The Mythical World of Ben Bernanke

For Ben Bernanke and their ilk, the world exists in a causation vacuum, as things are just seen as they are, as if they are simply "given". And people’s action expressed by the marketplace, are seen as fallible, which only requires the steering guidance of the technocracy (the arrogant dogmatic belief that political authorities are far knowledgeable than the public).

Monetary economist Professor George Selgin majestically blasts Ben Bernanke’s self-glorification. (bold emphasis mine)

So like any central banker, and unlike better academic economists, Bernanke consistently portrays inflation, business cycles, financial crises, and asset price "bubbles" as things that happen because...well, the point is that there is generally no "because." These things just happen; central banks, on the other hand, exist to prevent them from happening, or to "mitigate" them once they happen, or perhaps (as in the case of "bubbles") to simply tolerate them, because they can't do any better than that. That central banks' own policies might actually cause inflation, or contribute to the business cycle, or trigger crises, or blow-up asset bubbles--these are possibilities to which every economist worth his or her salt attaches some importance, if not overwhelming importance. But they are also possibilities that every true-blue central banker avoids like so many landmines. Are you old enough to remember that publicity shot of Arthur Burns holding a baseball bat and declaring that he was about to "knock inflation out of the economy"? That was Burns talking, not like a monetary economist, but like the Fed propagandist that he was. Bernanke talks the same way throughout much (though not quite all) of his lecture.

And for the central bank religion, politics has never been an issue. It’s always been about the virtuous state of public service channeled through economic policies…

In describing the historical origins of central banking, for instance, Bernanke makes no mention at all of the fiscal purpose of all of the earliest central banks--that is, of the fact that they were set up, not to combat inflation or crises or cycles but to provide financial relief to their sponsoring governments in return for monopoly privileges. He is thus able to steer clear of the thorny challenge of explaining just how it was that institutions established for function X happened to prove ideally suited for functions Y and Z, even though the latter functions never even entered the minds of the institutions' sponsors or designers!

By ignoring the true origins of early central banks, and of the Bank of England in particular, and simply asserting that the (immaculately conceived) Bank gradually figured-out its "true" purpose, especially by discovering that it could save the British economy now and then by serving as a Lender of Last Resort, Bernanke is able to overlook the important possibility that central banks' monopoly privileges--and their monopoly of paper currency especially--may have been a contributing cause of 19th-century financial instability. How currency monopoly contributed to instability is something I've explained elsewhere. More to the point, it is something that Walter Bagehot was perfectly clear about in his famous 1873 work, Lombard Street. Bernanke, in typical central-bank-apologist fashion, refers to Bagehot's work, but only to recite Bagehot's rules for last-resort lending. He thus allows all those innocent GWU students to suppose (as was surely his intent) that Bagehot considered central banking a jolly good thing. In fact, as anyone who actually reads Bagehot will see, he emphatically considered central banking--or what he called England's "one-reserve system" of banking--a very bad thing, best avoided in favor of a "natural" system, like Scotland's, in which numerous competing banks of issue are each responsible for maintaining their own cash reserves.

People hardly realize that central banks had been born out of politics and survives on taxpayer money which is politics, and eventually will die out of politics.

Any discussion of politics affecting central banking policymaking has to be purposely skirted or evaded.

Policies must be painted as having positive influences or at worst neutral effects. This leaves all flaws attributable to the marketplace.

In reality, any admission to the negative consequence of the central bank polices would extrapolate to self-incrimination for central bankers and the risk of losing their politically endowed privileges.

Besides ignoring the destabilizing effects of central banking--or of any system based on a currency monopoly--Bernanke carefully avoids any mention of the destabilizing effects of other sorts of misguided financial regulation. He thus attributes the greater frequency of banking crises in the post-Civil War U.S. than in England solely to the lack of a central bank in the former country, making one wish that some clever GWU student had interrupted him to observe that Canada and Scotland, despite also lacking central banks, each had far fewer crises than either the U.S. or England. Hearing Bernanke you would never guess that U.S. banks were generally denied the ability to branch, or that state chartered banks were prevented by a prohibitive federal tax from issuing their own notes, or that National banks found it increasingly difficult to issue their own notes owing to the high cost of government securities required (originally for fiscal reasons) as backing for their notes. Certainly you would not realize that economic historians have long recognized (see, for starters, here andhere) how these regulations played a crucial part in pre-Fed U.S. financial instability. No: you would be left to assume that U.S. crises just...happened, or rather, that they happened "because" there was no central bank around to put a stop to them.

Because he entirely overlooks the role played by legal restrictions in destabilizing the pre-1914 U.S. financial system, Bernanke is bound to overlook as well the historically important "asset currency" reform movement that anticipated the post-1907 turn toward a central-bank based monetary reform. Instead of calling for yet more government intervention in the monetary system the earlier movement proposed a number of deregulatory solutions to periodic financial crises, including the repeal of Civil-War era currency-backing requirements and the dismantlement of barriers to nationwide branch banking. Canada's experience suggested that this deregulatory program might have worked very well. Unfortunately concerted opposition to branch banking, by both established "independent" bankers and Wall Street (which gained lots of correspondent business thanks to other banks' inability to have branches there) blocked this avenue of reform. Instead of mentioning any of this, Bernanke refers only to the alternative of relying upon private clearinghouses to handle panics, which he says "just wasn't sufficient." True enough. But the Fed, first of all (as Bernanke himself goes on to admit, and as Friedman and Schwartz argue at length), turned out be be an even less adequate solution than the clearinghouses had been; more importantly, the clearinghouses themselves, far from having been the sole or best alternative to a central bank, were but a poor second-best substitute for needed deregulation.

