"He builds elaborate Keynesian models that treat consumer spending as the engine of prosperity..."

Paul Krugman: "He builds elaborate Keynesian models that treat consumer
spending as the engine of prosperity, ignores the capital structure of
the economy, and then acts surprised when manipulating
aggregate demand produces distortions in real production. 

"Paul Krugman has spent three decades telling you that government spending cures recessions, that deficits don't matter when interest rates are low, and that anyone who warns about inflation is a crank.* 

"Then 2021 happened. 

"The Biden administration pumped $1.9 trillion through the American Rescue Plan in March 2021. Krugman called inflation fears overblown. By June 2022, CPI hit 9.1 percent, the highest since 1981. Krugman's response was to move the goalposts and call it a soft landing when the Fed started hiking rates. [Similarly, here in New Zealand, CPI hit 7.3% in June 2022, a 32-year high, after Grant Robertson's own 'rescue plan' pumped $70 billion into our own small pond.]

"This is the pattern. He builds elaborate Keynesian models that treat consumer spending as the engine of prosperity, ignores the capital structure of the economy, and then acts surprised when manipulating aggregate demand produces distortions in real production. 

"The villain is IS-LM thinking that strips out time, entrepreneurship, and the price signals that actually coordinate economic activity. When you flatten the economy into aggregate demand curves, you produce policy advice that consistently mis-prices risk and encourages central banks to suppress interest rates well below what voluntary savers would accept. 

"Krugman won a Nobel in 2008 for trade theory work that genuinely mattered. But he abandoned rigorous analysis for political performance years before that prize arrived. His New York Times column became a vehicle for justifying whatever the Democratic Party needed justified, with the academic credentials attached as decoration. 

"Ludwig von Mises and Friedrich Hayek built their entire framework on the impossibility of central planners processing dispersed local knowledge. Krugman's worldview requires exactly that kind of central management. The [central bank] sets the price of credit for the entire economy, guided in part by intellectual cover that Krugman provides. 

"You pay for that cover every time your purchasing power erodes. But the man with the Nobel told you it was fine."

~ Handre

* Bernard Hickey put on a similar performance here, but without even the pretence of economic acumen. At least people have the excuse of a Nobel Prize and good work in the past for taking Krugman seriously. Galt knows what Hickey has done to deserve attention.

SUMMER READING: Unaffordable housing? No wonder!

For your summer reading this part of January, some posts from this year’s archives you might have missed but are still relevant.

ONCE AGAIN BERNARD HICKEY offers the insalubrious example of a commentator who knows something is wrong, yet knows nothing about how to fix it. Nothing that is beyond yelling “Something Must be Done!” And by “something he means “someone.” And by someone, he means the government.

First, the problem:

Auckland and Christchurch now have massive shortages of waterproof and undamaged homes that regular families can afford to own…
    The Department of Building and Housing forecast this month that New Zealand needs to build around 20,000 to 23,000 housing units a year over the next five years to keep pace with population growth. Meanwhile New Zealand has been building at a rate below 15,000 a year for the last three years…
    The crisis has intensified since 1999 with the introduction of the Metropolitan Urban Limit and the revelations that an entire generation of homes is leaky and will have to be either reclad or rebuilt…
    This crisis is playing out in a variety of ways.
    There is, of course, a rise in homeless numbers. But the more obvious increase is simply in the price of homes and rents. Both are rising quicker than the wider inflation rate and price rises outside of Auckland and Christchurch. There is an inevitable reaction to this, which is for young Auckland and Christchurch workers and families, those who are not property owners, to simply give up.

He is right that rents are rocketing and new homes are becoming less and less affordable.  The annual Demographia study has shown for years that even during this Great Recession house prices as a proportion of income in New Zealand’s cities are among the highest in the developed world—and increasing*. And the Productivity Commission (from whom Hickey got his figures) point out that “for younger people and those on lower incomes there is a missing step on the property ladder, particularly in Auckland. The chances of them ever purchasing their first home are decreasing.”

He is right, too, that while would-be home-owners burn, governments in Auckland and Wellington continue to fiddle—with train sets in Auckland, and with a pathetic, partial, poorly-done privatisation programme in Wellington.

The problem then is this: what is to be done? And the problem with Hickey is, he has no bloody idea.

So like every simple statist who Wants Something Done, he simply cries that Gummint Should Do Something!

“Government-owned land would need to be opened up and town planners overruled,” says Hickey, getting it half right, before heading down the route of statists immemorial in calling for “taxpayer money … to be invested and lots of it.” Presumably building those affordable houses that the government has made it unprofitable for private builders to build, using resources that will cost more than the sale price.

It’s the same “solution” put forward by Fran O’Sullivan (left) a few months back when she called for private land to be nationalised—expropriated outright by the grey ones—newly stolen land on which the Gummint Should Do Something.

Like O’Sullivan, Hickey is a business columnist. Yet just like her he has no idea how business works.

And they both write and talk about politics. But neither apparently have any conception of how politicians have caused the very “market failure” they describe. Because while calling for government to fix the problem by doing more, they never even bothered to ask themselves this fundamental question: whether it is government activity itself that has largely caused the problem.

And it has.

IN A NUTSHELL, THE big problem is that government has gone beyond right: it has passed laws giving the Reserve Bank the power to print money, bureaucrats the power to prescribe the methods and materials by which houses are built, and  planners the power to control and restrict people’s land.

Let’s look at these one at a time.

In recent years, the new money printed by the Reserve Bank (i.e., monetary inflation) has spilled over into the housing market, producing one housing “bubble” and thousands of NZers deluded into thinking their wealth has increased.

Meanwhile, the Department of Building and Housing were given the power to tell builders how to build houses. Rather than deregulation, which never happened here, builders have endured a flood of new regulation: producing pages and pages of gold-plated building regulations and a rise in the cost to build a house that has out-paced even the rate of house price rises.

And while the printing presses were going overtime printing new regulations and new money, the town planners were busy strangling land-owners and ring-fencing cities under the new powers given them by the Resource Management: the power, essentially, to restrict development of  new, affordable housing while charging builders and developers more for the “privilege” of trying to build something on their own land.

