Archive for Money and Banking
Antony — November 30, 2011
This morning the world’s major central banks announced coordinated measures to “ease liquidity”. What this really means is that they are paving the way for more money printing and quantitative easing. It is a show of force that the keepers of the printing presses are willing and able to coordinate their action, thereby centralizing control of all major world currencies.
They are using their money-creating power to bail out governments and big banks. The effect is to divert resources away from individuals and their preferences for consumption, investment or holding cash, and to redirect those resources to areas chosen forcefully by government policy. The distortion of interest rates also sends faulty signals to entrepreneurs about people’s time preferences and amount of savings. Both of these effects waste resources by diverting them away from where they would best serve the free preferences of all individuals.
The central banks are fighting reality. The reality is that there is too much debt that cannot be paid back. There are not enough savings to fund capital investment. And what savings there are are being misdirected and squandered by government policies and faulty interest rate signals. They are trying to counter these realities by hiding risks, and propping up unsustainable debts. These measures do nothing to address the real problems, they simply mask them in an illusion of stability.
But the illusion cannot last forever, reality has a tendency to make itself known eventually.
Antony — November 16, 2011
As a side-effect of reading our latest book “The Driver”, I have recently been doing some reading on monetary history. In particular, I have been trying to understand the conditions surrounding the Panic of 1893, the period in which the book is set. After a bit of reading, it becomes clear that the history of money is a story of chronic government meddling.
Pre-Fed U.S. monetary history has a very romantic feel, with battles between gold and silver proponents, and gold rushes and silver mining expansions affecting money supplies. But the economic principles are the same as today, with politicians seeking to inflate the money supply battling advocates of sound money. These battles were manifested in debates on bimetalism, whether gold and silver should both be recognized as money, and whether the government should keep their prices in a fixed ratio (a form of price control).
In the aftermath of a previous crisis, the Panic of 1873 (during which silver was de-monetised in favour of gold), proponents of loose money succeeded in introducing the Bland-Allison Act in 1878, which obligated the U.S. treasury to purchase silver at a high prices. Combined with this, large silver discoveries in the west (especially Nevada) resulted in an expanding money supply. This caused a boom in capital investment (in this case railroads) through the 1880s. In 1890, further fuel was added to the fire with the Sherman Silver Purchase Act, which required the US treasure to purchase increasing quantities of silver with notes backed by either silver or gold. Since the silver was purchase at artificial prices, shortages resulted, as with all price controls. Holders of silver rushed to trade in their silver for notes, which could then be redeemed for gold. The good times continued until the treasury ran out of gold in 1893.
This episode is a perfect example of Austrian Business Cycle Theory. A manipulated expansion of money and credit leads to an unsustainable boom in capital markets, which must inevitably crash. The pattern is almost exactly the same as our recent housing bubble, with the booming capital sector being housing rather than railroads. A key difference, however, is the increased degree of control that the state has over money these days, with central banking, fiat money, and the globalised financial institutions. This makes it more difficult to see the manipulation for what is is, gives the state more power to keep the artificial boom going for longer, and makes the unwinding more unpredictable and potentially more devastating.
Of course the solution to these problems is to allow the free market to function without interference, particularly when it comes to money. Advocates of sound money usually favour a return to gold, in some form. But it is worth keeping in mind why gold is valued; it is because that is what free markets have chosen as money historically. And this is what is important, not gold itself as a metal, but the freedom to choose it.
Antony — October 25, 2011
The Victoria Libertarian Book Club’s latest book is The Driver by Garet Garrett. The book is set in the aftermath of the Panic of 1893, and opens with the narrator reporting on the scene during a march on Washington by a ragtag group of protesters known as “Coxey’s Army”. The group, composed mostly of unemployed labourers, was marching on Washington to demand political intervention to deal with the economic crisis. Their mission is summed up in this quote:
“And for what purpose? Merely this: to demand from Congress a law by which unlimited prosperity and human happiness might be established on earth”
The march, as described in the novel, seemed bizarre and surreal. I was thus surprised to learn that Coxey’s Army was a real historical event.
I was struck by how the marchers portrayed in the novel seem so similar to the current “Occupy Wall Street” protests. They are scandalized by seeming corporate excesses, they cannot understand why there are so many unemployed while infrastructure crumbles, they favour massive public works programmes, and advocate inflation of the currency as a path to prosperity. It’s amazing how the rhetoric and arguments of the present day “Occupy” protesters are so similar to those of Coxey’s Army 120 years ago.
Another interesting anecdote is that, like the book’s narrator, a real-life observer of Coxey’s march was L. Frank Baum, the author of The Wonderful Wizard of Oz. This book is full of economic symbols on issues of the time: the yellow brick road representing the gold standard, and Dorothy’s silver shoes (changed to ruby in the movie to showcase Technicolor) represent silver, the tin man is the industrial worker, and the straw man the farmer. These allegorical elements are explored in the Money Masters film “The Secret of Oz”.
The historical economic issues mentioned in the book are interesting on their own merits but also have fascinating parallels to our current economic turmoil. I look forward to reading more, and hope to provide more blog reports as we read our way through the book.
Dave Killion — October 4, 2011
John Lott (More Guns, Less Crime) writes for Fox News;
“Newly released data for Chicago shows that, as in Washington, murder and gun crime rates didn’t rise after the bans were eliminated — they plummeted. They have fallen much more than the national crime rate.
Not surprisingly, the national media have been completely silent about this news.
