Tag: free markets

A Case for Monetary Independence

by Lucas M. Engelhardt – Mises Daily:monetary

“Sound money and free banking are not impossible — they are merely illegal. Freedom of money and freedom of banking are the principles that must guide our steps.” — Hans Sennholz

When I was asked to give the Hans Sennholz Memorial Lecture, I was uncertain what I should speak about. Should I give an inspirational, autobiographical talk about life as a young academic? Should I present cutting edge research? Should I advocate for better policy in some “hot” political topic? In the end, I looked at the title of the lecture — this was the Hans Sennholz Memorial Lecture. So, I decided that I should present something Sennholzian — especially since I am a Grove City College alumnus, though I was never a student of Sennholz — who had retired before I was a student here.

The only problem was that I knew embarrassingly little about Hans Sennholz. I had heard him speak — in the same room where I was going to speak — once. But, I only remembered two things about him. First, I remembered his German accent. Second, I remembered a brief story that he told about his experiences in academic publishing. Apparently, Harvard asked him to write an article — I don’t think he mentioned what — so he did, they published it, and he was paid $15 for his efforts. He thought this must be some mistake. Not much later, Harvard approached him again, so he wrote for them again — they printed it, and he received another $15. He decided to stop writing for Harvard. (Sennholz’s academic publishing experience is quite different from mine. I wrote an article that I sent to one of the American economic journals. They decided not to print it, and I paid them $100.)

Anyway, after realizing that I should discuss something Sennholzian, and realizing my own ignorance of Sennholz’s work, I hit the library and reserved every book by Sennholz in the state of Ohio’s library system. As I flipped through them: Age of Inflation; Debts and Deficits; The Great Depression: Will We Repeat It?; Money and Freedom a central theme emerged, and it’s the theme in the quote that I began with: Sound money and free banking. So, I hope to present to you today what I call a case for monetary independence — that is, a case for the separation of money and State. To make this case, I will consider a number of different institutional arrangements for how the monetary system may be organized.

 

Fully Dependent National Central Banks

Let’s start with the worst case — a central bank that is fully dependent on the political system. In effect, in such a system, the Treasury would have the power to create money at will. Economists generally agree that such a system would lead to very high rates of inflation. Government spending is popular — the left loves their social welfare programs, while the right likes funding a large military. However, taxes are politically unpopular — especially with those that have to pay them. So, it is unsurprising that governments typically run deficits. If the government were given direct control over money creation, one can expect that deficits would be funded largely by the creation of new money, as the effects of money creation are much easier to hide than the effects of taxation or decreases in spending.

The end result that economists expect with this framework is that hyperinflation becomes a very real possibility. Historically, hyperinflations tend to occur when large deficits are funded with money creation. This isn’t shocking — a $1 bill costs just about $0.07 to print, so money production is quite profitable. It’s a cheap way of raising funds for the government, and zeros are cheap. So, as prices go up and the money loses value, the Treasury can maintain their profits simply by adding zeros. Eventually, we end up with a Zimbabwe scenario. I have 180 trillion Zimbabwe dollars that I bought on eBay for $15 — and that included protective plastic sleeves. I suspect the sleeves are more valuable than the money inside them, but the point is: zeros are cheap. That being the case, there is virtually no limit to the inflation that a Treasury could create if it were giving the power to create money directly. For this reason, most economists now suggest that central banks should be independent.

 

Independent National Central Banks

In some ways, the claim that money should be independent of the State is a bit blasé. Over the past twenty or thirty years, the mainstream economics literature has converged around the idea that central banks — which govern monetary policy — should be independent of the governments that they operate under. Alberta Alesina and Larry Summers (Summers is the former Treasury Secretary under President Clinton, and former Director of the National Economic Council) found that independent central banks have better inflation performance — without having higher unemployment or more economic instability than countries with central banks that are less independent. Even President Obama has been clear that he supports a “strong and independent Federal Reserve” — an odd statement given that he has appointed all five of the current members of the Board of Governors, and appears to be looking to appoint more.

And the reality is that the Federal Reserve is not very independent. Dincer and Eichengreen, in a paper in the International Journal of Central Banking, ranked the United States’s Federal Reserve System as one of the four least independent central banks in the world — along with India, Singapore, and Saudi Arabia.

Beyond the institutional connections, there are clear policy connections between the Federal Reserve and government spending. After controlling for the state of the economy, a $1 deficit appears to be funded by about $0.30 of additional monetary base. So, while the Fed is not funding the government dollar-for-dollar, there does appear to be a very close connection between the two. The reason is simple: the Fed, under its current ideology, targets interest rates. If the government borrows a lot, it will drive interest rates up. So, the Fed produces more money to put into loan markets to drive rates back down to their target levels. The end effect is that the Fed is funding a significant portion of the government’s deficits.

So, is this any better than a fully dependent central bank? As many economists love to say — it depends. When the time comes, will the Fed decide to fight inflation rather than continue to fund government deficits? It is impossible to say for certain — though I will say two things. First, mainstream macroeconomists seem to have achieved a consensus that fighting inflation is a very important goal of monetary policy; perhaps the most important goal in most countries at most times. Second, the leadership of the Federal Reserve is convinced that, at the moment, inflation is not much of a concern. Whether they will change their minds in time, and have the political fortitude to stand up to a government that will, in all likelihood, still be deficit spending, is uncertain enough that I won’t speculate one way or the other.

 

Independent, Discretionary, International Central Banks

As we know, the Federal Reserve is not very independent. So, what does it take to make a central bank independent? Based on Nergiz Dincer and Barry Eichengreen’s research, the most independent central banks are mostly found in the Eurozone — where the European Central Bank is in control of monetary policy.

Is this international system a “better” one, though? Let’s take this to an extreme — an extreme which some people have suggested — and consider the benefits and drawbacks of such a system. Let us imagine that all central banks ceded their authority to the International Monetary Fund, which then acted as a single one-world central bank.

This system does, admittedly, have a number of very real benefits. Trade is certainly easier when there is a common currency. Decreased worries regarding exchange rate fluctuations encourage long-term investment projects across national boundaries, which can increase productivity by locating capital where it will be most productive, rather than where worries about currency stability are smallest. The IMF can be expected to be independent of any single government’s pressure to fund deficits — or at least more independent than a national central bank would be.

The drawbacks, however, are substantial. In his book The Tragedy of the Euro, Philipp Bagus suggests that the formation of the Eurozone created a tragedy of the commons in which weak economies — such as Greece, Portugal, and Spain — had incentives to run large budget deficits, funded, indirectly, by the European Central Bank. As the first recipients of newly created money, deficit-running economies can spend the money before it has its full impact on prices — thereby gaining at the expense of those countries that run more balanced budgets. This naturally creates an incentive for countries to run budget deficits — and, in fact, to compete for running the largest ones. This is a recipe for some combination of exceptionally high inflation — if the central bank were to accommodate the deficits or exceptionally high interest rates — if the central bank were to stand its ground.

While it may be that an international central bank could stand its ground more effectively than a national central bank could, recent experience in Europe raises questions about whether international central banks actually will stand their ground.

I want to make one last point about the danger of an entirely unified system: when doing risk management — and a lot of policy is really just risk management — one needs to pay attention to the worst case scenarios. As long as the central bank has discretion, the odds that — at some point in its history — the central bank is going to make a very large mistake is very high. The question then becomes: what is Plan B? We have seen in recent years that national-level hyperinflation, though terrible, has been fairly easy to recover from. The reason can best be seen by examining Zimbabwe. In its hyperinflationary episode in 2008, the internal economy of Zimbabwe was so disrupted that the gross national income per capita had fallen to its lowest level in forty years. However, since that time, gross national income per capital has more than doubled to its highest level since 1983. How did this happen? Zimbabweans abandoned their hyperinflated currency in favor of some combination of the euro, US dollar, and South African Rand — all of which were stable when compared to the Zimbabwe dollar. The adoption of a currency that is more stable gave people confidence to engage in market transactions again — which unfettered resources that had been largely unusable in a hyperinflationary environment.

This solution, though, required the existence of alternative currencies to switch to. What would happen if a single world central bank made a similar mistake? The answer is not at all clear, but I suggest that a worldwide hyperinflation, if it were to occur, would seriously disrupt the division of labor, and thereby lead to a collapse in the worldwide standard of living. The recovery would not be easy, as it would require the reintroduction of a new currency that is actually trusted by the people enough that they would accept it as a medium of exchange. Historically, some countries have succeeded at reintroducing a re-based form of their own currency — but there are also many cases, Zimbabwe among them — where the reintroduction failed.

Given, then, that there would be strong incentives toward hyperinflation, the odds of a hyperinflation actually occurring in a system with a single world central bank, at some point, are far from zero. In fact, given a sufficiently long time period, hyperinflation — or at least some form of serious monetary mismanagement — becomes highly likely. Is this risk worth the advantages? In my assessment, they are probably not.

Monetary Policy Rules

All that has been said thus far has assumed that money is produced by some human monetary policymaker that has some discretion about how much money they can produce. A popular alternative is a rule-based monetary policy. In this case, the political system sets up a monetary policy rule which, somehow, they are unable to alter. This rule then automatically decides what monetary policy should be.

There are several such rules that have been proposed. Milton Friedman’s constant money growth rule was one early — and remarkably simple — example. Friedman suggested that the money supply should grow at a constant rate near 3 or 5 percent. Given that production, on average, grows at a similar rate, this rate of growth will lead to an overall level of prices that is basically stable over the long run. Since Friedman, a number of other rules have been proposed. John Taylor famously proposed his rule which is based on a combination of recent inflation and the recent state of the economy relative to its long-term trend. Scott Sumner suggests what he calls Nominal GDP targeting — an idea not original to Sumner, nor does he claim it to be.

Rather than criticizing each of these individually, I will suggest a few difficulties with this institutional arrangement — regardless of the specific content of the rules.

