"The fundamental error of Keynesian central banking is the pretension that the business cycle can be comprehended, assessed and expertly managed by what amounts to a monetary politburo of 6 government apparatchiks on the Reserve Bank's Monetary Policy Committee."

"The fundamental error of Keynesian central banking is the pretension that the business cycle can be comprehended, assessed and expertly managed by what amounts to a monetary politburo of 6 government apparatchiks on the Reserve Bank's Monetary Policy Committee. Moreover, that so doing the central bank will enable both greater financial stability in the short-run and higher and more steady longer-run economic growth and living standard gains than the market economy would generate on its own steam.

"You could call this the 'aggregate market failure' axiom. Otherwise, why would you need 6 fallible bureaucrats to set money market interest rates or fiddle with the shape of the yield curve on longer-term debt when there are vast trading markets perfectly capable of doing the job?"

~ David Stockman from his post 'How The Fed And White House Spenders Reduced Growth To Stall Speed' [translated into Enzed terms, 'cos it's just as relevant]

Reserve Bank's 'stabilisation': still chaos

In honour of the Reserve Bank's admission this morning of their own blithering incompetence, I wore my favourite anti-monetarist shirt to work. Its point is that the so-called stabilisers of prices create instead more chaos from their incessant boom and bust programme — first overheating, then withdrawing the heat, then resiling and trying to re-heat again.

No to mention that they don't even know what they don't know.

From May to August, the Reserve Bank undertook what Michael Reddell calls "a huge shift" — "from a “hawkish hold” (best guess, no easing until this time next year, and possibly some tightening late this year) to not only an OCR cut now, but a really large (at peak 130 basis points) change in the projected forward track for the OCR."

Do you think they know what they are doing?

"There has been no nasty external shock in that time (global financial crisis, pandemic, collapse in commodity prices etc) ... . I can’t recall another change that large that quickly, in the absence of a major external shock, in the 27 years since the Bank started publishing these forward tracks."

So why did they cut now, when price inflation is still out there, when three months ago they insisted they wouldn't, and couldn't?

"It was simply because Orr and the Monetary Policy Committee [at the Bank] badly misread how the economy was unfolding now ... Other commentators have used the label 'U-turn.' I prefer flip-flop myself."

I'd suggest it's the simple incompetence of the monetary stabilisers, tilting at the same old windmills with the hope of a different result. The programme of the stabilisers ("we know how to put inflation back into the bottle" they crow, then prove they can produce only the destruction of boom and bust) has always and everywhere been destructive. Hayek nailed the stabilisers decades ago, placing the blame for “the exceptional severity and duration of the Great Depression” squarely on central banks’ “experiment” in “forced credit expansion” first to stabilise prices and then to combat the resulting depression.

Hayek defiantly declared: “We must not forget that ... monetary policy all over the world has followed the advice of the stabilisers. It is high time that their influence, which has already done harm enough, should be overthrown.”

It's the kind of thing you need nailed up above the Reserve Bank's door. At least some of us have it on the back of a shirt.

"This year’s banking crisis was never going to be 2008 redux — more like 2008, the sequel...."

"This year’s banking crisis was never going to be 2008 redux — more like 2008, the sequel....
    "In one respect, the collapse of both Silicon Valley Bank and Credit Suisse were isolated, one-off events that have now been contained.... Nevertheless, the runs on these banks are better seen as symptoms of an underlying disease that continues to fester.... the edge of a coming economic storm whipped up by a decade of geopolitical fragmentation and cheap money. Now, the overdue attempt to reverse this course has slowed the global economy, possibly to the point of recession.
    "Unlike the 2008 crash, this does not follow an era of prosperity, but rather 15 years of monetary chaos....
    "Central banks now find themselves trapped in a stop-start course of withdrawing money with interest-rate rises, and putting it back at each sign of stress ... And this hair-of-the-dog treatment may soften the hangover but only prolong the addiction of the financial system to cheap money."

~ John Rapley, from his post 'The Next Financial Crisis Will Get Ugly'

What Adrian Orr should learn from Jerome Powell: "Stick to the knitting"

"The case for monetary policy independence lies in the benefits of insulating monetary policy decisions from short-term political considerations. Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy....
    "It is essential that we stick to our statutory goals and authorities, and that we resist the temptation to broaden our scope to address other important social issues of the day. Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence."

~ US Federal Reserve Chairman Jerome Powell, quoted by The Grumpy Economist in his post 'Cheers for Powell' [emphasis mine]

Exorbitant Money Creation + Unhampered Government Spending = Stagflation

Too much government spending and too-loose monetary policy lead to rising prices, and falling economic growth rates. The Keynesian theories on which continuing monetary expansion is based lead not to continuing prosperity but to stagflation. Keynesian garbage in, garbage polices and economics destruction out. The 

The problem is not just local, it is worldwide. Again and again, the belief has been proven wrong that central bankers could guarantee so-called price stability, and that fiscal policy could prevent economic downturns. The looming inflationary crisis is one more piece of evidence that interventionist monetary and fiscal policies are disruptive. Instead of a permanent boom, explains Antony Mueller in this guest post, the result is stagflation....

Stagflation—a Keynesian Curse

Guest post by Antony Mueller

“Stagflation” characterises economies that are plagued by inflation, combined with economic stagnation. This is where most of the world is right now, because of the failed (and failing) economic policies they have all followed. In this case, the conventional Keynesian macroeconomic toolkit of monetary and fiscal policy, that offers no help in fixing the crisis it has caused.

Rising price inflation rates and tanking economies are the results of the policy mix that has dominated past decades. It has become common to believe that decades of expansive monetary and fiscal policies would not cause price inflation; that the expansion was 'all under control'; that policies of so-called price stability had somehow 'tamed' the inflation caused by the state's usual money printers. 

As recently as 2020, economic policy worldwide followed the false consensus that combatting the fallout from the lockdowns with additional money creation and higher government spending would lead to an economic recovery without higher price inflation. It was blithely assumed that what appeared to work in 2008 -- flooding economies with newly-minted cash -- would also function in 2020. However, policymakers ignored the difference between the two episodes.

In the aftermath of the financial crisis of 2008, the stimulus policies did not immediately turn into price inflation, as it's commonly measured, because the newly-created money remained largely in the financial sector and it only spilled over into the real economy in a big way in rocketing house prices (exacerbated in NZ by sclerotic land and housing policies). Outside of this generational calamity, the main effect of the policy of low interest rates was to support the stock market and to provide a windfall to financial investors. While Wall Street flourished, Main Street was left on the sidelines -- and while profits surged, wages remained stagnant.

