Communist Approval For Western Central Banking

I received an interesting email recently from a distinguished colleague in Spain. He was looking at the Central Bank of Cuba’s website where they state their monetary policy. He said to me, “you could ask your readers if they can grasp similarities and spot differences (other than that they recognize they are not a market economy) as compared with the monetary policy conducted by the Bank of England or the ECB. I guess that more than one western-world central banker would feel comfy with the Cuban approach.” Here’s the text:

In dealing with monetary policy, it is necessary to take into account that it adopts particular characteristics in the case of Cuba, since there is not a market economy but a central planning, mainly, of a financial type. In keeping with these considerations, the instruments of monetary policy carried out by the work of the central bank up to date are the following: controls over exchange rates and legal reserve ratios, among other provisions. In order to make up and implement monetary policy, in 1998, it was created the Comité de Política Monetaria (Monetary Policy Committee) in Banco Central de Cuba which gathers weekly with various objectives: to analyse money liquidity development; give its opinion on interest rates to be applied on the financial system; examine the exchange market where Casas de Cambio CADECA S.A. operates and, in general, inspect, know and decide on everything concerning the country’s monetary policy. Since 1999, important progress has been achieved in the formulation and implementation of monetary policy. In this sense, measures and instruments has been put into practice to adequate the monetary situation of enterprises as well as of the population to the development of the economy. In that year, interest rate policy for the national currency was modified, fixing ceilings of 5,0 percent for the short-term and of 7,0 percent for the medium- and long-terms; this way, the high number of purposes and of interest rates prevailing until then were eliminated. As part of that new policy, banks were given the possibility to move those ceilings to a +/- 2,0 percent, depending on the purpose of the credit, rating of the borrower and other considerations, always taking into account the risk analysis that may be effected. Accordingly, interest rates for credit granting may range from 3,0 to 9,0 percent, without meaning an onerous financial burden for enterprises. In regard to credit policy, it is based on effecting financing in national currency as well as in foreign currency through financial intermediaries under a strict risk analysis. In relation to loans made to the population in national currency, interest rates approved by the end of 1998 are still applied for three loan categories: consumer loans with an interest rate up to 8,0 percent; investment loans with a 9,0 percent as maximum and cash loans with an interest rate up to a 9,0 percent, also. Likewise, as of the 2000, banks are authorised to attract fixed deposits in national currency from natural persons with attractive interest rates shifting from an annual 2,5 to 7,5 percent, according to the term, that may vary from 3 months to 3 years. This measure allows the population to place new resources in this savings method or to immobilise part of the ordinary savings they hold for specific time periods, thus having a favourable impact in monitoring and controlling the money supply. Interest rates of loans to enterprises in freely convertible currency are at reasonable levels, around 11,0 percent, thus redounding to an acceptable cost of financing to the economy. Interest rates on deposits in foreign currency are fixed by commercial banks directly and related to international interest rates prevailing in each moment. At the same time, commercial banks have been authorised to take fixed deposits in national currency from enterprises which are engaged in the entrepreneurial improvement system. Legal reserve or minimum reserve ratio is continued to be applied on demand deposits of commercial banks. It is fixed at 10,0 percent for national currency and at 5,5 percent for foreign currency. This instrument of monetary policy has enable it to act on liquidity of the banking system and, therefore, on expansion or contraction of credit given to the economy. Work has been carried on in making a system of monetary aggregates with the objective of gradually improving control over the money supply. These monetary aggregates include national currency as well as foreign currency. Their components are liquidity held by the population, on demand or for a term, plus savings balances from enterprises and other entities operating within the economy. Likewise, it has been determined the monetary base which includes cash in circulation outside the central bank plus commercial banks’ reserves deposited in the central bank. In this issue, it is important to underscore that, due to the characteristics of our economy, the most important component of the monetary aggregates in order to monitor price behaviour is, precisely, liquidity held by the population which includes cash in circulation and call deposit accounts. On the other side, work is being done to estimate, among other elements, money demand of the economy by means of econometric techniques, counting on, to that purpose, with the advisory of specialists from central banks of Latin America. In relation to the exchange market, the CADECA’s informal market exchange rate which had remained stable for two years at about 20 Cuban pesos for one dollar, by the end of 2001, it was depreciated up to about 26 pesos for one dollar. This was mainly due to the international events and the impact of the world economic recession on the Cuban economy. The existence of a double money circulation is an aspect which makes difficult to conduct Monetary Policy at present. This is an issue where attention is focused on and whose solution is linked to the growth of the country’s economy, the increase in financing of the Current Account deficit in the Balance of Payments, mainly at medium- and long-terms, and to the increase of the International Reserves to acceptable levels. Along these years, specialists from Banco Central de Cuba have carried on different research works in which experiences from other Latin American countries facing a similar situation have been analysed.

