Tag: economics

Opposing The Keynesian Illusion: Spending Does Not Drive The Economy

Keynes held that the economy can suffer extended periods of high unemployment because of deficient aggregate spending. A contraction in spending results in businesses having excess inventories and reduced revenues. Businesses respond by cutting back and decreasing their demand for labor. Due to “sticky wages,” this results in a large decrease in employment and incomes for workers. The problem comes full circle and self-aggravating because workers as a whole must restrict their spending due to their reduced incomes.

For Keynes, the solution is found in the government, which can increase the money supply and engage in deficit spending. Monetary and fiscal policies are aimed at stimulating (indirectly) and replacing (directly) aggregate spending, respectively. Instead of focusing on these destructive prescriptions, I want to take a closer look at the central placement of aggregate spending in his analysis.

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Inflation Bites: The $38 Million Man

It’s easy to think of “inflation” as an abstract economic principle and forget that it has real impacts on real people.

Federal Reserve Chairman Jerome Powell acknowledged the pain of price inflation during his press conference at the close of the December FOMC meeting.

“We understand very well that prices went up by a great deal, and people really feel that, and it’s prices of food and transportation and heating your home and things like that. So there’s tremendous pain in that burst of inflation that was very global.”

Powell did not admit that he and his fellow central bankers were largely responsible for that pain, although he took credit for bringing inflation down, saying, “Now we have inflation itself is way down — but people are still feeling high prices — and that is really what people are feeling.”

Yes, Jay. We are feeling those high prices — because they haven’t come down! In fact, they continue to rise, just not as quickly as they were last year.

I might note here that inflation is on purpose. Making prices rise and go up is a stated policy. They just don’t want prices to rise so fast that you notice.

Unfortunately for the powers that be, you’ve noticed.

Just how much have prices gone up?

According to the most recent Consumer Price Index (CPI) data, prices are up 2.7 percent in the last year. But those of us living in the real world know prices have gone up much more than that.

Joaquin Henault and Laura Williams recently highlighted the dollar’s loss of purchasing power using the “Big Mac” index.

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The Economy Has Failed the American People, But It’s Taboo To Say Why

The economy has failed the American people, but it’s taboo to say why because that would undermine the entire power structure that so richly benefits the few at the expense of the many. The few have an extremely compelling motivation to obscure the “why” and to enforce the taboo on saying it aloud.

The economy has failed the American people because it’s a two-tiered power structure that’s essentially neofeudal, meaning it’s an updated version of traditional feudal social orders. To understand this, we must start by understanding traditional feudalism.

In feudal societies, life is pretty good for the nobility in the castle on the hill. For the powerless peasants working the fields below to fund the nobility, life is less good, and so the peasantry is open to changing this asymmetric power structure to a fairer balance.

To maintain its grip on power, the nobility must promote a social zeitgeist in which the peasantry’s powerlessness is the natural order of things and therefore resisting this structure is not only a sin, it’s futile.

One key feature of feudal social orders is the impermeability of the line between nobility and peasantry, what we call social mobility. Nobility and serfdom were established at birth, never to change. Serfs were bound to the land of their birth and could not leave; their servitude was for life.

This was a regression from the Roman Empire, which allowed ownership of land by free citizens, and relatively free movement of citizens throughout the vast empire.

Wedged between these hereditary classes were the merchants and craft workers whose services were essential to the nobility’s maintenance of power. As Fernand Braudel documented in his massive three-volume series Civilization and Capitalism, 15th-18th Century (Vol. 1: The Structure of Everyday Life, Vol. 2: The Wheels of Commerce, Vol. 3: The Perspective of the World), the story of capitalism is the steady expansion of commerce and production eventually generated a class with sufficient power to unseat the feudal power structure and replace it with various flavors of capitalism.

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Malice Aforethought

Professors of finance are a dime a dozen. Their theories are generally shallow and wrong… or kooky and silly. We weren’t sure which category Professor Richard J. Murphy of Sheffield, England, belonged in. We doubt that his core thesis on the coming crash is correct… but it is provocative.

