Power & Market

Current State and Federal Schemes to Bribe Voters are Totally out of Hand

09/06/2022Liam Cosgrove

Men are not infallible; they err very often. It is not true that the masses are always right and know the means for attaining the ends aimed at. “Belief in the common man” is no better founded than was belief in the supernatural gifts of kings, priests, and noblemen. Democracy guarantees a system of government in accordance with the wishes and plans of the majority. But it cannot prevent majorities from falling victim to erroneous ideas and from adopting inappropriate policies which not only fail to realize the ends aimed at but result in disaster. Majorities too may err and destroy our civilization.

-Ludwig von Mises, Human Action (1949)


Forbes recently published a list of 17 states that are implementing direct-to-consumer stimulus in order to provide ‘inflation relief’ to struggling residents. These include CA Governor Gavin Newson’s ‘gas rebates’ of $1050 for families earning less than $150k annually and even larger proposals like in Pennsylvania, where Governor Tom Wolf has proposed $2,000 stimulus checks for households earning less than $80,000 (estimated to reach a total of 250k households). Because that’s not enough, Wolf is also proposing small business grants of up to $50,000 in which firms owned by women and minorities, as well as rural companies, would get priority.Hey… at least ‘rural’ is now a protected class too!

It’s no surprise that nearly all of these proposals were signed or proposed just ahead of midterms, a strategy that is becoming alarmingly bipartisan. As an early adopter, NY Senator Chuck Schumer has mastered this technique. You may recall in early 2021, the stakes were high ahead of the Georgia run-off elections as this race would determine whether the Democrats would secure a majority in the senate. Polls slightly favored Republican candidate Perdue leading up to the start of the new year. Then, late in the evening on Dec 27 2020, Schumer announced his plan to raise the scheduled $600 stimulus checks to $2,000, emphasizing that “No Democrats will object. Will Senate Republicans?”. To the exact day, you can see how the polling results shifted, knocking Perdue’s +10 basis point lead down to -170 (note this is pre-Jan 6):

In response to Biden’s $10-20k student loan forgiveness executive order (also strangely enacted right before midterms), Schumer and MA Senator Elizabeth Warren released a joint statement which read “the work - our work - will continue as we pursue every available path to address the student debt crisis.” In other words, we’ll be forgiving more debt ahead of the 2024 presidential elections.

New York state has taken things considerably further. Last year, the state passed a measure allowing for stimulus checks of up to $15,600 to be given to undocumented workers. The $2.1 billion in funds quickly depleted, yet to this day, the Excluded Worker Fund receives hundreds of calls per month inquiring about further stimulus. The self-described “nonpartisan” think tank Economic Policy Institute praised the initiative and recommended all other states follow suit.

NY based immigration advocacy groups are now calling for another $3 billion in stimulus for the undocumented and $800 million to provide them with monthly unemployment checks of $1,200. While Governor Kathy Hochul has not weighed in, this year’s state budget includes subsidized medical care for undocumented seniors and mothers with newborns, estimated to cost $220 million. Ordinarily such measures would not qualify as constituent bribery, however, New York City passed a law earlier this year granting noncitizens suffrage.

In June, this law was shot down by the New York State Supreme Court. Still, the law is an omen for things to come, and during a time when senators and district attorneys consider the federal Supreme Court to be 'illegitimate’, it will be interesting to see how long this ruling holds up.

Masked-profile-picture MA Senator Ed Markey and NYC District Attorney Eliza Orlins call the Supreme Court 'illegitimate’.

All of this brings up this question: Should the recipients of outright bribes be permitted to participate in elections? Is the conflict of interest not too great? I’ve written in the past about implementing a ballot test to curb some of the less desirable symptoms of pure Democracy. But perhaps the solution is as simple as: if you receive direct payments from the government (federal, state, or local), then you cannot vote. Another solution is a poll tax, which, in addition to being a voluntary tax, ensures one’s vote is not influenced by the prospect of financial gain.

I realize these suggestions are literal “assaults on Democracy”, but I fear the path we’re on eventually leads to hyperinflation, capital controls, and a deterioration of personal autonomy over one’s property. I see no reason why the bribing-of-the-constituency trend reverses without decreasing the size of the US voting base, which is instead rapidly increasing as, in addition to adding noncitizens, Democratic congressmen are advocating to reduce the voting age to 16. Lastly, I don’t expect anyone in office to take up a position of reducing voter rolls as it’s too easy to be branded an “enemy of Democracy”.

I truthfully believe the US is beyond saving, although someone like Ron DeSantis could help to delay the inevitable for a while. That doesn’t mean the rest of the world is destined to our fate. Small government, anti-authoritarian, freedom-oriented, Libertarian ideals are more likely to take hold in countries where government has failed its people time and time again - countries in Africa, South America, and parts of Asia.

