Dr. Antal Fekete: Blowing Up Modern Austrian Economics … in a Good Way
By Anthony Wile - January 11, 2015

Introduction: Professor Antal E. Fekete is an author, mathematician, monetary scientist and educator. Born in Budapest, Hungary in 1932, he graduated from the Eötvös Loránd University of Budapest in mathematics in 1955. He immigrated to Canada in 1957 and was appointed Assistant Professor at the Memorial University of Newfoundland in 1958. In 1992, after 35 years of service, he retired with the rank of Full Professor. In 1983 he was resident scholar at the American Institute for Economic Research in Great Barrington, Massachusetts. In 1995 he was resident fellow at the Foundation for Economic Education in Irvington-on-Hudson, New York. In 1996 he was Visiting Professor at the Francisco Marroquín University in Guatemala. He is the founder and Chairman of the New Austrian School of Economics in Hungary. His website is www.professorfekete.com.

Professor Fekete is a proponent of the gold standard and an outspoken critic of the current monetary system based on irredeemable currency. His work falls into the school of free-market economic thought inspired by Carl Menger. He claims that his theory of interest is an extension of Menger's work. Menger championed the theory of direct exchange morphing into indirect exchange; in the same way Professor Fekete is championing the theory of direct conversion of income into wealth and wealth into income (read: gold hoarding and dishoarding) morphing into indirect conversion (read: selling and buying gold bonds). Professor Fekete is an advocate of Adam Smith's Real Bills Doctrine that he calls the Gold Bills Doctrine.

Daily Bell: We're going to ask you some questions based in part on feedbacks we recently received regarding some of our inflation articles. Please feel free to comment for as long as you want, but please try to keep your answers simple and comprehensible from a layman's perspective so people can gain as much as possible from your insights. We appreciate your patience, as we know you've answered some of these questions before, but with such subject matter, repetition can be a good thing.

Antal Fekete: "Repetitio est mater studiorum," says the Latin proverb – repetition is the mother of all learning.

Daily Bell: Please define deflation and disinflation from both a monetary and price standpoint.

Antal Fekete: Deflation is clearly not the same as a falling price level. Technological improvements in production cause a gently falling price level under sound money that is no deflation. Defining deflation as a contraction of the stock of money is plainly wrong. We have a vastly expanding money supply, yet a lot of economists (including myself) hold that we are in the midst of deflation. I prefer the definition of deflation as a pathological slowing in the velocity of money.

Daily Bell: We think monetary deflation over a long period of time is difficult to accomplish in a central bank, money-printing economy. Comments?

Antal Fekete: "Accomplish" is not the word. No one wants deflation any more than wanting a pathological condition in one's own body. "Occur" may be a better word. I disagree with your assumption that central banks' money printing is antithetical to deflation. I am in a minority of one in suggesting that just the opposite is the case: expansion of the money supply through open market purchases of government bonds by the central bank is the direct cause of deflation. I know this is counter-intuitive, yet true nevertheless. Please consider that bond speculators chime in and preempt the Fed. They buy the bonds first, only to dump them on the Fed at a hefty mark-up later. The current expression is "front-running the Fed." Speculators are in the driver's seat, not the Fed. It is amazing that smart speculators like John M. Keynes did not realize that there was a fly in their ointment for deflation, namely, risk free profits. The opportunity to reap them defeats the Quantity Theory of Money. "Propensity to consume" is eclipsed by the "propensity to pocket risk free profits."

Why is this deflationary? Well, because it slows down the velocity of money. No matter how fast the Fed is printing, its output is siphoned off by profit-hungry bond speculators even faster. So fast indeed that commodity speculators, who may otherwise be tempted to buy goods with the freshly printed money in anticipation of inflation, make a volte-face and march to the bond market where the fun is – unless they stay and short commodities like crude oil, to mention but one recent example.

Daily Bell: Along with Rothbard, as we understand it, asset inflation itself leads to what seems to be deflation and disinflation. Money volume must go up to go down. Truth to this?

Antal Fekete: I would modify language slightly: money velocity must go up first so that it could come down.

Daily Bell: If third-party credit facilities like American Express collapse, does this constitute monetary deflation?

Antal Fekete: The collapse of any firm is a symptom of deflation, with a vengeance. It activates the ''domino effect''. Deflation breeds more deflation. The velocity of money spirals down. Please note that the original push came from the open market purchases of bonds by the Fed. It caused to bleed white solid productive firms, whose profits were certainly not risk free.

Daily Bell: When central banks keep interest rates low, does this lead to disinflation and deflation? How so?

Antal Fekete: The word "disinflation," which suggests that the Fed can turn the spigot on and off, is not in my dictionary. In fact, the Fed has no such power. It can certainly turn the spigot on, but we have never seen the Fed turning it off. Worse still, it has absolutely no control over how people will be using the extra money spewed from spigots or dropped from helicopters. Well, the smart ones would buy bonds, not commodities as the Fed hoped. They knew they could always dump them on the Fed in the open market with a hefty markup. Risk free.

To answer your question, the central bank does not "keep" interest rates low. In fact, it "pushes" them low through open market purchases of government debt, which increases the bond price. The other side of the coin is the simultaneous decrease of the rate of interest. Of course, the purpose of the exercise, on a Quantity Theory argument, is the fomenting of inflation ? not deflation. The trouble is that the central bank does not know what it is doing. It sows inflation but reaps deflation. Its monetary policy is counterproductive, to put it politely. A more accurate way to describe it is that current monetary policy reflects a peculiar madness inflicted on a gang of impostors and usurpers of unlimited power who are trampling on the Constitution and causing unprecedented economic pain to society. When their system collapses, as John Law of Lauriston's has almost three hundred years ago, then they will have to escape from Washington in female garments, as John Law escaped from Paris, or in male garments with false beard, as would be more appropriate in the case of Janet, under the cover of the night.

Daily Bell: If central banks are keeping interest rates artificially low, how does this contribute to monetary deflation? What do the bond traders do that makes monetary INFLATION into a deflationary phenomenon?

Antal Fekete: It is not low interest rates that creates deflation but falling interest rates. The process is triggered by the central bank's open market purchases of bonds in an effort to pursue its inane policy of QE, eliciting the copycat action of bond speculators. A chain reaction is activated: bond purchases of the central bank alternating with bond purchases of the speculators. The central bank announces its time table for its bond buying program. Speculators pre-empt the central bank in buying first, dumping the bonds into the lap of the central bank while pocketing risk free profits afterwards. The expectation of the central bank, price inflation, does not materialize. It is frustrated by the bond speculators who hijack the freshly printed money on its way to the commodity market. Not to be deterred, the central bank prints more. To do that it has to go to the open market and buy more bonds, prompting speculators to pre-empt. The cycle now repeats and a vicious spiral is engaged. The upshot is a prolonged fall of interest rates that destroys capital across the board, causing a domino effect of falling firms ? as I mentioned a minute ago.

Daily Bell: Do you believe in the Misesian business cycle? Does it have validity, in your view?

Antal Fekete: Certainly, with some reservations. It does not assign a very high IQ to businessmen in the field. Why don't they learn from experience and factor into their calculations the distortion in the rate of interest due to monetary policy? I improve on the business cycle of Mises, pointing an accusing finger to bond speculation motivated by risk free profits. Businessmen are the brightest people we have. They are being victimized through the insane monetary policy of the Fed.

Daily Bell: Was the Great Depression a deflationary depression? We note that junior mining prices apparently went UP during the Great Depression.

Antal Fekete: Most certainly it was. It is axiomatic that gold mining shares go up during a depression. Depression is just another name for capital destruction, and gold is the only form of capital that is immune to destruction. If you consolidate all balance sheets in a country (including that of the national treasury), then all liquid assets will be wiped out, with the sole exception of gold. Gold is the only asset that is not duplicated as a liability in the balance sheet of someone else.

Daily Bell: Are we in a deflationary depression? Or are we in a kind of stagflation?

Antal Fekete: We are in a deflation that is metastasizing into a depression. The monster word "stagflation" does not appear in my dictionary.

Daily Bell: Has money volume increased in the US and Europe? Have prices increased in response?

Antal Fekete: As I hinted a while ago, increasing the volume of money does not necessarily cause an increase in the price level. The Quantity Theory of Money is a false theory. In spite of an eightfold increase in the stock of money in America the price of crude oil was cut in half and the price of iron, copper and a number of other metals showed steep declines ? thought impossible only a few months ago. If this is not deflation, then let me ask: How much farther do prices have to fall before we are allowed to use the D-word?

Daily Bell: Oil has apparently been manipulated down. Does this constitute price deflation nonetheless, or is it simply a kind of manipulation?

Antal Fekete: The manipulation theory was invented by those who are afraid to face the facts squarely. We should know better: no valorization scheme ever works for any significant length of time for any commodity. It is another matter that foreign policy makers in Washington may have stolen a ride on the back of spontaneously collapsing crude oil to punish Putin.

Daily Bell: Let's change the subject. Do you wish to have a larger debate on Adam Smith's Real Bills Doctrine and do you think this would be good for the field? Did anyone postulate real bills before Smith? Didn't he just comment on an observable phenomenon?

Antal Fekete: Yes, I do. The trouble is that my opponents don't feel they are sufficiently well versed in the subject to stand up in such a debate. You cannot have a debate with slogans, which is all I hear. Adam Smith did not postulate the Real Bills Doctrine; he was the first to codify it. Let's not belittle his contribution.

