As several of the worse performing currencies are in countries where the government manipulates statistics and exchange rates, it is not easy to come up with a perfect ranking. Using the inflation rate is a good approximation. In Venezuela the official price inflation is over 60%. In Argentina statistics are so manipulated that it is not worth mentioning what the government states, but private sector analysts place the Argentine 2014 inflation rate close to 40% . The Russian ruble, feeling the impact of factors that go beyond money, has lost almost half its value against the US dollar. Competing for the last place in these currency wars is Bitcoin, its price fell from $770 one year ago to less than half today. Unlike the Peso, the Bolivar, or the Ruble, Bitcoin is a market-based currency.
Its price is influenced not only by market forces but also by government policies, considerable hype, and misconceptions. During 2014 I attended several programs with panels on Bitcoin. The best was this past October in Indianapolis during the Free-Market Forum. This annual forum is hosted by Hillsdale College and the Acton Institute. The presentations on Bitcoin were by Garrick Hileman of the London School of Economics; Sam Patterson, author of Bitcoin Beginner; and George Selgin, of the Cato Institute. The presentations can be watched on easy accessible video on the Free-Market Forum website. Money is the most commonly used means of exchange so Bitcoin has yet to earn its role as such, so far it is a currency. Considerable part of the demand, used for payments more than for “saving,” comes from countries such as Argentina, with a dismal monetary record and abundant controls. One of the problems for Bitcoin and its free-market advocates is clear: the more that they convince Argentina or Venezuela to move to sounder money policies and more freedom to exchange, the worse for the price of Bitcoin.
I finish the year with the hope that in 2015 we will find better “Roads to Sound Money” founded on the best knowledge and traditions of respect for private property, rule of law, and contracts. Gold served that purpose well for relevant periods of civilized life. There might be other alternatives and together with our talented colleagues at the Sound Money Project, we pledge to work to find them.
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The economics discussion would be greatly enhanced if it were better understood that underlying all spending, selling, saving, lending, borrowing, and investing is an exchange of products, services or labor. Real things are always and everywhere being moved around when “money” changes hands.
It cannot be stressed enough that “money” is just an agreement about value that only has use insofar as there’s already wealth. Money does not instigate despite what economists, pundits and politicians tell you, rather it’s a consequence. We produce goods, we save them, we direct them to higher uses in the near-term since our needs are long-term (investment), and money is merely the medium that facilitates the movement of real things.
This requires mention ahead of what AEI resident scholar Paul Kupiec wrote in a recent Wall Street Journal opinion piece. Writing about the alleged tax implications of the impossibility that is “negative interest rates,” Kupiec observed that “the Fed hopes to avoid resorting to negative interest rates during the next recession, [but] without them the central bank’s ability to stimulate growth may be limited.” No, that’s not correct.
Readers should never forget that no one borrows dollars. Never. They borrow what dollars can be exchanged for: once again products, services, and most crucial of all to productive economic activity, labor. It’s all a reminder that the Fed’s ability to stimulate or shrink through its rate mechanism is only real in the eyes of economists, the media members who enable them, along with politicians who simply don’t know any better.
In the real economy, we borrow real things when we seek dollars, which means that the notion of Fed “ease” is pure fantasy. For one, dollars are the measure used to facilitate lending globally. Assuming a slowdown in U.S. economic activity, or a retrenchment by U.S. economic actors, the globalized nature of dollar credit means that increasingly austere market providers of dollars will overwhelm any artificial attempts by the Fed to rewrite reality with so-called “easy money.” In other words, what the Fed falsely “gives,” market sources of credit will take away.
After which we must return to the simple truth that the Fed can in no way increase access to the products, services and labor that borrowers seek when they borrow dollars. Implicit in Kupiec’s analysis is that the Fed can decree easy access to economic resources by merely fiddling with a rate. No, it can do no such thing.
