DECEMBER•2015 PULSE ON THE MARKET The Fed Awakens Junk Bond Fund Junk BUILDING THE 10% Shkreli Snatched LMR Page 6 UNIQUE FINANCIAL PROFESSIONALS by L. Carlos Lara Page 21 CHINA AND THE DOLLAR by Robert P. Murphy Page 9 TAKING UNCERTAINTY SERIOUSLY Interview With Adam Martin Page 29 LARA-MURPHY REPORT 2 LMR DECEMBER 2015 THIS MONTH’S FEATURES 219 29 CHINA AND THE UNIQUE FINANCIAL TAKING DOLLAR PROFESSIONALS UNCERTAINTY BY Robert P. Murphy BY L. Carlos Lara SERIOUSLY What does it mean that the IMF just The financial sector is becoming Interview added the Chinese currency to its increasingly sophisticated, making it reserve basket? all the more important to always be Texas Tech professor Adam Martin learning. explains what made him an economist. IN EVERY ISSUE 4 6 37 Dear Readers Economic Deep End One More Thing LARA-MURPHY REPORT PULSE ON THE MARKET EVENTS AND Uncertainty should not paralyze us. The Fed Awakens • Junk Bond Fund ENGAGEMENTS Indeed, Mises taught that action Junk • Shkreli Snatched Learn more in person from Lara, relies on uncertainty. Murphy, and other Austrian economists, at these upcoming appearances. Overview 3 LMR SEPTEMBER 2010 ABOUT LARA & MURPHY L. CARLOS LARA manages a consulting firm specializing in corporate trust services, business consulting and L. Carlos Lara debtor-creditor relations. The LMREditor in Chief firm’s primary service is working Dr. Robert P. Murphy with companies Executive Editor in financial crisis. Serving business Anne B. Lara Managing Editor clients nationwide over a period of three decades, these engagements have involved companies in Stephanie Long Design Director most major industries including, manufacturing, distribution and retail. Lara incorporated his CUSTOMER SERVICE consulting company in 1976 and is headquartered In order to subscribe to LMR, visit: in Nashville, Tennessee. www.usatrustonline.com/store He married Anne H. Browning in 1970. and click on subscriptions. Together they have three children and five To update your account information please visit the same grandchildren. online store, login and manage your account. For questions or comments concerning LMR, its articles or anything about the publication other than advertising please R OBERT OB D . R P. “B ” email: [email protected] MURPHY received his Ph.D. in economics For questions or comments concerning LMR advertising please from New York email: [email protected] University. After READERS teaching for three years STATUS: LMR staff and its contributors warrant and represent that they are not at Hillsdale College, “brokers” or to be deemed as “broker-dealers,” as such terms are defined in the Murphy left academia Securities act of 1933, as amended, or an ”insurance company,” or “bank.” to work for Arthur LEGAL, TAX, ACCOUNTING OR INVESTMENT ADVICE: LMR staff and its contributors are not rendering legal, tax, accounting, or investment advice. All exhibits Laffer’s investment in this book are solely for illustration purposes, but under no circumstances shall firm. Murphy now the reader construe these as rendering legal, tax, accounting or investment advice. runs his own consulting DISCLAIMER & LIMITATION OF LIABILITY: The views expressed in LMR business and maintains concerning finance, banking, insurance, financial advice and any other area are that of the editors, writers, interviewee subjects and other associated persons as an economics blog at indicated. LMR staff, contributors and anyone who materially contributes information ConsultingByRPM. hereby disclaim any and all warranties, express, or implied, including merchantability or fitness for a particular purpose and make no representation or warranty of the com. He is the author of several economics books for certainty that any particular result will be achieved. In no event will the contributors, editors, their employees or associated persons, or agents be liable to the reader, or the layperson, including The Politically Incorrect Guide it’s Agents for any causes of action of any kind whether or not the reader has been to the Great Depression and the New Deal (Regnery, advised of the possibility of such damage. 2009). LICENSING & REPRINTS: LMR is produced and distributed primarily through the Murphy is Research Assistant Professor with the internet with limited numbers of printings. It is illegal to redistribute for sale or for free electronically or otherwise any of the content without the expressed written Free Market Institute at Texas Tech. He is also Senior consent of the principle parties at United Services & Trust Corporation. The only legal Economist with the Institute for Energy Research and a audience is the subscriber. Printing LMR content for offline reading for personal use by subscribers to said content is the only permissible printing without express written Research Fellow with the Independent Institute. consent. Photo’s are from various public domain sources unless otherwise noted. 