The Circle Bastiat
Well, well, well, the Chinese economy is experiencing inflation. Overall consumer prices rose by 3.6 percent in March 2012, year-over-year, including an upsurge in food prices of 7.5 percent. Even the prices of venerable Chinese herbal medicines took an upward leap of 8.3 percent. According to a CNNMoney report, inflation is “the price of prosperity.” The report goes on to fatuously instruct us, “While inflation poses challenges for consumers, it is the byproduct of one of the most robust economies in the world.” A comparison of China’s 9.2 percent real GDP growth in 2011 with the paltry 1.2 percent growth rate for U.S. real GDP in the same year is thrown in as supposed proof of this statement.
But this is utter nonsense and one of the most deeply entrenched myths in both academic economics and media commentary. Basic economic theory demonstrates that “economic growth,” which is nothing but an increase in the supplies of various goods and services, is in and of itself deflationary. An increase in the supply of any good (or service), with the supply of money and all other factors fixed, results in a fall in its price and a growth in its sales, as the excess supply of the good drives the equilibrium price down and expands the quantity demanded. This irrefutable economic truth has been illustrated time and again since the late 1970s by sharp declines in the prices of items like personal computers, video game systems, HDTVs, digital cameras, and cell phones and of (uninsured) medical procedures like Lasik eye surgery and cosmetic surgery. Furthermore, this fall in prices has not caused stagnation in these industries but has instead coincided with their rapid expansion. I have explained this phenomenon of “growth deflation” in more depth elsewhere.
What then is the cause of the accelerating Chinese inflation? We need look no further than the money supply. The broad measure of the Chinese money supply, M2, which includes currency in circulation and all bank deposits, increased by 13.6 percent in 2011, although the People’s Bank of China had targeted a 16 percent increase. The PBOC has announced that it will set the money supply growth rate at 14 percent for 2012. This inflation targeting policy, so beloved by contemporary macroeconomists, augurs more rapid price inflation for Chinese consumers for years to come. More important, China’s long-standing super-loose monetary policy means that inflationary credit expansion has fueled a great part of the rapid growth of the Chinese economy, which is therefore unsustainable and doomed to collapse. Indeed, the pace of Chinese economic growth has already begun to falter in the last two quarters. In response, the PBOC has already cut reserve requirements twice in the last three months.
Having allowed the inflation tiger out of its cage, the Chinese government is now desperately hanging on to its tail. It must either cage the tiger forthwith and confront the damage it has already wreaked in the form of a collapse in its economic growth rate; or it must inevitably lose its grip and permit its burgeoning market economy to be devoured by the beast in an inflationary breakdown and reimposition of direct controls.
If you drive a car , I’ll tax the street.
If you try to sit , I’ll tax your seat.
If you get too cold , I’ll tax the heat.
If you take a walk , I’ll tax your feet.
. . . And if you don’t use your gift cards within two years, I’ll seize them all.
(With apologies to the Beatles)
Pursuant to a law passed two years ago, the New Jersey Department of the Treasury will soon compel sellers to obtain the ZIP code of every buyer of a gift card in order to enable the state to expropriate the value of the unused card as “unclaimed property” after two years. The law also applies to unused travelers’ checks and money orders in addition to gift cards
In 2011 the state seized $79 million of such “unclaimed property” under the law. There was huge outcry and a lawsuit quickly followed that resulted in an injunction against the collection of ZIP codes. But this injunction has just been lifted, although the case has not yet been resolved. American Express has responded by pulling its gift cards from pharmacies, supermarkets and convenience stores. Two third-party providers of gift cards to malls, convenience stores and grocery stores, Blackhawk Network and InComm, have followed Amex’s lead and announced that they will stop doing business in New Jersey in June. The reason is that it is impossible to ensure compliance with the ZIP code mandate when the cards are sold by other parties.
Unlike gift cards issued by retailers, network-branded cards like American Express and Visa gift cards have no expiration date, require no fees after purchase, and are acceptable in exchange virtually everywhere. They operate as what Mises would call “secondary media of exchange.” People therefore are willing to hold them for extended periods of time as (imperfect) substitutes for cash. Thus, based on the same reasoning, the state could declare that cash balances–in the form of currency and demand deposits–that an individual accumulates over a two year period are also “unclaimed property” and subject to seizure. Sound far-fetched? Well think again–the tax devouring politicians of New Jersey have already thought of that. The same law mandates that banks transfer to the state all funds in New Jersey resident accounts that have been “inactive” for more than two years. Of course you can appeal to the state to reclaim your “unclaimed property” but you must fill out a blizzard of forms and jump through bureaucratic hoops. Good luck with that.
