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.

They all ask some version of the same question, in any case. It’s the cocktail-hour question asked of every economist: What does the future hold and what should be done about it? The problem is that Bernanke doesn’t know more about the future than the markets know. Actually, looking at the transcripts of the 2006 FOMC meetings, the Fed knows much less than the markets know.

But at least we now know what Bernanke thinks he knows. A short summary of the flurry of news from the Fed yesterday: The economy is still in the tank, it will stay that way for years, interest rates will be held at zero and savers can go to hell.

That last part we can glean from the most-interesting question posed to Bernanke yesterday. Greg Robb of MarketWatch pointed out to him that he has some severe Republican critics. The Fed has been a major issue in the debates and on the campaign trail. Mr. Robb had a theory about why: Many Republican voters lived on fixed incomes that depend on some return on their money. For this crowd, zero interest rates are a disaster. Robbery, really.

Bernanke’s first response was to say that he was not going to involve himself in politics because he “has a job to do.” It is a credit to the press corp that they did not double over in laughter at the ridiculous claim that the Fed’s job has nothing whatever to do with politics! After 100 years of Fed service, it is pretty obvious that the Fed serves two clients: the big banks and the government. The Fed certainly doesn’t serve the class of people who save and invest.

So how did Bernanke deal with the second part of the question? This was interesting. He said that he was very sorry for savers and those who depend on interest income, but they need to understand that they too have a long-term interest in a healthy economy. If investment and productivity are rising, they create the conditions for growth down the line, and surely this is good for everyone.

That’s some crazy kind of circuitous reasoning going on there. It’s a bit like the thief who steals the silverware and then explains to the former owners that a wider distribution of beautiful tableware is surely good for everyone in the long run. Even if you buy the argument, it would be nicer if the owner had some choice in the matter.

And there’s another problem that is so incredibly obvious that no one at the press conference even dared point it out. The problem is that the zero-interest-rate policy has not worked to boost economic growth. What possible basis is there for thinking that two more years of this extermination of the saving class is going to do what the last three years have not done?

Of course, it depends on what you mean by “worked.”

Let’s say that the Fed wants to drive all investors away from government bonds and into riskier instruments in an attempt to artificially boost financial markets. Check.

Let’s say that the Fed wants to punish anyone who wants to sock away money for a rainy day and, instead, prod them into buying more plasma TVs, digital gizmos and summer homes. Check.

And let’s say that the Fed wants to artificially suppress the government’s own costs of borrowing in order to reduce pressure on the political class. Check.

In all these ways, abolishing interest rates works for the Fed and the political elites. But there are at least three downsides.

First, banks depend on interest payments for profitability, and low interest removes the financial incentive for banks to lend money in a normal way. This is why commercial bank loans remain low, with the latest data showing the volume at mid-2007 levels. One might suppose that this is contrary to the Fed’s aims, but it is a price that it is willing to pay.

Second, a low interest rate agenda requires that the Fed try to control not just the short-term rates over which it has the most influence, but also rates across the entire yield curve. This means removing risk premiums on longer-term loans by implicitly guaranteeing bailouts, just like those of 2008-10. This entrenches more moral hazard and drives a wedge between risk and result.

Third, this policy of low rates is similar to — but even worse than — the very policies that created the bubble of the 2000s that burst in 2008 and prompted the worst financial and economic calamity of many generations. The Fed has learned absolutely nothing from even its own most-recent history. If people can’t earn money through interest, financiers will find some other way to market risk, leading to crazy investments schemes and misallocated capital.

As David Malpass writes in The Wall Street Journal:

Near-zero interest rates penalize savers and channel artificially cheap capital to government, big corporations and foreign countries. One of the most fundamental principles of economics is that holding prices artificially low causes shortages. When something of value is free, it runs out fast and only the well-connected get any. Interest rates are the price for credit and shouldn’t be controlled at zero. It causes cheap credit for those with special access but shortages for those without — primarily new and small businesses and those seeking private-sector mortgages.

The big take-away from the Fed’s day in the news is its new policy benchmark of keeping inflation at 2%. This is sheer silliness. There is no such thing as a price level, as even recent CPI releases illustrate. Some prices went up (food, education, health), and some prices went down (oil, software, services). Mash them together and you get a single number that applies to absolutely nothing in particular.

In any case, the Fed can’t control prices in this way. It is always driving while looking in the rearview mirror. When the crash comes, there is nothing the Fed can do about it, despite Bernanke’s repeated promises to rescue the world from any bad effects of his policies.

As Bloomberg’s Caroline Baum says, it’s almost as if the Fed itself has completely forgotten the existence of the “long and variable lag” that separates its policies from their effects. She recalls Milton Friedman’s own analogy of the “fool in the shower” who keeps turning the water from all hot to all cold and wonders why he is either scalded or frozen.

Baum concludes that under Bernanke’s own plan, we would have “eight years of 0% interest rates. There will be a revolution in this country before then if the economy is lousy enough to warrant 0% interest rates for that long.”

Really? One would hope.

Regards,

Jeffrey Tucker

Zero Percent Uber Alles was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

We don’t have a government-created central repository that plans and manages shoe distribution. The market takes care of that. We don’t have one for cabbage, keyboards or curtains. Somehow, we get books, clothes, tree-cutting services and everything else we need and want without a central planning agency that manages the quantity available, fixes the prices of the products and bails out the firms when they overextend themselves.

Why should money and banking be any different? Money is a commodity. Banking is a business. They both originated in the market, not the state. They should have been left that way, so that the quality of the product could be subject to market discipline. In a market economy, things work themselves out. There is supply and there is demand. Entrepreneurs take notice of profit opportunities and jump in to pull the two together.

This is how the world works for us. This is how it has always worked. This is how we get our software, coffee, sheet music and beef. It’s how we get our cars, the parts that keep them running and the gas that fuels them.

The world is man-made in every respect, and the hands that made it productive, efficient, dynamic and socially beneficial operated within the market matrix. The simple relationships of learning, exchanging and competing gave rise to a glorious system that manages to sustain a global population of 7 billion people.