THE NET RESULT OF this three-pronged attack on property was to pump up demand with all those freshly-printed dollars while restricting the supply of the stuff they wanted to spend them on.

No wonder we saw a housing bubble.

No wonder price inflation on housing (which is all those price really increases were) went through the roof.

No wonder so many people were deluded by the price inflation into thinking they were becoming rich-instead of just seeing their dollars devalued.

No wonder land prices now account for up to 60% of the cost of a house in Auckland.

No wonder new homes tend to be at the top-end of the market.

No wonder things began to become insane, with the cost to build a house beginning to outstrip even the cost people were prepared to pay for it—meaning the model for speculative housing** (which has for decades been building the means by the vast majority of new affordable homes was built) is now permanently broken.

And as a simple measure of when affordable housing will be built again, it will be when the model for speculative house building returns.

How do we do that?

Simple. We stop what should never have been started.

We get rid of fiat money; we get rid of zoning; we shut planners up and put a stake through the heart of their Resource Management Act; we stop fighting so-called “sprawl” with “Urban Walls” and instead leave people free to develop their own land according to demand—according to people’s choices about how they actually want to live.***

In short, we give power back to builders and property owners to do what they do best, to properly service house buyers’ demand, while taking power away from those who only get in their way.

Yes, government could do more. It could do a whole lot more by doing a whole heck of a lot less.

And Bernard Hickey could either write less, or learn more.

* * * * *

* As the Annual Demographia Surveys ( www.demographia.com ) clearly illustrate - households should not be paying any more than 3 times their annual household income to house themselves - with mortgage loads around 2.5 times.  Unfortunately in NZ’s major cities home-owners are now paying from 6 to 8 times their annual household income to house themselves , a figure that increases ever year.

** What is speculative house building? It’s when Joe Builder buys a site, builds a house on it, and sells it to Mr and Mrs New-Home-Owner for more than he’s shelled out—giving him a small profit which he can use to build his next one. This is how “spec” houses have been built since Adam was a lad—but now can’t be.

** The Productivity Commission in its recent report on affordable housing is only half-way there with its own solution, which would at least be a start. The Commission’s key recommendations include:

• The urgent need for more land to be opened up for housing, especially in urban areas, because sections now average about 40% to 60% of the cost of a house.

• Reconsideration of Auckland’s draft spatial plan. Auckland faces significant housing affordability challenges and the Commission found its current plan, with a target of accommodating 75% of new homes within existing urban boundaries, will be difficult to reconcile with affordable housing.

• Improved processes for consenting, to speed up the service and lower costs.

• Improving how local council development charges for infrastructure are calculated and applied, including making them reviewable. The Commission found the current model has too much regional variation and is not transparent.

Perhaps Mr Hickey and Ms O’Sullivan could read them?

(First posted Feb 20, 2012)

Unaffordable housing? No wonder!

ONCE AGAIN BERNARD HICKEY offers the insalubrious example of a commentator who knows something is wrong, yet knows nothing about how to fix it. Nothing that is beyond yelling “Something Must be Done!” And by “something he means “someone.” And by someone, he means the government.

First, the problem:

Auckland and Christchurch now have massive shortages of waterproof and undamaged homes that regular families can afford to own…
    The Department of Building and Housing forecast this month that New Zealand needs to build around 20,000 to 23,000 housing units a year over the next five years to keep pace with population growth. Meanwhile New Zealand has been building at a rate below 15,000 a year for the last three years…
    The crisis has intensified since 1999 with the introduction of the Metropolitan Urban Limit and the revelations that an entire generation of homes is leaky and will have to be either reclad or rebuilt…
    This crisis is playing out in a variety of ways.
    There is, of course, a rise in homeless numbers. But the more obvious increase is simply in the price of homes and rents. Both are rising quicker than the wider inflation rate and price rises outside of Auckland and Christchurch. There is an inevitable reaction to this, which is for young Auckland and Christchurch workers and families, those who are not property owners, to simply give up.

He is right that rents are rocketing and new homes are becoming less and less affordable.  The annual Demographia study has shown for years that even during this Great Recession house prices as a proportion of income in New Zealand’s cities are among the highest in the developed world—and increasing*. And the Productivity Commission (from whom Hickey got his figures) point out that “for younger people and those on lower incomes there is a missing step on the property ladder, particularly in Auckland. The chances of them ever purchasing their first home are decreasing.”

He is right, too, that while would-be home-owners burn, governments in Auckland and Wellington continue to fiddle—with train sets in Auckland, and with a pathetic, partial, poorly-done privatisation programme in Wellington.

The problem then is this: what is to be done? And the problem with Hickey is, he has no bloody idea.

So like every simple statist who Wants Something Done, he simply cries that Gummint Should Do Something!

“Government-owned land would need to be opened up and town planners overruled,” says Hickey, getting it half right, before heading down the route of statists immemorial in calling for “taxpayer money … to be invested and lots of it.” Presumably building those affordable houses that the government has made it unprofitable for private builders to build, using resources that will cost more than the sale price.

It’s the same “solution” put forward by Fran O’Sullivan (left) a few months back when she called for private land to be nationalised—expropriated outright by the grey ones—newly stolen land on which the Gummint Should Do Something.

Like O’Sullivan, Hickey is a business columnist. Yet just like her he has no idea how business works.

And they both write and talk about politics. But neither apparently have any conception of how politicians have caused the very “market failure” they describe. Because while calling for government to fix the problem by doing more, they never even bothered to ask themselves this fundamental question: whether it is government activity itself that has largely caused the problem.

And it has.

IN A NUTSHELL, THE big problem is that government has gone beyond right: it has passed laws giving the Reserve Bank the power to print money, bureaucrats the power to prescribe the methods and materials by which houses are built, and  planners the power to control and restrict people’s land.

Let’s look at these one at a time.

“Are we really thinking about selling 49% of our SOEs to pay for 1 year’s worth of tax cuts?”

How often have we seen quick asides on Twitter reveal the implicit assumptions on which certain commentators base their pronouncements. Take this exchange on Twitter yesterday about the partial privatisation of SOEs, which speaks volumes.