But there is occasionally a silver lining to government’s never-ending effort to mulct the taxpayers of more and more of their income and wealth. Sometimes a law is so egregious and tyrannical that it causes the carefully fabricated curtain concealing the nature of government to momentarily fly back to reveal the greedy, money-grubbing little men frantically operating the levers of power for their own benefit. Then, the legitimacy of the state suddenly and magnificently dissolves and the public perceives government for what it is and always was: a band of thieves. This appears to be happening now in New Jersey, judging by the comments on the latest money grab. Here is a small sample:
“These criminals belong in jail.”
“Wow, you pay for a gift card, don’t use it then NJ comes along and claims your money. Isn’t that stealing?”
“This is insane… how can they possibly justify something like this?”
“What is the matter if someone uses their gift card in 10 years or 6 months? It is their money (gift card).”
“Yet another example of New Jersey’s big government stealing $$$$$ whenever and wherever it can.”
The New York Times opinion page recently ran a series of short pieces on Rethinking How We Teach Economics, making the point that we need to change our economics instruction to be able to account for the financial crisis. There are several articles in the “debate,” but I would like to consider Alan Blinder’s contribution. In addition to being a Princeton economist, Blinder was on President Clinton’s Council of Economic Advisors and he was also a member of the Board of Governors of the Federal Reserve, so his take on this is not surprising.
Blinder argues that we must change the way we teach economics. In his words,
We must now teach students how we got into the mess of the last five years and how we got partially out. For that reason, teaching elementary economics just got harder. Our teaching about monetary policy must be completely revamped. Specifically, students must now learn something about “unconventional” monetary policies.
Remember “conventional” monetary policy? The Federal Reserve shortens recessions by creating more bank reserves (“printing money”), which fuels a multiple expansion of the money supply and credit because banks don’t want to hold excess reserves. So they get rid of them making more loans and deposits, which also lowers short-term interest rates. Compare that to current reality: Banks are content to hold over $1.6 trillion in excess reserves, short-term interest rates are stuck near zero, and Fed policy often works on long-term interest rates instead. No, this is not your father’s monetary policy, and the old ways of teaching about it simply won’t do.
Blinder is right in saying that many instructors should change the way they teach economics, but it’s not because of the crisis. The crisis has exposed some of the failures of mainstream economic theory, namely the failure to explain the cause of the business cycle.
Austrian theory fully explains how Federal Reserve policies triggered the financial crisis. Austrians understand that the Fed does not counter the business cycle and instead it should be blamed for creating this meltdown.
Some instructors do not need to revamp their teaching methods. Those who teach Austrian business cycle theory can use the current crisis as another example of the failure of “conventional” monetary policy. Instructors that use Austrian readings such as Murray Rothbard’s “The Mystery of Banking” to explain business cycle theory do not need to “rethink how we teach economics.”
You’d think banks had all the political friends they need. After all, court cases have been going their way since 1811 when Master of the Rolls Sir William Grant ruled in Carr v. Carr that the term “debts” mentioned in a will included a cash balance in a bank deposit account. Grant ruled that since the money had been paid generally into the bank and was not earmarked in a sealed bag, it had become a loan rather than a bailment, thus codifying fractionalized banking.
“Congress isn’t afraid of bankers,” says Roger Beverage, the president and CEO of the Oklahoma Bankers Association. “They don’t think we’ll do anything to kick them out of office. We are trying to change that perception.”
So the Friends of Traditional Banking SuperPac is born to throw some big money at certain key races this fall.
A “surgical” strike at the industry’s enemies blares the headline.
It’s hard to know just how surgical it will be. To read American Banker’s reporting sounds like this SuperPac is going to be run like a…well…bank.
Friends of Traditional Banking will ask contributors to pledge from $150 to $500 to two congressional races each election cycle. An advisory council will research races and select the candidates to be targeted. A board of directors will sign off on the selections, and then information will be sent to those who pledged funding explaining how to donate to a particular candidate.