The Fed is a nonmarket institution, much like public housing and the space shuttle. It is a Dark Age creation that still exists for no apparent reason. By Dark Age, I mean, of course, the world before 1995, when the Web — meaning all information — became accessible to the world. Before that, the world remained mostly in the dark, when government controlled the information we could access and private truth had to be shared through paper sent through the government mail system.

During the Dark Age, only geniuses like Ludwig von Mises and F.A. Hayek knew that the Fed was a hoax. Most everyone else imagined that the people at the Fed were doing magical, wonderful things inside hallowed walls so that the economy would be stable and grow. Its board of governors was populated by people who knew the economic future and held the power to steer it in a way that benefited everyone.

Thanks to the digital age, we now have access to what really goes on. In the last 12 months alone, we’ve been inundated by reports of what actually goes on at the Fed. In 2006, according to released transcripts of its board meetings, its wise men were busy reassuring themselves that absolutely nothing was fundamentally wrong with real estate and that all other economic structures were humming along beautifully.

It is fascinating to read those candid transcripts. Far from being an open forum for discussion, Greenspan and Bernanke preside with all power to determine results, practically daring any of their subordinates to disagree with the consensus they arrive at beforehand. The Fed economist sometimes pops up his head to say that all is not well, but it’s like a game of Whac-A-Mole: He gets the hammer on the head every time.

It’s the worst case of bad corporate management you can find on record. It makes Dilbert’s world look like a paragon of management success. There is no openness, no truthfulness. If the chairman makes a joke, you must laugh. If the chairman says all is well, you must agree. If the chairman says he knows the future, you must be in awe of his insight. All dissent must be coached within a puffy framework that raises only a slight and probably irrelevant concern, and it is still likely to be punished.

Then there is the problem that it is not entirely clear, even to the people in the room: what precisely they can do about anything. They know what they are doing is important and want to believe that they have tremendous power. But here’s the problem…The Fed really has only one significant power: to create the conditions intended to encourage a change in the supply of money and credit.

That’s a huge power, but it is not a precise one. The money supply is a lot like an unruly child. Lots of times, the kid will obey you. Sometimes, and unpredictably, it will not. It depends on the mood, the context, the prevailing temperament, the rewards and punishments. And even when the kid obeys, the results are not always what you intend. The council of parents can meet and plan all day, but in the end, the kid has a mind of its own.

Two notable examples follow. In the early 1930s, the Fed was desperate to expand the money supply as a matter of both policy and practice. There was no intention to let the supply collapse, as Murray Rothbard has shown. The problem was that the Fed had to depend on the banking system to make it happen through the loan markets. But the system was broke, and it never happened.

The same thing happened again from 2008 and forward. The Fed did everything possible to manufacture a far-reaching monetary inflation, but failed to make it profitable for the banking system to cooperate. Contrary to the Fed’s wishes, it never fully materialized. Their efforts only ended up subsidizing failure and preventing a much-needed and deep market correction.

The sheer power of the Fed was in full display in 2008, and all the public records indicate what it was used for. The Fed provided liquidity for its friends. They said that they did it all for the nation, but it is unclear that the nation got anything at all from the deal. What is clear is that its friends survived and thrived, whereas many institutions should have gone belly up, as the capitalist system would dictate. That’s the essence of its power and the core of what the Fed does.

This is nothing new at all. It’s just that it is now on full display for all the world to see. And this is one reason that the Fed is now under fire as never before. The digital age has pulled back the curtain. Instead of the mighty Oz, we find a few people pulling levers with smoke and mirrors.

Before 1989, the world was strewn with such central planning agencies. They were all over Eastern Europe and the old empire called the Soviet Union. Then one day, the whole thing melted away and the absurdity and arrogance of the central planners were revealed to the world. The Fed is no different in structure from these institutions. The whole thing is based on a lie that it takes government power to have a good monetary system.

In what sense is it good? The depreciation of the dollar since 1913 has been catastrophic for prosperity. The dollar is now worth less than a nickel. Savings have been expropriated. The Fed’s interest rate policy has negated any real advantage of saving money. Business cycles have become national, international and extended, rather than local and short-lived as they were in the 19th century. The moral hazard that the Fed has built into the system is that financial systems no longer take proper account of risk.

In the digital age, the opportunity costs of the money monopoly have been huge. We might have had a competitive money system emerge by now. It could have been based on gold, silver or any other commodity. But the market has not been allowed to work. The Fed, working with the government that created and sustains it, has cracked down hard on every attempt by the market to make something better than the Fed-managed dollar. People now languish in jail for the crime of trying to restore money and banking back to the market.

What is the worst cost of the Fed? It has made the federal government, no matter how big it gets, beyond failure. This is the ultimate moral hazard. It has puffed up the leviathan state beyond anything that should ever exist in the world. It’s not taxes that have done this. It is the Fed. In this way, it has made itself the ultimate enemy of freedom itself. And as goes freedom, so goes human rights.

The whole catastrophe is no longer possible to ignore. Ron Paul has made it a political issue. Newt Gingrich has jumped on the bandwagon to scrap the Fed. The former CEO of BB&T gave an interview in which he said, “As long as the Fed exists, Congress can effectively print money. And it doesn’t matter whether they are Democrats or Republicans, they would rather print money than tax people. They want to spend because that effectively buys votes, and they don’t want to tax people because that loses votes.”

The problem of ending the Fed is not a technical one. It is not much of an intellectual one, either. It takes only a few minutes to figure out that the whole thing is rooted in myth. The problem of ending the Fed is entirely political. The government is dependent on its powers. So yes, it makes some sense that the political class and its friends — let’s call them the 1%, for short — think the Fed should exist. The rest of us should know better by now.

Regards,

Jeffrey Tucker

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

What’s more, the satellite states became independent nations. The empire on its borders devolved into a series of secessions. The map looked totally different one day to the next.

The central power — said to be ruthless and all controlling — lacked the will to fight it out and just gave up, completely unable to control events. The pretense of communism in all these places was dropped, industry was privatized, the countries adopted their old names and their populations were rolled into the global division of labor after 50-plus years of being shut out.

