Monty Pelerin's World

Economics, Finance and Politics Through The Prism of Classical Liberalism

August 2010 - Posts

Desperate Economic Action Ahead?
Aug 10 2010 The Apocalypse The economic condition of the country continues to decline toward its rendezvous with an, as yet, unknowable catastrophe. Speculation regarding this outcome is natural because self-interest, if not self-preservation, is at stake. Here is but one possibility. It is not a prediction, but a look at a series of not improbable events that could develop. Any similar government desperation would change our economic world overnight. It is mid-year 2012. The country has officially been in recession since the end of 2010. Many believe that it never recovered from what began in 2008. The word depression is now commonplace. Trust in Congress has fallen to single digits. Similarly, government reports and statistics are increasingly mocked by the public. The media is likened to Pravda because only government-speak is allowed. Distrust, despair and fear are everywhere. 2012 Economic Scenario: Official unemployment numbers approach 14%. Unofficial estimates of unemployment range from 30 -35%. There are no signs of a turnaround in employment. The Dow-Jones average has hovered around 4,500 for the past month. Official GDP has been declining for four consecutive quarters. Independent analysts estimate the true numbers have been declining for two years. Tax collections continue to drop while Federal spending accelerates. The deficit is expected to exceed $3 Trillion. Federal debt now exceeds $16 Trillion. The rate of foreclosures has doubled from the previous high in 2011. Personal and corporate bankruptcies have reached levels thought impossible. Major companies have left or announced intentions of leaving the U.S. to avoid the confiscatory taxes and regulations. College students, unable to find jobs, are emigrating to more favorable economies. California, Illinois and several other states are in bankruptcy court. Almost a thousand municipalities have filed as well. Many states and municipalities are using IOUs for payments. Welfare and unemployment checks are two months behind on average. Social Security checks and Medicare reimbursements are delayed. Some private pension funds have reduced their payments by 10 – 25%. Hospitals and doctors refuse to see Medicare patients until Federal reimbursements, already eight months behind schedule, are paid. Public unions across the country are on strike. Large areas are without teachers, police, firemen or hospital staff. Food stamps are rejected at grocery stores because of slow reimbursement and government default risk. Martial law has been imposed in several cities to counter rioting and looting. Isolated runs on banks have occurred. Mattress-stuffing is considered less risky than zero interest returns from banks. The dollar is rejected by local merchants around the world. Oil is priced in a weighted basket of currencies of which only 20% represents dollars. Foreign disinvestment in Treasuries has been accelerating as a result of trade wars, concerns of default and the desperate need for funding at home. Gold is selling at $2,800 per ounce. Despite QE on a scale not even Paul Krugman would have recommended, the economy continues to deteriorate. Treasury and toxic asset purchases have swelled the Fed’s balance sheet from $800 billion in 2008 to $6 Trillion. Despite incredible money-creation, the deflationary spiral continues. Banks continue to add more excess reserves. Creditworthy borrowers refuse to borrow. People and businesses everywhere have hunkered down, waiting for the next shoe to drop. Many withdraw funds from the banking system in fear of its collapse. The Emergency Measure It is against this backdrop that the President of the United States appears with a major economic announcement. Treasury Secretary Chris Dodd and Fed Chairman Barney Frank, both in their best solemnity, accompany him. President Joe Biden (in office for six months after former President Obama resigned “to spend more time with his family”) issues a short, terse message: The Federal Government, as a result of our national economic emergency, will be recalling all US dollars effective immediately. Continue reading »
Walter Williams, American

I recommend highly an interview by Daily Bell with Dr. Walter Williams. The interview conveys what Dr. Williams is about and what America is supposed to be about. Very worthwhile and he is a breath of fresh air and sense.

