Alan Greenspan, 1926-2026: 'The Undertaker' passes away

Alan Greenspan, dubbed by Ayn Rand as "The Undertaker."  
Ultimately, he took the job that John Galt refused: economic dictator

"Alan Greenspan died [earlier this week], and the man who spent two decades inflating bubbles will be eulogised as a maestro. Fitting, because he understood exactly what he was doing. 

"In 1966 a younger Greenspan wrote an essay called 'Gold and Economic Freedom.' [In it, he states that the gold standard is essential for economic freedom.] He laid out the case with precision. The gold standard protected savers from confiscation by inflation. Welfare statists hated gold because it stood in the way of their deficits. He wrote that the abandonment of gold made deficit spending a "scheme for the hidden confiscation of wealth." He was right. He knew it. Then he took the job running the printing press.

"From August 1987 to January 2006 Greenspan sat atop the Federal Reserve and did the opposite of everything that essay defended. After the 1987 crash he flooded the banks with liquidity and taught a generation of traders that the central bank would catch them every time they fell. They named the reflex after him: the 'Greenspan put.' He cut the federal funds rate to 1 percent by June 2003 and held it there, and you watched housing prices detach from any sane relationship to income. Mortgage credit gushed. He went on television in February 2004 and suggested Americans consider adjustable-rate mortgages, roughly eighteen months before he started hiking rates into those very borrowers. The man who warned in 1966 about the hidden confiscation of wealth engineered the largest credit distortion in postwar history. 

"Then came the apology that wasn't one. In October 2008, sitting before Congress as the wreckage smoked, Greenspan confessed he had found 'a flaw' in his model of how the world worked. He was 'shocked' that lenders [licensed to print money] had not policed themselves. You don't get to spend twenty years pricing risk at zero and then act surprised when men respond to the incentives you built. Any committee of economists cannot set the price of money better than a market can. 

"Greenspan knew the answer at 40 and spent the next half century pretending he'd forgotten it. The savers he warned about in 1966 paid for that performance. ..."

"Every Fed chair since Greenspan has discovered this truth the hard way. Bernanke cranked rates to zero after 2008, then Yellen kept them pinned there, then Powell printed $4 trillion more during COVID. Each crisis demanded bigger interventions than the last."

~ Handre

 

"Greenspan was the Dr. Robert Stadler of our age: the brilliant man who knew the right principles and betrayed them, certain his own genius could control the evil he agreed to serve. 

"He was a member of Rand's inner circle. His essay "Gold and Economic Freedom" appeared in Capitalism: The Unknown Ideal. He argued, correctly, that the gold standard protected savers from confiscation, that statists hated gold because it blocked their deficits, and that abandoning it turned deficit spending into a scheme for the hidden confiscation of wealth. 

"He even understood that Social Security was a Ponzi fraud that would help bankrupt the nation. He knew all of it. Then he took command of the Federal Reserve and did the opposite of everything he had written. 

"The 'Greenspan put,' rates held at one percent, the housing bubble, the very confiscation he had warned of, engineered by his own hand. 

"Here is the irony. Greenspan knew 'Atlas Shrugged' intimately. He watched Rand create Stadler, the genius who lent his mind to the looters' Institute believing he could outwit them, and who lived to see his knowledge weaponised as Project X. Greenspan studied that warning at the source, from the author herself. He understood the character completely. Then he walked the identical road and became the man the novel was written to expose. 

"When the wreckage came in 2008, he told Congress he had found 'a flaw' in his model. There was no flaw in the model. The flaw was in the choice to abandon what he knew. Some men meet the virus and are consumed by it. Greenspan had the answer at forty and spent the next fifty years pretending he had forgotten."

~ The Rational Animal

"Q: Alan Greenspan passed away [this week]. Alan Greenspan was a close associate of Ayn Rand for a while, and the Chairman of the Federal Reserve … these things did not overlap, as people familiar with Ayn Rand’s ideas wouldn’t be surprised to hear. So, Keith, I’m sure you’ve read [Greenspan’s essay] ‘Gold & Economic Freedom’ many times; so let’s get your thoughts on Greenspan’s passing…

"A: For anyone who’s read that essay, which was published in 1966 as part of [Ayn Rand’s] book 'Capitalism: The Unknown Ideal,' and therefore endorsed by Ayn Rand, he had to evade everything he knew in 1966 in order to take the job at the Fed. And ultimately, he took the job that John Galt refused, which was economic dictator.

"Now … everybody is confused about capitalism … but … there is no greater area of confusion than the concepts around money. Both the critics of capitalism and of gold, and the FANS of capitalism and gold will tell you that he was 'a Maestro' — and if you ask “a master of what?’ you’ll be told he was a master of central planning of our economy, and of managing our little lives for us. …

"They’ll say ... ‘he managed a sound money regime’— and the problem with the concept of sound money they use is an anti-concept, that is, [it’s a notion] that destroys and obliterates a legitimate concept in order to smuggle something else in. And what they mean by ’sound money’ is an irredeemable fiat currency jammed down our throats by the government forcing us to use it as if it WERE money, but ‘sound’ because it’s somehow managed to avoid consumer prices going up [by no too much].

