Book review: The Market for Liberty, by Linda Tannehill & Morris Tannehill

By Andy Duncan

screen-shot-2013-05-05-at-13-07-35In the comic book legend of Superman, an occasional ingredient in the story is the caped one’s ice cave, the Fortress of Solitude, usually located somewhere up near the North Pole. In the movie series, Christopher Reeve created this via a dense Kryptonian crystal, possibly a sun-stone sent to Earth with the escaping infant child by Superman’s father, Jar-El, as played by Marlon Brando.

This super-concentrated nano-crystal contained all the knowledge and memories of the Kryptonian race, to enable Superman to reach his full potential.

And in many ways, The Market for Liberty, by Linda and Morris Tannehill,  originally published in 1970 and now re-published by Laissez Faire Books, is a similar kind of nano-crystal sun-stone, containing virtually all the light required to form a complete global society free from the parasitical and metastasizing carcinoma virus of peace-destroying, wealth-destroying, and liberty-destroying government.

To provide a solid roadway into freedom I would normally recommend that a bolstering literary canon should include Ludwig von Mises, Murray Rothbard, Bruce Benson, Ayn Rand, George Orwell, and Hans-Hermann Hoppe. If, however, you want the whole freedom rush in one hit, this book could provide that super-dense Cuban cigar.

Take a look at this typical quote from the book.

“All that is required for the defeat of evil is that good men stop their unwitting support of it.”

If that seems a little simplistic, some firm meat backs it up.

“The majority of people firmly believe that we must have a government to protect us from domestic and foreign aggression. But government is a coercive monopoly which must demand sacrifices from its citizens. It is a repository of power without external check and cannot be permanently restrained. It attracts the worst kind of men to its ranks, shackles progress, forces its citizens to act against their own judgment, and causes recurring internal and external strife by its coercive existence.”

The first part of the book, labelled The Great Conflict, consists of a kind of Rothbardian-Randian soup, all compressed into a handy travelling cube, with plenty of motivational herbal notes along the way, such as this one.

“The free-market way of doing things is always superior to the only method government can use — coercion, as freedom is always superior to slavery.”

This first part is the best section of the book, flowing along beautifully like a wild canyon ride. After this poetry, we then towel ourselves down for some serious prose by progressing into part II, labelled A Laissez-Faire Society. Here, the authors dissect the Benson-Hoppe areas of competitive security production. We begin with straightforward fare.

“The belief that society couldn’t be defended without a government also assumes that government does, indeed, protect the society over which it rules. But when it is realized that government really has nothing except what it takes by force from its citizens, it becomes obvious that the government can’t possibly protect the people, because it doesn’t have the resources to do so.”

However, virtually every question a devil’s advocate minarchist could think of is tackled by the Tannehills in their quest to prove the unnecessity of the state. However, as others have noted before me, the ‘Randian’ nature of the book does lead to what I would consider a slip-up on the ‘intellectual property’ front. This perhaps marks the book’s first slight Achilles Heel.

Another distraction might appear to those already initiated with the Bensonian and Hoppeian ideas proclaimed – the justifications on how a truly free society will solve its security problems  start to become relentless. In wave after wave the book prescribes how the free market will solve the problems the state claims to solve now, mostly related to justice, peace, and security (all three of which the modern state lamentably and quite clearly fails to solve). However, although this forensic detail provides great ammunition for those who might occasionally find themselves trapped inside otherwise intractable arguments with minarchists – when perhaps they could be relaxing with a glass of pinot noir instead – we actually lack any real detailed clarity on how a free society will work once we take our freedom back from the state.

Could you predict from the outset how undirected biological evolution would progress in a complex free environment in the light of continual and unpredictable environmental change? Farmers try to tame, control, and direct evolution to satisfy their own personal needs, just as tax farmers do the same with society. But the minute a farming whip hand gets removed, nature and society quickly re-assert themselves into axiomatically-ordered chaos.

If evolution holds a combined nature of spontaneous chaotic unprediction based upon an axiomatic scientific framework of nucleic acid replication, then why would societal freedom be any different? The purpose of Austrian economics lies in mapping the axiomatic nucleic acid of society. Alas, how any isolated society will evolve once free of criminal restriction will never resolve itself entirely from the entrepreneurial fog of speculation.