Daily Bell described Williams thusly:

Yes, throughout his career Dr. Williams has been a courageous, even lonely, voice, standing against black victimization and for freedom at a time when there were very few voices to be heard sounding his sentiments. He has spent his life attempting to explain "real" economics; he did so at a time when such discussions had all-but-flickered-out. He provided a bridge between that barren age and the incredibly substantive and energetic conversation going on today in the Western world and especially in America. He is a pioneer; we look forward to his autobiography; we are certainly glad we had a chance to interview him.

From the interview, I extracted Williams' official pardon of white Americans. His sense of humor is often reflected in his writing to reflect absurdity, as it was in this pardon:

Proclamation of Amnesty and Pardon Granted to ... All Persons of European Descent Whereas, Europeans kept my forebears in bondage some three centuries toiling without pay, Whereas, Europeans ignored the human rights pledges of the Declaration of Independence and the United States Constitution, Whereas, the Emancipation Proclamation, the Thirteenth and Fourteenth Amendments meant little more than empty words, Therefore, Americans of European ancestry are guilty of great crimes against my ancestors and their progeny. But, in the recognition Europeans themselves have been victims of various and sundry human rights violations to wit: the Norman Conquest, the Irish Potato Famine, Decline of the Hapsburg Dynasty, Napoleonic and Czarist adventurism, and gratuitous insults and speculations about the intelligence of Europeans of Polish descent, I, Walter E. Williams, do declare full and general amnesty and pardon to all persons of European ancestry, for both their own grievances, and those of their forebears, against my people. Therefore, from this day forward Americans of European ancestry can stand straight and proud knowing they are without guilt and thus obliged not to act like damn fools in their relationships with Americans of African ancestry.

The Pretence of Knowledge

 

The "Pretence of Knowledge" was the title of economist Friedrich Hayek's 1974 Nobel speech. In his first few sentences, he described the then-prevailing economic condition in words appropriate to today:

... [this economic condition] has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things.

Hayek's words in 1974 were not meant to describe today's condition, although they were extremely prescient. His hope was that the limits of knowledge would be recognized by the economics profession so that we would never reach our current situation.

Hayek's call was for professional humility at a time when Keynesians arrogantly believed they could manage the economy and the business cycle. His was a caution about how little we really know about the economy and can ever know about it:

.. in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, ... will hardly ever be fully known or measurable.

Hayek described the role of economics as follows:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

Two decades earlier Hayek had dedicated his The Road to Serfdom to the socialists of all parties in hopes that they would see the error of their ways. This warning was ignored by the political class as his Nobel speech was subsequently ignored by most economists.

Last week the Chairman of the Federal Reserve, Ben Bernanke, testified before Congress. He described the condition of the economy as "unusually uncertain." That phrase, fogged up enough to make Alan Greenspan proud, was inconsistent with Mr. Bernanke's prior "pretence of knowledge." Peeling back the Fedspeak, Mr. Bernanke essentially admitted that he was baffled by the economy and had no idea what might happen next.

For anyone who has looked at Mr. Bernanke's (the Fed's) forecasting record, this quasi-admission should not surprise. Mr. Bernanke has not foreseen anything with reasonable accuracy. As Mish pointed out:

Ben Bernanke was pretty certain there would not be a recession, that housing was not in a bubble, that the unemployment rate would peak at 8.5%, that paying interest on reserves would enable the Fed to hold short-term rates above 2%.

Bernanke was wrong on every count. At least now he admits he is guessing.

Most economists have ignored Hayek's caution for humility. Bernanke's doubts in his recent testimony are both new and troublesome. It suggests that he does not know what to do next. He has tried everything that he “knows” in dosages never before imagined. Despite his actions, monetary and fiscal actions have not moved the economy. This is not the way the world is supposed to work, at least according to the (increasingly disrespected) prevailing macro-economics.

Mr. Bernanke and others of his generation and training have absorbed what Mark Twain described as dangerous knowledge:

It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.

