Coronavirus – We’re All In This Together

Coronavirus – We’re All In This Together

 This weekend, six states now have a “shelter in place” mandate that orders all residents to stay at home unless for essential work, supplies and services, and health and safety matters.  Additionally, all non-essential businesses must close.  We expect (and hope) that other states follow suit as we fight to slow the spread of the pandemic.

Now that the coronavirus has reached the U.S. and has spread across it, the best action for the economy and the U.S. is to take temporary pain for the long-term good.  The coronavirus has surpassed anyone’s expected measures of infection in terms of its contagion rate.  In our talks with epidemiologists, the main goal of a virus is to survive, and it does this by infecting new hosts and reproducing.  If it’s too fatal, the virus naturally dies out.  If it isn’t resilient enough and the body can kill it effectively, the virus naturally dies out.  The coronavirus is, unfortunately, hitting a sweet spot in this zone and at this point, the best action to fight it is by limiting contagion.

 From our perspective, the market, like the rest of the U.S. has started to settle into this new reality.  During this new normal, we continue to look for signs that the government and the Federal Reserve are enacting measures to ensure that the economy continues to function as it should during this time.  To this extent, the Federal Reserve implemented a variety of programs this morning to ensure that liquidity will still be available by buying assets from banks allowing them the ability to then lend that money to businesses.  The Federal Reserve is also looking into measures to directly help small and mid-size companies.

 On the White House front, we are looking for news of what the “phase 3” coronavirus bill will contain.  This bill is expected to contain stimulus measures to help businesses survive this new normal of limited mobility and social distancing.  It is also expected to provide direct stimulus to U.S. families.  The bill did not pass through the Senate with Sunday night’s vote and is currently back to the Senate for further negotiations and revisions. 

 Additionally, we see the President signing the Defense Production Act as a positive for the market.  If an already approved drug such as hydroxychloroquine (previously used to treat malaria) proves effective in treating coronavirus, the President can order all pharmaceutical companies to produce the drug.  Additionally, if a new drug is discovered, approved and treats the disease effectively, the President can order the same.  This will drastically decrease the burden on hospitals, allow social distancing and travel restrictions to be lifted and reduced, and speed up the timeline of economic recovery.

Government-Sponsored Corporatism Leading to Rise of Populism

Government-Sponsored Corporatism Leading to Rise of Populism

By Daily Bell Staff

2016 Campaign’s Populist Tone Rankles America’s CEOs … Chief executives at big American companies are increasingly frustrated by the populist tone of the presidential campaign, and concerns are mounting in boardrooms and corner offices that anti-business rhetoric may solidify even after the November election. – Wall Street Journal

This Wall Street Journal article makes the point that Trump has positioned himself at the head of an increasingly anti-business GOP.

More:

The GOP “has been captured by a large number of people who basically do not like big,” said Judd Gregg, a Republican former U.S. senator and governor of New Hampshire, who sits on the board of Honeywell International Inc.

By default, there’s nothing wrong with “big.” Theoretically, big business can mean economies of scale and economic efficiency. The oversized corporations of the US, however, are not natural products of the market. Instead, they are the artificial results of government policy.

As we’ve often pointed out, there are three areas where judicial force has been applied, swelling corporations to titanic sizes.

The first is intellectual property rights.

If corporations had to protect their own trade secrets rather than relying on government to do it for them, it is very probable that many corporations would be a good deal smaller.

The second is corporate personhood.

Corporate personhood makes it a good deal easier for individuals to avoid culpability for corporate acts. Those lodged within a corporation can often avoid penalties that would otherwise expose them to significant personal jeopardy. Because they stay in charge, continuity isn’t disrupted and exceptionally aggressive corporate strategies can be maintained.

The third area is monopoly central banking.

Monopoly fiat money benefits the world’s largest corporations inordinately. The money coming out of central banks, especially Western central banks, often finds its way to the largest multinationals first, providing significant liquidity to these massive entities.

There are other ways that “big business” is artificially supported and propped up in the West, but these seem to be the most significant.

To claim that the current US “populist” environment is anti-big business is to radically misconstrue the reality of American capitalism. American capitalism has very little about it that is laissez-faire.

US judicial decisions have created an environment in which gigantic corporations can flourish.

Thomas Jefferson and other founders were so worried about corporate bigness that corporate creation was lodged at the state rather than the federal level.

