Power & Market
The Fed met market expectations by cutting its target for the fed funds rate by 25 basis points, down to the range of 1.75 - 2.00 percent. In this post I want to demonstrate just how boxed in the Fed has now become, with the help of 3 charts.
First, let's review just how low interest rates have been (and still are), in a long-term historical context:
As the chart shows, the (effective) fed funds rate was in this range back during the early 2000s, which helped spawn the housing bubble and bust (as I predicted in this Mises.org article which ran 11 months before the financial crisis). Before then, we have to go all the way back to the early 1960s to see rates this low. And furthermore, to the extent that Mises was right, and artificially low interest rates lead to an unsustainble boom, then the seven years of virtually zero percent interest rates (from December 2008 - December 2015) have fostered a plethora of malinvestments.
Now here's the irony: In the midst of the Fed cutting rates, and injecting $75 billion in repo operations on Tuesday to push down a spike in short-term rates, at least on paper we see that everything seems to be fine. Specifically, consumer price inflation is a bit lower than the Fed's desired level but is still at a "healthy" 1.8% (year over year, as of August), while the official unemployment rate is still at a 50-year low:
Finally, despite the apparently healthy economy (vis-a-vis the Fed's "dual mandate"), there is still an extraordinary stockpile of excess reserves in the banking system, relative to the pre-crisis era:
Medical metaphors for economics are never perfect, but we can certainly say this: Far from being in the midst of a robust "recovery," the patient--i.e. the US economy--is still incredibly weak, needing constant infusions of medicine to stave off a crisis in its circulation.
On the one hand, it's refreshing that Fed officials don't think the economy can be summed up in two numbers, namely the official unemployment and consumer price inflation rates. But on the other hand, the fact that the Fed is cutting rates now, in spite of the "healthy numbers," is an ominous indication of just how deep the rot goes in the economy's capital structure.
Unfortunately, the world may soon see exactly why 7 years of unprecedently loose monetary policy was a very foolish idea.
Not that QE ever really went away, but the European Central Bank is taking it up a notch with today's rate cut. According to the Wall Street Journal today :
The European Central Bank cut its key interest rate and launched a sweeping package of bond purchases Thursday that lays the ground work for a long period of ultraloose monetary policy, jolting European financial markets and triggering an immediate response from President Trump.
The ECB’s pre-emptive move was aimed at insulating the eurozone’s wobbling economy from a global slowdown and trade tensions. It is the ECB’s largest dose of monetary stimulus in 3½ years and a bold finale for departing President Mario Draghi, who looks to be committing his successor to negative interest rates and an open-ended bond-buying program, possibly for years.
But the move triggered opposition from a handful of ECB officials, according to people familiar with the matter, while leaving key practical questions unanswered. Primarily: How long can the ECB keep purchasing bonds without significantly enlarging the pool of assets it can buy? Some analysts estimated it might be less than a year.
Meanwhile, the president attempted to use the move to put additional pressure on the Fed to ratchet up its own QE plans, writing: "European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!"
European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!— Donald J. Trump (@realDonaldTrump) September 12, 2019
Trump, apparently is unconcerned by the effects of negative rates on the banking sector or on family budgets.
For example, the European banking sector has been hit hard by negative rates, as shown by Maurus Adam recently at mises.org:
Low interest rates make credit for private banks — and in turn, for consumers — cheaper. But at the same time, the low return on government bonds makes investment in these long-term options unattractive. Inflation and low return on investment options discourage people from saving and investing capital but encourage spending. Moreover, the low interest rates result in a low return for banks on the credit they grant to consumers. High consumption, low investment, and low profit on all banking activities strongly affects the ability of European banks to compete. Consequently, Markets Insider reports :The extremely low interest rates in the Eurozone hit the bank’s investment branch hard...
The bank has struggled financially amid rock-bottom interest rates in Europe and fierce competition in the German banking industry, limiting its ability to invest and expand in line with US rivals.