Yes, some entrepreneurs such as Doug Casey achieve greater fog-guessing success than others, perhaps because they hear the helical chimes of crystalline nucleic acid patterns better than the rest of us, though none of these entrepreneurs ever sail in clear blue waters without the need for a fog horn, even when pressed by troublesome podcast hosts to ‘tell us what might happen next?’

That’s the beauty of both freedom and evolution, an intimate pair of development strands twisted together as related, spontaneous, and complex-chaotic processes. Both perform optimally to produce the greatest order when free to go whichever way they perform best given the changing and tangled environment in which they exist from moment to moment. Yes, the underlying frameworks of Austrian economics and nucleic acid replication ultimately provide ever-evolving order in both systems, but mapping out the future too closely can harm the reputation of both successful entrepreneurs and successful evolutionary scientists.

Having said all that, if you are a reluctant minarchist and you need some help, persuasion, and plausible ideas, to come to over the light side, this may just be the ideal book to bring you over a possible Stockholm-syndrome chasm of a vestigial emotional connection to a gang of bandits called government which has preyed upon your life’s energy output from birth.

Think Matrix. Think red pill.

The metaphorical call to man the barricade then comes in part III, labelled How Do We Get There?, which says what you might expect about privatisation, taking ownership of your life, and rejecting government wherever you can. One interesting trumpet note here leads the Tannehill charge, going beyond Rand or even Murray Rothbard, which is a call for the U.S. dollar’s replacement by something private people can transact safely and securely. Although they detail the importance of gold and silver as money, they believe it may take a while for these precious metals to fill any void left by the dollar’s ultimate and probably sudden collapse. I was particularly struck by the end of this line, first written and published 43 years ago.

‘…if it comes as a result of people deserting the dollar for a truly valuable medium of exchange than if the dollar collapses from hyper-inflation, leaving them no money commodity at all.’

Shades of Bitcoin anyone? It truly is a remarkable book, decades ahead of its time, and still highly useful today.

Once you’ve swallowed the Tannehill pill, prepare to throw away your Union Jack cufflinks, your Swedish flag backpack, and your Tricolour underwear. See why this book helped convert Doug Casey to the reality of true freedom. At least, that’s what it says on Wikipedia, and as that wonderful Internet source of information drew its inspiration directly from the ideas of Hayekian spontaneous order, who are we to argue?

You may also learn to feel the aspiration – no matter how long it takes to arrive – of a totally voluntary society, whether this society discovers itself on Earth, which I personally consider unlikely, or whether it first materializes out there on the upcoming frontier of space.

This may be a territory, an island, an asteroid, a moon, or a planet of super men and super women who have risen above the tax farming propaganda of criminal gang states via the inspiration of books like The Market For Liberty.

Perhaps we should therefore call this first free place Krypton? Or as our Bitcoin-supporting friends might spell it, Crypton. Though I would be happy for it to be called ‘Virgin Gulch’ or ‘Red Bull Field’, or named after whichever other private organisation first founds this magical place to reboot human progress after the disastrous 10,000 year experiment of the state.

After all, who am I to predict which company of free men and women will get there first and what they’ll call it? Though it would be really good if this first free city were named ‘Euro Vigilante Haven’.

That really would be quite a place.

Posted in Book Reviews | Leave a comment

New Laissez Faire Books release: Early Speculative Bubbles

Doug french BookLaissez Faire Books have just released a splendid new edition of Doug French’s book, Early Speculative Bubbles, previously published by Mises.org. So how do I know this book is splendid? Because I wrote the new Foreword, which just by itself is magnificent. For those who want more of a breakdown, you can see a review I did of the first edition, here. Below, is the new Foreword to this book’s LFB edition, a book which mainly concentrates on the hard-money inflation of Tulipmania:

IN A SINGLE LIFETIME, there are only so many books you can read. Obviously, at the top of that time-limited list is Human Action, followed by Man, Economy, and State. Following that, you might add the Bible, and The Complete Works of Shakespeare. Though as I’ve yet to meet any man or woman who has actually read the whole of The Complete Works of Shakespeare, from cover to cover, then perhaps we need to add another book to fill that coveted fourth spot.

Should it be this book, the one that you currently hold in your hands?

Okay, so perhaps Lord of the Rings, the complete set of Patrick O’Brian novels and Socialism by Ludwig von Mises spring to mind ahead of this one.

