The Political and Bureaucratic Elites Don't Get It

The elite will ultimately fail because they don't understand basic economics.

FT's Tony Barber observes:

One reason why the eurozone is sliding into ever deeper trouble is because its political and bureaucratic elites do not like, do not understand and have no wish to understand financial markets. This is an attitude embedded in European history and culture. Think of the 1793 Law of the General Maximum, an arbitrary attempt to fix prices at the height of the French Revolution. Or think of the social status attached for the past 150 years to being a state-employed soldier, teacher, office clerk or railway worker rather than a banker in Germany.

Since the world financial crisis started in summer 2007, the European Union’s authorities have tried to pin all the blame on “the markets” - often a codeword for the US and Britain, or at least their financial sectors. No one doubts that subprime mortgages, exotic financial instruments, reckless risk-taking and the like caused the trouble - but the EU took matters further. First, they said it was the fault of the hedge funds - all evidence to the contrary. Then the EU fired its popguns at sovereign wealth funds - although what they had to do with the crisis was a mystery to everyone outside Europe. Now it’s the turn of the reviled credit ratings agencies....Now there is talk - not for the first time in recent years - of setting up a European credit ratings agency. Chancellor Angela Merkel of Germany favours the proposal, as does Michel Barnier, the EU internal markets commissioner. The idea is to ensure that sovereign debt is “appropriately rated”.

Well, here we go again - it’s the same old hostility to the markets. Don’t Europe’s leaders get it? If a European credit ratings agency is established and there is even a hint that its decisions are influenced by political pressures, it won’t possess and it won’t deserve the slightest respect in the real world of real investors who handle real people’s money - yours and mine.

The elite create structures, including the EU and the Federal Reserve Bank, that have failure built into them. These constructs are no safer from collapse than the old Soviet Union was. We are seeing the collapse of the EU in front of our eyes.

Here's how the Federal Reserve will collapse.

The Fed was set up as an attempt to circumvent real money, such as gold. The banksters idea was to be able to print money at will and when things get out of hand to pull back a bit.

The plan is ultimately set up for failure because when the bankster tools at the Federal Reserve try to tighten the reigns, the system begins to collapse and government deficits skyrocket. The Fed then steps in to buy up the government debt. And so, while the Fed will talk a good game, they will ultimately print money to protect the elitist regime.

Fritz Machlup observed this elitist problem during the Great Depression:

...should..... bank deposits begin to rise, then the only available offset would be an open
market policy of the Federal Reserve banks which would endeavor to
reduce bank resources through selling securities from the Federal Re-
serve portfolio. Credit control in the discussed sense works therefore
only if the Federal Reserve banks do not buy any government bonds,
because this would increase excess reserves of member banks, and if
the Federal Reserve banks are prepared to start a sale of government
bonds at any moment that it should become neces ary.

What are the Federal Reserve banks doing instead? They are not
preparing for a sale, but showing readiness to purchase government
bonds in order to support the market for these bonds, the market for
new bonds which the government issues in order to finance its budget
deficit. As long as the government has a budget deficit and as long as
the Federal Reserve banks have to support the price of bonds by pur-
chases, no control can be effective. Thus, even if we know how we
might do something toward controlling the boom, we are not able to
apply our knowledge at the time being

In the current cycle, the government has attempted to prop up the collapsing distorted economic structure of the elites by (surprise) pumping money into the elite banks. This is just step one.

The huge deficits in the United States of  many cities, states and the federal government are the next problem on the horizon. Patch jobs will be tried here in the U.S., as they are being tried in Europe, but ultimately it will come down to, as it did during the Great Depression, the Federal Reserve buying debt, huge, huge mounds of debt.

The problem is that this time the debt overhang in the U.S. is so great that to absorb it the Federal Reserve will likely destroy the dolla,r because it will print so many of them to support the elitist structure.

Keep in mind that the Social Security Trust Fund just became a net seller of Treasury debt. Every year it will be selling more and more Treasury securities to meet retirement obligations. For all practical purposes, it will be competing with the Treasury to sell the stuff.

Times are changin'. It used to be that the SS Trust Fund BOUGHT 25% of all Treasury debt issued in a given year.

On top of the SS problem, we have wars that suck up billions upon billions. And in the White House, I am convinced we have a man who when he first heard the words "supply and demand" thought it was some kind of whitey rock group and never looked further into the matter, at least it appears that way, given his healthcare plan, his bailouts, etc. They all ignore basic economics and will add even more to the deficit.