And, as reported by Matt Egan at CNN:
Deutsche Bank's struggles have also been amplified by something the 149-year-old lender never imagined, mostly because it had never happened before in modern history: negative interest rates. In 2014, the European Central Bank wanted to boost the sluggish economy but interest rates were already at zero. The unconventional decision to take them into negative territory was aimed at encouraging growth and avoiding deflation, but it meant banks were charged a fee for parking their reserves with the central bank. The ECB's extreme policies may have injected some life into Europe's sleepy economy, in turn giving Deutsche Bank and other lenders a boost. However, negative rates are also crushing the profitability of all banks, Deutsche Bank included. And this unorthodox policy — one that the ECB is on the verge of doubling down on — is making it awfully difficult to revive the champion of Germany's banking system. But rates don't have to be negative to have a negative impact on savers and pensioners. In order to see any meaningful gains from saving in an economy with ultra-low rates, an investor must engage in yield chasing. but that;s much more difficult for ordinary households who don't have the tools of wealthy investors at their disposal - tools that allow for a variety of risky investments that may bring sizable returns. Ordinary people, in contrast, can't gamble their savings in that way, and can't even access hedge funds and other tools designed to seek out returns in an environment with so few opportunities for yield.
Moreover, pension funds that rely on more safe and traditional investments must pursue riskier investments, or do without the sorts of gains they need. That means future retirees will face far fewer returns and a falling standard of living.
None of this concerns the president, apparently, as he now appears to be champing at the bit to get his over version of European style QE.
Just yesterday, he was demanding the Fed cut the federal funds target rate "down to ZERO, or less":
The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term. We have the great currency, power, and balance sheet.....— Donald J. Trump (@realDonaldTrump) September 11, 2019
That is, the president apparently believes savers should have to pay to save money, as is potentially the case under a negative-rate regime.
The president might also want to consider the fact that even after a decade of extreme easy-money policies, the European economy is still weak, and the euro zone's growth has slowed to under one percent.
This won't surprise hawks who understand that easy money is not exactly a miracle formula for economic growth. But this fact is seemingly irrelevant to the president who sees monetary policy as little more than a tool to spur exports.
Although the Fed is now expected to cut its own target rate later this month, one can only hope that it keeps to only 25 basis points.
After all, the good news here is that, with a target rate of 2.25 percent, the US's central bank looks relatively sane compared to the ECB and the Bank of Japan, both of which are employing negative rates. The Fed is even clocking in at well above the Bank of England's target rate of 0.75 percent.
So long as the Fed does not significantly increase its own balance sheet and other QE efforts in response to the ECB and other central banks, the dollar will continue to look relatively attractive compared to other currencies. Predictions that the dollar will quickly devalue in relation to other currencies are likely overstated. It is true that larger geopolitical trends, such as de-dollarization efforts among some major world economies , are a threat. But these efforts lie outside run-of-the-mill monetary policy right now which continues to point to a relatively sound dollar.
A summary of the most recently set rates:
- USA: 2.25%
- Canada: 1.75%
- UK: 0.75%
- Australia: 1.0%
- ECB: -0.5%
- Japan: -0.1%
Note: All graphs by Ryan McMaken. Here are the specific key rates discussed here, with links:
In September 11, 2001, terrorists flew planes into the World Trade Center and the Pentagon. Hours later, more than 2,900 people were dead, the overwhelming majority of them in the civilian office buildings at New York's World Trade Center.
Within 24 hours, the US government was doing what it does best. It demanded more power, and set to work coming up with schemes for using its enormous military and national security apparatus — a group of agencies which had received more than half-a-trillion dollars during that fiscal year.
When the US national security state failed on 9/11, not a single person with any significant level of responsibility lost his job.
Notably, the very same people who failed utterly to provide national security on September 11th were the same people who were entrusted with providing security on September 12. Except now, those people, and their government agencies, were granted more power, bigger budgets, and were held to less legal and public scrutiny than ever before.
By November, the federal government had already rewarded itself lavishly for its incompetence. Congress passed, and the President signed, the USA Patriot Act a measure that transformed American jurisprudence and made every American a suspected terrorist, open to surveillance by government agents. DC politicians had also created yet another federal department, the department of Homeland Security, because apparently the Defense Department is concerned with things other than the defense of the US "homeland."
This war against the American people was complemented by ordinary shooting war against other nation states, including ones that had absolutely nothing to do with the 9/11 bombings. The invasion of Iraq, for instance was built upon intelligence manipulated and distorted by the White House and by CIA Director George Tenet. Iraq was not threat to the United States at all. But Washington, DC loves a war, and in the wake of 9/11, the American public was apparently willing to believe anything. So the politicians got their war. And have gotten many since.
Meanwhile, back home, the US government was transforming itself into something that looked like it was modeled more on China than on a government that claimed to revere the Bill of Rights.
As Jacob Hornberger writes :
Moreover, the [Chinese] regime can and does torture prisoners. Again, there is nothing anyone can do to prevent this. The torture is oftentimes so brutal that some independent minded, courageous individuals who were were protesting come out of the prison process as broken people, ones whose minds have been fixed through brutal and tortuous reeducation.
