Wednesday, March 20, 2019

For the Last Time: Dictatorship Didn't Kill Venezuela's Economy, Socialism Did.

Click here to read the original Cautious Optimism Facebook post with comments

3 MIN READ - Thoughts from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff about dictatorship as an alibi for Venezuela’s socialist failures.

President Donald Trump’s new sanctions against Venezuela have inspired western progressives and socialists to emerge from their recent sheepish silence and resume excusing the bankrupt nation’s collapse as the fault of anything and everything except socialism itself.

For example, there’s the new conspiracy theory that Trump’s sanctions—imposed in 2019—magically went back in time to 1998 and retroactively produced two decades of shortages, declining oil production, hunger, and inflation.

But the most popular recycled apology is now “The problem isn't socialism. It's dictatorship."

Click here to read an example of a typical apologist article from the press.

The excuse here is that it's dictators like Venezuelan President Nicolas Maduro who bring economies to ruin, not socialism which—characterized by nationalization of industries, price controls, and widespread distribution of shrinking wealth—is still inherently superior to capitalism.

The only problem with the "dictators, not socialism” argument is that whenever dictators have shifted gears and tried capitalism instead things have turned out really well.

A few examples:

1) Augusto Pinochet is widely condemned by socialists as a dictator who overthrew the Chilean Marxist Salvador Allende regime and killed thousands of suspected communists in the aftermath. But this dictator also employed a capitalist economic system with the help of Milton Friedman and University of Chicago economists who recommended free market reforms.

The Allende-era hyperinflation and chronic shortages rapidly disappeared and within a decade Chile was the top performing economy in South America. Economists today still refer to the Pinochet economy as the “Miracle of Chile.”

2) After the genuine socialist dictator Mao Zedong died and left 60 million corpses behind, another dictator, Deng Xiaoping, took over and opened the Chinese economy to markets, private property, foreign investment, and legal profit. Nobody has starved since and today China is the world's second largest economy.

3) Chiang Kai-Shek imposed martial law on the island of Taiwan for 26 years and his son for another 13 years after that, but they implemented market-based economic policies. By the time the first public presidential elections took place in 1992 Taiwan was already a wealthy country.

4) Francisco Franco jailed and executed hundreds of thousands of suspected socialists/anarchists but also implemented capitalist market reforms. During the 1960’s and 1970’s he (according to Wikipedia) “converted Spain's economic structure into one more closely resembling a free-market economy, [and] the country entered the greatest cycle of industrialization and prosperity it had ever known” in what’s known to economists as the “Spanish Miracle.”

But since Franco's death Spain’s democracy has drifted back towards socialism with a large welfare state and has been a basketcase for over a decade—its unemployment rate recently “falling” to 14.5%.

5) Lee Kuan Yew was criticized for being a dictator for three decades in Singapore. He adopted free market policies (Singapore has been ranked the #2 freest economy on earth for decades now) and in a little over a generation the island nation with no natural resources has soared from developing nation status to higher GDP-per-capita than the USA in another "economic miracle."

(BTW how often have you heard the phrase “economic miracle” associated with socialist countries?)

6) South Korea was run by a series of postwar dictators including two decades under Park Chung-Hee until his assassination in 1979. All embraced free trade and open markets and under Park the economic “Miracle on the Han River” completely reshaped and modernized the country. South Korea was another "Asian Tiger" even before the first public presidential elections in 1987.

7) And most recently Western left-progressives and liberals have whipped themselves into a feverish hysteria that Donald Trump himself is a dictator who subverts democracy. Yet to their puzzlement that dictator's corporate tax cuts and rollback of strangling regulations has made America the best performing advanced economy in the world.

All these real or alleged dictators rejected socialism, all embraced market capitalism, and all managed to make their citizens rich with no empty shelves, long lines, shortages, power blackouts, eating zoo animals, hyperinflation, or starvation.