The central plan stopped working, and not only in Moscow. The U.S.’ central plan also excluded the possibility that something this dramatic could happen. A decade of foreign and economic policy had been based on the Kirkpatrick Doctrine that totalitarian states were invulnerable and could only be contained or destroyed from the outside. It was on that basis that the U.S. chose its friends and enemies in the world.

Once the Iron Curtain was pulled back, we found societies ridiculously behind in the march toward material progress. The workers’ paradise had never materialized. And everyone wondered what we had really been afraid of all those years.

There’s no question that the Soviet state was an incredible threat to its own citizens — between 60-100 million deaths at government hands over 72 years — but was it really a threat to you and me? Far from being a superpower, it became clear that the Soviet Union had been decaying from within for a very long time.

I was raised at the tail end of the Cold War, but I find it nearly impossible to describe to younger people what it was like to be surrounded by the great Manichean conflict of those days. It consumed all political thinking from 1948-1991. Hundreds of thousands of experts devoted their lives to strategizing about it, writing about it and making a living off it in many different ways. It was the whole reason behind the gargantuan military empire that the U.S. put together over half a century. It was all done in the name of keeping us safe.

And then one day, it was gone.

Americans feared the communist menace for most of the 20th century. Russia was the embodiment of all evil but for those few years when, implausibly, Russia was oddly deemed an ally in World War II’s even mightier struggle against the horrors of Japan and Germany. Then in 1948, the status quo ante was restored again, and the Red Scare returned with a vengeance — from threat to ally to threat again in a matter of a few short years. It was a turnabout satirized in Orwell’s 1984 (flip the last two numbers and you see the point)…

The great debate of my early political experience concerned whether Russia should be treated as a unique evil in the world or just another country with whom the U.S. should have diplomatic relations. The thinker and intellectual who won the day was Jeane Kirkpatrick. Long before she became secretary of state, she wrote a famous essay, “Dictatorships and Double Standards.” This 1979 classic became a blueprint for the foreign policy of the next decade.

This powerful piece of writing excoriates the Carter administration for its alleged wimpiness on foreign policy, particularly with regard to its unwillingness to support authoritarian, noncommunist governments against the leftist rebels. The idea here is that we can live with authoritarian regimes and eventually democratize them, whereas once a state falls to communism, it is gone forever.

Therefore, the U.S. should back noncommunist thugs of any variety, whether in or out of power. That’s how the U.S. ended up supporting the Islamic fundamentalists in the mujahideen in Afghanistan, for example, that later became the Taliban and later the terror network that the U.S. now says is the mortal enemy.

Kirkpatrick couches in her claims in history, noting, “there is no instance of a revolutionary ‘socialist’ or communist society being democratized.” From there, the forecast is implied: It could never happen, ever. “There are no grounds,” she writes, “for expecting that radical totalitarian regimes will transform themselves.”

A little more than 10 years later, she was not only proven wrong, but history conspired to shred her entire analytical model to bits and toss it in the air like so much confetti. Not only has the Soviet Union vanished, but China is completely transformed. Cuba is privatizing. North Korea is probably the toughest nut to crack, but it too will relent in time.

Now, one might say that it was precisely the military buildup she inspired that brought about this result. The problem with that claim is that the military buildup was not designed to bring about that result, but rather to permanently “contain” the global Soviet reach and prevent it from spreading. In the mid-1980s, not a soul — and certainly not Kirkpatrick herself — anticipated that the next decade would open without the existence of the Soviet state at all.

What had been her mistake? She attempted to forge a law of politics based on recent history projected into the future. Her law blew up because there are no laws of politics of the sort she imagined. There are no permanent regimes. There is no impenetrable system of rules. States are created by elites and uncreated by everyone else. They are all more vulnerable than they appear, because they all consist of the few tricking the many into coughing up their property and giving up their lives on grounds that are ultimately revealed to be lies. When people catch on, the states get shaky and eventually crumble, sometimes when we least expect it.

This is a fact to celebrate, for if any state could create permanent rule, human freedom wouldn’t stand a chance. This is because every state is a conspiracy against liberty. No state is satisfied with just a bit of power and no more, just a bit of your money and no more. There is never enough. We must give and give until our freedom is completely suffocated. In the end, the people don’t like this and will not stand for it forever. This is true everywhere in all times.

Today, our own theorists say that the United States has figured out the key to permanent rule. Madeline Albright called the U.S. the one “indispensable nation.” Mitt Romney said that the U.S. is “the greatest nation in the history of the Earth.” Surely, the current configuration of the United States will last forever. Surely, it is destined to be the one stable and eternal global hegemon. It is the U.S. now that embodies Hegel’s divine will on Earth.

The lesson of the Soviet collapse is not just that socialism doesn’t work. It is that all-embracing statism cannot last, regardless of whether this comes about under one-party tyranny or the illusion of democracy. This experience of 20 years ago ought to instill some humility. In the same way that the Soviet experience was upended, the future history of the last superpower could change just as quickly.

There’s No Such Thing as a Stable State was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Much to my shock, I paid about the same for both. The DVD player — and I didn’t get the cheapest one — was a startlingly low $28. I’m pretty sure that I paid $150 for my last one. Looking this up, it turns out that these were $1,000 and up in 1997, and the price has been falling ever since. The price deflation has been relentless over these 14 years, and yet, somehow, the companies that make them have survived and thrived.

And the falling prices of such hardware are nothing compared with the price of the memory used in your laptop. After 15 years of falling, prices this year have dropped completely off the cliff, to the point where the 8 gigabytes I once thought unaffordable are now practically free. By year’s end, the homeless will enjoy more access to DRAM (dynamic random-access memory) than soup.

Falling prices are a great gift to the consumer, and the whole experience of the digital revolution has demonstrated that they are no threat to free enterprise as we know it. Far from having killed technology, this sector is the main source of economic growth, jobs, innovation and productivity. Thank goodness that technology did not enjoy the same treatment as real estate after its price crash in 2008…

We tend to realize this when we look at specific sectors like technology, but somehow, when it comes to the larger macroeconomic pictures, confusion sets in. In truth, there is no reason to fear falling prices. The greatest period of economic growth in American history took place during the Gilded Age, when average prices were falling 3.8% per year, even as economic growth marched onward at 4.5%.

