Mercantilism as the Economic Side of Absolutism

[This article is excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith.]
By the beginning of the 17th century, royal absolutism had emerged victorious all over Europe. But a king (or, in the case of the Italian city-states, some lesser prince or ruler) cannot rule all by himself. He must rule through a hierarchical bureaucracy. And so the rule of absolutism was created through a series of alliances between the king, his nobles (who were mainly large feudal or postfeudal landlords), and various segments of large-scale merchants or traders. “Mercantilism” is the name given by late 19th-century historians to the politicoeconomic system of the absolute state from approximately the 16th to the 18th centuries.
Mercantilism has been called by various historians or observers a “system of Power or State-building” (Eli Heckscher), a system of systematic state privilege, particularly in restricting imports or subsidizing exports (Adam Smith), or a faulty set of economic theories, including protectionism and the alleged necessity for piling up bullion in a country. In fact, mercantilism was all of these things; it was a comprehensive system of state-building, state privilege, and what might be called “state monopoly capitalism.”
As the economic aspect of state absolutism, mercantilism was of necessity a system of state-building, of big government, of heavy royal expenditure, of high taxes, of (especially after the late 17th century) inflation and deficit finance, of war, imperialism, and the aggrandizing of the nation-state. In short, a politicoeconomic system very like that of the present day, with the unimportant exception that now large-scale industry rather than mercantile commerce is the main focus of the economy. But state absolutism means that the state must purchase and maintain allies among powerful groups in the economy, and it also provides a cockpit for lobbying for special privilege among such groups.
Jacob Viner put the case well:

This post was published at Ludwig von Mises Institute on 12/26/2017.

The Chinese Economy’s Fatal Flaws

Dr. Per Bylund’s recently published article poignantly states one of the core problems in the Chinese economy and its the state-manipulated Keynesian foundation. I do agree with his opinion. And if we dig deeper into the exact situation of Chinese economy, we will find that it’s a typical failing of the Keynesian, cronyist system.
By using the perspective of Austrian business cycle theory, lets take a look at China’s real estate industry, which is suffering more and more painfully from artificial credit issued by China’s central bank, the People’s Bank of China (PBC). During the 2008 global economic crisis, China’s central government issued the famous RMB 4 Trillion Stimulus Package Plan (equaling to $586 billion). Since 2009, the Chinese real estate economy has already suffered from three small economic cycles. As it is becoming more difficult for real estate companies to live on artificial prosperity, the duration of every business cycle has become shorter than the previous one. We also see more and more ghost cities because of the economic boom in every sub-economic cycle. There were at least 12 ghost cities founded in 2013, and the number of them jumped to at least 50 in 2017! Bankruptcy is happening more frequently among Chinese real estate enterprises. Since 2016, at least three real estate companies – with a combined debt of at least RMB 763 million – have gone bankrupt. The story of bankruptcy is continuing, with one of the biggest real-estate-driven enterprises, Wanda Group, facing financing problems. If Wanda no longer has access to cheap debt, it might not be able to refinance or roll over all its debt again. If Wanda has to face bankruptcy, it could possibly accelerate an end of the the current Chinese boom.
The data from the Chinese local governments is also not optimistic; their debt levels have reached almost RMB 25 trillion (US$ 4 trillion) at the end of 2014. In 2015, even the PBC admitted in one of its annual reports saying that China’s financial system is facing higher instability and uncertainty.

This post was published at Ludwig von Mises Institute on August 22, 2017.

Macedonia Reject Soros & the EU Socialism

For 26-days straight, thousands of people have taken to the streets in order to send the message to Soros and European leaders that the people of Macedonia are a sovereign nation who utterly reject the left-wing agenda to divide the nation and bring a socialist-Muslim coalition to power. Johannes Hahn is an Austrian politician, who since November 2014 is Commissioner for European Neighbourhood Policy & Enlargement. He went to earlier last week to Skopje, in Macedonia, where he held talks with political representatives in a bid to contribute to a solution to the political deadlock there to get Macedonia to join the EU.
There was considerable corruption where the Prime Minister Nikola Gruevski was forced to resign in December 2015. The EU brokered elections in December 2016 to end the protests against the government of Gruevski. The December 2016 elections have left a transitional government was installed including from 20 October 20th, 2015 with the two main parties, VMRO-DPMNE and the Social Democratic Union (SDSM).

