Mises Wire |
- The First Economics Lesson
- Why the Debt Ceiling Won't Limit Debt or Spending
- Could 2022 Bring the Collapse of the Euro?
| Posted: 01 Jan 2022 12:00 PM PST Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics, or medicine—the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible. In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences. In this lies almost the whole difference between good economics and bad. The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups. The distinction may seem obvious. The precaution of looking for all the consequences of a given policy to everyone may seem elementary. Doesn't everybody know, in his personal life, that there are all sorts of indulgences delightful at the moment but disastrous in the end? Doesn't every little boy know that if he eats enough candy he will get sick? Doesn't the fellow who gets drunk know that he will wake up next morning with a ghastly stomach and a horrible head? Doesn't the dipsomaniac know that he is ruining his liver and shortening his life? Doesn't the Don Juan know that he is letting himself in for every sort of risk, from blackmail to disease? Finally, to bring it to the economic though still personal realm, do not the idler and the spendthrift know, even in the midst of their glorious fling, that they are heading for a future of debt and poverty? Yet when we enter the field of public economics, these elementary truths are ignored. There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: "In the long run we are all dead." And such shallow wisecracks pass as devastating epigrams and the ripest wisdom. But the tragedy is that, on the contrary, we are already suffering the long-run consequences of the policies of the remote or recent past. Today is already the tomorrow which the bad economist yesterday urged us to ignore. The long-run consequences of some economic policies may become evident in a few months. Others may not become evident for several years. Still others may not become evident for decades. But in every case those long-run consequences are contained in the policy as surely as the hen was in the egg, the flower in the seed. From this aspect, therefore, the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence:
Nine-tenths of the economic fallacies that are working such dreadful harm in the world today are the result of ignoring this lesson. Those fallacies all stem from one of two central fallacies, or both: that of looking only at the immediate consequences of an act or proposal, and that of looking at the consequences only for a particular group to the neglect of other groups. It is true, of course, that the opposite error is possible. In considering a policy we ought not to concentrate onlyon its long-run results to the community as a whole. This is the error often made by the classical economists. It resulted in a certain callousness toward the fate of groups that were immediately hurt by policies or developments which proved to be beneficial on net balance and in the long run. But comparatively few people today make this error; and those few consist mainly of professional economists. The most frequent fallacy by far today, the fallacy that emerges again and again in nearly every conversation that touches on economic affairs, the error of a thousand political speeches, the central sophism of the "new" economics, is to concentrate on the short-run effects of policies on special groups and to ignore or belittle the long-run effects on the community as a whole. The "new" economists flatter themselves that this is a great, almost a revolutionary advance over the methods of the "classical" or "orthodox" economists, because the former take into consideration short-run effects which the latter often ignored. But in themselves ignoring or slighting the long-run effects, they are making the far more serious error. They overlook the woods in their precise and minute examination of particular trees. Their methods and conclusions are often profoundly reactionary. They are sometimes surprised to find themselves in accord with 17th-century mercantilism. They fall, in fact, into all the ancient errors (or would, if they were not so inconsistent) that the classical economists, we had hoped, had once for all got rid of. It is often sadly remarked that the bad economists present their errors to the public better than the good economists present their truths. It is often complained that demagogues can be more plausible in putting forward economic nonsense from the platform than the honest men who try to show what is wrong with it. But the basic reason for this ought not to be mysterious. The reason is that the demagogues and bad economists are presenting half-truths. They are speaking only of the immediate effect of a proposed policy or its effect upon a single group. As far as they go they may often be right. In these cases the answer consists in showing that the proposed policy would also have longer and less desirable effects, or that it could benefit one group only at the expense of all other groups. The answer consists in supplementing and correcting the half-truth with the other half. But to consider all the chief effects of a proposed course on everybody often requires a long, complicated, and dull chain of reasoning. Most of the audience finds this chain of reasoning