Households Are Finding It Tougher Going

Because real income is down, while prices are up.  Real GDP reportedly shrunk during the first quarter for the first time in three years, while the food prices are rising at an annual rate of 22%! This is a consequence of Quantitative Easing Infinity. Monetary inflation via credit expansion fosters malinvestment which consumes capital and constrains economic progress. At the same time, it encourages increases in spending, which result in higher prices.

Cochran on the Real Lessons Learned from Government Rescue Attempts

John Cochran has written an excellent essay "New Lessons from the 'Rescue' and the Failed Stimulus" correcting a faulty Wall Street Journal piece by David Wessell that seeks to uncover the lessons we have learned since the financial meltdown and recession of 2008.

Cochran notes:

Wessel appears totally oblivious to the fact that absent the Fed as an enabler with its overly expansionary credit creation policy, first in the 1990s, and then in the mid-2000s, neither the dot-com boom-bust with its unfinished recession, nor the housing bubble, general boom and subsequent bust, which precipitated the financial crisis, would have happened.

Cochran explains why both Fed intervention and fiscal stimulus were not merely useless, but actually destructive hindering recovery.

Such a conclusion is not a throwing up of the hands and embracing a do nothing policy. As I explain in my book Foundations of Economics, there are many things that the state can due to help usher in a quicker, sustainable recovery:

In order for entrepreneurs to redirect resources toward their most productive use, they must be able to calculate profit and loss using market prices. Therefore, the markets for all goods should be allowed to adjust to their new equilibrium levels. The money stock should in no way be inflated. Taxation, government spending, and regulation on business should be reduced.

Is the Economic Crisis an Indictment of Capitalism?

One of the sad narratives of the financial meltdown of 2008 and its aftermath is that it was and remains the result of unbridled capitalism. Too much freedom spoiled the economic broth.

While doing research for a current project I'm working on, I came upon a remarkable essay by Ludwig von Mises. It turns out that Mises considered the question of whether economic crisis is an indictment of laissez-faire capitalism back in 1931 in the wake of the worst global economic downturn of the Twentieth Century.

In an essay, "The Economic Crisis and Capitalism," published in the German Neue Freie Presse (available in English Translation in Selected Writings of Ludwig von Mises, Vol. 2), he explains why the answer to the question is a decided no!

It is almost universally asserted that the severe economic crisis under which the world presently is suffering has provided proof of the impossibility of retaining the capitalist system. Capitalism, it is thought, has failed; and its place must be taken by a better system, which clearly can be none other than socialism.

That the currently dominant system has failed can hardly be contested. But it is another question whether the system that has failed was the capitalist system or whether, in fact, it is not anticapitalist policy--interventionism, and national and municipal socialism--that is to blame for the catastrophe.

The structure of our society resets on the division of labor and on the private ownership of the means of production. In this system the means of production are privately owned and are used either by the owners themselves--capitalists and landowners--for production, or turned over to other entrepreneurs who carry out production partly with their own and partly with others' means of production. In the capitalist system the market functions as the regulator of production. The price structure of the market decides what will be produced, how, and in what quantity. Through the structure of prices, wages, and interest rates the market brings supply and demand into balance and sees to it that each branch of production will be as fully occupied as corresponds to the volume and intensity of the effective demand. Thus capitalist production derives its meaning from the market. Of course, a temporary imbalance between production and demand can occur, but the structure of market prices makes sure that the balance is reestablished in a short time. Only when the mechanism of the market is disturbed by external interventions is the effect of market prices on the regulation of production prevented; they are disturbances that no longer can be remedied by the automatic reactions of the market, disturbance that are not temporary but prolonged.

In a free market rooted in private property, the only way entrepreneurs are able to sustain profits is by serving customers better than anyone else. It is only when they receive special privileges through preferential regulation, subsidies, bailouts and the like that they are able to reap profits for which they have not sowed productive activity.

I was struck by how much of what Mises said about the response of many to the Great Depression applies closely to our current situation. Just like Mises, we must never tire of explaining the fallacies in the thinking of those who think the Great Recession is a clear case of the failure of capitalism. In fact, it is a quintessential example of the failures of interventionism to bring about anything other than economic destruction and relative impoverishment.