It was only after the Civil War that judicial decisions began to lay the groundwork for the modern corporate state.

The modern corporate state is almost antithetical to the agrarian republicanism that Jefferson and others had envisioned – a free-market republicanism that was responsible for initial US growth. This Wall Street Journal radically misrepresents the reality of business in the US and throughout the West.

Rhetoric from Republican candidates has grown more populist and less friendly to big business than at any time in decades, while the Democratic race is being influenced by the rise of liberal Vermont Sen. Bernie Sanders.

Some of these instincts gave rise to the tea-party movement in 2009 and sent dozens of more conservative lawmakers to Washington the following year, fueling gridlock on Capitol Hill.

In the past, The Daily Bell has very clearly identified Tea Party sentiments with an underlying free-market instinct present in the US since its founding. In fact, this sentiment was present in the US long before the Constitution.

Instinctively, people know that “big business” does not present a competitive, free-market profile. The US and the West generally have developed a system more aptly characterized as “corporatism.”

Entrepreneurialism continues to diminish in the US. Regulations, taxes and the underlying judicial support for larger corporations are making it increasingly difficult for people to make even a modest living.

A recent article  entitled, “Authorities Fear Civil Unrest, Buy-Up Gear To Arrest, Disperse, Control Riots,” reported on the growing popular frustration with the direction of US society.

Riot control systems are expected to “generate revenues of over USD 3.5 billion by the end of 2020,” with North America being one of the primary growth areas for upgraded weapons due to “militarization of the police department and other law enforcement agencies.”

The article also mentioned recent comments by top insurer Lloyds in a report warning of a “pandemic of global civil unrest that could go viral, threatening international stability.”

Market-based economies generate entrepreneurial republicanism – a system that encourages both freedom and prosperity.

The US’s “Fortune 500” approach to “big business,” encourages the mingling of government power with titanic private interests. Over time, this trend creates corporatism, which can also be described as fascism. The interlocking, anti-freedom environment of modern Western society is generating increasing push-back for a number of reasons. It’s not a trend that will likely diminish.

Conclusion:  As always, we encourage independence – a “prepper” mentality – focused on personal preparedness. What happens to the larger society is beyond your control, but you can have an impact on your own personal environment. And you should.

Capitalism is not failing: the Question No One Is Asking About Central Banks

The Question No One Is Asking About Central Banks

By Daily Bell Staff  

Central banks face credibility test ... The retreat from unconventional monetary policy was always going to be tricky. While economists are almost equally divided on whether Federal Reserve chair Janet Yellen will raise U.S. interest rates this week, the bond market suggests policy makers will wait. October's Fed minutes will be scrutinized for signs around the argument to raise rates at the final meeting of the year What are the limits to the power of central banks? That is arguably now the most important question in global finance. – Financial Times

We can see from this excerpt that the efficacy of central banking is assumed. The only question we need to ask is, "What are the limits to the power of central banks?"

Over and over, this is how the conversation is controlled. One can never ask the big question: Are central banks even necessary?

No, the necessity for central banking is never in question.

The central bank promotion has been ongoing for a century now – but it seems nowhere near its end-date from the standpoint of the elites that back it.

It's more in vogue than ever (for them) even though the ramifications of central bank policies are increasingly grim.

In fact, the Financial Times article allows that the performance of central banking has been fairly disastrous and that central bank credibility is shaky (to say the least). But it positions these issues as a net negative for markets and economies:

What is unfortunate about the waning credibility of the central banks is that confidence holds the key to where we go from here. The collapse of the oil price has delivered a spectacular windfall to the household and corporate sectors — energy companies apart — of the developed world.

The imperative is to persuade consumers and businesses to spend that windfall. When markets are palpably losing confidence in central bankers, such spending is less likely to materialize.

Here's another dangerous, false assumption: the "necessity of consumer spending."

Economies do not "demand spending." As Thomas Jefferson pointed out, a free-market republic is likely an agrarian one where people, in aggregate, control the sources of their survival including farms and the lands supporting the farms.

But the current, controlled, fiat-money environment has removed people from the land and created an entirely new economy to employ them. This "new" economy depends on "consumer spending."

No spending, no economy.

The modern economy is dependent on large volumes of debt-based notes. But these days the "money" is not being circulated because people increasingly don't believe in the modern model.