At first glance, Murphy appears to be even more of a cynicalist than we are. He believes Donald Trump is offering dumb economic policies intentionally… trying to sink the US economy.

Everybody knows restricting trade is bad policy. It prevents people from getting the best product at the best price… and it allows uncompetitive, but politically well-connected, domestic companies to stay in business long after they should have been liquidated.

Threatening foreign nations with sanctions if they use currencies other than the dollar is another bad idea. It’s like when you’re losing a Little League baseball game… and threatening to take the bat home. Eventually the foreigners will find their own bat.

And there’s the threat of deporting millions of workers. Add those deported workers to the $2 trillion Musk and Ramaswamy say they will cut from the Federal deficits… and the higher prices caused by tariffs…

All of them coming on stream just as the stock market reaches bubble highs…

… and you have set the stage for a catastrophic meltdown.

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Is the Reign of the Dollar Coming to an End?

In early June, a rumour began to circulate – which was widely reported in the Indian press as true – that the government of Saudi Arabia had allowed its petrodollar agreement with the United States to lapse. This agreement, made in 1974, is quite straight-forward and fulfils various needs of the US government: the US purchases oil from Saudi Arabia, and Saudi Arabia uses that money to buy military equipment from US arms manufacturers while holding the income from the oil sales in US Treasury Bills and in the Western financial system. This arrangement to recycle oil profits into the US economy and the Western banking world is known as the petrodollar system.

This non-exclusive arrangement between the two countries never required the Saudis to limit their oil sales to dollars or to recycle their oil profits exclusively in US Treasury Bills (of which it holds a considerable $135.9 billion) and Western banks. Indeed, the Saudis are free to sell oil in multiple currencies, such as the Euro, and participate in digital currency platforms such as mBridge, a trial initiative of the Bank of International Settlements and the central banks of China, Thailand, and the United Arab Emirates (UAE).

Nonetheless, the rumour that this decades-long petrodollar agreement had come to an end reflects the widespread expectation that a seismic shift in the financial system will overturn the rule of the Dollar-Wall Street regime. It was a false rumour, but it carried within it a truth about the possibilities of a post-dollar or de-dollarised world.

The invitation extended to six countries to join the BRICS bloc last August was a further indication that such a shift is underway. Among these countries are Iran, Saudi Arabia, and the UAE, although Saudi Arabia has yet to finalise its membership. With its expanded membership, BRICS would include the two countries with the largest and second largest gas reserves in the world (Russia and Iran, respectively) and the two countries that accounted for nearly a quarter of global oil production (Russia and Saudi Arabia, all figures as of 2022). The political opening between Iran and Saudi Arabia, brokered by Beijing in March 2023, as well as the signs that the US allies UAE and Saudi Arabia seek to diversify their political linkages, demonstrate the possible end of the petrodollar system. That was at the heart of the rumour in early June.

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Civilization Depends Upon Economic Freedom

The BBC recently slapped a “trigger warning” on its popular 1969 series Civilisation, warning that viewers may deem the series objectionable as it presents Eurocentric perspectives. The series is now deemed to be “problematic” because it tells a “European story,” focusing on the Renaissance and the Enlightenment. This is criticized by academics—for example, the classicist Mary Beard—for excluding other cultures and also for excluding women while showcasing the achievements of men in Greece, Rome, France, Italy, Germany, and Britain.

This rejection of Eurocentricity by modern academics pervades the “decolonize” movement that has swept through all scholarly disciplines across the humanities and natural sciences. The science of economics has not been spared. Economic theories that have long been associated with economic progress and civilization are also rejected. The concept of “civilization” itself is rejected on the grounds that all cultures are equal; therefore, all cultures are a form of civilization, and no civilization is superior to any other. In this worldview, there is no particular reason why economic freedom should be prioritized above any other social goal.Jeffries, DonaldBest Price: $15.55Buy New $14.00(as of 11:47 UTC – Details)

Economic freedom concerns the human liberty to engage in the activities necessary to sustain prosperity and civilization, as well as the institutional conditions necessary for human beings to thrive. Economic liberty is therefore subsumed within civilization itself. The two concepts are linked, and the idea that we can choose to reject economic principles while maintaining the level of economic progress to which we have become accustomed is simply wrong. Ludwig von Mises explains this in Human Action:

What is wrong with our age is precisely the widespread ignorance of the role which these policies of economic freedom played in the technical evolution of the last two hundred years. People fell prey to the fallacy that the improvement of the methods of production was contemporaneous with the policy of laissez faire only by accident.

