title of […]
Although the mainstream media have turned its attention away from the wreckage of Obamacare, don’t think for a second that all is well.As the politicos in D.C. focus their attention on the midterm elections in November, now is a great time to study, prepare, and seek out the most affordable, accessible, and highest quality options […]
Turn on the tube and economic ignorance seems to be everywhere. There is constant shilling for more government. Business is demonized. Man is said to be trashing the environment. “Workers and women are oppressed” is the constant mantra.And members of the clueless media nod their heads in unison.Only John Stossel has provided the fresh air […]
In early July 1944, delegates from 44 countries gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire. A three-week summit took place, at which a new system was agreed to regulate the international monetary and financial order after the Second World War.The U.S. was already the world’s commercial powerhouse, having eclipsed the British […]
In the minds of many people around the world, including in the United States, the term “capitalism” carries the idea of unfairness, exploitation, undeserved privilege and power, and immoral profit making. What is often difficult to get people to understand is that this misplaced conception of “capitalism” has nothing to do with real free markets […]
Some people are saying it is just what the doctor ordered. Others are saying that the cure is worse than the disease.The Affordable Care Act? Reengagement in Iraq? Tea Party bullying in the GOP?Not this time. Just as protracted in the corridors of Congress and the White House is the debate over the proposed reform […]
In 2012, money mandarins running the European Union chose stagnation over restructuring. Here’s a consequence of that choice: expectations for a self-sustaining economic recovery keep getting crushed.Two years ago, European Central Bank (ECB) chief Mario Draghi promised to do “whatever it takes” to hold the eurozone together. He bluffed nervous investors into believing in a […]
People jacked up about income inequality can find a new hobby. The 1% are victims of a doomsday machine, and the countdown is ticking. Machine, thy name is “family.”This came to mind as I was reading a preview of Columbia Professor Andrew Ang’s forthcoming, must-read book on Asset Management. Ang is that oxymoron, an exciting […]
It might sound like the latest new product from Apple, but IPAB is actually the newest major legal challenge to Obamacare.Recently, a three-judge panel in the 9th Circuit Court of Appeals in San Francisco heard arguments about the Independent Payment Advisory Board, or IPAB, a 15-member panel created by the Affordable Care Act and empowered […]
Americans have come to believe that the IRS and the income tax are inevitable parts of our lives. After all, most everyone alive today has lived his entire life under federal income taxation.It wasn’t always that way. For some 125 years, the American people lived without having any tax imposed upon their income.The obvious question […]
Here’s a fun fact: Although we all hate the U.S. dollar, as it continues to hemorrhage wealth, its foothold as the world’s reserve currency isn’t going to disappear overnight.A Russian gas deal with China won’t change that — as we’ll highlight below.But before we get to the nitty-gritty, let’s dive into a story that’s right […]
Franklin Delano Roosevelt famously used the term “forgotten man” in a 1932 speech to describe those at the bottom of the economic pyramid who, he felt, government should aid.But the originator of the phrase “forgotten man” had a whole different meaning in mind. He aimed to expose the seeming good intentions of government to reveal […]
The Keynesian disaster recovery plan has been to lower rates, force people to take more risk in search of yield, and entice others to borrow and spend and, magically, more jobs will be created. If people won’t buy stocks, central banks will.Back in 2011, Ben Bernanke, when asked if QE2 was driving up stock prices, […]
I want to share some insight and give you a front-row seat to America’s next big shale play.Let’s get to it…Over the past 10 years, the U.S. has turned the ship around, quite literally.We’ve gone from a country that was expecting to import massive amounts of oil and gas — to a country that’s sitting […]
Whatever your views on the role of government, one thing is clear: There will be no way to pay for it if the economy doesn’t grow. And I’m not talking by a measly percentage point or two. If we can’t find our way back to 5% annual economic growth or above soon, America’s accumulated federal […]
According to the Bureau of Labor Statistics, consumer prices are rising at a 2.1% annual rate. This suggests to us that the current stock market boom will die with a bang, rather than a whimper.Fed economists say they don’t think inflation rates are rising. They think the most recent reading is a fluke. But why […]
Politicians love raising the minimum wage because they don’t have to ask voters to pay more in taxes. They just dump the costs onto shop owners. But they don’t act like politicians and go into debt to pretend like they have all the money in the world. They face real world situations. And sometimes that means replacing workers with more affordable options...
The great battle since 2008 has pitted the ghosts of F.A. Hayek against John Maynard Keynes.