And since some will ask, it’s worth briefly stressing that the Fed can’t alter the truth about price controls either. Assuming the Fed could decree zero or negative rates that market actors would actually abide (they wouldn’t, but let’s briefly imagine that they might), such a scenario would logically result in credit scarcity. Get it? When cities decree artificially low apartment rents, access to the latter shrinks as opposed to increasing. To believe the Fed can create abundance of credit through imposition of artificially low rates is much less than serious.
Which brings us to Kupiec’s mere suggestion that the Fed could engineer negative rates in a recession, and that doing so would prove stimulative. No, that’s an impossibility.
To see why, consider what investors do when they buy bonds. They in simple form buy bonds for say $100,000 now with an eye on getting the $100,000 back in the future, plus interest (let’s say for fun, 3%) throughout the life of the debt instrument. In short, they’re buying income streams meant to produce more than $100,000 for them over yet again the life of the bond. But that’s not what they’re really doing. With investment it’s always an exchange of resources with a view to attaining more resources in the future.
To buy a bond is to shift resource access to the borrower (think yet again products, services, and labor) in the present in order to attain access to products, services and labor in greater amounts in the future. Products for products. Always.
Yet explicit in negative rates is that investors, corporations and other holders of dollar wealth would quite literally provide resource access to borrowers in the near term worth – say – $100,000 in order to receive less than $100,000 worth of resources down the line. It’s all a reminder that in the real economy, negative rates are an impossibility. Once again, no one buys bonds, or the income streams that bonds pay out, as much as they buy the right to access greater amounts of goods (the income streams exchangeable for goods and services) in the future. Explicit in negative rates is that investors and businesses would literally invest in order to shrink the exchangeable value of their investment in the future. No chance.
In Kupiec’s defense, he acknowledges the above truth, though somewhat vaguely. He notes that when “corporate treasurers first faced negative deposit rates in Switzerland and Denmark, they looked for new places to park their cash balances.” Well, of course they did. Imagine what the stock market would look like if businesses were knowingly putting their dollar, euro, yen, Pound (name the currency) profits to work with an eye on shrinking their value. Or imagine if investors were pursuing negative returns.
Thankfully they don’t have to. Explicit in the market impossibility that is negative rates is that there’s a “glut” of savings such that economic resources are worse than useless. No. Not happening. Not during a recession, and not during a boom. Such a view is rather ignorant per Henry Hazlitt. So long as people have unmet wants, meaning forever, and so long as innovative thinkers have visions for improving, or better yet transforming our future, interest rates will always be positive to reflect the expense of accessing resources to bring the future into the present.
So what of negative rates? They do exist, don’t they? Yes, but what Kupiec left out is that the owners of these negative-yielding debt instruments aren’t investors, businesses or individuals; rather they’re central banks, insurance companies and pension funds. Oh well, central banks exist at the pleasure of governments, while insurance companies and pension funds operate with varying degrees of protection from government. And even the three entities mentioned have limits to how dense they can be. Ultimately insurance companies and pensions must produce returns, and central banks must remain somewhat solvent. In short, their capacity to absorb what is mindless has limits.
Looking ahead to the next downturn, economic laws will still exist. No doubt central banks cheered on by economists will promise all manner of interventions to allegedly soften the blow. And they’ll fail. Thankfully so. If central planners could truly alter reality for the better, as so many so sadly still believe, then the 20th century wouldn’t have been the murderous disaster that it was for so many. What’s too bad is that these lessons still haven’t sunk in with economists lucky enough to have prominent perches from which they’re empowered to preach what defies simple common sense.
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One of the many unsettling features of Donald Trump is his deep-seated antipathy to the time-honored doctrine of free trade. Even as early as 2016, Trump devoted a substantial portion of his Republican Convention speech calling for the adoption of protectionist tariffs and other trade restrictions against “any country that cheats.”
He proceeded to blame NAFTA for a litany of largely-imagined economic woes in the industrial sector; reiterated his support for an import-substitution regime to internalize manufacturing and tech production in the United States; likened the trade deficit to the federal budget deficit; and railed incoherently against that favorite modern-era scapegoat of all of America’s purported trade ills, China.
