Tag: fed

How I Became An Austrian Economist

Jozef Martiniak | Slovakia

In March of 2018, I attended a seminar on Austrian economics in Slovakia that was organized by an institute whose statements I had been following for a long time. The event lasted four days with lectures on economics, money, and business cycle theory among other things, and the statements made seemed consistent to me. The rhetoric remained the same – what was said ten years ago was still relevant to today.

Moreover, these views have somehow all given awareness to me, a man with common sense. Suddenly you find out that something that you feel intuitively has a 150-years-old historical tradition and that there is a school that studies and develops this tradition.

Surprisingly, the majority of the attendees ended the seminar with a conviction against Austrian economics, but I experienced a change. Out of the blue, I became an Austrian. My ideas were synthesized and I found out it all makes sense. I used to talk about this moment like the story of St. Paul’s fall off of his horse. It was a moment after which you start looking at the world through different eyes and you know it will never change, you will never get back. You start to realize the connections in everyday situations. Not long ago, you have not seen them, but now you can clearly. Tom Palmer says that suddenly you look at the world through the lenses of freedom, through a filter that the majority of people do not have.

You start to become aware that this change is not so obvious like you feel it is. You have a feeling that everybody must see it, so you control yourself, you dose your knowledge to people around you just in bits. Then you find out that people around you do not care about you at all and most of them have not noticed any change in you, they are preoccupied by their own problems.

The impression that you understand the world better is followed by the impression that people will not understand you anymore. Suddenly, it is clear to you how some things will end up, because you distinguish responsibility from irresponsibility. And that is what really irritates the eminent experts who somehow see the change happening in you, though they do not know what has happened, they just see that you can say something responsibly and hold your ground, because you simply know it is true. They do not like debating with you because instead of trying to understand your point of view, they focus on trying to humiliate you in rhetorical competition.

A side-effect of the “conversion” is that you suddenly start to understand the Idealists whom you did not understand before.

Hazlittian awareness of invisible consequences of the events that already happened is another consequence of the ‘conversion’. Only few people realize it. Most people simply analyze their lives and only see the closest area of consequence of the acts that happened and that are related to their past.

In the summer of 2018, I completed a course at Mises University and henceforth joined a sect of people with an Austrian point of view in economics. I have used the word “sect” on purpose since we fit into the characteristics of the word ‘sect’ – we are in minority, we look at the others like those who do not understand yet, but if they are insistent, they will find out where the truth is. The lecturers at the Mises Institute say we belong to the two percent of the population who understands economics better than the majority. Even if it is said as a joke, it seems to me inappropriate since those who really understand the nature of Austrian economics know that they really belong to that small percentage. And those who do not understand are uselessly given a false feeling of exceptionalism, because they do not know why and in what they should be exceptional.

I like working in a world where your steps have meaning. Since we are homo sapiens, we should stop and think about future consequences of our present actions. The economists of the mainstream cannot explain how debt of countries will impact their future. They cannot explain how long the FED and ECB control will work and the public will trust it. In these aspects, they have adopted Austrian rhetoric of “laissez faire” – let it be, it is working somehow.

The Austrians are not satisfied with an explanation that it will work out somehow, because everything has always ended up working somehow. They want to change this system – even though it is very corrupted – so that it is the furthest possible from disaster. I do not know how other Austrian economists came into existence, perhaps they were born like this (at least Carl Menger, as he was nobody’s pupil and he was quintessential to the marginal revolution), but I am for sure a convert.


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President Trump, We Can’t Just “Print More Money”

By Dane Larsen | @therealdanelars

Donald Trump, as reported in Bob Woodward’s new book “Fear: Trump in the White House”, told Gary Cohn, the Director of the National Economic Council, to just “run the presses– print more money” when addressing the insurmountable US Federal Debt. Donald Trump, the same man who ran a campaign to the White House that pledged to “eliminate the [$19 trillion national] debt over a period of eight years”, thinks we can print our way out of this mess.

