Mises Wire |
- Johnny Vedmore on Klaus Schwab, Kissinger, and the CIA
- No, It's Not the Putin Price Hike, No Matter What Joe Biden Claims
- Expect Washington to Throw a Fit over China's New Deal with the Solomon Islands
- It Is Time To End the Fixation with Federal Law Enforcement
- Disney's Special District Is Not a "City-State" or "Private City"
- Roots of Our Current Inflation: A Deeply Flawed Monetary System
- Capital Goods and Capital
| Johnny Vedmore on Klaus Schwab, Kissinger, and the CIA Posted: 02 May 2022 02:00 PM PDT Johnny Vedmore is an independent journalist from Cardiff, Wales. He discusses his masterful article on Klaus Schwab's mentors, including Henry Kissinger and John Kenneth Galbraith. Mentioned in the Episode and Other Links of Interest:
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Google Podcasts, Stitcher, Spotify, and via RSS.
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| No, It's Not the Putin Price Hike, No Matter What Joe Biden Claims Posted: 02 May 2022 09:00 AM PDT Politicians love their buzzwords and talking points, and the Joe Biden White House and the Democratic Party use them as much or more than when Donald Trump and the Republicans ran Washington's freak show. Last year, the mantra from the Biden administration was that inflation was "transitory," meaning that the inflation would not last long. From Biden (when he could remember what his talking points were supposed to be) to Paul Krugman in the New York Times, the faithful repeated the newest word of life: "Transitory." As the hard reality has set in that this inflation will not be going away any time soon, we have new talking points and buzzwords from the house of Biden and his political allies, the renaming of inflation itself. No longer do the faithful dutifully repeat "transitory" when asked about skyrocketing consumer and producer prices; today the holy writ is "Putin's price hike." Americans can be assured that inflation is the result of an unholy alliance between Vladimir Putin and American energy companies, claim the Biden administration and its supporters. How do we know this? We have it from the highest authorities of truth, Sen. Elizabeth Warren and Jerome Powell, chairman of the Federal Reserve. In a recent op-ed for the New York Times, Warren informs her readers that all that is needed to control inflation is some tough talk from Biden along with a new regime of price controls. She writes:
Elsewhere, Warren claims that the answer for lower prices lies in enforcement of antitrust laws, echoing Joe Biden's recent claim that our economy suddenly has become a nest of price-gouging monopolies. Warren goes on to say:
To read Warren, one would have to believe that the Federal Reserve's policies of pumping trillions of dollars directly into the hands of consumers to offset the covid lockdowns and restrictions really had nothing to do with what we are seeing now. Instead, we are expected to believe that suddenly (and for absolutely no reason whatsoever) greedy capitalists started to raise prices because they wanted higher profits. Even though they had not raised prices when Trump was president (even though Trump himself was a greedy capitalist who would not hesitate to raise prices), they decided to pounce when a hostile regime took over the federal government. Interestingly, neither Biden nor Warren is willing to lay the blame on Powell and even the Trump administration despite the fact that both men have played a huge role in the inflationary chaos we currently are experiencing. They have chosen, instead, to blame private enterprise and call for the kinds of price control regimes that even the Jimmy Carter regime refused to implement even though the official inflation numbers under Carter were higher than they are today. In the three graphs below, it is not hard to observe the culprit: a huge spike in the money supply, all underwritten by the Fed, which went on an asset-buying spree to finance the unholy mess.
