Last week I attended a workshop at the ECB on Global Liquidity. Global Liquidity of course refers to money flowing throughout the world as a result of western central bank money printing—especially Fed printing. I thought it might be beneficial to highlight some insights gained.

1. Attended mostly by central bankers, the group of 40-50 people seemed to be in agreement that their—and particularly the Fed’s—monetary policy is a key driver of financial asset prices, including commodities and real estate.

I learned that while there is no consensus among central bankers that increased bank credit is the sole driver of higher asset prices (though I’m told many say that it is, and one economist I spoke with said that it was), there is a consensus that it is the sole driver of inflation in the long run. The short-run drivers are rather insignificant. One that I agree with is changes in the supply of imports. As a booklet I bought states: “Inflation is ultimately a monetary phenomenon.”

Why central bankers agree that rising consumer prices are ultimately a monetary phenomenon, but believe rising asset prices are only a partial monetary phenomenon is beyond me.

Just to be clear, I asked one central banker about the theory that unions can drive up prices. He said that they could—if there was an increase in money. He was spot on.

An very interesting insight came about when he said that I sounded like a monetarist. I said that I was actually more aligned with Austrians. He immediately replied that the school is not much different than monetarists with respect to what we had been discussing. Of course he was right, but it impressed me that he was that intimately familiar with Austrian views. After all, one Italian central banker I spoke with a few years ago asked: “what is an Austrian?”

2. The group also discussed that monetary policy has both a supporting and a destabilizing effect on the economy and financial system (we, of course would argue that it is the sole driver of asset prices and of GDP and consumption in the long run). One PPT presentation by an economist from the Bank for International Settlements, regarding the financial crises concluded: “Who to blame? Model says the Fed.” I agree with him. But it’s shocking that they actually state/admit this.

Another statement was “the central bank can create distortions.” Again, to us they are—absent acts of nature—the only ones creating distortions, but that they accept their influence as matter of fact is surprising to say the least.

3. The group kept commenting that it was increased credit driving leverage. They agree that it is leverage driving asset prices. As one person said “increased leverage has to come from somewhere” (i.e., you cannot create new leverage without creating more money/credit). (They defined leverage as total bank assets over bank equity and as equity of banks times leverage). Interestingly, several people discussed that the leverage of banks is inversely related to the VIX.

4. There is a whole area of research related to the following information that I too have previously learned the importance of: the transmission channel of money flow into consumer prices (i.e., bank loans) is a completely different transmission channel of money flow into asset prices. For asset prices, money flow is originated in the interbank market (money market) with the large banks and hits the hedge funds/brokerage houses/institutional investors in the form of “non-monetary bank liabilities such as money market papers, certificates of deposit, commercial papers, structured notes, or bonds, which [are bank credit but] not recognized as the common medium of exchange.”

As part of this, there is a large debate about which side of bank balance sheets are responsible for rising prices: the asset or liability side. This is known as the money view vs. the credit view. The money view is the liabilities view that argues that the creation of money in the form of bank deposits pushes prices higher. The credit view is the asset view (or loanable funds theory) that argues that the creation of credit in the form of bank loans is responsible for rising prices. They noted that credit has grown much more rapidly than money over the last 25 years.

This explains why both GDP growth and consumer prices have had low growth rates while asset prices of boomed (asset inflation has been high). It also explains why performance of the financial market is unrelated to the performance of the real economy (money can flow into asset prices without flowing very much into consumer prices, causing GDP to stay low).

5. Though there was some debate on this, it was said several times that “the U.S. is the global provider of liquidity.” I thought that Europe and parts of Asia were also providers, by way of coordinated monetary policy. But somehow the US is supposed to be the driver. Perhaps they simply mean that the Fed initiates policy first, and that other central banks follow in the footsteps of the Fed unofficially so as to keep their currencies aligned. By intentionally keeping their currencies at parity, they suck in capital flows pushing their asset prices higher. Thus, US liquidity evolves into global liquidity.

6. One paper argued that Europe is as large of a driver of US asset prices, but it’s not registered on the radar screen as such because the Eurodollars they use are held in the names of US banks, and thus show up as US assets. If this is the case, European banks affect our asset prices much more than previously expected.

7. I was surprised at how their language was so similar to that of Austrians, since mainstream economists usually cloak their points with obscure, “roundabout” language. These monetary economists spoke regularly of the central bank creating money, and kept noting that it was only possible in a fractional reserve system. They even used the term “Ex nihilo” as Austrians do. They also spoke of misallocation of capital, distortions, and booms and busts. Interestingly, one paper presented distinguished between “aggregate demand” and “aggregate real demand” differentiating between aggregate demand caused by money printing and true aggregate demand in the real economy (which, of course, can rise only with more production).

