Another Take on the Fed

Thus far, I have given the argument that the FED is in the process of printing money, "pushing on the string" to get the economy going again, but that the money isn't being lent out and is therefore not "stimulating" the economy in proper Keynesian fashion. But what if this were not the case? I've been watching and involved in a few web discussions, notably on Gary North's site, which suggest this might not be the whole picture. In the previous post, I linked to an article which takes a look at political motives and what is going on behind the scenes with respect to the "powers that be." These are the facts as we know them: the FED has bought a very large quantity of assets under the TARP program (Troubled Asset Recovery Program), which has resulted in the creation of a large amount of money, as is showing up in the AMB. However, this money is not leaving the central bank, and therefore cannot be multiplied by the fractional reserve system and drive up prices in the marketplace. Part of this may indeed be due to fears of default and the other motives I have elaborated on in the past ("pushing on a string.") However, I have not mentioned that the FED is now paying interest on money held on deposit with the central bank, which has to motivate the banks to keep money there "earning" risk free interest, at least compared to having no interest payed on their reserves. How much is this rate? We don't know. We also don't know if the deposit is actually "profitable," in that it earns more interest than the interest the bank is paying out for holding that same money (to depositors and lenders, etc.) We also don't know exactly what is going on in the power struggle between the Federal Reserve, the Treasury, and other branches of government. We do know that both have taken very unusual actions of late, and that there have been questions about whether or not those actions are within the powers of these two organizations. We do not know the details of the deals these organizations have made with the banks for saving their sorry butts, although we do know that the banks are acceding to increased government regulation in their activities, as, for example, the last remaining investment banks like Goldman Sachs converted themselves into commercial banks, placing themselves under the same regulatory scheme the others fall under. The era of gunslinger capitalism in the US is over. The fact is, if that money EVER hits the marketplace, it will result in a level of inflation never before experienced by the United States. It APPEARS that the FED is very cognizant of this, and is taking pains to prevent that money from leaking out until it can find something to do with it. What could it do? A number of things. It could raise the reserve requirement, reducing the multiplying power of the fractional reserve banking system and keeping credit expansion in check. It could forcibly re-sell the assets it has bought, retiring money back into the central bank from the market. It could make up something entirely new, as it has for the previous few months. Another sign pointing in this direction, and away from the mass-inflation scenario, is the character of the men themselves, and Ben Bernanke in particular. Despite his "helicopter" comments during hearings before the senate, Ben Bernanke has been unusually tight as FED chairman thus far through his tenure. The media tends to focus on interest rate cuts, and Bernanke has cut the rate quite far, but they overlook the fact that the FED has actually had to put very little new money into markets to achieve those "rate cuts." The FED acted more as an observer than an actor under his direction, at least up until the crisis hit. On top of this, Obama has chosen Paul Volcker to head up his economic recovery team. Volcker is well-known as the inflation hawk who raised rates sky-high in the early '80's, causing severe recession, but bringing inflation under control, at least in comparison to the late '70's. Whatever their meddlesomeness, at this point neither seems to favor expansive monetary policies the way Alan Greenspan did. So what we are left with is the same old Keynesian choice: inflation or recession? Or in this case, inflation or depression? Standard politics of course favors inflation, as that has clearly been the choice of governments using a fiat money system (unbacked paper money) since the beginning of time. The problem is that this time around, thanks to the massive levels of debt we are talking about, the choice of inflation actually presents an existential threat to the dollar, and by extension, the US government itself. I do not think it is a stretch to say this. It appears that the government understands this, and is not bent on suicide. Governments usually want to expand. Its contraction that's difficult, and suicide pretty much never. They usually have to be taken down by very angry folks with torches and pitchforks. However, the political actors themselves will not want to face an angry electorate in a few years, so it is not necessarily an easy call. Could we then be looking at deflation? Probably not, at least not at levels seen in the early stages of the Great Depression, and not for long if it does happen. Nevertheless, it remains that if inflation is not chosen, it appears that the depressive effect could be very, very severe. If we do not see inflation, it is very possible that the country could be moving, ironically, to an economic model more similar to China's: you can mostly do what you want, but you WILL follow the government's orders if/when they decide to interfere. A great deal of lending may become politically driven as the government exercises its new control over the banking industry, in addition to the now politically driven tax and regulatory code. On top of this, our system will already have a lot more built-in red tape. So basically, we may be looking at moving more toward a quasi-fascist system, not unlike the systems of other countries. In fact, many of the changes I have named (interest on central bank deposits, politically driven lending, etc.) already occur in most other places. Sadly, that's probably the best we can hope for. The other alternative is death through inflation. As in other systems with such price regulation and government meddling, growth will be warped and stagnant, and markets inefficient. Command economies simply do not perform as well as open ones. The American dream will officially be over. That is, if we are lucky. A sad observation has occurred to me as I have written many of these posts: how very little of my "economics" posts are actually directed towards actual economics. Mostly, they are discussions of tax law, accounting, corrupt and unnecessarily convoluted banking practices, politics, and the like. This is not economics, this is a game of "guess what the tyrant will do next?" Maybe its time to consider the possibility that economics is dead.

Political Analysis of the Recession

Michael Rozeff provides a political analysis of what is going on in financial markets.

It is the government’s quest for its own survival that is paramount to government. The government would have vastly preferred that this crisis would not have happened, inasmuch as it threatens its own viability and freedom of violent action. There are many measures that the government could have enacted that would have quickly alleviated the problem of troubled assets, but they were not enacted because they would have altered the existing system in a fundamental way that would have threatened the existing power structure. Instead the government chose far more ineffective, costly, and inefficient means that, in its calculus, resolve enough of the problem while keeping government intact and even expanding its power. The government has used the crisis to its own advantage.

Undoubtedly correct. He goes on to make a number of other equally salient points. It is definitely worth your time to read this. One bone I would have to pick with him, and a lot of other commentators for that matter, is that he draws a distinction between the government and the governed. I don't care if we are talking about the US or China, or North Korea or Mexico, the government and the people are not separate entities. The culture of one is the culture of other. The US will never, ever, have a religious Hindu government. China will never, ever be ruled by Christian monarchs. America has the government it has now as a result of the actions of its people. Actions reflect beliefs. Beliefs, as we all know, have consequences. American culture is not what it was a hundred years ago. It is not even what it was thirty years ago. It does not value liberty, at least not nearly as much as it values comfort and security, nor does it value personal responsibility or strong ethics and discipline. We have the government we have chosen and the one we deserve. If it is beginning to look like an overbearing European centralist state, that is probably because American attitudes and culture have shifted to have priorities similar to the Europeans. If we are beginning to look like the mass of the other countries of the world instead of the "shining city on the hill," it is probably because we are becoming like them. We are not special anymore.

