- Does the recognition lag give the Fed an alibi for 2008? Scott Sumner, EconLog
- Dudley’s Defense of the Fed’s Floor System George Selgin, Alt-M
- Progress in economics Chris Dillow, Stumbling and Mumbling
- Moral grandstanding and character-based voting Irfan Khawaja, Policy of Truth
China Halts Bank Cash Transfers
“The People’s Bank of China, the central bank, has just ordered commercial banks to halt cash transfers.”
Could we be seeing the start of total economic collapse? The answer, ceteris paribus, is yes and the Austrian Business Cycle Theory (ABCT) explains why.
To quote Ludwig Von Mises’ explanation of the final act of the ABCT:
This means that when consumers finally realize that the money they have invested has actually been malinvested in the economy they then seek to acquire as much of their money as possibly from said investments. Most of which take the form of bank deposits.
The linked article reminds us that this is the numerous such time that China has adopted this policy saying:
“So what’s really going on? This crunch follows similar incidents in June and December of last year. In June, for instance, the central bank used the excuseof a “system upgrade” to allow banks to shut down their ATMs and online banking platforms. As a result, they conserved cash and thereby avoided a nationwide meltdown.”
Other instances, such as this one in England where “[s]ome HSBC customers have been prevented from withdrawing large amounts of cash because they could not provide evidence of why they wanted it,” show that this problem may not be contained to China and may be spreading to the international market.
What does Murray Rothbard say will happen when this “credit crunch” inevitably occurs?
Wasteful projects, as we have said, must either be abandoned or used as best they can be. Inefficient firms, buoyed up by the artificial boom, must be liquidated or have their debts scaled down or be turned over to their creditors. Prices of producers’ goods must fall, particularly in the higher orders of production—this includes capital goods, lands, and wage rates […]
this means a fall in the prices of the higher-order goods relative to prices in the consumer goods industries. Not only prices of particular machines must fall, but also the prices of whole aggregates of capital, e.g., stock market and real estate values. In fact, these values must fall more than the earnings from the assets, through reflecting the general rise in the rate of interest return […]
“Since factors must shift from the higher to the lower orders of production, there is inevitable “frictional” unemployment in a depression, but it need not be greater than unemployment attending any other large shift in production. In practice, unemployment will be aggravated by the numerous bankruptcies, and the large errors revealed, but it still need only be temporary […]
Another common secondary feature of depressions is an increase in the demand for money. This “scramble for liquidity” is the result of several factors: (1) people expect falling prices, due to the depression and deflation, and will therefore hold more money and spend less on goods, awaiting the price fall; (2) borrowers will try to pay off their debts, now being called by banks and by business creditors, by liquidating other assets in exchange for money; (3) the rash of business losses and bankruptcies makes businessmen cautious about investing until the liquidation process is over.
With the supply of money falling, and the demand for money increasing, generally falling prices are a consequent feature of most depressions. A general price fall, however, is caused by the secondary, rather than by the inherent, features of depressions.
So is the massive failure of all economies imminent? Well not necessarily because the government can take some steps to prevent the immediate failure.
“Continually expanding bank credit can keep the borrowers one step ahead of consumer retribution (with the help of successively lower interest rates from the central bank). In the theory, this postpones the “day of reckoning” and defers the collapse of unsustainably inflated asset prices. It can also be temporarily put off by price deflation or exogenous events such as the “cheap” or free acquisition of marketable resources by market participants and the banks funding the borrowing (such as the acquisition of land from local governments, or in extreme cases, the acquisition of foreign land through the waging of war).
The “false” monetary boom ends when bank credit expansion finally stops – when no further investments can be found which provide adequate returns for speculative borrowers at prevailing interest rates”
These steps only “kick the can down the road” and delay the inevitable since “the longer the “false” monetary boom goes on, the bigger and more speculative the borrowing, the more wasteful the errors committed and the longer and more severe will be the necessary bankruptcies, foreclosures and depression readjustment.”
We may be seeing the beginning of the next great depression here but only time will tell. One thing is certain though, a massive economic readjustment is coming and the central banks of the world have only been aggravating the problem. When it will hit is anyone’s guess but in this author’s opinion we are either looking at a repeat of the early 30’s or a repeat of the early 40’s and I can only hope we can avoid going through both.
I’m a dedicated libertarian but my first allegiance is to accuracy. It pains me when I see libertarians making arguments that are inaccurate, irrelevant, or just plain wrong. When they do so, they do themselves and our movement a big dis-service. I list seven such arguments here. More could be added.
The Fed is privately owned. This is true only superficially. Member banks own shares of stock in one of twelve district Federal Reserve Banks and they receive dividends on those shares. But they have little in the way of genuine ownership privileges. They cannot sell their stock and their voting rights are very limited. The President of the United States appoints the Board of Governors. Just because a legal arrangement is given labels that suggest private ownership, that doesn’t make it so.
