Don’t get too worked up over what Kangas has to say about economics. He does offer this “golden nugget of wisdom” regarding inflation:
Austrians often repeat that since the Federal Reserve System was created in 1913, our currency has devalued 98 percent, due to the printing of money. But this is a meaningless statistic. Suppose you need $2,000 a month to buy the necessities of life, but you earn $2,000 a month as well. You’re making ends meet. Now suppose that your bills climb to $10,000 a month – but so does your income. Has anything real changed? Of course not.
Enough humor, let’s get to it.
Regarding his summary, we can see several fallacies and inaccuracies. “They fear that printing money creates inflation, and retracting money causes recessions. But the opposite is also true: printing money cures recessions, and retracting it cures inflation.” Any Econ 101 student will tell that, ceteris paribus, increasing the supply of a good causes the price of that good to drop. This is because of a declining difference in the quantitative relationship between the availability of that good and the requirements for that good, leading to a decline of the value of that good as the significance of each unit is diminished, leading to lower price limits by the supplier and the consumer. So Kangas fundamentally is clueless about inflation, as already evinced by his summary. Printing money does not cure recessions, but brings recessions. As more money is printed, on purpose, it lowers the interest rate which causes consumers to spend more and investors to invest more. As the economy is pulled into two directions on the Production Possibilities Frontier, the economy is overheated because, by vector addition, the point at which the economy is producing, under the false interest rate, is outside the PPF and leads to a recession. The production structure is distorted due to malinvestment, overinvestment, and overconsumption. Retracting money is just as harmful as any manipulation of credit (deflation), which Kangas, at least sometimes, seems to oppose. “Governments in the last 60 years have used these policies with tremendous success. There has not been a single depression or bank panic in any nation anywhere in the world using Keynesian monetary policies.”
The first sentence is laughable, the second sentence underscores this. Proof? Look at the United States economy and the economies of the European nations: easy credit, high unemployment, large debt, and financial instability. So much for ‘tremendous success.’
“However, if mainstream economists (on both the left and the right) have anything to say about it, there will never be a return to “that barbarous relic,” as John Maynard Keynes called gold over 60 years ago.”
Odd, then, that many people see gold as their only chance and financial stability -due to an aggressive Federal Reserve- but again, Keynesian stimulus and paper money must be successful; just look around!
“The current system might, in theory, allow an unscrupulous government to create inflation or unemployment, but it also allows the government to fight inflation and unemployment.”
If this is the best government can do to fight inflation and unemployment then, please, STOP! As if the government has no financial/power interest in maintaining inflation and unemployment to fund all sorts of “beneficial” projects and keep people dependent on the government dole for their livelihood.
“And that is a tremendous achievement, because not one nation around the world using Keynesian monetary policy has experienced a depression in the last six decades. It appears that we eliminated depressions when we eliminated the gold standard.”
Not too difficult to do when changing the definition of “Depression” to “recession” and the definition of a “recession” to a “downturn.” Also, this is patently false as we’ve had several such episodes in the last 60 years.
" It hasn’t been for lack of opportunities. In 1987, the U.S. stock market crashed, in a “meltdown” that was even worse than the Crash of 1929.But the Federal Reserve had learned its lessons from the Great Depression, and this time it responded correctly: with a sharp expansion of the money supply. And not only was there no depression, but there was no recession either – in fact, the remarkable economic boom of the 80s continued without even a bump."
Sure- and that crash wasn’t the result of inflationary policies between 1982-1987 and retraction of credit didn’t go to cause the savings and loan crisis of 1989.
“But the invention of money presented a problem of what should be used for it. Suppose that a common resource like stones was used for money. The problem is that saleable goods are limited – it may take all day to hunt game or weave a rug. When you put your final product on the market, buyers will compete for it, because, after all, everyone desires to hoard wealth. The first buyer may pick a rock off the ground and offer it to you, whereupon a second buyer will pick up two rocks and better the offer. Soon a bidding war erupts, with buyers picking up rocks as fast they can. In the end you might receive an entire rock quarry for your marketed good. This example highlights two absurdities. First, this is the essence of inflation. When there is too much money available, prices soar, and tons of money are needed to buy things. Second, it is a waste of human and natural resources to dig up so much money – people might as well devote all this effort to producing the actual goods.” No, this example is the absurdity. Money was never “invented” it arose spontaneously from consumers realizing that indirect exchange helps them to better obtain wealth for themselves. Money is founded based on the perception that other consumers would be willing to accept it. If a scene erupted, as Kangas portrays, for a money that is established by the market then the money would lose any chance at having the perception that others are willing to accept it and would no longer be money. If, however, the government said that rocks were the only legal money, then inflation would arise.
