Talk on Economics to The Delphian School
On November 12, 2010 I gave a talk to The Delphian School, a boarding school in Oregon which was an extraordinary thing to behold. I couldn’t believe how mature the students were, and non-traditional the schooling environment was.
This is a fairly unique talk, so you might have this play in the background since I cover some things I normally don’t. It’s also a good gateway drug for your co-worker who is vaguely interested in free-market economics but needs a little push.
Ron Paul’s Idea to Repudiate the Fed’s Debt Holdings
It’s nowhere near the demand for me to comment on Bitcoin–that article is still forthcoming; it has turned into my Apocalypse Now–but a lot of people were asking what I thought about Ron Paul’s proposal for the Treasury to cancel the debt held by the Fed. So here ya go. An excerpt that I want to emphasize on reserve requirements:
In other words, rather than eliminating the excess reserves by having the Fed sell assets, [Dean] Baker is proposing that the Fed simply mandate that banks keep a larger amount of cash in the vault (or electronic reserves on deposit with the Fed) in order to “back up” the checking-account balances of the banks’ customers. In this way, the banks won’t be able to pile a massive amount of new loans on top of the existing reserves.
This may or may not be a good solution in the grand scheme of things, but I do want to point out that it’s equivalent to stealing that money from the banks. Consider the following analogy: Suppose the government passed a new law requiring all bank customers to keep a checking account balance of at least $1,000. No matter the emergency, people wouldn’t be allowed to let their checking accounts fall below $1,000 at any time, under threat of a ten-year prison term and huge fine.
But as far as Karl Denninger–who had flipped out over the “raw printing of money” that Paul’s proposal would entail–here’s an observation:
[H]aving the dollar backed up by gold is qualitatively different from having it “backed up” by IOUs issued by the federal government. For one thing, Federal Reserve notes (and banks’ electronic deposits with the Fed) are legal tender, and we truly have a fiat currency. If you turn in a $20 bill to the Treasury or the Fed, they will give you two $10s or four $5s, but they don’t owe you anything besides the US dollar itself.
Furthermore, reflect for a moment on the absurdity of claiming that Treasury debt “backs up” the dollar reserves in the financial system. Suppose someone is holding a $100 bill, but he’s not sure if he trusts it as an asset. Would it reassure him to know that somewhere in the vaults of the Federal Reserve there is a piece of paper issued by the US Treasury promising to pay a $100 bill in the future?
Tom Woods Doing the Job That Even Mexican Immigrants Wouldn’t Want
I’ve been feeling really guilty the past several months, because I asked Tom Woods for a review copy (that means a price of zero to me) of his latest book, Rollback, and I haven’t even finished it yet. (In defense of myself, I haven’t read any book this year, since I’ve been so busy, except The Theory of Money and Credit, for which I just wrapped up the study guide.)
Anyway, the book is awesome, but I can’t believe how much wonkish, boring econ think tank stuff Tom had to wade through to write it. It reminds me of the old Jewish comic who comes home to find his best friend in bed with his wife: “Tommy, I have to…but you?!”
It seems Tom’s penance has continued past the writing of that book. In a recent series of three articles at LRC (1, 2, and 3), he takes on anti-capitalist cliches. This is the kind of thing that I normally leave as an exercise for the student, but Tom isn’t taking any chances and wants everybody on script.
Anyway, you might want to forward the above links to people who are just getting into free-market economics, and still have doubts that you personally resolved 15 years ago. And then you can also thank your lucky stars that Tom wrote those articles, so we don’t have to. (I think I would rather play 52 card pickup ten times in a row.)
It’s All Been Done Before
Amongst my character flaws is a tendency to feel like I’m not being properly appreciated. This is yet another example of how Jesus’ life serves as a compass and a crutch in my moments of weakness. If I feel a pity party starting, I remind myself that there once was a Man who went around healing people and giving them incredible words of encouragement and wisdom. In return, the people He was trying to save tortured and murdered Him. Even His closest friends betrayed and abandoned Him, including Peter.
If that isn’t shocking enough, here’s the truly inconceivable thing: Knowing full well all of this would happen, Jesus went through with it anyway, and then forgave everyone while He was dying from the wounds they inflicted on Him.
So I pretty much need to suck it up and ask myself what the Lord wants me to do right now. I’m pretty sure the answer is NOT, “Reflect on all the things you don’t like about others.”
May Issue of the LMR and Come to the Night of Clarity!
In the May issue of the Lara-Murphy Report, Carlos and I talk about the Infinite Banking Concept, and we also interview John Papola.
If you’re suitably intrigued, go here to get more details about the Night of Clarity (just about two weeks out!) and/or the Lara-Murphy Report.
Is Keynes From Heaven or Hell?