8. Though they know that they are aware causing rising prices, boom and bust asset movements, and financial crises, they still support fractional reserve banking and credit creation. They really, truly believe that economies need new credit in order to grow. That, is their originating flaw.

The main takeaway is that it is very surprising how aligned with Austrians these monetary economists are. I think this is so because these people focus in such a detailed fashion on money and prices that they cannot avoid the real facts. Within the scope of their daily work, they are not political propagandists; they are merely seeking—as are Austrians—to understand how things really work. It’s just too bad they don’t advocate different policy actions based on their conclusions.

Michael Feroli, chief U.S. economist at JPMorgan Chase (michael.e.feroli@jpmorgan.com), stated that Ron Paul’s idea of returning to the gold standard would result in the exact opposite of what, in reality, it would result in. He implies that under a gold standard, financial markets would be volatile and would be based on manipulation of the money supply by gold producers.

In reality, asset prices on a gold standard could never rise over the long term—they could only fall. They would also be very calm, as there would not be new, fake money sloshing around. Indeed, prior to the Fed’s creation in 1913, most financial markets were very calm, even boring. Commodities in particular spiked stongly—periodically—in parallel to the bursts of money printing, and then fell again upon the subsequent monetary contraction. But all asset (and consumer) prices at the end of the 1800s were the same as the beginning of the 1800s, oil included. Indeed, if the banks had been restrained by a free market from creating monetary booms, commodity prices would also not have boomed. Equities and oil in particular were basically flat-lined.

In contrast, these days, with banks being able to print unlimited quantities of money, asset prices are very volatile and continue to rise. Feroli alludes to the OPEC cartel controlling oil prices (which they don’t). But the banks are in fact a cartel that controls—indirectly—ALL asset prices, including oil. Still, Feroli says that if the free market and gold producers supplied our money, prices would be high and volatile. In other words, what Feroli says would be the case under a gold standard would not be. It’s the case currently because Feroli’s industry is in charge of creating money instead of the free market. And, it’s absurd to think that scores of producers could control the supply of money—especially any more than the monopoly central bank does today!

Feroli knows better. He knows the real story. He lied in order to help is bank, his industry, and himself. Here is the email I wrote him:

Dear Mr. Feroli,

You stated:

“We would still have monetary policy – it would be set by gold miners in South Africa and Uzbekistan, rather than bureaucrats in Washington,” said Michael Feroli, chief U.S. economist with JPMorgan Chase.
“If you like what OPEC means for oil prices, you’d love what the gold standard would do to financial markets.”

I’m sure your understanding of economics is not so little that you really believe such illogical, stupid statements. If it were, I would be happy to educate you. But indeed, it’s worse: you state such audacious lies merely to protect your employer and your industry. You want to keep benefitting at the expense of other citizens by redistributing their money to you, your firm, and to wealthy investors by way of inflation. You are actively promoting theft and the harm of millions of people. You will win, because people are ignorant enough to believe your propaganda. But no matter, it is immoral and unethical.

Sincerely,

Kel Kelly
Atlanta, GA

Yes, we are now at that point. The Australian government is proposing to kill Camels in the wilds of the country in order to reduce methane output. Experts say the camels are a menace: they are doing damage to physical property, trampling vegetation, and invading remote settlements. Thus, it would be good to kill them. The government would pay sharpshooters in the form of so-called carbon credits.

This makes one wonder how the world existed without global warming being at the “tipping point” for tens of thousands of years while camels, as well as numerous other methane-emitting animals existed.

It also sets a precedent. For whatever animals are a menace, and can be traced to damage or nuisance of one form or another, let’s just kill them all. We could start with the cows (thus reducing our food supply).

Similarly, we could kill groups of people who are seen to be a menace or nuisance. After all, humans are emitting methane as well, and leaving huge carbon footprints (thankfully—or we’d all be dying of starvation, cold, heat, or disease).

