Government counterfeiters
Via Samizdata,
Bank steps up pace of quantitative easing:
The Bank of England stepped up its quantitative easing programme on Thursday, saying it would buy 5 billion pounds of gilts next week after investors eagerly offloaded 2 billion pounds worth on Wednesday.
Fake cash gang ‘run as business’:
Five men have been jailed and a sixth given a suspended sentence after admitted running a £5m counterfeit currency operation “like a successful business”.
As one commenter said,
The Government clearly does not like competition, especially from the private sector.
There is no good reason why the government should be allowed to print more money.
Inflation is supposedly neutral in the long run. If the nominal value of everyone’s money doubled overnight, and all prices doubled overnight, then it would make no difference.
However, in the short run, the people who get newly printed money benefit first. It takes a while for that money to filter through the economy. The people who get the newly printed money second benefit a little less. As the money filters through the economy, prices start to rise. The people who get the new money last are the ones who lose out. The price rises have already occurred before they get that money.
It doesn’t matter whether counterfeiters get the money first, or whether it is the government and its allies. Inflation hurts the little man.
So in the short run, inflation is immensely damaging. In the long run, too, inflation is immensely damaging. The amount of money the government creates is unpredictable, leading to unpredictable inflation. The subtle shifting of relative prices is drowned out by the general rise in all prices. People can not use price signals, and therefore cannot plan rationally. Prices are information. Inflation is like the government going around after an earthquake jamming the radios of the people who are trying to help.
Economics is the same in a recession
Does “Depression Economics” Change the Rules?, by Robert P. Murphy
we need to understand what is causing so many resources to be unemployed in the first place. According to the Austrian theory of the business cycle, the housing and stock market booms were fueled by Alan Greenspan’s decision to slash interest rates in an effort to provide a “soft landing” after the dot-com crash and 9/11 attacks. This artificial stimulus goaded entrepreneurs into starting numerous projects that were unsustainable.
In short, people in the private sector made decisions as if there were far more real resources at their disposal to “fund” the projects to completion. When reality set in, many of the projects had to be abandoned, meaning that the workers and other resources involved had to be laid off. (See this article for Mises’s analogy of the master homebuilder being misled by an erroneous resource inventory, and why workers would be unemployed once he discovers his error.)
Once people in the private sector realized they had made horrible decisions during the boom years, they needed to stop business as usual and figure out how to make the best of a bad situation. Homeowners who had skimped on their savings for years (relying on booming house prices) had to slash spending to compensate for years of overconsumption, while entrepreneurs needed to decide which activities were likely to be profitable going forward, in light of the new information.
…
the period of “idle unemployment” serves a real function in a market economy. It is true that such periods of massive discoordination are almost always the fault of government interference, but whatever the initial cause, there is no denying that the discoordination is real. Writers such as Krugman and Thoma act as if recessions are caused by massive bouts of irrational consumer anxiety, and that all problems can be patched up by a simple boost of “aggregate demand.”
On the contrary, the economy’s capital structure really was thrown into an unsustainable condition during the boom years, and it takes time for the mess to be sorted out.
…
if the government wants the economy to recover as quickly as possible, the solution is simple: cut spending, cut taxes, stop inflating the money supply, and stop changing the rules every three days. But this solution won’t be adopted, since it doesn’t allow the politicians to pose as generous saviors.
Government inflating the Pound at 16%
The government is printing money at the rate of 16% per year
Source: http://ukhousebubble.blogspot.com/2009/01/uk-money-supply-growing-at-16-percent.html
See also: http://www.economicnews.ca/cepnews/wire/article/168316
UK government secrecy over printing money
In December, Guido Fawkes pointed out something odd in the new Banking Bill:
Section 6 of the Bank Charter Act 1844 (Bank to produce weekly account) shall cease to have effect.
If this passes, the government will be able to print money in secret, because the Bank of England will no longer have to publish accounts. It will be able to print as much money as it wants and nobody outside will know.