Today, however, the fear of deflation is pushed by the Fed at every possible opportunity. Just last month, Ben Bernanke, speaking in Fort Bliss, Texas, called falling prices “both a cause and a symptom of an extremely weak economy.” Bernanke would clarify that he means deflation induced by deleveraging and liquidation, not falling prices in response to increased productivity and innovation.

The problem with that distinction is that it is purely theoretical; it means nothing from the point of view of producers and consumers who face the same reality, whatever the cause. What’s more, even in cases of an economic bust, market prices do not lie; they are there to reveal truths about resource allocations that not even central bankers can sweep under the carpet.

So in his mind, falling prices, even of the sort that we’ve seen in the technology sector, can be seen not only a sign of weakness (which is, obviously, untrue), but also an actual cause of weakness (which is even less true). This view seems like a leftover from the Great Depression, when economists wrongly concluded that deflation was the reason for the persistence of weakness. Murray Rothbard, nearly alone, has disputed this and pointed out that falling prices are the one saving grace of a depressed economy, something to cheer, not jeer.

Afflicted with this dogma, the Fed, the Treasury and nearly everyone else set out to stop the fall in real estate prices starting in 2007. This has been a central concern of economic policy ever since, and trillions have been wasted in this endeavor. But it’s all for nought. Prices have a mind of their own, an amazing pigheadedness that disregards the wishes even of the world’s mightiest military power. The price system is the ultimate resistance force in the universe, more effective than all the insurgency operations in the world combined.

Why might the Fed be so interested in propagating the view that falling prices are a disaster? Because its main business is creating money, which always ends up watering down the value of the existing money stock, in addition to distorting production structures. Inflation is its main product. Or in our times, when the Fed’s attempt to do this has been frustrated by the banking system’s lack of cooperation, it can at least claim that it does the good of preventing deflation.

In 2009, consumer prices as measured by the CPI actually fell for the first time in 50 years. Thanks to the Fed’s intervention, this trend came to a halt and prices in general have marched upward ever since, despite the downward pressure in housing and technology. The main movers here have been the sectors where the state has the most control: education, utilities and medical care.

Counterfactuals are always speculative, but one does wonder what the world would look like today had the Fed not pushed its inflationary agenda after 2008. Would the price declines have continued? And if so, how much cheaper might everything be today after the global deleveraging that took place? It would have been wonderful for the consuming public and posed new challenges for capitalist producers to solve. It would have been thrilling to see how this would have led to a much-needed upheaval across the corporate world.

So let us speculate here. Given the efforts that the Fed has undertaken to manufacture high inflation, how can we account for its seemingly slow rate today? Why is the inflation taking the the form of a slow burn, rather than a roaring bonfire? One possible way to look at this is that it has taken the form of the absence of the price deflation we otherwise would have enjoyed in absence of the Fed’s actions. If prices might have fallen 10%, but instead rise 2%, perhaps we should include the boon foregone as a cost of the Fed’s monetary policy.

We can see, then, why the Fed has every reason to push this view that deflation is the worst possible hell in which we can find ourselves. This claim stands against all human experience. When I encountered stacks of DVD players at Wal-Mart, I experienced the right kind of sticker shock. Broaden that model to all goods and services and we would be living in a beautiful world of rising prosperity, rising value for our money and relentless innovation.

Perhaps someday, even iPhone4 cases will be reasonable.

Regards,

Jeffrey Tucker

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

The longer the unemployment problem persists, the more we are seeing oddball theories and proposals for dealing with it. Ben Bernanke remains enthralled with the antique view that the way to cure unemployment is to depreciate the value of money. You have to blow the dust off some old Keynesian macroeconomics texts, surely to be found in some dingy library somewhere, to see his rationale.

I’ll cite two additional cases in point (one news story and one commentary) as indicators of a more widespread problem.

A New York Times news story by Adam Davidson regrets how the economic changes of the last half-century have made job opportunities fewer than ever. He cites the common complaint about international trade. Steel, textiles, toys, furniture, electronics were once domestic industries, but these goods are, mostly, made overseas now, presumably, leaving less for us to do.

This is the common protectionist line, and it is rooted in fallacy. Offloading these industries where they can thrive more efficiently does two things: saves American consumers money so that they can save or spend on different things, and saves American workers from wasting time making things that can be made more cheaply elsewhere, so that they can do things that are more productive, rewarding and remunerative.

The end result should be more and better jobs at home. (I’ll get to why that is not happening in a bit.)

His second complaint is straight out of the Luddite playbook. Davidson regrets how technology (capital) has replaced human hands with machines. This isn’t about technology only recently online. He regrets that “countless secretaries were replaced by word processing, voice mail, email and scheduling software; accounting staff by Excel; people in the art department by desktop design programs.” It gets worse. He seems to regret even your ability to buy a bookshelf at OfficeMax because there are no longer “a bunch of people…helping measure things and making sure everything worked correctly.”

My goodness. He might as well regret the invention of the wheel, because those employed to carry others around on their backs are now out of work. If we take this logic far enough, we would be back to the Stone Age, when, it’s true, everyone had jobs to do. Then again, the living standards were rather low.

It seems trivial to point it out, but market-created technology is not violence to society. It appears because we want it, and we want it because it helps our lives. We become better at what we do. The outmoded technology no longer needs to be made — shed a tear for typewriter manufacturers! — but there are new jobs in making the new technology, and industries that use that new technology can expand because they are more efficient than ever.

I’m sorry for wasting your time by pointing out some commonplace refutations of brainless nostrums, but apparently, there is nothing so brainless that it is unworthy of being featured in The New York Times. And if it is being featured there, it strongly suggests the need for refutation. So let us visit yet another piece along these lines, this one even wackier and more wicked than the last one.

In “The Age of the Superfluous Worker” by Columbia sociologist Herbert Gans, we discover an even-more-bizarre explanation of why unemployment persists. He begins by pointing out that having surplus workers is hardly a new problem; it has been an issue faced by all countries in all times. But in the old days, he writes, surplus workers were afflicted with “illnesses” that caused them to be “incapacitated” or were otherwise “killed off.”