But this time it's different. In 2008, the production side of economies were 'mismatched' due to the earlier credit expansion, but still intact; but this time, they are severely damaged by a major pandemic.  The crisis of 2008 left the capital structure of the real economy intact. Due to the lockdowns, however, this is no longer the case. Consequently, severe interruptions of the global supply chains have happened. In such a constellation, new stimulus measures further weaken already fragile economies. 

The present situation is less like 2008, which most of of us still remember, and more like the oil price shock in 1973 -- which too many current economic practitioners and advisers have forgotten. At that time, like now, the external shock hit an economy rampant with liquidity. Stimulating the economy by fiscal and monetary expansion produced not prosperity but long-lasting stagflation. Back then, along with “stagflation,” the term “slumpflation” was coined to characterise an economy that is mired in a deep slump that then gets devastated by price inflation.

When stagnation and recession show up together with price inflation, the conventional macroeconomic policy becomes impotent. Applying the Keynesian recipe to an economy whose capital structure is still intact inflates bubbles; but applying it to one who capital structure has already been ravaged invites disaster.

Intentionally or by ignorance, policymakers neglected the long-term effects of their doing. Going this wrong way led to such aberrations that policymakers and their intellectual bodyguards even tended to believe that some truth could be found in the alchemy of the so-called modern monetary theory and market monetarism.

The consequences of these policy errors have now come to light. They are particularly grave because they were committed by all major central banks and the governments of all leading industrialised countries. They all follow the concept of “inflation targeting.” Other than timing, there has been not much difference among the policies of major Western economies. Japan is a special case only insofar as its policymakers have applied the Keynesian recipe for over three decades by now.

Let us have a look at Japan first and then at the United States -- who both offer lessons for New Zealand.

Japan

Japan began applying vulgar Keynesianism as early as in 1990. Faced with a slight downturn after the boom of the 1980s, instead of allowing things to cool down, the Japanese leadership instead insisted on going on with the show.

Yet, the more the government began to accelerate public spending and increases the fiscal stimuli, the less its spending policy produced economic recovery. Even when monetary policy fully supported the government’s expansive fiscal policy, the hoped-for recovery did not materialise.

John Maynard Keynes, on whose theories this "rescue" was based, once advised that policy-makers should ignore advice that such loose spending would lead to destruction in the long run -- "in the long run," he quipped, "we're all dead." But Japan's short run is now the long run: its policy mix of fiscal and monetary expansion has been going on now for three decades. In recent times, the Bank of Japan even doubled down, setting extremely low-interest rates and finally resorting to negative interest rates (NIRP). In the meantime, public debt as a percentage of the gross domestic product (GDP) rose to a whopping 266 percent (see figure 1).

Figure 1: Japan: Policy interest rate and public debt as a percent of GDP

Source: Trading Economics.

Despite its magnitude, this stimuli did not lift the Japanese economy out of its quagmire. Instead, economic growth remained anemic for a quarter of a century (figure 2).

Figure 2: Japan: Annual economic growth rates of real GDP

Source: Trading Economics.

As an “early starter” in applying vulgar Keynesianism to its 'macroeconomy,' the Japanese economy was also early to suffer from productivity stagnation. Unlike economies like the United States, France, Germany, and many other industrialised countries, which have continued with productivity gains over the past decades, after it had begun with its extreme Keynesianism in the 1990s Japan's has moved sideways (and New Zealand, for slightly different and equally tragic reasons, has followed a similar path -- figure 3).

Figure 3: Productivity per hour worked: Germany, United States, France, Japan, New Zealand

Source: Our World in Data.

It is important to note that one of the most devastating effects of the Keynesian policy mix is its effect on productivity. A country’s long-run economic progress (or growth, as it's often called) is mostly the result of productivity gains. Labour productivity is the main determinant of wages. A slowdown in productivity precedes the economic decline. When the output per unit of input tends to fall, even lower interest rates will not stimulate business investment. The marginal productivity of debt, already low, diminishes even faster -- and further. 

And when government then jumps in to compensate for this “lack of aggregate demand,” things get even worse because governmental enterprises are fundamentally less productive than the private sector.

The United States

Confronted with the financial crisis of 2008, the US government abandoned any sense of economic responsibility and decided instead to launch a series of stimulus packages. The American central bank provided full support, drastically reducing its interest rate.

As a result, the ratio of public debt to GDP rose from 62.6 percent (in 2007) to over 91.2 percent just three years later (in 2010), reaching a full 100.0 percent in 2012. The next two boosts came in the wake of the policies to counter the effects of the economic lockdowns, when the ratio of public debt to GDP rose to 128.1 percent in 2020 and to 137.2 in 2021 (see figure 4). It took less than fifteen years to more than double an already barely-sustainable debt -- and, unfortunately, New Zealand governments chose a similar destructive trajectory.

Figure 4: The United States: Policy interest rate and federal debt as a percentage of GDP

picture4.png

Figure 4a: New Zealand: Policy interest rate and government debt as a percentage of GDP

Source: Trading Economics.

In the face of the crisis in 2008, the American central bank brought down its interest rate quickly from over 5 percent in 2007 to under 1 percent in 2008 (NZ's meanwhile dropped its rate from 8% to 2.4% over the same period). After a short-lived period when the American central bank tried to raise the interest rates, the consequent market reaction of falling prices of bonds and stocks induced the Fed to resume its policy of “quantitative easing” that combined low interest rates with the massive expansion of the monetary base. 

Then, in early 2020, still trying to escape from the bear-trap of quantitative easy, it also began trying to "ease" the economic effects of the lockdowns with its patent brand of monetary salve, deciding to continue with its expansive monetary policy. And not just to continue, but to accelerate! In due course, the central bank’s balance sheet rose to $7.17 trillion in June 2020, reaching $8.96 trillion by April 2022. Once again, New Zealand's Reserve Bankers followed the lead.

Figure 5: Balance sheet of the US Federal Reserve System & NZ Reserve Bank

Source: Trading Economics.

As figure 5 shows, the Fed had tried to trim its balance sheet somewhat from 2015 to 2019 when it had brought down the sum of its assets to $3.8 trillion in August 2019. Yet beginning already in September 2019, many months before the lockdown was implemented, the balance sheet of the American central bank began to expand again and reached over four trillion before the additional big increase happened due to the fallout from the lockdowns. (And, once again, NZ's central wbankers followed their 'expansive' lead.)

Since the time before the financial crisis of 2008, the assets of the Federal Reserve System rose from $870 billion in August 2007 to a whopping $4.5 trillion in early 2015 and to around nine trillion US dollars in early 2022.

