Tag Archives: central banking

The Pragmatic Musings of an American Nobody Trying Not to be Evil, by Doug “Uncola” Lynn

The evil ones want to wipe out not just commitment to the nation’s founding principles, but memory of what those principles are. From Doug “Uncola” Lynn at theburningplatform.com:

You were blameless in your ways from the day you were created till wickedness was found in you. Through your widespread trade you were filled with violence, and you sinned. So I drove you in disgrace from the mount of God, and I expelled you, guardian cherub, from among the fiery stones. Your heart became proud on account of your beauty, and you corrupted your wisdom because of your splendor…

– Ezekiel 28: 15-17

To the angel of the church in Laodicea write: These are the words of the Amen, the faithful and true Witness, the Originator of God’s creation. I know your deeds; you are neither cold nor hot. How I wish you were one or the other! So because you are lukewarm—neither hot nor cold—I am about to vomit you out of My mouth!  You say, ‘I am rich; I have grown wealthy and need nothing.’ But you do not realize that you are wretched, pitiful, poor, blind, and naked.

– Revelation 3:14-17

It’s been said the greatest trick the Devil ever pulled was to convince the world he didn’t exist. And, subsequently, perhaps the next greatest deception ever perpetrated on earth occurred when Fractional Reserve Banking was invented to create money out of nothing. Bubbles are created from thin air; as are the dreams of those who measure wealth by the fading fumes of fiat currency.

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Money, funny-money and crypto, by Alasdair Macleod

This is a great explanation of money and how money works in an economy, a shredding of Keynesian economics, a clear warning of what’s to come, and a dashing of hopes that cryptocurrencies will be the replacement for failing fiat currencies. Alasdair Macleod is one of the few economists who understands that debt is not money, that money cannot be a liability (see also “Real Money” by Robert Gore, SLL, September 9, 2015). From Macleod at goldmoney.com:

That the post-industrial era of fiat currencies is coming to an end is becoming a real possibility. Major economies are now stalling while price inflation is just beginning to take off, following the excessive currency debasement in all major jurisdictions since the Lehman crisis and accelerated even further by covid.

The dilemma now faced by central banks is whether to raise interest rates sufficiently to tackle price inflation and lend support to their currencies, or to take one last gamble on yet more stimulus in the hope that recessions can be avoided.

Politics and neo-Keynesian economics strongly favour monetary inflation and continued interest rate suppression. But following that course leads to the destruction of currencies. So, how should ordinary people protect themselves from currency risk?

To assist them, this article draws out the distinctions between money, currency, and bank credit. It examines the claims of cryptocurrencies to be replacement money or currencies, explaining why they will be denied either role. An update is given on the uncanny resemblance between current neo-Keynesian monetary inflation and support for financial asset prices, compared with John Law’s proto-Keynesian policies which destroyed the French economy and currency in 1720.

Assuming we continue to follow Law’s playbook, an understanding why money is only physical gold and silver and nothing else will be vital to surviving what appears to be a looming crisis in financial assets and currencies.

Introduction

With the recent acceleration in the growth of money supply it is readily apparent that government spending is increasingly financed through monetary inflation. Those who hoped it would be a temporary phenomenon are being shown to have been overly optimistic. The excuse that its expansion was only a one-off event limited to supporting businesses and consumers through the covid pandemic is now being extended to seeing them through continuing logistics disruptions along with other unexpected problems. We now face an economic slowdown which will reduce government revenues and, according to policy planners, may require additional monetary stimulation to preclude.

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Central Banks and Socialism Are Forever Linked Together, by Jorg Guido Hullsman

You’ll never see free, private money in a socialized system. From Jorg Guido Hullsman at lewrockwell.com:

It is well known that socialism is a shortage economy. It is the economy of inefficiency and corruption, of indifferent workers and of bigwigs, of lacking spare parts, of lacking funds, of failure, of permanent reform needs and of constantly unsuccessful reforms. This concerns in particular total socialism, as it was realized in the Soviet Union or under National Socialism. But it is no less evident in the numerous partial socialisms that are featured in the real existing welfare state, in its numerous state “systems.” Budget deficits year in, year out despite high contributions—that is the reality in the state pension system and in the state health system. The state education system is similar: declining student performance and growing illiteracy despite sky-rocketing expenditure. No private entrepreneur could afford to let the costs get out of hand in such a way. Anyone who is in competition has to keep improving. Only those who have a legal monopoly and can make use of taxpayers’ money if necessary do not need it.

