Out of interest Mr. Murphy, is there a reason why you don’t disseminate this program far and wide?
My instinct would be to post it on YouTube at a minimum. Seems an odd choice to restrict exposure when you’re an outlier
There’s a kind of background theme I’ve noticed in the last two CK episodes, and I don’t know if it’s just so obvious that no one comments on it, or else maybe you are trying to be subtle about it and see who notices, or maybe it’s just me. I could be unconsciously tying in concepts from LMR here, because I often listen to that at about the same time.
Anyhow, the theory seems to be that increasing sovereign risk will drive down real interest rates.
Doesn’t sound so thrilling at first glance, I know… but came to me as a big realization recently, and after playing the search engine jockey, I didn’t see a whole lot of discussion on this particular topic. IMHO it ties together an important gap in how Austrians can explain a Keynesian perspective.
Based on the concept that real interest rates can only come from real physical returns (i.e. it’s impossible to have a real interest rate of 10% if no investment exists that is capable of returning at least 10%) the physical return must be scaled back if you think there is high risk involved… but wait, sovereign risk is a special case where potentially it can strike anywhere (i.e. that’s all investments, every single one of them, and all savings).
Consider the Peter Schiff case “BUY GOLD” … although the gold itself is low risk (humans always desire gold) we have seen FDR demonstrate he can snatch the gold right out of your hands! Let’s suppose gold is your reference point (not a bad reference if you are thinking long term, and we could run this same thought experiment with a different reference if you like). In an ideal world of stable property rights, you buy your gold bar, it sits around, it does not decay, at the end of a long time period you still have a gold bar. That should be the “neutral” reference of 0% interest (give or take some small fees for security, etc).
Take this scenario (gold reference = 0% interest) and now introduce sovereign risk, thus you might get your gold back, or else FDR might snatch (you judge the odds). Once risk has been factored in, your real expectation of return must be less than zero, i.e. must surely be negative, right? You start with a 0% return (the reference), you factor in an expectation of loss due to risk… result is negative.
But this applies not only to the gold reference scenario, it applies to all possible scenarios of investment and saving… and that’s the nature of sovereign risk… nothing is ever entirely safe from this powerful force. You might think you have some idea of where it will strike (good luck if you do) but there’s no way to be sure. That’s why risk is risky.
Regarding government debt: this is a promise offered to current generation that future generations will pay your money back with interest. I kind of like Bob’s “cynical” description that it allows savers to purchase a stake in the Mafia protection racket… actually I cannot find anything to quibble with, Bob’s description is accurate. So there’s sovereign risk involved in holding government debt, obviously the government may default, or else they may “soft default” by monetary inflation, but either way there’s risk. How much risk? Well, let me see… this is all on the backs of future generations, who can only pay so much in real terms before it breaks them (or in a democratic nation they simply collectively refuse) so therefore the larger the government debt (as ratio of GDP) the higher the risk of some bad outcome. Thus the qualitative equation:
Increasing government debt to GDP ==>
==> increasing sovereign risk ==>
==> lower real interest rates (even really negative).
But there’s more.
Suppose a guy from government knocked on your door and explained that goons would burn down your house next month. Would you decide this is a good time to paint the house? To fix up the roof, perhaps?
Probably not. The whole thing is going to burn anyway, just stash what possessions you can and get out of there with your life intact. But suppose the government guys said, “Relax, chump, there’s only a 5% chance we will burn your house, we just need to reduce total housing stock and the fairest way is to randomly select 5% of the houses to burn. So now that’s sovereign risk again. Would you paint your house at 5% odds it was going to be a wasted investment? My conclusion:
increasing sovereign risk ==>
==> consumption of capital (no incentive for maintenance)
Krugman is right, we are indeed suffering from a global “safe asset shortage,” driven by the danger of sovereign risk, turning normally safe assets (like a gold bar) into potential liabilities (when FDR gets wind that you own said gold bar). When governments are cracking down on the ability for private citizens to own cash at all the sovereign risk is greater and one more “safe asset” is removed from circulation. This is the inevitable flipside of the Keynesian “War on Savers”.
Apologies for the long-winded post, maybe I’m just reiterating the last two podcasts in my own words, but with a bit of a darker spin on it. Been a bit like that for me lately, not intending to be confrontational or anything. Sometimes the same ideas from a slightly different angle can appear very different.