It’s a long shot, but if you’re a person with means who would like to attempt to fix big government, reach out through my Substack and let’s see if we can get a group and some capital together. Then use it to either back pro-freedom candidates in a developing nation or educate the local population in these concepts (a foreign Mises Institute). Just a thought I’ve had for some time but never acted on. It certainly feels like the authoritarians are winning these days, why not try to counter them?

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California’s Unemployment Fund is Insolvent, Far Surpassing Other States

08/22/2022Liam Cosgrove

I recently dug into our government’s convoluted unemployment insurance system. As is typically true with most government policy, any stone one decides to unturn is ripe with waste, fraud, and mismanagement.

In 1935, FDR (of course) created the first federal unemployment insurance program via the Social Security Act. The program created a national lending pool for states with insolvent unemployment relief accounts. It began by ‘incentivizing’ states to join the program and of course is now a required federal tax on all employers. 

Called the FUTA tax, it’s levied on business owners directly for each employee they have. The IRS makes clear on its website, “Only the employer pays FUTA tax; it is not deducted from the employee's wages.” Leaving aside the naive assumption that employees and customers will not share the burden of this tax, I can’t help but laugh at the rationale here: Private employers are, by definition, the greatest force combating unemployment. So, let’s punish them with a tax - reducing their ability to hire - and use it to incentivize not working!

During COVID, with unprecedented levels of layoffs amid government lockdowns and commensurate increases in unemployment stimulus, many state unemployment relief funds became deeply indebted to the national fund. Though none come close to California’s negative $19 billion balance

In a world where trillion-dollar spending packages are commonplace and each week another billion is sent to Ukraine, it’s hard to grasp what is actually a big number. To put it into perspective, the second most indebted state is New York at negative $9 billion. Look at how CA compares to its peers:

Yet another example of how your federal taxes are being used to bail out California.

According to the Congressional Research Service, if these debts are not repaid “states may face interest charges and the states’ employers may face increased net FUTA rates until the loans are repaid.” In other words, California business owners (who are already fleeing the state en mass) will soon face even higher taxes. The reality is, however, that CA will never be able to pay back this debt. It will likely come down to higher taxes for ALL business owners and some help from the Federal Reserve.

California has seen a substantially slower jobs recovery than most of the country (see LA below).

Maybe… just maybe… massive welfare programs that encourage people not to work and excessive taxes and regulatory headaches for business owners do not actually solve the problem.

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Chicken, Beef, & Bugs

08/15/2022Robert Aro

You know the economy is in trouble when a CNBC headline reads:

This was a good week for inflation numbers, but whether it can last is the big question

…citing the Consumer Price Index (CPI) increase by 8.5% and the Producer Price Index (PPI) increase of 9.8% from a year ago as a mild victory. However, the celebration came with a reminder that:

Fed officials will be watching closely to see larger trends in how inflation is impacting Main Street.

Yet, understanding how Main Street is impacted is an impossible task. Measuring the average price increase, for the average person, in the average city, has severe limitations. Then there are even more immeasurable elements like human suffering, capital destruction, and opportunity cost that also comes from centrally planning an economy.

Using the Fed’s own data, we can attempt to visualize how bad things are by looking at one of the few things many people still have in common, their love of eating chicken and beef.

According the Bureau of Labor and Statistics, who compiles data used by the Fed, the average cost of chicken breasts is up almost 32% from a year ago:

The average price of ground beef hasn’t increased as much, only 12% from a year ago, per below:

Of course these titles sound unintentionally humorous and highly arbitrary. In the case of ground beef, the Fed says this applies to: “Fresh regular 100% ground beef excluding round, chuck, and sirloin. Includes organic and non-organic. Excludes pre-formed patties.” Should one be so inclined to actually read the calculation method and average price data, it will quickly be obvious how inexact a science inflation calculations really are.

They categorize meats, poultry, fish and eggs together to arrive at a change in the CPI by only 11% from a year ago:

For those who abstain from eating meat entirely the average price of beans is up 17% from a year ago:

While not everyone is looking to buy a used car, pay tuition, owns a pet, or takes public transportation, everyone must eat food; and, by all measures, grocery bills, like the price of gas, remain elevated. The future shows little promise of sustained and long-term price decreases occurring anytime soon… or ever, since the Fed is pro-inflation.

