Tuesday, August 29, 2017

Free the Arctic!

From the Sunday, August 27th New York Times:

Russian Tanker Completes Arctic Passage Without Aid of Icebreakers

A new Russian tanker with a reinforced hull has cut shipping time from Europe to Asia by thirty percent. One would think that such an event would be hailed by all who desire the betterment of all mankind, but such is not the case. Canada and other nations object, claiming great swaths of the Arctic as sovereign, territorial waters. How foolish! The nations of the world should unite to grant homesteading rights to any entity that uses the arctic for erecting structures, such as oil derricks, and also to grant free passage for any ships to traverse the area for commercial purposes. For Canada to claim sovereignty over great swaths of the Arctic is akin to Spanish Conquistadors planting the Spanish flag in a square foot of beach and claiming an entire hemisphere as property of the Spanish crown.

Wednesday, July 19, 2017

The Real Aim of EU Brexit Talks and Why It Will Fail

From today's Open Europe news summary:

German MEP says EU wants to punish UK in Brexit talks

Writing in The Times, German MEP Hans-Olaf Henkel argues that the European Parliament Brexit negotiator, Guy Verhofstadt, and the EU’s chief Brexit negotiator, Michel Barnier, want to “punish” Britain in the Brexit talks. He adds, “The reason is simple. They would seek to make sure that Brexit is such a catastrophe that no country dares to take the step of leaving the EU again.” Henkel stressed that he would like the UK to stay a member of Euratom but warned if it chooses to do so it would “will mean paying in and abiding by the rules, as Britain does now, and accepting the jurisdiction of the European Court of Justice when it comes to overseeing Euratom.” Henkel is a member of Germany’s far-right AfD party.

The only tool that the EU can wield is to forbid the importation of British goods. But that is self-defeating. The EU punishes its own citizens by forbidding them from purchasing British goods and services. I doubt that the EU will try to forbid its exporters from selling into the British market, so the European Central Bank will accumulate British Pounds. It's tantamount to selling someone a good or service and telling him that you promise never to cash his check.


Monday, June 26, 2017

Why Sound Money Does Not Need a Central Bank, Only the Rule of Law

The money that all nations use today is composed either of reserves created by a central bank and/or credit money created by banks via fractional reserve banking. In the first case, a central bank can create reserve money via open market operations, whereby the central bank buys an asset--any asset--with reserves that it creates out of thin air. These reserves land in a bank and allow the banking system to create credit money in multiples of the new reserves via the fractional reserve lending process. Both methods of money creation are fraudulent, if done by any entity other than a central bank, in the case of open market operations, or a bank member of that central bank system, in the case of fractional reserve lending. All nations have thrown the rule of law out the window for these monetary counterfeiters.


A sound money system does not sanction counterfeiting money, either via creating reserves out of thin air or via creating credit money via fractional reserve lending. In a sound money system there is only commodity money; i.e., gold, silver, bails of tobacco, etc. Commodity money may be spent, as in using gold or silver coins in everyday transactions, or other receipts may be exchanged which represent commodity money that is stored in a safe and trusted facility. Issuing a coin that does not contain exactly the weight and purity as represented is fraud in a society governed by the rule of law. Issuing certificates or bank receipts in excess of the stored commodity also is fraud in a society governed by the rule of law.


A society governed by the rule of law does NOT exempt any entity, including the government itself, from the law. Thus, a central bank that creates reserves out of thin air is committing a crime, as recognized by Sir Robert Peel in his famous Bank Charter Act of 1844. A member bank that pyramids these reserves into multiples of credit money via the lending process is committing a crime, as cogently explained by Jesus Huerta de Soto in his Hayek Memorial Lecture at the London School of Economic in 2010.


In a free society governed by the rule of law any entity can create money and offer its use to the public. I can offer the public the use of my wife's delicious quart jars of homemade pickles as money, either in direct exchange (for example, a jar of pickles for a box of nails at our local hardware store) or as indirect exchange (a certificate that may be redeemed for a jar of pickles upon demand). However, I have violated the law if I hand over a jar that I claim contains my wife's pickles but instead contains something else. Likewise, I  have violated the law if I issue more certificates for my wife's pickles than jars of pickles in her larder, which fraud would be revealed should too many people try to redeem their certificates at my house.


Of course, for transactions among people who do not know one another personally, unlike the local recipients of my wife's pickles, a more generally accepted commodity would be used and certificates and/or book entry receipts would have to be issued by more widely known entities. For example, Citibank or Bank of America might issue gold certificates and maintain book entry gold accounts that would be generally accepted by a wide group of strangers as long as these strangers had confidence that Citibank or Bank of America had not engaged in fraud. Gold in their vaults equaled the certificates plus book entry accounts to the gram.