Even when inflation rates began to rise towards the end of 2020, the US central bank had kept its policy of tapering small and refrained from tightening. The monetary authorities had simply abandoned the objective of reining in the money supply, becoming instead almost Wall Street's banker. Each time they tried to tighten monetary policy, the financial markets began to tank and tended to crash. As soon as the central bank began to raise its policy rate of interest, the bond market began to tank and took the stocks down with it. In 2022, it was not different. Yet in early 2022, the policymakers could not shrink back. Different from the episodes before, the price inflation had begun to skyrocket (see figure 6, and NZ following in almost lockstep, figure 6a).

In the first months of 2022, stagflation became fully visible. While price inflation rose, the rate of real economic growth began to fall. In the first quarter of 2022, the US inflation rate moved up to a rate of 8.5 percent, while the real annual growth rate fell by 1.4 percent. Similar things were happening in the South Pacific.

Figure 6: United States: Policy interest rate and official consumer price inflation rate

Figure 6a: New Zealand: Policy interest rate and official consumer price inflation rate

Source: Trading Economics.

Of course, none of this should come as any surprise. With global supply chains in disarray, and national protectionism on the rise, the assistance that came from the expansion of international commerce after the crisis of 2008 is no longer with us. The lockdown of economies has severely hurt the global system of supply chains -- and now, a huge monetary overhang meets a shrinking production. The war in Ukraine, which started in February 2022, is not to blame for the distortions, albeit it will make them more severe.

Conclusion

The levee broke. Price inflation is on the rise. This is the result of the accumulation of liquidity that has been going over decades. There is the risk that things will get worse because the world economy has been severely wounded by the lockdown. More so than only mild stagflation, a “slumpflation” looms on the horizon as the world economy gets mired in the morass of a deep slump combined with steeply rising price inflation.

But the problem was not inevitable -- it is a result of specific policies followed out on the basis of flawed economic theory. Local politicians are right in one way to blame the problem on global issues -- the problem is that this destructive Keynesianism is everywhere, and as long has it is, so will the problems.

* * * * 

Author: Dr. Antony P. Mueller is a German professor of economics currently teaching in Brazil. See his website and blog. A version of this post previously appeared at the Mises Wire.

"The NZ Reserve Bank is now in panic mode...."

 

"After keeping the cash rate so low for so long, and embarking on a $53 billion quantitative easing programme, the [NZ Reserve] Bank is now in panic mode. Those having trouble paying back their mortgages in the next few years can blame our RBNZ Governor [Adrian Orr] and Finance Minister [Grant Robertson]. They encouraged a borrowing binge to buy [and borrow against] houses at wildly inflated prices, financed by dirt-cheap credit, turning a blind eye to the breach of the target to which they mutually agreed, and not learning the lessons of the global financial crisis in 2008.

    "The RBNZ was once lauded around the world for making NZ exceptional. It pioneered inflation targeting. We became the gold standard [sic] of monetary credibility.

    "Now, our hard-fought success and huge reputation built up over thirty years lie in ruins.... our RBNZ Governor and Finance Minister have driven a truck through the single most important agreement underpinning our economic security since 1989."

~ Auckland Uni economics professor Robert MacCulloch, from his op-ed 'The case against the Reserve Bank & Finance Minister'

 

Central banks' unprecedented monetary expansion over recent years has created damage they cannot simply undo by switching directions now - as Frank Shostak explains in this guest post, their tight interest stance now will struggle to undo the damage caused by their previously ultra-profligate position.

Central Banks Cannot Undo the Damage They Have Already Caused

by Frank Shostak

On March 16 this year, the US central bank (aka the Federal Reserve) raised the target for their federal funds rate by 0.25 percent, to 0.50 percent. According to officials of "The Fed," their increase was in response to the strong increases in the yearly growth rate of the Consumer Price Index (CPI), which in February stood at 7.9 percent (risen from 7.5 percent in January, and from 1.7 percent in February of the year before).

Most commentators believe that by raising the interest rate target, the central bank can slow the increase of prices of goods and services. Supporters of this strategy often refer to May 1981, when then Fed chairman Paul Volcker raised the Fed's funds-rate target from 11.25 percent to 19 percent. The change was dramatic. By December 1986, the yearly growth rate in the CPI, which in April 1980 had stood at 14.8 percent, had fallen to 1.1 percent (see Fig. 1 below).

Fig. 1: CPI vs Federal Funds Rate, 1980 to 1986

Note that commentators commonly identify the growth rate measured by the CPI, i.e. rising prices, as "inflation." We hold, however, that what inflation is all about is increases in money supply. 

As such, we do not say that inflation is caused by increases in money supply, as some commentators are suggesting. Instead, we hold that increases in money supply are what inflation is all about. 

The price of a good is the amount of money paid for it, but whenever there is an increase in the money injected into a particular goods market, this means that the price of the goods in money terms will tend to rise. All things being equal, however, this increase in money in one market will be offset by a decrease elsewhere. It is only an increase in the money supply itself that allows all prices to raise across all markets. This general increase in prices is itself not inflation, however, but rather the manifestation of inflation as a result of the increase in money supply, all other things being equal.

Bad as this is, what is even more important than the increases it causes in the prices of retail goods is the damage that monetary inflation inflicts to the process of wealth generation. This is because increases in money supply set in motion an exchange of nothing for something, which generates a similar outcome to what counterfeit money does. This counterfeit capital progressively weakens wealth generators, thereby weakening their ability to generate wealth. This, in turn, undermines living standards even as real capital is consumed.

Also, note that when this new money is injected, it initially enters a particular goods market. Once the price of those goods rises to a level at which they are perceived as fully valued, the money begins spilling over into other markets that are now considered under-valued. This gradual shift from one market to other markets gives rise to a time lag between these increases in new money, and their effect on the wealth generation process.

Central Banks do not set interest rates. Individuals do.

Note that contrary to popular thinking, interest rates are determined not by central bank monetary policy. Instead, they are driven by the time preferences of individuals. According to the founder of the Austrian school of economics, Carl Menger, the phenomenon of interest is the outcome of the fact that individuals assign a greater importance to goods and services now than they do to identical goods and services in the future. I is this that we call "time preference."

For example, most people will generally prefer being given $100 now rather than, say, $103 a year from now. It is this evaluation by multiple individuals that is the driving force of interest rates across all markets.