Maybe even Sword of Marathon — by my very good friend, Jack England — earns that coveted fourth spot.

Yes, well, except for these magnificent testaments to the creativity and brilliance of mankind — especially when unleashed from the ten-thousand-year-old tyranny of the state — what should we read next?

Well, my friends, I think it has to be this book. Why? Because it is extraordinary, that’s why.

Why is it extraordinary? Because it is filled with the spirit of one of the greatest men who ever lived, Murray N. Rothbard, as propagated through the fingers of one of his lucky students, Douglas E. French. For where most Austrian economic texts deal with paper money, and its problems, this book deals with something most others have been afraid of exploring, which is hard, precious-metal money, and its problems.

There is a reason why centuries passed before any Austrians attempted to explain the problem of hard-money inflation, as opposed to the much easier subject of paper-money inflation, and that is because nobody possessed the requisite testosterone and the essential nerve to do it. And as a former American football player, Doug French possesses that requisite testosterone and that essential nerve by the syringeful.

How could hard metal fail? How could a 100 percent reserve of pure, physical silver fail? How could the Bank of Amsterdam fail — the hardest hard-money bank in the world, which made the goblin Gringotts Wizarding Bank look like a Federal Reserve outlet populated by Paul Krugman clones?

Tulipmania, based upon a banking system with a 100 percent silver metal reserve has to be explained. Otherwise, we are left with the madness of crowds as an explanation to everything, which our friends in government would love to be seen as the solution to everything, so that they can bring a hobgoblin promise of order to this supposed madness of crowds. But if you’re an Austrian, you believe that all events, no matter how illogical on the surface, possess a valid praxeological explanation.

And that is what Douglas French provides when describing Tulipmania.

I shall leave him to explain how hard-money metal failed, in this magnificent new edition of his book. However, let us assume for now that it had something to do with the power-crazed protection-racket gang known as the state. French uncovers how the chaos of government managed to mess up such a simple and otherwise perfectly functioning system of a totally voluntary money supply. He achieves this with the dexterity of a quarterback winning a Super Bowl in the last second, with one inch to spare on the final touchdown.

And just when you think he’s done, French also explains the South Sea Bubble and the Mississippi Bubble too, as a postgame treat. However, as these were both based upon paper monies and paper share certificates, it’s like men playing against boys. The real meat of this book is delivered in his section on Tulipmania, as supervised by Murray Rothbard, and as brought to us now by the hall-of-fame team of Laissez Faire Books.

Read something and learn.

I did.

Andy Duncan

Posted in Book Reviews | Leave a comment

My letter to the NY Times re: The False Choice Between European Federalism and Tribalism

Re: Where’s Charlemagne when we need him? , by Istan Deak

TribeDear Sirs:
Professor Deak fails to understand that the euro project is a tool of the European elite.  Its purpose is to force a federal Europe on an unwilling populace through control of the currency.  The Maastricht Treaty of 1992 is the culprit.  The fall of the Soviet Union and the NATO military alliance had ushered in the promise of eternal peace and prosperity for Europe.  But this was not enough for an elite seeking greater glory for themselves.  The common currency project threatens to undo all the good of decades of hard work to reduce barriers to trade, capital, and people.  Professor Deak is just another European dreamer who would pull all that down for a “new imperial construct”.  What a dangerous idea.  Patrick Barron

Posted in News/ Lessons | Leave a comment

It isn’t capitalism that has caused the crisis!

The financial journalist Lars Schall talked for Matterhorn Asset Management with seasoned investment banker and renowned economist Prof Thorsten Polleit whether the financial system can adjust by itself, whether central banks are needed or not, and whether the gold market is a free market at all. Moreover, Prof Polleit gives his answer to the question: what is good money?

By Lars Schall

Thorsten-PolleitThorsten Polleit, born 1967, is Chief Economist of Degussa Goldhandel GmbH (established in Frankfurt, Germany in 1843) and a member of the firm’s advisory board (www.degussa-goldhandel.de). In the period of October 2000 to April 2012, he worked as Chief German Economist for Barclays Capital, focusing on European economic and political developments. Before that, he worked as Chief German Economist for ABN AMRO in London, Amsterdam and Frankfurt.