The Motive Powers Of Destructionism

Its a great pleasure to wake up in the morning on holiday and read something very true, as always, from Mises. Its also a great pleasure to get emails from fellow Cobdenites. One of our supporters sent me this link to a recent Bloomberg article. In short, it has got on the band wagon of GDP targeting for the central banks. This is when the nine central planner magicians, oh, sorry, I mean economists, of the MPC choose another target to set their monetary goals. Little thought is given to how wealth is actually created. This should not be expected any more from people who profess to know something about the economy. That requirement went out of the window many decades ago. Granted, this is akin to a doctor not being able to take a patient’s pulse, but this is now the norm. Anyway, here is a small chapter from Socialism by Mises, written in 1922, when economists were required to know the basis of wealth creation as they fought to show how socialism could never create wealth but only destroy it. Our modern day economists would do well to take note and abandon their futile attempts to manipulate wealth creation.

CHAPTER 33 – The Motive Powers of Destructionism 1 – The Nature of Destructionism To the socialist, the coming of Socialism means a transition from an irrational to a rational economy. Under Socialism, planned management of economic life takes the place of anarchy of production; society, which is conceived as the incarnation of reason, takes the place of the conflicting aims of unreasonable and self-interested individuals. A just distribution replaces an unjust distribution of goods. Want and misery vanish and there is wealth for all. A picture of paradise is unfolded before us, a paradise which—so the laws of historical evolution tell us—we, or at least our heirs, must at length inherit. For all history leads to that promised land, and all that has happened in the past has only prepared the way for our salvation. This is how our contemporaries see Socialism, and they believe in its excellence. It is false to imagine that the socialist ideology dominates only those parties which call themselves socialist or—what is generally intended to mean the same thing—“social.” All present-day political parties are saturated with the leading socialistic ideas. Even the stoutest opponents of Socialism fall within its shadow. They, too, are convinced that the socialist economy is more rational than the capitalist, that it guarantees a more just distribution of income, that historical evolution is driving man inexorably in that direction. When they oppose Socialism they do so with the sense that they are defending selfish private interests and that they are combating a development which from the standpoint of public welfare is desirable and is based upon the only ethically acceptable principle. And in their hearts they are convinced that their resistance is hopeless. Yet the socialist idea is nothing but a grandiose rationalization of petty resentments. Not one of its theories can withstand scientific criticism and all its deductions are ill-founded. Its conception of the capitalist economy has long been seen to be false; its plan of a future social order proves to be inwardly contradictory, and therefore impracticable. Not only would Socialism fail to make economic life more rational, it would abolish social cooperation outright. That it would bring justice is merely an arbitrary assertion, arising, as we can show, from resentment and the false interpretation of what takes place under Capitalism. And that historical evolution leaves us no alternative but Socialism turns out to be a prophecy which differs from the chiliastic dreams of primitive Christian sectarians only in its claim to the title “science.” In fact Socialism is not in the least what it pretends to be. It is not the pioneer of a better and finer world, but the spoiler of what thousands of years of civilization have created. It does not build; it destroys. For destruction is the essence of it. It produces nothing, it only consumes what the social order based on private ownership in the means of production has created. Since a socialist order of society cannot exist, unless it be as a fragment of Socialism within an economic order resting otherwise on private property, each step leading towards Socialism must exhaust itself in the destruction of what already exists. Such a policy of destructionism means the consumption of capital. There are few who recognize this fact. Capital consumption can be detected statistically and can be conceived intellectually, but it is not obvious to everyone. To see the weakness of a policy which raises the consumption of the masses at the cost of existing capital wealth, and thus sacrifices the future to the present, and to recognize the nature of this policy, requires deeper insight than that vouchsafed to statesmen and politicians or to the masses who have put them into power. As long as the walls of the factory buildings stand, and the trains continue to run, it is supposed that all is well with the world. The increasing difficulties of maintaining the higher standard of living are ascribed to various causes, but never to the fact that a policy of capital consumption is being followed. In the problem of the capital consumption of a destructionist society we find one of the key problems of the socialist economic policy. The danger of capital consumption would be particularly great in the socialist community; the demagogue would achieve success most easily by increasing consumption per head at the cost of the formation of additional capital and to the detriment of existing capital. It is in the nature of capitalist society that new capital is continually being formed. The greater the capital fund becomes, the higher does the marginal productivity of labour rise and the higher, therefore, are wages, absolute and relative. The progressive formation of capital is the only way to increase the quantity of goods which society can consume annually without diminishing production in the future—the only way to increase the workers’ consumption without harm to future generations of workers. Therefore, it has been laid down by Liberalism that progressive capital formation is the only means by which the position of the great masses can be permanently improved. Socialism and destructionism seek to attain this end in a different way. They propose to use up capital so as to achieve present wealth at the expense of the future. The policy of Liberalism is the procedure of the prudent father who saves and builds for himself and his successors. The policy of destructionism is the policy of the spendthrift who dissipates his inheritance regardless of the future.

The Hope Of Osborne And The Error Of Osborne

The following quote is taken from page 155 of Capital and Production by Richard von Strigl, which you can download in PDF format from our downloads section, or in various formats from H/T to Sean Corrigan for drawing our attention to this note.

