Caribe Investments

Whenever I see somebody advocating the government promote “clean energy,” I’m reminded of a plea from a congressman I saw many years ago encouraging people to report price gouging at the gasoline pump. If somebody saw a gasoline price that deviated upwards from some “normal,” they were encouraged to report it to some hotline. Simultaneously, there are regional committees that enforce regulations against undercutting on the price of gasoline. In other words, the real purpose of the central planners was to enforce the same price.

There’s only one reason to set similar prices amongst vendors, and that’s not to curtail price gouging, but to fix prices upwards. The market will punish price gouging naturally, driving gougers out of business. How so? If a vendor is selling gasoline 5 or 10 cents higher than other gas stations, that vendor will lose market share to other vendors. If somebody sees higher prices on the same gasoline, don’t call a hotline. Buy the cheaper gasoline. Furthermore, how do we know what vendors are price gouging and what vendors are undercutting? If half the stations have a price that’s lower than the other half, is one half price gouging or is one half undercutting?

That price gougers can’t succeed in the free market is why cartels must rely upon government intervention and support. All participants must raise prices in synchronization with one another. The moment one participant begins to set prices pursuant to supply vs. demand, the entire cartel begins to collapse. The problem for the cartel is that even if all participants set prices pursuant to the price-fixing scheme, vendors can’t short inventory at prices above what consumers are both willing and able to pay. Higher prices beget fewer consumers, diminishing the volume of sales.

The campaign against fossil fuels has nothing to do with saving the environment. It’s all about price-fixing by erecting barriers for oil producers that benefit the big oil producers and big “green” energy companies that can’t compete against fossil fuels. It’s about the restraint of trade to curtail competition. Not only is it about price-fixing, it’s about waging war against humanity. Restricting the supply of energy is most injurious to the poor. On one hand, the government offers subsidies to people with low income. On the other hand, the government pursues policies that raise the cost of living.

The key to an economic recovery does not rest in Washington. The key to an economic recovery is to put Washington through a recession. Any efforts by politicians to con you into believing they’re stimulating some kind of economic progress — again, bribing you with your own money — by promoting one form of energy or another should be detected as a ruse.

Some politicians have gone “green” in the name of curtailing “dependence on fossil fuels” and “foreign oil.” It’s a sham. Why not promote a certain type of underwear in the name of curtailing dependence on a particular foreign brand?

The fundamental problem is that most politicians and central planners view the economy as a blob to be manipulated, rather than a complex capital structure involving individuals making choices in exchanges, a process of production, and a price mechanism.

Last year, the United States imported about 2.3 million barrels of oil per day more than it exported. The reason why the United States is so dependent upon foreign oil is due to policies that have already been put in place. The solution, then, is to repeal and correct these policies — not creating new legislation.

Artificially low interest rates, brought on by loose monetary policy at the FOMC, drives capital overseas (by deploying unearned income from a printing press, disconnecting consumption from production, capital is also consumed). Capital naturally gravitates to cheaper, more efficient, higher-yield economies. It’s called arbitrage. Rather than generating revenue and income, the nation spends beyond its means. That’s the short explanation. I hate to spend time belaboring the long answer, because I have already done so in previous commentaries.

Look at it like this: If a person, firm, or nation is dependent upon inflationary credit expansion, then that person, firm, or nation is insolvent and inefficient. We are spending beyond our means, which — yes — engenders dependence upon cheaper markets to supply us with production.

If you want to reduce dependence upon foreign “anything,” then the Fed has to tighten, forcing up interest rates, and Washington has to abandon the spending orgy. Dollars that have been accumulating in foreign reserves will then come flowing back into the domestic loan market, begetting lower interest rates.

It’s impossible for any industry — including clean energy — to thrive in the absence of sound economic policy. Rather than promoting one form of energy or another, the best thing the government can do to buttress clean energy would be to pursue free-market policies which extend the maximum number of benefits for the maximum number of people. It’s impossible for a government to bankrupt a people and keep industry intact.