“Suppose that a village is using gold for money, but unfortunately there is only one gold nugget.” This further underscores Kangas’ misunderstanding of how a good comes to be “money” on a market. If there was only one golden nugget, then it wouldn’t ever be seen as money by a village. If, however, the village government said that golden nuggets were the legal tender, then the results that Kangas states would follow. “So the amount of money has to be optimal – not too much, but not too little, to support the natural amount of trading that goes on. As you can see, this calls for some knowledge of the amount of economic activity that normally occurs.”
Once a good is at an “optimal” level, there no longer needs to be either deflation or inflation on the part of the government. And this knowledge comes from market actors who have an interest in trading with a sound unit of exchange. People aren’t as idiotic as Kangas assumes.
“An economist would need to measure this activity, and calculate how many coins would cover this activity without causing either inflation or unemployment.” What a clown. By far his funniest assertion. How would this economist calculate economic activity without a monetary unit in the first place? D’oh!
“But when the money supply is determined by some completely arbitrary factor, like the amount of gold that happens to be in the hills, then the odds that the money supply will match the amount needed are virtually zero.” Since, of course, this “arbitrary factor” is really an “irrelevant factor,” Kangas’ “point” here is useless. Again, once a good is accepted as a money there no longer needs to be an inflation/deflation of the money supply. At the end, the only thing that will have changed is the price level of goods. In between however is economic impoverishment, to which Kangas is entirely, perhaps defiantly at this point, ignorant.
“An insufficient money supply is not the only thing that can cause a recession. Recessions commonly occur when people start hoarding money. In normal economies, there is a circular flow of money, as my spending becomes part of your earnings, and your spending becomes part of my earnings. But for some reason, you may see tight times ahead, and decide to save your money to get through them. But this only makes things worse on me, because I am depending on your spending. So I respond to tight times by hoarding my money also. The result is a drop in economic activity, rising unemployment, and recession. Keynesian monetary policy calls for expanding the money supply, which puts more money in the hands of consumers, restores their confidence, and encourages them to begin spending again.” This just shows Kangas’ ignorance to the production structure and how money is saved, not under one’s bed, but in the bank where that money is then borrowed to invest in projects which yield greater wealth in the future. Any (literally, any) basic economics book shows that increased savings leads to a higher level of consumption- even textbooks written by Keynesians! His next example of villagers with a currency of “units of work” is flat out fallacious and deserves no scrutiny. How many units of “work” is repairing a car? Baking a loaf of bread? Lessons in basic economics?
“Or they could let the value of the coins increase.” In reality, this is how the wages and wealth of consumers and workers rose before the Federal Reserve.
“Prices do indeed inflate and deflate in this way. The problem is that this process is terribly inefficient.” These statements are totally ridiculous. Kangas clearly has no comprehension of what inflation and deflation mean if he uses them to describe the rise and fall of the price of a single good. And price adjustment is an infinite amount of times more efficient than any pretentious planner could adjust prices- look at the economic glory that was the Soviet Union. If we only could ignore that wages are set by marginal productivity and the wages of a worker could one day be $20 an hour and $4 an hour the next day! “The Great Depression, for example, dragged on for ten years, with the natural deflation of money proceeding at a glacial pace. It wasn’t until World War II that the government was forced to conduct a massive monetary expansion (to fund its defense spending). The result was such explosive economic growth that the U.S. economy doubled in size between 1940 and 1945, the fastest period of growth in U.S. history. Another example is Japan in the 1990s. Its economy has stagnated for five years now, and many economists have criticized its government for not doing enough to expand the money supply. But whatever the solution, the important point is that Japan’s government has done very little, and its economy has not deflated or adjusted itself – Japan’s economic pain continues five years later.” The monetary policy during the Great Depression was inflationary and the Great Depression itself was a manifestation of increasing credit throughout the 1920s as Gene Smiley makes clear in this article and as Tom Woods makes clear in Meltdown. The idea that WWII -when there was economic rationing on most goods such as frigerators and gasoline; when the fabric of clothing was changed from cotton to a type of polyester to send those materials to the troops; when the unemployed were shipped overseas, which necessarily reduced unemployment; when most prices were not set by the market but by government- brought prosperity to the US is specious to the point of absurdity. Economic prosperity didn’t start until spending/regulations were ended after WWII, when Keynesians were still, hysterically, calling for the production of weapons and tanks to fuel the economy- make weapons for no war, yeah, that’ll work!
