Mises Wire

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When Fiat Currency Stops Being Money Posted: 04 Dec 2021 03:30 AM PST Most emerging and developed market currencies have devalued significantly relative to the United States dollar in 2021 despite the Federal Reserve's aggressive monetary policy. Furthermore, emerging economies that have benefitted from rising commodity prices have also seen their currencies weaken despite strong exports. As such, inflation in developing economies is much higher than the already elevated figures posted in the United States and the eurozone. The main reason behind this is a global currency debasement problem that is making citizens poorer. Most central banks globally are implementing the same expansionary policies of the European Central Bank and the Federal Reserve System but the results are disproportionately hurting the poor as inflation rises, particularly in essential goods and services, while fiscal and monetary imbalances are increasing. Many emerging economies have implemented a very dangerous policy of boosting twin deficits—fiscal and trade deficits—under the misguided idea that it will accelerate growth. Now growth and recovery estimates are coming down but monetary imbalances remain. Therefore, most currencies are falling relative to the US dollar. The policies implemented by global central banks are as aggressive or even more so than those of the Federal Reserve but without the global demand that the US dollar enjoys. If global nations with sovereign currencies continue to play this dangerous game, local and international demand for their currency will evaporate and dependence on the US dollar will rise. More importantly, if the Federal Reserve continues to put its global reserve status to the test, all fiat currencies may suffer a loss of confidence and a move to other alternatives. If the private sector does not accept this currency as a unit of measure, a generalized means of payment, and a store of value backed by reserves and demand from the mentioned private sector, the currency becomes worthless and ceases to be money. Ultimately, it becomes useless paper. Examples of state currencies that are neither a store of value nor a generally accepted means of payment are many. From the sucre in Ecuador, which disappeared, to the Argentine peso or the Venezuela bolivar, the examples in history are innumerable. In Cuba inflation is now estimated at 6,900 percent due to the lack of demand for a worthless currency with no real demand or reserves to back it. Once this sort of thing happens, the state does not create money, it simply issues a means of payment—the currency—using the credibility of private sector demand to issue its promissory note. Like a debt issuer who loses repayment credibility, the value of this promise fades if the currency does not have private backing. More importantly, the value of the currency and its use is not decided by the government. It is decided by the last private sector agent who accepts the promise of payment because they assume that it will maintain its value and its acceptance as a medium of payment. As such, when a government creates many more of these increasingly worthless promissory notes, far outstripping the real local and international demand, the effect is the same as a massive default. The government is simply impoverishing the citizens, who are forced to use the currency, and destroying the credibility of the value of the government's promissory notes. When a state creates a currency without real reserve backing or demand, it destroys money. When the government issues currency—promises of payment—that are neither a store of value nor a generally accepted means of payment nor a unit of measure, it not only does not create money, it destroys it by sinking the purchasing power of the poor captive citizens, who are forced to accept its notes and little pieces of paper (government officials, pensioners, etc.). This is what we are seeing in many nations all over the world, a massive salary and savings slash created by government intervention on the monetary balance to its own benefit. Governments benefit from inflation because they pay their debt in a currency of diminishing value and they impose a cut to the price they pay for wages and the services of the sectors that provide service to the issuer of currency. Even in developed nations with relatively stable currencies, inflation is a big benefit for governments that collect higher revenues from the money-based taxes (wage, profit, and sales taxes) … and a big negative for savers and real wages. Some say that workers may benefit because wages will rise in tandem with inflation. This is simply incorrect. Wages, at best, may rise with the consumer price index, which is a very weak measure of inflation and is a basket created by government bodies to lower real inflation in an average of combined goods and services. However, even if you consider the consumer price index, the vast majority of workers do not even see a rise in wages that compensates for the index rise. That is why median real wages are falling in the United States. Those who say that the state can always "create money and spend it"—and only has to create the money it needs to finance the public sector because it will be accepted by the rest of the economic agents—should be obliged to receive their salaries in Argentine pesos and enjoy the experience. This posting includes an audio/video/photo media file: Download Now

