on Higher Interest Rates, Collectivism and the Coming Collapse by Anthony Wile |
June 15, 2013
Dr. Richard Ebeling is a senior fellow at the American Institute
for Economic Research in Great Barrington, Massachusetts
and professor of economics at Northwood University in Midland,
Michigan. He has been a visiting professor at Trinity College
in Hartford, Connecticut (2008-2009), served as the president
of the Foundation for Economic Education (FEE) from 2003
to 2008 and was the Ludwig von Mises Professor of Economics
at Hillsdale College, in Michigan (1988-2003). Dr. Ebeling
is the author of Political Economy, Public Policy, and Monetary
Economics: Ludwig von Mises and the Austrian Tradition (Routledge,
2010), Austrian Economics and the Political Economy of Freedom
(Elgar, 2003) and is also the editor of the Selected Writings
of Ludwig von Mises (Liberty Fund), based on the "lost
papers" of Ludwig von Mises, which he recovered from
a formerly secret KGB archive in Moscow, Russia. The last
of this three-volume set was published in April 2012. Dr.
Ebeling is also the co-author and co-editor of the multi-volume
work, In Defense of Capitalism (Northwood University, 2010-2013).
In the early 1990s, Ebeling consulted on market reform and
privatization with the emerging new democratic government
in Lithuania when it was still part of the Soviet Union
and witnessed the violent, attempted Soviet crackdown on
the Lithuanian freedom movement in January 1991. He also
was with Russian defenders of freedom in Moscow during the
failed hardline coup in August 1991. Dr. Ebeling earned
his PhD in economics from Middlesex University in London,
Thanks for sitting down with us again, Richard. What is
going on with gold and silver? The markets seem to be diverging
between paper and physical.
Richard Ebeling: In the
long run, gold and silver remain the historically important
hedges against inflation and government confiscation of
wealth through depreciation of paper currencies. The decline
in the prices of gold and silver, especially since the beginning
of this year, are partly indicative of the short-run fluctuations
that always affect commodities because of day-to-day and
month-by-month changes in supply and demand conditions.
It is also indicative of the fact that markets
are hesitant and uncertain about the future course of central
bank monetary policy. The Federal Reserve, the US central
bank, has been sending out mixed signals about the course
of monetary policy over the remainder of this year and into
At the end of last year, the Fed announced
that it would continue for an indefinite period its policy
of "monetary easing," with planned purchases of
US Treasuries and home mortgages at an average amount of
$85 billion per month – which would amount to over
$1 trillion in the current year - for as long as the government-measured
unemployment rate remained above 6.5 percent and CPI-measured
price inflation remained no higher than 2 percent at an
Yet over the last couple of months, the
Fed has been sending out new signals that it may possibly
step back from its "cheap money" policy during
the second half of the year, even though the unemployment
rate is still around 7.5 percent and the latest CPI-measured
price inflation was not much above 1 percent.
If the Fed reduces its purchases of Treasuries
and mortgages, interest rates will no doubt start rising
from their artificially low levels. As estimated by the
St. Louis Federal Reserve Bank, the discount rate and the
one-year Treasury bills, when adjusted for price inflation,
for a long time have been in the negative range. That is,
expansionary monetary policy has resulted in banks being
awash in loanable funds such that they are lending money
nearly for free to credit-worthy borrowers in the private
This has fed the stock market and bond market
booms. But with the uncertainty whether "free money"
will continue to be available into next year, people are
wondering how much price inflation may or may not pick up
in the US.
The doubt is also reinforced by another
factor. While the Federal Reserve authorities refuse to
admit it, their easy money policy has enabled the US Treasury
to finance its trillion-dollar-a-year deficits at rock bottom
borrowing costs over the last four years. The government
is now estimating that at least for the next few years its
borrowing needs will fall noticeably below that annual trillion-dollar
level. This means that the Federal Reserve will not have
to be as "accommodating" to assure that enough
new money has been created to easily "monetize"
the government's borrowing.
But if one takes a wider political and ideological
perspective, there is nothing that suggests, either in the
US or in Europe, for instance, that governments are likely
to reduce the amount of their spending. In the European
Union, in particular, all the talk is about ending "austerity,"
which is merely "code" language for increasing
government expenditures, raising taxes and running up more
and larger budget deficits.
In the United States, even if the government's
projections of smaller budget deficits for the next couple
of years is correct, the fact remains that everyone knows
that the driving force behind the growth in government expenditures
are the "entitlement" programs – Social
Security, Medicare-Medicaid and soon-to-be fully implemented
ObamaCare – with the trajectory of government spending
pointing only in the direction of higher and higher taxes
and more and more borrowing to fund all of these redistributive
promises. This will inevitably mean turning on the monetary
spigot in the years and decades to come – if nothing
happens to radically reduce and/or abolish the Welfare State.