First of all, what’s with the “we” white man? What’s with the “our”?  Since when did you or I or your interlocutor have any actual control or real ownership stake in these government monopolies? (Most of which, by the way, are power companies that should never have been placed in government hands in the first place).

Second, what’s this with the fixation on dividends? “They’re certainly generating a pile of dividends for someone?” Silly me. I thought the primary purpose of power companies (for example) was to generate power—you know, the lifeblood of an industrial economy.  The stuff that keeps the wheels of industry turning. The stuff we’ve got too little of due to lack of real investment..

Power companies, sir, are primarily there to generate power not to fund a dying welfare state.

Or election bribes.

THIS IS NOT JUST an academic argument. In simple terms (which is clearly all Mr Hickey understands now he’s had his lobotomy) the power that power companies make effects every single company in New Zealand--which is to say, it effect the lives, wealth, wellbeing and wages of everyone in the country.  That is a far more tangible thing than talking bollocks about “our” power companies at the Grey Lynn cocktail parties Mr Hickey now attends.  The more cheap power we have (and instead of cheap and abundant power, we’ve been  going headlong in the other direction) the more wealth New Zealand business will be able to generate. And the more capital that is invested and reinvested in power companies, the more cheap and abundant energy we might have.

And to put it bluntly, but not as bluntly as the blunt object Mr Hickey deserves for running with the statist ball, the more capital that foreign owners invest (since there’s blessed little real capital around “our” way to do anything with), the more power there is for New Zealand producers to use to produce things.

That’s a good thing. A very good thing. More foreign owners, more capital, more power. (I keep it simple so Mr Hickey can catch up.)

Now Mr Hickey and his ilk bleat about “foreign ownership” as if Genghis Khan will be coming down from the hills to ravage our cities, and “we,” i.e., “real” New Zealanders, have no power to stop him.  Quite apart from this petty small-town provincialism (which is what this moron’s xenophobia amounts to) this is just more abject bollocks.  The fact is that if left free to make their own decisions (an unfashionable notion, I’ll admit, amongst the people with whom Mr Hickey now sips his lolly water) the “mum and dad” investors in the first public offering of these shares will be able to choose to either keep their shares or sell to a higher bidder. Which means that the decision about foreign ownership is actually in the hands of real New Zealanders. i.e., the New Zealanders who are prepared to put their money where other people’s big mouths are, and to make these SOEs their own.

Moreover, if New Zealand investors in that initial 49% float are bought out by foreign owners, as is likely to happen when or if the shares are allowed to end up in the hands of those who value them the most (as they will if markets are kept free of interference) then those New Zealand investors in receipt of this subsequent windfall are not going to take their money and just bake it into pies, are they. They’re going to reinvest it. They’re going to start new businesses. They’re going to recapitalise existing ones. Which means we, i.e.,  you and I and Bernard Hickey (even though he wouldn’t deserve it) would be better off than we are now from this “second wave” of capital.

We’d all be better off because the country’s businesses would be getting a double bonus of two capital injections: one of which is flushed out by the first, and the first of which helps all our lights stay on. (And as far as dividends go, what do you think NZers would be receiving from their “second wave” of investments? Cookie crumbs?)

So everyone’s better off. Businesses, investors, wage earners. Even the people at Grey Lynn cocktail parties. Everyone, that is, except the moaners.

All very straightforward, really.

Now it might be objected however that any major improvements in power generation would only come about if we could harness the expertise of big overseas players. And we could only harness their full and  undivided interest if they could buy more than the derisory 10% which our sad excuse for a Finance  Minister will allow them to buy. Which is of course an argument not just for the pathetic partial privatisation proposed by this pussy, but for the fully-fledged full-blooded proper privatisation in which all the shares of all the government “assets” (sic) are allowed to find their way into the hands of those who value them the most.

But the Finance Minister is a moron too.

Fran O’Sullivan jumps Bernard Hickey’s shark

Every taxi driver, barber and newspaper columnist is the same.

They know how the world works. They know what needs to be done to fix things.  They know, uniquely, what has to happen, and all they need is is big bossy gummint to give them the big stick!

Fran O’Sullivan is no different.

Staring at Christchurch and seeing only months of inactivity brought about by government meddling both central and local (waiting for EQC to sign off houses, builders and buildings; waiting for CERA o demolish what’s left of people’s property in the central city; waiting for council to release its “strategy” for what property owners in the city might be allowed to do;  waiting for government to decide what regulations it might issue mandating how they might be allowed to do it;  waiting (vainly, I might add) to see if council’s District Plan might be relaxed to allow businesses to relocate to new office buildings in different parts of the city, and new housing to be built in places the planners never contemplated) Fran doesn’t draw the obvious conclusion that making the country’s second-largest city a ward of the state is neither sustainable nor affordable.

Instead, she leaps for the same big stick beloved of blowhards everywhere: the gummint must do something! (As if it weren’t already doing enough!)

Fran has a plan. It’s not very complicated, or even very well thought out. Specifically, Fran demands the government:

• nationalise all the private land on the outskirts of Christchurch (i.e,, completing the job CERA have already largely done in the CBD);
• build houses on it (because the government does this so well); and
• raid the pocketbooks of everyone in the country able to afford a Rugby World Cup ticket to pay for it.

Simple as that. A plan that every barber, every taxi driver--every blowhard and Bernard Hickey in the country--could agree with and call their own.

Fran O’Sullivan is a business columnist.

But she has no idea, apparently, how business works. She doesn’t realise that regime uncertainty and a loss of property rights between them have barred businesses from doing what they do best.

Fran O’Sullivan writes about politics.

But she has no idea, apparently, that making the city a ward of the state has caused the very malaise she decries.

It can be undone, but not by making the state’s interference even bigger. It can be done very simply: by letting businessmen themselves rebuild the city businessmen created.

Tell business owners they can relocate wherever in Christchurch they want, and that zoning will be relaxed to accommodate that, and watch businesses start to take off again.

Tell owners of stable land that they can build as many houses on their land as they can provide services for, with neither costs to nor charges from council, and watch a festival of house-building take off.

Let those who own their own property determine between them and their insurance company what they wish their building standards to be. Such a system can be set up very quickly as it already exists in government reports. And then watch the festival start producing innovative affordable homes.