All that is required to convert to the rule of law is the repeal of legal tender laws granting special exemptions from normal commercial law to the central bank and its system of member banks. The reverse of Gresham's Law would prevail. i.e., sound money would drive out bad.

Sunday, April 16, 2017

No Nation Can Harm Another Economically

My recent Mises Daily Article titled Two Common Objections to Unilateral Free Trade drew some criticism that I would like to answer.


Unilateral free trade rewards the country that adopts it


Several commented that my use of the term "unilateral" negated my argument. They resurrected the argument that free trade is beneficial to both parties only if both agree to remove trade barriers to the other's products. Otherwise, the party that removes its trade barriers suffers economically by having its industries destroyed by the party that keeps its trade barriers in place. This argument stands all of economics on its head by asserting that consumers are required to support producers; whereas, the purpose of production is to meet consumer demand. If one producer, whether domestic or foreign, wishes to lower its price, accept a lower return on capital, obtains an agreement from its employees to work for less, and thusly is able to capture more market share, no one is harmed. Even if a government taxes its citizens in order to provide subsidies to some producers, this is no concern of the consumers or producers in another country. It is no business of anyone other than the taxpayers of the subsidizing government. These people have a legitimate gripe, for they are being robbed to pay privileged insiders within their own country. Producers in the country that lowered its trade barriers have the choice to redirect their capital to other uses and employees have the freedom to work in other industries. The country's cost of living drops, and its standard of living rises. Even those workers temporarily unemployed will benefit from this lower cost of living.


Concentrate solely on freeing one's own economy


Others commented that my use of the term "unhampered market" negated my argument. I pointed out that there is always more work to be done and that there is opportunity for all in an unhampered market. These commentators pointed out that no country has an unhampered market; therefore, unilateral free trade would cause permanent unemployment. This makes two false assumptions. One, that workers can only train for one job in a lifetime and, two, that it is futile to lower barriers to employing capital and labor efficiently in one's own country. The obvious proper response is to insist that one's own government allow its citizens full economic freedom and not waste its time trying to persuade other governments to adopt economically sound policies. If other countries wish to punish their own citizens, that is their business and not ours. In fact we are made richer by their poor policies which provide us with subsidized products.




The only just policy that any government can take is to free its own economy to allow its citizens to purchase any legal product no matter where produced. This provides investors and workers with the only government help they need; i.e., the freedom to employ their capital and labor wherever it may achieve the greatest return. A nation's citizens will enjoy the highest possible standard of living that adopts low taxes, the few regulations that merely support normal commercial law to protect citizens from fraud, and sound money to allow producers and consumers alike to correctly value their present transactions and expected future returns.


A corollary to freeing a market economically is to reduce public expenditures that discourage rational actors from engaging in socially destructive behavior. Welfare payments of all kinds, taxpayer supported public schools, unsound and unfunded government mandatory retirement schemes all reduce socially beneficial behavior. In fact our nation's so-called immigration problem would go a long way to being solved if neither immigrants nor native born citizens had access to welfare, so-called free public schooling, free or subsidized housing, etc. on demand, nor could they trespass on either public or private property. This may not solve the immigration problem to everyone's satisfaction, but it would be a huge step in the right direction.


The only economic problems that this country or any country faces come from its own misguided attempts to thwart the free market within its own borders. Stop complaining about what other countries are doing for the simple reason that they cannot harm us. Our economic future lies in our own hands.

Friday, March 31, 2017

Two Unfounded Objections to Unilateral Free Trade


Recently I forwarded to my circle of friends what I considered to be a concise and accurate argument in favor of unilateral free trade. The author was Professor Don Boudreaux of George Mason University, writing in his daily blog Cafehayek.com. He responded to Mr. Daniel Dimiccio, former CEO of Nucor Steel, who was defending tariffs on foreign steel. Professor Boudreaux explained that arguments in favor of tariffs place all of economics on its head; i.e., that consumers were required to support producers rather than the other way around.


After sending Professor Boudreaux's article, I have been hearing two common objections to his article from friends who consider themselves generally to be in favor of free trade, even unilateral free trade. The first objection I will call the Donald Trump objection; i.e., that imports have cost Americans good paying jobs, from which the nation has never recovered and cannot recover as long as we allow imports to replace American made products. The second I will call the essential industries objection; i.e., that there are some products that America must produce itself, no matter what the cost or inefficiency, in sufficient quantities to ensure access to these products in time of war.


