Olduvaiblog: Musings on the coming collapse

Home » Posts tagged 'Economic policy'

Tag Archives: Economic policy

Central Bankers: Inflation is God’s Work – Ludwig von Mises Institute Canada

Central Bankers: Inflation is God’s Work – Ludwig von Mises Institute Canada.

Friday, February 21st, 2014 by  posted in Uncategorized.

Inflation is always somebody else’s fault. Ludwig von Mises called out finger pointing central bankers and politicians decades ago in his book, Economic Policy. “The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.”

In the fall of 2007, Gideon Gono blamed his country’s inflation rate of 4,500 percent on “the differences that Zimbabwe has had with its former colonial master, the UK,” and added, “we are busy laying the foundations for a serious deceleration programme.” Deceleration? A year later inflation was 231 million percent.

Money printing didn’t have anything to do with it according to the central banker. Droughts began to be more frequent in the 2000’s and Gono believed  ”there is a positive correlation between the drought and inflation.” Dry weather, he told New African magazine, has, “got a serious bearing on our inflation level.”

In Gono’s dilluded mind,inflation was about the weather, lack of support from other nations, and political sanctions. He had nothing to do with the hyperinflation in his country. “No other [central-bank] governor has had to deal with the kind of inflation levels that I deal with,” Gono told Newsweek. “[The people at] my bank [are] at the cutting edge of the country.”

These days in Argentina its not the weather and political sanctions causing prices to rise, its businesses engaging in commerce. President Cristina Fernández de Kirchner is urging her people to work “elbow-to-elbow” with her government to stop companies from looting the people with high prices. Two weeks ago the government devalued the peso by 20 percent but it is private businesses that are stealing from working people with price increases.

Posters of retail executives have been plastered around Buenos Aires. For instance, Wal-Mart Argentina’s president Horacio Barbeito has his mug on a poster with the caption, “Get to know them, these are the people who steal your salary.”

Kirchner’s cabinet chief Jorge Capitanich calls economists who point to government policies as inflation’s culprit “undercover agents.”  He implies that these economists are the tools of business. “Argentines should know that independent, objective economists don’t exist,” Capitanich claims. “I want to say emphatically that when unscrupulous businessmen raise prices it has absolutely nothing to do with macroeconomic variables.”

In 2012 the president of Argentina’s central bank, Yale-educated Mercedes Marcó del Pont, said in an interview, “it is totally false to say that printing more money generates inflation, price increases are generated by other phenomena like supply and external sector’s behaviour.”

So while its central bank prints, the Kirchner government has enlisted the citizenry to work undercover in the fight against rising prices. A free smartphone application is encouraging Argentines to be citizen-cops while they shop.

The app is a bigger hit than “Candy Crush” and “Instagram.” President Kirchner wants “people to feel empowered when they shop.” And, they do. “You can go checking the prices,” marveled Analia Becherini, who learned of the app on Twitter. “You don’t even have to make any phone calls. If you want to file a complaint, you can do it online, in real time.”

“Argentina’s government blames escalating inflation on speculators and greedy businesses,” reports Paul Byrne for the Associated Press, “and has pressured leading supermarket chains to keep selling more than 80 key products at fixed prices.”

However, businesses aren’t eager to lose money selling goods. Fernando Aguirre told Chris Martenson that with price inflation running rampant, “Lots of stores don’t want to be selling stuff until they get updated prices. Suppliers holding on, waiting to see how things go, which is something that we are familiar with because that happened back in 2001 when everything went down as we know it did.”

In his Peak Prosperity podcast with Aguirre, Martenson makes the ironic point that when governments print excessive amounts of money, goods disappear from store shelves. In a hyper-inflation the demand for money drops to zero as people buy whatever they can get their hands on. Inflation destroys the calculus of profit and loss, destroying business, and undoing the division of labor.

Aguirre reinforced Martenson’s point. Describing shelves as “halfway empty,” in Argentina he said,  “The government is always trying to muscle its way through these kind of problems, just trying to force companies to stock back products and such, but they just keep holding on. For example, gas has gone up 12% these last few days. And there is really nothing they can do about it. If they don’t increase prices, companies just are not willing to sell. It is a pretty tricky situation to be in.”

Tricky indeed.  “It would be a serious blunder to neglect the fact that inflation also generates forces which tend toward capital consumption,” Mises wrote in Human Action. “One of its consequences is that it falsifies economic calculation and accounting. It produces the phenomenon of illusory or apparent profits.”

