Economics

Mises Institute – Mises Media Podcasts, interviews, lectures, narrated articles and essays, and more. This is the Mises Institute’s master online media catalog.

  • Mark Spitznagel: At What Price Safety?
    by Mark Spitznagel on July 27, 2021 at 4:45 pm

    By: Mark Spitznagel Editor’s note: Mark Spitznagel is President and Chief Investment Officer for Universa Investments. He has written about risk mitigation and “tail hedging” in his books The Dao of Capital and Safe Haven. He is a well-read student of Austrian economics, and has applied the insights of Mises and others to his professional work. This editorial, originally published July 20 in the Financial Times here, provides compelling insights into Mr. Spiztnagel’s view of “risk mitigation irony”: as politicians and investors attempt to mitigate risk, they miss the “unseen,” which Frédéric Bastiat admonished us to consider. For Spitznagel, both politicians and investors fail to understand the true (i.e., full) costs of their risk mitigation strategies—the former overcorrect for covid dangers, the latter overcorrect for crashes. For those interested in the distinction between uncertainty and risk in economics, see Frank Knight’s Risk, Uncertainty, and Profit and Mises’s Human Action, chap. 6. From public policy to private investing, it is the central question of our time: how high a price should we pay to keep ourselves safe from harm? And this begs even more fundamental questions: should risk mitigation come at a cost at all, or should it rather come with rewards? That is, shouldn’t risk mitigation be “cost-effective”? And if not, what is it good for?  Think of your life like an archer releasing just one single arrow at a target. Naturally, you want to make your one shot at life a good one—to hit your bullseye—and this is why you mitigate your risks: to improve your precision (or the tightness of the grouping of your potential arrows) as well as your accuracy (or the closeness of that potential grouping to your bullseye). We often lose sight of this: safety is instead perceived as improving precision (removing our bad potential arrows) at the expense of accuracy. The fact is, safety from risk can be exceedingly costly. As a cure, it is often worse than the disease. And what’s worse, the costs are often hidden; they are errors of omission (the great shots that could have been), even as they mitigate errors of commission (the bad shots). The latter are the errors we easily notice; ignoring the former for the latter is a costly fallacy. Of course, we expect politicians to commit this risk mitigation irony. Ours is the great age of government interventionism—from corporate bailouts to extraordinary levels of debt-fueled fiscal spending and central bank market manipulations. Fallaciously ignoring errors of omission to avoid errors of commission essentially is the job of politics, as every government programme involves hidden opportunity costs, with winners and losers on each side. More surprising, even investors engage in risk mitigation irony as well. They strive to do something—anything—to mitigate risk, even if it impairs their portfolios and defeats the purpose. The vast majority of presumed risk mitigation strategies leave errors of omission in their wake (i.e. underperformance), all in the name of avoiding losses from falling markets. Modern finance’s dogma of diversification is built around this very idea. Consider diversifying “haven” investments such as bonds or, God forbid, hedge funds. Over time, they exact a net cost on portfolios’ real wealth by lowering compound growth rates in the name of lower risk. They have thus done more harm than good. The problem is, such safe havens simply do not provide very much (if any) portfolio protection when it matters; therefore, the only way for them to ever provide meaningful protection is by representing a very large allocation within a portfolio. This very large allocation will naturally create a cost burden, or drag, when times are good—or most of the time—and ultimately on average. Over time, your wealth would have been safer with no haven at all. An overallocation to bonds and other risk mitigation strategies is the principal reason why public pensions remain underfunded today—an average funding ratio in the US of around 75 per cent—despite the greatest stock market bull run in history. For instance, a simple 60/40 stocks/bonds portfolio underperformed the S&P 500 alone by over 250 per cent cumulatively over the past 25 years. What was the point of those bonds again? Cassandras typically and ironically lose more in their safety interventions than they would have lost to that which they seek safety from. Most investor interventionism against looming market crashes ultimately leads to lower compound returns than those crashes would have cost them. Markets have scared us far more than they have harmed us. While Cassandras may make great career politicians and market commentators, they have proven very costly in public policy and in investing. We know that times are fraught with uncertainty, and the financial markets have perhaps never been more vulnerable to a crash. But should we seek safety such that we are worse off regardless of what happens? We should aim our arrows such that we mitigate our bad potential shots and, as a direct result, raise our chance of hitting our bullseye. Our risk mitigation must be cost-effective. This is far easier said than done. But by the simple act of recognizing the problem of the deceptive, long-term costs of risk mitigation, we can make headway. If history is any guide, this might just be the most valuable and profitable thing that any investor can focus on.