Bus Bob Parker, Gerry Brownlee, Roger Sutton and all the town planners--and Fran O’Sullivan--out of Christchurch permanently, get the hell out of the way, and allow the city and the people within it to reinvent itself spontaneously. This would be a wonder to see.  Call it spontaneous order, if you will, since that’s what you’re trying to kick off. Call it crowd-sourcing, if you like, since that’s what markets and entrepreneurial activity like this are really made of.

In fact, call it an Enterprise Zone and allow some enterprise to happen in the city for the first time in nearly a year.

Make it an Enterprise Zone instead of a Ward of the State, get government out of the way (and provide land-owners and businesses some certainty they’ll stay there), and can I assure you you’ll be surprised what might happen. 

Even Fran might be.

Because Fran O’Sullivan is a business columnist. Or was.

A Hick-up on economic history

The ignorance of so-called financial commentators is legion.

Take this just yesterday from alleged financial commentator Bernard Hickey, showing he’s as poor a historian as he is an economist.

Obama is just like Hoover - US economist Thomas Palley
hits the nail when he compares Obama to President Hoover,
the President before Roosevelt who fiddled* while the economy
slumped into recession…

This is just flat-out ignorant nonsense. Dangerous nonsense, since it is intended to reinforces a myth that encourages more meddling, of which Mr Hickey now approves. I replied at his site roughly as follows:

Bernard, you said, "Obama is just like Hoover - US economist Thomas Palley hits the nail when he compares Obama to President Hoover, the President before Roosevelt who fiddled* while the economy slumped into recession..."
    There is no polite way to say this: This is just flat out wrong.
    If Palley has hit anything it is only his thumb--and yours. If you are going to talk as some kind of authority, then please learn what you're talking about before you open your mouth.
    The only thing Palley got right is that Obama (and Hoover, and Roosevelt, and Bush) should not have listened to mainstream economists.  But to listen to Palley peddling lies about Hoover’s record (and you spreading them further) makes my stomach turn.
    Because, far from keeping his hands off while the economy tanked, Hoover was precisely as active as you and your new interventionist mates would have liked him to be **
    He intervened to keep prices up.
    He intervened to keep wages up.
    He borrowed to put deficits up.
    He supported and signed the Smoot-Hawley Tariff Act.
    He endorsed the Federal Farm Board, which placed the government into the farm business.
    He introduced the Reconstruction Finance Corporation (RFC), which spent billions on loans (or gifts) to prop up failing banks and industries.
    In short, he did almost exactly what Bush did, and what today’s mainstream economists encourage, with results that were just as dismal. 
    And instead of fixing the crash, he turned it into a full-blown depression.
    He introduced what Benjamin Anderson calls “Hoover’s New Deal,” and with it he delivered what deserves to be called “Hoover's Depression.”
    Virtually everything in Roosevelt’s New Deal was in Hoover’s. Just like Obama did with Bush, And after campaigning against Hoover's "big-spending" and “fiscal irresponsibility,” when elected FDR went right on ahead and did just what Hoover did, only moreso.  Just like Obama did with Bush. 
    And instead of fixing the depression, he made it last for years.
    Between them, Hoover and FDR were a disaster—and their “underconsumptionist” thesis firmly exploded. 
    So if there's any historical comparisons to be made here (and there are) the only one that makes any sense is to say that Obama is playing FDR to Bush's Hoover. 
    And they're both a goddamned disaster.

HOWEVER, if you really do want to learn about an Administration that sat back while the economy slumped into recession, you really should learn more about the “Great Depression of 1920-21”--where the initial slump was even bigger than it was nine years later. 
    But do you want to know why you don't hear more about The Great Depression of 1920-21? It's simple. While the slump was much bigger, because the government sat back, got out of the way, and allowed the economy to recover, in less than two years the US economy had restructured, recovered, and was back on its way to growth again.
    In short, the authorities then did what Hoover (and Bush, and FDR, and Obama, and Greenspan, and Bernanke) should have done.
    Which was to get the hell out of the way.
    And that's why it's been called "The Depression You've Never Heard Of."  Because their fiddling* in 1920-21 while the economy slumped into recession was what allowed the economy to restructure, to recover, to “rebalance,” and to get back on the road again.
    It’s just impossible for an economy to do that when government is doing all it can to meddle.

* * * *

* Just to be clear, so there's no misunderstanding, by fiddling we all mean what Nero did -- which was "fiddling while Rome burned" -- not what Obama/Bush FDR/Hoover did, which was intervene, intervene, intervene.

** "Franklin D. Roosevelt, in large part, merely elaborated the policies laid down by his predecessor. To scoff at Hoover's tragic failure to cure the depression as a typical example of laissez-faire is drastically to misread the historical record. The Hoover rout must be set down as a failure of government planning and not of the free market. To portray the interventionist efforts of the Hoover administration to cure the depression, we may quote Hoover's own summary of his program, during his presidential campaign in the fall of 1932:

        “We might have done nothing. That would have been utter ruin. Instead we met
    the situation with proposals to private business and to Congress of the most gigantic
    program of economic defense and counterattack ever evolved in the history of the
    Republic.’”  [Quoted in From Murray Rothbard's book America's Great Depression]

*** In the 1932 election Roosevelt attacked Hoover’s meddling, and “promised a free-market approach to economic growth: cut federal spending, reduce taxes, and lower the Smoot-Hawley tariff.  He hit these three points frequently [“… also promising to cut government in size by 25 percent and to balance the budget in each year of his presidency”] , and no doubt won many votes because of that…” [Quoted in Burton Folsom’s New Deal or Raw Deal]

At the time of writing, Hickey hasn’t bothered to respond.

NB: There are two primary reasons an economy needs a hands-off approach in order to restructure.

First, the economy has got out of whack in the boom period, during which much money has been lost and many resources consumed in malinvestments. 