Inflation is also rampant at the other end of South America.  Venezuela inflations is clocking in at 56 percent. Comparing the two countries, Leonardo Vera, a Caracas-based economist told the FT, “Argentina still has some ammunition to fight the current situation, while Venezuela is running out of bullets.”

Fast money growth has also led to shortages such as “newsprint to car parts and ceremonial wine to celebrate mass,” reports the FT.

Venezuelan president Nicolás Maduro is using the government’s heavy hand to introduce a law capping company profits at 30 percent. Heavy prison sentences await anyone found hoarding, overcharging, or “destabilising the economy.”  Hundreds of inspectors have been deployed to enforce the mandates.

The results will be predictable. “With every new control, the parallel, or black market, dollar will keep going up, and so will the price and scarcity of milk, oil, and toilet paper,” says Humberto García, an economist with the Central University of Venezuela.

Don’t expect the printing to stop any time soon. Central bankers believe they are doing God’s work. “To ensure that my people survive, I had to print money,” Gideon Gono toldNewsweek. “I found myself doing extraordinary things that aren’t in the textbooks. Then the IMF asked the U.S. to please print money. The whole world is now practicing what they have been saying I should not. I decided that God had been on my side and had come to vindicate me.”

It seems disasters wrought by inflationary policies must be experienced again and again, as “Inflation is the true opium of the people,” Mises explained, “administered to them by anticapitalist governments.”

The practice of central banking is the same around the world. The only difference is in degree. Before he destroyed the Zimbabwean dollar Gono looked to America for inspiration. “Look at the bridges across the many rivers in New York and elsewhere,” Gono told New African, “and the other infrastructure in the country that were built with high budget deficits.”

The Zimbabwe, Argentina, and Venezuela inflations may seem to be something that happens to somebody else. But Mr. Aguirre makes a point when asked about 2001, when banks in Argentina, after a bank holiday, converted dollar accounts into the same number of pesos. A massive theft.

“Those banks that did that are the same banks that are found all over the world,” Aguirre says. “They are not like strange South American, Argentinean banks–they are the same banks. If they are willing to steal from people in one place, don’t be surprised if they are willing to do it in other places as well.”

 

Douglas E. French is a Director of the Ludwig von Mises Institute of Canada. Additionally, he writes for Casey Research and is the author of three books; Early Speculative Bubbles and Increases in the Supply of Money, The Failure of Common Knowledge, and Walk Away: The Rise and Fall of the Home-Owenrship Myth. French is the former president of the Ludwig von Mises Institute in Auburn, Alabama.

Joseph E. Stiglitz argues that bad policies in rich countries, not economic inevitability, have caused most people’s standard of living to decline. – Project Syndicate

Joseph E. Stiglitz argues that bad policies in rich countries, not economic inevitability, have caused most people’s standard of living to decline. – Project Syndicate.

FEB 6, 2014 6

Stagnation by Design

NEW YORK – Soon after the global financial crisis erupted in 2008, I warned that unless the right policies were adopted, Japanese-style malaise – slow growth and near-stagnant incomes for years to come – could set in. While leaders on both sides of the Atlantic claimed that they had learned the lessons of Japan, they promptly proceeded to repeat some of the same mistakes. Now, even a key former United States official, the economist Larry Summers, is warning of secular stagnation.

The basic point that I raised a half-decade ago was that, in a fundamental sense, the US economy was sick even before the crisis: it was only an asset-price bubble, created through lax regulation and low interest rates, that had made the economy seem robust. Beneath the surface, numerous problems were festering: growing inequality; an unmet need for structural reform (moving from a manufacturing-based economy to services and adapting to changing global comparative advantages); persistent global imbalances; and a financial system more attuned to speculating than to making investments that would create jobs, increase productivity, and redeploy surpluses to maximize social returns.

Policymakers’ response to the crisis failed to address these issues; worse, it exacerbated some of them and created new ones – and not just in the US. The result has been increased indebtedness in many countries, as the collapse of GDP undermined government revenues. Moreover, underinvestment in both the public and private sector has created a generation of young people who have spent years idle and increasingly alienated at a point in their lives when they should have been honing their skills and increasing their productivity.

On both sides of the Atlantic, GDP is likely to grow considerably faster this year than in 2013. But, before leaders who embraced austerity policies open the champagne and toast themselves, they should examine where we are and consider the near-irreparable damage that these policies have caused.