This post was published at Armstrong Economics on Mar 27, 2017.

The Fallacies of Bernie Sanders

Where Bernie Went Wrong: And Why His Remedies Will Just Make Crony Capitalism Worse. By Hunter Lewis. Axios Press, 2016. 284 pages.
Hunter Lewis has rendered a great service with his new book. Writing from an Austrian perspective, he has given us the definitive analysis of the Bernie Sanders phenomenon. Though Sanders did not win the Democratic nomination, he accomplished something remarkable. ‘If Bernie’s campaign was primarily an exercise in moving public opinion, it was wildly successful. He carried young people by wide margins. He shifted the Democratic Party and eventually its platform in his direction.’ (p.1)
How did he do this? ‘Bernie often says out loud what others are privately thinking.’ (p.13) The middle class and the poor are not doing well, he says; and the fault lies in a ‘rigged’ system. ‘The economy becomes rigged because the rich, primarily represented by ‘greedy’ billionaires and corporations, use their wealth to subvert the political process and take command of government.’ (p.24)
Lewis finds much truth in Sanders’s accusation. In a manifestly corrupt way, for example, failed banks and businesses were ‘bailed out’ after the financial crash of 2008. ‘[Hank] Paulson, former CEO of Goldman Sachs, was one of the architects of the Wall Street bailout of 2008 which not only rescued Wall Street, but also rescued his own firm, along with all the shares he still retained in that firm.’ (p.132)

This post was published at Ludwig von Mises Institute on Nov 25, 2016.

Week in Review: October 29, 2016

Obamacare premiums are exploding, just as mises.org has long predicted. Another disastrous example of politicians discarding basic common sense in passing through legislation to address a problem they themselves have created. Unfortunately there is little hope of politicians learning from their mistakes, as they continue to push through bill, after bill, after bill that expands their influence at the expense of the market and human freedom. No wonder public faith in elections is collapsing as the reach of the state grows larger. Hopefully this growing distrust can spur a libertarian populist awakening, leading to the spread of the ideas that make civilization prosperous.
The Mises Institute will further discuss the collapsing public trust in politics next weekend during our Dallas-Ft. Worth, Mises Circle. You can join Jeff Deist, Lew Rockwell, Robert Murphy and our other great speakers in person, or follow the event live at Mises.org/live.
On Mises Weekends, Jeff is joined by Nomi Prins, a prolific writer and speaker on the subjects of central banking, financial markets, and Wall Street cronyism. She is a former managing director at Goldman Sachs and Bear Stearns, but left investment banking to speak out against what she perceives as global financial malfeasance by commercial, investment, and central banks. Nomi is a dedicated progressive who supported Bernie Sanders, but she’s also a harsh critic of the Fed and sympathetic to Austrian depictions of malinvestment and artificially-created bubbles.

This post was published at Ludwig von Mises Institute on October 29, 2016.

The Partitioning Of Syria And The Great Game Of Empire

Russia’s decision to greatly reduce its military presence in Syria, coming as it did with little warning, has left the world struggling for explanations. Russia is to maintain a military presence at its naval base in Tartous and at the Khmeymim airbase. In fact Russia is ‘withdrawing without withdrawing’.
The partial withdrawal is seen by many as a message to the Assad government to not take Russia’s military aid for granted, and to be more flexible in the upcoming peace negotiations.
As Robert F. Kennedy Jr., attorney and nephew of US President John Fitzgerald Kennedy explains, the major reason for the west’s attempt to overthrow the Assad government was to build a natural gas pipeline from Qatar that traversed Syria, capturing its newly discovered offshore reserves, and continued on through Turkey to the EU, as a major competitor to Russia’s Gazprom.
By re-establishing the Assad government in Syria, and permanently placing its forces at Syrian bases, the Russian’s have placed an impenetrable obstacle to the development of the Qatar gas pipeline. Russia has also placed itself at the nexus point of other new offshore gas discoveries in the Eastern Mediterranean, including Israel, Cyprus, and Greece.
It’s not hard to imagine a new Russian pipeline to Europe serving these new partners. Could easing of sanctions also lead to the implementation of the long-stalled plans of Gazprom for a second pipeline under the Baltic Sea to Germany for Russia and its partners, Royal Dutch Shell, Germany’s E. ON, and Austria’s OMV?

