Economic Aspects of the Pension Problem – Part 2

Appears Sixty Years Later

Part Two: Productivity Theory of Interest Revisited

Antal E. Fekete

In Part One I discussed the clear and present danger to pension rights: deflation as manifested by the interest rates structure that has been falling for thirty years, while most observers think that the real danger is inflation. In this second part I carry out a deeper analysis of the pension problem, looking at the marginal productivity of labor and capital and its relevance to the theory of interest.

Courtesy of Professor Fekete @ Professor

Higher marginal productivity: boon or bane?

There is a lot of loose talk about productivity. Paul Krugman is expecting miracles to start happening after an increase in a mythical productivity, provided that government spending is increased to the level matching or exceeding that during World War II.

However, as Mises pointed out, productivity is a vacuous concept unless its meaning is fixed, such as that of marginal productivity of labor. Then, and only then, can one state the pension problem. According to Mises, the only means to increase permanently the wages and benefits payable to workers is to increase the per capita quota of capital invested in the methods of production, thereby raising the marginal productivity of labor. (See References, Planning for Freedom, p 6.) This is certainly true so far as it goes. It is also true that, if we project this observation to the world at large, then we can conclude that in order to have a progressive world economy and receding poverty, global capital accumulation must accelerate relative to increase in population. The greater the quantity and the better the quality of tools, the greater will be the output of the marginal worker, that is, the greater will be the marginal productivity of labor.

In reading Mises one may get the impression that an increase in marginal productivity is always beneficial to society ― as indeed it would have been under the conditions he envisaged. However, in the case of a monetary system that admits both large swings and prolonged slides in interest rates, this is no longer true. If the matter were simply increasing marginal productivity, monetary policy would be a valid means of “turning the stone into bread”. All it would take is central bank action to keep raising the rate of interest indefinitely. This would force the marginal producer whose capital produces at the marginal rate of productivity to fold tent. His marginal equipment and plants would be idled. His workers producing, as they are, at the marginal rate of productivity of labor would be laid off. Marginal productivity would increase. Indeed, the marginal productivity of both capital and labor automatically rises as a consequence of a rise in the rate of interest. However, in this case the rise in productivity, far from being a boon, is a bane to society, as it makes output and employment shrink. The trick is precisely to make marginal productivity rise along with rising output and employment.

Gold standard: a safeguard against deflation

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Economic Aspects of the Pension Problem – Part 1

As It Appears Sixty Years Later

Part One: Euthanasia of the Pension Funds

Antal E. Fekete

Sixty years ago. in 1950, Ludwig von Mises published an article with the above title. He pointed to inflation as the greatest threat to pension rights. Today an additional threat is looming large on the horizon: the threat of deflation, and a new examination of the pension problem is timely.

Courtesy of Antal E. Fekete @

Deliberate Dollar Debasement

In 1950 Mises looked at the pension problem from the point of view of the shrinking purchasing power of the dollar, a consequence of what he called the deliberate policy of currency debasement by the U.S. government. In 1950 a pension of $100 per month was a substantial allowance, he noted. Shelter could be rented for a month for less than $30 in most parts of the country. (In 2010, $100 hardly buys one night’s stay at a decent hotel.) In 1950 the Welfare Commissioner of the City of New York reported that 52 cents would buy all the food a person needed to meet his daily caloric and protein requirements. (In 2010, $100 barely buys a cup of coffee and a muffin for every day of the month.)

Of course, currency debasement does far more damage than simply eroding the purchasing power of pensions. As Mises observed, it also leads to the insufficiency of capital accumulation. Companies report phantom profits that mask losses, since depreciation quotas understate the wear and tear of productive equipment. Savings are hardly adequate to pay for capital maintenance, let alone new capital or technological improvements in production — the only source from which pensions to an increasing labor force can be paid. When young workers who now join the labor force are ready to retire, the necessary funds to pay their pensions will simply not be available.

Capital destruction due to declining interest rates

I have written extensively about the proposition, one that mainstream economists doggedly refuse to discuss, that a falling interest-rate structure has a deleterious effect on accumulated capital. Capital is destroyed across the board simultaneously and stealthily. By the time the damage is discovered, it is too late to do anything about it and firms go bankrupt in droves. The falling trend of interest rates is the unrecognized cause of the depression that is presently devastating the world economy — just as it also was 80 years ago. Nowhere is the erosion of capital caused by falling interest rates is more obvious than in the case of the capital of the pension funds. They must earn adequate return on their investments, but a falling rate of interest frustrates this effort. At the lower rate the original schedule of capital accumulation cannot be met. Continue reading

On the Payment of Interest

Courtesy of Hugo Salinas Price @ Plata:

The question of interest has occupied thinkers for more than two thousand years. Aristotle came to the conclusion that interest is illegitimate and cannot be justified, since “money cannot beget money”, unlike all living things which reproduce themselves. Since “money cannot beget money”, Aristotle argued that it is unreasonable and impossible to demand that money lent should be repaid with a greater amount than the amount of the original loan.

