Category Archives: Economics1

Coronavirus: Bursting Babylon’s Bubble

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Hanging Gardens of Babylon

Our world has been hurtling toward globalization for decades. Progressives spend their lives devoted to the cause of globalization with zeal unmatched by most of their ideological opponents. And, with the enthusiastic and unwitting help of their conservative opponents, a global capital economy has engulfed the majority of today’s societies.

From the point of view of economics, a nation is simply a political barrier to the movement of the factors of production. Since capital freely flows across borders in our modern global economy, globalization is nearly accomplished from an economic standpoint. Regional economies such as the European Union already allow the free movement across national borders of another factor of production—labor.

With a global economic system in place, progressives need only consolidate political power to achieve their goal of a one-world government. Progressives hate nationalist and populist movements because they stand in their way. I think this explains the irrational hatred of Donald Trump and his supporters among the media and progressive elites as well as the opposition to Brexit.

Nations Have a Purpose

From one man he made all the nations, that they should inhabit the whole earth; and he marked out their appointed times in history and the boundaries of their lands. God did this so that they would seek him and perhaps reach out for him and find him, though he is not far from any one of us.

—Acts 17:26-27

People have a natural, sinful tendency to think they are self-sufficient, without any need for God to help them succeed.

You may say to yourself, “My power and the strength of my hands have produced this wealth for me.” But remember the Lord your God, for it is he who gives you the ability to produce wealth—Deuteronomy 8:17-18

In the Bible, Babylon represents any world system antagonistic toward God and his people. It is no wonder then, that the most famous king of Babylon was judged for failing to recognize God’s sovereignty over him.

All this happened to King Nebuchadnezzar. Twelve months later, as the king was walking on the roof of the royal palace of Babylon, he said, “Is not this the great Babylon I have built as the royal residence, by my mighty power and for the glory of my majesty?”—Daniel 4:28-30

This illusion is even more powerful and destructive when the entire world gathers together to solve humanity’s perceived problems without any deference to God and without acknowledging the real problem facing humanity—sin. At the tower of Babel the result of humanity’s desire to unite in rebellion would have been so disastrous that God, in his mercy, confused their language and scattered them over the earth. Better a world divided into nations than a world united in apostasy.

Recognizing Babylon

Both Scripture and history describe the world system called Babylon.

John in Revelation 17:5 describes Babylon as the great harlot (Revelation 17:5). The Bible uses adultery to describe idolatry. Idolatry is unfaithfulness to God (Hosea 1:2). Babylon opposes God’s redemptive plan and replaces it with human self-sufficiency. Babylon seeks power and wealth in an illusory attempt to get away with a sinful lifestyle opposed to God’s standards (Revelation 18:3). The great whore Babylon seeks worldly wealth convinced that its lack is humanity’s real problem. It hates the real riches we can obtain only through Jesus (2 Corinthians 8:9).

Babylon at the time John wrote the Revelation was Rome, an empire that persecuted Christians and sought to control vast portions of the world. The world system Babylon at the end of the age will be drunk with the blood of the saints (Revelation 17:6) as it seeks luxury. Its merchants will both fear and mourn her demise, one she never saw coming because of her rebellion against God (Revelation 18: 7,10-11).

We can recognize Babylon as any society that makes wealth acquisition its top priority at the expense of others (i.e., slavery in Rome, or enslavement by debt in modern societies) and one that opposes God’s standards of morality while persecuting Christians who would stand against its man-made standards.

Coronavirus vs Globalization

Globalists/progressives try to plan the world’s course without God. Our modern day situation is really not that much different than that at the tower of Babel. The predictable outcome now seen in the developed world—record individual, government and corporate debt, unrestrained sexual immorality, rampant abortion, small families and the resultant demographic crises—can be directly attributed to the all-out quest to serve money instead of God.

The coronavirus, with astonishing speed, has brought the global economy to a standstill.

Will anyone notice the spiritual implications?

We don’t know how long the coronavirus will wreak havoc on the global economy. But even if the pandemic ends sooner than expected, it will leave in its wake a worldwide economic crisis (more on that in my past and future blogs).