Daily Bell: For real bills to function properly do we need to get rid of monopoly central banking?

Antal Fekete: The existence of central banks is irrelevant to the proper functioning of real bills, as the experience of the 19th century convincingly demonstrates. Nor is the existence of a central bank a prerequisite for real bill circulation. By contrast, circulating gold coinage is.

Daily Bell: Is monopoly central banking tolerable and sustainable in the long run? Is it a good for society?

Antal Fekete: In the 19th century central banks operated on the profit principle and they did not have special privileges such as the monopoly of issuing legal tender bank notes. If anything, they had less elbow-room than other banks. For example, they were not supposed to take the initiative in putting out their credit. They did not foist their credit on society as latter-day central banks do. Customers were supposed to step forward and take the central bank's credit on the terms offered ? or leave it.

Daily Bell: Is government borrowing a "blessing," as Alexander Hamilton once held?

Antal Fekete: Hamilton was talking about government borrowing subject to a debt ceiling. He must have been turning in his grave for the past decade watching the annual ritual of Congress busily lifting the ceiling, eventually abolishing it altogether.

Having said that I may add that Hamilton is not my hero on the question of the debt of the federal government. Jefferson is.

Daily Bell: Can the government do good things with borrowed money?

Antal Fekete: It can provide for national defense, in case the country is threatened by a foreign enemy.

Daily Bell: Is government good for anything else than taking responsibility for defense?

Antal Fekete: That government is best whose debt is least. Government debt must be kept on a golden chain. It will break any other.

Daily Bell: Here's a quote from one of our feedbackers: "Real bills play a significant role in providing liquidity in gold redeemable currency which empowers the individual. Also, and perhaps more importantly, real bills keep the currency away from the grip of financial oligarchs." True? False? Why?

Antal Fekete: Absolutely true. There was no "structural unemployment" in the heyday of real bills in the 19th century. Structural unemployment appeared in the 20th century when the victorious Entente powers blocked the bill market in their neurotic fear of German competition, after the cessation of hostilities in 1918.

Daily Bell: Why doesn't someone involved with the Mises Institute find merit in the Real Bills Doctrine?

Antal Fekete: I am told that they do but are browbeaten by the doctrinaire and cultist leadership. After all, the name over the entrance is that of Ludwig von Mises, arch-opponent of the Real Bills Doctrine.

Daily Bell: What is their argument against the Real Bills Doctrine? Is it that real bills are in some sense inflationary? How so?

Antal Fekete: You have to ask them. In no sense are real bills inflationary. They arise and expire pari passu with the emergence of new merchandise and their removal from the market by the ultimate gold-paying consumer.

Daily Bell: Changing the subject, is charging interest on debt a form of usury? Should people be thrown in jail if they do it?

Antal Fekete: The whole complex problem of usury disappears at once if you change the perspective and look at the transaction not as lending and borrowing, but as exchanging income for wealth and wealth for income, which is a biological necessity for mortals like us. The borrower, typically a young man, exchanges income of which he has a surplus for wealth of which he has a deficit. By contrast the lender, typically an old man, exchanges wealth of which he has a surplus for income of which he has a deficit. Why in the name of the blindfolded Lady Justice should either man be thrown in jail for making the the exchange?

Daily Bell: Do real bills provide an alternative to charging interest? How so?

Antal Fekete: No. The rate of interest is not involved at all with credit conveyed through bill trading. What is involved here is the discount rate. The rate of interest is conveyed through bond trading. The two are entirely different, both in origin and effect. This is a large subject of its own. I am just posting a major paper entitled Credit, the subject of my Privatseminar in Madrid, in a few days' time, on my website: www.professorfekete.com, in which I carefully elaborate on this difference.

Daily Bell: Did Ludwig von Mises ignore some of the work of Menger? How so?

Antal Fekete: Not only did he ignore whole chunks of it, Mises took positions directly opposed to those of Menger. Menger did not subscribe to the Quantity Theory of Money; Mises did. Menger did not castigate commercial banks by calling them by the derogatory name "fractional reserve banks" for covering part of their note and deposit liability by real bills maturing in gold coin in 91 days or less; Mises did. Menger fully accepted Adam Smith's Real Bills Doctrine; Mises rejected it. Menger did not believe that fiat currency was a "present good"; Mises did. The list goes on.

Daily Bell: A feedbacker comments: "Carl Menger's is pure Austrian economics, in that he postulated a philosophy of free exchange and economic prosperity which rests on honest money and the liquidity that arises from real bills." Comment, please.

Antal Fekete: I wish to congratulate your feedbacker for his clear insight.

Daily Bell: Was Menger a proponent of real bills?

Antal Fekete: He didn't have to be. He didn't have to endorse the air he was breathing in either. Menger was immersed in a world financing its foreign and domestic trade in merchandise by drawing real bills on the retail merchant selling to the ultimate consumer before World War I. Menger fully accepted the practice of "fractional reserve" banking as legitimate. See his encyclopedic article Geld, 1909 edition.

Daily Bell: How far into the past do real bills go? Hundreds of years? Thousands of years?

Antal Fekete: Cicero mentions letters of credit, a precursor of bills of exchange, in one of his epistles to a friend who lived in Athens. His son was about to sail there. He wanted to know whether the son could take letters of credit rather than gold coins with him on this trip, drawn on an importer in Rome owing to an exporter in Athens. Apparently such letters of credits had a wide circulation based on the extensive trade between the two cities.

Real bills proper as Adam Smith understood the term originated in the 1200s in the Italian city states such as Venice, Florence and Genoa, for example. They had a vast trade with the Far East and the Levant, all of which was financed by drawing bills of exchange on local retailers, such as Antonio in Shakespeare's Merchant of Venice.

Daily Bell: Was there free-market private money before real bills? Would you characterize those systems before real bills as primitive?

Antal Fekete: Not during the Dark Ages. Lights went out and trade came to a standstill. Autarky was the rule after the collapse of the Western half of the Roman Empire. But before that event trading bills was the most sophisticated way of financing trade. It would never occur to me to characterize it as "primitive."

Daily Bell: The modern Austrian School, as one of our feedbackers put it, "subverted the classical Austrian school by denying society much needed liquidity, thus condemning it to deflation and depression, through denigrating real bills." Comments, if you please.

Antal Fekete: I wish to congratulate your feedbacker for his clear insight.

Daily Bell: Why do real bills provide extra liquidity? Is it because they make borrowing easier? Can't people borrow without a real bills facility? Does it have to be that formal?

Antal Fekete: It is a major misconception to think that real bills involve lending and borrowing. They don't. What they involve is clearing. When a wholesale merchant draws a bill on a retail merchant, he does not lend and the retail merchant does not borrow. Hardly ever would the latter pay gold coin upon delivery of supplies, and the former would never demand payments in gold coin.

Circulation of real bills started entirely spontaneously. Suppliers of the wholesale merchant were delighted to accept the bill drawn on the retail merchant in payment upon endorsing. The bill was an earning asset in their hands, thanks to the discount. They could liquidate the bill on short notice if the need arose.

Daily Bell: How did real bills pass out of favor in the 20th century? Are they still illegal?

Antal Fekete: They did not pass out; they were sabotaged by the victorious Entente powers in blocking the bill market in London, as I have already mentioned. They were guided by their neurotic fear of German efficiency. In doing so they inadvertently destroyed the wage fund out of which the wages of workers producing merchandise could be advanced ahead of the sale of merchandise to the ultimate gold-paying consumer. The destruction of the wage fund was the true cause of the Great Depression of the 1930s, and the horrendous unemployment it engendered. There was no way of advancing wage payments other than bill trading. Once suspended, no one was there to pay the wages of workers producing consumer goods. They had to be laid off.

Real bills were never made illegal. There was no need. The withdrawal of gold coins from circulation did the trick. The idea of a real bill maturing in irredeemable currency is preposterous. The real bill must mature in something more liquid, and irredeemable currency is less liquid than the real bill. It is a promise to pay nothing.

Daily Bell: What is necessary to allow real bill circulation – letting them return to prominence?

Antal Fekete: Three things: gold coins, gold coins and gold coins.

Daily Bell: Any other points you want to make?

Antal Fekete: Yes. Gold coins are the most marketable instruments known to man. Its holder can trade on the best terms possible. Gold bills are the second most marketable instruments. Demand for them is virtually unlimited. Banks overflowing with gold coins scramble to expel them in exchange for real bills, the best earning asset a commercial bank can have.

If you bought a house in the 19th century, you would not accumulate gold coins in anticipation of paying the purchase price on closing day. You accumulated real bills with the same maturity. Likewise, if you issued bonds, you did not accumulate gold coins in anticipation of paying the face value of your bonded debt upon maturity. You accumulated real bills with the same maturity date.

Only ignoramuses believe that gold coins financed the economy directly in the 19th century and real bills were just a reactionary aberration.

Daily Bell: Thanks for your time!

After Thoughts

So much to unpack here. Let's try to reduce it. In one form or another, real bills have probably been around thousands of years. It's not clear to us that they need gold and silver for at least partial functionality but certainly in the modern era, the lack of gold (and silver) as money along with the conversion of the monetary system into a kind of central banking economy doomed the broader utilization of real bills in the modern, formal sense.

It seems a continued schism will exist between what we can call the Misesians and the Mengerites. It is understandable since the way Dr. Fekete lays out the differences in the schools – Austrian versus Neo-Austrian (?) – seems to repudiate some Misesian doctrine. Nonetheless, even granting Dr. Fekete the full panoply of his views, there are plenty of areas where there is overlap.