Daily Bell: It seems like
a symptom of a larger dysfunction. You wrote an article
recently implying the US was slipping into fascism. Is that
a present danger, in your view?
Richard Ebeling: The "larger
dysfunction," as you express it, arises out of a number
of factors. The primary one, in my view, is a philosophical
and psychological schizophrenia among the American people.
While many on "the left" ridicule the idea, there
is a strong case for the idea of "American exceptionalism,"
meaning that the United States stands out as something unique,
different and special among the nations of the world.
That uniqueness arose out of the fact that
the American Founding Fathers constructed a political system
in the United States based on a concept on which no other
country was consciously founded: the idea of individual
In the rest of the world, and for all of
human history, the presumption has been that the individual
was a slave or a subject to a higher authority. It might
be the tribal chief; or the "divinely ordained"
monarch who presumed to rule over and control people in
the name of God; or, especially after the French Revolution
and the rise of modern socialism, "the nation"
or "the people" who laid claim to the life and
work of the individual.
But the American Revolution and the US Constitution
hailed a different conception of man, society and government.
Each individual, by his nature and his reason, had a right
to his life, his liberty and his honestly acquired property.
Governments did not exist to give or bestow "rights"
or "privileges" at its own discretion. Governments
were to secure and protect each individual's rights, which
he possessed by "the nature of things."
The individual was presumed to own himself.
He was "sovereign." Self-government in this American
tradition did not only or primarily mean the right of people
to freely elect those who held political office for the
enforcement of rights-protecting laws and legislation –
though this was understood to be an essential aspect to
a free society.
The real and fundamental notion of "self-government"
referred to the right of each individual to rule over himself.
That is, as long as the individual did not violate the equal
rights of others to their life, liberty and property, each
person was free to shape and guide his own future, and give
meaning and value to his own life as he considered best
in the pursuit of that happiness that was considered the
purpose and goal of each man during his sojourn on this
It is not an accident or a coincidence that
during the first 150 years of America's history there was
virtually no Welfare State and relativelyfew government
regulations, controls and restrictions on the choices and
actions of the free citizen. Such non-interference with
each individual was a logical and necessary corollary of
a view of man as possessing a right to his own life and
the fruits of his own labor. To compel him to do things
or sacrifice things against his will for some presumed national
or social good was diametrically opposed to the "American
But for more than a century, now, an opposing
conception of man, society and government has increasingly
gained a hold over the ideas and attitudes of people in
the US. It has been a "counter-revolution" against
this American ideal. It was "imported" from Europe
in the form of modern collectivism. The individual was expected
to see himself as belonging to something "greater"
than himself. He was to sacrifice for "great national
He was told that if life had not provided
all that he desired or hoped for, it was because others
had "exploited" him in some economic or social
manner, and that government would redress the "injustice"
through redistribution of wealth or regulation of the marketplace.
If he had had financial and material success, the individual
should feel guilty and embarrassed by it, because, surely,
if some had noticeably more, it could only be because others
had been forced to live with noticeably less.
These two conflicting conceptions of man,
society and government have been and are at war here in
the United States. It is what is behind all the "crises"
around us. They are the crises of the Interventionist-Welfare
State: the attempt to impose reactionary collectivist policies
of political paternalism and redistributive plunder on a
society still possessing parts of its original individualist
and rights-based roots.
Daily Bell: How about for
the West at large?
Richard Ebeling: The euphoria
in the West with the fall of the Soviet Union more than
two decades ago and the belief that "capitalism"
had triumphed over "socialism," in fact, was only
Yes, there are few proponents anymore of
old Soviet-style socialist central planning. But I would
argue that the "specter of communism" continues
to haunt the world. Not, as I said, in the form of a call
to return to a comprehensive command and control economy
in the Soviet Union or Nazi Germany. Rather, it is in the
form of communism's and socialism's critique of capitalism.
Unregulated capitalism leads to "unearned"
and "excessive" profits; unbridled markets generate
the business cycle and the hardships of recessions and depressions;
left on its own, free competition tends to evolve into harmful
monopolies and oligopolies, with the wealthy "few"
benefiting at the expense of the "many."
One finds far fewer defenders of free-market
capitalism (what historically was known a "classical
liberalism") in Europe, because the collectivist mindset
runs far deeper there than in the US. Most Europeans cannot
imagine a life without the State caring for them from "cradle
It has been captured in all those pictures
of "anti-austerity" demonstrations in many European
countries. The cries are all the same: "Please don't
take away my government job, don't take away my government
pension, don't take away my government health care, my government-guaranteed
wage and work conditions, my government mandated month's
vacation, my government provided . . . everything!"