Wow, bring back the old days, huh? What’s more, he writes, wars were a blast, because they “absorbed the surplus” of labor by employing people to kill or be killed. Ah, the salad days of mass bloodshed when “sufficient numbers of those serving in the infantry and on warships were killed or seriously enough injured so that they could not add to the peacetime labor surplus.”

Sadly, those days are long gone, he writes, because people are so much healthier now. Not even war works its magic on the labor pool anymore: “Iraq and Afghanistan wars have left many more service members injured than killed.” (This whole line is based on a myth that war and death have an economic upside.)

So we are in a pickle. Gans says that we need an “industrial policy” that brings together government and business to make new jobs. An example he offers: “Reducing class sizes in all public schools to 15 or fewer would require a great many new teachers, even as it would raise the quality of education.”

We could have government employ some people to dig holes and other people to fill them back up again. Laugh if you want, but this is precisely what J.M. Keynes suggested in his General Theory. His plan was to have government fill up bottles with money, throw them into mines, fill the mines with trash and have private enterprise set loose to find them. Voila, no unemployment. He failed to add that this would be incredibly stupid and a ghastly waste of resources. (The best refutation of this fallacy should be distributed by the case.)

Gans ends his theorizing with the suggestion that government restrict everyone to working only 30 hours per week. When that time is done, presumably, others will be standing right by to step in to fill up the rest of the week, while the first workers go home to vegetate and wait for their turns at the wheel again. Actually, I don’t know why he says 30 hours per week. We have a growing population. Maybe we should all be forbidden by law from working more than 10 or five hours per week! That would, surely, bring prosperity.

All these cockamamie theories are deeply dangerous, and they evade the incredibly obvious point as to why there is unemployment in the first place. If you read economics books from the 15th-19th centuries, there was hardly a word written about unemployment at all.

Why is that? Because there is more than enough work to do in this world. There is no shortage of jobs, now or ever. The only question concerns the terms of exchange between the worker and the person who is being hired. Only in the 20th century and, mostly, beginning during the Great Depression has there been widespread unemployment, and that is because of the government’s interventions in the relationship between workers and employers.

What kinds of intervention? There are legal restrictions that make hiring and firing a litigator’s paradise. There are high payroll taxes that vastly increase the cost of new works. There are minimum wage laws, labor union privileges and “child” labor laws that cartelize the workplace to benefit the few at the expense of the many. There are restrictions on immigration that make it very difficult for many businesses to function and expand. If you could somehow get rid of all these problems in one fell swoop, the so-called unemployment problem would vanish rather quickly.

The problem of unemployment is not really an economic problem; it is a political problem. It is one of the many costs imposed by a state that involves itself in things it ought to leave alone. But rather than eliminating these costs, there is a growing fascination with wacky ideas, which will only guarantee that a bad problem grows ever worse. If you know a New York Times editor, send him or her a book on the basics of economics, and soon.

As for Bernanke, he has never met a problem in life for which he doesn’t see the solution as more paper-money printing. If he could find a way for the Bureau of Engraving and Printing to hire 7 million people, and another 6 million to fly the helicopters needed to distribute the new bills, we’d had full employment, and absolutely no reason to work.

Regards,

Jeffrey Tucker

Unemployment Solutions: Both Weird and Scary was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

It’s sounds new, but it is not. Following the Second World War, John Maynard Keynes pushed hard for a global paper currency administered by a global central bank. This was his proposed solution to the problem of national currency disputes. Let’s just take the inflation power away from the national state and give it to a world authority. Then we’ll never have to deal with a lack of coordination again.

The idea didn’t fly, but the institutions that were supposed to administer such a system were nonetheless created: the International Monetary Fund and the so-called World Bank. It didn’t work out that way. Instead, nation-states retained their monetary authority, and the new institutions became glorified welfare providers, conduits for transfer payments and loads to developing nations.

The dream lived on, however. The creation of the euro and its central bank was a step in that direction. So was the Nixon’s closing of the gold window. Each new currency crisis has created the excuse for further steps toward what Murray Rothbard calls the Keynesian dream.

Why hasn’t it happened yet? Many reasons. Nation-states do not want to give up power. The World Bank and the IMF are institutionally unsuited to the task. Many people in the banking world are also downright squeamish about the idea, with full knowledge of the ravages that unchecked inflationary credit can bring to the world economy. Mostly, there hasn’t been a crisis big enough to warrant such extreme measures.

However, that crisis might have finally arrived. Since 2008, the Fed has demonstrated that among all the world’s central banks, it alone is brave enough to embrace gigantic inflationary measures without wincing. The European Central Bank is under some strictures to not act as a monetary central planner. China is unconverted to the inflationary faith. The same holds true for England.

Ben Bernanke, however, is different: He is revealing himself to be an unreconstructed Keynesian with an unlimited faith in the power of paper money to solve all the world’s problems.

What this means is that it is left to the Fed alone to bail out the world. There is a perverse logic to this. After all, if you are going to be a world empire, operating under the assumption that nothing on the planet is outside your political purview, you bear certain responsibilities as well. Foreign aid and troops in every country are just the beginning. You must, eventually, embrace your financial responsibilities, too. A globalized economy addicted to debt needs an institution willing to step up and guarantee that debt, and provide the liquidity necessary to get us through the hard times.

As soon as the announcement of the new Fed measures came, the smart set of the World Wide Web lit up with the obvious observations that these measures come with massive risk of setting off a global inflationary crisis. It could lead to the final crack-up boom.

The Fed assures us otherwise. It “bears no exchange risk” in undertaking such actions. But as economist Robert Murphy explains:

“Strictly speaking, this isn’t true. If the Fed gives $50 billion in dollars to the ECB, which (at those market prices) gives $50 billion worth of euros to the Fed, then the ECB lends out the dollars to private banks, and before they repay the loans, the euro crashes against the dollar…then the ECB has no means of acquiring dollars to repay the Fed. Even though the ECB has a printing press, it is configured for euros, not dollars.”