Money and Inflation
Inflation is where the aggregate level of prices goes up and deflation where the aggregate level of prices goes down. Inflation will occur if V and T remain constant but M goes up, i.e. the supply of money increases without any other changes. Inflation can also occur if V goes up (people spend money more quickly) or T declines (the economy shrinks), as the other variables are constant. Most inflations, however, occur because of independent increases in the money supply. That can happen either with commodity money or credit money. A flood of silver from the New World caused a devastating inflation in 16th and 17th century Spain; and gold strikes in California, Australia, South Africa, and the Yukon produced inflations in the 19th and early 20th centuries. Now inflations are always the result of increases in the supply of credit money: it is easy to print paper, and governments that have begun issuing paper money have always eventually fallen to the temptation of just printing and spending new money. Paper money achieved legitimacy in the first place only because the Bank of England, which was privately owned (founded in 1694 and nationalized in 1946), was the first note issuing agency in history that behaved responsibly and restrained its issue of paper money. Consequently, Bank of England notes were “as good as gold.” Inflation does not occur because of a “wage-price spiral,” an “overheated” economy, excessive economic growth, or through any other natural mechanism of the market. A government debasing the currency would not have fooled anyone a century ago. Now, through deception, a government can try to blame inflation on anything but its own irresponsible actions.
The Great Depression and the Second World War
It may seem strange to lump Herbert Hoover and Franklin Roosevelt together. The conventional wisdom is that Hoover was a supporter of laissez-faire capitalism whose inactivity let corrupt business practices drive the country into the Depression, while Roosevelt reformed the economy and therefore pulled the country out of the Depression. Neither impression is true. Hoover was a Teddy Roosevelt “Progressive” who believed in activist government. Federal spending increased faster during Hoover’s four years than during the first seven years of the New Deal. Hoover promoted high wages for workers and high prices for farmers. Twice, in 1920 as chief of the wartime Food Relief Administration and then after he became President in 1929, Hoover wrecked the American agricultural export market by using the power of the federal government to drive up agricultural prices. That was supposed to be good for farmers, but it simply destroyed their foreign markets. Hoover then destroyed almost all export markets by signing the Smoot-Hawley Tariff in 1930, even though he was warned in a petition from 1000 economists not to do it. Within a year American trade had fallen more than 50% and unemployment had jumped from 6% to 17%. Later Roosevelt said that farmers didn’t need an export market anyway! (For the details of this, see The Farm Fiasco, by James Bovard, ICS Press, San Francisco, 1991.)
Although it is Roosevelt who is famous for pro-labor legislation, especially the National Labor Relations Act of 1935 and the Fair Labor Practices Act of 1938, pro-union legislation began with the Norris-LaGuardia Act of 1932, under Hoover, which exempted labor unions from antitrust law, freed them from any responsibility for violence that their members might engage in, and granted additional privileges. It is no wonder that Calvin Coolidge said of Hoover: “That man has offered me unsolicited advice for six years, all of it bad.” Occasionally Hoover is credited with having “anticipated” many of Roosevelt’s New Deal policies. The irony is that the New Deal policies did not work (if their purpose was to end the Depression, rather than just expand the power of government or open the way for socialism); and if Hoover “anticipated” Roosevelt’s policies, this means that the Depression was perpetuated when Roosevelt continued and expanded the very devices by which it was created in the first place. Indeed, there were limits to what Hoover was willing to do: he did not believe the federal government should make direct payments to private individuals or seize unconstitutional powers to completely control finance, business, and commerce. Roosevelt had no such scruples, though even what he did now looks modest compared to the powers that the Federal Government has since usurped.
…
It is common and indeed conventional knowledge that only World War II ended the Depression. It is also generally understood why the War did that, with millions of men drafted into the armed forces and the government borrowing and spending mountains of money on war production. What is less often acknowledged is that the New Deal as such thus failed to end to the Depression. Nor is it generally understood why the Depression did not return in 1946, after the military was demobilized and war production ended. By all rights, nothing should have been any different from 1939. But the Depression did not return. Despite demobilization and the end of war production, unemployment in 1946 was 3.9% and in 1947 3.9%.