Perhaps another sign of the times was from an article the World Economic Forum published earlier this year entitled:

5 reasons why eating insects could reduce climate change

Whether one eats chicken, beef, or chooses to eat bugs, we must remain cognizant of the fact that it never had to be this way. We should get angry when the mainstream media chooses to portray a CPI of 8.5% as good news, or worse, claim that:

Wednesday’s inflation numbers could take some heat off the Fed.

Remember no amount of positive CPI or PPI is necessary to support a functioning society. All these calculations attempt to do is capture how much the cost of living has changed from the month, or year prior, with the hope that it always goes up by a certain amount. For the planner, they’re okay with making life more expensive for you with each passing year, because they need to increase the money supply in order to pay for things not generally valued by the public, like wars, corporate bailouts and tax collector salaries. In their perfect world, they’d hope this to be gradual, so the public would never become aware of the perpetual loss of purchasing power.

The thing about a central plan is that it never goes as planned. If there is a silver lining, it’s the hope that this lesson in inflation will become a generational learning curve, much like price inflation, permanently entrenched.

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Can a Libertarian Pragmatically Support Pax Americana? The Case of Freedom in Central and Eastern Europe.

07/30/2022Karol Mazur

The war in Ukraine has brought back the debate on international security among European countries, especially in the countries of the former Soviet bloc in Central and Eastern Europe. Most of these countries, such as Poland, the Czech Republic, Slovakia, Lithuania, Latvia and Estonia, broke free from the communist regime with the end of the Cold War and the collapse of the Soviet Union at the end of the 1980s. These countries began to build democratic structures with a relatively free market economy.

The shift from central planning economy to capitalist enrichment mechanisms and privatization has become a reality. In some countries that transformation unfortunately was done not in peace but in accordance with Jefferson's famous sentence that „the tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.”

A few years ago, before the war was started, Polish organization „Stowarzyszenie Libertariańskie” (Libertarian Association) wrote an optimistic statement about Ukraine:

We are witnessing a repeat from Lithuania, but on a larger scale. In the elections, Volodymyr Zelensky was elected president, whose political staff openly admits to libertarian ideas. (..) it is worth keeping your fingers crossed for the initiative and potential implementation of several libertarian postulates in the beautiful Ukrainian lands. 

After February 24, 2022, the discussion on security flared up again, also on the websites of European libertarians and supporters of the Austrian school of economics. In an interview with Dr. Michał Stępień from the Department of International and European Law at the University of Wrocław, published on the website of the Polish Mises Institute we read that:

The scale of armed aggression by Russia with the participation of Belarus against Ukraine since February 24, 2022 and the related scale of crimes against humanity, which is being committed by the Russian army, has meant that the previously used arguments of Russia, assuming that it is a defense of the Russian minority living in Ukraine and Georgia, is completely inconsistent with the actual situation witnessed by the international community. In the event of the occupation of Crimea, the Russian armed forces pretended not to be the armed forces of Russia. What the armed forces were, today is absolutely beyond dispute, so this trick is legally insignificant. In the case of the military operations undertaken on February 24, 2022, the armed forces conducting the military operations against Ukraine have been officially announced by the Russian authorities.

Support for Ukraine and words of encouragement come from libertarians for obvious reasons. However, the fundamental question that arises is whether, in such a situation, the libertarian can compromise using ideological pragmatism. Can we accept the fact, for the needs of the moment, that the domination of the United States within Pax Americana as a hegemon and gendarme of the world was and is necessary in this part of Europe to maintain civil liberties, free market, and to expand these aspects within the self-determination of newly liberated countries?

The European freedom perspective is closely correlated with the analysis of the imperial activity and policy of the United States, to which the former Soviet bloc states owe their freedom. So, does a European libertarian, e.g., a Polish libertarian, can and has to adopt the view that the involvement of the United States can serve to extend freedom? Paradoxically, this thesis is not as obvious as it might seem. After all, as a political movement, libertarianism believing in small government, is opposed to imperialism, unfounded aggression, and the destructive role of violence in human relations. Maybe some societes can take advantage of US hegemony, according to geopolitical rules, to expand their sphere of freedom, democracy and free market? The conflict in Ukraine, despite the obvious reasons on the side of the attacked Ukraine, seems to divide many libertarians. Libertarians, as we read in the principles of Libertarian Party:

...believe that war is justified only in defense. We are opposed to a draft. If a war is just and necessary, Americans of all backgrounds will volunteer to fight it. We believe that a draft enforced by law is no different from slavery.

Much has been written about international relations from a libertarian perspective (including classics of thought like Murray N. Rothbard and H.-H. Hoppe). But the European perspective of the libertarian movement seems to be a little different. This is probably because many European libertarians know historical aspects and realize that without the involvement of the United States, especially in their culminating moment, i.e., the presidency of Ronald Reagan, the countries of Central and Eastern Europe might still be in captivity and Russian dependence, like in Belarus or Chechnya for other example. 