From where or from whom the wealth and resources
are to come to maintain the unsustainable? Well, from somewhere
and from someone. Just don't take it away. And if it cannot
be gotten and guaranteed through the redistributive mechanisms
of the European Union and the euro, well, maybe we should
return power to our own nation-states to provide the jobs,
the social "safety nets" and the financial means
to pay for it through, once again, printing our own national
This is the political-philosophical bankruptcy
of the West and the dead ends of the collectivist promises
of the last 100 years.
Daily Bell: Let's ask you
some political questions. Please relate what we are asking
to Mises and his great work, Socialism. Is the EU starting
to collapse, or just the euro?
Richard Ebeling: Well,
Ludwig von Mises's book, Socialism: An Economic and Sociological
Analysis, originally published in 1922, demonstrated how
and why a socialist, centrally planned system was inherently
unworkable. The nationalization of productive property,
the abolition of markets and the prohibition of all competitive
exchange among the members of society would prevent the
emergence and operation of a price system, without which
it is impossible to know people's demands for desired goods
and the relative value they place on them. It also prevents
the emergence of prices for the factors of production (land,
labor, capital) and makes it impossible to know their opportunity
costs – the value of those factors of production in
alternative competing uses among entrepreneurs desiring
to employ them.
Without such a price system the central
planners are flying blind, unable to rationally know or
decide how best to utilize labor, capital and resources
in productively efficient ways to make the goods and services
most highly valued by the consuming public. Thus, Mises
concluded, comprehensive socialist central planning would
lead to "planned chaos."
Mises also extended his criticisms of socialism
to the interventionist-welfare state. Government control
of prices and/or regulation of production do not completely
prevent markets from working, but it is like "sand
in the machine." Government intervention prevents prices
from "telling the truth" about the real supply
and demand conditions thus leading to imbalances and distortions
in the market. Government production regulations, controls,
restrictions and prohibitions prevent entrepreneurs from
using their knowledge, ability and capital in ways that
most effectively produce the goods consumers actually want
and at the most cost-competitive prices possible. Thus,
the interventionist state leads to waste, inefficiency and
misuses of resources that lower the standards of living
that we all, otherwise, could have enjoyed.
You asked about the euro and its future.
The first thing we need to keep in mind is that the euro
and the US dollar are currencies subject to monetary central
planning. They are monopoly monies controlled and issued
by central banks. Their quantity is determined by the decisions
of the monetary central planners who oversee them; they
influence the amount of "reserves" banks have
for lending purposes, and through this control over the
supply of money in the banking system can manipulate a variety
of interest rates, especially in the short run.
As a consequence, financial markets do not
work like real markets. We cannot be sure what the amount
of real savings may be in the society to support real and
sustainable investment and capital formation. We cannot
know what the "real cost" of borrowing should
be, since interest rates are not determined by actual, private
sector savings and investment decisions. And, therefore,
there is no guaranteethat the amount of investments undertaken
and their time horizons are compatible with the available
resources not also being demanded and used for more immediate
consumer goods production in the society.
This is why countries around the world periodically
experience booms and busts, inflations and recessions -
not because of some inherent instabilities or "irrationalities"
in financial markets, but because of monetary central planning
through central banking that does not allow market-based
financial intermediation to develop and work as it could
and would in a real free-market setting.
The divisions in the European Union go beyond
monetary policy alone, of course. It is closely connected,
as I said earlier, with the fiscal crisis in the EU due
to the contradictions and conflicts within the welfare state.
Daily Bell: Can the ECB
save it with more monetary stimulation?
Richard Ebeling: The European
Central Bank only could "save" the euro if it
stopped playing central planner, that is, if it stopped
manipulating the money supply and interest rates. This is
highly unlikely, given the economic philosophy that guides
those who run the ECB and the political demands of the member
governments. So monetary mismanagement in Europe will continue
Given the more "conservative"
views of the governments of some of the member countries
on the question of monetary "stimulus," I think
it is highly unlikely that the ECB will follow a monetary
policy course, in the foreseeable future, which would threaten
Daily Bell: What is happening
to the IMF's austerity? That didn't work very well.
Richard Ebeling: What is
"austerity"? I think most ordinary people, when
they hear the word, think that it means that someone has
been spending too much, has gotten themselves into unsustainable
debt and now has to significantly get their personal finances
in order so as not to "go under" – that
is, lose their home, be delinquent on their credit cards
and face bankruptcy.