The second and third graphs show the growth of the Fed balance sheet, and one can see that, like the spike in money growth, the balance sheet exploded during the covid lockdowns and is still metastasizing to the point where Fed asset purchases are consisting of about 40 percent of US gross domestic product. Jeff Deist explains what happened:
When one understands the extent of the economic intervention of both the Fed and governments at all levels in the past two years, the real question one should ask is not why we are having inflation, but rather why prices have not risen further. Moreover, ever since September 2008 (as is clear from the second and third graphs), the Fed has gone on an unsustainable buying binge that has propped up the mortgage markets, repos, and long-term government bonds (Operation Twist). One must emphasize that the economy simply cannot absorb the dollars that the Fed has flushed into it. Furthermore, despite what the so-called ruling classes are telling us, stuffing dollars into the hands of people who lost their jobs due to wrong-headed covid lockdowns and production restrictions and paying other people not to work are not a perfect substitute for producing real goods and services. Even if Putin were to call off the Ukraine invasion and agree to sell Russia's oil and natural gas at steep discounts, the current consumer price increases in the USA would remain near unchanged. While no doubt the invasion has affected current gasoline and oil prices (and European natural gas prices), it has been irrelevant in the overall inflation picture in this country. Biden and the ruling classes never will admit to such a state of affairs, and we can be sure that Krugman, the New York Times, the Washington Post, and other mainstream journalism outfits will blame Putin, climate change, corporate profits, and whatever else crosses their paths. Meanwhile, the Fed will continue its unsustainable practices and everyone else will watch inflation erode their personal assets. This posting includes an audio/video/photo media file: Download Now |
| Expect Washington to Throw a Fit over China's New Deal with the Solomon Islands Posted: 02 May 2022 07:00 AM PDT Washington regards the entire world as its "sphere of influence." But now Beijing is looking to follow the US playbook on hegemony and expand Beijing's network of military bases abroad. Original Article: "Expect Washington to Throw a Fit over China's New Deal with the Solomon Islands" This Audio Mises Wire is generously sponsored by Christopher Condon. |
| It Is Time To End the Fixation with Federal Law Enforcement Posted: 02 May 2022 05:00 AM PDT For many years, conservatives have held the FBI as being nearly infallible. It is time to rethink this devotion to a federal agency that pursues its own political agendas. Original Article: "It Is Time To End the Fixation with Federal Law Enforcement" This Audio Mises Wire is generously sponsored by Christopher Condon. |
| Disney's Special District Is Not a "City-State" or "Private City" Posted: 02 May 2022 04:15 AM PDT One of the stranger narratives coming out of the controversy over Disney's "special district" in Florida is the notion that Disney's Florida property is some sort of truly independent self-governing entity operating without government oversight. Most claims in this regard wildly overestimate the degree to which Disney enjoys self-governance. Some also claim that Disney's Florida special district represents some sort of model for a truly "private city" in the model of a sovereign city-state. Or as one Twitter commenter put it, "Unironically, Walt Disney style private city-states is my ideology."
Yet the Disney "special district" means only this:
Nothing about the creation of a special district is unique, either. The United States has literally tens of thousands of special districts, which are corporate entities with special prerogatives and which are governed by boards separate from local municipal and county governments. Special districts have been created for many purposes, such as fire suppression, water and sewage, private toll roads, and education. The only thing that's arguably unique about the Disney special district is that it was created explicitly to benefit a single private for-profit corporation for general purposes. This also means Disney is essentially a private corporation that can issue tax-free "municipal" bonds. On the other hand, the fact that Disney has its own police force, maintains its own roads, and can exclude people who don't "follow the rules" means nothing special at all. All this means is that Disney World functions in this respect like a huge shopping mall that employs its own private security and maintains the roads, parking structures, and general infrastructure in its immediate vicinity. (It would be quite wrong, for instance, to think that Disney's law enforcement institutions are somehow independent from state and local law enforcement. Disney parks are very much within the jurisdiction of the local county sheriff.) So, needless to say, this idea that Disney World is some sort of revolutionary form of "privatization," a city-state, or a shining example of a "private city" is misleading and unhelpful. For example, the use of the phrase "city-state" implies that Disney World is in the same league as modern-day polities like Vatican City or Monaco—or Renaissance states like Cospaia or the Republic of Florence. Indeed, to look at real city-states—which by definition enjoy some actual de facto degree of sovereignty—illustrates just how very wrong it is to portray the Disney World