A Little Help from Gerard Jackson

Gerard Jackson has written a series of insightful articles about the likely consequences of the actions which appear forthcoming from the Obama administration. He is a pro at Austrian theory, and explains things much better than I do. Monetary Policy: Is the Fed Pushing on a Piece of String Obama's New Deal v. the US Economy Why Obama's Economic Program Will Collapse Most of my writing to this point has focused on the financial and debt problems, however, it is important to remember (as I have said before) that economics is really about stuff, not money. Money-stuff is just the medium we use for the exchange of stuff-stuff, and the problem with the government meddling with the money-stuff is that it causes distortions and irrational allocations of the capital-stuff we use to produce the consumer-stuff. The financial/accounting/debt problems are important in that they lead to malinvestment and distortions of incentives. Gerard Jackson points out a critical one: that by trying to "stimulate" consumption by transferring wealth from savers to spenders, either through "progressive" tax policy or through inflation, the result is to make business/production unprofitable. When there is no profit to be had, business has a tendency to stop producing the "stuff" we need, and people go unemployed. Once again, bad ethics (theft, redistribution) has bad consequences (poverty). The real solution is not to keep prices and wages at "reasonable" levels, according to government dictat, but to let them get to self-sustaining levels in the free market. This will allow entrepreneurs to "see" where shifts in production need to be made and new opportunities to satisfy consumer demand (and make a profit, by golly!) are to be found. Again, accurate price structures are the answer, not artificial ones. Take away the profit motive, and the entreprenurial genius rightfully sits on his hands.

Why I Do Not Believe in Global Warming

I was going to write a post about why I do not believe in global warming. I was going to write about how I did not think the phenomenon was even physically possible. I was going to say that of the various wavelengths of electromagnetic radiation that can be absorbed by carbon dioxide, only the IR absorbance was important, and that even at the low present concentrations, these absorbances would be completely saturated. Therefore, since the atmosphere is completely opaque to these wavelengths at this point anyway, any increase in carbon dioxide, even a drastic increase, would have little to no effect on the temperature of the atmosphere. I was going to say these things, and write a really cool post about the various bond stretches, bends and rotations, and a bit about the physical phenomena of how they work, when I went online to look up the values so I could write up the post and make a few back-of-the-envelope calculations. There I found that somebody has already beaten me to it. (For a look at the physics of the process, see here.) Fantastic analysis. Probably too many big words for most folks, but very thorough and convincing nonetheless, without getting into all the overbearing and naseatingly overdone academic language that makes me want to vomit. He found exactly what I was expecting from Beer's Law: the energy absorbance would increase rapidly, then flatten out as carbon dioxide concentrations increased, and present conditions would indicate that we are already so far up the curve that the energy response is flat. So it doesn't matter how much carbon dioxide we put out there. The effect is already saturated. I would also make another note: many anti-environmentalist types like to argue that carbon dioxide is so small a fraction of the atmosphere, that doubling it would still be a tiny change in concentration so it wouldn't matter. This is actually backwards! The lower the concentration, the larger the effect that results from a change. This is one reason that gasses like methane actually would matter a lot: their present concentration is so very small, that some of that radiation can still escape without being converted to kinetic (thermal) energy. Increasing the concentration would keep some fraction of this energy from escaping. So they were really arguing for the other side, its just that neither side really understood the physical phenomenon. At any rate, eventually we would suffocate ourselves with too much carbon dioxide, but that threshold is a very long way away. We are actually quite safe. Global warming is not real folks. Let's move on to the next manufactured crisis.

Another Absolute MUST READ

This is an ABSOLUTE MUST READ. Don't read anything else until you read this. Seriously. You'll regret it if you don't. Don't say you weren't warned. Once again, I found this on Gary North's site, which has to be one of the best $15/month I ever spent.

The FED-Debt Conundrum

I've spent a lot of blog space devoted to the issue of national debt. Its a big deal. But there's one big thing I don't understand. So that you can understand my dilemma, I'll try to explain bonds really quickly. When somebody wants to borrow money, one way they can handle it is by selling a bond. The bond entitles the holder to a specified "coupon" to be payed on a schedule, plus a guarantee to have his bond bought back from him at the same price he paid at some future date. This is called maturity. By buying the bond from this entity, the buyer transfers money (e.g. he "buys the bond" with cash), which the business entity uses for whatever business activity it so chooses. The business then pays the bond-holder (a "creditor") interest (the coupon), until the bond matures, at which point he must pay the bond-holder the money back. Any major business entity usually has lots of bonds outstanding at any one time. The process of selling new bonds is a lot like an auction. The bidders offer to buy at certain coupon rates, and the coupon rate becomes a large determinant of the value of the bond itself, since it determines the "payoff" of holding the bond. It also influences the value of other bounds out in the market, because people would rather have a bond with a higher rate than a lower one, all other things being equal. Because the rate is set at auction, the rate can be interpreted as "demand" for bonds: the lower the rate, the higher demand was when the bond was issued. High demand is usually the result of particularly good creditworthiness, since there is always the risk that the business might go bankrupt, and the bondholder won't get to collect his coupon or have his money returned at maturity. High demand can also result from other effects, like a simple excess of buyers (so-called "high-liquidity") or even from fear, since a bond is an agreement to return the money in the future, unlike a stock or commodity future contract. Among the three, the bond is considered "safer" so its demand will increase in times of uncertainty. Inflation, on the other hand, tends to decrease demand for bonds, because they are "fixed income" assets which will lose value as the value of the dollar, which is the fixed denomination of the asset, falls. A commodity future contract, on the other hand, should increase in value, because it represents a claim to "real-stuff," which is inflating in value. The higher the inflation rate, the higher the interest rate buyers will expect for holding a devaluing bond. Here is where we arrive at the dilemma. The government is the entity in question, in this case. It issues bonds, called Treasury debt, just like any business might, to pay for things the government wants to buy but doesn't have the money for, like giant bailouts and handouts to taxpayers. The Treasury will run up huge debts going forward, that's a given. That means that lots and lots of bonds are to be auctioned in a short time. It also means that the creditworthiness of the US will come into question, as the ability to repay the debt becomes strained and the temptation to default, either outright or through monetary inflation, increases. The demand for those debt certificates on the open market should fall as a result of all of these effects. Also a given. Therefore, interest rates should rise dramatically, making it ever more difficult for the Treasury to borrow more money. Enter the FED. In order to borrow at reasonable interest rates, the Treasury will depend on the Federal Reserve to buy up its bonds, increasing demand artificially, and reducing the interest rate it has to pay. This is where things get interesting, becaue the FED is a unique buyer. When the FED buys assets, new money enters the market, because the FED gets money "from nowhere." This is the primary source of monetary inflation. To make matters worse, that new money enters the fractional reserve banking system, beginning that miracle of miracles we have all heard about, the "multiplication of money," which gave us such wonderful things as the Great Depression, the tech and housing bubbles, and the present crisis. The new money gets multiplied even more. Obviously, the effect of this is mass inflation. But mass inflation reduces demand for Treasuries, remember? It increases interest rates, precisely the opposite of what the FED was attempting to accomplish by buying the bonds in the first place! The FED is the only buyer which has this effect, as other buyers do not increase the money supply as they buy. And with an increase of inflation, the holders of Treasury debt should increasingly sell these assets, as inflation reduces their value over time. It seems to me that the ONLY way for the FED to achieve low interest rates with this policy is to pretty much buy ALL the debt out there. Each new purchase it makes to suppress the interest rate induces more selling, which requires more buying by the FED to keep the rate steady. Its a self-feeding cycle. But by the time the FED buys all the debt, it will have to create on the order of ~$15 trillion dollars, and probably much more as inflation raises the prices of the things the government would like to buy! This would be added to the AMB, the Adjusted Monetary Base, the total quantity of money put out by the FED which circulates in the market. Up until ~3 months ago, the AMB was less than $1 trillion. That's an increase of 15 times, at the bare minimum! $1 trillion in circulation gave us a Federal Budget of ~$2.5 trillion, from a GDP of ~$14 trillion. Are we looking at a GDP of $210 trillion, even with no growth at all? Will all our assets lose >90% of their value over the next few years? I find it hard to comprehend how this could be the case, yet I see no alternative. Except, of course, for national bankruptcy. Does anybody else have any thoughts? I'd like to hear them...