Every downturn eventually comes to an end. The mark of a good policy is that it succeeds in making the downturn shallower and shorter than it otherwise would have been. The mark of the austerity policies that many governments embraced is that they made the downturn far deeper and longer than was necessary, with long-lasting consequences.

Real (inflation-adjusted) GDP per capita is lower in most of the North Atlantic than it was in 2007; in Greece, the economy has shrunk by an estimated 23%. Germany, the top-performing European country, has recorded miserly 0.7% average annual growth over the last six years. The US economy is still roughly 15% smaller than it would have been had growth continued even on the moderate pre-crisis trajectory.

But even these numbers do not tell the full story of how bad things are, because GDP is not a good measure of success. Far more relevant is what is happening to household incomes. Median real income in the US is below its level in 1989, a quarter-century ago; median income for full-time male workers is lower now than it was more than 40 years ago.

Some, like the economist Robert Gordon, have suggested that we should adjust to a new reality in which long-term productivity growth will be significantly below what it has been over the past century. Given economists’ miserable record – reflected in the run-up to the crisis – for even three-year predictions, no one should have much confidence in a crystal ball that forecasts decades into the future. But this much seems clear: unless government policies change, we are in for a long period of disappointment.

Markets are not self-correcting. The underlying fundamental problems that I outlined earlier could get worse – and many are. Inequality leads to weak demand; widening inequality weakens demand even more; and, in most countries, including the US, the crisis has only worsened inequality.

The trade surpluses of northern Europe have increased, even as China’s have moderated. Most important, markets have never been very good at achieving structural transformations quickly on their own; the transition from agriculture to manufacturing, for example, was anything but smooth; on the contrary, it was accompanied by significant social dislocation and the Great Depression.

This time is no different, but in some ways it could be worse: the sectors that should be growing, reflecting the needs and desires of citizens, are services like education and health, which traditionally have been publicly financed, and for good reason. But, rather than government facilitating the transition, austerity is inhibiting it.

Malaise is better than a recession, and a recession is better than a depression. But the difficulties that we are facing now are not the result of the inexorable laws of economics, to which we simply must adjust, as we would to a natural disaster, like an earthquake or tsunami. They are not even a kind of penance that we have to pay for past sins – though, to be sure, the neoliberal policies that have prevailed for the past three decades have much to do with our current predicament.

Instead, our current difficulties are the result of flawed policies. There are alternatives. But we will not find them in the self-satisfied complacency of the elites, whose incomes and stock portfolios are once again soaring. Only some people, it seems, must adjust to a permanently lower standard of living. Unfortunately, those people happen to be most people.

Read more at http://www.project-syndicate.org/commentary/joseph-e–stiglitz-argues-that-bad-policies-in-rich-countries–not-economic-inevitability–have-caused-most-people-s-standard-of-living-to-decline#huJ4BlicZg9e2A6X.99

Real wages have been falling for longest period for at least 50 years, ONS says | Business | theguardian.com

Real wages have been falling for longest period for at least 50 years, ONS says | Business | theguardian.com.

Real wages have been falling by 2.2% a year in the longest sustained period of falling real wages in the UK on record
Average earnings growth
Average earnings growth, with RPI inflation stripped out. Source: ONS

Real wages have been falling consistently since 2010, the longest period for 50 years, according to the Office for National Statistics, which said that low productivity growth seems to be pushing wages down.

The ONS study followed a report by the Institute for Fiscal Studies (IFS)which said that while the fall in household incomes has now probably come to a halt, living standards are still “dramatically” down on what they were before the global financial crisis hit in 2008. The IFS analysis suggested “there is little reason to expect a strong recovery in living standards over the next few years”. According to the Office for Budget Responsibility, real earnings are not expected to return to their 2009-10 levels until 2018-19.

The government said last week that most British workers have seen their take-home pay rise in real terms in the past year.

Jobs website Adzuna showed in a report that salaries dropped to a 16-month low in December, equal to a real-term drop in wages of £2,136. In the year to December, salaries fell in every region of the UK aside from Wales, where salaries have risen 4.1% over the 12 months to December. Andrew Hunter, co-founder of Adzuna, said: “The recovery in the jobs market is far from over. The great news is unemployment has fallen at record levels, but wages are still stuck in a post-recession hangover – while the backlog of employees waiting for the right time to change jobs is clearing, salary levels are yet to catch up.”