To be fair, Bernanke does eventually get 'round to offering a theory of crises. The theory is the one according to which a rumor spreads to the effect that some bank or banks may be in trouble, which is supposedly enough to trigger a "contagion" of fear that has everyone scrambling for their dough. Bernanke refers listeners to Frank Capra's movie "It's a Wonderful Life," as though it offered some sort of ground for taking the theory seriously, though admittedly he might have done worse by referring them to Diamond and Dybvig's (1983) even more factitious journal article. Either way, the impression left is one that ought to make any thinking person wonder how any bank ever managed to last for more than a few hours in those awful pre-deposit insurance days. That quite a few banks, and especially ones that could diversify through branching, did considerably better than that is of course a problem for the theory, though one Bernanke never mentions. (Neither, for that matter, do many monetary economists, most of whom seem to judge theories, not according to how well they stand up to the facts, but according to how many papers you can spin off from them.) In particular, he never mentions the fact that Canada had no bank failures at all during the 1930s, despite having had no central bank until 1935, and no deposit insurance until many decades later. Nor does he acknowledge research by George Kaufman, among others, showing that bank run "contagions" have actually been rare even in the relatively fragile U.S. banking system. (Although it resembled a system-wide contagion, the panic of late February 1933 was actually a speculative attack on the dollar spurred on by the fear that Roosevelt was going to devalue it--which of course he eventually did.) And although Bernanke shows a chart depicting high U.S. bank failure rates in the years prior to the Fed's establishment, he cuts it off so that no one can observe how those failure rates increased after 1914. Finally, Bernanke suggests that the Fed, acting in accordance with his theory, only offers last-resort aid to solvent ("Jimmy Stewart") banks, leaving others to fail, whereas in fact the record shows that, after the sorry experience of the Great Depression (when it let poor Jimmy fend for himself), the Fed went on to employ its last resort lending powers, not to rescue solvent banks (which for the most part no longer needed any help from it), but to bail out manifestly insolvent ones. All of these "overlooked" facts suggest that there is something not quite right about the suggestion that bank failure rates are highest when there is neither a central bank nor deposit insurance. But why complicate things? The story is a cinch to teach, and the Diamond-Dybvig model is so..."elegant." Besides, who wants to spoil the plot of "It's a Wonderful Life?"

Cherry picking of reference points and censorship had been applied on historical accounts that does not favor central banking.

Of course, it is natural for central bankers to be averse to the gold standard. A gold standard would reduce or extinguish central banker’s (as well as politicians') political control over money.

Bernanke's discussion of the gold standard is perhaps the low point of a generally poor performance, consisting of little more than the usual catalog of anti-gold clichés: like most critics of the gold standard, Bernanke is evidently so convinced of its rottenness that it has never occurred to him to check whether the standard arguments against it have any merit. Thus he says, referring to an old Friedman essay, that the gold standard wastes resources. He neglects to tell his listeners (1) that for his calculations Friedman assumed 100% gold reserves, instead of the "paper thin" reserves that, according to Bernanke himself, where actually relied upon during the gold standard era; (2) that Friedman subsequently wrote an article on "The Resource Costs of Irredeemable Paper Money" in which he questioned his own, previous assumption that paper money was cheaper than gold; and (3) that the flow of resources to gold mining and processing is mainly a function of gold's relative price, and that that relative price has been higher since 1971 than it was during the classical gold standard era, thanks mainly to the heightened demand for gold as a hedge against fiat-money-based inflation. Indeed, the real price of gold is higher today than it has ever been except for a brief interval during the 1980s. So, Ben: while you chuckle about how silly it would be to embrace a monetary standard that tends to enrich foreign gold miners, perhaps you should consider how no monetary standard has done so more than the one you yourself have been managing!

Bernanke's claim that output was more volatile under the gold standard than it has been in recent decades is equally unsound. True: some old statistics support it; but those have been overturned by Christina Romer's more recent estimates, which show the standard deviation of real GNP since World War II to be only slightly greater than that for the pre-Fed period. (For a detailed and up-to-date comparison of pre-1914 and post-1945 U.S. economic volatility see my, Bill Lastrapes, and Larry White's forthcoming Journal of Macroeconomics paper, "Has the Fed Been a Failure?").

Nor is Bernanke on solid ground in suggesting that the gold standard was harmful because it resulted in gradual deflation for most of the gold-standard era. True, farmers wanted higher prices for their crops, if not general inflation to erode the value of their debts--when haven't they? But generally the deflation of the 19th century did no harm at all, because it was roughly consistent with productivity gains of the era, and so reflected falling unit production costs. As a self-proclaimed fan of Friedman and Schwartz, Bernanke ought to be aware of their own conclusion that the secular deflation he complains about was perfectly benign. Or else he should read Saul's The Myth of the Great the Great Depression, or Atkeson and Kehoe's more recent AER article, or my Less Than Zero. In short, he should inform himself of the fundamental difference between supply-drive and demand-driven deflation, instead of lumping them together, and lecture students accordingly.

Although he admits later in his lecture (in his sole acknowledgement of central bankers' capacity to do harm) that the Federal Reserve was itself to blame for the excessive monetary tightening of the early 1930s, in his discussion of the gold standard Bernanke repeats the canard that the Fed's hands were tied by that standard. The facts show otherwise: Federal Reserve rules required 40% gold backing of outstanding Federal Reserve notes. But the Fed wasn’t constrained by this requirement, which it had statutory authority to suspend at any time for an indefinite period. More importantly, during the first stages of the Great (monetary) Contraction, the Fed had plenty of gold and was actually accumulating more of it. By August 1931, it's gold holdings had risen to $3.5 billion (from $3.1 billion in 1929), which was 81% of its then-outstanding notes, or more than twice its required holdings. And although Fed gold holdings then started to decline, by March 1933, which is to say the very nadir of the monetary contraction, the Fed still held over than $1 billion in excess gold reserves. In short, at no point of the Great Contraction was the Fed prevented from further expanding the monetary base by a lack of required gold cover.

Finally, Bernanke repeats the tired old claim that the gold standard is no good because gold supply shocks will cause the value of money to fluctuate. It is of course easy to show that gold will be inferior on this score to an ideally managed fiat standard. But so what? The question is, how do the price movements under gold compare to those under actual fiat standards? Has Bernanke compared the post-Sutter's Mill inflation to that of, say, the Fed's first five years, or the 1970s? Has he compared the average annual inflation rate during the so-called "price revolution" of the 16th century--a result of massive gold imports from the New-World--to the average U.S. rate during his own tenure as Fed chairman? If he bothered to do so, I dare say he'd clam up about those terrible gold supply shocks.

So when it comes to the gold standard, it is not only the omission of facts and of glaring blind spots, but importantly, it is about deliberate twisting of the facts! At least they practice what they preach--they manipulate the markets too.

Now this is what we call propaganda.

