Recently, banks have failed, and the Federal Reserve has raised interest rates another 25 basis points, or 0.25%. Some analysts say banks are safe while others cry that the sky is falling. Who is right? Christians need to discern the financial signs of the times.
Jesus warned his disciples to get out of Jerusalem when they saw a sign: “When you see Jerusalem being surrounded by armies, you will know that its desolation is near. Then let those who are in Judea flee to the mountains, let those in the city get out, and let those in the country not enter the city,” (Luke 21:20,21). The early church followed Jesus’ advice and fled to Pella in modern Jordan, thus saving the small group from a similar fate.
Solomon wrote, “A prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences,” (Proverbs 27:12).
Johnson & Johnson CEO Alex Gorsky looks on as President Joe Biden delivers remarks on COVID-19 vaccine production Wednesday, March 10, 2021, in the South Court Auditorium in the Eisenhower Executive Office Building at the White House. | White House/Adam Schultz
President Biden’s Build Back Better boondoggle is on life support in the Senate and should die, but it’s still worth considering one thing it reveals about its supporters - their love of money. Paul wrote this in I Timothy 6:9,10:
“Those who want to be rich, however, fall into temptation and become ensnared by many foolish and harmful desires that plunge them into ruin and destruction. For the love of money is the root of all kinds of evil. By craving it, some have wandered away from the faith and pierced themselves with many sorrows (NIV).”
It’s natural for people to want money for the things it can buy, such as food, clothing, politicians, etc. Honest people provide a service that others value in exchange for money. Evil ones commit a crime or immoral act to get it. Some people love money so much they are willing to counterfeit it. In Biblical days, only the government could counterfeit money. They did so by melting down gold and silver coins, adding copper and making new coins stamped with a false weight of the precious metal. I have written before that the practice is the sin of false measures mentioned in the Bible.
Debasing coins in that way didn’t fool merchants, who merely raised prices to account for the smaller amount of precious metal in the money. But the people blamed the merchants for rising prices and not the dishonesty of the government. Politicians responded by setting prices for most goods and punishing merchants who raised prices above the limit. That caused merchants to quit selling their goods at a loss and led to shortages of food and clothing.
Why would governments resort to such destructive behavior? Because they had taxed the people into poverty and could squeeze no more money out of them. But to stay in power, the governments needed to continue their reckless spending on the military and free food to the poor. So they destroyed their coins.
Eventually, debasing coins became ineffective, but then governments discovered the convenience of printing paper money as a substitute for gold and silver money. They were supposed to limit the amount of paper money in circulation to the value of the gold on deposit in banks, but as usual they succumbed to the love of money and printed far more paper money than the value of gold deposits to pay their armies. Again, prices soared.
Today, governments have sophisticated methods of counterfeiting that few people know about or can understand. Most economists refer to them as “printing” money because they have the same effect, price increases. Central banks, like the Federal Reserve, can increase the supply of money by reducing the interest rate they charge banks to borrow money. Banks borrow more and lend it at lower rates, thereby increasing the supply of money.
Central banks can also “buy” bonds from banks. Banks invest excess reserves in government bonds and can’t loan that money to customers. When the Fed buys those bonds, the banks have extra cash to lend and increase the supply of money. But the Fed has no money of its own to use to buy the bonds. It creates the money out of thin air.
What does money creation have to do with Biden’s boondoggle? The President knows that raising taxes to pay the $2 trillion cost will be unpopular, won’t bring in enough revenue, and will euthanize an already ailing economy. So he will rely on the Fed to “print” more money for him. The result will be the same as in Biblical days, rising prices, or at best, prices that remain the same when they should have fallen.
Politicians persist with the dishonesty of printing money because they know most people don’t understand what’s happening to them and gullible politicians like Elizabeth Warren will blame greedy businessmen.
Hayek wrote in Intellectuals and Socialism that, “The main task of those who believe in the basic principles of the capitalist system must frequently be to defend this system against the capitalists--indeed the great liberal economists, from Adam Smith to the present, have always known this.”
Harvard economist Greg Mankiw thought President Trump’s nominations of Herbert Cain and Stephen Moore to the Federal Reserve Board would sully the reputation of his mistress. Sounding like a teenage girl with a crush, or sportscasters talking about their favorite running back, Mankiw wrote a gushing love letter to the Federal Reserve for the New York Times:
I have a confession to make: I love the Federal Reserve. And I suspect that, in their heart of hearts, most other economists love the Federal Reserve, too. But I fear our love may be in peril...
At this point, you might be saying: “Whoa, Nelly! Have you already forgotten the financial crisis and Great Recession?”