Fear of the Russian Federation seems to be a natural determinant of the European libertarians' view of the collective involvement of Western forces in helping Ukraine. By the way of example; Polish libertarians expressed their indignation at the words of the famous psychologist Jordan B. Peterson speaking on the war in Ukraine. Peterson declared that he saw the conflict (war) as a clash of values. As we said libertarians' support for Ukraine seems obvious.

Various supporters of freedom seem to recognize this problem and support Ukraine by sending money and basic necessities. But is it enough? Does the role of commitment end there? Many freedom activists says that the case of Hong Kong should be a warning to the free world. The prospect of a libertarian Ukrainian state that breaks out of the gloomy Kremlin despot seems very tempting and possible. For example, Rainer Zitelmann sees opportunities for Ukraine, which may become an economically liberal state in which political currents of freedom thought can and develop.


This short and provocative reflection maybe open the great debate. The problem outlined here requires a broader attention to this issue throughout the Austro-libertarian community. If we have two or more agressive imperialist Leviathans, should we choose the lesser evil among them? What strategies of freedom should be adopted in the face of that kind of crisis? Are there any alternatives to imperial military alliances? What criteria for collective self-defense of states should be adopted from a libertarian perspective? The answers still remain open and we should not avoid them.

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Congressional Term Limits: How Short Should They Be?

07/28/2022Ryan McMaken

Here's an interesting bit of new legislation coming from Congressional Democrats. Georgia Democrat Rep. Hank Johnson has introduced the "Supreme Court TERM Act." This legislation would

  • Establish terms of 18 years in regular active service for Supreme Court justices, after which justices who retain the office will assume senior status;
  • Establish regular appointments of Supreme Court justices in the first and third years following a presidential election as the sole means of Supreme Court appointments;
  • Require current justices to assume senior status in order of length of service on the Court as regularly appointed justices receive their commissions;
  • Preserve life tenure by ensuring that senior justices retired from regular active service continue to hold the office of Supreme Court justice, including official duties and compensation; and
  • Require the Supreme Court justice who most recently assumed senior status to fill in on the Court if the number of justices in regular active service falls below nine.

It's a both a court-packing bill and a term limits bill. It's unclear that the bill would pass constitutional muster under federal judges' current interpretations of Article III of the US Constitution. But, that probably doesn't matter since such legislation is unlikely to get through the Senate, given that Sen. Manchin of West Virginia has already said he would not support any court-packing legislation. 

The idea of Congress erecting term limits for the Supreme Court while doing nothing to create term limits for Congress is an impressive display of chutzpah for current members of Congress. After all, term limits for Congress have long been very popular, with the idea often commanding around 75 percent support from those polled. That's even more than the support for limiting the tenures of SCOTUS justices, which is apparently around two-thirds in support

Legislation limiting Congressional terms is also of unclear constitutionality, at least as far as current interpretations offered by federal judges go. But there's no reason why Congress couldn't put the wheels in motion for enacting Congressional term limits. The reason this hasn't happened, of course, is obvious. Those in Congressional leadership positions—the ones who determine what gets voted on—would be the most impacted were such measures adopted. 

But how much would term limits affect the average member of Congress? 62 members of the Congress over the years have served more than 40 years in Congress overall. 10 members of the Senate have served more than 40 years in the Senate alone. 32 members of the House of Representatives have served 40 years in the House alone. 

It's a fairly safe bet that most members of the public would support term limits set at well below 40 years. But how much lower? Not all members are in there for these long multi-decade periods. What is the average tenure for a member of Congress? 

Well, according to a July 2022 report by the Congressional Research Service

The average length of service for Representatives at the beginning of the 117th Congress was 8.9 years (4.5 House terms); for Senators, 11.0 years (1.8 Senate terms). 

So, setting the term limit for members of the House at, say, 12 years of the House of Representatives and 18 years for the Senate, would not impact the "average member." But it would definitely eliminate those members of congress who serve decades in Congress. People like Mitch McConnell or Chuck Schumer or Nancy Pelosi would be long gone. Even if these 3 people had served 12 full years in the House and then moved to serve 18 years in the Senate, they still would have used up their full terms years ago. 

Do Members Stay in Congress Longer in the 21st Century? 

Of course, we haven't approached the question of whether or not term limits are a good thing. It's not at all obvious that term limits would make Congress more laissez-faire, less corrupt, or less warmongerish. It could be that term limits would just bring in a larger number of people who are pretty much like the current sorts of people who inhabit Congress. Moreover, maybe in the good ol' days people actually served longer in Congress than they do now. Maybe longer Congressional tenures would actually improve things? 