On 5 June 2004, the day Ronald Reagan died, there was a report on CNN about the Normandy landings (whose 60th anniversary would be the following day) and about the impact of World War II on subsequent history. The reporter said that the War ended the Depression with the draft and by “putting money in workers’ pockets” — and that things have continued much the same ever since. The reporter, however, failed to reason through that with the end of the War the draft ended and that during the War it was both the case that wages were frozen and that war production was not of consumer goods to be bought by those workers. Civilian housing, automobiles, and tires were not even produced during the war. People had to just either save their money or buy War Bonds with it. After the War, the money was then worth less because of inflation. So his explanation didn’t add up.
So why didn’t the Depression return in 1946? Because wages were frozen even while the money supply was inflated with the war spending. This drove down real wages, the opposite of the consistent policy of Hoover and Roosevelt for a decade to drive up wages. In 1946, wages were low enough to clear the employment market. If employers could then hire workers at a market wage, and produce consumer goods, business could get back to normal. It did.
The first post-War recession was in 1949. In the fourth quarter of 1949 unemployment peaked at 7.0%. President Truman was urged to do something, but he actually said, “The kind of government action that would be called for in a serious economic emergency would not be appropriate now” [Richard K. Vedder and Lowell E. Gallaway, Out of Work, Unemployment and Government in Twentieth-Century America, Holmes & Meier, 1993, p.185]. By the second quarter of 1950, unemployment was already back down to 5.6%.
Say’s Law and Supply Side Economics
There was a series on PBS about the Great Depression some years ago. Remarkably, there were no actual economists interviewed about the causes of the Depression. Instead, pseudo-authorities, like Gore Vidal, and ordinary people from the time were asked what the problem was. They repeated phrases about “overproduction and underconsumption.” Like Herbert Hoover and Franklin Roosevelt themselves, they thought that people simply did not have enough money to buy the output of industry. In a sense that was true, but the program that such a theory evidently called for, raising wages and protecting jobs, which would presumably give people the extra money needed to buy all industrial production, had disastrous results: Unemployment hovered around 20% for a decade, despite all the bells and whistles of the New Deal. Vidal said that Roosevelt “saved capitalism,” but the New Deal did not revive the economy or substantially lower unemployment. Most people are aware of this — otherwise the Depression after 1933 would not still have been the Depression — but acknowledging its implications is avoided.
Even today, economics is often still thought of in “underconsumptionist” terms — not often by economists but frequently in politics and in public debate — and the Los Angeles Times still prints articles to the effect that the basic problem of economics is “how to achieve sufficient demand to absorb available production”. In fact, public policies including everything from protective tariffs and “fair trade” to unionism and the minimum wage are based on this principle. These kinds of ideas in the post-World War II world are usually identified with John Maynard Keynes. A biographer of Keynes, Robert Skidelsky, says that Keynes’s “aim was simply to ensure a level of aggregate demand sufficient to enable market-clearing real wages to be established without price inflation”.
But Hoover, Roosevelt, and Keynes had it all backwards. The proper economic principle is called “Say’s Law,” for Jean Baptiste Say (1767-1832), that “supply creates demand.” This means that “overproduction” in a free economy is actually impossible.
Why Say’s Law is correct is evident from one simple consideration: if inventory doesn’t sell, then prices will be cut until it does… When industrial production increases and more goods become available, some old goods will go unsold as money moves over to the new goods, and prices will have to fall right across the board. That is called “deflation,” and it is what happened in the United States from the end of the Civil War until 1896, while the United States grew into the largest economy in the world. Money became more valuable, and wages continued to buy as much as was desired of total production…
Why hasn’t there been any deflation since World War II, even though the U.S. economy has grown vastly since then? Deflation will only happen if the money supply does not grow fast enough as production increases. Prices will remain stable or even increase (inflation) if the money supply grows as fast or faster than production. Under the gold standard, what happened to the money supply depended on the supply of gold. As gold from California slowly ran out, there was deflation; but, after 1897, gold strikes in the Yukon and South Africa created a mild inflation until World War I. Now that nations are no longer on the gold standard, governments can increase the money supply and even create permanent inflation just by printing money. Indeed, most people today, including reporters, businessmen, politicians, and even many economists, unaware of monetary history, think that a growing economy somehow actually causes inflation.
