What replaced the German Weimar government of the post-war?  Nothing.  The Weimar Republic continued until the early-1930s, and was replaced by an even stronger government — the Third Reich.  What replaced the Zimbabwe government in late-2008, or early-2009?  Nothing.  Robert Mugabe is still dictator.  Low hyperinflation in Russia and Ukraine, almost right after the fall of the Soviet Union (1992–1993), did not threaten the viability of either country’s new governments.  The list can go on forever — check out Wikipedia, and see what hyperinflation ended in anarchy.  I bet the answer is “none”.

For the short period of time there will be hyperinflation — if there even will be hyperinflation — you will be far more worried about scoring a high enough wage for the day to pay for your way home and the day’s food.  Your gun won’t come in handy, because if armed chaos was really a threat I would bet my hyperinflationary day’s wage that all the store vendors will be well prepared for that.  Furthermore, let’s face it, armed chaos is not really to anybody’s advantage, because in a hyperinflationary environment everyone has better things to worry about.

Gold?  What societies turned to gold after hyperinflation?  Germany?  Zimbabwe?  Argentina?  Israel?  Russia?  Ukraine?  The answer is: none of the above.  When and if society collapses (let us just assume this will occur, for the sake of argument), who will deliver all your gold bonds in their value in gold?  Or, if you own physical gold, who will turn this gold into coin?  How will effectively barter with vendors with no common weight standardization of value?  Gold is always a viable monetary alternative, but the fact is that government fiat is a more probable alternative to a failed fiat standard, not gold.

On the other hand, I will always suggest holding savings in the form of physical, tangible assets, such as property — things which hold value which will not depreciate to a large extent over time.  Gold can preform this function, but the question is what is the real value of gold today?  Sure, an ounce of gold is worth $1,000+, but to what extent is this the result of relative inflation?

If you don’t believe me, maybe Robert Higgs is more aggreeable: Which End, if Any, is Near?

Society will survive the present economic crisis, just as it will survive all future economic crises.  Perhaps our division of labor society will take comparatively small hits, but it will never disintegrate.  You can live your life at least certain of this.

Man has only one tool to fight error: reason. — Ludwig von Mises

(I had to come up with a better title than “great links”, so I borrowed Daniel Kuehn’s snazzy title format.)

Below the fold are a number of links, and some commentary, readers will find interesting.

1.  “The Worst Case Scenario“, Economic Policy Journal

Robert Wenzel posts a guest essay by Egon von Greyerz, which ends with the usual Austrian apocalyptic conclusions — the global economy will end in hyperinflation.  These are the type of posts which cause non-Austrians to come to believe we’re crazy (even if in the distant future it is true that the dollar will succumb to hyper inflation) and that Austrian economics really has no merit.  It leaves a gap in logic between our present situation and this “inevitable” hyperinflation (if the government abolished the Federal Reserve, and somehow managed to keep itself from distorting the money supply, would we still see hyperinflation?  This is one of the disadvantages about talking in absolutes.)

Von Greyerz claims,

The world financial system has temporarily been on life support by trillions of printed dollars that governments call money. But the effect of this massive money printing is ephemeral since it is not possible to save a world economy built on worthless paper by creating more of the same.

How much of the current economy has been saved by this so-called life support?  While it’s true that there has been quite a bit of industry that is currently being supported by direct injection of federal aid (i.e. the bailouts), how much of total industry does this represent?  If the bailouts were not extended, would have all the healthy companies that still exist also go under?

Furthermore, this really sounds too similar to the mainstream’s “too bit to fail” argument.  If without the government the world’s financial system would collapse, then doesn’t this to some degree vindicate the mainstream?  The entire point is that not all assets are toxic, and that financial institutions that did succumb to bankruptcy would have their good assets purchased by other institutions which could afford them.  I just don’t buy the argument that a major financial crisis would completely devastate the division of labor.  The financial system may not look the same, and perhaps it could end devastated and weak, but it would not be non-existent.  Perhaps I am reading too much into it, but my point is that claiming that the world’s financial system (systems to infer the entire financial industry) is a bit extreme.