The Error

Financing consumption through consuming capital also occurs in what is generally recommended under the title of emergency measures in times of crises. Even though production is directly financed here, this is only done for the purpose of creating values which do not free up the invested capital. If a production integrated in the normal course of the economy is financed, then it creates a product — as we have already explained — from whose sale the further financing of this production becomes possible. If, in contrast, a street is built, then means are employed which produce a street that can naturally be valued in economic terms, too, but not a product whose sale will finance further production processes. No more shall be said here on the question of when such an expenditure can be justified solely from an economic point of view. There is only one thing to be said: If the neighbours (and other interested parties) attain a greater return after the street is built and save this return; that is, use it for new investments, then in this case the capital invested in the street is set free via a detour. If, however, this increased return is consumed, then from an economic point of view this is a case of freezing free capital. In both cases there occurs, of course, an enrichment of such interested parties at the expense of those who have provided the means for the street (or respectively in the case of inflationary money creation: at the expense of all owners of money). A purely economic calculation of profitability of the street could take place via the formula of comparing the costs with the possible surplus return for the interested parties, whereby naturally in this formula an interest rate would have to be incorporated.

The book is one of the most accessible introductions to capital theory and the Austrian Theory of the Business Cycle in the style of Mises and Hayek. As we know, the ATBC is the only theory that can predict credit booms and busts, so if you get a chance, do read it. Anyway, the hope of all politicians in a tough economic climate is that they can get some money from somewhere – tax, more debt, or QE – and spend it on something to hopefully create some demand and jobs where the private sector has “failed”.

The Hope

MoneyMarketing – Osborne plans state-backed bank for small businesses:

Chancellor George Osborne is planning to set up a Government-backed bank to lend to small businesses as part of wider measures to prop up the economy… He said the small business bank would “bring together all the alphabet soup of existing schemes” which provide funding to small businesses. Osborne said: “The weakness in our banking system is one of the biggest problems we have got. Small businesses are the innocent victims of the financial crash.” The Financial Times reports the idea has been developed based on similar models from Germany, the US and Ireland. The newspaper reports the bank would operate online initially, and in future could enter into partnerships with the private sector or access the securitisation market.

The Error Further Explained

Any layman with more than room temperature IQ can understand that he needs to do some useful work for somebody, either in an employed or self-employed capacity, to gain money that he can exchange for goods and services produced and provided by others. He first focuses on his most urgent survival needs, and later on the products and services that provide a “good” life. When the government taxes, taking money productively earned by Person A and giving it to institution B to spend on person C, this is redistribution only and never new incremental wealth creation. So there is no increase in productivity or more products made for exchange than there would have been. All that has been achieved is that B and C have A’s money to spend. When the government issues debt, and it is bought by people who have previously produced and earned (e.g. most pensioners and large numbers of savers), all we have is savings spent today on current consumption that would have been spent on tomorrow’s goods and services. So there’s nothing new to lift up the wealth of the nation on a permanent basis. When the government buys its own debt through QE, there is no new production, just raw consumption (we may see it as stealthy confiscation of the purchasing power of all money-holders). The wealth of the nation is decreased whenever this is done. In a well-reasoned article for the FT (“Sorting fact from fiction on Bank’s QE” – 3 Sept), Jonathan Davis writes:

You do not have to be a fully paid up member of the Austrian school to believe the long term costs of distorting price signals in the bond market may turn out to be very high, and by inducing the misallocation of capital ultimately potentially every bit as damaging as the short term benefits are positive. QE is a path that leads eventually to zombie banks, zombie property companies and zombie businesses

The corrective process of the market has been stopped. It seems we are destined for a prolonged Japan-style zombie recession that will go on for decades. If we let the corrective process start, then billions of pounds held on corporate balance sheets and in investment funds will be freed up to exercise real demand and sort out these companies – to make them produce things people want at prices they’re willing to pay. When bank credit is granted unbacked by the real savings of others, the credit it is created “out of thin air”.  As Frank Shostak has repeatedly argued, such transactions do not enrich the nation.  They enrich some at the expense of others, and destroy wealth overall. Savings, investment, and production are the answer, not credit and consumption.  Osborne’s scheme is especially suspect because credit and consumption will be directed according to the whims of government. Even with the best intentions, they cannot possibly guess which projects are worthy and which are not.  Only the market can determine this.  Osborne’s project will not achieve what it has set out to achieve.

The Ultimate Subsidy For The Rich

I am delighted that Fraser Nelson and the Spectator have picked up something we have been saying all the time for our nearly three years in existence: that QE is a regressive tax that transfers from the poor to the rich and should be stopped with immediate effect. This of course should not be the only reason why it should be stopped, the principal one being that no new amount of money units created causes more goods and services to be made — more things that people want at cheaper prices (yes, deflated prices!), served in a more timely fashion to suit the most urgent consumer needs. Only entrepreneurs, by refraining from consumption — i.e., doing that most terrible of things according to the mainstream economist, saving — can they deploy their wealth to invest in more intensive, better combinations of factors of production.  In short, to invest further in the capital structure of their business to produce these better goods and services. I recommend this article and welcome that even the mainstream media are now starting to pick up on these points. There may be hope for sound economic reasoning yet!