Socialism via QE: Bank of Japan 'Whale' Now Owns 55% of ETFs; also Top 10 Shareholder of 90% of Nikkei Stocks!

At the end of March I wrote,

In the political spectrum, the BoJ's increasing ownership of the factors of production simply means nationalization of assets or increased embrace of or the slippery slope to socialism.

Now for the proof.

From Bloomberg: 

They may not realize it yet, but Japan Inc.’s executives are increasingly working for a shareholder unlike any other: the nation’s money-printing central bank.

While the Bank of Japan’s name is nowhere to be found in regulatory filings on major stock investors, the monetary authority’s exchange-traded fund purchases have made it a top 10 shareholder in about 90 percent of the Nikkei 225 Stock Average, according to estimates compiled by Bloomberg from public data. It’s now a major owner of more Japanese blue-chips than both BlackRock Inc., the world’s largest money manager, and Vanguard Group, which oversees more than $3 trillion.

Wow, top 10 shareholder in 90% of stocks comprising the Nikkei !

Here's more. (bold added)

Under the BOJ’s current stimulus plan, the central bank buys about 3 trillion yen ($27.2 billion) of ETFs every year. While policy makers don’t disclose how those holdings translate into stakes of individual companies, estimates can be gleaned from publicly available central bank records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan. The BOJ declined to comment on Bloomberg’s findings.

The estimates reveal a presence in Japan’s top firms that’s rivaled by few other big investors, often called “whales” in the industry jargon. The BOJ ranks as a top 10 holder in more than 200 of the Nikkei gauge’s 225 companies, effectively controlling about 9 percent of Fast Retailing Co., the operator of Uniqlo stores, and nearly 5 percent of soy sauce maker Kikkoman Corp. It has an estimated shareholder rank of No. 3 in both Yamaha Corp., one of the world’s largest makers of musical instruments, and Daiwa House Industry Co., Japan’s biggest homebuilder.

If the BOJ accelerates its ETF purchases this week to an annual rate of 7 trillion yen -- the pace predicted by Goldman Sachs Group Inc. -- the central bank could become the No. 1 shareholder in about 40 of the Nikkei 225’s companies by the end of 2017, according to Bloomberg calculations that assume other major stakeholders keep their positions unchanged. It could hold the top ranking in about 90 firms using HSBC Holdings Plc’s estimate of 13 trillion yen.

Astounding, 55% of ETFs now owned by BoJ!

The BoJ's QE program, which has partly been intended to bolster the stock market, implicitly means the use price controls. Such tacit price controls were originally designed to favor stock market owners through the mechanism of increased demand provided by the BoJ and reduced supply from the public in order to push equity prices higher.

Yet increases in BoJ's share ownership of a corporation means decrease in the public's share ownership.  Remember, the BoJ buys these shares from the public. Hence, intensifying implicit price controls through the deepening of BoJ's asset buying extrapolates to the path of complete nationalization of the Japan's stock market.

Furthermore, as the BoJ increases its ownership in the stock market, liquidity is reduced if the BoJ does not sell. Eventually, the greater the BoJs ownership, the lesser the trading volume/liquidity. In essence, sustained BoJ QE would mean monopolization, and thus, the end of the stock market.

Additionally, sustained QE would translate to BoJ's direct and indirect control of corporate (internal and external) activities through its increased share of ownership. 

So instead of corporations focusing to serve consumers, these corporations would have mutated to become state owned enterprises (SOE). And priorities of such SOEs would instead be directed at the attainment of political objectives of Japan's political leaders. 

Moreover, with greater government interference, employment in these firms will likely be dictated by patronage politics

All these indicate that by virtue of sustained BoJ's QE, Japan's economy would likely transform into a socialist paradise overtime!