The antipathy must surely come from a variety of places. Notably, we are aware that Rothbard had little use for Adam Smith and in one of his most devasting and compressed critiques pointed out that what Smith termed the Wealth of Nations is actually the Wealth of People.

In some sense, the Great Smith was an aggregationist, a Royalist … someone who believed that social structures needed to be tempered by the Invisible Hand but not radically reconfigured. Mises, for all his bureaucratic accomplishments, was far more radical than Smith, given his emphasis on human action. He laid the groundwork for what is now an enunciated sociopolitical philosophy at the Mises Institute – anarchocapitalism.

We rightfully honor what Lew Rockwell and Murray Rothbard and others have accomplished on behalf of Mises (and Hayek). The concept of human action itself is one of the noblest and most generous insights ever annnunciated. Its enunciation stands like a roadblock in the way of tyranny and despotism.

Combine this with Mises's insights about the necessity of price signals in a private market and how government short-circuits them and you have as devastating a critique of modern Leviathan as has ever been levelled in recent written history.

Mises was a human being. The Great Conversation never ends and is always being revised. After Mises and Fekete there will be others. Usually in these cases, someone comes along and makes a synthesis. Real bills do not contradict the thrust of Austrian economics that we can tell any more than Mises did or Fekete does.They elaborate and eventually they shall be subject to a kind of fusion.

What is more important is that Austrian economics provides with as close to a scientific economic approach as exists in this day and age. It has in fact given us the tools to strip away the facade of directed history from the corrupt oligarchical manifestations of modernity. It has already deprived Leviathan of any real justification for its actions.

Briefly, as we close, let us suggest one kind of synthesis now. From our point of view, Dr. Fekete's ideas regarding deflation and the business cycle can coexist with large parts of the Misesian perspective. Inflation can and must come before deflation. The front-running of bond traders can co-exist with the idea that people are "tricked" by central bank money printing.

It is not, by the way, low-IQ investing that drives the Misesian businesscycle but the ineluctable necessity for businesses and individuals to derive yield from the market. If the market is going up, it's going up. If investment is expanding, it's expanding. If you are not on board, you may be fired by the board – at the very least your immediate family and your wife, if you have one, may be unhappy.

There are pressures to involve oneself with a booming economy that far exceeds the "perpetual forgetting" that Dr. Fekete suggests. This is why regulation is so unproductive when it comes to risk control. In the midst of a euphoria, regulations are apt to be abandoned at just the time when they are supposedly needed most.

We thank Dr. Fekete for his generous insights and hope that some of his best-received ideas will recieve wider debate within the Austrian community from where so many world-changing insights have already evolved.

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Posted in EXCLUSIVE INTERVIEW, Gold & Silver
  • DB: “real bills have probably been around thousands of years. It’s not clear to us that they need gold and silver for at least partial functionality”

    It is “not clear”? It certainly is crystal clear to Prof. Fekete!

    Daily Bell: What is necessary to allow real bill circulation – letting them return to prominence?
    Antal Fekete: Three things: gold coins, gold coins and gold coins.

    I cannot see how it “is not clear” that real bills need Gold for functionality. Monetary metals are the only financial asset that are not also someone else’s promise to pay. Therefore monetary metals are the only financial asset not subject to default!! How could this be anything but clear? Certainly land (real estate) is not someone else’s liability if it is owned free and clear. But it is not a liquid and fully fungible financial asset. What is needed as the stable base for any monetary system is a financial asset that is fungible, liquid, and not a promise to pay. I fail to see how this is anything other than self-evident. Only monetary metals fit this description.

    • As Murray Rothbard pointed, money is what people choose to accept. It doesn’t have to be gold and silver, though in modern Western history, especially, it has been.

      • We have chosen to accept Federal Reserve Notes – a form of debt. Debt is not a stable base for a monetary system! Neither are hopes whispers or promises to pay. The insanity of money by decree has been proven many times in history to be a complete fraud ending in disaster, and this time will be no different. When people no longer accept FRNs perhaps we will see the wisdom of insisting on a stable base for our monetary system ~ until we forget again : )

        • Did you choose? We didn’t …

          • If it wasn’t so awful it would br funny. The choice was made for us in 1913 – that is well before even I was born. : (

      • dave jr

        As I understand it, Real Bills as they existed, developed spontaneously as a service within the gold standard, not in place of it. It operated as a convenience, as a method of accounting and clearing so physical gold didn’t have to be moved from vault to vault and back again. When the gold standard was pre-empted by fiat currency, then the peripherals including Real Bills were pre-empted with it. I believe it is true that money is what people choose to accept. But could it be said that what we use today is not money, only currency…accounting? Could it be said that Fed and Gov are currently attempting to run a Real Bills type monetary system only without the convertibility/redeemability into real money? If so, it should be obvious why.

        • Good points, but in a sense real bills are invoices with a time deadline and within this context they could be seen as emerging almost anywhere, anytime …

          • dave jr

            A maturity date, beyond which there is no deadline, like there was with planned depreciating currencies, like that of Woergl. Anyway, that is beside the point. Real bills are not invoices but is currency backed by ‘real’ invoices of ‘real’ worth. The fact is, without redeemability, they haven’t spontaneously emerged anywhere or at anytime.

          • They operate in a way that is similar to an invoice. And in this interview, Dr. Fekete confirms that pre-real bill solutions with elements of real-bills existed long ago.

  • ThomasJK

    When Leviathan grows larger and larger its worth to the Citizens and to the nation declines to be less and less. History informs that then when any government has reached a size that it is worth nothing to anyone, it will and must close up shop and disappear.

    Are we there yet? Think eviction, not secession.

    • Danny B

      Thomas, 51% of Americas receive a check from GOV. THEY value GOV.

      • autonomous

        I receive a check from the gov. I don’t value the gov. The Mafia guards my business, but only from themselves less what they extort from me. Therefore, they only allow me subsistence, not life. That is the essence of slavery.

  • wraft

    Fekete’s statement that ” I prefer the definition of deflation as a pathological slowing in the velocity of money ” can be easily demonstrated by the following chart: https://research.stlouisfed.org/fred2/graph/?graph_id=102562&category_id= The collapse of money velocity from 1879 to 1971 was caused by a congressional act which required that greenbacks should be fully redeemable in silver coin. At the time, greenbacks were circulating at a discounted value of 62 cents, so that forcing their value up to that of a silver dollar amounted to a monetary expansion of more than 50%.

    A proper analysis based on the Quantity Theory of Money shows that velocity will always collapse long before inflation sets in. Inflation only occurs after velocity reaches a very low value V < 1.

    • And yet as well, haven’t top modern Austrians pointed out that at any given instant the velocity of money is zero?

      • wraft

        That is self evidently an idiotic statement.

        • You miss the point, WRAFT. The velocity of money is secondary to demand. You can’t push a string. Human action is required BEFORE monetary velocity comes into play. Dr. Fekete knows this but since he didn’t mention it, we felt we should. It’s a very subtle, profound point,one of the most important for anyone who wishes to understand free-market economics. Don’t be so quick to dismiss ideas just because you believe them to to be “self evident,” or “idiotic.”

          • wraft

            Velocity is demand for money, just as price is demand for goods. Have you even looked at the chart? It shows that a large expansion of money supply leads to a collapse of velocity, just as a huge glut of goods would lead to a collapse of price. This is the point Fekete was making when he said that Fed printing causes deflation, not inflation.

          • “Have you even looked at the chart? It shows that a large expansion of money supply leads to a collapse of velocity.”

            Within certain contexts your statment doesn’t hold up. Initially, money printing (lower, non market rates) causes asset bubbles and INCREASED monetary velocity.

            Rothbard specifically held that it was this INCREASED velocity and monetary debasement that eventually generated a crash and disinflation or deflation. You put the cart ahead of the horse. We insist the horse pulls the cart …

          • wraft

            “Within certain contexts your statment doesn’t hold up. Initially, money printing (lower, non market rates) causes asset bubbles and INCREASED monetary velocity.”

            The housing bubble was financed by debt, which is extremely low velocity money. The velocity of a 30 year mortgage is roughly 1/30. The aggregate money velocity (MZM) is around 1.38 presently. The aggregate velocity is based on the sum of cash plus debt, the two components of money supply. The net contribution of asset speculation financed by debt results in a net LOWERING of the aggregate velocity, not, certainly, an INCREASE.

            When the money supply growth rate exceeds real growth, m’/m – Q’/Q = c > 0 which means that debt is increasing. The QTOM corollary is that price level growth p’/p = V’/V + c or, equivalently, that p’/p – V’/V = c because supply side imbalances are the same as demand side imbalances. NOW, Rothbard was writing in the 1970s after the gold window was closed, so that gold was no longer contraband, as it had been in the US since 1935. The US price of gold rose from $35/oz to $850/oz in 1980, before the market stabilized at around $300/oz. If one assigns p = 1 to $35/oz gold, then p rose to about 8.5 when gold was at $300/oz. In addition, Fed policy was extremely tight money so that c = 0 if not lower. If c = 0 then p’/p = V’/V and the price level increases result in velocity increases (shown on the chart as well)

            A side note – Friedman’s misunderstanding of QTOM was that m’/m = p’/p is completely erroneous and was easily demonstrated to be false which resulted, unfortunately, in QTOM to be rejected as well.

            2nd side note – The 2nd collapse of velocity in 1983, when Volcker was told to relent on the Fed Funds rate (which had been 22%!) could only have been engineered by a rigging of gold prices and supply by GHW Bush and his nazi-banker friends via gold leasing and other central bank frauds.