Bob Woodward, an investigative journalist and Editor at the Washington Post since back in the Nixon days of 1971, wrote a full book exposure of the Trump White House in comparison to the other administrations he’s seen in his tenure at WaPo. In the book, Woodward describes a back-and-forth between the National Economic Council and Trump that is truly telling of how out of the loop President Trump is. While the book dates the quotes and conversations back to 2015 and 2016 during his campaign, it is hard to believe the stances on this economic issue have changed in the slightest. With the signing of reckless spending bills and omnibus budgets that only increase the forecast of US government expenditures, it is clear that President Trump is all talk and no walk on the subject of the current economic crisis that is the National debt.

Whether or not it was already known that Trump’s words bleed insincerity when it comes to spending cuts or a balanced US checkbook, it is evident now that the current POTUS has no viable long-term solution for the issue, which could cause the worst depression yet. His “solution” if it could be considered as such, of printing more money to offset the effects of the ever-growing now $21 trillion national debt is not just infeasible, but is admittedly extremely popular in Washington D.C. and the White House itself, with past Presidencies.

We see in the Obama administration, the idea of printing more money caught wildfire throughout the EU and G-20 with direction by former President Obama himself. In fact, there was a specific occasion during a G-20 meeting where Obama and Biden called on Angela Merkel of Germany to start “pulling their weight in the global effort of economic stability” by “printing” more money. As much of an oxymoron as that sounds to even the most amateur economist, it is a legitimate belief that has spiraled many countries to insurmountable debt.

The Basis of Economics

The principles of economics rest on responsibility with the money you own. It would be foolish for the average person to go out and buy a $350 Xbox One when after my checkbook is cleared, I only have $150 to spend. Why do we not ask this much culpability from our Federal Government?

It all started back in the days of Woodrow Wilson, and the creation of the Federal Reserve as an entity itself in 1917. The overarching power of a central bank to be the authority on all things money related can be a powerful responsibility, and in most times, a detriment to the economy it attaches itself to. Before the creation of the Federal Reserve, only $20 billion in debt had accumulated in the years after the Civil War. When adjusted to inflation, this comes out to around $51.7 billion, just barely 25 percent of what the US National Debt is today. Since then, we’ve seen the ability to print money used as a weapon to over tax citizens, and justify wars overseas where the US frankly should not be involved in at all.

In the case of George W. Bush, the National Debt was increased 101%, tacking on $5.849 trillion to pay for the (ongoing) War on Terror in Afghanistan and Iraq. Military expenses rose to all-time highs, and when the US taxpayers couldn’t chip in the yearly $600-800 billion necessary to fund it, Bush and the Federal Reserve created the money out of thin air to respond to the 9/11 attacks over a span of 8 years that hasn’t stopped since. When will we be done with this intervention? The question has yet to be answered, and President Trump hasn’t made progress in that regard either.

Bad economic habits and fiscal irresponsibility is prevalent across the board, no matter party denomination. President Obama raised the debt 74% in his tenure in the White House, adding $8.588 trillion from fiscal years 2008-2016. Whereas Bush picked his poison with military spending, Obama focused more on tax cuts, unemployment benefits, and public works projects to recklessly spend more money than the US Government could even think about obtaining. That’s not to say that Obama didn’t have his fair share of military spending checks sent to the Department of Defense consisting of artificially printed money, because the War on Terror persisted throughout his Presidency as well. These bad values will lead us to the next depression at the expense of the taxpayer and common folk, while the people who got us in this mess leave untouched.

Hyperinflation

Hyperinflation is defined as the monetary inflation that occurs at a high. uncontrollable rate. When the economy sees an influx of money in circulation, prices rise as the natural tendency of the free market sets out to do. When the government steps in to pay for it’s mistakes or overspending by printing money out of thin air is where the problems really start to occur. As Kimberly Amadeo of The Balance describes: “Instead of tightening the money supply to stop inflation, the government keeps printing more. With too much currency sloshing around, prices skyrocket. Once consumers realize what is happening, they expect continued inflation. They buy more now to avoid paying a higher price later. That excessive demand aggravates inflation. It’s even worse if they stockpile goods and create shortages.”

