Why Private Roads Would Have Fewer Traffic Jams

Why Private Roads Would Have Fewer Traffic Jams

06/18/2019Gor Mkrtchian

The regular occurrence of traffic jams in major cities is not an immutable fact of urban life. Private roads show us the path out.

A shortage occurs when the price of a scarce good is set below the market-clearing price.1 If the state monopolized milk production, produced a fixed quantity of milk every year, set the price of milk at zero, and distributed it on a first-come first-serve basis, the result would be an anarchic rush to attain as much milk as possible, without consideration for the milk needs of others. A shortage would occur.

The state, for almost all of the highways and streets it controls, has set the price of this essential, scarce good at zero. Traffic jams are a manifestation of shortages in the road supply. Treating a good of which there exists a finite supply as though it existed in infinite abundance (had a price of zero) is incongruent with reality, and we should expect it to cause problems.

Congestion Pricing

If prices were allowed to adjust to demand, the price of using a given highway would increase when more people want to use it and decrease when fewer people want to use it.2 The result would be that people would think twice before driving at a costly time. Those who needed most to use the highway at a time of high demand would be willing to pay the price,3 while those who were willing to wait would adjust their behavior on the margin. When demand and hence prices for roads are highest, more people would go to the close bowling alley instead of the far away movie theatre, the closer restaurant instead of the farther one, or do something at home instead of going for a drive. They would be more cautious to schedule their errands before or after peak hours, instead of during them. As a result, the number of cars driving during peak hours would be reduced, mitigating traffic jams.

Employers would also react to priced roads by altering their employees’ hours. Employers would seek to schedule their workers’ shifts such that their commutes are during cheaper, lower demand hours, lest the employer need to pay higher salaries to offset the inconvenience of more expensive, slower commutes to attract employees of the same quality. The result would be more staggered commute schedules, such that fewer people are driving to or from work at any given time, reducing traffic.

Some businesses like restaurants and movie theaters would not react much, because:

Most restaurants, for example, are busiest during breakfast, lunch, and dinner time, and perhaps, in some cases, after show closings, for late-night meals. In other words, restaurants suffer from congested traffic, a peak load problem, during these times. But, were a restaurant management seriously to propose that its customers stagger their meal times ‘in order to reduce and spread out the rush hour peaks,’ it would be laughed right out of business in a trice. Its competitors would have a field day.4

However, other businesses would be more capable of beginning their employees’ shifts a few hours earlier or later than the bulk of other employers:

. . . if a price reduction is offered for off-peak travel, all employers will be tempted to accede to the wishes of their employees for cheaper travel. The ones who actually give in and reschedule their work forces will tend to be the ones whose employees’ productivity is increased to the least degree by working the same hours as the general labor force.5

The result would be social coordination of road use. Those industries which least need their employees working at a particular time would most strongly react to road prices by scheduling shifts to provide the cheapest commutes. If omnipotent, caring Martians were to dictate to every industry when their employees’ shifts should begin to both maximize workplace productivity and minimize traffic, the result would be the same as under a system of private roads.

Not only would the currently existing roads be rationed according to prices instead of the current free-for-all, the ability to make money from providing roads would lead to the widening of existing roads and the creation of new roads altogether when demand points to new profits to capture, “Privately-owned roads and bridges would have tolls set by supply and demand, just like prices are set in any other market. Infrastructure in need of repair or expansion would get it, whereas wasteful boondoggles would be minimized with private money on the line.”6

Likewise, road owners hoping to lure potential customers to choose their routes instead of rival routes (intra-market competition) or to use their routes more often instead of staying at home and driving less altogether (inter-market competition) would wish to make their roads as safe, uncongested, and attractive as possible. This means wherever currently there is a stop-sign that should be a yield sign, a 45 MPH speed limit that should be a 65 MPH speed limit, a traditional intersection that should be a roundabout, or any other change in road design and rules, private road owners would be driven by self-interest to adjust in order to maximize safety and traffic flow.