This post was published at David Stockmans Contra Corner on March 23, 2016.

Rand Paul Is Dead Right: ‘The Fed Is Crippling America’

On Jan. 12, Congress is scheduled to vote on the ‘Audit the Fed’ legislation (H. R. 24/S. 264), which, if passed, would bring to an end to the Federal Reserve’s unchecked – and even arguably unconstitutional – power in the financial markets and the economy.
We aren’t the first to be wary of the powers of central banks. Founding Father Thomas Jefferson viewed the powers of central banks as being contrary to the protections of the Constitution. As Jefferson wrote: ‘I sincerely believe that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.’
In a similar vein, the great Austrian economist Ludwig von Mises also recognized that limiting government power in the realm of money was a matter of liberty, not merely economics. Mises explained that ‘the idea of sound money … was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.’
How far we have come as a country that these words from Jefferson and Mises sound so foreign today. Perhaps we have all been blinded by the credit and equity bubbles that surround us. But what better wake-up call to rally support for legislation that would shine a bright light on the government institution that today has created these bubbles, subsidizes small subsets of the population (thus amplifying wealth inequality), and enables endless government debt?

This post was published at David Stockmans Contra Corner on January 12, 2016.

Why Austrians Are Not Neoliberals

Philip Mirowski, known for his book More Heat than Light: Economics as Social Physics, Physics as Nature’s Economics in which he criticizes neoclassical economics for adopting methods from the natural sciences, recently published a book on neoliberalism and the economics profession during the financial crisis. In Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown, his main thesis is that the economics profession utterly failed in predicting and explaining the financial crisis. Nevertheless mainstream economists did not suffer any negative consequences but continue with business as usual.
In Mirowski’s view, neoclassical economics, neoliberalism, and the political right came out of the crisis stronger thanks to a complicated propaganda effort and an intricate lobbying machine headed by the Mont Pelerin Society (MPS). According to Mirowski, the Mont Pelerin Society functions at the heart of a complex web of conservative and free-market think tanks and the neoliberal academics that controls politics.
Mirowski’s analysis is interesting even though it comes from a far left and egalitarian perspective. Especially pertinent is his analysis and critique of neoclassical economics.

This post was published at Ludwig von Mises Institute on JANUARY 4, 2016.

More Than $2 Trillion Of Euro Debt Has Sub-Zero Yields – -Yet The Deranged Draghi Promises Even More

Investor expectations of expanded monetary easing from European Central Bank President Mario Draghi have pushed the amount of euro-area government securities that yield below zero to more than $2 trillion.
Bonds across the region climbed last week when Draghi said the institution will do what’s necessary to rapidly accelerate inflation. The statement recalled the language of his 2012 pledge to do ‘whatever it takes’ to preserve the euro and it solidified investor bets on further stimulus at the ECB’s Dec. 3 meeting. While 10-year bonds fell Monday, the two-year note yields of Germany, Austria and the Netherlands all dropped to records.
‘The ECB is doing little to counter this market speculation,’ said Christoph Rieger, Commerzbank AG’s head of fixed-income strategy in Frankfurt. ‘Should they not deliver now it would clearly cause a huge backlash with regards to the euro and overall valuations.’
The anticipation of greater easing has also undercut the euro. The single currency weakened to a seven-month low on Monday after futures traders added to bearish bets. A 10 basis- point cut in the deposit rate is now fully priced in, according to futures data compiled by Bloomberg, while banks from Citigroup Inc. to Goldman Sachs Group Inc., are predicting an expansion or extension of the ECB’s 1.1 trillion-euro ($1.2 trillion) quantitative-easing plan.