The crisis of confidence taking place in the West and around the world has to do with the malfunctioning of the current system and people's appraisal of its failure.

This is a significant – epochal – occurrence. But one that seems to be flying below the proverbial radar.

The Financial Times article ends by stating that, "The most difficult trick is to manage an orderly decline in the price of assets that had first been puffed up by the world's leading central banks."

This is true, but misses the point.

The trick is to find a SUSTAINABLE economic model that is not dependent on the artificial production of central bank money.

This is not something those in charge of the current system will try to do, however. Their wealth and control rests on the continuance of the current system.

The challenge to our modern-day central banking economy may arrive anyway – but it will come from people simply refusing to support the system as it is.

Conclusion: 

Your challenge is to prepare for difficulties that are forming as a result of central banking failures. Which is why we mention regularly that you need to secure elements of your own survival and your family's through various common sense measures.

How Economic Disinformation Works: A Modest Case Study

How Economic Disinformation Works: A Modest Case Study

Daily Bell Staff

Fears grow of repeat of 2008 financial crash as investors run for cover... As leaders gathered in Davos, FTSE 100 was gripped by panic selling and entered bear market with Dow Jones also plunging. – UK Guardian

Dominant Social Theme: Fears are growing as the world's economic system trembles on the verge. What to do?

Free-Market Analysis: Let us recall how long ago we were misled and what techniques were used. This Guardian article provides us with a proverbial "teachable moment."

In broadest terms, the article, like others of its type, is written to engage our emotions and excite our fears. Then, toward the end of the article, we are exposed to various solutions and soothing words that seem to indicate that all will be well sooner or later if we just trust the correct authorities. In other words, first the article excites and then it calms.

More:

The Dow Jones Industrial Average slid more than 450 points, or 2.9% in morning trading. The Dow Jones Industrial Average slid more than 450 points, or 2.9% in morning trading ... Earlier this week, China recorded the slowest rate of economic growth for 25 years.

You see? The drumbeat begins immediately. The statistics lend credence. Then there is this, the crux paragraph:

Fears that the global economy could be heading for a repeat of the 2008 financial crash have sent shockwaves through financial markets – prompting a rush to safe havens by investors. Oil prices fell to a fresh 12-year low on Wednesday and metal prices tumbled in response to warnings that China's slowdown could derail the global recovery at a time when central banks, which came to the rescue in the credit crunch, have only limited firepower.

First we are terrified and then, quietly, an oboe sounds – the first tentative notes of salvation couched in skepticism ... "Central banks, which came to the rescue in the credit crunch, have only limited firepower ..."

Some more:

William White, a former chief economist of the Bank for International Settlements (BIS), the central bankers club, who now chairs the OECD's review committee warned that central bankers had "used up all their ammunition"... "The situation is worse than it was in 2007.

If central banks cannot help us, what can? Cleverly, the article suggests a sub-meme: the wisdom of the bankers of Davos. First we are reminded that White's pedigree is derived from the awesome power of the BIS and then this:

The BIS was one of the few organizations to warn during 2006 and 2007 about the unstable levels of bank lending that eventually led to the Lehman Brothers crash.

Okay, maybe the BIS did warn, but we can count on our fingers, toes and teeth, the many alternative media blogs and websites that were sounding the alarm about central bank low-rate profligacy throughout the 2000s. Of course, why let inconvenient facts spoil the music.

The head of the Swiss banking giant UBS, Axel Weber, turned the screw by warning that the world was stuck in an era of low growth ... His comments came after the chancellor, George Osborne, warned in a new year speech of a "cocktail of threats" to the UK's prospects from an increasingly uncertain world economy.

Minor chords are now being presented. Important people at the heart of business and finance are sounding the alarm. (Never mind that the alternative media has been doing the same thing far longer.)

Importantly, none of the imminent catastrophes we face are truly explained. We are apparently in the grip of a disaster that has no face or real explanation.

Toward the end of the article (a fairly long one), the themes repeat and expand as the notion of a solution begins to be presented. There is the always-quotable Nouriel Roubini:

[Roubini said] the crash was overplayed: "It is not going to be like 2008-09. There is not the excessive leverage in the financial system that there was last time."

Roubini also contributes to the meme of central banker omnipotence, saying that 2016 is going to be a difficult year and that "central banks [should] respond with extra stimulus."