$700 Billion...Yeah...Right

Found this link on Vox Day's blog:

The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

Lot's of big numbers in this piece, some of them dumb, like $38 trillion in value of world stock markets destroyed in the last month. No, once again, the value was destroyed a long time ago when people wasted perfectly good raw materials and labor producing something stupid, usually as a result of government policy. The world only realized how stupid over the last month or so, so prices fell. The big lesson here: never, ever believe the first estimate given by a bunch of politicians for how much some program would cost. They'll always low-ball it. I actually guessed $2-3 trillion some time ago, but it seems even I came up way too short. Vox also has a very good analysis of how far GDP will fall in his weekly column. I like the logic he uses. I still think such an analysis is still very much a shot in the dark, if an educated one, and I also question just how valid a number like GDP is anyway. We can produce lots of things, but if we are not satisfying consumer demand, we're wasting our time. After all, our GDP has been growing since 2001, but the truth is we were still poorer for it because it was all skewed towards things we didn't need. We were (and are) burning capital. And as bad as a 29% drop in GDP sounds, how much worse is it of what we are producing is not needed. Another thing folks must understand: globalization, much of which has been phony due to mercantilism on the part of many countries and the use of the dollar as the world reserve currency, has made the US a very specialized economy. We don't have anywhere near the heavy industry and basic manufacturing we once did, and not nearly enough to satisfy domestic demand. Should the US decide to stiff its creditors through inflation (it will), I expect the forces of globalization will unwind quite quickly as other nations find that they don't like financing the American lifestyle. We will not be able to afford imports anymore without the aid of willing financiers. The US will be forced to re-industrialize, after decades of de-industrialization, at least if it wants to have goods on store shelves. In the meantime, we will have to pay top dollar for basic necessities. In the long run, expect to see a lot more "Made in the USA." Expect more manual labor, more factory work, fewer cushy financial and service jobs. The US has been very spoiled for a very long time. Our subsidies are now disappearing. We have moved almost all the "dirty work" overseas, and will find ourselves having to do it once again. We will not be able to afford a lot of the regulations that have been passed. This work is dirty and unsafe. Will we have the political will to make the changes? Will we have the "stuff" to become an industrial economy once again, or will we enter an economic death spiral, refusing to face reality, clinging to the wealth and comfort of our imagining, and burning up the capital left in our country in an attempt to sustain an unsustainable lifestyle? Do we have it in us anymore? Do we have what it takes to be great? Or at least normal? I'm not so sure... Of course, all of this hinges on countries like China showing good economic sense, growing their economies, and leaving their yuan/dollar games behind them. Not necessarily a sure bet, but more likely to happen than not, in my estimation.

Heeeee's Baaa-aaaack.....

It appears that Tom "The Antichrist" Daschle has come back from the dead to haunt the halls of Washington once again. I had thought that the oaken stake through the heart planted by Jim Thune in 2004 would have driven his evil spirit far, far into the political nether regions. But it appears that his powers were stronger than I had thought, and he has now returned to seize the political pulpit with his clutching undead fingers and hurl his blasphemies and lies once again. It also appears from his picture that he's taken to wearing a pair of spectacles, perhaps to cut down on the glare from the demonic glow that emanates from his beady serpentine eyes. The Economist, as usual, hails yet another craptacular American politician for his supposed abilities to "get things done." Is it just me, or are there others out there who would seriously like to see Washington get much, much less done? If we complain to no end that these guys do absolutely nothing right, why in the world do we want them working harder to get anything done at all? Personally I'm all for giving them all lifetime appointments and sending them on permanent vacation to Tahiti at taxpayer expense, on the condition that they do absolutely nothing more to/for this country EVER, never return, and that their respective office permanently dies with them.

In addition, there is such widespread agreement on the need for fiscal stimulus at the levels of hundreds of billions that it might, paradoxically, become politically easier to slip another large programme into the mix, especially one that benefits ordinary people rather than bankers. Last, stressed American companies are actively backing radical reform, because the burden of health insurance costs is crippling their ability to compete abroad.

The Economist also makes a slew of asinine arguments like these: that some kind of universal-healthcare-fiscal-stimulus-thingy might actually be good for the economy, that this might actually "cut costs" and reduce the burden of healthcare on American businesses, etc. At least it doesn't make any attempt at outright puncture the popular political perception, as it should. I WANT TO VOMIT. This is pathetic. The Economist should have torn this to shreds. When was the last time that throwing loads of taxpayer money, or any kind of money, at an industry ACTUALLY LOWERED COSTS? Housing bubble, Fannie Mae, Freddie Mac, anybody? How in the world does it reduce the burden on industries? Do people seriously think this stuff is not going to be paid for? Who is going to pay? Higher taxes, higher deficits, forever and ever... Yes, that's what is going to help America's "competitiveness." Oh yeah, and the Obama folks are apparently considering the creation of a "Federal Health Board," I suppose to add to the swelling ranks of the Central Planning Committee, err, I mean, "Presidential cabinet." I'm seriously considering removing The Economist from my list of recommended econ links. The only saving grace of this publication is its fantastic writing style, at least relative to other such publications, and its coverage of foreign news. Other than that, it is increasingly worthless, as its actual economics is ludicrous and its libertarian perspective is becoming progressively corroded. But I suppose, they do have to sell magazines to stay in business... Again, avoid the mainstream. It is simply a problem, once again, of economics. These publications need readership to make money, and they must do so by catering to previaling tastes, which are socialistically inclined, Keynesian, and authoritarian at heart. Its another case of popular culture and media feeding off eachother's mutually regurgitated perspective, in some hopes that somehow, if everybody agrees, if they are all swallowing eachother's vomitus and having their own vomitus swallowed, it must be correct vomitus. Don't waste your valuable time with this stuff. (why do I? I forget...)

Light Posting

Sorry, folks, but posting from myself is going to have to get a little lighter for awhile. I've already got too many irons in the fire, and though I have lots to say, I just don't have the time. Holidays probably won't help much either. I'll do the best I can.

I Love Fran's Site!

Francis Porretto has one of the very best libertarian/conservative blogs on the web, in my opinion. I may not agree with him about everything, but he writes darn good, very insightful stuff and has a great supporting cast. Aaron has a great analysis of the recently passed presidential election and the effect of the economic crunch on Republican and national politics, though I think he underestimates the severity of what is about to happen and its effects on the country. Duyen Ky makes an interesting point about political "fairness." Leonidas seems to be one of the few non-dedicated-Austrian bloggers to "get" the present financial crisis, and provides a fantastic link to an interview with Peter Shiff. He also maintains a blog of his own. (Might want to listen to this one, Mackay! He talks a bit about the "higher education bubble" which I would agree will probably bust over the course of this crisis.)