The individual has to "trim" his
current spending out of income: find ways to cut corners
and reduce buying those things that he decides are of a
lower priority and which he can get by without. At the same
time, he might see if there are any avenues to try to earn
some extra income to help take the pressure off their budgetary
But in the United States and especially
in Europe, government "austerity" means merely
temporarily reducing the rate of increase in government
spending, slowing down the rate at which new debt is accumulating
and significantly raising taxes in an attempt to close the
The fundamental problem is that over the
decades, the size and scope of governments in the Western
world have been growing far more than the rates at which
their economies have been expanding, so that the "slice"
of the national economic "pie" eaten by government
has been growing larger and larger, even when the "pie"
in absolute terms is bigger than it was, say, 30 or 40 years
Too many European governments, in general,
take the view that "austerity" means squeezing
the private sector more through taxes and other revenue
sources to avoid any noticeable and significant cuts in
what government does and spends. So there is "austerity"
for the private sector and a mad rush for financial "safety
nets" for the government and those who live off the
Now, don't get me wrong, some governments
have had to make cuts in social benefits and redistributive
programs simply because the money is not there to cover
all that has been promised and citizens have been used to
receiving. But the attitude of those affected by any such
"trimming" is that it should be reversed, preferably
immediately, since they can't conceive of life without what
the government provides and guarantees; and those in political
power clearly view it all as an "emergency" to
get over, so that when "normal" times return,
the "trend line" of growing government can be
restored and continued.
In reality, of course, it is the burdens
of government regulation, taxation and impediments to more
flexible labor and related markets that have generated the
high unemployment rates and the retarded recovery from the
Daily Bell: Will Britain
leave the EU?
Richard Ebeling: I think
that if a referendum was held many people would vote for
departure or reconsideration of Britain's membership in
the EU. However, such critics of the European Union have
a wide variety of reasons for wanting Britain to withdraw.
In my view, the fundamental reason for "disappointment"
with the EU is that it has strayed from an earlier conception
that it was meant to offer opportunities for mutual improvement
and reduced conflicts that might lead to war by establishing
a system of freedom of trade among the member countries.
Instead, the "common market" ideal
has been transformed into the goal of a European Union "Super-State"
to which the individual countries and their citizens would
be subservient and obedient. The tentacle of regulations,
restrictions and politically-correct social controls are
spreading out in every direction from Brussels and its European-wide
manipulating and mismanaging bureaucracy.
What Britain and Europe should have as its
goal is the ideal of the classical liberal free traders
of the 19th century – non-intervention by governments
in people's lives, at home and abroad. That is, a de-politicization
of society, so people may freely work, trade and travel
as they peacefully wish, with government merely the protector
of people's individual rights.
We are a long way from that ideal in both
domestic and foreign affairs. But it is the alternative
that friends of freedom should be espousing for a truly
better world for tomorrow.
Daily Bell: What do you
make of UKIP?
Richard Ebeling: As with
many political movements and parties, there are various
strains of policy views. The issue is why does the UKIP
support withdrawing from the EU? What would they want Great
Britain to be like "outside" of the European Union?
Listening to some UKIP supporters quoted in the media, one
has the impression that too many want to reduce or limit
trade with Europe and "protect" British industry
through trade barriers.
Or they express anti-immigrant sentiments
that ignore the benefits that "new" blood can
offer to a society – risk-taking entrepreneurs, those
who will take jobs that British subjects may be reluctant
to perform, skilled and unskilled labor that helps keep
market wages from significantly rising and therefore keeping
costs down so British industry can become more effective
in both its domestic market and in foreign lands.
The "problem" with free immigration
into Britain from other EU countries is not the arrival
of more hands to do work that can be done. Rather, it is
the availability of incentive-destroying welfare and related
benefits that undermine the incentive for too many people
to find productive employment.
Take the benefits away and tell people they
are free to come and work to support themselves and their
families. Restore more flexibility and competitiveness to
labor markets and reduce taxes and business regulations.
Then those who come to Britain's shores will be those wanting
freedom and opportunity without being a burden upon others.
But in the eyes of some UKIP members and
supporters, Britain needs more and better welfare guarantees
and more government financial supports. Needless to say,
these that got Britain and many other nations, to begin
Daily Bell: There is now
a German version of UKIP. Are the Germans rebelling against
the EU finally?
Richard Ebeling: Many Germans
resent that other members of the European Union expect Germany
to pick up the tab for the loans to be made to cover the
financial embarrassment of those countries far more fiscally
irresponsible than the Germans.
Furthermore, many Germans wish the Mark
had not been abolished as their own national currency. One
indication of this is that according to publications like
Der Spiegel, people in Germany use over 30 regional and
local alternative "private" currencies in place
of the euro.