It is best to point out how Bernanke’s central banking has destroyed the purchasing power of the US dollar as shown in the chart above.

Yet here is another example of the mainstream falling for Bernanke’s canard.

Writes analyst David Fuller,

Preservation of purchasing power is the main reason why anyone would favour a gold standard. However, if we assume, hypothetically, that the US and other leading countries moved back on to a gold standard, I do not think many of us would like the deflationary consequences that followed. Also, a gold standard would almost certainly involve the confiscation of private holdings of bullion, as has occurred previously. Most of us would not like to lose our freedom to hold bullion.

I have long argued that we would never see the reintroduction of a gold standard because no leading government is likely to surrender control over its own money supply. For current reasons, just ask the Greeks or citizens of other peripheral Eurozone countries, struggling to cope with no more than a euro standard.

There would also be national security issues as it would not be difficult for rogue states to manipulate the price of bullion as an act of economic war.

First of all, the paper money system is not, and will not be immune to the deflationary impact caused by an inflationary boom. That’s why business cycles exist. Under government’s repeated doping of the marketplace we would either see episodes of monetary deflation (bubble bust) or a destruction of the currency system (hyperinflation) at the extremes.

As Professor Ludwig von Mises wrote

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Next, as previously pointed out the intellectuals and political authorities resort to semantic tricks to mislead the public.

Deflation caused by productivity gains (pointed out by Professor Selgin) isn’t bad but rather has positive impacts—as evidenced by the advances of technology.

Rather it is the money pumping and the leverage (gearing), or the erosion of real wealth, caused by prior inflationism from the central bank sponsored banking system. These political actions spawns outsized fluctuations and the adverse ramifications of monetary deflation.

And it is the banking system will be more impacted than that the real economy which is the reason for these massive bailouts and expansion of balance sheets of central banks. It's about political interest than of public interests.

In addition, it is wildly inaccurate to claim to say gold standard would “involve the confiscation of private holdings of bullion”. FDR’s EO 6102 in 1933 came at the end of the gold bullion standard which is different from the classical gold standard. In the classic gold standard, gold (coins) are used as money or the medium of exchange, so confiscation of gold would mean no money in circulation. How logical would this be?

Finally while the assertions that “no leading government is likely to surrender control” seems plausible, this seems predicated on money as a product of governments—which is false. Effects should not be read as causes.

As the great F. A. Hayek wrote (Denationalization of Money p.37-38)

It the superstition that it is necessary for government (usually called the 'state' to make it sound better) to declare what is to be money, as if it had created the money which could not exist without it, probably originated in the naive belief that such a tool as money must have been 'invented' and given to us by some original inventor. This belief has been wholly displaced by our understanding of the spontaneous generation of such undesigned institutions by a process of social evolution of which money has since become the prime paradigm (law, language and morals being the other main instances).

If governments has magically transformed money into inviolable instruments then hyperinflation would have never existed.

At the end of the day, the world in which central bankers and their minions portray seems no less than vicious propaganda.

Why The Gold Standard was NOT Responsible for the Great Depression

Rebutting critics of the Gold Standard, monetary economist George Selgin writes,

This classical gold standard can have played no part in the Great Depression for the simple reason that it vanished during World War I, when most participating central banks suspended gold payments. (The US, which entered the war late, settled for a temporary embargo on gold exports.) Having cut their gold anchors, the belligerent nations’ central banks proceeded to run away, so that by the war’s end money stocks and price levels had risen substantially, if not dramatically, throughout the old gold standard zone.

Postwar sentiments ran strongly in favour of restoring gold payments. Countries that had inflated, therefore, faced a stark choice. To make their gold reserves adequate to the task, they could either permanently devalue their currencies relative to gold and start new gold standards on that basis, or they could try to restore their currencies’ pre-war gold values, though doing so would require severe deflation. France and several other countries decided to devalue. America and Great Britain chose the second path.

The decision taken by Winston Churchill, then Britain’s chancellor of the exchequer, to immediately restore the pre-war pound, prompted John Maynard Keynes to ask, “Why did he do such a silly thing?” The answer was two-fold: first, Churchill’s advisers considered a restored pound London’s best hope for regaining its former status – then already all but lost to New York – as the world’s financial capital.

Second, Britain had other cards to play, aimed at making its limited gold holdings go further than usual. Primarily, it would convince other countries to take part in a gold-exchange standard, by using claims against either the Bank of England or the Federal Reserve in place of gold in international settlements. It would also ask the Fed to help improve Great Britain’s trade balance by pursuing an easy monetary policy.

The hitch was that the gold-exchange standard was extremely fragile: if any major participant defected, the British-built house of cards would come tumbling down, turning the world financial system into one big smouldering ruin.

In the event, the fatal huffing and puffing came then, as it has come several times since, from France, which decided in 1927 to cash in its then large pile of sterling chips. The Fed, in turn, decided that pulling back the reins on a runaway stock market was more important than propping-up the pound. Soon other central banks joined what became a mad scramble for gold, in which Britain was the principal loser. At long last, in September of 1931, the pound was devalued. But by then it was too late: the Great Depression, with its self-reinforcing rondos of failure and panic, was well under way.

So the gold standard that failed so catastrophically in the 1930s wasn’t the gold standard that some Republicans admire: it was the cut-rate gold standard that Great Britain managed to cobble together in the 20s – a gold standard designed not to follow the rules of the classical gold standard but to allow Great Britain to break the old rules and get away with it.

The typical ruse employed by anti-gold standard proponents have been to misinterpret effects as causes.

Gold is Money: Iran Edition

Economic sanctions on Iran seems to be ushering in gold’s default role as money.

Earlier I pointed to a rumor where under economic sanctions from the US and Europe, Iran would circumvent these by using gold to trade with India.

Andrey Dashkov and Louis James at the Casey Research has an update

It proved to be nothing but a rumor, however: the sides decided to arrange the deal in a more tactical manner. India will partly cover the purchases with its own currency, and Iran will later use those funds to acquire imports.

But gold is not out of the equation yet. The US-initiated sanctions were effective, at least in the sense of making international institutions avoid the pariah nation. Reuters reported that Iran has failed to organize imports of even basic food staples for its population of 74 million. Prices on local markets rose sharply; and as the country nears parliamentary elections on March 2, the government is taking radical steps to provide citizens with basic necessities. One of those unconventional solutions was offering gold as barter for food.