Now there is one partial socialism that stands out from the usual array of failures. Here we see gains instead of losses. Here we often find all the other signs of a successfully run company, from the private legal form to the pinstripe-filled boardroom. We are talking about central banking. The term “central bank” actually refers quite clearly to a centrally planned economy. But when people talk about the Fed, the ECB or other central banks today, hardly anyone thinks that they are talking about an offspring of the socialist spirit. On the contrary, central banks are typically viewed as particularly “capitalist.” After all, what would be more capitalist than money? And what would be more closely related to money than a bank?

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Fedophilia, by George Selgin

Central banking has become sacrosanct within the economics professio. Possible alternative monetary systems are dismissed out of hand. From George Selgin at alt-m.org:

As we start off the New Year, we thought it might not be a bad idea to remind our readers of the need to resist status-quo bias in assessing both the Fed’s performance and the merit of alternative institutional arrangements. -Ed.

***

Although the movement to “End the Fed” has a considerable popular following, only a very tiny number of economists—our illustrious contributors amongst them—take the possibility seriously. For the rest, the Federal Reserve System is, not an ideal currency system to be sure (for who would dare to call it that?), but, implicitly at least, the best of all possible systems. And while there’s no shortage of proposals for reforming it almost all of them call only for mere tinkering. Tough though their love may be, the fact remains that most economists are stuck on the Fed.

This veneration of the Fed has long struck me as perverse. Its record can hardly be said, after all, to supply grounds for complacency, much less for the belief that no other system could possibly do better. (Indeed that record, as Bill Lastrapes, Larry White and I have shown, even makes it difficult to claim that the Fed has improved upon the evidently flawed National Currency system it replaced.) Further, as the Fed is both a monopoly and a central planning agency, one would expect economists’ general opposition to monopolies and to central planning, as informed by their welfare theorems and by the general collapse of socialism, to prejudice them against it. Yet instead of ganging up to look into market-based alternatives to the Fed, the profession, for the most part, has relegated such inquiries to its fringe.

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150 years of bank credit expansion is near its end, by Alasdair Macleod

Alasdair Macleod’s innocuously titled article has enormous implications. From Macleod at goldmoney.com:

The legal formalisation of the creation of bank credit commenced with England’s 1844 Bank Charter Act. It has led to a regular cycle of expansion and collapse of outstanding bank credit.

Erroneously attributed to business, the origin of the boom and bust cycle is found in bank credit. Monetary policy evolved with attempts to control the cycle with added intervention, leading to the abandonment of sound money. Today, we face infinite monetary inflation as a final solution to 150 years of monetary failures. The coming systemic and monetary collapse will probably mark the end of cycles of bank credit expansion as we know it, and the final collapse of fiat currencies.

This article is based on a speech I gave on Monday to the Ludwig von Mises Institute Europe in Brussels.

Introduction

So that we can understand the financial and banking challenges ahead of us, this article provides an historical and technical background. But we must first get an important definition right, and that is the cause of the periodic cycle of boom and bust. The cycle of economic activity is not a trade or business cycle, but a credit cycle. It is caused by fractional reserve banking and by banks loaning money into existence. The effect on business is then observed but is not the underlying cause.

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Austrians get (some) mainstream credibility, by Alasdair Macleod

From Alasdair Macleod at goldmoney.com:

Well, well: who would have believed it. First the Bank for International Settlements comes out with a paper that links credit booms to the boom-bust business cycle, then Britain’s Adam Smith Institute publishes a paper by Anthony Evans that recommends the Bank of England should ditch its powers over monetary policy and move towards free banking.

Admittedly, the BIS paper hides its argument behind a mixture of statistical and mathematical analysis, and seems unaware of Austrian Business Cycle Theory, there being no mention of it, or even of Hayek. Is this ignorance, or a reluctance to be associated with loony free-marketeers? Not being a conspiracy theorist, I suspect ignorance.

The Adam Smith Institute’s paper is not so shy, and includes both “sound money” and “Austrian” in the title, though the first comment on the web version of the press release says talking about “Austrian” proposals is unhelpful. So prejudice against Austrian economics is still unfortunately alive and well, even though its conclusions are becoming less so. The Adam Smith Institute actually does some very good work debunking the mainstream neo-classical economics prevalent today, and is to be congratulated for publishing Evans’s paper.

