Central banks: Running out of ideas and road

This will end badly

by DETLEV SCHLICHTER

On page two of today’s Wall Street Journal Europe you will find the result of a readers’ poll from last Friday: Question: Will the ECB’s rate cut help restore confidence in the bloc’s economy? Answer: 81 percent of readers say no, 19 percent yes.

Last week’s round of global monetary easing – another ECB rate cut, another round of debt monetization from the BoE, another rate cut from the People’s Printing Press of China – is, of course, more of the same old same old. It has a discernible touch of desperation about it and this is not lost on the public. Monetary policy is ineffective. Or, to be precise, it is only effective in delaying a bit further the much-needed liquidation of the massive imbalances that previous monetary policy helped create, and thereby is contributing, on the margin, towards making the inevitable endgame even more painful. It is counterproductive and destructive. It is certainly not restoring confidence.

Yet, many commentators and many of the establishment economists out there are not giving up. If only the ECB had cut by 0.5 percent instead of 0.25 percent, the equity market could have responded more optimistically. Maybe this would then have restored confidence? — Really? We are now below 1 percent in official interest rates, having cut by a full 400 basis points since the crisis started. How realistic is it to assume that another 0.25 percent is the difference between confidence-enhancing monetary stimulus and dread-inducing disappointment?

The Folly of Nation Building

Imperial Illusions

By AMITAI ETZIONI

THERE IS a growing consensus that the United States can’t afford another war, or even a major armed humanitarian intervention. But in reality, the cost of war itself is not the critical issue. It is the nation building following many wars that drives up the costs.

For every war of the kind we are waging in Afghanistan, we could afford five hundred interventions of the type America carried out in Libya in 2011. The war in Libya cost the United States roughly $1 billion, according to the Department of Defense, and the war in Afghanistan so far has cost over $500 billion, according to the National Priorities Project.

If costs are measured in blood and not just money, the disparity is even greater, both in terms of our losses and the losses of all others involved. Particularly important in this context is the fact that nation building, foreign aid, imported democratization, Marshall Plans and counterinsurgency (COIN) with a major element of nation building are not only very costly but also highly prone to failure. Thus, they are best avoided.

On Attacking Austrian Economics

Josh Barro’s and David Frum’s Pathetic Attack on Austrian Economics

by James Miller

Josh Barro of Bloomberg has an interesting theory.  According to him, conservatives in modern day America have become so infatuated with the school of Austrian economics that they no longer listen to reason.  It is because of this diehard obsession that they reject all empirical evidence and refuse to change their favorable views of laissez faire capitalism following the financial crisis.  Basically, because the conservative movement is so smitten with the works of Ludwig von Mises and F.A. Hayek, they see no need to pose any intellectual challenge to the idea that the economy desperately needs to be guided along by an “always knows best” government; much like a parent to a child.  CNN and Newsweek contributor David Frum has jumped on board with Barro and levels the same critique of conservatives while complaining that not enough of them follow Milton Friedman anymore.

To put this as nicely as possible, Barro and Frum aren’t just incorrect; they have put their embarrassingly ignorant understandings of Austrian economics on full display for all to see.

The Ugly Truth about Algeria

One big murder mystery

By John R. Schindler

Despite not really being in the news, Algeria still appears in the Western media intermittently. As the Maghreb’s last dictatorship, the recent wave of regime change and democratization has passed this important country by, at least so far. Algeria is the key state in Northwest Africa—by virtue of its size, position, natural wealth and regional influence—yet has missed out on the trend that has overtaken so much of the Arab world for the past two years. It remains notable that Algeria’s bloody civil war, which began twenty years ago, never really ended. And now with the help of Al Qaeda, the conflict may be spreading across the Sahel region.

Events in Algeria have long been underreported in the U.S. and Western media (with the exception of France), and there is a general lack of understanding of what ails the country. Certainly the terrible fratricide there in the 1990s got little coverage in Western media, despite the fact that it probably claimed twice as many lives as the Bosnian conflict, which ran concurrently and received nonstop Western attention.

