Sound Money Is Key to Defending Our Liberties

By Thorsten Polleit from: Mises Institute

The title of this article epitomizes what the Austrian economist Ludwig von Mises (1881–1973) called the “sound money principle.” As Mises put it:

The sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.

And further:

It is impossible to grasp the meaning of the idea of sound money if one does not realise that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of right.

Mises tells us that sound money is an indispensable line of defense of people’s liberties against the encroachment on the part of the state and that sound money is a kind of money that is not dictated by the state but is chosen by the people in the free marketplace. The world we find ourselves in is a rather different place. Our monies—be it the US dollar, the euro, the Chinese renminbi, the yen, or the Swiss franc—represent fiat currencies, monopolized by the state.

Fiat money is economically and socially destructive—with far-reaching and seriously harmful economic and societal consequences, effects that extend beyond what most people would imagine. Fiat money is inflationary; it benefits a few at the expense of many others; it causes boom-and-bust cycles; it leads to overindebtedness; it corrupts society’s morals; and it paves the way toward the almighty, all-powerful state, toward tyranny.

Central Banking Is Marxist
It is certainly no coincidence that “the state” has been expanding ever since the world adopted an unfettered fiat money regime back in the early 1970s, and that as a result individual liberties and freedoms have been under pressure ever since. The state feeds itself on fiat money. It simply issues new debt, which is then monetized by the its central bank, which is at the heart of the fiat money regime.

Perhaps you will find it surprising that I believe that the concept of central banking is truly a Marxist concept. (I am not saying that central banking is only favored by Marxists. Not at all! There are also many other ideologies which approve of central banking.)

In their Communist Manifesto of 1848, Karl Marx (1818–83) and Friedrich Engels (1820–95) compiled a list of measures necessary to establish communism. Measure number 5 reads as follows:

Centralisation of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.

Against this backdrop there should be no doubt that once the state has become the absolute ruler of fiat money, the door is open for it to grow bigger and bigger, eventually turning into the dreaded deep state. And the deep state, as we know well from history, has little regard for individual freedoms and liberties.

Making Money Great Again: Returning to Sound Money
What needs to be done? Well, the challenge at hand is “Making Money Great Again”! This requires, first and foremost, ending the state’s money production monopoly and opening up a free market in money. A free market in money means that people have the freedom to choose the kind of money they wish to use and that people have the freedom to provide their fellow men with alternative goods that may serve them well as money.

As things stand, however, a final solution to the “money problem” has not arrived yet—even considering the emergence of the cryptocurrency space. This is because the financial intermediation problem is still unsolved in the cryptocurrency ecosystem; we will come back to this issue in a moment.

But first let us address the question: How can we get from a state-controlled fiat money regime to a free market in money?

The first strategy is monetary enlightenment—informing the widest possible audience about the evils of fiat money and how it affects their personal lives, families, and communities. This also includes explaining to people that there is a superior and practicable alternative to a fiat money regime, namely a free market in money.

The second strategy is making progress in the field of alternative currencies and payment systems, especially in terms of technological disruptions and their economic profitability. This is the activity space for those among us who are propelled by entrepreneurial spirit.

The Limits of Cryptocurrency
The cryptocurrency community, the bitcoin community in particular, and also precious metals–based payment system providers have been making some headway in this area in recent years, but unfortunately victory has not yet been achieved.

For instance, bitcoin still has some scalability and performance issues. Currently, the bitcoin network settles a peak of around 350,000 transactions worldwide every day, and given its present configuration, it is presumably running at almost full capacity. By comparison, the German fiat money payment system alone processes more than 75 million transactions on average every business day. From the payment processing viewpoint, bitcoin cannot outshine fiat currencies yet.

What is more, a currency in a modern economy must provide for the possibility of financial intermediation (an issue I mentioned earlier). People typically demand payment or storage services for their money, or they want to lend and borrow money—irrespective of the kind of money they actually use. Often peer-to-peer is not enough, a third party is required.

Providing intermediation services outside existing state regulation is difficult. In fact, it would put an upper limit on the financial sophistication of any cryptocurrency. This is a heavy drag on their competitiveness compared to fiat currencies. And if a cryptocurrency comes out into the open space, it will have the state breathing down its neck, drowning it in business-destroying regulations and restrictions. Because the financial intermediation problem is still unsolved, one has reason to remain skeptical that—given the current circumstances—existing cryptocurrencies will succeed in pushing aside the state and replacing its fiat currency just like that.