model as revolutionary or somehow contrary to the prerogatives of centralized states. Disney doesn't even enjoy the status of a "client state" or a "protectorate," which generally exercises independence in internal affairs. No, Disney World is directly subject to state law and is in every way a fully integrated part of the political jurisdiction known as Florida. In fact, the Disney World model is best portrayed a just another "public-private partnership" employed by the state government to benefit the state government. The provenance of the Disney special district lies in nothing more than a calculation made by state agents that exempting Disney World from some local government ordinances would benefit the government of the state of Florida in the long run. In this, Florida politicians were probably right, and the Disney special district has helped produce immense amounts of tax revenue that have allowed the Florida government to greatly expand its powers elsewhere. (In this state-corporate bargain, it is Disney's potential competitors who lose most.) One can certainly argue in favor of exempting property owners from certain building codes and taxes. That's a good thing, but it hardly suggests the creation of a city-state or private city. Decentralizing municipal power across smaller jurisdictions—i.e., urban secession—is a good thing as well. This helps to disperse and limit political power. But as with the Disney special district, such changes do not limit the powers or jurisdiction of higher levels of government, such as state or federal governments. Yet one will still occasionally hear from a libertarian activist that Disney World is a radical model for "private governance" allegedly independent from government oversight. The Disney situation is not nearly as groundbreaking as such statements contend. In fact, the Disney World model only proves that—with an army of lobbyists—a large property owner can enter into a special arrangement with the government in which said property owners are exempted from some local ordinances. That's all it is. This posting includes an audio/video/photo media file: Download Now |
| Roots of Our Current Inflation: A Deeply Flawed Monetary System Posted: 02 May 2022 04:00 AM PDT A monetary system that allows the creation of money out of thin air is vulnerable to the fits of credit expansion and credit contraction. Periods of credit expansion typically occur over many years and even decades while the phases of credit contraction happen like sudden implosions. The monetary policy makers tend to promote the prolongation of credit expansion because they fear deflation. By doing this, however, the central banks prevent monetary moderate deflation as it would happen as the natural consequence of rising productivity. This way, an antideflationary monetary policy lays the groundwork for an upsurge of price inflation along with augmenting the risk of an abrupt contraction of the financial markets. Credit CyclesFinancial cycles can extend over long periods of time. In the past decades, there has been a massive global credit expansion, each of which has received new waves of boosts as it happened since the 1980s and as the result of such events like the 2008 financial crisis, the 2020 pandemic policy, and the current policy of sanctions in response to the war in Ukraine. Figure 1: Global debt since 1970 as a percentage of World GDP  The chart (fig. 1) shows total global debt, public debt, household debt, and non-financial corporate debt as a percentage of the global gross domestic product. Calculated in absolute terms, total global debt is rapidly approaching $300 trillion. With the end of the US dollar's link to gold in the 1970s, the international monetary system lost its anchor. Global debt in relation to the world's gross domestic product has risen from one hundred percent to over two hundred and fifty percent. The attenuation of this credit cycle is long overdue. However, again and again, the major central banks have been fighting any sign of a credit contraction for several decades. In Japan, the battle against credit consolidation began as early as the 1990s. In the United States, the fight against a perceived threat of deflation began around the turn of the millennium. Since the European debt crisis in 2010, the European Central Bank has also joined the monetary orgy. Obviously, the monetary policy makers ignore the risk that by not letting moderate deflationary contraction happen, they produce a monetary overhang. This in turn, poses the twin risk of higher price inflation along with an uncontrolled collapse of the credit markets. Central banks are waging a relentless fight against deflation. Being traumatized by the Great Depression, the modern monetary policy makers suffer from the psycho-pathological condition of "apoplithorismosphobia"—the fear of deflation. The battle of the central banks against deflation has created so much liquidity that the earlier deflationary tendency begins now to manifest itself as an upsurge of price inflation that even the official statistics cannot hide anymore. Having internalized the monetarist lesson about the origin of the Great Depression, central bankers have a deep-seated fear of price deflation, assuming that a fall in the general price level would provoke an economic contraction. However, had central banks left the system alone, deflation would have happened gradually without much turmoil. The economic actors would have had enough room and time to adapt. As such, deflation would not only be harmless but also beneficial. Trapped by their obsession with "stabilization," central banks have not permitted the economy to move on its natural path. Instead of allowing the self-correcting economic fluctuations, monetary policy has fabricated one artificial expansion after the other. The conventional monetary theory claims that a growing economy would need an expanding money supply. Even monetarist economists like Milton Friedman supported this idea. Yet Murray Rothbard has shown that there is no need of expanding the money supply to provide more liquidity even when the economy grows. If the money supply remains constant and productivity increases, prices would fall accordingly. This would be a beneficial deflation. Why complain when the goods are getting cheaper for consumers and the real wages rise? The crucial point is whether the price deflation happens due to productivity gains in the economy or abruptly as a sharp decline of the liquidity due to a financial market crisis. When central banks intervene and expand the money supply, as it happened in the form of the "zero interest rate policy" (ZIRP) or in some cases of a "negative interest rate policy" (NIRP), tensions will arise between the natural tendency of the interest rate to rise and the monetary interest rate that is kept low through the interventions of the central bank. Because of this discrepancy, there will be an additional demand for money. Over time, this monetary overhang promotes financial fragility and lays the foundation for future price inflation. The massive expansion of the Federal Reserve's money supply in the form of its monetary base did not immediately lead to price inflation because the velocity of money experienced a sharp fall since 2008. The trend of a falling velocity began to stop in the third quarter of 2020—well before the outbreak of the war in Ukraine. Given that the monetary overhang had persisted, prices began to rise right away, and the official consumer price inflation has accelerated to its highest rate in the past four decades. Changes in Relative Prices Do Not Cause Price InflationThe increase in individual prices—for example, crude oil—manifests itself as the change in the relative price. One specific good becomes more expensive in relation to other products. Only if there is a monetary overhang as the result of a previous or ongoing credit expansion, such individual price increases would show up in the so-called price level as an increase of general price inflation. When the policy makers manipulate the interest rate, they create a discrepancy between human time preference and the monetary interest rate. Stimulus policies push down artificially the monetary rate below the natural interest rate, which would emerge in the unhampered market if there were no central bank intervention. Disproportions occur in the financial markets the same way as they do when the state intervenes in the market for goods. Relative prices then no longer reflect consumer preferences and the marginal cost of production. The consequences are economic disruptions in the supply and demand of these goods. The monetary system possesses a natural degree of elasticity. Even if the money supply were tied to a fixed supply of central bank money or in a gold standard, there would be expansions and contractions in macroeconomic spending and the nominal national income. With an anchor of the money supply, these variations of economic activity would happen mainly as fluctuations and short-term swings and not as prolonged phases. The whole idea of stabilization stands in contrast to the need for a system in motion to fluctuate. Money does have loose joints to do its job, yet it should have an anchor to prevent extreme cycles. Under a gold standard, for example, there is an elasticity of money, even if the gold stock is constant. In this respect, the current monetary system is dysfunctional. The use of money will oscillate naturally also with a fixed quantitative amount of its base. It is wrong to claim that only the artificially created so-called fiat money would offer financial flexibility. Rather, the decisive point is that with an anchored monetary system, the degree of deviation is limited, while under the current fiat money regime, there is no restriction. ConclusionA state-sponsored fiat currency system with only a partial reserves coverage of the money in circulation allows the commercial banks to put more money into circulation than they hold in cash. By persistently pursuing an antideflationary policy, the central banks have fueled an ongoing credit expansion. They artificially prolonged the cycle of credit expansion. This means that a natural contraction has been prevented. Along with an upsurge of price inflation, this policy has also increased the risk of an uncontrolled implosion of the credit markets. The current outbreak of price inflation does not come by accident or because of external shocks. The foundation for rising prices was laid over a long period of time. As a consequence, another severe financial crisis looms now again on the horizon. This posting includes an audio/video/photo media file: Download Now |