Why victim culture is running riot

The vulnerable arsonists

Last year's English riots weren't down to government cuts but to a vast culture of self-pity and entitlement among the young.

by Neil Davenport 

A new Church of England report into last August’s riots in England ‘sounds a clear warning note’ about the ‘social consequences’ of austerity measures, senior cleric Reverend Peter Price said on Sunday. After the LSE/Guardian Reading the Riots reports, the Children’s Society’s Behind the Riots, and the government’s own independent panel report, the Church of England is the latest, and probably not the last, institution to blame the riots on cutbacks in social services. Written by the church’s mission and public affairs (MPA) council, the Testing the Bridges report is made up of interviews with clergy around the country who witnessed the riots breaking out.

A mixture of poverty and welfare cutbacks has, according to the church, had a negative impact on ‘already vulnerable people’. This has contributed to a ‘feeling of hopelessness which may sometimes emerge in destructive and anti-social actions’. The idea of the looters and arsonists being seen as ‘vulnerable people’ may surprise those who were attacked or had their livelihoods destroyed. But in recent years, being ‘vulnerable’ essentially means anyone who is not under the direct control of state agencies. These individuals, who clearly can’t cope when left to their own devices, must be nurtured, flattered and mollycoddled by nice, caring professionals.

Repudiating the National Debt

Α horse of a very different color

by Murray N. Rothbard

In the spring of 1981, conservative Republicans in the House of Representatives cried. They cried because, in the first flush of the Reagan Revolution that was supposed to bring drastic cuts in taxes and government spending, as well as a balanced budget, they were being asked by the White House and their own leadership to vote for an increase in the statutory limit on the federal public debt, which was then scraping the legal ceiling of $1 trillion. They cried because all of their lives they had voted against an increase in public debt, and now they were being asked, by their own party and their own movement, to violate their lifelong principles. The White House and its leadership assured them that this breach in principle would be their last: that it was necessary for one last increase in the debt limit to give President Reagan a chance to bring about a balanced budget and to begin to reduce the debt. Many of these Republicans tearfully announced that they were taking this fateful step because they deeply trusted their president, who would not let them down.

Famous last words. In a sense, the Reagan handlers were right: there were no more tears, no more complaints, because the principles themselves were quickly forgotten, swept into the dustbin of history. Deficits and the public debt have piled up mountainously since then, and few people care, least of all conservative Republicans. Every few years, the legal limit is raised automatically. By the end of the Reagan reign the federal debt was $2.6 trillion; now it is $3.5 trillion and rising rapidly. And this is the rosy side of the picture, because if you add in "off-budget" loan guarantees and contingencies, the grand total federal debt is $20 trillion.

Politicians’ Dreams

Falling prey to charlatans and quacks

By Walter E. Williams

Several aspects of human behavior, besides a misunderstanding of reality, are critical to the survival of political scoundrels. Let’s look at a few.

Tariffs and import quotas raise sugar prices. Michael Wohlgenant and Vincent H. Smith, in their article “Bitter Sweet: How Big Sugar Robs You” (The American, February 2012), say sugar restrictions cost the economy an average of over $3 billion a year in higher food prices. That’s the cost side. Roughly 40,000 Americans in the sugar industry benefit from import restrictions because they raise sugar prices and deliver higher profits and wages. One might reasonably ask, “How is it possible for the few to impose huge costs on the 312 million of the rest of us?”

The Myth of Wartime Prosperity

World War II didn't improve the average American's standard of living

By ROBERT P. MURPHY

When pressed for a “success story” of their policies, Keynesians point with pride to World War II. They claim that it is the perfect illustration of the ability of massive government spending to lift an economy out of the doldrums.

In the effort to battle this myth, Steve Horwitz and Michael J. McPhillips offer an interesting new article that analyzes diaries, newspapers, and other primary source documents from the wartime era. They show that average Americans on the home front certainly did not think they were living amidst a great economic recovery. Yet as I’ll show in this article—relying on the pioneering efforts of Robert Higgs—we can use even the official statistics to turn the conventional Keynesian account on its head.

Our Money Is Dying

Spinning in the water

by Chris Martenson

As every effort to re-inflate and perpetuate the credit bubble is made, the words of Austrian economist Ludwig Von Mises lurk ominously nearby:

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as the result of a voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system involved." (Source)

Because every effort is being made to avoid abandoning the credit expansion process -- with central banks and governments lending and borrowing furiously to make up for private shortfalls -- we are left with the growing prospect that the outcome will involve some form of "final catastrophe of the currency system"(s).

