Jesus Huerta de Soto is an Austrian Economist with fairly conventional views:
Millions have scratched their heads over that one... the euro is a state creation. But he has some interesting things to say about deflation:
Yes, this is basic, if the terms hold their definitions. He goes on and gets to this:
When I give my customers 30 days to pay, I have not "created money." I simply created credit, but even there not really, since there is an asset backing my loan, legally a call as much of the money my customer makes necessary to cover what I in effect loaned.
So real bills is actually the heart of human history, but where it goes wrong, as usual, is when bankers start creating derivatives, discounting the paper incoming and lending it at usury outgoing, then getting more and more reckless with mismatched maturities, fractional reserve, then bank runs, then... a call for a bank of last resort, the FED.
Yes, sometimes debts are extinguished with money, usually by silver for the poor and gold for the rich, if all of human history is any guide.
So woodsmen fell oak trees, who sell to saw mills that create staves, which are sold to coopers who make barrels, and in turn are sold to breweries who fill them with water, barley and hops, who in turn sell them to pubs. Every step of the way each level gave the next time to pay, extended credit at no interest. At the end of the day the woodsman, miller, cooper and brewmaster gather at the pub and have a beer. At the end of the month they pay their tab, and the real bills are successively extinguished all the way back. Mostly credit in this system, the free market.
Who went first? Who extended credit? The workers in pre-history, as agriculture spread, the workers agreed to share produce with a guitar player to play and sing as the others worked. Artists are the only people who create something of value which does not require extinguishing something before or after. This practice of supporting artists to make life better introduced the concept of credit, and from there it advanced division of labor, innovation, specialization, and an economy. But back to the writing of Jesus:
His whole article is supercilious and at times sacrilegious. Free markets came to North and West Europe via Islam up through Spain, the Spanish scholastics who passed it on to the French, in turn to the Scottish Catholics and absorbed by Scottish Protestants who landed it in Hong Kong and USA at the same time. Spain owns free markets, having seized the ideas from the Moslems they conquered. It is sad to see it given up so easily. I can only guess de Soto believes the euro is here to stay and is betting on a nice sinecure as some director. Well, everything on red.
Absurd? Well, if real bills includes bank brokering and the problems of discounting incoming and usury-based outgoing, then it is fraudulent, but quite rational.
Yes, the face value is 1.5% on the bond, but people are buying that promised interest rate to be paid out in 2025, today at a negative interest rate. People see that the interest rate is negative, and they still buy:
http://www.investing.com/rates-bonds/switzerland-10-year-bond-yield
So, yes, bonds are sold at negative interest rates. That bridge has been crossed. What Mish and de Soto are saying is "it will never happen that the Swiss or anyone else will issue bonds offering negative interest rates, for why would people wittingly buy bonds at a negative interest rate?
Again, that bridge has been crossed. What deSoto and Mish et al have not figured out is there are plenty of people who would rather lose 2% in ten years on Swiss bonds than 50% on stocks, real estate or any of the other bubble assets on offer right now. Plenty of people see what deflation is, and that is the longer you wait to be paid, the harder the currency with which you will be paid. Your 2% less in ten years will buy far more in deflation than what you'll get out of liquidating stocks in a decade. Since that bridge has been crossed, I expect be "absurd" and "impossible" to happen: the Swiss and others eventually offer bonds denominated in negative interest rates.
Back to Jesus Huerta de Soto:
At a conference on world trade and cross-border eCommerce, I had a chat with a senior international banker regarding credit deflation and such and he said the problem from the bankers point of view got down to one word:
trust
Banks cannot trust anyone's word any more, top to bottom, left to right... government or private. All that paperwork is untrustworthy, performing due diligence gets you nothing, and few assets are marked to reality.
Credit is at its root trust. The trust is gone, and so goes their system. We once had a system in which the players all knew each other, trusted each other, behaved for each curbed the enthusiasms of others, and it all worked well. I saw if, or the tail end of it. I watched the change to inflation-based economy, and the destruction therefrom.
We will go back, but who knows what adventures between now and then.
Feel free to forward this by email to three of your friends.
You already know that the state is the embodiment of evil and the source of all the ills that afflict humanity… One of these ills, as we will analyze in a moment, is deflation deliberately induced for political reasons or caused by errors of the state.But he also holds a controversial view:
... we need a single currency which cannot be manipulated by each nation state, and which somehow simulates the functioning of the gold standard. Nowadays that currency, as you know and I have tried to articulate in various academic papers and, on a popular level, in my article and film, “In Defense of the Euro,” is the euro.