It sounds like it would be easier to get approval for a construction loan to build a spec office building in Las Vegas than talking these guys into parting with campaign money.
But while the bankers are talking big, they’re just hoping to cobble together a million dollars to start with.
“It would be nice to sit on the sidelines or sit on our hands and say, ‘Oh we don’t get involved in that stuff,’ but that just means you get run over,”Don Childears, the president and CEO of the Colorado Bankers Association told American Banker. “We need to get more deeply involved as an industry in supporting friends and trying to replace enemies.”
“Clearly there are Members of Congress who have absolutely no reservations about kicking traditional banks in the teeth, and we are tired of it,” says Utah Bankers Association president Howard Headlee. “We’ve got to be able to defend the folks who have the courage to stand up for us as well.
Wanted: politicians who will protect the interests of bankers.
Can those be hard to find?
Ben Bernanke is starting to get his way. Matt Wirz writes for The Wall Street Journal that companies with junk credit ratings are bellying up to the debt trough like no other time in history. The first quarter of 2012 will go down as the most active for junk bond issuance since 1980 when Thomson Reuters began keeping track, with 130 companies floating $75 billion in debt offerings.
Investors can’t get enough of that high-yield stuff, with banks and Treasuries paying just north of zero. “The rally in junk bonds extends an advance that began in early 2009 and can be traced largely to the Federal Reserve’s policy of keeping benchmark interest rates near zero,” writes Wirz.
“It’s the only place I can find any yield whatsoever with a reasonable risk,” Lee Hevner, individual investor and first time junk bond buyer, told Wirz. High-yield corporate borrowers paid an average rate of 7.98% on bonds they have sold this year, according to Thomson Reuters, the lowest since the junk-bond market was created in the 1980s.
The Fed’s rate stomping even has Wall Street looking at rental homes. Warren Buffett, mastermind of Berkshire Hathaway, Inc. told a CNBC audience he would buy “a couple hundred thousand” single-family homes if he could given the high yields on rentals.
The Wall Street Journal’s Nick Timiraos, Robbie Whelan and Matt Phillips write:
Economists at Goldman Sachs estimate the annual yield on an investment on rental property nationwide averages about 6.3%, but can exceed 8% in cities that were hit hard during the housing bust, including Las Vegas, Detroit and Tampa.
Fannie Mae is looking to bulk sale 2,500 divided into eight regional pools. The total current market value is $320 million. If the sale goes well, Fannie and Freddie have plenty of inventory to sell. Fannie Mae has 120,000 foreclosed properties. However, the buyers are lining up.
“A pretty robust cottage industry has developed and is absorbing this at an incredibly fast pace,” Richard Smith, chief executive of Realogy Corp., tells the WSJ.
Bernanke’s Fed has kept the rate it controls at just above zero for going on four years now. And he has promised continued low, low interest rates until 2014. Jim Grants told the New York branch of the Federal Reserve that holding rates stable is de-stabilizing. While speculators know what to do with cheap money, the uninformed pay the price.
With 11 million underwater homes, the housing market has not come close to clearing the housing boom malinvestment. Companies forced to pay high interest rates are being signaled by the market, not to take on more debt, but instead to de-lever. All cheap refinancing does is mask poor management or a poor-quality product. The Fed’s pushing of investors to higher risk allows enterprises that should be liquidated to continue wasting capital.
The Fed’s policy is squashing these market signals. We now have malinvestment in malinvestments, making the eventual crash a catastrophic one.
Meanwhile, the average Joe is looking for some divine intervention in the form of winning the Mega Millions lottery with a jackpot of at least $640 million and possibly much more the way people are lining up for tickets. In Katy Texas convenience store manager Salim Turk said lottery ticket sales have been off the charts this week. The store sold more than $1,000 in tickets by 11 a.m. Friday. Sales on Thursday exceeded $3,500 and reached about $2,800 Wednesday. The typical jackpot only draws about $1,000 in sales a day, he said.
It is unknown how many Mega Millions tickets Ben Bernanke has purchased.
Retailer J.C. Penney just announced a new pricing policy that will make its prices more rigid and other retailers are moving in that direction. Can depression and mass unemployment be far behind?
