As the European welfare state is officially in its death-throes none of us should be surprised if political strife gets cranked up to eleven. I firmly expect that we will see much more of this in the future. While I can understand the anger of the electorate and sympathize with the sense of desperation and foreboding, I cannot, however, consider the electoral choices of the weekend particularly enlightened. They do not reflect a coherent, let alone intelligent strategy as the Daily Telegraph headline seems to imply.

If those who ‘won’ the election deliver on their promises, economic disintegration will only accelerate. What is being offered in terms of ‘solutions’ is a dangerous assortment of economic poisons, more suitable to describe the European disease than provide a recipe for stronger growth.

Recovery through early retirement and infrastructure spending? – C’mon. Nobody can take that seriously.

But it seems that just because this heap of economic stupidity can neatly be swept under the wide tent of ‘anti-austerity’, the commentariat seems somehow willing to believe in the wisdom of the crowds and look for some deeper insights here.

I guess the reason for this is that the economic ideologies that are now being strenuously interpreted into the election results rhyme with the economic prejudices of most commentators. They, too, believe that state bankruptcy is best to be ignored or not to be taken too seriously so that we can spend our way out of this mess.

For a long time media pundits have treated us to the perceived wisdom that economic growth can only come from the actions of the government. Only devaluation through euro-exit, inflation through more money printing and more government deficit-spending, preferably by the still credit-worthy Germans and then fiscally-transferred to the maxed-out Greeks, can revive the economy because only this can lift aggregate demand, which is the magic cure-all of economic problems.

What is lost on these commentators is that the European mess is nothing but the inevitable result of government-stipulated aggregate demand. Easy money funded the Spanish and Irish real estate booms and bankrupted their banks and by extension their governments. Easy money allowed Greece’s political class to go on a borrowing binge that has now bankrupted the country and lured large parts of the population into zero-productivity, soon-to-be-eliminated public sector jobs.

Do you still want the state to ‘stimulate’ the economy? Be careful what you wish for.

The real culprit of high youth unemployment in Spain and Italy is not ‘austerity’, which hasn’t even started there, but a bizarrely overregulated and sclerotic labour market in which it is almost impossible for firms of a certain size to fire people. The incentives are thus stacked massively against hiring. Yet, in France one of Hollande’s election promises is not to deregulate the labour market. If I were unemployed in France I would not be counting my chances of getting a job over the next five years.

In France the state runs more than half the economy, yet Hollande promises not to privatize state-run industry. Where is the wisdom in that?

Yet, the statists and socialists are delighted. Paul Krugman, who never saw a debt crisis you could not borrow and spend your way out of, rejoices at such display of economic genius. We are all Keynesians now! Listening to Krugman you would think Greek and French voters were not using the ballot to cling desperately to some remnants of the welfare state but were in fact positively advertising the wisdom of government stimulus and the mystical ‘multiplier’.

Some of the commentators tried to argue that what happened over the weekend was also some kind of anti-establishment vote, a verdict against centralisation and the dominance of the deservedly despised bureaucratic elite in Brussels.

Nice try, but that is rubbish.

This was not an anti-establishment vote at all. It was not a vote for change but a desperate vote for the status quo. Of course, the old elite deserved the sack but they were largely booted out not because people got tired of the old policies but because the leadership now finally admitted that they could no longer deliver on the old promises.

The established parties lost because they could not continue upholding the false promise that had kept them in office for years or decades, the promise to make the “European model” work. They had to admit that the European welfare state was now bankrupt. Kicking the can down the road is increasingly not an option as the end of the road is now in sight.

And the election winners were those who had the chutzpah to maintain that drastic belt-tightening and painful reform were not required but that the people just had to ‘stick it to the man’, who is Angela Merkel and sits in Berlin. The tactic is straightforward. Shoot the messenger!

In France that meant voting for a charisma-free Socialist bureaucrat who will revive France with higher taxes, early retirement and a Hoover dam funded by Eurobonds and the ECB. In Greece, the big winner was an ex-Communist firebrand who admires Hugo Chavez, and who has raged against austerity measures and structural reform.

I guess we now know what the electorate is against. “Say no to cuts!” But what is it for? Over in Ireland, the deputy leader of Sinn Fein, Mary Lou MacDonald, had the answer: “A No vote (to the ‘Austerity Treaty’) in Ireland will strengthen those arguing for jobs and growth.”

Well, who could not love a politician who promises jobs and growth? But the relationship between politics and jobs and growth is a tenuous one. Politicians are not savers who fund the creation of a capital stock through saving, and they are not entrepreneurs who put that capital to productive use. Politicians are people who spend other people’s money. In Ireland the budget deficit runs at 13 percent of GDP per annum, which according to Krugman’s logic must be a fantastic recipe for jobs and growth. Let’s just sit back and watch how that economic miracle is going to unfold.

My guess is that many people in Europe still know, or at least instinctively sense, that the promises of jobs and growth through state spending and money printing are hollow. They know that the state is bust and cannot keep spending money it doesn’t have. The policy options are much more limited than the campaign rhetoric indicates. On trend, fiscal consolidation and structural reform will continue, and Germany’s negotiating position will remain strong.

Yet, on the margin this was an indication that Europe, and in particular France, remain in many areas unreformable, and that the pressure on the ECB to sustain the unsustainable with sizable money injections will, if anything, intensify.

Regards,

Detlev Schlichter

Europe’s Voters Say “No” to Economic Reality was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

What makes him so annoying is his unquestioning, reflexive and almost childlike enthusiasm for state intervention, even in the face of its obvious failure, and his apparent unwillingness to probe any deeper into the real causes of our present economic problems or to show any willingness to investigate the effectiveness or ineffectiveness of his particular medicine. His Keynesian convictions are presented as articles of faith that no intelligent person can seriously question.

A Krugmanesque argument is always built on a number of assumptions that are beyond doubt:

1) Recessions, depressions and crises are the result of the unhampered market. We actually do not have to investigate if markets were really free when recessions occurred or what really were the specific causes of whatever threw the economy off track. When there is a recession, depression or crisis, there must have been too much of an uncontrolled market.

2) The Great Depression was caused by uncontrolled markets.

3) Recessions, depressions and crises are practically the result of one problem: a lack of aggregate demand. People, for whatever reason (and who cares about the reason; let’s not get hung up on those details!) don’t spend enough. If everybody were to spend more, people would sell more. Problem solved. It is the role of government to get people spending again. This is done by printing money and causing inflation so that people spend the money rather than save it. Or by the government running up deficits and spending it on behalf of the stupid savers.

4) The Great Depression was solved by the government spending lots of money and the central bank printing lots of money.

5) This explains ALL economic problems.

6) If there are recessions, depressions and crises, they can all be solved by printing money and by deficit spending.

7) If after many rounds of money printing and deficit spending there is still a recession, then only one conclusion is permissible: There was obviously not enough money printing and deficit spending. We need more money printing and deficit spending.

If after another round of money printing and deficit spending we still have a recession, then….well, are you stupid, or what? We obviously have NOT PRINTED ENOUGH MONEY and we are NOT ACCUMULATING ENOUGH DEBT!

(And, by the way, remember (7) above.)

Krugman is practicing Keynesianism as a religion. The 8 commandments above are not to be questioned. Whoever questions them is not worthy of debate. Consequently, Krugman has turned down requests to debate people like Peter Schiff or Bob Murphy. Interestingly, he agreed to debate Ron Paul on TV. The link is here.

I have to say that Ron Paul did not do as well as I had hoped he would. He did not sufficiently attack Krugman in my view, for the failure and ultimately disastrous consequences of his policy prescriptions. Krugman is the one who should be made to explain his policy recommendations. After all, t’s policies like the ones he is recommending got us into this mess in the first place Krugman needs to explain why his policy ideas have been implemented for years to no effect.

Yet, Krugman succeeded in putting Paul on the defensive, something in which he was greatly helped by the following: While Krugman may be the most outstanding, unashamed and fundamentalist of the celebrity Keynesians, the attitudes of the general public, the other journalists and thus most of the TV viewers are predominantly shaped by Keynesianism as well, and this means that Krugman, more than Paul or any ‘Austrian’ debater, can rely on some sense of intellectual sympathy.

Maybe the viewers don’t quite share the unquestioning, almost vulgar dedication to the Faith, that Krugman epitomizes. Maybe they feel queasy about printing trillions of paper dollars and running trillion-dollar deficits. Of course, a true believer like Krugman will never allow himself such feelings. But in general, the public, too, believes that the free market (and greedy bankers) caused the financial crisis; that we need low interest rates and other government measures to stimulate the economy; and that inflation is really not our main concern. Krugman, I think, cleverly used these attitudes to present himself as the safe and rational choice, and Paul as the weirdo who wants to pour out the state-policy baby with the crisis bath water.