          • An asset bubble involves a massive expansion of money, material and demand. A million houses under construction in your estimation would DECREASE velocity? What about the purchase of lumber, payment of workers, etc? What about the enhanced land speculation, the increase in REITS and trading volume, hedge fund involvement? When you rely on equations you can end up with funny results …

          • Casey Phyle

            Is the massive expansion of money, material and demand permanent or temporary? Once the bubble pops does not the inevitable decrease of velocity follow?

            That’s what the Chinese experience now with their steel industry, having increased their steel capacity 12 times, at least half of which they will never be able to use again, according to David Stockman. That will depress the iron ore mining and all its downstream industries for a long time, causing massive reduction of money velocity until it returns to a sustainable level many years from now.

          • Again, this was Rothbard’s argument. Central banks cause the initial inflation, as they did during the Great Depression. The deflation is often a natural outcome of the initial expansion.

          • Casey Phyle

            But the two don’t balance. The damage or deflation or decrease in velocity is far greater and longer than the short lived rise the bubble produced until it popped.

          • The bubble of the 20s lasted a very long time. So is this “bubble.”

          • wraft

            Bubbles pop because of a dearth of cash. A house with a million dollar mortgage isn’t necessarily worth a million dollars. It is worth what the cash in the market says it’s worth.

            High debt levels are repaid at the expense of cash levels.

          • wraft

            The initial expansion was caused by the treasury selling $20B of war bonds at 4.5%. In 1929, for the first time, the Fed started selling treasuries at open market bids where the yields were far less, resulting in a credit contraction.

          • You are certainly entitled to your opinion, but this is not Friedman’s or Rothbard’s conclusion as we understood it regarding the 1929 contraction.

          • wraft

            An asset bubble involves a massive expansion of DEBT, which, as I said, is extremely low velocity money. If, however, it were financed by helicopter cash WITHOUT ANY DEBT CREATION, this cash would raise the general price level, which in turn, would raise velocity. Lincoln financed the Civil War with cash. After the war, the money supply corrected via discounting greenback dollars to 62% but only public creditors like state and federal governments were forced to accept them at face value for public debts.

            BTW, the post-Civil War economy was really rocking until the banks crushed silver in 1873 and created a war debt in 1879.

      • Bill Ross

        “And yet as well, haven’t top modern Austrians pointed out that at any given instant the velocity of money is zero?”

        this is a trite statement, demanding a trite response. At any given instant, by definition, time is stopped, so is velocity and everything else. If anywhere, a trade involving the exchange of money is occurring, the velocity is non-zero.

        If you equate fiat currency to “money”, the only time that the velocity becomes zero is when “money” is no longer traded, accepted as a “medium of exchange”. Not long now.

        For example, the velocity of the Zimbabwe dollar or Roman Drachma is ZERO. Both are dead, without movement.

        • Sorry you find human action and the demand-driven explanation of the economic cycle to be “trite.” Since you are not oriented toward free-market economics, one would assume you have some level of sympathy for Keynes. You might wish to explain what Keynes believed in regards to economic utility. Good luck.

          Also, you misquoted our point. We wrote at “any instant” the velocity of money is zero as it has to be. You are confusing velocity with time.

          • Bill Ross

            Well, I’ll let is slide regarding misreading my philosophical / economic orientation.

            Velocity = distance traveled / unit time

            Monetary Velocity = money exchanged / unit time

            Touchy, eh?

          • If you want to begin to translate Austrian economics into econometrics, go ahead. We’ll take a pass.

  • Bill Ross

    AF: “neurotic fear of German efficiency”

    Therein is the core fact. When your “gig” and survival is derived from and totally dependent on an unearned “cut” (extorted, when fake rationalizations of state “value” fail), a percentage, any efficiency translates to economic efficiency and, less cut. By this primary fact, from the perspective of organized power, control must be asserted to prevent economic efficiency. This includes sabotaging and subverting education, to reduce collective intelligence, to stop, dead in its tracks any human progress / efficiency. Since humanity cannot be long harnessed, they war, to destroy the cumulative wealth of efficiency (civilization) and gain the “tax” from rebuilding.

    AF: “Real bills were never made illegal. There was no need. The withdrawal of gold coins from circulation did the trick.”

    The only thing “magic” about gold is that it is REAL, un-counterfeitable and agreed by consensus to be “real value, a store of wealth”. When gold as a medium of exchange was banned, and replaced by “rule of man” decreed “value”, well it was not a physical “bait and switch”, it was, in actual fact, the destruction of trust that the “value” of what you are forced to trade real goods / services for actually has any lasting value, once it is recognized that fiat currency is a worthless promise to pay (for others = YOU) of liars / fraudsters.

    In general, the “decrees of man” resulting in fiat currency are just a small subset of “rule of man, enslaving other men”, creating an entirely false, forcefully imposed “reality” that is at odds / warring against natural law (which ALWAYS prevails) . This is the very same insanity that resulted in the hubris and destruction of civilizations that have vexed mankind for all of recorded history, at least until the “rule of law” was discovered and honored by the sane, until it was AGAIN rationalized away by the insane:


    DB: “The concept of human action itself is one of the noblest and most generous insights ever annnunciated. Its enunciation stands like a roadblock in the way of tyranny and despotism.”

    Oh, like, uh, choose the human actions that result in YOUR freedom:


    I also think Dr. Fekete’s counter-intuitive point that monetary inflation is, in actual fact, deflationary needs elaboration, unless the point is that bond speculators, front-running the FED actually consume the inflationary currency, so, whatever the FED prints, does not make it to the general economy, to have any effects?

  • The ‘light-bulb’ moment for me in this discussion was Prof. Fekete’s comment: “if you change the perspective and look at the transaction not as lending and borrowing, but as exchanging income for wealth and wealth for income…”.

    Isn’t the foundation of banking and finance based upon the cornerstones of converting income into capital and capital into income? This puts the role of the creation of fiat money into a realistic context. Fiat money is generally accepted as being able to represent a store of wealth: a capital asset. Such a capital asset has a value – in as much as it can be exchanged for an income.

    The fraudulence of creating fiat money is exposed when one realises that creating fiat money is effectively creating an income. Where does this income come from? As new income is not created, and as the income has to come from somewhere, the outcome of creating fiat currency has to be the dilution of all incomes. Is it any surprise then that the creation of fiat money results in lower interest rates?

    • Let’s make it even simpler. In one form or another, real bills have probably been around thousands of years. They are basically what today we might call invoices. The difference is that real-bill invoices in the past were utilized like gold-storage receipts (what today we call paper money). That is, they could be passed around as necessary by those who wished to accept them. Thus, there was in a way two kinds of ”money” available – bank receipts and ”invoice money.”

      Today such bills may travel vertically in an industry credit-chain but they don’t travel horizonatlly. You can’t buy a hamburger at McDonald’s as you might have been able to do with a “real” real bill.

      Dr. Fekete believes that it was lack of circulating gold coins that doomed real bills, so far as we can tell. but again, it seems to us in the absence of regulatory and monopoly central bank impediments, “real bills” could again circulate without full-reserve basis.

  • synthetic_society

    “The idea of a real bill maturing in irredeemable currency is preposterous.”

    Aren’t commercial invoices factored every day? Isn’t that a practical example of the function of real bills?…albeit in an irredeemable currency. Cash is more liquid than an invoice.

    • Yes, it seems to us that even a society accepting PRIVATE fiat currency with or without a gold basis could operate a version of real bills … the gold issue seems to be somewhat secondary and it could be argued that it in fact impedes or at least complicates Dr. Fekete’s otherwise clear messsage.

      In making this point, we are in no way downplaying the efficacy or utility of gold. A private gold standard operating within the parameters of the Invisible Hand would be infinately better than the monopoly/fiat central banking money we have now.

      • Bill Ross

        see my comment to the effect that gold = trust, fiat = risk / distrust below.

        Concede the point that if “somehow” fiat could be trustworthy and retain value, what you claim is at least plausible.

        • synthetic_society

          If fiat currency was created only from draws on commercial invoices it may be possible to operate with that trust. At least the issuers of the currency would have a vested interest in validating the commercial invoices (i.e. market force for fraud prevention). This would dampen or outright eliminate the creation of non self-liquidating debt.

          I have to admit that know l little about this doctrine, so I might be missing something obvious.

          • Andras

            The Professor explained it, you just had to listen!
            You can not redeem something with a lower order currency. What makes fiat seemingly higher in order is the legal tender laws thus the aggression of the state behind them. Using them in any trade spoils the free market and introduce a host of unintended consequences.

          • synthetic_society

            I read and understood his point. You missed my point. You are talking about public fiat currency, and the conversation is about how fiat currency might be trustworthy. I agree with DB comments that a PRIVATE fiat might be viable, and I floated an idea on how that might be accomplished.

          • Andras

            PRIVATE fiat is an oxymoron.
            Fiat, by definition, means by decree. ( http://en.wikipedia.org/wiki/Fiat_money )

            Its issuer may look benevolent but it is still an enforcer by aggression. Sooner or later the issuer will counterfeit and do other mischiefs as well. Under this situation Gresham’s Law applies.

          • synthetic_society

            It seems that the concept of “private fiat” is not quite as settled as you seem to think. http://fee.org/freeman/detail/let-there-be-money

            “Generally, the currency risk over a short period of time (30-60 days) is low. Therefore, unless there is a dramatic change in purchasing power in a very short period, the entity that purchased the “real bill” from the producer at a discount, will receive more actual value than was paid.”