The thinking of Aristotle influenced the Catholic Church, which for centuries banned the taking of interest. Loans with interest were made by Jews, not subject to the laws of the Catholic Church, and by Christians who sinned in doing so, and circumvented the prohibition on interest by schemes which hid the interest under other labels. It was at least partly due to a sense of having sinned, and in atonement for it, that the heads of the great financial dynasty of the Medici of Florence contributed so heavily to the building of the Renaissance temples of that city, and paid splendidly for the beautiful religious art of that period.

There is still, today, a minority who agree with Aristotle. And of course, there is the Islamic ban on the taking of interest, which is substituted in Islamic law or sharia, by having the lender participate, according to a set of rules, in the profits expected by the borrower as a result of obtaining a loan. (Note: I am not endorsing all modern Islamic banking, because it seems to me that the Islamic bankers may be evading their religious law by various schemes, just as the Medici did in their time; one important Islamic scholar and leader has told me that Islam is flatly against all payment of interest whatsoever.)

A popular argument against the Western banking system is frequently expressed as “the banks make loans and in doing so, create money; but they do not create the money to pay the interest. Therefore, the system is unsound and must collapse eventually.” This would appear to be a variant of the Aristotelian objection.

The argument that “banks make loans and thus create money, but do not create the money to pay the interest on the loan” is a specious and confusing argument because, on the one hand the power which modern banking systems have to create money out of nothing by granting credit is an anti-social power based on fraud, since real money can only be gold and silver and these cannot be created out of nothing. And on the other hand, the idea that “there is not enough money in existence at any moment to pay the interest due on loans” is fallacious, because all interest does not come due at any given moment; the payment of interest takes place over time as debts mature and become payable. Continue reading


(Part Two)
Antal E Fekete
New Austrian School of Economics

Courtesy of Professor

In Part One of this two-part series I have argued that Keynes inadvertently ignored the rule asserting that the rate of interest and the price of bonds vary inversely and, as a consequence, his conclusions concerning employment, interest and money are irreparably faulty.

In this second part I shall argue that the policy of open market operations of the Fed causes deflation rather than inflation as intended. The authors of the policy have inadvertently ignored its effect on bond speculation. This was true in the 20th century; it is true in the 21st century as well. The Fed’s monetary policy is counter- productive. It is trying to foster inflation through its bond purchases, but what it in fact does is fostering deflation through capital destruction. It is responsible for the coming depression, just as bond purchases of central banks were responsible for the Great Depression of the 1930’s.

The fact is that the policy of open market purchases makes bond speculation risk-free. Speculators forestall the central bank and front-run its bond-buying program. Gradually the central bank is losing control. Bond speculators are now in charge. The central bank is trying to call off the bond-buying campaign, in vain. Like the Sorcerer’s Apprentice, it is desperately trying to find an ‘exit strategy’ only to realize, too late, that it hasn’t got the magic word.

The interest-rate structure goes into a free-fall, causing prices to fall, too. One can see that at the heart of the problem is the fact that the central bank (deliberately or inadvertently) ignored the rule that the rate of interest and the bond price vary inversely. Continue reading



(Part One)
Antal E Fekete
New Austrian School of Economics

Courtesy of Professor

The title of Sy Harding’s article (Gold Eagle, January 31) says it all: “Bonds Defy Dire Forecasts”. But as I have been saying for years, bonds have not been defying logic, Greenspan’s cliché “conundrum” notwithstanding. The behavior of the bond market has been consistent with Keynesianism. By his compassionate phrase “euthanasia of the rentier” Keynes meant the reduction of the rate of interest, to zero if need be, as part of the official monetary policy to deprive the coupon- clipping class of its “unearned” income. Perhaps it is not a waste of time to repeat my argument why, in following Keynes’ recipe, the Fed is acting contrary to purpose. While wanting to induce inflation, it induces deflation.

The main tenet of Keynesianism is that the government has the power to manipulate interest rates as it pleases, in order to keep unemployment in check. Keynes argued that the free market economy was unstable as it was open to the swings of irrational investor optimism or pessimism that would result in unpredictable and wild fluctuation of output, employment and prices. Wise politicians guided by brilliant economists − such as, first and foremost, himself − had to have the power “to prime the pump” (read: to pump up the money supply) as well as the power to “fine-tune” (read: to suppress) the rate of interest. They had to have these powers to induce the right amount of spending needed to put people to work, to entice entrepreneurs with ‘teaser interest rates’ to go ahead with projects they would otherwise hesitate to undertake. Above all, politicians had to have the power to unbalance the budget in order to be able to help themselves to unlimited funds to spend on public works, in case private enterprise still failed to come through with the money.