GDP is the market value of all goods in an economy. If I have an economy of my Mises liberty band and the market price for this band is $1, and I, the government, legislate the band at $2, my economy has grown 100%. A quick history lesson, that explains that this is exactly what FDR did to most goods in the economy in the Depression, would likewise show that the GDP numbers under FDR’s terms were just as meaningless.
And anyone who looks to the Japanese economy as a haven of laissez-faire capitalism is deluded to the point of pity.
His representation of goldsmiths and the origins of banking seem fair.
“Of course, if too many people come in at once demanding their gold, the banker is out of luck. Experience may teach him that he needs to keep a reserve ratio of 1 gold unit to 3 banknotes. Any more banknotes and he might not be able to cover withdrawals.”
This begs the question as to whether Kangas believes that offering 3 receipts for 1 unit of gold in reserve is somehow not unstable and that some unmentionable horror happens when the banker dares to offer 4 receipts for 1 unit of gold in reserve. What function did he use?
“Temporarily suspending the gold standard in favor of fiat money during times of war became common over the next century. During the American Civil War, the government interrupted its policy of gold convertibility and issued nonconvertible “greenbacks” instead. During World War I, all belligerent nations did much the same. It is interesting to note that during times of war, when a nation’s survival is on the line and it must boost productivity, the economic policies its leaders resort to are always liberal ones. Fiat money, tax hikes and Keynesian monetary expansions result in booming economies, hence the truism that “war is good for the economy.” It took economists and politicians over a century to learn that these policies could be applied during times of peace as well.”
Odd that Kangas omits the obvious fact that rampant inflation ended the greenback and plagued most economies after WWI. The idea that war is “good” for the economy is obviously puerile. So our economy is in trouble right now. According to Kangas, we should spend time manufacturing, engineering, research and development, resources and all the various inputs to make an entire fleet of aircraft carriers, send them out to the middle of the Atlantic Ocean, move the crew to safety on other boats, sink the aircraft carriers, and then celebrate on how much wealthier we have become. Isn’t it great? All those inputs that could have been used on goods which consumers demanded, now rests at the bottom of the ocean, useless.
“The U.S. suffered three depressions during the Gilded Age, and the gold standard and its bank panics were often held to blame.” No- overextension of credit, bailouts by the government to favorite state banks, disobedience to the rules of the gold standard, and the fractional reserve banking system -which he touted above- are to blame.
“Suppose Britain ran up a trade deficit with the U.S., and promptly paid in gold. The U.S. money supply would expand, and its economy would experience a mixture of inflation and growth. Conversely, the British money supply would shrink. Theoretically, this should have resulted in deflation, but in practice it resulted in widespread unemployment, due to price stickiness. Therefore, outflows of gold from a country were often very painful to its economy. And when people learned that gold was leaving the country, they often conducted bank runs, trying to withdraw their gold before it ran out. Thus, the Gilded Age was replete with bank panics and failures.”
Kangas clearly has no idea that a trade deficit merely means that one country has bought goods from another country and in no way, shape or form implies that one of the countries involved has a debt to pay as is the case with the debt of the federal government or an individual. His ideas of what caused bank runs are, again, entirely fictional and due to how governments didn’t abide by the gold standard, inevitably leading to harsh consequences. “In the U.S., two gigantic bank runs caused over 10,000 bank failures. So many people were left holding worthless banknotes that the money supply shrank by about a third – a catastrophic reduction.”
Again, Woods makes clear in Meltdown that the money supply increased by 55% from 1922-1927. And there were numerous anti-branching laws that prevented the branching of banks to different locations in the same state. The result being that risk was centralized in one bank- leading to the bankruptcy of 1/3 of the banks in the US. Contrast this with Canada, which had no such regulations, where not one bank went bankrupt.
“He declared a “banking holiday” that closed banks to the public for eight days, to prevent further withdrawals. During that time, the banking system was reorganized. When banks finally reopened, banks deposits actually exceeded bank withdrawals. It was a tremendous political success for Roosevelt, and America’s last bank run. Later under the New Deal, bank deposits would become insured by the federal government.”