Poland's Beef with the EU Shows the Dangers of Political Centralization Posted: 04 Dec 2021 03:00 AM PST Across the pond, Poland and the European Union find themselves deadlocked over a question about judicial primacy. In early October, Poland's Constitutional Tribunal sparked controversy when it ruled that EU law does not supersede national legislation. At stake in the EU-Poland legal dispute, was Poland's decision in 2018 to rein in its judiciary and establish a disciplinary chamber to remove judges. Before these reforms were undertaken, the Polish judiciary was largely viewed as corrupt and inefficient, possessing vestigial features of the previous Communist order, when Poland was a member of the Warsaw Pact. What initially started out as a mundane domestic reform soon transformed into an international controversy. The European Court of Justice (ECJ) took exception to Poland's reforms and ruled that EU law takes precedence over Polish law. The ECJ's ruling did not deter Poland, though. Back in March, Polish prime minister Mateusz Morawiecki brought the case before the Polish Constitutional Tribunal, subsequently leading to the Polish tribunal's controversial ruling in October. Following the October ruling, the EU commission had choice words for Poland's superior court and reaffirmed its EU-law-über-alles stance. Possessed by a universalist spirit, the EU ramped up the pressure on Poland by slapping it with a daily fine of €1 million euros (slightly over $1.1 million) until the Law and Justice (PiS, Prawo i Sprawiedliwość) government modifies its judicial legislation to align with EU standards. The Poles remain intransigent. They know what is at stake. Having gone through a series of partitions in the late eighteenth century in addition to being placed under the Soviet Union's thumb via the Warsaw Pact in the twentieth century, Poles' skepticism toward supranational entities and hostile external actors is justified. The former Soviet satellite will not compromise on its sovereignty both as a matter of principle and national identity. The current tension between Poland and the European Union offers a glimpse of the new kinds of struggles nation-states are confronting in contemporary times. The erosion of national sovereignty is becoming the norm throughout the West as governments grow and political planners find every way possible to build superstates. The EU represents the most significant trial run of such a utopian project. Despite its failed attempts to create a United States of Europe so far, Eurocrats remain committed to their fantastical vision. The biggest obstacles central planners in Brussels face are the former Soviet satellite states, which have grown skeptical of the EU's pie-in-the-sky project for the Old Continent. As the largest member of the Visegrad Group, Poland has established itself as an opposing pole to Brussels-style globalism. Poland's judiciary reforms are part of a broader set of populist measures that span restricting the resettlement of Middle Eastern migrants within Europe to standing up for traditional cultural norms that have irked the bien-pensants all the way from DC to Brussels. For its defiance of conventional Western political norms, Poland has earned the illiberal democracy label, accompanying its fellow Visegrad Group member Hungary in receiving this dubious distinction. The curious thing about Poland's fracas with the EU is that Poland doesn't want to leave the EU, at least not for now. According to various Polish polling firms' findings, support for leaving the EU has never exceeded 20 percent. Since joining the EU in 2004, Poles have generally held the supranational union in high esteem. Further, Poland heavily relies on intra-EU trade for its exports. Trade with EU members accounts for 80 percent of Polish total exports. Even Prime Minister Morawiecki reiterated that a "Polexit" is not in the cards at the moment. However, political intentions can change. Eurocrats fail to recognize that the EU's initial popularity was predicated on reasonable benefits such as free trade between member states, liberalized travel within the EU, and greater diplomatic integration to prevent the kinds of fratricidal wars that devastated the Old Continent during the first half of the twentieth century. The 2016 Brexit vote showed the world that the EU's power is not yet monolithic and that with the right amount of political will, EU member states can go their separate ways. The more the EU micromanages Polish internal affairs and punishes Poland for the simple act of exercising sovereignty, the more likely it is to entertain the idea of exiting the EU altogether—a potentially devastating blow to the Eurocrats' quixotic political project. This posting includes an audio/video/photo media file: Download Now

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