Millions have scratched their heads over that one... the euro is a state creation. But he has some interesting things to say about deflation:
According to Mises, deflation is a monetary change which consists of a decrease in the money supply. Or, to put it another way, an increase in the demand for money (to decrease supply is to increase demand).
Any contraction in the supply of any good or service brings about a relative rise in scarcity, and thus also a rise in the price, which is affected by the contraction in the supply. In this case, the contraction is in the money supply, and the effect, other things being equal, is an increase in the price of the monetary unit (the price of money is its purchasing power).
At that moment, a financial crisis erupts, because it becomes clear that a large number of the loans banks granted during the stage of credit expansion were granted for unviable or unsustainable investment projects. Furthermore, since the collateral for those loans from the bubble stage are deposits created from nothing (which, with all due respect to the new real-bills theorists, are money), it is revealed that banks’ assets have only a fraction of the value that was thought, while banks’ liabilities remain the same, and thus the entire banking system is in a state of failure.No! His definition of money slips. Real bills are simply receipts of some sort, I owe somebody $500 for materials in my warehouse, my customers owe me $2000, and I have the BsL and Invoice copies to prove it, a warehouse has issued a receipt for $20,000 worth of whatever I am storing. All this is called commercial paper because it is recorded on paper.
When I give my customers 30 days to pay, I have not "created money." I simply created credit, but even there not really, since there is an asset backing my loan, legally a call as much of the money my customer makes necessary to cover what I in effect loaned.
So real bills is actually the heart of human history, but where it goes wrong, as usual, is when bankers start creating derivatives, discounting the paper incoming and lending it at usury outgoing, then getting more and more reckless with mismatched maturities, fractional reserve, then bank runs, then... a call for a bank of last resort, the FED.
This is where a highly curious phenomenon occurs; I call it “the phenomenon of the pyromaniac firefighter.” For one of the most important conclusions to be drawn from the existence of this fractional-reserve system is that its survival depends on a lender of last resort (or central banker) who, as these errors are regularly discovered, heads off the collapse of the entire monetary system and our ultimate return to the very beginning of the process of monetary development, which would be a social tragedy, because as you know, money is the quintessential social institution, and we cannot do without it, not even in a fractional-reserve banking system like the current one."Like the current one" is referring to 2008. Anyway, who is "we?" If money is properly defined, then clearly he is wrong, for most people in most of history never handled money. Almost all human interaction, quantitatively has been on credit. Disaster comes and goes in direct relation to the degree the credit is asset-backed on one hand, and non-usurious on the other hand. Let either go, disaster follows, let both go and disaster is exponential. Both are gone wild.
Yes, sometimes debts are extinguished with money, usually by silver for the poor and gold for the rich, if all of human history is any guide.
So woodsmen fell oak trees, who sell to saw mills that create staves, which are sold to coopers who make barrels, and in turn are sold to breweries who fill them with water, barley and hops, who in turn sell them to pubs. Every step of the way each level gave the next time to pay, extended credit at no interest. At the end of the day the woodsman, miller, cooper and brewmaster gather at the pub and have a beer. At the end of the month they pay their tab, and the real bills are successively extinguished all the way back. Mostly credit in this system, the free market.
Who went first? Who extended credit? The workers in pre-history, as agriculture spread, the workers agreed to share produce with a guitar player to play and sing as the others worked. Artists are the only people who create something of value which does not require extinguishing something before or after. This practice of supporting artists to make life better introduced the concept of credit, and from there it advanced division of labor, innovation, specialization, and an economy. But back to the writing of Jesus:
Imagine what would have happened in the last cycle, which has just concluded, and from which we are beginning to emerge, if states had reacted just as Hoover and Roosevelt did. We would be in a severe depression with much more serious deflation. And it would not be owing to a lack of money injection by central banks, but to errors of specific economic policy. Or, to put it in today’s language, a failure to have implemented the necessary economic-liberalization reforms.Ungh! Now he may be right, we are emerging from the recession, and the QE etc is all working well. But my head aches to hear this from an Austrian. But heck no, he is so far off track, and how come? Definitions: money, credit and an acceptance of the charging of interest.
It is time for us to pause and think a moment. If, as a result of a process of productivity growth, particularly in this stage in which the economy begins to recover, the production of goods and services should grow faster than the money supply, which would mean an increase in the purchasing power of the monetary unit, economic agents, who are very nimble negotiators of their borrowing and lending operations, would take these deflation expectations into account and incorporate them when reaching an agreement on the corresponding market interest rate.