The linchpin of all varieties of Keynesian economics is the assumption that prices and wage rates are rigid and do not respond to changes in supply and demand, at least in the short run. As was demonstrated in 1944 in a famous article by Franco Modigliani, himself a Keynesian and later a Nobel laureate in economics, absent this assumption and the entire Keynesian edifice falls to the ground. It is because prices do not adjust immediately, say, to a fall in demand, that quantities must adjust, meaning that unsold goods pile up in inventories and an excess supply of labor goes unhired resulting in depression. A modern version of this story is also invoked by modern free bankers to justify their conclusion that the supply of money must be continually adapted to changes in the demand to hold money, lest recession and unemployment emerge. This version attributes the rigidity or “stickiness” of prices to objective factors like “menu costs,” which refer to the resource costs that the seller must incur every time he changes his array of product prices.
Of course our daily experience with coupons, early morning specials, restaurant blackboard specials, supermarket rewards cards, and so on makes this widely accepted story of intractable price rigidities ring hollow. But whether prices are rigid or flexible is really beside the point. The point is that the degree of price rigidity or flexibility is not determined by objective external factors such s menu costs, but is chosen by entrepreneurs as one of the dimensions of the good or service they bring to market. As Hans Hoppe once succinctly put it, “Prices are as rigid or as flexible as they need to be.” Entrepreneurial pricing policies are driven by and constantly adapted to the demands of consumers. For instance, the prices of movie theater tickets change very slowly and appear somewhat sticky because consumers prefer it that way; in contrast the prices of theater concession items like soft drinks, popcorn, and candy are continually varied by coupons, rewards cards and daily specials. Now back to J.C. Penney.
Large retailers and transportation firms often vary their pricing policies, trying to achieve the optimal degree of price flexbility in a changing economic environment. As reported this week, retailer J .C. Penney has introduced a radically new pricing policy in response to a shift in consumers’ shopping habits. With the increasing availability of shopping comparison apps for mobile electronic devices and the omnipresence of large Internet sellers like Amazon and eBay, consumers are increasingly shunning high mark-up items which they know will be eventually marked down. In the case of J. C. Penney, in 2002 an item that cost the retailer $10.00 was typically marked up to $28.00. That mark up was progressively increased and by 2011 a $10.00 item sold for $40.00. But despite the greatly increased mark up, the average price that a consumer paid for a $10.00 item rose only from $15.90 to $15.95 duing that same period Thus consumers have become more savvy and resourceful in their shopping practices. J. C. Penney has responded by slashing its prices by 40 percent and rounding all prices to the nearest dollar. This new “fair and square” pricing policy introduces greater simplicity but more rigidity into its pricing structure and involves getting rid of daily sales on multiple items and establishing three pricing tiers: every day regular prices; month-long specials; and “best prices” for clearance items on the first and third Friday of every month. Walmart has responded very differently via a highly flexible price policy of an Ad Match Guarantee in which it promises to match, under specified conditions, the prices advertised by competitors.
It remains to be seen whether consumers accept J. C. Penney’s new pricing structure. In 1992 American Airlines tried a similar scheme, slashing the number of prices in its computerized reservation system by 86 percent, from 500,000 to 70,0000. In the process the average fare was reduced by 38 percent and first class fares by 20 to 50 percent. The airline had estimated that the move would save $25 million annually and enable it to reallocate 600 employees to other tasks. No sale—air travelers rejected it and within six months the plan was rescinded.
Entrepreneurial experimentation with diverse pricing policies is an integral part of the market process. To single out sticky prices or, in technical jargon, “nominal rigidities” as a market failure and the root cause of macroeconomic fluctuations is just plain silly. It demonstrates the giant chasm that exists between lifeless macroeconomic models and the dynamic pricing processes of the real world.
Las Vegas has the reputation as being a libertarian city, but like anyplace else, certain business interests would rather use the force of government to stifle competition rather than compete in a free market. Cab drivers in Las Vegas have immense political power. In 2005, then Governor Kenny Guinn vetoed a bill that would have outlawed cabdrivers from receiving kickbacks for delivering customers.
“Taxicab drivers contribute greatly to the economy of this state,” Guinn said. “I cannot support Section 133 of AB 505 because it singles out and hurts the financial well-being of taxicab drivers.”
Visitors to Vegas will notice that there is no public transportation from the airport to the hotels, or hotel shuttle buses for that matter. The Las Vegas Monorail doesn’t even come close to McCarran Airport. If it did maybe someone would ride it.
