If one boldly asserts the importance of the right of freedom of speech, it is almost inevitable that another will respond with one of the most common apologetic arguments for the government limitation of speech, “But you can’t yell ‘Fire!’ in a crowded theater.” The non sequitur argument is supposed to humble the right of free speech in favor of some government restriction. This argument fails logically because it does not follow that because a theater may restrict speech of those it admits through sale of a ticket that government must be empowered to legally restrict the speech of its citizens in general.
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.
The Federal Reserve has been increasing the money supply at an explosive rate. The federal budget, deficits, and the trade deficit are record levels. Governments, both foreign and domestic, have locked down people, restricting production and consumption. How should this be viewed by an economist?
Speaking at the Jackson Hole meeting on August 27, 2021, Federal Reserve (Fed) chairman Jerome J. Powell indicated that he supported “tapering” toward the end of this year and hastened to add that interest rate hikes are still a long way off. The term “tapering” means that the central bank reduces its monthly purchases of bonds and slows down the monthly increase in the quantity of money accordingly. In other words, even with tapering, the Fed will still churn out newly printed US dollar balances, but to a lesser extent than before; that is, it will still cause monetary inflation, but less than before.
The philosopher Michael Huemer is usually favorable to the free market, and he is also a strong defender of anarchism. Although I disagree with some of the arguments in his defense of anarchism, The Problem of Political Authority, it is an excellent book.
Since the 1800s, surly Americans have derided politicians for spending tax dollars “like drunken sailors.” Until recently, that was considered a grave character fault. But Joe Biden’s American Rescue Plan Act shows that inebriated spending is now the path to national salvation.
There is a considerable Austrian literature on the unsustainable boom driven by credit expansion. When the boom ends, a depression begins. The depression is a transitional period of reduced production that lasts until entrepreneurs restructure capital and labor into sustainable uses. During the depression, there is unavoidable unemployment of both people and productive assets. The recovery is marked by an increase in production and the employment of resources that were idle during the bust.
A recent article on this page highlighted a stunning situation in which a surgery clinic in Oklahoma City was able to offer outpatient procedures at less than one-tenth of what local hospitals were charging to third-party payment systems such as insurance companies and Medicare. This was a significant article in many ways, in that it presented what truly is a shocking picture of what really happens in the medical care systems in this country.
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.
In order to gain insight into the current and future state of an economy, many economists hold that it is helpful to get the view on this from consumers and businesspersons. Randomly selected consumers and businesspersons are asked to provide their views about the current and the future state of the economy.
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.
Under the Biden administration the US continued escalating the economic and geopolitical frictions with China. At the recent G7 Summit in Carbis Bay, President Biden sought to rally a “united front” against China with traditional G7 allies and new ones such as Australia, India, South Korea, and South Africa and rebuked China on economic policies, human rights, and tensions in the East and South China Seas. The US also persuaded its G7 allies to back a massive infrastructure support package for developing countries. The so-called Build Back Better World Partnership (B3W) is a de facto rival to China’s Belt and Road Initiative (BRI). But it is far from obvious what the West stands to gain by emulating China’s exorbitant and highly controversial modern “Silk Road” venture.
Minimum-wage laws are again in the news, as Joe Biden and his political allies in Congress seek to push the national minimum from its current level of $7.25 per hour up to $15 per hour. Some politicians, Sen. Bernie Sanders for one, declare that people can barely survive even on $15 per hour. If the law takes the minimum up to $15, we can expect pressure to raise it still further in the future.