However, Keynes completely ignored the constraints of finance, including the elementary fact that ex nihilo nihil fit (nothing comes from nothing). In particular, he ignored the fact that there is obstruction to suppressing the rate of interest (namely, the rising of the bond price beyond all bounds) and, likewise, there is obstruction to suppressing the bond price (namely, the rising of the rate of interest beyond all bounds). Thus, then, while Keynes was hell-bent on impounding the “unearned” interest income of the “parasitic” rentiers with his left hand, he would inadvertently grant unprecedented capital gains to them in the form of exorbitant bond price with his right. Continue reading

The US is the New Falling Roman Empire (Exclusive Interview with Antal E Fekete)

Courtesy of Guillermo Barba @ Inteligencia Financiera Global:

The Inteligencia Financiera Global blog (Global Financial Intelligence Blog) is pleased to present this exclusive interview with Prof. Antal E. Fekete, founder of the New Austrian School of Economics, monetary scientist, proponent of the gold standard and a critic of the monetary system based on irredeemable currency (fiat money).


Thanks for accepting this interview.

– Prof. Fekete, why did you decide to found the “New” Austrian School of Economics (NASOE)? Did you find something wrong within the “old school”? What about Carl Menger and Mises?

– What I have found was that post-Mises Austrian economists, but already Ludwig von Mises himself, had substantially deviated from Carl Menger’s teachings for the worse. Thus in my view a rather large portion of the post-Mises Austrian economists’ research is in error. I took it upon myself to criticize the deviation from Menger and correct it. The list includes their dismissal of Adam Smith’s Gold Bills Doctrine, the theory of interest as distinct from the theory of discount, to name but a few. The New Austrian School of Economics (NASOE) was launched under the slogan: “Back to Menger!”

– We know you don’t support both the Keynesian and Monetarist theories. What’s wrong with them? What’s their biggest mistake, if any?

– The biggest mistake of Keynesianism and Friedman-style monetarism is that they favor the destabilization of the interest rate structure that was stable before, but had started gyrating and, more recently, plunging into the black hole of zero interest. All this was in consequence of Keynes’ and Friedman’ success in undermining and ultimately overthrowing the gold standard.

– If these two theories are wrong, why do you think they have become the mainstream all around the world? Were they imposed by somebody?

– They became mainstream for reasons of their demagoguery. They are designed to appeal to one’s sense of justice: antidote against misery amongst plenty. They take advantage of the appallingly low level of education based, as it is, on envy. It is characterized by an almost complete neglect of the aprioristic branches of science: logic, mathematics and economics. And I say this as a professional mathematician. Keynes ensnared F.D. Roosevelt; Friedman ensnared Nixon. These two presidents were happy to trample upon the United States Constitution at their bidding. As a consequence the gold standard was destroyed and irredeemable currency was foisted upon American citizens in 1933 and, on every inhabitant of the Earth in 1971. At the same time the gold of the people was looted by the government. Continue reading

Coordination of the Natural Social Interaction

Courtesy of Sandeep Jaitly @ Fekete

The aim of this paper is to show that the monetary/financial system that develops is a representation of some form of productive social interaction. The monetary system is the consequence, not the cause, of productive social interaction.

Money is defined as that substance which is the ultimate extinguisher of any debt. As a consequence the substance(s) used as money must have perceived value in and of itself. Menger described the iterative procedure by which a substance was promoted to money by the people themselves in ‘The Origin of Money (1892.)’

There is no record of the date at which humanity first gave value to gold and silver because the Sanskrit literature that first referred to them cannot itself be accurately dated. However, we can be sure about the mechanism that resulted in their promotion to the monetary metals courtesy of Menger.

The substance which is promoted to money will necessarily have very high inventory to primary production ratio (also known as stocks to flow ratio.) This arises from the fact that incremental additions to one’s personal holdings of this substance do not affect one’s personal terms of acceptance of this substance. This substance must exist, just as the largest number amongst a set of numbers must exist.

If one arranges all commodities on earth by the stocks to flow ratio, two metallic commodities stick out markedly: gold and silver. The extent by which these two metals differ from the next substance in terms of stock to flow is astounding and testimony to the exceptionally long period of time over which humanity has valued these two metals. There can be no other explanation.

With the monetary substance chosen, the evolution of the financial and payment system – merely a mirror of the natural ‘social interaction’ that arises from the fact of our own existence – can begin.

Economic activity is a base synonym for ‘social interaction:’ the farmer sending wheat to the miller who sends flour to the baker who makes bread for consumption. The crude extractor sending oil to the refiner who sends on refined petroleum distillate to the retail pumps. These are all examples of social interaction. Interaction that is not related per se to the medium used for money. Interaction that occurs by the very nature of our existence. Interaction that must recur for the maintenance of our existence.