He further states what everyone knows but no one is will to say:

“The current round of interventions will not solve the problem. Down the road — probably much sooner, rather than later — the central banks of the world will engage in some further extraordinary measures, again, lest the whole world fall apart. Even so, printing money doesn’t fix the underlying problems. No matter what they do, eventually, the whole financial world will fall apart.”

The speed at which all of this is happening is startling to behold. It was only 36 hours ago that we heard the first public worries about the drying up of credit in Europe. Large corporations were seeing their credit lines tightened. Banks were starting to become more scrupulous in their operations, which is hardly a surprise, given that zero interest rates have made it nearly impossible to make a profit in conventional lending operations.

Where in the fall of 2008, the Fed let the worries about tight credit grow to the point of international mania before it acted, this time, it jumped in to anticipate the inevitable warnings about the imminent death of civilization. Only trillions in paper money can save us now! The Fed saw what was coming and decided to do the deed, even before the demand came.

But rather than settle markets down, the real effect is the opposite. If you go to the doctor with a head cold, and he rushes you to the hospital for surgery, you don’t merely congratulate him for being thorough. You figure that he knows something that you don’t, namely that your condition is way more serious than you thought. Your family is likely to fly into a panic.

For this psychological reason alone, this action is likely to roil markets in crazy ways. The Fed is now paper money printer for the entire world. It’s a new world, and a brave one. If you think that a new era of prosperity, peace and stability awaits, you have been living under a rock for at least a century. There’s not a soul alive who will sleep soundly knowing that Ben Bernanke has elected himself the loan officer of the entire globe.

Regards,

Jeffrey Tucker

Leaping Toward the Keynesian Dream was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

That’s how our friend Detlev Schlichter signs off his weekly reports on his website, papermoneycollapse.com. It’s appropriate. Now more than ever.

On Monday, we sent you Detlev’s latest on the continued debasement of the euro. We also reported on Bundesbank president Jens Weidmann’s opposition to further monetization of national debt via the European Central Bank. Detlev sent us his thoughts…

“Hi Gary,

“Weidmann’s position is understandable. He knows that this will lead to disaster. The Bundesbank is strongly opposed to the ECB’s buying of government bonds. I am pretty confident that concerns over this type of policy are also more widely shared, and more intensely felt, among the German public than in many other countries.

[Editor's note: Germany's recent history is real-world proof of the evils of monetizing government debt with newly created money. For a detailed account of hyperinflation in early 20th-century Germany, get a copy of When Money Dies here, for 20% off.]

“The President of Germany, Christian Wulff, has publicly opposed it, and two senior central bankers in Germany have resigned in protest: Axel Weber, who was a shoo-in to succeed Trichet as ECB president, and Jurgen Stark, who is still chief economist of the ECB, but will leave soon.

“But none of this will change the final outcome. These people are fighting a battle they have already lost. The ECB is already committed to supporting the euro-government bond market. The ECB had bought €160 billion in bonds a few weeks back but has since bought more Italian debt. I guess they must be close to €200 billion in total by now. The ECB is the single largest creditor to the Greek government. But what about the treaty, the ‘ban on monetary financing’? Rubbish. The ECB has simply argued that it is buying these bonds to allow a proper transfer of its monetary policy, to sustain orderly markets. And if need be, politicians will simply change the treaty. These people do as they please.

“The Bundesbank has two people on the ECB board. They can easily be outvoted. Those who left in protest will be replaced with more-compliant bureaucrats. While Weidmann was giving this interview to the Financial Times, the chief economist of Deutsche Bank was calling for unlimited purchases of Italian bonds by the ECB to keep yields below 5%!

“This thing will unfold as I predicted.

“Best wishes,

“–Detlev”

Just a few hours after getting Detlev’s response, we woke up to find the world rushing to unfold just as Detlev has been predicting. Not to be outdone by the Fed and the ECB, the Bank of England pours on the speed in the quantitative easing marathon. We read in the Financial Times:

“Bank of England Signals More Quantitative Easing”

“Economic activity will be ‘broadly flat’ until the middle of next year, the Bank of England warned in a gloomy inflation report which signalled that its monetary policy committee [MPC] will announce more quantitative easing in the coming months.

“Sir Mervyn King, the governor, said on Wednesday that ‘inflation is more likely to be below than above the target’ over the next two years, implying that the bank believes more asset purchases will be necessary. The report’s central forecast shows inflation falling to far below the Bank’s 2% inflation target toward the end of 2013, the forecast horizon the MPC considers when deciding whether or not to conduct further quantitative easing.

“The bank is due to finish buying the £75billion worth of asset purchases that the MPC announced in October by February. Analysts had already expected more quantitative easing to be announced at that point. But a further round of asset purchases could now be brought forward.

“Chris Williamson of Markit said: ‘Concerns over deflation have grown. If the situation in the eurozone fails to improve, then there is a good chance that the MPC could introduce more QE at its December meeting, though it is more likely to wait until the new year.’”

We remind our long-suffering readers every chance we get: Price deflation is a good thing. It’s the thing that free markets do best…turning luxuries into increasingly affordable everyday commodities.

That’s what happens in an environment of free enterprise, competition…and a stable form of money (and stable forms of money are exactly the kind that the markets pick when left to their own devices… without a “flexible” currency imposed on them by a central bank with the force of government law behind it)…

The modern economic myth is that “deflation” — falling prices — is the bogeyman, the killer of economic growth. This myth supports the existence of central banks, whose primary mandates include “price stability.”

Ha! “Price stability” means pumping the economy with more and more money to keep prices from falling.

This is always a bad idea. Because money supply inflation by the government-backed monopoly currency issuer is legalized counterfeiting. It transfers wealth from savers to the central bank…which then doles it out to its commercial bank stooges and eventually to underwater governments…

But the pursuit of so-called price stability is especially malicious during a depression, when falling prices would help the common man the most.

During an economic depression, one of the breadwinners in a household may lose his or her job. The other may not get a raise for two or three years…or ever worse, the remaining jobholder may get a pay cut. Is it better for such a household to have “stable” or rising prices for groceries and gas? Or would they be better off if prices came to reflect general economic conditions and, you know, actually declined?