Well, it turns out that the average length of tenure of members of Congress has gone up considerably over the past 150 years. As noted above, the average tenure for the current crop is 8.9 years in the House and 11 years in the Senate, but those averages were much lower in the nineteenth century. As we can see, the average for Senators never exceeded 6 years until the late nineteenth century. It never exceeded 4 years in the House until around 1900. The overall trend has been steadily upward since then

Source: Congressional Research Service.

In other words, for the first 100 years of the Republic, the average length of so-called "service" in the Senate was one term, while it was less than two terms in the House. 

[Read More: "Repealing the 17th Amendment Won't Fix the Senate" by Ryan McMaken.]

Those could be due to many different factors. It could be due to the structure of political parties which was much different in the nineteenth century. Senators, of course, were generally chosen by state legislatures, and many senators came and went based on deals struck with state politicians. In any case, we do know that greatly reducing the average tenure of members of Congress would simply return average tenure lengths to what was common in the past. 

That's unlikely to "fix" Washington, DC. But holding Senators to a single term or a House member to 2 terms would not necessarily be a radical departure from the Congresses of the past either. 

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Call for Papers: Essays in Literary and Media Criticism in Memory of Paul A. Cantor

07/14/2022Jo Ann Cavallo

Call for Papers: Essays in Austro-Libertarian Literary and Media Criticism for a volume in memory of Paul A. Cantor

The groundbreaking research of the late Paul A. Cantor (1945-2022), Clifton Waller Barrett Professor of English at the University of Virginia, ranged from canonical English authors the likes of Shakespeare and Shelley to popular American television series such as Gilligan’s Island and South Park. His scholarship was so prolific and all-embracing that it led some to question whether the same person could have authored such a breadth of work. “Yes,” replies Peter Hufnagel, creator of the website prof.Cantor, “the Paul A. Cantor who writes about Averroism in Dante's Divine Comedy is the same Paul A. Cantor who writes about Walter White as a tragic hero in Breaking Bad.”

Yet it is not simply the scope and copiousness of Cantor’s scholarly output to which the proposed volume intends to pay tribute, but also, and especially, to his pioneering interdisciplinary method which turned to the Austrian School of economics and libertarian philosophy in the interpretation of literature and media. As Alberto Mingardi has recently commented, “Such an interest in Austrian economics brought him to be that rare thing: an intellectual in the humanities—even more, a literary critic—who had some sympathy for capitalism. At one level, this sympathy emerged in the very fact that he was not a snob: together with his Shakespeare studies, he cultivated an interest in popular culture that he understood as a living thing, and sometimes a beautiful thing too” (“Paul Cantor RIP”).

When I was corresponding with Paul about a volume I planned to co-edit with Carlo Lottieri, eventually titled Speaking Truth to Power from Medieval to Modern Italy, he reflected on the difficulties he had faced when trying to track down libertarian literary scholars in the early 2000s: “When I first planned what became LITERATURE AND THE ECONOMICS OF LIBERTY I hoped to micro-manage the volume and get just the essays I wanted. But I found that I couldn’t get people to write exactly the essays I wanted them to. In the end, I settled for the best people I could find and letting them write about anything they wanted, and that pretty much involved the whole range of literature, across the world and across the centuries. And I had so few people to draw from that in the end I had to write half the essays in the volume myself” (email, March 29, 2013).

The volume in question, Literature and the Economics of Liberty: Spontaneous Order in Culture(Mises Institute, 2009), contained ten essays by five contributors, including two by co-editor Stephen Cox and five by Cantor himself. Consisting of a whopping 510 pages despite the small number of contributors, the volume indeed spanned the globe and encompassed various time periods, with studies on canonical European and American authors (including Cervantes, Jonson, Shelley, Whitman, H. G. Wells, and Cather) and the contemporary Nigerian novelist Ben Okri. Beyond the insights found within the individual chapters, what is of special importance, as the co-editors explain, is the fact that this is “the first collection of essays that accepts the idea that economics is relevant to the study of literature, but offers free market principles, rather than Marxist, as the means of relating the two fields” (x). The introduction to the volume, which could be read as a manifesto, argues that Austrian economics, “which focuses on the freedom of the individual actor and the subjectivity of values, is more suited to the study of literature and artistic creativity than a materialist, determinist, and collectivist doctrine such as Marxism” (12). As Matthew McCaffrey notes in “The Importance of Literary Criticism from a Free-Market Perspective” (2014), that volume “helped lay the foundation of a libertarian literary criticism.”