Before the 9/11 attacks, that sort of thing could not happen here in the United States, at least not legally. If the government arrested someone, it was required to file formal written charges (e.g., an indictment) that would notify the person of what he was being charged with. He also would be entitled to a jury trial instead of judge trial or a tribunal trial. He had the right to an attorney to represent him. He also had a right to an independent judge. And no cruel and unusual punishments, such as torture. That’s all because our American ancestors had the wisdom to guarantee such rights in the Bill of Rights.
What if U.S. officials did to someone what the Chinese government has done to Simon Cheng. In that event, the Constitution enables him to file a petition for writ of habeas corpus, a right that stretches back several centuries in English history and which actually is a lynchpin of a free society. An independent federal judge orders the government to bring the person to court and show cause why he should not be released. At the habeas hearing, the judge orders the government to charge the person with a crime or release him. No indefinite detention, like there is China. And of course no torture.
All that came to an end with the 9/11 attacks. At that point, the national-security branch of the federal government adopted many of the same powers as the Chinese communist regime, and without any amendment to the Constitution. The military and the CIA, two of the principal elements of the national-security state, now wield the power to take anyone, including both Americans and foreigners, into military or CIA custody by simply labeling them a “terrorist,” hold them as long as they want in a military dungeon or secret CIA prison camp, torture them, and even assassinate them. While Americans still have the right to file a petition for habeas corpus, federal judges will customarily defer to the Pentagon and the CIA on their determination that a person poses a threat to “national security.”
In today's America, everyone is a potential terrorist. The country is always at war. "National security" demands American citizens be murdered by drone without trial. Or dropped into Guantanamo and forgotten about. Just in case.
In the wake of the terrorist attacks, we were often told that we must go on about our daily lives, or else "the terrorists win." Except it wasn't the terrorists who did the most to change America. For America, the post-9/11 world meant more searches, more regulations, more spying, more debt, and more endless haranguing about how we must all "support the troops" and how "you're either with us or with the terrorists." "We must sacrifice" we were told. Your "freedom" demands it.
What was the upside? So far, there's no reason to believe that there is one. No evidence is provided, especially since the federal government maintains everything is secret, classified, or unfit for the public. "Trust us, we're keeping you safe" is the constant refrain. For some reason, a lot of people buy it.
Meanwhile, the feds themselves didn't sacrifice anything. For the feds, it was just more of what they'd always wanted. More taxpayer money. More power. More untrammeled authority to imprison, spy, tax, search, and control. Their abysmal failures on 9/11 led to no changes, no reforms, and no accountability. For them, everything got better.
If the destruction of American liberties was something the terrorists wanted, then they got what they wanted, too.
Modi's Policy of Higher Taxes, Spending, and Inflation Make India a Growing Risk in Emerging Markets
India’s economy had an annual growth of 5.0 percent in the April-June quarter, the slowest in more than six years dragged down by weak consumer demand and private investments.
A Reuters poll of economists had forecast annual growth of 5.7 percent for April-June, compared with a 5.8 percent rise the previous quarter. For April-June 2018, India reported 8 percent growth.
Last year I commented about the risks for India here.
Governments always consider that economic problems come from lack of demand, and they assign themselves the task of “correcting” that wrong assumption by massively increasing deficits and using monetary policy well beyond any logical measure.
India’s rising populist policies are part of the nation’s current problems.
Recent data is quite concerning.
Industrial production, manufacturing PMIs and growth estimates are coming down (according to Focus Economics).
According to Kotak Economic Research, India’s current account deficit is forecast to be the highest in six years. The overall balance of payments is moving into larger deficits than expected, as capital inflows weaken and are unable to current account deficit.
Another warning comes from the maturities in foreign exchange. Nearly $220 billion of short-term debt, equal to more than half of India’s foreign exchange reserves, will come up for maturity in 2018-2019 fiscal year. Moody’s states that India is one of the countries that are least exposed to a rising US dollar. However, Moody’s did not expect the rupee to fall this much.
The average maturity of debt is close to 10 years and over 96 percent of it is in the local currency, according to Moody’s. However, it also notes the country’s low debt affordability. Given that the vast majority of debt is in the local currency, the incentive to depreciate the rupee is very high.
Foreign exchange reserves remain acceptable but can fall rapidly. Foreign exchange reserves are likely to suffer another dip as the rupee falls against the US dollar.