            Who cares if it isn’t redeemable in gold coins? If it is a short period of time the value is relatively close (unless there is a sudden and substantial change in purchasing power). This means the entity/financial institution taking on this risk can price it into the discount.

            I’m simply elaborating on my agreement with the DB’s comment “that even a society accepting PRIVATE fiat currency with or without a gold basis could operate a version of real bills”.

            You seem inclined to recite what other people have said. That’s a great way to miss the value of a good thought experiment and not develop critical thinking.

          • Andras

            Even if you used “fiat” as a mistake and you meant other private paper instruments such as notes, bills or bonds, they are all lower in order than real bills, maturing in 91 days in gold coins. Why would anyone accept these for a real bill?

          • acudoc1949

            But doesn’t there have to be a standard of actual value at some point in the production chain for commercial invoices to have worth? Otherwise the last man left standing in the supply chain, the party providing an actual initial resource, is left holding pieces of paper, redeemable in nothing. Like several other people in the thread, I have to admit I don’t really understand Professor Fekete’s challenging explanations, which elicit more questions in me than answers.

          • synthetic_society

            The standard of value is the current purchasing power of the currency. While it is inherently declining all the time, each party in that chain is agreeing to part with their resources for a given amount of the currency. They adjust what they are willing to part with based on what that amount of currency will currently buy.

            Generally, the currency risk over a short period of time (30-60 days) is low. Therefore, unless there is a dramatic change in purchasing power in a very short period, the entity that purchased the “real bill” from the producer at a discount, will receive more actual value than was paid.

            Until the entire system collapses, this idea of irredeemability is entirely theoretical. In the meantime, the reality that all things are relative and rational actors can make the necessary adjustments to reflect the shifting sand seems worthy of acknowledgement.

            My main point in the earlier comment is that it seems possible to have a system where private financial institutions purchase invoices (with seashells for all I care), where the debt is secured by the product or service. Presumably, the buyer made a rational purchasing decision, and will again sell to another distributor in that chain, or to the end customer (or they won’t be in business long). The buyer will then trade that product for currency, and use the proceeds to pay the real bill. What I find interesting is that this means of providing liquidity through short term financing results in only actual productive activities being financed. Said another way, activities that do not in and of themselves contain the value required to pay off the debt are not financed.

            So to summarize my response to your question, I think the standard of value is the stability of the rate of change. Ultimately it’s a game of hot potato, but in the meantime the world keeps turning.

        • Thanks.

      • synthetic_society

        Sometimes the “perfect” solution gets in the way of a more practical and incremental step.

  • NAPpy

    Great interview. I especially liked your emphasis that some insights come from synthesizing or fusing previously, seemingly contrasting points of view. I agree.

  • Bruce C

    Maybe it’s just me but I find Dr. Fekete’s explanations very hard to follow and understand.

    Although I agree that “money printing” via bond monetization generally has a “deflationary” effect I believe it is because of the “artificial” lowering of interest rates that is a mathematical consequence of the bond buying by a central bank. There are many different manifestations and consequences of artificially low interest rates, and one very significant one – especially when there are large existing debt levels throughout the economy as we have today – is that the serving of debt becomes a relatively more “profitable” use of money than investment.

    As I’ve tried to explain before, if one has assets such as cash/currency then at any given time one can choose to invest those assets to procure a gain or return, OR one can choose to pay off existing debt balances to reduce expenses (i.e., interest costs). If, adjusting for risk, the projected gain from an investment is the same or less than the savings of interest costs on existing debt, then serving the debt rather than investment is the wiser course.

    That said, I disagree with the doctor’s explanation of how bond monetization is “deflationary”. What he is describing is a transitory effect that occurs only at the beginning of a quantitative easing cycle. When a monetization program is first announced it is true that bond “vigilantes” front-run the Fed and buy bonds as quickly as possible before the bond prices rise. But as soon as the central bank begins buying bonds itself the prevailing bond prices have already stabilized at a new elevated level. There is little profit in just churning bonds at that point. New bonds are being issued all the time because of deficit spending by governments all over the world so it is not like the central banks would be reducing the number of bonds on the market.

    Furthermore, it should be emphasized that it is important that the central bank monetization mechanism be widely publicized versus being done in secret. Otherwise bond vigilantes wouldn’t know to front run the central bank to begin with, nor what to buy, and so the whole deflationary process would not occur in the way he describes, if that is in fact the way it works. For example, if the Fed were to announce today that it going to begin purchasing US equities then US stock markets would – presumably – rise quickly because investors would want to front-run that process. If, however, the Fed were to buy shares secretly without anyone knowing then it wouldn’t have the same effect. It would still “work” to raise equity prices but it would happen more slowly and because, unlike bonds, the total number of outstanding shares on the market would steadily decrease (assuming the Fed never sells the shares it buys.)

    • Bruce C

      Remember also, that the reason for debt monetization by central banks is because the economy is “deflating”, so QE may not cause deflation but rather doesn’t stop it, though it may slow the process.

      • The only way QE slows or stops deflation is by bailing out banks that would otherwise fold into bankruptcy, taking money out of circulation. So in the immediate, bailing out the banks slows deflation or stops a deflationary credit collapse from cleansing the economy. Over the long haul, every time QE lowers rates, that is deflationary! So in the long haul you will still face the same issues only worse, as we are about to find out……. As for “the reason” for QE perhaps you might consider that what the CBs SAY, often bears little or no relation to the truth, in fact what they say is usually designed to hide the truth. Between the CB pronouncements and the media repetition of same, we are blinded to the true purposes of the .0001% who own the CBs and control their policies, while having a line up of “good gray men” to be their front to the world. What a dog and pony show with the media micro analyzing every nuance of every CB remark or hint.

        • Bruce C

          The irony is that since we are so far off the reservation, so to speak, maybe the ultimately futile efforts by the CBs do, in fact, lessen the INTENSITY of the blow back. Maybe “we” might think a full-on catharsis is preferable but evidently that’s not our call. Lack of demand or a kind of tuning out by the masses is one freedom that everyone still has. Call it lack of demand or low money velocity or whatever, but if everything stops then it really doesn’t matter what “the system” is any more does it?

  • Andrew Cullen

    Dr. Fekete deserves much more “air time”.While the Mises Institute is to be congratulated on their multiple achievements, there is space for more diverse conversation amongst all of is who are “miseans” but not necessarily “rothbardians”.

    • Sounds like you might wish to be a “Mengerite.”

      • Andrew Cullen

        You are missing the point. The problem is that in N. America, the Misean tradition is somewhat ” hijacked” by an anarcho-capitalist position, as espoused by Rothbard and supported devoutly by the Mises Institute. Not only has this “crowded out” thinkers like Dr. Fekete, it is risky because it claims to inherit Mises’ theories, despite the fact that he was a classical liberal – not a libertarian.

        The “sleight of hand” that I see in the libertarian school was when Rothbard, having published his excellent book on Ethics, then proceeded to weld it to Mises’ theories, claiming that Mises would endorse his positions.

        Mises endorsed “Power & Markets, but not – so far as I know – “The Ethics of Liberty”. The reason being, Mises stayed rigorously to social scientific method, thus excluding ethical judgements.

        What is refreshing with Dr. Fekete, is that he is forthright in taking forward key arguments within the tradition of Menger/Mises, including positive criticism where he sees it necessary, yet meets with resounding silence for the Mises Institute folks.

        This type of ostracism is pathetic and damaging, IMO.

  • dave jr

    Whether Quantity Theory or Velocity Theory, they are both “pushing on a string” if it is thought that they are mechanisms of controlling economic activity, in the way that Fed and Central Bankers seem to think. Any free market will have a naturally occurring quantity of currency and rate of exchange that are in constant flux. Even if they can be measured accurately, that is all they are, measurements. Artificial manipulations of them alone it seems, will have as much of an effect on economic activity as putting fingers on the bulb of a thermometer will raise outdoor temperatures. At best, it is a manipulation that will cause a need for recalibration in order to factor out the manipulation. Seen this way, could the skewed measurements simply be a way of masking the effects of larger perturbations like regulation, monopolization and authoritarian cronyism?

    • wraft

      Central banks can only control money supply, not velocity. Falling velocity is an indication of mismanagement.

      • You’ve got to be kidding! MISMANAGEMENT? Who is doing the mismanaging? Who is at fault?

        • wraft

          A legit central bank would enforce Say’s Law so that money growth, m’/m was the same as real growth, Q’/Q. Then, money created would be cash, ie., would circulate in the economy. Q’/Q is the sum of productivity growth, population growth, and employment growth. Productivity grows at about 2.2%, population at about 1.2% and employment growth is variable. At most, real growth is 3.4% and is always less than that because there is some unemployment.
          If you add in depreciation of about 1%, then, investment demand is always less than about 4.4% Creating money at a faster annual rate merely overloads the economy with debt, which is suicidal.

          • A legit central bank! What the heck is that? A private clearinghouse? What? … And what makes you so sure that productivity grows at 2.2%, etc.? This era’s monopoly central banking statistics? Are they in any sense trustworthy? You’re very certain about your numbers!

          • talk about an oxymoron : )

          • wraft

            You can plug in any numbers you like. The market always has the final word.

            I don’t mean to say I’m in favor of central banks, either, but so long as women have the vote we’re stuck with the nanny state.