Objection number one: Free trade causes unemployment


The first objection is easiest to dismiss, for it attempts to refute the "Law of Comparative Advantage", postulated exactly two hundred years ago by the great English economist David Ricardo. Peaceful cooperation among peoples of the earth has no limit. Just as we Pennsylvanians find it advantageous to import pineapples from Hawaii rather than attempt to grow them ourselves, Americans find it advantageous to import many goods from people who just happen to live in foreign countries. Absent government intervention to restricts one's own citizens from entering into peaceful cooperation to produce any legal product or service, all will find employment and all will be wealthier. A simple example will suffice. Let's assume that Michael Jordan, the greatest basketball player of his generation (and perhaps of any generation) desired a new home. Let's also assume that Mr. Jordan was a skilled carpenter, electrician, plumber, etc. Would Mr. Jordan become wealthier by quitting basketball for a year or two at the height of his career in order to build his own home? Of course not. Even if we assume that Mr. Jordan not only was a skilled craftsman but just happened to be the best craftsman in the world, he still would be wealthier paying less skilled workmen to build his new home while he earned much higher wages playing basketball. The corollary is that even those who are less skilled in ALL things can find useful employment in an unhampered market.  This is the "Law of Absolute Advantage", a corollary to the "Law of Comparative Advantage".


The Law of Comparative Advantage is also revealed once producers create a surplus. Savings produces capital, which produces more wealth when individuals are allowed to engage in the productivity enhancing division of labor via trade. The resulting products and services cost less than previously, yet employment is not destroyed. It is transferred to better uses, which enrich all. Both sides expect that trade is beneficial and must be allowed to freely trade their surplus product. The political location of individuals engaged in such trade is completely irrelevant to the wealth enhancing benefits of trade.


The logical conclusion of restricting international trade for just one or two so-called threatened industries is the demand that all products be protected. Advocating an autarkic society is to argue in favor of the fallacy of composition; i.e., that what might be good for one industry--for example, allowing domestic steel producers to extort higher prices from customers--cannot be extended to all industries.


This is akin to standing in a giant circle with everyone picking the pocket of the person in front while having his pocket picked in return.


The source of our societal problems, even those correctly identified, such as persistent unemployment, must be found elsewhere. As Ludwig von Mises would advise, one must find the proper means to arrive at the ends desired. If the US really does suffer from collapsing industries, restricting trade is not the solution but will exacerbate the problem. In other words, trade restrictions to cure unemployment are the wrong cure and will cause even more harm to society.


Unfortunately in modern day America there are many suspects to which one can assign economic decline. American industry is hampered by a panoply of regulatory red tape and outright restrictions at federal, state, and local levels. One needs only to consider the effects of the Environmental Protection Agency, the Occupational Health and Safety Administration, the Federal Food and Drug Administration, not to mention similar agencies at the state level, plus the disaster that is public education (regulated mostly by the states) and ever increasing regulations on economic life at the local level. (My tiny township government in southeast Pennsylvania recently informed us homeowners that we needed to obtain a township issued permit in order to resurface our driveways. So, now I need government permission to maintain my home in good repair!)


Objection number two: Essential industries must be protected


This is the national security objection; i.e., that the US must maintain a minimum production level of essential war related products.  This is not an argument in favor of economic efficiency. Quite the opposite. Furthermore, little or no evidence is offered that nations have lost wars due to running out of essential products, although it undoubtedly is true that denying the enemy all kinds of goods and services does reduce a nation's war-making capability. Nevertheless, one can make a good case that this concern is unlikely to be a factor by taking a closer look below the surface of this argument.


Stating the "essential industries" case:

Let's assume that China wants to drive US steel manufacturers out of business. It succeeds by offering US steel users--manufacturers of buildings, bridges, autos, etc-- high quality products at low prices for an extended period of time. After US steel production has been reduced to zero, China suddenly refuses to sell steel to us and, as a consequence we cannot build essential war material that requires steel components. We surrender to China, withdraw our military protection to allies, and/or accede to China's demands, whatever those may be.


The response:

Note that for a long period of time, perhaps years or even decades, China must subsidize steel production, which drains its public coffers and actually reduces its own war making capacity. (China can't build its own battleships, for example, if it is subsidizing construction of ours.)  In the meantime, the US enjoys an increase in its standard of living. We build up our country in many ways, from new and improved bridges to a revitalized domestic auto industry (remember, cheap, high quality Chinese steel is subsidizing US car makers). Now China embargoes steel shipments to the US and makes threats of some kind. Our modern battle fleet, the product of cheap Chinese steel, is at our immediate disposal.


Meanwhile, our modern infrastructure, built with cheap Chinese steel, allows us to rush stockpiled war material, also built with subsidized Chinese steel, to our fleet and onward to our overseas bases and the battle area. We then gear up for the possibility of a protracted war by placing orders for steel with the other thirty-odd nations of the world who are eager to sell us high quality steel but who have been shut out of the American market by subsidized Chinese steel.


