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“Inferno” and the Overpopulation Myth – Article by Jonathan Newman

“Inferno” and the Overpopulation Myth – Article by Jonathan Newman

The New Renaissance Hat
Jonathan Newman
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Inferno is a great thriller, featuring Tom Hanks reprising his role as Professor Robert Langdon. The previous movie adaptations of Dan Brown’s books (Angels and Demons and The Da Vinci Code) were a success, and I expect Inferno will do well in theaters, too.

Langdon is a professor of symbology whose puzzle solving skills and knowledge of history come in high demand when a billionaire leaves a trail of clues based on Dante’s Inferno to a biological weapon that would halve the world’s population.

The villain, however, has good motives. As a radical Malthusian, he believes that the human race needs halving if it is to survive at all, even if through a plague. Malthus’s name is not mentioned in the movie, but his ideas are certainly there. Inferno provides us an opportunity to unpack this overpopulation fear, and see where it stands today.

Thomas Malthus (1766–1834) thought that the potential exponential growth of population was a problem. If population increases faster than the means of subsistence, then, “The superior power of population cannot be checked without producing misery or vice.”

Is overpopulation a problem?

The economics of population size tell a different, less scary, story. While it is certainly possible that some areas can become too crowded for some people’s preferences, as long as people are free to buy and sell land for a mutually agreeable price, overcrowding will fix itself.

As an introvert who enjoys nature and peace and quiet, I am certainly less willing to rent an apartment in the middle of a busy, crowded city. The prices I’m willing to pay for country living versus city living reflect my preferences. And, to the extent that others share my preferences or even have the opposite preferences, the use and construction of homes and apartments will be economized in both locations. Our demands and the profitability of the varied real estate offerings keep local populations in check.

But what about on a global scale? The Inferno villain was concerned with world population. He stressed the urgency of the situation, but I don’t see any reason to worry.

Google tells me that we could fit the entire world population in Texas and everybody would have a small, 100 square meter plot to themselves. Indeed, there are vast stretches of land across the globe with little to no human inhabitants. Malthus and his ideological followers must have a biased perspective, only looking at the crowded streets of a big city.

If it’s not land that’s a problem, what about the “means of subsistence”? Are we at risk of running out of food, medicine, or other resources because of our growing population?

No. A larger population not only means more mouths to feed, but also more heads, hands, and feet to do the producing. Also, as populations increase, so does the variety of skills available to make production even more efficient.  More people means everybody can specialize in a more specific and more productive comparative advantage and participate in a division of labor. Perhaps this question will drive the point home: Would you rather be stranded on an island with two other people or 20 other people?

Malthus wouldn’t be a Malthusian if he could see this data

The empirical evidence is compelling, too. In the graph below, we can see the sort of world Malthus saw: one in which most people were barely surviving, especially compared to our current situation. Our 21st century world tells a different story. Extreme poverty is on the decline even while world population is increasing.

world-population-in-extreme-poverty-absoluteHans Rosling, a Swedish medical doctor and “celebrity statistician,” is famous for his “Don’t Panic” message about population growth. He sees that as populations and economies grow, more have access to birth control and limit the size of their families. In this video, he shows that all countries are heading toward longer lifespans and greater standards of living.

Finally, there’s the hockey stick of human prosperity. Estimates of GDP per capita on a global, millennial scale reveal a recent dramatic turn.

rgdp-per-capita-since-1000

The inflection point coincides with the industrial revolution. Embracing the productivity of steam-powered capital goods and other technologies sparked a revolution in human well-being across the globe. Since then, new sources of energy have been harnessed and computers entered the scene. Now, computers across the world are connected through the internet and have been made small enough to fit in our pockets. Goods, services, and ideas zip across the globe, while human productivity increases beyond what anybody could have imagined just 50 years ago.

I don’t think Malthus himself would be a Malthusian if he could see the world today.

Jonathan Newman is a recent graduate of Auburn University and a Mises Institute Fellow. Contact: email

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

The Bad Economics Behind “Monopoly” – Article by Chris Calton

The Bad Economics Behind “Monopoly” – Article by Chris Calton

The New Renaissance Hat
Chris Calton
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In 1868, a young Henry George wrote an editorial on the nearly completed Pacific Railroad that was soon to connect his state of California with the rest of the country. This editorial, “What the Railroad Will Bring Us,” acknowledged the progress that railroads would signify in the industrializing economy of the Gilded Age, but George saw this as a boon only for the privileged few. Like many thinkers of his time, he was concerned with the “labor question,” which he referred to as one of “the riddles of a Sphinx, which not to answer is death.” Why was there poverty in an age of economic expansion?

Henry George believed that he figured out the riddle after a horseback ride in Oakland Hills, California. While stopping to give his horse a drink of water, George engaged in polite conversation with a farmer, casually asking the value of the land around him. The farmer told him of some land for sale nearby for $1,000 per acre. With this thought in mind, George concluded that land values would inevitably rise as the population grew, and speculators — that economic specter historians love to fear — could own land unproductively to profit merely off its natural increase in value. This, George decided, was the reason why there was poverty in a progressing economy.

In 1879, George published the book Progress and Poverty, formally laying out this conundrum and his answer to it. In it, he detailed for the first time his “Single Tax Plan” that proposed to tax land in proportion to its increase in value, which he believed would lead to the end of property rights in land entirely.

Apparently, George’s idea hit home with a lot of people at the time. His book outsold every book the year it was published except for the Bible, and a movement to form “Single Tax Clubs” spread throughout the country and beyond. Henry George became a Gilded Age rockstar.monopoly1

Among his followers was a woman named Elizabeth Magie. She believed that George’s land value tax plan was the solution to economic woes, and she wanted to bring this idea to as many people as she could. To do this, she developed The Landlord’s Game. This board game intended to demonstrate the horrors of land accumulation and rent, and to illustrate the benefit of George’s Single Tax Plan.

The original game, patented in 1904, closely resembles the modern game of Monopoly, that would later evolve out of it. Players started in a square that said “Labor Upon Mother Earth Produces Wages.” As the original rules state, “Each time a player goes around the board he is supposed to have performed so much labor upon Mother Earth, for which after passing the beginning-point he receives his wages, one hundred dollars, and is checked upon the tally-sheet as having been around once.”