The economy will crash in the event of Trump printing more money to stabilize the National Debt, and it won’t be a small recession. We will see the closing of businesses as the value of the US dollar declines, leading to lower imports and exports, and a shortage of goods in the US market. With all of this leading to a disaster, we beg the question: Why aren’t we holding these government workers to higher standards? After all, they clearly aren’t looking out for our best interests. On his campaign trail, Trump vowed to be the change in the government bureaucracy that is Washington D.C., but he clearly can’t live up to that.


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Deflation: The Cure to the Economic Crisis of Government

By TJ Roberts| United States

The world is sitting on the largest financial bubble ever created. While the economic elite says that we will never see another crisis in our time (just as Keynes said two years before the crash of 1929), we have been living in a bubble for more than a century, and it will inevitably break. This bubble, however, is unlike any economic boom we have dealt with before. The inflated commodity that will cause the future bust is the currency which the US Federal Government forces us to use: the US Dollar, and this is all because of the unnecessary fear of deflation.

Estimates say that as much as 98% of the value of the US Dollar has disappeared since the Federal Reserve claimed a monopoly power over currency in the United States. The only reason the Dollar has not collapsed already is due to legal tender laws, which requires businesses to deal in US Dollars within the US.

So, how did it get so bad? As alluded to in the first paragraph, it is because the government is terrified of deflation. They fear that since prices have a tendency to decrease, people will hoard their money since they can make a profit by simply refraining from spending in the present. Since consumers hold on to their money, firms earn less revenue, which causes them to decrease their spending. This leads to a decrease in employment, and therefore production. With this loss of production, those who make the factors of production also lose revenue, leading them to cut spending, thus decreasing production and employment. With the loss of employment, consumers spend even less. This ultimately leads to a complete collapse of the economy according to the Keynesians (see Chapter 12 of John Maynard Keynes’s The General Theory of Employment, Interest, and Money).

Deflationary Spiral will not destroy the economy

The process outlined in the prior paragraph is known as a “deflationary spiral,” in which deflation causes the entire economy to disappear. This, however, is an economic myth. In truth, a deflationary spiral can only occur under special circumstances. The reason why Keynes is wrong in assuming a deflationary spiral will happen is two-fold.

First, it is not possible for human beings to reduce spending externally. Although money does possess deflationary tendencies when unregulated, this does not mean that people will hoard their money indefinitely. Humans have basic needs, namely food, water, and housing. It simply isn’t possible for the people to cease all forms of economic activity.

The second reason why a deflationary spiral will not destroy an economy is time preference. Time preference is the concept that human beings prefer present goods to future goods. If one offered you one thousand dollars today or one thousand dollars in one month, people will typically take the money today. This is why we have an interest in society. Interest gives an incentive for one to refrain from present consumption so that they may have even more future consumption.

People, however, have varying degrees of time preference. The lower your time preference is, the more willing you are to forego present consumption for future consumption. Simply because something is cheaper in the future does not guarantee that someone will wait to consume it. If the price drop is high enough, then they will wait, but that only applies to those with low enough time preferences to be willing to wait. Those with higher degrees of time preference will still consume and the economy will not totally disappear.

What are the causes of deflation?

There are four immediate causes of deflation.

  1. An increase in the demand for money will cause deflation. If the demand for money increases relative to the demand for goods, then price deflation will occur. Money will have an increased purchasing power due to the increased demand for money.
  2. A decrease in the supply of money will lead to price deflation. If less money is in the system, then people will marginally value money more than goods. Simply put, with less money in the system, people will be able to purchase more goods for less money.
  3. A decrease in the demand for goods. If the demand for goods decreases relative to the demand for money, then money becomes more valuable and deflation occurs.
  4. An increase in aggregate output. In other words, an increase in the supply of goods will cause price deflation because production has become more efficient.

The commonality among these causes is that it leads to the decrease in the price of goods.

Deflation is caused by economic growth

The fourth cause of deflation, an increase in aggregate output, is simply economic growth. Economic growth, in fact, is inherently deflationary. When the people can afford more for less, there is growth. This compels more production, more innovation, and more prosperity, especially among the lower classes.