Has coronavirus dealt a serious blow to globalization? Or, will progressives find a way to use it to their advantage, not willing to let any crisis go to waste? It’s not hard to imagine a progressive call to unite the world to fight future pandemics and to resolve the looming worldwide economic crisis. Of course, they will want to expand government to attain their goal.

Bursting Babylon’s Bubble

This is where American Evangelical Christians need discernment. We have been told that, before coronavirus, the United States economy was very strong; even the best we’ve ever had. That’s a lie. Our economy and the world economy were unsustainable; they were built on debt. Coronavirus was simply the pin that pricked the debt bubble. The underlying problems in our economy and that of the world are so deep and severe that two or three months of a shut down economy pale in comparison.

Years of artificially low interest rates have increased the money supply (in the form of debt) to unprecedented levels. When all of that money is unleashed on economies that have misallocated resources into non-productive assets, prices will skyrocket as competition for necessities increases amid a slowed economy. The world is awash in debt it cannot repay (Psalm 37:21). Babylon cannot solve the problems it has made for itself.

Christians Unite

God will not give his glory to another (Isaiah 42:8). Not to progressives, not to conservative politicians, not to our economy, not to a united world. God provided the solution to the world’s problems when Jesus Christ died on the cross for our sins and rose from the dead. If Christians are to unite, let’s do so to proclaim God’s mercy to the world.

Helicopter Money

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helicopter drops money

According to some economists and government leaders, parents all across America have evidently been wrong for decades. Money actually does grow on trees.

To these leaders, money is free. All you have to do is create it, ex nihilo, and watch as it magically transforms into stuff everyone can use and enjoy. This is but one more example of economists abandoning common sense while claiming that what holds true for individuals somehow doesn’t apply to nations.

The Economic Chicken and Egg Question

Most economic theory boils down to two disparate beliefs, either that supply necessarily precedes demand or that demand necessarily precedes supply. The predominate belief, implemented by central banks around the world, is the latter. It’s otherwise known as Keynesian economics.

It is true that need precedes supply, but need is different from demand. Need always exists. Demand doesn’t. Demand implies the ability to pay for what someone else supplies.

In reality, the only thing we have to offer anyone for their goods or services is the fruit of our own labor be it in the form of goods or services. Not so for Keynesians. They believe simply having money creates legitimate demand. But this is a disingenuous position, because even Keynesians would not accept counterfeiting by individuals.

Somehow, though, counterfeiting is morally good if done by the government.

They base this belief that it is good for the government to create money “out of thin air” on the premise that falling prices, i.e. deflation, leads to a death spiral of delayed spending, reduced profits and increased unemployment. I discussed this false premise in a previous article on negative interest rates.

Thus, for many economists, inflation is the key to economic growth. They believe the threat of higher prices in the future causes people to spend more now, leading companies to hire more workers to produce goods that meet this demand.

So, when considering supply and demand, which is the chicken and which is the egg?

Why It Matters

Too much money chasing too few goods and services produces inflation. If governments can increase the amount of money people spend without a commensurate increase in the amount of goods they supply to society they can achieve their goal of inflation.

There are only three ways to gain wealth above and beyond what you have produced through work. You can steal, borrow or receive a gift.

I have discussed how inflation is theft, yet governments and central banks act as if inflation is the gift that keeps on giving. Our government, in its quest for inflation and ever-increasing demand, encourages covetousness and its accomplice debt by offering tax deductions for interest payments. Artificially low interest rates allow this generation to steal from the next.

The alternative perspective that supply is prior to demand recognizes that need motivates people to provide for themselves and their families. As they become more productive through experience and innovation, their productivity increases which means they can gain more wealth per hour of labor. This is just another way of saying prices fall (deflation).

This cycle of work/save/spend is morally superior to the Keynesian cycle of borrow/spend/work because it recognizes that the borrower is a slave to the lender. Its practitioners are less likely to succumb to covetous desires to acquire wealth outside God’s providential timetable. It also does not leave them open to being those the Bible describes as wicked because they borrow and do not repay.

Helicopter Money

I suppose that one’s stance on these matters depends, in part, on whether or not one believes that policies geared toward increasing demand have worked.

Despite declarations from politicians and economists that the economy has recovered from the 2008 crisis, it has not. Keynesian policy has not worked as evidenced by the fact that the dire situation portrayed in my post, The Wizard of Odd, has only gotten worse during the past year. Quantitative easing and near zero interest rates have not succeeded in increasing inflation or the hoped for demand but have succeeded in increasing debt.