A Second Nail in the Dollar Coffin

Japan is asking for new Treasury purchases to be denominated in yen.

TOKYO - Japanese economists, increasingly concerned that the United States might seek to pay its enormous and growing debt obligations in a weakened US dollar, are looking to the possibility of US Treasuries being issued in yen.

Of course, this doesn't help them much with the enormous pile of our debt they've already purchased. They must figure they've already been suckered enough. Increasingly foreign nations are leery of lending us money. Increasingly, we appear to want to borrow our way out of the present crisis. One of two things must happen:

• Interest rates must skyrocket
• Monetary inflation must skyrocket, as the FED becomes the only body willing to purchase the debt

Probably, it will be a little of both. The turning point will be when the FED begins buying in earnest. Technically, this would mean massive inflation. Realistically, it may mean de facto national bankruptcy. Expect international trade to begin breaking down. Any day now.

Sticking it to the other Ben

Ben Stein writes a piece for Yahoo!Finance begging for mo' money. It was hard picking a particular bit to blockquote, but this should do to summarize the tone of the piece:

Obviously, this is also a time for extreme monetary growth. As we economists would say, the velocity of money — that is, how often it changes hands — is falling rapidly. This means the Federal Reserve can pump up the quantity of money greatly to offset that fall without fear of inflation. There are the usual "pushing on a string" limits to how well this will work but it must be attempted.

The real issue choking the economy now is lack of lending and fear by the banks and other lenders. This must be met by explicit solvency guarantees from the central banks. There should be no pussyfooting around this. It's a matter of extreme urgency.

I have to say, I actually really like Ben Stein as a human being. He seems like a really great guy. The first book I ever bought about stock market investing was written by him, and I followed him for a long time on FoxNews and later on Yahoo!Finance. I still occasionally read up on his columns in the American Spectator, but needless to say, if you've read anything on this blog up to this point, you'll know how very much I now disagree with the man. What Ben Stein is suggesting is mass monetary inflation. He justifies the expansion of the money supply on the grounds that the CPI is down, therefore inflationary pressures are low and an increase of the money supply will not result in appreciable price increases. This is the same justification Alan Greenspan used as he inflated the money supply through the 90's and early 2000's, without significant price increases AT THAT TIME. Now look what we have! These two men (and, frankly, most economists) fail to understand that stable prices are actually inflationary. Prices should fall as a result of increases in efficiency and productivity over time, not remain stable. Ben Stein is one of those guys who has the best education that money can buy. He has learned exactly what is taught in school and is widely viewed by mainstream folks as an expert in economics. A perfectly mainstream education for a perfectly mainstream guy. The problem is that what is taught in school is mainstream Keynesianism and it is wrong. The reader simply must understand a few things about monetary expansion:

• Monetary expansion is inflationary regardless of its effect on price levels.
• Monetary expansion is redistributive in its effects. It is stealing by another name. It does not matter whether prices remain stable or not. Real purchasing power is transferred from holders of the old money to the recipients of the new money. The consequence is this is obvious, as I discussed earlier. (Anyone remember those strangely low savings rates these past years? Who in their right mind saves? Interest rates are too low, and if you don't spend your money, the government spends if for you!)
• Monetary expansion warps the price structure of the economy. This results in irrational investment, bubble activity, and a warped production structure that does not satisfy real needs in an optimal fashion.
• Monetary expansion erodes the most critical function of money: its ability to serve as an accounting system. Money's most important role is to allow resources to flow in an optimal fashion based on pricing structures. It is a "lubricant" of the economy, allowing rational resource exchange and flow to occur. It is NOT A MEASURE OF WEALTH! True wealth is contained in the goods and services produced in an economy. Money allows their exchange in a rational fashion to meet the needs of people. Hence, it acts as an accounting system to keep track of how things are best exchanged and make rational economic calculations for future plans. Monkeying with the money supply is disruptive to this process, screws up the accounting, and leads to irrational and destructive activities.

Of course, in a way, this is the whole point. The fact is, right now the economy is broken. The economy is broken because people have made very bad decisions with the allocation of their time and resources and made financial obligations they cannot possibly meet. Why? Some were just plain stupid, but mostly it is because the accounting system was screwed up back when they made the decisions due to an expanding money supply. Pricing was wrong. Irrational exchanges were made. The money supply stabilized in 2007, and the consequences of these decisions were revealed. "Papering over" the screw-ups with yet more money makes things look better once again, which is why everybody wants to do it except the Austrians. They are the only ones who seem to understand that things are not made better by more messed up accounting! The screw ups are not revealed, and things are not straightened out! The problem is NOT an accounting problem, it is a real problem of bad investment and wealth allocation created by previous bad accounting! Fudging the accounting with new money doesn't fix it, it kicks the can down the road for somebody else to take the loss! One thing that bothers Ben the most is the drastic fall in the stock market. He knows better than almost anybody else how many people's retirements depend on those stock prices. But the problem with the stock market is not that it has fallen. IT IS THAT IT WAS INFLATED IN THE FIRST PLACE! The stock market boom WAS BAD! It was a reflection of erroneous, unsustainable earnings and earnings growth as a result of monetary expansion, which was revealed when the money supply stabilized, again, in 2007, and it was no longer so easy to "make money," pardon the pun. Those prices were never justified. The "wealth" was not real. It was imaginary growth, now revealed for what it really was: a figment of our imaginations. We only imagined ourselves wealthy. In reality, we've been burning capital for some time and becoming poorer in the process. What we really need is to stop doing this and get on a constructive, sustainable path. Re-inflating the stock market and the economy will not do this. What is needed more than anything is accurate, market pricing, which will allow people to get their spending priorities right and make rational, constructive choices with their lives and their efforts to meet their individual needs. As it is, nobody knows which way is up, and everybody is begging for the government to make somebody else pay the price for the bad decisions which have already been made. This is not constructive. Nobody knows what to do, and valuable effort is being wasted as people are left spinning their wheels. Inflated house prices are bad. Inflated stock prices are bad. Inflated anything is bad. I would think that was clearly apparent in the whole "flate" part of the word, which suggests to me "not as it ought to be." But more than likely, Ben's advice will be taken. If the AMB is any indicator, it already has been. Expect more irrational business practices. Expect to get poorer.

The Real Conspiracy: Keynesianism and Central Banking

Judging on the basis of Ben's previous post, it appears to me that he has experienced a quantum leap in his understanding of economics and the present sorry state of affairs. To be specific, he appears to have seen through one of the greatest conspiracies of our time: the near universal acceptance of the economic false-doctrine of Keynesian monetary theory and the conspiracy of central banking to control world economics and politics. Another prominent quote from the article he cited:

"While reforms in the financial sector are essential, the long-term solution to today's problems is sustained economic growth," Bush said at Federal Hall on Wall Street. "And the surest path to that growth is free markets and free people."