Precious metals suffer from similar problems. In many countries, the state subjects gold and silver to value-added taxes and/or capital gains taxes. This makes them uncompetitive versus fiat currencies in terms of using them in daily transactions.

The Key to Free Market Money Is Deconstructing the State
In fact, is it possible that a free market in money can ever emerge as long as there is the kind of state we know today? The state is, as most of you probably know, the territorial monopolist of ultimate decision-making with the right to tax its citizens. We can rightfully expect that this kind of state will do its best to crush any competitor to its fiat money and prevent a free market in money from emerging.

So if we want a free market in money, the sobering logical conclusion is this: we need to reform, to deconstruct, the state (as we know it today).

Now the uncomfortable truth is out, because the state is possibly the fiercest adversary you could choose. How can we hope to achieve victory?

Well, there is certainly no magic spell. One possible and straightforward strategy might be appealing to people’s inner self, and that is their right to self-determination.

The right to self-determination is inalienable and it is an indisputable truth. Each and every individual is the owner of his or her body and the owner of goods acquired in nonaggressive ways (without violating the physical integrity of someone else’s property). We cannot dispute these words without causing a logical contradiction.

The right to self-determination implies that the citizens of a state have the right (1) to make it known, by a freely conducted plebiscite, that they no longer wish to be members of the state and (2) to form an independent state or to attach themselves to some other state. In other words: the right to self-determination includes the right of secession, that is, people’s right to break up the big state and to deconstruct it into smaller units.

Smaller political units are less powerful, more peaceful, and free market oriented. They keep taxation low, or may even go without it and become wealthier. Just think of, e.g., Shanghai, Hong Kong, Switzerland, Liechtenstein, or Monaco. This is because small political units must compete for capital and talents with other political units. They must behave themselves nicely. Otherwise, people and capital will leave their territory. Given a great number of small political units, there is a good chance that some of them will allow for, even encourage, a free market in money, setting an example that creates emulators.

Conclusion
It is hard to say which route would be the most effective in “Making Money Great Again.”

Perhaps the cryptocurrency community will somehow succeed in ending the state (as we know it today), leaving a truly free market in money in its place.

In the meantime, however, it certainly would not hurt if we (1) kept educating the wider audience about what good money is and what bad money is and also (2) kept unmasking the state (as we know it today), showing that it is incompatible with and a violation of the inalienable right to self-determination of each and every human being.

In any case, it is of the utmost importance to wrest the money monopoly out of the hands of the state. Otherwise, there is indeed little hope that the free society (or what little is left of it) can survive.

(The complete article, with footnotes, is located here)

10 Myths About Government Debt

Antony Davies, Phd goes through a listing of 10 Myths about Government Debt. For future blog posts, I will attempt to expand on each of these 10 myths. This growing debt is a huge issue, not only for current generations, but for those to come in the future. As mentioned in the video, Dr. Davies does provide a “solution” to handle the Government Debt. It is a must see. Take copious notes.

Cheers,

Robert

Seems Counter-Intuitive in This Crisis: Inflation Heats Up for Services Firms, and They’re Able to Pass it on via Higher Prices

Even manufacturers, after months of crushed commodities prices, experience inflation and are able to pass it on. Stimulus money the government and the Fed have thrown around by the trillions.
By Wolf Richter for WOLF STREET.


It seems somewhat counter-intuitive in this crisis that companies in the services and non-manufacturing sectors – which dominate the US economy – would report higher input prices and higher sales prices. And there are now also smaller pricing pressures cropping up in the manufacturing sector.

“Inflationary pressure returned as both input prices and output charges rose for the first time since February, with both increasing at solid rates,” reported IHS Markit this morning in its Services Purchasing Managers Index (PMI) for June.

PMIs are based on responses from executives about their own companies – if particular activities are higher, unchanged, or lower in the current month than they’d been in the prior month. No quantitative measures or dollar amounts are involved.

“Inflationary pressures intensified for the first time since February at the end of the second quarter, as both input prices and output charges increased,” IHS Markit added in its Services PMI.

Read the rest of the story here.