The primary difficulty, of course, is the political one. Any political system that is strong enough to establish a monetary policy rule is strong enough to modify it — or discard it. So, what would it take for the monetary policy rule to be established and then left alone? We know that there are times that policymakers are actually strong enough to implement a policy, but would not be strong enough to eliminate it. I think of Social Security as an example. In this case, the policy created an interest group — and a popular one — that would fight for the policy to continue. Everyone loves their Grandma, and everyone’s Grandma loves Social Security — so it is such a popular program today that no politician would be willing to seriously attempt to eliminate it. For us to do this with monetary policy, we’d need to have a monetary policy rule that created a popular interest group that would resist any changes to that rule. How to do that is not clear to me — but I may just be uncreative at coming up with political solutions.

Even if we were to solve the political problem, these rules all share in common certain economic problems — primarily one of measurement error. Any use of economic data must acknowledge that discussing data from a scientific standpoint, such as saying that the overall price level will rise if the money supply increase sufficiently quickly, is different from saying that a particular measurement of that variable will act in a specific way. The Consumer Price Index, Producer Price Index, and GDP Deflator all seek to communicate the “overall price level” — but they all have weaknesses.

That is: the statistics that we can actually measure don’t align perfectly with the scientific conceptions that they are designed to estimate. In short: in reality, there is error in any macroeconomic measurement. For scientific purposes, this is something we can deal with. As long as our statistics are reasonably well correlated with the underlying reality that we care about, errors can be expected to, in a sense, cancel out, on average. So, as long as actual prices, on average, act like the CPI, and as long as the true money supply, on average, acts like M2, then any statistical connection between CPI and M2 would be expected, on average, to reflect the actual relationship between money and price levels.

But, policymaking is an entirely different matter — it’s far closer to engineering than science. That being the case, the errors are, in a sense, exactly what matter. If our measure of the money supply is temporarily undermeasuring the true money supply, then we’ll end up creating too much money under a Friedman rule. Is this temporary? Yes, but in the world of economics, temporary things are exactly those things that create economic disruptions.

An additional economic problem with these rules is that they assume that, in a sense, the world is, or should be, static. The Friedman Rule and Nominal GDP targeting both implicitly assume that overall price levels or total spending in the economy should not change. Why not? The Taylor Rule implicitly assumes that the equilibrium real interest rate in the economy should not change. Again, why not? The economic world is a dynamic one in which change is one of the very few constants. At its most fundamental level, economic activity is the use of resources to satisfy our preferences based on our technical know-how. But all three of these are in constant flux. We are continuously using, creating, exhausting, and discovering resources. We are continuously changing our preferences. Our technical know-how is continuously changing as we learn new things and unlearn others. Why then would we expect macroeconomic aggregates — even if we could measure them perfectly — to remain constant? So, rule-based policymaking has serious economic problems because of mismeasurement and the natural dynamism of the real world. Perhaps fortunately we will likely never experience these problems as the political problems with getting such rules established are likely to be insurmountable.

 

Market-Based Money

Our final stop in the spectrum of monetary independence is a truly independent currency — that is, a money that has no legal advantages or disadvantages when compared to other goods. In short: a free market in money where moneys are free to compete with one another to attain the favor of users. Anyone who wishes may introduce their own money — so I could print Engelhardt dollars in my basement — and try to convince people to use them. The only restriction would be that fraud would be banned — so no one else could mimic my Engelhardt dollars.

In such a system, I would expect that moneys would be governed by the normal, everyday actions of entrepreneurs that do so well satisfying so many of our desires. As they respond to demand and competition from other suppliers, the supply of money would grow at the pace that the market determines. If more of a particular money is demanded, that money will rise in value — increasing the profitability of producing it — leading those entrepreneurs that produce it to produce more, and drawing other entrepreneurs toward producing money that is similar — and therefore competitive — with that money.

As entrepreneurs respond to demand, one would expect that the value of a winning money is likely to be fairly stable over long periods of time — not perfectly stable, of course, as there is often a delay between a change in demand and changes in production to meet that demand. But, the market will reward those money producers that do the best job providing a money that people actually want to use.

As Sennholz observed in many of his writings, there’s something about gold that makes it a particularly good money. And that something is not just some undefinable “X Factor.” It’s a list of traits. As laid out in Sennholz’s Money and Freedom, gold is useful, but unessential, easily divisible, highly durable, storable and transportable. So, the fact that gold — in many cases operating alongside the remarkably similar, but somewhat less valuable silver — was, historically, what emerged as money on the free market. Like Sennholz, I also agree that it seems fairly likely that, if people were left to their own devices, they would again use gold as money.

The question then is: what would it take for us to establish a market-based money? When I first read Sennholz’s Inflation or Gold Standard? I read his plan for reform — and on nearly every step, I said to myself “Well, we’ve already done that.” Only a couple points remained. When Sennholz wrote Money and Freedom in 1985, his original intent was just to update Inflation or Gold Standard? — but he realized that the world had changed enough in the ten or so years since Inflation or Gold Standard? was written that a new book was required. So, he laid out a new plan for reform. It ends up very little has changed in the past thirty years — so Sennholz’s plan from 1985 is mostly still relevant to us today.

The first step: Legal tender laws must be repealed. Allow private debt payments to be written so that they can be repaid however the borrower and lender find acceptable. As Sennholz notes — this move isn’t really particularly radical. If the federal government wishes to receive its own fiat currency in payment for taxes, no one is preventing them from continuing to do so. If it prefers to borrow and repay in its own fiat currency, that is also fine. Similarly, if any private business or individual wishes to continue using paper dollars exclusively, they are free to do so. The only difference is that people would also be free NOT to deal in paper currency. To some degree, we already have this freedom in most of our transactions. When selling goods and services, businesses are permitted to refuse — or require — payment in any form they like. Legally in the US, only debt falls under the legal tender provision. Again, the legal change we’re asking for is not radical.

A second step is what I call “Honesty in Minting.” The US mint produces gold and silver coins — which have a legal tender value that is a small fraction of their metal value. Under Gresham’s Law, these coins are hoarded while paper money — which is worth far more in exchange than the paper it is printed on — is used as money. This should stop. Rather than stamping a Silver Liberty with a phony legal tender value, simply stamp it with its weight and purity. The back of a Silver Liberty should say 1 oz fine silver. I’d note that it already does include this — it just appends the rather silly “ONE DOLLAR” designation as well. This creates confusion for any business that may want to accept gold or silver coins by suggesting that the coin is worth one dollar when its metal value is worth far more than that. Simply eliminating the one dollar designation would make these coins far more usable in transactions, by allowing them to be traded for their fair value.

In addition to honesty in minting, additional freedom in the banking system would also make the market for money more competitive. For example, free entry in banking should be allowed. Banks should be free to accept deposits and offer check-writing and debit-card services denominated in any currency, or any commodity, that depositors and banks find acceptable.

Technically, you can have deposits in the US that are denominated in foreign currencies — but the minimum deposits tend to be prohibitively high — I found one account that you could open for a mere $50,000 or so. Allowing free entry for banks that specialize in foreign currencies would make the possibility of using alternative moneys real to more than just those that are exceptionally wealthy. In addition, banks should no longer be required to be members of the FDIC or Federal Reserve System. As with any organization, banks should be allowed to join if they believe that the benefits outweigh the costs, and not to join if they believe the costs outweigh the benefits.

Again, these are not radical moves. I am not calling for the end of the FDIC — though I confess that I would like to see it vanish. I am not calling for the abolition of the Federal Reserve — though, again, I am convinced that that would, on the whole, be a good thing. I am simply asking that these organizations be opened up to the normal market forces of competition from competitors who are free to enter or exit the market, producing innovative products that may operate alongside — or may replace — those products currently being provided by the Federal Reserve and FDIC.

I will close as I began, with Sennholz. The last paragraph of Money and Freedom declares to us:

Sound money and free banking are not impossible; they are merely illegal. This is why money must be deregulated. All financial institutions must be free again to issue their notes based on ordinary contract. In a free society, individuals are free to establish note-issuing banks and create private clearinghouses. In freedom, the money and banking industry can create sound and honest currencies, just as other free industries can provide efficient and reliable products. Freedom of money and freedom of banking, these are the principles that must guide our steps.

Article originally posted at Mises.org.

Drought and the Failure of Big Government in California

by Ryan McMaken – Mises Daily:government

California Governor Jerry Brown has announced that private citizens and small businesses — among others — will have their water usage restricted, monitored, and subject to heavy fines if state agents determine that too much water has been used. Noticeably absent from the list of those subject to restrictions are the largest users of water, the farmers.

Agriculture accounts for 80 percent of the state’s water consumption, but 2 percent of the state’s economy. To spell it out a little more clearly: Under Jerry’s Brown water plan, it’s fine to use a gallon of subsidized water to grow a single almond in a desert, but if you take a shower that’s too long, prepare to be fined up to $500 per day.

 

There Is No Market Price for Water

The fact that the growers, who remain a powerful interest group in California, happen to be exempt from water restrictions reminds us that water is not allocated according to any functional market system, but is allocated through political means by politicians and government agents.

When pressed as to why the farmers got a free pass, Jerry Brown was quick to fall back on the old standbys: California farms are important to the economy, and California farms produce a lot of food. Thus, the rules don’t apply to them. If translated from politico-speak, however, what Brown really said was this: “I have unilaterally decided that agriculture is more important than other industries and consumers in California, including industries and households that may use water much more efficiently, and which may be willing to pay much more for water.”
In California, those who control the political system have ensured that water will not go to those who value it most highly. Instead, water will be allocated in purely arbitrary fashion based on who has the most lobbyists and the most political power.

Numerous economists at mises.org and elsewhere have already pointed out that the true solution to water shortages lies in allowing a market price to determine allocation — and in allowing there to be a market in water — just as there is a market in energy, food, and other goods essential to life and health. Supporters of government-controlled water claim that billionaires will hoard all the water if this is allowed, although it remains unclear why the billionaires haven’t also hoarded all the oil, coal, natural gas, clothing, food, and shoes for themselves, since all of these daily essentials are traded using market prices, and all are used daily by people of ordinary means.

