The deliberations of the individuals which determine their conduct with regard to money are based on their knowledge concerning the prices of the immediate past. If they lacked this knowledge, they would not be in a position to decide what the appropriate height of their cash holdings should be and how much they should spend for the acquisition of various goods.
This year’s Nobel Prize in economics was awarded to David Card of the University of California, Berkeley, Joshua Angrist of Massachusetts Institute of Technology, and Guido Imbens of Stanford University. The laureates, according to the Nobel Committee have made an important contribution as to how to ascertain cause and effect from observational data.
Through the sheer power of his intellectual output, Ludwig von Mises established himself as one of the most important intellectuals of the twentieth century. His work Human Action remains a foundational text of the Austrian school. His critique outlining the impracticality of socialism was vindicated with the fall of the Soviet Union and remains without a serious intellectual challenge today.
Knowledge of the effects of government interference with market prices makes us comprehend the economic causes of a momentous historical event, the decline of ancient civilization.
Human history can be viewed from many angles. One of them is to see it as a struggle for power and domination, as a struggle for freedom and against oppression, as a struggle of good against evil.
Central banks should know by now that you cannot have negative interest rates with low bond yields and strong growth. One or the other.
Central banks have chosen low bond yields at any cost, despite all the evidence of stagnation ahead. This creates enormous problems
It is not a surprise that markets have bounced aggressively, driven by the tech sector, after a slump based on concerns about the pace of economic growth. Stimulus package effects are increasingly short, and this was pretty evident in the poor figures of industrial production and the ZEW survey gauge of expectations. The same can be said about a weakening ISM index in the United States. United States ISM Services PMI came in at 60.1, below expectations (63.5) in June, precisely in the sector where the recovery should be strongest.
Interestingly, European markets declined sharply after the European Central Bank sent the ultimate dovish message, a change in its inflation target that would allow the central bank to exceed its 2 percent limit without change of policy. What does it all tell us?
First, that the placebo effect of stimulus packages shows a shorter impact. Trillions of dollars spent create a small positive effect that lasts for less than three months but leaves a massive trail of debt behind.
Second, central banks are increasingly hostage to governments that simply will not curb deficit spending and will not implement structural reforms. The independence of the monetary authorities has long been questioned, but now it has become clear that governments are using loose policies as a tool to abandon structural reforms, not to buy time. No developed economy can tolerate a slight increase in government bond yields, and with sticky inflation in nonreplicable goods and services, this means stagnation with higher prices ahead, a bad omen for the overall economy.
Third, and more concerning, market participants know this and take incremental levels of risk knowing that central banks will not taper, which leads to a more fragile environment and extreme levels of complacency.
So-called value sectors have retraced in equity markets, which shows that the recovery has been priced and that the risk ahead is weakening margins and poor growth, while the traditional beneficiaries of “low rates forever” have soared to new highs.
Despite rating agencies’ concerns about the rising figure of fallen angel debt, there is extreme complacency among investors looking for yield, and they are buying junk bonds at the fastest pace in years despite a rising number of bankruptcies.
Central banks justify these actions based on the view that inflation is transitory but ignore the risks of elevated prices even if the pace of increase in those prices slows down. If food and energy prices rise 30 percent, then fall 5 percent, that is not “transitory” to consumers who are suffering the above-headline increase in the prices of the things they purchase every day, a problem that occurred already in 2020 and 2019. The most negatively affected are the middle-low and poor classes, as they do not see a wealth effect from the rise in asset prices.
Sticky inflation and misguided loose fiscal and monetary policies are not tools for growth, but for stagnation and debt.
So far, central banks believe their policies are working, because equity and bond markets remain strong. That is like giving more vodka to an alcoholic because he has not died of cirrhosis yet. Low bond yields and high levels of negative-yielding debt are not signaling monetary success but are evidence of a deep disconnection between markets and the real economy.
Central banks have already stated that they will continue with ultraloose policies no matter what happens to inflation in at least a year and a half. For consumers that is a lot of time for weakening purchasing power of salaries and savings. Markets may continue to reward excess and high risk, but that is not something that should be ignored, let alone celebrated. Extreme risk will be blamed for the next crisis, as always, but the cause of that extreme risk -perennial loose monetary policy- will not stop. In fact, it will be used as the solution if there is a market collapse.