Although Austro-libertarian literary and media scholarship may still be off the radar of most English Departments, since the early 2000s it has engaged increasing numbers of scholars whose interests have ranged from ancient Chinese writers (Roderick T. Long, Rituals of Freedom: Libertarian Themes in Early Confucianism, 2016) to modern American cowboy movies (Ryan McMaken, Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre, 2012). Matt Spivey’s recent Re-Reading Economics in Literature: A Capitalist Critical Perspective (2020) and the forthcoming Show and Biz: The Market Economy in TV Series and Popular Culture edited by María Blanco and Alberto Mingardi attest to the field’s current vibrancy and future possibilities. The growing body of libertarian-leaning scholarship is listed in the bibliography “Austrian Economics, Libertarianism, and Academic Writing in the Humanities” (2022).

In short, literary and media criticism grounded in the Austrian School of economics and libertarian philosophy opens up largely uncharted paths for researchers to recognize and investigate the form, nature, and effect of economic systems and political power structures in creative works across media during any time period and at any point on the globe. This volume aims, therefore, to present cutting-edge research that will contribute to the continued development of this exciting new field.

If you are interested in submitting an essay that analyzes literature or media from the perspective of the Austrian School of Economics and/or libertarian philosophy, please send an abstract of 150-200 words, together with a bio of 75-100 words, to me at jac3@columbia.edu by January 15, 2023. You will be notified of acceptance of the abstract by January 30, 2023. The abstracts and bios will be used in securing the interest of a suitable publisher, and completed essays will be due one year from that time. Please feel free to contact me in advance of sending an abstract if you have queries or would like to discuss any aspect of a potential submission.

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Croatia May Become the 20th Member of the Eurozone in 2023: What Does this Mean to the Euro?

06/30/2022André Marques

The European Central Bank (ECB) informed, in June, that Croatia fulfills the requirements and can join the euro on January 1st, 2023. If this happens, Croatia will be the 20th member of the European Union (EU) to be part of the single currency.

The European Commission also recommended Croatia's entry into the eurozone to the Council, stating that the country meets the conditions to do so. Plus, the Eurogroup recommended Croatia’s adhesion to the euro as well.

The European commission also stated that

…the Council [Ecofin] will take the final decisions on Croatia’s adoption of the euro in the first half of July, after discussions in the Eurogroup and the European Council, and after the European Parliament and the European Central Bank have delivered their opinions.

According to the ECB's assessment, Croatia fulfills the convergence criteria (price stability, budget deficit and public debt to GDP ratios, exchange rate and long-term interest rate) and its legislation fully complies with the requirements of the Treaty on the Functioning of the European Union and the statutes of the European System of Central Banks and the ECB:

Price Stability:

In April 2022, the 12-month average rate of consumer price inflation by the Harmonized Index of Consumer Prices (HICP) was 4.7 percent in Croatia, below the reference value of 4.9 percent. However, considering the 10.7 percent annual consumer price inflation for Croatia in May, the ECB stated that the sustainability of inflation convergence in Croatia in the long run is a concern.

Budget Deficit and Public Debt to GDP Ratios:

Croatia's public deficit at the end of 2021 was just below the 3 percent of GDP reference value, while public debt was above the 60 percent of GDP reference value (but it was lower than in the previous year). The budget deficit was 2.9 percent of GDP in 2021, which meets the deficit criteria. The public debt was 79.8 percent of GDP in 2021, which represents a reduction from the maximum value of 87 percent of GDP recorded in 2020.

Exchange rate:

The Croatian kuna was included in the ERM II on July 10th, 2020 at a central rate of 7.53450 kuna per euro with a normal fluctuation band of ±15 percent. In the two-year reference period (May 26th,2020 to May 25th, 2022), the kuna exchange rate had a lower degree of volatility and the currency traded close to its central rate.

Long-Term Interest Rate:

In the reference period from May 2021 to April 2022, long-term interest rates in Croatia averaged 0.8 percent (below the reference value of 2.6 percent for the interest rate convergence criteria). Long-term interest rates in Croatia have fallen since 2012, with the 12-month average rates falling from a value slightly below seven percent to a value below 1 percent.

In addition to Croatia, there are six countries that have not yet joined the euro but should do so once the requirements are met: Bulgaria, the Czech Republic, Hungary, Poland, Romania, and Sweden.

The ECB concludes that only Croatia and Sweden meet the price stability criteria. And all other EU members mentioned above meet the public finances (budget deficit and public debt to GDP) criteria, with the exception of Romania, which is currently the only member subject to an excessive deficit procedure (Romania's budget deficit was 7.1 percent of GDP at the end of 2021, while Croatia's was 2.9 percent of GDP).

