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A Case for Monetary Independence

by Lucas M. Engelhardt – Mises Daily:

“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:

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.

Government Loans: Risky Business for Taxpayers

by Matt Battaglioli– Mises Daily:

Obtaining a loan from the government now seems perfectly normal to most Americans, be the loans for education, business, healthcare, or whatever else.

Examples include Small Business Administration loans, where a potential business owner goes to the government to get startup cash, and student loans, where a college student borrows money for tuition or even living expenses. These loans can often be paid back with interest over the course of what is often several decades.

Other examples might include Federal Housing Administration (FHA), Veterans Administration (VA), or Rural Housing Services (RHS) loans, which differ from the former in the sense that they are government insured loans, yet the fundamental principle behind them remains the same: government is taking upon itself (via taxpayers) the risk behind making the loan.

Of course, private loans are also available, though those that do not employ government insurance or other subsidies usually come with higher interest rates. The higher interest rates in the purely-private sector come from the fact that the private entity making the loan must take on all the risk, instead of externalizing it to the taxpayers.

So, the reality of lower interest rates in government and government-subsidized loans means they are vitally necessary, right?

First of all, the government doesn’t “make money,” in the way that private entities do. There is only one way in which states initially accumulate revenue, and that is through taxation. This extorted wealth is originally made in the private sector. So, in order for a government to make a loan back to the private sector, that money must first be removed from the private sector via taxation.

Government Knows How To Best Spend Your Money

For private entities, however, when they make a loan and determine who qualifies for it, and at what interest rate, the private firm making the loan is basically determining at what price (i.e, interest rate) the firm feels adequately compensated for the risk of lending out this money, and for giving up direct control over that money for the duration.

To claim, therefore, that the government should be in the business of making loans because private loans are generally too costly or too inaccessible for buyers, is no different than saying that government must take individual’s money and use it in a way that the original owners (i.e., the taxpayers) themselves would determine to be reckless and irresponsible. While it is true that occasionally a government loan may be paid back with interest at the appropriate time, it would be absurd to suggest that politicians would be more knowledgeable about how a person’s money should be used than the person who originally created and owned the wealth in the first place.

But Government Should At Least Prevent Usury, Right?

Moreover, there are those who will say that private firms making loans should be restricted from charging “excessive” interest on their loans (i.e., usury). This is an example of a very well-meaning, but utterly damaging regulation. It is crucial to note the differences in time preference displayed by both the lender and the borrower. The lender’s time preference (in this case) is lower than that of the borrower’s, meaning that the lender prefers a larger sum of money in the future, and the borrower prefers a smaller sum now. To get money now, however, the borrower must pay for it in the form of interest.

This represents a healthy balance between lenders and borrowers. It is why loans are made. Laws passed that prohibit certain interest rates on loans are far more likely to hurt those who need the loans, than anyone else. As was previously stated, a firm or person making a loan must feel compensated for the risk of making the loan, and that compensation manifests itself in the interest rate. To restrict a firm from charging a certain percentage of interest on their loans will only reduce the amount of loans it gives out.

Taking Away Your Choices

If a potential borrower who is determined to be a rather high risk asks for a private loan, then their interest on that loan will be quite high, but at least in that situation, the borrower has the choice of taking the loan, or to not take the loan. In the end, the borrower will choose what he or she believes will most benefit him or her. Yes, the borrower might miscalculate and the loan might turn out to have been a bad idea, but at least the borrower had a choice.

On the other hand, if the amount of interest that could be charged on the loan were to be forced down via government regulation, then the firm or person making the loan would simply not offer the loan at all, as he or she would not feel their risk is justified by the legally-allowable interest rate.

Faced with a lack of loans, risky borrowers may then look to government and government-subsidized loans as an option, but we find here just another case of government offering itself as the (taxpayer-funded) solution to a problem it caused in the first place.

Article originally posted at Mises.org.

Why the Austrian Understanding of Money and Banks Is So Important

by Jörg Guido Hülsmann– Mises Daily:

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.