I think there are a significant number of
Germans who see the benefit of open commerce and trade with
any and all of their European neighbors. But they do not
believe that the EU serves, any longer, as the vehicle to
sustain and secure it.
Daily Bell: Mises was correct,
Richard Ebeling: On issues
of European economic integration, Mises was a strong advocate
of free trade in goods, money and people. But he believed
that this was unlikely to come about through intergovernmental
bureaus, agencies and departments. What was needed was a
change in ideas from the statist mentality to one of individual
freedom and unhampered free markets.
In an epoch of collectivist ideas, don't
be surprised if governments regulate, control, intervene
and redistribute wealth. And it does not matter if such
policies are introduced by national governments or super-national
political entities such as the European Union. The greater
danger from the EU structure is that bad polices get introduced
in all of Europe at the same time. Where political control
is decentralized into the hands of the traditional nation-states,
one country may follow an especially foolish economic policy
direction; but the surrounding countries need not do so,
also. The lessons from implementing wrong and misguided
policies can be learned before other countries going down
the same bad path.
Daily Bell: How come, despite
Mises's contributions, nation-states around the world use
Richard Ebeling: Keynesian
policies offer people and politicians what they want to
hear. Claiming that any sluggish business or lost jobs are
due to a lack of "aggregate demand," Keynes argued
that full employment and profitable business could only
be reestablished and maintained through "activist"
government monetary and fiscal policy – print money
and run budget deficits.
In the name of assuring "national prosperity,"
politicians could spend money to buy the votes that get
them elected and reelected to government offices. And every
special interest group could make the case that government-spending
programs that benefitted them were all reasonable and necessary
to assure a fully employed and growing economy.
Furthermore, the Keynesian rationale for
government deficit spending enabled politicians to seem
to be able to offer something for nothing. They could offer,
say, $100 of government spending to voters and special interest
groups but the tax burden imposed in the present might only
be $75, since the remainder of the money to pay for that
government spending was borrowed. And that borrowed money
would not have to be repaid until some indefinite time in
the future by unspecific taxpayers when that "tomorrow"
This type of fiscal sleight-of-hand can
work and go on for a long time. But eventually, the debt
comes due and it is discovered that someone is going to
have to pay the bills for all the previous years of government
spending with borrowed money.
This is the bill that too many European
governments are finding it hard to pay – without either
dramatically cutting spending or raising taxes. In other
words, as Ludwig von Mises warned more than once during
his lifetime, eventually you reach the longer-run consequences
of short-run policies. That is where we are today.
Daily Bell: The biggest
problem that Keynes had, from our point of view, is that
he never defined how a depression or recession comes about.
What was his explanation, if he had any?
Richard Ebeling: In a nutshell,
Keynes argued that the market economy's inherent "instability"
arose from the "animal spirits" of businessmen,
who were subject to irrational and unpredictable waves of
"optimism" and "pessimism." This set
off waves of unsustainable investment spending followed
by a prolonged period of money hoarding by people in the
society that pulled money out of the economy, which caused
the fall in "aggregate," or economy-wide, demand
that could only be filled by government borrowing the sums
of unspent hoarded savings, or by printing money.
Keynes also claimed that workers would not
accept cuts in their money-wages to make themselves less
costly to hire because of "money-illusion." That
is, the idea that workers only thought about the nominal
amount of money in their paychecks, and not that at a time
of falling prices in a depression, they could accept lower
money-wages and be no worse off in real terms if the prices
of the goods they bought had decreased more or less by the
same amount as their wages had gone down.
Thus, the economy could get stuck in a prolonged
depression or recession with a relatively high level of
unemployment, unless cured by the "stimulus" of
government borrowing and spending.
Daily Bell: Contrast that
to Mises, please.
Richard Ebeling: Mises
argued that there was nothing inherent in the market economy
to bring about these swings of economic booms followed by
periods of depression and unemployment. If markets got out
of balance with the necessity of an eventual correction
in the economy to, once again, set things right, the source
of this instability was government monetary policy.
Central banks too often followed a policy
of trying to create "good times" in the economy
by expanding the money supply through the banking system.
With new, excess funds created by the central bank available
for lending, banks lower rates of interest to attract borrowers.
But this throws savings and investment out of balance, since
the rate of interest no longer serves as a reliable indicator
and signal concerning the availability of real savings in
the economy in relation to those wanting to borrow funds
for various investment purposes.
