Monetary Policy

The Difference between Public and Private Debt

A Longer form response on this issue in summary

– All government debt is not used to pay for infrastructure, and often paying for things with no return

– Governance of Public institutions are more political with more fragmented interests that a private institution leading to worse usage of capital from debt

– Government unlike private institutions doesn’t pay back its debt once its investment matures but rolls it over so when rates do rise, it’s super problematic

– Makes it hard monetary policy authorities to raise rates when they need to forcing them to choose between a budget crisis and inflation

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Free Markets and Europe

Free Markets and EuropeBy Alex Merced
 When you hear left wing politicians like Bernie Sander and Hillary Clinton argue for policies that require forced transfers of wealth (high taxes with generous welfare programs), they often site European nations as country who have succeeded with these types of policies?
Do these countries truly combines the level of regulations, taxes and welfare that many people think or do they have a more broader mix of these policies with free market friendly stances that many give them credit for. (Which makes the source of their alleged prosperity less clear)
In this new episode of the contra krugman podcast, Tom Woods and Robert Murphy spend time focusing on Denmark which is regarded as the happiest country in the world. The results is a very insightful discussion that makes you question much of the lefts rhetoric which you can listen here:
http://contrakrugman.com/ep-6-enough-about-denmark-already-heres-what-krugman-and-sanders-left-out/
Here are some other good articles on Europe and economic policy:
http://www.cato.org/publications/commentary/europe-embraces-freemarket-reforms
http://www.cato.org/events/switzerland-free-market-model-europe
http://www.aei.org/publication/swedens-swing-toward-a-free-market/
https://www.freeenterprise.com/did-sweden-just-make-case-free-market-policies/

http://www.npr.org/sections/money/2011/09/23/140707524/germanys-painful-unemployment-fix
http://www.bloomberg.com/bw/magazine/italys-labor-pains-11162011.html
https://mises.org/library/vampire-economy-italy-germany-and-us

Libertarian 101

So over the last few political seasons you’ve had a few questions about this term you’ve kept hearing people mention, “Libertarian”.
Essentially libertarians are those who look at all questions regarding government and policy from the perspective of the golden rule (do unto others as you’d have done unto yourself). Although, libertarian philosophy and tradition runs much deeper.
To understand what is a libertarian and the different categories of libertarianism watch this video:

Now below I’ll link to several videos to address different issues regarding libertarianism:

(Watch all the videos below, I’ll be surprised if you don’t find yourself thinking more libertarian when you done)
Healthcare


The Great Depression

Inequality


Central Banking


Taxation


Minimum Wage

Simple Overview of the Great Depression

Recently I made a blog post where I shared several articles to help dispute characterization sod the free market in history. I figured I’d post a very simplified timeline of the Great Depression. 
step 1 – Andrew Mellon who is the treasury secretary advocates tax and spending cuts under Warren Harding and Calvin Coolidge freeing up capital the of colony begins growing

(keep in mind in 1920-1921 there was a deep recession but with very little government intervention the economy was rebounding a year later)​

step 2 – Fed Chairman Ben Strong in the mid 20’s begins to increase the money supply and cut interest rates creating an artificial increase in credit. 

step 3 – companies which are already doing well issue stock then use the money to buy foreign bonds (lending money abroad so they can keep buying stuff from the U.S.) the return on these bonds make the companies look more profitable than they are and traders begin using the credit created by Fed chairman Ben Strong to speculate and the stock prices went up beyond the actual real profitability of these companies. 
Step 4 – eventually in 1929 valuations hit their ceiling and prices begin to fall, this forces margin calls (people having to sell to pay their loans since their stocks are falling) which causes prices to fall even further. The market crashed
Step 5 – the economy finds it hard to recover as Herbert Hoover signs the Smoot Hawley tariff which taxes many foreign goods but many countries then do the same In retaliation, hurting trade further weakening the economy.
step 6 – US policy influenced by economist Irving Fisher (who failed to predict the crash and lost almost everything cause of it) focuses on policies to prevent the fall of asset prices (which were overvalued… Duh) slowing down the ability for economy to discover what the true value of these assets are so they can be sold and the economy can again move forward
Step 7 – Herbert Hoover raises taxes to 62% in 1932
Step 8​ – FDR becomes president raises taxes to the 90s and continues to fight asset price deflation dragging out the liquidation even further
step 9 – While GDP and Umeployment improve during World War II (building tanks and drafting soldiers will do that) It’s not till post WWII tax and spending cuts does private investment and quality of life truly begin to improve

Why Taxing Wealth is a bad idea?

by Alex Merced

In his new book, “Capital in the 21st Century“, Piketty advocates for a global tax on wealth as a way to curb growing income inequality. Of course, as a libertarian you can probably guess I think this is a bad idea but for good reason. I have discussed income inequality in previous articles I’ve written, and disagree with Piketty that the correlation between the return on capital and income inequality means the capital growth is cause of the inequality (thus taxing it the cure). Instead, I believe my other article on how monetary policy and inflation increase income inequality not only explains the correlation (inflation increases returns to capital and decreases return on wages) but also just makes more sense in explaining the trends discussed by Piketty.