Now the "finale" ... a triumphant one. We learn from Pierre Moscovici, the European economics commissioner, that "central banks retained some firepower to prevent another crisis" after all.

"I don't feel that the financial crisis is coming back. We don't feel that we are facing the risk of a breakdown in world growth, but there are downsides that we need to address," he said.

Maurice Obstfeld, the chief economist at the IMF, adds to the uplift, saying that central banks should be more relaxed about printing money and keeping rates low. Sure, they may "overshoot" inflation targets but he believes they should be more concerned about deflationary pressures.

It sounds like it will be okay after all. In fact, if you haven't taken the time to learn about alternative (non-mainstream) financial realities, it is easy to come away from an article like this with two main impressions.

First, the world is in a terrible state and second – one way or another – government and banking "experts" will figure out how to combat the multiple, looming catastrophes.

The article succeeds partially by omission because it does not explain fundamental economic truths. We never learn, for instance, that central banking is price-fixing and price-fixing inevitably distorts and then ruins economies.

The article never concerns itself with marginal utility, the idea that the market itself creates prices and that nothing else but the Invisible Hand can do so. It gives us almost no frame of reference (well, there is one brief allusion to overly low interest rates) as to why these market disasters occur over and over again. It maintains that economic growth can be summoned via monetary (Keynesian) debasement.

Somehow, flooding the market with debt-based notes creates prosperity. It's simply not so. One can argue, of course, as to whether such articles are premeditated. We have long since concluded that they probably are.

The antidote is education and access to credible information. Fortunately, there is the Internet, a miraculous device that like binoculars, allows us to look at the "big picture" and then at the details.

We will still need to learn where to look, of course. But one should keep in mind that information that stresses competitive forces is to be preferred over theories that emphasize a concentration of power among a handful of "chosen" controllers. Austrian economics is perhaps the best theoretical construct in this regard.

Internalize this harsh reality: Government won't protect you. Central bankers will only make things worse. Internalize, as well, the idea that the market provides us with results ... always. Human beings cannot control the Invisible Hand that will write as it wills.

Most everything we read in the mainstream media is propaganda. (Of course, one must be careful about the alternative media as well.)

Conclusion: 

Don't be seduced by the mainstream media. Its memes are easy to absorb, which is why they are convenient to swallow. But the problems with the world's economy are getting worse and will not end well. It behooves us to work hard to learn the truth. There is no other way.

How GDP Data Blocks Us From Seeing the Recession

How GDP Data Blocks Us From Seeing the Recession

By Roger McKinney

Economists look to GDP to determine if the US economy is in a recession. Generally, it takes two quarters of the economy shrinking (economists call it negative growth, but they’re linguistically challenged) for the National Bureau of Economic Research to declare a recession. Of course, those two quarters indicate the bottom of the recession, by definition.

The problem with GDP accounting is that it ignores about half the economy. GDP was designed to calculate new, value added production. Using standard accounting lingo, GDP is not gross anything; it’s net production. Net numbers, such as net profit, are the gross (total) sales minus the costs of doing business, such as material costs. That’s GDP. So GDP mostly counts retail sales and government spending while leaving out most industrial production. And that’s one reason that recessions take mainstream economists by surprise.

Recessions start in the mining, energy, industrial production sectors that are missing from GDP. They spread to shipping, railroads and trucking and finally hit retail, GDP, last. The odds are good that the US will hit its two quarters of shrinking GDP early next year, but that won’t be the beginning of the recession. It will be the bottom. The beginning will be calculated from the peak of previous GDP growth, probably the second quarter of 2015.

We have been watching the slow motion destruction of the industrial/capital goods sector for a while:

Year-over-Year, Durable Goods orders tumbled 3.6%, accelerating weakness from August, according to Zero Hedge.

From railroads to manufacturers to energy producers, businesses say they are facing a protracted slowdown in production, sales and employment that will spill into next year. Some of them say they are already experiencing a downturn, said a recent WSJ article.

“The industrial environment’s in a recession. I don’t care what anybody says,” Daniel Florness, chief financial officer of Fastenal Co., told investors and analysts earlier this month.

Most of the new jobs created since the recession has come from the oil and gas industry:

Direct employment in the oil and gas industry rose 40% from 2007 through 2013, as compared to a decline of about 3% in the overall U.S. economy.