"Grain deals are being paid for in gold bullion and barter deals are being offered," one European grains trader said, speaking on condition of anonymity while discussing commercial deals. "Some of the major trading houses are involved."

Another trader said: "As the shipments of grain are so large, barter or gold payments are the quickest option."

Trading in gold rather than a fiat currency is "cashless." That may sound as if there's no medium of exchange, but that is of course a misconception: gold is history's longest-standing medium of exchange.

As long as the sanctions remain in force and the Iranian government has limited access to international currency markets, gold will remain an obvious way to settle transactions. Decreasing oil imports to Japan, the world's third-largest importer, will impact the Iranian economy further, draining foreign currency inflows. Lacking foreign currency may push the country to continue using its foreign exchange reserves, or gold, to cover its international liabilities. Oil looks like a viable, though less convenient, alternative as well.

The Iranian economy is in a state of crisis, and due to the lack of trust in its currency, leaders are increasingly resorting to extraordinary offers to trading partners. The situation would clearly worsen if the country enters a state of war. While that's still speculation, imagine what would happen to the price of gold if a part of Iran's 29-million ounce gold reserve becomes a medium - not an object - of exchange in international trade.

That reduction in potential supply could be a game-changer, not only because of crisis-struck Iran, but because it could open the door for other countries to follow suit. The price of gold would likely respond very positively.

This scenario, while possible, may not happen very soon: large-scale trading in gold has occurred only rarely in recent years. Traces of deals are difficult to track down due to the anonymity of the yellow metal. This re-emphasizes our point regarding gold as money in extremis: when economic push comes to shove, gold will outlast any other medium of exchange in existence. As the evidence from Iran shows, even governments - the masters of the central banks - will resort to mankind's oldest form of money when pressed.

Which brings us to this evergreen conclusion: Gold is one of the best assets to own in both good times and bad. It can rise with inflation in a surging economy, and it can be practical for exchange when times are bad.

Gold isn't just a hedge; it's money.

The policies of inflationism, compounded by protectionism and imperial foreign policies account for as self-designed path towards the perdition of the current monetary standard. And if these conditions intensify, gold may redeem its role as money overtime.

In the meantime gold’s role in the financial system will deepen, expanding its functionality from hedge to collateral, and perhaps to become an integral part of financial securities, such as bond issuance backed by gold, and possibly in the fullness of time, towards a medium of exchange.

Warren Buffett versus his Dad Howard Buffett on Gold

Warren Buffett has long been averse to gold as an investment (and as part of his political philosophy), focusing on the polemics that gold does not account for a productive asset.

In a recent Fortune article he continues with this line of rant. (bold emphasis mine)

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth -- for a while…

Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).

It’s bizarre to see Mr. Buffett argue about the non-productive role of gold yet imply of gold’s potential as a currency or as money.

Mr. Buffett ignores that, money, to quote the great Murray N. Rothbard, forges the connecting link between all economic activities. This only means that any massive debasement of the currency, which again is used as link to all economic activities, will undermine the division of labor which thereby erodes the productive capacity of an economy (and specifically Mr. Buffett’s or anyone’s investments or ‘capacity to deliver milk’).

In short, it would be a serious gaffe to think that economic activities can be isolated from the ever changing conditions of money. Thus, his objection that gold represents a non-productive asset is essentially a non-sequitur.

And obviously Mr. Buffett admits to such spurious reasoning through some of his actions in his flagship Berkshire Hathaway: (bold emphasis added)

Under today's conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be.

So Mr. Buffett holds non-gold currency based investments in spite of his reluctance to incorporate them as part of his portfolio. So Mr. Buffett practices a deny but apply strategy.

And finally, here is another blatant inconsistency in his letter

Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety -- but we will also be owners by way of holding sizable amounts of marketable stocks

The folksy Mr. Buffett is not being candid at all.

Today, his investments have not been about taking on first-class ‘efficiently deliver goods and services wanted by our citizens’ but rather on businesses that heavily relies on government’s support. For instance Mr. Buffett has profited from Obama’s anti-competition energy policies such as the Keystone pipeline controversy, and earlier, Mr. Buffett also profited immensely by participating in the various bailouts conducted by the US government in the US financial system.

In short, Mr. Buffett has morphed from value investor to a political entrepreneur or a crony. This hardly represents the ideals Mr. Buffett has been preaching about.

And importantly the sage of Omaha’s actions runs to the contrary against the virtues espoused by his venerable father Mr. Howard Buffett, the staunch ‘old right’ libertarian.

My guess is that Mr. Buffett’s antipathy towards gold has really nothing to do with economics (which he uses as a flimsy cover or camouflage) but could most likely represent a personal issue—specifically based on an implicit division with his father (for whatever reasons)

Here is an excerpt on Mr. Howard Buffett’s celebrated treatise on “Human Freedom Rests on Gold Redeemable Money”

Far away from Congress is the real forgotten man, the taxpayer who foots the bill. He is in a different spot from the tax-eater or the business that makes millions from spending schemes. He cannot afford to spend his time trying to oppose Federal expenditures. He has to earn his own living and carry the burden of taxes as well.

But for most beneficiaries a Federal paycheck soon becomes vital in his life. He usually will spend his full energies if necessary to hang onto this income.

The taxpayer is completely outmatched in such an unequal contest. Always heretofore he possessed an equalizer. If government finances weren't run according to his idea of soundness he had an individual right to protect himself by obtaining gold.

With a restoration of the gold standard, Congress would have to again resist handouts. That would work this way. If Congress seemed receptive to reckless spending schemes, depositors' demands over the country for gold would soon become serious. That alarm in turn would quickly be reflected in the halls of Congress. The legislators would learn from the banks back home and from the Treasury officials that confidence in the Treasury was endangered.

Congress would be forced to confront spending demands with firmness. The gold standard acted as a silent watchdog to prevent unlimited public spending.

I have only briefly outlined the inability of Congress to resist spending pressures during periods of prosperity. What Congress would do when a depression comes is a question I leave to your imagination.

I have not time to portray the end of the road of all paper money experiments.