"So I’d like people to think about a simple fact, that in every industry seeking greater efficiency, that is, they want to produce more with less — with less cost, with fewer inputs, with less labour, land, physical commodities etc. — and of course that’s happening relentlessly across the entire economy in every sector (unless regulation prevents it…).

"So suppose the average across the entire [economy] is a 2 percent gain in efficiency every year, all else being equal, you’d expect consumer prices therefore to be falling comparatively across industries, as costs are falling. SO your expect consumer prices tl be falling roughly 2 percent per year.

"So imagine it it were possible as the manager of the currency to debase the currency at a matching rate. Now, this is pure fantasy [hoho!]; this is only interesting as a thought experiment … but suppose it were possible to debase the currency at a matching rate so that every company from Intel to US Steel to Rolls Royce making aircraft engines is cutting costs at 2 percent, [while] you are debasing the currency at a matching 2 percent, and the nett result is CPI = zero. Would anybody call that SOUND?

"I wrote an article called ‘Sound Money is Not What You Think It Is,’ and I had a picture that I took from Norman Rockwell [above, with customer and butcher both cheating] … and I asked if that would be considered a sound measurement of the weight of the chicken, and therefore a sound price to pay … And at best, that’s what Greenspan did."

~ Keith Weiner from Monetary Metals, interviewed on the 'Daily Objective'

"Of course you can 'speak ill of the dead' ...  After all, wrote Shakespeare, 'The evil that men do lives after them; / The good is oft interred with their bones.'

"Alan Greenspan, former chairman of the Federal Reserve System, just died at age 100. The general public wants to blame the United States president for the health of the U.S. economy, but the Fed chairman has much more influence over economic conditions. 

"Greenspan spent some time early in his career as an Ayn Rand acolyte, and in fact three chapters of Rand's book Capitalism: The Unknown Ideal, were written by the future Fed chairman.... Greenspan's opponents on the left therefore interpreted his whole career through a Randian lens, which serves to remind us how stubbornly they refuse to understand the world. 

"Had Greenspan wanted to run the Federal Reserve in such a way as to approximate a gold standard as much as possible, he could certainly have done so. Instead, he used it as an instrument for central planning, with disastrous results.

"Initially, Greenspan could do no wrong. He became known as 'The Maestro' ....  Meanwhile, Greenspan's contempt for the public was legendary: he confessed to Lesley Stahl of CBS that before congressional committees he would speak gibberish -- a tactic he called 'syntax destruction.' The next day the headlines would report two different things about what he had said, and for Greenspan that meant he had succeeded. Greenspan's policy moves (like arranging for a bailout of Long Term Capital Management in 1998) gave rise to the belief in a 'Greenspan put,' according to which investors could be assured that the Fed chairman was prepared to use the tools at his disposal to backstop the market if it should ever fall below a certain level. 

"And of course his monetary stimulus after the dot-com bust in 2000-2001, which looked to some observers at the time as a brilliant move, only delayed the reckoning, and transformed that bust into a real estate bubble (and eventual bust). When the lights of the economy should have turned red, Greenspan made them all green. That was the only recession on record in which housing starts rose rather than fell. 

"The Federal Reserve, like the government itself, has no real goods at its disposal, so while its various tricks can redistribute resources and simulate prosperity, it cannot generate real wealth. It simply arranges the economy into an unsustainable configuration that has to come apart. 

"Because of Greenspan's earlier association with Ayn Rand, and because the general public knows so little about the Fed, when the 2008 crash occurred, people generally went along with blaming 'capitalism' -- even though the Federal Reserve is a non-market institution created by act of Congress and enjoying a government-granted monopoly, and even though Greenspan's manipulations overrode what the market was trying to say. 

"Greenspan's legacy is 2008, and the undeserved reputational damage that the market economy suffered as a result."

~ Tom Woods

The Chart of the Century, in context

"Imagine a horse race between Smith, Schumpeter, and Stupidity," begins economist Peter Boettke. Who wins?

The horse "Smith" is Adam Smith. He represents the gains from trade and division of labour about which Adam Smith spoke so well.

"Schumpeter" is the horse representing gains from invention, from new technology, from all the gains that innovation brings.

Together they drive the race forwards.

But "Stupidity" is the horse sponsored by the government, and trained by big-government worshipping economists. He bumps into the others, bites at their heels, and generally gets in their fucking way. 'Stupidity' represents every stupid idea, every stupid regulation—and all that insane tinkering with counterfeit credit as if it were the way to economic nirvana. 

He takes it all backwards.

We can see Leg One of that race below: Mark Perry's famous “Chart of the Century,” tracking the price of 14 items over the last quarter-century. 

It's pretty clear that when 'Smith' and 'Schumpeter' can run largely unhindered, then nearly everyone gets better off. Even if the change in average hourly wages is taken into account, all but five of the items tracked above give those two horses (and every wage-earner) a win.