In modern days, Twain’s aphorism was formalized by Thomas Kuhn. Kuhn wrote The Structure of Scientific Revolution which dealt with the difficulty of changing scientific paradigms.We are at the point where increasing numbers of people question the value of the existing economic paradigm. Bernanke’s testimony may be the start of his Thomas Kuhn moment.

A long battle between the defenders of the old paradigm and the rise of a new one is about to take place. Bernanke, most professional economists and politicians will do everything they can to protect the status quo. Crises often shorten the period of acceptance for something new. That was the case in the 1930s when we accepted the false paradigm of Keynesianism. Desperation caused hundreds of years of economics to be thrown overboard for an unproven theory.

Two years into the crisis with unemployment still rising (using the broader measures) and stimulus almost exhausted, the economy is dead man walking. Negative GDP numbers are likely to appear once the stimulus ends. While government may have some bullets left, they fired their missiles and howitzer shells and are left with small arms. Somewhere Mr. Hayek must be smiling and thinking: "I told you so more than fifty years ago."

Trichet

The incorrect paradigm that has guided government policies for about 70 years is spent. Economies around the world have been crippled as a result of its incorrect prescriptions --  increased taxation, spending, debt and regulation. Even the highly socialist European economies appear to recognize the errors in such stimulus policies. In the Financial Times Jean Claude Trichet, Bernanke’s counterpart, has recently been highly critical of U.S. stimulus efforts.

To be fair to Mr. Bernanke, it is not his fault. As Hayek explained, no one is capable of doing what cannot be done. Mr. Bernanke's sin was to pretend otherwise, not his failure to do the impossible. Of course, to not pretend would have made Mr. Bernanke ineligible for government employment. Whether he truly believed he was capable of managing the economy or he just tried to maintain the crucial statist political myth is not knowable. My guess is that Bernanke was motivated primarily by his sincerity to the false Keynesian paradigm but also recognized the necessity of maintaining the myth.

Critics will judge Mr. Bernanke harshly. They will argue that prior Fed chairmen did better jobs. That conclusion is false, although arguing it is as subjective as judging a beauty contest and as useful as last week’s newspaper. The reality is that other Fed chairman had options not afforded Mr. Bernanke. Because they preceded him, they worked with an economy less damaged than Bernanke inherited. It was their decades of false paradigm prescriptions that so damaged the current economy.

A free-market economy is a self-correcting mechanism, despite all the protestations of Keynes, his followers, government economists and politicians. Benign neglect is all that is required for economic recovery when an economy is free and flexible. Prior Fed chairman did not practice benign neglect. Like early physicians, economists believed their form of bloodletting cured the economy. This myth was especially convenient for politicians who could claim credit while buying votes at the same time.

Cumulative abuses weakened the economy's resilience. The patient is now so weak that additional bloodletting is likely to cause death. It was Mr. Bernanke's misfortune to attain the job at the wrong time. While this may buttress the case that he was no worse than his predecessors, it certainly doesn't excuse his judgment.

For any thinking economist, not blinded by the false Keynesian paradigm, it was obvious where this economy was going at least ten years ago. Bernanke’s decision to accept the job was equivalent to knowing history and accepting the captaincy on the maiden voyage of the Titanic. Should we be surprised that Bernanke is unable to forecast with any accuracy? Or are we to presume that his ego was so big that he believed he could navigate the ship through the icebergs?

Hayek’s final book, written in 1991, had the title of The Fatal Conceit. Although not directed specifically at economists, the phrase is an accurate description of the economics profession for much of the past 70 years. Our economy is broken and on the verge of collapse.

Our economy is broken and on the verge of collapse. Send thanks to most any economist that has served in government over this period or taught at an Ivy League school.

Monty originally posted this on 20smoney.com

Monty Pelerin blogs at ww.economicnoise.com

 

Inflation: The Last Gasp of the Obama Economic Crisis

Inflation: The Last Gasp of the Obama Economic Crisis

Inflation is neither strategy nor solution; it is the last gasp of a desperate ruling class. Inflation is the inevitable ending of this awful economic crisis. The only questions are how much and when.