It is worse than just the high prices that you have heard about. Monetary chaos was followed in Germany by a Hitler; in Russia by all-out Bolshevism; and in other nations by more or less tyranny. It can take a nation to communism without external influences. Suppose the frugal savings of the humble people of America continue to deteriorate in the next 10 years as they have in the past 10 years? Some day the people will almost certainly flock to "a man on horseback" who says he will stop inflation by price-fixing, wage-fixing, and rationing. When currency loses its exchange value the processes of production and distribution are demoralized.

For example, we still have rent-fixing and rental housing remains a desperate situation.

For a long time shrewd people have been quietly hoarding tangibles in one way or another. Eventually, this individual movement into tangibles will become a general stampede unless corrective action comes soon.

Mr. Warren Buffett is being exposed for his rhetorical sophistry. Besides, the markets will eventually expose on his equivocation, which apparently he has taken on some 'deny and apply' insurance. He should instead pay heed to his Dad's wisdom, if not at least follow his Dad's legacy of honesty.

Peter Schiff Interviews James Rickards on the Currency Wars

Peter Schiff recently had an interesting interview with author James Rickards author of the sensational Currency Wars: The Making of the Next Global Crisis.

Find below the interview along with my comments [bold italics]

Peter Schiff: You portray recent monetary history as a series of currency wars - the first being 1921-1936, the second being 1967-1987, and the third going on right now. This seems accurate to me. In fact, my father got involved in economics because he saw the fallout of what you would call Currency War II, back in the '60s. What differentiates each of these wars, and what is most significant about the current one?

James Rickards: Currency wars are characterized by successive competitive devaluations by major economies of their currencies against the currencies of their trading partners in an effort to steal growth from those trading partners.

While all currency wars have this much in common, they can occur in dissimilar economic climates and can take different paths. Currency War I (1921-1936) was dominated by a deflationary dynamic, while Currency War II (1967-1987) was dominated by inflation. Also, CWI ended in the disaster of World War II, while CWII was brought in for a soft landing, after a very bumpy ride, with the Plaza Accords of 1985 and the Louvre Accords of 1987.

What the first two currency wars had in common, apart from the devaluations, was the destruction of wealth resulting from an absence of price stability or an economic anchor.

Interestingly, Currency War III, which began in 2010, is really a tug-of-war between the natural deflation coming from the depression that began in 2007 and policy-induced inflation coming from Fed easing. The deflationary and inflationary vectors are fighting each other to a standstill for the time being, but the situation is highly unstable and will "tip" into one or the other sooner rather than later. Inflation bordering on hyperinflation seems like the more likely outcome at the moment because of the Fed's attitude of "whatever it takes" in terms of money-printing; however, deflation cannot be ruled out if the Fed throws in the towel in the face of political opposition.

[My comment:

At this point policy actions by global authorities do not seem to indicate of a currency war or competitive devaluation as the olden days (as per Mr. Rickards scenarios].

While major central banks have indeed been inflating massively, they seem to be coordinating their actions to devalue. For instance, the US Federal Reserve has opened swap lines to major central banks and to emerging market central banks as well. Japan’s triple calamity a year ago prompted a joint intervention in the currency markets, which included the US Federal Reserve.

Current actions partly resembles a modern day concoction of Plaza Accord and Louvre Accord]

Peter: You and I agree that the dollar is on the road to ruin, and we both have made some drastic forecasts about what the government might do in the face of the dollar collapse. How might this scenario play out in your view?

James: The dollar is not necessarily on the road to ruin, but that outcome does seem highly likely at the moment. There is still time to pull back from the brink, but it requires a specific set of policies: breaking up big banks, banning derivatives, raising interest rates to make the US a magnet for capital, cutting government spending, eliminating capital gains and corporate income taxes, going to a personal flat tax, and reducing regulation on job-creating businesses. However, the likelihood of these policies being put in place seems remote - so the dollar collapse scenario must be considered.

Few Americans are aware of the International Economic Emergency Powers Act (IEEPA)... it gives any US president dictatorial powers to freeze accounts, seize assets, nationalize banks, and take other radical steps to fight economic collapse in the name of national security. Given these powers, one could see a set of actions including seizure of the 6,000 tons of foreign gold stored at the Federal Reserve Bank of New York which, when combined with Washington's existing hoard of 8,000 tons, would leave the US as a gold superpower in a position to dictate the shape of the international monetary system going forward, as it did at Bretton Woods in 1944.

[my comment: the direction of current trends in policymaking is the destruction of the US dollar standard. The alternative would be the collapse of the banking system along with the welfare-warfare state. Policymakers are caught between the proverbial devil and the deep blue sea.]

Peter: You write in your book that it's possible that President Obama may call for a return to a pseudo-gold standard. That seems far-fetched to me. Why would a bunch of pro-inflation Keynesians in Washington voluntarily restrict their ability to print new money? Wouldn't such a program require the government to default on its bonds?

James: My forecast does not pertain specifically to President Obama, but to any president faced with economic catastrophe. I agree that a typically Keynesian administration will not go to the gold standard easily or willingly. I only suggest that they may have no choice but to go to a gold standard in the face of a complete collapse of confidence in the dollar. It would be a gold standard of last resort, at a much higher price - perhaps $7,000 per ounce or higher.

This is similar to what President Roosevelt did in 1933 when he outlawed private gold ownership but then proceeded to increase the price 75% in the middle of the worst sustained period of deflation in U.S. history.

[my comment: I don’t think current policymaking trends has entirely been about ideology, a substantial influence has been the preservation of the incumbent political institutions comprising of the welfare-warfare state, the politically privileged banking and the central banking system. True, the markets will eventually prevail over unsustainable systems]

Peter: You also write that you were asked by the Department of Defense to teach them to attack other countries using monetary policy. Do you believe there has a been an deliberate attempt to rack up as much public debt as possible - from the Chinese, in particular - and then strategically default through inflation?

James: I do not believe there has been a deliberate plot to rack up debt for the strategic purpose of default; however, something like that has resulted anyway.

Conventional wisdom is that China has the US over a barrel because it holds more than $2 trillion of US dollar-denominated debt, which it could dump at any time. In fact, the US has China over a barrel because it can freeze Chinese accounts in the face of any attempted dumping and substantially devalue the worth of the money we owe the Chinese. The Chinese themselves have been slow to realize this. In hindsight, their greatest blunder will turn out to be trusting the US to maintain the value of its currency.

