A treaty with the EU or the ECB means nothing

Posted on July 11, 2014 by radiofreemarket

From today’s Open Europe news summary:

French Economy Minister Arnaud Montebourg said yesterday, “[It is] inevitable that the ECB goes even further in its non-conventional monetary policies, by finally proceeding to the purchase of public debt securities if the euro doesn’t go down and growth doesn’t return within the eurozone.”
As much as I hate to admit it, I agree with M. Montebourg.  The European Central Bank will do whatever it chooses, regardless of treaties solemnly and carefully negotiated and presented to national electorates.  Implicit in his statement is the overarching Keynesian assumption that prosperity will return to Europe by driving down the value of the euro in relation to all other currencies. The ECB is not alone.  All central bankers are engaged in a policy of mutual self-destruction of their currencies.  No one in a position of power anywhere seems to question this basic assumption.  But if this assumption is correct, why did not Zimbabwe become a prosperous country by devaluing its currency, the Zim dollar?  Patrick Barron
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I’ll punish you by starving my own people!

Posted on July 3, 2014 by radiofreemarket

From today’s Open Europe news summary:

EUobserver reports that Russia has retaliated against the signing of a new trade treaty between Moldova and the EU, by banning the imports of processed beef, horse meat, lamb and pork from Moldova.
EUobserver
Who suffers here?  Of course the Moldovans lose a customer, but one can assume that they will sell their food products to someone, perhaps even themselves.  There will be a temporary glut of these food products on the Moldovan market, so one can expect prices to fall until more lucrative external markets are found.  The real losers here are the Russian people, who no longer can purchase these food products.  Their standard of living will decline as they spend more on substitute products or do without.  I doubt that the Russian leaders care anymore about their people’s plight than did America’s leaders in boycotting Iranian oil.
Patrick Barron
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Helping with the difficult transition to private life

Posted on July 1, 2014 by radiofreemarket

From today’s Open Europe news summary:

The Irish Independent reports that outgoing European Commissioner, Maire Geoghegan-Quinn, is entitled to a total €432,000 EU pay-off over the next three years to help her adjust to life after Brussels.
According to Wikipedia, this lady has been out of public office for only two years since seceding her father in the Irish parliament in 1975 when she was twenty-five years old.  Therefore, she will need substantial financial help with this difficult transition to private life. But for some reason I do not think she will have any problems peddling the political influence that she has gained in the last forty years.  Patrick Barron
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Bank of England Governor will hold back the tides

Posted on June 30, 2014 by radiofreemarket

Re: The new normal is 2.5%, not 5% benchmark interest rate

 
Mark Carney, Governor of the Bank of England:

“Why is that the case? Things have changed. Households have a lot of debt. The Government is consolidating its financial position. Europe is weak. The pound is strong. The financial system has been fundamentally changed – it has to carry a lot more capital, it has lot carry a lot more liquidity insurance and it will pass on those costs to borrowers. “As a consequence of all those factors, in order to bring the economy back to full employment, in order to get inflation at target, the new normal is materially lower than the old normal.”

Notice that Mark Carney does not offer a real reason that interest rates cannot rise to 5%, only that it would be inconvenient for borrowers and the ever hopeful “This time its different” theme. Therefore, it won’t happen. Really? Sometimes it is inconvenient for the tides to rise, so perhaps Mr. Carney could be named Governor of Tides and hold them back.  His assumption, of course, is that interest rates are determine solely by central banks and that market forces are irrelevant.  Patrick Barron

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European “Champion” or European “Crony Capitalist”?

Posted on June 27, 2014 by radiofreemarket

From today’s Open Europe news summary:

Following the failed merger of Siemens and Alstom, which eventually joined with General Electric, France is reportedly pushing for an easing of the EU’s antitrust rules to allow the creation of European “champions”. 
Language is very important.  The merger between Siemens and Alstom did not “fail”; it was scuttled by the French government.  Now we see the true reason behind France’s action–it wishes to create a crony capitalist company that it can control.  It is mercantilism in a new guise.  Patrick Barron
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My letter to the Financial Times, London re: Here…take all the cocaine you want…

Posted on June 26, 2014 by radiofreemarket

Dear Sirs:

The Fed’s warning to banks that tougher stress tests are coming, so they should be making extraordinary preparations, is tantamount to passing out cocaine while warning that tough new drug tests will follow.  What does the Fed believe is the cause of this excessive risk taking if not its own policies to flood the banks with zero interest rate money?  Its explicitly stated purpose is to make funds available to those who would not receive loans otherwise, due to the natural interest rate pricing them out of the market.  But that is a good thing! Why should anyone desire to lend money to someone who cannot pay them back, which is exactly what the Fed’s actions are designed to accomplish?  Madness!!!!
Patrick Barron
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My letter to the Financial Times, London re: Socialized monetary union means constant meddling into sovereign affairs