Sorry kids–Major Freedom in particular–but I think Keynes is brilliant in Chapter 13 of the General Theory:
It should be obvious that the rate of interest cannot be a return to saving or waiting as such. For if a man hoards his savings in cash, he earns no interest, though he saves just as much as before. On the contrary, the mere definition of the rate of interest tells us in so many words that the rate of interest is the reward for parting with liquidity for a specified period. For the rate of interest is, in itself, nothing more than the inverse proportion between a sum of money and what can be obtained for parting with control over the money in exchange for a debt for a stated period of time.
As I put it in my neglected dissertation, the rate of interest is an exchange rate between present and future dollars (or euros or ounces of gold or whatever the money commodity is). Austrians wouldn’t explain the exchange rate between the USD and the Japanese yen by reference to “proximity preference,” or the fact that consumers subjective prefer, other things equal, American goods to Japanese goods.
Obviously, I don’t endorse Keynes’ nutjob “socialization of investment” stuff in the final chapter, or any of his policy recommendations for that matter. But on his neutral, scientific assessment of what interest is, I actually agree with him more than Mises.
Believe me, it pains me to say that. I feel like this guy.
More on Asset Privatization
At EconLib this month I have an article going into more detail about how much in (fairly) liquid assets the government owns. I was actually surprised by some of these numbers, so you might be as well. For example:
International reserve assets. As of June 3, 2011, the Treasury reported international reserve assets of $144.2 billion.2 They include gold, securities and deposits denominated in euros and yen, as well as “IMF reserve position” and “Special Drawing Rights” (SDRs). However, this figure is substantially understated, as the Treasury officially values its 261.5 million troy ounces of gold at a price of $42.2222 dollars each. If we priced the Treasury’s gold holdings at the current market price of about $1,500 an ounce, then the currency reserve assets have a market value closer to $525 billion.
Other financial assets. According to the Federal Reserve, as of the end of the first quarter in 2011, the federal government held $786 billion in “credit-market instruments” (including $138 billion in agency- and GSE-backed securities, as well as $355 billion in student loans). The government also still held $55.4 billion in corporate equities acquired under the TARP.
I still don’t understand why some of the more firebrand “conservative” Republicans in Congress aren’t jumping on this bandwagon. (I don’t even mean, “Because it would save the country!!” I just mean, I happen to think this makes a lot of sense in the current political environment, and I don’t understand why Republicans aren’t picking it up–even if they don’t care one way or the other–just as a way to confound Obama and Geithner’s assertions.)
Krugman on Keynes
Well this was an obvious thing I had to watch, since I’m currently teaching a class on the two fellows. Anyway, if you want to spend 50 minutes (or even just 30 minutes, really, since that alone will give you a good taste) learning what the big fuss is about Keynesian economics, I think Krugman does a good job in this lecture celebrating the 75th anniversary of the General Theory. Some quick remarks:
(1) Is Krugman usually this jumpy/nervous in public talks? I don’t remember him being like this when I saw him at NYU’s Stern School, back in the early 2000s talking about Japan.
(2) Around the 9:00 mark, Krugman quite explicitly says that the General Theory is about people not spending enough. As obvious as that might seem to some people, I point it out because I’m pretty sure our resident Keynes-defender has complained that this is a strawman erected by Rush Limbaugh.
(3) In the same area, Krugman puts up a slide from the General Theory, going over just the stuff I was asking about last week. Great economists think alike. (BTW Daniel Kuehn went way beyond the call of duty to try to help me out.)
(4) Somewhere in the 10:00 – 25:00 range (sorry can’t be more specific), Krugman quotes from Barro from a WSJ op ed, where Barro said (paraphrasing) “Keynes thought wages could be too high, but monetary policy can address this problem.” Krugman said something like, “This is just completely failing to understand the central Keynesian point.” But how is it? Isn’t that Krugman’s own solution for Japan (and us)? What I mean is, is Krugman here making a complicated argument involving the relative likelihood of pushing a deficit through versus getting the public to believe the Fed will allow future price inflation? Or is he saying something much more basic than that? Because I didn’t see what the problem was with the quote from Barro, whereas I did understand why Krugman would start choking on the (alleged) stupidity of John Cochrane’s quote a few minutes later in the lecture.
(5) Somewhere near the 30:00 mark, Krugman says that the policy debate over China has it all wrong. Rather than having us over a barrel, the Chinese have an unloaded water pistol pointed at our heads. In fact, if the Chinese stopped buying our Treasury debt, Krugman says we should send them a thank you card.
Now this part confused me too. Krugman had just gotten through the demonstration that equilibrium, full-employment interest rates right now are negative. OK fine, and so if the Chinese didn’t buy as much of our debt, that wouldn’t make US interest rates go up, since they would still be stuck at the zero bound. But how would it help us? Is Krugman assuming that if the Chinese don’t buy our Treasury debt, instead they would use the money to start infrastructure projects? I.e., if the Chinese just started buying debt issued from Canada, that wouldn’t do anything to help, right? (I mean this from his point of view, of course.)
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