A defined amount of the monetary substance is the unit of account of multiple aspects of this social interaction. An extended social procedure stretched over countless millennia itself gave birth to the monetary media, so it is quite clear to see that neither the monetary substance itself, nor the amount in existence, would influence that social interaction.

Social interaction occurs in different ‘forms’ and ‘frequencies.’ For example, the sale of bread by the baker is pretty much guaranteed whereas the sale of the new jet engine to the aircraft company is not. This is an example of differing forms of social interaction.

The construction of an airport takes a different period of time (usually) to the construction of a residential home. This would be an example of differing frequencies of social interaction. Continue reading


I was fortunate enough to be at the launch of the New Manifesto. From this memorable time I understood that if we do not like the reality set before us, we must change it or accept the consequences. Courtesy of Professor

July 4, 2013
Formally adopted at the Seminar held in the British Museum, London, on October 6, 2013

In a recent pamphlet Llewellyn H. Rockwell, President of the Mises Institute writes that we are all ceaselessly being bombarded by the media and college educators with propaganda to the effect

“that capitalism causes depressions and exploits the poor. That government is our salvation, and the bureaucrat a hero. That America owes its wealth to the Federal Reserve. That without massive regulation we’d be sunk…That cutting government even a smidgen and permitting free markets would be a disaster… John Maynard Keynes died more than 60 years ago, but his ideas still rule us from the grave: give government more power, and print more money…”

It is a pleasure to acknowledge that Mises University, the Mises Institute’s week-long summer program for students has done an outstanding service to society in flouting the conventional wisdom about government, and explaining the logic behind free enterprise. Continue reading

Positivism and The Quantity Theory of Money

I believe that within this world we are forced into boxes and categories, believing we should act and behave within certain parameters and fit into models created on previous action. I posit that this is not the case, that we are human beings with souls and we can act in an infinite number of ways on a finite timeline, not in a finite number of ways on an infinite timeline. Positivism has no place in a free thinking and flowing world but one entrenched in a blockaded and statist world.

Courtesy of  Sandeep Jaitly @

What is positivism and how does the quantity theory of money fit in with it? The doctrine of positivism is a form of arch-empiricism that tries to crystallise the supposed process of ‘scientific thought’. An adherent of positivism believes that there are general ‘laws’ of cause and effect in the natural/social sciences and the only way to uncover these ‘laws’ is via the tool of research. An adherent of positivism believes that objective analysis – whatever is meant by this – is the only form of analysis; indeed there exists a zero possibility of the observer influencing the observed. Nature is orderly and regular; scientific knowledge is cumulative in character and all objective phenomena are eventually knowable – all characterize the approach of positivism.

Whilst it may seem to be a sound basis for a doctrine, positivism is utterly flawed and mischaracterizes the process of natural/social scientific thought. Simple examples shall be described to show why the approach of positivism is flawed. Take Newton’s ‘law’ of gravity. Newton’s observations of the movement of the visible planetary bodies seemed to fit with a certain type of mathematical relationship related to the masses of the bodies, and their distances apart. In slightly further detail, the relationship involves the inverse square of the distances apart. In the context that Newton was working, this ‘law’ was more than adequate. Indeed, centuries later, the ‘law’ was sufficient to send rockets into (near) outer space and back. However the nature of the establishment of this ‘law’ should not be mischaracterised – as a positivist approach did indeed cause with the observations of Einstein at the turn of the twentieth century. Newton’s ‘law’ is invalid over super-massive distances. When Einstein changed the context further beyond Newton, Newton’s observations did not quite fit the bill and scientific squabbling ensued. To the benefit of the physicists however, this supposed dichotomy was resolved – Einstein is appropriate in a broader context than Newton. Continue reading

The Siren-song of Welfare State

By Hugo Salinas Price and courtesy of Plata:

Our world is run – and has been run for some time now – by a relatively very small group of individuals who have it in their power to manage, as they think, the economies of nations. Managing the affairs of a nation implies making people behave in ways in which they would not otherwise behave. National management of an economy thus means making millions of individuals do what they wouldn’t do if left to themselves.

There is not one single national economy in the world today whose people are free to do as they wish; it is not so much that people are forbidden to do what they think best, as that their choices are being narrowed, day by day, to being able to do only what is allowed.

One of the very first choices which free individuals made thousands of years ago was the choice of the money they would use in their exchanges of goods and services; after using other substances such as salt, or copper, or sea-shells, they finally chose gold and silver for use as money, because all humanity valued these metals above all other substances, and consequently gold and silver were the most convenient substances to use as money. Continue reading