Contrast this with the current system under which certain government run intersections are infamous for being dangerous and accident prone. Why do political actors allow these preventable series of tragedies to persist rather than adjusting the designs and/or rules of those intersections? The overseers of government run roads are chosen democratically, rather than by the market. Whereas the private owner of a road bears direct legal and financial responsibility for its safety, mayoral, gubernatorial, and presidential elections, occurring once every four years, seldom depend upon the candidates’ positions on individual intersections or roads:

The dollar vote occurs every day, the ballot box vote only every two or four years. The former may be applied narrowly, to a single product (e.g., the Edsel) while the latter is a ‘package deal,’ an all or none proposition for one candidate or the other. That is, there was no way to register approval of Bush’s policies in areas 1, 3, 5 and 7, and for Clinton in 2, 4, 6, and 8. People were limited to choosing one or the other in the last presidential election.7

Mayor Jones and Governor Smith may go through their entire election campaigns and reigns without giving a thought to death-trap intersections under their jurisdictions that could stop killing people if only some signs or speed-bumps were added. With privatization, each road would have a special caretaker, an owner, whose livelihood and freedom depended on the quality and safety of their product.

Road privatization launches a triple-attack on traffic. First, prices for road use allow coordination in when and how much travelers use particular roads. Second, the road supply is increased through construction of new roads and expansion of existing roads. Third, entrepreneurs seeking to improve their services would optimize the designs and rules of their roads. In severe traffic, how often have our thoughts turned to state-enforced population control, when we just needed to know that keeping the price of a scarce good at zero causes shortages?

  • 1. The market-clearing price is the price at which there is a willing and able buyer for every unit of a good produced, and visa-versa.
  • 2. Uber’s surge pricing works similarly.
  • 3. If roads were privately provided, the state would no longer need to collect taxes to finance roads, and so society could use the money saved in taxes to pay for tolls, or anything else.
  • 4. Walter Block, The Privatization of Roads and Highways, Ludwig von Mises Institute, 2009, p. 60.
  • 5. Ibid., pp. 60-61.
  • 6. Robert P. Murphy, “A Gas Tax Hike is the Wrong Way to Fund Highways,” Mises Wire, 2018.
  • 7. Walter Block, The Privatization of Roads and Highways, Ludwig von Mises Institute, 2009, p. 196.
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The Quarterly Journal of Austrian Economics Volume 22, Issue 2 is Now Available!

09/24/2019Mises Institute

This issue contains selected lectures, papers, and abstracts of papers presented at the 2019 Austrian Economics Research Conference in Auburn, Alabama. Articles include Daniel Ajamian's "The Cost of the Enlightenment," Michael Rectenwald's "Libertarianism(s) versus Postmodernism and 'Social Justice' Ideology," Edward Fuller's "Keynes and the Ethics of Socialism," Jeffery Degner's "Family Formation, Fertility, and Failure: A Literature Review on Price Increases and Their Impact on the Family Institution," and more.

Available here.

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Prolonged Monetary Easing Paves Way for Wealth Redistribution

09/24/2019Victor Xing

Recent Democratic debates focused on rising wealth inequality, as candidates introduced various ideas to roll back disparity by taxing the affluent and redistribute their wealth. This would punish working professionals and small business owners without capital market access nor legislative influence. Meanwhile, malinvestment reliant on central bank stimulus and the unproductive of “zombie firms” sustained by ultra-low rates would proliferate unabated.

Both the GOP and Democrats tolerate monetary stimulus, for elected officials view effects of easy money (higher equities and lower bond yields) as beneficial to economic growth. This enabled the triumph of asset owners over wage earners to create the most potent inequality catalyst of the 21st century.

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Inherent risks in the financial market used to decimate malinvestment and define capital gain in terms of risk-adjusted returns. However, central banks’ volatility suppression policies such as quantitative easing and negative rates have enabled a decade of policy-fueled capital gain to outpace wage growth. In the case of QE, relentless bond buying and “reach-for-yield” would immediately boost asset prices, while impacts on the real economy (and especially wage earners) would materialize over Milton Friedman’s famous “long and variable (policy) lags.” Under monetary intervention, fortunes have diverged along the lines of asset ownership.