No, I have not. As I wrote just last year, the Fed’s decision not to rescue Lehman Brothers when the investment bank faced a liquidity shortfall in September 2008 was arguably an unforced error. And though we’ll never know for sure, subsequent events might have been less tragic if the Fed had acted more boldly.
Institutions, like people, should not be judged by the standard of perfection. They should be judged by whether they are doing the best they can. By this standard, I give the Fed a top grade.
Anatole Kaletsky wrote in “A ‘Macroneconomic’ Revolution?” that the new French President has figured out the golden mean of economic policy that will lead France out of the swamp of despair into which its economy has sunk for a decade.
Typical of socialists, Kaletsky blames Europe’s lost decade on too much capitalism, or as he says, market fundamentalism. In the great film Casablanca, the Police Chief tells his deputy to “round up the usual suspects” after a crime has been committed. There was no effort to investigate or search for evidence. He had a standard set of criminal types that he harassed on a regular basis in order to appear to be doing something. Socialists respond to every economic crisis by rounding up one usual suspect – capitalism.
The US had become increasingly socialist since the election of Wilson. A nation that takes 45% of GDP for all levels of government, has over three million pages of business regulations that grow at the rate of 100,000 pages per year, and most of its citizens get their income from the government cannot be considered a capitalist or market fundamentalist nation. Europe has been socialist much longer. See Hayek’s Counter-Revolution in Science and Bastiat’s essays for evidence from the 19th century France. Germany was completely socialist by 1918 and still indicted capitalism for its problems.
At the recent summit held in Europe of the seven richest countries, the G-7, President Trump trashed the German trade surplus, “The Germans are bad, very bad. Look at the millions of cars that they’re selling in the USA. Horrible. We’re gonna stop that.” German newspapers translated “very bad” as “evil.” Many "reputable" financial publications, including the Wall Street Journal, sang harmony with Trump. Here is a sample of the lyrics:
Germany’s current account surplus–the amount its exports outpace its imports–recently hit 270 billion euros, close to 8.9 percent of its gross domestic product. This upward trending trade surplus shows little signs of slowing and Germany’s current account balance may rise above 9 percent of its this year. Despite years of criticism from the Obama administration and the International Monetary Fund, Germany has shown no willingness to address the persistent imbalance.
Germany’s persistent current account surpluses add to German GDP while they subtract from the GDP elsewhere around they [sic] world. Germany is not just exporting products–it is exporting stagnation, job losses, and deflation.
Germany’s trade surplus with the U.S. is particularly large and damaging. It exports high-end manufactured goods to the United States–such as cars, auto-parts, chemicals and airplanes. Cars, for instance, make up more than 10 percent of its exports to the U.S. A more balanced trade in these goods would mean many more high quality jobs in the United States in regions that badly need them.
Keeping your hard-earned wealth is hard. The state wants most of it in taxes. A couple of weeks ago I explained how socialists use randomness to steal your wealth. Now economists want to use a cashless society to take it.
Many of the world’s top economists want to get rid of paper currency and force all of us to use electronic banking. One of the top mainstream economists, Kenneth Rogoff, has written a manifesto for them in his 2016 book, The Curse of Cash. Rogoff is the Thomas D. Cabot Professor of Public Policy at Harvard and former chief economist of the International Monetary Fund. Many economists around the world have subscribed to his manifesto. Here are Rogoff’s main reasons for wanting a cashless society:
The real issues involve the ability to use monetary policy to (1) stabilize the economy, (2) issue credit in response to financial crises (act as lender of last resort), and (3) be able to inflate the price level in an emergency where it is necessary to engage in partial default (in real terms) on government debt. To achieve these ends effectively, it is extremely helpful for the government to control the unit of account and the currency to which most private contracts are indexed.
Some of us suffer from Fed head: we have allowed anger at the Fed to infect our brains to the point that we blame it for everything from flat tires to broken bed springs. George Selgin, an Austrian friendly economist at the Cato Institute, says take two aspirin and read his blog in the morning:
The view that the Fed might have raised interest rates long ago, had it only wanted to, became notorious during the presidential campaign, when Donald Trump publicly accused Janet Yellen’s Fed of keeping rates low for political reasons. But Trump was merely embroidering a belief common among many (mostly conservative) Fed critics...
The unvarnished truth, I hope to persuade you, is that interest rates have been low since the last months of 2008, not because the Fed has deliberately kept them so, but in large part owing to its misguided attempt, back in 2008, to keep them from falling in the first place.