Pumping newly-printed money back in to make up the loss (which as Von Mises used to say is like backing over a man you’ve just run down in your car, in the hope that the new accident will remedy the last) only leaves everyone uncertain about where and when all that newly-printed money is going.  What businessmen need to be able to do is read the price signals, and fit their price “coats” according to the reduced amount of monetary “cloth” around. Once the new price levels have been found, the economy is ready to be productive once again—but that can’t happen when prices themselves are being meddled with. Businessmen can’t do that when the whole price structure is put out of whack by these gobs of counterfeit capital, .  

Second, because the economy has got out of whack, it does need to restructure. Resources are down, and the best use has to be made of what’s remaining. The best way to ensure that doesn’t happen is to bail out bad positions, making sure those resources can’t be put to better use elsewhere. The second-best way to ensure it doesn’t happen is to announce so many new laws, measures, rules, regulations and bail-outs that no businessman knows from one day to the next what he can plan for. This is what Robert Higgs calls the phenomenon of regime uncertainty, which is arguably more responsible  than anything else for so many businessmen hunkering down and refusing to invest.

Here’s the sort of thing I mean: legislation introduced yesterday to break up what was once NZ's largest company.

Recession means recovery—or should do—iff governments get out of the way so businessman can recover.

Explains Murray Rothbard in America's Great Depression (which you can, and should, read online here in PDF),

 The "boom" ... is actually a period of wasteful misinvestment. It is the time when errors are made, due to bank credit's tampering with the free market. The "crisis" arrives when the consumers come to reestablish their desired proportions. The "depression" is actually the process by which the economy adjusts to the wastes and errors of the boom, and reestablishes efficient service of consumer desires.

The "depression" is a necessary thing.

The adjustment process consists in rapid liquidation of the wasteful investments. Some of these will be abandoned altogether (like the Western ghost towns constructed in the boom of 1816–1818 and deserted during the Panic of 1819); others will be shifted to other uses.
    Always the principle will be not to mourn past errors, but to make most efficient use of the existing stock of capital. In sum, the free market tends to satisfy voluntarily-expressed consumer desires with maximum efficiency, and this includes the public's relative desires for present and future consumption. The inflationary boom hobbles this efficiency, and distorts the structure of production, which no longer serves consumers properly.
    The crisis signals the end of this inflationary distortion, and the depression is the process by which the economy returns to the efficient service of consumers.
    In short, and this is a highly important point to grasp, the depression is the "recovery" process, and the end of the depression heralds the return to normal, and to optimum efficiency. The depression, then, far from being an evil scourge, is the necessary and beneficial return of the economy to normal after the distortions imposed by the boom. The boom, then, requires a "bust."

Time to stop worrying then, and learn to love the recovery.

And to stop treating the likes of Hickey as an economic authority.

As good as gold? Or as bad as paper [updated]

"Of all the contrivances for cheating the laboring classes
of mankind, none has been more effective than that
which deludes them with paper money."
                   - Daniel Webster

I’ve bagged Bernard Hickey mercilessly (and deservedly) for his calls for a return to Muldoonist mercantilism, but in truth there’s one thing about Bernard that has to be said: he at least realises that the present monetary system is broken. He realises that we are living not just through global financial and economic crisis, but (more accurately) a monetary crisis. He realises, more perhaps than many of the other status-quo merchants, that the way the present system is set up makes it both unsustainable and destructive. Sadly, however, he is as incapable of proposing any solution to the crisis beyond reversion to many of the statist band-aids that helped cause it.

Developed in crisis and destined to die in another one, let’s join him at least in agreeing that the present system is broken, just like all the other systems of the last century from which it grew. But let’s disagree with him in saying that the only solution is his reversion to currency nationalism and the breakup of world trade. The solution, I suggest, is to revert to the system that built internationalism and world-wide prosperity just over a century ago.

The present system, which has lasted barely two decades, has been dubbed “The Great Moderation”: based on a model in which a government’s Central Bank Governor sets interest rates to maintain so-called price stability (while all around him booms and busts), it is a paper-based currency system built on organising ever-rising mountains of debt into ever-more ballooning quantities of currency.

From Europe to America, the system is clearly broken, not least here in New Zealand where (even when things were apparently running well) the new money entered the system as unsustainable debt, and the interest rates set to maintain domestic “price stability” set up a positive feedback loop punishing progress, rewarding stagnation, and (still) attracting the sort of hot foreign money to our shores that drives up our dollar’s exchange rate without making any real capital investment to compensate producers for the rises in their costs.

Hickey is right to criticise the present collapsing system; but he’s wrong to think that a few statist band-aids could, would, or should fix it. Like the few other commentators who’ve identified that things as they are now are indeed broken, he’s left floundering when it comes to what “new thing” to fix it all with.

And since ours is not the first monetary system to have collapsed, we’ve seen plenty of “new things” to fix the same old monetary problems over the last century—each of them purporting to be the way to wealth and riches (or, to use the words of John Maynard Keynes who was responsible for at least two of those systems, they way to effect “the miracle of turning stones into bread.”)

Consider, over the last century—ever since the First World War threw all the belligerents off their managed gold standards—there’s been fix after fix to the world’s monetary systems, each one lasting barely two decades before collapsing just like the latest system, taking in its wake the wealth, prosperity and hard-earned savings of everyone who trusted it.

Ever since gold coins were taken out of workers’ hands, we’ve seen a (mis-)managed bullion standard leading to explosive boom then catastrophic bust (1921 to 1933); worldwide competitive devaluations leading to monetary and military chaos  (1933 to 1946); the unsustainable Bretton Woods I, which collapsed in 1971 when the US defaulted on its gold obligations, and the world collapsed into a decade-and-a-half 0f stagflation;  and finally the “Great Moderation” of the last two decades which supposedly brought all the chaos under control.

Yeah right.

We’ve seen a century in which the world’s money has abandoned its links to gold, and has built instead a money that is built on debt, and lots of it; a century in which we’ve gone from a money that acted as anchor has been transformed to one that swings like a weather-vane; a century of chaos in which at least ninety-five percent of the value of every paper currency has  been destroyed—and people’s savings and prosperity with it.

Things certainly are broken.

 

Recognising the current catastrophe as just the latest monetary dissembling since the links to gold were dissolved, some folk are calling for a return to gold.