. . .
Someone will probably link to where Rothbard already explained all this I suppose 🙁
Great podcast today in regards to the take on Hamilton and debt. Indeed the mainstream view on thinking debt is ok, is absurd and only goes along with their complete misunderstanding of the capital structure and ignorance of capital consumption.
I was a bit surprised by Tom Woods’ pretext for Jackson’s racism though. I highly admire Woods and think he is the best historian of our times (this makes me an avid follower of his podcast as a matter of fact), but it certainly did sound as though he were giving a typical mainstream pretext for Jackson’s racism. I mean let’s face it, the founding fathers were racists, and many presidents that espoused slavery or legislation that hindered upon peoples’ freedoms in regards to race, can be said to be racist as well.
This does not mean Krugman was right at all, Hamilton was also the same way. Just like the people of gentry at the time, they compromised their ethics to keep in place slavery. Jefferson and Franklin and other founding fathers were against slavery, or spoke against it, but seemed to back off when it came to eradicating it from the system. It was the small amount of radicals that spoke up most fervently that finally got things to change.
That being said, I have to disagree cold-heartedly with anyone that makes pretexts against such inhumane decisions as those made by many of the government officials during the beginning years of this nation. The government was racist and held firm to the beliefs that the laws protected the unjust institutions that existed during the time like slavery. Let us not forget that the Quakers were themselves abolitionists, and they came prior to the founding fathers. To espouse any pretense towards justifying a government official’s actions which are contrary to human ethics (i.e. Jackson and the Indians, or Hamilton and his wealth garnered from the slave trade), is anti-Libertarian and anti-humanity. Sure Jackson ended the central bank, but any logical human could do that if they understood basic economics.
That Woods v. Malice debate was fascinating, but I probably shouldn’t have watched it after reviewing one of the Trump related episodes. I don’t want to say why I think it kinda messed with my reception of it but let’s just say it didn’t shift my opinion on who was right, but only because it wasn’t going to in the first place.
Hm I’d better find something to put me in a less dim mood.
Out of interest Mr. Murphy, is there a reason why you don’t disseminate this program far and wide?
My instinct would be to post it on YouTube at a minimum. Seems an odd choice to restrict exposure when you’re an outlier
There’s a kind of background theme I’ve noticed in the last two CK episodes, and I don’t know if it’s just so obvious that no one comments on it, or else maybe you are trying to be subtle about it and see who notices, or maybe it’s just me. I could be unconsciously tying in concepts from LMR here, because I often listen to that at about the same time.
Anyhow, the theory seems to be that increasing sovereign risk will drive down real interest rates.
Doesn’t sound so thrilling at first glance, I know… but came to me as a big realization recently, and after playing the search engine jockey, I didn’t see a whole lot of discussion on this particular topic. IMHO it ties together an important gap in how Austrians can explain a Keynesian perspective.
Based on the concept that real interest rates can only come from real physical returns (i.e. it’s impossible to have a real interest rate of 10% if no investment exists that is capable of returning at least 10%) the physical return must be scaled back if you think there is high risk involved… but wait, sovereign risk is a special case where potentially it can strike anywhere (i.e. that’s all investments, every single one of them, and all savings).
Consider the Peter Schiff case “BUY GOLD” … although the gold itself is low risk (humans always desire gold) we have seen FDR demonstrate he can snatch the gold right out of your hands! Let’s suppose gold is your reference point (not a bad reference if you are thinking long term, and we could run this same thought experiment with a different reference if you like). In an ideal world of stable property rights, you buy your gold bar, it sits around, it does not decay, at the end of a long time period you still have a gold bar. That should be the “neutral” reference of 0% interest (give or take some small fees for security, etc).
Take this scenario (gold reference = 0% interest) and now introduce sovereign risk, thus you might get your gold back, or else FDR might snatch (you judge the odds). Once risk has been factored in, your real expectation of return must be less than zero, i.e. must surely be negative, right? You start with a 0% return (the reference), you factor in an expectation of loss due to risk… result is negative.