Although in this article I’m less concerned with what is the true cause and cure for income inequality, but with how bad a solution a global tax on wealth would be. Taxing wealth would not only have the effect of reducing and confiscating wealth which of course is abhorrent from a libertarian perspective, but it will also make capital gravitate to more risky investments than they otherwise would, destabilizing the capital structure of the economy.

So why would higher taxes mean riskier investments?

From an investors point of view, you are generally not just looking for a high % return but generally a return after you adjust for inflation and taxes. The higher the taxes and the higher the rate of inflation the higher return needed to survive both.

For example:

Let’s say you have a 10% (which is pretty good) with a tax rate of 35% and inflation rate of 3%

After taxes you will have a 7.5% return (10 – 35%)

Adjust that for 3% inflation (7.5 – 3)

your at a 4.5% return (and this ignores state and other taxes, also ignoring any issues in measuring inflation)

The point being is that as the hazards of inflation and taxes build up, one must seek more return and the name of the game is “more risk, more reward” meaning that higher returns will be found in increasingly risky investments.

Why do riskier investments return more?

Imagine a world where investments of all levels of risk gave you a 10% return, which one would you choose to put your money in?

If you answered the safest, that would be quite rational and would be what many others would do as well. The result is, that everyone wanting the safest investment will bid up the price which in turn reduces the return on investment (your giving up more for the same thing) and the return will continue to go down until the return goes so low it’s not worth it to investors to bid it any higher.

These investors would then do the same with the next safest investment, etc. By the time you start getting to the riskier investments there will be less potential buyers so they won’t be bid as high, and when you get the riskiest of investments they may be bid down (because maybe 10% return is not worth the risk) so a lower price would give you a higher return (giving up less for the same thing).

Bottom line, investments are generally priced heavily based on risk and reward. So more taxes and inflation will just lead to an increased demand for risk, which at some point will create a scenario that bad investments may outweigh good investments and growth turn into a slump.

Monetary Policy and Income Equality

by Alex Merced

In a previous article I discussed that redistribution of income isn’t necessary to create equality, instead you should unleash market forces by reducing barriers into wealth markets. In this article I’d like to make the argument that another culprit in creating growing inequality is not only market controls but monetary policy, especially expansionary policy.

What is Monetary Policy?

Monetary policy is a policy tool, often controlled by central banks, that revolves around the control of a country’s money supply and credit. Monetary policy mechanisms usually consist of interactions with the banking system that make it easier or harder for banks to extend more credit. A couple of major mechanisms include:

Discount Lending: When banks have liquidity or solvency issues they may borrow from other banks to keep things going, but when there isn’t a bank to borrow from they can go to the central bank and borrow against typically high quality assets(“safe” stable liquid assets like government debt). These loans are usually in the form of deposits on the banks balance sheet (record of asset and liabilities).

Open Market Operations: Another way of getting money in and out of financial institutions is to enter short term contracts called Repurchase Agreements (repos for short) where the Central Bank lends money by purchasing an asset today with a contractual promise the bank will repurchase it from the central bank in coming days (the reverse of this is called a reverse repo when central banks need to take money from the banks).

Quantitative Easing: Similar to open market operations without the agreement to repurchase, basically the central bank outright sells or buys assets depending on their goals which can have the largest impact of three mechanisms discussed in this article.

What are contractionary and expansionary policy?

The central bank usually conducts either contractionary policy or expansionary policy:

Expansionary Policy: By increasing the amount of money in the economy (usually in the form of lending to banks) the amount of credit available increases. This is usually done when  central banks are worried about unemployment (due to what I believe is a misguided belief in a trade-off between unemployment & inflation). So by inflating the money supply several things happen such as…

– The lowering of real interest rates (rates after inflation) makes it unwise to hold money, or even relatively safe investments (since the return will still be negative after inflation), encouraging investment in riskier higher return investments

– Lower interest rates will encourage more borrowing (although the lower rates would discourage lending, the low real rates make it even worse not to).

Contractionary Policy: By decreasing the amount of money in the economy you end up with the opposite result.

How does this affect inequality?

While inflating the money supply may not immediately in the short run inflate the price level, it can have several pernicious effects on the distribution of wealth.

1. Drives up the prices of capital goods: the low nominal and real rates will make longer term, capital intensive investments more attractive resulting in driving up the prices of capital (natural resources, property, etc.). The result is that this increase in capital asset values increases return to the owners of capital (often the wealthier portion of the population) and squeezes out the resources available to firms to pay labor even if the purchasing power hasn’t depreciated yet (the low income population depends on wages a bit more).

2. Financial assets will also be driven up in value: Since financial institutions are the mechanism for increasing the money supply, money that isn’t lent will often go into buying financial assets like stocks. One signal that prices of stocks may be drifting away from the real value of the company is rising Price/Earning Ratios (often referred to as expanding multiples on financial television). This means the owners of financial assets (often the wealthy) get a pseudo-free gain on their assets increasing disparities in wealth. This is often justified under the idea of the “Wealth Effect” that people seeing their assets increase in value will spend and invest more.

While there is nothing inherently wrong with consumer prices and asset values rising, the intervention of the central banks creates a one sided arbitrary and regressive redistribution of wealth in the name of financial stability.