Due to the artificially lower rates of interest,
investment projects of various time durations are undertaken
which, in retrospect, will be found to be unable to be completed
or operated on a profitable basis because the savings needed
to finish the projects or operate them profitably does not
exist. The economic crisis comes when it is discovered that
all the claims on resources, capital and labor for all the
attempted consumption and investment activities in the economy
are greater than the actual and available amounts of such
The price inflation that usually accompanies
a monetary-generated economic boom period is an indicator
that people are trying to purchase and use more of the scarce
resources of the society than are available for all the
investment projects attempted.
The recession period, in Mises's view, is
the necessary "correction" period when in the
post-boom era, people must adapt and adjust to the newly
discovered "real" supply and demand conditions
in the market. Any interference with the "rebalancing"
of the economy by government raising taxes, imposing more
regulations, or new artificial government "stimulus"
activities merely makes it more difficult and time-consuming
for people in the private sector to get the economy back
on an even keel.
Daily Bell: How come Keynes
retains any credibility at all?
Richard Ebeling: In my
opinion, it is because of the theory's naïve and superficial
simplicity. People are out of work,businesses are operating
at less than full capacity and goods are not selling at
the retail end of the market? Nothing is simpler than to
believe that all can be set right if only "someone"
– the government – is out spending more money
so the goods on the shelves can be sold and profits can
once more be made by getting the machines working in the
factories and hiring back unemployed labor to get the necessary
Plus, as I explained already, it is a convenient
explanation for politicians to use as a rationale for increased
government spending with borrowed money to feed the special
interests the politician needs to stay in office. As one
of Franklin D. Roosevelt's staff members said during the
New Deal Days of the 1930s, "Spend, spend, spend –
elect, elect, elect."
Daily Bell: Does printing
money ever work? What are the effects?
Richard Ebeling: The most
concise answer is: No. Of course, the central bank can create
money out of thin air and governments can proceed to spend
it. This may put people to work, producing what the government
is spending that money on. And after a while, prices in
general – "price inflation" – can
emerge as one of the symptoms.
But in the longer run the jobs created in
this way by the monetary "stimulus" are totally
dependent on its continence. That is, it more or less requires
government continuing to spend sums of money on the same
particular goods, and on the basis of which businesses find
it profitable to hire specific types of workers to do particular
jobs that produce the goods the new money is being spent
Thus, once any spending with this newly
created money is slowed down or stopped, the very jobs "created"
by the government in this way inescapably start disappearing,
resulting in emerging unemployment. As Mises's longtime
friend and colleague, the Austrian economist and Nobel Prize
winner, Friedrich A. Hayek, once observed, unemployment
is not "caused" by stopping an inflation, but
rather inflation induces the artificial employments that
cannot be sustained and which inevitably disappear once
the inflation is reined in.
Daily Bell: Why are the
Japanese now embarking on it? What will be the end result?
Richard Ebeling: The Japanese
government has been very clear over the last several months
since it came into office. They want to create a price inflation
equal to at least two percent a year to try to push up "aggregate
demand" and "create" jobs. In my view, the
end result will be the same as everywhere else: a short-run
impact that sets the stage for another downturn in the future.
Daily Bell: How about in
the US? We are told that Bernanke saved the US economy by
printing money. Can Bernanke now engineer a soft landing
by gradually withdrawing the stimulus? Or would that put
the US in another deeper recession/depression? Is the US
Richard Ebeling: The recession
of 2008-2009 was the result of several years of central
bank stimulus. From 2003 to 2008, the Federal Reserve increased
the money supply by about 50 percent. Interest rates for
much of this time, when adjusted for inflation, were either
zero or negative.
Awash in cash, banks extended loans to virtually
anyone, with no serious and usual concern about the borrower's
credit-worthiness. This was most notably true in the housing
market, where government agencies like Fannie May and Freddie
Mac were pressuring banks to make mortgage loans by promising
a guarantee that they would make good on any bad home loans.
Since 2008-2009, the Federal Reserve has,
again, turned on the monetary spigot, increasing its own
portfolio by almost $3 trillion, by buying US Treasuries,
US mortgages and other assets. So why has there not been
a complementary explosion of price inflation?
In some areas there has been, most clearly
in the stock market and the bond market, But the reason
why all that newly created money has not brought about a
higher price inflation is due to the fact that a large part
of all newly created money is sitting as unlent reserves
in banks. This is because the Federal Reserve has been paying
banks a rate of interest slightly above the market interest
rates to induce banks not to lend.
In my view, the idea of a "soft landing"
is an illusion based on the idea held by central bankers,
themselves, that they have the wisdom and ability to know
how to "micro-manage" all the changes and adjustments
resulting from their own manipulations of the monetary aggregates.
They do not have this wisdom and ability. So hold on for
what is most likely to be another rocky road.