It's only when 'Stupidity' is allowed a free rein that he starts to come out ahead. (And I'm fairly sure that an analysis using NZ data would show something very similar.)

Let's hope the lesson is clear?

John Key is still a fucking moron

Cartoon by Richard McGrail from The Free Radical

I've been reminded this morning about what a clueless fucking moron we had as a Prime Minister for two-and-a-half terms. Back a few years ago when we were "rock stars." Remember that?

Anyway, here's John Fucking Key last month giving his considered analysis of what's wrong with New Zealand's economy now:

"The guts of what’s wrong is that the housing market is going down, not up,' he said.
    “When house prices go up, everybody tells the pollsters, ‘Oh that’s terrible, my son or daughter can’t buy a house. I feel really bad.’ The technical term for that is ‘bullshit’.
    “What they really do, is they say to their wife – or the wife says to her husband – ‘God, we paid $1 million for this house and it’s worth $1.7 million now.’ Quietly they go, ‘Oh, we feel rich’.
    “And then they go and borrow a bit from the ANZ and they go on holiday and they upgrade their kitchen, they feel good about life. So when you have a negative wealth effect, they feel bad.”

And I bet the roomful of home owners and property "investors" and National Party political advisors — no to mention all his former colleagues on the ANZ board —had a smug little chuckle into their at their man's shrewd witticisms. It's hard to know where to begin at his economic acumen however, 'cos apparently it's never begun.

Let's make it simple, since that's the best description of Key's grasp of things. Trump's been called a fucking moron for not understanding the economic destruction of tariffs. And rightly so. But Trump doesn't pretend to be in any way clued up about economics. Key does. And yet the fucking moron apparently knows nothing about a simple enough concept: capital consumption. It's a process of converting someone else’s wealth into your income.

And this is his one simple trick to fix the fucking economy.

You wouldn't believe it.

Here's what the fucking moron either doesn't know, or doesn't care to know.

That fucking "wealth effect" the moron talks about is paid for by one thing: it's paid for by eating the fucking seed corn. The seed corn is the part of your harvest you put aside to plant again next year. Without that seed corn, you have nothing to plant, and nothing further to harvest. What Key wants to "fix" the economy, the simple guts of it, is for is to eat the fucking seed corn. That's his recipe for success. 

Any fucking moron could get a "wealth effect" (and a poll bump) by consuming the seed corn.  But ultimately the farmer will pay a price; he'll no longer have anything to farm.

Fellow on the right enjoys Key's "wealth effect." Not so much farmers on the left.

But the difference in what Key proposes is even worse: he wants home owners to consumer other people's seed corn. Hayek used to call this "forced saving." Savers have to save more, or else, because the "seed corn" being consumed is theirs. 

Here's the thing: When mum and dad borrow a bit from the ANZ and go on holiday and upgrade their kitchen and put in another fucking ensuite, that's paid for by what was, or would have been, accumulated capital. The accumulated capital of those other savers. It's called "forced saving" because what pays for John Key's fucking borrowing is new counterfeit capital: i.e., new money that's been borrowed into existence to pay for the holiday, the new kitchen, the fucking ensuite. That counterfeit capital means savers are forced to save more just to keep up.

That's because this new borrowing is new money "injected into the economic system at a specific point" that advantages those consuming the counterfeit capital while disadvantaging those trying to save.

If the money or credit were evenly distributed among all economic agents, no “expansionary” effect would appear, except the decrease in the purchasing power of the monetary unit in proportion to the rise in the quantity of money. 

However if the new money enters the market at certain specific points, as always occurs, then in reality a relatively small number of economic agents initially receive the new loans. Thus these economic agents temporarily enjoy greater purchasing power, given that they possess a larger number of monetary units with which to buy goods and services at market prices that still have not felt the full impact of the inflation and therefore have not yet risen.

The purchasing power of these home-owners is paid for by the losses of savers. 

Hence the process gives rise to a redistribution of income in favour of those who first receive the new injections or doses of monetary units, to the detriment of the rest of society, who find that with the same monetary income, the prices of goods and services begin to go up. “Forced saving” affects this second group of economic agents (the majority), since their monetary income grows at a slower rate than prices, and they are therefore obliged to reduce their consumption, other things being equal.

In a nutshell Key's quick-fix for poll-driven success, and economic growth, is to grant home-owners purchasing power by quietly, secretly and unobserved, stealing from savers. ("By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens." ~ John Maynard Keynes)

Recall that he said something similar when the problem erupted of paying to repair leaky homes. He said quite bluntly, not to worry,  inflation would fix that. Remember that when housing unaffordability was bad before he took office, and he promised to fix it. He didn't, of course. Instead, he did everything he could to put rocket fucking fuel under house prices. It would, he claimed, 'fix" the problem of paying for the problem. 

This prick has form.

He's either a calculating Machiavellian.

Or he's pig ignorant.

My money's on the latter.