Ron Paul started strongly by pointing out that Krugman’s policy is based on the idea that a bureaucratic elite can set interest rates and decide how much money should be created, and that this involves an arrogant and dangerous pretence of knowledge. Very good point.

Immediately, the apostle Krugman raised his head. “You cannot get the state out of money.” “The Fed has to set interest rates.” “You cannot go back 150 years.”

I think this is where Ron Paul should have dug in and put Krugman on the defensive:

“Why not? There was no Fed before 1913. That the Fed made things more stable is your assumption. But is it true? People like you and Bernanke tell us that the gold standard was to blame for the Depression. In the run-up to the Depression we had a gold standard but we also had a Fed. How can you say that the gold standard was to blame and the Fed was ultimately the solution?

“Dr. Krugman just said, ‘history told us’. That is nonsense. History doesn’t tell us anything. You need theory to interpret history, and your theory is wrong. You assign blame for the depression according to your Keynesian theory. If that theory is wrong – and I think it is completely wrong – your interpretation of history is hopelessly wrong.

“Dr. Krugman, we do no longer live in the 1930s. Why is it that you are harking back to those days? Are we still solving the Great Depression?

“Fact is that the monetary and economic institutions of America were shaped by people with your beliefs, Dr. Krugman. We have your system today. We have conducted and are conducting your policies. And, Dr. Krugman, do you really want to tell the American public that these policies and these institutions, such as the Fed, are working?

“We have no gold standard. Since 1971, the Fed is entirely free to print as much money as it likes. That is your system, isn’t it? That is what you recommend. – You say the Fed needs to keep interest rates low and print money to stimulate growth. That is what the Fed did in 1998 after LTCM and the Russia default, just as you recommended. That is what the Fed did again after the NASDAQ bubble burst and after 9/11 – surely, that was not an Austrian policy but a Keynesian one. It was straight out of your rule book, Dr. Krugman. You say the uninhibited market is to blame for the financial crisis. I say your policy is to blame. The mortgage bubble was blown by the ‘stimulus’ policy of the Fed – low interest rates and plenty new bank reserves – between 2001 and 2005. That was your recommendation, right? And those of your Keynesian buddies, such as Paul McCulley at Pimco.

“Since 2007, the Fed is conducting your policy. So is the US government. You demanded monetary stimulus and you got it. The Fed created $2 trillion dollars out of thin air. Interest rates have been zero for years. The US government is conducting stimulus policy to the tune of $1trillion-plus every year. Are you telling me, these are not Keynesian policies? What is it, Austrian policy?!

“What you are recommending has in fact been the guiding principle of global economic policy for years. What you are recommending is a systematic distortion of the market place. It is persistent price distortion. That is why we had an unsustainable housing boom. That is why we had a mortgage boom. That is why we had a financial industry boom. And whenever these artificial booms – that you create with your policy – falter, the American public has to pay the price. And what do you suggest then? More of the same. More cheap credit. More government debt. In the hope that you can generate another artificial boom for which a later generation will again have to pay the price.

“Dr. Krugman, you just answered the question of this journalist about how much more debt we should accumulate, by saying maybe another 30 percent but that nobody can say for sure. I agree that nobody can say how much debt the system can still take. But tell us, why do you think that the next 30 percent of state debt will magically stimulate the economy and that these 30 percent will thus achieve what the previous 30 percent obviously failed to do.

“Dr. Krugman, you have me worried here. And I think our viewers too. The only response you have to the abject failure of your policies is that we should do more of them. Whatever Keynesian stimulus is being implemented and whatever money the Fed prints, all you ever say is that it is not enough. We need more. Has it ever occurred to you that maybe the problem is the policy itself? Maybe your medicine is making things worse and not better.

“And something else worries me, Dr. Krugman. When do we ever stop printing money and borrowing? I think that you are stuck in a failed paradigm, a failed economic theory and a failed policy program. This has happened to scientists and politicians before. You cannot admit that failure. When you are confronted with the failure of modern central banking, of Keynesian stimulus and of moderate inflationism, your only answer is that nothing is wrong with any of it, it is just not implemented forcefully enough. Dr. Krugman, you remind me of a doctor, who misdiagnosed the disease and prescribed the wrong medicine and who is now unwilling to look at the situation objectively. All you want to do is increase the dosage.

“If the viewers really want to understand what is going on, they should not buy Krugman’s new book but go to the website of the Mises Institute and look for some excellent Austrian School literature, in particular anything written by Ludwig von Mises himself. But if you don’t have time to do this, an excellent start is a book by Detlev Schlichter, with the title Paper Money Collapse.”

Well, I guess this is how it could have unfolded.

Regards,

Detlev Schlichter

How To Debate Paul Krugman was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

That’s right. Bernanke is taking his easy money message to the streets.

According to Bloomberg:

“Now that the weather is nice, I’m half-expecting Ben Bernanke to set up a lectern outside Federal Reserve headquarters on Constitution Avenue so he can enlighten passersby about the need for easy money. He’s been delivering the message lately to anyone who will listen–including a couple dozen lucky students at the nearby George Washington University School of Business. The Fed chairman is worried that the economic recovery could stall out if the Fed yanks monetary stimulus too soon.”

Source

Dan Denning continues:

“He is returning to his roots as a professor. But professors must profess. So what is Dr Bernanke? Obviously he’s repeating the claptrap that to simulate growth you need to lower interest rates. But according to the rather nauseating article (which isn’t much more than an appeal to authority) Bernanke is going after Herbert Hoover’s Treasury Secretary Andrew Mellon.

“Mellon was asked by Herbert Hoover how to deal with the Great Depression. According to Hoover’s memoirs, Mellon replied:

‘Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.’

“Now there is some doubt as to whether Mellon actually said this. The only source is Hoover, who was trying to make himself look compassionate and enlightened by comparison. But if Mellon didn’t say it, he should have. This is a common sense view, which is probably why so many people oppose it. Time does not make bad investments go good. The recession/correction/liquidation is the cure for the disease of inflation.

“Mellon, if he actually said those words, certainly didn’t mean liquidation in the sense that say, Stalin, would have meant it. He wasn’t suggesting Hoover go out and shoot the farmers the same way Stalin liquidated the Kulaks who opposed his collectivist agrarian policies. But Bernanke reportedly called Mellon’s prescription, ‘pretty heartless’.

Isn’t that big of him?

“The ‘liquidation’ of bad investments is another way of saying that there comes a time when you must give up on the belief that an investment will come good. The sooner you do this, the better it will be for everyone. Resources like capital and labour will no longer be tied up in unproductive investments. But more importantly, human lives will no longer be engaged in activity that doesn’t make anyone more productive, wealthier, or happier.

“Bernanke is the heartless one in all of this, even if he thinks his heart is in the right place. He represents an idea that has destroyed the life savings and purchasing power of millions of people. The control of money by central banks has sucked even more people into investment and borrowing decisions that will take them years to recover from, if they ever do.

“It’s not only heartless to believe in fiat money. It’s brainless. Maybe that’s why the centralisation of the money supply by people who have infinite confidence in the technology of the printing press receives so much popular support. People who support it aren’t really thinking. They’re believing…and following orders. ‘Nothing to see here… move along.’”

We think it’s fair to say that Ben Bernanke is willing to destroy the economy and your standard of living.

We don’t know if he’s part of a deliberate coordinated effort to transfer your wealth to the political and banking elite…if he does what he does knowing full well the destruction he’s causing.

Or maybe he just has a head full of bad ideas. Like a medieval “scientist” whose considerable knowledge all rests on the faulty premise of geocentricity.

No matter what Bernanke says, no matter how much the masses put their faith in his words, low interest rates and unbacked money creation cannot cause economic growth. Not the sustainable kind anyway.

All this interest rate manipulation causes are distortions. It may seem to create wealth and the appearance of economic vitality. But that activity is just misallocation of resources. And the misallocations will correct themselves soon enough. These corrections are attended by the disappearance of jobs in industries that should never have flourished (remember, these were misallocations).

Low interest rates distort economic signals. They tell producers that money is plentiful. Interest rates are the cost of borrowing money and when they are naturally low, it means that there is plenty of money looking for borrowers. The market is making borrowed money more available to both consumers and producers. This saved capital can be put to work to generate economic activity. Consumers will borrow to buy. Producers will borrow to expand start or expand production.

Artificially low interest rates, however, send a false signal to those consumers and producers. They get the economic juices flowing when capital is actually scarce.

Sure the economy may appear to grow. But they mask the reality, like when beer improves the appearance of the homely women at the bar. There are really no nutrients to support this growth. There is no saved capital. Low interest rates give the illusion of plenty of savings looking for investment. But it is just an illusion.

Also in an artificially easy money environment there are few corrective signals. This leads to malinvestment and to financial bubble. More nail salons and transgender studies degrees than there would have been without the easy money. Houses and company stocks may find they fetch a higher price than they otherwise would have, too.