Daily Bell: What about
employment? Why hasn't employment rebounded in the US or
Richard Ebeling: European
Union unemployment is at historical highs. This is the worst
jobs recovery in US post-World War II history. Among the
reasons for the sluggish jobs growth in the US are: (a)
general "regime uncertainty," that is, no one
knows what government policy will be tomorrow; will ObamaCare
be fully implemented after January 2014?; (b) what will
taxes be for the rest of the current president's term in
the White House; (c) what will the regulatory environment
be like for the next three years – in 2012, the government
implemented around 80,000 pages of regulations as printed
in the Federal Registry; (d) how will the deficit and debt
problems play out between Congress and the White House and
will it threaten the general financial situation in the
country; and (e) what wars, if any, will the government
find itself involved in, in places like the Middle East?
In Europe taxes are high, regulation is
pervasive and "activist," labor market rules make
it difficult to fired workers, new debt crises could break
out at any time and no one knows for sure what is likely
to happen with the euro and the EU as a whole. This is not
a positive economic environment for job creation.
Daily Bell: Will the Miracle
of China continue or is that economy headed down?
Richard Ebeling: I was
in China for a brief time in January 2013. First impressions
when you are in Shanghai are of a modern society whose people
are striving to catch up with and match the West. But a
little bit more observation and questioning of people makes
it clear that this is still a controlled and commanded society,
with a government that works hard to try to determine what
people read, see and think.
A bit of travel around the country also
makes it clear that China is facing the danger of its own
economic bubbles bursting. The vast construction boom is
far out of any proportion to what the society is wealthy
enough and economically developed enough to efficiently
Impressive row after row of skyscraper apartment
complexes everywhere one looks in cities and on the roads
between cities are often dark and empty at night, with vacancy
rates of 80 or 90 percent. Shopping malls and government-planned
entertainment and "restaurant rows," with literally
dozens of restaurants and bars next to one another, are
practically all empty even on a Friday or Saturday night.
All these building projects have been brought
into existence by a government that not only controls the
money supply and manipulates interest rates but also heavy-handedly
tells banks whom to specifically loan to and for what investment
activities. Central planning is alive and well in China,
with the motives being both power and profits for those
inside and outside the Communist Party having the most influence
and connections in "high" places.
In my opinion, China is heading for a great
economic crisis, resulting from a highly imbalanced and
distorted economic system still guided far more by politics
than sound market decision-making. Whether China's bubbles
burst next month, or two years from now, it did not seem
that there was anyway for them to spend their way out of
these wide and unstable mismatches between supply and demand.
This makes it highly unlikely that their
currency, the yuan, has any chance of becoming a major monetary
player in global financial markets in any foreseeable future.
It is a money that still primarily exists to serve the political
purposes of those who sit in the "inner circles"
of power in Beijing. Another worrisome
impression is that Chinese leadership is determined to play
the closely controlled "nationalist" card to maintain
the loyalty and obedience of the population. Students at
universities, I discovered, know little about the history
of their own country other than what the Communist Party
sees that they know.
There was surprise and shock among some
Chinese students when in my lectures at a university in
the industrial city of Wuxi I explained to them the costs
in lost human lives under Chairman Mao in the name of building
socialism – estimated at 80 million innocent men,
women and children who were shot, worked to death, or starved
to death in government-caused famines.
Their understanding and view of the West,
including America, is one designed by tightly controlled
government educational propaganda. And most people don't
want to find out anything different from what the government
wants them to know. This is partly because they "don't
want trouble," and partly because they just want to
focus on getting a good job and becoming wealthy if they
The "Great Leap Forward" or the
"Cultural Revolution" that destroyed tens of millions
of lives to serve Mao's purposes? Well, they knowjust that
it happened a long time ago, are bad things that happened
to a grandfather, that it is not relevant to the young student's
life. As for Tiananmen Square in June 1989 . . . almost
none ever heard of it and know nothing about it. But
what is known is that while corruption is rampant and power
is everywhere abused, the leaders are working hard to make
China strong on the international scene, to restore China's
rightful place as a "great power" to be feared
and respected. The young Chinese can feel pride and loyalty
to the government that is undoing the humiliations China
long suffered at the hands of the Western powers in the
19th and 20th century.
Daily Bell: Where does
the West go from here ... a gradual, continual unraveling?
Richard Ebeling: If there
is one thing that history can teach us, it is that the future
course of human events is unpredictable in all their detail.
One hundred years ago, in 1913, how many could have predicted
that a year later a European-wide war would break out that
would lead to the destruction of great European empires
and set the stage for the rise of totalitarian collectivism
that resulted in an even worse global war two decades later?