Posted on June 24, 2014 by radiofreemarket

Dear Sirs:

Wolfgang Munchau’s post on June 23rd titled “Merkel versus Renzi for the future of the eurozone” illustrates the inherent weakness of the European Monetary Union.  Like all socialized services, the EMU requires constant meddling by foreigners into the affairs of sovereign nations, which can only lead to animosity and not cooperation.  Without the socialized EMU Italy could run its economy and its currency as it wished…and bear the full consequences of its policies.  Likewise, Germany could set a good example for the rest of Europe and the world…(are you listening US?).  Rather than lecturing one another or adopting policies, such as the European Central Bank’s negative interest rate, that some believe to be destructive, each country should mind its own business.  This was the case before Germany was blackmailed into giving up its beloved and successful Deutsche Mark in order to gain international approval to reunite its country.

Patrick Barron

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My letter to the Philadelphia Inquirer re: Wanting to jail the wrong bankers

Posted on June 23, 2014 by radiofreemarket

Dear Sirs:

Mr. Joseph N. Distefano’s column “Should some bankers be in jail?” targets the wrong the bankers.  Sure, private sector banks made what ultimately came to be revealed as bad loans, but why would they do this?  There is no quicker way to lose money than to loan it to someone who cannot pay it back.  The real cause of the banking crisis is central bank intervention to lower the interest rate below the natural rate set by the market.  Central bankers, Keynesians all, believe that such action is necessary to provide full employment and economic prosperity.  But the interest rate is the method for the efficient allocation of scarce savings.  Artificially lowering the rate makes it appear as if more savings are available for extending credit to the next, less creditworthy tier of borrowers.  It is a fiction.  Fiat paper credit is not the same as real credit, which can only be created by real savings.  Central bank intervention to lower the interest rate gives less incentive to savers while making it appear as if more credit is available to less worthy borrowers.  If any bankers should go to jail, it should be central bankers.
Patrick Barron
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Understanding the Price Level

Posted on June 22, 2014 by radiofreemarket

When I teach Austrian economics, I spend a lot of time explaining the three uses of money–holding, spending, and investing–and how only spending and investing affect the overall price level.  This helps my students understand that the total money supply can go up and prices remain stable or actually fall, if all the increase in the money supply goes into the holding portion.  On page 505 of his magnum opus Capitalism, George Reisman explains that the price level is determined by total spending in society divided by total production of goods actually sold in society.  So the spending part of his simple equation is composed of the final two uses of money–spending and investing.  His formula also helps explain the phenomenon of falling prices when total spending goes up, which can occur when there are revolutions in production, such as happened in America in the 1920s.  Furthermore, his formula helps explain an important consequence of malinvestment; i.e., that a society can produce things that no one wants to buy and that this production will not enter into the formula. Yet people were paid and create spending.  So the numerator goes up and the denominator stays the same or may actually fall, causing the overall price level to rise.

Understanding this is very important and not all that hard.  By the way, Reisman’s book can be downloaded for free from his website:  http://www.capitalism.net/
Patrick Barron

 

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My letter to the NY Times re: UKIP is neither left nor right

Posted on May 28, 2014 by radiofreemarket

Re: Populist Party Gaining Muscle to Push Britain to the Right

Dear Sirs:
It is about time to end the inaccurate labeling of all political parties as either of the left or of the right.  The ultra left is always linked with Soviet communist and the ultra right is always linked to Nazi fascism.  The laymen is left to believe that there is no other paradigm for government and that most governments fall somewhere between the two extremes.  Your recent article about UKIP, the British Eurosceptic party, is a case in point.  Supposedly UKIP is a party of the right.  The error is one of trying to pound every political movement into the left/right paradigm.  The real divide is between freedom and tyranny.  Both communism and fascism are tyrannies and both are socialist.  Ludwig von Mises explained that there were two models of socialism–the Russian model, exemplified by the Soviet Union, and the German model, exemplified by Nazi Germany.  (“Nazi” itself translates as “national socialism”.)  In the book that was partly responsible for winning him the Nobel Prize in Economics, The Road to Serfdom, Friedrich Hayek said that communism and fascism were two sides of the same socialist coin.  UKIP, by contrast, is a party of freedom.  It may be conservative in the sense that it wants to conserve (and regain) ancient British liberties and, to fulfill that end, Britain needs to leave the EU.  One needs merely to follow the daily insane edicts streaming from Brussels to realize that it is not a source or protector of anyone’s liberties.  Patrick Barron

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