At the same time, 68% of the fiscal deficit target for 2019 consumed in the first quarter.
India expects a fiscal deficit of 3.3% of GDP in 2018-19 that seems quite challenging, given the weakening of data and the rise in expenses. The deficit was revised up to 3.5% of GDP in 2017-18.
The combination of wider trade and fiscal deficits added to lower reserves makes the currency weaken severely. The rupee keeps plummeting to new lows vs the USD.
India’s government usually solves this equation increasing subsidies and raising taxes. That combination will not work in a world that has a lower tolerance for fiscal and trade imbalances and a risk-off scenario. Additionally, the tax wedge is already a high burden. As Prateek Agrawal notes, “if one looks at GST and taxes on the affluent sections, India would rank as one of the highest taxed countries globally. For consumption, these sections are actually paying close to 60 percent of the income as taxes).
Additionally, printing more rupees is not going to solve the challenges.
The situation in India is not as desperate as in Turkey or Argentina, because FX reserves are not being depleted at a high rate, but the trend is concerning and the outlook for growth, trade and fiscal balances is weakening.
The government has preferred to raise taxes and increase spending, and the demonetization policy was a big mistake (read). All the cash that was taken out of the system came back a few months later. It is time for India to change its historical policies of subsidizing the low productivity sectors to penalize the high productivity ones with more taxes.
India can easily navigate this turmoil if it changes some misguided demand-side policies. The question is, will the government do it? Or will they prefer to blame an external enemy and increase the imbalances?
If the government decides to ignore these issues, India could become a big risk in emerging markets.
This past week Trump’s Energy Department announced a relaxation of a set of light-bulb energy efficiency standards ( EISA ) first implemented under George W. Bush and finalized under Obama. The standards were set to go into full effect in January 2020 (eliminating incandescent versions of three-way bulbs, candle-shaped, globe-shaped and reflector bulbs).
The autistic screeching from the corporate press and leftist “public policy” lackeys only underscores the lengths to which “ the Cathedral” will go to in order to maintain the hell-fire of climate alarmism. For Cathedral adherents the sky is quite literally falling. It is because of their prescient guidance that the rest of us are corralled into doing “the right thing” – namely spending $10 on a bulb to save $15 in electricity – over the next 30 years. Even though the market has always deprecated older technology in favor of newer, we just can’t wait when it comes to energy efficiency. In the words of New York Times columnist John Schwartz , we need the federal government to “force(d) Americans to use more energy-efficient light bulbs.” Please note that “force” here is a politically correct euphemism for “threaten with initiatory violence”. Now it is true, force can solve problems quickly. All the mugger needs to do is to wave his gun in my face and moments later his monetary problems are solved. One would like to believe that in the “land of the free” such state sponsored aggression would not be so readily lauded as the primary method deployed against perceived societal problems. Of course I do not expect the state to abjure this special power it has any time soon, it is the qua sine non of every state/government. When a such a body dictates to the citizenry what they may or may not manufacturer and buy, then that country is no longer entitled to call itself “the land of the free” or claim “liberty and justice for all.”
One of the more vocal critics of this rollback, an Andrew deLaski of the Appliance Standards Awareness Project went on record with some rather eyebrow-raising comments. For example
“The Trump administration is trying to protect technology that was first invented in the 1800s. It’s like trying to protect the horse and buggy from the automobile technology.”
Correct me if I’m wrong, but as I recall the government did not OUTLAW the sale or manufacture of the horse and buggy in favor of promoting the automobile. Consumers transitioned to the newer technology over time at a rate mediated by both the cost and advantages of the new technology.
To imply that removing regulations that are annihilating an industry is equivalent to “protecting” said industry makes about as much sense as saying someone who was in the process of knifing you to death but then pauses and begins to only punch you in the face is actually now “protecting” you. The truth is the polar opposite. The manufacturers of fluorescent and LED bulbs are the ones receiving state protection insofar as competing technology have being outlawed. But we’re “protecting” the planet so greater good trumps all. Makes one wonder what the left is capable of when they eventually hold power and the climate apostates are in their cross hairs. In the words of Cole Porter I suspect it will be “anything goes!”
I’m happy to announce that the 2018 collection The Economic Theory of Costs: Foundations and New Directions, is now available in paperback at a substantially reduced price (see the post announcing its original publication here). This collection includes contributions from both leading and up-and-coming scholars working in the Austrian tradition. The contributors include many of the senior faculty members of the Mises Institute, as well as many of the younger fellows. It focuses especially on price theory, the unique feature of Austrian economics.