In the following years, Trump only doubled down on his calls for alleged economic autonomy, threatening to take the United States out of the World Trade Organization, imposing vast tariffs against any country with whom the US runs a “trade deficit,” threatening more tariffs as a political bludgeon, daily introducing more uncertainty about the rules in a way that has made business cautious to invest.
Protectionists are not new to American politics, though they do buck the trend toward a managed but certain trade liberalization, advanced by both major parties over the past eighty years. In his own idiosyncratic and sometimes vulgarized way, Trump represents the resurgence of an economic philosophy as old as the republic itself: that of Alexander Hamilton.
Hamilton’s “Fortress America” Economic Policy
A skilled, if often mistaken, political commentator in his own right, Hamilton was the father of the direct antecedents to Donald Trump’s favored economic system. Over the course of almost 30 years in political life, Hamilton developed a program of sometimes nuanced but assertive economic nationalism. He believed that trade restrictions were crucial to the development of the fledgling nation’s “infant” industrial base, as well as a guardian against practices of European nations that he deemed unfair or harmful to American interests.
To attain this result, Hamilton advocated a complex and carefully tuned system of “bounties” (essentially, subsidies to boost American companies against their competitors abroad) and protective tariffs to insulate American industries from foreign competition. Hamilton and his political heirs coupled this prescription with an aggressive program of harbor, canal, and road infrastructure spending, often called “internal improvements.”
These public works projects would in turn provide the means to transport American-made products to American consumers, thereby bypassing the alleged “dependency” on Europe for manufactured imports. As an added bonus, their construction would supply American workers with jobs and industry in its own right.
Hamilton’s Plan to Make America “Grand and Glorious” Again
The parallels to Trump’s agenda are no accident. To quote the great classical liberal economist William Graham Sumner, Hamilton’s mind was “completely befogged in the mists of mercantilism.” This affliction lasted from his earliest forays into politics as a young soldier in the revolutionary army until his most famous economic treatise, the deeply protectionist “Report on Manufactures,” that he wrote as Secretary of the Treasury in 1791. To Hamilton, economic “autonomy” — maintained through an extensive system of state regulations and economic management — was a primary feature of the American experiment.
“Food and clothing we have within ourselves,” he wrote in 1774. The rest could be cultivated with a policy of forced economic independence. Hamilton continued:
Our climate produces cotton, wool, flax, and hemp; which, with proper cultivation, would furnish us with summer apparel in abundance… We have sheep, which, with due care in improving and increasing them, would soon yield a sufficiency of wool…
It would be no unbecoming employment for our daughters to provide silks of their own country. The silk-worm answers as well here as in any part of the world. Those hands which may be deprived of business by the cessation of commerce, may be occupied in various kinds of manufactures and other internal improvements.
If, by the necessity of the thing, manufactures should once be established, and take root among us, they will pave the way still more to the future grandeur and glory of America; and, by lessening its need of external commerce, will render it still securer against the encroachments of tyranny.
Trumpilton Trade: Winners vs. Losers, Cheaters vs. Suckers
This aggressively autarkic pronouncement gave way to greater nuance as Hamilton’s politics matured, but protectionism always remained a constant feature of his message. In 1782, he pressed its strategic propriety in a blistering assault on the national government’s lack of regulatory powers under the Articles of Confederation.
“To preserve the balance of trade in favor of a nation ought to be a leading aim of its policy,” Hamilton declared. “The avarice of individuals may frequently find its account in pursuing channels of traffic prejudicial to that balance, to which the government may be able to oppose effectual impediments.”
Trade regulation, to Hamilton, was the essence of economic policy. Free trade, he complained, stood “contrary to the uniform practice and sense of the most enlightened nations.” Rather, commerce must be subject to “the encouragements or restraints of government.” The “power of regulating trade ought to have been a principal object of the Confederation,” he continued, laying out the case for a national authority to regulate commerce that would come to pass under the new Constitution of 1787.