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TGIF: The Economic Is Personal

Contrary to accepted doctrine, we have no grounds for regarding so-called economic liberties as less important or less worthy of protection than so-called personal, or civil, liberties. That’s because we have no essential grounds for distinguishing so-called economic ends from so-called personal ends. (Let’s dispense with the “so-called” qualifier for the sake of fluency.)

Each of us pursues ends, full stop. Our ends vary widely in content and time required for accomplishment. Some are achieved quickly; others require prolonged effort and can be called projects. Some directly involve money-making; others don’t. What could be more personal than deciding how to earn a living? Why should the sort of end sought matter to the discussion of liberty?

Ends imply action, purposeful behavior. The laws and logic of human action — praxeology, Ludwig von Mises called it — thus apply to all action (the word purposeful is redundant) no matter what is sought and by whom, whether it’s Jeff Bezos or whoever succeeded Mother Teresa. The involvement of money is irrelevant. Ends, means, costs (opportunities forgone), profit, loss, and time (explicit or implicit interest) are all relevant concepts regardless of the ends we seek. As the British economist Philip Wicksteed put it, “The general principles which regulate our conduct in business are identical with those which regulate our deliberations, our selections between alternatives, and our decisions, in all other branches of life.”

Economics as an important discipline, Thomas Sowell emphasizes, is a way to analyze action, no matter its objective. It is how we understand the unplanned social consequences and institutions — property, markets, money, prices, and so on — that unfold when diverse people with divergent personal preferences aim at objectives using scarce resources that could be used in multiple ways. It’s the study of the social cooperation that emerges among widely dispersed strangers as an unintended byproduct of individuals’ pursuit of happiness. It’s not the particular objective that makes an activity “economic.” It’s an aspect of human action in itself.

Nevertheless, it is common in government offices and many people’s minds to rank economic liberty below personal liberty. Samuel Johnson said, “There are few ways in which a man can be more innocently employed than in getting money,” but many disagree.

An infamous footnote in a New Deal-era Supreme Court decision, which upheld a federal ban on interstate trade in filled milk, formalized and reinforced the ominous distinction between economic and personal liberty, which had replaced an earlier more fully pro-liberty view. The footnote seemed to say that while the government probably can’t interfere with, for example, the exercise of religion or expression, it probably can interfere with the exercise of commerce and manufacturing. In the latter activities only, the government should be allowed great leeway to interfere.

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Why Mankind Remains So Lost In Economic-Ignorance & Tribalistic-Warmongering

Carl Menger is widely recognized as one of the economists leading the so-called marginalist revolution along with William Stanley Jevons and Léon Walras. There are two other contributions by Menger that are relatively underappreciated and are vital for making sense of the socioeconomic order, including why mankind remains so lost in economic ignorance and tribalistic warmongering.

They are, first, his insights into the proper method or way to study the economy or social order and its emergence-evolution, and second, his application of such wisdom to explain the evolution of money and the entire socioeconomic order that further emerges thanks to money. Let’s further expand on these two.

Menger wrote an entire book devoted to discussing the proper method with which to study the social sciences, aptly titled Investigations into the Methods of the Social Sciences. So how should we study the social sciences according to Menger? He writes,