This post was published at David Stockmans Contra Corner on November 24, 2015.

Americans ‘Too Fearful to Face’ Facts That the Republic is Dead, the Country is Gone

Editor’s Comment: No matter what happens in the news, most Americans just can’t face it. At ballgames, schools, churches, meetings, jobs and stores, Americans tend to salute the flag, accept b.s. rationales for evil deeds and stupid policies, and shun inconvenient truths that would otherwise inform a thinking person that the game is rigged, that the Republic is dead, and that the country is gone.
Agree or not, the issues raised below are crucial to the arrangement of government, and the power of the people in that government. By all accounts, corruption has become legalized, government has assumed all meaningful power – except that which is reserved to the corporations and banks – and rule of law has been replaced by rule of an elite who make their own rules. Academic studies, Congressman and Federal Reserve chairs now acknowledge that the United States has become an oligarchy… and oligarchies consist mainly of a few noblemen, and a mass population of obedient and powerless serfs. Better face up, because nothing is going to change for the better by ignoring it.
– – – – – –
10 Disturbing Facts Most Americans Are Too Fearful To Face
By Bernie Suarez
Sometimes you have to put out information in hopes that those who haven’t heard this will at least absorb a fraction of it. If you haven’t heard this and you absorb just one of these random points, I believe that may be enough to cause a major paradigm shift in your life or in the life of someone you know. Here are 10 random, mostly recent but some archival information that is factual and verifiable for anyone willing to look it up.
1. Genetically Modified Foods are illegal in many countries for health and medical reasons all the while the U. S. passes laws making GMO labeling illegal.
You may be thinking, say what? That’s right. U. S. citizens are being propagandized daily and are being practically forced to blindly consume GMOs while countries like Austria, Bulgaria, Germany, Greece, Hungary, Ireland, Japan, Luxembourg, Madeira, New Zealand, Peru, Australia, Russia, France and Switzerland all have booted Monsanto and their GMO crops from their countries. That’s like being booted out of a town for being a rapist and child molester only to have that same person settle into the next town over and become a grade school teacher or pastor. Now imagine the citizens of that other town having a law forced on them that says rapists and child molesters must be allowed to teach little kids and run churches. That’s what we’re talking about here.
While humanity in other countries wakes up fully to the dangers of GMO foods, Monsanto and other GMO food producers are having a feast in the U. S. buying out politicians, distorting news, research and evidence that proves GMO foods are directly linked to cancer. Like a scene from a bad movie, only it’s not a movie. Actually it’s YOUR life if you are in the United States dealing with this nightmare.
As bizarre as it seems, only in the U. S. do criminal corporations like Monsanto enjoy the benefits of the support of the political and legal system. A bird’s eye view of the situation clearly shows how corrupt and evil the control system in the United States really is. Sadly, most Americans have no idea that they are being lied to every day and lured into eating dangerous cancer-causing and health-destroying food just so that someone can profit from your disease later on.
2. As a result of ‘Act of 1871′ by the 41st Congress, the United States ‘Corporation’ was created to trample the original Republic.

This post was published at shtfplan on August 14th, 2015.