With the bust in oil and natural gas prices, those jobs are evaporating. Caterpillar, the epitome of capital goods production, has lost sales for a couple of years and looks forward to a bleak future:

Caterpillar said Thursday that its full-year sales and revenue for 2015 and 2016 have weakened, with 2016 revenue now projected to be 5% lower than 2015′s already diminished levels.

Walmart is facing declining sales and that may mean that the disaster in industrial production is finally bleeding over into retail. It's only a matter of time before the stock market catches on and corrects the over valuation that has caused it to sail far above that justified by profits.

September Jobs: Some Numbers Bubblevision Didn’t Mention

September Jobs: Some Numbers Bubblevision Didn’t Mention

By David Stockman

The September establishment survey showed a 248k job gain, but that was the seasonally maladjusted, preliminarily guesstimated version which will be revised in October and November, and then re-benchmarked several more times in the coming years. So let’s take a pass on the enthusiasm with respect to this fleeting monthly delta and consider a couple of trend points evident in this morning’s release—-data points which aren’t going to get revised away and which actually provide some fundamental insight about the actual “employment situation” and the true condition of the US economy.

My favorite number is right at the top of the BLS table and it’s 155.9 million. That is the civilian labor force number for September and it compares to 154.9 million reported for October 2008 way back when the financial crisis was just erupting. The reason that rather tepid gain of 1 million labor force participants over the course of six years is important is that during the same period the working age civilian population (over 16 years) rose from 234.6 million to 248.4 million—-or by 14 million in round terms.

That’s right, the labor force grew by only 7% of the gain in adult population. That explains, of course, why the labor force participation rate of 66.0% back at the time of the crisis has plunged to a 36-year low of 62.7% in September. Or to put it another way, the employment-to-population ratio of 59.0% last month compared to just under 62% six years ago and 64.2% in the year 2000.

Needless to say, that huge 500 basis point decline in the true jobs ratio is dramatically more important than the monthly jobs delta—even if the later did trigger a run-the-stops burst by the robo traders within seconds of the release. The fact is, the plummeting rate of employment among the adult population means that the effective rate of taxation on labor hours worked has risen sharply, and will continue to do so as the baby boom ages.

So you don’t have to be a raving supply-sider to realize that a rising tax rate on labor—expressed as either current taxes or future debt service— as far as the eye can see is not a formula for the kind of perpetual earnings growth that is being capitalized by today’s bubblicious stock markets; and that’s especially true in a world crawling with cheap workers and massive excess production capacity stimulated by 14 years of financial repression and ultra-cheap capital by the world’s central banks.

Indeed, the single most important number in today’s report is 102 million, which is the rounded sum of adults either not in the labor force or unemployed, and it amounts to 41% of the adult population. Stated differently, that’s the number of adults who do not contribute to current production and must be supported either by family breadwinners or the state—-and nowadays especially the latter.

Indeed, when these trends for prime age workers (25-54 years) are viewed, the case is even more compelling. The employment ratio for that group is at 1982 levels——a  ratio that prevailed when the female labor force participation rate was still climbing strongly. On a sex-adjusted basis, the prime age employment ratio has never been as low as it has remained since the end of the Great Recession.

Among other things, these dismal employment ratio numbers tells you why the Wall Street patter about PE multiples being at or below historical norms is so wrong-headed. The capitalization rate for the American economy should be falling because the dependency burden faced by workers and entrepreneurs is soaring at rates never before witnessed. Going back to September 2000, for example, there were only 76 million adults not in the labor force or unemployed, and that represented just 35.8% of the adult population of 213 million.

This means there has been a 26 million gain in the number of adults not working—-even part-time—during that 14 year period. About 10 million of that gain is accounted for by retired workers on social security—-a figure which has risen from 28.5 million to 38.5 million during the interim. But where are the other 16 million?  The answer is on disability (+4.5 million), food stamps (+25 million), survivors and dependents benefits, other forms of public aid, living in parents’ basements on student loans or not, or on the streets.

There should be no mistake about the implications of these baleful trends as once again reinforced in today’s “jobs Friday” report.

They do not represent merely a social problem or the fact that Washington’s fiscal calamity is going to get steadily worse in the years ahead. They also embody an endemic economic problem and staggering challenge to the Keynesian money printing regime now incumbent in Washington.