L.S.: Is the economic and financial crisis the consequence of the failure of capitalism?

T.P.: This is perhaps the most important question that needs to be raised, and hardly anyone is raising it. So I am most pleased with the opportunity to provide a proper answer. Let me give it to you straight: No, it isn’t capitalism that has caused the crisis. The world we are living isn’t capitalism, as many people would like to make you believe. We live in a world of interventionism: that is government interfering in the market, violating peoples’ property rights, thereby providing people with incentives to do bad things. This is what has brought about all the trouble we face today. If we had true capitalism, we wouldn’t have the current problems, to be sure.

L.S.: However, do we see a failure of the science and profession of economics?

T.P.: Under the dominance of state education – from Kindergarten to university –, economics has actually become, first and foremost, a pseudo-science legitimizing government interventionism in virtually all walks of live. So my answer to your question would be yes, I am afraid.

L.S.: Which causes do you see for the crisis?

I know it has become quite fashionable among economists to mention all sorts of causes: such as a lack of regulation, manager greed, insufficient policy coordination and so on. However, I see just one cause: and that is societies having fallen victim to paper, or fiat, money. Of course, you may explain the latter by blaming, say, the welfare-warfare state, majority voting etc. Fair enough. But I would think that if people understand paper money as the root cause of the current problems, we would be a great deal nearer to a solution to these problems.

L.S.: Can the system adjust by itself?

T.P.: Sound economic theory – and that is the Austrian School of Economics – would tell you NO. The fiat money system cannot adjust itself back to equilibrium. For fiat money causes, and necessarily so, economic disequilibria. Central banks slashing interest rates, pumping up the money supply, running deficits etc., wouldn’t unwind any disequilibrium. On the contrary. Any such measures would make them even worse.

L.S.: What do you think about bank bailouts?

T.P.: I guess I very much understand those advocating bank bailouts as a means for avoiding a recession-depression. However, as an economist in the Austrian tradition I must say that bank bailouts will not cure the crisis but will make it even worse. Government interference in the market place may mask the real economic problems, it may postpone the true outbreak of the crisis, but this comes at a high price, namely an even bigger crisis in the future. We won’t escape the damage caused by having used fiat money.

L.S.: Are the rescue measures in the euro crisis more or less just another bailout of banks, in this case predominantly German and French banks?

T.P.: The banking system operates on fractional reserves, and that makes it vulnerable to bank runs. Bailing out one bank is therefore benefitting all other banks, as investors typically assume that central banks will provide a safety net for all banks. That said, having bailed out Greece, Irish, Portuguese and Spanish banks means of course helping Italian, French and German banks.

L.S.: Does the world need central banks?

T.P.: Money has emerged spontaneously out of the free market. It is a free market phenomenon. This is a theory put forward by the economist Carl Menger (1840 – 1921). That said, you wouldn’t need any government, or any central banks for that matter, for getting sound money. In fact, the opposite is true: government replaces unsound money for sound money. Indeed, the world over central banks have been created by governments to destroy free market money and give government full control of society’s monetary affairs. Central banks serve a few at the expense of the great majority of the people. So, no, we do not need central banks.

L.S.: Why do central banks have to set interest rates in the first place? Isn’t that something a free market place can do?

T.P.: In a fiat money system, money is produced through bank credit expansion. On the one hand, this is a fairly profitable business for the fiat money producer – that is for government and the banking industry. One the other hand, controlling the interest rate offers money producers and their beneficiaries a strong grip on the economy, that is it offers power on a grandest scale. This is why central banks (and their beneficiaries) want to set interest in the first place.

L.S.: What do you think about the LIBOR scandal?

T.P.: If the public was somewhat better informed, it would realize that the interest rate scandal that really matters is what central banks’ manipulation of market interest rates. By doing so, central banks not only cause economic problems on the grandest scale, but also enriching some at the expense many others. You may want to dig into what happened in the calculation of Libor. But this issue is really dwarfed by the evils caused by central banks manipulating market rates.

L.S.: Do you think the world of fiat money will go under?

T.P.: Well, what do you mean by “going under”? Do you mean that fiat money’s purchasing power will decline by, say, 90%? Or do you mean that fiat money will be destroyed as it happened in 1923? In both cases you could very well say that fiat money has gone under … . Now, this is what I think: Fiat currencies will be heavily debased, and some of them will go under.