RELATED:

• Key on housing affordability and elsewhere - NOT PC, 2007
• Counterfeit capital - NOT PC, 2008
• Mr Key’s dirty little secret - NOT PC, 2009
• We’re rock stars! - NOT PC, 2014
• How Do People Destroy Capital? - Keith Weiner, SNBCHF, 2015
• Housing bubble is consuming our capital - NOT PC, 2015
• The Reserve Bank’s war on capital - NOT PC, 2016
• Key admits to ‘crisis theatre’ and talks up house-price inflation - NOT PC, 2016
• John Key has had an unbelievable solution for affordable housing - NOT PC, 2017

'China's Trade Surpluses are Not a Source of Strength'

“'China believes it has a mandate to rule the world,' and that it is using trade balances to accomplish this. ... But, ultimately, Chinese trade surpluses [don’t] help ... '[Right up to] 1839 ... trade favoured the Chinese.' Little good it did them: China [eventually] experienced military humiliation, political and social disintegration, and an eventual descent into communism. ...
   "China’s 'strategy of generating massive trade surpluses [would] not have worked [when money was] backed by bullion ... the trade surpluses incurred by exporting more than its imports [would] have caused China’s currency to appreciate ... [making] Chinese manufactures more expensive and less attractive for outsourcing…'
   "'That never happened' ... because [without a gold standard] China [could devalue] its currency, harming its own people...' .... China’s currency manipulations have imposed costs on its citizens in terms of reduced real incomes. 

   "That isn’t all. The currency creation necessary to keep the yuan’s exchange rate with the dollar somewhat stable when new dollars are being produced at an impressive rate has helped fuel one of the biggest property bubbles in history [in both China and the US] .... [A] US deficit on the trade account must be offset with a surplus on the capital account ... [so] to maintain its export advantage was devious: it invested in the United States, 'buying US assets with US dollars ...The CCP today sits atop a $3 trillion hoard of assets, many of them American.' 

    "And, again, little good it did them. Holding significant stocks of depreciating US government debt isn’t, in fact, a source of strength. China cannot dump them to drive Federal borrowing costs up without tanking their value, which the Federal government is doing itself. As for those US assets, like farmland, it isn’t going anywhere, just like the buildings bought to much distress by the Japanese in the 1980s.
   "China’s government might well be running a trade surplus as a matter of policy. It may even be doing so with the aim of strengthening itself relative to geopolitical rivals like the United States. But ... it has tried this before [and] that same history indicates that the prospects for the government in Beijing are not good. Little good it did the Qing dynasty and little good will it do the Communist Party....

   "As Adam Smith observed in 'The Wealth of Nations,' mercantilism can enrich a few individuals but not entire countries – it detracts from, rather than adding to, the general welfare."

~ Composite quote from John Phelan, Kevin Roberts and Richard Fulmer from the post 'China's Trade Surpluses are Not a Source of Strength'

"Monetary Policy is very difficult to understand—given it effectively operates as a political programme ... dictated by political expediency."

“'[M]onetary policy' ... is in fact very difficult to understand—given it effectively operates as a political programme within the muddled field of macroeconomics ... dictated by political expediency.
    "As for money itself, there is nothing so difficult about it conceptually. A hundred and fifty years ago Carl Menger explained how money arose as the most saleable commodity in the marketplace, with the best properties to be a store of value and medium of exchange. Thus money solved the problems and inefficiencies of barter. Forty years later Ludwig von Mises relied on Menger’s subjective marginal-utility theory to solve the circular problem of explaining how money obtained value in the first place ... explaining how commodities’ 'moneyness' value evolved from their preexisting nonmonetary uses. No government or central bank was necessary ...
    "These two concepts give us the baseline conceptual understanding of money’s origin and value. But every shrewd merchant and trader over the centuries already understood money instinctively.... Many people intuitively understand money. What they don’t understand is monetary policy. The idea that exceedingly intelligent people at central banks and national treasuries must 'run' complex monetary 'systems' surely is one of the greatest swindles ever perpetrated. It nonetheless remains widely accepted ...
    "At its core, economics is conceptually simple: humans make choices in an environment of 'scarcity' to achieve ends. Money is a means to those ends, not an end in itself. It is the market’s answer to the inefficiency of barter....
    "Today, however, the concept of money is overwhelmed and completely obscured by politics. Modern money is political (fiat) money, which is to say it is a tool of government and an instrument of political power....
    "Thanks to political money, confusion reigns.... [M]ostly we hear confusion between wealth and money, rooted in the politicised, zero-sum nature of monetary policy. More money and credit do not magically create more goods and services, more capital investment, or a more productive economy. Prosperity cannot be legislated by politicians or engineered by central bankers.
    "What to do? The best approach in a confused world is a return to fundamentals. Mises’s 'The Theory of Money and Credit' is a great place to start, as is Murray Rothbard’s 'What Has Government Done to Our Money?' and Robert Murphy’s recent 'Understanding Money Mechanics'. For most lay readers, any of these books would be sufficient to puncture today’s money mythology. Circulate them among friends and family to help build the future cadre of monetary policy deniers. What the world needs today is champions of commodity money, sound money, hard money with a high stock-to-flow ratio, all of which is to say money that retains or increases purchasing power even when held in a simple savings account. This will require all of us ... to push for a great awakening.
    "Money is simple, but opposing the political tool of monetary 'policy' is not."