Federal Reserve Rhetoric Versus Reality

Two days ago Roger Lowenstein had an interesting piece in the New York Times about how the practice of the Federal Reserve has significantly departed from the purposes for which its founders ostensible created it. (For the real scoop on how the FED came to be, I recommend Rothbard's Case Against the Fed and Part 2 his A History of Money and Banking in the United States).

As Lowenstein notes, the FED's early opponents had much insight on what the FED would really become. In Congressional debate leading up to the Federal Reserve Act's eventual passage, Representative Charles Lindbergh, Sr. argued that the central bank would become "the most gigantic trust on earth" and function as "an invisible government behind the money power." Elihu Root predicted that the FED would foster a currency that is all expansion with no contraction.

The propaganda of the FED's advocates, on the other hand, said the country needed a central bank to provide for an "elastic currency" that would expand and contract with the needs of commerce. It was claimed that such an elastic currency would eliminate financial panics of the sort experiences in 1907.

After the Federal Reserve Act was signed into law in late 1913, the following year's Annual Report of the Secretary of the Treasury included a stunningly naive forecast. It was claimed that, because the FED would provide a sufficiently elastic money stock,

Under that operation of this law such financial and commercial crises, or 'panics,' as this country experienced in 1873, 1893, and again in 1907, with their attendant misfortunes and prostrations, seem to be mathematically impossible (p. 479).

 Alas, we know all too well that this was not the case. In fact, as has been documented time and time again, the FED as sown the seeds of malinvestment, panic, and recession.

Herbener on the Slow Recovery

Today's ADP National Employment Report estimates that the rate of job growth in March was the slowest in five months, causing some to speculate that "the economic recovery could be hitting a soft patch."

That makes Jeff Herbener's recent Freedom Readers lecture, " Why the Recovery Is Taking So Long and What to Do About It" as timely as today's headlines.  My friend and department chair explains that real capital accumulation is necessary for real recovery and explains what is holding that back. My oldest daughter volunteered to come with to the lecture and found it "very interesting." You can listen to his lecture by clicking here.
 

It Didn't Have to Be This Way

So says Harry Veryser about the financial meltdown and subsequent Great Recession. Veryser has written a new book explaining that Austrian economics and its policy implications are the key to understanding why this is so. Veryser's book sounds like just what the economic doctor ordered to provide a way out of our mess and to prevent similar messes in the future.

As Veryser says:

For years now, we have endured a barrage of bad news: businesses going belly-up, people losing their jobs and homes, government debt soaring. It didn’t have to be this way. The Austrian School presents the most coherent explication of the economic relations among men and—more so than any other system today—lays out economic guidelines that offer real prospects for prosperity worldwide. 

As indicated above, Veryser  draws upon Austrian Business Cycle Theory to explain the nature of the boom/bust economic cycle, which is also the theory that I discuss in Foundations of Economics. Additionally, I personally know Veryser to be a true gentleman and a scholar. He is presently an associated scholar of the Ludwig von Mises Institute and has served as director of the graduate program in economics at the University of Detroit Mercy and chairman of Walsh College’s Department of Economics and Finance.

Is the U.S. Economy Already in Recession?

ECRI's Lakshman Achuthan things so:

Ritenour Quoted in U.S. News and World Report

I was blessed to be interviewed by David Francis last week for a piece published today by U.S. News and World Report. In his article, Francis asks "Is the Economic Recovery Real?" Francis quotes myself and Ron Weiner, founder and president of RDM Financial Group.

Francis accurately communicates my views on the question. I stressed that the financial and economic meltdown of 2008 was due to massive capital malinvestment, so any apparent economic recovery that is the result of government fiscal or monetary stimulus is unsustainable.

Readers should note, however, that the article states Grove City College is south of Pittsburgh when it is actually 58 miles north of Pittsburgh. Additionally, at one point I am quoted as saying, "My concern is the stimulus seems to be what is needed to keep unemployment from being really bad." That statement should not be taken to mean that I am in favor of government stimulus to keep the unemployment rate down. The statement was in the context of what would happen to unemployment if we allowed the market adjustment process to run its natural course.

I suggested that without government intervention it is likely that in the short-run the unemployment rate would jump higher until the necessary adjustments took place so that entrepreneurs could get an accurate lay of the economic land. Only then would they be able to make better decisions putting us back on the road to prosperity. My concern is that the lower unemployment rate is not due to real improvement in the economy due to increases in truly productive activity, but is, in fact, more due to government stimulus.