| Posted: 02 May 2022 03:30 AM PDT There is an impulse inwrought in all living beings that directs them toward the assimilation of matter that preserves, renews, and strengthens their vital energy. The eminence of acting man is manifested in the fact that he consciously and purposefully aims at maintaining and enhancing his vitality. In the pursuit of this aim his ingenuity leads him to the construction of tools that first aid him in the appropriation of food, then, at a later stage, induce him to design methods of increasing the quantity of foodstuffs available, and finally, enable him to provide for the satisfaction of the most urgently felt among those desires that are specifically human. As Böhm-Bawerk described it: Man chooses roundabout methods of production that require more time but compensate for this delay by generating more and better products. At the outset of every step forward on the road to a more plentiful existence is saving—the provisionment of products that makes it possible to prolong the average period of time elapsing between the beginning of the production process and its turning out of a product ready for use and consumption. The products accumulated for this purpose are either intermediary stages in the technological process, i.e., tools and half-finished products, or goods ready for consumption that make it possible for man to substitute, without suffering want during the waiting period, a more time-absorbing process for another absorbing a shorter time. These goods are called capital goods. Thus, saving and the resulting accumulation of capital goods are at the beginning of every attempt to improve the material conditions of man; they are the foundation of human civilization. Without saving and capital accumulation there could not be any striving toward non-material ends.1 From the notion of capital goods one must clearly distinguish the concept of capital.2 The concept of capital is the fundamental concept of economic calculation, the foremost mental tool of the conduct of affairs in the market economy. Its correlative is the concept of income. The notions of capital and income as applied in accountancy and in the mundane reflections of which accountancy is merely a refinement, contrast the means and the ends. The calculating mind of the actor draws a boundary line between the consumer's goods which he plans to employ for the immediate satisfaction of his wants and the goods of all orders—including those of the first order3—which he plans to employ for providing by further acting, for the satisfaction of future wants. The differentiation of means and ends thus becomes a differentiation of acquisition and consumption, of business and household, of trading funds and of household goods. The whole complex of goods destined for acquisition is evaluated in money terms, and this sum—the capital—is the starting point of economic calculation. The immediate end of acquisitive action is to increase or, at least, to preserve the capital. That amount which can be consumed within a definite period without lowering the capital is called income. If consumption exceeds the income available, the difference is called capital consumption. If the income available is greater than the amount consumed, the difference is called saving. Among the main tasks of economic calculation are those of establishing the magnitudes of income, saving, and capital consumption. The reflection which led acting man to the notions implied in the concepts of capital and income are latent in every premeditation and planning of action. Even the most primitive husbandmen are dimly aware of the consequences of acts which to a modern accountant would appear as capital consumption. The hunter's reluctance to kill a pregnant hind and the uneasiness felt even by the most ruthless warriors in cutting fruit trees were manifestations of a mentality which was influenced by such considerations. These considerations were present in the age-old legal institution of usufruct and in analogous customs and practices. But only people who are in a position to resort to monetary calculation can evolve to full clarity the distinction between an economic substance and the advantages derived from it, and can apply it neatly to all classes, kinds, and orders of goods and services. They alone can establish such distinctions with regard to the perpetually changing conditions of highly developed processing industries and the complicated structure of the social cooperation of hundreds of thousands of specialized jobs and performances. Looking backward from the cognition provided by modern accountancy to the conditions of the savage ancestors of the human race, we may say metaphorically that they too used "capital." A contemporary accountant could apply all the methods of his profession to their primitive tools of hunting and fishing, to their cattle breeding and their tilling of the soil, if he knew what prices to assign to the various items concerned. Some economists concluded therefrom that "capital" is a category of all human production, that it is present in every thinkable system of the conduct of production processes—i.e., no less in Robinson Crusoe's involuntary hermitage than in a socialist society—and that it does not depend upon the practice of monetary calculation.4 This is, however, a confusion. The concept of capital cannot be separated from the context of monetary calculation and from the social structure of a market economy in which alone monetary calculation is possible. It is a concept which makes no sense outside the conditions of a market economy. It plays a role exclusively in the plans and records of individuals acting on their own account in such a system of private ownership of the means of production, and it developed with the spread of economic calculation in monetary terms.5 Modern accountancy is the fruit of a long historical evolution. Today there is, among businessmen and accountants, unanimity with regard to the meaning of capital. Capital is the sum of the money equivalent of all assets minus the sum of the money equivalent of