            While we’re on the subject of politics, I’d like to add that I favor direct democracy because I think rough justice is better than slow, or no, justice.

          • dave jr

            So long as the women hahahahah…so long as the wo hahahaha. Is that because they have breasts? hahahah. ohhh lordy.

          • dave jr

            A “legit” central bank is as rare as a unicorn farting fairy dust.

          • davidnrobyn

            That sounds like the Chicago school, or Greenspan until his “irrational exuberance” speech. The idea of creating a de facto gold standard by interest rate manipulation.

      • dave jr

        Mismanagement? Corruption maybe. It is hard to ignore the gun toting player who brings his own supply of chips, which he never redeems, at the table. Many would cash out and leave except…dammit, that gun toting player has regulatory agency flying moneys insuring that he is the only game in town.

      • Not accurate since every time you increase money supply you decrease velocity. Money velocity M2 is defined as the percentage of money in circulation. More money, with the same amount in circulation = lower velocity.

      • acudoc1949

        It seems to me that velocity of money is controlled by too many psychological as well as market and central bank variables to be a useful concept in practice. If people want to hold onto their money it is nobody else’s business! If the central bank wants to create a lot of currency, who can predict the outcome? The money could go anywhere, there could be a bubble in child piggy bank holdings. The sticking point I always have is why should there be a central authority controlling the quantity of money? Everything bad stems from this presumed expert control of a currency which is not even a real money by the Austrian definition. Much of modern day court economics strikes me as a variation of two drunks arguing over a bar bill on the Titanic.

        • wraft

          Well, of course if there were competing bank note currencies, inflating banknotes would lead to bankruptcy for the issuer. The Fed has eliminated all competition so it has to regulate itself.

        • davidnrobyn

          Even “people holding onto their money” (unless it is money under the mattress) is simply putting money to other uses than buying consumer goods. Often it’s buying producer goods rather than consumer goods, something an economy like ours is in desperate need of, and which the Keynesians denigrate or ignore.

    • autonomous

      Makes sense.

    • acudoc1949

      Nicely put.

  • Danny B

    Well, congratulations to both Anthony and Antal. You’ve certainly added a lot of clarity to the question of real bills. It appears that the “discount” mechanism is substituted for the “interest” mechanism. This brings real bills closer to Sharia compliant banking than to Western banking. This puts a greater % of the profits in the pocket of the tradesmen. Both Bischoff and I, et al, believe that the slashing of oil prices was an overt action to exorcise the bankers out of the oil business. I suspect that the oil majors pulled the plug at the worst possible time for the bankers. A happy confluence for them and disaster for Wall St.
    While I really like this interview, I still have my own questions regarding wages, demand and automation. The first “human action” is survival. You take a job at whatever wages are offered. Wages are falling towards a global mean. The global mean wage is not set by man. It is set by machine. https://www.youtube.com/watch?v=7Pq-S557XQU
    There are claims that we will invest new jobs to offset the jobs lost to machines. Experience shows otherwise.

    • Thanks. Repetition is helpful, as Dr. Fekete affirms.

    • wraft

      Machines don’t buy Buicks. Neither do unemployed people.

      • Danny B

        wraft, you’re quite correct. That is why I constantly write about the lack of demand. If you follow the video closely, you will see the future. There is NO cure for efficiency. As the vid clearly points out, machine intelligence is NOT creating new job niches for humans. As the job market demands workers who can handle ever-greater complexity and dexterity, those workers are ever-less likely to be human. I claim to be a neo-Luddite. It’s not that I believe that machines should be destroyed. The economy would stagnate if mechanization were curtailed.
        Our continuing invention of labor-saving devices, first resulted in a lessening of hours worked. Then, it resulted in the elimination of animal labor. The horse population peaked in 1915.
        The West had a gradual shrinkage of job niches due to mechanization. When low-wage labor markets crashed into our value-added industries, this process greatly accelerated. The original bubbles were blown in sectors that weren’t readily susceptible to off-shoring. The tech bubble couldn’t be blown in London of Shanghai because the schools and conditions weren’t amenable. The housing bubble was blown because house construction couldn’t be readily off-shored.

        Under normal progression, man moves from an agrarian society to an industrial society in a measured pace. China super-accelerated this pace. They weren’t in any position to consume what they produced. That meant that 300 million Chinese who had made a breakneck transition into the labor force displaced hundreds of millions of Westerners.
        The is all ABOUT JOBS.
        The BRICs have the jobs but, not the consumptive ability. The West has neither. In most work, machine labor has replaced human labor. Is there any reason to believe that machine intelligence won’t replace human intelligence?

        One of the prime facets of socialism is inefficiency. One of the prime facets of capitalism in efficiency.
        Socialism is seen as the cure in that it would provide lots of jobs. Socialism would eventually collapse anyway but, the PTB see it as an interim solution until ??????
        Look at Watson (IBM) and Socrates (Martin Armstrong). These 2 programs could replace 99% of politicians and 98% of economists. The drumbeat of socialism from high places is a plea to preserve the jobs and incomes of those who pretend

        to contribute to society.

        • wraft

          Demand will always increase because there will always be unsolved problems – for example – human immortality. After that is solved, there are vast galaxies to be explored. People are needed because they always cause problems and are necessary for the economy.

          • Danny B

            Yeah, demand increases,,, people in hell want ice water. Desire may increase but, NOT demand. Everybody wanted food during the Great Depression I. They couldn’t pay.
            The CFR and Speigel and many others are calling for helicopter money to the poor. Everywhere you look there is insufficient demand. Global aggregate productive capacity is constantly growing. As we morph towards a low global mean wage, consumption falls. World aggregate wages are falling.
            It is anathema to mention it here but, we will eventually have “social credit”.

            Did Captain Kirk ever talk about his wage-and-benefit package?
            Just project the trends in robots, additive manufacturing, computers, software, etc.
            Read up Kurxweil, http://www.kurzweilai.net/

            Sure, we will explore “space” but, only as tourists. There is nothing that a person can do that a drone can’t do better.
            This movie is a pretty good representation of what most space exploration will be. https://www.youtube.com/watch?v=gVebPEYiq2o
            Have you noticed how many UFOs are reported in backyards, stadiums, gardens, highways, etc?
            Top secret military projects are not flow willy-nilly to every nook and cranny. When we set off the first thermo-nuclear explosions, we sent a shock wave through the aether. This announced our presence to the nearer sectors of the galaxy. We’ve had space tourists ever since. Some of them are evidently piloting jalopies. There have been a lot of crashes.
            “Alien” with Sigourny Weaver had a crew on a mining transport ship. WHY?

  • Praetor

    “Gold is the only capital immune to destruction”. All fiat or Real Bills not backed or final redemption by something is nothing. Mr. Fekete, has said many interesting things, in his own interesting way. Madness inflicted (on) or did he mean by a gang of imposters and usurpers. QE, meant to have a certain effect on the economy or at “lest the stated reason” for QE, but, because of the Invisible Hand of Human Action that effect was nullified and that Human Action help create a Risk free Market for Risk Free Profits, with that Risk (Debt), through regulation being shifted to the People. We as myself always or most the time link Invisible Hand of Human Action with (Good), but, in fact it can be linked to (Evil) Action, its not a tempering force, but, intervening force. The picture is becoming clearer! The fact that Jefferson is his hero, and Jefferson’s ideas on debt, does indicate Mr. Fekete’s belief Jefferson’s beating back a Centralized Banking System of debt was a worthy fight, and a fight we should all be waging today. I like he calls Keynes a speculator only if the system is Risk Free with Risk Free Profits and only for himself and his elite buddies. The ultimate, Insider Trading, at its finest. Today, with our, “I promise to pay you”, if I have the funds to pay you, ” Promissory Notes”, and the promise of Trillions of more promises, is metastasizing into Depression. It seems the elites did learn from history, “Repetition is the Mother of all Learning”, they have done it all before. Great Article, DB.

    • Thanks.

    • Using your argument, the Scottish Golden Age of private, fiat commercial banking could not have included money-as-invoices. Interested to find out what Dr. Geroge Selgin would say about this!

      • Praetor

        “O” DB, my brain being more inclined to mechanical things, but do know numbers well, am always willing to learn. Economics is a mystery to me. That is why I’m finding it fascinating, “Economics” that is. I will research and read Dr. Selgin, and of course formulate an opinion, as all individuals do.

        • We’ve interviewed both Selgin and White. Just search for them along with “Daily Bell.”

          • Praetor

            Yes, now that you mention it, I may have read those interviews. Have to revisit those. Internet Reformation of information can put your mind in over load at times. It does seem, does it not?, that all “MEANS” of a “TRANSACTION” in their final conclusion for goods or services needs something of “TRUE VALUE” to finalize that transaction, at some point, a final accounting, to bring it into balance, we are at even in our transaction, because that thing of true value has been transferred. This being the reason our present system is out of balance, because nothing of true value is being transferred, just paper saying I promise to pay, it come down to, pay what. Just a layman’s reading of things. Like I say its fascinating.

          • Pilgrim

            By law the frn is the thing with value. “for all debts public and private” When I argue it has nothing of value backing it, I’m told it is backed by the goods it can be exchanged for. But it sounds suspiciously like a circular argument to me.

            If congress passed a law that the sky is mauve, would it be so?

  • dave jr

    Dr. Fekete: “The current expression is “front-running the Fed.” Speculators are in the driver’s seat, not the Fed.”
    I can hardly believe this. It has to be a concerted effort between the Fed and their loyal agents, otherwise it doesn’t make any sense. The Fed pre-announces how much and at what rate they will buy. You and I are not allowed to participate.