[my comment: There are always two parties to a trade, if China would be “dumping” then there has to be a buyer. Question is who would be the buyer? If the world will join China in the US treasury dumping binge, then obviously the buyer of last resort would be the US Federal Reserve. If the US Federal Reserve does not assume such role, then there would be a freeze in the global banking system similar to 2008 or worst.

As to freezing of China’s account; that may happen after the US Federal Reserve consummates the transaction. This stage may not even be reached, unless the US will declare economic sanctions against China which would signify an indirect declaration of war.]

Peter: In your book, you lay out four possible results from the present currency war. Please briefly describe these and which one do you feel is most likely and why.

James: Yes, I lay out four scenarios, which I call "The Four Horsemen of the Dollar Apocalypse."

The first case is a world of multiple reserve currencies with the dollar being just one among several. This is the preferred solution of academics. I call it the "Kumbaya Solution" because it assumes all of the currencies will get along fine with each other. In fact, however, instead of one central bank behaving badly, we will have many.

The second case is world money in the form of Special Drawing Rights (SDRs). This is the preferred solution of global elites. The foundation for this has already been laid and the plumbing is already in place. The International Monetary Fund (IMF) would have its own printing press under the unaccountable control of the G20. This would reduce the dollar to the role of a local currency, as all important international transfers would be denominated in SDRs.

The third case is a return to the gold standard. This would have to be done at a much higher price to avoid the deflationary blunder of the 1920s, when nations returned to gold at an old parity that could not be sustained without massive deflation due to all of the money-printing in the meantime. I suggest a price of $7,000 per ounce for the new parity.

My final case is chaos and a resort to emergency economic powers. I consider this the most likely because of a combination of denial, delay, and wishful thinking on the part of the monetary elites.

[my comment:

I am less inclined to think of a global money (or second) scenario.

I think that the incumbent currency system may transform or morph into a regime of multipolar currencies and or with possible gold/silver participation.

Since I don’t believe that the world operates in a vacuum, even if a global hyperinflation does become a reality, people, communities, states or even governments will act to substitute a collapsing currency incredibly fast.

The currency crisis hasn’t happened, yet we seem to see signs of nations already taking steps towards self-insurance, partly by engaging in bilateral trade financed by the use of local currencies (Brazil-Argentina, China-Japan), and partly by increasing gold’s role in trade: Some US states have begun to promote the use of gold and silver coins also as insurance.

So the seeds to a transition of monetary standards are being sown]

Peter: What do you see as Washington's end-game for the present currency war? What is their best-case scenario?

James: Washington's best-case scenario is that banks gradually heal by making leveraged profits on the spreads between low-cost deposits and safe government bonds. These profits are then a cushion to absorb losses on bad assets and, eventually, the system becomes healthy again and can start the lending-and-spending game over again.

I view this as unlikely because the debts are so great, the time needed so long, and the deflationary forces so strong that the banks will not recover before the needed money-printing drives the system over a cliff - through a loss of confidence in the dollar and other paper currencies.

[my comment: debts are symptoms of prior government spending both from welfare-warfare state and rescues/bailouts of crisis affected institutions including governments]

Peter: I don't think this scenario is likely either, but say it were... would it be healthy for the American economy to have to carry all these zombie banks that depend on subsidies for survival? Wouldn't it be better to just let the toxic assets and toxic banks flush out of the system?

James: I agree completely. There's a model for this in the 1919-1920 depression, when the US government actually ran a balanced budget and the private sector was left to clean up the mess. The depression was over in 18 months and the US then set out on one of its strongest decades of growth ever. Today, in contrast, we have the government intervening everywhere, with the result that we should expect the current depression to last for years - possibly a decade.

[my comment: indeed]

Peter: How long do you think Currency War III will last?

James: History shows that Currency War I lasted 15 years and Currency War II lasted 20 years. There is no reason to believe that Currency War III will be brief. It's difficult to say, but it should last 5 years at least, possibly much longer.

[my comment: past performance may not guarantee future outcomes]

Peter: From my perspective, what is unique about a currency war is that the object is to inflict damage on yourself, and the country often described as the winner is actually the biggest loser, because they've devalued their currency the most. Which currency do you think will come out of this war the strongest?

James: I expect Europe and the euro will emerge the strongest after this currency war by doing the most to maintain the value of its currency while focusing on economic fundamentals, rather than quick fixes through devaluation. This is because the US and China are both currency manipulators out to reduce the value of their currencies. In the zero-sum world of currency wars, if the dollar and yuan are both down or flat, the euro must be going up. This is why the euro has not acted in accord with market expectations of its collapse.

The other reason the euro is strong and getting stronger is because it is backed by 10,000 tons of gold - even more than the US This is a source of strength for the euro.

[my comment:

I don’t think the ex post gold holding under current monetary system will significantly matter.

Some countries (like crisis affected Europe) may sell gold while others (such as emerging markets) may buy gold. So gold ownership will be in a state of continued flux.

The crux would revolve around the following issues

-control of debt build up from government spending

-allowing markets to clear

-what governments does with their gold holdings or will governments reform their currency system by eliminating policy induced bubble cycles? How?]

Peter: You and I both connect the Fed's dollar-printing with the recent revolutions in the Middle East. This is because our inflation is being exported overseas and driving up prices for food and fuel in third-world countries. What do you think will happen domestically when all this inflation comes home to roost?

James: The Fed will allow the inflation to grow in the US because it is the only way out of the non-payable debt.

Initially, American investors will be happy because the inflation will be accompanied by rising stock prices. However, over time, the capital-destroying nature of inflation will become apparent - and markets will collapse. This will look like a replay of the 1970s.

[my comment: the $64 trillion question is inflate against who? Every major central banks seem to be engaged in synchronous-coordinated inflation.]

Peter: How long do you think China's elites will put up with the Fed's inflationary agenda before they start dumping their US dollar assets?

James: The Chinese will never "dump" assets because this could cause the US to freeze their accounts. However, the Chinese will shorten the maturity structure of those assets to reduce volatility, diversify assets by reallocating new reserves towards euro and yen, increase their gold holdings, and engage in direct investment in hard assets such as mines, farmland, railroads, etc. All of these developments are happening now and the tempo will increase in future.