Most of the squares look at least somewhat familiar. Many gave sale prices and rent costs, not unlike modern monopoly. This was explicitly meant to illustrate the belief that land rent transactions were involuntary, a notion that Benjamin Powell has already addressed. The railroads are also present, representing “transportation, and when a player stops upon one of these spaces he must pay five dollars to the ‘R.R.’” Less familiar squares demonstrated the horrors of private property rights by saying “No Trespassing. Go to Jail” from which the more ambiguous “Go Directly to Jail” corner would evolve in the modern game.

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In 1913, a version of the game was picked up in Britain called Brer Fox an’ Brer Rabbit, taking the name from the African fables of Brother Fox and Brother Rabbit (the native language of African slaves lacked the diphthong syllable, so the word “brother” was pronounced “br’er” when told in English). In this, the clever Br’er Rabbit represented the wily landowner earning his immoral rents. The pesky Br’er Fox was meant to represent British reform leader David Lloyd George, who was of no relation to Henry George but was a strong supporter of his land value tax. In 1909, Lloyd George came up with the “People’s Budget” which instituted a version of Henry George’s land tax and planted the seeds for the British welfare state. His face is imposed on the figure of Br’er Fox on the original cover for the British game.

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This version of the game was actually used to educate students about Henry George’s ideas in places like the University of Pennsylvania and Columbia. The Landlord’s Game and its British variant attempted to teach people the socialistic concepts that wages come from land, private property in land was immoral and destructive, and the economy is a zero-sum environment. The game evolved over time into the modern version Monopoly, whose invention is falsely credited to Charles Darrow.

Today, of course, the specifically Georgist elements have been removed from the game. There are no longer any “No Trespassing” squares, and what once was known as “The Poor House” where bankrupt players were forced to go upon running out of money is now the “Free Parking” square. The several “Absolute Necessity Taxes” across the board (perhaps the one aspect of the game’s educational commentary that libertarians could agree with) have been reduced to the Luxury and Income Tax squares. And of course, the unambiguously socialistic “Mother Earth” starting square became simply “Go.” Nonetheless, the modern variant retains the zero-sum myths of monopoly land accumulation, and in this, the legacy of Henry George is retained. If you’ve ever finished a game of monopoly with a frustrated player overturning the board and scattering the pieces, then it’s possible that Lizzie Magie accomplished her original goal.

Chris Calton is a Mises University alumnus and an economic historian. See his YouTube channel here.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Why Modern Luddites Are Attacking Uber Drivers – Article by Mateusz Machaj

Why Modern Luddites Are Attacking Uber Drivers – Article by Mateusz Machaj

The New Renaissance HatMateusz Machaj
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Earlier this year, a number of Uber cars in Poland came under attack by a group of vandals who were likely taxi drivers. In general, these types of vandalism have a long tradition in human history and have contributed to keeping populations’ general living standards at very low levels.

Attacks on Uber drivers are simply the latest chapter in a long story of efforts to intimidate and destroy innovators who are moving markets and societies in new and unfamiliar directions.

Reactions to Early Machines
For a very long time, separation of grain from the chaff was done in a very primitive manner. The process took weeks, involved hard working men, hard working women feeding them, and also children working as additional helpers. Finally, someone invented a threshing machine that allowed farmers to get rid of all this hard work: the machine could do the job much faster with less physical labor involved.

The change happened contrary to what many historical books claim: the move to threshing machines did not occur because of the patent system put in place 150 years before the change. It happened because social and political forces were too weak to stop it from happening.

Beginning in the eighteenth century in Europe, the entrepreneurial class was growing. They were a group of small profit-driven innovators interested in selling various products, and beating their competitors to markets. This “Great Change” was driven forward by many cultural, religious, political, legal, and technological factors.

At first, threshing machines were very imperfect. They didn’t always work well, and they also were expensive. There was a lot of room for improvements, and for making them better, faster, and cheaper. As they were slowly improved, it quickly became apparent the new machines were more efficient than the old manual methods. It was only a matter of time until someone would realize that steam engines could be combined with the threshing machines.

Not surprisingly, threshing machines were not welcomed by everyone. Swing Riots flared up and the Luddite movement attempted to crush technological innovation. Despite such obstacles, the entrepreneurs won out, paving the way for the future chain of market innovations, well symbolized by the modern farmer sitting in the modern air-conditioned tractor (with a good stereo system). Over the past two hundred years, agricultural workers were reduced from more than 80 percent of workers to less than 5 percent.

Economic Growth and Social Change
One of the big mysteries of human history is the question of why rapid technological and innovative growth started only around the nineteenth century. Many new ideas and technological changes were present for ages (and invented centuries before). Other cultures introduced many new innovative ideas as well.

Some steam engines were even being used in ancient times. They were applied in narrow places, however, due to social and political circumstances.

One early example of political resistance is related to us through the Roman Emperor Vespasian’s opposition to new labor saving innovations. Faced with the prospect of replacing workers with machines, Vespasian reputedly said: “You must let me feed my poor commons.”

Vespasian’s reaction is understandable; it is hard to predict what will happen in response to innovations that make certain job skills obsolete. And it’s not just the workers who fear the change. The ruling class, faced with an idle and unemployed population might also fear social upheaval.

The words of Peter Green summarize many of these concerns:

The ruling class were scared, as the Puritans said, of Satan finding work for idle hands to do. One of the great things about not developing the source of energy that did not depend on muscle power was the fear of what the muscles might get up to if they weren’t kept fully employed. The sort of inventions that were taken up and used practically were the things that needed muscle power to start with, including the Archimedean screw. On the other hand, consider that marvelous box gear of Hero’s: it was never used. That would have been a real conversion of power. What got paid for? The Lagids tended to patronize toys, fraudulent temple tricks in large quantities, and military experiments.

Naturally, human history is complicated and subject to many different factors. Nevertheless, there appears to be some truth in the argument that fixed social and political structure did not favor society open to the widespread adoption of innovation. Otherwise, it is hard to explain why so many new technical discoveries were not applied for so long, even though science and intelligence supplied them centuries before. We had to wait for the new political and social arrangements that either were tolerant of new innovations, or were unable to stop them.

Uber and Beyond
Everywhere we look, we see both the creative and destructive power of innovation. First threshing machine sellers lead to reductions in agricultural employment. Later, tractors killed the threshing machines. Telegraph and railway killed communication systems that relied on horses. Cars destroyed the horse industry. Mass production of textiles destroyed the demand for hand-crafted items. Big stores destroyed smaller shops, now discount shops (in parts of Europe) are destroying big stores. Video rentals hampered the cinema industry, now Netflix and others killed video rentals, while Napster’s success (despite its illegality) predicted a coming end to the old music industry. China’s growth and cheap efficient outsourcing reshaped traditional industries in developed countries. (From an economic perspective there is no difference between hiring cheaper labor or hiring a better machine.)