~ Jeff Deist, from his post 'Money versus Monetary Policy'

World-class surfer of central banks' tidal wave of counterfeit capital,

Klaus Schwab, speaking to fellow surfers at his absurdly influential World 

Economic Forum. [Image credit: World Economic Forum, CC BY 2.0, via Wikimedia Commons]

Vladimir Lenin once boasted that capitalists would sell the rope to hang themselves -- and then set about organising things to make that happen. He failed, but so-called capitalists still line up to keep trying: one latest attempt being something they call 'stakeholder capitalism,' characterised by so-called 'responsible investing.' As Dan Sanchez explains in this Guest Post, it's anything but...

"ESG" -- Capitalism's 'Great Reset'?

Guest Post by Dan Sanchez

Capitalism needs few descriptive adjectives beyond the words "laissez-faire" or "unhampered." In recent years however, so-called "stakeholder capitalism" has taken the global economy by storm. Its champions proclaim that it will save—and remake—the world. Will it live up to its hype or will it destroy capitalism in the name of reforming it?

Proponents pitch their "stakeholder capitalism" as an antidote to the excesses of so-called “shareholder capitalism,” which they condemn as too narrowly focused on maximising profits (especially short-term profits) for corporate shareholders. This, they argue, is socially irresponsible and destructive, because it disregards the interests of other stakeholders, including customers, suppliers, employees, local communities, and society in general.

"Stakeholder capitalism" [which earns every inverted comma we can muster - Ed.] is ostensibly about offering business leaders incentives to take these wider considerations into account and thus make more “sustainable” decisions. This, it is argued, is also better in the long run for businesses’ bottom lines.

The Rise and Reign of ESG

Today’s dominant strain of "stakeholder capitalism" is the doctrine known as ESG, which stands for “environmental, social, and corporate governance.” Got that? The acronym was coined in the 2004 report of Who Cares Wins, a joint initiative of elite financial institutions invited by no less than the United Nations “to develop guidelines and recommendations on how to better integrate environmental, social and corporate governance issues in asset management, securities brokerage services, and associated research functions.”

In other words, how best to make businesses throw themselves under the bus before governments do it for them.

Who Cares Wins operated under the auspices of the UN’s Global Compact, which, according to the report, “is a corporate responsibility initiative launched by Secretary-General Kofi Annan in 2000 with the primary goal of implementing universal principles in business.” For "universal" read "the UN's."

Much "progress" has been made toward that goal. Since 2004, ESG has evolved from talk of “guidelines and recommendations” to hard, explicit standards that hold sway over huge swathes of the global economy and billions of dollars worth of investment decisions. ESG has begun to move the world.

These standards to which businesses are all-but required to dance are set by ESG rating agencies like the Sustainability Accounting Standards Board (SASB) and enforced by investment firms that manage ESG funds. One such firm is Blackrock, whose CEO Larry Fink is a leading champion of both ESG and SASB.

In December, Reuters published a report titled “How 2021 became the year of ESG investing” which stated that, “ESG funds now account for 10% of worldwide fund assets.”

And in April, Bloomberg reported that ESG, “by some estimates represents more than $40 trillion in assets. According to Morningstar, genuine ESG funds held about $2.7 trillion in managed assets at the end of the fourth quarter.”

To access any of that capital, it is no longer enough for a business to offer a good return on investment (or, sometimes, any at all). It must also report “environmental” and “social” metrics that meet ESG standards.

Is that a welcome development? Will the general public as non-owning “stakeholders” of these businesses be better off thanks to the implementation of ESG standards? Is stakeholder capitalism beginning to reform shareholder capitalism by widening its perspective and curing it of its narrow-minded fixation on profit uber alles?

Capitalism Is for Consumers

To answer that, some clarification is in order. First of all, “shareholder capitalism” is a misleading term for laissez-faire capitalism. It is true that, as Milton Friedman wrote in his 1970 critique of the “social responsibility of business” rhetoric of the time:

In a free‐enterprise, private‐property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.

Since the owners of a publicly traded corporation are its shareholders, it is true that they are and ought to be the “bosses” of a corporation’s employees—including its management. It is also true that corporate executives properly have a fiduciary responsibility to maximise profits for their shareholders.

But that does not mean that shareholders reign supreme under capitalism. As the great economist Ludwig von Mises explained in his book Human Action:

The direction of all economic affairs is in the market society a task of the entrepreneurs [which, according to Mises’s technical definition includes shareholding investors]. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain's orders. The captain is the consumer.

The “sovereign consumers,” as Mises calls them, issue their orders through “their buying and their abstention from buying.” Those orders are transmitted throughout the entire economy via the price system. Entrepreneurs and investors who correctly anticipate those orders and direct production accordingly are rewarded with profits. But if one, as Mises says, “does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him.”