Another example of hyperbole,

But from 1971 when Nixon abolished gold backing of the dollar, virtually all of the growth in the Western world has come from the massive increase in credit rather than from real growth of the economy.

This is a strong argument to make, and I’m not sure it’s completely correct.

Finally,

Governments now have two options; continue to spend and print money like the US or introduce austerity programmes like Europe. Whichever way they chose will not matter since they have reached the point of no return.

The entire article is about the inevitable hyperinflation to come, largely because it is within government’s nature to continue to inflate (which I agree with), but then the author switches and says that no matter what path is taken certain end is inevitable.  Perhaps the article should build more on that point.

In any case, my major problem is not with its conclusions.  My problem is that this article follows a similar trend that most other Austrian pieces do, and that is describing a certain apocalypse without giving any caveats.  Moreover, one exaggeration leads to another, and soon enough you have unsubstantiated claims that really weaken the case.  Authors should really be more careful (and, I know since I admit that [too] many times I have to be more careful, as well).

2.  Robert Higgs, “Can the Dead (Capitalism) Be Brought Back to Life?“, The Beacon.

Thus, most recently, by undertaking a series of decisive interventions stretching from the Fed‘s mismanagement of monetary policy, to Fannie and Freddie’s subsidies of unqualified home buyers, to the self-serving idiocies of Barney Frank, Chris Dodd, and Co., among other ill-fated actions, the government created the complex of interrelated disasters that includes the housing boom and bust, the financial debacle of 2008, and the economic recession since 2007. And who’s to blame? That’s right: capitalism. Which must then be “reformed” by mountains of additional government interventions laid atop the previously existing mountain, leaving, of course, Barney and Chris sitting pretty as the reformers, and the key troublemakers?the Fed, Fannie, and Freddie?smelling like roses, with the Fed being given even more power, and Fannie and Freddie being fed a diet of hundreds of billions of dollars in ongoing taxpayer-funded bailouts to continue doing the damage they do.

Perhaps, if we all frankly admitted that capitalism has been as dead as a dodo since 1914, if not even longer, then such factually absurd, ideologically inspired, politically tactical blame-casting would be precluded. It would make no more sense than blaming our economic troubles on the divine right of absolute monarchs, centuries after that doctrine has been abandoned. Perhaps.

3.  Tyler Cowen, “Kling on Free Parking“, Marginal Revolution

This is Cowen’s response to Arnold Kling’s recent post (“Why is their Free Parking?“).  Also see brief commentary by Robert Wenzel, related discussion by Mark Thoma and Robert Hanson.

I think much of the debate is ridiculous.  Municipal governments charge parking rates all the time, and these oftentimes go up when the city needs money.  These charged parking spaces are usually always completely filled, so why would the opposite occur if private enterprise were to charge for parking in their own lots?  Mark Thoma takes it to an even more absurd conclusion (something about government intervention).

Cowen was never talking about parking lots with a lot vacant spots, rather he was referring to parking in high demand and where substitutes are difficult to find.  In any case, today I will be going to a Mises reading group where the parking lot next to it charges $5 an hour (and is absolutely empty during the weekdays, but filled during the weekends).

Since the rise of Hugo Chavez, Venezuela has become a superstar of sorts. It frequently makes headline news, whether due to some type of utility shortage, some political scandal, or a corruption case. The most common perception of Venezuela is one of economic peril. Indeed, analysts have been predicting the government’s collapse since at least 2007. While Chavez’s Venezuela has survived so far, most agree that its economy limps on one leg and that default is only a matter of time.

Mark Weisbrot, codirector of the Center for Economic and Policy Research, disagrees. In a recent article for The Huffington Post (“Venezuela is not Greece“), he argues that Venezuela’s saving grace is Chavez’s efforts to maintain the national debt as low as possible. Given a low public debt, high government expenditure, “low inflation,” and the ability to manipulate exchange rates, Mark Weisbrot holds that Venezuela is poised to “pursue a robust economic expansion.”

In reality, Mark Weisbrot’s analysis could not be further from the truth.