Rising support champions inflation as a salvation strategy. Richard Russell in a recent newsletter provides the rationale (emboldening by Mr. Russell):

In my opinion, the US MUST default on its debt. There are two ways to default. One is simply to renege on the debt …. The other way to default on the debt is to inflate it away. I'm absolutely convinced that this is the path that the US will take. If the US inflates enough, then over time (many years) the devalued dollar will tend of reduce the power of the debts.

Mr. Russell lived during the Great Depression and has been involved in the financial world since. His experience and observations are valuable. The desperation of our current economic situation should be apparent when default is presumed the only option. The idea is hardly unique to Mr. Russell. Anyone who has studied the numbers knows the mathematical impossibility of paying off the debt.

I differ with Mr. Russell not on the government’s intent but on their ability to execute such a strategy. They do not possess the knowledge to manage such a strategy. Nor is the government likely to have the luxury of time to succeed, given the rate we are adding new debt.

I expect inflation because it is based on a universal political characteristic -- cowardice. Politicians are not going to stop welfare, social security, unemployment and Medicare, at least not willingly. Furthermore, the Federal Reserve is not going to force the government into insolvency. The Fed, while de jure independent, is de facto not. It was created by legislation and can be disposed via legislation. The Fed must be a willing slave for the government.

Bernanke will "print" so long as the Federal Government is unable to support itself via tax revenues and market-based bond sales. Government as presently constituted will never regain this stasis of self sufficiency. The Fed has been forced into an accelerating Quantitative Easing spiral which will not stop until market or political forces intervene. The timing of the end and its ultimate form are not yet knowable.

Former Fed Chair Paul Volcker understood the dangers [To read rest of article, click here

 