The present head of the World Bank, Robert Zoellick, has begun to suggest that the world needs to think seriously about “readopting a modified global gold standard to guide currency movements.”  What he means by that, however, is a “gold exchange standard,” something like the one (mis-)managed earlier last century in which governments and central banks hold gold in ingot form, and let people see it on television occasionally just to keep them happy it’s still there.

Without any doubt at all, this will work no better than it did before—particularly since no debt-laden government on earth is interested in sound money at this time.

Meanwhile, Financial Times columnist Martin Wolf asks, “Could the World Go Back to a the Gold Standard?”

It is not hard to understand the attractions of a gold standard. Money is a social convention. The advantage of a link to gold (or some other commodity) is that the value of money would apparently be free from manipulation by the government. The aim, then, would be to ‘de-politicize’ money.

But Wolf musters more objections than praise for the system that leaves money free from political manipulation (objections which Richard Ebeling masterfully dismisses).

In response to calls like Zoelick’s and Wolf’s, there are folk like Edwin Vieira who call for a return to the sort of real gold-coin standard that underpinned the long-term prosperity of the late-nineteenth century, a standard that leaves gold coins in the pocket of workers—giving them the power to manage their own affairs that the governments took away.  [Hat tip Antal Fekete]

But their remains this recalcitrant rump of people who do know that the world’s money is broken, but who resist the call for its full de-politicisation. Much of that resistance is based on the love of the state, but much is based on just flat-out ignorance.

Consider this piece by Nouriel Roubini, for example, one of the few folk to warn in advance about the onset of the latest crisis. Here's Why a Gold Standard Won't Work , he says. Let’s fisk what he has to say.

…a gold standard would make central banks unable to fight inflation or deflation, much less do anything to combat persistent unemployment…

Since the central banks’ paper is itself (during the boom) the source of price inflation, and the centrally-managed fractional reserve system the source (during the bust) of monetary deflation, this seems a bizarre complaint to make about a gold standard, particularly when those charts above show the sort of real  price stability that gold anchored over centuries of growing prosperity. Furthermore, the world had never seen the levels of structural unemployment seen in the 20th and 21st centuries of debt-based monetary booms and busts.

A fixed exchange regime, even if it is not a gold standard…just exacerbates the business cycle. Roubini asks us to imagine two countries: One that's growing very quickly, and one that's growing very slowly. The economy that is growing quickly would tend to "overheat"—an economic phenomenon characterized by accelerated growth, inflation and the potential for asset bubbles. In the economy that is growing more slowly, there would be a tendency toward deflationary pressure and recession. So, instead of having a central bank with the capacity to successfully counter-balance these tendencies, an economy with a fixed exchange rate regime would continue to reinforce the existing negative trends in the business cycle…

This really is flat-out ignorance. In a gold-based system of stable exchange rates (stable, because all prices everywhere are determined in weights of gold) the higher priced, overheating economy with lower interest rates would tend to lose gold (lose it because more imports are bought, and because money will be seeking higher interest rates), giving the precise counter-cyclical pressures that are needed; whereas the more depressed economy with higher rates and falling costs will tend to attract gold and new investment. 

Instead of having a central bank which over the last century has always made things work, gold effects a naturally-equilibrating process which has been known about for centuries (at least since David Hume first explained it in the 1700s) and which worked to harmonise world trade over the period in which it flourished most successfully.

….fixed rate regimes inhibit the ability of banks to provide lender of last resort support to an economy when necessary….

But as the present bank bailouts demonstrate, the “lender of last resort” fallacy leaves the world trapped in a cycle where new debt is simply passed round and round in circles.  We need a mechanism to wind up failed banks, not to reward them while impoverishing ourselves.

Roubini raises the following question: If you are on a gold standard, or modified gold standard, what do you do in the event of a bank run—if you don't have enough gold to fully back the currency? Roubini explains that most central banks in today's economy have far greater financial liabilities than gold in reserve. In fact, according to Roubini, in the case of most central banks today that ratio is about 40 or 50 to 1.
    Of course, many who support a gold standard would say that limiting the ability of central banks to increase their leverage would be a benefit of adopting the gold standard…

They certainly would. As Roubini must surely know (unless he’s simply being disingenous), virtually all of those arguing for a return to the classical gold standard have been in the van in calling for an end to the unstable fractional reserve system on which it was unfortunately based (and which still exists in the paper system, exacerbating the violent monetary inflations and deflations of boom and bust); and those who support a gold-coin standard like the one Vieira proposes insist that all central banks be kept away from gold as a matter of urgency, with those coins being put in the hands of workers, credit unions and private (non-leveraged) banks.

“We printed at once the notes, large and small,
Tens, twenties, fifties, hundreds and all,
You can't imagine how it pleased the folk, short and tall!”
- Goethe, Faust (Part II, Act I)

Of course, the major objection to the reintroduction of any gold standard is that it would take away the freedom of governments to “manage their own affairs,” by which is meant it would impose on them a fiscal discipline that would make impossible governments’ rampant profligacy, their inflationary electioneering, their multiplication of the welfare-warfare state, and the creation of all that paper-based “sovereign debt” in which the world, from Ireland to Sacramento, is now drowning.

It should be understood (and this is probably the most important lesson to take from all this) that far from being something about gold to decry, this discipline that it imposes on governments is in fact one of gold’s primary virtues.

UPDATE: The government thinks they own our money. George Reisman explains it is otherwise.

Economic thinkers say Emperor has no clothes [update 2]

The mainstream, “textbook” economics of recent decades is under threat.

Ben Bernanke’s quadrillion-quintillion injection of counterfeit capital into the banking system of the world’s reserve currency has got the world’s economists beginning to scratch their heads in wonder at the system they’ve upheld for the last few decades—which (instead of relying on savings to fund growth) essentially relies on ever-inflating gobs of cheap counterfeit capital to be lent out to create asset bubbles to fund “growth” during the boom and, once the bubble bursts the growth stops and the pool of real savings has been diminished, to fund the “stimulus” on which politicians and other know-nothings now set their hopes.

Instead of relying on the questionable acumen of a monetary dictator to set interest rates (cue lots of media conversation about how the dictator is feeling this week, and the “semantic nuances” of his carefully chosen words in public), more far-seeing economists are beginning to say the current emperors have no clothes.