Now, I ask you...is this not the more likely scenario?


Importing subsidized products--perhaps especially products essential for war--increase a nation's war making capacity rather than diminish it. We build up all aspects of our nation's economy, including the defense sector, by using products with the best combination of quality and price, whether imported or not. Doing so allows us either to spend less for the same level of defense or increase our defense by spending the same amount of money but getting more war material in return. Our theoretical potential enemy has actually helped us defend ourselves and our vital interests abroad.




In conclusion, these two common objections to unilateral free trade do not stand up to closer scrutiny. For two hundred years David Ricardo's Law of Comparative Advantage has informed us that in an unhampered market economy all will be employed to the limit of their capabilities. Furthermore, rather than reduce a nation's security, imports of what we might consider to be "essential materials" actually enhance our security. We need to tax our own citizens less for the same level of security while building up our nation at the expense of potential enemies.


Let us end such nonsensical worries and trade freely with the world, especially with those whom we might currently fear, such as China. It wasn't that long ago our nation feared Germany, Japan, and even Great Britain. It's good to remember that peaceful cooperation provides its own momentum for everyone.


Thursday, March 23, 2017

The true goal for the EU's call to beef up financial regulation

From today's Open Europe news summary:

European Commission considers beefing-up powers of pan-EU financial supervisors

The Financial Times reports that the European Commission is considering plans to beef-up the powers of the three pan-EU financial supervisors, in a bid to address potential supervisory loopholes ahead of Brexit. Valdis Dombrovskis, a vice-president of the Commission, is quoted as saying, “Already you hear there are some disagreements among [EU] member states whether or not some kind of regulatory arbitrage is taking place, so indeed it strengthens the need of the case for regulatory convergence.” The article notes that one of the options under consideration would see the European Securities and Markets Authority (ESMA) been given powers to directly supervise clearing houses, as well as greater oversight over cross-border investment funds.
Let's all consider the true meaning of the Commission's goals by examining these phrases:

"potential supervisory loopholes"
"regulatory arbitrage"
"the need for regulatory convergence"
The EU is terrified that Brexit will mean that it is losing its stranglehold on ever increasing financial regulation.


Tuesday, March 21, 2017

End Banks' Exemption from Normal Commercial Law

Mr. Burke asked me to respond to the article below about how banks engage in money creation. Like many such articles, the one by Mr. Werner seems almost designed to be confusing and obtuse. My short explanation attempts to inform the layman of what is actually happening; i.e., that banks are exempt from normal commercial law and we all suffer.

Pat Barron

From: Patrick Barron
Sent: Tuesday, March 21, 2017 10:33 AM
To: Dan Burke
Subject: Re: Richard Werner
Banks are exempt from normal commercial law; i.e., they are allowed to engage in fractional reserve banking. In other words, a new dollar of reserves can be pyramided into approximately ten dollars of new bank deposits. Austrian economists call such money created out of thin air as fiduciary media in order to differentiate it from deposits backed by actual reserves. A loss of confidence in a bank can cause a bank run in which there are more claims for deposit withdrawals in the form of actual reserves (Federal Reserve Notes) than the bank actually owns. The bank's bankruptcy is exposed. Bank runs are rare today, because the Federal Reserve promises, via Federal Deposit Insurance, to lend the bank as many reserves as necessary. Nevertheless, this does not fix the fundamental error, which is legal tolerance for fractional reserve banking, and merely causes an expansion of base money (cash and bank reserve balances at local Federal Reserve offices) and sets the stage for another round of money expansion via banks' fractional reserve lending capability. Furthermore, the expansion of base money leads to malinvestment of capital and a rising price level, commonly and mistakenly called inflation. (The real inflation is inflation of the money supply via fractional reserve banking.)

The solution is to withdraw the banks' exemption from normal commercial law and prosecute fractional reserve banking as the fraud that it is. Banking would divide itself naturally into deposit banking, with one hundred percent reserve backing, and loan banking, in which the depositor gives up access to his money for a certain period of time so that the loan banker can find credit worthy customers.

Such a system would lead to the immediate end of federal deposit insurance and government bank examiners. Deposits would become bailments. Loans would be subject to full loss, just as today there is full risk of loss of one's investment in corporate bonds, corporate stock, real estate, etc.

Patrick Barron

From: Dan Burke
Sent: Tuesday, March 21, 2017 9:08 AM
To: PatrickBarron@msn.com
Subject: Richard Werner
Would you please react to Mr. Werner's article? http://www.sciencedirect.com/science/article/pii/S1057521914001434

How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking ☆ Richard A. Werner