Under laissez-faire capitalism therefore, the principal "stakeholders" whose preferences reign supreme are not not shareholders, but consumers. And (as Mises wrote in his paper “Profit and Loss”) shareholder profit is a measure of—and motivating reward for—success “in adjusting the course of production activities to the most urgent demand of the consumers.” 

What this means for the “stakeholder capitalism” discussion is that, to the extent that the profit-and-loss metric is discounted for the sake of competing objectives (like serving other “stakeholders”), the sovereign consumers are dethroned, disregarded, and relatively impoverished.

Now it’s at least conceivable that ESG standards are not competing, but rather complementary to the profit-and-loss metric and thus serving consumers. In fact, that’s a big part of the ESG sales pitch: that corporations who adopt and adhere to ESG standards will enjoy higher long-term profits, because breaking free of their fixation on short-term shareholder returns will enable them to embrace more “sustainable” business practices.

In a free unhampered market, whether that promise would be fulfilled or not would be for the sovereign consumers to decide, and ESG would rise or fall on its own merits.

Who Complies Wins

Unfortunately, our market economy is far from free or unhampered. The State has instead rigged capital markets for the benefit of its elite lackeys in the financial industry: like those “Who Cares Wins” fat cats who started the ESG ball rolling in 2004 under the auspices of the United Nations.

One of the prime ways the State rigs markets is through central bank policy.

The prodigious amount of newly created money that the Federal Reserve and other central banks have pumped into financial institutions in recent years has transferred vast amounts of real wealth to those institutions from the general public. As a result, those institutions—big banks and investment companies—are now much more beholden to the State and much less beholden to consumers for their wealth.

As they say, “he who pays the piper calls the tune.” So it’s no surprise that these institutions are stumbling over themselves to get on board the State’s ESG bandwagon. 

And that means that if non-financial corporations want access to the Fed’s money tap, and thus to the stream of counterfeit capital gushing out, they too have to get with the ESG program. Especially as the average consumer becomes increasingly impoverished by disastrous economic policies, the incentive for corporations to earn market profit by pleasing consumers is being progressively superseded by the incentive to gain access to the Fed’s flow of loot by meeting the State’s “social” standards.

By increasingly controlling capital flows, the State is gaining ever more control over the entire economy.

This may explain the recent willingness of so many corporations to alienate customers and sacrifice profits on the altar of “green” and “woke” politics. It's not necessarily that they embrace the nonsense themselves (though many do); it's that the governments and their well-rewarded agents have rigged businesses' financial incentives that way.

It is no coincidence that Klaus Schaub, the preeminent champion of the “Great Reset” also co-authored a book titled Stakeholder Capitalism. The upshot of "stakeholder capitalism" is that consumer is supplanted as the economy's supreme stakeholder by The State. The sick joke of stakeholder capitalism therefore is that it “reforms” capitalism by transforming it into a form of socialism. Lenin would be laughing up his sleeve.

Dan Sanchez is the Director of Content at the Foundation for Economic Education (FEE), editor-in-chief of FEE.org, and writer for (among others) The Mission, the Ron Paul Institute for Peace and Prosperity, David Stockman’s Contra Corner, and many other popular web sites. He wrote a weekly column for Antiwar.com.
At the Mises Institute, Dan was editor of Mises.org and launched the Mises Academy, the first ever free-market economics online learning platform.
Dan has delivered speeches for FEE, Praxis, the Mises Institute, Liberty on the Rocks, America’s Future Foundation, and more.

A version of his post first appeared at FEE.Org.

Central banks' unprecedented monetary expansion over recent years has created damage they cannot simply undo by switching directions now - as Frank Shostak explains in this guest post, their tight interest stance now will struggle to undo the damage caused by their previously ultra-profligate position.

Central Banks Cannot Undo the Damage They Have Already Caused

by Frank Shostak

On March 16 this year, the US central bank (aka the Federal Reserve) raised the target for their federal funds rate by 0.25 percent, to 0.50 percent. According to officials of "The Fed," their increase was in response to the strong increases in the yearly growth rate of the Consumer Price Index (CPI), which in February stood at 7.9 percent (risen from 7.5 percent in January, and from 1.7 percent in February of the year before).

Most commentators believe that by raising the interest rate target, the central bank can slow the increase of prices of goods and services. Supporters of this strategy often refer to May 1981, when then Fed chairman Paul Volcker raised the Fed's funds-rate target from 11.25 percent to 19 percent. The change was dramatic. By December 1986, the yearly growth rate in the CPI, which in April 1980 had stood at 14.8 percent, had fallen to 1.1 percent (see Fig. 1 below).

Fig. 1: CPI vs Federal Funds Rate, 1980 to 1986

Note that commentators commonly identify the growth rate measured by the CPI, i.e. rising prices, as "inflation." We hold, however, that what inflation is all about is increases in money supply. 