And there we have it. The conceit of the Keynesians. They believe that good, honest growth can come by inducing borrowing with easy, greasy new money. Austrian school types insist that there must be savings first from which to borrow. Any boom based on low interest rates must necessarily result in a bust when the reality — There was no accumulated capital upon which to draw! — asserts itself.

But how do you go about monkeying with interest rates? Ah, that’s where having a monopoly on the money supply comes in really handy! You just create a boatload of new money and shovel it into the bond market.

And here the plot thickens. You see, a lot of this newly created money can buy up government bonds. That is to say, the central bank can lend the new money to the government through their preferred brokers.

Two birds, one stone. Interest rates are lowered (inducing “growth”) and the government has more borrowed money to play with. It’s a central planning jackpot.

Not enough tax money to cover the costs of all those wars and wealth transfers? No problem! Deficits don’t matter when the central bank is willing to keep lending you money…and keep the cost of borrowing (interest rates) down to boot!

Of course, these sorts of shenanigans can’t go on forever. It just seems like they can while your in their midst. But the reckoning must come. Anyone who is not prepared will be wiped out.

Interest rate manipulation and the creation of unbacked new money…it’s all part of a great con. We’re all told it spurs economic growth. But what it really does is destroy the things upon which growing economies rely: accumulated capital in the form of savings, and clear economic signals in the form of prices, both for goods and for the use of money itself.

We suspect that there are people who benefit from this degenerate non-market, central banking system and who know that they benefit from it at the expense of billions of their fellow humans. We’re not sure Ben Bernanke, however, is in the know.

Perhaps Greenspan was. But we think Bernanke really believes his lines. He is as fervent in his belief in artificial control of interest rates and fiat money as any free marketer is about his gold and silver. Ben Bernanke is a “fiat bug”.

Our advice is to stay as far away from Bernanke and the supply of paper he controls as you possibly can. That means physical gold and silver.

But “paper” gold and silver, along with other “paper” commodities may greatly benefit from Bernanke’s tender ministrations. At least for a little while before the whole house of cards comes down.

As the dollar goes down gold, silver and oil will obviously go “up”. But the stocks in the companies that look for and mine these things may benefit even more from a falling dollar.

In fact, the price of mining and oil companies and may be the only place Bernanke may be able to reach his stated goal of fighting deflation.

Bernanke considers your standard of living expendable. He’s willing to wreck the economy by sticking to his easy money claptrap.

Your employer or your customers will hand you Federal Reserve Notes for your labors. They have to by law. But you don’t have to keep those notes.

Protect your purchasing power and standard of living. Trade those notes for real money. Bernanke may only think something is “money” when its supply is under central bank control. But you know better.

After you get your gold and silver, however, be sure to get ready to profit even more from Ben’s efforts to fight price deflation. Get the right mix of gold and silver miners and energy companies.

Regards,

Gary Gibson

Ben Bernanke Considers Your Happiness and Security Expendable was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

People were honoring his memory by looking back at the timeline of his life, seeing the change in his face and appearance from the youngest age when he played the Artful Dodger to his last year, in which he was still singing (and actually, he looked great!).

The same now happens when every major culture figure passes on. We see a lifetime of pictures. We see the change, the aging process, the gradual graying, the weight gain, the other intriguing responses of our physical appearance to the passage of time.

The digital age has brought us many new things, but the least expected is a new awareness of time and the inevitability of decline and death. Digits have a way of collapsing it all so we can view it in a much sped-up process. We can see performances from decades ago as easily as we can see one from yesterday.

It’s never been this easy to observe the phrase “ashes to ashes” play itself out before our eyes. The analog age generally gave us only what was going on at the time, or rather, we could go to some lengths to get the full picture of past and present The digital age, with its penchant for giving us every bit of information we could possibly want, puts the passage of time at our fingertips and burns the reality of mortality into our brains.

The passage of time is newly fashionable. Facebook, used by nearly one-sixth of humanity, has recently changed its default layout from displaying random stuff to organizing it all in a timeline. Software widgets show what we will look like in 50 years. Our email archives keep a running chronicle of our lives, day by day, thought by thought, friend by friend.

It’s all symbolic of a new embrace of the most-relentless force in the universe, more powerful than all states and all private markets put together: the inevitability of change embedded in the passage of time. It is unstoppable, undeniable and omnipresent and a constant reminder that no matter how much power humankind accumulates, it will never be more powerful than time itself. There is some comfort in that.

What economic institution most embodies the inescapability of time’s relentless march? Ludwig von Mises, in his wonderful treatise Human Action, tells us that it is the interest rate. Interest rates reflect our degree of valuation of present goods over future goods. Everyone prefers the same good now, rather than later, all else being equal. However, in the same sense that we choose which goods and services we want to buy or decline to buy, we also choose our time horizon: acting for now or acting for later to achieve our ends.

If we want a car today and don’t want to defer our consumption for a year or two down the line, we have to pay someone else who has deferred that consumption to loan us saved money. If we are starting a business and think its near-term profits are going to be higher than the expected interest charges, we make the deal. If we save money and make it available to others to use, we expect a reward in the form of interest.

The interest rate is supposed to signal to investors how to handle time commitments. A low rate of interest is supposed to signal vast savings available in a society that has deferred consumption and planned for the future. A high rate of interest suggests a relative scarcity of savings and a scramble to use what is available. In this way, interest rates carefully sync present and future.

The passage of time also instantiates itself in the institution of capital — goods produced not for immediate consumption, but rather for making other goods. If there were not time structure of production, capital would have no unique value, no real contribution to overall prosperity. But it does because its very existence points to how property owners are able to plan for the future.

In societies in which there is no planning for the future, either because the culture is present oriented or because the law is too unstable to permit planning, no capital formation takes place. No time structure of production exists. And there are no savings to back the wide availability of credit.

In developed economies, the capital structure reflects a huge variety of time commitments. Every production process has an endpoint of consumption, but those endpoints are all over the map. I can make soup to eat now. Or I can save to buy some grapevines and build a vineyard to make wine that might only be drinkable and marketable 10 or 15 years from now.

The Austrian economists tell us that other economic theories are nearly brain-dead when it comes to thinking about the passage of time and its role in the institution of capital. This is one of many reasons that they miss an extremely important point about Federal Reserve policy. That is, by manipulating the interest rates, the Fed is playing with the signaling system that tells investors and capitalists how much they can plan ahead — how much “real stuff” is available to cause their plans to work out.

In this way, a manipulated rate like we have today is nothing but a lie. It tells capitalists to borrow and plan when the resources aren’t really available to justify that. It tells us that there are huge reserves available to support future consumption, whereas they aren’t really there. As a result, the finely calibrated singling system of capital markets isn’t really functioning as it should.

In a strange way, then, the Fed is in denial about something that we’ve all embraced in the digital age.

Even Facebook is on board with acknowledging that all its accounts will go the way of all flesh. The Fed seems to think that its powers allow itself to live as if time doesn’t matter.

Bernanke might be powerful, but he can’t achieve what no one ever has: the abolition of time as a undeniable factor of economic life. It is the ultimate act of arrogance to act as if the relentless forward march of time is pure illusion.

Regards,

Jeffrey Tucker

Economics of the Timeline was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Normally we would not look upon buying a single family house for personal use as an investment. But these are strange times we live in.

Why don’t we consider a single-family house for personal use an investment?

In a completely free market (and a free market means no central bank with a monopoly on currency issue and the ability to manipulate interest rates) housing prices would probably act like the price of all other goods and services. That is to say, that they would tend to move downward over time due to increasing production efficiency and competition among producers against the backdrop of precious metals money and competing currencies that would tend toward stability.

The notion that housing prices should rise at all is born of generations experiencing constant expansion of the money supply by the central bank. Rising house prices are just a byproduct of inflation. A house’s price has no more natural inclination to rise than the price of a gold coin, a good suit or a laptop sans inflationary policy and artificially low interest rates.

A house is at base merely a very durable good for consumption. It provides its user with an essential function: shelter. In terms of assets a house for personal use is more like a car or a kitchen appliance than it is like a stock in a company.

That is unless the house is used like an apartment building. When bought and rented out at a profit, then a house becomes sort of like a dividend-paying stock.

Even in a fiat currency environment with its strong inclination toward inflation, we see small pockets of the free market driving prices downward over time. Technology springs first to mind. But even items whose prices rise due to inflation tend to do so more slowly than wages so that the items themselves require shrinking percentages of median income.

This is not the case with markets in which the state tinkers most: things like medical care, education and housing.

In the case of both education and home ownership, government has tried to increase availability by encouraging increasing levels of debt thus driving up the costs. This is the opposite of the market’s mechanism of fostering lower prices through innovation and competition.

We want to make clear that housing for personal use would likely become increasingly cheaper in a free market. A home would never have been misconstrued as an “investment” in such a free market. It would have been seen for what it really is: a durable good meant for consumption and enjoyment.