Central banks should be tapering already, and if they believe that low sovereign yields are justified by fundamentals, let markets prove it. If negative nominal and real yields are justified by the issuers’ solvency, why is there any need for monetary authorities to purchase 100 percent of net issuances? Reality is much scarier. If central banks started tapering, sovereign yields would soar to levels that would make many deficit-spending governments quake. Therefore, by keeping yields artificially low, central banks are also sowing the seeds of higher debt, lower productivity, and weaker growth—the recipe for crowding out, overcapacity, and stagnation.
Author: Daniel Lacalle
Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).
He is a professor of global economy at IE Business School in Madrid.
Now and then, it pays to take a step back to get a broader perspective on things, to look beyond the daily financial news, to see through the short-term ups and downs in the market to find out what is really at the heart of the matter. If we do that, we will not miss the fact that we are living in the age of fiat currencies, a world in which basically everything bears their fingerprints: the economic and financial system, politics—even people’s cultural norms, values, and morals will not escape the broader consequences of fiat currencies.
This second part of the series about the Principles of Economics treats Menger’s exposition of the economy. In continuation of the first part, which covered the general concept of goods, the part on the economy treats the role of economic goods in relation to human wants. Based on the original version in German, published in 1871 as Grundsätze der Volkswirthschaftslehre, the following exposition tries to capture the spirit of the work, with all direct quotes in the text freshly translated for this article.
An insider confided to a friend that all he is doing right now is transaction work for real estate holders who are selling now before the market crashes. His clients, members of Sin City’s illuminati, once bitten by the ‘08 crash, believe they’ll beat the crowd to the sales window before the local retail and office market collapses.
As it began rapidly expanding the money supply early in 2020, the Fed confidently assured the public there would be no unanticipated or serious rise in inflation. Now that their projections have failed to materialize (in fact, their forecasts were off by almost 40 percent), they assure us that this will be but a temporary spike.
In his book Denationalisation of Money, F.A. Hayek argued that governments have never devoted their power to provide proper money over time. They “have refrained from grossly abusing it only when they were under such a discipline as the gold standard imposed.”1 The gold backing of the US dollar as the global reserve currency was lifted in the early 1970s, and paper currencies, so-called fiat currencies, have since become the norm. Following this decision, the paper currencies have dramatically lost value against gold (figure 1). Since the turn of the millennium, this process has substantially accelerated.
Money supply growth slowed again in May, falling for the third month in a row, and to a 15-month low. That is, money supply growth in the US has come down from its unprecedented levels, and if the current trend continues will be returning to more “normal” levels. Yet, even with this slowdown, money-supply growth remains near some of the highest levels recorded in past cycles.
What is noteworthy about the depressing title to this article is its source. In a case of uncommon candor, President Biden’s economic team has announced that once the artificially high, stimulus-juiced GDP (gross domestic product) measurements of the next two years subside, the United States will experience sub–2 percent growth for the rest of the decade. This dismal forecast wouldn’t be surprising if it had come from Biden’s political opponents, but coming out of the White House itself, it is an astonishing admission.
I spent the last week at the Bitcoin Lounge nestled cozily amid the Free State Project’s annual Porcfest in New Hampshire—named for the Porcupine, the libertarian mascot, and located just 7 miles from the infamous Bretton Woods as the crow flies.
Last Week, the US Supreme Court confirmed that Fannie Mae and Freddie Mac are essentially government-owned corporations, and are likely to stay that way.
The Court didn’t say this in so many words, but the ruling (namely, Collins v. Yellen) helps to end the fiction that Fannie and Freddie are private organizations only temporarily in a state of “conservatorship” under the control of the US government.
The ruling itself is seemingly extremely mundane. The Court ruled that the chief executive of the Federal Housing and Finance Agency (FHFA)—the government agency that effectively owns Fannie and Freddie—was for all practical purposes a government appointee like any other executive from a government agency. Moreover, the Court refused to intervene to end the federal government’s practice of “sweeping” funds from Fannie and Freddie and placing those funds in the US Treasury.