As such, we do not say that inflation is caused by increases in money supply, as some commentators are suggesting. Instead, we hold that increases in money supply are what inflation is all about. 

The price of a good is the amount of money paid for it, but whenever there is an increase in the money injected into a particular goods market, this means that the price of the goods in money terms will tend to rise. All things being equal, however, this increase in money in one market will be offset by a decrease elsewhere. It is only an increase in the money supply itself that allows all prices to raise across all markets. This general increase in prices is itself not inflation, however, but rather the manifestation of inflation as a result of the increase in money supply, all other things being equal.

Bad as this is, what is even more important than the increases it causes in the prices of retail goods is the damage that monetary inflation inflicts to the process of wealth generation. This is because increases in money supply set in motion an exchange of nothing for something, which generates a similar outcome to what counterfeit money does. This counterfeit capital progressively weakens wealth generators, thereby weakening their ability to generate wealth. This, in turn, undermines living standards even as real capital is consumed.

Also, note that when this new money is injected, it initially enters a particular goods market. Once the price of those goods rises to a level at which they are perceived as fully valued, the money begins spilling over into other markets that are now considered under-valued. This gradual shift from one market to other markets gives rise to a time lag between these increases in new money, and their effect on the wealth generation process.

Central Banks do not set interest rates. Individuals do.

Note that contrary to popular thinking, interest rates are determined not by central bank monetary policy. Instead, they are driven by the time preferences of individuals. According to the founder of the Austrian school of economics, Carl Menger, the phenomenon of interest is the outcome of the fact that individuals assign a greater importance to goods and services now than they do to identical goods and services in the future. I is this that we call "time preference."

For example, most people will generally prefer being given $100 now rather than, say, $103 a year from now. It is this evaluation by multiple individuals that is the driving force of interest rates across all markets.

Observe that the higher valuation of present goods is not the result of capricious behaviour, but rather the identification that life in the future is impossible without sustaining it in the present. According to Menger:

Human life is a process in which the course of future development is always influenced by previous development. It is a process that cannot be continued once it has been interrupted, and that cannot be completely rehabilitated once it has become seriously disordered. A necessary prerequisite of our provision for the maintenance of our lives and for our development in future periods is a concern for the preceding periods of our lives. Setting aside the irregularities of economic activity, we can conclude that economising men generally endeavour to ensure the satisfaction of needs of the immediate future first, and that only after this has been done, do they attempt to ensure the satisfaction of needs of more distant periods, in accordance with their remoteness in time.1

Hence, various goods and services required to sustain one’s life at present must therefore be of a greater importance to that individual than the same goods and services in the future. The individual is likely to assign higher value to the same good in the present versus the same good in the future.

Naturally, each individual's time preference is different. Those with paltry means often have shorter time horizons -- they can contemplate only short-term goals, such as making a basic tool. As his means increase, however, he can consider undertaking the making of better tools. With the expansion in the pool of means, individuals are able to allocate more means towards the accomplishment of ever-more remote goals in order to improve their quality of life over time.

Again, while prior to the expansion of means, the need to sustain life and wellbeing in the present made it impossible to undertake various long-term projects, with more resources now this has become possible.

Not that few, if any, individuals will embark on a business venture promises a zero rate-of-return. The maintenance of the process of life, over and above hand-to-mouth existence, requires an expansion in wealth. Wealth expansion implies positive returns.

Is the lowering of rates the key cause behind the increase in capital-goods investment?

Contrary to the popular thinking, a decline in the interest rate is not the driving cause behind the increases in capital-goods investment. What permits the expansion of capital goods is not the lowering of the interest rate but rather the increase in the pool of savings.

This "pool of savings" comprises of finished consumer goods -- finished consumer goods produced, but not yet consumed. It is this pool of savings that sustains people employed in the enhancement and the expansion of capital goods such as tools and machinery. With these increased and enhanced capital goods, it is then possible to increase the production of future consumer goods.

Note that in an unhampered market it is not the interest rate per se that drives this pool of savings towards more (or less) future-directed production -- it is the sum of individuals' time preferences toward more (or less) future focus that compel producers to make this choice.

Individuals' decisions to allocate a greater amount of means towards the production of capital goods is signalled by the lowering of individuals' time preferences, i.e., assigning a relatively greater importance to the future goods versus the present goods. 

Hence, the interest rate is just an indicator as it were, which reflects individuals’ decisions regarding their present consumption versus future consumption. (Again, the decline of the interest rate is not the cause of the increase in capital investment. The decline simply mirrors the decision to invest a greater portion of savings towards capital-goods investment).

In a free unhampered market, a decline in the interest rate informs businesses that individuals have increased their preference towards future consumer goods versus present consumer goods. Businesses that want to be successful in their ventures must abide by consumers’ instructions, and organise a suitable infrastructure to accommodate this signalled demand for more consumer goods in the future (rather than now). 

Note that through the lowering of time preferences, individuals have signalled that they have increased savings which will support the expansion of the production structure to become more future-directed. In the unhampered market, the decline in interest rate is therefore both a signal for more future-directed production, and a reward for undertaking it.