  • Was It Always This Way?
    by Robert Aro on July 27, 2021 at 2:45 pm

    By: Robert Aro How well can anyone remember past Federal Reserve Chairs? There was Volcker, who allegedly solved the inflation crisis by raising rates and bringing about a recession. After Volker there was Greenspan who is still referred to as “the Maestro.” Followed by “Helicopter” Ben Bernanke… a name he probably doesn’t appreciate much. After Ben came Yellen and now Powell. With each new Chair came a bigger and bigger balance sheet and expansion of central bank powers. We now live in an era where the Fed garners a significant amount of attention; but was it always this way? Roughly every 6 weeks the world waits to see what the Fed will say, closely listening for clues as to what they might do next. A significant amount of our time and decision making is heavily wrapped around this elusive club of central planners who create money at will and determine the benchmark interest rate for an entire nation. As per usual, leading up to the main event, the economic news headlines are abuzz with mounting speculation as to the decisions to come out of this Wednesday’s Fed meeting. CNBC notes that: While no action is expected, there could be some mention of the central bank’s possible wind down of its bond program. That could move the markets since the tapering of the central bank’s bond purchases is seen as the first step on the way to interest rate hikes. The article goes on to say that the Fed may take a year to eventually scale back its $120 billion a month bond purchase to zero, which should then open the door to rate hikes. Reuters notes a new dilemma on the horizon: a Fed that is now facing higher than expected price increases, accompanied by “slow annual economic growth” (which it blames on supply chain problems) and the rise of the delta variant. No definitive answer was given, but it’s believed that: Things could play out in a way they didn’t expect. The Fed could always shrink its balance sheet quicker than expected, but the opposite can easily come true and it could find reasons to increase its asset purchases. If an expansion of the balance sheet were to happen this year, it would definitely be something “they didn’t expect,” but still a move that cannot be put past the Fed given how nimble they are to act when circumstances change (according to them). As the world waits, various stock market indices flirt around all time highs, house prices continue to increase and inflation calculations continue to read red hot, while it was announced just last week that the recession officially ended in April 2020… over a year ago. But was it always like this? Did the world always wait to see what the Fed would say or do, speculating the effects on asset and general prices? Given the monumental growth of the balance sheet, the percentage of debt to national debt held, and its robust set of assets like mortgages debt and corporate bonds, it’s safe to say the role the Fed has played in our lives has increased with each passing Fed Chair. Combining its power with the digital age, it’s no wonder not a day passes on any business news channel where “the Fed” is not mentioned in some capacity. It’s difficult to say how sentiment towards the Fed was several generations ago. But if the former Fed Chairs and their escalating level of intervention under each tenure is used as a measure, then our future becomes certain. Any talk of tapering the balance sheet, raising rates, or getting back to some sense of normal will be nothing more than a “transient” phase at best.

  • The Federal Reserve Cannot Help America
    by Robert Aro on July 21, 2021 at 6:45 pm