The great Austrian economist Ludwig von Mises was prescient, there is no middle of the road policy. Price controls, in this case BoJ's monetarism, only serve as one of the main channels to achieve socialism

But when this state of all-around control of business is attained, there can no longer be any question of a market economy. No longer do the citizens by their buying and abstention from buying determine what should be produced and how. The power to decide these matters has devolved upon the government. This is no longer capitalism; it is all-around planning by the government, it is socialism.

No Middle of the Road between Capitalism and Socialism and between Individualism and Collectivism

In the past I have pointed out why there can be no compromise between capitalism and socialism. This is for the simple reason that every bargain or accommodation for interventionism of various flavors leads to MORE socialism than LESS. Problems that emerges from each intervention would incite for more intervention which eventually leads to total government control. In the political context, "it’s never enough!"

This is specially pronounced during crisis. Austrian economist Robert Higgs calls this the “ratchet effect”. As per FEE.org (bold mine)

The problem in governance that arises when government intervention increases during crises such as wars, natural disasters, or economic depressions.  After the crisis government meets resistance in reversing the intervention, creating a situation where government intervention rarely returns to pre-crisis levels, which lead to a constant ratcheting up effect in growth of government intervention over time.

Expect an explosion of interventions in the coming crisis.

Yet interventionist transitions has almost always been a slippery slope process. Such transition can be seen in two ways. The great Austrian economist Ludwig von Mises explained: (bold mine)

There are two methods available for the transformation of capitalism into socialism. One is to expropriate all farms, plants, and shops and to operate them by a bureaucratic apparatus as departments of the government. The whole of society, says Lenin, becomes "one office and one factory, with equal work and equal pay,"  the whole economy will be organized "like the postal sytem."  The second method is the method of the Hindenburg plan, the originally German pattern of the welfare state and of planning. It forces every firm and every individual to comply strictly with the orders issued by the government's central board of production management. Such was the intention of the National Industrial Recovery Act of 1933 which the resistance of business frustrated and the Supreme Court declared unconstitutional. Such is the idea implied in the endeavors to substitute planning for private enterprise…

The middle-of-the-road policy is not an economic system that can last. It is a method for the realization of socialism by installments.

Yet it is not just in the realm of economics but in metaethics too. The great free market champion Ayn Rand said the same: There is no middle of the road between individualism and collectivism.

From Ms Rand’s Textbook of Americanism (fee.org) [bold mine]

The mark of an honest man, as distinguished from a Collectivist, is that he means what he says and knows what he means.

When we say that we hold individual rights to be inalienable, we must mean just that. Inalienable means that which we may not take away, suspend, infringe, restrict or violate — not ever, not at any time, not for any purpose whatsoever.

You cannot say that "man has inalienable rights except in cold weather and on every second Tuesday," just as you cannot say that "man has inalienable rights except in an emergency," or "man's rights cannot be violated except for a good purpose." 

Either man's rights are inalienable, or they are not. You cannot say a thing such as "semi-inalienable" and consider yourself either honest or sane. When you begin making conditions, reservations and exceptions, you admit that there is something or someone above man's rights who may violate them at his discretion. Who? Why, society — that is, the Collective. For what reason? For the good of the Collective. Who decides when rights should be violated? The Collective. If this is what you believe, move over to the side where you belong and admit that you are a Collectivist. Then take all the consequences which Collectivism implies. There is no middle ground here. You cannot have your cake and eat it, too. You are not fooling anyone but yourself. 

Do not hide behind meaningless catch-phrases, such as "the middle of the road." Individualism and Collectivism are not two sides of the same road, with a safe rut for you in the middle. They are two roads going into opposite directions. One leads to freedom, justice and prosperity; the other to slavery, horror and destruction. The choice is yours to make. 

The growing spread of Collectivism throughout the world is not due to any cleverness of the Collectivists, but to the fact that most people who oppose them actually believe in Collectivism themselves. Once a principle is accepted, it is not the man who is half-hearted about it, but the man who is whole-hearted that's going to win; not the man who is least consistent in applying it, but the man who is most consistent. If you enter a race, saying: "I only intend to run the first ten yards," the man who says: "I'll run to the finish line," is going to beat you. When you say: "I only want to violate human rights just a tiny little bit," the Communist or Fascist who says "I'm going to destroy all human rights" will beat you and win. You've opened the way for him.