Observe that in an unhampered market, fluctuations in interest rates will tend to be in line with changes in consumers’ time preferences. Thus, a decline in the interest rate is in response to the lowering of individuals’ time preferences. Consequently, when businesses observe a decline in the market interest rate, they respond to it by increasing their investment in capital goods to accommodate the likely increase in demand for future consumer goods. (Note again that in a free-market economy, a decline in the interest rate indicates that on a relative basis individuals have lifted their preference towards future consumer goods versus present consumer goods).

What I have described here however is what happens in a free unhampered market -- in particular, one unencumbered by a government central bank. A major reason for the discrepancy between the so-called 'market interest rate' and the interest rate described here (i.e., the interest rate that fully reflects individuals' time preferences) is caused by the central bank. For instance, an aggressive loose monetary policy by the central bank leads to the lowering of the observed interest rate regardless of individuals' expressed time preference. Businesses respond to this lowering by increasing the production of capital goods, i.e., tools and machinery, in order to be able to accommodate the demand for consumer goods in the future. Note, however, that consumers have not actually indicated a change in their preferences toward present consumer goods. The time-preference interest rate did not go down. And so a gap emerges between the time-preference rate and the market rate.

It is this gap that causes the dislocations between consumption and consumption that presage economic corrections in future, and encourage over-consumption of capital now.

Because of this breach between the time-preference interest rate and the market interest rate, businesses responding to the declining market interest rate have essentially malinvested in capital goods relative to the production of present consumer goods. At some stage, by incurring losses, businesses are likely to discover that pass decisions with regard to the capital-goods expansion were in error.

Why tightening now cannot undo the negatives of a previous loose stance

According to Ludwig von Mises, a tight monetary stance cannot undo the negatives of the previous loose stance. (In other words, the central bank cannot generate a “soft landing” for the economy.) The misallocation of resources due to a loose monetary policy has already happened, and cannot simply be reversed by a tighter stance. (Mises likens the attempted correction to attempting to cure a road-accident victim by reversing over him.) According to Percy L. Greaves Jr. in the introduction to Mises's The Causes of the Economic Crisis, and Other Essays before and after the Great Depression:

Mises also refers to the fact that deflation can never repair the damage of a prior inflation.... Inflation so scrambles the changes in wealth and income that it becomes impossible to undo the effects. Then too, deflationary manipulations of the quantity of money are just as destructive of market processes, guided by unhampered market prices, wage rates and interest rates, as are such inflationary manipulations of the quantity of money.

A tighter interest-rate stance, while likely to undermine current bubble activities, is also however still likely to generate various distortions, thereby inflicting damage to wealth generators. Note that a tighter stance is still intervention by the central bank, and in this sense it still falsifies the interest-rate signal set by consumers. A tighter interest-rate stance still doesn't result in the allocation of resources in line with consumers’ top priorities. Hence, it does not follow that a tighter interest rate stance can reverse the damage caused by inflationary policy. 

Now, if we were to accept that inflation is about increases in money supply, then all that is required to erase inflation is to seal off the loopholes for the generation of money out of “thin air” by the central bank. A careful scrutiny of this is going to reveal that the culprit behind the increases in money supply is the monetary policies of the central bank. 

Policies aimed at stabilising price increases are in fact producing economic upheavals. Observe that by February 2021, the yearly growth rate of our monetary measure for the USA jumped to almost 80 percent! This is truly astonishing. Against the background of this massive increase, one should not be at all surprised that the yearly growth-rate of the CPI has accelerated. And against the background of this article, one might begin to understand why policies that aim only at slowing the growth rate of the CPI rather than arresting the growth rate of money supply are likely to undermine economic conditions rather than improve them.

Conclusion

As long as sustaining our lives remains individuals' ultimate goal of individuals (that is, as long as our species continues to breathe), they will go on assigning a higher valuation to present goods than they will to future goods -- to $100 now rather than to $103 a year from now -- and no amount of central-bank interest-rate manipulation is going to change this reality. 

But this will not stop them trying. Any attempt by central bank policy makers to overrule this fact however will undermine the process of wealth formation, and will lower individual living standards.

On the one hand, if individuals have not allocated adequate savings to support the expansion of capital goods investments, then it  is not going to help economic growth if the central bank artificially lowers interest rates. It is not going to help, because it it not possible to replace real savings with more money and an artificial lowering of the interest rate. It is not possible, because it it not possible to generate something from nothing. 

Likewise, by raising interest rates the central bank cannot undo the damage from its previously easy interest-rate stance. A tighter stance will likely generate various other distortions. Hence, what is required is that policy makers should leave the economy alone -- and let the market be completely free from central-bank tampering.

* * * * 

Dr Frank Shostak is a leading Austrian economist and director of Applied Austrian School Economics Ltd, which aims to assess the direction of various markets using the Austrian School methodology. AASE aims to make Austrian economics accessible to businessmen.

Versions of this post previously appeared at the Mises Wire and Cobden Centre.