L.S.: You’re an advocate of “free banking” with private money. What’s that?

T.P.: It basically means: leave monetary issues to the free market, like the shoe business, the car business, or the fashion business. Get government out of the money business, and let the free market decide what kind of money people would like to hold. Don’t limit peoples’ choices. Don’t restrict people in supplying money. Don’t provide certain people with government granted privileges. The free choice of currency is accompanied with entrepreneurs being free to enter and exit the money warehouse business and the credit business.

L.S.: What are the advantages of such a system?

T.P.: To answer this question we have to talk about the advantages of free banking over the current arrangement, that is a government sponsored fiat money regime. In a true free banking system, you wouldn’t have chronically inflationary money. You wouldn’t have money that benefits a few at the expense of many others. You wouldn’t have boom-and/bust cycles, which are so harmful for societies. And you would have the yoke of eventual over-indebtedness, with all its economic and political problems.

L.S.: What’s good money?

T.P.: Good money is money produced in the free market, money that is produced in full compliance with the principles of the free market. The latter basically means unconditional compliance with individual property rights. That said, good money means that money holders are free to decide which kind of money they would like to hold. It also means that there is full freedom of the suppliers of money to offer their monies. It is the demand for money that decides what will be money.

L.S.: Is gold money?

T.P.: I would say so, gold is indeed the ultimate means of payment.

L.S.: Is the gold market a free market?

T.P.: A free market means that there is a free supply of and a free demand for gold, that determines its purchasing power. However, government sponsored central banks also play a role in affecting the supply of and demand for gold through, for instance, lease transactions. In that sense market conditions are influenced, and at times greatly so, by government interference – and therefore do not correspond with the principles guiding a free market.

L.S.: What do you see as the end scenario for the euro?

T.P.: Well, one could image several “end scenarios” for the euro. In the “end scenario” euro denominated savings deposits and bonds denominated in euro might become worthless, I am afraid, be it because of ECB embarks upon money printing, be it because of a currency reform, or because of a disorderly blow up of the single currency area.

L.S.: Thank you very much for taking your time, Prof Polleit!

INFORMATION: Thorsten Polleit holds a diploma in economics and was awarded a doctorate in 1996 at the University of Muenster, Germany. In 2000, he founded “ECB Observer,” an independent ECB watcher group (www.ecb-observer.com). He is also a co-founder of the research network “Research on Money in the Economy (ROME)”( http://www.rome-net.org/html/home.html), and co-founder / partner of Polleit & Riechert Investment Management LLP (http://www.polleit-riechert.com/ . In 2003, he was appointed Professor for Economics at the Frankfurt School of Finance & Management. He also lectures at the universities of Duisburg-Essen and Bayreuth. Moreover, he is an Adjunct Scholar at the Ludwig von Mises Institute in Auburn, Alabama, USA.

His latest books are “Monetary Economics in Global Financial Markets” (2009, co-authored with Prof. Dr. Ansgar Belke) and “Geldreform” (2010, co-authored with Dr. Michael von Prollius). His research interests are monetary economics, capital market theory, and the Austrian School of Economics. A publication list can be found at his personal web site here: http://www.thorsten-polleit.com/.

Posted in Capitalism | Leave a comment

Another Self-serving Call for Monetary Debasement

Re: Aluminum producer says the high euro is crippling growth

windowOne should not be surprised that heads of exporting industries desire that the monetary authorities debase the currency, because these exporters will be able to sell more product.  So, you may ask, what’s wrong with that?  The answer is that such a policy is a rather complicated and hidden mechanism whereby wealth is transferred from the ordinary citizens of the weaken currency to the exporters’ customers.  There is no way that one country can force another to pay for its internal growth.  Oh, be assured that the exporting industries will show that they increased sales and may even add employment, but the funding for such expansion is provided by a transfer of wealth from the rest of the country via monetary debasement.  The exporters’ customers receive more of the country’s currency per unit of their own currency, so their purchases appear to be cheaper…and, for the exporters’ customers it is cheaper…for awhile.  But over time the monetary expansion will cause prices to rise in the exporters’ country, wiping out any cost benefit that the exporters may have gained.  Then the exporters will be right back writing articles about the currency being too expensive and the need for another round of monetary debasement.  This is the state of affairs in the entire world at the moment, with monetary authorities everywhere falling over themselves trying to cheapen their currencies faster than all other countries.  Madness!  Patrick Barron