This statement is patent nonsense. As I have said, the problem is ethics, and so is the solution. When we get that right, we'll have free markets. Then we'll have sustainable economic growth. "Economic growth" and "freedom talk" is neither the solution nor the problem. It is a distraction. The world had mostly free-markets for nearly a century. It had sustained economic growth. It was called the Industrial Revolution. It decided that was not good enough, and got rid of it. Bush only gives the free market lip service as he works to undermine it himself. Sadly, he probably believes he is pro-free market because he and most other people alive today do not know what a free market is. That is because we are all Keynesians. The fact is, Keynesianism displaced Classical economic thought, the chief proponent of the free-market, many decades ago in the midst of the Great Depression. The Depression itself was caused by an abandonment of the free-market a few decades previously when the Federal Reserve was created in 1917. It pursued a policy of monetary expansion during the 1920's which resulted in the now famous boom of the time, then tightened its policy to produce the bust which followed. The Federal Reserve had been created primarily to steal (ahem, "finance") the funding necessary to finance the US war machine during World War I. It was also supposed to serve to alleviate the bank runs that plagued the ethically and financially bankrupt fractional reserve banking system, which never should have been legal in the first place. Its purpose, known to the public or not, understood by the politicians or not, was the forcible withdrawal of their savings through inflation for the purpose of financing government policy. That policy was waging war and propping up bankrupt banks. Not exactly free market. No surprise that it failed. The Austrians, a division of the Classical school and true proponents of the free-market, vocally criticized this system, and for a time in the early 30's it appeared they might become the dominant school of thought as their apocryphal predictions were coming to fruition. However, they became displaced by the followers of Keynesianism, who were seduced by the promise of government managed solutions and a guaranteed path to prosperity and comfort if they would only give the government and Franklin Roosevelt a little more power. Just a little more. Today, Keynesianism dominates the economic discussion we see on business shows on the boob tube and is universally taught as the gospel in the classroom. Occasionally a fringe "supply sider" or a Monetarist (follower of Milton Friedman, or the Chicago school) voice is heard, such as that of Arthur Laffer, but that is rare. Nobody mentions the lessons of the Classical school. It is considered a barbaric relic of the past. According to mainstream opinion, we've moved on since then to more modern ideas. The choice is Keynesianism, or Keynesianism-lite. Keynes was not a defender of the free-market, he was a usurper. Neither the Republicans, nor the Democrats, nor any major political force is for free-markets, though many claim to be. Not even Arthur Laffer. The only ones left are the scattered few Austrians and Ron Paul. Who calls for the abolition of the Federal Reserve or a return to gold as currency? Nobody. To understand what this means, it is akin to "modern" physicists reasserting that lighter objects actually fall more slowly than heavy objects, after a century of studying Newton's laws which state that F=ma and all objects should therefore fall at the same rate. Economics as a field rapidly advanced through the 19th century to a near consensus of opinion at the time the Austrian school came into being, then was rapidly overturned by a change of sentiments early in the 20th during the crisis of the depression. This is bizarre. The reality is that we had it right, but when we didn't like the truth, we turned to pleasant sounding fiction. Keynes was the man of the hour with the tale of the hour. He gave us the illusion of control, and people loved it. We all bought into it. This is the secret of a successful conspiracy, according to R. J. Rushdoony (and Gary North, where I encountered the idea):

The important question to ask is this: What makes a conspiracy work? Let us suppose that a number of us conspired together to turn the United States into a monarchy, and ourselves into its nobility; let us further suppose that we could command millions from our own to achieve this goal. Or, let us suppose that, with equal numbers and money we conspired to enforce Hindu vegetarianism on the country. In either case, we would have then, not a conspiracy, but a joke. A successful conspiracy is one which is so in tune with the faith and aspirations of its day that it offers to men the fulfilment of the ideals of the age. It is an illusion to believe that dangerous or successful conspiracies represent no more than a small, hidden circle of diabolical men who are manipulating the world into ruin. Such groups often exist, but they only exist and succeed because their plan and hope is closely tied to the public dream and the faith of the age. If the threat were only from small circles of hidden men, then our problem would be easy. Then, as Burton Blumert has observed, "if we only unmasked the conspiracy, all our problems would be solved, but if the trouble is in all of us, then we really are in trouble."

That's the trick: we all buy into it. Its a "conspiracy" on a grand scale. We are all a part of it. It is a mass delusion that we buy into because we have adopted a culture that wants to hear these things. And we're never going to fix it so long as we do not know, and don't want to know, what's going on. Ignorance keeps the Federal Reserve and the powers that be in charge. That's the critical part: we don't want to know. We want to believe the fairy tales. They aren't true. That's the real conspiracy. Gary North pointed it out to me. Now, I'm pointing it out to you. Ben and I see through it. You can, too. Don't be a part of it. Don't listen to mainstream economics. Use the links I've put on this very page under "Scott's Econ Links." I know that "Austrian theory" sounds gimicky and strange. I thought so too. I was wrong. Go to Mises.org. Read Mises on Money. Go to Gary North's site. Get a subscription. Read all you can. Its worth it. Learn the truth.