    By: Robert Aro Over the weekend, Yahoo Finance Editor-in-Chief Andy Serwer wrote an article titled: How the Federal Reserve can really help America. His error is as old as the word “Socialism” itself. The author seems genuine in wanting a better society, but his misguided belief is that the way there is through better planning from the government and the Fed. Unfortunately, this is asking for something unachievable, as history has shown. He opens with a nod to central banking, saying the: Federal Reserve has greatly aided our economic well-being (by cushioning us from and even helping us avoid economic catastrophe)… It’s understood the Fed tells us that without their interference in the free market, society would be a worse place; but multiple generations of Austrian authors have written to the contrary. Specifically, about the boom/bust cycle central banks cause through the interference of the money supply and interest rates, which most impacts vulnerable members of society. Yet the warnings go unheeded. He says things like: The Fed’s boosting of the economy by keeping interest rates low disproportionately helps rich people and thereby actually disadvantages those in need. The revelation can be applauded. But Mises, Rothbard, Hayek, Hazlitt, to name a few of a long list of authors, have been saying this and much more for a very long time. Why aren’t their ideas further explored? A difficult passage comes from an associate professor at University of Chicago, Michael Weber, who, according to the author, says: It’s important to note here that low rates and goosing the economy does help people of color, lower educated women and other less wealthy groups… It’s just that it benefits the already advantaged more.  In an era where statues are being torn down and maple syrup has become offensive, it’s shameful to think comments from an academic like Mr. Weber go unnoticed. That a handful of experts are paid to support a system which plans the economic landscape for “people of color” and “lower educated women” is highly disrespectful. Despite mentioning “inequality” nearly 20 times, the author never defines specifics that can be resolved. The article continues with various opinions on how intervention can be used to address inequality, with no clear message other than the Fed should do something, which always boils down to money creation or interest rate manipulation. The hope of using money creation to create a more just society is actually a very old tactic known as “inflationism.” Mises discussed this over 100 years ago, the various problems with tinkering with the money supply and how it ultimately hurts society. That the Fed’s metaphorical money printer be halted is not even considered by the author. By the end, one question illustrates the problem the author missed completely, asking: What if the Fed, Treasury Secretary (and former Fed chair) Janet Yellen and congressional leaders from both parties, convened a summit on how the federal government should address inequality?  The appeal to a higher power is tempting. But it neglects over a century of Fed intervention, the boom/bust cycle, perpetual loss of the dollar’s purchasing power, asset bubbles, and abysmal track record governments have with creating solutions to our problems. A desire to ameliorate economic disparity is commendable. But because it’s the government and the Fed who creates the disparity, the request is little more than appeal to popular hope and emotion. The author even cites some of the Fed’s missteps, but instead of asking to stop central planning, he asks for a better central plan. He is asking that a mix of elected and unelected officials, by way of taxation or money creation, confiscate or create money to disburse to certain members of society, as well as manipulate interest rates to help those deemed most in need. The hope is that this new allocation of funds and changes to rates will make for a better society. Congress mandated the Fed the tasks of full employment and price stability; but we must delve deeper to understand this. The goals can only be reached when the Fed says they are reached, as judged by measurements known only by the Fed. Although there is no such thing as an optimal money supply or an ideal interest rate, the Fed insists on controlling these on behalf of the nation; both being tasks that hundreds of millions of market participants can do better than any central bank. If free market solutions to America’s economic problem are not considered, the alternative will always be a call for more socialism, except this time, it’s definitely going to be done right.

  • La Reserva Federal no puede ayudar a América
    by Robert Aro on July 21, 2021 at 6:45 pm