difficult to follow and soon becomes bored and inattentive. The bad economists rationalize this intellectual debility and laziness by assuring the audience that it need not even attempt to follow the reasoning or judge it on its merits because it is only "classicism" or "laissez faire" or "capitalist apologetics" or whatever other term of abuse may happen to strike them as effective. We have stated the nature of the lesson, and of the fallacies that stand in its way, in abstract terms. But the lesson will not be driven home, and the fallacies will continue to go unrecognized, unless both are illustrated by examples. Through these examples we can move from the most elementary problems in economics to the most complex and difficult. Through them we can learn to detect and avoid first the crudest and most palpable fallacies and finally some of the most sophisticated and elusive. To that task we shall now proceed. The Broken WindowLet us begin with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass. A young hoodlum, say, heaves a brick through the window of a baker's shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor. Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $50 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer. The glazier's gain of business, in short, is merely the tailor's loss of business. No new "employment" has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye. The Blessings of DestructionSo we have finished with the broken window. An elementary fallacy. Anybody, one would think, would be able to avoid it after a few moments thought. Yet the broken-window fallacy, under a hundred disguises, is the most persistent in the history of economics. It is more rampant now than at any time in the past. It is solemnly reaffirmed every day by great captains of industry, by chambers of commerce, by labor union leaders, by editorial writers and newspaper columnists and radio commentators, by learned statisticians using the most refined techniques, by professors of economics in our best universities. In their various ways they all dilate upon the advantages of destruction. Though some of them would disdain to say that there are net benefits in small acts of destruction, they see almost endless benefits in enormous acts of destruction. They tell us how much better off economically we all are in war than in peace. They see "miracles of production" which it requires a war to achieve. And they see a postwar world made certainly prosperous by an enormous "accumulated" or "backed-up" demand. It is merely our old friend, the broken-window fallacy, in new clothing, and grown fat beyond recognition. This article is excerpted from Economics in One Lesson. This posting includes an audio/video/photo media file: Download Now |
| Why the Debt Ceiling Won't Limit Debt or Spending Posted: 01 Jan 2022 03:30 AM PST Not surprisingly, both houses of Congress approved another increase in the debt ceiling and have sent the bill to President Biden, who will most assuredly sign it. The bill raises the debt ceiling to $31.5 trillion. This debt ceiling is expected to last through the upcoming midterm elections so that incumbent elected officials don't have to deal with it in their campaigns for reelection. Here's my prediction: none of the mainstream commentators who were screaming about the dire necessity of raising the debt ceiling will publish any articles or editorials calling for federal expenditures to be drastically reduced in order to meet the new debt ceiling a couple of years from now. On the contrary, they will ardently support current levels of spending and maybe even call for higher spending. In other words, now that they got another increase in the debt ceiling, it is back to business as usual, until a couple of years from now, when they will be, once again, desperately calling for another increase in the debt ceiling. Taxes are imposed on people to pay for government expenditures. At the federal level, that's what the income tax and the IRS are all about. Some federal expenditures are for legitimate purposes. Example: a federal judiciary which tries criminal cases and civil cases. Other expenses are illegitimate. Examples include welfare payments to others (e.g., Social Security, Medicare, Medicaid, and foreign aid), the drug war, assassinations, and foreign military adventures. Ideally, the amount of taxes equal the amount of expenditures. But in a welfare-warfare state system, it never works out that way. That's because welfare-warfare state expenses quickly begin to soar because more and more people want to go on the dole and because the military-intelligence complex is just as voracious. As federal expenditures soar, income taxes can be raised to cover the additional expenditures. But rising taxes produce anger among the citizenry. That's the last thing federal officials want to deal with, especially before elections. So, they just borrow the money and go into debt to cover the additional expenditures. At the end of the year, the government now owes money to creditors. That debt must be paid off. But there is only one way to pay it off—raise taxes to a level where they cover current expenditures plus pay off the accumulated debt. But again, public officials know that raising taxes is going to cause anger and resentment among voters. So, instead of paying off the debt, they