I know clean energy sounds so nice, so questioning it is very environmentally incorrect. I will put everything I can into layman’s terms. Let’s start with the following axiom: We consume energy in everything we do. If you’re that environmentally conscious, you shouldn’t be online reading this right now because you’re using electricity which is consuming energy. That’s why I’m confident that everybody reading this agrees with everything I write in this commentary.

Solar energy sounds so nice. After all, it comes from the sun. But let’s not forget that there is a process of production. Take, for example, the solarization of a house. Solar energy requires panels, charge controllers, batteries, inverters, etc. And then let’s not forget capital asset depreciation. Energy is consumed during the process of production.

If clean energy has a positive yield, then it is profitable and private enterprise will pony up the capital. The government need not encourage this. If clean energy has a negative yield, then it is unprofitable and would be dependent on so-called “dirty energy” for its sustenance. It would be akin to consuming 1,000 blueberries for every 500 you are growing — nobody in their right mind would pursue that course absent government subsidies. Somewhere, the difference has to be made up.

I’m not arguing that solar power is necessarily inefficient, but that the market will naturally produce the most efficient, and therefore the cleanest, forms of energy. It’s the pursuit of profits on the free market that engenders efficiency. It’s government intervention in the marketplace that engenders inefficiency and the needless consumption of resources. Government subsidies enable firms to produce inefficient energy. By mandating inefficiency, only those with political connections can compete. Conversely, sound economic policies enable firms to supply efficient forms of alternative energy absent government support.

This leads me to the following axiom: The most profitable and economically-efficient form of energy, within the construct of the unhampered market, is also the cleanest form of energy. Also, pretending that climate change is real, does this mean we should rely upon government coercion to solve the problem? Cancer is real, but that doesn’t mean we should trust the government to run our healthcare. Rather than saying end our dependence on oil, if you support clean energy then you should be saying end our dependence on government intervention in the marketplace.

The best ecological hygienist is the unhampered market. Suppose a logging company owns a forest. That logging company can clear-cut the forest, say, tripling immediate income. However, this must be weighed against diminishing future income, or the capital value of the forest as a whole. Suppose, however, this is government property. This calculation no longer needs to be made, and the objective is going to be rapid extraction of resources. Private property rights engender environmental stewardship.

No shocker, then, that government is the biggest abuser of the environment and waster of resources. Look at the atomic weapons tests done in the Nevada desert — and right on top of our own military service members. Or think about the government’s war policy, which both major parties support. Last time I checked, there are no CAFE standards on tanks. How are exploding munitions good for the environment? Have politicians seriously considered the environmental impact of their foreign policy?

The government does not sustain itself by satisfying consumer demands, but through compulsory taxation. Government subsidies to, and control over, industry diminishes the need to set prices pursuant to supply vs. demand. Why? Because sustenance is no longer nexused with having to satisfy consumer demands. Sustenance is disconnected from the satisfaction of consumer demands.

It’s the price mechanism that ensures resources are allocated and managed efficiently. The price mechanism can only function within the construct of the unhampered market, allowing for producers to set prices pursuant to supply vs. demand (i.e. market-clearing prices). The scarcer the supply, the greater the demand, the higher the price. Consumption runs inversely with prices.

Government subsidies distort prices, interfering with the price mechanism, and cause prices to be set above, or below, market-clearing prices. There is a paradox in government policy in that the government encourages consumption without production (in the name of demand-side stimulus), tells us that we should conserve resources, while simultaneously punishing “price gouging.” Within the construct of the unhampered market, there can’t be price gouging any more than there can be wage gouging, since vendors can only short inventory at prices consumers are both willing and able to pay.