If central banks release volatility back into the market, malinvestment will reprice and valuations will again couple with risks, while prudent management would reward astute investors. This is an organic path to solve the inequality puzzle, but prolonged easing (as central banks mistaken structural low inflation from globalization for cyclical weakness) have increased developed economies’ sensitivity to higher interest rates. As major central banks grab the volatility tiger by the tail, they have fostered a vicious cycle where brittleness under ultra-low rates would beget even more easing:

debttrap.PNG

Wealth Redistribution Follows Monetary Intervention

As rampant asset price appreciation worsen inequality, angry voters left behind by a buoyant market would give rise to anti-establishment candidates unsympathetic to consensus views. As protectionist policies take hold, erosions to global value chains (GVCs) would lift inflation and threaten major economies’ debt-fueled growth model. To make matters worse, central banks resorting to money printing would risk sending bonds yields soaring under higher inflation and subsequently threaten risky assets.

Faced with voter anger and eager to counter the rise of anti-establishment challengers, elected officials would resort to another policy intervention to placate voters: wealth redistribution. In other words, wealth redistribution programs are often attempts to “amend” monetary policies’ distributional effects . Rather than unwinding policy disruption, authorities would double down with further measures to offset effects of prior policies. In the end, repeated interventions would exacerbate socioeconomic distortions to beget further redistribution.

At the July FOMC meeting, “a number of” Fed officials urged the central bank to be even more aggressive at interventions such as deploying quantitative easing, for they were encouraged by the perception  many of the potential costs of the Committee's asset purchases had failed to materialize.” The Fed officials did not connect the dots between rapid asset price appreciation, worsening inequality, and the 2016 election. As a result, their actions will likely pave way for further waves of follow-up wealth redistribution, as well as elected officials losing their seats to political insurgents capitalizing on popular discontent.

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The US Military Isn't As Invincible As It Thinks

09/24/2019Ryan McMaken

The United States itself has about a zero-percent risk of being invaded from any foreign power. This has been clear since 1945 that the Navy and nuclear arsenal make invasion of the US both politically and practically impossible for any foreign regime. The US Army could be totally abolished this afternoon without in any way increasing the risk of foreign military action against the US in North America.

The invincibility of the military itself, on the other hand, is something different. After all, the US military is mostly in the business of doing things other than protecting the borders of the United States. It primarily worries about projecting its power into every corner of the globe, propping up dictators in places like Egypt and Saudi Arabia, and bossing around foreign regimes that are no threat to the United States.

But most of this has long been based on the assumption that the US can do anything it wants to any country without any fear of significant repercussions to its allies anywhere.

Those days are rapidly coming to an end.

In the UK's Independent last week, Patrick Cockburn noted that some important targets are now sitting ducks, and the US and its allies have no economical defense:

On the morning of 14 September, 18 drones and seven cruise missiles – all cheap and unsophisticated compared to modern military aircraft – disabled half of Saudi Arabia ’s crude oil production and raised the world price of oil by 20 per cent.

This happened despite the Saudis spending $67.6bn (£54bn) on their defence budget last year, much of it on vastly expensive aircraft and air defence systems, which notably failed to stop the attack. The US defence budget stands at $750bn (£600.2bn), and its intelligence budget at $85bn (£68bn), but the US forces in the Gulf did not know what was happening until it was all over.

...a middle ranking power like Iran, under sanctions and with limited resources and expertise, acting alone or through allies, has inflicted crippling damage on theoretically much better-armed Saudi Arabia which is supposedly defended by the US, the world’s greatest military super-power.

...If the US and Saudi Arabia are particularly hesitant to retaliate against Iran it is because they know now, contrary to what they might have believed a year ago, that a counter-attack will not be a cost-free exercise. What happened before can happen again: not for nothing has Iran been called a “drone superpower”. Oil production facilities and the desalination plants providing much of the fresh water in Saudi Arabia are conveniently concentrated targets for drones and small missiles.