    • Mortimer Sled

      Yes, the front-running could very well be Fed-sanctioned. So, yes to the first statement and an abstention on statement two.

      • dave jr

        The abstention, your right, is interesting. Will the Fed, does the Fed, purchase outside of the short list?

  • Mortimer Sled

    The best thing about Fekele is that he’s clearly engaged in that vanishing pastime called thinking. The doctrinaires will always take up roost somewhere. Like the poor, the programmatic will always be with us.

    “I prefer the definition of deflation as a pathological slowing in the velocity of money”

    Bingo. Deflation is not a monetary phenomenon. In fact it’s unfortunate it’s differentiated from inflation merely by a prefix as that cognitively ‘monetizes’ it in our brains. Freud before Friedman. Deflation is fear. Pathological fear would be an out-sized fear, a fear whose depth exceeds the perceived threat. However I’m not so sure my fear rises to the level of pathology. So I might differ with the good Doctor but only by a matter of degree. Healthy (rational) fear can degrade velocity as well.

    The PATHOLOGICAL greed of Wall Street which compels the extinguishing of price signals and discoveries makes me doubt everything about what I purport to call my wealth. So I reduce the velocity of my life. The process of systemic corruption levies an existential doubt across a society which acts in many ways like a tax. We need more moral philosophy and less econometrics in our discussions of money (ala Adam Smith). We need more jail time too. Moral hazard with teeth. Money is a psychological marker before it becomes a socio-economic actor. Greed and the compulsivity of the hamster-wheel (‘how much have I got vis a vis him over there’) tends to obscure more transcendent realities. -Norman Ball

    • davidnrobyn

      When you said, “Deflation is not a monetary phenomenon” a lightbulb went off in my little pea-brain :-). So deflation is more like the opposite of HYPERINFLATION, NOT inflation. They are both (if you are correct) FEARS of the masses, not monetary phenomena per se. Rational fear can both degrade AND enhance monetary velocity.

      • Pilgrim

        The ptb know this, and explains why the emphasis is always on ‘confidence in the economy’, ‘confidence in the dollar’ or ‘confidence in the administration’.

  • Mortimer Sled

    “It is axiomatic that gold mining shares go up during a depression. Depression is just another name for capital destruction, and gold is the only form of capital that is immune to destruction.”

    This resembles Jim Rickards’ argument for gold appreciation even in a deflation.

  • Sometime in the distant future the wise intellects of the freedom movement will hopefully come to realize that both Ludwig von Mises and
    Antal Fekete have powerful visions regarding economy and money. Fekete needs to be listened to by Austrians, rather than ignored and smeared by the stalwarts who prevail. Upon reading Fekete’s “Monetary Economics 101 and 102,” [ http://professorfekete.com/moneycredit.asp ], one sees immense brilliance that needs to be discovered, not denigrated.

    No mortal man has a total lock on the truth. Men can only glimpse parts of the truth. To put Mises up on a pedestal and worship him as a god, who has no errors in his body of thought, sabotages rather than advances the concept of freedom.

    In fact, Mises, himself, would be horrified with his present day defenders in the face of Fekete’s challenge. If Mises were alive, he would be the first to stand on a stage with Fekete and debate the great issues of money, economy, real bills, interest, clearing, etc. He would certainly not rely on avoidance and the employment of smear in the face of Fekete as many Austrians have done. He would be the first to answer the call for a Grand Debate on Real Bills and their Significance.

    Out of such a debate, the freedom movement would be strengthened immensely because its stalwarts could then perhaps see the value of merging prevailing Austrian theory with Fekete’s New Austrian School of Economics. Fekete’s defense of Real Bills and his critique of Mises’ errors would lift much of the darkness that presently impedes Austrian economics from storming the Keynesian Bastille that dominates modern day governments. The Austrian approach is the only hope for rational economics to be restored, but it will never bring about such a restoration because of the Misesian flaws, flaws that Fekete corrects.

    • Good points, thanks.

    • Praetor

      May I say, I think Mises, as you say, would be horrified. You Sr. are, absolutely, correct! There is a lot to learn about our world and how it works. I have always said, that’s why we are here. TO LEARN, HOW TO LIVE WITH ONE ANOTHER, and economics is one of those things to learn. Mises was Human, as is Fekete.

    • Bill Ross

      When one refuses to engage / debate dissenters and other “shoot the messenger” behavior, well, that can only be interpreted as “seeking control”. Doomed to fail.

      A brilliant intellect such as Mises would be “dismayed” and, Dr. Felete, appalled and not impressed, as many here, who can think, are.

    • TG Molitor

      Thank you Nelson for once again raising an economic debate to a higher level of what supports the freedom movement.

  • TG Molitor

    Drop in commodity prices:

    It’s interesting, just this past week the MSM business writers have explained the drop in oil prices and other commodities as a symptom of the slowing of China/Euro’s demand for commodities.

    Fekete’s explanation:

    > No matter how fast the Fed is printing, its output is siphoned off by profit-hungry bond speculators even faster. So fast indeed that commodity speculators, who may otherwise be tempted to buy goods with the freshly printed money in anticipation of inflation, make a volte-face and march to the bond market where the fun is <

    Real Bills Doctrine:

    As I understand it, the Real Bills Doctrine says if the central bank loans money only for productive projects, the loans will not be inflationary. As envisaged in 1913, the central bank would provide credit to borrowers that produce real goods and services and this credit would be short-term and self-liquidating and would not be inflationary.

    The Quantity Theory of Money says otherwise: all money creation is inflationary.

    Food for thought: But how does one decide for themselves which food to order?

    • Danny B

      TG, the unmentioned point about commodities is that they rely on end-consumption. That requires demand. Commodities are in a big decline because demand is declining. If the fresh-ink money had flowed into commodities, they would have crashed that much sooner. Bonds require no consumptive demand. Unlimited paper currency can flow into unlimited bond printing. Bonds can absorb huge flows that commodities can not.
      “The Quantity Theory of Money says otherwise: all money creation is inflationary.”
      This may very well be true but, does it matter. If tangible wealth is growing at the same rate that currency is growing, what is the negative?

      • Explanations matter, Danny B.

      • TG Molitor

        Danny B, do we know that true demand for commodities is declining?
        Jim Rogers sells long-only funds on this premise: world demand for commodities, in the long-run, can only rise due to standard of living increases in emerging countries. This is not happening, why? Secondly, QE debases the value of the USD. Commodities are priced in USD, which means it takes more USD to buy commodities and that drives commodity prices up. This is not happening, why? The USD has risen in value 15 percent in six months, yet oil prices have halved, why? Fekete says QE hasn’t increased the velocity of money, in fact, it’s decreased it. What’s going on here?

        • Danny B

          TG, I won’t vouch for all commodities but, iron ore is down. It reached $ 180 per ton in Feb of 2011 and is now about $ 68. https://ycharts.com/indicators/iron_ore_spot_price_any_origin
          That indicates a drop to me and, it is still falling. Copper is down.

          The standard of living increases in poor countries is mostly related to food, not so much manufactured goods. China produces half of the world’s pigs now that they have more money. http://www.thepigsite.com/articles/1807/china-pork-powerhouse-of-the-world

          Home production of food commodities doesn’t cause price inflation like importation would.
          QE debases the value of a dollar BUT, not equally in every market. I suspect that the PTB don’t want price inflation if food commodities. It causes a LOT of unrest. http://necsi.edu/research/social/img/fig1_crises.png

          Oil prices have fallen dramatically because of lack of demand. The GEAB has forecast this a while ago.
          This fall in demand was anticipated by the oil majors. They propped up demand until everybody was on board. Then, they crashed it all down. They hope to exorcise the financials from the oil business. They pulled the plug when pressure was at it’s highest.
          As far as the dollar rising, keep in mind that it is rising against currencies that are falling fast. The dollar isn’t falling as fast so, it looks to be rising. Imagine the Yen thrown overboard with 2 cement overshoes and the dollar thrown overboard with just one cement overshoe. 🙂

          • kenvandoren

            Side note an American friend of mine is at least partly responsible for increased pig production. He, his Chinese wife and kids live in CHina, and he is a consultant/researcher, large animal specialist living and working there.

            Right on with your dollar analysis as well. If not for the fact that other countries are debasing their currency faster than we are, the dollar would or could have crashed already. We have become the tallest midget, or nearly so. If other countries move in the direction of shoring up the value of their currencies, the USD is in trouble. Note that some (DB I BELIEVE?) think that the best reason for US attack on Libya, Iraq, and its efforts to destabilize Venezuela is because leaders were shifting oil away from dollars, toward hard money and gold. Makes more sense than a lot of other explanations, as we have tolerated brutal dictators, even supported them in the past.

        • kenvandoren

          David Stockman has a good explanation, based on Austrian theory. Commodity prices peaked because of increased demand driven by monetary inflation. This is the boom side of the equation. During this boom, China virtually duplicated the world’s productive capacity of steel as its economy grew at insane rates. Now they have apartments and high rises that are empty and entire cities that are virtually so. The economy has softened world wide, and China is no longer exporting the cheap goods it produces, idling a lot of productive capacity. (the UNSUSTAINABLE BOOM) Now that demand is approaching historical levels (much lower than the boom) we are in the bust phase. For many industries, companies will continue to produce until the prices they get for their goods falls to below their marginal costs ( if they are smart) or until they run out of cash. For those reasons, we may see a continued decline in commodity prices. We are in for a massive correction, completely consistent with Austrian boom bust business cycle theory. It fits so good, I see little reason to give but a passing glance at alternative theories, and then most often to refute them.