 

City Water vs. Agricultural Water

For a clue as to how divorced from reality is current water policy in California, we need only look at the government-determined “price” of water there. Even under current conditions, water remains very inexpensive in California, but for the record, city dwellers have historically paid much, much higher prices for water than growers.
For example, according to one study, water for residents of San Francisco rose by 50 percent from 2010 to 2014, but residents were still paying about 0.8 cents per gallon for water. In Los Angeles, the price growth was a little less over the same period, but the Los Angeles price was also low, coming in a little over 0.6 cents per gallon. City dwellers are told that water is incredibly scarce, but as Kathryn Shelton and Richard McKenzie have noted, the price of water is so low that virtually no one even knows the per-gallon price.

But how much do growers pay for their water? In a recent LA Times article contending that growers “aren’t the water enemy,” it was noted that growers are now paying $1,000 per acre foot. This is supposed to convince us that water prices are incredibly high. But how does this compare to city prices? An acre-foot is about 326,000 gallons of water, so if we do the arithmetic, we find that growers who pay $1,000 for an acre-foot are paying about 0.3 cents per gallon for their water. That’s a little less than half as much as the city users are paying.

Now, city water is treated potable water, so we might expect a premium for city water. Historically, however, the gap between city prices and agricultural prices is much, much greater. Bloomberg notes that as of 2014, the price of water had risen to $1,100 “from about $140 a year ago” in the Fresno area. Going back further, we find that in 2001 many farmers were paying $70 per acre foot. Prices well below $1,000 are far more typical of the past several decades than the $1,000 to $3,000 per acre-foot many growers now say they pay. In fact, if we see what the per-gallon price would be for a $140 acre-foot of water, we find that a city dweller could use fifty gallons per day at a monthly price of 64 cents per month, or a per-gallon price of 0.04 cents.

At prices like these, it is no wonder that there is now a shortage of water. The price of water has for years been sending the message that water is barely a scarce resource at all.

In many cases, the low prices are enabled by decades of taxpayer subsidization of water infrastructure. A year round flow of water to both cities and growers is ensured in part by huge New Deal-era projects like Shasta Dam, and Hoover Dam, which the State of California could not afford to build, but which today California largely relies upon for water, care of the US taxpayer.

In central and northern California, the primary beneficiaries of federal water projects are growers, although it’s the city dwellers, who use a relatively small amount of water, who get lectured about conserving water. Were an actual market in water allowed, however, growers would have to compete for water with city dwellers, whose industries are far more productive than agricultural enterprises and who are likely to be willing to pay higher prices. Even when the private sector owners of water are old farming families (a legacy of prior appropriation), the water would still tend to go to those who value it the most as reflected in the per-unit prices they are willing to pay. That is: city dwellers

 

What Will We Do Without California Growers?

The fact remains that much California farmland is in a desert where it rains under twelve inches per year. Massive irrigation projects have made farming economical in the region, but it’s unlikely that the status quo can continue forever if California dries up and cities begin to compete for more water.

When crops like pecans, which are native to Louisiana where it rains over fifty inches per year, are being grown in central California, we will have to ask ourselves if there is true comparative advantage at work here, or if the industry is really sitting upon a shaky foundation of government-subsidized and -allocated resources.

The rhetoric that’s coming out of the growers, of course, is that California growers are essential to the American food supply. Some will even suggest that it’s a national security issue. Without California growers, we’re told, we’ll all starve in case of foreign embargo.

But let’s not kid ourselves. North America is in approximately zero danger of having too little farmland for staple crops. In fact, one can argue that some of the best farmland in the world — in Iowa for instance — is underutilized because policies like Jerry Brown’s farm favoritism send the message that California will prop up its desert agriculture no matter what.

No, if California farmland continues to go dry, this only means that Americans will have to turn to other parts of the US or imports. After all, many of the crops grown in dry parts of California are much more economically grown in more humid environments, including citrus plants, avocadoes (which are native to Mexico), and various tree nuts. And of course, it’s these crops, which are already fairly expensive and water-intensive that get mentioned when we’re told that California growers must be given what they want until the end of time. This will likely mean higher prices for some of these crops in the short run, the correct response is not government favoritism, but free trade, and letting comparative advantage work. In a world with market prices, it’s simply not economical to grow everything under the sun in the California desert. If markets were allowed to function, with real water prices and free trade, this would quickly become abundantly clear.

Article originally posted at Mises.org.

Voluntary Exchange vs. Government Mandates

by Patrick Barron – Mises Daily:voluntary exchange

The basic unit of all economic activity is the uncoerced, free exchange of one economic good for another. Moreover, the decision to engage in exchange is based upon the ordinally ranked subjective preferences of each party to the exchange. To achieve maximum satisfaction from the exchange, each party must have full ownership and control of the good that he wishes to exchange and may dispose of his property without interference from a third party, such as government.

The exchange will take place when each party values the good to be received more than the good that he gives up. The expected — but by no means guaranteed — result is a total higher satisfaction for both parties. Any subsequent satisfaction or dissatisfaction with the exchange must accrue completely to the parties involved. The expected higher satisfaction that one or each expects may not be dependent upon harming a third party in the process.

 

Third Parties Cannot Create Value by Forcing Exchange

Several observations can be deduced from the above explanation. It is not possible for a third party to direct this exchange in order to create a more satisfactory outcome. No third party has ownership of the goods to be exchanged; therefore, no third party can hold a legitimate subjective preference upon which to base an evaluation as to the higher satisfaction to be gained. Furthermore, the higher satisfaction of any exchange cannot be quantified in any cardinal way, for each party’s subjective preference is ordinal only.

This rules out all utilitarian measurements of satisfaction upon which interventions may be based. Each exchange is an economic world unto itself. Compiling statistics of the number and dollar amounts of many exchanges is meaningless for other than historical purposes, both because the dollars involved are not representative of the preferences and satisfactions of others not involved in the exchange, and because the volume and dollar amounts of future exchanges are independent of past exchanges.

 

One Example: The Case of Ethanol

Let us examine a recent, typical exchange that violates our definition of a true exchange yet is justified by government interventionists today: subsidized, protected, and mandated use of ethanol.

The use of ethanol is coerced; i.e., the government requires its mixture into gasoline. Government does not own the ethanol, so it cannot possibly hold a valid subjective preference. The parties forced to buy ethanol actually receive some dissatisfaction. Had they desired to purchase ethanol, no mandate would have been required.

Because those engaging in the forced exchange did not desire the ethanol in the first place, including the dollar value of ethanol sales in statistics purporting to measure the societal value of goods exchanged in our economy is meaningless. Yet the government includes all mandated exchanges as a source of “value” in its own calculations.

This is just one egregious example of many such measurements that are included in our GDP statistics purporting to convince us that we have “never had it so good.”

 

Another Example: The Soviet Economy

Our flawed view that governments can improve satisfaction caused us to misjudge the military threat of the Soviet Union for decades. Our CIA placed western dollar values on Soviet production data to arrive at the conclusion that its economy was growing faster than that of the US and would surpass US GDP at some point in the not too distant future. Except for very small exceptions, all economic production resources in the Soviet Union were owned by the state. This does not necessarily mean that it was possible for the state to hold valid subjective preferences, for those who occupied important offices in the state held them at the sufferance of what can only be described as gang lords, who themselves held office very tentatively.

State ownership is not real ownership. Those in positions of power with responsibility over resources hold their offices for a given period of time and have little or no ability to pass their office on to their heirs. Thus, the resources eventually succumb to the law of the tragedy of the commons and are plundered to extinction. Nevertheless the squandering of the Soviet Union’s commonly held resources was tallied by our CIA as meeting legitimate demand.

Professor Yuri Maltsev saw first-hand the total destruction of the Soviet economy. In Requiem for Marx he gives a heartbreaking portrayal of the suffering of the Russian populace through state directed, irrational central planning that did not come close to meeting the people’s legitimate needs, while our CIA continued to crank out bogus statistics of the supposed strength of the Soviet economy upon which the Reagan administration based its unprecedented peacetime military expansion.

 

Peaceful Exchange Allowed, Violent Exchange Redressed

With the proviso that no exchange may harm another, as explained so well in Dr. Thomas Patrick Burke’s bookNo Harm: Ethical Principles for a Free Market, we are led to the conclusion that no outside agency can create greater economic satisfaction than can a free and uncoerced exchange. The statistics that support such interventions are meaningless, because they cannot reflect the satisfaction obtained from true ordinally held subjective preferences. Once this understanding is acknowledged and embraced, the consequences for the improvement of our total satisfaction are tremendous. Our economy can be unshackled from government directed economic exchanges and regulations.

Article originally posted at Mises.org.

Bait & Switch: Economic Development in the States

by Jeff Scribner – Mises Daily:economic development

North Carolina recently offered Boeing $683 million in tax incentives to open a plant in North Carolina to build Boeing’s new 777X jetliner. The NC bid failed, as did those from some other states, when Boeing decided to build the 777X in its home state of Washington where there is no state, personal, or corporate income tax.

More recently, North Carolina was prepared to offer Toyota up to $107 million worth of incentives to lure the automaker’s North American headquarters from Los Angeles to Charlotte, bringing 2,900 jobs with it. The Charlotte Observer reported that Charlotte lost out to Plano, Texas. The Texas offer was only $40 million but Texas has no corporate or personal income tax and has direct flights to Japan.

Businesses do not locate in any one place solely because of the tax laws. However, as tax burdens climb, the tax treatment of the business itself, and of its higher-paid employees and executives, becomes a more important consideration. Thus the incentive packages, made up primarily of special tax abatements for a set period of time, are developed and used in recruiting new businesses.