Rather than admit defeat, central bankers are willing to go “all in” to prove their economic theories work. Not only has there been talk of negative interest rates, but also of “helicopter money.” This term is not new, Milton Friedman coined it in 1969 to describe what could theoretically be done when all else failed to produce inflation. The fact that anyone even mentions helicopter money now indicates the poor condition our economy is in.

The Federal Reserve’s Hubris

With their heads planted firmly in the sand, central bankers continue to deny the ticking time bomb they have created by flooding the economy with money. They even have the hubris to blame the failure of their policies to increase demand on banks for not lending the money and on consumers for not taking out loans. So, in their benevolence and intellectual superiority, they will consider plans to place money directly into the hands of consumers. Instead of giving money to people who already have plenty like they did with quantitative easing, they will give it to people they believe will actually spend it.

But, I think these “intellectual giants” have underestimated the public. Yes, many will spend the money, but there will be plenty of people who will be prudent enough to pay off debt with the money they are given. The problem of low demand the Federal Reserve seeks to fix will persist.

Former Federal Reserve chairman Ben Bernanke, while acknowledging the political difficulty of implementing a helicopter money policy (because it will remove central bank independence), touts the benefits of “helicopter money” in the form of increased public spending or tax cuts financed by a permanent increase in the money supply. He asserts that such a move, unlike debt-financed programs, would not be paid for by issuing new government debt to the public and would not increase future tax burdens.1

Money Doesn’t Grow On Trees

Herein lies a major flaw in Keynesian economics – failure to recognize that every dollar issued is an I.O.U. Helicopter money will monetize debt, both public and private. Critics warn it could result in hyperinflation. They’re correct.

But this is the endgame we find ourselves in. Those in charge of our money will destroy it because of an irrational fear of deflation and because of a defiant defense of their belief that “governments should never have to give in to deflation.” 2

Imagining that money grows on trees won’t save our economy. Money dropped from metaphorical helicopters won’t either.

Notes:

  1. Bernanke, B S. (2016), “What tools does the Fed have left? Part 3: Helicopter money”, Brookings Institution, 11 April.
  2. Bernanke, B S. (2016), “What tools does the Fed have left? Part 3: Helicopter money”, Brookings Institution, 11 April.

America’s Level of Prosperity Is Not Sustainable

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The proposition that the level of prosperity the U.S. enjoys is unsustainable will inevitably draw scorn from patriots and economists alike. Wealth creation, to many, has no fixed ceiling. Whether because of faith in the idea of American exceptionalism or in Yankee ingenuity or that America possesses an unsurpassed entrepreneurial spirit, or in our military might or that the good times will continue because we are the recipients of God’s favor, many cannot be convinced that our fortunes will decline significantly and for a considerable length of time.

Whatever one may think about the United States, one thing Christians should know is that the U.S. is not special enough to violate God’s principles without repercussions. The borrower is still slave to the lender (Proverbs 22:7) and the wicked borrow and do not repay (Psalm 37:1). And that is the problem – we are a debtor nation, have been for a long time and may not be able to repay what we owe.

IOUs and You

We must reap what we have sown (Galatians 6:7).

The United States has had a trade deficit each of the past 40 years. Simply stated, on a net basis, we have obtained goods and services from other nations in exchange for IOUs in the form of dollars. Essentially, what this means is that we have enjoyed a portion of the fruit of the labor of people in other nations in addition to the fruit of our own labor. We consume more than we produce. If we ever intend to pay them back, we must reverse the process and produce more than we consume with the excess production going to our creditors. This obviously requires a lower average standard of living in the U.S.

Another option to make good on our IOUs, and one that is occurring now, is for people of other nations holding dollars to buy up our real estate and corporations. Certainly we are not as wealthy or prosperous when foreigners own our land and factories and we possess our returned IOUs.

A third option is to not repay or at least not repay everything we owe. This is why, in my opinion, the Federal Reserve targets an inflation rate of 2%. When successful, the value of our debt is reduced by nearly half after 30 years. Whatever circumstances Psalm 37:1 includes, it certainly must mean that those with a planned goal to continue consuming other’s goods and not fully repay the debt they owe are acting wickedly.