Our Patrick Henry Moment is Here
Our Patrick Henry Moment Is Here By Monty Pelerin Obama's election was supposed to transform America, at least in his mind. This country's first socialist president strode into office confident that he would remake this country. Fortunately for the country, the timing of his election was twenty, if not fifty, years too late. Socialism has failed in its pure form wherever it has been tried. Now it has failed in its modified form. While much of the world realizes this, President Obama is either ignorant or has more sinister plans for the country. In the 1920s, Ludwig von Mises demonstrated via economic reasoning why socialism could not work. His argument was that without market prices, there was no way to properly allocate resources. About ten years later, Friedrich Hayek supported Mises' conclusion from a different angle. He approached it as a "knowledge problem" and argued that no central authority, regardless of how intelligent, could possess enough information to make proper and efficient decisions for tens of millions of people and businesses. History validated the theory of the two Austrian economists. Russia, China, Eastern Europe, Cuba, and North Korea produced inevitable the misery, poverty, and brutality. The two countries that continue the system are amongst the poorest countries in the world, held together only by totalitarian rule and outside economic support. With the recognition that socialism did not work, "do-gooders" changed their efforts to a system that would be part capitalism and part socialism. They believed that capitalism could be used for resource allocation while the "caring nature" of socialism could ensure equitable distribution of wealth. President Clinton expressed interest in what was then referred to as a "third-way." Western Europe had adopted this approach decades earlier. Interestingly, Mises argued that a "third way" could not work, either. In the 1940s, Mises demonstrated that one intervention begets additional interventions. A so-called mixed system is nothing more than capitalism with interventionism imposed. Mises showed that any such system eventually degenerates into full-fledged socialism. In a collection of essays entitled "Planning for Freedom," Mises concluded: There is no other alternative to totalitarian slavery than liberty. There is no other planning for freedom and general welfare than to let the market system work. There is no other means to attain full employment, rising real wage rates and a high standard of living for the common man than private initiative and free enterprise. The countries of Western Europe have, as Mises predicted, deteriorated into social welfare states likely never imagined or intended at their inceptions. As full-blown socialism approached, these countries became insolvent. Soon all will be forced to either dismantle their welfare states or incur sovereign defaults. The U.S., while never formally adopting either socialism or the mixed system, drifted into the mixed system by gradually adopting many socialist programs. As a result, the U.S. faces the same future of insolvency as its European counterparts. In terms of history, the mixed system dates back only to Bismarck in the 1880s. It was initiated in a few countries in the first quarter of the twentieth century. Its widespread acceptance occurred after World War II, when several countries chose not to return to the decentralized economies that existed prior to the war. England was the prime example. Industries nationalized for the war effort remained nationalized after the war. England rapidly devolved into a third-rate economy as a result. Prime Minister Thatcher reversed the decline by re-privatizing most of these industries. It took only about fifty to seventy years for the mixed systems to fail. That is literally a moment in terms of history. Many people are still reluctant to admit that socialism is a failure despite the theoretical warnings and the actual failures themselves. With socialists, it is never the system and always the people that are the cause of failure. "If only we had better leaders." As Hayek and Mises pointed out, it has nothing to do with leadership. There is a fatal flaw in the concept. As a result of attempting to extend the socialist myth, governments and their populations are now burdened with debt, much of which will never be paid. We are on the verge of a worldwide depression that will hit as governments run out of resources. It is likely that politicians will continue to play the game of "extend and pretend." But we have reached Ms. Thatcher's end-point: "The problem with socialism is that you run out of other people's money." How ironic that President Obama's first major achievement was ObamaCare. In May, Greece was ordered to privatize its health care system. This month, it was reported that England was going to overhaul their health care system. England was frequently referenced as a model of affordable, efficient health care by ObamaCare advocates. Apparently, the English government and its people view it differently. These instances are not one-time events. Nor will they be limited to health care. The welfare states of Europe will soon be dismantled in part or whole. So too will the entitlement programs in the U.S. The laws of economics and physics are immutable. They are above legislation. Countries do not have the resources necessary to honor their commitments, period! Our Founding Fathers, without using the term socialism, designed a Constitution to protect against such incoherent schemes. Over time, the Constitution was vitiated by "living document" interpretations, penumbras, and other nonsense. Now, the U.S. stands on the precipice of failure just as Western Europe. It is insolvent, and there are no other alternatives than to default or dismantle. The world is at a very dangerous inflection point. We are about to enter a depression. Politicians are not going to back away from socialism willingly. They and large numbers of other beneficiaries will do whatever they can to retain the status quo. Despite the unequivocal failure of the modern welfare state, it is unlikely to disappear quietly. The status quo is always difficult to change. It becomes especially so in desperate economic times and for people who believe they are entitled to be taken care of by others. The welfare state is headed for the dustbin of history. That is certain because it is no longer sustainable. The critical question is what will replace it. As Mises pointed out, there are only two alternatives: freedom or totalitarianism. There is no middle ground. There is no political compromise that can bridge this gap. Regardless of which side of the issue you are on, the battle will be bitter and likely last a decade or more. Economically, everyone will be hurt, including many of the "well-off." Whether our moral and ethical code is strong enough to get through this together is moot. We are not like our ancestors in the sense of their strong commitment to community, responsibility, forbearance, and integrity. We are the pampered generation, entitled to gratification now and willing to cut corners to get it. In many ways, this problem is more serious than that faced by our Founding Fathers. After all, King George had little control over their lives or fortunes. Yet these principled men risked both rather than accept even a little bit of tyranny. Theirs was a fight of principle; ours is one of survival. The fight is made more important when it is coupled with a depression. We know what monsters rose to power during the last depression and their effect on the world. We will either get liberty or totalitarianism. There is no middle ground. For me, the choice is clear and was stated by Patrick Henry more than two centuries ago: "Give me liberty or give me death." I am willing to sacrifice just as much as our Founding Fathers did so that my grandchildren and their grandchildren can live in the same country I grew up in. I hope enough others feel the same. Monty Pelerin blogs at www.economicnoise.com.