Dell smashed the traditional computer industry with eliminating many middle men. Ikea did something similar in the furniture industry. The internet destroyed regular newspapers, while Google smashed the marketing industry. Amazon destroys bookstores around the world, while Uber is doing the same with the taxi industry.

Economic progress decreases employments in one place, allows for creation of new ones, even in the service sector. During the process of liquidating employment positions, huge economic development is capable of multiplying per capita production within one generation, positively affecting all social classes.

The current state of affairs is not the end of history. Those companies, innovative today, will be endangered tomorrow. Even Jeff Bezos, creator of Amazon.com, admits Amazon won’t last forever:

Companies have short life spans. … And Amazon will be disrupted one day. I don’t worry about it ’cause I know it’s inevitable. Companies come and go. And the companies that are, you know, the shiniest and most important of any era, you wait a few decades and they’re gone.

Mateusz Machaj, PhD in economics; is a founder of the Polish Ludwig von Mises Institute. He has been a summer fellow at the Ludwig von Mises Institute. He is assistant professor at the Institute of Economic Sciences at the University of Wroclaw.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Trump and Hillary Don’t Know How to Fix the Economy – Article by Justin Murray

Trump and Hillary Don’t Know How to Fix the Economy – Article by Justin Murray

The New Renaissance HatJustin Murray
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Recently, Hillary Clinton was taped ridiculing Donald Trump for lacking a detailed plan for the American economy. The message, so it goes, is that Trump is not suited for the presidency because he doesn’t have a plan on how to turn the American economy around.

But is it really more dangerous to elect a president who makes up economic policy on the fly than one who proclaims to have a detailed plan for us?

The answer to this is no, it is not more dangerous to elect someone who makes up economic policy by the seat of his pants — as Donald Trump is prone to do — than it is to elect someone who thinks she can have the future of the economy neatly mapped out. However, this does not imply that seat-of-the-pants method is less dangerous either. The underlying problem is we have two competing people who think they can manage the American economy.

The core of why both philosophies are equally dangerous is best summarized by F.A. Hayek and the pretense of knowledge. Hayek notes in his speech in 1974:

Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones … in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process … will hardly ever be fully known or measurable.

We are incapable of knowing what the future will bring. No president can come up with a detailed or air tight plan or can accumulate a sufficient stable of experts to be able to guide the behavior, wants, and needs of 320 million people.

For example, if we were to have asked George Bush and his economic experts in 2002 to develop a five year plan for cell phones, we would have built up a massive production capacity and R&D structure around miniaturizing phones as that was all the rage. If someone said in 2002 that people in the future would give up physical buttons and want larger screens, they would have been looked upon as mad. People are buying smaller and smaller phones, there’s no way they could touch the screen and get anything done! But come 2007, Apple introduces the iPhone and the older-style button phone has nearly vanished from the marketplace. Had the government decided it needed to plan the economy around smaller phones, we wouldn’t be enjoying a mobility revolution.

This extends well beyond cellular phones and into all walks of our lives. We don’t need central planning on how we consume our energy, what cars we can buy, what we charge people for borrowing money, and so forth.

All behavior is risky. Even if central planners could somehow canvass all of our wants and needs, figured out when exactly we want to satisfy those needs, and determined who gets what in a world of scarcity, the planners would still fail. This is because even we have no idea what we’ll want in the future. If we were to ask someone to write down exactly what they would buy on August 14, 2017 and put it in an envelope then open it up and compare it to what was bought on that day, there is little doubt the results would be wildly different.

The planner is going to do no better. Instead of a single individual failing to predict his own habits in a fun exercise, we’ll be malinvesting untold amounts of money into unwanted industries and imposing counterproductive and dangerous rules on businesses — the effects of which are impossible to predict. Furthermore, central planning shuts down innovation and the entrepreneurial process because it assumes to know today what is wanted tomorrow. Most innovation arises when someone produces a product we had no idea we wanted and couldn’t fathom existing.

Does Hillary Clinton’s plan for the economy make her a more qualified president than Donald Trump, who will likely create plans spontaneously? No, it makes them equally dangerous as both assume they have the ability to do what countless officials over the centuries have never managed to do — predict the future.

Justin Murray received his MBA in 2014 from the University of St. Gallen in Switzerland.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Chasing 2 Percent Inflation: A Really Bad Idea – Article by John Chapman

Chasing 2 Percent Inflation: A Really Bad Idea – Article by John Chapman

The New Renaissance HatJohn Chapman

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In just two years, inflation targeting (namely, the quest for 2 percent inflation) has gone from the lunatic fringe of economics to mainstream dogma. Much of the allure springs from notions that a little inflation motivates people to speed up spending, thereby greatly increasing the efficacy of central bank stimulus. It is touted as a cure for sagging demand and a defense against the (overly) dreaded deflation.

Other benefits include melting away some of the massive government and private debts and improving people’s perception of progress as they see their nominal wages rise. Employers can lower real wages without unpopular dollar pay cuts. The Fed can allow price increases to signal the need for production responses, allow for minor supply shocks and for monopolistic industries to increase prices all without a monetary response that would hurt other elements of the economy.

For the politicians it provides a tax windfall in the form of capital gains taxes on inflated assets and income taxes on interest that simply reflects inflation. It also necessitates printing more money thereby earning seigniorage (profits from printing money) for the government. In addition, it provides cover for competitive currency devaluation and is a great excuse to kick the can down the road: “Let’s not tighten before we reach our highly desired inflation target.”

What’s Magical about 2 Percent Inflation?
Then there is the question of why 2 percent? Perhaps that was seen as a still comfortable rate during some past periods of strong growth. Conditions today are very different, which perhaps suggests they are trying to imitate past growth by copying symptoms instead of substance. Of course for politicians, permission to print money is a godsend, and with inflation all around the developed world below 2 percent, it was “all aboard!”

Clearly not all of the features above are desirable, but even some of the touted ones are underwhelming. While increased inflation expectations will speed up spending, it is far from being the reservoir of perpetual demand that some seem to believe. Essentially, a onetime increase in expectations of a new steady rate of inflation would speed up purchases for the period ahead, but with negligible net effects in subsequent periods — a onetime phase shift in demand.