Posted in News/ Lessons | Leave a comment

How to think about “Greece’s Great Fire Sale”

Re: Greece’s great fire sale

lunchOne way to look at this phenomenon of Greece’s government selling off the country is that this is the mechanism by which Greece financed its bloated bureaucracy and welfare state.  Greek citizens are consuming their country bit by bit so they can retire early on state-provided pensions with all sorts of welfare benefits, too…all administered by an inefficient and overpaid bureaucracy.  Becoming a member of the eurozone helped conceal the ill effects for many years and speed along the process. Here’s my advice for the Greeks, which applies equally well to all other members of the EU, plus America, plus Japan:

Time to get back to work, reduce one’s standard of living, and start saving.

Patrick Barron

Posted in News/ Lessons | Leave a comment

IMF reports shows Germans supporting wealthier nations

Land office

Study on Wealth Fuels Euro Crisis Debate in Germany

This study by the IMF was reported in the influential German news magazine, Der Spiegel, and has created quite a stir.  It shows that both Greeks and Spaniards are wealthier than Germans, yet Germany is expected to bail them out of their financial difficulties.  A major portion of the Greek and Spanish wealth is held in land; whereas, the Germans hold less of their wealth in land.  Nevertheless, why shouldn’t the Greeks and Spaniards liquidate their land holdings before going hat in hand to Germans for financial assistance?  This situation is analogous to the financial condition of the US. The US runs a huge budget deficit each year, yet refuses to sell its vast land holding in the western part of the US and Alaska.  These areas contain huge amounts of valuable natural resources that the US refuses to allow commercial companies to exploit.  Patrick Barron

Posted in News/ Lessons | Leave a comment

University of Iowa student Trevor Polk on the welfare-warfare state in one North Korean agenda

Songun-500x281Being a part of Austrian circles, you hear a lot of chatter about the bloated welfare-warfare state – a conflation of the expansionary agendas of the neocons and the lefties. And that’s exactly how I’ve always distinguished it. Two separate agendas, one state. When I heard about the recent North Korea scare, I nearly peed my pants chuckling about the irony. Two separate states, one agenda!
Am I the only laughing in the room? Let me explain why I have tears.
Here is “beggar state” North Korea (thanks Ted Carpenter, senior fellow for defense and foreign policy studies at the Cato Institute, for that acute title), coming off the year anniversary of their failed satellite launch, browbeating with hollow threats of “cutting edge” nuclear weapons, and now the hawks want the United States to strut their stuff and show some muscle. Senator James Inhofe recently proclaimed that the United States needed to have in place “right now” a plan for preemptive strike on North Korea if the mess went south.
Japan and South Korea certainly have reason to be apprehensive, but why all the buzz here when a North Korean assault on the United States would be unlikely and suicidal? Where is the significance to Americans?
The United States, years after World War II, the Korean War, and the Cold War absurdly upkeeps military bases within South Korean borders. Let the free riding on United States tax payers keep on rolling! The consequence? United States entanglement in an irrelevant North Korean chest pounding party, leaving Americans afraid and turning to Uncle Sam for further involvement and intervention. Support for the United States police state lives another day. The bells of imperialism resound evermore!
So here’s what’s a hoot to me: the U.S. welfare state has swelled to the far reaches of South Korea with transfer payments in the form of a big, fat warfare-state. Two separate states, one agenda (big gov), and all of the unintended consequences.
Trevor Polk, University of Iowa
Posted in News/ Lessons | Leave a comment

The False Choice in Europe Between Austerity and Growth

By Patrick Barron

headThe debate in Europe over what policies the debt ridden countries should pursue is being falsely constructed as a choice between austerity and growth.  Not only is there another, more appropriate alternative, but these two alternatives themselves are not properly defined.  The misconstruction of the euro has led to unsustainable debt levels.  The simplistic alternatives offered are (1) cutting spending and raising taxes–the austerity option–and (2) even more monetary stimulus–the growth option–which promises that even more credit will stimulate an economy to higher levels of production from which debt can be amortized.  These alternatives emerge out of a failure to understand why the countries are in debt in the first place and why previous credit injections have failed to ignite increased production.  Therefore, if the problem is not understood, the solutions offered are likely to fail.