* * The market itself gave the economists a kick in the pants by responding to Bernanke’s openly inflationist cheque book by soaring past $1,400 per troy ounce for the first time.

* * The German Finance Minister helped kick off the head scratching by pouring opprobrium on the acumen of Bernanke and his colleagues (who could not be more mainstream)

“With all due respect, U.S. policy is clueless,” the German Finance Minister Wolfgang Schaeuble told a conference. “(The problem) is not a shortage of liquidity. It’s not that the Americans haven’t pumped enough liquidity into the market, and now to say let’s pump more into the market is not going to solve their problems.”

* * And the Chinese—the Chinese!—told a news briefing at the G20 conference the move “smacked of outmoded central planning.” Which, of course, it does.

* * In the British Parliament, the cradle of modern democracy, two Conservative MPs have introduced a bill to end shut down the spigot of endless credit—every new note of which dilutes the purchasing power of every note in your pocket—and replace the system that produced the boom and bust with a system of honest money and sound banking.  Introducing his bill, Douglas Carswell told the parliament:

Since the credit crunch hit us, an endless succession of economists, most of whom did not see it coming, have popped up on our TV screens to explain its causes with great authority. Most have tended to see the lack of credit as the problem, rather than as a symptom. Perhaps we should instead begin to listen to those economists who saw the credit glut that preceded the crash as the problem. The Cobden Centre, the Ludwig von Mises Institute and Huerta de Soto all grasped that the overproduction of bogus candy-floss credit before the crunch gave rise to it. It is time to take seriously their ideas on honest money and sound banking.

The bill is beginning to gather widespread support.

* * Indeed, the bill has been lent support by Britain’s own monetary dictator Mervyn King, the governor of the Bank of England, who told an audience last week it is time to talk about “eliminating fractional reserve banking.”

* * And just yesterday, the head of the World Bank chief Zoellick said the world needs to think seriously about “readopting a modified global gold standard to guide currency movements.” And he’s right, you know, it does. The US Federal Reserve’s insistence on diluting the world’s present “reserve currency” only makes it more urgent to re-adopt that more rational numeraire—the one that underpinned the enormous economic progress of the nineteenth century (not coincidentally, the period which enjoyed the most historically sustained economic progress ever).

So the world’s economists are beginning to turn. They’re beginning to realise their emperors of the last few decades have no clothes, and their their textbook theories so widely held hold no water.

It’s only early days, but as Malcolm Gladwell explains about tipping points, this is how change happens.

Gladwell’s Law of the Few contends that before widespread popularity can be attained, a few key types of people must champion an idea, concept, or product before it can reach the tipping point. Gladwell describes these key types as Connectors, Mavens, and Salesmen. If individuals representing all three of these groups endorse and advocate a new idea, it is much more likely that it will tip into exponential success.

We’re nearly there.

As Ludwig Von Mises, F.A. Hayek, et al. took great pains to explain, what this means is that the seemingly golden age — in reality, a thinly gilded one — during which the first, most favored issuers of cheap credit and artificially boosted equity prices enjoyed almost effortless success, has reached the limit of its ability to postpone the workings of fundamental economic law

And the people who need to are quietly, and not so quietly, realising that over sixty years after John Maynard Keynes died, his gig is finally up, and in the Hayek-Keynes debate (one of the most crucial of the twentieth century) a winner is conclusively being confirmed.

Not before time.

UPDATE: In New Zealand, meanwhile, the hegemony of the econo-morons continues.

Faced with the news that his government’s accounts now show him responsible for a 6.5 billion dollar hole in his accounts that he’s borrowing like mad to fill, Bill English promised nonetheless to keep on spending up to a billion more every year, and blamed the shortfall in his balance sheet on those pesky savers. “The lower-than-forecast tax take is largely the result of lower-than-expected consumer spending as New Zealanders pay down debt and save more,” said the know-nothing, before promising to keep right on spending in order to keep the govt “stimulus” flowing in order to artificially up NZ’s GDP figures  to keep the economy humming.

In response, Labour’s Associate Finance Spokesthing Stuart “Mangrove” Nash said Billy Boy isn’t spending enough. “As I have said before,” said Mangrove, “Keynesian economic theory states that in times of economic recession, you don’t give tax cuts to the highest income earners because they will tend to either save or retire debt (i.e. they won’t spend), and this is exactly what has happened.” Mangrove appears unaware of what those luminaries cited above have come to realise: that saving is simply a decision to spend later rather than now, and it is the pool of real savings on which all production actually relies, not the consumption that denudes it.

And over at Bernard Hickey’s place, the new fan of central planning and currency controls has a poll up asking you to pick your favourite of six different flavours of currency intervention (including the present failing modus) and no option to abandon the whole framework of intervention altogether, and bite the bullet that Zoellick and King and Carswell says needs to considered.  Hickey’s issue is that having the economic dictator setting interest rates for our economy only invites “hot money” into the country,  sending the NZ dollar into orbit (a problem exacerbated by Helicopter Ben’s concurrent downward dilution of the US dollar). He is totally unaware of what Zoellick et al are not: that under a gold standard, a country’s interest rates are set by the level of gold flowing into it.  When the flows increase, the interest rates decrease; when they decrease, interest rates do the reverse.  Unlike the present system (which Hickey and the econo-morons still haven’t realised is broken), there is a feedback mechanism promoting stability. A stability the economic dictators will never be able to match.

“Under the classical gold standard prior to World War I,” the period in which history records the world’s greatest ever sustained economic expansion, “ short term interest rates in both the United States and Britain tended to cycle between 2% and 5%,” while the numeraires of each country moved together with gold as their base.  Good for exporters, good for importers, good for producers of every kind. This is the kind of stability of which the Keynesians and currency controllers can only dream.