Observe that the higher valuation of present goods is not the result of capricious behaviour, but rather the identification that life in the future is impossible without sustaining it in the present. According to Menger:

Human life is a process in which the course of future development is always influenced by previous development. It is a process that cannot be continued once it has been interrupted, and that cannot be completely rehabilitated once it has become seriously disordered. A necessary prerequisite of our provision for the maintenance of our lives and for our development in future periods is a concern for the preceding periods of our lives. Setting aside the irregularities of economic activity, we can conclude that economising men generally endeavour to ensure the satisfaction of needs of the immediate future first, and that only after this has been done, do they attempt to ensure the satisfaction of needs of more distant periods, in accordance with their remoteness in time.1

Hence, various goods and services required to sustain one’s life at present must therefore be of a greater importance to that individual than the same goods and services in the future. The individual is likely to assign higher value to the same good in the present versus the same good in the future.

Naturally, each individual's time preference is different. Those with paltry means often have shorter time horizons -- they can contemplate only short-term goals, such as making a basic tool. As his means increase, however, he can consider undertaking the making of better tools. With the expansion in the pool of means, individuals are able to allocate more means towards the accomplishment of ever-more remote goals in order to improve their quality of life over time.

Again, while prior to the expansion of means, the need to sustain life and wellbeing in the present made it impossible to undertake various long-term projects, with more resources now this has become possible.

Not that few, if any, individuals will embark on a business venture promises a zero rate-of-return. The maintenance of the process of life, over and above hand-to-mouth existence, requires an expansion in wealth. Wealth expansion implies positive returns.

Is the lowering of rates the key cause behind the increase in capital-goods investment?

Contrary to the popular thinking, a decline in the interest rate is not the driving cause behind the increases in capital-goods investment. What permits the expansion of capital goods is not the lowering of the interest rate but rather the increase in the pool of savings.

This "pool of savings" comprises of finished consumer goods -- finished consumer goods produced, but not yet consumed. It is this pool of savings that sustains people employed in the enhancement and the expansion of capital goods such as tools and machinery. With these increased and enhanced capital goods, it is then possible to increase the production of future consumer goods.

Note that in an unhampered market it is not the interest rate per se that drives this pool of savings towards more (or less) future-directed production -- it is the sum of individuals' time preferences toward more (or less) future focus that compel producers to make this choice.

Individuals' decisions to allocate a greater amount of means towards the production of capital goods is signalled by the lowering of individuals' time preferences, i.e., assigning a relatively greater importance to the future goods versus the present goods. 

Hence, the interest rate is just an indicator as it were, which reflects individuals’ decisions regarding their present consumption versus future consumption. (Again, the decline of the interest rate is not the cause of the increase in capital investment. The decline simply mirrors the decision to invest a greater portion of savings towards capital-goods investment).

In a free unhampered market, a decline in the interest rate informs businesses that individuals have increased their preference towards future consumer goods versus present consumer goods. Businesses that want to be successful in their ventures must abide by consumers’ instructions, and organise a suitable infrastructure to accommodate this signalled demand for more consumer goods in the future (rather than now). 

Note that through the lowering of time preferences, individuals have signalled that they have increased savings which will support the expansion of the production structure to become more future-directed. In the unhampered market, the decline in interest rate is therefore both a signal for more future-directed production, and a reward for undertaking it.

Observe that in an unhampered market, fluctuations in interest rates will tend to be in line with changes in consumers’ time preferences. Thus, a decline in the interest rate is in response to the lowering of individuals’ time preferences. Consequently, when businesses observe a decline in the market interest rate, they respond to it by increasing their investment in capital goods to accommodate the likely increase in demand for future consumer goods. (Note again that in a free-market economy, a decline in the interest rate indicates that on a relative basis individuals have lifted their preference towards future consumer goods versus present consumer goods).

What I have described here however is what happens in a free unhampered market -- in particular, one unencumbered by a government central bank. A major reason for the discrepancy between the so-called 'market interest rate' and the interest rate described here (i.e., the interest rate that fully reflects individuals' time preferences) is caused by the central bank. For instance, an aggressive loose monetary policy by the central bank leads to the lowering of the observed interest rate regardless of individuals' expressed time preference. Businesses respond to this lowering by increasing the production of capital goods, i.e., tools and machinery, in order to be able to accommodate the demand for consumer goods in the future. Note, however, that consumers have not actually indicated a change in their preferences toward present consumer goods. The time-preference interest rate did not go down. And so a gap emerges between the time-preference rate and the market rate.

It is this gap that causes the dislocations between consumption and consumption that presage economic corrections in future, and encourage over-consumption of capital now.

Because of this breach between the time-preference interest rate and the market interest rate, businesses responding to the declining market interest rate have essentially malinvested in capital goods relative to the production of present consumer goods. At some stage, by incurring losses, businesses are likely to discover that pass decisions with regard to the capital-goods expansion were in error.

Why tightening now cannot undo the negatives of a previous loose stance

According to Ludwig von Mises, a tight monetary stance cannot undo the negatives of the previous loose stance. (In other words, the central bank cannot generate a “soft landing” for the economy.) The misallocation of resources due to a loose monetary policy has already happened, and cannot simply be reversed by a tighter stance. (Mises likens the attempted correction to attempting to cure a road-accident victim by reversing over him.) According to Percy L. Greaves Jr. in the introduction to Mises's The Causes of the Economic Crisis, and Other Essays before and after the Great Depression:

Mises also refers to the fact that deflation can never repair the damage of a prior inflation.... Inflation so scrambles the changes in wealth and income that it becomes impossible to undo the effects. Then too, deflationary manipulations of the quantity of money are just as destructive of market processes, guided by unhampered market prices, wage rates and interest rates, as are such inflationary manipulations of the quantity of money.

A tighter interest-rate stance, while likely to undermine current bubble activities, is also however still likely to generate various distortions, thereby inflicting damage to wealth generators. Note that a tighter stance is still intervention by the central bank, and in this sense it still falsifies the interest-rate signal set by consumers. A tighter interest-rate stance still doesn't result in the allocation of resources in line with consumers’ top priorities. Hence, it does not follow that a tighter interest rate stance can reverse the damage caused by inflationary policy. 

Now, if we were to accept that inflation is about increases in money supply, then all that is required to erase inflation is to seal off the loopholes for the generation of money out of “thin air” by the central bank. A careful scrutiny of this is going to reveal that the culprit behind the increases in money supply is the monetary policies of the central bank. 

Policies aimed at stabilising price increases are in fact producing economic upheavals. Observe that by February 2021, the yearly growth rate of our monetary measure for the USA jumped to almost 80 percent! This is truly astonishing. Against the background of this massive increase, one should not be at all surprised that the yearly growth-rate of the CPI has accelerated. And against the background of this article, one might begin to understand why policies that aim only at slowing the growth rate of the CPI rather than arresting the growth rate of money supply are likely to undermine economic conditions rather than improve them.