[my comment: Dumping isn’t going to happen unless there would be a buyer. See my earlier comment above]

Peter: In your view, what is the best way for investors to protect themselves from this crisis?

James: My recommended portfolio is 20% gold, 5% silver, 20% undeveloped land in prime locations with development potential, 15% fine art, and 40% cash. The cash is not a long-term position but does give an investor short-term wealth preservation and optionality to pivot into other asset classes when there is greater visibility.

[my comment:

I would adjust portfolio according to the evolving circumstances.

Taking a rigid stance under current heavily politicized conditions could bring about huge market risks. For example, if hyperinflation occurs which Mr. Rickards sees as a “more likely outcome at the moment”, then cash and bond holdings will evaporate]

Ludwig von Mises on Some Objections to the Gold Standard

Former IMF chief Economist Simon Johnson raised an objection, at the New York Times Blog, to the gold standard:

And the idea that pegging the value of the dollar or any currency relative to gold leads to financial and economic stability is an illusion. During the 19th century the dollar was freely convertible into gold — except when it wasn’t. There were serious “suspensions” of convertibility about every 10 to 15 years; most of these were the outcome of boom-bust cycles in the private sector and had nothing to do with the government, which had a very limited monetary role before the Civil War…

The gold standard is just a rule and rules are broken by powerful people under all monetary systems. Assuming that this won’t happen in any future arrangement just encourages illusions.

Apparently the great Ludwig von Mises, decades ago, had a retort on what seems as a recycled (or stereotyped) challenge. [bold emphasis mine]

The gold standard is certainly not a perfect or ideal standard. There is no such thing as perfection in human things. But nobody is in a position to tell us how something more satisfactory could be put in place of the gold standard. The purchasing power of gold is not stable. But the very notions of stability and unchangeability of purchasing power are absurd. In a living and changing world there cannot be any such thing as stability of purchasing power. In the imaginary construction of an evenly rotating economy there is no room left for a medium of exchange. It is an essential feature of money that its purchasing power is changing. In fact, the adversaries of the gold standard do not want to make money's purchasing power stable. They want rather to give to the governments the power to manipulate purchasing power without being hindered by an "external" factor, namely, the money relation of the gold standard…

However, the futility of interventionist policies has nothing at all to do with monetary matters. It will be shown later why all isolated measures of government interference with market phenomena must fail to attain the ends sought. If the interventionist government wants to remedy the shortcomings of its first interferences by going further and further, it finally converts its country's economic system into socialism of the German pattern. Then it abolishes the domestic market altogether, and with it money and all monetary problems, even though it may retain some of the terms and labels of the market economy. In both cases it is not the gold standard that frustrates the good intentions of the benevolent authority.

The significance of the fact that the gold standard makes the increase in the supply of gold depend upon the profitability of producing gold is, of course, that it limits the government's power to resort to inflation. The gold standard makes the determination of money's purchasing power independent of the changing ambitions and doctrines of political parties and pressure groups. This is not a defect of the gold standard; it is its main excellence. Every method of manipulating purchasing power is by necessity arbitrary. All methods recommended for the discovery of an allegedly objective and "scientific" yardstick for monetary manipulation are based on the illusion that changes in purchasing power can be "measured." The gold standard removes the determination of cash-induced changes in purchasing power from the political arena. Its general acceptance requires the acknowledgment of the truth that one cannot make all people richer by printing money. The abhorrence of the gold standard is inspired by the superstition that omnipotent governments can create wealth out of little scraps of paper.

It has been asserted that the gold standard too is a manipulated standard. The governments may influence the height of gold's purchasing power either by credit expansion — even if it is kept within the limits drawn by considerations of preserving the redeemability of the money-substitutes — or indirectly by furthering measures that induce people to restrict the size of their cash holdings. This is true. It cannot be denied that the rise in commodity prices that occurred between 1896 and 1914 was to a great extent provoked by such government policies. But the main thing is that the gold standard keeps all such endeavors toward lowering money's purchasing power within narrow limits. The inflationists are fighting the gold standard precisely because they consider these limits a serious obstacle to the realization of their plans.

What the expansionists call the defects of the gold standard are indeed its very eminence and usefulness. It checks large-scale inflationary ventures on the part of governments. The gold standard did not fail. The governments were eager to destroy it, because they were committed to the fallacies that credit expansion is an appropriate means of lowering the rate of interest and of "improving" the balance of trade…

The struggle against gold, which is one of the main concerns of all contemporary governments, must not be looked upon as an isolated phenomenon. It is but one item in the gigantic process of destruction that is the mark of our time. People fight the gold standard because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty.

Mainstream economists still detest the gold standard, which reminds me this quote attributed to Janos Feteke (who I think was the deputy governor of the National Bank of Hungary)

There are about three hundred economists in the world who are against gold, and they think that gold is a barbarous relic - and they might be right. Unfortunately, there are three billion inhabitants of the world who believe in gold

Video: Ron Paul's Plan for Monetary Freedom

In the following interview with Judge Andrew Napolitano, Ron Paul discusses the possible transition process towards 'sound money' or monetary freedom from the current fiat standard.

Euro Debt Crisis: The Confidence Fairy Tale and Devaluation Delusion

The Confidence Fairy (Fear and Greed) Fable

Suggestions have been made that Euro crisis has been an issue of confidence or “animal spirits” as alleged by the mainstream analysts.

This represents half-truth.

The idea that people are driven by sheer optimism or pessimism dumbs down the people’s ability to look after their self-interest. Of course those peddling such rubbish assume that they are above the rest of mankind.

Yet in a bizarre way of thinking, they use assorted and complex economic analysis when at the end of the day, everything for them, essentially boils down to random optimism or pessimism.

The assumption that psychological factors as purely driving the marketplace ignores the truism of the collective individual’s ability to calculate on the elemental tradeoffs of cost relative to benefits or of risk relative to rewards.

People don’t buy financial securities because they wake up in the morning feeling ‘optimistic’ or sell when they feel ‘pessimistic’. People buy or sell because they see, rightly or wrongly, beneficial aspects from the execution of such actions. Whether psychic or monetary, the assumed rewards are subjectively determined by the person taking action.

The supposed confidence fairy of fear and greed are essentially driven by an underlying event stimulus or incentive and not by mere impulse.