Natural organisms almost without exception exhibit, when closely observed, a really admirable functionality of all parts with respect to the whole, a functionality which is not, however, the result of human calculation, but of a natural process. Similarly we can observe in numerous social institutions a strikingly apparent functionality with respect to the whole. But with closer consideration they still do not prove to be the result of an intention aimed at this purpose, Le., the result of an agreement of members of society or of positive legislation. They, too, present themselves to us rather as “natural” products (in a certain sense), as unintended results of historical development. One needs, e.g., only to think of the phenomenon of money, an institution which to so great a measure serves the welfare of society, and yet in most nations, by far, is by no means the result of an agreement directed at its establishment as a social institution, or of positive legislation, but is the unintended product of historical development. One needs only to think of law, of language, of the origin of markets, the origin of communities and of states, etc. Now if social phenomena and natural organisms exhibit analogies with respect to their nature, their origin, and their function, it is at once clear that this fact cannot remain without influence on the method of research in the field of the social sciences in general and economics in particular. . . . Now if state, society, economy, etc., are conceived of as organisms, or as structures analogous to them, the notion of following directions of research in the realm of social phenomena similar to those followed in the realm of organic nature readily suggests itself. The above analogy leads to the idea of theoretical social sciences analogous to those which are the result of theoretical research in the realm of the physico-organic world, to the conception of an anatomy and physiology of “social organisms” of state, society, economy, etc.

Like Herbert Spencer, his contemporary and arguably the most famous and influential intellectual of the late 1800s, Menger too felt like the social order was akin to a “social organism” and should be studied using an organic or evolutionary approach similar to how we study the biological order. Menger thus felt like the methods of the physical sciences, like their use of mathematics, was as inappropriate for understanding the monumental complexity and evolution of the social order as it was for the biological one.

He writes, “I do not belong to the believers in the mathematical method as a way to deal with our science. . . . Mathematics is not a method for . . . economic research.”

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When Trade War Threatens Real War

Since the 2020 campaign, President Joe Biden has emphasized that America seeks “competition rather than conflict” with China. In the 2023 State of the Union address, amid tensions with the Chinese government over a spy balloon that floated through American airspace, he returned to the notion, saying his administration was willing to “work with China where it can advance American interests” while also bragging the U.S. was in “the strongest position in decades to compete” with the country.

That message of productive, if a bit unfriendly, economic competition is increasingly at odds with the aggressive trade policies Biden is pursuing behind the scenes. Indeed, it’s at odds with what prominent members of the administration, including the secretary of the treasury and the White House’s top national security adviser, are now openly admitting in public speeches: The United States is escalating its trade war with China, and it is doing so by targeting the free movement of goods and money across the globe in new ways.

“Technology export controls can be more than just a preventative tool,” national security adviser Jake Sullivan told a small crowd gathered at the Capital Hilton, just blocks from the White House, in a speech delivered last September. “If implemented in a way that is robust, durable, and comprehensive, they can be a new strategic asset in the U.S. and allied toolkit to impose costs on adversaries, and even over time degrade their battlefield capabilities.”

Sullivan said the theory had already been put to the test once. After Russia rolled tanks and troops into Ukraine in early 2022, the United States responded with financial sanctions aimed at Russian President Vladimir Putin and his cronies. It also imposed severe export controls meant to hobble Russia’s industrial and military might. In Sullivan’s telling, this represented “the most stringent technology restrictions ever imposed on a major economy.”

“Those measures have inflicted tremendous costs,” Sullivan continued, “forcing Russia to use chips from dishwashers in its military equipment.”

The “adversaries” that could be targeted with that “new strategic asset” would not be limited to those that had invaded their neighbors. For Sullivan, the apparent success of the export restrictions targeting Russia meant we might reshape how America conducts foreign policy, particularly with regard to China. America should abandon the idea that it must only maintain a relative lead over China in the development of key technologies, he said. Instead, the tools and tactics of an international trade war could be used as an economic complement to America’s military arsenal—one that could effectively serve as an opening salvo in a real war.

Sullivan was speaking at a gathering of the Special Competitive Studies Project, a joint venture of tech and national security experts funded by a private foundation created by former Google CEO Eric Schmidt. Four days before the summit, the group published a lengthy report, co-authored by Schmidt and Robert Work, a deputy defense secretary under both President Barack Obama and President Donald Trump. The report crystallized many bipartisan worries about how China’s technological advances might factor into a future war, and its conclusions mirrored Sullivan’s: “Warfare will be waged with and against industrial and financial power and pit innovation ecosystems against each other.”

What both Sullivan and the report describe could be called a total trade war: a conflict where the exchange of goods and money across borders is viewed through a military lens.

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