The only examples in which economic growth was not deflationary was in times of war. In times of war, the State forces an increase in production through inflationary policies that allow the government to “afford” these wars. This inflation, of course, always leads to a bust in the future.

Inflationary growth is unsustainable.

Under inflationary growth, the government utilizes their power to dictate the devaluation of their currencies. This leads to vast misallocations of resources. By devaluing the currencies, governments redistribute wealth to political entrepreneurs who position themselves to receive money straight from the printing press. Major banks and corporations are among the most prone to doing this.

The growth these firms experience, however, is vastly unsustainable, whereas it is built upon wealth that did not exist in the first place. In true growth, firms cut their costs in order to produce more efficiently and maximize their profits. Under inflation, however, the exact opposite happens. An inflationary monetary policy, especially one based on a fiat currency in a system that tolerates fractional reserve banking, will lead to a boom that must be corrected.

The idea that inflationary policies can lead to growth in the short run is just another example of the broken window fallacy. As mentioned before, political entrepreneurs who receive money straight from government printers benefit, but those who are not politically connected suffer since they cannot pay the higher wages and other costs. This leads to unnatural growth at the expense of others.

Inflation is fraud.

When the government implements a fiat system, they have the ability to manipulate the currency to deceive the masses into believing out economic condition is better than what it really is.

deflation vs inflation
Annual inflation (in blue) and deflation (in green) rates in the United States from 1666 to 2004.

Fractional Reserve Banking

Perhaps the most egregious form of inflationary fraud is fractional reserve banking (FRB). FRB is a system in which banks loan out the deposits of its customers, keeping only a fraction of their nominal reserves in the bank. This leads to unnaturally low-interest rates and thus high levels of debt.

If a shock in the economy occurs, bank runs will happen. When it comes out that the bank can’t give its customers their money, the bank goes under (or gets bailed out due to government intervention), and the people lose everything.

FRB is a clear instance of fraud in which a bank claims to have more money than it truly has. It is loaning out its customers’ funds, leading to credit expansion, which leads to business cycles.

Of course, we can dodge this by returning to the gold standard and punishing those who partake in fractional reserve banking.

Deflationary Spiral punishes parasitic frauds.

Inflation must come down eventually. And the only way to do that is through deflation. This is not to be feared but celebrated. It is the market’s way of correcting the malinvestments caused by government manipulation of money. Deflation is a means by which the economy returns to the real world. In addition, it halts the centralization of power under governments that have cartelized the monetary system of their nations.

Firms that are deeply in debt, which have certainly taken advantage of the fraudulent fiat and fractional reserve banking systems, will go under. The power elites of the State will be humbled as they will lose the foundation on which they rested. Deflation purges our society of the parasites and frauds that have been manipulating the economy to their advantage since 1913. By this, of course, I mean the central planners and political entrepreneurs who have propped up the Federal Reserve and the federal government. For they have delayed deflation for more than a century. For liberty and prosperity to return, we must have a deflationary spiral to rid us of the wealth that the State holds, which never existed, to begin with.


Originally published on freedomandeconomics.org.

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Jerome Powell: The Name All Libertarians Should Remember

By Michael McCosker | United States

Jerome Powell sounds like he could be the head of your local home owners association or the banker that works off your main street. Jerome Powell, however, is not that person. Powell is a name that all Libertarians should remember at least until 2028. Jerome Powell is important to know because he is the current Chair of the Federal Reserve. With his Chair term ending in 2022, and his position on the Federal Reserve Board of Governors ending in 2028, the American people will feel the effects of Jerome Powell’s leadership for years to come.

Most Libertarians may have just lost interest once the Federal Reserve was mentioned, due to the fact that as a “central bank,” the Reserve is a monopoly and has control of the American financial system, and is enforced by government violence. However, it is important to understand the present head of the Federal Reserve, so that we may understand where investment opportunities lie.