The Real Cause of the Euro Debt Crisis

The establishment of the euro led to lower interest rates, as there were explicit and even some implicit statements that no member of the euro zone would be allowed to default.  This led to a classic case of moral hazard, whereby borrowers assume increased risk due to the promise that losses will be born either wholly or partially by others.  The increased debt was supported by euro expansion by the European Central  Bank, which monetized sovereign debt in a backdoor method.  But rather than lead to increased profitable production, the profits of which could amortize the debt, the increased debt led to unprofitable, speculative investment and expansion of welfare benefits.  There were no profits for debt amortization.

The original sin was a scramble for more euros, a classic tragedy-of-the-commons, whereby the debt guarantee created an unprotected common resource–the euro–for all to plunder to extinction.  This fiat money credit expansion led to misallocation of resources that caused disequilibria in the structure of production.  There were no real savings by real people, who preferred to sacrifice in the present for greater economic benefits in the future.  In other words, individual time preference–the relationship of one’s preference for present vs. future goods–remained unchanged.  This led to the economic crisis, whereby rising prices in consumer goods forced the abandonment of longer term projects due to lack of adequate resources for their profitable completion.

The commonly stated alternative solutions, austerity or stimulus, do not address the source of the problem.  Austerity proponents offer increased taxation and reduced government spending to reduce the deficit.  This is half right as far as it goes.  Government spending must be cut, since this reduces the drain on resources from productive, private, and profitable uses to non-productive, unprofitable, government ones.  But raising taxes diverts these resources right back to government.  Growth advocates want even more credit expansion, which amounts to little more than a denial of cause and effect and a belief that more of the same somehow will produce a different result.

Indeed, growth is the key to solving the euro debt crisis, but it will not be the result of increased credit expansion.  The first order of business must be to stop credit expansion in order to end the misallocation of resources that disrupts the structure of production and leads, instead, to economic contraction.  This  problem must be solved first, either through a rededication of the ECB to monetary stability (very unlikely, given the common ownership of the bank by irresponsible governments with a vested interest in monetary expansion) or through reinstating national currencies tied to gold.  Then the governments must remove the barriers that stifle the components to real economic growth.

The Three Components of Real Economic Growth

Real economic growth derives from the application of (1)accumulated capital to (2) modern technology by innovative (3) management techniques.  Technology, capital, and good management lead to greater productivity of labor, the only source of a higher standard of living.  Of the three, technology is the easiest to acquire.  But entrepreneurs need the freedom to use it in innovative ways, not restricted by laws that favor entrenched unions or by other so-call labor friendly regulations.  The least understood component is capital.  Capital is accumulated from savings, not from fiat credit expansion.  Real people reduce their present consumption and invest their savings for a better future.  Anything that inhibits savings must be eliminated.  The interest rate must not be suppressed, so that savings is encouraged and rewarded.  Government spending must be reduced so that taxation can be reduced.  All manner of regulations on business must be eliminated.  Property rights must be strengthened, so that investors will commit to long term projects and not fear future government predation.  Entrepreneurs must have the freedom to buy goods and labor services from anywhere in the world with no tariffs or quota restrictions.  With these liberal policies in place, the economy can grow and eventually help pay off the government debt mountain.

Conclusion

The governments of Europe have spent beyond their means and have tried to bridge the gap with increased debt.  The promise that the debt can be amortized through further monetary stimulus has failed, because it led to capital misallocation and lower, not higher, economic output.  Nor should governments raise taxes in order to balance their books, as championed by the austerity advocates.  The real solution is an abandonment of monetary and fiscal interventions to be replaced with sound money and laissez faire capitalism in all its forms.  There is no path to prosperity other than profitable work and thrift, which will lead to capital accumulation and greater productivity out of which the debt mountain can be honorably extinguished.  The sooner the countries of Europe begin this process, the sooner they will return to real, sustainable growth.

Posted in News/ Lessons | Leave a comment

Godfrey Bloom calls for prosecution of central bankers

DoclGodfrey Bloom is a member of the European Parliament, representing Yorkshire and North Lincolnshire.  He calls for a financial crimes court, similar to the Nuremberg Trials, for central bankers and their lackeys.

Posted in News/ Lessons | Leave a comment