Meanwhile the dictators who adopted socialism instead include Fidel Castro, three generations of North Korean Kims, Josef Stalin, Pol Pot, Salvador Allende, Siad Barre (Somalia), Mengistu Haile Mariam (Ethiopia), and of course Hugo Chavez and Nicolas Maduro. They've all consistently produced famines, hyperinflation, shortages, and pre-industrial age living conditions.

So once again the economic problem in Venezuela is NOT lack of democracy. The problem is socialism. Period.

ps. Note that every cited “capitalist dictatorship” has also rapidly adopted democratic political reforms and popular elections (exception: Deng Xiaoping). But no socialist dictators have been willing to give up power without dying in office or being violently deposed—except for Maduro. The verdict is still out whether he’ll walk out of office or be carried out.

Saturday, March 16, 2019

ExxonMobil Thinks it Can Achieve $15 a Barrel Production in the Permian

Click here to read the original Cautious Optimism Facebook post with comments

1 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff has followed the U.S. shale oil/natural gas revolution for several years now and considers himself a staunch optimist about the promise that human innovative thinking—operating within an environment of economic freedom—can solve problems of resource scarcity with remarkable ingenuity.

Yet the COCEA is still shaking his head in disbelief at this story.

Wellhead breakeven oil prices for the Permian Delaware shale region were $80+/barrel in 2013. To think that $15/barrel oil, which is approaching the cost of OPEC conventional "easy oil" resources, could even enter a conversation less than six years later is absolutely mindboggling. The breakneck pace of the shale revolution serves as yet another example of economist Julian Simon's thesis in his book "The Ultimate Resource" that the only truly scarce natural resource is human ingenuity.

And to think a little over a decade ago anti-fossil fuel energy "experts" and environmental activists were adamant that commercial shale oil research should be shut down because extraction of oil and natural gas from kerogen would never be economically feasible.

Read the full Dallas Morning News story here.

Monday, March 11, 2019

Lessons from the Great Depression: Monetary Policy and the Federal Reserve System (Part 4 of 4)

Click here to read the original Cautious Optimism Facebook post with comments

10 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff concludes his marathon series on monetary policy during the Great Depression with Franklin Roosevelt’s New Deal remedies and lessons applied during the 2008 financial crisis.

 To read prerequisite Parts 1-3 of the series see the links at the bottom of this article.


As incoming President Franklin Roosevelt was being inaugurated in March of 1933, a giant banking panic was consuming the nation. During the campaign Roosevelt had refused to address rumors that he might devalue the dollar or take America off the gold standard completely. As FDR was sworn in, depositors panicked in a “run on the dollar,” pulling not only cash out of the system but also gold in case FDR arbitrarily decided the gold content of the dollar was to be officially reduced.

By early March of 1933 Herbert Hoover had considered declaring a national bank holiday to stop Americans from withdrawing more cash or gold from the system, but he wasn’t sure the federal government had authority to do so during peacetime under the 1917 Trading with the Enemy Act.

Hoover advised President-elect Roosevelt he would execute such powers anyway provided FDR would follow up upon inauguration, but Roosevelt was still unsure what policy he was going to pursue (his “Brain Trust” chief Raymond Moley was still working out a plan). His response to Hoover was vague and noncommittal so Hoover deferred until the new President was to take power.

Meanwhile several states had taken matters into their own hands and declared bank holidays. These were mostly counterproductive or even destructive. During a bank holiday no one could get cash to make payments, so commerce ground to a halt in those regions. Many consumers and businesses had to resort to writing their own scrip or temporary private money to keep commerce moving until banks were reopened.

Another problem was interstate contagion. When residents of Illinois watched the governor of Michigan close down all the banks in his state, they rushed to Illinois banks to withdraw cash before an anticipated bank holiday came to their own state—real or imagined. Thus disparate state bank holidays spread panic to nearby states worsening the problem.

On March 5, 1933—the day after his inauguration—FDR announced an eight-day national bank holiday during which time Congress would pass emergency banking legislation and the Treasury Secretary and Fed officials would determine what criteria separated sound banks from unsound.