The Danger of Raising Interest Rates
After almost eight years of stimulus, the Fed has taken its first timid steps toward normalizing monetary policy. That means we will soon have to contend with something entirely absent during the years of easy money — a bill for all of the goodies passed out and the distortions created. And what a bill! A 3 percent rise in average interest rates on just our present government debt over the next few years would ultimately amount to over $500 billion a year in additional interest expense, equal to roughly 1/7 of current Federal tax receipts. Those bills start arriving with a vengeance when rates go back up, and for the first time in years the market will see concrete evidence of whether the US and other governments are willing to pay the price of continuing to have viable currencies.

Prior to the appearance of inflation targeting, I was already dreading the impact of political interference with efforts to return to normal. But targeting makes every politician an economist, able to make simplistic, grandstanding statements with the authority of the Fed’s own model. This makes the problem far worse.

Two percent, which has (foolishly) been defined as desirable, will quickly be interpreted as an average. “So what’s the big deal,” critics will say, “about a pop to 3 percent or more, after all it has spent years ‘below target’, and if you excluded a handful of ‘temporary exceptions’, it would still be only 2 percent …?” Imagine the political storm if the Fed decided to quickly raise rates a couple of full percentage points in response to a surge in inflation to 3 percent.

There are a lot of people (especially politicians) whose short-term interests would be harmed by a sharp rise in interest rates. Lulled by today’s relative calm, many fail to appreciate how explosive the situation becomes when we transition from the concerned waiting of the long easy money period to the concrete tests of our credibility during renormalization. If we had to temporarily sacrifice half a percent from our already tepid growth rate to preserve the credibility of the dollar, that would pale next to the cost of worldwide panic and collapse. Unfortunately the sacrifice part is up front.

Americans think of inflation as a purely monetary phenomenon, which the mighty and independent Fed has handled in the past and will again if necessary. Actually once the inflation genie starts to escape from the bottle it becomes purely a political problem. Even the most determined central banker is helpless if the people refuse to accept the paper money, the politicians balk and take away the bank’s independence, or there is an opposition political party promising a credible-sounding and painless alternative plan. It comes down to what the market sees as the political will and ability to pay the short-term cost of reining in the inflation.

The Political Advantages of the 2 Percent Target
Political resistance to the cost of moving back to normal plus our willingness to decisively confront signs of panic will be watched carefully by owners of dollars and dollar instruments. This is a huge liquid pool which could stampede en masse into wealth storage and productive assets. Such a run would quickly become unstoppable and would mean a collapse of the world economy. Inflation targeting greatly facilitates the political opposition to decisive Fed action right at the first critical test points where there might still be hope of heading off an uncontrollable panic.

Deliberately seeking higher inflation amounts to intentionally damaging people’s faith in a fiat currency, one already in danger from massive debt, disquiet over novel monetary policy, and noises from Congress about reducing Fed independence. Targeting also provides a handy excuse to delay returning to normal, thereby worsening the mounting distortions. Finally, it invites wholesale political interference with the Fed’s efforts to manage an orderly return to normal financial conditions.

John Chapman is a retired commodity trader, having headed his own small trading firm for over thirty years. Prior to that he worked in the international division of a large New York bank, managed foreign exchange hedging for a major NY commodity firm, and worked as a silver trader.

Economics, especially money and banking, has been a passion of his since college. In 1990 he took a trip to South America for the express purpose of studying inflation “at its source.” His formal economics credentials consist of half a dozen courses, five of which were as an undergraduate at MIT (where he majored in aeronautical engineering.) He also received an MBA from the University of Arizona.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Dumb and Dumber – From Negative Interest Rates to Helicopter Money – Article by Paul-Martin Foss

Dumb and Dumber – From Negative Interest Rates to Helicopter Money – Article by Paul-Martin Foss

The New Renaissance Hat
Paul-Martin Foss
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We’ve all run into someone who thinks that all it take to bring about prosperity is to give everyone a million dollars. If everyone is a millionaire, we’ll all be rich and be able to afford anything we want, or so the thinking goes. Any sound economist knows that wouldn’t be the case, however. If everyone were given a million dollars the increased amount of money chasing the existing stock of goods would merely result in a massive rise in prices. No one would be better off, at least not once prices were once again equilibrated. The concept of giving everyone a million dollars is so absurd that no one takes it seriously. That is, they don’t take it seriously when a million dollars is the proposed amount. When the amount is smaller, all of a sudden it becomes a viable and increasingly-discussed policy proposal: helicopter money.

Ben Bernanke was derided for bringing up the possibility of helicopter money in 2002, although the idea dates back to Milton Friedman. What Bernanke did say was:

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

In fact, if you read that speech you will see Bernanke touting the effectiveness of policies which the Fed has since tried and failed at, as well some policies which the Fed has not yet tried and which we hope it never will.

As a decade of stimulus, quantitative easing, and zero or below-zero interest rates has now proven to be an absolute failure, helicopter money is once again being discussed as a potential central bank action, by central bankers who have no idea what to do and who are grasping at straws. The chief fixed income analyst at Nordea bank has publicly speculated that the European Central Bank (ECB) might be able to distribute 1,300 euros to each European citizen in a bid to boost inflation.

This bid to boost inflation makes the age-old error of confusing more money and higher prices with greater wealth. We know from our million-dollar example that that isn’t the case. So why try on a small scale what fails at the large scale? It is like the minimum wage debate, in which those who favor boosting minimum wages argue that it will result in workers being better-paid and more well-off. Yet we know that raising the minimum wage will result in some workers losing their jobs, as businesses cannot absorb all the increased costs and must dismiss their least-productive workers. The challenge to the proponents of minimum wages always is, if $15 an hour is so good, why not $15,000 an hour? Well, that’s because such a large increase would make abundantly clear what the minimum wage proponents are trying to hide. Minimum wages make some workers better off, but they do so by forcing other workers out of work, thus their wage falls to $0. In the same way, if the ECB could give 1,300 euros to each person, why not 1,300,000 euros? Because prices would rise in result and quickly negate any short-term benefit gained by the monetary increase. That type of hypothetical question exposes the farce of such handouts.

If helicopter money is implemented, those who first gain the use of the new money may benefit by increasing consumption before prices rise, while others will see prices rise before they are able or willing to use the money. But the end result will be higher prices but no overall increase in welfare. The economy will not see any sort of burst in productivity from a one-shot injection. So what will be proposed next? How about multiple injections of helicopter money over extended periods of time? That would seem to follow.