The Private Equity Boom, Easy Money, and Crony Capitalism

by Brendan Brown – Mises Daily:

Amongst the big winners from the Obama Fed’s Great Monetary Experiment has been the private equity industry. Indeed this went through a near-death experience in the Great Panic (2008) before its savior — Fed quantitative easing — propelled it forward into new riches. There is no surprise therefore that its barons who join the political stage (think of the last Republican presidential candidate) have no interest in monetary reform. And the same attitude is common amongst leading politicians who hope private equity will provide them high-paid jobs when they quit Washington.

The ex-politicians are expected by their new bosses to join the intense lobbying effort aimed at preserving the industry’s unique tax advantages, especially with respect to deductibility of interest and carry income. They are also expected to do this while establishing the links with regulators and governments (state and federal) that help generate business opportunities for the private equity groups themselves. The special ability of these political actors to take advantage of the monetarily induced frenzy in high-yield debt markets — and secure spectacularly cheap funds — means they become leading agents of malinvestment in various key sectors of the economy.

What’s Makes Private Equity Run?

Spokespersons for the industry claim that the private equity business is all about spotting opportunities to take over already established businesses, and then using home-grown talent (within the private equity management team) to transform their organization so as to create value for shareholders. And this can all be accomplished, they say, without the burden of frequent reporting requirements as in public equity.

That is all very laudable, but why all the leverage, why all the political connections, and why all the tax advantages? And even before getting to these questions, why should we praise the secrecy? After all, public equity markets are meant to do a good job of incentivizing and disciplining management, especially in this age of shareholder activism. So why is private equity supposedly superior?

Perhaps there are instances where companies which are now in the public equity market cannot economically justify the fixed costs of maintaining their presence there (filing reports, auditing, etc.). In practice, though, this public-to-private conversion function of the private equity industry has been dwindling in overall significance compared to private-to-private acquisitions and new ventures.

Why There’s So Much Leverage

But why should there be so much leverage? Why could their economic functions not be achieved on a purely or largely equity basis?

After all, there are reports of private equity groups turning away would-be new participating partners offering to bring in zillions of new funds to the party. If individual investors in private equity wanted high leverage they could do this on their own account without saddling the particular enterprises with large debts.

The obvious answer to this conundrum is that the private equity groups are in fact risk-arbitragers (and tax arbitragers) between what they view as greatly over-priced high-yield debt markets (sometimes described as junk-debt markets) and less overpriced equity markets.

How Easy Money Enables Private Equity

The Great Monetary Experiment has induced such a plague of market irrationality characterized by desperation for yield that the price of junk has reached the sky. On top of this, the US tax-code incentivizes such arbitrage by allowing full deduction of interest from corporate profit. Why are some affiliates of private equity groups buying the junk? Perhaps that has to do with the benefits to be derived in the event of any particular enterprise owned by the group filing for bankruptcy. The private equity group would be in a better position to negotiate a debt-equity swap if it is on both sides of the deal.

The name of the game is achieving as high a leverage as possible and nothing brings success here like success. Specifically, as private equity investments have produced a series of great returns in recent years — as indeed we should expect from highly leveraged strategies in a powerfully rising equity market — the speculative story that their managers really have talent has attracted more and more believers who are willing to back it with their funds. One aspect of this has been the ability of private equity groups to leverage up their businesses to an extent never previously achieved as the buyers of their junk debt believe that unique talents of the partners and their managers make this acceptable. And the cost of equity to the private equity groups falls as a wider span of potential partners believes in their power of magic.

The Crony Capitalist Connection

The new business ventures on which private equity has concentrated in recent years are often in areas where regulatory or political connection is important — whether in finance, real estate, energy extraction, or providing health-care facilities. A private equity group buys the advantages of “connections” (otherwise described as cronyism) for all the small or medium-sized enterprises operating within its fold. If each one were to build up its connections independently that would be much more expensive per unit of enterprise capital.

Hence one essential feature of private equity is the taking advantage of economies of scale in cronyism. And the tax advantages secured by political connections are crucial to the private equity model. The case for a reform of the tax code which would lower the overall rate on corporate profits but end the tax deductibility of interest is strong. But how could this ever make headway against the private equity industry and its deep roots in Washington, DC?