War on Democracy: Spain and Japan Move to Criminalize Protests | A Lightning War for Liberty

War on Democracy: Spain and Japan Move to Criminalize Protests | A Lightning War for Liberty.

As might be expected as political and economic policy failures pile up and citizens become increasingly mad, the status quo is becoming increasingly authoritarian (recall blogger “Mish” was just fined 8,000 euros for a blog post).

In the latest disturbing news from a desperate power structure, the conservative government in Spain has passed an Orwellian bill titled the Citizens’ Security Law, which allows for fines of up to 600,000 euros ($816,000) for “unauthorized” street protests, and a 30,000 fine for merely having signs with “offensive” slogans against Spain or for wearing a mask.

This law is a perfect example of the increasing neo-feudalism being implemented across the globe by a corrupt, decadent and depraved status quo. Such laws must be immediately resisted or they will only get worse, much worse. It is quite obvious what the power structure in Spain in trying to do. It is putting into place an egregious punishment framework that could bankrupt a person by merely protesting. Such a threat is intended to make people not even consider their rights as human beings to express grievances to a crony government.

Instead of eye for an eye, it is like 25 eyes and a limb for an eye. If this does’t tell the Spanish people all they need to know about their government I don’t know what will. Below are some excerpts from a Reuters story covering the law:

(Reuters) – Spain’s conservative government agreed on Friday to toughen penalties for unauthorized street protests up to a possible 600,000 euro ($816,000) fine, a crackdown that belies the peaceful record of the anti-austerity protests of recent years.

Street protests and strikes have became increasingly frequent in recent years following huge cuts to education and health spending aimed at shrinking Spain’s public deficit to adhere to European Union demands.

But in contrast to Greece and elsewhere, where many similar protests have turned violent, Spain’s have remained largely peaceful, despite unemployment of 26 percent, rising poverty, and changes in labor laws that make firing easier.

Among other measures, protesters who cover their faces at demonstrations could be fined up to 30,000 euros while “offensive” slogans against Spain or its regions could reap a similar sanction.

The government also plans a new law restricting labor protests.

“This law … attempts to criminalize the act of protest,” said United Left lawmaker Gaspar Llamazares, questioning whether it complied with Spain’s constitution. “The government is trying to turn its political opponents into delinquents.”

 ”Compare events in Spain with those of other countries around us,” wrote conservative columnist Jose Antonio Zarzalejos on the website El Confidencial. “This security law … will add the stigma of authoritarianism to the political failure of the PP.”

It’s not just Spain though. This sort of panic attack from desperate members of the status quo is popping up elsewhere. Japan is another example, and over the weekend I read that Liberal Democratic Party Secretary-General Shigeru Ishiba compared demonstrations to “acts of terrorism.” From the Japan Times:

Citizens demonstrating against the controversial state secrets bill are committing “an act terrorism,” according to Liberal Democratic Party Secretary-General Shigeru Ishiba.

In a blog post Friday, he wrote: “If you want to realize your ideas and principles, you should follow the democratic principles, by gaining as much support as you can. I think the strategy of merely shouting one’s opinions at the top of one’s lungs is not so fundamentally different from an act of terrorism.”

My take is that people worldwide will not stand for such nonsense. Increasingly citizens have very little to lose and if they all say no together, there is not much the state can do. Just look at how Ukrainians responded to a ban on protests. Hundreds of thousands of them filled the streets in defiance. Below is a video of just one of the many incredible street scenes from over the weekend. In this case we see demonstrators using a tractor to break police barricades.

Interesting times indeed.

In Liberty,
Mike

 

The World Complex: Economic policy and the price of gold

The World Complex: Economic policy and the price of gold. (source)

Economic policy and the price of gold

Then the rumour circulated that at night the Fed Governors neglected their sacrifices and prayers. A great depression seized everyone. One day the President said to the Fed Chief, “When will we celebrate the return of normal unemployment rates? I would like to make a journey and return in time for the feast. How long is it until the day of the feast?” The Fed Chief was embarrassed. It had been several days since she had looked at the moon and the stars. She had learned nothing more about their courses. The Fed Chief said, “Wait one more day and I will tell you.” The President said, “Thank you. Tomorrow I will come to see you again.”

The Fed Chief gathered the Fed Governors together and asked, “Which of you lately has observed the course of the stars?” None of Fed Governors answered, because they had all stayed to listen to the stories of Fiat-do-lar. The Fed Chief asked again, “Hasn’t even one of you observed the course of the stars and the position of the moon?”