    By: Robert Aro Durante el fin de semana, el editor jefe de Yahoo Finanzas, Andy Serwer, escribió un artículo titulado: Cómo la Reserva Federal puede realmente ayudar a América. Su error es tan antiguo como la propia palabra «socialismo». El autor parece genuino en su deseo de una sociedad mejor, pero su creencia errónea es que la manera de lograrlo es a través de una mejor planificación por parte del gobierno y la Reserva Federal. Por desgracia, esto es pedir algo inalcanzable, como ha demostrado la historia. Abre con un guiño a la banca central, diciendo que el: La Reserva Federal ha ayudado en gran medida a nuestro bienestar económico (amortiguando e incluso ayudando a evitar la catástrofe económica)… Se entiende que la Fed nos diga que sin su interferencia en el libre mercado, la sociedad sería un lugar peor; pero múltiples generaciones de autores austriacos han escrito lo contrario. En concreto, sobre el ciclo de auge y caída que provocan los bancos centrales a través de la interferencia de la oferta monetaria y los tipos de interés, que es lo que más afecta a los miembros vulnerables de la sociedad. Sin embargo, las advertencias no son escuchadas. Dice cosas como: El impulso de la Fed a la economía manteniendo los tipos de interés bajos ayuda de forma desproporcionada a los ricos y, por tanto, perjudica a los necesitados. La revelación puede ser aplaudida. Pero Mises, Rothbard, Hayek, Hazlitt, por nombrar algunos de una larga lista de autores, llevan mucho tiempo diciendo esto y mucho más. ¿Por qué no se exploran más sus ideas? Un pasaje difícil es el de un profesor asociado de la Universidad de Chicago, Michael Weber, que, según el autor, dice Es importante señalar aquí que los tipos bajos y el goteo de la economía sí ayudan a la gente de color, a las mujeres con menor nivel educativo y a otros grupos menos ricos… Es sólo que beneficia más a los ya aventajados. En una época en la que se derriban estatuas y el jarabe de arce se ha convertido en algo ofensivo, es vergonzoso pensar que los comentarios de un académico como el Sr. Weber pasan desapercibidos. Que se pague a un puñado de expertos para que apoyen un sistema que planifica el panorama económico de la «gente de color» y de las «mujeres con menor nivel educativo» es una gran falta de respeto. A pesar de mencionar la «desigualdad» casi 20 veces, el autor nunca define los aspectos específicos que se pueden resolver. El artículo continúa con diversas opiniones sobre cómo se puede intervenir para abordar la desigualdad, sin otro mensaje claro que el de que la Fed debería hacer algo, lo que siempre se reduce a la creación de dinero o a la manipulación de los tipos de interés. La esperanza de utilizar la creación de dinero para crear una sociedad más justa es en realidad una táctica muy antigua conocida como «inflacionismo». Mises discutió esto hace más de 100 años, los diversos problemas de juguetear con la oferta monetaria y cómo en última instancia perjudica a la sociedad. El autor ni siquiera se plantea que la impresora de dinero metafórica de la Fed se detenga. Al final, una pregunta ilustra el problema que el autor pasó por alto por completo, preguntando: ¿Qué pasaría si la Reserva Federal, la Secretaria del Tesoro (y ex presidenta de la Reserva Federal) Janet Yellen y los líderes del Congreso de ambos partidos, convocaran una cumbre sobre cómo el gobierno federal debe abordar la desigualdad? La apelación a un poder superior es tentadora. Pero deja de lado más de un siglo de intervención de la Reserva Federal, el ciclo de auge y caída, la pérdida perpetua del poder adquisitivo del dólar, las burbujas de activos y el pésimo historial de los gobiernos en la creación de soluciones a nuestros problemas. El deseo de mejorar la disparidad económica es encomiable. Pero como son el gobierno y la Fed quienes crean la disparidad, la petición es poco más que una apelación a la esperanza y la emoción populares. El autor incluso cita algunos de los errores de la Fed, pero en lugar de pedir que se detenga la planificación central, pide un plan central mejor. Pide que una mezcla de funcionarios elegidos y no elegidos, mediante impuestos o creación de dinero, confisquen o creen dinero para desembolsarlo a ciertos miembros de la sociedad, así como que manipulen los tipos de interés para ayudar a los que se consideran más necesitados. La esperanza es que esta nueva asignación de fondos y los cambios en los tipos de interés mejoren la sociedad. El Congreso encomendó a la Fed las tareas de pleno empleo y estabilidad de precios; pero debemos profundizar para entenderlo. Los objetivos sólo pueden alcanzarse cuando la Fed dice que se alcanzan, a juzgar por las mediciones que sólo conoce la Fed. Aunque no existe una oferta monetaria óptima ni un tipo de interés ideal, la Fed insiste en controlarlos en nombre de la nación; siendo ambas tareas que cientos de millones de participantes en el mercado pueden hacer mejor que cualquier banco central. Si no se plantean soluciones de libre mercado para el problema económico de Estados Unidos, la alternativa siempre será un llamamiento a más socialismo, salvo que esta vez se hará definitivamente bien.

