I am hosting my own site as I have plans to grow beyond this place’s capability. In the short term it will be more of the same blogging, but I plan on providing chartology, individual equity analysis, book reviews (now I have to read, lol) and research papers and policy reviews. If you have any other econ/finance suggestions that you would love to see please let me know.
Here is the new site:
One of the reasons I’m blogging is to increase familiarity with a macroeconomic phenomenon called the “Triffin Dilemma.” The Triffin Dilemma correctly predicted the demise of Bretton Woods a decade in advance and continues to have dire consequences that are amplified by the absence of a gold standard. The Triffin paradox states that in order for a nation’s currency to be an international reserve currency, more dollars need to leave the country than flow in to meet the foreign demand for reserves. But at the same time the, for long-term confidence in the currency, more of the currency needs to flow into the country.
The reason this concerns me and I feel it should concern all Americans is two-fold:
1) I believe the consequences of the Triffin dilemma are the canvas that the current and future crises are painted on. There is plenty of blame to go around to be sure, (Fannie/Freddy, Washington, Federal Reserve, China etc…) but these are just agents acting under circumstances that wouldn’t exist without the paradox.
2) The only people discussing the Triffin Dilemma are the people who will profit from the dollar’s inevitable destruction, China and the IMF. The problem is that their solution to this problem is to remove the dollar and replace it with SDRs or some other basket fiat global currency.
I am going to be making a series of blogs on the cause and effect of the paradox and my proposed solution. Of course one powerless individual cannot change the international financial architecture so I am seeking other Austrian minded individuals to be discussing this, because I think that this is something that will need be addressed in the coming years, and we Austrians don’t want to miss out on another opportunity to predict another future crisis that is somewhat salvageable before it’s total collapse. Unfortunately the political will to wake up only happens after the collapse has happened, but at least we will continue to be the only remaining credible econ field if we play this right. Because as it stands right now, if the dollar collapses tomorrow and we don’t promulgate our Austrian alternative, the Keynesian central bankers will automatically win the debate since they will be the only ones to have addressed it with Keyne’s proposed Bancor (Pre-Bretton-Woods Keynesian proposal of what now is IMF and SDR’s). I think we can agree that centrally planned systems are inferior to a Hayekian solution of a free market system.
The below excerpt is from Bullard’s research paper that is shaping current Fed policy. He is speaking in regards to the historical application of low interest rate policy to boost a sluggish economy. Ironically he uses “success” of the post dot com/ 9/11 Greenspan policy to justify the current low interest rates:
“These data are labeled .2003-2004 and are associated with a policy rate at 1.0 percent and the inflation rate between 1.0 and 1.5 percent. This episode was the last time the FOMC worried about a possible bout of deflation.
Thornton shows that the longer-run expected inflation rate, as measured from the 10-year Treasury inflation-indexed security spread, was 1.74 percent during the period from January 2001 through April 2003, before any of these statements were made. After the statements, from January 2004 to May 2006, the longer-run inflation expectation averaged 2.5 percent.
In the event, all worked out well, at least with respect to avoiding the unintended steady state.12 Inflation did pick up, the policy rate was increased, and the threat of a Japanese-style deflationary outcome was forgotten, at least temporarily. Was this a brilliant maneuver, or did the economic news simply support higher inflation expectations during this period?”
http://research.stlouisfed.org/econ/bullard/pdf/SevenFacesFinalJul28.pdf
I’m amazed it is even a question if the low interest rates from the Fed fueled the housing boom. Unfortunately our monetary leaders must not have read Bastiat or Henry Hazlitt to be able to imagine the “unseen” as well as the “seen.” Our world is so full of variables and unknowns that it is easy to shift blame on externalities, but a little deductive reasoning can go a long ways.
A Keynsian recently proposed to me the idea that low interest rates don’t distort the structure of production unless capacity utilization is high. I am inclined to think he is flat out wrong or confusing capital structure with a pre-determinant of inflation. Of course artificially low interest rates distort production, as was the case with the housing bubble, houses were built that shouldn’t have been, people were employed in more construction jobs than should have been, the easy credit and rising prices made people think that buying a house to live in was an investment due to perpetually rising prices. Now people are losing their homes and people who were employed in the housing industry are coping with cut demand for their specialized services. Which leads me to my next point; “cyclical unemployment” is actually under-reported “structural unemployment.” Land, labor and capital was committed to malinvestment that needs to be liquidated. But just as some capital goods are specialized, so their use is limited, so are people’s job skills. If you spent the last five years building houses in Las Vegas, it might be difficult to move to a new sector in an already competitive labor market. Just as the Greenspan interest rates enabled a boom in the housing market, the Bernanke rates are enabling a boom in government. When interest rates rise and people are less willing to lend to the government the state and federal governments will face a funding crisis and be forced to cut back.