For instance, a market crash doesn’t happen because of fear itself. Instead a crash happens when people discover that the issues they own have not been priced accordingly or has substantially been worth below the most recent value as a result of some chain of causes.

Like those stampeding out of a theater (effect) because of a sudden discovery of fire (cause), the simultaneous act by many to exit ownership of financial securities fuels impulses or emotions to go along with the crowd (bandwagon effect). Thus fear signifies a symptom of an underlying cause rather than a cause in itself.

Yet fear and greed are prominent symptoms of bubble cycles.

During market euphoria usually at the acme of a bubble cycle, people pile up on ascendant prices because of the thought of the perpetuity of such price trends.

Of course, this can be only made possible by the loosening of extensions of credit (circulation credit) where the credit-collateral feedback loop mechanism gets rolling—where rising collateral values prompts for more lending, and more lending increases collateral values.

Thus, circulation credit (which are consequences of artificially suppressed interest rates and from policy directives, e.g. credit subsidies, bailouts) fuels bubble cycles which impels contortions in people’s economic calculations and subsequently results to the emotive price chasing phenomenon—Greed.

The opposite phenomenon holds true during bubble busts. The credit-collateral feedback loop mechanism goes into a reverse operation—falling collateral values prompts for margin calls and the calling in of bank loans both of which decreases collateral values. The simultaneous acts of exodus essentially signify—Fear.

In truth the confidence fairy has nothing been more than a pretext for more government intervention.

As the great Murray Rothbard once wrote[1]

Keynesian doctrine is, despite its algebraic and geometric jargon, breathtakingly simple at its core: recessions are caused by underspending in the economy, inflation is caused by overspending. Of the two major categories of spending, consumption is passive and determined, almost robotically, by income; hopes for the proper amount of spending, therefore, rest on investment, but private investors, while active and decidedly non-robotic, are erratic and volatile, unreliably dependent on fluctuations in what Keynes called their "animal spirits."

Fortunately for all of us, there is another group in the economy that is just as active and decisive as investors, but who are also--if guided by Keynesian economists--scientific and rational, able to act in the interests of all: Big Daddy government. When investors and consumers underspend, government can and should step in and increase social spending via deficits, thereby lifting the economy out of recession. When private animal spirits get too wild, government is supposed to step in and reduce private spending by what the Keynesians revealingly call "sopping up excess purchasing power" (that's ours).

The Euro crisis has hardly been founded from the issue of greed and fear, but of boom bust cycles.

Following massive imbalances acquired from the antecedent boom, market prices have been prevented from clearing or from seeking to adjust to the required levels that would allow resources to be transferred from unproductive to productive use. The discoordination and coordination mechanism of the marketplace have been impeded.

Yet the constant interventions that has sustained the current artificial price levels have led to mass distortions and market participants astray. So once the effect of interventions subsides or once markets discover the artificiality of such price levels, volatility ensues. Emotional transactions follow.

Hence, the distributive outcomes from a significantly politicized marketplace suggest of massive price distortions from repeated government interventions. This has been mistakenly construed or touted as fear. Those saying so have been misreading effects as the cause.

Political Insanity and the Devaluation Elixir

The mainstream has also been suggesting that the gold standard effect from the Eurozone Union, which prohibits internal devaluation of member states, has been a cause to this crisis. For me this represents as unalloyed hogwash[2].

While I agree that the EU needs to be dissolved because of the latent intention to politically centralize Euro economies such as the supposed need to fiscally integrate the EU, I oppose the idea of nationalizing currency for the sole purpose of inflationism via devaluation.

I will not elaborate on the evils of inflationism[3], but rather point out how ridiculous the assertion of supposedly allowing Greece, for instance, to devalue to become ‘competitive’.

Based on the average hourly labour costs in the business economy in 2009[4], Greece has been one of the cheapest among the peripheral EU states. Italy, Spain and Portugal are just within the range of Greece.

The cheaper labor costs (on the right) belong to those of emerging Europe.

And labor costs signify as part of labor market efficiency[5]

The crisis affected PIIGS also belong to the least competitive rankings[6] in terms of labor efficiency.

In other words, cheap labor did not translate to export greatness.

Thus, devaluation will hardly impact the competitiveness of the labor market because this does not treat the disease.

The disease which plagues the PIIGS are highlighted by the unfriendly business enviroment[7] caused by too much regulations and bureaucratic hurdles.

And importantly, by the intractable government expenditures[8] mostly from the welfare state as measured by the Fiscal Imbalances (FI)[9].

At the end of the day, those who yearn for a Zimbabwe solution to the Euro don’t have the intention of resolving the crisis but to promote the same ills that has blighted them.

No wonder Albert Einstein called—doing the same thing and expecting different results—insanity.

---

[1] Rothbard Murray N. Keynesianism Redux, Chapter 12, Making Economic Sense

[2] See Quote of the Day: A Very Expensive Education in Basic Economics, November 10, 2011

[3] See Vatican Banker Endorses ECB’s Inflationism November 24, 2011

[4] Euro Commission Wages and labour costs, Eurostat

[5] Financial-lib.com Labor efficiency variance: the number of hours actually worked minus the standard hours allowed for the production achieved multiplied by the standard rate to establish a value for efficiency (favorable) or inefficiency(unfavorable) of the work force

[6] Infectiousgreed.com Reforming Labor Markets, November 14, 2011

[7] Danske Research Euro Area Macro Handbook, November 2011

[8] Gokhale Jagadeesh Measuring the Unfunded Obligations of European Countries January 2009

[9] The fiscal imbalance (FI) measures the size of the total imbalance built into current fiscal policies, including future changes already scheduled by law. It is a country’s unfounded liability, looking indefinitely into the future. It is the difference between the present cost of continuing current government spending programs, including entitlement promises, present public debt, net of expected tax revenues. It is the amount of additional resources the government must have on hand today, invested and earning interest, in order to continue policies forever. Alternatively, it equals the additional net revenue or cost savings required from future policy adjustments to close the budeget gap embedded in current fiscal policies.

The FI is similar to outstanding public debt in one important way: It grows larger over time because of accruing interest costs. In addition fiscal policies that imply a positive FI are unsustainable: Because the ratio of FI to the present value of future GDP also grows larger over time, the implied annual service payments would eventually become larger than annual GDP