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Showing posts from May, 2011

That Other Invisible Hand

As Adam Smith explains, the free market brings its wonders to the world by virtue of an invisible hand.Individuals cooperating under the international division of labor and seeking generally to satisfy their own wants end up promoting the general welfare, often without intending to or without realizing it.
Not to be outdone, government too has developed a systemic hand that is usually not seen.Unlike the market, when this hand moves, we lose.Through inflation, government snatches the market’s bounty for its own purposes, enervating our lives accordingly.
As a “stealth tax,” inflation requires no legislation to impose, no agency to collect, and diverts responsibility for damages onto politicians’ favorite whipping boys.It gives government the ability to buy almost anything for nothing, while creating endless problems that serve as a pretext for intervention.Inflation is the foundation of arrogant government and a prescription for our own demise.
Government inflates through its central ba…

The Triumph of the Bankers

In spite of its success in bestowing wealth on some men while funding an unnecessary war, [1] the National Banking System proved unsatisfactory to financial leaders.  (See “Who Paid for the Civil War?”)  Even with laws discouraging or restricting redemption, crises still occurred, and banks had to contract and deflate to survive.  They were unable to inflate their way out of recession because they lacked a centralized lender who could provide them emergency funding.  In addition, people, especially those who kept their savings outside the banking system, generally saw the notes that circulated as mere substitutes for the real thing, which financier Jay Cooke disparaged as a “musty [relic] of a bygone age,” a sentiment no doubt shared by a certain Scottish adventurer of the early 18th century.  [2] Even if the system had a centralized lender it would still be subject to market retribution because people cannot arbitrarily create gold or silver coin.  Money was still the most marketable…

Central banking quicksand

In 1903, a lawyer in Germany took out an insurance policy and made payments on it faithfully.When the policy came due in 20 years he cashed it in and bought a single loaf of bread with the proceeds. [1] He was fortunate.If he had waited a few days longer, the money he received would have bought no more than a few crumbs.
Germany had been on the usual fractional reserve gold standard prior to World War I, with the Reichsbank, its central bank, expanding the money supply at a “mild” 1-2 percent inflation rate. When war broke out in 1914, government followed the standard policy of deficit spending rather than attempting to raise taxes.The Reichsbank’s role was to monetize the government debt – that is, pay for new treasury obligations by printing more money.
At the war’s end the number of German marks in circulation had quadrupled and prices had gone up 140 percent.[2]But the mark was no worse off than the currencies of other belligerents.It was weaker than the American dollar but strong…

Inflation, government's WMD

Jorg Guido Hulsmann's 2008 masterpiece The Ethics of Money Production exposes the full extent of the monetary phenomena the Federal Reserve is solely responsible for creating.  Gauging inflation on the basis of a price index is vastly misleading.  Below is an excerpt from my review of Hulsmann's book:
Inflation’s legacy
Inflation’s standard definition is too narrow to provide an appreciation of the extent of its harm; it is far more than a deterioration of the currency’s purchasing power.  It’s also much more than a “hidden tax.”  Government’s perennial fiat inflation is a subtle WMD.  Consider:
1.  In funding wars, it allows government to ignore the fiscal resistance of its citizens.
2.  It benefits the central government at the expense of secondary and tertiary governments.
3.  It turns moral hazard and irresponsibility into an institution, and guarantees recurring economic crises.
4. By making credit cheap, it encourages businesses to finance their ventures through borrowing rath…

Selling Fraud

By most accounts, selling a central bank to an educated populace should be a daunting public relations task, if not an impossible one.  Think of trying to convince the Pope to swear allegiance to the devil or getting a politician to resign and get a productive job.  Yet selling lies, even Big Lies, is an area where power lovers have excelled throughout history with unsurpassed brilliance.  Even after the Great Meltdown of 2008, which came as a shock to everyone except those annoying Austrians, the Fed is still regarded as our economic stabilizer and savior, the pacemaker keeping the capitalist system alive.  Bernanke is not the villain, as a handful of troublemakers claim; he’s da Man, the Person of the Year in 2009.  And it was a well-deserved award - it takes genius to dream up TARPS, TAFS, and massive taxpayer-provided bailouts to keep the house of cards standing. Central banking is regarded as a natural process of evolution in the life-cycle of capitalist economies.  As capitalism …