Why central banking persists

Only a few people care whether central banking persists, and they’re the ones who profit from it. In some cases they profit enormously. The average Joe or Jill doesn’t know about central banks and doesn’t care to know. To the ones at the top of the political – economic heap, this is how they want it.
A central bank comes about through political favors — favors to big bankers and to politicians intent on buying votes and making war. Where you find a country with a central bank, you have laws establishing it. It requires political force to make them work. A central bank is not an agreement among bankers. It is an agreement backed by the monopoly force of government between bankers and politicians. They are not free market entities, though they usually posture as one.
Central banks are often described as inflation fighters. As monopoly producers of money, they are instead the sole source of inflation.
Central banks are said to be responsible for making capitalism work. By making honest price discovery impossible and raging war against savers, they are in fact anti-capitalistic. If you want to kill capitalism and replace it with cronyism and instability turn the market over to central bankers.
Almost every textbook that discusses the history of the U. S. central bank, the Federal Reserve, will say it came about as a solution to the various Panics of the 19th century and the Panic of 1907. What the textbooks don’t discuss is why the Panics came about: the common practice of fractional reserve banking. In simplest terms fractional reserve banking consists of a bank giving two people equal claim to the same monetary unit at the same time. This is standard operating procedure for banks. Except among Austrian economists, it is noncontroversial.

This post was published at GoldSeek on 12 July 2015.

A JOURNALIST UNDER MARTIAL LAW

Police are everywhere. My ID has been checked more times than I can remember. This is a police state, and the number one suspects are journalists. Charlie Skelton’s account of police in his hotel room going through his things while in his nude then taking him to his car to search that is merely one example of the conditions under which those of us who are here to cover the Bilderberg conference find ourselves.
This year, some of the world’s elites have travelled to the Interalpen-Hotel Tyrol in the Austrian Alps for the Bilderberg conference so that the police protecting them can hassle well-meaning journalists, activists and so on. Journalists here at Bilderberg are the criminals in the Orwellian world while people like CIA mafioso David Petraeus are on the inside wining, dining and dealing on the taxpayer’s tab. It’s a long history of crime from Bilderberg’s attendees, starting with the group’s first chairman, Prince Bernhard of the Netherlands, who was caught in the 70s bribing and being bribed by Lockheed and Northrop.
Then there is Douglas Flint, HSBC chairman, at Bilderberg too this year and branded by Guardian ‘a bank beyond shame’; but yet here are the executives of that bank meeting with powerful cronies and government officials. Just this week Henry Kissinger, Bilderberg steering committee member, said that the US has been arming ISIS. Like Skelton, my friends Luke Rudwkowski, Dan Dicks and myself have had our fair share of run-ins with the Austrian police.

This post was published at Dollar Vigilante on JUNE 12, 2015.

OPEC is at risk of falling apart

OPEC has been the most talked about international organization among investors, analysts and international political lobbies in the last few months.
When OPEC speaks, the world listens in rapt attention as it accounts for nearly 40 % of the world’s total crude output.
With its headquarters in Vienna, Austria, one of the mandates of 12-member OPEC is to "ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry."

This post was published at Business Insider

Austria ‘Pulls Ripcord’ on Bailouts, Lets ‘Bottomless Pit’ Hypo Alpe Bank Drag State of Carinthia into Bankruptcy

A ‘long-yearned-for shock of liberation’ for taxpayers. Hypo Alpe-Adria bank, owned by the small Austrian state of Carinthia, was a cesspool of corruption. It involved bankers, politicians, and powerbrokers in Austria and the Balkans. It was the perfect union of money and power. Investigators found 160 instances of suspected fraud, amounting to 1.6 billion, of which 890 million occurred in Austria, 250 million in Croatia, 164 million in Bosnia and Herzegovina, among others. Six of the bank’s former executives have been convicted of crimes.
‘I’m not aware of a criminal case bigger than this one,’ explained Christian Bhler, whose forensics team started investigating the bank in 2011. ‘It was a mix of greed, criminal energy, and utter chaos.’
The sheen started to come off in 2006. The Austrian banking supervisor determined that executives had buried over 300 million in losses. And Hypo’s business model fell apart: it had been issuing bonds guaranteed by Carinthia that gave it access to cheap money to fund it shady activities. But the EU prohibition against state guarantees was kicking in. So it was time for Carinthia to sell the bank.
Sure enough, in 2007, state-owned Bavarian bank, BayernLB, despite warnings from its own analysts – a ‘squeezed-out lemon,’ they called Hypo – bought a majority stake for 1.66 billion. Within months, BayernLB had to bail out its crown jewel with a capital injection of 441.3 million.
In 2008, BayernLB itself toppled and was bailed out by the German and Bavarian taxpayers to the tune of 10 billion, of which 700 million went to prop up Hypo, along with 900 million from the Austrian government. In 2009, Bavaria shuffled its Hypo jewel off to Austria, which nationalized it. The deal left Bavaria as one of Hypo’s creditors. It has since sued Austria, which has countersued, and more suits and countersuits followed.