Now a San Francisco company called Uber Technologies Inc. wants to challenge the livings of Las Vegas cabbies. Joe Schoenmann reports for the Las Vegas Sun that Uber offers a high-tech livery service in nine cities. The company “runs dispatch centers that customers access via a smartphone. To provide the rides, the company partners with licensed companies that use sedans, SUVs or limousines, using those vehicles during the companies’ down time. No cash changes hands — the transaction, including tip, is paid for using the phone.”
Uber provides a smartphone app that allows customers to view a map and follow where their vehicle is and how long before it arrives.
But the problem is that southern Nevada livery services are required by law to charge $40 to $45 per hour, with a one–hour minimum, making them uncompetitive with taxis for short rides.
Uber has never encountered these high minimum charges anywhere else.
The Nevada Taxicab Authority, which regulates the taxi industry, has its eye on Uber, according to Schoenmann. Charles Harvey, Taxicab Authority administrator, told the Sun, an “unregulated, unlicensed quasi-taxi operator is a concern,” and that the agency is doing research on the company and talking to the limousine regulator, the Nevada Transportation Authority.
Uber could request a lower minimum rate, because the Nevada Transportation Authority approves rates for each operator. “But even if a livery company figures it can make a profit with a minimum hourly rate of, say, $15,” writes Schoenmann, “sources said opposition from the powerful cab companies would make it difficult, if not impossible, to get regulators to go along.”
Local Taxi-cab strongholds are nothing new. In the June 1988 edition of The Free Market, Sam Wells wrote,
Taxi monopolies are powerful on the city level. They lobby government to make new drivers go through lengthy procedures or acquire expensive licenses to own a taxi. These laws don’t exist to protect the public; they protect a privileged industry from competition and work against the public interest.
The tourism business in Vegas still has not recovered. Allowing cash-strapped tourists options for transportation would help.
Under cover of its multiplicity of fabricated wars on drugs, terror, tax evasion, and organized crime, the US government has long been waging a hidden war on cash. One symptom of the war is that the largest denomination of US currency is the $100 note, whose ever-eroding purchasing power is far below the purchasing power of the €500 note. US currency used to be issued in denominations running up to $10,000 (including also $500; $1,000; $5,000 notes). There was even a $100,000 note issued for transactions among Federal Reserve banks. The United States stopped printing large denomination notes in 1945 and officially discontinued their issuance in 1969, when the Fed began removing them from circulation. Since then the largest currency note available to the general public has a face value of $100. But since 1969, the inflationary monetary policy of the Fed has caused the US dollar to depreciate by over 80 percent, so that a $100 note in 2010 possessed a purchasing power of only $16.83 in 1969 dollars. That is less purchasing power than a $20 bill in 1969!
Despite this enormous depreciation, the Federal Reserve has steadfastly refused to issue notes of larger denomination. This has made large cash transactions extremely inconvenient and has forced the American public to make much greater use than is optimal of electronic-payment methods. Of course, this is precisely the intent of the US government. The purpose of its ongoing breach of long-established laws regarding financial privacy is to make it easier to monitor the economic affairs and abrogate the financial privacy of its citizens, ostensibly to secure their safety from Colombian drug lords, Al Qaeda operatives, and tax cheats and other nefarious white-collar criminals
Now the war on cash has begun to spread to other countries. (Click here to read the whole article.) As reported a few months ago, Italy lowered the legal maximum on cash transactions from €2,500 to €1,000. The Italian government would have preferred to set a €500 or even €300 maximum limit but reasoned that it should permit Italians time to adjust to the new limit. The rationale for this limit on the size of cash transactions is the fact that the profligate Italian government is trying to reduce its €1.9 trillion debt and views its anticash measures as a means of cracking down on tax evasion, which “costs” the government an estimated €150 billion annually.
The profligacy of the Italian ruling class is in sharp contrast to ordinary Italians who are the least indebted consumers in the eurozone and among its biggest savers. They use their credit cards very infrequently compared to citizens of other eurozone nations. So deeply ingrained is cash in the Italian culture that over 7.5 million Italians do not even have checking accounts. Now most of these “bankless” Italians will be dragooned into the banking system so that the notoriously corrupt Italian government can more easily spy on them and invade their financial privacy. Of course Italian banks, which charge 2 percent on credit-card transactions and assess fees on current accounts, stand to earn an enormous windfall from this law. As controversial former prime minister Berlusconi noted, “There’s a real danger of crossing over into a fiscal police state.” Indeed, one only need look at the United States today to see what lies in store for Italian citizens.