Conclusion

As long as sustaining our lives remains individuals' ultimate goal of individuals (that is, as long as our species continues to breathe), they will go on assigning a higher valuation to present goods than they will to future goods -- to $100 now rather than to $103 a year from now -- and no amount of central-bank interest-rate manipulation is going to change this reality. 

But this will not stop them trying. Any attempt by central bank policy makers to overrule this fact however will undermine the process of wealth formation, and will lower individual living standards.

On the one hand, if individuals have not allocated adequate savings to support the expansion of capital goods investments, then it  is not going to help economic growth if the central bank artificially lowers interest rates. It is not going to help, because it it not possible to replace real savings with more money and an artificial lowering of the interest rate. It is not possible, because it it not possible to generate something from nothing. 

Likewise, by raising interest rates the central bank cannot undo the damage from its previously easy interest-rate stance. A tighter stance will likely generate various other distortions. Hence, what is required is that policy makers should leave the economy alone -- and let the market be completely free from central-bank tampering.

* * * * 

Dr Frank Shostak is a leading Austrian economist and director of Applied Austrian School Economics Ltd, which aims to assess the direction of various markets using the Austrian School methodology. AASE aims to make Austrian economics accessible to businessmen.

Versions of this post previously appeared at the Mises Wire and Cobden Centre.

"That the central banks were totally surprised by today’s inflation indicates a fundamental failure. Surely, some institutional soul searching is called for...."

"The obvious question to ask first is how the Fed [and the local Reserve Bank] blew its main mandate, which is to ensure price stability. That the Fed [and the Reserve Bank] was totally surprised by today’s inflation indicates a fundamental failure. Surely, some institutional soul searching is called for....
    "America [and the world] is awash in debt. Everyone assumes that taxpayers will take on losses in the next downturn. Student loans, government pensions, and mortgages have piled up, all waiting their turn for Uncle Sam’s bailout. But each crisis requires larger and larger transfusions. Bond investors eventually will refuse to hand over more wealth for bailouts, and people will not want to hold trillions in newly printed cash. When the bailout that everyone expects fails to materialise, we will wake up in a town on fire – and the firehouse has burned down.
    "In 2008, regulators and legislators at least had the sense to recognize moral hazard, and to worry that investors gain in good times while taxpayers cover losses in bad times. But the 2020 blowout has been greeted only with self-congratulation.
    "The same Fed [and Reserve Bank] that missed the subprime-mortgage risks in 2008, the pandemic in 2020, and that now wishes to stress-test 'climate risks,' will surely miss the next war, pandemic, sovereign default, or other major disruptive event. Fed regulators aren’t even asking the latter questions. And while they issue word salads about 'interconnections,' 'strategic interactions,' 'network effects,' and 'credit cycles,' they still have not defined what 'systemic' risk even is, other than a catch-all term to grant regulators all-encompassing power.
    "Regulators will never be able to foresee risks, artfully calibrate financial institutions’ assets, or ensure that immense debts can always be paid. We need to reverse the basic premise of a financial system in which the government always guarantees mountains of debt in bad times, and we need to do it before the firehouse is put to the test."
          ~ John Cochrane, from his post 'Accounting for the Blowout'

QotD: The gold standard v the PhD standard

"Under the classical gold standard, prices and wages were expected to adjust to economic disequilibria. Under the PhD standard, it’s interest rates and exchange rates and asset prices that are expected to do the adjusting......."Well, if Eisenhower-era America scratched its head over the classical gold standard, what will futurity make of the PhD standard [that now runs the monetary world]? Likely, it will be even more baffled than we are. Imagine trying to explain the present-day arrangements to your 20-something grandchild a couple of decades hence—after the crash ... that wiped out the youngster’s inheritance and provoked a central bank response so heavy-handed as to shatter the confidence even of Wall Street in the Federal Reserve’s methods....."I expect you’ll wind up saying something like this: 'My generation gave former tenured economics professors discretionary authority to fabricate money and to fix interest rates. We put the cart of asset prices before the horse of enterprise. We entertained the fantasy that high asset prices made for prosperity, rather than the other way around. We actually worked to foster inflation, which we called ‘price stability’ ... We seem to have miscalculated.”~ Jim Grant, the world's most famous interest rate observer, speaking in Nov. 2014 on 'An Agenda for Monetary Action'

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Q: What are the three most harmful modern myths?

[Hat tip Vinay Kolhatkar]

Prices are stable?

 

The idea of a general price level is as stupid as the idea that inflating credit and the money supply with it doesn’t create inflation, yet the ‘Consumer Price Index’ that measures this imaginary figure has achieved virtual Holy Writ status, and is written into laws, contracts, and payment plans.

For Ludwig Von Mises, any decent analysis of this “inflation figure” would begin by “decomposing” the so-called macroenomic aggregates “into their micro-economic components by rigorously analysing the ‘transmission mechanism’ of a monetary injection.’”

But this is precisely what mainstream commentators wish to avoid. It would demand they recognise that the figure itself is illusory, and their practice credit injection damaging.

Let’s see what the aggregate figure of the general price level hides:

Quite some disparity, eh?

Anybody who thinks there is such a thing as a single inflation figure should be warned. And anyone who reifies it should not be in charge of a baked bean, let alone of being any kind of bean counter. Especially one who constantly “warns” that we have no inflation in New Zealand.

The big lesson, as Hayek once explained: “Mr Keynes’s aggregates hide all the mechanics of change.” In this case, of destructive change.

There’s another important lesson to draw here. The items below the “index bar” all represent the result of of invention, of innovation, of productivity—of everything that makes real wages higher – of the Hank Rearden effect that makes prosperity more widespread and abundant -- all the things the central banks rely on to keep their own phony inflation figure down while their monetary inflation goes through the roof, all while screwing the Hank Reardens around.

Whereas the items in the top of the index bar represent things that the government subsidises, or heavily regulates.

Mind you, the graph is only for the US, although doing one for NZ would look very much the same.

And just to make ours more realistic, I added in the results of our rampant house-price inflation (taken from REINZ figures). Which puts a whole lot of things in perspective, don’t you think?

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[Hat tip Catallaxy Files]

RBNZ fixes prices

 

I see, as you’ve probably seen, that Governor Graham Wheeler issued a new diktat this morning on interest rates. The central planner’s central banker has decreed that the price at the heart of our alleged market economy should be made to drop to the lowest level in all human history.

Why?