Postponing the Inevitable

When illuminated by the light of Scripture, our nation’s current economic policies and monetary maneuvers can be seen for what they are – attempts to deny the consequences of debt and postpone the inevitable day of reckoning.

We really don’t have to look very hard to see that we are already beginning to reap a harvest of misery. The decrease in our standard of living is evidenced by increased underemployment, increased inequality, stagnating wages and an intractable dependence on entitlements even as we continue to increase our indebtedness.

A Christian Response

How should we, as American Christians, respond to the unpleasant facts of our economic situation? Even though changes could be made to our nation’s fiscal policies or to the global economic system that would, over time, improve our debt burden; and even though it is true that increases in productivity lead to increases in living standards, we still have this reality facing us – our standard of living is going to decrease.

If it is true that we should repay our debts, and I believe it is, then even if our leaders make wise economic choices from here on, we still face a major reduction in our prosperity.

How will hard economic times affect your walk with the Lord?

May I suggest a few ways one’s faith can increase? What if hard times help deliver us from our idols and lead to a greater trust in God? What if we learn contentment instead of covetousness and generosity instead of greed? What if, having been stripped of our security blanket of riches, we become free in the arms of Providence to love fully and fearlessly?

Would these things not make us richer than we are now?

We adhere to a faith that teaches us to be thankful for and content with much less wealth than we have now (1 Timothy 6:6-10; Philippians 4:12-13; Proverbs 30:8; Matthew 6:11). Would it really be a disaster if we had to live with less? Can Christians not, if prepared to do so, be beacons of light amid the darkness of whatever economic trouble lies ahead?  I pray we will be.

Note:

If you study economics at all, then you probably won’t be surprised to hear that some economists claim that we needn’t worry about the next generation because government debt cannot be passed from one generation to the next and that it is impossible for the United States to default on its debt because it can always print money. This article and this article make these claims. An interesting exercise, for anyone so inclined, is to discover and expose the non-biblical worldview lying beneath these assertions.

 

Negative Interest Rates – Ingenious, Absurd, or Diabolical?

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downtown financial district

On January 29, 2016 the Bank of Japan announced it would join the European Central Bank (ECB) and three national banks in the negative interest club. Members in this exclusive club pay their own nation’s banks negative interest to keep excess reserves at the central bank in hopes that losing money will overcome the risk aversion banks have during uncertain economic times. Coercing the member banks to buy assets in this manner increases asset prices and decreases borrowing costs. By loosening credit the central banks believe they will spur economic growth and win the fight against their dreaded enemy – deflation.1

Negative interest rates are not just for banks; they find their way to the average person. The interest paid on short-term sovereign bonds has gone negative in Austria, Denmark, Germany, the Netherlands and Switzerland.2 This can happen very quickly as evidenced by Japan’s 10-year bonds dropping into negative interest rates today, February 9, just eleven days after the Bank of Japan announced the policy rate change.

Before going further, let’s just make this point and get it out-of-the-way – to be paid to borrow and charged to save is absurd. There, I said it. Let’s continue.

So, why would anyone buy government bonds that have a negative interest rate? One reason is for safety, fearing other types of investment might lose even more in a financial crisis. Another reason to buy bonds is to sell them at a profit anticipating that interest rates will go even lower.

What Enemy Are the Deflation Fighters Really Fighting?

We are told, erroneously in my opinion, by most economists and by those in power that deflation is the worst of all scenarios. They claim it leads to an economic death spiral like we experienced in the Great Depression. The argument goes like this: Once people realize prices are falling they delay spending until prices fall even further. This decreased spending lowers business sales and profits which, in turn, increases unemployment which decreases spending and so on.3

I believe the real reason indebted governments consider deflation disastrous is because deflation forces them to pay back debt in currency that is worth more than when they borrowed it. Financial repression, on the other hand, seeks to devalue the currency to pay off debt more easily.

Negative Interest Rates Have Some Disturbing Repercussions

I think many people, at a gut level, will suspect there is something sinister about negative interest rates. Hopefully this uneasiness will lead to more awareness of the widespread use of financial repression by governments around the world.