Hamilton’s 1791 Report turned these sentiments into prescriptive policies. Deeming foreign demand for American agricultural products “too uncertain a reliance” for the fledgling nation, he called for the use of economic regulations, tariffs, and bounties to create “a substitute for it, in an extensive domestic market.”
The reason for these policies, according to Hamilton, was an allegedly unfair playing field abroad. “If the system of perfect liberty to industry and commerce were the prevailing system of nations,” he argued, free trade would have merit. “But the system which has been mentioned, is far from characterising the general policy of Nations. The prevalent one has been regulated by an opposite spirit.”
Echoing Hamilton, Trump advanced a boorish but conceptually identical argument in the March 10, 2016 Republican debate: “Take China as an example. I have many friends, great manufacturers, they want to go into China. They can’t. China won’t let them. We talk about free trade. It’s not tree free trade; it’s stupid trade. China dumps everything that they have over here. No tax, no anything.”
Who Could Be against “Improvements”?
To complement his managerial approach to international trade and domestic industry development, Hamilton also used the 1791 report to propose a national infrastructure plan. “Improvements” favoring the transportation of goods, he argued, were an object of any government. In this area, “The United States stand much in need.” He continued:
The symptoms of attention to the improvement of inland navigation which have lately appeared in some quarters, must fill with pleasure every breast, warmed with a true zeal for the prosperity of the country. These examples, it is to be hoped, will stimulate the exertions of the Government and citizens of every State.
There can certainly be no object more worthy of the cares of the local administrations; and it were to be wished that there was no doubt of the power of the National Government to lend its direct aid on a comprehensive plan. This is one of those improvements which could be prosecuted with more efficacy by the whole, than by any part or parts of the Union.
If these features sound familiar, consider the following line from Trump’s acceptance speech: “This new wealth will improve the quality of life for all Americans — we will build the roads, highways, bridges, tunnels, airports, and the railways of tomorrow. This, in turn, will create millions more jobs.”
It is more or less the same argument, updated by about 200 years of technological advance and distilled into the bombastic platitudes of an idiot.
Pro-Immigration — in Theory
If Trump’s trade protectionism is essentially less coherent Hamiltonianism, what about its close cousin in immigration? Trump has infamously appealed to the nativist tendencies of American populism, ranging from his proposal to build a massive wall on the American border with Mexico to a range of notorious “security” deportations and immigration restrictions, in the name of fighting crime and terrorism.
Alexander Hamilton was, famously, an immigrant himself. He also diverged from Trump in his pairing of immigration and protectionism. The 1791 Report contained an extensive defense of “promoting of emigration from foreign Countries” and linking this policy to his broader program for the state promotion of manufactured goods.
Though he struck liberal policy tones on immigration for his day, Hamilton’s immigration views were not without nuance, and an uglier side emerged toward the end of his life. Hamilton proved quite capable of espousing openly xenophobic and nativist beliefs, often to the surprise of his contemporaries who knew of his own birth on the Caribbean island of Nevis.
One striking episode came to print in 1796, involving a dispute between Hamilton and William Findley, a congressman from western Pennsylvania who had harshly criticized Hamilton’s role as Secretary of the Treasury in instigating the Whiskey Rebellion.
Addressing the Irish-born Findley and Swiss-born politician Albert Gallatin, Hamilton “censured the people [of Pennsylvania] for electing us.” According to Findley’s recollection:
[Hamilton] expressed much surprise and indignation at their reposing so much confidence in foreigners, that Gallatin and I were both foreigners and therefore not to be trusted.
When it was answered, that I had been in the country from my youth, &c. and that Mr. Gallatin had come into it very young and had been a citizen a competent length of time, to be legally qualified for trust, that we were both sensible men, and had a sufficient stake in the country, to secure our interest, he persisted in saying, that we were bad hearted men and dishonest politicians.
