Richard Ebeling on Higher Interest Rates, Collectivism and the Coming Collapse

Introduction: 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, England.

Daily Bell: 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 next.

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 annual rate.

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 sector.

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 rights.

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 Earth.

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 relatively few 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 ideal.”

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 causes.”

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 partly justified.

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 to grave.”

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 paper currencies.

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 guarantee that 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 to persist.

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 hyperinflation.

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 problems.

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 deficit gap.

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 ago.

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 State.

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 recession.

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 with.

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, wasn’t he?

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 Keynesian formulas?

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” finally arrived.

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 scarce resources.

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 work done.

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 to buy.

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 really recovering?

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 Europe?

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 utilize.

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 can.

The “Great Leap Forward” or the “Cultural Revolution” that destroyed tens of millions of lives to serve Mao’s purposes? Well, they know just 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 own 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 lives.

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.


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