Venezuela’s economy is heavily burdened by the state. Not only have Venezuelans been deprived of their right of free speech, but Hugo Chavez has also burdened the markets through his incessant quest for power. Most of the country’s utility industries have been outright nationalized, and the nationalizations have spread to other sectors as well. Fear of expropriation has paralyzed investment. Without a healthy private sector, Venezuela does not boast of the necessary foundations for a true economic expansion. Not even Hugo Chavez believes otherwise!

Weisbrot is right about one thing: Venezuela’s government enjoys a relatively small public-debt burden. This is but one of the many advantages of having your own central bank. Indeed, why care about debt at all? One can simply print it out of existence! While surely Chavez has benefited from the printing press, other Venezuelans have not been so fortunate. Contrary to Weisbrot’s claims, inflation has skyrocketed. Venezuelans have become progressively poorer, as Chavez funds his social programs through monetary expansion.

Venezuela’s inflation can be considered a type of fraud. Economies are not built on cash. Automobiles are not fabricated out of money. Families do not eat paper. By printing money, Venezuela’s central bank and government are not creating capital, they are only funding their ability to bid it away from the private sector and squander it on uneconomical public programs. Imagine the average Venezuelan who receives nothing but a currency that is consistently falling in value in exchange for his resources. Simultaneously, his savings are confiscated, because they are progressively worth less in the face of rising prices. How can anybody consider this a basis for a rise in wealth?

Anatomy of an Economic Disaster

In Venezuela, entrepreneurship is condoned when it doesn’t interfere with the plans of Hugo Chavez. Unsurprisingly, entrepreneurs in the utility industries are not part of Chavez’s plans, and as such the Venezuelan utility market has been almost completely nationalized. While prior to the recent global depression Chavez stuck to nationalizing certain sectors at a relatively slow (yet steady) pace, the onset of global crisis accelerated the socialization of Venezuela’s economy. Indeed, few foreign-owned oil companies were left untouched after Chavez decided to solve his debt problem by simply taking over those businesses he owed money to.

Other key industries nationalized include the telecommunication and electrical markets. Admittedly, Chavez’s nationalizations did not consist solely of expropriating the property of others for the benefit of the “people of Venezuela.” Like any good politician, Chavez pandered to big business, offering two Spanish electrical companies, Iberdrola and Elecnor, a total of nearly two billion dollars to build a 1000Mw electrical plant in the city of Cumaná, in eastern Venezuela. The average construction cost for the specific type of plant being built was $0.75 a watt. Chavez paid Iberdrola and Elecnor $2 a watt.

www.youtube.com/watch?v=n9kEmZB5luM

The only disagreement I have is with one of the introductory statements.  The video makes a distinction between spending which funds long-term benefits (i.e. investment) and spending which is wasteful and only brings about short-term satisfaction (i.e. consumption), and applies it to government spending.  It later provides an analogy by applying these two distinctions to household deficit; borrowing for a business which will generate revenue over the long-term, and therefore make the interest rate (price of borrowed capital) bearable, compared to borrowing for consumption spending, which will not lead to long-term revenue, and will make paying the interest less bearable (or unbearable).  I think that Dan Mitchell would agree that government generally does a poor job in investing and therefore all government expenditure can usually be lumped under consumption.

My disagreement specifically deals with the lesson’s caveat that government spending is OK while it brings about long-term benefits.  There is no clear distinction on what type of government spending is justified, and so by adding the aforementioned caveat it seems to open the door to a wide possibility of justifications for different government programs which are definitely not beneficial over the long-term (such as, let us say, social security).  While I think that the distinction should have been made clearer (with less room for interpretation), as I said before the video was made for a mainstream crowd.

My disagreement is an unfair distraction.  The point of the video is: while government deficits and temporary government spending can be dealt with if productivity increases to such a degree to which it makes paying the interest on the debt bearable, this relationship fails to hold true if government spending continues indefinitely and productivity falls.  So, while paying for the Second World War caused no major harm to the American economy, because high spending ceased after the war, today we are burdened with ever increasing government spending which shows no signs of receding.  This is due to the unfunded liabilities created through government welfare programs.  Indefinite spending will have to be paid for by higher taxes, which will take a toll on productivity.