According to the ECB's assessment, Bulgaria and Croatia meet the exchange rate criteria. The long-term interest rate criterion is met by Bulgaria, Croatia, the Czech Republic and Sweden.

What Can Joining the Euro Mean for Croatia and the Rest of the Eurozone?

As Philipp Bagus explained in The Tragedy of the Euro, the mechanism behind the euro produces an incentive for its members to get into debt over time. Yes, there are periods when most countries decrease their indebtedness (albeit very slowly). But eventually they increase it to an even higher level (so, in the long run, indebtedness increases).

At first, Croatia's adhesion to the euro should be beneficial to the country's inhabitants, as the euro is stronger than the kuna (1 euro has fluctuated between 7.1 and 7.7 kuna since 2004). If Croatia joins the euro, its inhabitants will have greater purchasing power than they do today, even though the euro is devaluing at a greater intensity, leading to the highest consumer price inflation in the history of the euro. Croatians will be able to import more (and better quality) goods. And long-term investments will be more possible than they were with kuna. This can improve the standard of living of Croatia's inhabitants.

On the other hand, joining the euro can also bring problems. Like other eurozone governments, Croatia's government may become larger (increase its spending and indebtedness) over time. It may increase intensely (as happened with Portugal, Spain, Italy and Greece) or at a lower intensity (as in Germany and Luxembourg, which despite being countries with more frugal governments, their indebtedness increased in the long run).

In any case, it is likely that, by joining the euro, Croatia will increase its indebtedness (which means that the government will absorb more resources from society, decreasing the productive investments in the country). Furthermore, if Croatia goes down the higher debt path, it will be yet another major source of debt issuance that the ECB should eventually buy (yes, the ECB announced it will cease its Asset Purchase Program in July, but this halt will hardly be permanent). If this happens, Croatia's indebtedness would be another major source of inflation for the euro, further decreasing its purchasing power over time. Everything will depend on how the Croatian government behaves in the years following its adhesion to the euro.

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Countdown to Crisis

06/27/2022Liam Cosgrove

If you’re into finance, you may have seen this chart:

Fed hiking cycles end in crisis - every time. The chart also illustrates that, since the 1980s, the Fed has been unable to achieve a Fed Funds Rate (FFR) at or above the peak of the preceding tightening cycle. 

It’s not a mystery why this happens: lower-for-longer rates allow for greater debt accumulation and create an ever-increasing dependency on cheap rollover costs.

While the above chart isn’t a very large data set, it appears that crises manifest when FFR reaches 50 percent to 80 percent of the immediately preceding FFR peak. Given today’s effective FFR has been jacked up from nearly 0 to 66 percent of the 2018 peak in a matter of four months (for reference it took over 3 years for the previous cycle to cover the same relative ground), the likelihood of “something breaking” seems high.

Before gobbling up VIX futures, it’s important to check the thesis.

Many are pointing to the huge sums parked the Fed’s Reverse Repo (RRP) facility, excess cash earning overnight yield from the Fed, as one reason why “things may be different this time”. Translation: there’s too much cash for a liquidity crisis. 

First, the majority (88 percent) of RRP participants are Money Mutual Funds. This is A LOT of cash that would otherwise be chasing T bills, commercial paper, or lent in the repo market. This means an inter-bank lending crisis is unlikely.

That is not to say we will not see “something break”' in the private sector - in the form of margin calls, mass layoffs, or bankruptcies - due to the rapid uptick in costs of capital. Ironically, the high RRP balance may be giving false confidence to FOMC members that further tightening can be sustained.

Let’s look more broadly at money supply:

The interesting thing to note here is the vastly greater increase in money supply (both nominal and percentage wise) post-GFC as compared to post-Dot Com. When comparing the “success” of each hiking cycle that concluded these two eras (see below), it appears that money supply and economic robustness are inversely correlated. This is especially odd given that post-GFC was supposedly when regulators cleaned up the financial system with stricter collateral and lending criteria.

So, the suggestion that excessive liquidity will save us from a crisis is not supported by the data (and in fact the opposite may be true).

I know the recession-will-force-a-Fed-pivot trade is becoming popular now, but I would be careful. The pace of this tightening cycle dwarfs those of the last three bubble bursts shown above, and our economy is more dependent on cheap debt than ever before. Short duration debt (< 1 year) has also seen an unprecedented surge during the COVID era - meaning our countdown-to-crisis could be much shorter than previous cycles. Something may break before the Fed even has time to pivot. 