When I was in high school, an American history textbook had a diagram of the “wage and price spiral.” Workers would press for higher wages. Then businesses would raise prices. Then workers would press for even higher wages. This was supposed to explain how inflation happened. However, there is a very simple reason why this isn’t correct: If the money supply does not increase, the “wage and price spiral” runs out of money. If a business raises prices to offset wage increases, less of its production will be sold. If enough is sold that revenue actually increases, as desired, this will have two effects: (1) people are getting less for their money from this business, which decreases the value going to consumers; and (2) money is drawn from elsewhere in the economy, which means that there is less money left to buy the production of other businesses. Somebody gets the short end of the stick. Somebody has to cut prices.
If a business must cut prices to sell its inventory, will it not also cut wages to preserve its profit margin, meaning that the growing value of deflating wages will simply be offset by wage cuts? Wages will indeed fall with prices in a deflation, but falling nominal wages in the post Civil War era actually meant rising real wages: Wages did not fall as fast as the prices of goods. If the value of wages simply fell equally with the value of production, then cutting prices to move inventory would be ineffective — no new products, like cars or radios, could ever be introduced into an economy, since the purchasing power would not be there to buy them. Why real wages would rise as nominal wages fell may be understood in terms of another simple consideration: expanded production will always mean expanded demand for labor. Drawing off labor to produce new goods bids up the value of labor, which would offset the downward tendency of deflation…
Artificially raising wages, on the other hand, or maintaining nominal wage levels during a deflation, as with Hoover and Roosevelt, only manages to produce unemployment…
How to deal with recession
If government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire — to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates, and business liquidation will the necessary adjustment proceed with smooth dispatch.
Any propping up of shaky positions postpones liquidation and aggravates unsound conditions. Propping up wage rates creates mass unemployment, and bolstering prices perpetuates and creates unsold surpluses.
Moreover, a drastic cut in the government budget — both in taxes and expenditures — will of itself speed adjustment by changing social choice toward more saving and investment relative to consumption. For government spending, whatever the label attached to it, is solely consumption; any cut in the budget therefore raises the investment-consumption ratio in the economy and allows more rapid validation of originally wasteful and loss-yielding projects.
Hence, the proper injunction to government in a depression is cut the budget and leave the economy strictly alone. Currently fashionable economic thought considers such a dictum hopelessly outdated; instead, it has more substantial backing now in economic law than it did during the 19th century.
Testing Keynes to Destruction (Again!)
Sean Gabb:
http://www.seangabb.co.uk/flcomm/flc178.htm:
I am not sure when the present cycle started, but interest rates have, for many years, been manipulated by the politicians below the level needed to balance savings and loans. The resulting additional demand for loans was satisfied by creating new money out of nothing. This enabled a gigantic speculative bubble that sprang a puncture last year, and that has now burst. Recession is the natural result. The structure of relative prices has been distorted. Investments have been made that are now shown to be unwise. There must be changes. The beginning of change is to allow interest rates to rise and unsound businesses to go bankrupt. The faster this is allowed to happen, the sooner we can return to prosperity.
Sadly, the political response has been to look for any scheme to save or replace the speculative bubble. Interest rates have been cut in England and America. The taxpayers’ money has been lavished on propping up the more unsound banks. Governments are threatening to inflate without limit. The stated purpose of this is to avoid recession. The result will be to make the recession longer and deeper than it needs to be. The politicians tell us that Keynes was right after all. Perhaps that is what they believe. More likely, they have been taken in by the bankers with warnings about total collapse of the financial system, and are now responding like the victims of those Internet frauds run from Nigeria. I see the car makers have taken up the bleat for subsidies. I suppose they will be joined soon enough by the coffee bars and every other business that overexpanded.