Cochran on the Latest Evidence Supporting an Misesian Interpretation of Our Recent Economic Past

One of the criticisms of Austrian business cycle theory that many continue to make is that the it is merely an "armchair theory" with little or no empirical data to back it up. One can immediately rebut such charges because the Austrian literature does contain several contributions that puts empirical meat on the theoretical bones. Murray Rothbard's America's Great Depression and The Panic of 1819 quickly come to mind, as does the historical discussion in Chapter 6 of Jesus Huerta de Soto's Money, Bank, Credit and Economic Cycles.

Writing at the Circle Bastiat, John P. Cochran provides some excellent analysis of median household data that provides empirical support for an Austrian interpretation of 1995-2012. As Cochran notes,

While one should always be careful using median income figures, the data is consistent with and can be best understood when combined with a capital-structure macro model of the economy.

He cites several recent articles by Roger Garrision, Frank Shostak, Adrian Ravier, and Joseph T. Salerno that bear this out. Cochran packs a lot into a relatively brief post that is well worth reading.

Ritenour on The What's Up Radio Program

Last Thursday I appeared on The What's Up Radio Program hosted by the lively Terry Lowry. I discussed the unemployment picture and the state of our economy. The discussion was prompted by my recent piece, "What's in a Recovery?"

You can listen to an archived recording of the program by clicking here.

Miller on How Govermnent Is Hampering Economic Recovery

Yesterday, my colleague Tracy Miller had an essay published on Forbes.com explaining how government policy is restraining economic recovery. He discusses the many ways the government has responded to the Great Recession and how they have hindered a return to prosperity.

As Miller concludes,

The financial crisis is to blame for the depth of the recent recession and partly to blame for the slow economic recovery. If market forces were allowed to work, however, the economy would recover more quickly. If they did not have extended unemployment compensation, some unemployed workers would find and accept new jobs. If uncertainty about government policy and its impacts weren’t such a big concern, firms would be willing to invest in expanding production in response to lower interest rates. A return to a system with fewer entitlements, less government spending, stable rules and a commitment to maintain low tax rates would increase confidence about the future so businesses and households would be more willing to invest and create new jobs.

We're Not Japan, but We Can Hope

In this short video clip from Bloomberg TV, their "single best chart" of the day shows that our so-called recovery is the worst since the 1940s and even worse than Japan's lost decade thus far.




Such is what is wrought when liquidation of malinvestment via the market process is hampered.

Fraud: The Cause of the Great Recession

A new documentary about the cause of the financial meltdown of 2008 and the resulting recession has been produced by amagifilms.The title of the film is Fraud. It correctly cites our fractional reserve banking system supported by central banking as the primary culprit.


"fraud. why the great recession" (official version) from amagifilms on Vimeo.

The producer's synopsis is as follows:

Free markets are not to be blamed for the Great Recession. On the contrary, its origins rest upon the deep government and central bank intervention in the economy. Through fraudulent mechanisms, this causes recurrent boom and bust cycles: bad policies create phases of irrational exuberance, which are then followed by economic recessions, a result that every citizen ends up suffering from.

The film features brilliant monetary scholars such as Jesus Huerta de Soto and Philipp Bagus. I watched it during my flight back from the government and economics seminar at which I lectured and this documentary is tremendous. It provides a clear, solid, and concise explanation of how our economic mess occurred.

Note Bene: It is a Spanish production with a lot of Spanish dialogue, so much of the film uses English subtitles, but do not let that scare you. This is an important document.

Bagus on Spain

It is no secret that the Spanish economy is in serious trouble. Just recently it was announced that it had taken a second dip into recession. Philipp Bagus, Professor of Economics at Universidad Ray Juan Carlos in Spain was recently interviewed on the RT network about the unpleasantness in Spain.

In this brief interview, Bagus provides insight on the real and negative consequences of decades of government intervention in the Spanish economy and the future of the Euro.

He also provides important clarification on the austerity question. Many Keynesians, such as Paul Krugman, have been claiming that Europe has tried fiscal austerity, the economies are in trouble, ergo Keynes was right QED. Bagus explains the important difference between true and phony austerity. True austerity requires a reduction of state presence in the economy, not higher taxes.