One of Milton Friedman’s favorite analogies about monetary policy was driving a car. He compared money creation by the Fed to pushing on the gas pedal. On flat ground giving the engine more gas makes the car speed up, so giving the economy more gas should cause it to accelerate as well. But giving the engine more gas by pushing on the pedal may allow the car to slow down when climbing a hill if the engine doesn’t get enough gas to overcome the gravity involved in climbing the hill.
Friedman’s point: interest rates tell us nothing about whether Fed policy is too tight or too loose. Only the speed of economic growth can tell us that. Low interest rates may be too high if the economy is climbing a steep hill, like a recession. On the other hand, high rates may be too low if the economy is speeding up, as it does near the end of an expansion. The grandchildren of Friedman use that analogy to argue for nominal GDP targeting by the Fed instead of price targets. The problem with the Fed’s driving strategy is that it never knows if it is climbing or descending a hill or how fast the economy is growing at the time it makes its policy decisions because of long lag times from policy decision to its impact.
For the first time in almost a decade the market shrugged off a significant move by the Fed when it increased its rate by 0.25%. Of course, the market had anticipated the increase for a year and so priced it in earlier. And euphoria over the president elect trumped Fed policy. This is a good time to reassess the logic of dancing to the Fed’s fiddle.
Mainstream economists used to dance to the tune of Keynes and fiscal policy until the disaster of stagflation in the 1970s. Fiscal policy, they cried, suffered from too many lags to be effective, as if the lags were the only reason it couldn’t be effective. There were no problems with lags during the 1930s under FDR and it still wasn’t effective.
Fickle as teenage groupies, mainstream economists switched their adoration to the Fed. The Fed could save us all when Uncle Sam failed. Adulation for the Fed climaxed with the financial media’s crowning of Fed chairman Alan Greenspan as the “Maestro” who could orchestrate the economy as he wished with a wave of his wand.
Then housing landed on the economy and caused the Great Recession (GR). Ben Bernanke waved his wand but the economy wouldn’t perform. It couldn’t get out from under the house. Eight years later, confidence in the Fed has evaporated and mainstream groupies are bailing out on the Fed and returning to their first love, fiscal policy.
The whole point of negative interest rates (NIRP) in Europe and Japan was to force people to spend by punishing them for clutching their cash. The rationale goes deep into the middle ages before modern economics: the economy is sluggish because people are saving too much instead of spending. Good economists thought they had buried that monster by the 1930’s, but Lord Keynes resurrected it and gave it a title of nobility. That’s how medieval economics came to dominate mainstream academics and central banks for 90 years. If you don’t believe in zombies, you haven’t followed mainstream economics for long.
Decades ago an old lady yelled, “Where’s the beef?” when handed a burger in a fast food commercial. It became a catch phrase for occasions when people wanted to advertise that an idea lacked substance. So while the media proclaims the virtues of the current economy, many economists are asking, “Where’s the growth?”
The Bureau for International Settlements (BIS), the central bankers’ bank, recently issued a report card on the efforts of their client central banks to boost growth since the last recession and given them a failing grade. In the report “Unconventional monetary policies: a re-appraisal,” the BIS economists wrote:
We reach three main conclusions: there is ample evidence that, to varying degrees, these measures have succeeded in influencing financial conditions even though their ultimate impact on output and inflation is harder to pin down;
Bob Bryan at Business Insider had an interesting column on why economic growth in the US is dying. For the cause, he defers to Mike Thompson of S&P Global Market Intelligence:
Instead of continuing to invest in the business and focus on growing over time, according to Thompson, managements are trying to undercut possible disruptions by showing constant earnings growth and streamlined companies.
This activist-style, short-term attitude is exactly what Blackrock CEO Larry Fink decried in a letter to all S&P 500 CEOs at the start of 2016. Thompson said that these larger firms are most susceptible due to their size.
Revenue growth is predicated on economic growth and innovation,” he said. “We don’t have that sort of economic growth, and, let’s be honest, big companies simply aren’t that innovative. So instead these big companies shift their focus.
Thompson claims that large corporations are doing three things: 1) cutting costs; 2) creating shell companies or doing inversions to reduce taxes; and 3) buying back shares in order to boost earnings per share.
When a sailor hits a dead spot where the wind refuses to
blow he cays he is “in irons.” Japan’s economy sailed into the irons this past
quarter when its GDP declined for the second quarter in a row and officially
signaled a recession. GDP fell 0.8% in the third quarter after shrinking 0.7%
in the second on an annualized basis. This marks the fourth recession Japan has
endured since the global crisis hit in 2008.
Following so soon on the heels of massive stimulus, the
recession should strike a death blow to mainstream monetary theory. Abenomics,
the economic recovery plan that Prime Minister Shinzo Abe launched in 2012, was
the poster child for mainstream monetary theory. Japan would wash away deflation
and decline with a torrent of new money.