So people aren’t entitled to their own money- good idea. While it may have been politically expedient, it in no way corrected the problem caused by inflation and the necesary correction that had to follow- which FDR successfully prevented for more than a decade. And Bank deposit insurance by the FDIC never led to moral hazard…
“After the Great Depression struck, the world wasted little time severing its ties to gold. Britain left the gold standard in 1931, as did the U.S. in 1933. By 1937, not a single country remained on the gold standard. After World War II, the U.S. partially restored the gold standard for international trade. And to prevent citizens from bank panics, it made its currency inconvertible at home. In 1971, a diminishing gold supply and growing deficits caused the U.S. to suspend the gold standard even for international trade. Ever since, international trade has been based solely on the dollar and other paper currencies. Today, there are no mainstream economists who call for a return to the gold standard; it is widely regarded as a fringe idea of the radical right.”
In short, ‘we should leave the gold standard to allow governmental irresponsibility with the money supply and spending; and lets add a sprinkle of argumentum ad hominem for good measure.’
“Even so, this reason is weak. Argentina did not need a gold standard to tie its currency to a more responsible country and solve its problems. Furthermore, a monetary policy that’s right for one country might be completely wrong for another. For example, in the early 1990s, Europe tried to unify its currency by tying it to the German mark. But subsequently the German economy boomed while the rest of Europe became mired in double-digit unemployment. And following Germany’s anti-inflationary monetary policy only made things worse, because it was exactly the opposite policy they should have been following. Finally, many countries have established long and sound reputations with fiat money – Switzerland, Japan and the U.S., for example.”
In short, ‘Fixing fiat money to fiat money didn’t work so fixing money to gold wouldn’t work either; anti-inflationary policy, which I advocated above, doesn’t work; and let’s sprinkle a bit of argumentum ad consequentiam for good measure.’ The Japan and US government fiscal policy is anything but “sound.”
“What are the benefits of the current system? The most important has already been mentioned: the elimination of depressions. Being able to expand the money supply in times of unemployment and recession is a critical tool for government.”
No, the system Kangas advocates is the cause of depressions and the avoidance of necessary reallocations of capital after recessions/depressions. This ‘tool’ is critical only to preserve the façade that is the ability of the government to create a stable monetary base by unstable means.
His list of depressions is rather interesting given that in 1920, there was no intervention on the part of the Federal Reserve, the first year of the depression was worse than the first year of the Great Depression and the economy recovered in just that time- about a year. Imagine that- the market is capable of reallocating resources by the price system and that economic laws don’t disappear in times of recession/depression! Further still, there are explanations for the majority of these depressions/recessions that are due to the same policies for which Kangas agitates. And his idea that Keynesian policies are responsible for not one single Depression is absurd on its face- it caused a big one called the Great Depression and an even bigger one, if he were alive to witness it, called the Great “Recession” which, again if he were alive, would probably call even worse than the Great Depression; these two in addition to the numerous other ones to which he claims innocence on the part of his policies.
“To see how unrelated it is, consider the following trends. Since the U.S. dropped the gold standard in 1971, the price of gold has risen tenfold. But consumer prices have risen only two and a half times. If the U.S. had instituted a full gold standard in 1971, the result would have been the worst deflation since the Great Depression. And considering that widespread unemployment is usually the result, not deflation, it is easy to see the why such a policy would increase the risk of a depression.”
This proves nothing and is only an implicit admission that Keynesian policies are responsible for stealing the wealth from consumers. This assertion, in and of itself, is baseless due to the fact that we have no idea how government would have behaved under the lukewarm gold based money policy it had in Nixon’s day, were it to have continued until today.
“Gold bugs also face an enormously challenging question: what kind of gold standard would they like to create? One based on fractional reserves? But that led to countless bank runs. Furthermore, as a practical matter, it doesn’t stop banks or governments from changing the money supply, simply by changing the amount of fiduciary notes.”
In other words, if we were to have a gold reserve system, the system would have to overcome Keynesian economics.
“But there is no longer enough gold in the modern world to cover the needed economic activity.”
Again this is a specious point, as covered in his prior, illogical, example.
“But if a workable gold standard requires a tremendous amount of design, effort, regulation and safeguards, we might as well use fiat money, which is already simple and enjoys a successful track record.”
How I pity him…