Prices send signals to entrepreneurs, telling them where to deploy capital. Prices tell entrepreneurs what to produce and what not to produce. Prices tell consumers what to buy and what not to buy. The price mechanism can only function within the construct of an unhampered market. There’s no need for the government to encourage or discourage the use of any kind of energy. And let’s not forget that tax credits are subsidies camouflaged as tax cuts. A tax credit merely allows a person to use a portion of their income for a specific purpose (i.e. indirect subsidy).

I write as a native Minnesotan. Minnesota is one of the states that mandated the use of ethanol-blend fuels. I hate ethanol-blend fuel. It’s “cheap” for a reason: It’s inefficient. There are environmental groups pointing out that the production of biofuels is a drag on the environment.

Only politicians can get away with turning efficient food into inefficient fuel. If politicians keep at it, we will soon be filling our automobiles up with corn and drinking motor oil. Maybe after installing those solar panels, the government can begin shooting those pollution particles — which supposedly ”clean energy” is designed to curtail — into the atmosphere in order to block the sun and “save” us from “global warming.” Sounds like the perfect plan – one only a politician in Washington can dream up.

As I wrote over a decade ago, we will soon not only be dependent upon foreign sources of fossil fuels, but also foreign sources of so-called clean energy. That has come to pass. Unfortunately, it was due to misguided policies coming from Washington. If people truly cared about the environment, they would embrace the free market.

Once upon a time, I chauffeured Pat Buchanan. Around the same time, I even listened to right-wing talk show host Alex Jones. This is going back around 18 years ago for both. I say this to help readers understand that I don’t write as a left-wing Democrat. As I took time to actually learn and understand economics starting in the year 2000, I equipped myself to discern fact from fallacy. Today, I see the right wing promoting a plurality of dangerous fallacies. I never thought I would have to sit here believing that the biggest menace we now face is right-wing socialism.

On one hand, President Trump and the right wing are complaining about the actions of Fed head Jerome Powell. Why? Because the Fed is tightening. From a free-market, Austrian-school perspective, Jerome Powell and the Fed are doing the right thing. Yet, the right wing is agitating for quantitative easing in perpetuity. On the other hand, President Trump and the right wing are agitating for bigger government to impose trade and immigration controls, and build a border wall.

Pursuing an uber-loose monetary policy in juxtaposition with tighter trade and border controls is about the worst of all combinations. The case I make is that if we solved our economic problems through sound policy, settled would be the symptoms of bad policy like job losses and trade deficits that the right wing is trying to remedy through bigger government.

When one understands how capital flows, it becomes much easier to see the absurdity of Trump trying to remedy the trade deficit through tighter trade controls while simultaneously agitating for a promiscuous Fed. David Hume taught us how capital flows in 1752:

“Suppose four-fifths of all the money in GREAT BRITAIN to be annihilated in one night, and the nation reduced to the same condition, with regard to specie, as in the reigns of the HARRYS and EDWARDS, what would be the consequence? Must not the price of all labour and commodities sink in proportion, and every thing be sold as cheap as they were in those ages? What nation could then dispute with us in any foreign market, or pretend to navigate or to sell manufactures at the same price, which to us would afford sufficient profit? In how little time, therefore, must this bring back the money which we had lost, and raise us to the level of all the neighbouring nations? Where, after we have arrived, we immediately lose the advantage of the cheapness of labour and commodities; and the farther flowing in of money is stopped by our fulness and repletion.

“Again, suppose, that all the money of GREAT BRITAIN were multiplied fivefold in a night, must not the contrary effect follow? Must not all labour and commodities rise to such an exorbitant height, that no neighbouring nations could afford to buy from us; while their commodities, on the other hand, became comparatively so cheap, that, in spite of all the laws which could be formed, they would be run in upon us, and our money flow out; till we fall to a level with foreigners, and lose that great superiority of riches, which had laid us under such disadvantages?” —David Hume, “Essays, Moral, Political, and Literary,” 1752

What David Hume describes in this superb passage is called arbitrage. Some people have an inverted understanding of how capital flows, believing that inflation is good for exports. As Hume articulated, inflation makes not only the money less attractive abroad, but the higher-priced goods as well. It also makes the higher-priced goods less attractive right here at home. Using inflation to remedy a trade deficit is akin to breaking a leg to make yourself more competitive.