Jerome Powell was both a lawyer and banker for 32 years, in which he managed several funds. Most recently, he managed the Global Environment Fund, a private investment firm that invests solely in sustainable energy. (1)( 2) Powell served for three years as the Under Secretary of the Treasury for Domestic Finance under George H. W. Bush, in which he was responsible for fishing out and purging corrupt and illegal business practices of the Salomon Brothers bank. (3)  One of his most notable achievements is that he was the first person supported by the opposition party since 1988, with President Barack Obama nominating Powell, a known Republican. (4)

In a 2013 speech, Powell made a speech in which he spoke about ending “too big to fail,” a policy in which the federal government promises to financially prop up businesses whose closure would be possibly catastrophic to the American economy. (5) Powell has also voiced his displeasure with Fannie Mae and Freddie Mac, publicly traded government agencies that specialize in selling debt by way of mortgages to the American people, saying that their current methods are “unsustainable.” (6) Despite the fiscally conservative stance that Powell often takes, he is in favor of most of the Consumer Protection Act, the Obama era response to the 2008-2009 economic collapse, although Powell believes to “do it more efficiently.” (6)

What does all this mean? Yes, most of this does seem like random irrelevant information, but it is important.

Powell is a Republican, but he is the worst kind and the biggest threat to Libertarian beliefs. Powell plays both sides of the aisle, and he truly believes that both sides have something to offer. Libertarians, while sharing some beliefs with either side, should acknowledge that both Republicans and Democrats both seek the same end, and that is the further enslavement of the American people by means of increased taxation, increased inflation, and an increase in the number of laws in effect. Powell, being the Chairman of the Federal Reserve has the ability to raise and is in favor of raising interest rates, as he did three times in 2017. (7)

While I am not an investment specialist of any kind, it is easy to understand that the continued devaluation of the American dollar makes investing into any sort of commodity or crypto-currency during this financial period appealing.

Capital Gains is Hurting Cryptocurrency

By Addie Mae Villas | United States

With few exceptions, most libertarians can agree that taxes are theft. The government taxes our money, for their own interests, and do so under threat of punishment. Although we should abolish nearly all taxes, the capital gains tax (CGT) is one of the worst. The government penalizes an investor for making money, drawing off of their rewards. One area that is being hurt the most from the CGT is cryptocurrency users, as the IRS is trying to enforce the tax on their gains, sacrificing the privacy of crypto users.

Before the GOP created their recent tax laws, Bitcoin users could simply transfer their coin to other cryptocurrencies and state that there was no gain. But now, the tax bill states that the exchange of cryptocurrencies is simply a property exchange. This makes all crypto exchanges eligible for taxation. With the new classification, government is able to tax cryptocurrencies anytime someone uses or exchanges it.

With the IRS cracking down on crypto users, users can forget about privacy. We can simply look to when the IRS requested that Coinbase send all the records of users from 2013-2015. In April, the IRS expects all crypto users to report their gains on their tax returns. However, this is an unreasonable request, as crypto users will have to forgo their anonymity with the market. This leads into the fact that 36% of investors plan to commit tax fraud. With the risk of losing privacy on the line, many expected this statistic to further rise.

The new classification of cryptocurrencies is just another way the government is trying to control the markets and an individual’s right to privacy. Cryptocurrencies have proven to be the future, as they are far more effective than our current currency. Ron Paul has stated time and time that we need to end the Federal Reserve to advance liberty. In its absense, cryptocurrencies provide a path forward for economic development. Seeing that cryptocurrencies are direct competition to a government-run bank, it’s no surprise that is under attack.

The funny thing about the government enforcing the CGT is that they are haltering investment, which hinders innovation, which in the end only harms the economy. Since we have the CGT in place, investments are more expensive, causing fewer people to invest. The OECD reported that innovation comes from investment, and the growth of an economy is reliant on innovation. The removed competition is inherently harming the economy.

The capital gains tax is just another tax government uses to assert unjust power over the people. The crackdown on crypto users is not only harming the crypto market but also removing the values of privacy from all the users. The CGT puts a consequence on being successful, and only adds onto a very high income tax for most taxpayers.The capital gains tax needs to be abolished to protect the crypto market and encourage investments for capital gain.

(Image from wccftech.com)