It is apparent that the politicians — politicians as diverse as Governor Pat McCrory of North Carolina and Governor Andrew Como of New York — who try to make use of these incentives, are totally missing the point they are illustrating. If you have to bribe a company to locate in your state or bribe one not to leave, your taxes and whatever else you are using to bribe them, are too high or otherwise onerous. If this were not so, companies and entrepreneurs would move to your state without being bribed and those already there would not be trying to leave. Low taxes and a favorable business climate, like that of Texas, bring in many companies from other places, like California, where the business climate and taxes are not favorable.

Ally Bank ran a commercial several months ago illustrating this concept. The point of the commercial was that it is wrong to treat new customers better than old ones. More importantly, state “incentives” for new businesses, or those planning to leave, may amount to failure to provide equal protection under the (tax) law and may actually be bad for the state’s economy.

In April, Governor McCrory proposed a public-private partnership that would take over the economic development functions of the North Carolina Commerce Department. It is not yet clear how the partnership’s marketing would work or whether it would still offer tax and other “incentives” to attract companies to relocate to North Carolina. The budget approved by the House and Senate has no credits, instead offering grants totaling $10 million. (The Department of Commerce is in the process of determining how the grants program will be structured.) As a point of comparison, under the current incentives program, the state gave out $61.2 million in credits in 2013.

New York is mounting an effort to attract new businesses and entice entrepreneurs to start new businesses through its “Start Up New York” program. See their video ad here.

The Upstate New York economy is not good. Many of the little manufacturing companies that lived along the old Erie Canal have gone and even some of the big ones, like Xerox, Kodak, IBM, Bausch & Lomb have left, are leaving, or are diversifying out of state. In his article “The Ghost of America Future” Bob Lonsberry points out that New York has the highest combined state and local taxes, property taxes, and gasoline taxes in the country. Upstate New York is also losing population and representation in Congress. Is this a place where you would move to or start your business? Even if you get a tax break now, what happens when the time is up? Worse yet, if other businesses and population are leaving, will there be any local market for you?

North Carolina, on the other hand, has gained some of the people leaving New York. North Carolina’s traditional tobacco and furniture manufacturing businesses have shrunk. But North Carolina is home to Research Triangle Park (RTP) the biggest research park on the east coast and home to several information-technology, communications, and biotech companies. Moreover, the influx of people moving in from New York and other high-tax northern states has boosted the North Carolina service and real estate sectors. So North Carolina is a better place to move your business to or start up a new business. Then why does Governor McCrory have to offer incentives? Because, even though North Carolina is much better than New York, it is still too highly taxed and regulated when compared to many other states.

In truth, the states should close their economic development offices, cut the size and expense of their governments, and reduce or eliminate the taxes levied on businesses. They should also cut the regulatory red tape required to start a business and then operate that business within their state. Personal income taxes should also be eliminated so that companies considering moving to take advantage of the good business climate will bring their headquarters and high earners along. If you really are a good place to do business and your current businesses are doing well, you will not have to bribe a company to move in. Just get out of the way. Look at Texas!

If you are a small businessman or CEO of a big public company like Boeing, where do you want to move or expand? If a state that you are considering will offer you a “bribe” to move there, how will they treat you when you become one of the “old” companies there? If you are in the economic development office of a state, why do you think you should offer a new company something you would not offer to those already there? If you are a businessman in any state whose government will offer “incentives” to a new company, you should consider suing for equal protection under the law!

Article originally posted at Mises.org.

This is Why Your Wages Aren’t Rising

by Bill Bonner – Bonner and Partners.com:wages

We ended last week wondering what had gone wrong: How come the 21st century has turned out to be such a dud?

Where are the jaw-dropping new inventions? Where are the rising incomes? Where is the dynamic, sizzling economy we expected?

Back in about 1963, we recall trying to picture ourselves in the 21st century. The rate of progress then was so fantastic we had to stretch to imagine it.

Every year, Chevrolet, Ford and Chrysler put out a new and better automobile. In 50 more years, surely cars would be regularly flying through the air!

In 1969, Neil Armstrong walked on the moon. It was just a matter of time before we had a colony there… from which we could explore the solar system.

Then in 1970, the pocket electronic calculator appeared. Half a century later, imagine the condensed knowledge and computing power we would be able to carry around.

 

Aging Economies

The only one of those things that realized its apparent potential was the increase in computing power.

That has changed life on planet Earth. Now, instead of talking to your neighbors in the elevator, you can keep your head down and focus on your smartphone.

We’ve seen couples in restaurants who never talk among themselves – each fiddled with their iPhone through the whole meal.

Is that progress or what?

Since the 21st century began, the average US household has lost income. Bummer.

Why has this happened?

One answer we proposed to readers of our new monthly publication, The Bill Bonner Letter, was that three of the leading economic zones – the US, Europe and Japan – have come to be dominated by old people.

But that explains only a part of it… and probably not the major part.

 

Stopping the Future from Happening

The other reason is that government is always reactionary.

It protects existing voters from those who haven’t been born yet… existing wealth businesses from entrepreneurs… and the past, generally, from the future.

Much of the blame for this flop of a century can be put on government and its cronies in the private sector.

At this suggestion, apologists for big government point out that government spending, as a percentage of GDP, is scarcely higher now than it was in the 20th century.

But today, much more of the private sector has been crony-ized.

Since 1960, the number of rules, regulations and taxes has soared.

As we showed last week, far fewer new businesses are being started now than were in the 1960s.

This is partly because a high wall of regulation, designed to keep out competitors, protects existing businesses.

 

Chock-a-Block with Cronies

The “security” industry is obviously a government affair – dominated by large, entrenched cronies.

But so are businesses in finance, health care, housing and education. They are not exactly married to the feds… but they are so close they spend almost every night in each other’s arms.

When you buy a house, for example, it is considered a private sector transaction.

Fannie Mae, Ginnie Mae and Freddie Mac mortgages don’t show up as government spending.

But the US government created and operates them. And these three “government-sponsored enterprises” are responsible for about 95% of mortgages issued in the last three years.

Banking, medicine and schooling – even at the university level – are so dependent on government rules and government money. And they are so chock-a-block with cronies, that they might as well be government itself.

And take a company such as GE. It is supposed to be in the business of power generators and airplane engines and other major industrial innovations.

But prior to the crisis of 2008, it worked fiddle and bow with the feds to play the government’s distorted yield curve… and then, when that gig was up…. it was saved by more direct federal bailouts.

You can read the whole sordid story at David Stockman’s excellent website, Contra Corner. (Stockman was President Reagan’s budget adviser before quitting in disgust over the administration’s profligate spending.)

In short, after 1960, the economy came to be more controlled by people who were more interested in protecting current wealth than in producing more of it.

Central planning led to a decline in growth rates throughout the rest of the 20th century. The rate of innovation slowed.

What we are seeing in the 21st century is proof of our dictum: The real role of government is to look into the future and prevent it from happening.

Article originally posted at Bonner and Partners.com

Why the Austrian Understanding of Money and Banks Is So Important

by Jörg Guido Hülsmann– Mises Daily:Money and Bank

This article is adapted from the foreword to Finance Behind the Veil of Money: An Austrian Theory of Financial Markets by Eduard Braun.

The classical economists had rejected the notion that overall monetary spending — in current jargon: aggregate demand — is a driving force of economic growth. The true causes of the wealth of nations are non-monetary factors such as the division of labor and the accumulation of capital through savings. Money comes into play as an intermediary of exchange and as a store of value. Money prices are also fundamental for business accounting and economic calculation. But money delivers all these benefits irrespective of its quantity. A small money stock provides them just as well as a bigger one. It is therefore not possible to pull a society out of poverty, or to make it more affluent, by increasing the money stock. By contrast, such objectives can be achieved through technological progress, through increased frugality, and through a greater division of labor. They can be achieved through the liberalization of trade and the encouragement of savings.

 

The Austrians Are the True Heirs of Classical Economics

For more than a century, the Austrian school of economics has almost single-handedly upheld, defended, and refined these basic contentions. Initially Carl Menger and his disciples had perceived themselves, and were perceived by others, as critics of classical economics. That “revolutionary” perception was correct to the extent that the Austrians, initially, were chiefly engaged in correcting and extending the intellectual edifice of the classics. But in retrospect we see more continuity than rupture. The Austrian school did not aim at supplanting classical economics with a completely new science. Regarding the core message of the classics, the one pertaining to the wealth of nations, they have been their intellectual heirs. They did not seek to demolish the theory of Adam Smith root and branch, but to correct its shortcomings and to develop it.

The core message of the classics is today very much out of fashion — probably just as much as at the end of the eighteenth century. As the prevailing way of economic thinking has it, monetary spending is the lubricant and engine of economic activity. Savings are held to be a plight on the social economy, the selfish luxury of the ignorant or the evil, at the expense of the rest of humanity. To promote growth and to combat economic crises, it is crucial to maintain the present level of aggregate spending, and to increase it if possible.

This prevailing theory is precisely the one refuted by Smith and his disciples. Classical economics triumphed over that theory, which Smith called “mercantilism,” but its triumph was short-lived. Starting in the 1870s, at the very moment of the appearance of the Austrian school, mercantilism started its comeback, at first slowly, but then in ever-increasing speed.1 In the 1930s it was led to triumph under the leadership of Lord Keynes.

 

How Keynesianism Destroyed Economics

Neo-mercantilism, or Keynesianism, has ravaged the foundations of our monetary system. Whereas the classical economists and their intellectual heirs had tried to reduce the monetary role of the state as much as possible, even to the point of privatizing the production of money, the Keynesians set out to bring it under full government control. Most importantly, they sought to replace free-market commodity monies such as silver and gold with fiat money. As we know, these endeavors have been successful. Since 1971 the entire world economy has been on a fiat standard.

But Keynesianism has also vitiated economic thought. For the past sixty years, it has dominated the universities of the western world, at first under the names of “the new economics” or of Keynesianism, and then without any specific name, since it is pointless to single out and name a theory on which seemingly everyone agrees.