In the first place, the massive monetary experiment since 2000—which has seen the Fed’s balance sheet grow from $500 billion to $4.5 trillion or by 9X—-has not caused macro-economic performance to improve. The employment ratio has plunged; full-time breadwinner jobs have actually shrunk; total labor hours employed have been stagnant; real GDP has grown at only 1.8% annually for 14 years—compared to 4% annually between 1956 and 1970; and real net capital investment is 20% below its turn of the century level.

Breadwinner Economy Jobs

So what is really embodied in today’s report is more evidence that America’s dependency ratio is still rising and that the already crushing burden of the welfare state will weigh ever more heavily on an economy that is visibly failing as measured by any of the fundamental trends of performance. Indeed, it is well to recall that even today—after what the clueless occupant of the White House claims as 10 million new jobs when 90% of that number, in fact, represents “born again” jobs relative to the 2007 peak—-there are 110 million Americans living in households receiving means-tested benefits and 158 million in households that receive transfer payments of all types.

Yet as the burden of taxation and public debt resulting from these trends weigh ever more heavily, it leaves the mad money printers resident in the Eccles Building stranded in an impossible corner.

Unless they wish to destroy the monetary system and keep money market rates at zero forever, they will have to normalize interest rates. And rising interest rates—eventually 300-400 basis points at minimum— on top of rising taxes do not amount to a formula for booming growth. Or even any meaningful economic growth at all.

In that context, capitalizing S&P earnings at 20X reported profits on the eve of the coming storm is a fool’s errand. And you can look it up. What really counts for growth and stock market value beyond the day trader’s horizon is all right there in the September jobs report—-even if they didn’t mention it on Bubblevision.

Keynes, Lenin, and Hyperinflation

Keynes, Lenin, and Hyperinflation

Gary North 

In 1919, John Maynard Keynes became an international figure of considerable influence because of his book, The Economic Consequences of the Peace. It was a critique of the Versailles Treaty's imposition of reparations payments on Germany in the aftermath of World War I.

In that book, Keynes made the following observations.

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers', who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.

This became one of the most widely quoted statements from the book. Yet the book really was not about inflation, Lenin, and the destruction of capitalism. But the quotation was simply too good to resist for defenders of the traditional gold standard.
Beginning in the 1970's, the authenticity of the quotation from Lenin was called into question by a series of economists and historians. There is no reference to this in Lenin's collected works. The hostility to the gold standard is so great, that this is one time that Keynes was called into question by his academic acolytes. If it is a question of attacking the gold standard or calling Keynes into question, Keynesians are willing to call Keynes into question. First things first.

Yet it turns out that Keynes was right, and the critics of Keynes on this one particular point have been wrong. Lenin said far more than the brief extract attributed to him by Keynes. Lenin made it very clear why he believed that inflation will ultimately destroy capitalism. He was overseeing the process of this destruction, and his use of paper money was central in his organizational plans. Here is what he said:

Hundreds of thousands of rouble notes are being issued daily by our treasury. This is done, not in order to fill the coffers of the State with practically worthless paper, but with the deliberate intention of destroying the value of money as a means of payment. There is no justification for the existence of money in the Bolshevik state, where the necessities of life shall be paid for by work alone.Experience has taught us it is impossible to root out the evils of capitalism merely by confiscation and expropriation, for however ruthlessly such measures may be applied, astute speculators and obstinate survivors of the capitalist classes will always manage to evade them and continue to corrupt the life of the community. The simplest way to exterminate the very spirit of capitalism is therefore to flood the country with notes of a high face-value without financial guarantees of any sort.

Already even a hundred-rouble note is almost valueless in Russia. Soon even the simplest peasant will realise that it is only a scrap of paper, not worth more than the rags from which it is manufactured. Men will cease to covet and hoard it so soon as they discover it will not buy anything, and the great illusion of the value and power of money, on which the capitalist state is based will have been definitely destroyed.
This is the real reason why our presses are printing rouble bills day and night, without rest.