Governments and central banks don’t see it this way. FDR certainly didn’t when he did everything in his power to prop up food prices “to protect the farm industry” even as it became harder and harder for everyone to afford to eat.

And we haven’t even yet considered that central bank action is what makes the boom and its attendant bust possible in the first place. They cause the illness. Then they prevent the healing. When the condition of the economy worsens, they enthusiastically administer more of the virus.

The result? An increasingly weak economy. The politically well-connected make out just fine under such conditions. After all, they’re the ones who benefit from the inflation-wrought transfer of wealth!

The middle class, however, suffers. They slip into the ranks of the poor. And often, they have no idea why. The mainstream media aren’t exactly of much help in telling them either. In his article “Why the Old Media Ignore Ron Paul,” Thomas DiLorenzo explains why:

“All governments, Rothbard wrote, rely crucially on a set of myths and superstitions about its alleged greatness and benevolence, coupled with accompanying lies, myths and superstitions about the ‘evils’ of freedom, voluntarism, private enterprise and the civil society. These myths and superstitions are not spread by government bureaucrats as much as by various intellectual prostitutes in academe and in the media. The ‘court historians’ of academe spin tall tale after tall tale about the alleged need for more and more government (Keynesian economics would be a good example), while these ideas are spread about to the general public by pundits and journalists.

“This, too, is why the media ignore Ron Paul. There are a few exceptions, but for the most part, they have invested many years of schooling and work as propaganda mouthpieces for the state. They are as much a part of the state apparatus as is any government bureaucrat or any politician.

“They are the essential tool of the state in dumbing down the general population so that it will peacefully acquiesce in the never-ending expansion of the state and the financial enrichment of all its functionaries, while losing their own freedom and prosperity at the same time.

“They are the paid professional liars who repeat, over and over, such absurdities as ‘Higher taxes and more government spending will make us prosperous’…”recessions and depressions are caused by sudden outbursts of greed and animal spirits” (according to John Maynard Keynes); ‘capitalists get rich by selling people products that harm or even kill them’; and on and on and on.”

With this in mind, we cast our dubious, Whiskey-soaked eye upon an article in The New York Times with the headline:

“Middle-Class Areas Shrink as America Divides Into ‘Two-Tiered Society’ of Rich and Poor

“Study: 44% of families lived in middle-income neighborhoods in 2007, down from 65% in 1970.”

To be fair, the article didn’t prescribe the usual stuff — more regulations, more taxes on the productive, more redistribution. It just points out the growing gulf between the haves and have-nots, along with the social ramifications.

But it also failed to do what all the other articles from the mainstream media do. Like a cop on the take at a crime scene, it pretended not to notice the muddy footprints leading straight back to the perpetrator’s hideout.

The growing disparity in incomes started in the early 1970s. Despite nominal increases in their wages, working American families haven’t seen real increases in wages or purchasing power since around 1971.

Note, good patron, that was just after President Nixon severed the last ties of the U.S. dollar to gold. We’ve found our perp…and he’s still holding a smoking gun!

The world has been floating on a sea of unbacked currencies ever since. With the luxury of a flexible currency governments have been freer to rack up debts. The financial sector also benefited at the expense of manufacturing. And as Bill Bonner recently put it, “The fed’s funny money system caused the export of millions of good jobs to emerging markets.”

Wealth has been harder to build for the middle class, and now they’re falling hopelessly behind.

You won’t see the press or the academics talking about the damage wrought by unbacked fiat money, however. They’ll point you to the dangers of free trade…or the speculators…or the profit seekers.

They won’t tell you that the one thing that kept the state in check — the gold standard — was the only thing that could have prevented the collapse now unfolding across the world.

(For a more-thorough explanation of how the gold standard kept the state in check and provided the environment for economic progress, please read Congressman Ron Paul’s minority report, The Case for Gold.)

This catastrophe was inevitable. But all hope is not lost. Though the masses may find themselves falling into poverty — and while the mainstream media continue to mock gold and venerate central banking — those in the know have been taking the steps to protect themselves.

Step one is the ownership and continued purchasing of precious metals. Gold and silver are your very first line of defense as the central banks around the world continue to debase their currencies.

Sadly, gold and silver aren’t the bargains they used to be. As we mention from time to time, perhaps the world is slowly waking up to the nature of the problem. Sure, the media and benighted protesters around the world may call for more “help” from the state…but we get the sense that more and more people are figuring out the root of the problem. And they’re bidding up the prices of gold and silver.

Regards,

Gary Gibson

Bank of England Announces More Currency Destruction was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

All they can offer is a description of symptoms, such as with their favorite phrase: lack of “aggregate demand.” Which, if you think about it, doesn’t really explain anything. How come demand dropped? Why did it drop now and not at any other time? Whose demand dropped? (Hint: Mine didn’t.)

Sigmund Freud Meets Dr. Ruth

But hey, when faced with a lack of proper economic explanations, you can always fall back on some amateur psychology. Everything must be down to what goes on in people’s heads, right? People just get all mixed up. Too pessimistic. (Animal spirits, anybody?)

That’s why it is always up to those coolheaded guys and gals in government to use their policy tools to change expectations, change the psychology of people, cajole everybody into some elevated state of positive thinking and, hence, more economic activity. Save the masses from their own silly notions in their tiny heads, like saving and getting rid of debt. They all just clam up and save? Pitiful. But most importantly, why even worry about explaining the recession if you are confident, if you simply know, deep down in your heart, how to get out of it?

Most politicians don’t know any better. They certainly don’t know any economics. So the same toxic policy mix of Keynesian deficit spending and monetarist money printing has been implemented around the world since this crisis started four years ago. Just as in any other recession of the past 40 years, ever since Nixon cut the last link to gold and fulfilled every interventionist’s wildest fantasy: unlimited paper money under full control of the state! Yeah, baby, no more recessions!

Alas, it is not working, is it?

Rates were cut, and the state not only spent money it didn’t have…as usual, it spent much more money it didn’t have. But the economy did not recover. So more of this policy was implemented. And then, more again. In fact, by any standard, never before in modern times has the economy been “stimulated” more through Keynesian and monetarist government intervention than over the past four years.