But again, anticipation and expectation of future injections would not lead to economic growth. It would only serve to further raise prices as new money enters the economy and transfers wealth to those who first use the new money from those who don’t. Economic growth comes not from more money or higher prices, but from savings and investment. No matter where in the economy central bank monetary injections enter, they cannot and will not result in real economic growth.

Zero interest rates didn’t do what central banks thought they would do, so they moved to quantitative easing. QE didn’t do what central banks thought it would do, so they moved or are moving to negative interest rates. Negative interest rates won’t work either so, assuming they don’t completely destroy the banking system beforehand, central banks may very well resort to helicopter money. Guess what, that won’t work either. How much more suffering will central banks have to impose on their countries before people realize that they are monetarily, morally, and intellectually bankrupt?

Paul-Martin Foss is the founder, President, and Executive Director of the Carl Menger Center for the Study of Money and Banking, a think tank dedicated to educating the American people on the importance of sound money and sound banking.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

A Conversation with My Neighbor “Sam” – Article by Mark Brandly

A Conversation with My Neighbor “Sam” – Article by Mark Brandly

The New Renaissance HatMark Brandly
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Lately, I’ve wondered how my neighbor, Sam, affords to buy so much stuff. He appears to have an unlimited budget. When I asked him about this, Sam asked, “Do you think I’m spending too much?”

“That depends,” I said, “How much money do you make?”

“I take home $100,000 a year.”

That surprised me. I would guess that he’s spending more than that. But I tried to be encouraging, “That sounds like plenty of income. With a little planning, you should be able to budget your spending and be financially stable.”

“But my finances are a mess,” Sam replied. “I spend more than I take home. Last year I had to borrow $12,000 just to cover my spending.”

“Well maybe things will be better this year,” I said, hoping that Sam’s spending issues was a one year problem.

“No,” Sam replied. “Actually, in the first three months of this year, I’ve already spent $19,000 more than I’ve made. It looks like my budget deficit this year will be much worse than it was last year.”

Now I was starting to worry. “Have you been borrowing money to cover your spending for a long time?”

“Oh yes. I have a lot of debt. Part of the problem is that I owe myself $150,000.”

I wondered if Sam misspoke, “Wait, wait, wait, you owe yourself $150,000? Why do you think that you’re in debt to yourself?”

“Well you see, over the years I promised myself that I was going to use my paychecks to pay for a fund for my children’s education, but instead of spending $150,000 on colleges, I spent the money on other expenses. So I figure that I owe myself this money so that I can pay for my children’s college tuitions.”

Obviously Sam doesn’t understand the definition of the word “debt.”

I tried to be polite in my response: “That doesn’t make any sense. It’s true that you’ve made some horrible decisions regarding your spending, but it’s ridiculous to claim that you owe yourself money. A debt occurs when one person owes another person money. Just because you changed your mind about how to spend your paychecks doesn’t mean that you’ve borrowed money from yourself.

“So the first thing you need to do is to think clearly about the amount of debt you have. You don’t owe yourself any money. Now, forgetting about this ridiculous notion of self-debt, how much do you owe?”

“Alright, I think I see your point. Let’s just talk about the rest of my debt. I owe various banks about $420,000. This debt is more than four times my take-home income.”

Sam often lies about his income and spending issues, but he always understates his budget problem. If he’s lying now, then I can be sure that the problem is even greater than he says. I wanted more information.

“That a pretty high debt to income ratio. But that might be somewhat manageable, although unwise, if you’ve borrowed that money at low interest rates.”

“I have some good news and some bad news,” Sam said. “Interest rates are low. In fact, in the last fourteen years, my debt has more than quadrupled, but my interest payments have increased less than 50 percent. That’s because interest rates have collapsed during that time. Isn’t that good news?”

“I suppose, but do you know that interest rates are going to increase over the next several years?”

“Yes, that’s the bad news. In the past year, I only paid $7,000 of interest, but within ten years my debt will increase over 50 percent, and possibly much more, and with higher interest rates I expect to be paying at least four to five times that much in interest annually.”

“That’s a huge problem. So to be able to make your loan payments, I assume that you’ve taken out some long-term loans.”

“No, no, no. In order to take advantage of the low interest rates, most of my borrowing is short term. I rollover my loans quickly. In the past year my principal payments on these loans totaled $207,000.”

“Let me get this straight. Your loan payments, including principal and interest, are well over twice your take home pay?”

“Yes, I take home a little over $8,000 per month and my loan payments are over $17,000 per month. But it’s no problem. In the past year I borrowed $223,000 to cover everything.”

Shocked, I said “How can you say borrowing more than twice your income is not a problem?”

“I simply borrow all the money I need to make all of my loan payments. I never pay any of the loans down. I’ve been doing this for years, ever since I started spending more than I make.”

“Okay. Most of your borrowing goes to cover your increasingly large principal and interest payments. And as interest rates rise, interest payments will become a bigger percentage of your spending. When that happens, your total debt will increase faster than your income. What is your plan, say in the next ten years, to correct this situation?”

“Well I don’t have a plan for correcting anything, because I don’t see how I can cut my spending.”

“What if the banks stop loaning you money to make your payments on your loans? What happens then?”

“I guess I’m assuming that won’t happen.”

Sam’s Budget Situation in Real Numbers
If one of our neighbors budgeted in this manner, we would obviously conclude that the guy is crazy. No such plan could work. Eventually lenders would refuse to fund Sam’s spending.

However, Sam’s situation looks a lot like the federal government budget plan. Take a look at some recent federal budget information and some Congressional Budget Office projections:

  • In FY (fiscal year) 2015, the feds had a budget deficit, counting only debt held by the public, of $339 billion, which is about 10 percent of their tax revenues of $3,248 billion. The deficit has been declining the last few years, but that is now changing.
  • In fact, in the first three months of FY 2016, according to the Treasury Department, federal debt held by the public increased $548 billion. Admittedly, some of this debt was due to the fact that the feds were cooking the books in FY 2015 when they hit the debt ceiling limit. Nonetheless, the first quarter 2016 deficit is already 60 percent larger than the overall 2015 deficit.
  • The federal government claims to owe itself over $5 trillion (they call it intragovernmental debt here). This $5 trillion represents tax revenues that were earmarked for specific spending programs, such as Social Security, but were spent on other programs. Since the feds collected taxes to pay for Social Security, but spent the money on something else, they conclude that they owe it to themselves to collect those tax revenues again. That’s the essence of intragovernmental debt. We should not count this as debt. Give the Treasury Department credit for ignoring this type of “debt” in their Daily Treasury Statements and in their end of the year debt reports.
  • As of September 30, 2015, the feds had $13.1 trillion of debt owed to the public. FY 2015 tax revenues totaled $3.248 trillion. So just like Sam the government has a 4-to-1 debt-to-tax-revenue ratio.
  • In the past fourteen years, from September 30, 2001 (the start of George Bush’s first budget) to September 30, 2015 (the end of Barack Obama’s sixth budget), debt owed to the public increased from $3,339.3 billion to $13,123.8 billion. That’s an increase of 293 percent.
  • According to the Daily Treasury Statements, in the past fourteen years, interest on treasury securities increased from $162.5 billion in fiscal year 2001 to $233.1 billion in fiscal year 2015. That’s a 44 percent increase during the same period when federal debt owed to the public almost quadrupled.
  • In FY 2015, again according to the Daily Treasury Statements, the feds borrowed $7,251.4 billion (see the Public Debt Cash Issues for September 30, 2015), an average of almost $20 billion per day. They spent $6,740.3 billion of this borrowing rolling over their debt. So, Federal principal and interest payments are more than double federal tax revenues.
  • According to the Congressional Budget Office’s baseline projections, debt held by the public in 2025 should exceed $21 trillion and during that time interest rates are expected to increase. Interest rates have been kept artificially low for years. If interest rates return to a more normal level, say to the rates they were paying when George Bush took office fifteen years ago, then interest payments in 2025 will exceed $1.2 trillion. That’s over a 400 percent increase compared to the FY 2015 interest payments. I should note here that the baseline budget projections are optimistic. We should expect the debt situation in 2025 to be significantly worse than these projections.

The federal government’s debt has exploded under the Bush and Obama administrations. Low interest payments due to the low interest rates have masked their budget problems. As interest rates and the spending gap on entitlement programs such as Social Security both increase, the budget problem will compound.

The federal government’s plan is to borrow all of the money they need to pay all of their principal and interest payments and to also pay for the budget deficits in their spending programs. The question we should ask is: what’s going to happen when the world’s lenders refuse to bankroll DC’s spending schemes?

Mark Brandly is a professor of economics at Ferris State University and an adjunct scholar of the Ludwig von Mises Institute.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Central Banks Should Stop Paying Interest on Reserves – Article by Brendan Brown

Central Banks Should Stop Paying Interest on Reserves – Article by Brendan Brown

The New Renaissance Hat
Brendan Brown
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In 2008, the Federal Reserve began paying interest on reserve balances held on deposit at the Fed. It took more than seven decades from the US leaving the gold standard — in 1933 — for the fiat regime to do this and thus revoke a cardinal element of the old gold-based monetary system: the non-payment of any interest on base money.

The academic catalyst to this change came from Milton Friedman’s essay “The Optimum Quantity of Money” where he argued that the opportunity cost of paper money (any foregoing of interest compared to on alternative money-like instruments such as savings deposits) should be equal to its virtually-zero marginal cost of production. Opportunity cost could indeed be brought down to zero if base money (bank reserves, currency) in large part paid interest at the market rate. Under the gold standard, the opportunity cost of holding base money largely in metallic form (gold coin) was indeed typically significant. All forms of base money paid no interest. And the stream of interest income foregone in terms of present value was equal in principle to the marginal cost of gold production (this was equal to the gold price).

Interest on Reserves are Important to Controlling Markets and Imposing Negative Rates
Friedman, however, did not identify the catch-22 of his proposal. If the officials of the fiat money regime indeed take steps to close the gap between the marginal production cost and opportunity cost of base money, with both at zero, then there can be no market mechanism free of official intervention and manipulation for determining interest rates.

That is what we are now finding out in the few years since central banks in the US, Europe, and Japan started paying interest on reserves. (The ECB was authorized to do this since its launch in 1999, while the Fed and BoJ began following the 2008 financial crisis.) Central banks can now bind the invisible hand operating in the interest rate market to an extent almost unprecedented in peacetime. In some cases, central banks have even deployed a negative interest rate “tool” which would have been impossible under the prior status quo where base money paid no interest.

How We Got Here
The signing into law of the Financial Services Regulatory Relief Act in 2006 authorized the Federal Reserve to begin paying interest on reserves held by depository institutions beginning October 1, 2011. On the insistence of then Fed Chief Bernanke, that date was brought forward to October 1, 2008 by the Emergency Economic Stabilization Act. He was in the process of dispensing huge loans to troubled financial institutions but wanted nonetheless to keep interest rates at a positive level (one purpose here was to protect the money market fund industry).

Accordingly, the Federal Reserve Board amended its regulation D so that the interest rate paid on required reserves and on excess reserves would be at levels tied (according to distinct formulas at the start) to market rates. An official communiqué explained that the new procedure would eliminate the opportunity cost of holding required reserves (and thereby “deregulate”) and help to establish a lower limit for the Federal Funds rate, becoming thereby a useful tool of monetary policy.

This was useful indeed from the viewpoint of rate manipulators: by setting the rate on excess reserves the Fed could now determine the path of short-term interest rates and strongly influence longer term rates regardless of how the supply of monetary base was growing relative to trend demand. By contrast, under the gold standard and the subsequent first seven decades of the fiat money regime, interest rates in the money market were determined by forces which brought demand for base money into balance with the path of supply as set by gold mining conditions or by central bank policy decision respectively. A rise in rates meant that the public and the banks would economize on their direct or indirect holdings of base money and conversely.

Back Before the Fed Paid Interest on Reserves
Yes, under the fiat money system the central bank could effectively peg a short-term rate and supply whatever amount of base money was needed to underwrite that — but the consequential growth of supply in base money was a variable which got wide attention and remained an ostensible policy concern. Right up until the Greenspan era, the FOMC implemented policy decisions by directing the New York Fed money desk to increase or reduce the pace of reserve growth and changes in the Fed funds rate occurred ostensibly to accomplish that purpose. This old method of determining money market interest rates under a fiat regime — in which banks’ need for reserves was minute given deposit insurance, a generous lender of last resort, and too-big-to-fail — depended on the banking industry enduring what was essentially a tax on its deposit business, which was then magnified by fairly high legal reserve requirements. Thus, it is not surprising that the original impetus to paying interest on reserves, whether in the US or Europe, came from the banking lobby. There was no such burden under the gold standard even though the yellow metal earned no interest. Banks in honoring their pledge to deposit clients that their funds were convertible into gold had to visibly hold large amounts of the metal in their vaults or at hand in a reserve center. Actual and potential demand for monetary base by the public is more limited under a fiat money regime than under the gold standard as bank notes are hardly such a distinct asset as gold coin from other financial instruments.