Capitalism and Ethics

Previously, we saw that while looking at economics on the micro-scale the forces of production and consumption were at odds, competing with one another for optimal pricing, in the bigger picture the far more fundamental relationship was one of cooperation. The two constitute a virtuous cycle, as the desire of one leads to the fulfillment of the other, around and around, resulting in ever increasing wealth and satisfaction of the desires of this life. The accumulation of capital was critical to this process, as the tools and other material resources allow the productive output of human labor to be multiplied. However, we noted that there were a few conditions which must be met for this relationship to be consummated; particularly one that property must be secure. Many people will try to argue that capitalism is in fact unethical, but the reality is that capitalism is utterly and absolutely dependent upon ethical behavior. Without ethical behavior on the part of economic actors, capitalism will fail. To illustrate this idea, let’s take a brief look at two possible imaginary “worlds,” one in which the ethics criteria is met, and one in which it is not. A theoretical treatment of the issue would show the same thing, but in this case I think an example is much clearer. Imagine that you are suddenly snatched up from this planet and find yourself living amongst aliens. They are primitive aliens, not very bright, but very honest and friendly. They have a hard life, as their planet is quite arid and they have little in the way of technology to grow their crops. They frequently experience famines and shortages, and life is quite tough. You are not a farmer, but find that even with only a simple knowledge of tools and a basic understanding of how agriculture is supposed to work, you are far more advanced than they are. You can design and make tools for them, and teach them how to use the new gadgets, how to irrigate their fields and as a result they are far more productive. In return, they pay for your services in the crops they grow, which is a good thing, because you would have had no idea what to grow on the alien planet in the first place. Within a single season, you are all quite comfortable and happy, with food to spare, and plans to expand next year! Now imagine you land in a very different place. It is still arid, and life is difficult, but the aliens here are quite different. They are still stupid and backwards, but these beings are vicious, jealous, and dishonest. You find that you cannot deal with them, as they will never fulfill their end of a bargain and try to take advantage of you at every turn. You produce tools for yourself, and grow crops the best you can, but at night, they come on to your property and steal your tools and whatever else of value they can find. By the end of the season, everyone is hungry, you have no accumulated tools or produce, and everyone is just barely surviving. You also find that you have absolutely no motivation to produce tools anymore, or attempt to better yourself or your situation in any way, because the result is that anything of value you produce and any investment you make is stolen from you. There is simply no way for anyone to get ahead in such a savage environment except through means of violence and at the expense of others. Yes, it is entirely obvious that an honest society will be more wealthy and productive than a dishonest one. The important thing to notice is the reason why: 1) a lack of ethics prevents the accumulation of capital and therefore lowers per capita productivity 2) a lack of ethics acts as a disincentive to investment and productivity. There is a tendency to produce only the bare minimum, as anything more is subject to confiscation. In fact, I would go so far as to say that “capitalism” itself is a misleading word. The institutions and conventions associated with this “form” of economic structure are not mandated by law or any other government act as are the planning boards and what-have-you of socialism. No government agency legislated banking into existence or lending with interest. They arise naturally in any ethical system where property is protected and fraud punished. As such, the word “capitalism” is like trying to apply a term for a state of “normalcy:” it is just what happens when ethical people go about their business in the real world. It is not a philosophy; really it is nothing more than allowing natural law to take its course. The variants of socialism (fascism, communism, and the like) are actually “something” in that they are actual political and social constructs brought about by force of the hand of man. Nobody forces anyone into capitalism, except possibly, it could be argued, God. Capitalism, then, is merely one of many manifestations of proper human ethics. Theft, corruption, and deception, on the other hand, are actually inimical to capitalism. That they might occur on occasion in a nominally capitalistic system, while detrimental, ought not to persuade a person that they are part and parcel of the system itself. This is simply the darker side of human nature flaring up, and regardless of what system is employed, this cannot be stopped. However, when they occur at rampant levels, and in fact become necessary to the functioning of the economy itself, one might be forced to consider whether or not the system itself is actually “capitalistic” or not. In this light, we may understand the failure of the “developing world” to ever develop, despite a never-ending supply of foreign aid and the opening of first-world economies for trade. These countries are now exporting enormous quantities of goods, but where is all that money going? It is being devoured by the forces of unethical behavior. As we have seen, in a society where theft and corruption are rampant, capital accumulation is strongly deterred. What money is earned is spent almost entirely on consumption or hidden away where nobody may find it that it may never be stolen. It is not invested, or “put to work” in new capital, due to these fears of theft, so per-capita productivity never increases and the society does not develop. Wealth never increases. Their perpetual “economic problems” and “poverty” are really not economic in nature at all. In reality, there are no “economic problems,” only ethical problems. While the ethical connection of production and consumption is not severed, the result of their natural action is the generation of wealth. This applies equally well to America’s “problems.” The fact is, the present economic crisis is a problem of ethics, the self-same theft that impoverishes most of the rest of humanity. The difference is that in this country, the theft has been forced into disguise. America is wealthy because of a long history of the embrace of ethical rule of law and enforcement of property rights. This is because the culture of its people demanded such laws of the government. In truth, there is still great popular opposition to the kind of overt theft and corruption which occurs in many parts of the world, and this is the factor far more than any supposed “force of law” which keeps this behavior to a minimum here. Because of this, in this country, such behavior must be especially well hidden. Ironically, it has found refuge in the most difficult to find of places: in plain sight. It occurs right under our noses because it has taken a form that people do not recognize. “Underground” behavior has been forced “above ground.” Rather than occurring through money passed in envelopes through back channels, the corruption here has cloaked itself in the legitimacy of law. Here, it is not called “theft,” or “corruption;” it goes under names like “redistribution,” “tax,” “incentive,” “deduction,” “welfare,” and “stimulus.” In most places, corruption is a risky black-market affair. Here, corruption is institutionalized and efficient. At the apex of this redistributive structure stands the Federal Reserve, which has the power to appropriate the saved funds of the entire nation at a moments notice through the agent of inflation. It regularly uses this power to “regulate” the economy. The vast majority of tax and regulatory law is devoted to the redistribution of funds from one entity to another. It’s a simple fact. Each time the baton of power passes from one party to another, one of the first issues to be jiggered with is tax law. New groups must be rewarded for their political patronage, and out of favor groups foot the bill. Furthermore, and even worse, the populace itself sees the redistributive process as a means to advance social and political objectives, often under the most innocent and noble sounding rhetoric. I have little doubt that President Bush meant what he said about the “ownership society” and the efforts of Fannie Mae and Freddie Mac to put folks on the lower scale of the income ladder into houses of their very own. I have little doubt that the folks who went along with it felt it was a perfectly justifiable and worthy use of government power. But the fact is the activity was subsidized. The subsidy money came from somewhere, and it was not the folks buying the house. It was not voluntarily given, but taken through force of law. The fact that a majority votes for an activity cannot change the ethics of an act. Democracy is a process, not a source of ethical legitimacy. The appearance may be different, but the result is the same. The mind of man may be fooled, but the universal and inescapable laws of God are not. The result of theft, whether known to us or not is always the same: the disincentive of production, the erosion of capital, and impoverishment. The fact is, we are all fooled. We fool ourselves. The further we travel down this path, the more we will look like the remainder of the world. Even as the present crisis unfolds, we turn to the same poison that led us to the very predicament we are currently grappling with. The crisis is construed to be a product of the free market. It cannot be a product of the free market because the market in the US is not free. Regulation is not the answer. Stimulus is not the answer. Bailouts and an increase of the money supply are not the answer. Government programs are not the answer. They are not the answer because they do not address the problem. They are the problem. The solution is ethics.

Go to John Galt!

Great link, Scott.  Yes, I do like a good conspiracy theory every now and again.  This one was both educational and thought-provoking.  But, I want to add something to it that might yield a more "rational" theory.

I was poking around on the Internet yesterday, and I happened to come across President Bush's speech before the G20 meeting.  I decided to listen.  Most of it was the usual economic rhetoric, such as:

"...the surest path to growth is free markets and free people."

Ok, that sounds good....but then Bush said this:

"I'm a market-oriented guy, but not when I'm faced with the prospect of a global meltdown."

Mind you that the article where I found this quote is entitled:

"Bush defends free-market system ahead of G20."

That is not a defense of a free-market system.  A defense of a free-market system would have been something like, "I'm a market-oriented guy, ESPECIALLY when I'm faced with the prospect of a global meltdown."  If you don't trust the market in the face of a meltdown, then when do you trust it?

I found the answer today on the Mises site (thank you, Scott).  In the November 13 audio article Jeffery Tucker at about minute 2:30 explains that one who studies the Austrian or Classical schools of economic theory... 

"...is immediately confronted with the reality that this is of course not the economic theory propounded in the business press or accepted by the government.  The major theoretical apparatus that these people use has its origin in the work of John Maynard Keynes, whose major assumption...is that the price system does not work properly."  

Tucker then explains that Keynesians view prices as something that should be controlled, prodded and guided, along with everything else in the economy.

Even though Bush talks a lot about free markets, his seemingly off-the-cuff personal admission is actually seriously profound.  He just admitted to which school of thought he belongs.  He's a Keynesian, or at least he's acting that way.  So is Paulson, Bernanke, and probably every government official we've had for the past century.  And finally, probably so is Greenspan.  Maybe Greenspan WAS a laissez-faire guy, but it looks like he changed his mind.  Or maybe he decided that if you can't beat 'em, join 'em was a better approach.  

Granted that this theory isn't nearly as cool as thinking that Greenspan wants to start his own free-market society somewhere....actually, it sounds kind of nice....

Go to John Galt!

Alan Greenspan = John Galt?