It should come as no surprise that inflation and the trade deficit have risen in juxtaposition with one another. With inflation comes higher costs. To reduce costs, capital flight takes place. Inflation nurtures dependence on cheaper foreign markets to supply us with production. Trade controls are not the solution. The problem isn’t that foreign markets are cheaper, but that the U.S. has been too expensive. Why? Because we’ve had an uber-loose Fed, which the right wing wants to continue on unabated. The only path to repatriating dollars and curtailing capital outflow is Fed tightening. Attacking Jerome Powell and the Fed for making moves in the right direction is serious error.

The right wing platform is one of creating inflation, scapegoating immigrants for subsequent economic problems, and then trying to combat the effects of its own policies through tighter trade controls, which are objectively capital controls. In other words, pour on the money supply, blame immigrants and foreigners for our economic problems, and then restrict trade for Americans. That’s why I say what the right wing is agitating for is the worst of all combinations. There’s a synergy in having a promiscuous Fed in juxtaposition with tighter trade controls.

When President Trump was candidate Trump, he unveiled a plan to proscribe remittances sent to Mexico. Amazingly, remittances sent to Mexico were characterized by Trump as “de facto welfare.” Pursuant to the Trump calculus, money earned through productive work in the private sector is synonymous with welfare. By treating honestly earned money on the free market as “welfare” that the government can seize, this would discourage immigrants from performing honest and productive work. No matter where dollars earned flow, productive work is a benefit to the economy.

The purpose of Trump’s plan was to pressure the Mexican government into taxing its citizens in order to fund a border wall. In other words, Donald Trump has wanted to impose capital controls in order to get the Mexican government to pay for his cronies to build a border wall, which somehow isn’t considered to be welfare.

If Trump planned to impose capital controls in order to build a border wall, why believe a border wall wouldn’t be used to impose capital controls? With legislation like Foreign Account Tax Compliance Act that passed in 2010, why believe it would be used for anything other than trapping people and capital into the United States? Yet we were supposed to believe that Trump’s capital controls would have been used only against immigrants and until the Mexican government ponied up the capital to build a border wall, at which time Trump would cease being a menace.

Supposedly, Trump’s plan would have been limited to immigrants (somehow making it a good thing). Arbitrage has a funny way of holding lawless regimes in check. Desperate governments – like ones with a $22 trillion debt – do desperate things, and if we can justify curtailing capital outflow to Mexico in one instance, then why not in every instance? Why stop with just Mexico? Why not every other country?

I didn’t have to read about Trump’s plan to know that Trump would impose capital controls. The populist indictment of immigration is that immigrants “drive down wages.” Not true. This argument dovetails with arguments in favor of minimum wage law as an effort to fix wages. The welfare-warfare state drives down wages. The problem is not the immigration, but the welfare-warfare state. As I wrote in 2010, immigration restrictionism taken to its logical conclusion: capital controls.

Pursuant to the right wing, more immigration means more labor and consequently lower wages. On the surface, it sounds plausible. But sound economics informs us that more productive labor results in higher real wages for everybody. Objectively, the argument is that the way to boost wages is not by increasing, and removing impediments to, productivity, but by shrinking the labor pool. Yet, curtailing immigration to the U.S. does nothing to shrink the labor pool. The aggregate supply of labor remains intact, but in other countries.

The government could inflict injury upon every employer of Mexican immigrants (legal or illegal). However, this would do absolutely nothing to create or save a job. If employing inexpensive labor at home is curtailed, this begets one of two possibilities: the job is destroyed altogether, or the employer flees the country altogether.