The table of contents is as follows:
Introduction: “The Economic Theory of Costs in Perspective” Matthew McCaffrey
Cost and Choice
Chapter 2: “The ‘Income Effect’ in Causal-Realist Price Theory” Joseph T. Salerno
The Evolution of Causal-Realist Production Theory
Chapter 4: “Man, Economy and State, Original Chapter 5: Producer’s Activity” Murray N. Rothbard
Risk, Uncertainty, and Cost
Chapter 5: “The Myth of the Risk Premium” Jörg Guido Hülsmann
Chapter 6: “Time and the Theory of Cost” Jeffrey M. Herbener
Causal-Realist Price Theory: Debate and Synthesis
Chapter 7: “Monopsony Theory Revisited” Xavier Méra
Chapter 8: “Costs and Pricing: An Austro-Post-Keynesian Synthesis?” Mateusz Machaj
Economic Organization, Entrepreneurship, and the Firm
Chapter 9: “Austrian Economics and Transaction Cost Economics: Notes on a Doubtful Compatibility” Mihai-Vladimir Topan
Politicians from Alexandria Ocasio-Cortez to Dick Cheney are united in their agreement that deficits don't matter. Of course, that's exactly what a politician would say. Politicians score points by spending other people's money, so naturally, they don't want to hear anything about how prudence suggests it might be a good idea to not spend that extra 800 billion dollars they don't have.
But there is apparently little concern in Washington, DC as the annual deficit — for a single year, mind you — approaches one trillion dollars for the first time since the hit-the-panic-button days of the Great Recession. Except that now huge deficits are coming during "good" economic times.
Moreover, as the Congressional Budget Office has forecast, the debt load is expected to rise to 125 percent of GDP over the 20 years. That's higher than the US debt-to-GDP ratio during World War II.
This, of course, assumes no major geopolitical or economic disruptions, whicih would make things far worse.
For those who believe huge debts are no big deal, however, there's still no need to worry. After all, they say, actual debt payments are still only a minor issue. In fact, they're still lower than where they were during the early 1990s.
Consider the first graph, for example. If we take the federal government's interest payments, and calculate them as a percentage of federal tax revenue, we find 12 percent of what the feds take in has to paid out as interest. Back during the early nineties, on the other hand, the feds were paying more than twenty percent of their tax revenue toward debt service.
Source Office of Management and Budget and US Bureau of Economic Analysis.1
Of course, that's not all due to debt load. A lot of it depends on the interest rate. Back in late 1990, for example, the target federal funds rate was over 7 percent. The 10-year note rate was around seven percent also — compared to around two percent today. Not surprisingly, the feds were paying more on the debt they owed than under current conditions with a note rate of two percent.
But, the CBO estimates the 10-year note rate to double between now and 2020. I'm skeptical it will rise that fast from its current low levels, but when it does go up, so will the amount of money the federal government has to devote to servicing the debt. And that means cuts to things like defense, social security, and medicare.
Moreover, as the debt gets bigger and bigger, the need to keep the interest rate low via central bank "quantitative easing" will become more important, meaning middle class savers will take more of a hit to savings accounts and pension plans.
But perhaps the most striking aspect of the growing debt is the fact there really is no end in sight, and the US has no chance of ever paying off the debt.
We can see this when we compare the total size of the debt with government revenue.
Comparing Debt to Tax Revenue
Part of the reason people have a hard time comprehending the sheer size of the debt is because it is often compared to total GDP size. For example, it's easy to find online that the US debt-to-GDP ratio right now is around 105 percent. But what does that mean? One problem we encounter here is the fact when it comes to personal debt, people don't think of making debt payments as a percentage of their household "GDP." That wouldn't make much sense since the ability to pay off debt usually depends on income.
So what is the national debt as a percentage of the federal governments income? Income, in this case is the federal government's tax revenue. And it turns out by this measure, we're in uncharted waters.
In fact, the national debt is now eleven times annual federal revenue. And as far as I can tell, that's the highest it's ever been. (In 1945, the national debt was $251 billion, and tax receipts were $45 billion, meaning the national debt was 5.6 times tax revenue that year.)
Specifically, in 2018, the national debt ($21.4 trillion) was 10.9 times the size of annual tax receipts ($1.9 trillion). That's even higher than what it was during the dark days of the "stimulus" following the great recession. In 1981, on the other hand, the total debt load was only two-and-a-half times annual tax receipts.