Meanwhile the war on cash in Sweden is accelerating, although the involvement of the state is less overt. In Swedish cities, cash is no longer acceptable on public buses; tickets must be purchased in advance or via a cell-phone text message. Many small businesses refuse cash, and some bank facilities have completely stopped handling cash. Indeed in some Swedish towns it is no longer possible to use cash in a bank at all. Even churches have begun to facilitate electronic donations from their congregations by installing electronic card readers. Cash transactions represent only 3 percent of the Swedish economy, while they account for 9 percent of the eurozone and 7 percent of the US economies.
A leading proponent of the anticash movement is none other than Bjorn Ulvaeus, former member of the pop group ABBA. The dotty pop star, whose son has been robbed three times, believes that a cashless world means greater security for the public! Others, more perceptive than Ulvaeus, point to another alleged advantage of electronic transactions: they leave a digital trail that can be readily followed by the state. Thus, unlike countries with a strong “cash culture” like Greece and Italy, Sweden has a much lower incidence of graft. As one “expert” on underground economies instructs us, “If people use more cards, they are less involved in shadowy economy activities,” in other words, secreting their hard-earned income in places where it cannot be plundered by the state.
The deputy governor of the Swedish central bank, Lars Nyberg, gloated before his retirement last year that cash will survive “like the crocodile, even though it may be forced to see its habitat gradually cut back.” But not everyone in Sweden is celebrating the dethronement of cash. The chairman of Sweden’s National Pensioners’ Organization argues that elderly people in rural areas either do not have credit or debit cards or do not know how to use them to withdraw cash. Oscar Swartz, the founder of Sweden’s first Internet provider, a supporter of the phasing out of cash, argues that without the adoption of anonymous payment methods, people who send money and make donations to various organizations can be “traced every time.” But, of course, what the artless Mr. Swartz does not see is that this is the whole point of a cashless economy — to make even the most intimate economic affairs of private citizens transparent to the state and its fiscal and monetary apparatchiks, who themselves hate and fear transparency like vampires do sunlight. And then there are the benefits that accrue to the government-privileged banking system from the demise of cash. One Swedish small businessman shrewdly noted the connection. While he gets charged 5 kronor (80¢) for every credit-card transaction, he is prevented by law from passing this on to his customers. In his words, “For them (the banks), this is a very good way to earn a lot of money, that’s what it’s all about. They make huge profits.”
Fortunately, the free market provides the prospect of an escape from the fiscal police state that seeks to stamp out the use of cash through either depreciation of central-bank-issued currency combined with unchanged currency denominations or direct legal limitation on the size of cash transactions. As Carl Menger, the founder of the Austrian School of economics, explained over 140 years ago, money emerges not by government decree but through a market process driven by the actions of individuals who are continually seeking a means to accomplish their goals through exchange most efficiently. Every so often history offers up another example that illustrates Menger’s point. The use of sheep, bottled water, and cigarettes as media of exchange in Iraqi rural villages after the US invasion and collapse of the dinar is one recent example. Another example was Argentina after the collapse of the peso, when grain contracts (for wheat, soybeans, corn, and sorghum) priced in dollars were regularly exchanged for big-ticket items like automobiles, trucks, and farm equipment. In fact Argentine farmers began hoarding grain in silos to substitute for holding cash balances in the form of depreciating pesos.
As has been widely reported recently, an unlikely crime wave has rapidly spread throughout the United States and has taken local law-enforcement officials by surprise. The theft of Tide liquid laundry detergent is pandemic throughout cities in the United States. One individual alone stole $25,000 worth of Tide detergent during a 15-month crime spree, and large retailers are taking special security measures to protect their inventories of Tide. For example, CVS is locking down Tide alongside commonly stolen items like flu medications. Liquid Tide retails for $10–$20 per bottle and sells on the black market for $5–$10. Individual bottles of Tide bear no serial numbers, making them impossible to track. So some enterprising thieves operate as arbitrageurs buying at the black-market price and reselling to the stores, presumably at the wholesale price. Even more puzzling is the fact that no other brand of detergent has been targeted.