By permitting themselves this initial dishonesty and evasion, men have now fallen into a Collectivist trap on the question of whether a dictatorship is proper or not. Most people give lip-service to denunciations of dictatorship. But very few take a clear-cut stand and recognize dictatorship for what it is: an absolute evil in any form, by anyone, for anyone, anywhere, at any time and for any purpose whatsoever.

A great many people now enter into an obscene kind of bargaining about differences between "a good dictatorship" and a "bad dictatorship," about motives, causes, or reasons that make dictatorship proper. For the question: "Do you want dictatorship?" the Collectivists have substituted the question: "What kind of dictatorship do you want?" They can afford to let you argue from then on; they have won their point. 

A great many people believe that a dictatorship is terrible if it's "for a bad motive," but quite all right and even desirable if it's "for a good motive." Those leaning toward Communism (they usually consider themselves "humanitarians") claim that concentration camps and torture chambers are evil when used "selfishly," "for the sake of one race," as Hitler did, but quite noble when used "unselfishly," "for the sake of the masses," as Stalin does. Those leaning toward Fascism (they usually consider themselves hard-boiled "realists") claim that whips and slave-drivers are impractical when used "inefficiently," as in Russia, but quite practical when used "efficiently," as in Germany.

(And just as an example of where the wrong principle will lead you in practice, observe that the "humanitarians," who are so concerned with relieving the suffering of the masses, endorse, in Russia, a state of misery for a whole population such as no masses have ever had to endure anywhere in history. And the hard-boiled "realists," who are so boastfully eager to be practical, endorse, in Germany, the spectacle of a devastated country in total ruin, the end result of an "efficient" dictatorship.)

When you argue about what is a "good" or a "bad" dictatorship, you have accepted and endorsed the principle of dictatorship. You have accepted a premise of total evil — of your right to enslave others for the sake of what you think is good. From then on, it's only a question of who will run the Gestapo. You will never be able to reach an agreement with your fellow Collectivists on what is a "good" cause for brutality and what is a "bad" one. Your particular pet definition may not be theirs. You might claim that it is good to slaughter men only for the sake of the poor; somebody else might claim that it is good to slaughter men only for the sake of the rich; you might claim that it is immoral to slaughter anyone except members of a certain class; somebody else might claim that it is immoral to slaughter anyone except members of a certain race. All you will agree on is the slaughter. And that is all you will achieve.

Once you advocate the principle of dictatorship, you invite all men to do the same. If they do not want your particular kind or do not like your particular "good motive," they have no choice but to rush to beat you to it and establish their own kind for their own "good motive," to enslave you before you enslave them. A "good dictatorship" is a contradiction in terms.

The issue is not: for what purpose is it proper to enslave men? The issue is: is it proper to enslave men or not? 

There is an unspeakable moral corruption in saying that a dictatorship can be justified by "a good motive" or "an unselfish motive." All the brutal and criminal tendencies which mankind — through centuries of slow climbing out of savagery — has learned to recognize as evil and impractical, have now taken refuge under a "social" cover. Many men now believe that it is evil to rob, murder, and torture for one's own sake, but virtuous to do so for the sake of others. You may not indulge in brutality for your own gain, they say, but go right ahead if it's for the gain of others. Perhaps the most revolting statement one can ever hear is: "Sure, Stalin has butchered millions, but it's justifiable, since it's for the benefit of the masses." Collectivism is the last stand of savagery in men's minds.

Do not ever consider Collectivists as "sincere but deluded idealists." The proposal to enslave some men for the sake of others is not an ideal; brutality is not "idealistic," no matter what its purpose. Do not ever say that the desire to "do good" by force is a good motive. Neither power-lust nor stupidity are good motives.