In a marathon series of allnight deliberations, the Treasury directed the Federal Reserve to begin issuing new Fed notes and bank reserves that were unbacked by gold. Although the new notes didn’t contain a pledge to “pay to the bearer on demand,” they looked like traditional Federal Reserve notes in every other respect and the public was generally fooled into believing they were no different from the pre-crisis Fed notes.

The irony of course is that the Fed had the means and power all along to issue not only new Fed notes backed by gold, but new banks reserves throughout the 1929-1933 period. Yet it had mostly abstained in accordance with the Real Bills doctrine. Roosevelt effectively forced the Fed to do three years late what it should have been doing all along.

More important than the new notes was a Treasury plan to separate all banks into three classes. Class A banks were those determined to be solvent and eligible to open immediately. Class B banks were those that needed a little help with recapitalization either through new share issuances or a small government loan. Class C banks were so insolvent that they were to be closed.

Once the bank holiday went into effect a new chaos struck the U.S. where, absent a banking system to convert deposits to banknotes, cash was in short supply. Workers and businesses could not get paid, and the value of American dollars overseas nosedived. Famously Princess Erik of Denmark found herself cashless and relying on scrip written by her Pasadena hotel to survive. Elsewhere across the country scrip was frantically written and the disruptions stemming from the bank holiday marked the low point of the entire Great Depression.

However the turning point was on March 12, 1933 when FDR conducted the first of his famous fireside chats. Over radio broadcast the new President explained to the public which banks would be reopened and closed. His conversations were clear, free of technical jargon, and imbued a sense of confidence with Americans that the reopened banking system would be sound since unsound banks would not be allowed to resume business.

When the banks reopened on March 13 the response was very positive. Large numbers of Americans returned their currency and banks were not only moderately recapitalized, but the deflationary trend was halted as banks were for the first time seeing their reserves increase instead of contract.

FDR’s bank holidays and bank classifications finally put an end to the mystery and uncertainty of which banks were safe and which would fail. At the lowest depths of an unprecedented spiraling panic, one can credit FDR and government action for finally stopping the bleeding of public confidence.

However no comprehensive history is complete without forcefully reminding readers that the spiral and panic itself were caused by the Federal Reserve and the thoroughly destructive economic interventions of the Hoover administration to begin with. In other words, the arsonist government does get credit for finally showing up with a fire hose, but only after he had already burned down half the house. Unfortunately all too many government-adoring historians and economists who laud federal action for “saving the economy” forget the critical first half of the story: the federal government put the economy in peril in the first place.


Once the banking system was stabilized and the deflation stopped, the White House’s next concern was reinflating the price level. Although prices were rising from their March nadir, the White House wanted to restore prices to a pre-1929 level. So long as prices remained substantially below 1929 levels, Americans were still weighed down by deflation and higher real debt payments that spawned bankruptcies. American economist Irving Fisher vaguely estimated the “correct” price level to be “halfway back to 1929” (Fisher, 1932). FDR chose for himself a price level from 1926.

The track record of FDR’s reinflationary policies is more uninspiring.

On the positive side, the trend of customer deposits accelerated in June with the passage of the Banking Act of 1933 which established Federal Deposit Insurance and the FDIC. Although deposit insurance would not officially go into effect until January 1, 1934, the announcement itself was itself enough to send more Americans back to their local banks to deposit currency. U.S. bank deposits also sharply increased at the beginning of 1934 as the FDIC took effect.

Although freer banking systems such as Canada’s (1817-1935) with no central bank, no deposit insurance, and far less regulation fared much better (zero banks failed in Canada during the 1930’s versus over 10,000 in the United States), the regulated, splintered, and inherently fragile American system—compounded by the Federal Reserve’s blunders—was significantly stabilized by the FDIC. The guarantee on deposits has also prevented widespread bank runs ever since. Milton Friedman and Anna Schwartz noted in their 1963 book “A Monetary History of the United States”…

“Federal insurance of bank deposits was the most important structural change in the banking system to result from the 1933 panic, and, indeed in our view the structural change most conducive to monetary stability since state bank notes were taxed out of existence immediately after the Civil War.”