Economists predicted a 2.25% gain in Japan’s GDP after the 7.3% fall in the second quarter. As usual, they missed it again. Japanese GDP fell 1.6% last quarter according to initial estimates. Mainstream economics’ theory of business cycles states that such downturns in the economy are random events, shocks to equilibrium. As the London School of Economics told the Queen, they had successfully predicted that no one can predict the onset of the worst recession since the great one. Still, they crank out GDP forecasts as if they could predict a recession. They irony is huge, but apparently unnoticed by most of the profession.
However, the most important part of the story was that Prime Minister Abe has been conducting a major monetary policy experiment. He promised to boost nominal GDP and achieve a minimum inflation of 2% by printing as much money as was necessary. No limits. Paleo-Keynesians like Paul Krugman were giddy.
Abe also promised to reduce the deficit through tax increases and reform the structure of the economy. Partly as a result, the Japanese stock market climbed 55% and the value of the Yen fell 25% in 2013.
Anyone not a mainstream economist has recognized the awesome
blindness of the profession to the approach of the latest financial crisis and its
impotent policies afterwards. I recently finished a book published last year
that not only explains why mainstream economics failed but promotes good
economics, the Austrian kind, and provides another tool for telling the future.
Thomas Aubrey, the author of Profiting from Monetary Policy and founder of Credit Capital
Advisory in the U.K., consults businesses on how credit creation affects global
asset prices. Aubrey begins by detailing the devastation of the crisis on
pension funds. Not only did many funds lose money in the crisis, but the low interest
rate monetary policies intended to restore the economy have inflicted more
damage and will lead to many failing in the future. Aubrey doesn’t mention the
life insurance industry, but it and millions of retired people are suffering
for the same reasons.
The ghost of David Ricardo must be sending chills up the
spines of the economists of Europe and Japan. They may not understand what
causes those chills because of the poverty of their education. The US may soon
experience a similar visit. Here is how the Wall Street Journal put it in email
newsletter:
Can the U.S. go it alone? All of a sudden, economic data
from around the world is looking decidedly worrisome. China on Thursday showed
stark, sudden slowdown in lending and home buying in July, while Europe’s
second-quarter results confirmed everyone’s worst fears, with Germany
registering a contraction for the quarter and the euro zone as a whole failing
to grow. This comes after a very big slowdown in the same quarter for Japan,
the world’s second-biggest economy.
Mainstream economics denies that Cantillon Effects exist.
Cantillon Effects are one of those insights that Austrian economics offers
followers that help us avoid nasty surprises like the Great Recession. Recently, McKinsey and Company
provided research that supports the Austrian view of Cantillon effects
from QE. Here is one of their charts:
Trouble in emerging markets has provided the rationale for
at least part of the recent correction in the stock market. Emerging markets,
such as, Brazil, Russia, India,
Turkey, Thailand and China, are suffering largely
because of the withdrawal of US dollar investments from them and this confirms
the effects of monetary policy as described by the ABCT, the Austrian business
cycle theory. Here is a chart showing the performance of emerging market stocks
relative to the rest of the world:
To refresh your memory, the ABCT states that inflationary
monetary policies such as those of the Fed for the past five years will cause
an unsustainable boom as new money pours into the economy and stimulates demand
for consumer goods and for investment. Usually we think of the ABCT in terms of
a single nation, but the EM problems demonstrate that it has international
implications, especially in a world of increasing trade integration and a
currency that other countries use for trade and their banks for reserves.
ABCT Investing is based on the Austrian business
cycle theory, so I become mildly concerned when others criticize the
theory. I never become seriously concerned because I have learned over
the years that most critics are unbelievably lazy.
If they bother to read Mises or Hayek they do so through the lenses of
mainstream econ and fail to understand what the authors are actually
saying.
The Social Democracy blog has posted a long
diatribe against Ludwig von Mises, which I would normally ignore had
Paul Krugman not advertised it. Krugman even gets wrong much of what the
blog says, but the blog gets a few things wrong
so here are my responses:
Natural rate of interest
The blog is right that the “natural rate” of interest
doesn’t exist. Of course, neither does “equilibrium.” Both are
theoretical constructs to help us think about economics. Wicksell
defined the natural rate as
the rate of interest in a barter economy. Interest would exist if we were forced
to barter goods because interest is nothing but the opportunity cost of
giving up the use of something for a period of time. Austrian economists
picked up on the idea as a useful way to
explain how interest under barter differs from interest using money.
It’s a teaching devise. But if you don’t like it you can ignore it. It
helps teach the ABCT, but has little importance to the working of the
theory.