The $800 Trillion Scandal

How Banks' LIBOR Lies Affected You

By Christopher Barker, The Motley Fool

Banking scandals have grown so common that perhaps folks have simply run out of outrage. Or maybe the numbers are just too huge to wrap our mortal heads around.

Whatever it is that's behind the relatively light news coverage and lack of public debate on this incredible LIBOR rate-rigging scandal thus far, the story is not going away. In fact, it's bound to grow substantially in scope, as many of the world's largest banks have already been implicated in manipulating interest rates that are tied to some $800 trillion in loans and securities.Λ


LIBOR -- the London Interbank Offered Rate -- is supposed to reflect the average interest rate at which banks are willing to loan funds to each other. Banks submit their daily estimates of borrowing costs for various loan durations in 10 different currencies, and after tossing out the top 25% and bottom 25% of those estimates, the LIBOR rates are calculated as an average of the remaining 50% of submissions. A separate benchmark called EURIBOR tracks borrowing costs among eurozone banks.

The Fallacy of the "Public Sector"

Why not give the free market a county or even a state or two, and see what it can accomplish?

by Murray N. Rothbard

We have heard a great deal in recent years of the "public sector," and solemn discussions abound through the land on whether or not the public sector should be increased vis-à-vis the "private sector." The very terminology is redolent of pure science, and indeed it emerges from the supposedly scientific, if rather grubby, world of "national-income statistics." But the concept is hardly wertfrei; in fact, it is fraught with grave, and questionable, implications.

In the first place, we may ask, "public sector" of what? Of something called the "national product." But note the hidden assumptions: that the national product is something like a pie, consisting of several "sectors," and that these sectors, public and private alike, are added to make the product of the economy as a whole. In this way, the assumption is smuggled into the analysis that the public and private sectors are equally productive, equally important, and on an equal footing altogether, and that "our" deciding on the proportions of public to private sector is about as innocuous as any individual's decision on whether to eat cake or ice cream. The State is considered to be an amiable service agency, somewhat akin to the corner grocer, or rather to the neighborhood lodge, in which "we" get together to decide how much "our government" should do for (or to) us. Even those neoclassical economists who tend to favor the free market and free society often regard the State as a generally inefficient, but still amiable, organ of social service, mechanically registering "our" values and decisions.

The Twilight of Casino Capitalism

The Libor scandal tells us time is running out for America's crony capitalists

By PATRICK J. BUCHANAN

Comes now news from across the pond that executives at one of the world’s most respected banks, Barclays, rigged Libor. Even the venerable Bank of England is apparently being investigated.

For sports fans, this is like fixing the Super Bowl or doping a horse in the Derby. But it is rather more serious. For the London Interbank Offered Rate is the benchmark interest rate for trillions in loans around the world.

Manipulate Libor a small fraction of a point, and lenders reap millions more in interest income on hundreds of billions in loans. How many more such blows to their credibility can the financial elites sustain before people turn on the capitalist system itself?

Why Economic Policy is Paralyzed

The blunder of the Sixties has had a long afterlife

By Robert Samuelson

Wondering why government can't restart the sluggish economy? Well, one reason is that we are still paying the price for the greatest blunder in domestic policy since World War II. This occurred a half-century ago and helps explain today's policy paralysis. The story -- largely unrecognized -- is worth understanding.

Until the 1960s, Americans generally believed in low inflation and balanced budgets. President John Kennedy shared the consensus but was persuaded to change his mind. His economic advisers argued that, through deficit spending and modest increases in inflation, government could raise economic growth, lower unemployment and smooth business cycles.

None of this proved true; all of it led to grief.

The House of Lords doesn’t need reforming, it needs abolishing

We don’t need to be lorded over by experts

Nick Clegg’s proposed reform of the Lords will achieve the feat of making these ‘remains of aristocratical tyranny’ even more tyrannical.

by Tim Black 

The excitement is difficult to miss. There’s a buzz, a democratic fizz in the air. In pubs and bars, community ‘hubs’ and shopping centres, people just can’t stop talking about it. That ‘it’ is, of course, the very real possibility that the UK will have a mainly elected House of Lords. I feel electrified just typing those words, ‘mainly elected’. After over a hundred years since Herbert Asquith’s Liberal government first promised it, we the people are finally getting the power we have been demanding, a second chamber ‘constituted on a popular instead of a hereditary basis’, as Lloyd George put it back in those heady pre-World War days.