In other words, the military playing field will be a lot more level in future in a conflict between a country with a sophisticated air force and air defence system and one without. The trump card for the US, Nato powers and Israel has long been their overwhelming superiority in airpower over any likely enemy. Suddenly this calculus has been undermined because almost anybody can be a player on the cheap when it comes to airpower.

Meanwhile, the US is pouring money into expensive toys like the F-35 which after more than a trillion dollars offer no defense against dirt-cheap drones:

Compare the cost of the drone which would be in the tens or even hundreds of thousands of dollars to the $122m (£97.6m) price of a single F-35 fighter, so expensive that it can only be purchased in limited numbers. As they take on board the meaning of what happened at Abqaiq and Khurais oil facilities, governments around the world will be demanding that their air force chiefs explain why they need to spend so much money when cheap but effective alternatives are available. Going by past precedent, the air chiefs and arms manufacturers will fight to their last breath for grossly inflated budgets to purchase weapons of dubious utility in a real war.

It is unknown how long it will take for US military planners to accept "that they command expensive, technically advanced forces that are obsolete in practice. This means they are stuck with arms that suck up resources but are, in practical terms, out of date."

This doesn't mean, of course, that the US has no options here. The US could engage in a full-scale war against Iran, killing hundreds of thousands of Iranians and spending trillions. The number of US casualties would be very small by comparison, but probably not trivial. This bloodbath eventually incapacitate the Iranian state, but not before Iran destroyed the flow of oil out of the Persian gulf, and extracted its pound of flesh from US allies such as Saudi Arabia and Israel.

The effect on rivals like China and Russia would be electrifying as well, since the US would then be viewed as having slipped the bonds of rational foreign policy.

This means the situation now is far different from what it was before. But don't expect the Pentagon to act any differently. It will keep demanding trillions of dollars for weapons of war designed to fight a 1960's-style war. But that all sounds perfectly reasonable in a place like Washington, DC where both Capitol Hill and the Pentagon exist in a world of fantasy built on printed money.

See more:

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How Entrepreneurs Can Survive the Next Recession

09/20/2019Per Bylund

There has been increasing talk of a burgeoning recession, whether because of a historically rare decade-long economic expansion or recent reports of an inverted yield curve, which is traditionally an indication of a downturn. Any recession is hard on all Americans, but it can be particularly devastating for entrepreneurs, who often have more to lose. Not only does an economic ebb add to the uncertainty of owning and running a business, but it also means opportunities become scarcer, with fewer potential partners willing to invest, consume and otherwise enter into deals.

Recessions, of course, are famously hard to predict, but even when there's mounting evidence of a looming crisis, it can be hard to anticipate timing and how it will affect your industry. Simply closing shop is no solution. It might not even be an option. A better strategy is to prepare for the worst and make your business downturn-proof. But how does one do that? Here are four things to think about that can help make your business recession-ready ... just in case.

Full article at Entrepreneur

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The Conscientious Objector

“Because liberty is so fragile, its true defender recognizes that war is its greatest enemy, and therefore the true patriot is often the courageous individual who opposes a particular war because he recognizes that it is unjust — that it would be fought for the wrong purposes or that the risk for the loss of liberty is greater than any benefit to be gained by the war.” - John V Denson

If we have freedom: are we not responsible for what we do and what we fail to do? History is littered with stories about valor and bravery on the battlefield. Men who went off to war, who fought, and died. But what about the men who refused to fight?

The World War II draft operated between 1940 - 1946, and inducted some 10 million men into forced military service. Of those 10 million men, approximately 72,000 were conscientious objectors, of which 25,000 entered the military in noncombatant roles, another 12,000 went to civilian work camps, and as Robert Higgs points out in the book, The Cost of War :

The government also imprisoned nearly 6,000 conscientious objectors- three-fourths of them Jehovah’s Witnesses- who would not comply with the service requirements of the draft laws.