After all, one Australian medical expert has called for a $5,000 tax on all children born, and an annual carbon tax of up to $800 per child, due to the supposed negative effect on the environment each person produces. The environmental group The Voluntary Human Extinction Program, which has the slogan, “May we live long and die out,” consists of volunteers who have made decisions to remain childless, so that other species can live instead. The group’s founder states, “As long as there’s one breeding pair of homosapiens on the planet, there’s too great a threat to the biosphere.” A University of Texas biology professor claims that humans must die for earth to live, and states that disease “will control the scourge of humanity. We’re looking forward to a huge collapse.” These people certainly must be the life of the party at summer cookouts. Do you doubt that they would support government action (government force) to advance their cause?

(See page 379 of my book for supporting documentation of these facts)

Yet more evidence that politicians are both incompetent and immoral: a month after they began taxing witches on their trade, authorities are pushing a new bill that will allow for the fining and imprisonment of witches who fail to foretell events accurately.

While the government says it is merely cracking down on tax evasion (by creating new, unjustifiable taxes), critics say the proposal is a ruse to move attention away from the country’s economic problems.

Something like this should not come as a surprise in a country where the president, Traian Basescu, hit a child in the face while on his most recent campaign trail, but, shockingly, was still elected!

Thus, I agree with Romanian political commentator Stelian Tanase, who said: “The government doesn’t have real solutions, so it invents problems. This is the government that this country deserves.”

Redtube.com is an internet site offering high quality porn for free. But competitor sex sites which were trying to charge for the same service didn’t like the supposedly unfair competition (and California does have an “unfair competition” law). Thus, one competitor sued. Thankfully, however, a California Appeals court dismissed the case, essentially stating that anyone has the freedom to publish whatever one wants on the internet. The court called the plaintiff’s bluff by saying that having the freedom to post what one wanted is “the ‘predatory pricing’ that [the plaintiff] complains of.”

The plaintiff argued that Redtube.com was selling its product below cost so as to gain market share. While this absurd claim didn’t hold up in this case, it often does. For many companies have gone down in flames due to the flimsy “price dumping” argument. The reality of anti-trust laws is that they are about politics, not competition. Legislators who passed anti-trust laws themselves admitted that companies were expanding output and lowering prices. The problem is that they also thought that this was “unfair competition.” The legislators had less competitive companies voting for them back home that wanted “a fairer playing ground.” Companies often run to the government claiming “unfair competition” when they can’t compete in the marketplace. A prime example is the Microsoft case of the late 1990s.

(For a brief background on antitrust laws and the case against them, see pages 167-179 of my book)

It is one of thousands of cases where one group of people wants to live differently than the way in which another group of people forces them to live. In this case, those who were not allowed to live as they wanted have now been given the choice to vote their way to freedom. Low and behold, 99% of the people chose to live differently.

The world is celebrating Southern Sudan independence as a great thing. But in most cases in history, those who want to secede are violently stopped from seeking the freedom they want. Even in our “free” country of America today, one who talks about secession is seen a quack and a nut, even though secession is precisely what our country was founded on.

It is a true shame that most people in the world today do not live as they would choose to live, and are not given the option of doing so.

The former Tunisian police force belonging to President Zine ElAbidine Ben Ali were thugs who enforced the dictator’s rule. They engaged in bullying, intimidation, bribery, and numerous human rights abuses, including contributing to the deaths of more than 100 government protestors in the last couple of months. On Saturday, they too took place in protests, alongside those they used to assault.

The quotes below come from these various news outlets.

http://news.yahoo.com/s/ap/20110122/ap_on_re_af/af_tunisia

http://www.bloomberg.com/news/2011-01-22/tunisian-police-demonstrate-in-capital-reject-blame-for-protester-deaths.html

http://www.time.com/time/world/article/0,8599,2043966,00.html

I’ve listed the more notable quotes from these stories below. I make comments in order to put these statements into perspective.

They sought to press demands like the creation of a labor union, better pay and — like other protests in recent days — the ousting of any members from Ben Ali’s party from the government

Their protest does not seem to be about freedom or morality. They are in it for themselves. By forming a union, they can force the (presumably less coercive) new government to pay above market wages at the expense of everyone else in society.

[One officer] said he wanted a labor union to help defend police officers’ interests — and wanted to convince Tunisians in general that “we are here for the people and we want to serve the people.”

Police are basically the same all over the world: they describe their role of carrying out the force and coercion required by those wanting to control others as being a role of “serving the people.” Those who are at the receiving end of the force and coercion are usually submissive and question nothing.

“The government always made sure the people were scared of us but this must end,” he told The Associated Press. “Also I don’t want the blood of our martyrs on my hands.”