This post was published at Wolf Street on March 4, 2015.

Debt Be Not Proud

Some things never change. Here is Eugen von Bhm-Bawerk, one of the founding intellectuals of the Austrian school of economics, writing in January 1914, lambasting politicians for their complicity in the corruption of monetary policy:
We have seen innumerable variations of the vexing game of trying to generate political contentment through material concessions. If formerly the Parliaments were the guardians of thrift, they are today far more like its sworn enemies. Nowadays the political and nationalist parties … are in the habit of cultivating a greed of all kinds of benefits for their co-nationals or constituencies that they regard as a veritable duty, and should the political situation be correspondingly favorable, that is to say correspondingly unfavorable for the Government, then political pressure will produce what is wanted. Often enough, though, because of the carefully calculated rivalry and jealousy between parties, what has been granted to one has also to be conceded to others – from a single costly concession springs a whole bundle of costly concessions. [emphasis mine]
That last sentence is a key to understanding the crisis that is unfolding in Europe. Normally, you would look at a country like Greece – with 175% debt-to-GDP, mired in a depression marked by -25% growth of GDP (you can’t call what they’re going through a mere recession), with 25% unemployment (50% among youth), bank deposits fleeing the country, and a political system in (to use a polite term) a state of confusion – and realize it must be given debt relief.

This post was published at Mauldin Economics on FEBRUARY 24, 2015.

Commodity Prices Are Cliff-Diving Due To The Fracturing Monetary Supernova – The Case Of Iron Ore

Crude oil is not the only commodity that is crashing. Iron ore is on a similar trajectory and for a common reason. Namely, the two-decade-long economic boom fueled by the money printing rampage of the world’s central banks is beginning to cool rapidly. What the old-time Austrians called ‘malinvestment’ and what Warren Buffet once referred to as the ‘naked swimmers’ exposed by a receding tide is now becoming all too apparent.
This cooling phase is graphically evident in the cliff-diving movement of most industrial commodities. But it is important to recognize that these are not indicative of some timeless and repetitive cycle – – or an example merely of the old adage that high prices are their own best cure.
Instead, today’s plunging commodity prices represent something new under the sun. That is, they are the product of a fracturing monetary supernova that was a unique and never before experienced aberration caused by the 1990s rise, and then the subsequent lunatic expansion after the 2008 crisis, of a cancerous regime of Keynesian central banking.
Stated differently, the worldwide economic and industrial boom since the early 1990s was not indicative of sublime human progress or the break-out of a newly energetic market capitalism on a global basis. Instead, the approximate $50 trillion gain in the reported global GDP over the past two decades was an unhealthy and unsustainable economic deformation financed by a vast outpouring of fiat credit and false prices in the capital markets.
For that reason, the radical swings in commodity prices during the last two decades mark the path of a central bank generated macro-economic bubble, not merely the unique local supply and demand factors which pertain to crude oil, copper, iron ore, or the rest. Accordingly, the chart below which shows that iron ore prices have plunged from $150 per ton in early 2013 to about $65 per ton at present only captures the tail end of the cycle.
What really happened is that the central bank instigated global macro-economic bubble ripped commodity pricing cycles out of their historical moorings, resulting in a one time eruption of price levels that had no relationship to sustainable supply and demand factors in the mines and petroleum patch. What materialized, instead, was an unprecedented one-time mismatch of commodity production and use that caused pricing abnormalities of gargantuan proportions.

This post was published at David Stockmans Contra Corner on December 29, 2014.