What gives here? This is just another confirmation of Menger’s insight that the market responds to the absence of sound money by monetizing highly salable commodities. It is clear that Tide has emerged as a subsidiary local currency for black-market, especially drug, transactions — but for legal transactions in low-income areas as well. Indeed police report that Tide is being exchanged for heroin and methamphetamine and that drug dealers possess inventories of the commodity that they are also willing to sell. But why is laundry detergent being employed as money, and why Tide in particular?
Menger identified the qualities that a commodity must possess in order to evolve into a medium of exchange. Tide possesses most of these qualities in ample measure. For a commodity to emerge as money out of barter, it must be widely used, readily recognizable, and durable. It must also have a relatively high value-to-weight ratio so that it can be easily transported. Tide is the most popular brand of laundry detergent and is widely used by all socioeconomic groups. Tide also is easily recognized because of its Day-Glo orange logo. Laundry detergent can also be stored for long periods without loss of potency or quality. It is true that Tide is somewhat bulky and inconvenient to transport by hand in large quantities. But enough can be carried by hand or shopping cart for smaller transactions while large quantities can easily be transported and transferred using automobiles.
Just like the highly publicized war on drugs that the US government has been waging — and losing — for decades, it is doomed to lose its surreptitious war on cash, because the free market can and will respond to the demand of ordinary citizens for a reliable and convenient money.
Small business is the subject for debate in today’s Wall Street Journal. Small business is said to be the main job creator in the U.S. economy and with unemployment still high, and a punk business climate, a goosing from government policy is thought to be the tonic to put us right back comfortably in bubble land.
All we need is a massive wave of entrepreneurship and we’re off to the races. And if you believe Noam Wasserman, who teaches entrepreneurship at Harvard Business School, we can all be entrepreneurs. Dr. Wasserman says doctors, lawyers and engineers are trained, why not entrepreneurs?
Forget about the school of hard knocks, students can study other people’s mistakes, learning what pitfalls to avoid and presto: any business school grad has what it takes to launch the next Facebook or maybe just an internet cafe downtown.
But Ludwig von Mises contends,
What distinguishes the successful entrepreneur and promoter from other people is precisely the fact that he does not let himself be guided by what was and is, but arranges his affairs on the ground of his opinion about the future. He sees the past and the present as other people do, but he judges the future in a different way.
Peter Klein explains that for Mises, entrepreneurial judgment is not a mechanical process of formulating values using known probabilities. Instead it’s “a kind of Verstehan that cannot be formally modeled using decision theory.” This echos the view of Frank Knight, who believed entrepreneurial decision making is not modelable.
Mises emphasizes, some individuals are more adept than others, over time, at anticipating future market conditions, and these individuals tend to acquire more resources while those whose forecasting skills are poor tend to exit the market. Indeed, for Mises, the entrepreneurial selection mechanism in which unsuccessful entrepreneurs–those who systematically overbid for factors, relative to eventual consumer demands–are eliminated from the market is the critical “market process” of capitalism.
Instead of the unfettered market directing capital to successful entrepreneurs, the Small Business Administration (SBA) seeks to direct capital to anyone who thinks they might be an entrepreneur, especially if they fall into certain favored categories of race and gender. Veronique de Rugy argues that the SBA is a waste of money, citing Frederic Bastiat’s insight that those helped by government policy are very visible, while those harmed by the same policy go unnoticed. Ms. de Rugy writes, “we don’t know how many more jobs might have been created if market forces determined the allocation of capital.”
Arguing the other side is Barbara Kasoff who claims the SBA “helps keep capital, contracts and know-how flowing to small businesses,” citing plenty of big numbers making the case for government’s capital steering involvement. But the SBA assumes capital is homogeneous and that everyone (who can qualify for an SBA loan) is equally gifted as an entrepreneur. However, if these borrowers had proven track records of entrepreneurial acumen, presumably no government guarantee would be needed for banks to be induced to make the loans in the first place.
The mere fact that government has interceded means capital is being misdirected away from those with proven entrepreneurial ability and toward those who are lacking the same. Over time, while its proponents claim the SBA program is creating jobs, it is in fact destroying capital, and jobs along with it.
Federal Reserve Chairman Ben Bernanke went back to the classroom to educate young minds at George Washington University about the history and role of central banks and the Federal Reserve in particular.