Maybe negative interest rates (combined with a zero or positive inflation rate) will end up serving a good purpose in a way that near zero interest rates never could. It is obvious that something is amiss when your bank savings statement shows an interest deduction. It is less obvious when the rate of inflation is higher than the low but positive interest rate you receive from the bank. In the latter case, your account has more money in it but you can purchase less with it. Maybe negative interest rates will expose central banks’ financial repression policies for what they truly are – wealth transfers.

Lest we think negative interest rates couldn’t happen in the U.S., consider the Federal Reserve’s 2016 Supervisory Scenarios for Annual Stress Tests. Though they are quick to say that their Severely Adverse Scenario “does not represent a forecast of the Federal Reserve” it does, nonetheless, include the use of negative interest rates in the event of a catastrophic financial crisis.4

Employing negative interest rates is economic theory run amok. Yet, in some weird and perverse way, it is logical. If the government fears deflation so much that they want to ensure people will not hoard money waiting for prices to drop, then they must take away the money they save faster than deflation lowers prices so that consumers don’t delay spending. It is truly diabolical genius.

Wait. It gets worse.

Banks subjected to negative interest rates are faced with lower profits if they fail to pass the rates through to customers and risk losing depositors if they do. But this may not be a conundrum for long as there is talk of banning cash. Seriously, there is.

But that troubling topic will have to wait until my next post.

 

References:

  1. Global Economic Prospects, June 2015, Global Economic Prospects, Box 1.1
  2. Frank Hollenbeck does a nice job of refuting this argument in his article entitled “What’s So Scary About Deflation”
  3. Federal Reserve 2016 Supervisory Scenarios for Annual Stress Tests

 

 

Feeling Repressed?

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Do you feel repressed? No? Well, maybe you should.

Please let me explain. If you live in a nation that has a central bank (and who doesn’t?) then you are probably subjected to some form of financial repression.

Governments spend money on wars or the preparation for war and on social programs. Governments spend a lot of money. Trouble is, they don’t have any money. But you do. You have money because you worked and provided a tangible good or service for which someone else was willing to pay you.

Since the government has no money they get it from you through taxation or through borrowing. Governments issue bonds that people purchase and in return the government pays back the bondholders both principal and interest. So, where does the government get the money to pay back its creditors?

Tax increases are obvious and unpopular so governments usually pay back bondholders by selling yet more bonds. As long as the government can find buyers for its debt, then its leaders are lulled into thinking they need not raise taxes or cut spending.1  Instead, government debt is continuously increased. Eventually paying even the interest on all the debt becomes burdensome. 2

There are a few ways a government can reduce its debt. Economic growth and the increased taxes that accompany it is one way. A two-pronged approach of raising taxes and decreasing spending is the most obvious solution, but tax increases are opposed by one side as vehemently as spending decreases are by the other. Outright default or restructuring of debt is not an avenue that the U.S. is willing to go down at this point.

What if there was another way to pay off the debt? What if there was some sort of “hidden tax” that the government could levy to pay down its debt? There is. It’s called financial repression.

What Is Financial Repression?

Financial repression refers to methods used by governments and central banks to liquidate public and private debts and ease the burden of servicing those debts following periods of war or financial crisis.3  Governments promote monetary policies that favor debtors because they themselves are debtors.

Financial repression includes but is not limited to the following: capping interest rates banks can pay on savings deposits, interest rates for loans capped through the central bank’s target interest rate, and requiring pension funds to hold government debt.4  All of these actions direct funds to government that would normally flow elsewhere. It makes borrowing cheap for government.

But when the Federal Reserve talks about interest rates it doesn’t mention anything about trying to reduce government debt or financial repression. Instead, they base their monetary policy on “promoting maximum employment, stable prices, and moderate long-term interest rates.” They believe their mandate is best accomplished by monetary policy that has a 2% rate of inflation as its goal.5  Setting interest rates charged to banks near zero for the past seven years has been an attempt to stimulate the economy and increase employment.

So why do I believe that Fed policy is, in fact, financial repression and not economic stimulus?