So Capitalism-Individualism (freedom) are diametric opposites to collectivism-socialism (slavery). This hasn't been a false choice. Real life developments reveal such dynamic at work.

Simon Black of the Sovereign Man tacitly expounds on the consequences of the Middle of the Road policies in the US via his article “America isn’t Communist, It’s only 70% communist” (bold mine)

Within his 1848 Communist Manifesto, Marx outlined a list of ten short-term demands. These, he thought, would be the precursor to the ideal stateless, classless communist society.

Ironically in today’s world, Marx’s demands look pretty much mainstream.

That is because nearly every single item on the list has been implemented to varying degrees in the United States.

Think that couldn’t be possible in the Land of the Free? Just take a look.

Topping Marx’s list is the abolition of private property.

True, private property exists, but only until the state wants to take it. With its powers of eminent domain, the government can and does confiscate people’s property when it wants for public use.

Your property isn’t unconditionally yours. Just think of property taxes, for example.

If it’s actually YOUR private property, then why would you need to pay tax on it? And why do they have the authority to take it from you if you don’t pay?

Likewise, while we haven’t seen the complete abolition of inheritance (another Marx demand), the government can take up to 40% of your estate when you die.

So ultimately your estate is not your own. You don’t get to control what happens to your wealth and possessions when you die. It’s just a matter of proportion.

Marx also demanded the centralization of transportation and communication. Check, and check.

Try broadcasting over the airwaves in the Land of the Free without a license and special permission.

Practically the entire electromagnetic spectrum is tightly controlled by the state, centralized by a handful of government agencies.

Same with the network of roads and highways. Because, after all, without government, who would build the roads…

Another point of Marx is state-guided agricultural production and combination of agriculture and manufacturing.

And the Land of the Free does not disappoint. Though its activities may not be as prominent in the news, the US Department of Agriculture is easily one of the busiest government departments.

With a budget of $146 billion a year, and much more for subsidies, USDA tirelessly works to dictate every major and miniscule activity in the sector.

Next on the list, is equal liability of all to labor. If you have at any point wondered, as I have, why politicians are always pushing jobs for the sake of jobs, rather than value and wealth creation—now you know why.

Between minimum wage laws and the constant stream of legislation that promises jobs for all, it is clear that politicians have wholly internalized this Marxian ideal.

Now, you might think that this is just a fluke, just a coincidence that some US policies resemble what’s on Marx’s list of demands.

But then you see these demands, which have not only been fully implemented in the US already, but are thoroughly entrenched in the national psyche:

First, there’s free education for all children, to enable the uniformity of thought. Check.

Then there’s a heavy progressive income tax. Yep, I’m pretty sure you’re familiar with this one, which has actually become so mainstream, that to have any system other than this would be considered revolutionary. Check.

Third, is the confiscation of the property of emigrants (expatriates) and rebels.

Between the IRS bullying of political opposition groups and the imposition of exit taxes for those that renounce their citizenship, the United States is firmly set up to discourage dissent and escape. Check.

And last but not least, the centralization of credit in the hands of the state, by means of a national bank. Check.

Remember, Karl Marx thought central banking was a great idea—the same guy who thought that individual success and private property were evil.

Think about that the next time the Federal Reserve comes up with a plan to help businesses and fix the economy.

So now you know, America isn’t communist. It’s only about 70% communist. No reason to worry.

Slippery slope indeed.

Quote of the Day: The Supremacy of Public Opinion

This timely quote from yesterday’s article at the Mises Institute is dedicated to my libertarian and Casey Phyle friends, as well as my, passive freedom loving readers…

Here the best theories are useless if not supported by public opinion. They cannot work if not accepted by a majority of the people. Whatever the system of government may be, there cannot be any question of ruling a nation lastingly on the ground of doctrines at variance with public opinion. In the end the philosophy of the majority prevails. In the long run there cannot be any such thing as an unpopular system of government. The difference between democracy and despotism does not affect the final outcome. It refers only to the method by which the adjustment of the system of government to the ideology held by public opinion is brought about. Unpopular autocrats can only be dethroned by revolutionary upheavals, while unpopular democratic rulers are peacefully ousted in the next election.