 

The Key Importance of Money and Banking

No other area has been more affected by this counter-revolution than the theory of banking and finance. It was but a small step from the notion that increases in aggregate demand tend to have, on the whole, salutary economic effects, to the related notion that the growth of financial markets — aka “financial deepening” — generally tends to spur economic growth.2 Whereas the classical tradition had stressed that “financing” an economy meant providing it with the real goods required to sustain human labor during the production process (which was called the wage fund respectively the subsistence fund), the Keynesian counter-revolution deflected attention from his real foundation of finance. In the eyes of these protagonists, finance was beneficial to the extent — and only to the extent — that it facilitated the creation and spending of money. Financial intermediation was useful because it prevented that savings remained dormant in idle money hoards. But finance could do much more to maintain and increase aggregate demand. It could most notably rely on the ex nihilo creation of credit through commercial banks and central banks. It provided monetary authorities with new tools to manage inflation expectations, for example, through the derivatives markets. And financial innovation was likely to create ever new opportunities for recalcitrant money hoarders to finally spend their cash balances on attractive “financial products.”

The youthful and boastful neo-mercantilist movement of the 1930s and the early post-war period did not bother to refute the classical conceptions in any detail. The theory of the wage fund was brushed aside, rather than carefully analyzed and criticized, just as Keynes had brushed aside Say’s Law without even making the attempt to dissect it.3 As a consequence, the foundations of the theory of finance have remained in an unsatisfactory state for many decades. A newer vision of finance had supplanted the older one. But was the latter without merit? The new theory appeared to be new. But was it true?

Finance Behind the Veil of Money is one of the very first modern discussions that try to come to grips with these basic questions. Steeped in the tradition of the Austrian school, Dr. Eduard Braun delivers a sweeping and original essay on the foundations of finance. Relying on sources in three languages, and delving deep into the history of capital theory — most notably the neglected German-language literature of the 1920s and 1930s — his work sheds new light on a great variety of topics, in particular, on the history of the subsistence-fund theory, on the relation between monetary theory and capital theory, on economics and business accounting, on price theory and interest theory, on financial markets, on business cycle theory, and on economic history.

Two achievements stand out.

One, Braun resuscitates the theory of the subsistence fund out of the almost complete oblivion into which it had fallen after WWII. He argues that this theory has been neglected for no pertinent reason, and with dire consequences for theory and economic policy. In particular, without grasping the nature and significance of the subsistence fund, one cannot understand the upper turning points of the business cycle, nor the economic rationale of business accounting, nor the interdependence between the monetary side and the real side of the economy.

Two, the author reinterprets the role of money within the theory of finance. He revisits the theory of the purchasing power of money (PPM) and argues that a suitable definition of the PPM relates exclusively to consumer-good prices, not to capital-good prices. Dr. Braun argues that the PPM in that sense is the bridge between the theory of money and the classical theory of the subsistence fund.

His book shows that this is a fruitful approach and a promising framework for future research in a variety of contemporary fields, such as financial economics, finance, money and banking, and macroeconomics. The current crisis is a devastating testimony to the fact that mainstream thought in these fields is very deficient, and possibly deeply flawed. At the very moment when governments and central banks, with the encouragement of academic economists, set out to apply the conventional Keynesian policies with ever greater determination, Eduard Braun invites us to step back and reflect about the meaning of finance. This is time well spent, as Braun’s readers will find out.

Article originally posted at Mises.org.

It’s All About How You Think!

by R. Nelson Nash
Author of Becoming Your Own Banker
Article originally published in the April issue of BankNotesthink

 

Some years ago, the late Nobel prize-winning Dr. Albert Schweitzer was asked by a reporter, “Doctor, what’s wrong with men today? The great doctor was silent a moment, and then he said, “Men simply don’t think!”

Surely, by this time in your life, you have a deepseated feeling that there is something fundamentally wrong in the financial world today. There is debt of unbelievable proportions! There is confused thinking that results in irrational behavior as a matter of course. We are treated to a plethora of information daily to substantiate this truth.

As a result of all this, I see a lot of despair and anguish expressed by a large segment of our population. I really think that it is the feeling of most people. They are saying, “What a mess we are in! What are they going to do about it? We need to get the right folks in our government offices! Get out and vote! That is our only hope!”

Of course, there is another large faction that is totally consumed with apathy. They don’t have a clue as to what has happened – and what is currently happening. You see them – and you can identify them – so I don’t see a need to elaborate this point.

The fact that you are taking the time to read this article indicates that you are searching for an answer to financial matters in your life. We hope that the efforts of the Nelson Nash Institute will be of benefit to you. Thank you for your search. The solution to any money problem begins there.

What happened to cause this deplorable situation?

These things just don’t happen by chance. There is always an underlying cause.

 

How Did Governments Build A Trap To Enslave People Financially?

Here in the United States two significant events occurred just over one hundred years ago:

1. The Income Tax Law – October 3, 1913

2. Adoption of the Federal Reserve Act – December 23, 1913

But, something else occurred 100 years ago: World War I – a tragic event! One that should never have happened! It was the result of unsound thinking by government leaders.

Notice that the Income Tax Law was adopted one year before WWI, and the Federal Reserve preceded WWI by just eight months.

Why is this significant? Study history and you will find that during the War of 1812 an attempt to adopt an income tax failed. Citizens wanted no part of another tax to fund the war. Apparently we had a greater proportion of clear thinkers at that time than we have today.

So – what to do? Plan ahead – because the “powers that-be” knew full well that war was imminent. But, in order to gain public acceptance create the means of funding it before the war starts! But, use some other reason for doing so! This form of deflection is necessary in order to fulfill the hidden agenda.

Wars cost lots of money! Who benefits from all this? History is clear – International Bankers, that’s who! They not only create wars but also actually financeboth sides! If you haven’t figured this out, then you need to start studying history. As a starting place please study the lives of the preeminent Rothschild banking family. Take note that it was the patriarch Rothschild, Mayer Amschel Rothschild, who famously proclaimed, “Give me control of a nation’s money and I care not who makes the laws.”

On our website www.infinitebanking.org you will find a resource tab. Click it on and then click on the Recommended Reading List. There you will find a large selection of books on economics and history that will help you in your search for the truth about the financial world and the ways bankers carry out their goals. A good starting book to read would be The Law by Frederic Bastiat. Then read Economics in One Lesson by Henry Hazlitt.

A word of caution – this action can lead to a beneficial compulsion to continue reading all the books listed there!

For instance, are you aware of the characters at Jekyll Island, Georgia who designed our Federal Reserve System? It is well acknowledged that the chief driving force of this scheme was Paul Warburg, a Germanborn banker. The mismatch between the story the public receives, versus what really happened behind the scenes, has rarely been so large as it was with the founding of the Fed and the advent of World War I.

For example, are you aware of how this central bank idea was made into law by Congress in late December 1913, while most Americans were busy celebrating Christmas with their families? There is plenty of information available to teach you the real history of how all this came to be if you will simply search the right sources.

Let me issue a warning that some revisionist authors make unwarranted leaps and see sinister plots when there is really a much simpler explanation, but that doesn’t mean the entire genre is misguided. A careful student of history will see that the public has been systematically misled about the origin of our modern banking institutions; this was not all designed “forour benefit.” It is not the purpose of this article to show you all this information. My purpose here is to challenge you to read and think!

 

Removing The Blinders

“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”― John Maynard Keynes

Probably the greatest source of our disastrous financial situation can be laid at the feet of Lord Maynard Keynes with his book, The General Theory of Employment, Interest, and Money, published in 1936. Keynesian thinking has the entire world in a death grip. I well remember Richard Nixon, in a speech on TV saying, “We are all Keynesians now!” He absolutely did not speak for me, but that is the method that such leaders use to induce people to think the way they do.

Only the Austrian School of Economic thought is correct in explaining the business cycle – central bankers inflate the money supply dramatically and people behave as if the money is “real.” But, it is all an illusion – it is a lie! This inflation always results in booms and busts. What is called a “depression” is not really a “depression” – it is a return to reality! The Austrian economists point out that the real harm during the business cycle comes during the boom phase, not the depression, and that if you want to avoid the painful busts, then you must stop artificially inflating the economy. But the public has been convinced that the boom is a period of genuine prosperity. Those who benefit most from this chicanery are always the bankers.

Your local commercial bank is the primary indirect source of inflation by way of a warped law within their “fractional reserve lending system.” They are actually lending money that doesn’t exist! Note, however, that they cannot lend money unless theyhave customers. Therefore, if you have a loan at any such financial organization, then you are a part of the problem!

I got “hooked” on Austrian Economics 58 years ago and the study of the subject became a passion for me. It was this background, plus a 35-year career in life insurance sales, which led me to see there is a way to build a system for individuals to avoid the devastating effects of inflation in their lives – and to be free of the clutches of bankers. There really is a way out of the financial condition that has enslaved most people and the Nelson Nash Institute can help you discover it.

We have had a tragic change of behavior in our country during the last 100 years. Thought always precedes behavior. The easiest way to motivate people to a desired action is through producing fear in the minds of people! War is probably the ultimate method of doing so.

The State uses contingencies of crisis and misfortune to increase its power – which in turn develops the habit of acquiescence in the people.

In the words of Judge Andrew Napolitano, our country has become a nation of “sheeple.”

This is why I’m leading a movement to change the name of Washington, D.C. to “The Fear Factory.” Notice that every action that is proposed in Washington has fear as its reason for being. “The world is coming to an end if the Government doesn’t take immediate action on (blankety, blank, blank)______________.” You fill in the blank. I challenge you to examine every one of their proposals and determine the validity of my statement.

I had a personal experience with this phenomenon in 1961. I was educated as a forester at the University of Georgia, class of 1952. The Korean Conflict was two years old at that time. During my college years I was an Air Force ROTC student as part of the means of financing my way through school. As a result, all of my ROTC class had to go on active duty for two years to repay the government for the stipend they paid us while we were in college.

During the two years of active duty, I was an aerial photo interpreter with Strategic Air Command at March Air Force Base, California.