This statement was reprinted in an article by a pair of economists, Michael V. White and Kurt Schuler, who included it in their article, "Who Said 'Debauch the Currency': Keynes or Lenin?" It was published in the Journal of Economic Perspectives, Volume 23, Number 2 (Spring 2009), p. 217. This is a publication of the American Economic Association. The article is online.
The reason why scholars did not find it in the collected works of Lenin is that this was reported in newspapers at the time. The authors of the journal article describe this article. "A report of an interview with Lenin was published on April 23, 1919, by the Daily Chronicle in London and the New York Times. Dated April 22 and cabled from Geneva, the article claimed to be based on 'authentic notes of an interview with Vladimir Ulianoff Lenin, the high priest of Bolshevism, which were communicated to me by a recent visitor to Moscow.'"
Because the author of the article was not identified, skeptics may decide to criticize it as a hoax. But Lenin never indicated that it was a hoax, nor did he challenge Keynes's summary statement. He commented on Keynes' book in 1920, but he did not single out Keynes' statement as a misrepresentation.

IS THE OBSERVATION CORRECT?

The hyperinflations that occurred in Germany, Austria, and Hungary in the early 1920's did not destroy capitalism. They certainly dispossessed investors and bonds, life insurance policies, bank accounts, and other investments that were tied to the value of the respective fiat currencies. Other capitalists prospered, however. Anybody who had purchased real estate by means of a mortgage, or any farmer who had operated his farm by means of money borrowed from a bank, benefitted greatly. There were winners and losers, but more losers than winners.

Except during wartime, and except in the immediate aftermath of the lost war, only one Western nation has ever indulged in hyperinflation: the state of Israel in the mid-1980's. The German and Austrian hyperinflations ended in 1924. The memory of the hyperinflation in Germany has kept German central bankers from inflating their currencies on this scale.
There have been periods of what can be called repressed inflation, where nations inflate their currencies, but control prices and wages by law in order to conceal the effects of this policy. Nevertheless, we have never seen a situation in the West in which capitalism has been called into question as a result of hyperinflation. Lenin was wrong. Keynes was wrong.
Hyperinflation is a short-term phenomenon. By its very nature, it disrupts market processes. But that means it disrupts legal and above-board market processes. It makes black marketeering profitable. It is true that, in reaction against the profiteering of the great inflations immediately after World War I, there was considerable hostility against capitalists, and especially Jewish capitalists, who had profited as a result. But because Jews were mostly urban, and hyperinflation hurt cities far more than the countryside, where barter was possible, urban Jews on the whole were dispossessed of their property. It is true that many farmers did really well as a result of hyperinflation, but one of the titles of the world's shortest books is this: Famous Jewish Farmers. 

Hyperinflations redistribute wealth. They do not last long, because it is not possible to conduct economic affairs in a currency that has collapsed. You can pay off old debt with it, but you cannot buy anything of value with it. It destroys the division of labor in the legal markets, and it transfers the division of labor into the black markets. Because hyperinflation is not understood by most people, there are a few winners in the period of hyperinflation, and there are lots of losers. But we have not seen a move directly from hyperinflation to socialism or communism.

It is often said that Hitler was a result of the hyperinflation in Germany. This is not an accurate assessment. The Weimar Republic operated for nine years after the hyperinflation before Hitler came to power in 1933. It was not socialist. It had what we would call welfare state tendencies, but it was not marked by the state's ownership of the means of production. It was more like the New Deal than the USSR. So, for that matter, was Hitler's Germany.
Hyperinflation is a bugaboo within the Right. It should not be. 

The problem of central banking is not that it leads to hyperinflation. The problem with central banking is the endless cycle of booms and busts, euphoria and disappointment. These periods tend to increase the central governments' control over the economy, especially during periods of big bank bailouts. There is a move towards Keynesianism, but there is not a move toward socialism or communism. The victims of hyperinflation do not call for the overthrow of capitalism. They have not even gone so far as to call for the cessation of central banking. Central banking came into its own during World War I, and it has never surrendered territory since then. Germany and Austria did not abolish their central banks after 1923. If the hyperinflation of the 1921-23 period did not persuade the voters that the pre-gold coin standard was superior to central banking, then central bankers are safe in seeing no threat to their control over national economies around the world.

Hyperinflation is not in our future. The massive debts of the modern welfare state are not such that they can be paid off by two or three years of hyperinflation. The political promises made by central governments to the masses of the population are promises that are thought to extend down through the ages: irrevocable. The fiscal burdens of Social Security and Medicare cannot be relieved by hyperinflation. Hyperinflation produces the destruction of the currency, and a currency revision follows. The political promises of the modern welfare state will still be on the books in the aftermath of any hyperinflation. This is why there is no payoff to the government or the central bank from hyperinflation. 