I asked the Federal Reserve a question last year regarding a provision in their charter that details the maturities of debt that they can hold on their books:
“May I get a clarification on the reason that section 14 of the Federal Reserve Act restricts trading securities that have a maturity of six months or less? 1.To buy and sell, at home or abroad, bonds and notes of the United States, bonds issued under the provisions of subsection (c) of section 4 of the Home Owners” Loan Act of 1933, as amended, and having maturities from date of purchase of not exceeding six months… ”
It took a while to get their reply, I guess they were busy manning the printing presses full steam:
| From: |
“FRB.Mail@frb.gov” <FRB.Mail@frb.gov
|
Your question concerns section 14(b) of the Federal Reserve Act. The six month maturity limitation you refer to applies only to bonds issued under the provisions of section 4(c) of the Home Owners’ Loan Act of 1933 and not to open market operations involving bonds and notes of the United States. This distinction is made clear in the last sentence of section 14(b)(1) which reads as follows: “Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to principal and interest may be bought and sold without regard to maturities but only in the open market.”
The reference to obligations issued under the provisions of section 4(c) of the Home Owners’ Loan Act was added to the Federal Reserve Act in April 1934. The six month maturity date appears to have been placed there to make such bonds similar to the bonds of the Federal Farm Mortgage Corporation, which had been given a six month maturity date limitation for purposes of section 14(b) in January 1934. The reference to the obligations of the Federal Farm Mortgage Corporation was deleted from section 14(b) in 1961.
So there you have it. A little confusing due to the outdated program references, but there are no restrictions on the maturities of securities that can be held by the Fed, so long as it is an Open Market Operation.
What does it mean to be a generous person? Does it only mean to sacrifice your time or valuables for another person without an expectation of return? Is living prudently so your children may live more comfortable lives being generous? Does the motive for the act of generosity diminish or enhance the outcome? Or is the method of generosity a larger factor of the outcome?
There are many reasons why a person would be motivated to help another without direct compensation. Some examples include: religious beliefs, tax incentives, a hope that someone would do the same for you if you were in the same situation, a belief in an ideology or simply for the emotional benefit one receives from knowing they helped someone.
While there are many reasons why someone would be generous, there are only two methods: voluntarily or forcibly. Voluntary generosity is called charity. Charity can be done directly, such as volunteering at a nursing home, or buying a meal for the homeless; or it can be done indirectly, through donations to a church or charity of a person’s choice that acts on their behalf. If the organization does not perform their services efficiently or effectively enough then contributors will donate their money somewhere else.
Welfare is the well intended act of governments to take resources forcibly from certain individuals to help another group of individuals that is selected by politicians. I see four major problems with welfare.
1) The moral problem with taking a person’s money and spending it on someone else against their will.
2) Unlike charity, welfare does not face competition and the efficiency and effectiveness degrade as the organization faces less incentive to perform their assigned task.
3) Beneficiaries of welfare are more inclined to consider their benefits as a privilege and the moral hazard is created to become dependent on the welfare services.
4) With welfare, there is less satisfaction than charity for the person whose assets were seized. The chance of there being a human connection between the contributor and the recipient is almost eliminated.
Milton Friedman said there are four ways you can spend money.
1) You can spend your money on yourself, which you will guarantee will be to your satisfaction.
2) You can spend your money on someone else, which you will also ensure that you spend it properly.
3) You can spend someone else’s money on yourself, which you will also spend wisely.
4) You can spend someone else’s money on someone else, which case you have little incentive to ensure the outcome pleases either the contributor or the recipient. This is how government spends money.
Charitable spending would fit into number two category, and welfare would fit into category number four. Politicians make the argument that without the government, the poor and needy would not be cared for at all so they expand the role and size of government. The more welfare the government produces, the more taxes have to be raised. The more taxes are raised, the less charity there is since the expendable income that people donate to charity is crowded out by having to pay higher taxes. Even if the intention is good, the outcome of welfare is bad.
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