4 LMR DECEMBER 2015 “Man lives in the shadow of death. Whatever he may have achieved in the course of his pilgrimage, he must one day pass away and abandon all that he has built. Each instant can become his last. There is only one thing that is certain about the individual’s future—death.” —Mises These are no-nonsense words for all of us to reflect on. The unavoidable certainty of death is not only true, but its exact time of arrival is also unknown, making this unique event of life all the more perplexing. Yet regardless of what the future may bring in the interim we cannot withdraw from the necessities of the moment. These obligations present themselves each morning as either obstacles that must be overcome, or toil that must be accomplished. In this simple fact no one stands apart. Whether we realize it or not, our individual aspirations are to preserve and strengthen a better life for ourselves. That is to say that we all strive to reach a place of final contentment—of happiness. If this is the goal of all humanity what then shall we do with the life we have this day? It is interesting to note how various famous individuals throughout history, all having the same inevitable fate as the rest of us, have answered this inquiry by their individual actions. Their deeds eventually became lifetime achievements and Lara-Murphy Report 5 LMR DECEMBER 2015 landmark accomplishments—guideposts for history, either for good or evil. Consider for example Mises’ urgings that we save as being the “step forward on the road to a more plentiful existence,” compared to Keynes’ advice for governments to spend beyond their means in order to (allegedly) promote prosperity. Which path have you followed? If we but for a moment examine our own personal vision for a better life can we detect if our own deeds have taken from or given to future generations? To put it more directly, are we givers are or we takers in the mission of life? We believe our LMR readers are givers and it is this giving spirit that will ultimately triumph and direct the path of the future. As this year approaches its end, we want to express our sincere gratitude and appreciation for all the support you have given us as members of the 10%. We could not continue without you. As we build together let us not forget that our God is the consummate giver and the controlling factor in all human affairs, in whose name we place our complete faith and trust for a better world to come. Yours truly, Carlos and Bob “It is the masses that determine the course of history, but its initial movement must start with the individual.” — How Privatized Banking Really Works Lara-Murphy Report 6 LMR DECEMBER 2015 PULSE ON THE MARKET RECENT DEVELOPMENTS THAT MAY BE OF INTEREST TO READERS OF THE LARA-MURPHY REPORT… The Fed Awakens A LONG TIME AGO, IN AN ECONOMY FAR FAR AWAY, WAS THE LAST TIME THE FED HIKED RATES This month the Fed hiked its target for the federal funds rate, which is the interest rate that banks charge for overnight loans of reserves. This was the first time the Fed had raised rates since June 2006, and is the first time rates have been higher than zero since December 2008. (Strictly speaking the target for the last seven years was a range from 0 to 25 basis points, whereas now the target range is 25 to 50 basis points, meaning 0.25 percent to 0.50 percent.) Americans have become accustomed to the situation and so the shock may have worn off. But imagine if the government had somehow held the price of, say, electricity at virtually $0 per kilowatt-hour for seven years, or the price of lumber. It is obvious that this “cheap” policy for inputs wouldn’t help the economy, but would serve only to channel scarce resources into the wrong businesses. After all, as the Austrian economists taught us, market prices serve a definite social function. It hampers the ability of prices to communicate information between consumers and producers when the government interferes. When the central bank fosters credit expansion and artificially low interest rates, this only gives the illusion of prosperity. However, beyond the usual story of the Fed distorting the structure of production, in our current cycle we face something new. Typically, the Fed will “hike rates” by selling off assets and thereby draining reserves from the banking system. (In some cases the operation is merely relative to the pre- existing trend: In other words the Fed might slow the rate of injection of new reserves, leading to a higher fed funds rate.) Yet this time around, the Fed doesn’t want to unload its balance sheet, for fear of crashing certain asset prices. So the way it will “raise rates,” at least for now, is to increase the interest rate paid on excess reserves.