Private Equity, Shale Oil, and Other Bubbles

In thinking about the downside of private equity for economic prosperity there is much more to consider than stalemate on tax reform. There is the specter of the infernal combination of monetary disequilibrium and cronyism producing huge malinvestment. That picture is already emerging in the shale oil and gas industries where private equity with its highly leveraged structures has been prominent. Elsewhere, the finance companies spawned by private equity and outside the ever-more regulated traditional bank sector. These have played a lead role in rapid growth of sub-prime auto-loans which have contributed importantly to the boom in vehicle sales. Private equity owned leasing companies have outsmarted their competition to provide enticingly cheap terms to aircraft carriers especially in Asia and helped fuel a tremendous boom in sales by Boeing and Airbus. Private equity participation in investing in apartment blocks has helped fuel the mini-boom in multifamily housing construction.

This is all fine whilst folks are dancing to the music of the Great Monetary Experiment. But what will happen when speculative temperatures fall across a wide range of markets presently infected by asset price inflation? We know much about the disease of asset price inflation from the past 100 years of fiat money under the leadership of the Federal Reserve. Each episode of disease is different but there are common elements. One of these is a deadly end phase featuring plunging speculative temperatures, great recession, and the revelation of huge capital squandered in previous years. The private equity story is new, but there is nothing new under the sun.

Article originally posted at Mises.org.

Government Regulation is a Hidden Tax

by Brady Nelson – Mises Daily:

Perhaps due to it not being as readily quantifiable as government taxation, debt, welfare, and money creation; regulation has too often been superficially dealt with. In many ways, the largely “hidden tax” of regulation is a bigger threat to liberty, economy, and morality than other weapons of forceful government intervention.

What Is the Problem?

The total number of restrictions in federal regulations has grown from about 835,000 in 1997 to over one million by 2010, and the number of pages published annually in the Code of Federal Regulations, never substantially declined, and in fact has consistently grown. It has been estimated that regulatory compliance and economic impacts cost $1.863 trillion annually. This amounts to US households paying $14,974 annually in regulatory hidden taxes, with households thereby spending more on embedded regulation than on health care, food, transportation, entertainment, apparel and services, and savings.

However, this is just the proverbial tip of the regulatory-burden iceberg. The tangible burdens above are a quite manageable list of the more immediate impacts such as extra money spent by business to comply and government to enforce regulation. However, the intangible burdens are an almost infinite list of the less immediate impacts, such as lower performance throughout the economy in terms of entrepreneurship, innovation, growth, customer service, and jobs. The intangible burdens do not readily lend themselves to quantification like the tangible burdens do, and thus it is harder to understand the magnitude and even the exact nature of the almost infinite potential problems caused-and-effected. This is made harder due to the fact that value is always subjective (and ordinal) to each individual at any one point in time and, thus, there are no objective (or cardinal) opportunity costs and benefits of regulations as a whole that can simply be observed, calculated, and compared using cost benefit analysis (CBA).

Why Is There a Problem?

The most important of these intangible burdens of regulation are the unintended negative consequences on decentralized and dispersed knowledge and incentives. As Frédéric Bastiat pointed out: “In the economy … a law gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen.”

Thus, in terms of regulation and other policies: “[I]t almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse.” The unintended consequences of regulation are usually even worse than this, as they usually — unlike in free markets — promote a relatively small group of private interests at the expense of a relatively large group of individuals.

From a Public Choice school perspective, the regulation problem is essentially one of government failure andrent seeking, noting that: “(1) individuals in government (politicians, regulators, voters, etc.) are driven by self-interest, just as individuals in other circumstances are, and (2) they are not omniscient.”

Worse still: “[S]pecial interests are disinclined to seek direct wealth transfers because their machinations would be too obvious. Instead, regulatory approaches that purport to provide public benefits confuse the public and reduce voter opposition to transfers of wealth to special interests.”

From an Austrian school perspective, the regulation problem is essentially one of economic calculation and bureaucracy. Ludwig von Mises explains: “Without market prices for the means of production, government planners cannot engage in economic calculation, and so literally have no idea if they are using society’s resources efficiently. Consequently, socialism [and regulatory interventionism] suffers not only from a problem of incentives, but also from a problem of knowledge.” Mises said regarding the latter that: “A bureau is not a profit-seeking enterprise; it cannot make use of any economic calculation.” And this inevitably leads to regulatory failure as: “… [t]he lack of [profit-and-loss, price and customer-oriented] standards [which] kills ambition, destroys initiative and the incentive to do more than the minimum required.” All of this is, of course, the antithesis of consumer-driven entrepreneurialism.