The population would have rightly cheered the tendency for homes in this environment to get more and more affordable, just like they do when their electronic geegaws get more sophisticated while coming down in price. (The laptop on which your editor is typing this has a 17” screen, an absolute luxury that would have costs thousands of dollars just a few years ago which now costs us a little over $400). There wouldn’t have been this happy expectation of rising home prices (and simultaneous perverse fretting creating “affordable housing” for the poor who find home ownership increasingly impossible because of those rising prices).

As it is we don’t live in the fantasy land where free markets reign. We live in a world of government tinkering and central bank manipulation of currency supply and interest rates. We live in conditions that foster speculative asset bubbles. We have no choice but to act accordingly.

So while we lament the absence of freedom and free markets, we remain on the lookout for the financial pitfalls of a bubble-prone world. And we look out for the resulting opportunities.

And the opportunity right now? Use borrowed money to get a house for personal use. (Then fill the basement with nickels and silver, guns and non-perishable food).

Ten years ago our advice was different. We said to anyone who would listen, “Sell your house, rent a place instead of buying another house and use the proceeds from your sale to buy silver.”

That was the trade to make back when silver had been languishing in the single digits for two decades, having tumbled from an all-time high of nearly $50 in 1980. Housing in the meanwhile was starting to feel the effects of artificially low interest rates and becoming the bubble du jour. Real estate prices were rising fast as people took on more and more debt to buy houses.

The prices rises were beginning to fuel a bona fide mania. The public came to believe that real estate was a “can’t miss” investment whose prices would never go down again. Just about everyone wanted to get in before they were left behind forever.

Little did they suspect that there would be plenty of opportunity to get into real estate cheap in just a few years.

Silver was clearly undervalued for many reasons. Meanwhile real estate was in full speculative bubble mode. Anyone not caught up in the mania (and who recognized silver’s potential because of monetary and industrial demand reasons) would have sold the increasingly overvalued asset and bought the undervalued one. How well would that have worked out?

Pretty well. After 2006 real estate prices started sliding while silver started really taking off. Real estate is down around 30% from its 2006 while silver is up over 500%.

Now this may seem so clear in hindsight, but it’s the exact kind of clarity that the masses and the mainstream media never seem to have while honest money advocates often have it in spades. That’s because hard money advocates can see speculative bubbles for the central bank-induced temporary distortions they really are. Even when those bubbles are growing in precious metals.

For example, we have no problem admitting that at some point gold and silver will be in absolute bubble territory. There will be a time to get out of precious metals and into something else. We don’t know what shape the dollar or other currencies will be in at that time. But gold or silver may have reached their highs against other things. Like houses. Surprisingly, that time may be right now for gold.

Take a look at this chart:

It shows the median home price in the U.S. priced in gold going back over a century to 1890. Notice that in 2010 gold could buy as much house as it could during its previous all time high back in 1980.

The only other time gold has been able to buy as much house was back in 1980.

What is more likely at this point? Will houses get cheaper or more expensive in terms of gold? We would argue that the trend is ready to revert to the mean. The dollar may continue to fall so that both gold and houses get more expensive in dollar terms, but houses would get expensive more quickly. If the gold price in dollars stays relatively flat, then house price in dollars is likely to go up.

Bottom line: houses are set to get more expensive in terms of gold. Just as it was a good idea to trade your house for gold and silver before 2006, it is now a good time to trade your gold (at least) for a house.

Or more specifically, you should trade your gold for a down payment and then mortgage the rest. Get dollars for your appreciated gold in order to place a down payment. Then borrow the other dollars necessary.

You see, we wouldn’t actually recommend staying in dollars more than you have to. The dollar’s long-term fate remains the same. So locking in a fixed amount of dollar debt at today’s low borrowing cost means you are almost guaranteed to be paying back in much cheaper dollars in the future.

You can take advantage of gold appreciation to secure another inflation hedge at the bargain rates created by the Federal Reserve with the housing bubble and bust and today’s low interest rates.

The Fed is handing you a gift. Sure it is wrecking the economy, but like we said before, you can’t stop that. All you can do is act accordingly to protect yourself.

We may have our problems with Warren Buffett as a shill for the state in general and taxes in particular. We often wonder if the government actually pays the man to act as its charming spokesperson to lull the masses with his homespun advice.

But we have to acknowledge his business acumen even as we scratch our heads at his economic and political philosophy. The man has made ungodly amounts of wealth from knowing where to place his bets. And now he’s calling real estate the smartest place to put your money.

In a February 2012 interview with CNBC Buffett said that if he had a way to buy “a couple hundred thousand single-family homes” and easily manage them, he would “load up on them” and “take mortgages out at very, very low rates.”

Buffett said that right now a single-family home with a 30-year mortgage is a better choice than even stocks for investment purposes.

According to Buffett, “It’s a terrific deal. It’s a leveraged way of owning a very cheap asset now and I think that’s probably as an attractive an investment as you can make now.”

Why would we take Buffett word’s so seriously now? Because we can’t help but notice that he seems to be on the money no matter how you slice it.

Also it lines up with the opinion of another uncanny investor with a very sound understanding of economics…

Agora Financial managing editor Chris Mayer spotted this trend a while back. A little over a year ago he wrote:

During the past few years, rare was the investment thinker who said you should buy a house. Housing was in a bubble that was deflating.

But the investment seasons turn. Today some smart investors are once again saying you should a buy house. John Paulson is one of them.

You may know him as the man who turned the greatest trade of all time. Betting against the housing market, he netted a cool billion dollars for himself in 2007. One fund he managed rose 590% that year. Today, he is one of the richest men in America.

His advice today is very different. “If you don’t own a home, buy one,” Paulson said. “If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.”

That’s a strong endorsement. It sounds similar to the advice another investor gave his audience in 1971, at the dawn of one of America’s biggest housing bull markets. The investor was Adam Smith (George Goodman) on The Dick Cavett Show. Here is a snippet from that conversation:

Smith: The best investment you can make is a house. That one is easy.

Cavett: A house? We were talking about the stock market. Investments…

Smith: You asked me the best investment. There are always individual stocks that will go up more, but you don’t want to give tips on a television show. For most people, the best investment is a house.

Cavett: I already own a house. Now what?

Smith: Buy another one.

It was good advice. In the 1970s, US stocks returned about 5% annually, which failed to keep pace with inflation. Still, it was an up-and-down ride. In 1974, the stock market fell 49%. But here are the average selling prices for existing homes in the 1970s as inflation heated up:

1972 – $30,000

1973 – $32,900

1974 – $35,800

1975 – $39,000

1976 – $42,200

1977 – $47,900

1978 – $55,500

1979 – $64,200

You can see that housing held up pretty well. And think about the effect of a mortgage on 80% of that house in 1972. That would mean $6,000 in equity, a sum that went up fivefold in eight years. It’s hard to find a better inflation fighter than that. Granted, today’s market is different, but still.

Apart from this, you might also reflect on the fact that it is quite absurd today to think that anyone can buy an average house for any of these prices – and that, too, is the point. The average price today is $257,500 – even after the great collapse in the last few years.

“If you have a 7% mortgage and your house is worth half a million dollars,” Adam Smith writes, “you may gripe about shoes and lamb chops and tuitions like everybody else, but your heart isn’t in it.” Your heart won’t be in it because you’ll be in fine fettle with your house.

Of course, you can do a lot better than 7% today. For the first time, the rate on 30-year mortgages slipped below that on the 30-year Treasury bond. You can get a 30-year mortgage at little more than 4% today.

Factoring in mortgage rates, housing affordability is back to where it was in September 1996. Then mortgage rates were 8% and the average price of a home was $171,600. As Murray Stahl writes: “One can actually buy a home for a monthly payment that is not very many dollars different from the monthly payment one would have needed in September 1996, when rates were significantly higher.”

Adjusted for inflation, Stahl points out that the payment for an average-priced home today is about 30% lower than it was 14 years ago.

The advice of Paulson and Smith starts to make sense now, doesn’t it?

Essentially, real estate is a way to buy now and pay later. And the case for housing extends to other property types, too. Owners of quality real estate are getting deals on mortgages that we are unlikely to see for a generation.

Real estate, after a long absence from the menu, is back on.

–Chris Mayer

Now, if you don’t plan on sticking around for around three years or more, then buying a house for personal use could be much more expensive than merely renting.

Sure, your monthly carrying costs will ultimately be lower than paying rent (at least in a non-bubble market when people would rather have a pricey mortgage than a cheap rent for a comparable property).

And of course you can deduct the interest payments (structured to be a higher portion of the monthly payment in the earlier years of the mortgage) from your income taxes. Add it all up and your monthly mortgage and interest payments could be as little as half renting a comparable property. And you are also moving toward ownership of the property (in a mere thirty years…after which time if you don’t pay the local government “rent” in the form of taxes, they will show you to whom the property truly belongs).