The supremacy of public opinion determines not only the singular role that economics occupies in the complex of thought and knowledge. It determines the whole process of human history.

The customary discussions concerning the role the individual plays in history miss the point. Everything that is thought, done and accomplished is a performance of individuals. New ideas and innovations are always an achievement of uncommon men. But these great men cannot succeed in adjusting social conditions to their plans if they do not convince public opinion.

The flowering of human society depends on two factors: the intellectual power of outstanding men to conceive sound social and economic theories, and the ability of these or other men to make these ideologies palatable to the majority.

That’s an excerpt from the magnum opus of the great Professor Ludwig von Mises.

The bottom line is that the battle for freedom fundamentally hinges on the arena of education, where ideas of liberty must be made “palatable to the majority”.

In short, communicate to educate. And we can speak or write or do both. Aside from traditional mediums, the internet has facilitated horizontal flow of communications through blogs (such as this), podcasts, social media, youtube, or etc…, which essentially bypasses the top-down flow communication monopolized and controlled by statists and their cronies. Debates can be held on neutral grounds which runs to our favor.

Remember the more the sources of ideas of freedom, the greater the chances that these may become public talking points.

Localizing freedom or merging freedom with domestic applications should increase the topical relevance that should connect with the local audience and thus attract wider participants.

In other words, communicate freedom under the framework of your specialty.

Consequently, a widening reach to the public implies higher chances for social acceptability or a change in public opinion. It’s no easy task as Professor von Mises and our free market champions have shown.

But the deepening of the information age and the law of depreciating returns for vertical organizations has been and will continue to provide us with useful examples of why individual liberty is the only option to the economically unsustainable alternative of statism. There is no middle of the road compromise.

Freedom and the basic law economics are inherently compatible. And that's why I am optimistic that the knowledge revolution will provide the ideological justification for political reforms that should lead to social decentralization.

Lessons from the Roman Era Socialism

Inflationism had only been part of the financial repression policies that led to the fall of the Roman empire. Surviving the Roman empire’s welfare-warfare state prompted for broader adaption of socialist policies

Writes Simon Black, (bold emphasis mine)

In the terminal collapse of the Roman Empire, there was perhaps no greater burden to the average citizen than the extreme taxes they were forced to pay.

The tax ‘reforms’ of Emperor Diocletian in the 3rd century were so rigid and unwavering that many people were driven to starvation and bankruptcy. The state went so far as to chase around widows and children to collect taxes owed.

By the 4th century, the Roman economy and tax structure were so dismal that many farmers abandoned their lands in order to receive public entitlements.

At this point, the imperial government was spending the majority of the funds it collected on either the military or public entitlements. For a time, according to historian Joseph Tainter, “those who lived off the treasury were more numerous than those paying into it.”

Sound familiar?

In the 5th century, tax riots and all-out rebellion were commonplace in the countryside among the few farmers who remained. The Roman government routinely had to dispatch its legions to stamp out peasant tax revolts.

But this did not stop their taxes from rising.

Valentinian III, who remarked in 444 AD that new taxes on landowners and merchants would be catastrophic, still imposed an additional 4% sales tax… and further decreed that all transactions be conducted in the presence of a tax collector.

Under such a debilitating regime, both rich and poor wished dearly that the barbarian hordes would deliver them from the burden of Roman taxation.

Zosimus, a late 5th century writer, quipped that “as a result of this exaction of taxes, city and countryside were full of laments and complaints, and all… sought the help of the barbarians.”

Many Roman peasants even fought alongside their invaders, as was the case when Balkan miners defected to the Visigoths en masse in 378. Others simply vacated the Empire altogether.