This will all result on huge pressures on the Fed to inflate and, again, bailout the bankster elite who hold much of the debt. The Fed will respond by doing as pressured and buy and buy debt. At some point, the dollar will collapse on international markets and inflation will gallop. At that time, the masses will vaguely recall from the back of their heads some guy who warned about all this in a book called End the Fed, and they will put an end to the Fed quicker than you can say "the collapse of Keynesian economics."

Remembrances of Fritz Machlup

By Richard Ebeling


Years ago -- in an earlier century! -- I knew Machlup at NYU when I was a graduate student.

He was a master of the spoken word. He would sometimes begin a public lecture by saying that someone had asked him before the talk that they were looking forward to hearing what he had to say. Machlup would say that he told that person that he (Machlup), too, was looking forward to finding out what he would say!

Thus, he gave the impression that it was all extemporaneous, off the top of his head. But it was always clear that his words had been clearly thought out before he got up to speak, though he often did not read from prepared notes.

He has great charm, and an old-world Viennese gentlemanly style. He would be introduced to women attending his lecture, and invariably would kiss their hand, and complement them in some way.

He was always patient and giving of his time. There were many occasions during which I would spend hours in his company at his office at NYU, with him telling stories of old Vienna, the Mises-Circle, and the economic controversies of a long-gone era.

I liked him very much. I had lunch with him only two or three days before he died, and he told me to be sure to come to see him, again, soon. There was a lot more he still had to tell. Alas, that time was the last.

Dr. Richard Ebeling is a faculty member in the Economics department at Northwood University in Midland, MI, and the "discoverer" of the lost papers of Ludwig von Mises. His most recent book is Political Economy, Public Policy and Monetary Economics: Ludwig von Mises and the Austrian Tradition

Can We Control the Boom?

Richard Ebeling emails:

Dear Bob,

In 1937, Fritz Machlup participated in a conference at the University of Minnesota on the theme of "Can We Control the Boom?" (along with Bertil Ohlin and Arthur Marget.)

To my knowledge, Machlup's written talk has never been reprinted since the proceedings were published as a pamphlet in October 1937.

It is Machlup at both his free market and "Austrian" best.

I've scanned the title page and Machlup's remarks. As you know, Machlup was always clear and often witty. I thought you might find it interesting to read.

I'm sending it along with the email as an enclosure.

Best,
Richard 

Richard has made another grand discovery. This is indeed Machlup at "both his free market and 'Austrian' best."

In this speech, Machlup, who served as  President (1966) of the American Economic Association, and President of the International Economic Association (1971 74), discusses the economy while it is in the midst of the Great Depression. From beginning to end, it reads as though he is discussing today's headlines.

He is clearly in his "Austrian" mode, as Ebeling indicates, but unlike Hayek and most Austrians today, Machlup discusses the business cycle in terms of money flows, rather than from the viewpoint of interest rates as signals. Neither is incorrect. They are both looking at the same picture, just from a slightly different perspective. Personally, I prefer the money flows perspective and was pleased to see Machlup using it.

Machlup first discusses the fact that during the boom period leading up to the Great Depression, much like the period leading up to the current  financial crisis, it was mostly just the prices of real estate and the stock market that were soaring. However, he correctly states that this doesn't mean there weren't other maladjustments in the economy.

He then takes on the task of explaining why trying to support the economic structure from collapse is an error, even as far as unemployment is concerned.

He then explains why falling wages might even lead to increasing real wages and argues that the government attempts to support wages through an increase in money supply will ultimately lead to a greater crash.

Using the example of locomotives, he explains why even a slowdown in money printing will lead to an unwinding of the economy (This is important to understand in light of the money printing in China, which has slowed, but not stopped).

Machlup finishes by discussing the then problem of excess reserves in the system and the fact the Federal Reserve will have to stand ready to drain reserves should banks start to employ these excess reserves. He then explains the problem for the Federal Reserve is that instead of draining of reserves, the Federal Reserve is:

showing readiness to purchase government bonds in order to support the market for these bonds, the market for new bonds which the government issues in order to finance its budget deficit. As long as the government has a budget deficit and as long as the Federal Reserve banks have to support the price of bonds by purchases, no control can be effective. Thus, even if we know how we might do something toward controlling the boom, we are not able to apply our knowledge at the time being.

Sound familiar?

Machlup's speech is must reading for anyone who wants to understand many of the nuances of the business cycle that were part of the Great Depression and are part of the current crisis. I have placed Machlup's full speech in the EPJ Vault, here.