In effect, the rulings confirm what more cynical and savvy observers have long known: that Fannie and Freddie have always been quasi-government organizations, and are now full-on government bodies following the bailout and takeover of the two corporations which occurred in September 2008.
In other words, in practice, Fannie and Freddie are no more “private” entities than is Pemex, Mexico’s state-owned petroleum company.
This past week, the government announced that it would take Freddie Mac and Fannie Mae, the mortgage giants, under conservatorship, which is a nice way of saying that they will be nationalized.
We don’t use the word nationalize any more. We can try an experiment and read the new term “conservatorship” back into history. In fact, we might say that Stalin and Lenin put Russia’s industries under a kind of conservatorship. Or we might say that Mao pushed a kind of land conservatorship, or that Hitler’s policy was one of national conservatorship. Marx’s little book could be retitled The Conservatorship Manifesto.
You see, the government keeps having to make up new names for these things because the old policies, which were not that different in content, failed so miserably. The old terms become discredited and new terms become necessary, in an effort to fool the public.
So, although we now politely—nearly 13 years later—refer to Fannie and Freddie as companies “in conservatorship”—the reality is these companies have been nationalized.
Of course, they were never truly private. Fannie and Freddie were created by Congress to add liquidity to the mortgage markets by buying up mortgages in the secondary market. For investors, the desirability of their stock to investors long rested on the implicit promise—a de facto wink and nod—making it clear that Congress would never allow these companies to fail. Yet, not even this was enough for the management at Fannie and Freddie. As early as the late 1990s, Fannie Mae was likely “misstat[ing] its financial statements.” Freddie engaged in similar behavior. None of t his affected what many investors were banking on: that in case of any major disruptions to the housing market, the federal government would force the taxpayers to bail these companies out.
That’s exactly what happened in 2008, as just the latest spasm of “financialization” which sucked ever more resources out of the non-financial economy in order to pour more cash into the financial sector.
Yet, investors perhaps did not expect the feds to expropriate the companies, although such terms were never used. Both investors and federal regulators have continued to fight over just how fully these companied had been nationalized. Last week’s ruling makes it clear they are indeed truly nationalized, and the money that flows into Fannie and Freddie is the federal government’s money.
Nor should we expect this to change any time soon. Approximately half of the mortgage market at this point is backed by Fannie and Freddie, and that means the stakes are high. Congress needs Fannie and Freddie to grease the wheels of the mortgage market and to ensure that there is always plenty of money sloshing around in the mortgage markets so that interest rates remain low and the homeownership rate is propped up.
To trust Fannie and Freddie to the “free market” might allow interest rates to adjust to a significantly higher rate, and that’s clearly not tolerable in the current climate in Washington, DC.
It’s clear Washington never intended these companies to be truly private, but the current housing market is so fragile and so reliant on artificial amounts of liquidity—and artificially low interest rates—that it appears clear federal officials will continue to insist on direct control.
It’s all just another example of how the modern US economy is heavily socialized, financialized, subsidized, and controlled by federal technocrats.
The Court has just told us what we already knew, but now it’s getting harder to investors to deny this reality. Following the ruling last week, Fannie and Freddie stock plummeted 45 percent at one point, and remains at a multi-year low as investors now increasingly suspect hopes for “reprivatization” are in vain.Author:
Carl Menger has not only provided an irrefutable praxeological theory of the origin of money. He has also recognized the import of his theory for the elucidation of fundamental principles of praxeology and its methods of research.1
The United States retail sales and jobless claims weakness, significantly below estimates, coincides with the largest fiscal and monetary stimulus in history. Something is not right when these figures come significantly below estimates in an environment of massive upgrades to gross domestic product (GDP). Why?
The diminishing returns of stimulus plans are very evident. Artificially boosting GDP with large government spending and monetized debt generates a short-term sugar high that is rapidly followed by a sugar low. The alleged positive effects of a $1 trillion stimulus plan fade shortly after three months. I recently had a conversation with Judy Shelton where she mentioned that the recovery would be stronger without this latest massive stimulus package. The economic debacle happened due to lockdowns and the recovery comes from the reopening. We need to let the economy breathe and strengthen, not bloat it.