Perhaps “foreigners are bad hearted men” was 18th century shorthand for “the Mexicans are sending us drugs dealers, criminals, and rapists.”
Trump’s Dream: The Alien and Sedition Acts
Hamilton also served as something of a behind-the-scenes cheerleader of perhaps the most severe anti-immigration policy to emerge during the founding era, the legislative package known as the Alien and Sedition Acts of 1798. This set of four bills is best known today for its penalization of “sedition” — the criminalization of certain forms of political speech that the Federalist Party used to persecute opposing newspaper editors.
The legislative package’s other three less-discussed provisions actually pertained to immigration:
- The Naturalization Act of 1798 increased the required residency period for an immigrant to obtain naturalized citizenship from 5 to 14 years.
- The Alien Enemies Act authorized the imprisonment or forcible deportation of non-citizen males coming from any country with which the United States was in a state of declared war (note that this provision extended to persons who would have also lost their citizenship eligibility under the Naturalization Act).
- The Alien Friends Act granted the president wide authority in times of peace to order the detention or deportation of foreign nationals that were deemed “hostile” to the United States, and to prescribe severe restrictions on the durations that targeted persons could remain in the country.
These draconian measures came into being as a product of early anti-immigrant sentiments tied to the undeclared Quasi-War with France, which Hamilton played a key role in fomenting. The Quasi-War itself was an outgrowth of the French Revolution, entangling the United States in a state of degrading diplomatic and eventually naval relations with a succession of governing regimes in France.
As Hamilton’s political adversaries, the Democratic-Republicans, had expressed early sympathies for the French Revolution, the episode also functioned as a prime opportunity for the Federalists to whip the American public into a state of alarm about the presence of alleged subversives and other “treasonous” elements who supposedly threatened to import a Jacobin “Reign of Terror” into the fledgling United States.
In reality, the Federalists’ driving motivator was likely a combination of (1) a ploy to strengthen the case for war with France, and with it the establishment of a “defensive” army under Hamilton’s command, and (2) an old-fashioned ballot suppression scheme to disenfranchise immigrants, who tended to vote for the opposition Democratic-Republicans.
Hamilton followed the bills’ progress through Congress closely. While his role in their drafting is confounded by the destruction of Hamilton’s personal papers — and a disputed assignment of blame to him by Hamilton’s bitter enemy, President John Adams — there can be little doubt that he approved of the anti-immigration measures.
As Congress debated the bills, he wrote Secretary of State Timothy Pickering for information about their progress. Hamilton informed Pickering of his opinion that “the mass [of Aliens] ought to be obliged to leave the Country,” though he wished for Congress to carve out exceptions for persons “whose situations would expose them too much if sent away & whose demeanour among us has been unexceptionable,” and he asked that their enforcement “not be cruel or violent.”
Nonetheless, his position was clear. Hamilton supported deporting foreigners on suspicion of threat to the United States, which in his own time entailed the publicly inflamed specter of Jacobin revolutionaries in France. It is not difficult to see the parallel “national security” rationale for the Alien Acts of 1798 and Donald Trump’s own vulgar plan for banning Muslims from entering the country.
The Long Shadow of Hamilton
Most of the alien and immigration restrictions were quickly repealed after the Federalists fell from power in 1800, though they served as an unsettling precedent for subsequent anti-immigration measures across American history. The Alien Enemies Act remained on the books however, and provided an important legal pretext for more aggressive measures enacted under the Espionage Act of 1917.
Since then, economists have also debunked the reasoning behind Hamilton’s neo-mercantilist economic system, but its popular appeal has persistently lingered over American politics. Hamiltonian ideas directly sustained a trade-penalizing protectionist regime into the early 20th century.
Unfortunately Donald Trump has reinvigorated one of America’s oldest and most dubious political traditions, and this time it’s coming with all the reckless ambition of its founder, but none of his intellectual sophistication or erudition.