  • Danny B

    Something else occurred to me; “The
    borrower, typically a young man, exchanges income of which he has a
    surplus for wealth of which he has a deficit. By contrast the lender,
    typically an old man, exchanges wealth of which he has a surplus for
    income of which he has a deficit.”
    How does this dynamic work for a corporation that is never “old”? Japan is in a bad demographic crash and it is easy to see the effect when the elderly quit spending. What about a corporation?
    I found an EXCELLENT article that casts a different light on some current events. http://russia-insider.com/en/2015/01/07/2253

    • Age isn’t a factor at all. Exchanges are between an income and a capital value, irrespective as to who the exchangers are. Think of how a company buys back its own shares. It obtains (borrows) money on the promise of an income (interest). If the company can buy back some of its shares – shares which provide dividends greater than the interest being paid on its loan – the company will have made a profit. This profit will be reflected in the share price, which will go up because the company will have to pay out less. At least, this is the theoretical reasoning – risk factors can make a nonsense of this, but, probably not before company directors have extracted their increased profitability bonuses.

    • Greg Jaxon

      The question was about the morals of “usury”; for which the Professor’s answer was in layman’s terms and, frankly, beautifully human.

      To scale this up, Fekete has an excellent model (he talks about these as his “pentagonal” and “hexagonal” models) of finance; see for example the earliest dated paper on his website “Whither Gold?”. This is an Austrian economy where each actor has mastered a different arbitrage. In it there is a (high) place for “the investment banker”. The corporation’s bond offering is a problem in the market of the old guy and the young turk – it is sub-marginal, being sized and priced beyond the range of most individual market participants. That very inefficiency causes a price spread which pays for a class of specialists who close the spread by reaggregating investment funds and packaging better small investment products. The existence of the bond as a medium of indirect exchange (between wealth and income) makes possible all the advanced structure of the financial marketplace.

  • acudoc1949

    There seems to be more division than necessary between Misesians and Neo-Milesians. Dr. Fekete wants to increase the liquidity of payment methods in the system by using real bills, which are ultimately redeemable in gold (basically a system of post-dating checks that are backed up by gold in 91 days and using them as temporary money substitutes in conjunction with a discounting process), as he sees a flaw in the present system which reduces the velocity of money and thus might disrupt or even make impossible a particular chain of production. The followers of Mises emphasize the reguirement that all money substitutes be ultimately redeemable in gold or silver or any other medium of exchange that market actors may freely choose, gold and silver being the time-honored choice so far in man’s history. The real flaw in the present system, with or without real bills, is the issuance of claims on production and resources in a bewildering myriad of forms which have been given legal privilege by the State, allowing a top-tier of non-producers to control the allocation of resources. People are starting to realize that these financiers, playing their complicated financial games with paper money, have too much power for the actual good they do society. Basically, they are dishonest and love their dishonest toys (fiat money).

  • There has been much discussion on this site about inflation/deflation: many differences of opinion, a fair amount of confusion and complexity. It must be admitted that both inflation (bubble) and deflation (contraction) often take place at the same time in this world. It depends on what markets one is looking at and what country those markets are in. Food prices for the common man are evidence of inflation, which is much worse in several other countries than it is here. I think it is fair to say we are in the grip of a worldwide monetary sickness which I describe as a chills and fever economy. I have always believed that tracking a basket of commodities is the most accurate way to see what is going on with monetary expansion or contraction in the US dollar. Commodities reflect the entire world, measured in the reserve currency (dollars). From this very simple perspective I present the chart below. Make up your own mind:


    • As an addendum, I have yet to see, in 40+ years of observing markets, a single instance where a sustained decline in the commodity index was not followed by a sustained decline in US equities…….

      • Thanks but no doubt that includes oil? …

        • From the G-Sachs website:

          Currently, the S&P GSCI™ contains 24 commodities from all commodity sectors: six energy products, five industrial metals, eight agricultural products, three livestock products and two precious metals. This broad range of constituent commodities provides the S&P GSCI™ with a high level of diversification, both across sub-sectors and within each sub-sector. This diversity minimizes the effects of highly idiosyncratic events, which have large implications for the individual commodity markets but are muted when aggregated to the level of the S&P GSCI™.

    • Danny B

      Dave, your link seems to be short a “/” at the end.

  • Danny B

    I found something on Herman Daly. I guess that there is one more person that I need to read.

    14) Mainstream Keynesian Economists and those governments who follow their line, typically aim for the Wrong Target — increased aggregate GDP Growth, when they should be aiming for greater GDP per capita
    in a “Steady State” Economy (see the Work of Economist Herman Daly).
    This Keynesian view leads to a variety of flawed policies including the
    one that assumes that population growth is Good-in-itself. In the U.S.
    and Eurozone, for example, this has led to the Counterproductive Policy
    which encourages Mass Immigration. In fact this Policy results in larger
    and larger social-welfare-Dependent Populations, and the Diversity it
    brings generates loss of Social Cohesion. And this Mass Immigration
    Decreases Job Opportunities and Wages for the Native-born (“Foreign-born
    employment has increased by 1,028,000, while the number of native-born
    Americans working has decreased by 780,000” (Rubenstein, vDare.com,
    11/8/14) in the receiving Societies. Highly selective and extremely
    limited immigration creates better results Economically and Socially.
    (See the non-profit http://www.carryingcapacity.org)


  • Danny B

    This is off topic but, very interesting. Belarus is seriously rocking the boat.
    Greece is rocking the boat. Saudi is rocking the boat. Russia is rocking the boat.

    This boat may take on some water 🙂

    • kenvandoren

      SOME? Be it noted as well, that the water takes different forms from those different sources.

  • kenvandoren

    I prefer the definitions of Mises and classical economics, that inflation is an increase in money supply. It does not matter what form this takes so long as the money is at least a bit fungible. Deflation then, is a decrease in money supply. Mises pointed out that all value is subjective, and that it is not in direct proportion that an increase in money yields an increase in prices. In fact, he (and I) anticipate that money supply can increase while prices generally decrease. This is in fact what happened in the lead up to the Great Depression. Capital prices increased as the FED cranked out more money, but consumer prices decreased due to greater productivity and competition. Mises also allows that an increase in money supply ALWAYS has some effect, usually a net negative one.

    I do not like the confusing use of the terms “disinflation” and the use of inflation and deflation without qualifying, are we taking money quantity, or are we talking price levels? Hard to have an intelligent discussion without defining those terms.

    One more thing, can not remember if it was Mises or another, but I think money velocity is overrated. For one thing, for most of life’s necessities, the demand is rather inelastic. One can only store so much milk, bread, meat, etc, So rapid changes in money velocity hardly ever go in the direction of necessities. Most often, it is during times of financial or other man made or natural disasters that money velocity increases significantly. These calamitous times hardly ever bode well for the economy or personal wealth, at least not in the short term. Better to avoid these disasters if possible, for the orderly functioning of the economy and greater wealth for the most people.

    • Greg Jaxon

      Ken, these things all cohere for you because you see Money as an elemental, unitary, perfectly fungible thing. Mises (and you, and most regular folks) do not differentiate between different quality monies. Your hedge that you only need the money being supplied to be “a bit” fungible is a self-deception – go ahead, measure fungibility (or derive it from marketability, e.g., by measuring bid/ask spreads). Things today regarded as money are not all equally marketable. On crisis days, cash-equivalents lose their precise equality. If you are rigorous about marginalism and subjective valuation, and you take the extra time required to penetrate some of Dr. Fekete’s writings, I think you will find an admirable and More Complete, more nuanced, theory. In that theory you will find it hard to define “the money supply” as if it was some given objective fact that you might trivially measure. If I take your “preferences” at face value, you appear to agree with Steven Landsburg that gold miners are the most evil inflationists of all, and that is an Austrian heresy if ever there was.

  • Danny B

    Lies and half truths; ” The Federal Reserve Act of 1913 was based in part on the Real Bills Doctrine, which asserted that the creation
    of money would automatically be directed to real goods and services if the central bank and banks provided credit only to
    short-term, self-liquidating loans. The Real Bills Doctrine has been completely discredited since 1945 by most economists.”


    • Greg Jaxon

      It is no lie that the 1913 Act called for gold and real bills as the bases for the FRN money supply, nor that this was swiftly subverted and then retroactively repealed. If there is any “half-truth” in this quote (which comes from where, exactly?, not the article above!), it is the pejorative label “Doctrine”. The first link you cite is a clueless rebuttal of a strawman version of Dr. Fekete. Firstly, Menger’s evolution of money did not require a State, though he talks about state actions re monies. Secondly, Fekete’s argument is only “Mengerian” in those ways that it is not “Misean”: mainly in the rejection of Quantity as the lead term in the value of money.

      Above, Fekete said: “The existence of central banks is irrelevant to the proper functioning
      of real bills, … Nor is the existence of a central bank a prerequisite for
      real bill circulation.” The rebuttal you cite makes the exact opposite claim. Because “bills” form legal contracts, their quality and marketability depend upon Justice being available to settle disputes. That alone does not make them products of the monopoly State, and if it did, there would be no hope for any other form of grassroots anarcho capitalism.

      Your criticisms and those you cite have it wrong.

      • Danny B

        It wasn’t cited as a rebuttal. It was cited as an example of false arguments.