all liabilities as dedicated at a definite date to the conduct of the operations of a definite business unit. It does not matter in what these assets may consist, whether they are pieces of land, buildings, equipment, tools, goods of any kind and order, claims, receivables, cash, or whatever. It is a historical fact that in the early days of accountancy the tradesmen, the pacemakers on the way toward monetary calculation, did not for the most part include the money equivalent of their buildings and land in the notion of capital. It is another historical fact that agriculturists were slow in applying the capital concept to their land. Even today in the most advanced countries only a part of the farmers are familiar with the practice of sound accountancy. Many farmers acquiesce in a system of bookkeeping that neglects to pay heed to the land and its contribution to production. Their book entries do not include the money equivalent of the land and are consequently indifferent to changes in this equivalent. Such accounts are defective because they fail to convey that information which is the sole aim sought by capital accounting. They do not indicate whether or not the operation of the farm has brought about a deterioration in the land's capacity to contribute to production, that is, in its objective use value. If an erosion of the soil has taken place, their books ignore it, and thus the calculated income (net yield) is greater than a more complete method of bookkeeping would have shown. It is necessary to mention these historical facts because they influenced the endeavors of the economists to construct the notion of real capital. The economists were and are still today confronted with the superstitious belief that the scarcity of factors of production could be brushed away, either entirely or at least to some extent, by increasing the amount of money in circulation and by credit expansion. In order to deal adequately with this fundamental problem of economic policy they considered it necessary to construct a notion of real capital and to oppose it to the notion of capital as applied by the businessman whose calculation refers to the whole complex of his acquisitive activities. At the time the economists embarked upon these endeavors the place of the money equivalent of land in the concept of capital was still questioned. Thus the economists thought it reasonable to disregard land in constructing their notion of real capital. They defined real capital as the totality of the produced factors of production available. Hairsplitting discussions were started as to whether inventories of consumers' goods held by business units are or are not real capital. But there was almost unanimity that cash is not real capital. Now this concept of totality of the produced factors of production is an empty concept. The money equivalent of the various factors of production owned by a business unit can be determined and summed up. But if we abstract from such an evaluation in money terms, the totality of the produced factors of production is merely an enumeration of physical quantities of thousands and thousands of various goods. Such an inventory is of no use to acting. It is a description of a part of the universe in terms of technology and topography and has no reference whatever to the problems raised by the endeavors to improve human well-being. We may acquiesce in the terminological usage of calling the produced factors of production capital goods. But this does not render the concept of real capital any more meaningful. The worst outgrowth of the use of the mythical notion of real capital was that economists began to speculate about a spurious problem called the productivity of (real) capital. A factor of production is by definition a thing that is able to contribute to the success of a process of production. Its market price reflects entirely the value that people attach to this contribution. No less detrimental was a second confusion derived from the real capital concept. People began to meditate upon a concept of social capital as different from private capital. Starting from the imaginary construction of a socialist economy, they were intent upon defining a capital concept suitable to the economic activities of the general manager of such a system. They were right in assuming that this manager would be eager to know whether his conduct of affairs was successful (viz., from the point of view of his own valuations and the ends aimed at in accordance with these valuations) and how much he could expend for his wards' consumption without diminishing the available stock of factors of production and thus impairing the yield of further production. A socialist government would badly need the concepts of capital and income as a guide for its operations. However, in an economic system in which there is no private ownership of the means of production, no market, and no prices for such goods, the concepts of capital and income are mere academic postulates devoid of any practical application. In a socialist economy there are capital goods, but no capital. The notion of capital makes sense only in the market economy. It serves the deliberations and calculations of individuals or groups of individuals operating on their own account in such an economy. It is a device of capitalists, entrepreneurs, and farmers eager to make profits and to avoid losses. It is not a category of all acting. It is a category of acting within a market economy.6 This article is excerpted from chapter 15 of Human Action.
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