In his book Decadent Societies, historian Robert Adams wrote, “[B]y the fifth century, men were ready to abandon civilization itself in order to escape the fearful load of taxes.”

Perhaps 1,000 years hence, future historians will be writing the same thing about us. It’s not so far-fetched.

In the economic decline of any civilization, political elites routinely call on a very limited playbook: more debt, more regulation, more restriction on freedoms, more debasement of the currency, more taxation, and more insidious enforcement.

Further, the propaganda machine goes into high gear, ensuring the peasant class is too deluded by patriotic fervor to notice they’re being plundered by the state.

The lesson is simple: the loss of freedom leads to a collapse of civilization. Freedom is the essence of humanity.

As the great Ludwig von Mises wrote, (bold emphasis mine)

The establishment of this truth does not amount to a depreciation of the conclusiveness and the convincing power of the antisocialist argument derived from the impairment of productivity to be expected from socialism. The weight of this objection raised to the socialist plans is so overwhelming that no judicious man could hesitate to choose capitalism. Yet this would still be a choice between alternative systems of society's economic organization, preference given to one system as against another. However, such is not the alternative. Socialism cannot be realized because it is beyond human power to establish it as a social system. The choice is between capitalism and chaos. A man who chooses between drinking a glass of milk and a glass of a solution of potassium cyanide does not choose between two beverages; he chooses between life and death. A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings.

Do Central Banks Uphold Or Undermine Free Market Principles?

When I read Professor Art Carden’s statement from this article,

Far too often, people use terms like "capitalism" and "socialism" sloppily, either because they don't understand them or because the words make for cheap but effective (albeit inaccurate) political rhetoric. The Great Conversation suffers because of it.

It struck me that many arguments supposedly for the so-called advancement of the political philosophy of libertarianism, free markets and or classical liberalism have precisely been anchored on this—rhetoric misrepresented as principles.

And this is exactly the essence of my last article, The Middle Of The Road Policy Of A Local Free Market Group. Where I was earlier disappointed about the issue of principles, I was even more dismayed by the responses.

Given the benefit of the doubt that perhaps my article or my “spin” could have lacked clarity, or that specialization may have lead to the misunderstanding of my message, my argument against the positive relationship between central banking and the free market was certainly not about utility nor was it about market failure.

By utility, I mean it would seem misguided to compare what is essentially is a monopoly—operating on the power of coercion, funded by taxpayer resources and whose decision making process by the authorities are (externality) risk borne by the taxpayers—with private and semi-private enterprises operating mostly on a competitive environment.

By market failure, the standard statist ‘Paul Krugman’ tactic—throw up a strawman, assail or shoot it down with econometric gibberish or economic models, and declare “market failure”, thus justifying government intervention—eludes the question about this relationship between free markets and the central bank.

The fact that the local central bank began only in the Philippines in 1949, goes to show that even in our colonial past the nation has survived without it, thereby, disproving the presumed sine qua non nature of central banking to the local economy.

As my colleague Paul How writes in his 'as-yet unpublished manuscript', the “Philippine Banking And The Business Cycle” about how the domestic monetary system operated, (bold emphasis mine)

During the 19^th century, the monetary system had a gold standard in place, where each monetary note was presumed to redeem a fixed amount of gold...

Clearly, people, in their private capacity, preferred the use of a medium of exchange whose value was based not on government decree but on the amount of rare metals contained in the item. Even after the Spanish handed the Philippines over to the United States in December 1898, Filipinos continued using the Mexican coin, much to the chagrin of US officials keen on imposing their culture on the new colony’s inhabitants.

Where half of our transactions are settled for by money which is issued by an institution owned and controlled by the government, this extrapolates to half of our trading activities under the indirect purview of the government. Thus it is very important to put in question the role of such institution under the Free Market precept.

Ultimately, what for stands as the most important issue is through this question:

Do central banks promote or undermine the Free Market Principles?

This brings us back to definition. A free market, according to Wikipedia, is a market in which there is no economic intervention and regulation by the state, except to enforce private contracts and the ownership of property.

If freedom to contract and private property rights are the key pillars of free market principles as stated by such definition, do central bank activities promote these?

As a side note, under classical liberalism I would not say that free market is the absence of intervention or regulation, but instead a free market is self regulated by (mostly non-state) institutions operating under the rule of law.

Nevertheless the entire concept of freedom to contract and private property or even the rule of law are put into a test under the central bank’s operations: (bold highlights under below quotes are my emphasis)

1. Inflation of the monetary system

Thus, credit expansion unavoidably results in the economic crisis. In either of the two alternatives, the artificial boom is doomed. In the long run, it must collapse. The short-run effect, the period of prosperity, may last sometimes several years. While it lasts, the authorities, the expanding banks and their public relations agencies arrogantly defy the warnings of the economists and pride themselves on the manifest success of their policies. But when the bitter end comes, they wash their hands of it.

The artificial prosperity cannot last because the lowering of the rate of interest, purely technical as it was and not corresponding to the real state of the market data, has misled entrepreneurial calculations. It has created the illusion that certain projects offer the chances of profitability when, in fact, the available supply of factors of production was not sufficient for their execution. Deluded by false reckoning, businessmen have expanded their activities beyond the limits drawn by the state of society’s wealth. They have underrated the degree of the scarcity of factors of production and overtaxed their capacity to produce. In short: they have squandered scarce capital goods by malinvestment.

Ludwig von Mises, The Causes of Economic Crisis,

Does price signalling distortion, reduction of purchasing power of money and capital consumption from these forces represent as free market principle? The same question should all be applied on the following aspects shown below.

2. The nature of central bank’s fractional reserve system

As Huerta de Soto points out, the problem of the tragedy of the commons always appears when property rights are defined improperly. In the case of fractional reserve banking, bankers can infringe on property rights because it is not clearly defined who owns the deposit.

When customers make their deposits, the promise is that the deposit is always available for withdrawal. However, the deposits, by the very definition of fractional reserve banking, are never completely available to all customers at one time. This is because banks will take a part of these deposits and loan them out to other customers. In other words, they issue fiduciary media. By issuing more property titles than property entrusted to them, the banks violate the traditional property rights of their customers. (One of the most important contributions of Huerta de Soto's exhaustive book is to demonstrate how banking developed historically and that fractional reserve banking evolved as a perversion of deposit banking.)

Philipp Bagus, The Commons and the Tragedy of Banking

3. Externality costs from the knowledge problem

The odds that 19 men and women (a.k.a. the Federal Open Market Committee) will be able to select the overnight interest rate that keeps the U.S. economy growing at its potential in perpetuity are next to nil.

There would be a huge outcry if the Fed set the price of oil or copper or soybeans. Yet we accept the central bank as a price setter, a monopolist, when it comes to the interbank lending rate.

Caroline Baum Capitalism Still Has Legs That Are Long and Sexy

3. Operates from an environment of arbitrary rules

The concept of the rule of law in jurisprudence and political philosophy has several dimensions. At its core is the classical liberal principle of nondiscretionary governance that stands in contrast to the arbitrary or discretionary rule of those people currently in authority. In shorthand, either we have the rule of law or we have the rule of authorities. Under the rule of law, government agencies do nothing but faithfully enforce statutes already on the books. Under the rule of authorities, those in positions of executive authority have the discretion to make up substantive new decrees as they go along, and to forego enforcing the statutes on the books.

Dr. Lawrence H. White Rule of Law or the Rule of Central Bankers?

Think currency interventions in behalf of exporters and OFWs at the expense of importers and consumers via elevated prices of goods and services.

4. Operate on persistent political pressures

To put it into the hands of an institution which is protected against competition, which can force us to accept the money, which is subject to incessant political pressure, such an authority will not ever again give us good money

Friedrich August von Hayek A Free-Market Monetary System

5. Choosing winners and losers

The real reason for the adoption of the Federal Reserve, and its promotion by the large banks, was the exact opposite of their loudly trumpeted motivations.