Salerno on the Great Recession of 2008

Joseph Salerno has brought forth his explanation of the economic mess of 2008 and in doing so, refines Austrian Business Cycle. His paper, "A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis," refutes critics who claim that Austrian business cycle cannot explain the most recent recession.

Salerno concludes,

Once we understand the ABCT [Austrian Business Cycle Theory] as a theory of the destruction and renewal of both the capital structure and monetary calculation, we are in a position to fully account for the events of the past decade. Furthermore, given the unprecedented monetary interventions by the Fed and the enormous deficits run by the Obama administration, ABCT also explains the precarious nature of the current recovery and the growing probability of a double-dip recession.

I saw Salerno present this paper at the most recent Austrian Scholars Conference and recommend it highly.

HT: Tom Woods

It's the Fed

Heleen Mees in Foreign Policy gets it. . . at least partly. In her article "The Perils of Loose Living," she explains how too much debt fueled our economic crisis and that the Fed bankrolled the whole thing. (Thanks to my friend and colleague Sam Stanton for alerting me to this article). As she correctly notes:

The real culprit was the Federal Reserve. With its ultraloose monetary policy in the early 2000s, the Fed single-handedly created the refinancing boom and ushered in the housing bubble. The record-low interest rates not only fed the boom that had to go bust, but also favored that sector of the U.S. economy that is predominantly financed with debt, i.e., the financial sector, at the expense of sectors that are more reliant on risk capital, such as manufacturing. That might explain why, by the mid-2000s, bank profits accounted for 30 percent of all profits reported by S&P 500 companies. In other words, Americans stopped making stuff and relied on paper earnings instead.

Mees also rightly understands that the Fed pushing for even more monetary expansion will not solve our problem.

Unfortunately, her prescription is not nearly as insightful. She plays our ailing economy off against that of the Chinese and the Germans. She asserts that both of their economies of booming and implies that the secret to their success is government spending on research, development, and innovation. That is what they used to say about Japan's economy before it took a nosedive back in the early 1990s. If the Chinese have to "cool down" the economy, that is an indication that the boom is a product of monetary inflation and, hence, unsustainable.

No, government spending of any kind is not the solution either. The only thing that will put our economy back on a firm footing is to free the market: stop increasing the monetary base, cut government spending, and reduce business regulation. This will allow for more saving and investment in productive activity, which is the true job creator.

Jobless Recovery?

Not only are there no jobs. There is no recovery. Such is the verdict, correct in my opinion, from Tim Kane at Growthology.

The concept of a jobless recovery has been redefined, both for America and for my family, with the new jobs report out this morning. For America, this is the first jobless recovery lacking not only jobs, but also a recovery. A freind the other day noted it was the 2 year anniversary since that recovery officially began.

Jeff Tucker has also alerted us to the fact that mainstream media may be catching on that the recovery was, as they say, only on paper.

Because a picture is worth a thousand words, give or take a few, Joe Weisenthal at Business Insider has compiled a set of graphs compiled from the June jobs report published by the Bureau of Labor Statistics. It is headlined by what he calls the new scariest jobs chart ever.

This in addition to the traditional graph they call the Scariest Jobs Chart Ever which is scarier than ever.

Together they paint a very dismal picture indeed.  I've said it before and I'll probably say it again, money cannot buy prosperity.

Inflation-fueled spending does not result in true economic prosperity in the form of more goods to satisfy our ends. It might encourage more spending, but not investment that reflects the wishes of society. Investors are encouraged to invest in industries that are too capital-intensive relative to the wishes of savers in society. Such malinvestment fuels investment bubbles.

For all the money the Federal Reserve has created and the government has spent we have merely prolonged the necessary readjustment process and capital accumulation process that could serve as a solid foundation for true economic prosperity.

Reckless Endangerment: Another Reason to End the Fed

The more I hear from Gretchen Morgenson and Josh Rosner, co-authors of a new book Reckless Endangerment, the more I like. The book is about the cause of the financial crisis to hit in 2008 setting in motion the Great Recession.