What next? Criminalize capital flight? Pursuant to the statutory case against hiring illegal immigrants, the de jure case for capital controls is already in place. If it’s illegal to hire an illegal immigrant at home, then why is it legal to do business with “undocumented” workers abroad? (In that case, one becomes the de facto employer of foreigners living abroad.) For the sake of logical consistency, outsourcing should be criminalized. All international trade and commerce should be criminalized. If the government should proscribe remittances, then why not proscribe Americans from traveling to Mexico and paying Mexican nationals for goods and services?

An economic iron curtain, which the right wing clamors for, works both ways. Let me remind you that if the government can trap capital in, it can trap people in. Try leaving the country without your capital. If immigrants aren’t permitted to send money to Mexico, then how can they be expected to leave the United States? This means that Trump has, almost paradoxically, devised a scheme to trap immigrants into the country. Coming to the United States will be akin to checking into a roach motel. Furthermore, remittances to Mexico would curtail emigration from Mexico. This means curtailing remittances to Mexico would encourage emigration from Mexico.

Restricting the flow of people necessarily restricts the flow of capital, and vice versa. Immigration controls focus on the person, while trade controls focus on the capital, but both achieve the same undesirable results. Even if you believe Trump has the best of intentions and would never use the border wall to trap Americans in, who is to say his successors won’t?

We are being told that protectionism and capital controls are used to protect us, to protect our jobs. In reality, capital controls are a makeshift effort to remedy capital outflow engendered by loose monetary policy — not to mention a backdoor bailout of the U.S. banking system. Loose monetary policy not only drives up prices, but it drives down rates of return. Capital naturally gravitates to cheaper, higher-yield economies. It’s called arbitrage. This is why the earnings — and therefore the returns — are overseas.

The only way to repatriate capital is for the central bank to stop inflating, force up interest rates and return to sound money. If we pursued the right economic policies, people would voluntarily keep their money in the United States. If the government in Washington seeks to curtail capital flight, it must stop fixing prices and stop using the central bank to suppress interest rates. If Powell is getting anything wrong, it’s that the Fed isn’t raising rates aggressively enough. The policy of gradualism will only postpone the day we hit bottom, sidelining investors.

Not only will capital controls not work, capital controls will beget greater problems. If we reject the free market argument against capital controls today, then the resulting chaos will be met with demands for tighter controls tomorrow. Trump’s plan will morph the United States into an open-air prison. Trump’s plan will actually precipitate an exodus of capital.

Senator Catherine Cortez Masto is now saying that one of the biggest issues facing Nevadans is a lack of affordable housing. Senator Cortez Masto says that HUD Secretary Dr. Ben Carson isn’t doing enough to help create more affordable housing. See: https://www.rgj.com/story/news/politics/2018/03/27/masto-says-trump-appointee-carson-has-no-plan-help-nevadas-affordable-housing-crisis/464506002/ But is Senator Cortez Masto’s indictment legitimate?

“The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing consequences of that not merely for one group, but for all groups.” -Henry Hazlitt

Far too often, politicians in Washington are plagued by myopia. Rising prices are not synonymous with economic growth, and falling prices are not synonymous with economic decline. Genuine economic growth tends to beget falling prices. Yet Senator Cortez Masto and her colleagues have supported government schemes to combat falling prices, i.e. price fixing. There’s a paradox in that politicians have sought to combat falling real estate prices while simultaneously complaining about a lack of affordable housing.

It’s the effort to prop up prices through stimulus that’s prevented the housing market from clearing. People have lost homes because homes are unaffordable, not because they are too cheap. Thus deflation is the cure, not the problem. What sense does it make to provide somebody with a cheaper mortgage — by interest rate manipulation through loose monetary policy at the FOMC — on a more expensive house that costs more to maintain? But that’s the aim of present policy. What sense does it make to stimulate more home building when housing isn’t clearing the market as is?

No matter which way the government inserts itself into the housing market, this diminishes the need for sellers to set prices pursuant to supply vs. demand (i.e. market-clearing prices). Whether the government buys up bad mortgages, bails out the homeowner or the bank, this interferes with the price mechanism. If we continue down the current policy path, one will have to be politically connected to get an “education,” a job, healthcare, and a house!