Or, let’s say the Fed cautiously pauses hikes. The markets would undoubtedly smell blood and rally on Fed capitulation. But we’re forgetting that our economy has been nursing at the test of 0 percent rates for roughly a decade - we can’t even handle 2 percent! Maybe David Hunter will finally be right and such a scenario will be the catalyst for his melt-up and subsequent crash.

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Central Banking: The Root of Economic Instability

06/24/2022Liam Cosgrove

 “An economic foundation that was built on cheap money and debt.”

Bond and equity markets have collectively seen one of their worst years on record. 

This may come as a shock to those who have followed mainstream financial outlets over the past two years, as everyday we were reminded of the “robust” recovery and “strong” labor market. 

But our economy is far too dependent on central bank policy. Peter Boockvar is a financial analyst with the Bleakly Financial Group. He sums the problem up succinctly: 

Markets and the economy… do well when the central banks are easing and cost of capital is cheap and the liquidity is flowing. But then it all reverses when they tighten monetary policy.

Boockvar adds that we are operating under “an economic foundation that was built on cheap money and debt.” Low interest rates, while incredibly stimulative for capital markets, have destroyed small/medium sized businesses and injured most banks. 

Smaller banks without access to cheap liquidity must earn the old fashioned way - lending out deposits and capturing the spread. In the falling interest rate environment of the last 40 years, these spreads have become increasingly thin, which might explain why the number of banks in the US fell by 80% from 1980 to 2020.

Another consequence from decades of accommodative monetary policy is, according to Boockvar, the exponential increase in economic fragility that results from each subsequent easing cycle. 

As interest rates remain low, businesses and households are able to borrow more. Then, when the Federal Reserve decides it is time to tighten, the large accumulation of debt means the economy cannot bear even moderately higher rates. 

This dynamic is clearly represented in the historical Fed Funds Rate chart:

We see that since the 1980’s, when Volcker aggressively tightened into recession to tame inflation, each subsequent Fed tightening cycle was unable to reach its previous height before triggering a recession (indicated by the gray vertical lines). 

This tightening cycle will be no different, and in fact may be worse. 

According to Boockvar, “We’re just getting a rerun of the same movie we’ve seen many times before… This is a sequel with scarier characteristics,” due to inflation and rapid pace of the central bank’s response.

The US has not seen serious inflation since the early 1980’s. Will the Fed tighten through a recession? Listen to more of Peter Boockvar’s insights in his full interview here:

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Cantillon Effects, Business Cycles and Market Bubbles

03/17/2022Leonel Regalado

Richard Cantillon was probably one of the first people to actually write about economic theory, and his findings are still relevant today. We’ll focus on one specific topic: the non-neutrality of money, “Cantillon Effect”. What is this? Mark Thornton brilliantly explains it in a recent article:

“The general form of a Cantillon effect is that there is increased money coming into an economy from somewhere. The first recipients benefit. They spend it according to their preferences, and this causes certain prices to go up. The sellers of those goods benefit from the new money, while others who only face higher prices are hurt.”

So basically, when prices go up in an economy, they don’t go up at the same time, or in the same proportion. Several cases have been made to indicate how CPI is problematic because of this, but that’s not our main point. In our modern society, this expansion of money comes from Central Banks, which expand the money supply either by printing money or by adding zeros to the accounts that commercial banks and entities have with them. This new money must enter the economy somewhere: the banking system. For years and years central banks have been expanding the money supply excessively, injecting money not only into the banking system, but the financial system as a whole.

This monetary expansion that goes right into the financial system tends to make the price of whatever asset most firms are investing in go up. A clear example are real estate prices right before the Great Recession: most financial firms were investing in mortgage-backed securities, which made getting a mortgage attractive, ultimately making prices go up. Cantillon effects may take months, or years to have their full effect: money can be poured into one market, without inflationary consequences in the rest of the economy for years.

Now, let’s talk about market bubbles and how they can delay these Cantillon Effects: let’s suppose the newly created money starts going into a stock market, making prices of certain stocks go up. This makes the prospect of investing in these stocks better, so as prices start going up, more people will be investing in these stocks. This delays the change of prices in the rest of the economy because more people are spending their money on these assets than buying any other goods.

It's not a surprise that most of the recessions in the last hundred years have come from these so-called bubbles. For Austrian Economists this is not a surprise, as credit expansion makes certain projects look profitable (which weren’t profitable before the credit expansion), people invest in these projects, leading to a boom, and then a bust when credit expansion halts. The main difference is that as time has passed, our financial markets have become deeper, and Cantillon Effects are delayed further and further as the new money very slowly exits the financial system into the consumer goods markets. But they can’t be delayed forever, which is why now, after a gigantic monetary expansion in the previous years, we’re seeing 21st century record-levels of inflation.

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