Radio Free Market

Re: Button-Down Central Bank Bets It All

Dear Sirs:
Your excellent report of the unprecedented action by the Swiss National Bank to drive its currency lower is an example of the trap in which all the world’s central banks have fallen.  Their false paradigm of Keynesian and Monetarist monetary theory blinds them to reality.  In their false paradigm the weaker the currency the better, because a weak currency spurs exports.  But this shallow view fails to see the underlying reality that spurring exports with cheaper money is paid not by one’s trading partners but by one’s own citizens via higher prices and a lower standard of living.  It is an internal transfer of wealth.  Furthermore, any export gains that accrue as a result of weakening the currency will be short lived, because the exporters’ factors of production will increase as inflation ravages the entire country.  At that point exports will fall and the option will appear to be that another round of money printing is required.  If this process is not halted, the currency will collapse.  Since Switzerland is a relatively small country, the likelihood of its currency being the first to collapse is very great.  Patrick Barron

Re: Consequences in a Fiscal Plan: Municipalities Fight Proposals to Tax Their Bond Interest

Dear Sirs:
There is another objection to taxing municipal bond interest that goes beyond one of class warfare (“the government forgoes about $32 billion a year in taxes”) and stands upon the principle of federalism, a check upon the power of government every bit as important as the separation of powers.  Or is this principle to be thrown aside, as have so many others, as a barrier to the desires of the all-powerful federal government? Patrick Barrron

From Open Europe news summary of December 19, 2012 (my highlight in red):

Berlusconi: Italy will be forced to leave the euro unless ECB starts printing money In an interview on Italian public broadcaster Rai Uno yesterday, Silvio Berlusconi said, “Either Germany understands that the ECB must act as a real central bank, and therefore print money, or unfortunately we will be forced to leave the euro and return to our currency.” Meanwhile, Berlusconi’s party has asked to postpone the Italian general elections “by one or two weeks” – suggesting either 24 February or 3 March as possible dates. Separately, La Stampa reports that over the weekend, Mario Monti could officially endorse a group of centre parties which have pledged to continue with his agenda, rather than running himself. ASCA Il Messaggero Corriere della Sera Corriere della Sera 2 Repubblica Repubblica 2 Rai Uno AGI Libero La Stampa Times: Emmott

So there we have it–the real roll of a central bank is to print money.  Patrick Barron

From Open Europe news summary of December 19, 2012:

Cyprus announced yesterday that it would not default on any payments as the pension funds for the public electricity and telecoms firms as well as the Ports Authority have agreed to provide the state with a cash injection to meet costs in December. Kathimerini

For many countries, robbing pension funds in order to avoid default will be more palatable than practicing sound budget discipline.  Patrick Barron

From today’s Open Europe news summary:

Dutch daily Trouw has seen leaked European Commission and Court of Auditors documents it believes shows that “the Czech Republic is committing large scale fraud with EU subsidies”, while “the European Court of Auditors has concluded in May that the Czech authorities have been lying to Brussels in a systemic way”.      Trouw Elsevier

Common EU subsidies have created a “tragedy of the commons”, whereby all EU members are encouraged to plunder the commonly owned resource (in this case “subsidies”).  Charges of fraudulently trying to increase one’s plunder simply ignore the power of economic law.  The subsidies are there for the taking and, I would suspect, national governments encourage their bureaucrats to find creative ways to get more plunder.  “Lying to Brussels in a systemic way” has been a common occurrence for years.  For example, Greece was admitted to the EU after it falsely claimed its budget deficits met EU rules.  Patrick Barron

Re: How Big Deficits Became the Norm