Suppose there’s a shop owner whose inventory is piling up because nobody can afford to pay for his prices. What does the shop owner have to do? Lower prices. But suppose the government inserts itself into the picture and subsidizes the shop owner. No longer is the shop owner’s sustenance dependent upon having to satisfy consumer demands, thus diminishing the need to set market-clearing prices. Within the construct of the unhampered free market there can’t be price gouging any more than there can be wage gouging, since vendors can’t short inventory at prices above what consumers are both willing and able to pay.

Let’s try another scenario. Suppose the government distributed “credits” or “vouchers” to this shop owner’s customers. This would be perceived as an “enlightened” form of welfare for the shop owner’s customers. However, this is yet a different way to subsidize the shop owner, by letting the shop owner sell at artificially high prices. A move like this prices the poorer non-recipients of “credits” or “vouchers” out of the marketplace. No surprise that education and healthcare — two of the most government subsidized cartels — have also had the highest levels of price inflation. This begets the erroneous perception that the problem is a dollar shortage for the one who didn’t receive “stimulus.”

It’s the subsidies and stimulus that have priced the poor out of the marketplace. Rather than understanding that it’s the “help” that has hurt us, the mistaken conclusion is that we need more subsidies and stimulus.

I’ve always said that, by rights, the impoverished belong to the free market movement. With the government as large as it is today, would it not be a fair assumption that many people who are poor are so precisely due to big government, whereas many people who are wealthy are so precisely due to big government? You see, big business uses big government to manipulate the marketplace on its behalf.

The flawed assumption made by some progressives is that big government is somehow less dangerous than big business. This begets the erroneous conclusion that the problem is an absence of regulation. It’s paramount to understand that we can’t regulate away insolvency. We can’t regulate away past mistakes. But we can regulate everybody except the big cartels out of existence.

Ludwig von Mises and Eugen von Bohm-Bawerk saliently articulated how labor can’t increase its share at the expense of capital. Nobody can argue against capital without arguing for a reduction in their own standard of living. Thus the problem for the progressive should not be with capital, per se, but that capital is so inaccessible to the common person.

Why is capital so inaccessible to the common person? Every tax, every regulation, every government program drives up the cost of capital. Politicians love this, because they get power. Big business loves this, because it creates barriers to competition. Big government creates monopolies, as a monopoly is a state of imperfect competition, and imperfect competition is begotten by government interference in the marketplace.

The situation with housing is no different than that of the shop owner I described above. In a market unhampered by government, sellers are sustained by selling inventory. When the government inserts itself into the picture, sellers are no longer dependent upon having to satisfy consumer demands by selling inventory. Sustenance is disconnected from the satisfaction of consumer demands. In the case of housing, the government and the Fed have subsidized the loan market to hold back inventory. See: https://www.sfgate.com/realestate/article/Banks-aren-t-reselling-many-foreclosed-homes-3165431.php

Simultaneously people are living in tents. The mission of politicians in Washington is literally to keep people homeless. Politicians are little more than kleptocrats masquerading as philanthropists. So long as the government keeps trying to prop up prices – as it has done with healthcare and education – housing will become increasingly unaffordable and the market won’t clear.

Anything that contributes to sticky prices and/or wages will prevent the market from clearing. Economic recovery rests upon a smooth-functioning price mechanism, where the market can discover real prices. How is Senator Cortez Masto or anybody else supposed to know what prices of everything are supposed to be? Would politicians mind telling me what housing prices are supposed to be? Should they be higher or lower? And if policy makers can’t answer this question, how can they possibly set sound policy?

DEBUNKING MYTHS & OFFERING THE SOLUTION

Myth: The problem is “toxic” assets (e.g. mortgage-backed securities) which have created systemic risk

When a hospital can’t collect payment, the hospital sells this debt to a collection agency. This doesn’t create booms and busts. The risk is asystemic unless the government bails out every debtor and/or creditor.