— modified from The Ruin of Kasch

Economics isn’t a science. It is a mistake to think it would be so. Science does not have schools. Only philosophies have schools.

The difference between a science and a philosophy is the difference between seeking truth while honestly admitting you don’t know it and declaring that truth is something you define.

Ideally science is described by working hypotheses, which are constantly tested, and if falsified, replaced (unless pride is involved or money). In philosophy, you begin with axioms, which are untestable statements that are defined as being true. Each school of economics has its own set of axioms. From axioms, you apply rules of inference (logic) in order to generate new statements, which are also true. These generated statements are called theorems. Thus all theorems are true (within the school of philosophy) but not necessarily applicable to the real world!

In the early days of geology, there were competing schools: the Neptunists and thePlutonists being two that come to mind immediately. The Neptunists believed that all rocks formed in the sea, either as sediments, or by crystallization as salts (this was their central axiom). The Plutonists believed that all rocks formed from magma (as their central axiom). Debates between adherents of the two schools were rowdy, fruitless affairs, because the nature of philosophy is that it cannot be overturned by mere observations.

The distinction between science and philosophy with respect to economics is important because economists have an annoying ability to set policy–policy that affects the quality of your lives. It probably doesn’t matter much to you whether some geologists can’t decide among themselves whether a particular rock formed in the sea or on a volcano (or even on a volcano in the sea). But it does make a difference if some Fed official acts on her belief thatbankrupting the elderly eliminating interest on savings is a cure for unemployment.

Application of economic policy follows the axiomatic approach. Some high priest of an obscure caste

Recently, The World Complex presented the inverse correlation between the unemployment rate in the UK and its “confidence ratio” (dollar value of public debt divided by the dollar value of gold holdings). The idea was that a high ratio could only be supported if bondholders had high confidence that the debt would be properly serviced (forget about repayment). The flip side is that a high ratio could be interpreted as a measure of a country’s ruin.

In the article I had suggested that government economists might cheer a decline in the price of gold.

So today, we look at the same relationship for the United States.

Once again we see a strong inverse relationship between confidence ratio and unemployment.

One of the goals set out for the Federal Reserve is to manage the unemployment rate. Looking at this chart, the answer is clear–to reduce unemployment, increase the confidence. Confidence (as defined above) can be increased in three ways: 1) raise debt, 2) sell gold, 3) lower the gold price.

Of course we all know that correlation does not imply causation. But it doesn’t have to in order to impact on Fed policy. That’s the beauty of politics–reality and truth don’t really matter when there are elections to be won.

There was a comment that perhaps I have too much time on my hands. I’m not sure if the intent was to say that only someone with a lot of time on his hands would notice this relationship. The economists at the Fed have far more PhD’s and time on their hands than does this corner of webspace. So I’m sure they have already seen this.

So the question becomes–even if no causation can be established, can it be used to set policy? And what policies will be followed?

Raising debt is the old standby–but as we see in the clarified chart below, it doesn’t seem to be working anymore.

Since the 2001 peak (on September 10, perhaps?), the increasing debt has been more than compensated by the rising price of gold. Don’t be fooled into thinking the US is sinking into solvency–it is creating debt faster than any time in history. But the price of gold has been rising faster still (although we shall see about 2013).

It appears that policy #2, the sale of gold, is politically untenable. Officially at least. Selling gold is for lesser countries. So that leaves option #3–hope the price of gold falls. Perhaps they do more than hope.

. . . at first the story of Fiat-do-lar was like hashish when it makes wakefulness happy. Then the story was like hashish when it makes dreams delirious. Toward morning, Fiat-do-lar raised his voice. As the Nile rises in the hearts of men, so his words swelled. To some, his words brought serenity; to others, they were as terrifying as the appearance of Azrael, the angel of death. Happiness filled the spirits of some, horror the hearts of others. The closer morning came, the mightier that voice grew and the more it resounded within the people. The hearts of men rose up against one another like clouds in the sky on a stormy night. Flashes of wrath met thunderbolts of fury. When the sun rose, the tale of Fiat-do-lar reached its end. Ineffable wonder filled the confused minds of the people. For when the living looked around, their gaze fell upon the Fed Chief and Governors. They were stretched out on the ground, dead.

— modified from The Ruin of Kasch

 

Why Policy Has Failed | Zero Hedge

Why Policy Has Failed | Zero Hedge.

 

%d bloggers like this: