Wednesday, April 13, 2011

Tax Freedom Day -- Not

by Doug Bandow

Americans finally finish working for the federal government on April 12 this year. That's three days later than last year, but still a couple weeks earlier than Tax Freedom Day in 2006 and 2007, April 24. The record in both peace and war was May 1 in 2000. Had Al Gore defeated George W. Bush in that year, TFD probably would have continued rising, as it had since Bill Clinton's election in 1992.

Unfortunately, April 12 still isn't much to be happy about. TFD rose to April 12 in 1962, but quickly fell back. In 1967 TFD again hit April 12, eventually oscillating between April 16 and 24. TFD fell to April 19 in 1992 before beginning another sharp rise. As a percentage of income taxes hit 30 percent in 1969 and hovered around the level for years. The tax burden did not fall below 29.1 percent until 2003. This year that percentage will be 27.7, a welcome but only marginal improvement.

Total taxes this year will cost Americans more than what they'll spend on food, shelter, and clothing combined. Not all of these purchases will prove worthwhile for all people, obviously. But compare their value to what the government does with their money.

Doug Bandow is a Senior Fellow at the Cato Institute and the Senior Fellow in International Religious Persecution at the Institute on Religion and Public Policy. A former Special Assistant to President Ronald Reagan, he is author of Beyond Good Intentions: A Biblical View of Politics (Crossway).

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Taxpayers are bailing out virtually every interest known to man — plus a few not previously recognized. Banks get money. Auto companies get aid. Labor unions get benefits. Homeowners get help. Insurance companies get cash. Investment funds get guarantees. Property sellers get subsidies. Taxpayers get the bill.

But all this pales in comparison with the cost of last year's health care legislation. Everyone knows that the administration and Congress, like the famed Isuzu salesman, were lying. Taxpayers soon will be paying off insurance companies, doctors, and pharmaceutical companies — just coincidentally all among the bill's most avid supporters — as well as people forced to buy high-priced health insurance.

Americans also get the pleasure of subsidizing a gaggle of rich allies around the world, such as the Europeans, who are too busy supporting welfare states to maintain effective militaries. South Korea and Japan also are on the U.S. military dole, leaving the heavy lifting to Americans. Even corrupt Third World politicians, like Hamid Karzai, are on Washington's military payroll. America's ungrateful dependents now include the Libyan rebels, who blame the U.S. for the failure of their untrained, uncoordinated, and divided forces.

Taxpayers pay for domestic "welfare" too, which has done so much to destroy families and communities. Welfare reform in 1996 reduced the damage, but the so-called "stimulus" bill reversed course. The latter also wasted money without promoting long-term growth. In fact, the Congressional Budget Office figured that this legislation, after providing a short-term boost, will permanently reduce economic activity starting around 2015. Which means working families will earn less while paying higher federal interest payments on the borrowed funds.

There's so much more. A crowd favorite is pork barrel projects, used by big spending politicians to generate political support. Yes, I'm a thief, the lawmaker admits, and I stole from you, but I'll share a bit of the ill-gotten loot. Vote for me! Such is the appeal of democracy.

No wonder two-thirds of Americans believe they are overtaxed. Eight of ten mainstream voters believe that they pay too much. But not the political class. According to Rasmussen Reports, 87 percent of America's governing elite, who decide how to spend everyone else's earnings, disagree. They see a penny not taxed as a penny not spent, defeating their role in life.

More significantly, TFD doesn't mean much anymore. Taxes provided a relatively accurate measure of the burden of government when the budget was balanced — most recently in 2001. (Guess which president was most responsible for that budget: It wasn't a Republican.) When you finished paying taxes, you were actually done paying for government.

No longer.

The federal budget this year will run about $3.8 trillion, give or take a few dozen billion dollars, which hardly counts anymore. Borrowing will account for between $1.5 trillion and $1.65 trillion, depending on who is doing the estimating. That is roughly 40 percent of total federal outlays. Unless Uncle Sam defaults on his obligations — a tempting thought, since it would cut taxpayers' present obligations while making future borrowing much more difficult — that money will eventually have to be paid.

Although the borrowing binge is occurring during Barack Obama's presidency, the Republicans also are responsible. George Bush and the GOP Congress turned a surplus into a big deficit.

They increased federal spending across-the-board. They created the Medicare drug benefit, with an unfunded liability of around $15 trillion. The president launched and Congress funded two unnecessary nation-building expeditions in distant Third World lands. And President Bush was the driving force behind TARP and assorted other bail-outs. Indeed, his officials admitted that they had no "metric" for the $700 billion TARP proposal; they just wanted a "big number." And they got it.

In short, the GOP created a solid foundation for President Obama's Big Government empire.

The Tax Foundation, which estimates Tax Freedom Day, acknowledges the problem. Since 2008, observes the Foundation, "deficits have been massive by any measure, and as a result, Tax Freedom Day may give the impression that the burden of government is smaller than it is. If the federal government were planning to collect enough in taxes during 2011 to finance all of its spending, it would have to collect about $1.48 trillion more, and Tax Freedom Day would arrive on May 23 instead of April 12."

That revised TFD would set a peacetime record. You have to go back to World War II to find a time when the U.S. government spent a larger proportion of the economy. And World War II was the greatest conflict in human history. A little "kinetic military action" in Libya for who knows what purpose doesn't come close.

Unfortunately, there is little reason for optimism about the future. The congressional Republicans originally proposed to cut $61 billion from this year's expenditures, about 1.6 percent. Now they've settled for $22.5 billion less.

House Budget Committee Chairman Paul Ryan has offered a thoughtful long-term plan that would make major reductions in entitlements as well as discretionary spending. But its political future is, to put it kindly, uncertain. It won't go anywhere with a Democratic Senate and president. It might not go anywhere even if the Republicans win control of both ends of Pennsylvania Avenue next year.

The current budget numbers look frightening enough. But more spending is inevitable. Fannie Mae and Freddie Mac continue to lose money. The Federal Housing Administration is insuring more problem mortgages than ever. The FDIC continues to close banks. The Pension Benefit Guaranty Corporation continues to take over the pension plans of failed businesses. All of these and many other bills will eventually come due.

The Obama administration has got America into its third unnecessary Middle Eastern war in a decade. With military forces still occupying Iraq eight years later and still fighting in Afghanistan nearly ten years later, who knows how long the U.S. will be stuck fighting, occupying, and reconstructing Libya. War is just another Big Government program with an equally large unfunded liability.

Then there's Obamacare, assuming it is not repealed by Congress or overturned by the Supreme Court. By one estimate the legislation imposed an unfunded liability of over $13 trillion. No one knows for sure, since the official estimates were fudged by Congress. Permanent, non-political officials at the Centers for Medicare and Medicaid Services have repeatedly said, ever so politely, that the Democrats lied about the numbers. The Medicare cuts that were necessary to fund the program simply aren't going to happen: they are "very unlikely to be viable indefinitely," under the new reimbursement rates providers "would eventually be unwilling or unable to treat Medicare beneficiaries," and projections based on these changes "are very likely to seriously understate actual Medicare costs in the long-range future."

Finally, there are the unfunded liabilities for Social Security, Medicare, and Medicaid. The federal government only develops an estimate for the first two, and their combined future red ink came to $107 trillion in 2009, the last reliable estimate. Medicaid is on a similar trajectory. Left unchanged, these three programs alone will eventually destroy federal finances. Yet even many avid members of the Tea Party don't want to touch what they see as "their" benefit programs.

The fiscal train wreck is approaching. "The federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long-run," warned the CBO. Looking ahead just a decade, the agency reported: "To keep annual deficits and total federal debt from reaching levels that would substantially harm the economy, lawmakers would have to increase revenues significantly as a percentage of GDP, decrease projected spending sharply, or enact some combination of the two."

Indeed, after the coming tsunami of spending, deficits, and debt, one hates to imagine the date of future Tax Freedom Days. Will there even be a tax freedom day? Maybe taxpayers will face the ultimate simplified tax form of just two lines: "1) How much did you earn? 2) Send it in."

With the president and Congress attempting to provide a full service global welfare state, the IRS is likely to become a little like the Eagles' Hotel California, where you can check out but never leave. You will be able to earn money, but never spend it. After all, everything you own was long ago promised by Uncle Sam to someone else.

When Intervention Is Easy

When Intervention Is Easy

by Harvey Sapolsky and Benjamin H. Friedman

America's halfhearted adventure in Libya falls within a cycle of U.S. military intervention since the end of the Cold War: Success brings hubris, hubris causes overreach and failure, and failure breeds caution - though not necessarily restraint. Once another cautious intervention seems to succeed, the cycle begins anew.

The first major post-Cold War U.S. military intervention was cautious. Once an American-led coalition ejected Iraqi forces from Kuwait, in 1991, the first Bush administration resisted pressure to overthrow Saddam Hussein by marching on to Baghdad or fighting alongside Shiite insurgents. But many Americans saw their military's swift success as evidence that it could do nearly anything at low cost, including make nations from chaos.

Two years later, the debacle in Somalia showed otherwise, fueling the timidity that followed in the face of the Rwandan genocide and the murderous disintegration of Yugoslavia. The Clinton administration did not stay out of the Balkan conflicts, of course, just as it did not quit enforcing no-fly zones over Iraq. But it limited the risks to U.S. forces, bombing from great heights and deploying peacekeepers only after the fighting had ceased.

Success brings hubris, hubris causes overreach and failure, and failure breeds caution - though not necessarily restraint.

That was the first post-Cold War cycle. The second, which began with the relatively cautious invasion of Afghanistan after 9/11, is now ending.

The exaggeration of our successes in Bosnia and Kosovo - both of which became dysfunctional international protectorates that only nation-building enthusiasts can regard as victories - dimmed memories of Vietnam and Somalia. Rapid initial progress in Afghanistan encouraged the hubris that led to the disastrous Iraq war, as well as a more extensive and ever more frustrating effort in Afghanistan.

But the flow of American blood and treasure required to prop up venal governments in those states eventually undercut enthusiasm for occupational warfare, especially amid an economic downturn.

Power gives American presidents more choices than other leaders. U.S. military capabilities and wealth make almost any global action possible. And the Cold War that checked much of our proclivity for intervention is over.

To fight as we do in Afghanistan, even most wealthy nations would have to hike taxes or slash other expenditures, provoking domestic opposition. We do it with less than 1 percent of gross domestic product, mostly borrowed.

Because we can intervene relatively cheaply, temptation always beckons. The world never lacks for civil unrest whose victims we might save. Congress' halls are rarely free of emissaries claiming we could advance liberty by fighting for the would-be nation they represent. And few years pass without outraged editorials arguing that American values and interests compel our troops to occupy some bloody corner of the Earth. Unhappy memories of recent wars are one of the few domestic forces that restrain us from those fights.

Harvey M. Sapolsky is a professor emeritus of public policy and organization at the Massachusetts Institute of Technology. Benjamin H. Friedman is a doctoral candidate at MIT and a research fellow at the Cato Institute.

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These contradictory impulses explain the incoherence of the U.S. war in Libya. The Obama administration naturally sympathized with rebels claiming to be democrats and overmatched by a particularly odious despot. But the two unpopular occupations already under way encouraged caution. The compromise is a limited air war meant to overthrow Moammar Gadhafi while minimizing the risk to U.S. service members and the cost to taxpayers.

The president ruled out ground forces before he articulated war aims. He resists arming the rebels, has handed over combat missions to our allies, and pretends we are enforcing a no-fly zone only to protect civilians - a fiction required to maintain the alliance. Rarely has a nation gone to such lengths to show its disinterest in winning a war it is fighting.

The allies' success defending rebel territory has not allowed the insurgents to fell the regime. If the stalemate lingers and costs mount, or anarchy engulfs post-Gadhafi Libya, the war will reinforce the caution brought about by Iraq and Afghanistan. But if things work out well enough for hawks to declare victory - if air power quickly allows the rebels to establish a revolutionary government - the resulting hubris will encourage more reckless campaigns.

Caution in American military policy is fleeting. We are so powerful and secure that even military debacles are insufficient to permanently teach us restraint. That is both a good thing and an endless source of trouble.

Congress Has Become the Least Dangerous Branch

Congress Has Become the Least Dangerous Branch

by Gene Healy

In last week's budget standoff, the headlines had President Obama repeatedly "summoning" the speaker and the Senate majority leader to the White House. "Why," my colleague David Boaz asked, "doesn't the speaker 'summon' the president to what I think is the real seat of government?"

It's a good point: Whether or not you score the budget deal as a win for the GOP, the casual way the media describes the president's role shows how dangerously far we've drifted toward one-branch rule.

Congressmen of old "would have received as a personal affront" any message from the president calling on them to change their position, Massachusetts Sen. George Hoar wrote in his 1903 memoirs: "If they visited the White House, it was to give, not to receive advice." "In a republican government," the Federalist explains, "the legislative authority necessarily predominates," and is therefore most to be feared.

In the shell game of modern American governance, we've let ourselves become easy marks.

Today, not so much. Consider the controversial "policy riders" that almost sank the budget deal. The measure defunding Planned Parenthood got most of the coverage, overshadowing important provisions aimed at restricting the Environmental Protection Agency's power to regulate greenhouse gases.

Seizing on the Supreme Court's 2007 ruling that the Clean Air Act's definition of "pollutant" was broad enough to encompass CO2 — a gas essential to life on Earth — the Obama administration has begun to "legislate" global warming policy in an end-run around Congress.

Whatever your views on climate change, you ought to find it unsettling that, here and elsewhere, most of the actual "law" in this country is crafted by unelected executive-branch bureaucrats.

But that's where we are. A few months back, the New York Times reported that some 230 health regulators had descended on Bethesda — paying double rent for office space so they could immediately begin drafting more than 300 rules implementing Obamacare. Thanks to "mega-bills passed by Congress," the Times explained, regulators are issuing "hundreds of sweeping financial and health care regulations that will ultimately affect most Americans."

As at home, so too abroad: having ceded its constitutional power, Congress sits on the sidelines and carps while the president wages war.

Two weeks ago — nine days after we started bombing Libya — President Obama got around to explaining why. His televised address ran more than 3,000 words, but "Constitution" never appears — and "Congress" occurs only once: a passing reference to "consulting the bipartisan leadership of Congress."

The president's supposed to do more than "consult"; the real "decider" is Congress. Our Constitution grants the legislature sufficient power to make talk of "co-equal branches" a misnomer.

Gene Healy is a vice president at the Cato Institute and the author of The Cult of the Presidency.

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The constitutional scholar Charles Black once commented, "My classes think I am trying to be funny when I say that, by simple majorities," Congress could shrink the White House staff to one secretary, and that, with a two-thirds vote, "Congress could put the White House up at auction." (I sometimes find myself wishing they would.)

But Professor Black wasn't trying to be funny: it's in Congress' power to do that. And if Congress can sell the White House, surely it can defund an illegal war and rein in a runaway bureaucracy.

If they don't, it's because they like the current system. And why wouldn't they? It lets them take credit for passing high-minded, vaguely worded statutes, and take it again by railing against the bureaucracy when it imposes costs in the course of deciding what those statutes mean.

But it's our fault as well. In the shell game of modern American governance, we've let ourselves become easy marks. Unless and until voters wise up and demand accountability, Congress will continue to take our money and shirk its duty.

The Fed Obliterates the Savings Ethic

The Fed Obliterates the Savings Ethic

Mises Daily: by

Depression babies learned early that "saving for a rainy day" was not something one hopes to do but a requirement. The saying originated when most people worked on the farm. And when it rained, the fields were too wet to plow, and the farmer — not to mention the hired hands — made no money.

Of course, my grandfather was the diligent sort who would use rainy days to do required maintenance on his implements, noting with derision other farmers who spent rainy days at the bar in town. He believed they would surely end up with broken equipment when the sun would reappear, keeping them from making hay.

So the idea of savings is not necessarily the return one receives on the money that's socked away, but the piece of mind that, when the weather doesn't cooperate, the saver has a little stash to tide him over. Of course, the vast majority of us don't have to worry about the weather.

But an economic storm hit a couple years ago and plenty of people have not had work, rain or shine. Those who took heed of that old saw have no doubt weathered the storm better than those who didn't. Most financial advisors recommend that a person have three month's worth of living expenses saved — and some say six months worth, just in case. But how many people heed that advice?

There is no caveat to the counsel that says, "Keep six months of savings around if the money is earning at least six percent." Even if the money sits there all shiny, not earning a thing, it's the liquidity and insurance against the unknown that's the issue.

Unfortunately, a central bank's debauchery of the currency serves to raise people's time preferences and impair their judgment. In a blog post recently, I highlighted the advice of life coach and author John P. Strelecky, who advises people to spend their tax refunds on an experience they will remember forever, rather than saving the few hundred or thousand dollars that the IRS may be giving back.

Live your life for today, says the life coach — a couple thousand bucks isn't going to matter anyway. I posted to the Mises Blog to point out how ludicrous this advice is. But most who commented sided with Strelecky:

I think his advice is spot-on, at least given the constraints of the times in which we live. What's the point in saving if inflation will ravage whatever you manage to accumulate?

You play by the rules of the game. Your savings growth will be puny due to pathetic interest rates, erased by inflation, and confiscated by a rapacious state. So go ahead, enjoy the "money" now, while it still has some value.

Most people don't really have a better place to put the money than into a pleasurable experience, which is all you will want in the end.

Gotta agree with the comments. Maybe not trips or other "experiences." But I feel safer with stuff than I do with Federal Reserve notes going forward.

That's just what central bankers like to hear. They are worried about deflation. A few months ago, the Chicago Fed's Charles Evans said,

It seems to me if we could somehow get lower real interest rates so that the amount of excess savings that is taking place relative to investment is lowered, that would be one channel for stimulating the economy.

Lord Keynes was constantly worried that people were saving too much and consuming too little — thus the need for more and cheaper money to stimulate the economy. Mr. Bernanke is nothing if not a good Keynesian, and his low rates make even the savviest question whether to forgo consumption.

And likely no retiree, when contemplating leaving the workforce, figured 1 percent interest rates (or less) into their retirement cash-flow planning. In a front-page article, the Wall Street Journal took a look at "retirees who find themselves on the wrong end of the Federal Reserve's epic attempt to rescue the economy with cheap money."

The WSJ rightly points out that the Fed's low rates have been a windfall for banks and borrowers, but a problem for those needing income from their savings to live on. People who thought they played the game right, worked hard, saved money, and now want to take it easy, are panicked that money-market funds are throwing off but 24 basis points. "That's one-tenth the level of late 2007 and the lowest on records dating back to 1959," the Journal reports.

As bad as the Fed-engineered low rates are for those trying to live off past savings, reporter Mark Whitehouse makes the point that the low rates keep young people from building up funds for the future — whether it's for emergencies or retirement. Working Americans put less money into financial assets last year than at anytime on record — except 2009, when people pulled money out. And while the Department of Commerce says the personal savings rate has risen to 5.8 percent, Whitehouse explains, "That's in large part because it counts reductions in personal debt, such as mortgages and credit-card balances, as savings." But most debt reduction, Whitehouse writes, has been driven by defaults, rather than saving.

The Fed's interest-rate policy also leads people into taking more risk with their savings than they should. "That's why most of us are in the stock market, because there's no place else to go," says 70-year-old John Lehman, who would rather have his money in bank certificates of deposit but must resort to speculating. "I hope my assets don't run out before I die."

Many retire with next to nothing as it is. According to AARP, 16 percent of Americans have not saved a dime for retirement, and nearly half have saved less than $50,000.

Those with no savings are more dependent on government and others when the unexpected occurs, whether it's job loss or the washing machine quits. Professor Paul Cantor reminds us in his article, "Hyperinflation and Hyperreality: Mann's 'Disorder and Early Sorrow,'" that "money is a central source of stability, continuity, and coherence in any community. Hence to tamper with the basic money supply is to tamper with a community's sense of value."

When the Fed makes saving seem futile and immediate pleasure seem rational, the world has been diabolically turned upside down. Just one step away from hyperinflation, the central banks' actions are threatening "to undermine and dissolve all sense of value in a society."

"Thus inflation serves to heighten the already frantic pace of modern life, further disorienting people and undermining whatever sense of stability they may still have," Cantor explains.

The social order is upended in Mann's story as wealth is transferred from those who diligently saved all of their lives to speculators. As it was in the Weimar Germany that Mann describes, so it is today, as people believe it futile to sock away a little money here and there, and instead feel compelled to either speculate or just blow what they have on good times.

And while the retirees mentioned in the WSJ article are being crippled financially, Cantor points out that Mann's portrayal of hyperinflation uncovers "something psychologically more debilitating happening to the older generation." Impetuous, high-time-preference behavior displayed by the young appears rational in an inflationary period, while prudence and conservatism appear to be not even quaint but downright silly.

As Mann described so long ago, the world of inflation is the illusion of wealth, created by the government's printing press, distorting everything we see and perverting our judgment. Meanwhile the cry for stimulus continues, while our culture and values are buried under a pile of paper.

Why Monetary Expansion Must Stop

Why Monetary Expansion Must Stop

Mises Daily: by

[Address delivered at the European Parliament in Brussels on March 16, 2011]

Introduction: The Illusion of Unlimited Resources

The current problems faced by all the world's economies stem, primarily, from one source: the demise of sound money, whose quantity could not be increased without significant cost, and its replacement with fiat money that can be inflated to infinite amounts at almost no cost to the producer.

Expansion of fiat money makes it appear to all market participants, including financial regulators, that there are more resources available than really exist. Thusly, all participants, including governments, embark on programs that cannot be completed; there just are not enough resources in the economy.

Not only does fiat money create the illusion of greater wealth, it makes embarking on new projects irresistible. After all, does it not always appear that lack of money is all that stands between man and the fulfillment of all his dreams? Now, with unlimited quantities of fiat money, the day seems to have arrived when anything is possible. But this is an illusion.

Throughout my talk I will refer to economic laws that act as impenetrable barriers to achieving the goals sought by monetary expansion. These are laws of human nature — to ignore them brings serious adverse consequences.

Economics is a social and not a natural science, because man is a social being. His actions are not governed by physical stimuli but by preferences derived from subjective valuations, all of which are unknowable, undergo constant change, and therefore cannot be predicted. Nevertheless, we do know that man is rational; that he acts to attain goals which he believes will improve his satisfaction; that he employs scarce means to do so and that means imply costs; but since he expects to improve his satisfaction, he expects the costs to be less than the satisfaction to be attained; so man expects to profit from his actions. From this brief explanation of man as a rational being, we can derive irrefutable economic laws.

Two Evils of Monetary Expansion

There are two main evils of monetary expansion: (1) recurring financial crises and (2) expansion of the wealth-destroying welfare-warfare state.

I'll start with why we continue to have recurring and ever more damaging financial crises. Then I will discuss very briefly the expansion of the wealth-destroying welfare-warfare state.

No Societal Benefit from Monetary Expansion

Expansion of fiat money denies the irrefutable economic law that money is subject to the law of diminishing marginal utility. This insight was explained by Ludwig von Mises in his 1912 classic, The Theory of Money and Credit. Mises explained that money is not "neutral"; money is a good and is subject to all the laws of economics as are all other goods. Because each new marginal unit conveys less utility than all previous units, and because money is fungible — meaning that each new unit is indistinguishable from monetary units already existing — then the purchasing power of all money is reduced.

The first users of the new money benefit most from the newly created money. This is a tight circle nearest the event of the new money being created. Those furthest away from this event, who are in a wider circle of the general economy, all lose because this new money dilutes the value of each unit of money they are already holding. Think of it as pouring water into milk. Therefore, expansion of the money supply conveys no overall societal benefit.

Money Expansion Is Not Stimulative

Immediately we see that an increase in money cannot be stimulative overall. Although it can stimulate some parts of the economy (those who get the new money first), it can do so only at the expense of all other parts, violating another immutable law of economics, Say's Law, which essentially tells us that we can't get something for nothing. With the creation of new fiat money, wealth has been redistributed from the current holders of money — the rightful owners — to illegitimate new allocators who steal, without getting noticed, other people's money. The first or early receivers of the new money benefit at the expense of those who receive it later, through the market process, or do not receive it at all — for example, retirees living on privately accumulated wealth. The early receivers buy at existing lower prices, while later receivers pay higher prices.

As this newly created money dilutes the existing money's purchasing power, we see this as high prices — later and not immediately. Higher overall prices are the logical consequence of any expansion of money. The price level can be thought of as the result of total monetary spending divided by the total supply of goods and services offered on the market. If the numerator (total spending) goes up or the denominator (total market supply of goods) goes down, the price level increases.

Some may object to this explanation, saying that sometimes the price level remains relatively flat despite an increase in the quantity of money, because the total supply of goods increases enough to offset increases in total spending. My answer is that this is a justification for slow, planned inflation, which ignores damaging structural changes that still occur in the economy. I discuss these changes below.

The Prosperity Illusion Caused by a Rising Gross National Product

Unfortunately, increased spending creates the illusion of increased prosperity, because we measure prosperity by the growth in Gross National Product (GNP), a measure only of total spending, the numerator in the quantity-theory-of-money equation. Under sound money, GNP remains the same, because the quantity of money — and thusly, the quantity of total spending — remains unchanged.

But fiat-money inflationary spending, caused by planned inflation of the money supply, is described as economic "growth." The more government inflates the quantity of money, the greater economic growth appears to be as measured by GNP. But this is an illusion. It is not growth at all. It is just a consequence of measuring higher prices.

So far we have seen that fiat money does not stimulate the economy overall; it merely rewards some at the expense of others and creates higher overall prices. But the main structural damage, to which I earlier referred, occurs in the structure of production as manifested by recurring boom/bust cycles. Here is where fiat money and credit expansion cause pure capital consumption, robbing the future productive capability of the economy.

Malinvestment and the Austrian Business Cycle

In the mistaken belief that the economy can be stimulated into a higher level of production by more money, central bankers lower interest rates below the natural, market rate. The ultimate result of such intervention is destruction of capital through what Austrian economists call malinvestment. Capital is devoted to lines of production, primarily into longer-term investments, that will never be profitably completed.

We must address this most pressing question: Why do so many businesses fail at the same time? Can it be that a mass incompetence spreads through the economy so that we experience a large-scale bust from time to time? Governments and central bankers focus on this bust and try to postpone it, thinking that this bust is the problem.

"Lower interest rates and increased government oversight provide nothing more than full employment for bureaucrats."

But, ladies and gentlemen, I am here to tell you that the bust is not the problem. The problem is the boom and what created it in the first place. Fortunately this business-cycle phenomenon has been very well explained by Austrian economics. For those of you who have the time, I will be happy to explain the details of this after my talk. Suffice it to say that it is the intervention of the central bank that puts into motion the culprit of "artificial interest rates." These are false signals to businesses that there are new, real resources for investing in longer-term, capital-expansion projects. But there are no new, real resources for the successful and profitable completion of all new boom-time projects.

Coercion Is No Solution

Rather than cease its monetary intervention, government counters these consequences with coercion in the form of increasing bureaucratic oversight of banks, mandatory increases in bank capital requirements, and the creation of bailout funds.

Increasing bureaucratic oversight rests on two false ideas — that bureaucrats can discern potential problems to which bankers are blinded and that, unlike bankers, bureaucrats are not greedy by nature, so they will not take on increased risk. But government bureaucrats can no more detect errors, culpable or otherwise, than can the financial community they are supposed to regulate. The normal economic cues are hidden by expansion of money and manipulation of the interest rate. Regulators and systemic-risk analysts are no more able to detect these errors than anyone else. All the oversight boards will accomplish is adding cost to the banking system and possibly creating what Wilhelm Röpke called repressed inflation (what we today call stagflation), whereby production declines and employment falls while prices rise.

Bailout funds are the culprits behind any increased risk taking by greedy bankers. These funds create moral hazard, whereby market participants know that some or all of the cost of increased risk will be borne by others but that benefits will not be shared. In addition, due to the law of diminishing marginal utility of money, the funds themselves continue, rather than cure, the problem initially caused by money expansion, for the funds are formed by even more money expansion.

All of this intervention leads back to the evils of redistribution of wealth, higher prices, and more malinvestment — a vicious and destructive cycle.

The Cognitive Dissonance of Money Expansion Followed by Increased Coercion

This entire process creates a psychological phenomenon called cognitive dissonance; that is, holding two conflicting thoughts in the mind at the same time. Expansion of the money supply and lowering of interest rates in order to stimulate the economy is not compatible with increased bank capital requirements and oversight boards to detect systemic risk.

The government expects that a lower rate of interest will promote more economic activity through increased lending. Yet the law of diminishing marginal utility applies also to lending . The only way to make more loans is to lend to less creditworthy customers. Yet this is the situation that more oversight attempts to prevent. Therefore, even if the government's oversight boards could detect less creditworthy borrowers, the very purpose of lower interest rates is to make loans to such people.

This makes no sense from an economic or financial point of view, but it does make sense from a political, command-and-control point of view. So lower interest rates and increased government oversight become nothing more than full employment for bureaucrats, who enjoy the perks of power and who bear none of the responsibility for their actions.

The choice is clear: either more of the same — that is, more fiat-money pumping and more regulation, with increasingly worse outcomes — or an abandonment of monetary expansion and bank oversight by government along with their replacement by sound money and the normal checks and balances of the free market.

Expansion of the Welfare-Warfare State

I'll now discuss the second main evil of fiat-money growth: expansion of the wealth-destroying welfare-warfare state.

Because the wealth-generating sector of society has nothing to gain and everything to lose by the expansion of the welfare-warfare state, under a sound-money environment these wealth-destroying activities would be vigorously opposed. But under a fiat-money system, many of those who benefit from the unhampered market economy are blinded by the money illusion and believe that government spending does not come out of their own pockets. Therefore, it is no coincidence that the Progressive movement in the late-19th and early-20th centuries coincided with both increased government spending and an increase in the money supply to be provided by central banks.

Like all unsustainable enterprises, the welfare-warfare state depends upon ever-increasing injections of fiat money; otherwise, its programs collapse rather quickly. Ever-larger increases in fiat money merely delay the day of reckoning, because the ordinary cues of higher taxes and higher interest rates are avoided for a time. So fiat money leads government to make promises that it ultimately cannot deliver.

When government finally becomes aware that it is limited in what it can accomplish, it is faced with a stark choice. If it scraps programs, it risks civil unrest from the program constituents. The alternative is to continue the programs in name only, resorting to price controls and rationing. National healthcare systems are the best examples of this phenomenon. Not only is demand for healthcare services greatly increased — a true tragedy of the commons, whereby commonly held resources are plundered to extinction — but the quantity and quality of services actually decline.

The Medicare system in America tries to solve this problem by underpaying for services and then forcing providers, via threats to pull their business licenses, to absorb Medicare losses in the hopes of making up the difference with private-pay patients. To avoid losses and remain in business, medical practices counter with lower service quality and delays. Our neighbor to the north rations care to those who can live and suffer long enough to advance to the front of long waiting lists. In a recent suit brought by a Canadian patient, a Canadian judge stated that "access to a waiting list is not access to healthcare."

The Long-Term Solution: Liberate Money and the Economy from Government Control

A free-market economy, which includes money freely chosen by the market, does not suffer disequilibria, periodic booms and busts, or high unemployment. The constant search of market participants to better themselves will result in cooperation, rather than confrontation, with all peoples everywhere. The liberal order, as envisioned by scholars such as Ludwig von Mises, can expand to encompass the entire world, resulting in peace and ever-expanding prosperity for all cooperating men everywhere.

Sound money is essential; therefore, the first order of business for Europe is to stabilize the euro. Stop inflating its supply. Stop purchasing sovereign debt. Anchor the euro in gold and/or silver. Try to gain international cooperation when doing so, in order to prevent large swings in gold and silver imports and exports when other nations see that they must emulate Europe. Nevertheless, if this is not possible, anchor the euro in gold or silver anyway.

Then begin the process of privatizing money by eliminating legal-tender laws. Let the market use whatever money it chooses, even multiple monies. Some Austrian economists believe that eliminating legal-tender laws is all that is required of government, that the free market will choose the money that it finds best suits its purposes. This may be the case; the attempt is certainly worth the effort. A practical step would be to relax legal-tender laws in one or both of two ways: the nonenforcement of legal-tender laws or the decriminalization of private money production. Nonprosecution would open the door to private, competing monies.

End all regulation of banking, including deposit guarantees, which only cause moral hazard. But enforce 100 percent reserves against money certificates and demand deposits. Reform the commercial code to provide legal protections for bank depositors just as is the case with any warehouse bailment.

But allow complete freedom of loan banking, whereby the banker takes legal ownership of funds for some set period of time, with a promise to return the funds, plus interest, at the end of the contract. This form of loan banking can be risk free, as when customer loans to the bank are less than the bank's capital account. It is also noninflationary, because the bank lends only funds that have been transferred to it and it alone — the depositor gives up his claim to the funds for the length of the contract. Undoubtedly, under such legal protections and known risks, the public would be better served than by the current, fractional-reserve system of constant expansion and contraction of the money supply via bank lending.


Rules for the Statesman

Those in positions of power, such as all of you here, must be guided by reason and not emotion. Adopt as your motto Immanuel Kant's categorical imperative. Pass only laws that are universally applicable — that benefit all men at all times and in all places. Treat men as ends in themselves rather than as means to other ends, such as national or regional pride.

Not many laws will meet these high standards. Certainly, printing money, which reduces the purchasing power of money already in circulation and benefits some at the expense of others, fails this test, as does buying sovereign debt at subsidized interest rates. Both of these practices lead not to freedom and security but to suffering and conflict. I ask you to lead as statesmen always do: based on principles that work, are true, and are real.

The Mind of Hans-Hermann Hoppe

The Mind of Hans-Hermann Hoppe

Mises Daily: by


[The Daily Bell, exclusive interview, March 27, 2011.]

DAILY BELL: Please answer these questions as our readers were not already aware of your fine work and considered opinions. Let's jump right in. Why is democracy "The God That Failed?"

DR. HANS-HERMANN HOPPE: The traditional, premodern state form is that of a (absolute) monarchy. The democratic movement was directed against kings and the classes of hereditary nobles. Monarchy was criticized as being incompatible with the basic principle of "equality before the law." It rested on privilege and was unfair and exploitative. Democracy was supposed to be the way out. In opening participation and entry into state-government to everyone on equal terms, so the advocates of democracy claimed, equality before the law would become reality and true freedom would reign. But this is all a big error.

True, under democracy everyone can become king, so to speak, not only a privileged circle of people. Thus, in a democracy no personal privileges exist. However, functional privileges and privileged functions exist. Public officials, if they act in an official capacity, are governed and protected by "public law" and thereby occupy a privileged position vis-à-vis persons acting under the mere authority of "private law." In particular, public officials are permitted to finance or subsidize their own activities through taxes. That is, they are permitted to engage in, and live off, what in private dealings between private law subjects is prohibited and considered "theft" and "stolen loot." Thus, privilege and legal discrimination — and the distinction between rulers and subjects — will not disappear under democracy.

Even worse: Under monarchy, the distinction between rulers and ruled is clear. I know, for instance, that I will never become king, and because of that I will tend to resist the king's attempts to raise taxes. Under democracy, the distinction between rulers and ruled becomes blurred. The illusion can arise "that we all rule ourselves," and the resistance against increased taxation is accordingly diminished. I might end up on the receiving end: as a tax recipient rather than a tax payer, and thus view taxation more favorably.

And moreover, as a hereditary monopolist, a king regards the territory and the people under his rule as his personal property and engages in the monopolistic exploitation of this "property." Under democracy, monopoly and monopolistic exploitation do not disappear. Rather, what happens is this: instead of a king and a nobility who regard the country as their private property, a temporary and interchangeable caretaker is put in monopolistic charge of the country. The caretaker does not own the country, but as long as he is in office he is permitted to use it to his and his protégés' advantage. He owns its current use — usufruct — but not its capital stock. This does not eliminate exploitation. To the contrary, it makes exploitation less calculating and carried out with little or no regard to the capital stock. Exploitation becomes shortsighted and capital consumption will be systematically promoted.

DAILY BELL: If democracy has failed what would you put in its place? What is the ideal society? Anarchocapitalism?

HOPPE: I prefer the term "private-law society." In a private-law society, every individual and institution is subject to one and the same set of laws. No public law granting privileges to specific persons or functions exists in this society. There is only private law (and private property), equally applicable to each and everyone. No one is permitted to acquire property by means other than through original appropriation of previously unowned things, through production, or through voluntary exchange; and no one possesses a privilege to tax and expropriate. Moreover, no one is permitted to prohibit anyone else from using his property in order to enter any line of production he wishes and compete against whomever he pleases.

DAILY BELL: How would law and order be provided in this society? How would your ideal justice system work?

HOPPE: In a private-law society the production of law and order — of security — would be undertaken by freely financed individuals and agencies competing for a voluntarily paying (or not-paying) clientele — just like the production of all other goods and services. How this system would work can be best understood in contrast to the workings of the present, all-too-familiar statist system. If one wanted to summarize in one word the decisive difference — and advantage — of a competitive security industry as compared to the current statist practice, it would be: contract.

The state operates in a legal vacuum. There exists no contract between the state and its citizens. It is not contractually fixed what is actually owned by whom, and what, accordingly, is to be protected. It is not fixed what service the state is to provide, what is to happen if the state fails in its duty, nor what the price is that the "customer" of such "service" must pay. Rather, the state unilaterally fixes the rules of the game and can change them, per legislation, during the game.

Obviously, such behavior is inconceivable for freely financed security providers. Just imagine a security provider, whether police, insurer, or arbitrator, whose offer consisted in something like this: I will not contractually guarantee you anything. I will not tell you what I oblige myself to do if, according to your opinion, I do not fulfill my service to you — but in any case, I reserve the right to unilaterally determine the price that you must pay me for such undefined service. Any such security provider would immediately disappear from the market due to a complete lack of customers.

Each private, freely financed security producer must instead offer its prospective clients a contract. And these contracts must, in order to appear acceptable to voluntarily paying consumers, contain clear property descriptions as well as clearly defined mutual services and obligations. Each party to a contract, for the duration or until the fulfillment of the contract, would be bound by its terms and conditions; and every change of terms or conditions would require the unanimous consent of all parties concerned.

Specifically, in order to appear acceptable to security buyers, these contracts must contain provisions about what will be done in the case of a conflict or dispute between the protector or insurer and his own protected or insured clients as well as in the case of a conflict between different protectors or insurers and their respective clients.

DAILY BELL: Are you denying, then, that we need the state to defend us?
HOPPE: Indeed.

And in this regard only one mutually agreeable solution exists: in these cases the conflicting parties contractually agree to arbitration by a mutually trusted but independent third party. And as for this third party: it, too, is freely financed and stands in competition with other arbitrators or arbitration agencies. Its clients, i.e., the insurers and the insured, expect of it that it come up with a verdict that is recognized as fair and just by all sides. Only arbitrators capable of forming such judgments will succeed in the arbitration market. Arbitrators incapable of this and viewed as biased or partial will disappear from the market.

DAILY BELL: Are you denying, then, that we need the state to defend us?

HOPPE: Indeed. The state does not defend us; rather, the state aggresses against us and it uses our confiscated property to defend itself. The standard definition of the state is this: The state is an agency characterized by two unique, logically connected features. First, the state is an agency that exercises a territorial monopoly of ultimate decision making. That is, the state is the ultimate arbiter and judge in every case of conflict, including conflicts involving itself and its agents. There is no appeal above and beyond the state. Second, the state is an agency that exercises a territorial monopoly of taxation. That is, it is an agency that can unilaterally fix the price that its subjects must pay for the state's service as ultimate judge.

Based on this institutional setup you can safely predict the consequences: First, instead of preventing and resolving conflict, a monopolist of ultimate decision making will cause and provoke conflict in order to settle it to its own advantage. That is, the state does not recognize and protect existing law, but it perverts law through legislation. Contradiction number one: the state is a lawbreaking law protector. Second, instead of defending and protecting anyone or anything, a monopolist of taxation will invariably strive to maximize his expenditures on protection and at the same time minimize the actual production of protection. The more money the state can spend and the less it must work for this money, the better off it is. Contradiction number two: the state is an expropriating property protector.

DAILY BELL: Are there any good laws and regulations?

HOPPE: Yes. There are a few, simple, good laws that almost everyone intuitively recognizes and acknowledges and that can also be demonstrated to be "true" and "good" laws. First: If there were no interpersonal conflicts and we all lived in perfect harmony there would be no need for any law or norm. It is the purpose of laws or norms to help avoid otherwise unavoidable conflict. Only laws that achieve this can be called good laws. A law that generates conflict rather than helps to avoid it is contrary to the purpose of laws, i.e., it is a bad, dysfunctional or perverted law.

Second: Conflicts are possible only if and insofar as goods are scarce. People clash because they want to use one and the same good in different, incompatible ways. Either I win and get my way or you win and get your way. We cannot both be "winners." In the case of scarce goods, then, we need rules or laws helping us decide between rival, conflicting claims. In contrast, goods that are "free," i.e., goods that exist in superabundance, that are inexhaustible or infinitely reproducible, are not and cannot be a source of conflict. Whenever I use a nonscarce good it does not in the slightest diminish the supply of this good available to you. I can do with it what I want and you can do with it what you want at the same time. There is no loser. We are both winners; and hence, as far as nonscarce goods are concerned, there is never any need for laws.

Third: All conflict concerning scarce goods, then, can be avoided only if every good is privately owned, i.e., exclusively controlled by one specified individual(s) rather than another, and it is always clear which thing is owned, and by whom, and which is not. And in order to avoid all possible conflict from the beginning of mankind on, it is only necessary to have a rule regulating the first, original appropriation of previously unowned, nature-given goods as private property.

In sum then, there are essentially three "good laws" that assure conflict-free interaction, or "eternal peace": (a) he who first appropriates something previously on-owned is its exclusive owner (as the first appropriator he cannot have come into conflict with anyone else as everyone else appeared on the scene only later); (b) he who produces something with his body and homesteaded goods is owner of his product, provided he does not thereby damage the physical integrity of others' property; and (c) he who acquires something from a previous or earlier owner by means of voluntary exchange, i.e., an exchange that is deemed mutually beneficial, is its owner.

DAILY BELL: How, then, does one define freedom? As the absence of state coercion?

HOPPE: A society is free if every person is recognized as the exclusive owner of his own (scarce) physical body, if everyone is free to appropriate or "homestead" previously unowned things as private property, if everyone is free to use his body and his homesteaded goods to produce whatever he wants to produce (without thereby damaging the physical integrity of other peoples' property), and if everyone is free to contract with others regarding their respective properties in any way deemed mutually beneficial. Any interference with this constitutes an act of aggression, and a society is unfree to the extent of such aggressions.

DAILY BELL: Where do you stand on copyright? Do you believe that intellectual property doesn't exist as Kinsella has proposed?

"In fact, the entire world can copy me,
and yet nothing is taken from me."

HOPPE: I agree with my friend Kinsella that the idea of intellectual property rights is not just wrong and confused but dangerous. And I have already touched upon why this is so. Ideas — recipes, formulas, statements, arguments, algorithms, theorems, melodies, patterns, rhythms, images, etc. — are certainly goods (insofar as they are good, not bad, recipes, etc.), but they are not scarce goods.

Once thought and expressed, they are free, inexhaustible goods. I whistle a melody or write down a poem, then you hear the melody or read the poem and reproduce or copy it. In doing so you have not taken anything away from me. I can whistle and write as before. In fact, the entire world can copy me, and yet nothing is taken from me. (If I didn't want anyone to copy my ideas I only have to keep them to myself and never express them.)

Now imagine I had been granted a property right in my melody or poem such that I could prohibit you from copying it or demand a royalty from you if you do. First: Doesn't that imply, absurdly, that I, in turn, must pay royalties to the person (or his heirs) who invented whistling and writing, and further on to those, who invented sound making and language, and so on?

Second: In preventing you from or making you pay for whistling my melody or reciting my poem, I am actually made a (partial) owner of you — of your physical body, your vocal chords, your paper, your pencil, etc. — because you did not use anything but your own property when you copied me. If you can no longer copy me, then, this means that I, the intellectual property owner, have expropriated you and your "real" property. Which shows: intellectual property rights and real property rights are incompatible, and the promotion of intellectual property must be seen as a most dangerous attack on the idea of "real" property (in scarce goods).

DAILY BELL: We have suggested that if people want to enforce generational copyright that they do so on their own, taking on the expense and attempting through various means to confront copyright violators with their own resources. This would put the onus of enforcement on the pocket book of the individual. Is this a viable solution — to let the market itself decide these issues?

HOPPE: That would go a long way in the right direction. Better still: more and more courts in more and more countries, especially countries outside the orbit of the US-dominated, Western-government cartel, would make it clear that they don't hear cases of copyright and patent violations any longer and regard such complaints as a ruse for big Western-government-connected firms, such as pharmaceutical companies, for instance, to enrich themselves at the expense of other people.

DAILY BELL: What do you think of Ragnar Redbeard's Might Is Right?

HOPPE: You can give two very different interpretations of this statement. I see no difficulty with the first one. It is that I know the difference between "might" and "right," and, as a matter of empirical fact, might is in fact frequently right. Most if not all of "public law," for instance, is might masquerading as right.

The second interpretation is that I don't know the difference between "might" and "right," because there is no difference. Might is right and right is might. This interpretation is self-contradictory; because if you wanted to defend this statement as a true statement in an argument with someone else you are in fact recognizing your opponent's property right in his own body. You do not aggress against him in order to bring him to the correct insight. You allow him to come to the correct insight on his own.

That is, you admit, at least implicitly, that you do know the difference between right and wrong. Otherwise there would be no purpose in arguing. The same, incidentally, is true for Hobbes's famous dictum that one man is another man's wolf. In claiming this statement to be true, you actually prove it to be false.

DAILY BELL: It has been suggested that the only way to reorganize society is via a return to the clans and tribes that characterized Homo sapiens communities for tens of thousands of years. Is it possible that as part of this devolution, clan or tribal justice could be reemphasized?

HOPPE: I don't think that we, in the Western world, can go back to clans and tribes. The modern, democratic state has destroyed clans and tribes and their hierarchical structures, because they stood in the way of the state's drive toward absolute power. With clans and tribes gone, we must try it with the model of a private law-society that I have described. But wherever traditional, hierarchical clan and tribe structures still exist, they should be supported; and attempts to "modernize" "archaic" justice systems along Western lines should be viewed with utmost suspicion.

DAILY BELL: You have also written extensively on money and monetary affairs. Is a gold standard necessary for a free society?

HOPPE: In a free society, the market would produce money, as all other goods and services. There would be no such thing as money in a world that was perfectly certain and predictable. But in a world with unpredictable contingencies people come to value goods also on account of their marketability or salability, i.e., as media of exchange. And since a more easily and widely salable good is preferable to a less easily and widely salable good as a medium of exchange, there is an inevitable tendency in the market for a single commodity to finally emerge that differs from all others in being the most easily and widely salable commodity of all. This commodity is called money.

As the most easily salable good of all, it provides its owner with the best humanly possible protection against uncertainty, in that it can be employed for the instant satisfaction of the widest range of possible needs. Economic theory has nothing to say as to what commodity will acquire the status of money. Historically, it happened to be gold. But if the physical makeup of our world would have been different or is to become different from what it is now, some other commodity would have become or might become money. The market will decide.

In any case, there is no need for government to get involved in any of this. The market has provided and will provide some money commodity, and the production of that commodity, whatever it is, is subject to the same forces of supply and demand as the production of everything else.

DAILY BELL: How about the free-banking paradigm? Is private fractional banking ever to be tolerated or is it a crime? Who is to put people in jail for private fractional banking?

HOPPE: Assume gold is money. In a free society you have free competition in gold mining, you have free competition in gold minting, and you have freely competing banks. The banks offer various financial services: of money safekeeping, clearing services, and the service of mediating between savers and borrower-investors. Each bank issues its own brand of "notes" or "certificates" documenting the various transactions and resulting contractual relations between bank and client. These bank notes are freely tradable. So far so good.

Controversial among free bankers is only the status of fractional-reserve deposit banking and bank notes. Let's say A deposits ten ounces of gold with a bank and receives a note (a money substitute) redeemable at par on demand. Based on A's deposit, then, the bank makes a loan to C of nine ounces of gold and issues a note to this effect, again redeemable at par on demand.

Should this be permitted? I don't think so. For there are now two people, A and C, who are the exclusive owner of one and the same quantity of money. A logical impossibility. Or put differently, there are only ten ounces of gold, but A is given title to ten ounces and C holds title to nine ounces. That is, there are more property titles than there is property. Obviously this constitutes fraud, and in all areas except money, courts have also considered such a practice fraud and punished the offenders.

On the other hand, there is no problem if the bank tells A that it will pay interest on his deposit, invest it, for instance, in a money-market mutual fund made up of highly liquid short-term financial papers, and make its best efforts to redeem A's shares in that investment fund on demand in a fixed quantity of money. Such shares may well be very popular and many people may put their money into them instead of into regular deposit accounts. But as shares of investment funds they would never function as money. They would never be the most easily and widely saleable commodity of all.

DAILY BELL: Where do you stand on the current central-banking paradigm? Is central banking as it is currently constituted the central disaster of our time?

HOPPE: Central banks are certainly one of the greatest mischief-makers of our time. They, and in particular the Fed, have been responsible for destroying the gold standard, which has always been an obstacle to inflationary policies, and replacing it, since 1971, with a pure paper money standard (fiat money). Since then, central banks can create money virtually out of thin air.

More paper money cannot make a society richer, of course — it is just more printed paper. Otherwise, why is it that there are still poor countries and poor people around? But more money makes its monopolistic producer (the central bank) and its earliest recipients (the government and big, government-connected banks and their major clients) richer at the expense of making the money's late and latest receivers poorer.

Thanks to the central banks' unlimited money-printing power, governments can run ever-higher budget deficits and pile up ever more debt to finance otherwise impossible wars, hot and cold, abroad and at home, and engage in an endless stream of otherwise unthinkable boondoggles and adventures. Thanks to the central bank, most "monetary experts" and "leading macro-economists" can, by putting them on the payroll, be turned into government propagandists "explaining," like alchemists, how stones (paper) can be turned into bread (wealth).

Thanks to the central bank, interest rates can be artificially lowered all the way down to zero, channeling credit into less and least credit-worthy projects and hands (and crowding out worthy projects and hands), and causing ever greater investment bubble-booms, followed by ever-more spectacular busts. And thanks to the central bank, we are confronted with a dramatically increasing threat of an impending hyperinflation when the chickens finally come home to roost and the piper must be paid.

DAILY BELL: We have often pointed out that the Seven Hills of Rome were initially independent societies, just like the Italian city-states during the Renaissance and the 13 colonies of the US republic. It seems great empires start as individual communities where people can leave one community if they are oppressed and go nearby to start afresh. What is the driving force behind this process of centralization? What are the building blocks of empire?

HOPPE: All states must begin small. That makes it easy for people to run away. Yet states are by nature aggressive, as I have already explained. They can externalize the cost of aggression onto others, i.e., hapless taxpayers. They don't like to see productive people run away, and so they try to capture them by expanding their territory. The more productive people the state controls, the better off it will be.

In this expansionist desire, they run into opposition by other states. There can be only one monopolist of ultimate jurisdiction and taxation in any given territory. That is, the competition between different states is eliminative. Either A wins and controls a territory, or B. Who wins? At least in the long run, that state will win — and take over another's territory or establish hegemony over it and force it to pay tribute — that can parasitically draw on the comparatively more productive economy. That is, other things being the same, internally more "liberal" states (in the classic European sense of "liberal") will tend to win over less "liberal," i.e., illiberal or oppressive states.

Looking only at modern history, we can so explain first the rise of liberal Great Britain to the rank of the foremost world empire and then, subsequently, that of the liberal United States. And we can understand a seeming paradox: why it is, that internally liberal imperial powers like the United States tend to be more aggressive and belligerent in their foreign policy than internally oppressive powers, such as the former Soviet Union. The liberal US empire was sure to win with its foreign wars and military adventures, while the oppressive Soviet Union was afraid that it might lose.

But empire building also bears the seeds of its own destruction. The closer a state comes to the ultimate goal of world domination and one-world government, the less reason there is to maintain its internal liberalism and do instead what all states are inclined to do anyway, i.e., to crack down and increase their exploitation of whatever productive people are still left.

Consequently, with no additional tributaries available and domestic productivity stagnating or falling, the empire's internal policies of bread and circuses can no longer be maintained. Economic crisis hits, and an impending economic meltdown will stimulate decentralizing tendencies, separatist and secessionist movements, and lead to the breakup of empire. We have seen this happen with Great Britain, and we are seeing it now with the United States and its empire apparently on its last leg.

There is also an important monetary side to this process. The dominant empire typically provides the leading international-reserve currency, first Britain with the pound sterling and then the United States with the dollar. With the dollar used as reserve currency by foreign central banks, the United States can run a permanent "deficit without tears."

That is, the United States need not pay for its steady excesses of imports over exports as is normal between "equal" partners, in having to ship increasingly more exports abroad (exports paying for imports). Rather, instead of using their export earnings to buy American goods for domestic consumption, foreign governments and their central banks, as a sign of their vassal status vis-à-vis a dominant United States, use their paper-dollar reserves to buy up United States government bonds to help Americans to continue consuming beyond their means.

I do not know enough about China to understand why it is using its huge dollar reserves to buy up US-government bonds. After all, China is not supposed to be a part of the US empire. Maybe its rulers have read too many American economics textbooks and now believe in alchemy, too. But if only China would dump its US treasuries and accumulate gold reserves instead, that would be the end of the US empire and the dollar as we know it.

DAILY BELL: Is it possible that a shadow of impossibly wealthy families located in the city of London is partially responsible for all this? Do these families and their enablers seek world government by elites? Is it a conspiracy? Do you see the world in these terms: as a struggle between the centralizing impulses of elites and the more democratic impulses of the rest of society?

HOPPE: I'm not sure if conspiracy is still the right word, because in the meantime, thanks to people such as Carroll Quigley, for instance, much is known about what is going on. In any case, it is certainly true that there are such impossibly rich families, sitting in London, New York City, Tel Aviv, and elsewhere, who have recognized the immense potential for personal enrichment in the process of state- and empire-building.

The heads of big banking houses played a key role in the founding of the Fed, because they realized that central banking would allow their own banks to inflate and expand credit on top of money and credit created by the central bank — and that a "lender of last resort" was instrumental in allowing them to reap private profits as long as things would go well and to socialize costs if they wouldn't.

They realized that the classical gold standard stood as a natural impediment to inflation and credit expansion, and so they helped set up first a phony gold standard (the gold-exchange standard) and then, after 1971, a pure fiat-money regime. They realized that a system of freely fluctuating national-fiat currencies was still imperfect as far as inflationist desires are concerned, in that the supremacy of the dollar could be threatened by other, competing currencies such as a strong German mark, for instance; and in order to reduce and weaken this competition, they supported "monetary integration" schemes such as the creation of a European Central Bank (ECB) and the euro.

And they realized that their ultimate dream of unlimited counterfeiting power would come true only if they succeeded in creating a US-dominated world central bank issuing a world paper currency such as the bancor or the phoenix; and so they helped set up and finance a multitude of organizations, such as the Council on Foreign Relations, the Trilateral Commission, the Bilderberg Group, etc., that promote this goal. As well, leading industrialists recognized the tremendous profits to be made from state-granted monopolies, from state-subsidies, and from exclusive cost-plus contracts in freeing or shielding them from competition, and so they, too, have allied themselves to and "infiltrated" the state.

There are "accidents" in history, and there are carefully planned actions that bring about consequences that are unintended and unanticipated. But history is not just a sequence of accidents and surprises. Most of it is designed and intended. Not by common folks, of course, but by the power elites in control of the state apparatus. If one wants to prevent history from running its present, foreseeable course to unprecedented economic disaster, then, it is indeed imperative to arouse public indignation by exposing, relentlessly, the evil motives and machinations of these power elites, not just of those working within the state apparatus, but in particular also of those staying outside, behind the scenes and pulling the strings.

DAILY BELL: It has been our contention that just as the Gutenberg press blew up existing social structures in its day, so the Internet is doing that today. We believe the Internet may be ushering in a new Renaissance after the Dark Age of the 20th century. Agree? Disagree?

HOPPE: It is certainly true that both inventions revolutionized society and greatly improved our lives. It is difficult to imagine what it would be to go back to the pre-Internet age or the pre-Gutenberg era. I am skeptical, however, if technological revolutions in and of themselves also bring about moral progress and an advance toward greater freedom. I am more inclined to think that technology and technological advances are "neutral" in this regard.

The Internet can be used to unearth and spread the truth as much as to spread lies and confusion. It has given us unheard of possibilities to evade and undermine our enemy the state, but it has also given the state unheard of possibilities of spying on us and ruining us. We are richer today, with the Internet, than we were, let's say, in 1900, without it (and we are richer not because of the state but in spite of it). But I would emphatically deny that we are freer today than we were in 1900. Quite to the contrary.

DAILY BELL: Any final thoughts? Can you tell us what you are working on now? Any books or websites you would like to recommend?

The Hoppe Collection
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HOPPE: I once deviated from my principle not to speak about my work until it was done. I have regretted this deviation. It was a mistake that I won't repeat. As for books, I recommend above all reading the major works of my two masters, Ludwig von Mises and Murray Rothbard, not just once, but repeatedly from time to time. Their work is still unsurpassed and will remain so for a long time to come. As for websites, I go most regularly to and to

As for other sites, I have been called an extremist, a reactionary, a revisionist, an elitist, a supremacist, a racist, a homophobe, an anti-Semite, a right-winger, a theocrat, a godless cynic, a fascist and, of course, a must for every German, a Nazi. So, it should be expected that I have a foible for politically "incorrect" sites that every "modern," "decent," "civilized," "tolerant," and "enlightened" man is supposed to ignore and avoid.

DAILY BELL: Thank you for your time in answering these questions. It has been a special honor to address them to you in the context of your remarkable work.

HOPPE: You're welcome.

Chris Matthews: Paul Ryan's Medicare Plan 'Going to Kill Half the People...

Clinton's ‘Failed State’ Warning

Clinton's ‘Failed State’ Warning Threatens Libya as NATO Can't Stem Chaos

NATO Secretary General Anders Fogh Rasmussen

NATO Secretary General Anders Fogh Rasmussen. Photographer: John Thys/AFP/Getty Images

U.S. Secretary of State Hillary Clinton’s early warning that Libya may become a failed state risks turning into reality as three weeks of Western military intervention have failed to stem the chaos that’s split the country in half.

Clinton on March 2 said Libya may become a “giant Somalia.” NATO Secretary General Anders Fogh Rasmussen on April 11 raised the possibility of a Libyan “failed state.” Moussa Koussa, Muammar Qaddafi’s lieutenant who defected last month, warned also that day of a Somalia-like collapse.

“It looks like a very untenable situation,” Geoff Porter, an analyst at North African Risk Consulting, said in an interview from New York. “Where we are heading is a de facto partition, between Tripolitania and Cyrenaica,” the historic names for western and eastern Libya.

The seven-week-old uprising aimed at ending Qaddafi’s 42- year rule has pulled a coalition led by the North Atlantic Treaty Organization into Libya and split the country between the oil-rich east, controlled by rebels, and Qaddafi’s stronghold in the west. Eni SpA (ENI), the biggest foreign oil producer in Libya, said last month its worst fear was that a breakdown in authority would shut production for years.

Oil Exports Hurt

Anarchy like that in Somalia, where areas have been ungoverned since a 1991 civil war, or in Sudan, whose southern portion voted to secede this year, would exacerbate concerns about oil investments. Libyan crude oil exports would be limited to about 29 percent of pre-crisis levels at first, if peace permitted all state-operated fields to return to full production, Nomura Holdings Inc. said in an April 7 report.

Foreign oil companies evacuated expatriate workers and “the shortage of human capital makes it difficult to bring all the fields back into production,” the report said.

Clinton and her NATO counterparts will meet tomorrow in Berlin to discuss next steps for the Libya mission. Foreign ministers and other officials from the “contact group” of nations involved in Libya are meeting today in Doha, Qatar.

“If Libya can be held together, it will not be a failed state,” said Elliott Abrams, senior fellow at the Council on Foreign Relations in Washington.

Oil production in Libya, which has Africa’s largest oil reserves, dwindled to a “trickle” last month, according to the International Energy Agency. In January, Libya was Africa’s third-largest producer.

Crude Down

Crude oil erased earlier gains in New York to trade near its lowest price in two weeks. Oil for May delivery fell as much as 88 cents, or 0.8 percent, to $105.37 a barrel on the New York Mercantile Exchange, the lowest price since March 31, and was at $105.50 at 9:08 a.m. London time.

If the rebels can control the eastern part of Libya, maximum oil flow will be around 300 million barrels a day, Michael Lo, a Hong Kong-based analyst at Nomura, said in response to an e-mailed question.

Preliminary data show global oil supplies beginning to look “thin” as the Libyan fight strains spare production capacity held by the Organization of Petroleum Exporting Countries, the IEA said yesterday in its monthly Oil Market Report.

NATO’s Rasmussen said prolonged fighting would invite “terrorists and extremists” such as al-Qaeda to exploit the disarray and called for a political settlement “sooner rather than later.” The danger was also flagged by Koussa, who most recently was Qaddafi’s foreign minister and previously the Libyan regime’s spy chief.

Avoid Civil War

“I ask everybody to avoid taking Libya into civil war,” Koussa told BBC television in his first remarks since abandoning Qaddafi and flying to the U.K. on March 30. “This would lead to so much blood and Libya would be a new Somalia. More than that, we refuse to divide Libya. The unity of Libya is essential to any solution and settlement.”

Somalia has become a haven for extremists in its central and southern regions. A Western-backed government controls a swath of the capital Mogadishu, where it fends off the Islamist al-Shabaab militia, which the U.S. accuses of having links with al-Qaeda. The country also is home to pirates who operate off the Horn of Africa, menacing trade in the Indian Ocean.

Libya, whose post-colonial history has been dominated by Qaddafi’s dictatorship, also has divisions drawn along tribal lines and lacks political parties or a constitution. The country is a colonial construct, forged under Italian rule by fascist dictator Benito Mussolini, who in 1934 combined the once-Ottoman provinces of Tripolitania, Cyrenaica and Fezzan.

Tribal Divisions

David Smock, an analyst at the Washington-based United States Institute of Peace, said Libya’s tribal divisions are parallel to clan rivalries in Somalia, where squabbling and animosity preclude national unity.

“Most failed states end up failed states because they have ethnic divisions and it is difficult to coordinate all the groups,” Smock said by phone from Washington.

Rebels this week turned down an African Union cease-fire plan that would leave Qaddafi in power. NATO, operating under a United Nations mandate, has used its firepower to cripple Qaddafi’s air force and destroy an estimated 30 percent of the regime’s military hardware.

Preventing a partition and forcing Qaddafi’s exit have been non-negotiable conditions set by a coalition still divided on whether to arm rebels in a bid to break the stalemate.

U.K. Foreign Secretary William Hague said only Qaddafi’s relinquishment of power will mean the end of NATO’s military campaign. “It will end with the departure of Qadaffi,” Hague told BBC Radio 4 from Qatar today.

Artificial State

Alessandro Politi, a former adviser to the Italian Defense Ministry, said by telephone from Rome that keeping Libya whole flies in the face of history.

“All this talk of unity is somewhat ridiculous when we are talking about an artificial state,” Politi said. “Qaddafi ruled with an iron fist, keeping it together, but the real Libya is a loose collection of tribes.”

Should the impasse continue, Libya risks joining African neighbors Chad and Sudan to become one of the most unstable nations in a 2010 failed-state index, assembled by Foreign Policy and the Fund for Peace. The index ranks states according to 12 measures including demographic pressures, public services and human rights. It now groups Libya with countries such as Mexico and Ukraine as “borderline.”

Somalia, Chad and Sudan top the list. Sudan has become divided since almost 99 percent of Southern Sudanese who cast ballots in a Jan. 9-15 referendum voted for the oil-rich region to secede from Sudan, according to the Southern Sudan Referendum Commission.

Unwelcome Option

Still, such a division appears to be an unwelcome option on both sides of the divide in Libya.

Unlike in Somalia, “Libyans on both sides agree that the unity of the country is essential,” said Ronald Bruce St John, an author of three books about Libya, including “Libya: Continuity and Change” published in February. “The Qaddafi regime will continue to try to reunite the country through force of arms, and the rebel side will continue to insist on a unified Libya without Qaddafi and his family.”

Asked about the prospect of a Sudan-like secession, State Department spokesman Mark Toner said it was “premature to talk about any eventuality.”

“It is a difficult situation,” Toner told reporters on April 11 in Washington. “We believe that we can continue to apply political pressure on Qaddafi and his regime so that he gets the message that it’s time for him to go.”

Obama's Debt-Cutting Plan

Obama's Debt-Cutting Plan Will Confront Challenge of Finding 'Sweet Spot'

U.S. President Barack Obama

U.S. President Barack Obama is expected to announce long-term proposals for cutting the federal deficit tomorrow, following a budget deal he reached with congressional leaders last week that averted a government shutdown. Photographer: Joshua Roberts/Bloomberg

April 13 (Bloomberg) -- U.S. Senator Richard Shelby, a Republican from Alabama, talks about the need to cut the U.S. budget deficit. President Barack Obama today will outline a path to reining in the nation’s long-term debt through reductions in entitlement spending and increased taxes on the wealthy while seeking to draw a sharp contrast with Republican proposals, according to a person familiar with the plan. Shelby speaks with Peter Cook on Bloomberg Television's "In the Loop." (Source: Bloomberg)

April 13 (Bloomberg) -- David Walker, chief executive officer of Comeback America Initiative, discusses the outlook for the U.S. budget deficit and President Barack Obama's speech today on cutting the nation's debt. Walker speaks with Deirdre Bolton and Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

April 13 (Bloomberg) -- Paul Donovan, deputy head of global economics at UBS AG, discusses the debt burden in the euro zone and U.S. He talks with Linzie Janis on Bloomberg Television's "Global Connection." (Source: Bloomberg)

President Barack Obama joins the discussion today over reducing the nation’s debt in a familiar position: accused of being late to the debate and facing party members on both sides skeptical of his intent.

His challenge will be to find some form of middle ground with a plan embracing entitlement cuts anathema to many Democrats and tax increases that Republicans have called a non- starter.

The president’s speech today must go beyond the budget he proposed in February so “markets and relatively impartial political observers judge that he met his own mark, without going so far as to further antagonize the unhappy members of his own coalition,” said Bill Galston, a Brookings Institution scholar in Washington. “That’s the sweet spot.”

Obama will try to show he’s willing to work with Republicans on debt reduction yet still “preserve the ability to draw a contrast in 2012” as he seeks re-election, said Karen Finney, a former spokeswoman for the Democratic Party. He needs to say that Republicans “want to end Medicare versus here’s what I want to do,” she said.

‘Presidential Dilemma’

Senator Richard Durbin of Illinois, his chamber’s No. 2 Democrat, said Obama faces the “classic presidential dilemma, having been criticized by members of both parties for not stepping in quickly enough on budget issues and now facing fire as he wades into the debt debate.

“I suppose they were waiting to see how the conversation would evolve, and where they would be asked to go,” Durbin said today at the Bloomberg Breakfast in Washington, referring to the Obama administration.

A broad group of Senate Republicans and Democrats has pressed Obama to endorse a goal of cutting the deficit by at least $4 trillion over 10 years, in line with a report last year by leaders of the his own bipartisan debt commission and a plan released last week by Republican House Budget Committee Chairman Paul Ryan of Wisconsin.

“You need a package that’s in that range -- roughly $4 trillion -- to get the debt back on track and to secure a strong future for the United States,” Democratic Senator Kent Conrad of North Dakota, head of his chamber’s Budget Committee,, said in an interview yesterday.


“People need to hear his ideas as to how to meet that standard,” said Senator Rob Portman, an Ohio Republican and director of the White House budget office under President George W. Bush. “The more specificity, the better, if we’re actually going to get something done.”

The president will call for tax increases on higher-income Americans and reductions in entitlement spending, as well as Pentagon cuts topping $150 billion, according to people familiar with the plan. Obama’s approach will draw on the debt panel leaders’ proposal for $3.8 trillion in budget savings through a mix of tax increases and spending reductions.

He will reject Ryan’s idea to replace Medicare with a voucher-like system for future recipients, a person familiar with the plan said.

Last week’s proposal by Ryan would reduce the deficit by $4.4 trillion over 10 years, mostly through deep spending cuts. It would lower the top corporate and individual tax rates from 35 percent to 25 percent and cap spending on Medicaid health care for the poor.

Income-Tax Cuts

Republicans who criticized Obama for failing to lead on deficit reduction in his February budget proposal are demanding details on how he would curb the growth of Medicare and Medicaid. They also reject any rollback of income-tax cuts for high earners.

Senate Minority Leader Mitch McConnell, a Kentucky Republican, described Obama’s speech as an overdue acknowledgement of “problems that the rest of the country has been waiting for him to address. It’s unfortunate that he had to be dragged into this discussion.”

In the House, Speaker John Boehner called tax increases “a non-starter.”

Some Democrats had fumed that Obama wasn’t involved enough in talks on the budget for this fiscal year, which began Oct. 1. It wasn’t until a few days before a threatened shutdown last week that the president became directly involved, holding daily meetings at the White House to hash out a deal with Republicans that cuts spending by more than #38 billion.

Prized Programs

Now, some Democrats say they are concerned Republicans are dominating the budget debate and undercutting prized government programs. They are urging Obama not to embrace entitlement changes, particularly given that Ryan’s proposals on Medicare and Medicaid provide a clear contrast to take to voters.

“From my perspective, the Medicare program is the best anti-poverty program we have ever put in place in this country,” Senator Patty Murray, the Washington Democrat who heads her party’s Senate campaign arm, said yesterday. “We need to make sure it is there for the future and not undermine it.”

Senator Max Baucus of Montana, chairman of the Finance Committee, said he expects Obama to “try to come across as balanced compared to the Ryan plan, which is unbalanced.”

“Ryan basically reduces deficits on the backs of average Americans,” Baucus said. “I think the president is going to say, ‘Hey, that’s not fair.’”

Not ‘a Penny’

Democratic-leaning advocacy groups are pressuring Obama not to endorse more spending cuts, particularly in entitlement programs. The Progressive Change Campaign Committee in Washington asked Obama supporters to withhold donations to his re-election campaign if he backs cuts to Medicare or Medicaid.

Obama shouldn’t “ask for a penny of my money or an hour of my time in 2012” if he supports such reductions, said the group’s e-mail petition to supporters.

Obama had little choice but to offer a plan after Ryan grabbed attention with his proposal, said Stephen Hess, a Brookings Institution scholar.

“He’s been pushed into a corner by Ryan,” Hess said. “Everybody can be against Ryan, but everybody still pats him on the back for courage, so what kind of a profile in courage will it be if the president just lets Republicans carry the ball?”

Sixty-four senators, evenly split between the two parties, wrote to Obama last month pressing him to lead an effort to slash the nation’s debt through spending cuts and tax increases, along the lines of a bipartisan group of six senators working on a plan based on the debt commission leaders’ report.

“I continue to believe that if we start from a bipartisan basis, we’ve got a better chance of actually getting the job done,” said Democrat Mark Warner of Virginia, co-leader of the six senators.

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