Upon completion of this obligation, I moved to Eastern North Carolina to begin my career as a private forester. I did not work for the government; Smokey Bear and I don’t agree on much of anything. It was here that I came face-to-face with the mental paralysis that Socialism causes among people. Up to that time I really never knew much about the idea itself. But, inherently I knew something was fundamentally wrong with it. It just didn’t “square” with my Christian upbringing which began when I was nine years old.

At that time the predominant agricultural product in Eastern North Carolina was tobacco. The entire production of tobacco was totally controlled by a government allotment program. Such programs dominated the thinking of the people who lived in that area of the state. I noted that this pattern of thinking spilled over into everyday life of people.

Upon witnessing all this over a significant period of time, I wondered, “Why do people think (and thus behave) this way?” This led me to become acquainted with the Austrian school of economic thought when I first read Henry Hazlitt’s book Economics in One Lesson. I became a voracious student of their teachings in 1957.

This brings us to 1960 when an article appeared in FOREST FARMER magazine about a proposed government program that would literally take over all the woodlands of private owners in the United States. Nikita Khrushchev, who was premier of the Soviet Union at that time, could not have pulled off such a program in that country! I could not sleep for several nights after reading the article. “How in the world could this be happening?” I thought.

In 1961, I was encouraged to write a memo on this proposed program and send it to a number of publishers and media outlets that would expose the absurdity of the idea. One of those places was NATION’S BUSINESS magazine produced by the U.S. Chamber of Commerce. My memo crossed their path at exactlythe right time! They knew the proposed program was “coming out of committee” soon and was to be voted on in Congress – and hopefully (for the bureaucrat proponents), to become law of the land. The editors at NATION’S BUSINESS were looking for a way to create a story for their magazine that would expose the nonsense of this Socialist proposal. And, so, they contacted me to help in developing it.

In June 1961 I became the subject of a feature article in NATION’S BUSINESS entitled, “Pattern for Federal Takeover of Your Business.” If you care to look it up, simply Google “NATION’S BUSINESS MAGAZINE JUNE 1961” and you will find it starting on page 34. You might find it interesting because the author, TaitTrussell, did a thorough job of isolating the methodology of every activity that exists in governments throughout the world.

The article was reproduced in large quantities by the Association of Consulting Foresters. Bottom line – we were able to defeat the program before it ever got out of committee and voted on by Congress. All this stuff is a lot of work for anyone that is involved so I won’t bore you with minute details.

However, I learned this about anything that goes on in Washington, DC. Bureaucrats take one segment of the economy, they accumulate bogus data, then they run this stuff through “their crystal ball” and conclude that we will all perish from the face of the earth unless the government takes over this particular economic activity.

During my experience with this event I became acquainted with many of the people advocating the idea. The architect of the proposed program to take over the timberland of private landowners was Undersecretary of Agriculture, Mr. Murphy. Upon defeat of the project, all Mr. Murphy could up offer up was, “I had heard that we were running out of timber and I just wanted to help.” Murphy knew absolutely nothing about timberlands or the forestry world.

None of the concerns expressed by the program were true, but that fact doesn’t matter to these folks. They just talk to themselves within the “D.C. Beltway” andbecome believers in their own nonsense. During all my work on this project I discovered that the Department of Agriculture was under some severe criticism at that time and this program was created to divert attention from their real problem.

This all reminds me of Argentina’s efforts to reclaim the Falkland Islands in 1982. The real reason for the action was because of the horrible economic conditions in Argentina at the time and they needed a smoke-screen to divert attention from their economic misery. If you have seen one government idea, you have seen them all!

Yes, we defeated the attempt of takeover the timberlands of private landowners in the U.S.– but another program of like kind appears again and again and again! When will people ever learn?

 

There Is A Way To Change Your Financial World

Let’s go back to the WWI – August 1914 began the bloodiest century of all time. I am soon to turn 84 years old as I write this, and thus, have witnessed most of this irrational behavior.

Yes, we do live in some interesting and deplorable situations in the financial world – but, it doesn’t have to be that way for any one individual person. However, this is going to require a significant change in the way that one thinks.

In the Sermon on the Mount, Jesus explains the human nature of people to His listeners.

Matthew 7:13-14 says, “Enter through the narrow gate for wide is the gate and broad is the road that leads to destruction, and many enter through it. But small is the gate and narrow the road that leads to life, and only a few find it.”

If Jesus were teaching us today, I think He would probably say, “Why do you folks want to follow those who are always wrong? – Is your mind really all that dull?”

While growing up in Athens, Georgia, I was amember of Prince Avenue Baptist Church. All churches encourage young folks to express their understandings of the vital things of life. I remember, at age 15, I was asked to make such a presentation at a Sunday evening service. I laid the foundation for my talk by pointing out that we know our world through our five senses that we all possess and that our brain determines our evaluation of what we experience. And that our attitude toward these things is all-important in determining outcomes in life. In other words, I could “change the world – my world – by changing my thinking.”

I continued, stating that, as you change your thinking, your attitude will change. As your attitude changes, your belief and actions will follow, and “a peace that transcends all understanding will guard your heart and mind in Christ Jesus.”

In Romans 12:2 St. Paul is teaching that we should not “conform to the pattern of this world, but be transformed by the renewing of your mind. Then you will be able to test and approve what God’s will is — his good, pleasing and perfect will.” I believe that Paul is teaching that we should secede from the way the world thinks. That you have to abandon the thoughts and behavior of the world in which you live. Here I am drawing on this ancient text to demonstrate to you that all of the relevant points of this article can be found there.

Furthermore, consider that the conscious mind can only entertain one thought at a time. Thinking is hard work and mankind is a lazy beast! The result of this idleness is rote behavior with most people. And so, we all have a paradigm by which we live our lives. This is the work of our sub-conscious mind.

When we ask, “Why is it that people behave the way they do?” The answer is quite obvious. It is all because of the way they think. That is the paradigm they have created for themselves sometime in their past. Most of our personal, everyday behavior, is determined by our untrained sub-conscious mind. It is as if we are on autopilot!

My personal observation reveals – that there is not all that much conscious mind thinking – going on in our world today.

However, we should take caution. There are certain caveats that appear in life. In other words, beware of an “open mind!” Without careful filtering you can get a lot of garbage thrown in there. We are totally surrounded by worthless noise! The financial world is a perfect example of this phenomenon. Develop the ability to recognize nonsense and don’t waste your valuable time on it!

On long airplane flights I use my “noise-cancelling headset” – a product manufactured by the Bose Company. Wouldn’t it be nice if we had such a device built into our minds to block the nonsense that dominates our every-day world? You can create one.

Consider what St. Paul counseled his followers to do a couple of thousand years ago in Philippians 4 verse 8. “Finally, brothers, whatever is true, whatever is noble, whatever is right, whatever is pure, whatever is lovely, whatever is admirable, if anything is excellent or praiseworthy — think about such things.”

 

Confiscation

Now, let’s turn our attention to the Internal Revenue Code.

According to the Commerce Clearing House Standard Federal Tax Reporter, as of 2013, it now takes 73,954 regular 8-1/2” x 11” sheets of paper to explain the complexity of the U.S. federal tax code. Additionally, the IRS continually makes changes in the Code. These constant changes are sometimes humorously referred to as “The Accountants and Lawyers Relief Act.”

Personally, I don’t know of anyone who has read the entire IRS code. I have read that the first nine pages contain the definition of income. The next 1,100 pages describe exceptions to the code.

Read just a few of the exceptions to the code and you can very easily understand what the entire IRS Code is really saying. Essentially, “We own everything and we are going to allow you to do these certain things.”

The object of the IRS code seems to be the outright control of your life and make you think that your blessings come from government instead of from God!

For example, tax-qualified retirement plans were all created under the guise of “giving you a taxbreak.” First, there were pension plans for corporate employees, then came HR-10 plans for partners and sole proprietors, and finally, IRAs for individuals, and, lastly 401(k)s.

Now, everyone has an exception to the IRS Code available to them. Think about it. If the government really wanted to give you a tax break all they had to do is cut out the taxes! Do you really think they want to do that?

And so, I ask, “When government creates a problem (onerous taxation) and then, turns around and grants you an exception to the problem they created (such as in any tax-qualified plan) — aren’t you just a little bit suspicious that you are being manipulated?” That leads to another question – “then, why are you participating in them?”

This entire confiscation scheme is similar to the modus operandi of the Mafia! They create a problem and then sell their victims protection services against the problem they created! For an in-depth explanation of what I am saying here I suggest that you read The Income Tax: Root of All Evil by Frank Chodorov. Just how blatant can an activity become before people take notice? It is the perfect example of the elephant in the room, but no one seems to recognize it!

 

Now, Let’s Talk About How You Think

I was introduced to The Foundation for Economic Education in 1957 through its monthly journal, THE FREEMAN.

I was particularly drawn to the writings of Leonard E. Read, the founder of the organization – along with cofounder, Henry Hazlitt, plus several additional greatthinkers. Over a period of time Leonard became my good friend and mentor. What a privilege it was to know, to talk with, and learn from such great minds as these two! Neither of these two had college degrees but they were voracious readers.

Among many other great writers, Leonard admired the works of Albert Jay Nock. I urge you to read Nock’s book, Our Enemy the State, published in 1935.

Another of my favorite authors is Mike Rozeff, a retired finance professor, who is a frequent columnist on LewRockwell.com. On July 16, 2013 he wrote an article entitled, “Don’t Go Back to The Original Constitution.”

Mike observes that a great many Americans who are unhappy with various facets of America’s political system, laws, rights, and justice system think that the solution is to “go back to the original Constitution.”

They do not understand that the original Constitution is a major cause of our present woes and troubles. For further understanding of the validity of this observation, I suggest you read Tom DiLorenzo’s book, The Curse of Hamilton. DiLorenzo points out that upon separation from the mother country, England, in 1776, our Confederation of States became “Jeffersonian” – following the thoughts of the author of the Declaration of Independence, Thomas Jefferson. But, while Jefferson was away in France as ambassador, in 1789 we became “Hamiltonians” – right back into the mercantilism we escaped from while we were subjects of English rule!