More Problems with Friedmanite “Solutions”
Friedman, when he advocated eliminating the opportunity cost of base money under a fiat regime, hypothesized that this could occur under a long-run declining trend of prices rather than by the payment of interest. The real rate of return on base money could then be in line with the equilibrium real interest rate. This proposal for perpetually declining prices would also have been problematic, though. The interest rate would fluctuate, and in boom times be well above the rate of price decline. In any case, the rate of price decline would surely vary (sometimes into positive territory) in a well-functioning economy even when the long-run trend was constant (downward). The equilibrium real interest rate would be below the rate of price decline sometimes (for example, during business downturns), meaning that market rates even at zero would be too high. That situation did not occur often under the gold standard where prices were expected to be on a flat trend from a very long-run perspective and move pro-cyclically (falling to a low-point in the recession from which they were expected to rise in the subsequent business expansion, meaning that real interest rates would then be negative).

What Can Be Done?
So what is to be done to escape the curse? A starting point in the US would be for Congress to ban the payment of interest on bank reserves. And the US should use its financial power with respect to the IMF to argue that Japan and Europe act similarly within a spirit of G-7 coordination such as to combat monetary instability. We have seen in recent years how rate manipulation and negative rates are made possible by the payment of interest on reserves, and are potent weapons of currency warfare. Yes, the ban in the immediate would force the Federal Reserve to slim down its balance sheet so that supply and demand for base money would balance at a low positive level of interest rates. The Fed might have to swap its holdings of long-maturity debt for T-bills at the Treasury window so as to avoid any dislocation of the long-term interest rate market in consequence. That, not the Yellen-Fischer “rate lift off day and beyond,” is the road back to monetary normalcy.

Brendan Brown is an associated scholar of the Mises Institute and is author of Euro Crash: How Asset Price Inflation Destroys the Wealth of Nations and The Global Curse of the Federal Reserve: Manifesto for a Second Monetarist Revolution. See Brendan Brown’s article archives.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

The Fed Passes the Buck: Blame Oil and China – Article by C. Jay Engel

The Fed Passes the Buck: Blame Oil and China – Article by C. Jay Engel

The New Renaissance HatC. Jay Engel
******************************

There are a handful of themes out there on recent market action that are either totally wrong or otherwise highly misleading. For instance, regarding the recent calamity in the capital markets, one especially apparent dichotomy has presented itself as offering two choices as to what, exactly, is causing the painful turbulence.

There are some who, in a complete echo of the news headlines, are quick to point the finger at both oil and China. And yet there are others who point the finger at the Fed for “raising rates too early.” Along with the second is the observation that “inflation is totally MIA” and therefore it was ludicrous that the Fed felt the need to “raise interest rates.” Both of these tend to express anguish over the “strong dollar.”

Both of these miss the entire point, and the cause of the current trouble. For one thing, it is ridiculous to blame oil for the falling markets when the falling oil is the very thing that needs to be explained. It is wholly unsatisfactory to explain something by describing it. It works well for headlines, and for shifting the blame away from where it really belongs, but one must learn to look deeper. One cannot expect to impress anyone by explaining that the plane is crashing to the ground because it is no longer flying. What is the cause of oil’s magnificent plummet toward the bottom? That is the true question.

Moreover, the problem with the “China thesis” is that it doesn’t explain anything either. It merely observes a correlation in the markets and therefore makes it highly convenient to put the blame on “the other guys.” Let me not be misunderstood here: the Chinese and US economies are certainly influenced by each other, especially in our age of fluctuating fiat currencies. But ultimately, both China and the US — indeed the entire world — are being dragged down by past actions of their respective central banks and more specifically the illusion of prosperity via monetary and credit expansion.

Which leads to the second theme: putting the blame on the Fed for “raising rates” too early. That is, there are a good many who argue that if the Fed had never announced in December that it was going to seek minuscule increases in the Federal Funds rate, none of the recent market drops would have happened. They will say things like “inflation was never a threat, so the Fed was irresponsible to raise rates.”

Money-Supply Inflation vs. Price “Inflation”
This is confused. First, it must be constantly emphasized that the meaning of inflation, contrary to the mainstream’s application of it, is more appropriately defined an increase in the money supply, not “rising prices.” The reason why the Fed and proponents of central banking prefer the “rising prices” definition is because it obscures the chief source of our present economic condition. It rips the blame away from the Fed and toward all kinds of other “market forces” and therefore encourages the central bank to swoop in to the rescue rather than be the object of severe suspicion. Indeed, as Mises observed (page 420 of Human Action):

What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism.

First of all there is no longer any term available to signify what inflation used to signify. It is impossible to fight a policy which you cannot name. …

The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are disguising their endeavors as a fight against inflation. While merely fighting symptoms, they pretend to fight the root causes of the evil. Because they do not comprehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they practicalIy make things worse.

Rising prices can be a result of inflation, but it is not itself inflation. So then, inflation was actually very high in the last decade due to the Fed’s QE and other monetary policy schemes. Second, it should never be ignored that “rising prices” can easily be found in the capital markets themselves. It doesn’t take an investment guru to observe the staggering levels to which the various market indexes have reached. Digging only a little bit farther into the surface reveals the absurd prices for the so-called highest valued stock such as Facebook, Amazon, Apple, and so on.

Where All That Money Went
More importantly, however, is the fact that much of the newly created money has not even come close to creating “widespread [consumer price] inflation” due to the actual structure of the current, post-crises banking regime. In fact, Jeffrey Snider, among others, have argued that it is literally impossible for “price inflation” to take place as a direct result of QE due to the way that money currently enters the system as reserves. “Price inflation” would need to come from the actions of individual banks themselves who are at present cautious about their consumer lending practices. Therefore the Fed is not creating “price inflation,” but something far worse: capital misallocation.

The point here is simply that those who want the interest rates to be continually suppressed so that economic activity will be encouraged, don’t even realize that this is literally the cause of bubble creations, not productive economic activity.