When it comes to the actual argument of the lesson, Daniel Mitchell (as usual) hits the nail right on the head.  The key is reducing government spending to a bare minimum.  Realistically, in today’s world, this means reducing government spending to that which covers only “bare essentials” (such as security).  Ideally, this means abolishing government spending altogether.

The success of this strategy of postponing the crisis through additional loans hinges on a continuously-growing rate of credit expansion. Hayek already revealed this principle in 1934 when he stated: “[I]n order to bring about constant additions to capital, [credit] would have to . . . increase at a constantly increasing rate.”  The need for this ever-escalating increase in the rate of credit expansion rests on the fact that in each time period the rate must exceed the rise in the price of consumer goods, a rise which results from the greater monetary demand for these goods following the jump in the nominal income of the original factors of production. Therefore given that a large portion of the new income received by owners of the original means of production originates directly from credit expansion, this expansion must progressively intensify so that the price of the factors of production is always ahead of the price of consumer goods. The moment this ceases to be true, the six microeconomic processes which reverse the changes made to the productive structure, shortening and flattening it, are spontaneously set in motion and the crisis and economic recession irrevocably hit.  In any case credit expansion must accelerate at a rate  which does not permit economic agents to adequately predict it, since if these agents begin to correctly anticipate rate increases, the six phenomena we are familiar with will be triggered.  Indeed if expectations of inflation spread, the prices of consumer goods will soon begin to rise even faster than the prices of the factors of production. Moreover market interest rates will soar, even while credit expansion continues to intensify (given that the expectations of inflation and of growth in the interest rate will immediately be reflected in its market value).

Hence the strategy of increasing credit expansion in order to postpone the crisis cannot be indefinitely pursued, and sooner or later the crisis will be provoked by any of the following three factors, which will also give rise to the recession:

(a) The rate at which credit expansion accelerates either slows down or stops, due to the fear, experienced by bankers and economic authorities, that a crisis will erupt and that the subsequent depression may be even more acute if inflation continues to mount. The moment credit expansion ceases to increase at a growing rate, begins to increase at a steady rate, or is completely halted, the six microeconomic processes which lead to the crisis and the readjustment of the productive structure are set in motion.

(b) Credit expansion is maintained at a rate of growth which, nevertheless, does not accelerate fast enough to prevent the effects of reversion in each time period.  In this case, despite continual increases in the money supply in the shape of loans, the six effects described will inevitably develop. Thus the crisis and economic recession will hit. There will be a sharp rise in the prices of consumer goods; simultaneous inflation and crisis; depression; and hence, high rates of unemployment.  To the great surprise of Keynesian theorists, the western world has already experienced such circumstances and did so both in the inflationary depression of the late 1970s and, to a lesser extent, in the economic recession of the early 1990s. The descriptive term used to refer to them is stagflation.

Hayek revealed that the increasing speed at which the rise in the monetary income of the factors of production pushes up the demand for consumer goods and services ultimately limits the chances that the inevitable eruption of the crisis can be deferred via the subsequent acceleration of credit expansion. Indeed sooner or later a point will be reached at which growth in the prices of consumer goods will actually start to outstrip the increase in the monetary income of the original factors, even though this may only be due to the emergence of a slowdown in the arrival of consumer goods and services to the market, as a result of the “bottlenecks” caused by the attempt to make society’s productive structure more capitalintensive. Beginning at that point, the income generated by the factors of production, specifically wages, will begin to decline in relative terms, and therefore entrepreneurs will find it advantageous to substitute labor (now relatively cheaper) for machinery, and the “Ricardo Effect” will enter into action, hindering the projects of investment in capital-intensive goods, and thus ensuring the outbreak of the recession.

(c) Finally let us suppose that the banking system at no time reduces the rate at which it accelerates credit expansion, and instead does just the opposite: it constantly and progressively intensifies it, with the purpose of quashing any symptom of an emerging depression. In this case, the moment economic agents begin to realize that the rate of inflation is certain to continue growing, a widespread flight toward real values will commence, along with an astronomical jump in the prices of goods and services, and finally, the collapse of the monetary system, an event which will ensue when the hyperinflation process destroys the purchasing power of the monetary unit and economic agents spontaneously start to use another type of money. At that point the six microeconomic reversion effects we are familiar with will appear in all of their intensity, as will an acute economic depression, which to the painful readjustment of a totally distorted productive system will add the tremendous cost and social harm involved in any general failure of the monetary system.