2009, therefore, will be a bad year in the economic sense. If it is not, the pain will only have been delayed until 2010, when it will be felt with compound interest.
http://www.seangabb.co.uk/flcomm/flc177.htm:
For many years, interest rates have been held below the sort of level needed to balance the supply of savings and the demand for loans. The result has been inflation. That many consumer prices have been falling is no argument against this proposition. Inflation is best seen not as price increases but as monetary expansion. There was a time when monetary expansion led fairly soon to price rises. Where at least Britain is concerned, though, most consumer goods are imported. So long as foreigners are willing to finance a growing current account deficit without devaluation, demand for imported consumer goods can expand rapidly and for years without any increase in prices.
The new money will therefore be used partly for investments in new production that may or may not be wise in the long term – and also to bid up the prices of property and of paper assets.
These bubbles never last. There comes a point where people lose faith in a currency, and where the upward spiral of asset prices is checked. The fall in the currency will push up consumer prices. Overvalued assets will fall in at least real terms. Many other investments will be shown to have been unwise. The immediate reasons for their bursting are less important than that they always will burst. This has now happened. There is no definite rule in these matters. But it seems that the length and intensity of the boom is roughly in proportion to the scale of the recession that follows.
The financial collapse we are now witnessing, therefore, should not be seen as some autonomous fall in aggregate demand that can be offset by increasing other variables in the national income income equation. It is instead part of the unavoidable correction to past experiments in demand management. All the clever people disagree. They do believe that playing with aggregate demand can avert, or at least moderate, the coming recession. Now, these people are often very clever – most of them more so than I am. They are still wrong.
Cutting taxes is always a good idea. Not balancing them with spending cuts is not so good. If the British Government will do tomorrow what the journalists say it will, the inflation will be continued, though now without the confidence in sterling that allowed it before last year to create the illusion of prosperity. Taxes will fall. Government and other spending will rise. Interest rates will be cut. In the short term, this may be enough to win the next election for Labour. It not even before, though, the pound will collapse shortly after. Interest rates will then need to rise sharply, if the Government is to continue selling its bonds and if consumer prices are not to rise sharply and continuously.
There is no reasonable chance of deflation. For the next few months, while the collapse of sterling is only gathering momentum, firms will be able to reduce prices to keep up demand for their products. This will give the appearance of deflation. Eventually, though, their margins will not be further reducible, and the collapse of sterling will raise costs that must be handed on. This will happen even without further action. The bank rescues of last month were financed by money creation that will, sooner or later, find its way into circulation. Deflation is the last of our worries.
I have no professional expertise in finance, and so give no warranties of any kind. This being said, I think it a good idea for anyone who has a mortgage to get the best fixed rate he can between now and Easter, and otherwise to avoid saving money at any rate fixed longer than six months ahead. If he wants to buy imported consumer goods, he should do so now or, at latest, in the sales after Christmas.
Beyond this, I have no advice. Just because I do not believe in the solution that everyone else is urging on us does not mean that I have any alternative solution to offer. We should never have got ourselves into this mess. Failing that, the recession should have been allowed to hit last year. Since it was then deferred, it should be allowed to hit now. It will do nothing to moderate the inevitable recession. But there is a good case for cutting taxes and government spending now by at least a third, and then by five per cent a year every year for the next decade. And there is a case for returning to a fully convertible gold standard.
Henry Hazlitt – Economics in One Lesson
In this lies the whole difference between good economics and bad. The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.
The distinction may seem obvious. The precaution of looking for all the consequences of a given policy to everyone may seem elementary. Doesn’t everybody know, in his personal life, that there are all sorts of indulgences delightful at the moment but disastrous in the end? Doesn’t every little boy know that if he eats enough candy he will get sick? Doesn’t the fellow who gets drunk know that he will wake up next morning with a ghastly stomach and a horrible head? Doesn’t the dipsomaniac know that he is ruining his liver and shortening his life? Doesn’t the Don Juan know that he is letting himself in for every sort of risk, from blackmail to disease? Finally, to bring it to the economic though still personal realm, do not the idler and the spendthrift know, even in the midst of their glorious fling, that they are heading for a future of debt and poverty?
Yet when we enter the field of public economics, these elementary truths are ignored. There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: “In the long run we are all dead.” And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.