As Ben is quite fond of conspiracy theories, I thought I'd throw this one out there. It is really quite interesting. I saw it first on Gary North's site, then went looking on google for more info. The basic premise is that Alan Greenspan saw/sees himself as a John Galt, a la Atlas Shrugged. For those who haven't read the novel (you should!), the story is about how global socialism and human socialistic tendencies lead unproductive people to attempt to live on the backs of the productive. John Galt leads a revolt among the productive folks, urging them to quit what they are doing and join in the parasitic behavior. By destroy their own successful businesses, there is nobody left to support the unproductive, and they are left to survive on their own pathetic means. John Galt is known as the "man who stopped the engine of the world." Alan Greenspan appears to have very nearly done the same thing: he may very well have destroyed the US dollar through his inflationary policies. The US dollar is now the world's reserve currency, and serves as the glue holding together the world economy as we know it today. Actually, Austrian critics of Alan Greenspan have been saying that he has destroyed the dollar and the American economy for some time, creating a number of bubbles including the Tech and Housing bubbles, and now the commodity bubble. But nobody, to my knowledge, ever accused him of doing it deliberately! They all seem to agree he was only incompetent! What makes it look like a conspiracy is that Alan Greenspan was actually a very, very close friend of Ayn Rand. Like the Austrians, the Objectivists (Ayn Rand followers) despise the Federal Reserve and believe the country should use gold as currency. Yet Ayn apparently did not object to one of her star pupils becoming chairman of the Federal Reserve. Very strange... Further, his behavior very closely mimics exactly what characters like d'Anconia did in the book: suddenly do a complete 180 and pretend to go along with the system and adopt its views, and use his position and skill to totally destroy the institution he is in charge of, all the while acting like he doesn't know what's going on. Recently, Greenspan made news by "admitting" that maybe free markets didn't really work. Very out of character for a Rand follower, but exactly what one might expect of a faker along the lines of a John Galt trying to destroy the present financial arrangement so that it must be recreated from scratch. Preferrably, better scratch. Am I buying it? No, not really. I'm not big on conspiracy theories. I tend to think that culture determines history more than anything else. But who could ever say... only Greenspan himself! And he'd never tell...

Going Green

Over the past few years there has been an obvious rise in talk of going “green:” environmental awareness, reducing carbon footprints, sustainability, conserving energy and looking for alternative energy sources.  And this week has been a great one for such talk.  

The first article I noticed this week was an op-ed piece in the New York Times by the notorious Al Gore.  After a brief lecture on the climate crisis, he arrives at his point:  We can solve the climate crisis, economic crisis and energy security crisis in “exactly the same steps.”  The basic logic here is that through “large and rapid investments in a jobs-intensive infrastructure initiative” we can begin to save the planet, save our economy, and reduce our dependence on foreign oil.  He then lays out 5 steps we should take to carryout his plan.  One of the more aggressive points is a “unified national smart grid” of power lines placed underground that we will all connect our electric cars to, effectively sharing energy amongst all.  How utopian.  It might be significant to note that Al Gore has refused Obama’s offer to become the next “Climate Czar.”

The next article I found was from The Economist warning of a “Global Green New Deal” that would be shoved down our throats by Obama and the Democrats.  They explain that massive government spending and subsidies are the wrong way to go green, citing the ethanol subsidies in America that caused a misallocation of investment (creating a boom-bust and driving up food prices) and solar subsidies in Germany “one of the world’s most sunless countries.”  Yet, despite these warnings, The Economist grants that there is a “case for giving the economy a boost through government spending.”  Further, they congratulate Obama for planning to introduce a cap-and-trade system on carbon emissions.

Then, I noticed an article on the Huffington Post by Tom Friedman arguing that we need an “overwhelming force” to bring us into the green revolution.  And that “the Cheney line – let’s let the market work” will not work because we have too many “legacy subsidies and tax incentives for dirty fossil fuels.  The whole thing is totally skewed. This market has been gamed from the beginning.  If we’re going to game the market let’s at least game it so that clean fuels are on an equal footing with the dirty fuels.”

Then, you have the T. Boone Pickens approach, whose California proposition 10 was rejected probably based on the large increases in public debt.  Pickens’ approach is basically to use hybrid-electric cars, natural gas (which we produce here in the USA) in large trucks, and we populate the plains from west Texas to North Dakota with windmills to generate our electricity. 

It should also be noted that both Friedman and Pickens have appeared in several interviews with a variety of media, including (ahem, Scott) The Daily Show with Jon Stewart this week, discussing these very ideas.  And these recent discussions are only the beginning.  A simple google search of “green economy” or “green jobs” reveals the iceberg of information beneath.  Other outlets such as Wired magazine have been promoting green everything for a while now.  A search of perpetual motion machines will result all sorts of gadgets and miracle contraptions.  The public interest is certainly out there.

The really interesting take-away from all this is that even though some of these ideas seem diametrically opposed, they all come from the same premise:  We can reduce our dependence on foreign oil, save the environment and our economy all with the same steps, as Al Gore says.  And more importantly, saving the planet does not imply killing our economy.  Berry foraging in hemp loincloths in the mountains is not part of the deal anymore.  The hippies have lost, it seems (and I was so looking forward to wearing my new hemp loincloth).

So, it seems that the crux of the argument comes down to the old government intervention vs. market forces.  When phrased like that it sounds like a no-brainer:  let the market work.  However, I think there is something to be said about reversing the momentum behind “Big Oil.”  The reality is that there is a huge infrastructural competitive advantage behind oil and huge governmental preference for oil thanks to lobbying.  What’s the scenery like on the drive down I-10 from Houston to Beaumont?  How many natural gas or bio-diesel filling stations have you seen lately in your area?  Does your car even run on natural gas or bio-diesel?  Can you convert your car?  How much more does a hybrid cost compared to a gasoline version of the same car?  In my area the answer is none of the above, but I can drive a quarter mile and find 10 gas stations.  How will the market ever reverse that?  Is the government the only whale in the sea that can cause a big enough wave to get all these little fish swimming in the right direction?

I can also see argument for investing in the kind of concrete that Scott mentioned in one of his posts.  Instead of investing in unnecessary strip malls, we should invest in things that are profitable and create real jobs (not to mention cool jobs like windmill technicians and solar roofing experts).  Could we also reverse our trade imbalances by becoming the world leader in green technology?  I can also see the very serious danger in the government trying to prop up technologies that are doomed to fail just because they are deemed “green.” 

So, I will leave the discussion here.  As I alluded, I think this is a great way to visualize the lassaiz-faire vs. government intervention argument?  Is it best to leave it to the market to decide?  Or is our market so un-free that we NEED the government to intervene?  Does the oil industry have such a ferocious grip on our economy that we need something equally huge to stop it?

I hope that my fellow bloggers will help me out on this issue, and I’m pretty sure they will.