The Federal Reserve’s Growing Balance Sheet and You

The Graph featured here shows the break out of the various debt holdings on the Fed’s balance sheet, over a specific time interval of 2004 to the present. It clearly shows a growing trend of the accumulation of assets. How did it grow so quickly during this time period? The Fed buys up the assets from the banks, as the banks receive cash from the Fed. Note: The third party dealers broker the transaction.

This has been the primary tactic for the various Quantitative Easing(QE) programs since the market correction of 2008. The balance sheet gives some indication of how much money was been introduced into the money supply, and just imagine how the fractional reserve factor has impacted the actual balance of loanable funds for the banks.


Inflation…inflation and inflation. $4.5 trillion and rising.

Inflation, The Coronavirus, and the Exponentially Growing Federal Reserve Balance Sheet

Since the outbreak of this “virus”, emergency measures, by The Federal Reserve(The Fed), have been implemented. One of those measures has been The Federal Reserve dropping interest rates to 0%.(Read more of this on my other blog articles) Other measures have been on going prior to this “pandemic”—these measures are accelerating thanks to the “virus”.

Let’s look at the graph of the growth trend Federal Reserve’s balance sheet. Assets, on the Fed’s balance sheet, have skyrocketed for the year 2020, overtaking the Repo activity done by the Fed from September 2019 to December 2019(On the graph it is indicated as QE-4). Although they did not officially call this “Quantitative Easing”, the net result was the same: Liquidity was restored for banks, while the Fed purchased the illiquid bank’s assets—this was done printing money from nothing. Looking at this chart, it is quite evident that the current Fed balance sheet is well over $4.67 trillion dollars and rising. This has surpassed the prior peak of circa 4.5 trillion during the zenith of QE-3.

Critics will claim: “Well there isn’t any inflation. See the Consumer Price Index.” This claim is non sense. By definition, inflation is a monetary phenomenon, as it is the expansion of the monetary base. It’s quite clear the monetary base as been expanded exponentially. The “price” inflation impacts the capital markets first, as seen by the equities market and other capital markets. (Note: The term “Price” inflation is simply used to recognize rising prices, as its separate from actual inflation) The recent market crash is evident of this, based upon the constant build up of the prior QE measures. Also, if there were no “price” inflation, why the need for the bailout of the banks with sub prime auto debt on the books?

With regards to sub prime auto loans, Car prices have risen—not necessarily due to the increase of the economic cost to make a car(I would argue it’s declined), but the value of the currency to actually purchase the vehicle has declined. This makes it difficult for the average citizen to purchase the vehicle, as the price seems out of reach. This is due to his wages not keeping pace with the rising prices(declining currency value). Sub prime lending bridges the gap, and many individuals can acquire a new vehicle. However, due to the nature of the sub prime market, the default rate is high—leading to bank illiquidity. Due to the increase of sub prime auto loan defaults, this creates a ripple effect on the secondary market—where institutional investors purchase large packages of these loans—causing the aforementioned QE action by the Fed. Yes, there is inflation.

A growing Fed balance sheet is a harbinger for inflation. The Fed simply doesn’t print cash, it buys assets with cash, that action expands the money supply. The transaction—that buys the assets—is done with a third party dealer, and that dealer deposits the check in their bank. The deposit expands the money supply thanks to fractional reserve banking deposit factor, Also, where does the Fed obtain the cash to buy the assets? Answer: It creates it out of thin air.

Oh and speaking of the dealers, here is a listing, per the New York Fed:

These entities handle the monies for the asset purchases between the Fed and the Fed chartered banks. Once the monies are deposited, the money supply is expanded.

The intrepid zeal to “fix” the issue is in play with the Fed especially during a time of crisis. Will these “fixes” “help” boost the economy?

Read more regarding this topic here:

Federal Reserve Engages in $500 billion in Repurchase Agreements—Pledges $10 Billion to Act as a back stop for Commercial Paper Market

The Federal Reserve, due to the current crisis caused by the cornavirus, has decided to engage in some aggressive monetary policy to boost the economy. First, they are seeking to acquire repurchase agreements(repos). These agreements have been discussed on this blog in detail. See here: http://robertwilliamsjr.com/repurchase-agreements-are-on-the-rise-who-cares-you-should

Secondly, the Fed placing forward $10 Billion to act as a backstop to the Commercial Paper market. Both measures are supposed to help in the liquidity of the banks that have commercial paper stagnated on their books.