But this applies not only to the gold reference scenario, it applies to all possible scenarios of investment and saving… and that’s the nature of sovereign risk… nothing is ever entirely safe from this powerful force. You might think you have some idea of where it will strike (good luck if you do) but there’s no way to be sure. That’s why risk is risky.
Regarding government debt: this is a promise offered to current generation that future generations will pay your money back with interest. I kind of like Bob’s “cynical” description that it allows savers to purchase a stake in the Mafia protection racket… actually I cannot find anything to quibble with, Bob’s description is accurate. So there’s sovereign risk involved in holding government debt, obviously the government may default, or else they may “soft default” by monetary inflation, but either way there’s risk. How much risk? Well, let me see… this is all on the backs of future generations, who can only pay so much in real terms before it breaks them (or in a democratic nation they simply collectively refuse) so therefore the larger the government debt (as ratio of GDP) the higher the risk of some bad outcome. Thus the qualitative equation:
Increasing government debt to GDP ==>
==> increasing sovereign risk ==>
==> lower real interest rates (even really negative).
But there’s more.
Suppose a guy from government knocked on your door and explained that goons would burn down your house next month. Would you decide this is a good time to paint the house? To fix up the roof, perhaps?
Probably not. The whole thing is going to burn anyway, just stash what possessions you can and get out of there with your life intact. But suppose the government guys said, “Relax, chump, there’s only a 5% chance we will burn your house, we just need to reduce total housing stock and the fairest way is to randomly select 5% of the houses to burn. So now that’s sovereign risk again. Would you paint your house at 5% odds it was going to be a wasted investment? My conclusion:
increasing sovereign risk ==>
==> consumption of capital (no incentive for maintenance)
Krugman is right, we are indeed suffering from a global “safe asset shortage,” driven by the danger of sovereign risk, turning normally safe assets (like a gold bar) into potential liabilities (when FDR gets wind that you own said gold bar). When governments are cracking down on the ability for private citizens to own cash at all the sovereign risk is greater and one more “safe asset” is removed from circulation. This is the inevitable flipside of the Keynesian “War on Savers”.
Apologies for the long-winded post, maybe I’m just reiterating the last two podcasts in my own words, but with a bit of a darker spin on it. Been a bit like that for me lately, not intending to be confrontational or anything. Sometimes the same ideas from a slightly different angle can appear very different.
. . .
Someone will probably link to where Rothbard already explained all this I suppose 🙁
Great podcast today in regards to the take on Hamilton and debt. Indeed the mainstream view on thinking debt is ok, is absurd and only goes along with their complete misunderstanding of the capital structure and ignorance of capital consumption.
I was a bit surprised by Tom Woods’ pretext for Jackson’s racism though. I highly admire Woods and think he is the best historian of our times (this makes me an avid follower of his podcast as a matter of fact), but it certainly did sound as though he were giving a typical mainstream pretext for Jackson’s racism. I mean let’s face it, the founding fathers were racists, and many presidents that espoused slavery or legislation that hindered upon peoples’ freedoms in regards to race, can be said to be racist as well.
This does not mean Krugman was right at all, Hamilton was also the same way. Just like the people of gentry at the time, they compromised their ethics to keep in place slavery. Jefferson and Franklin and other founding fathers were against slavery, or spoke against it, but seemed to back off when it came to eradicating it from the system. It was the small amount of radicals that spoke up most fervently that finally got things to change.
That being said, I have to disagree cold-heartedly with anyone that makes pretexts against such inhumane decisions as those made by many of the government officials during the beginning years of this nation. The government was racist and held firm to the beliefs that the laws protected the unjust institutions that existed during the time like slavery. Let us not forget that the Quakers were themselves abolitionists, and they came prior to the founding fathers. To espouse any pretense towards justifying a government official’s actions which are contrary to human ethics (i.e. Jackson and the Indians, or Hamilton and his wealth garnered from the slave trade), is anti-Libertarian and anti-humanity. Sure Jackson ended the central bank, but any logical human could do that if they understood basic economics.
That Woods v. Malice debate was fascinating, but I probably shouldn’t have watched it after reviewing one of the Trump related episodes. I don’t want to say why I think it kinda messed with my reception of it but let’s just say it didn’t shift my opinion on who was right, but only because it wasn’t going to in the first place.
Hm I’d better find something to put me in a less dim mood.