Mike Rozeff continues to note, “One man who recognized and explained this – and related developments – many years ago is Albert Jay Nock in his 1935 book, Our Enemy the State.” In the following I will provide some quotations from Nock’s book, with my commentary in parentheses.

• “Every increase in State power necessarily accompanies a decrease in social power. Increases in State power – reduce the disposition among people to use social power – and it indoctrinates the idea that social power is no longer called for.”

• “Government conceptually is not the same as the State.” (This confusion of the two is so prevalent that I recently spent several hours trying to explain the difference to my wife.)

• “Government does not arise from conquest and confiscation. The State does.”

• “Moreover the sole invariable characteristic of the State is the economic exploitation of one class by another – every State known to history is a class-State.”

• “Statism is the concentration of economic controls and planning in the hands of a highly centralized government often extending to government ownership of industry.”

• “Whatever noble government protective of rights that the Declaration of Independence suggested the influential and leading colonists were after a State, that is, an instrument whereby one might help oneself and hurt others; that is to say, first and foremost they regarded it as the organization of the political means.”

• “The U.S. Constitution did not place the principles of Thomas Jefferson and Thomas Paine in the Declaration concerning government into practice. To the contrary it intentionally set up a State, and a State that could become more and more powerful over time.” (For proof of Nock’s assertion, simply observe what has happened in our country since 1789.)

• “The ‘government’ was set up under this Constitution to do the work of the State — that is, to bring into effect the political means and exercise political power, was not from its birth a government consistent with the Declaration of Independence.”

Government schools do not teach this fact to your children! If they did so, then the agenda of Hamiltonians would be exposed.

 

The World In The Grip Of An Idea

As I began reading THE FREEMAN, the publication of The Foundation for Economic Education, I was also drawn to the work of Dr. Clarence B. Carson. My wife and I worked on his Board of Directors for over 20 years. He was a dear friend of ours. Among many other books Clarence was the author of The World In The Grip of an Idea (1977). On page 454 of that book he, like Rozeff and DiLorenzo, echoes Nock’s assertions:

“There is a crucial distinction between the state and government. The worship of government is attended by the same difficulty as the worship of humanity. The difficulty is that actual governments have flaws, or rather those who run them do. The state is an abstraction; it is pure; it can even be an ideal.”

Carson continues:

“Power vested in the state cannot be misplaced, for it is the natural repository of all power over a given territory. Sovereignty, absolute sovereignty, is its prerogative, its reason for being.”
On page 245, he says:

“The thrust of the idea that has the world in its grip is to take away the independence of the individual… the aim is to concert all human efforts for the common good.”

My mentor, Leonard Read once wrote a piece entitled, “There Ought To Be A Law” — that was not the way Leonard thought, he was merely being ironic. Leonard was reflecting on the confidence that most Americans have in the idea of The State. “Whatever the ideal an individual might have in mind the State must compel everyone to comply. We must force people to see the wisdom that I possess.”

Along the lines of everything we have said thus far, another of my favorite authors is Butler Shaffer who teaches at the Southwestern University School of Law. He makes these invaluable points that seem tosummarize everything:

“Whether mankind is to survive, or bring about its own extinction, will depend largely on the premises that underlie our social organizations. Will they exist as voluntary, cooperative systems through which individuals can mutually achieve their respective interests; or will they continue to function as herdoriented collectives that allow the few to benefit at the expense of the many?

The answers to such questions are to be found only within our individual thinking. Secession does not begin at the ballot box, or in courtrooms, or in signing petitions, but in the same realm where you lost your independence: within your mind, and your willingness to identify with conflict-ridden abstractions.”

And so, how do you secede without seceding? You simply don’t play their game!

All the foregoing in this article is evidence of mankind’s worship of the State — a mind-set that is totally irrational! The idea of “the State” is nothing more than mankind trying to play the role of God (in the pagan sense of the word). The book of Exodus in the Bible plainly tells us that, “God is a jealous God.” Obviously He won’t put up with that nonsense! History demonstrates that fact conclusively. All of mankind’s efforts to displace Him are doomed to failure. The fact that this takes place over a long period of time completely eludes mankind.

Look at what this mind-set has done to our present financial world.

•Unbelievable debt throughout the world. Financial slavery everywhere.

• People who are totally dependent on a government program.

• People who put confidence in a tax-qualified financial plan, even though all government programs have a perfect record of failure when compared with their stated objective.

• Mind-numbed robots that cannot seem to think for themselves.

 

Reclaim The Power

We hold the key through social power – voluntary and private social relations, including associations and economic exchange. And so, I ask, “Do you have the courage to examine your own thought processes and determine if you are, indeed, a STATIST?”

Or, do you have the courage to secede from the thinking that predominates in our world?

If you do then join together with those who have found the financial freedom that can be obtained through theInfinite Banking Concept (IBC) as taught by the Nelson Nash Institute. Your world will never be the same again.

Our mission is to educate and inspire the public to take control of their financial lives.

Our vision is a free society characterized by creative financial solutions independent of government intervention.

Please see the April issue of BankNotes for the original article and others like it.

The Scary Truth Behind Friday’s Jobs Shocker

by Bill Bonner – Bonner and Partners.com:jobs

On Friday, the Labor Department released a shockingly weak March jobs report. The feds and their cronies on Wall Street spent the weekend trying to put a bag over its head.

Former Pimco CEO and Bloomberg columnist Mohamed El-Erian gave this quick reaction:

The US employment machine notably lost momentum in March, with just 126,000 new jobs added – far fewer than the consensus expectation of around 250,000 – and with revisions erasing 69,000 from the previous two months’ total, according to the Labor Department. The lackluster result ends an impressive 12-month run of job gains in excess of 200,000.

Yes, the employment numbers were ugly. They confirm the other evidence coming in from hill and dale, industry and commerce, households and homesteads all across the nation, and all the ships at sea: This is no ordinary recovery.

Nip and Tuck

In fact, it’s no recovery at all. It is strange and unnatural, like the victim of a quack plastic surgeon.

But the damage was not an accident. No slip of the hand or equipment malfunction produced this horror. It was the result of economic grifters plying a fraudulent trade.

The Dow rose 118 points in Monday’s trading. A 0.7% increase, this was neither the result of honest investing nor any serious assessment of the economic future. Bloomberg attributed it to scammery from the Fed:

New York Fed President William Dudley said the pace of rate increases is likely to be “shallow” once the Fed starts to tighten.

His comments were the first from the inner core of the Fed’s leadership since a government report showed payrolls expanded less than forecast in March.
While data signaling rates near zero for longer have previously been welcomed by American equity investors, concern is building that economic weakness will worsen the outlook for corporate profits.

Get it?

“Shallow” rate increases. Translation: Savers will get nothing for their forbearance and discipline for a long, long time.

Instead, the money that should be rightfully theirs will be transferred to the rich… and to gamblers and speculators… as it has for the last six years.

A Frankenstein Economy

Back to El-Erian who, having seen the evidence of this botched operation, then goes goofy on us. He calls upon the authorities to “do something.”

As if they hadn’t done enough already!

The feds were the ones who injected the credit silicon, hardened the upper lip and created the Monster of 2008.

And then, when the nearest of kin started retching into the hospital wastebaskets, they went back to work. Now, the economy is more grotesque than ever.

But here’s El-Erian, asking for more:

The report is a further reminder of how much more the US economy could – and should – achieve if it weren’t for political dysfunction in Washington and a “do little” Congress that preclude more comprehensive structural reforms, infrastructure spending and a more responsive fiscal policy.

El-Erian is not the only one. One of our favorite knife men, Larry Summers, is suggesting more nip and tuck on the whole world economy.

It was Summers, as secretary of the Treasury between 1999 and 2001, who helped stitch this Frankenstein economy together.

He and his fellow surgeons are responsible for its unsightly lumps and inhuman shape. Their trillions of dollars of EZ credit leaked all over, causing bulges almost everywhere.

Does China have too much industrial capacity? Does the world have a glut of energy? Are governments far too deep in debt? And corporations?And households? Didn’t nearly every central bank in the world try to stimulate demand with cheap credit… thus laying on a burden of debt so heavy that it now threatens the entire world economy?

Poor Larry Summers

Now, Summers waves his scalpel in the air and can’t wait to get the patient back on the table.

He worries that the US should have given the International Monetary Fund more money, which would have “bolstered confidence in the global economy.”

He thinks the world’s problem is that “capital is abundant, deflationary pressures are substantial, and demand could be in short supply for quite some time.”

Poor Larry can’t tell the difference between capital and credit.

Capital – what you get from saving money and investing it wisely – is an economy’s real muscle. EZ credit – what the quacks pump into flabby tissue to try to make things look more fetching – is what has turned the economy into such a freak.

Alas, failing to give more money to the IMF, says Summers, may mean “the US will not be in a position to shape the global economic system.”

That would be a real pity.

Article originally posted at Author Joe WithrowPosted on Categories Finance & EconomicsTags , , , , , , , , , Leave a comment on The Scary Truth Behind Friday’s Jobs Shocker

Markets Restrain Bank Fraud; Central Banks Enable It

by Frank Shostak – Mises Daily:Bank

Originally, paper money was not regarded as money but merely as a representation of a commodity (namely, gold). Various paper certificates represented claims on gold stored with the banks. Holders of paper certificates could convert them into gold whenever they deemed necessary. Because people found it more convenient to use paper certificates to exchange for goods and services, these certificates came to be regarded as money.