One of those American conscientious objectors was Desmond Doss. During World War II he refused to carry a weapon and kill the enemy. Despite this, he is credited with saving 75 of his fellow soldiers during the Battle of Okinawa. To this day he is the only conscientious objector to receive the Medal of Honor for his actions on the battlefield.

Franz Jägerstätter was not as lucky as Desmond Doss. He was an Austrian conscientious objector during World War II who refused to fight for Nazi Germany. On February 23, 1943, he was drafted to serve and on March 1, 1943, upon entering into the Wehrmacht garrison, he declared his Conscientious Objector status and offered to serve as a paramedic instead. His offer to serve as a paramedic was ignored and he was arrested and later killed for refusing to fight for Hilter. He left behind a wife and three children.

These were men who dared to say no to war and murder and these are just two examples out of 1,000’s of men during that war. Why did these men oppose war? People may profit from studying their examples. For, As Lew Rockwell once pointed out :

“We don’t oppose the state’s wars because they’ll be counterproductive or overextend the state’s forces. We oppose them because mass murder based on lies can never be morally acceptable. So we don’t beg for scraps from the imperial table, and we don’t seek a seat at that table. We want to knock the table over.”

Conscientious Objectors refused to be pawns and knew that war was morally unacceptable, with some paying the ultimate price. Sadly, in a sense, there is a case to be made that these Conscientious Objectors were the only ones who truly did their job and upheld their oath.1 For all members of the military are instructed: they have a duty to obey all lawful orders, and conversely, they also have a duty to disobey unlawful orders. This principle is embedded in the precedent of the Nuremberg Trials whereby Nazi war criminals invoked the “just following superior orders defense” and were nevertheless found guilty as the orders were found to be illegal. It is worth noting at this point, that illegal orders can happen at any time, wartime or peacetime, civilian or military.

Does ‘Conscientious Objection’ relate only to war and military personal? Or, are there other circumstances to which this term may be applied? I contend that conscientious objection can and should apply to a variety of circumstances other than war, for example whenever morality and ethics are at play. Objections based on one’s conscience may arise in numerous and more mundane circumstances. The world would be a much better place if the principles of conscientious objections were more universally applied, and daily.

Consider this, the category of human action can refer to either an action, or an inaction. Both actions and inactions potentially have value, as Ludwig von Mises noted:

“For to do nothing and to be idle are also action, they too determine the course of events.”2

Let’s ask ourselves: Is Patriotism defined as blind obedience to governmental authority? Can saying ‘no’ be more heroic than saying ‘yes’, when your conscience tells you its wrong that the Government requires innocent blood on your hands? As the Afghanistan war enters its 18th year, it’s long past time we reconsider the examples set by those who conscientiously objected to war. In the words of the late Justin Raimondo,

“We have to show the American People that war is not patriotic.”

  • 1. Murray Rothbard noted that “ There have been only two just wars in American history that were, in my view, assuredly and unquestionably proper and just.”
    https://mises.org/library/just-war
  • 2. Murray Rothbard also stated in Man, Economy, and State that “Action does not necessarily mean that the individual is ‘active’ as opposed to ‘Passive,’ in the colloquial sense.”; See also Carl Menger’s discussion of useful inactions in Chapter 1, Principles of Economics.
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Let Alaskans Decide The Fate of Alaska's Forests

09/19/2019Ryan McMaken

Mother Jones today reports on how the Trump administration is loosening some restrictions on logging in some public-lands areas of Alaska.

In response, a group of indigenous women traveled to Washington to oppose the plan.

Most of the article goes into how the forests — left untouched — are good for local residents, and how the forests are allegedly a defense against global warming.

But it was a phrase in the headline that struck me most: "These Native Women Traveled 3,000 Miles to Stop It."

That is, a group of people from the Alaska panhandle, in order to talk policy about a forest right next door, had to fly thousands of miles to do so.

That strikes me as a bit odd.