However two more controversial measures imposed by Roosevelt had little impact on the stability of the banking system, and a third empowered the Federal Reserve to further inflate the money supply even though it was probably unnecessary:

-Executive Order 6102, signed in April of 1933, mandated all Americans surrender their gold to the U.S. government in exchange for $20.67 per ounce.

-In June 1933 Congress voted to nullify the right of American holders of dollars to redeem them in gold, effectively taking the U.S. off the domestic gold standard.

-In January of 1934 Congress passed the Gold Reserve Act which devalued the dollar by 41% to $35/oz for overseas holders (central banks resolving international balance of payments).

Executive Order 6102: Forcing Americans to surrender their gold provided a larger gold base for the Fed to further reinflate the money supply, but gold holdings had always been sufficient for the Fed to do so during the 1929-1933 period.

Taking America off the domestic gold standard gave the Fed further room to inflate the monetary base since the discipline of domestic redemptions was removed. But again, insufficient gold to inflate the base had never been a problem.

Finally devaluing the dollar also enabled the Fed to create more dollars (which it could have done all along), but it also boosted U.S. exports in an instance of “beggar thy neighbor” economic policy.

Other Congressional banking initiatives were figurative “stabs in the dark,” regulating anything remotely viewed as a source of crisis. The so called Glass-Steagall provisions of the Banking Act blamed the crisis on commercial banks issuing securities on behalf of their clients or underwriting bonds.

But as we’ve already seen, the crisis reached record depths not due to bondwriting but due to an initial Fed QE bubble (1927-1929) and then a combination of Fed inaction and catastrophic economic interventions by Herbert Hoover (1929-1933). Also Canadian banks had engaged in the same business practices, were even less regulated, had no central bank until 1935, and had no Glass-Steagall type provisions during the 1920’s and early 1930’s. Yet Canada suffered no panics and zero bank failures.

Ironically the Glass-Steagall provision made an exception allowing commercial banks to underwrite and invest in government bonds which guaranteed a huge pool of credit for Washington DC and state treasuries, so evidently alleged risktaking was acceptable so long as it benefited the government.

Regulation Q, added by Alabama Congressman Henry Steagall, blamed the crisis on overcompetition and forbid banks from paying interest on deposits. Not only was blaming paying interest on deposits ludicrous, but the provision was added by Steagall to protect the monopolies of “unit banks” within his home state—small banks that were granted exclusive legal license to serve a small geographic area. Ending interest on deposits prevented a competing bank in a nearby county from drawing customers out of another unit bank’s operating region and thus solidified their territorial fiefdoms.

What is the final verdict on both the March 1933 and subsequent monetary policy measures?

On the whole the Economics Correspondent’s view is that FDR’s banking holiday and public classification of banks based on safety was sufficient to stabilize the banking system and the money supply. His emergency measures finally stopped the bleeding although it should again be noted that the “bleeding” was the product of perverse and destructive Federal Reserve and federal government fiscal, wage, and trade policies. In the correspondent’s view, FDR’s famous March fireside chat, while very effective, should have disclosed blame where it was due even as the new president implemented measures to stop the freefall.

But politicians rarely blame Washington, DC when it’s the source of the dysfunction and prefer the scapegoat of “capitalism” and “the free market” in their quest for more economic controls. FDR was no exception and later went out of his way to implicate bankers and businessmen for problems that had been manufactured by the Fed and the Hoover administration.

The introduction of deposit insurance was successful in further inflating the monetary base and money supply when announced in mid-1933. However since 1933 the FDIC has also served as a mitigating tool to counter future crises/panics that have mostly stemmed from loose Federal Reserve policy. Therefore, barring total reform of the financial system towards a more stable framework, deposit insurance can be considered a reasonably successful policy.