Team Keynes dictated the policies we know too well: more government spending, flood the economy with money, prevent liquidation. This team predicted a recovery that still hasn’t come.
Meanwhile, Team Hayek has had a different set of predictions. This would not boost recovery. It will forestall it, even make everything worse. We’ll pay an even higher price later on.
As the failure of Team Keynes has become clearer, the battle has become brutal, a real war of words, some of which have been flung at our very own Robert Murphy, who serves on the Advisory Board of the Laissez Faire Club.
Naturally, we’re coming to his defense.
Hayek and Keynes — the great opponents in the struggle over how government should manage recessions — were social acquaintances. They disagreed profoundly on nearly everything. Still, they had respect for each other’s professional accomplishments.
For this reason, in 1946 Hayek asked Keynes the burning question. Did Keynes worry about whether his followers would use his theories and invoke his name on terrible policies? Keynes said “no” because he would simply step up and correct them, distancing himself from whatever contradicted his core values.
A few weeks later, Keynes died.
He left hundreds and thousands of economists — many generations now — to claim to speak for him. And what they have said and done is really quite terrible. And most of these terrible policies have been an extension of what Keynes himself suggested in the 1930s and 1940s.
Would Keynes have repudiated them? Maybe or maybe not. Keynes had a long record of randomly changing his mind depending on the political need at the time.
So it is with his followers. The two most prominent and politically engaged Keynesians today are Berkeley’s Brad DeLong and Paul Krugman of MIT and the New York Times. Since 2008, they have been the leading voices in in defense of endless rounds of stimulus. However much money Congress spends, it’s never enough. However much money the Fed creates, it should create more. No matter how low interest rates are, they should be lower.
For five years, they’ve engaged in an unrelenting rhetorical ploy. When there’s good economic news, they say: look how government intervention worked! When there’s bad economic news, they say: we told you that there needed to be more government intervention!
It’s pretty clear that no existing reality will ever shake their faith in the power of government to cure all ills through regulations, inflation, spending, and taxation. It’s an infallible doctrine.
It’s been fascinating to watch mainly for one reason. Those of us with a non-Keynesian understanding of economic processes knew all along that the post-2008 stimulus would not fix the problem and would actually end up doing more damage. The proponents like DeLong and Krugman — two among multitudes — said repeatedly that only government measures would cure the problem.
Team Hayek knew better. We knew that artificially low interest rates would only break the system, that more spending would only divert resources, that more regulation would only gum up the works of enterprise, and that more debt would only crowd out private investment.
You might think that DeLong and Krugman should be held to account. Well, one of the most effective interlocutors has been our own Robert Murphy. He has tracked their predictions carefully for five years and shown repeatedly that they have been consistently wrong. More substantially, he has shown why they have been wrong. Their simple mechanical models are too aggregated to capture the complex pricing signals of the market.
Murphy has repeatedly challenged Krugman to a debate, and even raised $81,000 to go to a charitable cause if Krugman agrees. But neither DeLong nor Krugman have shown any willingness to engage Murphy in a debate or closely discuss Murphy’s “Austrian” views on the great economic problems of our time.
Then at year’s end, both blew a gasket.
DeLong went first. He called out Murphy on his prediction that we would see 10% price increases by 2013, and further drew attention to a $500 bet that Murphy made with economist David Henderson on this point. Then Krugman jumped in too, further flogging Murphy. Both said that Murphy needs to apologize to his readers and rethink his entire worldview.
Talk about chutzpah, huh? The Keynesians are the ones who have been “completely, comprehensively, unmistakably, fundamentally, fatally, totally wrong” (to use DeLong’s words) about the stimulus. After all, if stimulus #1 worked, there would not have been a need for #2, #3, #4, and #5 unto infinity. It’s never enough. Even the little progress they can point to, such as a slightly lower unemployment rate, is compromised by the dramatic fall in the workforce itself. It’s hardly progress that millions have simply decided to give up on ever finding suitable employment.
It was Murphy that has been 100% right about the big picture: Keynesian policy has not done what it is supposed to have done, and this is for all the reasons that the Austrian-Hayekian model would predict.
But what about Murphy’s own inflation prediction? After all, wasn’t Murphy wrong here and didn’t he lose? Yes, he was wrong. But note: he obviously believed in it enough to put his own money on the line, which is saying something in a world of punditry without accountability.
Moreover, being wrong on this one empirical matter says nothing about the Austrian model itself, which is a not a model designed to predict inflation but a model to account for the business cycle itself and how not to try to cure it.