But that lower monthly carrying cost doesn’t come for free. There are those property taxes you’ll have to pay as long as you “own” the property, along with the transaction costs which could be 2-3% of the selling price. You would have had to save up as much as 20% of the total cost of the home in order to qualify for those lower monthly costs.

When you rent, that down payment money is available to do other things. When you buy that money is locked up in the house. In this environment, however, that may not be such a bad thing. The Fed has abolished the reasons to save the money while precious metals prices have already moved much higher making them less attractive to purchase now. The bargain now lies with housing. The advantage is more in favor of taking on a mortgage than it has been in years.

Lower housing prices, artificially low interest rates and almost guaranteed rising inflation make taking on a mortgage a smart move right now. It’s almost like getting a low interest loan in order to make a huge purchase of gold or silver back when they were cheaper.

Again, this wasn’t the case years ago when houses were expensive and precious metals were incredibly cheap. Try securing a fixed low interest rate loan from anywhere in order to buy precious metals. You won’t get that sort of a deal. But you will for a single family house, which right now can provide the same sort of hedge against a falling dollar that gold and silver do.

Right now perhaps the greatest opportunity to hedge yourself against inflation is getting a mortgage. Buy your inflation hedge now and pay for it with devalued dollars later.

Essentially real estate is the new inflation insurance that you can get on the cheap, much like silver and gold were back around the turn of the century.

Further a mortgage taken out now lets you leverage a whole lot of this cheap insurance, giving you command of much more money than you likely have available. If inflation takes off in the coming years, you could sell your house for far more inflated dollars than you would owe at that point.

Imagine if someone had lent you $250,000 at 5% interest fixed for thirty years in order to buy 50,000 ounces of silver in 2003. You would be sitting on over $1.5 million in silver right now.

That’s sort of the situation that getting a mortgage now could put you in. Of course a house has maintenance costs that precious metals do not. But these are costs you’d be covering with renting in any case.

And with this particular inflation hedge, you have a place to store your silver…along with your ultimate deflation and inflation hedge, the humble nickel (but more on that another time).

Regards,

Gary Gibson

Is a Mortgage a Better Inflation Hedge Than Gold and Silver? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Does the Fed’s latest colorfully named plan amount to anything more than money printing and legerdemain? Will it not punish savers and interfere with oh so vital capital accumulation?

Jeffrey Tucker is on hand to take a look in today’s feature article.

And then we get real in today’s Parting Shot with a look at real estate in the world the Fed has wrought. There’s actually a way to play it to your great benefit.

Keep reading below…

The Fed’s Newest Trick

The money masters at the Federal Reserve have done a splendid job, haven’t they? Well, no, and all the more reason to End the Fed, in the legendary slogan of Ron Paul.

Every few months since the great meltdown of 2008, there’s been some announcement that appears in the financial press about the latest fancy-pants move that the Fed will undertake to save the day.

These guys aren’t just printing money! They are engaged in amazingly technical maneuvers that mere mortals can’t fathom. The catchphrases are multiplying: quantitative easing, Operation Twist, sterilized QE, ZIRP (zero interest rate policy) and now reverse repo.

Stay tuned for other amazing tricks. They could pull out the camel clutch, the bite of the dragon, the hammerlock, the bridging chickenwing, the gorilla press, the octopus hold, the sunset flip, the inverted figure-four three-quarter leglock and finally, if they really get desperate, the Tree of Woe.

These names are all, of course, drawn from the world of professional wrestling. Sadly, the world of central banking is not nearly as entertaining, mainly because instead of just hurting each other, the bankers are hurting the rest of us.

You know this when you look at your bank statements and see that all your efforts to save money are for naught: Your money is losing more value through higher prices than it earns in cash.

The Fed is sending the message: If you save, you are fool. What message is it sending to investors? It is telling them to put their money in something, anything, besides short- and long-term bonds. In this way, it hopes to stimulate some kind of artificial boost of stocks and any form of financial arbitrage besides buying and holding debt. (See the Cleveland Fed for a wicked picture of what has happened.)

This is outright market manipulation of the sort that the government criminalizes if done by the private sector. For example, the Justice Department has said it is looking into charges that book publishers are manipulating the price of e-books and also said that it might force a settlement that could wreck this wonderful emerging market. Thanks a lot!

But how does pushing up the download fee of e-books by a buck or two compare with completely wrecking the price-signaling mechanism of interest rates, the very thing that every human soul relies to estimate the profitability of long- and short-term economic planning? As a result, no one knows for sure what is real and what is not.

This is not only perfectly legal, but it has also become the job description of the Federal Reserve itself. It is nothing more than an elaborate and insanely contorted central plan designed to manipulate prices. But because the Fed has the legal monopoly and claims to be doing this in the public interest (thanks for wrecking my reward for saving!), they get away with it.

Worse, they demand our respect and deference to their brilliance. But do they deserve it? The Fed set out in 2008 to rescue the credit markets, boost the housing industry, save the employment sector from stagnation and boost the economy.

It has failed on all four fronts. Bank lending for industrial and commercial purposes is still at 2007 levels. Housing price pressure is still pushing downward, there’s no end in sight to the foreclosure fiasco and Fed is the proud owner of as much as a trillion dollars in mortgage-backed securities. The unemployment picture is grim: Jobless claims are up, and labor force participation is at 1980 levels!

As for economic growth, it is so sparing that the whole financial press celebrates over the slightest good news like prisoners of war cheering the arrival of scraps of bread. Meanwhile, China, India, Argentina, Indonesia, Vietnam, Mongolia and even Botswana are managing growth rates between 6 and 10%. And this in times when economic growth ought to be as easy as breathing, giving the digital revolution that has blessed us with astonishing productivity gains.

The Fed couldn’t possibly have screwed up more than it has. It’s zero interest rate policy (ZIRP) has been a complete failure by any standard but one: It has kept the borrowing costs to the federal government at the lowest possible levels. Even then, the fiscal budget crisis is never ending. Should interest rates come back up to something approaching a human and realistic level, the budget will blow, which the Fed surely knows and which further gives some indication that the Fed knows who and what butters its bread.

But let’s say a quick word on this new trick called reverse repo. The Fed prints money to buy long-term bonds. But then the Fed “locks” the use of the new money by borrowing it back again for short periods at lower rates. It can conduct this operation with institutions other than banks, such as money-market funds. As James Grant has said, borrowing short and lending long is a great way to go broke.

There’s a line from the Hayek-Keynes video made by John Papola and Russ Roberts put into the rap by F.A. Hayek: “You’ve got to save to invest, don’t use the printing press.” That sums it up. There is no sound investment that is not preceded by savings. To save, you have to forgo consumption. Once saved, the money can be loaned out for future-oriented projects and pay higher returns than one could experience without the initial steps of saving. That’s how capitalism grows the economy: an evermore complex expansion of the division of labor sitting on a rising stock of capital.

The Fed’s claim to be spurring economic growth rests on a doctrine that gets this whole process backward. We are supposed to consume more and save less. If that works, the ticket to good bodily health is to be a beer-guzzling couch potato and avoid the gym like plague. Or maybe the plague is exactly what all these fancy Fed moves are actually bringing us.

Regards,

Jeffrey Tucker

A Parting Shot:

Yeah, thanks a lot, Federal Reserve.

Thanks for destroying savings. And thanks a lot for propping up the inflated housing market.

But wait! As Jeffrey points out, the Fed has actually failed in that mission. Housing prices are still moving down. But that’s a good thing.

You know, it really is strange to us that people would want housing prices to go up. The house you buy to live in, after all, is no more an investment than a car you buy to drive.

Sure, if you rent out either the house or the car at a profit, then it’s an investment. But if you are using either, then you are consuming it and it is consumer good, not an investment.

A house is something you use, like any appliance or your own vehicle. It is a very durable good, one meant for long-term consumption. Do you expect your blender or your Ford to go up in price over time? So why would you expect your house to do so?

Sure your house provides you with a very essential function: shelter. But the food you buy provides you with a more immediate function: nutrition. So why is it that of all the goods we consume, we expect houses to behave differently when it comes to price? Does a house’s combination of utility, necessity and durability give it some magical property that makes prices rise?

This is the Whiskey Bar so don’t be surprised when we point the finger at government. The government’s spent a century convincing (conniving?) us that “certain” markets need they’re intervention, particularly education, medical care and housing.

You’ll notice that these are the markets where prices keep spiraling up. In some cases (education), quality simultaneously moves down.

Markets with their competitive forces tend to drive quality up while relentlessly driving down prices. Housing should be — and would be — subject to this as well. Left to market forces, the quality of houses of would march upward over time while their affordability increased.

But the government has spent a century crafting a housing mythology that poo-poos outright renting and encourages increasingly longer term renting-to-own from the bank. We notice that this mythology has been augmented over the generations as real estate came to be seen as one of the ways to fight the savings-destroying inflation in which the central bank almost constantly engages.