The Bureau of Labor Statistics disguises the true unemployment situation by excluding workers who are “discouraged,” i.e., not seeking jobs. This is true of the U-3 unemployment figure which is the most widely cited figure, and the one the Fed says it is targeting. That figure is currently about 6.5%. The BLS also publishes its U-6 figure, which includes discouraged workers and currently stands at around 13%, down from about 17% at the height of the Great Recession. The BLS is not covering up anything here, although politicians may certainly choose to emphasize one figure or the other depending on what ax they’re grinding. Which is the “true” unemployment rate? There’s no such thing. The figures are what they are and observers can make of them what they will.
- “Chain-weighted” versions of the Consumer Price Index are politically motivated. These adjustments are intended to recognize the substitution effect, the classic example of which is when the price of beef rises and the price of chicken doesn’t, people eat less beef and more chicken. Peoples’ cost of living rises less than it otherwise would. CPI increases as measured by a chain-weighted formula reflect this fact, and the resulting price inflation estimates come out lower than under the old approach. That flashes a green light to some conspiracy theorists. While these adjustments are tricky business, substitution effects are real and the attempt to compensate for them should not be impugned.
The Consumer Price Index is politically manipulated by excluding food and energy. There are many versions of the CPI. One of them excludes food and energy because those prices are usually very volatile. That figure may be useful to economists who want to filter out volatile effects and focus on secular trends. Again, the figures are what they are, and politicians or for that matter we bloggers can use or misuse them as we wish.
“Banksters” control the U.S. government. There is a grain of truth in this one. The big banks are both victims and beneficiaries of government dominance of banking and finance. The reality of government regulation is that regulated firms employ many very smart and very well paid individuals who are constantly finding ways to manipulate or sidestep the regulations to which they are subject. The fact is that the regulators and the regulated are very thick. Banking and finance are controlled by a cabal of government and Wall Street firms and individuals. It’s a mistake to say that either group totally dominates the other.
Global warming is a myth and a scam. Ron Paul, whom I admire very much, blotted his copy book when he said on Fox News, “The greatest hoax I think that has been around for many, many years if not hundreds of years has been this hoax on […] global warming.” A few basic facts are beyond dispute: (a) carbon dioxide is a greenhouse gas, (b) CO2 levels are at an all time high, and (c) human activity is the primary cause of the increase. Beyond that, the evidence starts to get sketchy and incomplete. We do seem to have melting polar ice caps, record high temperatures in some places, droughts, etc. But overall there has been almost no temperature increase during the last ten years or so. Projections of rising temperatures and rising sea levels appear to be too pessimistic. This is a very complex issue and one where biases can overwhelm us if we aren’t careful. Statists are prone to accept the global warming thesis because they see it as a way to increase state power. Libertarians want the issue to go away for the same reason. This would be a great time for all parties to step back an exercise some epistemic humility. There’s a great deal about this issue that we just don’t know.
Let’s get rid of the state entirely, and all will be well. Given the present primitive degree of evolution of our species, a new state will pop up wherever an existing one is overthrown. The key to peace and prosperity is not anything so simple as abolition of the state, but to convince enough people, thoroughly enough, of the advantages of long-term cooperation. Good institutions will follow.
Last year I wandered down the street to an open house for sale. Even though I announced myself as a looky-loo, the agent welcomed me. We sat around talking and eating cookies for an hour; no prospects showed up.
It was a nice day today and I decided to walk to another open house thinking I’d again look around and chat with the agent. Hardly – the place was mobbed! It looks great in this picture but the reality is it’s stuck way up on a hill with a steep driveway and no garage. It’s 80 years old and although it’s been fixed up cosmetically it’s nothing to write home about; not in my book anyway. Nevertheless, I’m betting they’ll have multiple offers before this first day on the market is over.
This is the San Francisco Peninsula which is by no means representative of the whole country but I hear that Las Vegas has turned around too, as have tony places in New York. Why? Although I can’t prove it, I believe a good part the gusher of money that the Fed has been printing is now making its way into housing. The stock market has stalled, the bond market is in retreat, gold has plummeted, and that pretty much leaves housing.
So although the basic premise of monetary stimulus is plausible, it just doesn’t work. The new money seems to go careening around the economy in search of the Next Big Thing. Bubbles form and collapse, malinvestments are revealed and the cycle starts anew. What’s different this time is that it’s been such a short time since the collapse of the previous housing bubble to what looks like the start of another.
If these wasteful cycles of boom and bust are to end, the Fed must cease its stimulus programs. But it can’t. When the Fed dropped just a hint last week that it might start “tapering” off its bond-buying (money-printing) program, the bond market panicked. Why should we care about the bond market? For one thing, the average maturity of the federal debt is just a couple of years. Maturing debt must be rolled over into new debt, and if the new debt carries higher interest rate, the total annual interest payment could quickly swell from a “mere” $345 billion for the current fiscal year toward a trillion dollars per year, swamping any efforts to contain spending, like the $80 billion sequester that just took effect. We could end up needing a bailout from China.
The Fed will very likely continue or even accelerate its bond buying, depending on who occupies Bernanke’s seat come January. We should expect continuing cycles of bubbles and busts and the real possibility of some very nasty fiscal consequences.
In “More Bits on Whether We Need a Fed,” a November 21 MarginalRevolution blogpost, George Mason University economics professor Tyler Cowen questions “why free banking would offer an advantage over post WWII central banking (combined with FDIC and paper money).” He adds, “That’s long been the weak spot of the anti-Fed case.”
Free banking is better than central banking because only in a free market can the optimal prices and quantities of goods be determined. Those goods include the money supply, and prices include the rate of interest.
There is no scientific way to know in advance the right price of goods. With ever-changing population, technology, and preferences, markets are turbulent, and there is no way to accurately predict fluctuating human desires and costs.
The quantity of money in the economy is no different from other goods. The optimal amount can only be discovered by the dynamics of supply and demand in a market. The impact of money on prices depends not just on the amount of money, but also on its velocity, that is, how fast the money turns over. The Fed cannot control the velocity since it cannot control the demand for money, that is, the amount people want to hold. Also, even if the Fed could determine the best amount of money for today, the impact on the economy takes several months to take effect, and so the central bankers would need to be able to accurately predict the state of the economy months into the future. Continue reading
In Part 1 I outlined natural unemployment, government-caused unemployment, and the attempts to measure these. We saw how ambiguous and subjective some of the concepts of unemployment are and how the government, specifically the Federal Reserve, is charged with managing it. Now we turn to current conditions and what can be done about them.
There have been huge advances in technology and substantial declines in trade barriers in recent years. While these developments have raised living standards they have been hard on people whose skills were rendered obsolete or uncompetitive. When changes evolve gradually, as when so many people left farming in the last century, the disruption is not so great. Changes are now coming faster and are extending to some high-paid professional jobs. Automated systems can now handle at least the routine aspects of some legal research and medical diagnosis.
Time and time again new doors have opened to workers as old doors closed. Machines replace workers, but they raise productivity and produce new employment opportunities. We can expect this pattern to continue for a long time to come. Still, it is within the realm of possibility that robots and computers could take over so much work that the demand for human workers would shrink drastically. But those very machines would mean higher productivity and thus higher living standards.
A great deal of work can be now be done remotely, providing an advantage to areas with low living costs. Substantial outsourcing of such jobs to foreign countries has occurred (though that trend may be reversing as low-cost areas of the United States become competitive and as customer dissatisfaction and problems with managing offshore workers come up). The benefits of outsourcing and other productivity enhancements are spread across all consumers, but the job losses are concentrated among small and sometimes vocal minorities. Continue reading
Paul Volcker is a man of considerable stature, and not just because he’s six feet, seven inches tall. He gained a reputation for courage and plain talk as chairman of the Federal Reserve System under Presidents Carter and Reagan because he broke the back of the 1970s inflation. He did so by (mostly) sticking to a tight monetary policy even though that meant sky-high interest rates and sharp back-to-back recessions before the economy could enter its vigorous recovery. Now 84, he has enjoyed a comeback in recent years as an adviser to President Obama. His Volcker Rule, prohibiting proprietary trading by banks, was heralded as one way of preventing a repeat of the recent financial crisis, and it became part of the Dodd-Frank Act signed into law in July 2010.
Dodd-Frank’s full title, incidentally, is the Wall Street Reform and Consumer Protection Act. Like most current legislation its name reflects hoped-for outcomes, not its actual provisions. Reading the act (the PDF is available here) is not for the faint of heart. There are 16 titles consisting of 1,601 sections for a total of 848 dense pages. Only a lawyer could love sentences like this:
Any nonbank financial company supervised by the Board that engages in proprietary trading or takes or retains any equity, partnership, or other ownership interest in or sponsors a hedge fund or a private equity fund shall be subject, by rule, as provided in subsection (b)(2), to additional capital requirements for and additional quantitative limits with regards to such proprietary trading and taking or retaining any equity, partnership, or other ownership interest in or sponsorship of a hedge fund or a private equity fund, except that permitted activities as described in subsection (d) shall not be subject to the additional capital and additional quantitative limits except as provided in subsection (d)(3), as if the nonbank financial company supervised by the Board were a banking entity.
Volcker initially outlined his proposal in a three-page memorandum. It came to life as Section 619 of Dodd-Frank, expanded to 11 dense pages. This section is supposed to prevent banks from buying and selling securities for their own accounts, in contrast to brokering customer trades. It also prohibits banks from holding interests in hedge funds or private equity funds or from sponsoring such funds. These prohibitions are supposed to lessen the need for future bailouts like those that were provided to financial institutions in 2008 and 2009. Continue reading