At perhaps a still deeper level, Murray Rothbard reasoned:

When people are free to act, they will always act in a way that they believe will maximize their utility. … Any exchange that takes place on the free market occurs because of the expected benefit to each party concerned. If we allow ourselves to use the term “society” to depict the pattern of all individual exchanges, then we may say that the free market ‘maximizes’ social utility, since everyone gains in utility.

On the other hand:

Coercive intervention … signifies per se that the individual or individuals coerced would not have done what they are now doing were it not for the intervention. … The coerced individual loses in utility as a result of the intervention, for his action has been changed by its impact. … [I]n intervention, at least one, and sometimes both, of the pair of would-be exchangers lose in utility.

What Is the Solution?

The solution is of course deregulation — as much as possible, as fast as possible. However, both special interests (as emphasized by the Public Choice school) and bad economics (as emphasized by the Austrian school) will need to be overcome.

This combination was colorfully dubbed the “Bootleggers and Baptists” phenomenon. It has been observed that:

[U]nvarnished special interest groups cannot expect politicians to push through [regulation] that simply raises prices on a few products so that the protected group can get rich at the expense of consumers. Like the bootleggers in the early-20th-century South, who benefited from laws that banned the sale of liquor on Sundays, special interests need to justify their efforts to obtain special favors with public interest stories. In the case of Sunday liquor sales, the Baptists, who supported the Sunday ban on moral grounds, provided that public interest support. While the Baptists vocally endorsed the ban on Sunday sales, the bootleggers worked behind the scenes and quietly rewarded the politicians with a portion of their Sunday liquor sale profits.

More dauntingly, Murray Rothbard reminds us that, in many ways, the history of humanity can be seen as a race between bigger government versus freer markets:

Always man — led by the producers — has tried to advance the conquest of his natural environment. And always men — other men — have tried to extend political power in order to seize the fruits of this conquest over nature. … In the more abundant periods, e.g., after the Industrial Revolution, [freer markets took] a large spurt ahead of political power [including over regulation], which ha[d] not yet had a chance to catch up. The stagnant periods are those in which [such] power has at last come to extend its control over the newer areas of [freer markets].

It will not be easy to slow, stop, and reverse the century-plus growth of the regulatory state in the US and around the world. The crucial job of pursuing deregulation cannot just be left to politicians from the top down. It will need to come more from as many voters and seceders as possible from the bottom up and every direction in between.

Article originally posted at Mises.org.

How the Fed Grows Government

by Hunter Hastings – Mises Daily
Article originally published in the January 2015 issue of BankNotes

We are told that elections are important, but the most powerful state institution, the central bank, is totally out of reach of the voter.

Ludwig von Mises viewed democracy as a utilitarian concept. It was the form of political organization that allowed the majority to change the government without violent revolution. In Socialism, Mises writes “This it achieves by making the organs of the state legally dependent on the will of the majority of the moment.” He identified this form of political process as an essential enabler of capitalism and market exchange.

Mises extended this concept of utilitarian democracy to citizens’ control of the budget of the state, which they achieve by voting for the level of taxation that they deem to be appropriate. Otherwise, “if it is unnecessary to adjust the amount of expenditure to the means available, there is no limit to the spending of the great god State.” (Planning for Freedom, p. 90).

Today, this utilitarian function of democracy, and the concept of citizens’ limitations on government mission and government spending, has been taken away by the state via the creation and subsequent actions of central banks. The state carefully created a central bank that is independent of the voters and unaffected by the choices citizens express via the institutions of democracy. In the case of the US Federal Reserve, for example, the Board of Governors state that the Federal Reserve System “is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.”

Independent from Voters, But Not from Politicians

Importantly, the central bank is independent of the citizens in this way, but, in practice, not independent of politicians. Alan Greenspan, former chairman of the Federal Reserve, is quoted as asserting, “I never said the central bank is independent,” alluding to similar statements in two books he has written, and pointing to one-sided political pressure significantly limiting the FOMC’s range of discretion.