We fully believe that in a free market we would get to the point where a decent house would cost less than a year’s salary of the median income. The market would provide the affordable housing that people claim there’s not enough of…even as they salivate over the idea of Fed-manipulated interest rates boosting the price of their own homes.

Who wouldn’t want a world in which a modest 3-bedroom house could be paid off in three or five years…or paid in full in cash after a year or two of saving up while living with parents?

Apparently the Fed doesn’t want that. They tell us to be afraid of that kind of deflation. It may be fine for the constantly booming technology sector, but falling house prices would somehow be the deadly. So the house has become the means by which an unsustainable debt-driven consumption economy flourished.

You see, a free market unweighted by the politically backed monopoly of the Federal Reserve would have competing currencies, gold and silver as money. Competition and precious metals would act as a lid on inflation. Savings in these things would tend to gain value over time as the economy grew while this money supply grew less.

Does a bunch of currencies sound unworkable? It really shouldn’t. The currencies that performed best — those which best did the job of storing and increasing in value — would thrive. Multiple currencies in a region would be no more problematic than multiple currencies across the globe. The alternative is the monopolistic Federal Reserve system we have now. You know. The one that has destroyed over 95% of the dollar’s value in a century.

The Fed would have us believe that the much surer growth to prosperity is for them to have a legal monopoly on the issuance of new money. This may destroy savings, they admit, but it encourages investment in the bubbles the Fed’s policies are constantly germinating.

Fed to savers: “Quit whining about the destruction of your savings and your interest income. Hop on our inflation-fueled asset bubble ride!”

All good bubbles must come to an end, however. Houses are getting cheaper in terms of dollars. And since the Fed has been on a money-creating tear these past few years, houses are getting even cheaper in terms of real, Fed-proof money, like gold and silver.

Another way to play this is to keep an eye on the price of houses in terms of precious metals. Particularly in terms of silver. Houses are one real good that have a lot of downside left because their prices had been flying way too high thanks again to central bank monetary policy (You didn’t think really think it was just because of the wicked commercial banks, did you?).

Houses are below their median price in terms of gold. Even though they’re currently moving lower in terms of dollars as the house-in-terms-of-dollars bubbles deflates, this could easily reverse if the Fed’s easy money policies ignite a hyperinflationary storm. Of course, then the price of everything in terms would explode in terms of dollars.

We’re of the conviction that gold and silver would benefit from this more than any other commodity. Silver in particular would see greatly increased demand for use as a medium of exchange and for the storage of value (which is a basic a function of money as machine lubrication and energy are for oil).

So if you could find some decent, unusually expensive real estate right now (say, in an out of the way town in a state with no income tax and a burgeoning liberty movement where the mills have closed and houses are unusually cheap…like Berlin (rhymes with “Merlin”), New Hampshire, for example…), then you could get an affordable mortgage and keep accumulating silver.

Source

Silver prices are likely to go up no matter what. Even faster than housing prices in case the over-printed dollar tumbles against everything. Then you could pay back your fixed mortgage debt by selling your rapidly appreciating silver for rapidly depreciating dollars.

Of course, the conditions under which this plan would work mean that it’s prudent to hedge your mortgage with silver on a property well removed from big cities and welfare-dependent populations. If you plan to ride out the political and economic storms brewing here in the U.S., this is one way to do it.

Regards,

Gary Gibson

The Fed’s Newest Trick was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

But sometimes unintended consequences are nothing short of delightful. Consider the prospect of Iceland abandoning the krona and adopting the dollar as its currency. No, no, not the U.S. Greenback but the Canadian “loonie,” so named for the water fowl imprinted on the flipside of its

one dollar coin.

[Disclaimer: the author admits to being a Canadian who wishes to vacation in Iceland and, so, she may be biased in deciding what is delightful.]

Since the 2008 financial crisis in which its top three banks collapsed, Iceland has eyed other currencies with the goal of establishing both stability and liquidity even at the cost of losing control of its own monetary policies.

Why is the possibility of adopting the loonie “an unintended consequence”? Because up until now, the currency overwhelmingly favored for adoption was the Euro. Iceland applied to join the European Union in 2009 and formal negotiations began in 2011, with the issue of fisheries being particularly sensitive. Iceland has exclusive fishing rights to the 200 nautical miles surrounding its shores and fish constitute its largest export by far. There is understandable reluctance to entering an agreement that would open up Iceland’s fishing zone to competitors.

Moreover, the recent rockiness of the Eurozone and the euro itself cannot be encouraging to Icelanders. Indeed, given that Iceland rebounded from its fiscal crisis by defaulting on debts and not bailing out banks, it is unlikely to sympathize with the hysteria surrounding a Greek default. A recent Capacent Gallup poll found that 60 percent of Icelanders now oppose union with the Eurozone. The Finance Minister is among them. Who knew that strict fishing policies and the coddling of Greece would make the loonie glimmer in Icelandic eyes?

And, so, prominent Icelandic businessmen, opposition politicians and much of the public are favoring a move toward the loonie; the Canadian Ambassador Alan Bones had been scheduled to address the possibility of currency sharing at a political conference in Reykjavik in over the weekend. But the Canadian government apparently reconsidered the appropriateness of the venue for such a discussion; the conference had been sponsored by a specific political faction within Iceland. Instead, last Friday, the Canadian Ambassador announced on the Icelandic national broadcaster RUV that Ottawa was quite open to holding talks on the subject. The Icelandic Foreign Minister Ossur Skarphedinsson stated “I’m all in favor of discussing the alternatives we may have to the krona.”

On the street level, the Canadian public seems tickled. Indeed, in a recent column entitled “Five reasons why Iceland should adopt the Canadian dollar,” Michael Babad offered as the concluding reason:

“5. Our glowing hearts. For Iceland, do not underestimate friendship in this post-crisis era of currency manipulation and mounting trade tensions. We’re a wonderful people, they’re a wonderful people. We’ve got a beautiful country, they’ve got a beautiful country. True, it gets cold in Canada in the winter, but remember we’re talking about Iceland.

And surely we can forgive them for Björk.” [Björk Guðmundsdóttir is an Icelandic singer-songwriter.]

Icelanders seem receptive as well. According to the Globe and Mail, “In a recent Gallup poll, seven out of 10 Icelanders said they would happily dump their volatile and fragile krona for another currency. Their favoured alternative is the Canadian dollar, easily outscoring the U.S. dollar, the euro and the Norwegian krone.”
There are no reports of the Icelandic government opening discussions, however.

There are several reasons for the Canadian dollar – usually viewed as the Greenback’s poor cousin – to be preferred over the Euro. The loonie has a AAA sovereign debt rating and Canada has very little debt compared to every other Western nations. The Globe and Mail provides other reasons:

“It [the loonie] offers the tantalizing prospect of a stable, liquid currency that roughly tracks global commodity prices, nicely matching Iceland’s own economy, which is dependent on fish and aluminum exports, and in the future, energy.

There’s also a more sentimental reason. They’re both cold, Arctic countries. “The average person looks at it this way: Canada is a younger version of the U.S. Canada has more natural resources than the U.S., it’s less developed, has more land, lots of water,” explained Heidar Gudjonsson, an economist and chairman of the Research Centre for Social and Economic Studies, Iceland’s largest think tank. “And Canada thinks about the Arctic.”

Economic commentator ZeroHedge (Tyler Durden) ends his report on Iceland’s longing look at the loonie with a warning, “So be careful Canada: with great power, comes great a desire to distribute wealth. And we have all seen what happens next.”

Will currency imperialism go to Canada’s head? Fear not, ZeroHedge. I still remember the contest run by Canada’s national magazine Macleans years ago. It wanted to come up with a phrase that captured what was quintessially Canadian, similar to the down-under phrase “As American as apple pie.” And, so, Macleans invited readers to fill in the blank: “As Canadian as _________.” The challenge was distinguishing Canada from its neighbor who was louder, flashier, (then) richer, sexier and, well, add “er” onto almost any adjective.

The winner? “As Canadian as possible under the circumstances.” Arrogance is not a problem.

Regards,

Wendy McElroy

First We Conquer Iceland was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

He gets away with it because he makes sense, is super articulate, and is aggressive in getting his message out. Even if you don’t watch television (I don’t, not much), he has his own radio show, Youtube network, blog, social media accounts, and much more. You could probably spend a good part of your day living alongside the mind of Schiff and still not hear it all.

He is also the author of How an Economy Grows and Why It Crashes. I assure you that there is nothing else like this on the market today. In many ways, it is a work of genius. Imagine learning the complexities of macroeconomics and the business cycle through a series of cleverly drawn cartoons that illustrate a kind of economic parable.

It’s great for kids but also for adults. It was originally written by his father Irwin Schiff and became somewhat famous in the 1970s, but this new edition improves the original because the accompanying text reduces 100 years of scholarship into a plain-English explanation of economic development and the business cycle. The themes throughout are consistent: production comes before consumption; debt is not substitute for saving; credit is no fix for debt; economic reality cannot be held at bay forever.