Balance sheets of major central banks have tripled. Banks have been receiving limitless funds for free and will continue to do so forever, and governments are running deficits the likes of which mankind has only ever seen at the height of major wars, and which are increasingly funded by the printing press.

It is still not working.

You would probably guess that the interventionists of Keynesian and other ilk would be a bit more humble by now. Maybe check a few of those premises in their models? Or maybe start thinking again about those elusive explanations for what’s wrong with the economy in the first place? Are we really suffering from a lack of paper money and government spending? Maybe it is not simply down to all of us being too depressed, morose and in need of some policy Prozac. Maybe something else is broken.

Alas, no. The academically trained Keynesian economist is too committed to his or her beliefs to let the facts get in the way. Why has policy not worked? Because we have been too timid. We need the same policy. We just need more of it. A lot more.

More monetary madness

In her recent op-ed piece in The New York Times, High Priestess of Keynesianism Christina Romer suggests a radical policy “change” at the Federal Reserve: toward more money printing.

Rather astutely, she calls for Helicopter-Ben to embrace a Volcker-moment. Maybe by quoting the poster boy of the Reaganites and the hard-money crowd, she hoped to reach a new audience for her tiring and dreary, old policy recipe of more and bolder interventionism. She almost had me fooled.

Wait a minute, I thought. Volcker? He is the guy who abruptly stopped the printing press and allowed high real market rates to cleanse the system of the dislocations of previous booms, and to squeeze inflation out of the system, thus, giving the paper dollar another lease of life — albeit one that is quickly running out.

I thought, has Christina finally seen the light? Has she begun to realize how massively disruptive a constantly expanding supply of fiat money is for an economy? Is she calling, as I do, for an end to this monetary madness of zero policy rates and quantitative easing?

Well, no, she isn’t. She wants the Fed to print more money, much more. She wants the Fed to adopt a nominal GDP target. This will allow the Fed to become even more aggressive in its monetary policy and to communicate this aggressiveness better. Make people trust in that aggressiveness. And this communication is important for Romer.

As we have seen, for the good Keynesian, the policy was never wrong. The policy was just not ambitious enough. All it needs is a more-ambitious goal and better communication. People just have these bad thoughts and wrong expectations. The public is just not playing ball, not going along with this enlightened economic program. Well, says the Keynesian, we’ll teach them.

The Volcker analogy works like this for Romer: In 1979, inflation was too high, and small rate hikes didn’t work. So Volcker implemented a much tighter policy and crushed inflation. And it worked, because people believed him. Today, unemployment is too high. Gradual policy easing (not sure what planet Christina is on, but from where she is sitting, monetary policy in the U.S. must have appeared to be gradual) is not working, either.

So Bernanke needs to become more aggressive, and publicly so. Because people believe that if you stick to your policy, which — please remember — was, of course, the right policy to begin with, then the policy will really begin to work. You just need to drill it into those blockheads.

Every first-semester economics student, not only those at Berkeley — where Romer is economics professor — should be able to tear this apart with ease. The analogy with Volcker is silly. Volcker used monetary policy to fix a monetary problem: inflation. Stopping inflation by not printing money anymore is pretty straightforward. The link is kind of direct.

To be honest, it doesn’t even matter what the public believes or not. If you stop printing money, inflation will drop. Period. The link is that direct. You don’t need the accompanying belief system.

Was there full employment in Weimar Germany?

However, unemployment or the level of ‘aggregate demand’ is decidedly not a monetary phenomenon. Only in the airy-fairy dreamland of macroeconomic models is there a direct link.

To assume that we can simply and straightforwardly establish whatever nominal growth rate and level of employment we desire by means of the printing press is precisely the type of naive “building block economics” that got us into this mess in the first place. According to this worldview, the economy is just a machine, and all we need to do is to pull the right levers. Or it is like a cooking recipe, in which we need to simply change the ingredients a bit and — voila! The souffle will rise!

It is precisely because (a certain type of) economists have been telling us…that we can have more growth and high employment by constantly debasing money. This is how we created this highly levered economy over the past four decades. One that is so thoroughly addicted to ever larger fixes of cheap credit and that is now choking on excessive debt and weak banks.

By printing money and artificially lowering interest rates we have, again and again, bought near-term economic growth at the expense of long-term economic imbalances. That this was bad economics everybody is now learning the hard way. Everybody, that is, except Christina Romer. Her simple worldview is unshaken.

It is this weird combination of childlike belief in the simplicity of the problem (aggregate demand, lack of optimism) and the striking arrogance of the notion that the government can and should control the economy by simply pulling at the right strings hard enough that makes Romer’s article such an illustrative example of the intellectual dead end that is mainstream economics today.

Romer has apparently no notion of relative prices and of the importance, in particular, of interest rates for coordinating saving with investment. She cannot see that lowering interest rates administratively and injecting new money into the financial system will have many additional effects, other than lifting some statistical measure of aggregate economic activity. Easy money will always change resource use and capital allocation. Cheap credit encourages borrowing and debt accumulation, and will cause additional problems for the economy later.

Romer cannot perceive of these complexities. In her ivory tower, the world is one of simple statistical aggregates and large wholes that you can direct and mend to your liking. You just add the desired real growth rate (2.5%) and the acceptable inflation rate (2%) and stir it nicely to come up with the nominal growth rate (4.5%). How hard can it be?

We have some indication that Bernanke is not very sympathetic to this proposal at present. It doesn’t look like this will become official policy anytime soon. But who knows? A lot of what is now accepted monetary and fiscal policy in major countries and debated dispassionately by financial market economists would only a few years ago have been the mark of the economic crank, or the populist policy program of some economic backwater just before it was put under IMF surveillance.

But what is striking is this: Such rubbish emanates from the highest echelons of academic economics in America. Christina Romer is economics professor in Berkeley, Calif., and I fear that a lot of very bright young people burden themselves and their families with student loans and waste valuable time absorbing such drivel. If Romer is all that economics in Berkeley has to offer, why not emulate the late Steve Jobs and drop out?

Regards,

Detlev Schlichter

Christina Romer’s Toxic Cookbook was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.