His whole article is supercilious and at times sacrilegious. Free markets came to North and West Europe via Islam up through Spain, the Spanish scholastics who passed it on to the French, in turn to the Scottish Catholics and absorbed by Scottish Protestants who landed it in Hong Kong and USA at the same time. Spain owns free markets, having seized the ideas from the Moslems they conquered. It is sad to see it given up so easily. I can only guess de Soto believes the euro is here to stay and is betting on a nice sinecure as some director. Well, everything on red.
We could go a step further and add, as Mises does, a component for pure entrepreneurial profit. We could even make a concession to the absurd new real-bills doctrine because, sure enough, to the extent that those loans are short-term secondary media of exchange, they will have a negative premium, because they are very liquid, but we will set this topic aside now…
Absurd? Well, if real bills includes bank brokering and the problems of discounting incoming and usury-based outgoing, then it is fraudulent, but quite rational.
Moreover, this happens with greater intensity the closer the nominal interest rate gets to zero; but as is logical, in no case will the nominal interest rate become negative.But there are bonds at negative rates! How can de Soto, Mish and others say this when in fact bonds are sold at a negative interest rate:
The Swiss bonds were sold at a negative 0.055 percent rate and were comfortably gobbled up on the market. Their eventual yield, in 2025, will be a modest 1.5 percent. The amount sold was $241.3 million.
http://www.investing.com/rates-bonds/switzerland-10-year-bond-yield
So, yes, bonds are sold at negative interest rates. That bridge has been crossed. What Mish and de Soto are saying is "it will never happen that the Swiss or anyone else will issue bonds offering negative interest rates, for why would people wittingly buy bonds at a negative interest rate?
Again, that bridge has been crossed. What deSoto and Mish et al have not figured out is there are plenty of people who would rather lose 2% in ten years on Swiss bonds than 50% on stocks, real estate or any of the other bubble assets on offer right now. Plenty of people see what deflation is, and that is the longer you wait to be paid, the harder the currency with which you will be paid. Your 2% less in ten years will buy far more in deflation than what you'll get out of liquidating stocks in a decade. Since that bridge has been crossed, I expect be "absurd" and "impossible" to happen: the Swiss and others eventually offer bonds denominated in negative interest rates.
Back to Jesus Huerta de Soto:
Even in the academic sphere, we must admit, as Mises did, that a sound, suitable, and complete theory of deflation is sorely missing. To remedy this academic deficiency, Professor Rallo, Professor Philipp Bagus, and I have devoted our efforts in the writings I mentioned at the beginning.Indeed, the topic is not very well understood. We are in new territory.
At a conference on world trade and cross-border eCommerce, I had a chat with a senior international banker regarding credit deflation and such and he said the problem from the bankers point of view got down to one word:
trust
Banks cannot trust anyone's word any more, top to bottom, left to right... government or private. All that paperwork is untrustworthy, performing due diligence gets you nothing, and few assets are marked to reality.
Credit is at its root trust. The trust is gone, and so goes their system. We once had a system in which the players all knew each other, trusted each other, behaved for each curbed the enthusiasms of others, and it all worked well. I saw if, or the tail end of it. I watched the change to inflation-based economy, and the destruction therefrom.
We will go back, but who knows what adventures between now and then.
Feel free to forward this by email to three of your friends.
2 comments:
John. I didn't know the free markets had an origin related to Muslims. Can you link to a book or article that explains this?
O yes, I recommend three, the Koran, the Sunnah and the Hadith. Mohammed was a merchant, and it is clear his teaching reflect a free market with an anarchy coming from the old testament. Although Islam claims the Jewish and Christian Bibles got corrupted, his reading of the same seems to prefer a pro-business (peace prosperity and justice) bias.
Most of the Islamic conquests were civilians escaping the Christian chaos to Islamic anarchy, not quite what we are told by western schools. The Moslems need only approach and the people would prefer the lower taxes and freedom of religion under the conquerors.
Cortez and his 157 men used the same technique learned from the Moslems to overthrow Montezuma and his million man army. Take a wild guess how come ISIS makes such strides today.
The reason we learned what Islam had to offer is when they were driven out, for they themselves got corrupted after settling in for a few hundred years, there was enough residual talent to teach what was known, remnant Islam.
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