However the additional measures such as gold confiscation, ending the gold standard, and devaluing the dollar in international gold terms were probably unnecessary and simply annulled a right Americans had enjoyed since colonial days. Predictably, the end of dollar convertibility was and remains praised by Keynesian/inflationary policymakers then and now as the removal of a major obstacle to central bank hegemony and perpetual devaluation.

Additional measures like separating commercial from investment banking operations and outlawing interest on deposits were at best unproductive wild guesses or at worst political crony capitalist measures meant to serve the interests of businesses back home.

In short, the Economics Correspondent’s opinion is that FDR should have stopped after the bank holidays and at most deposit insurance. If afterwards he had torn down Smoot-Hawley trade barriers, reversed Herbert Hoover’s 1932 tax hikes, and then taken a decade-long vacation the Great Depression would have probably ended by 1935 or 1936. Instead as Roosevelt intervened deeper and deeper into the economy the slump dragged on until 1946.


When the 2008 financial crisis struck, the Federal Reserve was chaired by a lifetime scholar of the Great Depression. Ben Bernanke, formerly chair of the Economics Department at Princeton University, had spent his academic career studying the monetary policy failures of the 1930’s. Indeed, in 2002 at Milton Friedman’s 90th birthday celebration Bernanke (acting as a Fed governor) gave a speech on Friedman and Schwartz’s contributions to understanding the 1930’s Fed’s mistakes and ended his talk with the following tribute:

“I would like to say to Milton and Anna [Schwartz]: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.”

Bernanke was mostly correct in his indictment of Fed inaction, and when the 2008 crisis struck he was determined not to repeat the errors. In the midst of crisis his immediate focus was to ensure the country did not endure a massive wave of bank failures and deflation that would send prices tumbling by a third as they had during the 1929-1933 period.

Thus Bernanke adopted diametrically opposite policies from Fed officials during the Great Depression—putting his foot on the pedal and then to the floorboard. Instead of refusing to use Fed power to buy assets and expand the monetary base, Bernanke launched QE1 (2008), QE2 (2011), and Q3 (2013) which nearly quintupled the monetary base in about six years (see chart).

Instead of allowing banks to run out of reserves and fail, he bought up trillions of dollars in Treasuries and lousy mortgage securities, loading U.S. and even some international banks with excess reserves.

Instead of refusing to make emergency liquidity loans at the discount window, Bernanke loaned furiously and did so on lousy collateral and at very low interest rates (breaking two of Walter Bagehot’s famous rules for central bankers—lending on good collateral only and at punitive interest rates).

He encouraged giant financial institutions that weren’t Fed member banks—in fact which weren’t even banks at all—to apply for an endless wave of discount window loans and asset purchases. Non-commercial bank firms instantly lined up to change their status to Fed member bank in order to get a share of the helicopter money.

Insurers like AIG, Hartford, and John Hancock bought tiny community banks (whose deposits represented less than a day of their giant insurance operations) in order to access Federal Reserve money. Surviving investment banks Goldman Sachs and Morgan Stanley changed their status to commercial bank to do the same.

Fortune 500 company finance arms like GE Capital, GMAC, and Ford Credit also hopped into the banking business to get their share of central bank loans. By the fall of 2008 firms that were never meant to be part of the Federal Reserve system were all taking Fed money and Ben Bernanke was happy to oblige, his “take no chances” stance flooding the financial sector with new reserves and liquidity.

In the Economics Correspondent’s view, the 2008-2009 Fed went much further than it needed to in order to prevent a 1930’s style meltdown. It’s understandable that Ben Bernanke was determined not to oversee a Fed that “sat idly on its hands” in a 1930’s repeat, but to avoid the mistakes of the Great Depression the 2008 Fed needed only to do what the 1930’s Fed had not:

-Carry out the Fed’s lender of last resort charter for commercial banks.

-Buy sufficient assets from member banks to prevent a deflationary collapse.

-Let the FDIC (which didn’t even exist as a ameliorating agency in the early 1930’s) persuade depositors to leave their money in the bank.

Loading up virtually every financial firm in America with what would ultimately become $2.7 trillion in excess reserves was simply unnecessary, but in the heat of the crisis Bernanke decided Fed action would have no limits.