In his pursuit of what they allege to be “price stability.” Because, they say, “the general price level” is rising insufficiently to be healthy. Because this price stability demands that the money the central banker has been pumping into the system at around 8% every year is still insufficient to get lift-off in the measure they maintain for money’s inflation. It must go higher they say!

Inflation? Price stability? These bozos can’t even measure inflation – and while they bewail the dangers of “low inflation” (the numbskulls) they’re blind to the phenomenon of rocketing asset prices, and exploding house prices, both caused by their own inflation of the money supply bubbling out to cause havoc. Yet they still purport to believe that the price inflation of their monetary inflation is too low to be healthy, so let us all have some more.

No, folks, this is not inflation. How so? Because Uncle Graham says so.

 

It’s not because they’re stupid, these smart people. It’s because they’re still in thrall to a Keynesian idea that is.

They do this because they still genuinely believe, via that dead economist, that credit growth causes economic growth—specifically, that bank-created credit growth causes real and sustainable economic growth. This belief lingers despite the gobs of phony credit spewed out worldwide in the form of QE, ZIRP and NIRP returning less and less growth every time the credit spigot is uncorked, and the ever-inceasing amounts uncorked here showing returns only in the ever-inflated prices of houses, shares and other asset classes.

Yet this is not even real capital being lent out. It is counterfeit capital. “Capital in the form of credit is normally and, certainly, properly, extended out of previously accumulated savings,” explains George Reisman. “In sharpest contrast, credit expansion is the creation of new and additional money out of thin air, which money is then lent to business firms and individuals as though it were a supply of new and additional saved up capital funds.  Its existence serves to reduce interest rates and to enable loans to be made and debts to be incurred which otherwise would not have been made or incurred.”

The loans are increasing. The debts are ballooning. Asset prices and house prices are exploding. The fragility is mounting. And the Governor blinds himself to the reality, and decrees that we must have more.

It is insane.

RELATED POSTS & STORIES:

• “Cheap money! If you can get it. What we now have is a segregated credit regime in which many – ie younger, poorer people – can’t borrow because the loan-to-value ratios prevent them from doing so, but those who can access it – i.e., those with equity – have never been able to borrow at better rates.”
  Low for some – DIM POST
• “Moreover, the Reserve Bank's target range for inflation is 1-3 per cent, which implies that very low inflation and deflation are undesirable. The Reserve Bank, therefore, foreshadowed a further cut to the nation's base interest rate, the official cash rate, in an attempt to boost inflation.
      “Before trying to solve a problem, though, we need to be sure the problem actually exists. Is inflation actually too low?”
  New Zealand does not need more inflation – Fergus Hodgson, NZ HERALD
• “’Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. ...
      “’To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection--a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end. ...
      “’It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.
      “’We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilisers. It is high time that their influence, which has already done harm enough, should be overthrown.’”
  "Price Stability" is Chaos – NOT PC, 2012
• “So after five years of monetary policy pursuing growth at any cost, the Reserve Bank will again be pursuing price stability, the very policy that helped cause the bust…”
  The Fateful Wish for Price Stability – NOT PC, 2014

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Quotes of the Morning: Before & after the 1929 crash

One of Colin Seymour’s hobbies is collecting nonsense.

There are few more nonsensical prognostications than folk either side of the event that’s on everyone’s mind this week: the Great Wall St Crash that began in earnest on October 24, 1929.  Here’s what some numb-nuts had to say, with the times they said them indicated on Colin’s chart above. They offer a great example of hubris when humility would be far more appropriate.  Because these people had much to be humble about …

1. "We will not have any more crashes in our time."
    - John Maynard Keynes, leading British economist, in 1927

2. "I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future."
    - E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928

  "There will be no interruption of our permanent prosperity."
    - Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

3. "No Congress of the United States ever assembled, on surveying the state of the Union, has met with a
    more pleasing prospect than that which appears at the present time. In the domestic field there is tranquillity
    and contentment...and the highest record of years of prosperity. In the foreign field there is peace, the goodwill  
    which comes from mutual understanding."
    - US President Calvin Coolidge December 4, 1928

4, "There may be a recession in stock prices, but not anything in the nature of a crash."
    - Irving Fisher, leading U.S. economist, New York Times, Sept. 5, 1929

5. "Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a
    50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a
    good deal higher within a few months."
    - Irving Fisher, Ph.D. in economics, Oct. 17, 1929

    "This crash is not going to have much effect on business."
    - Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929

    "There will be no repetition of the break of yesterday... I have no fear of another comparable decline."
    - Arthur W. Loasby (President of the Equitable Trust Company), quoted in The New York Times, Friday, October 25, 1929

    "We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright,
    good stocks are cheap at these prices."
    - Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929

Those last few comments were just the day or so after the first big crash – in other words, about the same stage in the exact same stage in the cycle as we are now.

And as you’ll probably be aware, those two “leading economists” are still leading us—Keynes and his remedies being well known; Fisher’s doctrine of price stability having helped to cause both this crash and that one. (Fisher lost his shirt in that crash, but unfortunately not his reputation.)

Keynes’s “remedies that weren’t” didn’t take hold until later in the thirties. But it was Fisher who had claimed during the 20s that his “scientific” approach to so-called price stability” had established a “New era of prosperity during the 1920s.” (Ludwig Von Mises published a book in 1928 that critiqued Fisher's approach and predicted that it would lead to an economic crisis and collapse. Mises passed the "market test" while Fisher lost his personal fortune during an economic crisis that his economics help create.)

But the post-crash crystal ball gazing as the numb-nuts followed it all down was no better—some trying to convince themselves, some trying to convince themselves—starting with words that are already sounding very familiar.