Myth: Present problems were caused by bad lending (i.e. sub-prime loans)

Promiscuous lending is a symptom — not a cause — of economic conditions. Take bad lending to its own logical conclusion: Creditors give away money as an act of charity, getting nothing in return. Does charity cause booms and busts? No. Promiscuous lending is a symptom of loose monetary policy at the Fed, which tricks the loan market into consummating unjustifiable loans.

It’s primarily through FOMC operations that interest rates are determined (until the Fed loses control, which will eventually happen). By expanding the money supply, this increases the supply of loanable funds, but without an expansion of genuine savings. In doing so, the loan market appears to be more solvent than it truly is, tricking the loan market into consummating unjustifiable loans. This artificially suppresses nominal interest rates below their natural level (i.e. where they should be pursuant to the true supply of savings). By expanding the money supply, this allows debtors/borrowers to pay creditors/lenders with devalued dollars, thus lowering the real rate of interest.

The essence of a credit transaction is an exchange of a present good for a future good. If there are no present goods (i.e. savings, which aren’t created on a printing press), then credit has to be curtailed. The problem in that case would not be a credit crunch, but a savings crunch. Investment can only come out of savings because producers must consume in order to sustain the process of production. In order for the baker to make more bread, the baker himself must eat. Thus somebody must forego present consumption in order to fund credit expansion.

The rate of interest is the discount rate of future goods against present goods. An example would be what an investor pays for a printing press. Suppose the printing press will generate $500,000 in net income throughout a ten-year life. The entrepreneur will certainly not bid up the price of the capital equipment to $500,000. The entrepreneur is willing to invest, say, $200,000 for the printing press and the vendor is willing to part ways with the printing press in exchange for an immediate $200,000. The entrepreneur and capital equipment vendor mutually settle upon $200,000 — a sum far less than the $500,000 — in exchange for the printing press.

How much present income (i.e. present goods) is an entrepreneur willing to invest in order to garner $500,000 in future net income (i.e. future goods) over a ten-year period? Reflected in the transaction is the rate of interest as determined by time preferences. Interest rates represent an agio on present goods since present goods are more valuable than are future goods. A person would rather eat an apple today than eat an apple ten years from now. Interest rates must be set pursuant to the true supply of savings and are determined by time preferences. If everybody wants to consume without saving, then interest rates must rise to reflect time preferences.

There is no right way to extend credit at negative real rates, which is a negative rate of return in real terms. It’s a calculus for the loan market to go bust. Any person, firm, or institution (e.g. government) that’s dependent upon inflationary credit expansion is, by definition, insolvent (i.e. a non-income generator). Failure has to be an option for bad business decisions. That’s the check on excessive risk taking.

Capital naturally gravitates to lower priced, higher-yield economies. It’s called arbitrage. Artificially low interest rates engenders capital outflow. Capital goes racing overseas. The problem isn’t a dollar shortage, but a dollar leakage. The dollars are out there; they’re just piled up in foreign reserves. The way to repatriate these dollars is for the Fed to tighten, interest rates rise, prices collapse to reflect wages, which will then beget capital inflow thus lowering the natural rate of interest. If I give you $10 in exchange for a book and you turn around and give me that $10 in exchange for a DVD, the real means of purchase for the book was the DVD and the real means of purchase for the DVD was the book. Increasing the quantity of dollars creates no benefit for the economy.

If the Fed tightens, while it’s true interest rates could gyrate upwards in the short term, the market wouldn’t take very long to append a deflation agio onto rates by lowering rates, since the real rate of return would come from an increase in the purchasing power of the dollar.