The Clash of Economic Ideas

Τhe expansion of government’s role in the economy certainly did not begin with Keynes

By Lawrence H. White

At England’s stately University of Cambridge in fall 1905, a clever postgraduate mathematics student named John Maynard Keynes began his first and only course in economics. He would spend eight weeks studying under the renowned Professor Alfred Marshall. During the summer Keynes had read the then-current (third) edition of Marshall’s Principles of Economics, a synthesis of classical and new doctrines that was the leading economics textbook in the English-speaking world. Marshall was soon impressed with Keynes’s talent in economics. So was Keynes himself. “I think I am rather good at it,” he confided to an intimate friend, adding, “It is so easy and fascinating to master the principle of these things.” A week later he wrote: “Marshall is continually pestering me to turn professional Economist.”

Confusing society with the State, and altruism with collectivism

Socialism’s Prescient Critics

By Philip Vander Elst

There is a good case to be made that the birth and spread of totalitarian socialism defines the twentieth century more than anything else. That is not what most schoolchildren are taught or what most people in the West believe, but it is a justifiable conclusion. Not only was totalitarian socialism directly responsible for provoking the bloodiest war in history; it has also been the biggest single cause of internal repression and mass murder in modern times.

According to The Black Book of Communism (1999), at least 94 million people were slaughtered by communist regimes during the twentieth century. This is a truly colossal figure, yet that’s the lowest estimate. Professor R. J. Rummel, in his landmark study, Death by Government (1996), puts the death toll from communism at over 105 million—and his detailed calculations do not include the human cost of communism in most of Eastern Europe or in Third World countries like Cuba and Mozambique. Even so, his figure is double the total number of casualties (military and civilian) killed on all sides during World War II.

The Enarque-in-Chief Strikes Again

Hollande Government Raises Taxes

By Pater Tenebrarum

France's public debt amounts to over € 1.8 trillion, or about € 63,000 per household. At 89% of GDP and growing, it is a far cry from the Maastricht treaty limits.

In order to pay for the trick to artificially lower the country's embarrassingly high institutional unemployment (unemployment is at 10.1% and growing, and that's according to official statistics) by letting the government hire people no-one needs, Hollande has put in place one his other election promises – or rather, election threats. On Wednesday last week, he raised taxes, aiming to bring an additional € 7.2 billion into the government's coffers.

As Reuters reports:

Hiding behind government handouts

Not so melancholic about destroying the planet

By Philip Cross

It was widely noted that the films screened at the recent Cannes film festival were a tad pessimistic about the future of mankind. Over half of the 22 official films dealt with some form of systemic collapse, mixed with a heavy dose of vengeance, clearly the psychological hangover from the 2008 financial crash. Since artists supposedly are well attuned to emerging trends in society, this bodes ill for the world’s ability to cope with its lingering economic turmoil. Of course, most artists don’t know diddly about economics, as reflected in the exalted status they extend to the proverbial “starving artist.” Try selling the ideal of a “starving economist” to my chosen profession.

Much of this artistic pessimism derives from the film Melancholia by Danish filmmaker Lars von Trier, a legend in the industry despite (or because of) never being a commercial success in North America. He laid out the apocalyptic anti-business vision that other filmmakers are now following.

Healthcare and Obamacare Explained

The Illusion of government omnipotence  

Fractional Reserves, Legal Tender, and Central Banking

Keeping our eyes on the ball

By Steven Horwitz

If you ever want to see a furious discussion break out among libertarians influenced by Austrian economics, just start talking about money and banking. Despite their agreement on so many things, they often have a variety of views on the ideal banking system and how to best understand terms like “inflation” and “deflation.” The debate over the morality and efficacy of fractional reserve banking is one of the most divisive issues. I have addressed that topic in an earlier column, but here I want to tie it into some broader issues that enter into this debate.

This discussion is prompted by Larry White’s testimony on the history and practice of fractional reserve banking before Rep. Ron Paul’s subcommittee on monetary policy in late June. White’s testimony is a concise yet thorough discussion of why fractional reserve banking came to be and why it is not at the root of monetary problems. As he points out, “[A] fractional-reserve banking system is not unstable when the banking system is free of hobbling legal restrictions and free of privileges.” U.S. history illustrates this point.