With a Repo, the Fed actually purchases the debt from the banks, then exchanges that for cash. The banks will agree to buy back the debt at a later date. In the meantime, the banks’ balance sheet is strengthened thanks to the injection of cash.

My assessment: More cash in the system, more inflation. A higher back Commercial drop: A moral hazard.

Read more here

https://www.thestreet.com/investing/federal-reserve-sets-commercial-paper-backstop-dollar-gains

Negative Interest Rates: A Delusional Concept Beyond Space and Time

At the time of this writing, the notion of Negative Interest Rates are being pushed forward by central banks throughout the world. Bankers are developing new and improve ways to help stimulate the economy, and the employment of negative interest rates is the latest tool in the banker’s tool kit. Why the use of negative interest rates? How does it actually help the economy?(If it actually does) With this article, it will explore some things that make this concept of negative interest rates against reality. Keep in mind, an entire treatise can be written just on the notion of interest rates.

What Is the Interest Rate?

The non economist(and some mainstream economist) think the concept of the interest rate is exclusively related to the money and finance. There is some truth to this claim. Yes, interest rates are used in the world of finance, for example, loans to obtain a home, cars, or other fixed assets. Most will see the interest rate in these transactions as the “cost” of purchasing the underlying asset.

However, the origins of the interest rate does not begin in the world of Finance. It starts in the world of Economics. One of the forerunners of the development of the concept of the interest rate was Eugen Bohm Bawherk. His critique of Karl Marx’s work(Exploitation theory) lead to an expansion of the interest rate, and subsequent thinkers such as Knut Wicksell continued the development of this notion.

The fundamentals of the interest rate is straight forward: It is all directly related to human action. All behavior is purposeful. Since humans are unable to be in multiple locations in space and time, this means certain actions are done before others. This explicitly means there is a preference in ranking of preferred actions. For example, if three items are preferred, the first item, the second, and the third must be done in order temporally. The utility ranking(as this is called) simply is a preference ranking of the activities the actor chooses to engage. Of course, this example is given for simplicity, as this process is much more dynamic and there are many more options. Nonetheless, the ranking still exists, and due to the constraints of space and time, some items are done now(in the present) others in the later(in the Future).

The interest rate is derived from the economic actors choosing goods in the present versus the future. The prices of those goods–ones purchased in the present versus the ones in the future. That net ratio is the actual “interest rate”. The other consideration: This “interest rate” is unique to each individual. It is subjective to the individual’s preferences, as each person’s utility ranking varies.

Since each person’s utility ranking varies, and the interest rate is unique to each individual, how is it possible for the Central Bank to calculate the overall interest rate? It can not.

The Folly of the Negative Interest Rate

The interest rate, as it is based on present and future transactions, makes the outcome a positive integer. This is the first thing that makes the negative interest rate fallacious. Moreover, in consideration of how man moves through space and time, time travel going backwards in time is not possible. Having a negative interest rate implies the economic actor is moving backwards in time, and currently is choosing things in the past over things in the future. This is nonsensical. Back to the first point, if we take two prices of the same good, a current price versus a future price, how would that yield a negative number? One of those prices, in our ratio, would need to be a negative. Do Vendors sell goods with negative prices?

Vendors with Negative Prices

If vendors(firms) sell goods(currently or in the future) sell goods for a negative price, this would yield a negative interest rate. This also is absurd. The vendor is seeking to sell his goods at the highest price possible, and the consumer is seeking to purchase those goods at the lowest price possible. The optimal point of this scenario is the equilibrium price; this price is not a negative integer. Also, the business owner needs to earn a profit on the sale of his goods. The profit serves several purposes: (1) It allows the owner to cover his expenses to repurchase more goods to sell, (2) The net profit(revenue less expenses) acts as a return on his investment; this is adjusted against the interest rate. Having a negative interest would imply no prices, or no positive integers acting as prices, and the consumers would be receiving the goods plus extra cash(acting as a credit). This also works against the incentives of human action.

Negative Prices

Prices serve as signal callers in the marketplace. They allow both buyers and sellers to realize if there are changes occurring. For example, if prices rise sharply, this could indicate a scarcity issue with that certain good. Perhaps something along the supply change is impaired, causing a delay in the distribution or manufacturing of that good. Note: sharply rising prices will not detail why the food’s price has risen. Based upon that sharply rising price, the consumer can choose to re prioritize his utility preferences and elect to choose a viable substitute, at a lower price, or opt out of buying the good. With this activity, the increased prices discriminate against those who are willing to pay the increases price versus the group of persons who seek to pay for those goods a lower cost.