Paper certificates that are accepted as the medium of exchange open the scope for fraudulent practices. Banks could now be tempted to boost their profits by lending certificates that were not covered by gold. In a free-market economy, a bank that overissues paper certificates will quickly find out that the exchange value of its certificates in terms of goods and services will fall. To protect their purchasing power, holders of the over-issued certificates naturally attempt to convert them back to gold. If all of them were to demand gold back at the same time, this would bankrupt the bank. In a free market then, the threat of bankruptcy would restrain banks from issuing paper certificates unbacked by gold. Mises wrote on this in Human Action,

People often refer to the dictum of an anonymous American quoted by Tooke: “Free trade in banking is free trade in swindling.” However, freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it. It was this idea which Cernuschi advanced in the hearings of the French Banking Inquiry on October 24, 1865: “I believe that what is called freedom of banking would result in a total suppression of banknotes in France. I want to give everybody the right to issue banknotes so that nobody should take any banknotes any longer.”

This means that in a free-market economy, paper money cannot assume a “life of its own” and become independent of commodity money.

The government can, however, bypass the free-market discipline. It can issue a decree that makes it legal (or effectively legal) for the over-issued bank not to redeem paper certificates into gold. Once banks are not obliged to redeem paper certificates into gold, opportunities for large profits are created that set incentives to pursue an unrestrained expansion of the supply of paper certificates. The uncurbed expansion of paper certificates raises the likelihood of setting off a galloping rise in the prices of goods and services that can lead to the breakdown of the market economy.

Central Banks Protect Private Banks from the Market

To prevent such a breakdown, the supply of the paper money must be managed. The main purpose of managing the supply is to prevent various competing banks from over-issuing paper certificates and from bankrupting each other. This can be achieved by establishing a monopoly bank, i.e., a central bank-that manages the expansion of paper money.

To assert its authority, the central bank introduces its paper certificates, which replace the certificates of various banks. (The central bank’s money purchasing power is established on account of the fact that various paper certificates, which carry purchasing power, are exchanged for the central bank money at a fixed rate. In short, the central bank paper certificates are fully backed by banks’ certificates, which have a historical link to gold.)

The central bank paper money, which is declared as the legal tender, also serves as a reserve asset for banks. This enables the central bank to set a limit on the credit expansion by the banking system. Note that through ongoing monetary management, i.e., monetary pumping, the central bank makes sure that all the banks can engage jointly in the expansion of credit out of “thin air” via the practice of fractional reserve banking. The joint expansion in turn guarantees that checks presented for redemption by banks to each other are netted out, because the redemption of each will cancel the other redemption out. In short, by means of monetary injections, the central bank makes sure that the banking system is “liquid enough” so that banks will not bankrupt each other.

Central Banks Take Over Where Inflationist Private Banks Left Off

It would appear that the central bank can manage and stabilize the monetary system. The truth, however, is the exact opposite. To manage the system, the central bank must constantly create money “out of thin air” to prevent banks from bankrupting each other. This leads to persistent declines in money’s purchasing power, which destabilizes the entire monetary system.

Observe that while, in the free market, people will not accept a commodity as money if its purchasing power is subject to a persistent decline. In the present environment, however, central authorities make it impractical to use any currency other than dollars even if suffering from a steady decline in its purchasing power.

In this environment, the central bank can keep the present paper standard going as long as the pool of real wealth is still expanding. Once the pool begins to stagnate — or, worse, shrinks — then no monetary pumping will be able to prevent the plunge of the system. A better solution is of course to have a true free market and allow commodity money to assert its monetary role.

The Boom-Bust Connection

As opposed to the present monetary system in the framework of a commodity-money standard, money cannot disappear and set in motion the menace of the boom-bust cycles. In fractional reserve banking, when money is repaid and the bank doesn’t renew the loan, money evaporates (leading to a bust). Because the loan has originated out of nothing, it obviously couldn’t have had an owner. In a free market, in contrast, when true commodity money is repaid, it is passed back to the original lender; the money stock stays intact.

Article originally posted at Mises.org.

How Truly Free Markets Help the Poor

by Ryan McMaken – Mises Daily:free markets help the poor

Discussing poverty as an advocate of free markets is tricky business in today’s world. If one takes poverty seriously and points out the very real plight of the impoverished, it is often assumed that one must therefore be advocating for government “solutions” to the problem. The knee-jerk reaction of many defenders of free markets is to simply deny that poverty exists much at all, or that if the poor just try a little harder, or aren’t so lazy, they won’t be poor anymore.

This sort of reaction is natural for one who labors under the mistaken impression that the American economy is a free-market economy. Since the American economy is so free and filled with opportunity, they think, there’s really no excuse for being poor.

But, of course, the American economy isn’t even a mostly free economy. The entire financial sector is heavily subsidized and regulated. The regulatory costs imposed on small businesses are enormous. Trade of all types is regulated, and many goods are prohibited outright. Minimum wages make many entry-level jobs illegal, and one can’t even drive people around for money without facing a bevy of government regulations — and sanctions.

With all these millstones tied around the necks of poor and low-skilled workers, it’s a bit nonsensical to declare that poor people should just try harder. Perhaps they did try, and the government sent them the message loud and clear: “just give it up, because we’ve made everything you’re qualified to do illegal.”

Yes, it’s true that, to the extent markets are still free, they have led to an abundance of conveniences that even the poor can afford: air conditioning, television, household appliances, cell phones, and more. But at the same time, it would be wrong to sit back and say “they have enough” when an even greater abundance is to be had if the poor were simply given the freedom to work and own businesses without navigating a myriad of government requirements and regulations that often pose an insurmountable opportunity cost.

There are several ways that a turn to freer markets would open up a whole world to low-income families and unskilled workers immediately.

End the Minimum Wage

This is one of the worst offenders since it renders jobs illegal for the most unskilled workers, and hits the poor the hardest. As explained in the pages of mises.org, the primary effect of the minimum wage is to make the lowest-skilled workers legally unemployable. In other words, if the minimum wage is $10 per hour, and a worker only produces $8 of goods or services per hour, he will never be hired. Naturally, with a little experience, an unproductive (in the economic sense of the word) worker becomes more productive with job experience. But with a minimum wage, how is the worker supposed to get his first job? He can’t. As a result, many workers caught up in this catch-22 become long-term welfare recipients or they turn to black markets where they are branded criminals by the legal system.

Abolish All Income Taxes (Including Payroll Taxes)

Even low-income wage earners pay taxes on income. Social Security and Medicare taxes are nothing more than income taxes that go straight to the general fund — the “social security trust fund” does not exist. That claim by Mitt Romney that half the country doesn’t pay income taxes was never anything more than disingenuous political hair-splitting. Payroll taxes are income taxes, and we all know they take a big bite out of our paychecks, at all income levels.

Thus, even the poor pay taxes to finance TARP and various bailouts of the ultra-rich. As if this insult were not enough, the federal government then punishes the poor further with a central bank that punishes them for saving what little they can.

End the Fed

The Federal Reserve — and central banks in general — have in recent decades functioned largely to push down interest rates and devalue the currency.

The Federal Reserve — in addition to giving us the gift of the boom-bust cycle — has been key in bailing out huge too-big-to-fail corporations and has facilitated endless government spending on wars, corporate welfare, and social programs. Whether the amount of money poured into low-income households via social programs rivals the amount of money sucked out of them — in the form of devalued currency and below-inflation interest rates for low-income savers — remains to be seen.

What we do know is that the Fed’s commitment to low interest rates has made it almost impossible to save money through savings accounts and other low-risk traditional investments. Once upon a time, it might have been possible to put money in a savings account or CD and receive a respectable amount of interest on those funds, and at least earn an interest rate that exceeded the inflation rate. That certainly isn’t possible today. If you’re poor and try to make any returns off a savings account or CD, you’re out of luck. You’ll be very lucky to get 0.9 percent, and you’ll probably get lower than that. Meanwhile, the official low-ball inflation rate is well above that. So, your savings lose value in real terms constantly. You might as well keep that money in your mattress — where your money will also constantly lose value. On the other hand, if you have $100,000 to put in a CD right now, you might be able to get 1.5 percent at some banks. But poor people rarely have that kind of money lying around. People with more money are able to hire financial advisors and stock brokers and better keep up with an inflationary economy. The poor are just on their own.

Stop Regulating Small Businesses

Starting small businesses are often the preferred way for low-income, non-white workers to find work and build capital. Immigrants often turn to small businesses because they offer flexibility and work for people who are unattractive to larger established operations. While the wages and incomes associated with small businesses are often lower than they are in larger businesses, many turn to small business employment because they offer many non-monetary advantages over other types of income.

Governments work to crush small businesses on a daily basis. Every small business owner must deal with a myriad of government agencies from the IRS, to OSHA, to the EEOC, Obamacare, and beyond. Every new regulation and every new tax makes it harder for a small business owner to make payroll and to turn a profit. The net effect, of course, is to both restrict growth of small businesses and to restrict the number of small businesses. The decrease in competition then lessens benefits for both consumers and wage workers in the communities where these businesses are likely to spring up — in low-income communities. Instead, governments make sure that only large, well-capitalized companies can afford to open new businesses in many cases — probably miles away in higher-income areas.

Legalize Poverty

Everywhere the government intervenes to “help” we find not more choice, but less. Not more jobs, but fewer. Do you want to start up your own taxi service by driving people around? Forget about it if you have not obtained all the applicable (and costly) government licenses. Do you want to rent out your converted garage to tenants for cash? Too bad. Zoning laws don’t allow it. Do you want to get a job at five bucks per hour for your teenage son who has no skills? Sorry, that’s illegal too. Do you need a loan, but you’re a high risk borrower? Get lost. We’d have to charge you a high interest rate. That’s usury, and it’s not allowed.

We’re told every day that the only solution to poverty is more government power, more government regulation, more central planning, bigger deficits, and less freedom.

The true solution, however, is better described by a left-wing slogan: “Legalize Poverty.” The left usually says this when homeless people are being thrown off government property, but it’s better applied to the many types of free enterprise that are placed out of reach to the poor by government edicts. So many low-income workers must turn to black markets and low-wage semi-legal work because that’s all that’s open to them. It’s simply illegal for them to find entry-level work in mainstream enterprises, keep all of their meager wages, or start up small enterprises. Needless to say, these assaults on free markets help no one but the government agents paid to enforce them.

Article originally posted at Mises.org.