From the perspective of household management, this is easier to comprehend. For example, if a household has an income-to-debt ratio like the federal government, that would mean an annual income of $100,000 and a debt load of a million dollars.
Now, at ultra low interest rates, if payments are interest-only, and non-debt-related daily expenses are fairly low, one could certainly manage this. But there are risks here. Interest rates could go up. Other expenses could rise. And in the end, the great-grandchildren are still paying off the debt for vacations and fancy trinkets their ancestors bought decades earlier. Even worse, if interest rates go up significantly, one's great grandchildren have a lower standard of living because they have to devote more and more of their possible savings and consumption to unproductive debt service.
None, of this, however, is likely to convince those who think debt doesn't matter. Some may still cling to the idea that the government can just print more money and purchase bonds to drive down interest and make payments.There are at least two problems that emerge here. The constant forcing down of interest rates is a problem for those who rely on pension funds and other investments that need relatively lower-risk yield to grow. Meanwhile, households that are on fixed incomes will be harmed by growing inflation, if it takes the form of consumer price inflation. If, on the other hand, the money-supply growth leads to asset -price inflation (which is what we have now) then this will make housing more unaffordable, while locking out lower-income and lower-net-worth people from a variety of assets, such as homes.
Now, none of this is an apocalyptic scenario, but it is a scenario in which people with low and moderate incomes must pay more, and are able to save less and invest less. It's a scenario of a standard of living that in decline. It's a scenario in which much of the population faces more roadblocks to wealth accumulation and must devote increasing levels of income and resources to paying off the debts of past generations. Government amenities such as welfare payments and transportation facilities must also shrink as more tax revenue must be spent on debt service. And, of course, the tax burden on ordinary people certainly won't be going down.
- 1. For interest payment information, see Table 3.2 from OMB's historical tables. https://www.whitehouse.gov/omb/historical-tables/
In today’s political discussion, one of the fundamental principles our society is built on has been on the defense: private property rights and the protection of such rights. Just take the current debate about the housing shortage in Germany as a prime example. A very prominent policy proposal is flat-out expropriation of housing. Another one is the limitation of ownership of residential apartments.
Ideas such as these are not only supported by extremists. An activist group in Berlin collected over 77,000 signatures for the expropriation of private real estate corporations in Berlin. No worries, the appropriate vehicle for something like this already exists by the way: the German capital city already has an expropriation authority (Enteignungsbehörde).
Some proposals are less obvious, though they have the same basis. Rent control or the prohibition of “luxury renovations” seem harmless – but they are still major intrusions in one’s property. After all, these policies would result in the owner, in the legal sense, without real power or control over his own property.
Opponents of those policies correctly emphasize that housing in public ownership will lead to a state of disrepair, as it happened back in East Germany and as it still does to this day in socialist countries. The reason is that if the government has its hands in the housing sector to such a large extent, an imbalance of supply and demand will occur. And, as Mises and Hayek have shown, if too much tinkering with market prices fails, the price system will ultimately fail as well, leading to chaos, or that state of despair. At this point, socialists will point to a central planning board as a solution, but that would be no more than a “pretense of knowledge.”
However, the fundamental problem, of course, is the attack on private property itself. Property rights have not been created – they are a result of human action. Property rights developed over time through the interaction of people. Through a bottom-up process, this institution came into being organically, as Carl Menger, the founder of the Austrian School of Economcis, put it. It was not someone deciding top-down that we shall have property rights now. It came into being because people who accepted and protected property rights had an advantage over others, and so those others adopted the same approach.
The reason property rights have to be in place is scarcity. If the world was a utopia without any scarcity, private property would not be necessary. In such a world there would be no conflict between people over goods and services. There would be no necessity of an economy at all, as there would be no reason to trade. You could just have whatever you want. But the real world is characterized by scarcity. In the real world, not all dreams come true and human wishes stay unfulfilled. Some people have certain desirable goods, while others don’t.
At this point, there are two options: a Hobbesian anarchy, where everyone fights it out with hands and fists (or worse) who “owns” what – owning it only until someone else, someone stronger, comes along again. Or, you safeguard ownership, so that property is protected and the owner can be assured that he or she will own whatever he or she owns for longer, ultimately having the option to cultivate, to further develop the property – or to trade it for something else. Thus, property rights are at the basis of a genuine rule of law.
Without property rights, distrust and violence gain the upper hand. But with property rights, a peaceful order can emerge. It is this that Berlin’s expropriators seemingly have not realized yet.