I have not read the book, so cannot vouch for its contents, but the following interview segments from The Daily Ticker are quite interesting and revealing. Morgenson and Rosner seem to have the inside scoop about how cozy the Federal Reserve is to large commercial banks, thereby subsidizing and encouraging ever-more risky malinvestment. They note how corporatist (in a fascist sense) the who financial system is. The scary thing is that they report that the flurry of bailouts, monetary activism, and regulation has left the system even more precarious than ever. So far the Fed has merely further enshrined the doctrine of "Too Big to Fail."

One area in which I disagree with them, however, is their view of regulation. They are right to recognize that bank activity needs to be regulated, however, they seem to imply that it needs to be more strongly done by the state. They accept Alan Greenspan's verdict from a couple of years ago that he and the Fed were wrong to rely on banks' self-regulation. The implication they take is that we need better real regulation by the government over the banking system.

The reason self-regulation did not work, however, is that they were protected from the best regulation of all: the regulation of the market. They did not have to regulate themselves, because they knew that the Fed had their financial back. The profit and loss system of the free market is a stern regulator, because the entrepreneur is encouraged simultaneously by both a carrot and a stick to make only wise, productive investments. With the Fed standing ready to fix problems due to too many unsound decisions, bankers and financial institutions made a tanker-load of entrepreneurial errors.

Morgenson rightly notes in the last segment that one of the Fed's main errors was that it equated safety and soundness with profitability. However, in our current Fed-supported fractional reserve system, a bank can generate temporary profits for quite some time by engaging in activity that actually contributes to, well, reckless endangerment. The regulation by the market that promotes safety and stability is a profit and loss system. It is only when banking entrepreneurs must bear the full cost of their losses that they are careful not to make foolish or even evil financial decisions. Accepting that any institution is "too big to fail" is to participate in dismantling the regulation by the market. "Too Big to Fail" is a natural outcome of a banking system backed by a central money creator we call a central bank.

In any event, I recommend the following interview segments:

Economic Recovery Versus Financially Fragile

The Wall Street Journal reports that "nearly half of Americans are financially fragile." It cites an NBER study using data from the TNS Global Economic Crisis survey. It asked, among other things, how easy would it be to come up with $2,000 for an unexpected expense within the next 30 days. The survey indicated that "46.5% of all respondents are living very close to the financial edge." They include those who were certainly unable to get the money and those who could do so only by taking "extreme measures."

The story notes that it is not only lower income households that are on the precipice. Financial fragility is determined by more than income levels. It also has to do with indebtedness. Nevertheless, it is further evidence that, as I wrote almost two years ago,  Keynesian economic policy is a failure. Massive fiscal and monetary expansion has propped up the stock market, wall street investment firms, and large commercial banks, but has done little else except prolong the readjustment process necessary to right the tremendous amount of malinvestment still in our economy.

Is Economic Stagnation Fostered by Regime Uncertainty?

One entrepreneur thinks so. While on a plane, Yale law professor Stephen L. Carter recently struck up a conversation with a business owner who explained to him "why he refuses to hire anybody." His reason can be summed up in the word uncertainty. He is unsure about the regulatory environment and how changes in regulations will affect labor costs, investment returns, and capital gains he would reap if he merely sold his businesses. His response lends credence to Robert Higgs' theory of regime uncertainty contributing to economic recessions.

When asked what the property roll of government should be, the businessman responds,

“Invisible,” he says. “I know there are things the government has to do. But they need to find a way to do them without people like me having to bump into a new regulation every time we turn a corner.” He reflects for a moment, then finds the analogy he seeks. “Government should act like my assistant, not my boss."

Unfortunately, he does not elaborate what are the "things the government has to do." I imagine he means things like police, the military, roads and schools. That is not an uncommon opinion. Economic theory, however, teaches that even these are not things the government has to do.  His last sentence, moreover, implies he may mean something more. He may mean that the government should promote industry, provide protection against imports, give subsidies to small businesses, and ensure relatively low interest rates.  These things, of course, merely create more uncertainty.

The best thing for the state to do is to get out of the market altogether. Remove price controls and business regulation, lower government spending and taxes, and get out of the money production business. Such a path would of course change the current regime, but what follows would be a free society in which the division of labor could freely develop, making use capital accumulated and invested by entrepreneurs who could use economic calculation to make wise investment decisions. It would be the best possible environment for productive activity and for the employment and higher real wages that go with it. That is regime change we can believe in.