In the years following Robert Mugabe’s election as president, the new government of Zimbabwe enacted a policy of “land reform”, which effectively redistributed land from the wealthier and more efficient commercial farms (predominately owned by white businessmen) to poorer black citizens.[1] The policy stems from the apparent disparity between the richer soil owned by the commercial farms and the poorly developed lands of the collective farms owned by small-time, black farmers.  The majority of the collective farms were poorly irrigated, dry and scorched.  This had little to do with the availability of water, however.  Although Zimbabwe only accounts for seven percent of the total land area of the African continent, it holds ninety-three percent of all reservoir water surface area.  The problem had entirely to do with the lack of adequately defined property rights, as collective farms were heavily regulated by local chiefs and other forms of government, and the parcels of land themselves were heavily farmed and eroded.  Irrigation tubes built in public land were often plundered and were not maintained by the private sector, guaranteeing sub par deliverance of water to collective farms.  Although these factors were recognized by a number of government employees, Robert Mugabe decided to begin his redistribution program.[2]

By 2005, there were fewer than 500 white farmers in the country, down from over 5,000.  Many were driven out with government troops, who killed both white farmers and their black employees alike.  Ironically, the black employees who should have received the land, according to the intentions of Mugabe, did not.  Instead, the nationalization of former commercial farms led to widespread unemployment, as these vast tracts of land were instead given to party loyalist.  New farmers were inexperienced, leading to a dramatic drop in productivity.  Zimbabwe, a former exporter of foodstuff, has become reliant on foreign food aid.[3] For example, prior to the expropriation of land commercial farms provided the majority of the country’s tobacco crop, employing nearly half a million people.[4] Today, millions of Zimbabweans face starvation and the worsening economic conditions have led to an increase in government-inspired and funded tyranny.[5] Many continue to blame extensive droughts and the end of foreign government aid to Zimbabwe, including loans by the International Monetary Fund (IMF).  In order to pay for the spiraling costs of government programs, the government resorted to the wanton printing of money which caused hyperinflation, leading to a 99% devaluation of the Zimbabwean dollar.  The root of the problem is not the lack of money, or more accurately capital, but the lack of property rights which allows for the capital to be represented and used for economic development.

In 2000, Peruvian libertarian economist Hernando de Soto published a book called The Mystery of Capital.  In his book, de Soto explained why capitalism succeeded in “the West” and why it has failed in less developed countries (LDC).  According to his thesis, this disparity is not due to any inherent cultural or genetic disadvantage, the lack of entrepreneurial spirit, or the deficiency of savings, but to the lack of defined private property rights which disallow citizens of third-world countries to user their property as collateral to garner loans.  As a result, there is an obvious lack of investment.  In some countries, it can take many years to legally acquire rights to a certain property, and even then these rights are not entirely guaranteed.  Hernando de Soto goes to prove how total savings in the Third World are many times greater than the total amount of foreign aid by the First World.  This thesis was later used by Thomas DiLorenzo, in his 2004 book How Capitalism Saved America, in order to explain the failures of early colonization attempts by British companies in the 17^th century.  These reasons can be applied to the Zimbabwean case.  DiLorenzo makes the case that early pilgrims, devoid of property rights, had no motivation to work harder and invest their labor in land which was not theirs.  In other words, they worked sufficiently hard to meet their contract requirements.  It was only after the introduction of private property that the colonies began to prosper.  As explained by DiLorenzo:

Private property was thus put into place, and the colony immediately began to prosper.  There was no more free riding, for each individual himself bore the full consequences of any reductions in output.  At the same time, the individual had an incentive to increase his efforts because he directly benefited from his own labor.

This applies to Zimbabwe, because the lack of defined and protected property rights eliminates incentives to invest.  Rampant government expropriation has caused a drop in confidence, as businessmen have little way of knowing what the government will seize less.  Also, given the lack of defined property rights, these cannot be used as collateral for loans, given that the loaners cannot be guaranteed of the permanence of the property.  In other words, if the property is seized by the government, or it turns out that it is claimed by another person, then the loaner ultimately loses the guarantee of the return of the value of the loan.  As a result, there is not just a decrease in the incentives to invest, but a decrease in the motivation to lend the money to facilitate that investment.