It used to be, under the pre-crises fractional-reserve model, that there would be loads of malinvestment as a result of banks creating new loans (new economic activity would take place, and then collapse back down). But now, money is created, not by commercial banks, but mostly by the Fed itself. Which means that, in the phraseology of David Stockman, the new money is simply sloshing around the canyons of Wall Street and pushing up equity and bond prices, rather than reaching the “real economy.”

The Bubble Only Prolongs the Problem
Thus, contrary to those blaming the Fed for causing stocks to fall by “raising rates” (which Joe Salerno reflects on here) we want to stress the fact that, in raising rates, the most that the Fed could do is unravel previously made mistakes. In other words, there is nothing praiseworthy in the first place about artificially propped up stock market levels. We have no interest in lauding the longevity of the bubble, because the bubble is the enemy of the healthy economy. The collapsing equity markets reveal where bubbles were formed and that our alleged prosperity is an illusion. And this is precisely what former Dallas Fed Chairman Richard Fisher stated in a conversation on CNBC last week when he confessed: “We frontloaded a tremendous market rally to create a wealth effect.”

And thus, the money expansion must inevitably cycle back down. Fisher himself admits: “… and an uncomfortable digestive period is likely now.” What was inflated up to the top, must deflate down to the floor. That is the only way for an economy to recover: bad credit needs to be liquidated. Unfortunately, it is painful indeed.

That is the true cause of the recent calamity. The dollar is “strengthening” by virtue of our credit system cracking at the seams. In other words, the so-called “strong dollar,” is merely one side of the pendulum swing of a volatile collapsing banking system. It shouldn’t be assumed that the dollar is becoming more sound; it is not. But if we might ever again have a sound currency, we first have to face the music.

And thus oil too, after years of being elevated up toward the heavens via the Fed’s monetary shenanigans, is experiencing its own inevitable bust. The illusion is being exposed.

Unfortunately, the Fed is a wild card, so we stay tuned to whether it will let the markets recover, or continue the perpetual cycle of money creation. My own advice for the Fed is neither to “raise rates” nor to lower them. But rather, to let go and let the market correct itself. For we have a lot of correction ahead of us.

C. Jay Engel is an investment advisor at The Sullivan Group, an independent, Austrian-School oriented, wealth management firm in northern California. He is especially interested in wealth preservation in lieu of our era of rogue Central Banking. He is an avid reader of the Austro-libertarian literature and a dedicated proponent of private property and sound money. Feel free to email C. Jay, visit his blog, and follow him on Twitter.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Is the Auto-Loan Bubble Ready to Pop? – Article by Tommy Behnke

Is the Auto-Loan Bubble Ready to Pop? – Article by Tommy Behnke

The New Renaissance HatTommy Behnke
******************************

On Tuesday, it was announced that over seventeen million new vehicles were sold in 2015, the highest it’s ever been in United States history.

While the media claims that this record has been reached because of drastic improvements to the US economy, they are once again failing to account for the central factor: credit expansion.

When interest rates are kept artificially low, individuals are misled into spending more than they otherwise would. In hindsight, they discover that their judgment errors wreaked havoc on their financial well-being.

This is a lesson that the country should have learned from the Subprime Crisis of 2008. Excessive credit creation led too many individuals to buy homes, build homes, and invest in the housing industry. This surge in artificial demand temporarily spiked prices, resulting in over four million foreclosed homes and the killing of over nine million US jobs.

Instead of learning from the mistakes that sent shock waves throughout most of the planet, the Federal Reserve has continued with its expansionist policies. Since 2009, the money supply has increased by four trillion, while the federal funds rate has remained at or near zero percent. Consequently, the housing bubble has been replaced with several other bubbles, including one in the automotive industry.

Automotive companies have taken advantage of the cheap borrowing costs, increasing vehicle production by over 100 percent since 2009:

Behnke 1_0Source: OICA

In order to generate more vehicle purchases, these companies have incentivized consumers with hot, hard-to-resist offers, similar to the infamous “liar loans” and “no-money down” loans of the 2008 recession. Dealerships have increased spending on sales incentives by 14 percent since last year alone, and the banners in their shops now proudly proclaim their acceptance of any and all loan applications — “No Credit. Bad Credit. All Credit. 100 Percent Approval.” As a result, auto loans have increased by nearly $80 billion since 2009, many of which have been given to individuals with far-from-stellar credit scores. Today, almost 20 percent of all auto loans are given to individuals with credit scores below 620:

Behnke 2.pngSource: New York Fed

Not only are more auto loans being originated, but they are also increasing in duration. The average loan term is now sixty-seven months (that’s 5.58 years) for new cars and sixty-two (that’s 5.16 years) months for used cars. Both are record numbers.

Average transaction prices for new and used cars are also at their record highs. Used car prices have increased by nearly 25 percent since 2009, while new car prices have increased by over 15 percent. Part of this has to do with the increasing demand for cars generated by the upsurge in auto loans. The main reason, however, is that consumers — taking advantage of the accessibility of cheap credit — are purchasing more expensive body styles. This follows the housing bubble trend, when the median size of a newly built single-family home rose to 2,272 square feet at the start of 2007.

We all know the end result of the Great Recession — prices soared, millions of houses were foreclosed, and unemployment surged. Demand for homes then plummeted, and home prices ultimately dropped by 20 percent each month.

The auto bubble has yet to burst, but its negative effects are already starting to gradually appear. For one, delinquencies on car loans have increased by nearly 120 percent, from just over 1 percent in 2010 to 2.62 percent in 2014. Since cars rapidly depreciate in value, this number is projected to spike. By the time these six, seven, and eight year no-money down loans are due to be paid in full, many of these vehicles won’t be worth paying off anymore — maintenance and loan costs will start exceeding the value of the cars.

According to the Center for Responsible Lending, one in every six title-loan borrowers is already facing repossession fees. If defaults sharply increase in the coming years as projected, the market will become flooded with used cars, and their prices will, with near certainty, fall to a significant degree.

At a time when labor force participation is at its lowest level since 1977 — at a time when real wages are rising less than they have since at least the 1980s — it is imperative that the Federal Reserve stop misleading individuals into making irrational investments. The economy is simply too frail to continue weathering these endless business cycles. Economists, politicians, and the general populace need to start learning from their economic history so they can begin recognizing that favoring debt over thrift isn’t beneficial to the country’s financial well-being. Failure to do so will simply lead to more bubbles, more malinvestment, and more economic headaches in the years to come.

Tommy Behnke is an economics major and Mises University alumnus.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.