The mitigating factors that Murphy overlooked make a fascinating study in themselves. The European meltdown dramatically increased the market for dollars overseas, blunting inflationary effects at home. Money velocity has also taken a dramatic fall, reducing upward price pressure all around.
Above all else, Bernanke’s zero interest rate policy has broken the banking system and made it less effective in creating the credit that it might have in the past. In other words, Murphy had assumed that prevailing institutions would keep working as they had. But they stopped working and therefore didn’t react as one might expect.
(I’m also among those who had expected dramatic increases in prices, and admit that I too was wrong. My attempt to account for why appeared in Laissez Faire Today under the title “The Great Disconnect“).
There is nothing unusual about this. Recessions often signal troubled bank balance sheets and a broken system of credit expansion. In fact, he years 2008-2013 closely parallel the years 1930 to 1932, when the Fed was busy trying to create new money through the banking system but the banking system would not cooperate. Reserves ballooned (just like today) but money on the street did not.
Murray Rothbard tells the story in America’s Great Depression, the definitive Austrian account of the onset of the crisis. He shows how the Fed kept trying to expand money and credit through low rates and bond purchases, but they were unable to achieve their goals.
Following the stock market crash, “in 1930, the government instituted a massive easy money program. Rediscount rates of the New York Fed fell from 42 percent in February to 2 percent by the end of the year…. Despite this increase in reserves, the total money supply (including all money-substitutes) remained almost constant during the year,” while “production and employment kept falling steadily.”
Then in 1931: “The Federal Government had tried hard to inflate, raising controlled reserves by $195 million — largely in bills bought and bills discounted, but uncontrolled reserves declined by $302 million, largely due to a huge $356 million increase of money in circulation…. The inflationary attempts of the government from January to October were thus offset by the people’s attempts to convert their bank deposits into legal tender.”
Again: “The Federal Reserve tried its best to continue its favorite nostrum of inflation — pumping $268 million of new controlled reserves into the banking system (the main item: an increase of $305 million in bills discounted). But the public, at home and abroad, was now calling the turn at last…. the will of the public caused bank reserves to decline by $400 million in the latter half of 1931, and the money supply, as a consequence, fell by over four billion dollars in the same period.”
And then 1932: “Despite this great inflationary push, it was during this half year that the nation’s bank deposits fell by $3.1 billion; from then on, they remained almost constant until the end of the year. Why this fall in money supply just when one would have expected it to rise? The answer is the emergence of the phenomenon of ‘excess reserves.’ … Naturally, the banks, deeply worried by the bank failures that had been and were still taking place, were reluctant to expand their deposits further, and failed to do so.”
Rothbard summarizes the paradox with a general principle: “In a time of depression and financial crisis, banks will be reluctant to lend or invest, (a) to avoid endangering the confidence of their customers; and (b) to avoid the risk of lending to or investing in ventures that might default. The artificial cheap money policy in 1932 greatly lowered interest rates all-around, and therefore further discouraged the banks from making loans or investments. just when risk was increasing.”
As a result, money supply was flat or fell just as the Fed was inflating.
Sound familiar? Absolutely. It’s just like today. But get this: Rothbard is a thorough practitioner of the Austrian theory, a man from whom Murphy’s learned economics. His book is the main Austrian account of the Great Depression.
In other words, it is the Austrians who have best accounted for our current plight, and that includes the phenomenon that Murphy himself had mispredicted only because he underestimated how much the downturn plus Bernanke’s policies would wreck the credit system. Other than this point, Murphy has been more accurate in his forecasts than any economist of the non-Austrian variety.
It is very much to Murphy’s credit that he was chosen by the two leading spokesmen for Keynes today as the great enemy that they have to slay. He is indeed. He is young, smart, and he knows his stuff. He has argued consistently that the Fed’s policies will create new forms of distortions. We might yet see price inflation but even in its absence, the distortions in the bond market and capital structure are real and highly dangerous for the future of economic growth.
They attacked him on a small point on which he was vulnerable in order to distract from the bigger point on which he has been completely correct and they have been completely wrong.
I’m also very happy to announce that Murphy will be first up in an exciting new series of seminars run by the Laissez Faire Club. In the course of three lectures with questions and answers, he will discuss the current economic stagnation and the correct theory that accounts for it. He will present to readers the ideas that have granted him such prescience in a time when the Keynesians have been so consistently wrong.