Rather than create an institution to curb their own profits on behalf of the public interest, the banks sought a Central Bank to enhance their profits by permitting them to inflate far beyond the bounds set by free-market competition.

Murray N. Rothbard, The Case Against the Fed

6. Crony Capitalism

The answer was the same in both cases: the big businessmen and financiers had to form an alliance with the opinion molding classes in society, in order to engineer the consent of the public by means of crafty and persuasive propaganda.

Murray N. Rothbard, The Case Against the Fed

7. Promote Government Expansion

While, as we shall see presently, government's exclusive right to issue and regulate money has certainly not helped to give us a better money than we would otherwise have had, and probably a very much worse one, it has of course become a chief instrument for prevailing governmental policies and profoundly assisted the general growth of governmental power. Much of contemporary politics is based on the assumption that government has the power to create and make people accept any amount of additional money it wishes. Governments will for this reason strongly defend their traditional rights. But for the same reason it is also most important that they should be taken from them.

A government ought not, any more than a private person, to be able (at least in peace-time) to take whatever it wants, but be limited strictly to the use of the means placed at its disposal by the representatives of the people, and to be unable to extend its resources beyond what the people have agreed to let it have. The modern expansion of government was largely assisted by the possibility of covering deficits by issuing money-usually on the pretence that it was thereby creating employment. It is perhaps significant, however, that Adam Smith [54, p. 687] does not mention the control of the issue of money among the 'only three duties [which] according to the system of natural liberty, the sovereign has to attend to'.

Friedrich August von Hayek Denationalization of money

In my view, the fundamental case for free market capitalism begins with sound money and sound banking institutions (whether it is a 100% gold reserve or a free banking standard).

The Middle Of The Road Policy Of A Local Free Market Group

I was delighted to learn about the existence of a “free market” group in the country, especially that it seemed to have several prominent members.

But when I read further and saw that the same group acclaimed or endorsed the leadership of the local central bank for “steering” the economy and for producing “low inflation”—my enthusiasm faded. I got turned off and dismayed.

Suggesting that central banks can “steer” the economy essentially destroys the free market principle. Doing so suggests that socialism is superior to the free markets. If central banks can steer the economy, then why the heck bloviate about free markets at all?

There are many aspects to quibble with central bank operations, but the most important facet is the manipulation of interest rates.

Tinkering with interest rates represents a form of price control that causes price distortions which subsequently produces bubble cycles. In addition, maneuvering interest rates impels for indirect redistribution: from savers and creditors to debtors.

So essentially a central bank that dabbles with interest rates does this to promote the local banking cartel, (banks are financial intermediaries so lowering of interest rates attracts borrowers or clients for the industry) at the expense of the other industries and the consumers.

So what’s the essence of free market here? What you have instead is a banking cartel buttressed by state capitalism that essentially privatizes profits and socializes losses. (You will see this when a crisis surfaces)

As for low inflation, policies have intertemporal effects. Previous low interest regime was not due to central bank policies but due to many factors as globalization and technology aided productivity gains. Today’s rampaging food and energy prices are an offshoot to manipulated artificially suppressed interest rates, which promotes simulated unnatural demand, that will cause another global, if not, domestic crisis.

Thus, crediting central banks for current policies represents a naive and very narrow time oriented viewpoint.

It is of no wonder why free markets precepts in the Philippines have been denigrated.

They are founded on tenuous framework, which frequently gets obfuscated with the social democratic platforms.

In short, the free market principle is severely compromised and selectively and conveniently applied. This also means that the accommodation of the middle of the road policies such as the endorsement of central banking is a misguided way to promote free markets. It would seem like the devil who uses the Bible in order to mislead Christian devotees.

As the great Ludwig von Mises wrote,

The middle-of-the-road policy is not an economic system that can last. It is a method for the realization of socialism by installments.