The BIS paper will be the more influential of the two in policy circles, and this is not the first time the BIS has questioned the macroeconomic assumptions behind the actions of the major central banks. The BIS is regarded as the central bankers’ central bank, so just as we lesser mortals look up to the Fed, ECB, BoE or BoJ in the hope they know what they are doing, they presumably take note of the BIS. One wonders if the Fed’s new policy of raising interest rates was influenced by the BIS’s view that zero rates are not delivering a Keynesian recovery, and might only intensify the boom-bust syndrome.

These are straws in the wind perhaps, but surely central bankers are now beginning to suspect that conventional monetary policy is not all it’s cracked up to be. For a possible alternative they could turn to the article by Anthony Evans, published by the Adam Smith Institute. Their hearts will sink, because Evans makes it clear that central banks are best as minimal operations, supplying money through open market operations (OMOs) on a punitive instead of a liberal basis. Instead of targeting inflation, Evans recommends targeting nominal GDP. Evans’s approach is deliberately sound-money-light, on the basis that it is more likely to be accepted than a raw sound-money approach. But he does hold out the hope it will be an interim measure towards sound money proper: initially a Hayekian rather than a Misesian approach.

To continue reading: Austrians get (some) mainstream credibility

A Mania of Manias, by Robert Gore

On December 5, 1996, Chairman of the Federal Reserve Board Alan Greenspan asked: “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?” Greenspan was worried about the stock market, particularly the booming tech sector, but for the next three years they just got more exuberant and more irrational.

The subsequent crash took 38 percent off the DJIA and 77 percent off the tech-heavy NASDAQ in a couple of years. Speculators who were short the tech stocks and indexes made buy-an-island profits, but most of them had already been carried out on stretchers. The NASDAQ had gone from 1492.4 in 1998 to 5048.62 at its 2000 high, a gain of 238 percent. Up to the crash, speculators justifiably said, “This is insanity,” bet accordingly, and lost their shirts. The NASDAQ bottomed in 2002 at 1139.9, below where it had begun its final lift-off in 1998. Greenspan had been derided for his “irrational exuberance” speech for three years, but by 2002 he was hailed as a seer.

Greenspan’s speech incorporated no extraordinary analytical insight, merely recognition that in a finite world, off-the-chart returns can’t last forever, or as the old traders’ adage puts it: trees don’t grow to the sky. The paradox of Greenspan is that he made such a public utterance about a financial condition that he bore responsibility for perpetuating. He has never acknowledged what became known as the “Greenspan put,” first instituted in response to the stock market crash of 1987. Every significant financial perturbation was met with more and cheaper money, and the Greenspan Fed even launched a preemptive strike against a threat that never materialized. (Anybody remember the Y2K disaster?) That pre-millennium largess sparked the equity indexes’ final spasmodic rapture before the tech wreck.

Greenspan’s flood of money after that wreck launched the great housing bubble, and again those who muttered, “This is insanity,” and bet accordingly lost their shirts—until they didn’t. The tech bubble had been fed by dreams of technologies most of the dreamers didn’t understand, a belief in magic and a “new economy”. There’s nothing magic about a house. It’s a wasting asset, and for most of U.S. history it has been regarded as a place to live, not as an ATM, investment, or retirement nest egg. And certainly not as a speculative asset, bought on leverage, held for a short time, and flipped for a profit.

So there was not even a belief in technological magic to “excuse” the housing bubble, just a lot of people on TV, in academia, on Wall Street, and in the government, proclaiming that house prices never go down (they did in the Great Depression), so buy one, or several, or many, before prices went up next month. But for the easy, cheap money spewed by the Greenspan and Bernanke Feds, the housing bubble would never have happened. When it burst the DJIA lost 54 percent from its 2007 peak to its 2009 low. Many of the derivatives created on the financial back end were worthless. Some of the shorts found themselves on the Forbes 400, but not before they had suffered substantial losses. It’s tough to time a bursting bubble.

Which brings us to the present day. If the tech mania was based on magic, and the housing mania was based on a supposed fact that was historically untrue, today’s mania is a mania of manias, interlinked and resting on premises that are patently illogical, contradicted by both the historical record and current experience. Those premises are: central planning works, government debt promotes prosperity, and economic growth stems from central banks buying that debt with money they create from thin air. On these premises rest manias in governments, their debts, and central banking.