just pay the interest on it and roll it over for another year. At the same time, however, they borrow again to do the same thing. Thus, at the end of year 2, the debt has increased. This goes on year after year, with the total amount owed increasing exponentially. Today, the federal debt stands at $29 trillion and climbing. That amounts to $229,706 per taxpayer. That's a lot of money that is owed. And get this: the debt doesn't include Social Security and Medicare obligations, which amount to around another $2.3 trillion. To get a good shock at all this, see www.usdebtclock.org. The debt ceiling is an acknowledgment that too much debt is a very bad thing. After all, if too much debt was a good thing, there wouldn't be a need for debt ceiling. They could just keep borrowing and increasing the amount the government owes to their heart's content. The debt ceiling says: You will not be permitted to accumulate more than X amount of debt because it is bad and dangerous. When the debt ceiling is reached, that's it. No more new debt. At that point, the government must slash expenditures or raise taxes so that tax revenue equals expenditures. In other words, no more borrowing and, therefore, no more new debt. But as we have seen over the decades, it never works out that way. That's because public officials, with the full support of and even pressure from the mainstream press, continue to simply raise the debt ceiling to a new, higher level. That means, as a practical matter, that there is no limit on the amount of debt federal officials are permitted to accumulate. They are free to spend and borrow to their heart's content. Ultimately, however, the day of reckoning arrives. The government has accumulated so much debt that it is unable to cover interest payments on the debt as well as pay off its other ever-growing welfare-warfare expenditures. That's what happened to countries like Venezuela and Greece. They essentially have gone bankrupt. But there is another factor to consider: the Federal Reserve, America's central bank. From its inception, its job has been to pay off the debt and cover excess expenditures with newly printed paper money. That's why the Roosevelt administration in the 1930s canceled America's constitutional system of a gold-coin standard and made it illegal to own gold. FDR knew that with a paper-money standard, federal officials would be free to spend and borrow to their heart's content since the Federal Reserve could just print the money to cover the rising expenditures and rising debt. Thus, over the decades, the Fed has been expanding and inflating the money supply to accommodate all this massive spending and debt. As the Fed would do this, people's money would buy less, which would be reflected by rising prices across the board. Over the decades, the advantage to federal officials was that very few people understood that the reason prices were rising was because the Fed was debasing their money through inflationary expansion. Federal officials would tell people that the rising prices were due to rapacious, profit-seeking business owners. People bought into it, which is why they supported things like wage and price controls. You see the same phenomenon today when many people are blaming rising prices on supply-chain problems and other non-Fed-related activities. The last thing many people, including even college economics professors, suspect is that the Federal Reserve is, once again, debasing the money through inflationary expansion. A stopgap solution to this fiscal and monetary morass is to slash expenditures so that there is no new debt. In other words, enforce the previous debt ceiling. The ideal permanent solution, however, is to dismantle America's welfare-warfare state system, along with the income tax and the vicious IRS, restore America's founding system of a limited-government republic, implement a free-market monetary system, and end the Fed. Originally published by the Future of Freedom Foundation. This posting includes an audio/video/photo media file: Download Now |
| Could 2022 Bring the Collapse of the Euro? Posted: 01 Jan 2022 03:00 AM PST Like the Fed, the ECB is resisting interest rate increases despite producer and consumer prices soaring. Consumer price inflation across the Eurozone was most recently recorded at 4.9%, making the real yield on Germany's 5-year bond minus 5.5%. But Germany's producer prices for October rose 19.2% compared with a year ago. There can be no doubt that producer prices have yet to feed fully into consumer prices, and that rising consumer prices have much further to go, reflecting the acceleration of the ECB's currency debasement in recent years.1 Therefore, in real terms, not only are negative rates already increasing, but they will go even further into record negative territory due to rising producer and consumer prices. Unless it abandons the euro to its fate on the foreign exchanges altogether, the ECB will be forced to permit its deposit rate to rise from its current —0.5% to offset the euro's depreciation. And given the sheer scale of recent monetary expansion, euro interest rates will have to rise considerably to have any stabilising effect. The euro shares this problem with the dollar. But even if interest rates increased only into modestly positive territory, the ECB would have to quicken the pace of its