Here the pigs try to deceive the people into thinking that is was not their fault; they were forced to do these harmful things (never mind that they willingly kept their positions and took money from their employers in exchange for carrying out this aggression). Now, they pretend that they themselves are against those terrible things they were forced to do (such as taking bribes in exchange for not enforcing the “law”). They were apparently not too against it previously, because they continued to do it.

Added another officer, Nabil Jazeeri: “We need to forget the past and realize there is no home in Tunis that doesn’t have a police officer or a man serving in the army.”

Translation: “You need to forget the terrible things we’ve done to you, so that you don’t engage in retaliation against me. Besides, everybody was doing it—that makes it ok.”

In the southern city of Gabes, police officers also demonstrated, waving the Tunisian flag and singing the national anthem, state-run Agence Afrique Tunis Press reported.

No matter that it was the natural characteristics of the nation state which caused the police to be against the citizens, both sides get together and celebrate the existence of the nation state. Sheep are always led to slaughter.

“I thought you were my enemy but now I see that you are my brother,” says Mahmoud, a middle-aged bystander who has been listening intently and pushes through the small crowd to heartily embrace the policeman. “I know that you were oppressed too.”

This guy is a sucker, and most of the citizens are probably suckers too. They see the policemen, who voluntarily continued the job of oppressing people, as poor oppressed people themselves who need a hug.

“Colleagues, you are victims, come and join us,” they [citizens] chant to the men in uniform on the other side of the razor wire.

More suckers.

“We forgive you,” Sayed Ramadan, a business owner tells the officer. “Sometimes I’d have to pay the police bribes, but it was a difficult time for everyone. I knew you had low wages.”

Unbelievable. This guy deludes himself into thinking that the policeman who threatened him until he paid the policeman a bribe should be sympathized with because he was paid supposedly low wages. Perhaps we should forgive Hitler because he was bullied on the playground.

(This reminds me of how the leftist customer at the post office last week, after standing in the typical 20 minutes long line, sympathized with slow, rude, uncaring voluntary government clerk of a government monopoly who actually lied to her about not having a particular envelope, because he has such a tough job handling such long lines. (He was out of the envelope. The clerk next to him had it. He didn’t tell her the next clerk had it. She asked. He said yes, and got it. She thanked him for being so helpful.))

The police and national guardsmen are singing the national anthem. The crowds of citizens that have surrounded them heartily join in, clapping and applauding what just a few days ago seemed impossible.

.

Freedom Swiss style: Pay a per head tax on your pet or the state will kill it.

So much for private property—one’s pet—being one’s own. If pet owners don’t pay the state money, most of which goes into someone else’s pocket, it will come after them. A local Swiss politician described it for what it is:

“It’s meant to put pressure on people who don’t cooperate.”

That’s what’s called “liberty” by socialists.

Cuba is once again opening its economy in order to prevent further economic retrogression. Raul Castro says that this time it’s the real thing. But, he notes, that the act of permitting more capitalism is for the sake of strengthening socialism. What he’s really saying, obviously, is that socialism is not working and Cuba needs more free markets in order to make some progress.

What’s interesting about this assertion is that it is opposite to those in “developed countries.” In the developed countries, politicians install more socialism claiming that it will help capitalism, when it will instead do the opposite. Castro is—supposedly—employing capitalism and claiming that it will help socialism. I would prefer Castro’s method of pulling the wool over the eyes of the people to the opposite method used by our own beloved domestic politicians.

Some points of interest:

 Castro warns that people will actually have to work in the new Cuba. He says Cubans confuse socialism with freebies and subsidies. No surprise, except that a politician actually described reality accurately.

 As Cuba has declined economically even over the past five years, economists—including CIA economists—have estimated that Cuba’s GDP growth has been growing, and, in some years as high as 10%. The same thing happened in the Soviet Union. This is just more proof that GDP is in no way related to real economic growth. (Explained here, p.423)

Investors are happy today that a deal was reached on “tax cuts for the rich.” Lower taxes definitely help the real economy, but, except for a one-time pop, they can’t raise the stock market.

Only money/bank credit can push stock prices higher.

See here and here for explanations.

The country that has completely demolished its own economy by employing socialism is looking to trash other world economies as well—through climate legislation. Its politicians can’t successfully run their own country, but they think they know what’s good for the world.

“Progress has been made in some areas,” Zimbabwe’s Margaret Mukahanana-Sangarwe said. But she said the talks were “going backwards” on important issues. “We need to redouble our efforts.”

I don’t think Mukahana-Sangarwe sees the irony—being from Zimbabwe—in her comments.