The diminishing returns of stimulus plans are evident. A $20 trillion fiscal and monetary boost is expected to deliver just a $4 trillion real GDP recovery followed by a rapid return to the historical trend of GDP growth this will likely lead to new record levels of debt, weaker productivity growth and slower job recovery. The pace of global recoveries since 1975, according to the OECD shows a weaker trend.
Deficit spending is mostly devoted to current spending, which leads to an almost negligible potential growth improvement. If any, evidence suggests fiscal multipliers are poor, even negative, in highly indebted and open economies.
We must be cautious of the excess of euphoria that emerges from many statements about the so-called European “Next Generation” funds. Many of the optimistic estimates seem to forget the negligible effect of previous similar plans.
The sharp increase in contributions to the European Union Budget and the tax increases announced by some countries like Spain will likely diminish the net effect of these funds.
All the success or failure of the European Recovery Plan rests on the estimates of the multiplier effect of the investments made. And the prospects are not good if we look at history.
The average impact of the last programs such as the 2009 Employment and Growth Plan, the Juncker Plan or the Green Directives to support investment in renewables has been extremely low. The empirical evidence from the last fifteen years shows a range that, when positive, moves between 0.5 and 1 at most … And in most of the peripheral countries, they have been negative.
According to the European Union’s own estimates, the Juncker Plan generated between 2014 and 2019 a total impact pf +0.9 percent in GDP and added 1.1 million jobs from €439 billion invested. The return on invested capital of this massive plan was beyond poor. And let us remember that the Juncker Plan was used entirely for investment projects with expected real economic return and without the amount of current spending and political intervention of the 2021 Recovery Plan.
Can we really believe in an impact of 4 percent on GDP in three years from these European funds as the average consensus estimates when the Juncker Plan generated—if we believe it—0.9 percent in five years?
The government of Spain, in its Recovery, Transformation and Resilience Plan, states that “in aggregate terms, the employment generated by the Plan will represent twelve jobs for every million euros invested.” Twelve jobs per million spent!
The multiplier effect and its structural impact depend on execution and efficiency factors that are more than questionable. The likelihood that these funds will be malinvested or squandered is enormous.
The idea that hundreds of magnificent and profitable projects will suddenly appear is also questionable. It is very difficult to believe that, suddenly, thousands of profitable and job-creating projects will appear when they were not carried out in recent years with interest rates at historic lows, unlimited liquidity and growing investment appetite.
These so-called stimulus plans have a huge risk: that they involve a huge transfer of wealth from the middle classes and taxpayers destined for political spending without real economic return and investments of doubtful profitability.
There has never been capital available for technology, digitization, and sustainability investment. These investments do not need political direction or funding.
Cheap money, increased public intervention, and massive stimulus plans have not worked as drivers of productivity and potential growth. The path to stagnation and zombification was already a problem in 2018. We need private investment and free trade to boost productivity. We need open economies with a thriving entrepreneurial spirit, not an economy based on spending and debt. The problems created by the chain of the stimulus of the past years are clear: elevated debt and weak growth. More spending and debt will not solve them.Author:
[This article is part of the Understanding Money Mechanics series, by Robert P. Murphy. The series will be published as a book in 2021.] Although it conjures up scary imagery, shadow banking is simply a term for banking operations that occur through financial intermediaries that are not traditional commercial banks. The term was coined in 2007 by economist Paul McCulley and is related to the fact that standard banking regulations often do not apply to nonbank institutions (such as hedge funds and private equity lenders), which are hence operating “in the shadows.” According to estimates of nonbank credit intermediation made by the Financial Stability Board, “the global shadow system peaked at $62 trillion in 2007, declined to $59 trillion during the crisis, and rebounded to $92 trillion by the end of 2015.”1
In the wake of the Covid Recession and the drive to pour ever larger amounts of “stimulus” into the US economy, the Federal Government in 2020 spent more than double—as a percentage of all government spending—of what all state and local governments spent in 2020, combined.
Fighting The Tyranny 