On the topic of financial panics, Bernanke asks the students if they’ve seen the movie “A Wonderful Life.” Not as many students had seen the movie as he had hoped. Bank panics are a serious problem Bernanke explains. Banks borrow short and make long-term loans that are illiquid.
This would have been a perfect time to talk about unviability of fractional-reserve banking. However, Professor Ben avoided that and instead waxed eloquent about a perfect world where Jimmy Stewart would be able to borrow from a lender of last resort–the central bank– and FDIC deposit insurance would quell unsettled depositors.
Bernanke cites Walter Bagehot’s axiom that central banks must lend freely in a panic, against good collateral, at penalty interest rates. After all, the central bank doesn’t want borrowers taking advantage of cheap rates to get through the crisis.
No student hands shot up to question the Fed Chair as to how a Fed Funds rate of zero to 25 basis points could be defined as a “penalty rate.”
“Gold standards are far from perfect,” Bernanke said. “ They waste of resources,.” citing Milton Friedman’s quip about taking gold from one hole in the ground just to transfer it to other hole.
Gold standards are far from perfect because government bureaucrats have always been in charge of managing them. The mere fact that heavy costs and resources are involved to mine the yellow metal is one of the factors making gold a perfect money.
A gold-shackled currency takes away central bank flexibility, which bothers Bernanke. But the question is, how much Bernanke flexibility can the dollar stand before it falls apart completely?
The Fed Chair admitted that the gold standard provides price stability–but only in the long run. He stressed that there have been short-term periods of price inflation and deflation under gold. Well sure, prices increase and then correct, that’s what a gold standard does. Under central bank management prices just increase; either slowly, quickly, or catastrophically.
Exchange rates are fixed under gold thus, Bernanke told the students, shocks in the money supply in one country will affect other countries. He used the example that an accommodative monetary policy by his employer would cause inflationary pressures in China, because the yuan is tied to the dollar.
Bernanke cited speculative attacks on gold-backed currencies as a problem, saying that if it’s believed there isn’t enough gold backing the currency there can be a run on that currency. This is a human problem, not a gold problem. The same thing occurs more often under fiat currency systems. This is the way the market should work.
Amazingly, the Fed Chair rolled out the tired old “there isn’t enough gold to maintain a gold standard” argument. Showing a slide of William Jennings Bryant, Bernanke told of farmers struggling with debt that was fixed, while the price of their crops was dropping. Bryan called for a monetization of silver to increase crop prices.
Nigam Arora picks up on this theme in a piece for “The Trading Deck” on MarketWatch. Mr. Arora writes that Bernanke did a great job and thinks his “comments today on the gold standard may help those who are genuinely trying to make money from their investments.”
Arora writes that there just isn’t enough gold for the modern economy and the production of gold can’t keep up. He cites the Conference Board’s prediction that the world economy will grow by 3.6% this year, and gold production only grows 2-4% a year.
“The point is that the production of gold does not increase enough to accommodate growth in world economy,” Arora writes. “Then there is a peak gold theory which states that gold production has either peaked or will peak sometime in the near future. In contrast, the world economy will continue to grow.“
But growing the money supply doesn’t grow an economy: only real savings does. “Neither the Fed nor the government can grow the economy,” explains Frank Shostak. “All that stimulatory policies can do is to redistribute real savings from wealth producers to nonproductive activities. And these policies encourage consumption that is not supported by useful production.”
The redistribution created by the Fed’s monetary pumping actually weakens the economy over time as real savings is squandered on malinvestments. With gold as money, real production and savings is stimulated. Capital and savings flow to the most efficient and best producers.
Mr. Arora writes that South Africa is number one in gold mining followed by the US. Actually both of these countries are behind China and Australia, with Russia on the verge of pushing South Africa into the number five spot.
His bigger point is that countries without significant gold production would not be interested in a gold standard. No political class anywhere is interested in the gold standard because it limits government expenditures.
Arora’s hedge fund is short gold and owns inflation hedges “that have lower risk and higher rewards compared to gold.” He writes, “playing gold as a speculation based on momentum and confusing it with the gold standard and monetary policy without deep understanding of these subjects is a losing proposition.”
Arora’s arguments give us an idea how deep his understanding is: about the same as Chairman Bernanke’s.