Interestingly, in January 2009 the Reserve Bank of Zimbabwe published a report on the importance of private property to economic development.[6] In the report, it’s mentioned that economic performance relies on investment, which is promoted through clear and respected property rights.  Property rights are defined by the bank as the right to consume, sell, rent, mortgage, and transfer the property.  In the report, the author suggests that the government should enact policies to develop these property rights and protect them through legal measures, and goes as far as to claim that this will spur an increase in investor’s confidence, leading to a return to economic prosperity.  The report not only applies this to farming, but also to mining and factories in Zimbabwe.  Unfortunately, it seems as if these calls for political reform have been largely ignored by Robert Mugabe and the other factions of government which hold authoritarian sway over the nation.  Instead, Mugabe continues to shift the blame to other factors.  The Zimbabwean president went as far as to suggest that the economic troubles in the country are due to an international gay conspiracy.  Mugabe has made clear his opinion on homosexuality, and even accused former Prime Minister Tony Blair of being the head of a “gay government” of the “gay United gay Kingdom”.[7]

Given the extent of calls for reform within the government’s own ranks and the fanciful tirades given by Robert Mugabe, it’s patently obvious that the Zimbabwean leader is detached from reality.  This means that until he is replaced by whatever means (natural death, coup, et cetera) Zimbabwe is not likely to see a productive land reform which would allow for a return of the efficient commercial farms of before.  This also means that other extensive natural resources in the country, including gold, iron and other metals, will not be exploited.  It is important to realize that foreign investment and ownership is not something to fear and avoid, but should be welcomed.  Foreign investment of private capital will be a decisive factor in Zimbabwe’s economic recovery, once the foundations have been set for this recovery.  Private property, regardless of the race, sex or sexual orientation of the proprietor, must be respected by the government and by the law.  Only through the establishment of stability and the end of arbitrary land seizures by the government can local and foreign entrepreneurs begin to invest.

Other causes of Zimbabwe’s woes are purely superfluous to this underlying cause of the severe depression being suffered.  Of course, unrestricted government spending (over fifty percent of the gross domestic product), subsidization of inefficient sectors of markets and other government interventionism lead to greater instability and poverty.  But, the elimination of these tyrannies will only decrease the severity of the struggle, as oppose to catalyze economic growth.  Ultimately, the most important factor which will lead to recovery is the respect of private property rights by the Zimbabwean government and the end of collectivization and nationalization.  Perhaps the one “positive” outcome of the human tragedy that is Robert Mugabe’s Zimbabwe is that we now have a perfect case study against modern collectivization.  It is troubling, however, that despite the clear support for privatization and large commercial farms by the evidence—the evidence being that these commercial farms offered better standards of living, through their wages, than collective farms—there are those who still believe in central economic calculation.

[2] Richardson, Craig, “How the Loss of Property Rights Caused Zimbabwe’s Collapse”, Cato Institute Economic Development Bulletin, 14 November 2005: http://www.cato.org/pub_display.php?pub_id=9294

[3] Koinange, Jeff, “Tale of two farms in Zimbabwe”, CNN, 30 March 2005: http://www.cnn.com/2005/WORLD/africa/03/30/zimbabwe.farmers/index.html

[4] Standley, Jane, “World: Africa Zimbabwe faces farming anarchy”, BBC News, 25 November 1998: http://news.bbc.co.uk/2/hi/africa/222097.stm

[5] Keane, Fergal, “Famine plagues Zimbabwe”, BBC News, 21 January 2003: http://news.bbc.co.uk/2/hi/africa/2678557.stm

[6] Gono, G., “The Role of Property Rights in Investment Promotion”, Reserve Bank of Zimbabwe: http://www.rbz.co.zw/pdfs/2009%20Mps/Role_property_rights.pdf

[7] Barrow, Greg, “World: Africa The real Commonwealth Summit”, BBC News, 15 November 1999: http://212.58.226.17:8080/1/hi/world/africa/521672.stm