Austrian Inflation

Ben asks a good question. I'm talking about inflation, but prices are falling. What gives? Are there two different kinds of inflation? Yes. Austrians actually only consider monetary inflation to be inflation (sorry, Ben, I didn't tell you quite right.) They mostly ignore "general prices levels." Austrians expect that a stable money supply will result in slowly decreasing prices as increasing productivity puts more goods in the market ever more efficiently over time, while the money supply remains the same. Actually, you can see this in a few industries which are developing rapidly, like computer technology. $1000 buys you a lot more computational power than it bought last year or 10 years ago. The advances in computing are much faster than the rate of monetary inflation by the government. If you're a mol-bio geek like me, you also know about DNA sequencing costs which are doing the same thing. Probably other folks can think of other markets. Cell phones, digital cameras, lasers, etc. These products appear to buck the trend of inflation due to technological advances. The real difference comes down to the differing perceptions of exactly what money is. To most economists, money is a very special thing, a "store of value" or a "measure of value" for an economy. It is also a valuable tool for regulating economic growth. This is why they want to adjust the money supply to get stable prices, or low unemployment or whatever. To Austrians, money is not all that special. Money is just "stuff," like everything else. It has what value it has, and everything else can go screw itself. The only thing that distinguishes money from other "goods" on the market is that all economic actors deal in it, so you can trade it for virtually anything if you have it. Gary North would call it "the most marketable good." To an Austrian, there are no fixed "buyers" or "sellers," only traders. It is just as accurate to describe a grocery store as "a place people go to sell money for groceries" as it is "a place that sells groceries for money." OK, so they don't really talk this way, but its a good illustration of the idea. "Price inflation" is the empirically observed phenomenon of a general increase in prices. To Austrians, this is "Keynesian" or "Monetarist (Chicago school) talk" and not of general interest. It is an indication that money in general is becoming worth less as measured against other goods, and in the long term is usually the result of the more important phenomenon, monetary inflation. So how is it that you see a general reduction in prices (price deflation) at a time when the money supply is increasing dramatically (monetary inflation), as I showed in the AMB chart the other day? There are several answers. Number one is that that dramatic increase is currently being hoarded by the mountain trolls we call bankers. They aren't letting the money out into general circulation so that it can't be used to bid up prices at this time. That's the whole "pushing on a string" concept I talked about yesterday. Once the dam bursts and the money moves out into the market, expect inflation to start again. First, on the things that are bought on credit... (remember the Austrian business cycle theory (ABCT)?) Number two is that we are facing a recession. Money is the most marketable good, remember? We face uncertainty. We don't know what will happen to us in 6 months. So we hoard our cash if we have it in case of impending emergency. At that time, it will help us get through the rough patch. So we cut back on buying today. Money has become more valuable in this respect in relation to other goods. So prices (the exchange rate between money and other goods) falls. Number three is that an awful lot of people have an awful lot of bills to pay right now that they ran up during the credit bubble. They need cash to pay the bills. They don't have it. So they sell their goods to get it, putting more goods into the marketplace all at once and driving down prices. Especially the leftover capital equipment from failed business ventures that were destroyed by the popping of the recent bubble. If you don't believe me, go into a pawn shop and see how many roofing nail guns and drywall cutting reciprocating saws you can find. Now would be the time to get one cheap if you really want one. If you have been a saver recently, and have cash in your pocket, you are king for the next 6 months or so. Everybody wants the good you have. Money. You are the real estate agent or the homebuilder/developer of 2 years ago. I suggest you make good use of it while you can. If the AMB chart is telling us anything, it's that it won't last long. Of course, I'm just an amateur economist. I fully acknowledge that fact. You are perfectly free to screw up your own life in any way you see fit. Whatever you do, don't blame me when it blows up in your face. One other thing: notice what the effect of trying to keep stable prices is. We know that technology will produce cheaper goods in the future, due to increasing productivity. Yet as Keynesians/Monetarists we use the FED to try to keep the prices stable. The result: a built in bias favoring monetary inflation. We will always have bubbles so long as we try to keep prices stable. Its just a fact of life.

Revisiting China's "Stimulus": The End of Globalization?

Upon further consideration, and further reading, I think I'm beginning to come to a different conclusion about the Chinese stimulus plan that I posted about before. As I said before, China has been printing money to buy US debt to ensure that it has a stable market for its goods here in the States. No controversy there. China has also been disgruntled with the arrangement, as it is abundantly clear that the US is inflating to take advantage of the situation, essentially getting the good at an even larger discount. The US is stealing, basically. China has started up "sovereign wealth funds" and made several high profile purchases of US securities, presumably to avoid the "inflation tax" it was incurring with the debt certificates (and as anybody with a brain knows, bonds paying 4% long term are a lousy investment as inflation will destroy their worth). These investments subsequently blew up in their faces, but that's not the point. The point is that China isn't putting up with America taking advantage of the "dollar empire" through inflation any longer. That's what this stimulus appears to be to me. China is attempting to replace its dishonest American customers with Chinese ones. It doesn't want to restore the "Old Order." It wants to replace it with a new one: an economically independent China that can't be ripped off by the US. Will this work? First off, the American relationship didn't work in the first place. I've already been over that. The export market was an economic tumor whose sole benefit was that it kept large numbers of people employed. China is attempting to feed the tumor with another group of consumers. Its still a tumor. Secondly, once again, this is an act of redistribution. The capital for the stimulus will be withdrawn from the bank accounts of the middle class and the wealthy through inflation. Saved capital will be redirected to immediate consumption by the masses. The squandering of capital is never good for an economy, whatever the immediate effects might be. It is also a violation of property rights and unethical, and will have the predictable consequence of malinvestment and ineffeciency which will haunt them down the road when it is finally revealed by the markets that those factories are the economic tumors that they are. China can get away with this kind of thing now, since they come from such an incredibly backwards situation not so long ago that pretty much any change is an improvement, and they are bound to grow either way for some time to come so long as they don't go back to the old ways. But they cannot keep doing these kinds of things forever. And make no mistake: this is a HUGE plan for a country like China. We're talking ~$600 dollars to each individual in that country. That's about 1 months salary for a very good paying job over there. It positively dwarfs our "stimulus" package. But notice this: it is approximately equal to one year's account surplus with the US. Coincidence? I don't think this is a good idea. It is a bad idea that replaces another bad idea. The reason that the Chinese exported to America in the first place was because it gave them access to a relatively sane, predictable, and steady market. I would question whether China's new domestic market will have such qualities. That being said, the longer China keeps this relationship with the US, the more the US will take advantage of it. It has to be given up eventually. Too bad they didn't just let the free market take care of that by NOT MANIPULATING THEIR CURRENCY and trading good for good instead of good for paper. You can't inflate a good. It would have been a much easier transition. So, basically, I think it will turn out badly. It will not avoid the Great Depression they are facing in my estimation. What does this mean for the US? A great nation is rejecting the dollar. That's the biggest thing. The US dollar is now the world's reserve currency. It has replaced gold. The US took advantage of the situation, inflated to fleece its trading partners, and now at least one will have no more of it. I suspect others will follow. We will no longer be able to inflate our way to prosperity on the backs of others. We will have to pay our own way, and we are not used to that. If our central bank and our politicians continue with their profligate behavior, the consequences for us will be much more immediate and harsh than they have been in the past, since other economies were absorbing our inflation for us through their political addiction to our markets. They were forced to buy our debt whether they wanted to or not. This crisis will bring an end to that. It won't be an easy transition, under any circumstances, much less the present one. On top of that, this is China we are talking about. Our trade relationship has largely stabilized our relationship, as we are dependent on one another. If it is severed, we can expect conflicts to escalate more easily now that there will be less to lose. The US cannot afford more conflict, especially from a nation like China. We are in big trouble. We'd better tread carefully.