6. "This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan... that any man
    who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a
    bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in
    many years."
    - R. W. McNeal, market analyst, as quoted in the New York Herald Tribune, October 30, 1929

    "Buying of sound, seasoned issues now will not be regretted"
    - E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929

    "Some pretty intelligent people are now buying stocks... Unless we are to have a panic -- which no one
    seriously believes, stocks have hit bottom."
    - R. W. McNeal, financial analyst in October 1929

7. "The decline is in paper values, not in tangible goods and services...America is now in the eighth year of
    prosperity as commercially defined. The former great periods of prosperity in America averaged eleven years.
    On this basis we now have three more years to go before the tailspin."
   - Stuart Chase (American economist and author), NY Herald Tribune, November 1, 1929

    "Hysteria has now disappeared from Wall Street."
    - The Times of London, November 2, 1929

    "The Wall Street crash doesn't mean that there will be any general or serious business depression... For six
    years American business has been diverting a substantial part of its attention, its energies and its resources
    on the speculative game... Now that irrelevant, alien and hazardous adventure is over. Business has come
    home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before."
    - Business Week, November 2, 1929

    "...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not
    the precursor of a business depression such as would entail prolonged further liquidation..."
    - Harvard Economic Society (HES), November 2, 1929

8. "... a serious depression seems improbable; [we expect] recovery of business next spring, with further
    improvement in the fall."
   - Harvard Economic Society, November 10, 1929

    "The end of the decline of the Stock Market will probably not be long, only a few more days at most."
    - Irving Fisher, Professor of Economics at Yale University, November 14, 1929

    "In most of the cities and towns of this country, this Wall Street panic will have no effect."
    - Paul Block (President of the Block newspaper chain), editorial, November 15, 1929

    "Financial storm definitely passed."
    - Bernard Baruch, cablegram to British Chancellor Winston Churchill, November 15, 1929

9. "I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence
    that there will be a revival of activity in the spring, and that during this coming year the country will make
    steady progress."
    - Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929

    "I am convinced that through these measures [public spending, minimum-wage laws] we have
    re-established confidence."
   - U.S. President Herbert Hoover, December 1929

    "[1930 will be] a splendid employment year."
   - U.S. Dept. of Labor, New Year's Forecast, December 1929

10. "For the immediate future, at least, the outlook (stocks) is bright."
    - Irving Fisher, leading economist, in early 1930

11. "...there are indications that the severest phase of the recession is over..."
    - Harvard Economic Society (HES) Jan 18, 1930

12. "There is nothing in the situation to be disturbed about."
    - Secretary of the Treasury Andrew Mellon, Feb 1930

13. "The spring of 1930 marks the end of a period of grave concern...American business is steadily coming back
    to a normal level of prosperity."
    - Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930

14. "... the outlook continues favourable..."
    - Harvard Economic Society, Mar 29, 1930

    "... the outlook is favourable..."
    - Harvard Economic Society, Apr 19, 1930

15. "While the crash only took place six months ago, I am convinced we have now passed through the worst --
    and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. 
    That danger, too, is safely behind us."
    - Herbert Hoover, President of the United States, May 1, 1930

    "...by May or June the spring recovery forecast in our letters of last December and November should clearly
    be apparent..."
    - Harvard Economic Society, May 17, 1930

    "Gentleman, you have come sixty days too late. The depression is over."
    - Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery,
      June 1930

16. "... irregular and conflicting movements of business should soon give way to a sustained recovery..."
     - Harvard Economic Society, June 28, 1930

17. "... the present depression has about spent its force..."
   - Harvard Economic Society, Aug 30, 1930

18. "We are now near the end of the declining phase of the depression."
    - Harvard Economic Society, Nov 15, 1930

19. "Stabilization at [present] levels is clearly possible."
    - Harvard Economic Society, Oct 31, 1931

20. "All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in
    the presence of an agent of the I.R.S."
    - President F.D. Roosevelt, confiscating gold in 1933

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A version of this post appeared at the Gold-Eagle.

There's a Bull in the Greek China Cabinet

"We’ve got to make those bastards stand still!"
- Wesley Mouch, in Atlas Shrugged

Guest post by Chris Campbell from Laissez Faire Today 

• Is This It? A “crack-up” was always just a matter of time. Is this the time? Are China and Greece the snowflakes that start the avalanche?”
• The Rose that Grows Between the Cracks of Concrete: What the mainstream media isn’t telling you about what’s happening in Greece…

“Turning and turning in the widening gyre.
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold …”
- W.B. Yeats, “The Second Coming”

Today, we’re going to talk about Greece and China.

We’re also going to talk about one solution spontaneously popping up in Greece that few are talking about.

If you remember, a while back, I gave up using dollars for an entire week in favour of this solution.

Before we go there, though…

Here are two of Big Government’s biggest illusions. Those illusions are that:
a.) government intervention in the marketplace is effectiv,e and
b.) that the government ought to always do something.

There is a third illusion. This third illusion can be summed up in one word...

Stability.

“Have you ever noticed,” Robert Meyer of The Libertarian Way blog writes,

our political and financial leaders seem addicted to the notion of stability? Members of this elite group of economic nitwits come up with illusionary schemes for stabilising the economy.
    Here’s something to consider…
    If our “beloved” leaders actually achieve stability, progress would be out of the question.

As Ludwig von Mises explained in his book Human Action:

Stability, the establishment of which the program of stabilisation aims at, is an empty and contradictory notion. The urge towards action, i.e., improvement in the conditions of life, is inborn in man. Man himself changes from moment to moment and his valuations, volitions, and acts change with him. In the realm of action there is nothing perpetual but change.

In other words, where there is an urge toward the improvement of life, there is action. And where there is action, there is a lack of stability.

In its place, there is change. Every single individual on Earth is reaching for an improvement within his or her life -- rich and poor. And he or she is taking action.

Stability, therefore, is not only impossible, it’s unwanted. It’s only an illusory construct peddled by our “leaders.” And too many fall for it. Too many are willing to give up their liberty in order to gain an empty handful of this so-called stability.

It’s the race to “stability” that got us in this mess. Or the excuse of “stability” and the race toward totalitarianism. (Take your pick. They’re probably both right.)

Either way, governments have gone too far. The best government is the one which exists unnoticed -- not one that create monolithic sand castles over our heads that could tumble at any time.

Even the “regular people” who just want to live their lives… raise their children… focus on their passions... and not get involved in debates about the government… even they are getting sucked in. Today, no one can afford to sit on the side-lines.

The young can’t find jobs and are up to their split-ends in student loan debt. Middle-aged parents are finding it harder and harder to “put food on their families.” The Boomers are watching their life-savings slip through their fingers like the sands of time -- many without fully understanding why.

“And every one of us,” Matt Kibbe, author of Don’t Hurt People and Don’t Take Their Stuff writes,

is somehow being targeted, monitored, snooped on, conscripted, induced, taxed, subsidised, or otherwise manipulated by someone else’s agenda, based on someone else’s decisions, made in some secret meeting or by some closed-door legislative deal in [some nation’s capital].

We have the Big Government we begged for -- we have it long and hard. But, we ask, do we have the promised stability?

Now... today... right this second… flip on the tube and you’ll surely see the answer to this question. As a clear sign of what’s to come to a city near you, citizens in both China and Greece are being dragged through hot coals... fomenting what could turn into global outrage and chaos.

[Stretch… Yawn]

Gotta’ love the stench of false security in the morning.

“Two stories dominate global financial headlines,” Jim Rickards wrote in Daily Reckoning this week.

