North American Union Conspiracy

Just for Fun posted a link to a worthwhile video: Spooky, very spooky...

Predictions!

We are near the end of the year, so I thought I'd do a few predictions for the New Year. This is a little scary, since this will all be in print for the whole world to see and I'll never hear the end of it if I'm wrong. But hey, that's cool... Its part of the fun of it, and that's what blogs are all about. American economy

• all four quarters of '09 wind up being recessionary
• GDP for '08 will eventually (after all revisions are in) show a contraction of >5%
• GDP for '09 will contract 10-15% (depending on the numbers for '08)
• Overall contraction: 20-25%; annualized GDP at low point: $10 trillion (see Vox's column for the logic)
• DOW will bottom at ~4500 in Q3 or Q4; bottom will be fairly flat
• Gold will reach $2000/oz by Q4 of 2010
• Inflation will begin by Q4 of 2009; by 2010, it will be in double digits
• Housing will not bottom in 2009, either. Median home price by the end of the year: $140K or less
• >12% unemployment before its all over

Global economy

• China faces a huge crash; current projections for 2009 are ~7% growth, I'm saying 10% contraction. At least.

OK, I'm done for now. Maybe I'll add some more, later. You might say these predictions are pretty dismal. That's true, and they are mostly based on the Great Depression. The case could be made that today's situation isn't quite that bad. It is true that the bailouts are the wrong idea, but this is actually far less damaging than the price control system that was put in place back in the '30's. That is probably what did that generation in. So far, we haven't made that mistake. Yes, we're trying to "prop up" the price of housing with easy credit (again! will we ever learn!), but that's not quite as bad as an actual price control. And so long as there is no attempt to fix wages, unemployment shouldn't get that bad. It was 25% at times during the Great Depression. But if Congress starts squawking about raising the minimum wage - watch out! It could get very, very ugly. Of course, our inflation is much, much worse. So, it's a tossup.

Almost Austrian

Thanks for the link, Scott.  I took the quiz fairly quickly, trying to pick the Austrian answers, and I got 3 Chicago answers:  94% Austrian.  I guess I need to study some more.

P.S. I like the new look of the blog.  Very nice!

Are YOU an Austrian?

Here's a fun quiz from the Mises Institute. It asks 25 basic questions about economic philosophy and gives 4 answers to choose from, one Austrian, one Chicago School, one Keynesian, and one Socialist. The answers are not labeled, so you can see how closely what you think squares up with each school. OK, so it is a little lame, but in my opinion it is a great way to get a basic overview of what each school thinks about the economic basics. So if you are interested, take the quiz! (and yes, I did manage to get a 100% on the first try. Although I didn't agree completely with each answer, it was pretty easy to pick out the different schools...)

War and Rumors of War

Bad news. Israel has begun a large offensive in the Gaza Strip:

The Israel Defense Forces said Monday that the battle in Gaza was only beginning, and that "the worst is not behind us — it is still ahead of us" during a briefing to southern communities.

This is actually not what I'm afraid of. Hamas is a proxy force which Iran uses to attack Israel. I strongly suspect that Israel is not actually interested in wiping out Hamas, although I'm sure they wouldn't mind that happening. But it is simply not realistic. I think they want to severely disrupt Hamas in preparation for something larger, so that Hamas will be less able to inflict a counterattack. I think Israel is in preparation for an imminent attack on the Iranian nuclear program. Of course, one can never know until it has already happened, and many a prognosticator has looked foolish for predicting this event over the last several years. I'll probably join the ranks. I certainly hope so. Actually, I very much sympathize with the Israeli side of the conflict. I just think that military action is simply not going to work. As much as I hate to see Iran get nukes, I don't think that an attack is going to solve the problem or make the situation any better. I've been secretly hoping that the financial strain of falling oil prices on Iran would do the regime in. It is already unpopular and has been for a long time. Plus, nukes cost money. But the US seems intent on printing money, which jacked up the prices in the first place, and engaging in military action in the region, which doesn't help either. So it looks like we are in for more of the same. Can it get any worse? Why yes, as a matter of fact, it can...

Good Christmas Song

Here is a pretty good Christmas song I heard at church: Hope you enjoy it as much as I did!