I was reminded of the outcry from non-Alaskans when the Feds proposed renaming the state's highest mountain, now called Denali. Back in 2015, I wrote:

Here's the basic story: About 100 years ago, some people started calling Denali mountain in Alaska "Mount McKinley." Eventually they managed to convince the federal government to make "McKinley" the official name. In 1975, however, the government of Alaska petitioned the federal government to change the name back to "Denali." To this day, Alaskans routinely refer to the mountain as "Denali" in spite of the fact that the Federal government, seated 4,000 miles away in Washington, DC, had not respected their request. Then, during a recent trip to Alaska, Barack Obama decided that the federal bureaucracy is going to start using the name "Denali" for the mountain.

Reading this, the whole thing should strike any sane person as immediately absurd. Why do people in Alaska have to ask a bunch of non-Alaskans thousands of miles away to call their name by the locally preferred name? If the Alaskan government, not to mention most of the locals, call a mountain "Denali," then the mountain is obviously named "Denali."

But that's not how it works in the land of the free. Here in America, apparently, people from Ohio (McKinley's home state), 3,000 miles from the mountain in question, get to veto Alaskan petitions. In this article in the Washington Post, a writer from Ohio makes the case (with a straight face, no less) that it's mean and nasty of the federal government to defer to the Alaskans about the names of Alaskan mountains. For the Ohioans, it seems, it is of monumental importance that the United States Congress, composed of 533 non-Alaskans, and three actual Alaskans, decide what that mountain should be called.

This latest controversy over an Alaskan forest just highlights the absurdity of federal control of federal lands yet again. But while Mother Jones highlights the fact Alakans had to travel across a continent to address issues going on 50 miles away, the publication nonetheless considers this to be perfectly right and normal.

This, of course, is to be expected from those with a progressive mindset. For them, policy should be decided by "experts" perhaps 3,000 miles away who ought to control every aspect of life for people who have far less power and far less ability to affect policy than the experts in the metropolitan centers of power.

If this group of Alaskans fails to win the day, then that's just a sign that maybe some California billionaires should get involved bossing Alaskans around from a different ideological perspective.

The idea that It's the same attitude, of course, that we encountered in response to the Brazilian forest fires in recent months. Wealthy, powerful first-world politicians united to boss around impoverished Brazilians and tell them how to run their country. After all, we were told the Brazilian forests aren't really Brazilian anyway. They belong to everyone else because they are "the lungs of the world." Therefore, in their minds, the Frenchman Emmanuel Macron ought to be dictating to the Brazilians on the matter.

The same thinking rules the day in Washington, DC, including among Republicans who have no intent of relinquishing control over federal lands they now enjoy. For instance, when questioned about his willingness to decentralize control of federal lands to the states, Trump appointee Perry Pendley of the Bureau of Land Management called the idea "silly" and "illogical" even though he has admitted that the authors of the US constitution never envisioned the sort of vast federal land holdings that are now common in the US.

If there's anything DC politicians can agree on, it's that Washington, DC should have the final say over everything everywhere. This, of course, even extends to foreign countries.

For them, the idea of leaving Alaska to the Alaskans remains simply a bridge too far.

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3 Charts Showing Just How Boxed-in the Fed Is

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:

fed funds.png

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:

unemployment.png

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:

excess reserves.png

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.

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Joey Rothbard

09/17/2019David Gordon

Today would have been Joey Rothbard's 91st birthday. She was Murray Rothbard's "indispensable framework." She was a scholar in her own right, but she devoted her life to helping Murray. She was a wonderful friend, and I miss her very much.

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"This Is Basically Clown World," Jeff Deist Talks Negative Interest Rates on RT

09/13/2019Jeff Deist

Jeff Deist joins Rick Sanchez to weigh in on the European Central Bank’s introduction of negative interest rates and why it signals a global recession.

Europe’s desperation move to avert global recession

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European Central Bank Doubles Down on Ultra-Easy Money

09/13/2019Ryan McMaken

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.

entralbanks.PNG

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!"

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 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.

The extremely low interest rates in the Eurozone hit the bank’s investment branch hard...

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":

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.

fedfunds_0.PNG

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:

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