If central planning worked, there would still be a USSR and China would not have tossed Mao’s brand of communism into the dustbin of history. These historical bastions of non-prosperity had to resort to “demand management.” When their economies were unable to provide the basic necessities of life, their enlightened rulers slaughtered millions. The US imported central planning with the Great Depression, but it worked no better here than it had for Stalin. Since then, government failures have been legion while the Information Revolution has transformed the economy, but the belief in central planning—and hostility towards markets and the profit motive—is unshakeable. Millions supported Obamacare, a big step towards centrally planned and provided medicine, probably after reading about it on their iphones.

The term “developed country” now refers to those countries whose governments have developed mountains of debt and future commitments they have no hope of repaying. The valleys are demographic; most of those nations have birth rates that aren’t replacing the current aging populations, and fall far short of providing a sufficient workforce to fund the old folks’ benefits. Japan has the dubious honor of having one of the highest mountains—its government’s debt is over 240 percent of its GDP, and one of the deepest valleys. Its birthrate is among the world’s lowest, and it stringently restricts immigration.

Most government debt doesn’t go towards projects that will produce an economic return; it funds consumption. The belief (hope?) persists that such consumption somehow leads to economic growth, although a weak “recovery” in the face of the greatest global governmental debt binge in history offers no support. Germany, which has incurred relatively little debt since the financial crisis, has had one of the world’s best-performing economies, while Japan, which has buried itself in IOUs, just reentered recession.

The debt binge hasn’t worked out as planned, but the quack economic central planners have more snake oil: central bank monetization of that debt to suppress interest rates. The Japanese central bank has monetized its government’s debt at low rates for years. It is currently buying 100 percent of the government’s issuance, and the yield on its ten-year bond dropped to .31 percent, but Japan has endured serial recessions. If central bank balance sheet expansion and low interest rates were the road to riches, why not monetize everything and create universal wealth? The absurdity of that proposition is self-evident, but equity markets the world over rally every time a central banker hints of more balance sheet expansion and continuing microscopic interest rates (see “Ms. Yellen Whispers Sweet Nothings in Mr. Market’s Ear,” SLL, 12/19/14)

Tulips, the South Sea Bubble, the new economy, the housing bubble—at some point the greatest fool has bought into an absurdity and a market that could only go one way goes the other way, precipitously. If the tech wreck was a jump off a thirty-meter platform and the 2008 financial crisis a plunge off the cliffs of Acapulco, the end of this multiple-absurdity mania of manias will be a swan dive from the top of the Empire State Building into a two-foot wading pool.

Seismic economic and financial upheaval will shake political foundations around the world. What will governments and central banks do? They are already buried in debt, and interest rates are at zero or below. Yet their constituents have bought into the absurdities of their supposed omniscience and omnipotence. They will, like spoiled children, demand immediate solutions to decades-in-the-making problems caused by central planning, and its attendant debt promotion and central bank machinations.

Of course, the same prediction could have been made at the end of 2013, 2012, 2011, 2010, and 2009 (and SLL made it at the end of some of those years), and it may be a just a prediction, not a reality, at the end of 2015. A good mechanic can listen to an engine’s rattle and correctly predict the car will break down, but not necessarily say whether it will be 50 or 500 miles down the road. Who knows when the jerry-rigged contraption known as the global economy will fall apart? It’s belching blue smoke. The oil market serves as a reminder that not all assets can be monetized and not all prices “administered” by the central planners. It may also be the dashboard red light that goes on just before the engine gives its death rattle and the car stops (see “Oil Ushers in the Depression,” SLL, 12/1/14, and “Oil Economics, Part 2,” SLL, 12/3/14).. This time, however, there will be no deficit-financing or central-bank-monetization AAA tow truck a cellphone call away to come rescue it.

THERE WAS A TIME WHEN THE GOVERNMENT WAS SMALL, THE NATIONAL DEBT A ROUNDING ERRROR, AND  THERE WAS NO CENTRAL BANK. HOW DID WE SURVIVE? READ ROBERT GORE’S EPIC NOVEL OF THE INDUSTRIAL REVOLUTION AND FIND OUT!

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