  • Bitcoin Hodling and Gresham’s Law
    by Connor Mortell on July 16, 2021 at 2:00 pm

    By: Connor Mortell In 2013, a bitcoiner posted “I AM HODLING” on a bitcoin forum, intending to write that he was holding during a large price drop. He was explaining that most people are not successful traders and as a result they will inevitably just lose out in the process of trying to time the bear market, so instead he encouraged that bitcoiners should hold and trust bitcoin. Since that day, this typo, “hodl,” has worked its way into the everyday vernacular of bitcoiners. It now represents the stance that not only should one not attempt to trade bitcoin through bull and bear runs, but also should not sell bitcoin under any circumstances because whatever asset it is one may purchase with it will one day be outperformed by bitcoin. For some purposes, this may be helpful, but for the adoption of a private money, this is exceedingly dangerous. Gresham’s law is what makes this such a threat to bitcoin adoption. Gresham’s law is colloquially stated as “the tendency for bad money to drive out good money.” This happens because the consumer will find it preferable get rid of their “bad money” and as a result when they have to spend something, they will spend the “bad money” and it will end up being the money that is most widely accepted. It is used regularly to argue against private currencies with individuals like W.S. Jevons even citing it as the reason that “there is nothing less fit to be left to the action of competition than money.” Friedrich A. Hayek, however, dismantles this claim in his essay Denationalisation of Money: The Argument Refined: What Jevons, as so many others, seems to have overlooked, or regarded as irrelevant, is that Gresham’s law will apply only to different kinds of money between which a fixed rate of exchange is enforced by law. If the law makes two kinds of money perfect substitutes for the payment of debts and forces creditors to accept a coin of a smaller content of gold in the place of one with a larger content, debtors will, of course, pay only in the former and find a more profitable use for the substance of the latter. With variable exchange rates, however, the inferior quality money would be valued at a lower rate and, particularly if it threatened to fall further in value, people would try to get rid of it as quickly as possible. The selection process would go on towards whatever they regarded as the best sort of money among those issued by the various agencies, and it would rapidly drive out money found inconvenient or worthless. Indeed, whenever inflation got really rapid, all sorts of objects of a more stable value, from potatoes to cigarettes and bottles of brandy to eggs and foreign currencies like dollar bills, have come to be increasingly used as money, so that at the end of the great German inflation it was contended that Gresham’s law was false and the opposition and the opposite true. It is not false, but it applies only if a fixed rate of exchange between the different forms of money is enforced. Sure, the consumer would have the desire to spend their “bad money” in order to get rid of it in exchange for preferable products, but the producer would have a desire to not accept this “bad money” and thus would require more of it in exchange for any given good. That’s why, as Hayek explained, Gresham’s law is not true with variable exchange rates, as bitcoin has with the dollar. Under the natural system that Hayek lays out, if bitcoin really is the so called “good money” then because the exchange rate between these two currencies is variable, bitcoin should be able to drive out the “bad money.” However, if there is a widespread cultural discouragement of giving up bitcoin in exchange for other assets—put more simply, using bitcoin—there is an inverse effect to that of the variable exchange rate as it relates to Gresham’s law. Instead the average bitcoiner returns to the image originally painted in Gresham’s law where the owners of “good money” hold it away in a safe while the actually circulating money is the “bad money.” For all intents and purposes, the bad money ends up driving out the good again when bitcoiners over commit to hodling. This all comes with one final disclaimer: there is nothing wrong with holding/saving. In fact, as Austrians we know that saving is vital to the economy. I am by no means saying that bitcoin has reached some objective value that makes it worth selling and using now. Obviously, bitcoin’s value is subjective and thus one should not spend it on things which they hold lower in ordinal value than that amount of bitcoin. I’m simply saying that as long as the bitcoin community pushes a narrative of hodling no matter what and spending that bitcoin under no circumstances, it will push more and more a scenario in which the “bad money drives out good.”

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