Why Commodity Prices Are Cliff Diving: The Iron Ore Collapse Reflects The End Of The Monetary Super-Cycle

Crude oil is not the only commodity that is crashing. Iron ore is on a similar trajectory and for a common reason. Namely, the two-decade-long economic boom fueled by the money printing rampage of the world’s central banks is beginning to cool rapidly. What the old-time Austrians called ‘malinvestment’ and what Warren Buffet once referred to as the ‘naked swimmers’ exposed by a receding tide is now becoming all too apparent.
This cooling phase is graphically evident in the cliff-diving movement of most industrial commodities. But it is important to recognize that these are not indicative of some timeless and repetitive cycle – – or an example merely of the old adage that high prices are their own best cure.
Instead, today’s plunging commodity prices represent something new under the sun. That is, they are the product of a fracturing monetary super-cycle that was a unique and never before experienced aberration caused by the 1990s rise, and then the subsequent lunatic expansion after the 2008 crisis, of a cancerous regime of Keynesian central banking.
Stated differently, the worldwide economic and industrial boom since the early 1990s was not indicative of sublime human progress or the break-out of a newly energetic market capitalism on a global basis. Instead, the approximate $50 trillion gain in the reported global GDP over the past two decades was an unhealthy and unsustainable economic deformation financed by a vast outpouring of fiat credit and false prices in the capital markets.

This post was published at David Stockmans Contra Corner by David Stockman ‘ December 29, 2014.

Why Crony Capitalism Will Be Hard To Uproot: Interview Of David Stockman

David Stockman was elected to Congress at age 29 back in 1976; he was an avid student of Austrian economics and supported a gold-backed money system and a balanced budget. He later joined the Reagan administration as Budget Chief, where he watched in awe as the Reagan administration quickly became the most profligate spenders in the history of the United States.
After leaving the Reagan Cabinet, he worked at the well-known investment house Salomon Brothers, and later co-founded the Blackstone Group alongside legendary hedge-fund manager Steve Schwarzmann.
In his most recent book, The Great Deformation: The Corruption of Capitalism in America, Stockman systematically repudiates and dismantles the myths surrounding the Fed’s supposed past successes at helping the US economy avoid major breakdowns, going all the way back to the crash of ’29. Instead, as he explains, ‘Programs born out of desperation or idealism 75 years ago have ended up as fiscal time bombs like Social Security or as captive fiefdoms of one crony capitalist syndicate or another… Policies undertaken in the name of public good inexorably become captured by special interests and crony capitalists.’
The most important lesson I took from the book and the interview? Remember that there has never been a time of such profound debt saturation, coupled with intense crony capitalism, as today. No one has ever been here to tell how it turns out. We truly are in an unprecedented era…
David, can you explain how the ‘Fed put’ works on the stock markets and bond markets? How exactly does it translate into artificially higher stock prices and lower interest rates?
The Fed injects massive amounts of liquidity into Wall Street through the dealer system – that is, the 21 authorized treasury-bond dealers. The liquidity comes in the form of new credits to their bank accounts supplied by the Fed in return for the governments bonds, notes and bills, and even the GSE (Government-sponsored entity) obligations that it buys from them. The credit that the Fed supplies to the dealers is manufactured out of thin air; therefore it expands total credits and liquidity in the system. The dealers use it to buy other types of securities – stocks, bonds, derivatives positions and so forth.
Historically, the purpose of the Fed’s open-market intervention in this form was to encourage the banking system to extend credit to the business and household sectors, thereby stimulating economic growth, as predicated by the Keynesian model. That was always a one-time parlor trick, however, because with each cycle of easing leverage ratios in the business and household sectors were ratcheted steadily higher. Household debt ratios, for example, went from 80 percent of wage and salary income prior to 1975 to 220 percent by 2007.
The problem today is that we have reached ‘peak debt.’ The household sector has $13.3 trillion of debts1, even after the modest post- crisis deleveraging; the ratio is still sky-high at 180 percent of wage and salary income.

This post was published at David Stockmans Contra Corner on November 24, 2014.