This institutionally independent, but politically directed central bank spearheads a process that enables largely unlimited government spending. It expands credit and enables fiat money, which is produced without practical limitation. Fiat money enables government to issue debt, which, at least so far, also has been pursued without restraint. The unlimited government debt enables unrestrained growth in government spending. The citizenry has no power to change this through any voting mechanism.

Thus, the state is set free from having to collect tax revenue before it can spend, and as Mises explained, in such a case, there is no limitation on government at all:

The government has but one source of revenue — taxes. No taxation is legal without parliamentary consent. But if the government has other sources of income it can free itself from this control.

In other words, when faced with the possibility of voter reprisals, members of Congress are reluctant to raise taxes. But if government spending no longer necessitates taxes, government becomes much more free to spend.

Without restraints on government spending, there are no restraints on government’s mission, or on the growth in the bureaucracy that administers the spending. The result is a continuous increase in regulations, and a continuous expansion of state power.

Has The Central Bank Limited Itself?

In the one hundred years since the creation of the Federal Reserve in 1913, US federal government spending has grown from $15.9 billion to a budgeted $3,778 billion in 2014 (a number we now refer to as $3.8 trillion to make the numerator seem less egregious). Spending as a percentage of GDP has advanced from 7.5 percent to 41.6 percent over the same period. A comparison of regulation growth is more difficult, but over 80,000 pages are published in the Federal Register annually today, versus less than 5,000 annually in 1936.

The evidence, therefore, is that voting makes no difference to this lava flow of spending and regulation. Whatever the will of the majority of the moment, government spending and government power will continue to expand, with consequent reduction in the economic growth that is the primary goal of the society that is being governed.

John Locke opined that, when governments “act contrary to the end for which they were constituted,” they are at a “state of war” with the citizens, and resistance is lawful. (Two Treatises of Government, p. 74). The theory and practice of unhampered markets and individual liberty are particularly relevant at election time.

Hunter Hastings is a member of the Mises Institute, a business consultant, and an adjunct faculty member at Hult International Business School

Please see the January 2015 issue of BankNotes for this article and others like it.

The Wizards of Ozymandias

submitted by jwithrow.

“The Wizards of Ozymandias” by Butler Shaffer is a must-read for anyone who appreciates Percy Bysshe Shelley’s “Ozymandias”. The book is also a must read for anyone with an interest in the history of western civilization, social philosophy, free-market economics, or critical thinking in general.

A paperback copy of the book costs $16.85 and the kindle version costs $3.99. We will provide a link to the book at the end of this post.

In a nutshell, Shaffer spends 310 powerful pages exposing the fallacy of central planning and he does so in a common sensical way. There are no ideological theories or assumptions, just critical thinking and common sense – imagine that!

Coincidentally, critical thinking and common sense are two of the most important victims of central planning.

By the way, when we talk about central planning we are talking about the systems of societal control that have been gradually implemented over the past one hundred years or so. We are talking about socialism in general and all manner of destructive socialist policies. We are talking about organizations like the United Nations, the World Bank, the IMF, the Council on Foreign Relations, the Federal Reserve, the IRS, the military-industrial complex (please, look this one up), the FDA, the EPA, all other alphabet soup governmental organizations, all other organizations whose name starts with “The Department of”, and countless other massive, unaccountable monsters of bureaucracy.

And yes dear friend, the Federal Reserve and the IRS are instruments of socialism (and fascism and perpetual war – nothing is ever cut and dry). They are the opposite of free market capitalism. In fact, the implementation of a central bank is one of the planks of the Communist Manifesto. We think it is the fifth plank but we are not sure exactly and we haven’t looked it up because we don’t want to send mixed signals to our friends at the NSA.

Anyway, the point is that human beings are not robots. Human interaction does not need to be scripted according to some jerk’s sociopathic ideals.

Governments are not people. Nations are not people. Corporations are not people. People are people. People are best when they are free from coercion to voluntarily interact with others for their own benefit as they see fit. The free market serves people in this fashion as long as they abide by two rules:

Do not infringe upon another person or his property (natural law). Do all that you have agreed to do and nothing that you have agreed not to do (contract law).

Mr. Shaffer is a little better written than we are so we highly recommend his book.