How would a negative price come into play? If goods became scarce, the owner would not lower the price to the point he give the goods away for free AND provide additional monies to the consumer. The business owner would not stay in business very long. Eventually, consumers would run out of those goods.

Conclusion

As bankers adopt negative interest rates, it simply is a move from the sublime and into the land of folly. Consumers pay for goods with positive integer prices, and firms accept their cash with positive integer prices. This directly correlates into a positive interest rate. Moving interest rates to zero or in the negative simply has a negative impact on the economy, and it should be rejected as a means of monetary policy.

Fed Rates at 0%

In an effort to “boost” the economy, the Fed has dropped interest rates to 0%. What does this mean? With regards to the fundamentals of interest rate theory, the overall aggregate time preference of marginal utility is based upon purchasing items in the present versus the future. In short, the rationale behind this interest rate drop is to encourage spending and boost consumption. There are some glaring flaws with this tactic.


First of all, the notion of the interest rate is subjective to each individual in the economy: How does the Fed actually know what the utility ranking for each individual in the marketplace? They may aggregate numbers, and run various statistical models to attempt to determine the true interest rate, however, this process still will come up short. Unless the members at the Fed are demigods, there is no way of accurately determining the rate. This causes mis allocation of resources starting in the capital markets.

Secondly, it debases the monetary base. Since the rate is at 0%, the goal is to push for consumption in the present. The need to spend money now due to the “cheap” money will deliver more lending into the marketplace. Since the interest is technically a “price”, the Fed price fixing it at 0% makes for a false expansion of the money supply. The asset prices will rise(like a balloon), at the cost of those who can not afford to acquire those goods(assets) at the inflated prices. Note: The prices rise, not due to Price inflation per se, but due to the devalued monetary base. It takes more monetary units to buy that particular item, as that is reflected in higher prices for that item.

If many are concerned about the growing inequality between “classes”, the analysis should start here with monetary policy. As the Fed continues to expand the money supply and grow its balance sheet, look for a growing trend of more sub prime lending to help the lower income classes to acquire goods. This class will not be able to catch up with the rising prices, since their income is fixed.

Negative Interest Rates in Sweden a FAIL

The expanding popularity of the employment by central banks of negative interest rate is quizzical. How can so many experts take a wrong turn when it comes to economics? Especially, when these “experts” have learned the fundamentals? Speaking of the fundamentals, I will lay out a proof, in a future blog entry, on how the concept of negative interest rates are simply against nature. It is nonsensical.

Also: These experts use to validate the success or failure of negative interest rates by using the CPI(Consumer Price Index) as support. Using this technique also is fallacious. The analysis on why use of this index is fallacious will come for another essay.


Read more here:

https://mises.org/wire/why-sweden’s-negative-interest-rate-experiment-failure


The New York Federal Reserve: Household Debt and Credit Report

Recently, I posted this article, “Americans: The Increasing Debt Balance”. It referenced the findings from the New York Federal Reserve’s report. Here is an excerpt directly from the New York Fed’s report:

“Household Debt Continues to Rise; Mortgage Originations Hit 14-Year HighThe CMD’s latest Quarterly Report on Household Debt and Credit reveals that total household debt increased by $193 billion, or 1.4 percent, to reach $14.15 trillion in the fourth quarter of 2019. This marks the twenty-second consecutive quarterly increase, with total household debt now $1.5 trillion higher, in nominal terms, than the pre-recession peak of $12.68 trillion, set in the third quarter of 2008. Mortgage originations rose by $224 billion, or 42 percent, in the fourth quarter of 2019 to reach $752 billion, the highest volume seen since the fourth quarter of 2005.”

The one of findings that makes for a strong concern is the number of mortgage originations. It’s difficult to take that figure and draw conclusions regarding the real estate market, but this number does create the need to take a sharp eye at the real estate market.
The overall household debt rising, in my opinion, shows that many households are attempting to maintain a standard of living in this hyper consumption Inflationary based economy.

Read the New York Fed’s report here: https://www.newyorkfed.org/microeconomics/hhdc