 

  • First, their policy is based on the erroneous belief that demand creates supply and the irrational fear that deflation is the worst thing that can happen to an economy. In short, I don’t believe their policies can accomplish their stated purpose.
  • Second, the fact is, paying interest on our nation’s debt has already reached the point of being burdensome. The only rate of interest we can really afford is 0%. Therefore it is imperative that interests rates be kept near zero.
  • Third, employing quantitative easing (QE) proves how desperate the government is to keep interest rates low. When the Fed buys government bonds from banks in large amounts, the interest rate on bonds naturally goes down. Therefore, the government doesn’t have to offer higher rates to attract buyers (creditors) so the interest burden on its debt is less than if interest rates were higher. The Fed creates the artificial demand for its own debt and keeps interest rates down by printing money! It is only incidental that the fed hopes the money will circulate causing the economy to grow yielding more taxes to reduce the debt.
Why Use the Term Financial Repression?

So, you may ask, why use the term financial repression? Who gets hurt when the government and central bank intervene in the marketplace in this manner?

  • If there is any inflation at all, anyone who saves will see the purchasing power of his savings erode. Retirees are especially vulnerable because they are usually not in a position to put their money into higher yield, higher risk investments such as stocks that have the potential for large losses.
  • People who live within their means are forced to subsidize spendthrifts. Not only do Fed policies reduce the debt of the government, they reduce the debt of private individuals and corporations as well which have reached record levels in the last decade. The Fed’s policies make it possible for borrowers to get their hands on money at a lower interest rate than they could in a free market. A lower interest rate is forced upon savers who, without such interference, would receive a higher rate of interest from banks competing for deposits. This is not wealth creation; this is yet another example of wealth transferred from one group to another.
  • The economy as a whole suffers when financial repression is employed. Inequality rises when capital flows into stocks, not solely based on value, but because other alternative places to park money yield no return thanks to the Federal Reserve. Then, of course, prices are bid up and a bubble forms.  The system is set up in favor of the rich who have access to the first use of capital.6 When the bubble pops, capital is wiped out having served little purpose in growing the economy.  Then, the Fed and the Treasury bail out the financial sector.
  • Unemployed workers are harmed when they can only find part-time work or work at a lower wage because capital has been funneled into non-productive asset bubbles instead of being used to build factories or start new businesses.
  • Proponents of current monetary policy would argue that low-interest rates allow more people to obtain a home mortgage. Aside from the fact that indebting yourself for most of your working life might not be a good idea, the Federal Reserve’s policies essentially remove an important option for many people – to wait until they have saved more money. People who want to buy a home are harmed as the government entices them to borrow by offering low interest rates and tax incentives, and by producing asset bubbles prompting people to buy before they would normally for fear of being priced out of the market. This is especially true during a period of stagnating wages that are also a direct result of the same Fed policies.
Summary

Financial repression punishes you for saving, rewards you for going into debt, increases inequality, provides a disincentive for elected officials to balance the national budget, is a deceptive way to fund government spending, and tends to replace unemployment with underemployment. It produces a boom-bust economic cycle and then is offered as additional medicine to cure the diseases it caused in the first place.

On second thought, if you are retired or you live within your means or you are a member of the future generation who will more than likely pay the highest price for the Fed’s misguided policies, then maybe you shouldn’t feel repressed. The term is too vague. Maybe you should feel like someone who has been forced to contribute to someone else’s prosperity and later forced to suffer the consequences of their financial folly when the economy crashes because borrowers’ short-term gains came at the expense of long-term investment in the economy.

 

 

Notes:
  1. In the case of the wars in Iraq and Afghanistan, taxes were decreased and spending increased. Evidently it was believed that the tax cuts would increase tax revenues from individuals and corporations due to economic growth enough to offset the cost of the wars.  It didn’t turn out that way.
  2. Anyone with substantial credit card debt knows this. The difference between the credit card holder and the government is that the government can lower to zero the percentage interest rate it pays on the balance owed.
  3. “Financial Repression Redux”, Finance & Development, June 2011, Vol. 48, Carmen M. Reinhart, Jacob F. Kirkegaard, and M. Belen Sbrancia
  4. “The Liquidation of Government Debt” Carmen M. Reinhart, M. Belen Sbrancia, NBER Working Paper 16893
  5. “Statement on Longer-Run Goals and Monetary Policy Strategy”
  6. Read about the Cantillon Effect in my blog – Inequality, Part 3