The first is the meltdown of the Chinese stock market and efforts to organize a bailout fund to prop up the Shanghai Composite stock index. The other is the Greek referendum in which 60% of voters rejected the financial rescue terms offered by the “institutions” -- the IMF, ECB and European Union.
    Global capital markets are a tale of two crises.
    The two crises are different in their particulars, yet dangerously alike in their systemic implications. China is the second largest economy in the world; Greece does not rank in the top forty.
    Chinese financial assets are spread among hundreds of millions of investors, while Greek sovereign debt is concentrated in a few hands. China is an emerging market, while Greece is a developed economy. China is a top-down dictatorship, and Greece has just given the world a demonstration in bottom-up democracy.
    Yet what sets these crises apart is trivial compared to what unites them. Both have the potential to ignite a global systemic meltdown. The world is even more fragile than it was in 2007. The big banks are bigger. Aggregate bank assets are concentrated in fewer hands. The bank derivatives books are much larger. Market liquidity is worse.
    None of this is secret.

“Global financial elites have been shouting it from the rooftops,” Rickards goes on.

Warnings have poured in from the IMF, G20, World Bank, BIS and private think tanks.
    The warnings have mostly been ignored. The inmates (bankers) have continued to run the asylum (the financial system). Investors have continued to pile into stock and real estate bubbles from Wall Street to Wuhan in search of the elusive “yield.”
    A crack-up was always just a matter of time. Is this the time? Are China and Greece the snowflakes that start the avalanche?
    Probably not.
    The system is fragile and these crises are urgent. But they are also amenable to government responses ranging from plain vanilla bailouts to more extreme bail-ins, and the use of force majeure. Banks have already been closed in Greece. Exchanges may yet be closed in China. Individual bank and broker failures may proliferate. But the centre should hold -- for now.
    Simply put, China may have a multibillion-dollar meltdown but it has a multitrillion-dollar fire hose in the form of its official reserves. China can adopt the “whatever it takes” mantra of Mario Draghi and they don’t even have to print money; they can just use their reserves.
    The Greek situation is more difficult. There is less than meets the eye in the referendum. The “no” vote won overwhelmingly, but turnout was low. The deal that Greeks were voting on was never officially offered, and a new deal is certainly in the works. The referendum has no legally binding impact; it’s legally no more meaningful than a telephone poll.
    But, it is politically significant and will force the two sides to get back to the bargaining table, probably on terms more favourable to Greece. The referendum did nothing to provide cash to Greece or to reopen the banks.
    Greece is still in crisis on the morning after. Both sides still have the same interest in a negotiated solution because both sides have far more to fear from failure than from a few more concessions. The surprise resignation of the Greek Finance Minister, Yanis Varoufakis, will relieve some of the personal animosity and make resumed negotiations easier.
    So these crises will pass with the usual lists of winners and losers. Some investors in Chinese stocks were wiped out, but the market is already rebounding thanks to government intervention. Some investors in Greek bonds may be pleasantly surprised as well. The headlines will continue for the remainder of the summer, but markets will eventually digest the news and move on.
    This is not to say that it’s “all good.” It’s not. The makings of a massive global meltdown are still in place. The official warnings are correct. The crack-up will not come from the things we can see -- like Chinese stock bubbles, and Greek debt defaults -- but from something none of us has factored in.
    That’s the essence of complex systems. They are characterized by “emergent properties.” That means system behavior that cannot be inferred from perfect knowledge of all the parts of the system. The event that causes the crack-up will come like a thief in the night. Yet it will come.

“The hardest part is guessing what’s next,” Charles Hugh Smith wrote this week.

It seems the dynamic of “what’s next” is multiple currencies being used in Greece rather than one single currency: many, not one.

According to Smith, private "parallel currencies" are popping up in Greece in response to this crisis. Just as they did in the U.S. during the Great Depression.

Interesting, eh?

Not long ago I dove into the idea of parallel currencies. I devoted a full week to spending only Bnotes -- Baltimore’s local currency.

The conclusion of that painstaking investigation -- if one were brave enough to try to pick it apart -- was that many competing currencies seemed like a really good idea. Or at least a much better idea than one centralised one.

And guess what? Greece seems to agree.

The U.K.’s Telegraph reports:

Despite assurances, the crisis is likely to escalate fast if there is no resolution early next week. Businesses in Thessaloniki and other parts of the country are already creating parallel private currencies to keep trade alive and alleviate an acute shortage of liquidity. Vasilis Papadopoulos, owner of the Maxi paper mill in Katerini, said the situation was becoming desperate for his industry.
    “I have enough raw materials to last until July 14. If I don’t get any more pulp, I will have to close the factory. It is a simple as that. I have 183 employees and I will have to start laying them off,” he said.
    His firm has reached an accord with regional supermarkets to accept coupons or private scrip money in lieu of payment as soon as next week. His workers will then be able to use this paper as a parallel currency at the supermarket to buy goods.

The idea that scrips, IOUs, letters of credit or indeed, notched sticks, can act as perfectly legitimate money is not surprising to anyone who has read David Graber’s marvellous history of credit and money, Debt: The First 5,000 Years, or Ferdinand Braudel’s three-volume history of modern Capitalism.

“When exchange money is in short supply,” continues Charles Hugh Smith, in other words, when we’re experiencing a liquidity crisis,

various forms of currency arise to fill the need to grease commerce. Money has two basic purposes: to grease trade/commerce, and as a store of value.
    The two functions appear to be seamless when one form of money fills both needs, but quite often there is no one form of money available in sufficient quantity to fill both needs.
    Accounts of people in Greece buying crypto-currencies such as bitcoin strongly suggest that multiple currencies will serve as exchange-money. In its cash form, the euro will of course still be money, but there may not be enough of it in physical form to enable trade.

“What we may be witnessing,” Smith goes on, “is the first phase of a new era of widespread non-state currencies, that is, currencies issued by private parties rather than nation-states or central banks.

These could be crypto-digital currencies, gold-backed currencies or any number of other variations.
    Nation-states and central banks are anxious to maintain their monopoly on money issuance, of course, because the power to issue money is (along with forced conscription and making war) the ultimate foundation of state power.
    Breaking the grip of central-state/bank issued money will be a major evolutionary step forward for the global economy. Breaking free of the state’s power to depreciate our money at will is a major advance in human liberty and economic security.

Truth. Couldn’t have said it better myself. Hopefully, this trend of competing private currencies continues. If so, it’ll be the rose that grows between the cracks of concrete.

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Chris Campbell is the editor of Laissez Faire Today