Myth: The FDIC is good for depositors

The FDIC offers deposit insurance for bank customers, which is really a backdoor way to bailout insolvent banks. Could you imagine being able to run a ponzi scheme (e.g. fractional-reserve banking), knowing that when your insolvency is exposed the government will pay off your customers (i.e. a de facto bailout of you)? This creates yet another layer of moral hazard on top of the central bank injecting “liquidity” into the loan market. Thus the FDIC’s true purpose is designed to keep the unsustainable intact.

Needing to insure bank deposits should raise questions in and of itself. Unlike natural disasters, economic risk can’t be pooled. It’s one thing to guarantee one’s solvency should they get wiped out due to, say, a flood. It’s quite another thing to guarantee solvency, per se. It’s impossible to insure against economic miscalculation and loss. In the insurance industry, this is referred to as speculative risk. If I were to go into business and you offered to insure me against business failure, by underwriting and assuming the risk, you become the true entrepreneur.

The FDIC (insolvent) is backed by the Treasury (insolvent) which is backed by the Federal Reserve (insolvent). The Federal Reserve is backed by a printing press, which is backed by the savings of Americans. Not only is the concept of insuring economic risk altogether chimerical, but there’s a reason why only a government-backed entity would offer insurance to banks. Inflationary (as opposed to non-inflationary) credit expansion makes banks inherently insolvent. Demand deposits are payable on demand, while banks are lent long. Thus the time structure of assets and liabilities does not match.

At the end of the day, the FDIC/Treasury/Federal Reserve (all three of which are insolvent) can guarantee depositors pull money out of their bank, but there’s no guarantee of the currency’s value. By guaranteeing solvency, this places the currency’s value at risk. Deposits are guaranteed in nominal terms, but not in real terms.

By scrutinizing the role of the FDIC more closely, you should see that its entire purpose is keeping the good ole’ boy network intact, leaving Americans with nothing. If the free market were allowed to function, the government’s role would be limited to enforcing contracts. If homeowners default, the bank would foreclose. But if the bank defaults, the bank’s creditors — i.e. its depositors — would become receiver for the failed bank’s assets. Depositors should be senior to all other creditors. Thus, in the event of a bank run, depositors have the first legal claim to a bank’s housing inventory.

What does the insolvent FDIC do? If a bank fails, the FDIC sends in federal regulators to protect the bank’s assets from its depositors by becoming receiver for a failed bank’s assets. In many instances, the FDIC has arranged shotgun mergers with investment banks on Wall Street, turning investment banks into bank holding companies.

So we can see this sleight-of-hand trick, under the guise of protecting depositors, transfers real assets (i.e. housing inventories) from failed banks to Wall Street, while promising depositors nothing more than globs of Fed “liquidity.”

There’s no way the FDIC/Fed can guarantee the solvency of the banking system or depositors, which will destroy the currency, thus destroying the very depositors – i.e. anybody holding dollars – those institutions are supposedly designed to protect.

The solution, then, is to put a failed bank’s assets into the receivership of its depositors. Any other efforts to prop up the housing or bond market will prevent the market from clearing and block those who have already lost homes from ever regaining possession. We are now doing to the housing market the same thing that has already been done to healthcare and education.

I would submit to you that we would all be better off the less government intervenes in the marketplace, no matter how well intentioned is the intervention. The less politicians do, the better off we will all be. Politicians spend a great deal of time promising to fix problems that they created in the first place. The “fixes” beget more problems. Senator Cortez Masto is no exception. Everything Senator Cortez Masto has supported has made housing increasingly unaffordable.

For those who have lost homes: If you want to figure out how to get your homes back, then make an inquiry into where they’ve gone. The Fed is sitting on over $1.5 trillion worth of mortgage-backed securities. We can go a long way toward saving the dollar, creating affordable housing, and getting people back into homes if politicians like Senator Cortez Masto fight to compel the Fed to disgorge the mortgage-backed securities on its balance sheet. Any other plan will engender homeless people and peopleless homes, which is why Senator Cortez Masto is the wrong barrister with the wrong indictment of the wrong suspect.