In fact, only QE1 was enacted during the crisis itself. QE2 and QE3, far from being emergency measures to “save” the financial system, were Keynesian stimulus measures to accelerate economic growth out of the dismal depths it had drifted into during the first Obama term.

So in the end, yes, the Fed avoided another 1930’s style banking collapse. But that’s a pretty low bar to set given what the world has known about the mistakes of Great Depression monetary policy for a half century now. And in the meantime, by creating trillions of dollars in excess reserves the Fed has found itself in the awkward position of paying nearly $40 billion a year to member banks in risk-free, zero maturity interest payments on those reserves as it struggles under pressure from Congress to reduce its balance sheet. It has also reinflated not only the housing bubble, but also pushed stocks, bonds, commodities, and other assets to record levels.

Finally a word about the Fed’s alleged rescue of the economy. We’ve heard countless times from the liberal press, academics, politicians, and of course the Fed itself that its 2008 actions “prevented another Great Depression.” While doing nothing like the 1930’s Fed would have resulted in a worse crisis, alleging that the result would have been another Great Depression is simply exaggerated chest-beating meant to lionize government intervention.

As even this series of articles has shown, the Great Depression was not just the result of bad monetary policy. The deflation was worsened by government price and wage controls that prevented economic adjustments, thus preventing the market from clearing while creating surpluses of “unsold” goods and unemployed workers. The Hoover administration over doubled real government spending, then raised the top tax rate from 25% to 63% while on average doubling the tax burden of the working class. FDR raised the top rate again to 79% and again to 84% years before the U.S. entered World War II. Both administrations bought up huge surpluses of crops that rotted in storage, and then paid farmers to destroy produce and slaughter and burn their own livestock while Americans were going hungry. The Hoover administration launched an international trade war that reduced global trade by two-thirds within two years.

Had the George W. Bush or Barack Obama administrations and Congress been stupid enough to implement such policies in 2008 and 2009, then yes, combined with Fed inaction the United States could indeed have suffered another Great Depression. But neither president nor the either Democratic or GOP Congresses ever considered coming anywhere near such suicidal policies.

Even Obama’s modest tax hike on the rich, Obamacare, and new regulations look like a small drag on the recovery when compared to the wholesale destruction launched by both Herbert Hoover and later Franklin Roosevelt’s interventions.

So yes, the Fed helped prevent a worse monetary crisis and spared the United States a good degree of short-term pain. But those who declare “the Federal Reserve saved us from another Great Depression” need to reread their Great Depression history.

Parts 1-3 of this Federal Reserve history are available at:

Part 1

Part 2

Part 3

Friday, March 8, 2019

Japan Times: Japan may be in recession rather than longest growth phase since the war, key index suggests

Click here to read the original Cautious Optimism Facebook post with comments

1 MIN READ - Observations about Japan's now third lost decade from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff

Read Japan Times story here

1 MIN READ - So it's still a few months early to say if this is really a recession, but if it turns out Japan really is headed for one then by my count that will be the third recession in the six years since Abenomics and massive BOJ quantitative easing went into effect—2.5 times the size of the Federal Reserve's QE as a % of GDP.

It would also be Japan's sixth recession in a decade (2008-09, 2010-11, 2012, 2014, 2015, 2019?) during which the government has faithfully enacted consistent stimulus deficit spending plus uber-cheap money policies that went into overdrive with Abenomics in late 2012. So much so that since 1990 Japan's debt-to-GDP ratio has risen from an OECD-best 55% to a world's worst 260% chasing the forever elusive Keynesian stimulus recovery.

Yet there's no shortage of Washington Post and New York Times economics columns hailing Abenomics and BOJ QE as a roaring success that Europe and the USA need to replicate.

The Economics Correspondent has observed these articles always run en force the 50% of the time Japan is not in contraction, but you would think the New Keynesians would bother looking back at the last few years and consider all the recessions too before pushing the West to go down this same road.