In the 1970s, how many predicted the end of the Soviet Union
before the end of the 20th century and that it would end
not in a terrible global nuclear conflict but through a
domestic economic implosion with relatively little loss
of life in bringing about its disappearance from the map
of the world?
How will the West get through its current
cultural, political and economic crisis, looking toward
the rest of the 21st century? That will depend upon the
power and influence of ideas in the context and circumstance
of actual unfolding events. No one knows the answer to that.
It will, no doubt, seem "obvious," when a historian
looks back at our time from the perspective of, say, the
year 2113. But we who are living through that history cannot
completely or confidently see what tomorrow fully holds
in store for us.
A major reason for this uncertainty is that
it depends upon what we decide to do. In other words, our
ideas and deeds will determine the shape of things to come.
It does not already exist in some "big book in the
sky," from which nothing can deviate. Each of us, in
our ow corners of life, gets to help, in big ways and small,
to make that history.
Thus, whether, at the end of the day, freedom
triumphs and the future is one of liberty and prosperity
is partly on each one of us. Near the end of his great book,
Socialism, Ludwig von Mises said:
"Everyone carries a part of society
on his shoulders; no one is relieved of his share of responsibility
by others. And no one can find a safe way out for himself
if society is sweeping towards destruction. Therefore, everyone,
in his own interest, must thrust himself vigorously into
the intellectual battle. None can stand aside with unconcern;
the interests of everyone hang on the result. Whether he
chooses or not, every man is drawn into the great historical
struggle, the decisive battle into which our epoch has plunged
us . . . Whether society shall continue to evolve or where
it shall decay lies . . . in the hands of man."
The circumstances and the specific battles
have changed since Mises wrote these words in the context
of the, then, challenge of comprehensive socialist central
planning of man and society. But it no less rings true for
our time, as we fight over the right of individuals to be
free men, instead of puppets at the end of the strings manipulated
and pulled by the political paternalists who still assert
that they know better than we do, how we should live our
Daily Bell: Thanks again
for your time.
Daily Bell After Thoughts
Here is a key takeaway from this interview
with Richard Ebeling:
In my view, the idea of a "soft landing" is an
illusion based on the idea held by central bankers, themselves,
that they have the wisdom and ability to know how to "micro-manage"
the all the changes and adjustments resulting from their
own manipulations of the monetary aggregates. They do not
have this wisdom and ability. So hold on for what is most
likely to be another rocky road.
This explains clearly why it is impossible for central bankers
to "run" a worldwide economy approaching US$100
trillion a year. No one can do it and manipulations simply
make it worse. So-called soft landings are only soft in
the eye of the beholder. If one has lost one's home and
job, no summaries explaining the merits of a soft landing
are going to ring true or alleviate one's individual misery.
At the end of the day, these sorts of facile
observations are merely newsprint declarations. Mainstream
media's torrent of explanations regarding the terrible unemployment
that exists in Europe and the equally sluggish economies
in Britain and the US are no more useful. In the early 21st
century, pronouncements about "upturns" and "recoveries"
support an unsupportable system. They are a kind of phantasmagoria.
Richard Ebeling makes another succinct comment
toward the end of the interview, quoting from Mises in his
book Socialism, as follows:
"Everyone carries a part of society
on his shoulders; no one is relieved of his share of responsibility
by others. And no one can find a safe way out for himself
if society is sweeping towards destruction. Therefore, everyone,
in his own interest, must thrust himself vigorously into
the intellectual battle."
It was Mises's clear vision that once society
has broken the relationship between value and payment, sooner
or later people would not know the price of anything. At
this point, investment ceases and business becomes furtive
and transactional. People cannot plan for the future because
they do not understand the reality of the present. Society
begins to sink.
Ideas - and elections - have consequences.
It is a nice conceit to believe we can stand aside as money
is debauched and whole industries like healthcare are divorced
from supply and demand. But it is simply that, a conceit
- a comforting, egotistical notion that what is happening
to other fellows is not happening to you.
Economic illiteracy and the woeful results
that stem from it affect everyone. And if you don't understand
how economics works, how money works and who controls the
levers of power, you are truly destined to experience the
worst that modern society has to offer.
There is a reason that Austrian, free-market
economics has experienced such a surge of interest once
the Internet helped make it available. That's because it
explains our reality in simple and easy-to-understand terms.
Once you understand the Way the World Really
Works, you can finally take action, human action, to protect
yourself and your loved ones. Thanks to committed and courageous
individuals like Richard Ebeling for their guidance as we
travel down an often-treacherous trail toward an illumination
that is only reachable if we exercise discipline, prudence
and patience. The result will be worth the exertion.