I had the occasion to listen to a dinner lecture by Peter at the New Hampshire Liberty Forum. The conventional wisdom is that a dinner speech should be super short — think 20 minutes — because people are slosh-headed with wine and woozy from eating too much. I didn’t time his speech but Peter might have spoken 100 minutes. Dreadful? On the contrary. Everyone sat in rapt attention. I did too. We could have sat there and listened another hour.

Incredibly, Schiff doesn’t use any notes when he speaks. He starts and the speech rolls out of his mind like a carefully woven Persian rug. His cadence is unusual enough to entice the ear, with never missing beat. His vocabulary is vast. His rhetorical method is as follows. He introduces a topic. He presents the conventional wisdom. He points out what is wrong with the convention and then adds his spin. The he piles on evidence to support his opinion, until it becomes completely convincing. He provides a nice segue to another point and repeats the method.

His topic was very interesting this evening. He addressed the brain drain from the United States, the very alarming trend that is unique to our times. Everyone wants to talk about the immigration problem but he says we have an emigration problem. The smartest and wealthiest and most savvy young people are trying to get out.

Already in the UK, the waiting list for giving up American citizenship is long and growing. Americans are also leaving for Mexico, Latin America, China, and the Far East. Official data is extremely difficult to obtain so most evidence of the larger trend is anecdotal but no less real.

Why would anyone do this? American citizenship was once the ultimate asset. People came here for freedom, and they got it. More and more, citizenship is a liability. A major reason is that the U.S. is one of the few countries in the world that actually tracks down its citizens to force them to cough up taxes on income made in any country.

Instead of being a form of liberation, Schiff said, American citizenship it is like a metal ring around your ankle that you can’t saw off. The only way is to give it up, but that turns out not to be so easy. The forms alone are $450 and the wait time can be interminable.

American citizenship also exposes foreign banks and institutions to unwelcome intrusions from American bureaucrats, who no longer care anything about borders. It’s like wherever you go, you drag the American empire with you. This makes you something of a pariah to many foreign institutions. Apparently, American expatriates bump into this problem immediately when they attempt to open bank accounts and brokerage accounts, and even when trying to buy server space from foreign service providers.

As Schiff pointed out, this trend is a signal of larger problems in the United States. The unemployment issue is a huge one, especially among the young. Businesses don’t want to hire employees, which cost them far more than the salary. There are insurance mandates, payroll taxes, legal liabilities, not to mention the terrible risks associated with getting the wrong guy and then not being able to get rid of him.

How does this affect young people? It’s a disaster. Many just-graduated students are carrying debt in the six figures. They did what they were supposed to do, staying in good schools, obeying their teachers, getting good grades. But when they get out on the market, they find that they don’t have the skills that businesses want and they have no work experience that demonstrates that they can bring value to the firm. So they start at a low salary that isn’t even enough to service their existing debt load.

As if to underscore the point, just over the weekend I met a young lawyer who had graduated from the best schools with the best grades. She couldn’t find any position except that of a low-pay position as a public defender — a respectable job but not one with upward mobility. But here’s the catch: she was carrying close to $400,000 in debt. And this is at the age of 25. Talk about demoralization!

But back to Schiff’s speech. The picture he paints of the American future is shockingly grim. The national debt, the regulations that grow and grow, the intrusive and intense tax enforcement, the spying and police impositions, the broken banking system, the shocking level of sheer phoniness in the financial world — all of it adds up to a dark picture.

The rich seem to understand this problem. A news cycle a few months ago mention that Mitt Romney keeps some assets in the Cayman Islands. Why would anyone do this, especially given the long reach of the American tax police? There are two factors: reduce legal liability in case of trouble and the general need for political diversification. It illustrates something very important: the smartest and wealthiest among the population no longer trust the future.

And compare to other countries! Contrary to what most Americans believe, other countries are freer, with lower effective taxes, less police intrusions, less spying, fewer regulations on small business. Schiff says that you don’t have to go far to find more freedom: try one country to the north or one country to the south. And while many other countries such as Sweden and Finland are becoming freer, the United States is going the other way and there are very few prospects for a turnaround.

Schiff is an important voice to alerting us about realities that many people are reluctant to face. To gain and insight into a fundamental understanding of economic realities, I can highly recommend his How an Economy Grows and Why It Crashes. If something should ever happen to change the ideological culture in this country, this book can be an important tool for re-introducing people to sound economic thinking.

Regards,

Jeffrey Tucker

The Schiff Machine was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Official inflation is over 4 percent in the UK, so how printing more money is going to help meet a 2 percent inflation target is a bit difficult to grasp, but let us not quibble over such details. What counts is that the Bank of England is the undisputed champ of QE. After the next round of money printing, the BoE will have created new money to the tune of 20 percent of GDP, and will fund more than a quarter of all outstanding government debt via the printing press.

£275 billion of QE so far have not solved the crisis — the economy last year grew by less than 1 percent — but have lifted inflation and thus squeezed real incomes. At the same time, this policy has kept the government’s borrowing costs low and the banks from shrinking and in certain cases from collapsing. As with any policy of monetary debasement, the direct beneficiaries are the state and the banks.

This has tradition behind it. The Bank of England was founded in 1694 for the specific purpose of financing the Crown, which at the time was in low standing with its creditors. From its inception the Bank of England enjoyed numerous legal privileges that cemented its dominant position in the nascent but growing British banking system. Among them was the privilege to issue money against obligations of the Crown — a form of early ‘debt monetization’. Of course, the gold standard was a hindrance to unlimited money creation, so whenever the state needed more funds, usually at times of war, the Bank of England was conveniently absolved of any of its contractual agreements to redeem in specie, and kindly asked to fund the state through the creation of new money.

Gentlemen, start your printing presses!

But only after the gold standard was abandoned and the dollar’s gold window finally shut in 1971, the party could really begin. From 1965 to 2007, the year the present crisis started and UK banks began to collapse, the pound has lost more than 90 percent of its purchasing power! Two generations of British savers have been locked in a desperate struggle to sustain the real value of their savings. But hey, why save? Just borrow!

Such persistent monetary debasement has created a freak economy, in which every high street is littered with the cheap-looking branches of retail banks and in which property speculation is a national pastime. The English seem to live in the smallest and oldest houses of all of Europe but thanks to money-induced housing booms consider themselves to be wealthy, on paper at least, as long as they managed to get onto the housing ladder early enough. Why bother with engineering, once the hallmark of British industrial superiority, when you can flip a few semi-derelict terraced houses with borrowed money?

On a GDP-per-capita basis, 19 countries in the world now generate more income than the UK, but the UK is still world leader when it comes to leverage. According to a study by McKinsey, private and public debt combined stand at 5 times GDP, only Japan comes close.

But when the bubbles finally burst, the overstretched banks teeter on the brink of collapse, and the credit edifice wobbles, the central bankers counter with the only tool at hand: more money printing at an ever increasing rate. The central bankers are the arsonists of this crisis who now pose as fire fighters quickly labelling further monetary debasement ‘stimulus’. (In June 2011, Mervin King, the governor of the Bank of England, was knighted for his efforts during the financial crisis.)

This is the BoE’s strategy: to fight a hangover by opening another bottle of booze. “There is not a credit boom that a few trillion pounds cannot extend for a few more years.” That seems to be the modus operandi.

Or, will the public debt situation be better? Will the economy have deleveraged and rid itself of an unsustainable debt load? And will the economy then grow without the burden of the accumulated debris from previous cheap-money booms? –No, and no again! Deleveraging is verboten! Credit contraction is verboten! Bringing the economy back to anything that resembles a stable and sustainable structure is verboten! QE is designed specifically to stop the cleansing of the economy’s imbalances.

“Quantitative easing” has one objective: to generate headline growth through more money debasement, more credit creation, more balance sheet extension, and more debt! More money, more credit, more debt! If that sounds familiar, it is because that was the growth model of the past twenty years, the growth model that has set us up for the crisis.

The central bankers and their supporters among financial market economists have no other model. More money, more credit, more debt — that is the motto of the fiat money economy, and ever since the last link between state money and gold was severed, all central banks have constantly expanded their balance sheets, constantly bought government debt and created new bank reserves, constantly encouraged bank credit creation and borrowing.

In a fiat money economy, central banks are designed to be “quantitative easers”. That is what they do. The only thing that has changed recently is that the disastrous consequences of such a policy are now palpable and that the private sector is reluctant to participate any longer. The drastic acceleration in money printing that is now called “quantitative easing” simply marks the desperate attempt to outrun the system’s desire to shrink.

No, I am sorry, dear experts, but the idea that any of this will stop at £400 billion, £600 billion, or £1,600 billion is silly. You obviously failed to grasp the very essence of a paper money economy. We removed the golden shackles so that there will NEVER be an end to credit expansion and monetary debasement.