monetary creation just to keep highly indebted Eurozone member governments afloat. The foreign exchanges are bound to recognize the developing situation, punishing the euro if the ECB fails to raise rates and punishing it if it does. The euro's fall won't be limited to exchange rates against other currencies, which to varying degrees face similar dilemmas, but it will be particularly acute measured against prices for commodities and essential products. Arguably, the euro's derating on the foreign exchanges has already commenced. But there is an additional factor not generally appreciated, and that is the sheer size of the euro's repo market and the danger to it that rising interest rates presents. Demand for collateral against which to obtain liquidity has led to significant monetary expansion, with the repo market acting not as a marginal liquidity management tool as is the case in other banking systems, but as an accumulating source of credit. This is illustrated in Figure 4, which is of an ICMA survey of 58 leading institutions in the euro system.2 The total for this form of short-term financing grew to €8.31 trillion in outstanding contracts by December 2019. The collateral includes everything from government bonds and bills to pre-packaged commercial bank debt. According to the ICMA survey, double counting, whereby repos are offset by reverse repos, is minimal. This is important when one considers that a reverse repo is the other side of a repo, so that with repos being additional to the reverse repos recorded, the sum of the two is a valid measure of the size of the repo market. The value of repos transacted with central banks as part of official monetary policy operations were not included in the survey and continue to be "very substantial". But repos with central banks in the ordinary course of financing are included.3 Today, even excluding central bank repos connected with monetary policy operations, this figure almost certainly exceeds €10 trillion by a significant margin, given the accelerated monetary expansion since the ICMA survey, and when one allows for participants beyond the 58 dealers recorded. An important element of this market is interest rates, which with the ECB's deposit rate sitting at minus 0.5% means Eurozone cash can be freely obtained by the banks at no cost. The zero cost of repo cash raises the question of the consequences if the ECB's deposit rate is forced back into positive territory. The repo market will likely contract in size, which is tantamount to a decrease in outstanding bank credit. Banks would then be forced to liquidate balance sheet assets, which would drive all negative bond yields into positive territory, and higher, accelerating the contraction of bank credit even further as collateral values collapse. Moreover, the contraction of bank credit implied by the withdrawal of repo finance will almost certainly have the knock-on effect of rapidly triggering a liquidity crisis in a banking cohort with exceptionally high balance sheet gearing. There is a further issue to consider over collateral quality. While the US Fed only accepts very high-quality securities as repo collateral, with the Eurozone's national banks and the ECB almost anything is accepted — it had to be when Greece and the other PIGS were bailed out. And the hidden bailouts of Italian banks by bundling dodgy loans into repo collateral was the way they were removed from national bank balance sheets and hidden in the TARGET2 system The result is that the first repos not to be renewed by commercial counterparties are those whose collateral is bad or doubtful. We have no knowledge how much is involved. But given the incentive for national regulators in the PIGS to have deemed non-performing loans to be creditworthy so that they could act as repo collateral, the amounts will be considerable. Having accepted this bad collateral, national central banks will be unable to reject them for fear of triggering a banking crisis in their own jurisdictions. Furthermore, they are likely to be forced to accept additional repo collateral if it is rejected by commercial counterparties and bank failures are to be prevented. The numbers involved are larger than the ECB and national central banks' combined balance sheets. The crisis from rising interest rates in the Eurozone will be different from that facing US dollar markets. With the Eurozone's global systemically important banks (the G-SIBs) geared up to thirty times measured by assets to balance sheet equity, rising bond yields of little more than a few per cent will likely collapse the entire euro system, spreading systemic risk to Japan, where its G-SIBs are similarly geared, the UK and Switzerland and then the US and China which have the least operationally geared banking systems. It will require the major central banks to mount the largest banking system rescue ever seen, dwarfing the Lehman crisis. The required expansion of currency and credit by the central bank network is unimaginable and comes in addition to the massive monetary expansion of the last two years. The collapse in purchasing power of the entire fiat currency system is therefore in prospect, along with the values of everything that depends upon it. Excerpted from "Gold and Silver Prospects for 2022" at Goldmoney.com.
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