Hyperinflation calls attention to the incompetence of central bankers. This is why central bankers do not indulge in it, except when governments force them to do so.
The 450% inflation in the state of Israel in 1984 did not lead to a call to shut down the central bank. The bank stopped inflating. Capitalism remained intact. It will take more than hyperinflation to destroy either capitalism or central banking.

The End of Medieval Economics: How American Theologians and Merchants Abandoned Aristotle and Invented Capitalism

The End of Medieval Economics: How American Theologians and Merchants Abandoned Aristotle and Invented Capitalism

by Jerry Bowyer

Why were the Middle Ages so poor? There are many reasons: a mini ice age suppressing crop yields, the rise of the Islamic empire cutting trade and shipping ties in half, ideologies which degraded commerce in contrast with ‘higher’ pursuits like church work are among them. But for economists, what stands out most starkly is the flawed theory which held that there is a ‘just price’ for goods, currencies, and services, and that just prices should be enforced by ecclesiastical and civil law. This idea does not come from the Bible, but from “The Philosopher” (Aristotle), who was viewed as the ultimate authority on world matters.

While Aristotle made genuine advances in almost every field in comparison with what had come before him, his great genius became a kind of new authority, a dead hand of tradition which held Europe back from progress in many disciplines. It was Aristotle, not the Bible, who created the scientific theory that the earth is the center of the solar system (which was then codified into Ptolemaic astronomy) and it was Aristotle, not the Bible, who created the theory that money is sterile and therefore that all interest should be forbidden.

The United States could never have risen to become the world’s financial center without moving past Aristotle, past just price laws, past capital controls. But it did not move past these by simply embracing ‘the enlightenment’ (whatever that is), but by detailed reexamination of the Scriptures and seeing that they were not hostile to financial innovation. They did it by developing a doctrine of providence which gave the colonies a calling to transform the world spiritually by also transforming it economically. It did this by adopting a positive theology of wealth creation and putting it in the larger context of world evangelization and resistance to tyrannical government.

To learn more about this, you can read Professor Mark Valeri’s excellent book Heavenly Merchandize, listen to our interview here, or continue reading for a partial transcript and the final installment in this series.

Jerry: “You could also add that perhaps Protestant theology had a greater predilection to project Aristotle, who I think is a pretty key thinker in the scholastic school’s rejection of usury. They’re not necessarily part of the Thomistic synthesis, so they’re more ready to reject the Pagan philosopher Aristotle than maybe Roman Catholics would [be]. Do you see that–?”

Mark: “Yes. In fact, in 1699 a group of Boston-area ministers meet to debate lots of different policies, including usury, and they actually deconstruct the Aristotelian/Thomist argument against usury, that usury is perforce in medieval Catholic teaching, which they get from Aristotle. Usury is perforce deceitful because money is only a measure; it cannot increase; it’s like a ruler, and you use it for exchange but it itself cannot be a commodity. It cannot enhance in value, because once money enhances in value, it ruins its role as a stable measure of merely exchange, if you will, value. That’s the Aristotelian argument.”

Jerry: “And therefore, Aristotle said, “Money is sterile.””

Mark: “Exactly. “It cannot increase.” Well, the Puritans actually go at that argument and deconstruct it. They actually take it apart and show where it’s wrong, towards the end of the 17th century.”

Jerry: “Is there a document where they do this?”

Mark: “Yes.”

Jerry: “What’s the document?”

Mark: “It’s called 30 Cases. Not a very exciting title. There’s two places that I cite in the book: Cotton Mather was the recording secretary for this clerical meeting, it’s published in 1699 in Boston and it’s merely called 30 Cases; and then the theologian Samuel Willard gives an even fuller explanation behind it in his systematic theology, in his huge systematic theology, where he’s commenting on the 8th commandment (the commandment, “Thou shalt not steal,”) and he gets into usury and then he has even a more thorough deconstruction of medieval arguments.”

Jerry: “Is it Willard who said, “Aristotle says that money is sterile but in the world there’s practically nothing actually more fertile than money”? Who says that? Is it Willard… or is it Seward? It’s quoted in your book but I can’t remember.”

Mark: “It’s probably Willard, but I can’t recall off the top of my head.”