As Ludwig Von Mises pointed out sixty years ago:

The gold standard was the world standard of the age of capitalism, increasing welfare, liberty, and democracy, both political and economic. In the eyes of the free traders its main eminence was precisely the fact that it was an international standard as required by international trade and the transactions of the international money and capital market. It was the medium of exchange by means of which Western industrialism and Western capital had borne Western civilization into the remotest parts of the earth's surface, everywhere destroying the fetters of age-old prejudices and superstitions, sowing the seeds of new life and new well-being, freeing minds and souls, and creating riches unheard of before. It accompanied the triumphal unprecedented progress of Western liberalism ready to unite all nations into a community of free nations peacefully cooperating with one another.
    It is easy to understand why people viewed the gold standard as the symbol of this greatest and most beneficial of all historical changes.
    [It is also easy to understand why] all those intent upon sabotaging the evolution toward welfare, peace, freedom, and democracy loathed the gold standard, and not only on account of its economic significance. In their eyes the gold standard was the labarum, the symbol, of all those doctrines and policies they wanted to destroy. In the struggle against the gold standard much more was at stake than commodity prices and foreign exchange rates.
    The nationalists [fight] the gold standard because they want to sever their countries from the world market and to establish national autarky as far as possible.
    Interventionist governments and pressure groups are fighting the gold standard because they consider it the most serious obstacle to their endeavors to manipulate prices and wage rates.
    But the most fanatical attacks against gold are made by those intent upon credit expansion. With them credit expansion is the panacea for all economic ills…. What the expansionists call the defects of the gold standard are indeed its very eminence and usefulness. It checks large-scale inflationary ventures on the part of governments.
    The gold standard did not fail. The governments were eager to destroy it, because they were committed to the fallacies that credit expansion is an appropriate means of lowering the rate of interest and of "improving" the balance of trade.

He could have been writing that to Mr Zoellick just yesterday. And Mr Zoellick might very well have been reading it.

UPDATE 2:  This is the good news amid the recessionary gloom, people. It’s precisely because they are running out of options that the mainstreamers are looking outside their conventional nostrums to what the economics that worked well before their conventional textbooks wrote it out of history.  This is the light at the end of the tunnel, argues David Galland at Casey Research, that will bring about “The End of the Statist Quo.” [Hat tip Sovereign Life]

This sea change won’t happen all at once – and probably not without the global economy first going through a dark and troublesome period. But I have to believe that we’ll soon see a widespread recognition that there are problems to be solved, and opportunities to be captured, by breaking from the herd.

Lights, camera, strike! [update]

Strikes by teachers. Strikes by actors. Strike, strike, strike.

With strikes and union activism everywhere, politicians meddling in sport, and morons like Bernard Hickey imploring us to embrace the economic mercantilism of Fortress New Zealand, you could be forgiven for thinking Rob Muldoon was alive, well, and flourishing in places other than just the virtual “other-world” of Twitter.

In Muldoon’s day, it would have been striking boilermakers and Cook Strait stewards. Strikes by actors are a new, and much more media-friendly thing. But their basic premises are still the same:

1. the erroneous idea that workers own their job;
2. the advancement of one group of workers at the expense of all others;
3. the placing of the union’s interests above even that of its members…

Let’s consider these in turn.

Employees own their labour services, but they don't own their jobs.  They’re certainly entitled to withdraw their services, but nothing in justice gives them the right to exclude others from replacing them.  There is no right, in justice, that gives one group of employees the right to exclude others—especially not by force.

The extent to which industrial unions have been granted legal powers to forcibly exclude others from replacing their services, however—to run pickets shutting down companies and film projects by forcibly excluding supplies, customers and replacement labour—is the extent to which governments have given unions power beyond right to damage the welfare of everyone, including their own members.

William Thompson, a colleague of Robert Owen and a founder of so-called “scientific socialism” observed that the union’s “excluding system depended on mere force and would not allow other workers to come into the market at any price…”

It matters not [he said in1827] whether that force…be the gift of law or whether it be assumed by the tradesmen in spite of the law: it is equally mere force.
    Gains [of the unionised few] were always at the expense of the equal right
of the industrious to acquire skill and to exchange their labour where and how
they may.

No wonder unions like the Australian Media Entertainment and Arts Alliance (MEAA) have launched a naked power grab using the power beyond right that legal favour grants them, to use that power and and expand it across the Tasman—oblivious to the damage they will deliver to the whole NZ film industry and everyone in it, including the actors they’re courting, especially if Jackson’s new film The Hobbit heads to Eastern Europe as he says it might.

No wonder unions like the Post Primary Teachers Association (PPTA) want to use the power beyond right to grandstand on a party political issue—using children and their own unionised members as their political pawns.

The teachers union and the actors union have different aims. In the case of the teachers union, what they’re after is 4% and a chance to bash Anne Tolley.   In the case of the actors union, an Australian union seeking access here, what they’re after is power and publicity. In neither case are the welfare either of actors or teachers (or students) their primary concern.

At a time when jobs are scarce, money is short and everyone is having to tighten their belt, what both should get is what their premises  deserve.

Because as economist William Hutt argued, the extent to which these unions and every other are successful in their successful in their demands and destructive in their means of achieving them, they harm every other group in society.

As they almost always do.

UPDATE: At least NZ’s unionists aren’t throwing molotov cocktails. In Europe, however…

Union-backed workers rocked Europe this week with intermittently violent protests in Greece, Ireland, Belgium, Poland, Portugal and others. In Spain, a nationwide strike disrupted air travel, regional shipping and municipal services. Doctors at state-run hospitals walked off the job in Greece and subway lines shut down. Supermarkets reported shortages of basic goods.
    To call many of the increasingly regular demonstrations protests is generous. In Dublin, the gates to Ireland’s parliament were blocked yesterday by a demonstrator in a cement truck. In Barcelona, police cars were torched. And in Athens, a mob opposing cuts to government spending firebombed a bank in May, killing three people, including a pregnant woman.
    What makes these frightening scenes so unnerving is that they’re not occurring in third-world dictatorships, but in advanced economies within many of Europe’s largest cities. We’re used to seeing violent street clashes in Lebanon. But Belgium?
The conflicts are the inevitable consequences of entitlement spending and a society geared towards the “common good," not individual rights. Turns out the much-heralded “safety net” isn’t safe at all: When bureaucrats decide how long you work, what type of benefits you receive and which industries or sectors receive privileged treatment, the economy quickly turns into mob rule.

Read more: “Mobs in Europe, Records in Brazil”