Well, actually there will be an end. But that will come not through a calm measured decision by the MPC, the monetary policy committee that is digging itself an ever deeper hole. It will come when the public begins to lose faith in this charade. But whether that point is reached at £600 billion or at £325 billion, nobody can say.

Regards,

Detlev Schlichter

Paper Money Collapse

Parting Shot:

(From Mac Slavo of SHTFPlan…)

“Proponents of Gold Standard May Be Violent Extremists; Report ALL Suspicious Activity To the FBI”

If you support returning the United States monetary system to sound money backed by the gold standard and believe that our country is bankrupt as a consequence of out-of-control spending and fiat money printing, then you may soon receive a visit from your local DHS/FBI office.

This morning your family, friends and neighbors were alerted by representatives of the Federal Bureau of Investigation that you and those who share similar ideas as you are potentially dangerous extremists that could threaten the national security of the United States:

“Anti-government extremists opposed to taxes and regulations pose a growing threat to local law enforcement officers in the United States, the FBI warned on Monday.

These extremists, sometimes known as “sovereign citizens,” believe they can live outside any type of government authority, FBI agents said at a news conference.

“The extremists may refuse to pay taxes, defy government environmental regulations and believe the United States went bankrupt by going off the gold standard.

Source: Reuters

Whether you like it or not, if you promote the ownership of gold, reject the notion that forced taxation is your patriotic duty and prefer to live in a country with limited government interference, you have now been stereotyped and grouped in with the handful of criminals who have recently turned violent against law enforcement officials. And, chances are that those close to you, who may not necessarily share your views, have now been alerted to your volatile nature and potential for violence against local law enforcement officials and the free people of the United States.

“Routine encounters with police can turn violent “at the drop of a hat,” said Stuart McArthur, deputy assistant director in the FBI’s counterterrorism division.

“‘We thought it was important to increase the visibility of the threat with state and local law enforcement,’ he said.

“In May 2010, two West Memphis, Arkansas, police officers were shot and killed in an argument that developed after they pulled over a “sovereign citizen” in traffic.

Last year, an extremist in Texas opened fire on a police officer during a traffic stop. The officer was not hit.”

The narrative is clear: If you share the same ideas as someone who has made a personal choice to turn to violence in the past, then you too must be an equal threat. Furthermore, the FBI is actively instructing businesses in your local area to be on the look-out for suspicious activity which may be precursors to anti-government activities. In a related story from Infowars, Paul Watson reports that FBI advisory aimed at Internet Cafe owners instructs businesses to report people who regularly use cash to pay for their coffee as potential terrorists.

“The flyer, issued under the FBI’s Communities Against Terrorism (CAT) program, lists examples of “suspicious activity” and then encourages businesses to gather information about individuals and report them to the authorities.

…

“Indeed, the flyer aimed at Internet Cafe owners characterizes customers who “always pay cash” as potential terrorists.

“Of course, the vast majority of people who visit Internet Cafes use cash to pay their bill. Who uses a credit card to buy a $2 dollar cup of coffee? A lot of smaller establishments don’t even accept credit cards for amounts less than $10 dollars.

“Other examples of suspicious behavior include using a “residential based Internet provider” such as AOL or Comcast, the use of “anonymizers, portals, or other means to shield IP address” (these are routinely used by mobile web users to bypass public Internet filters), “Suspicious communications using VOIP,” and “Preoccupation with press coverage of terrorist attack” (this would apply to the vast majority of people who work in the news or political blogging industry).”

Source: Info Wars

Also See: FBI CAT – Potential Indicators of Terrorist Activities Related to Internet Café [pdf]

In a coincidental stroke of good luck and timing for the national security apparatus of the United States, the recently passed National Defense Authorization Act (NDAA) allows for the rounding up and detainment of of these potential extremists without charge or trial, because the last thing we need is for courts, juries, and evidence to be involved in ensuring the security of American citizens.

Be warned fellow Americans. No one will be immune to the violative laws, policies and regulations of the police state which is quickly and forcefully embedding itself into all aspects of American life and culture.

In the new America, every man, woman and child is a suspect, person-of-interest and potential terrorist.

–Mac Slavo,

SHTFPlan.com

There Will Be No End to Quantitative Easing was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In today’s world, burying that money might have been the better idea. Otherwise, the servant would have paid fees for depositing, withdrawing and transferring and would have earned no interest at all, and the money would have depreciated in value the whole while. It’s enough to cause you to weep and gnash your teeth.

That parable has had a long life because earning interest on deposits is a universal feature of the human experience in any finance economy. Until now. The Fed has announced that it will work to keep interest rates at zero for the next several years, all with the supposed goal of refurbishing the economy. Or so Bernanke tells us at great length.

But here’s the problem: This very strategy of driving interest rates to zero has been a feature of the period in which the Fed has managed the post-meltdown world. The result has been what The Wall Street Journal accurately described as a five years of missing economic progress: The economy today is barely larger than it was at the end of 2007, despite a rising population and a gigantic explosion in technology. Household income is still sinking, and an entire generation has readjusted its expectations for the future.

What has the Fed done? It has moved to create and guarantee some $13 trillion in phony assets to prettify the balance sheets of financial institutions that would have otherwise gone belly up. Those fake assets have served as substitutes for real reserves to create the illusion of balanced books. It has made its own discount rate vanish as a way of opening up its own reserves to the banking system to keep it floating. Finally, it has made it clear that it stands ready to be the lender of last resort for just about everything, removing the risk premium that would normally be attached to longer-term loans.

Altogether, this strategy has nearly abolished the banking system’s capacity to function, in effect turning banks into public utilities to serve themselves and governments, instead of depositors and lenders. Private industry seeks funding outside the official banking system, investors are scrambling for some other option and banks themselves have turned to other pursuits, like interest rate arbitraging and lending to other financial institutions, hedge funds, insurance companies and real estate.

During the 1930s, New Deal policies tried to revive agriculture and economic activity generally by telling farmers to plough under their crops and kill their livestock. Today, Fed policies are trying to revive real estate, banking and economic activity generally by undermining the capacity of the loan markets to function with any degree of normalcy.

Michael Hudson insightfully explains the problem:

“People used to know what banks did. Bankers took deposits and lent them out, paying short-term depositors less than they charged for risky or less-liquid loans. The risk was borne by bankers, not depositors or the government…Banking has moved so far away from funding industrial growth and economic development that it now benefits primarily at the economy’s expense in a predatory and extractive way, not by making productive loans.”

Even if Bernanke were telling the truth that this is all about inspiring recovery, there is no hope that it can work. The real estate markets are still an amazing mess, with one-quarter of the existing mortgages contracts marked above their market value. It fights against gravity to keep trying to lift up what wants to go down the instant that artificial stimulus recedes. And it should be obvious by now that ever lower rates don’t stimulate lending in this environment, but rather the reverse.

As the Austrian tradition has long explained, the basis of future prosperity is capital accumulation and deferred consumption in the form of real savings. These policies punish both. Worse: They make conventional savings nearly impossible. These policies encourage ever more consumption and debt accumulation and do nothing to address the core problem that brought about the artificial boom and the resulting bust.

But is Bernanke really telling the truth? No. In the balance between restoring growth and saving the banking system from the consequences of its own irresponsible policies, the Fed has chosen the latter. This is the unavoidable conclusion.

Otherwise, we would have to believe that the Fed is utterly blind to the recently proven results of its own policies. It is not managing the Fed in the public interest, but in the interests of the banks and the governments that are in hock to them. That you can’t earn a reward from saving money anymore is a microeconomic indication of a much-larger problem.

Consider the opportunity costs of these policies. We are living in a time of unprecedented innovation, thanks to digital media, the Internet and daily improvements in the production, management and distribution of information. Vast swaths of the commodifiable world have left the realm of scarcity to enter the sector in which infinite reproducibility is not only possible, but a regular feature of daily life.

With a healthy economic foundation, society should be getting get wealthier and wealthier at a pace that exceeds even that of the Gilded Age, when 10% and 15% growth was common and the human population began to thrive as never before. The digital age has given us economizing technologies that make all that have come before look like mere warm-ups. Instead, we are being denied those benefits and that growth, thanks to catastrophic policies of governments backed by central banks and dependent financial institutions.

What is the scenario under which normalcy returns? From Bernanke’s point of view, there is no end to this. It means ongoing stagnation for no good reason. For this reason, there has never been a more urgent time to abolish the Fed, institute a free market system and let a new monetary system emerge on a sound foundation. At the same time, the Fed has never faced more reason to keep alive the system that is killing future prosperity.

If the Parable of the Talents could be retold today, it would need a different ending, with a different gang of thieves thrown into the darkness to face weeping and gnashing of teeth.

Regards,

Jeffrey Tucker

The Transformation of Banking was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.