One can only imagine the coverage if crime rates had risen.”
I have always found the folks that delight in ridiculing creationists are the same bunch that adhere to the faith-based view that taking away a person’s means of self-defense will make that person safer. Apparently the scientific consensus only matters when it concerns global climate change.
Dave Killion — September 11, 2011
I hardly let a day go by without visiting Captain Capitalism, the blog of economist, dance instructor, motorcyclist, paleontologist, and all around alpha male Aaron Clarey. The Captain is one of those individuals who, like Milton Friedman, Thomas Sowell, and Don Boudreaux, cannot be bamboozled by numbers nor words, and he has generously elected to share his insights with a foolish and ungrateful world. I am very excited to have recently purchased his latest publication, “Privatizing Governments” not because anyone has referred it to me, but rather because my acquaintance with his other works makes this book self-recommending. Check out the book, check out the blog, and as Cappy Cap says – Enjoy the decline!
Antony — September 1, 2011
Following the housing and financial collapse in 2008, the political and financial establishment engaged in extraordinary measures to stem the panic. Included in these measures was the creation of huge amounts of money by the Federal Reserve, called “Quantitative Easing”, increasing the Base Money supply from about $800 Billion to $2.8 Trillion.
So why hasn’t this cash infusion shown up in the form of massive price inflation? Part of the explanation is that large amounts have been soaked up in the reserve holdings of foreign central banks. The monetary inflation has also been offset by deleveraging to repair balance sheets in the private sector, both by firms and individuals. But the primary reason that the Base Money has not made its presence felt in the general economy is that most of it is being held as excess reserves on the banks’ balance sheets.
These excess reserves represent potential future inflation. If they are loaned out into the economy though the fractional reserve system, the effects will be felt as price inflation. How and where these effects will appear depends on how the institutions that control them choose to channel the money into the economy.
How and when will this happen? Austrian Economics teaches us that the future is unpredictable, since it is based on human action. But we can monitor the pace at which the reserves are being lent out. A good indicator of this is the M2 money supply figures.
The money created through Quantitative Easing has accumulated like snow pack perched at the top of a cliff. Will it be released in an inflationary avalanche? If we are lucky the buildup may melt away harmlessly in the warm glow of a sound and vibrant economy. But if these first trickles are the tipping point in a runaway process, then watch out in the valley below.
Dave Killion — July 20, 2011
Having revisited my resolution to not accept pennies when I get change, I find myself with a growing stock of not only higher-value pennies, but the regular cheap pennies as well. The problem of dealing with the useless pennies may be resolved thanks to our friends over at Kyoot, etc., who have sent us this link. The project involves the destruction of some pennies, so if you want to try this, trade your useless Canadian pennies for some useless American pennies. Then you can chop the faux-coppers without fear of state retribution. Next up: wallpapering with inflation-destroyed fiat paper money!
Dave Killion — June 8, 2011
Over at Quora, someone asks “Is the cryptocurrency Bitcoin a good idea?” I find the answers have been very helpful for me in firming up my understanding of Bitcoins and their value. Surprisingly, I find many of the arguments posed against Bitcoin to be more relevant to centrally-directed fiat currencies like the dollar. For example, respondent Adam Cohen is concerned that because the algorithms that regulate Bitcoins limit the total amount that will be produced, deflation is inevitable. I think this is correct, but I much prefer Bitcoin deflation to fiat currency inflation, because it would encourage saving, which would encourage investment. To re-word Mr. Cohen –
Question: if your money is getting predictably
more less valuable, why would you want to spend save it? Answer: marginally speaking, you wouldn’t.
At this point, although I think heavy investment in Bitcoins is potentially very risky, they provide advantages for certain transactions that make a small investment in them a good idea. And even better, the more people agree with me and elect to wade around in the shallows, the more secure our investments become. Also, because the ‘currency’ is deflationary, early investors will be rewarded for their initiative.
Dave Killion — April 16, 2011
I had a good deal of success with my New Year’s Resolution in the early weeks, rejecting pennies everywhere I went. Despite the contention of one of our commentators, vendors would often round up to the nearest nickel rather than withholding more than three cents change, and I was making my statement at nearly no cost to myself. But recently it came to my attention that although recently minted coins rip off the taxpayer, there are lots of Canadian and US pennies and nickels circulating with a metal content that exceeds the face value of the coin.
This being the case, I have learned which dates to look for, and now I have fun sorting my change looking for 3¢ pennies and 12¢ nickels to collect. It’s also been a good opportunity to engage people in conversations about Gresham’s Law and inflation. Who knew being a libertarian could pay off in so many ways!
Dave Killion — December 31, 2010
I always love a good New Year’s resolution, although I don’t like them to be too challenging. Last year I promised to put on a little weight and lose some more hair. Having successfully cleared those hurdles, I have decided to raise the bar a bit. This year, I’m taking down the penny. It costs 1.5¢ to make a penny, which means they’re expensive. That isn’t bad in and of itself, but since hardly anyone wants to be bothered to pay in exact change, a bunch of money is being lost every year just so merchants can give us change at a level of accuracy most of us couldn’t care less about. See where I’m going with this? The penny needs to go, and I need a resolution? That’s right… I’m boycotting the penny. Join me, and soon the government will get the message and quit wasting our money. Hopeless, you say? We’re already part way there. So, the next time you buy something and the clerk is grabbing coins out of the till, I hope you will be like me and say, “No pennies, please.”