Argh! Another Failure!

Vanity Alert! This post is completely about me, me, me. You may read on, but be prepared to vomit... I've failed yet another quiz on Vox's Voxiversity read of America's Great Depression. 5/10 this week. Actually, I think I've got a failing average so far. Quite a few of the complete novices to Austrian economics are beating the pants off of me. Not that this is earth-shattering news. Most people probably don't care. I'm just saying... I would attribute this to several things:

• I'm obviously an obsessive economist. I probably could get higher scores, but I decided back when we were reading History of the Pelloponesian War that it wasn't worth the extra increment of time to get the higher score. I'll probably forget the details in a few months anyway. To that extent, I've decided not to care, and my low scores don't really bother me.
• I've only been an actual Austrian economist for about 8-9 months(!) I know, you're shocked, aren't you? I spent too much time in the other branches, especially the Chicago school and find myself having to unlearn a lot of what I knew. My advantage isn't as much as one might think.
• Because the project is of particular importance to me, I tend to schedule reading time early in the week so I will have it done by the weekend. That way, relatively low priority projects get the shaft instead of this one as I run out of time at the end of the week. And since I'm economizing on time, I only read it once through and never really look back. So I'm usually done with reading by Monday night and have forgotten a lot by Saturday. In that regard, my test scores are probably a good reflection of what I'll remember in the long run, since I've already had plenty of time to forget.
• I positively suck at retaining details. My forte, in fact, pretty much the only way I can function, is abstraction. I'm exclusively a big idea kind of guy, so I tend to get obliterated by the kind of quizzes Vox writes. I expect not to function well in such an environment. That doesn't make the pursuit less worthwhile.

And it does go to show a few things:

• Considering I've been complimented more than once on my writings here, you don't have to be a genius to do worthwhile things. You don't have to be an expert to change minds or make a difference.
• Even a relatively minimal understanding can be profoundly lifechanging for the better, if one pursues the right knowledge. I can't tell you how much even my present limited understanding has changed my life.
• It doesn't take a supergenius to cut even a guy like me down to size. I'm no fool. Most people would consider me relatively gifted. But there's some folks at Vox Popoli putting me to shame on a topic I consider myself to have at least a little bit of expertise in. It's been a humbling experience.

So there you have it. Failure is not always a bad thing! Free markets are the right way to go even when you're the guy cut down to size! Pursue great things, be humbled by them, and whether you win or lose, you'll grow as a result. But you've gotta be willing to do a little work, put it on the line, and face a little discomfort first.

More Environmental Economics...

Art Carden comments on discounting the future with respect to environmental and economic policy. He comes to a fairly radical conclusion:

At first glance, the goal of recycling more and conserving more seems appropriate, even desirable. As Landsburg's example shows, however, advocates of conservation do not have the information they need to make the right decision if property rights aren't clearly defined. Further, as Block's example shows, if we really are to care about future generations and sacrifice on their behalf by not discounting the future, the inevitable destruction of the Earth when the sun dies out suggests a radically different approach. If we are really as concerned about our multi-great grandchildren who will presumably inhabit the earth in several billion years, we shouldn't be worried about recycling paper. We should be worried about building Battlestar Galactica.

OK, so I didn't actually find the article all that interesting. It just gives me the excuse to make a point with respect to the whole recycling/save the forest argument. Wouldn't we have MORE trees if we used MORE paper? Think about it. Whether we like it or not, or even whether we know about it or not, most of the forest land of the US is actually used for lumber. I know, because I used to hunt such areas. The land is allowed to grow for ~20 years or so, then it is clearcut in patchwork, harvesting the trees for their wood and planting new, young trees for harvesting in ~20 years or so. You wouldn't know it to drive through, or even walk through, with all the wildlife and the natural beauty, but most forestland in the US is actually serving as "treefarms." So by reducing demand for paper, we should be reducing the value of those trees, and therefore, the acreage of land dedicated to producing lumber. In my opinion, if you want more forestland in the US, use MORE paper, not less. But that's just my opinion.

Jim Fedako on the Ethics of Theft

Jim Fedako does a better job explaining the ethics of redistribution and welfarism than I have.

Because ethics is missing from most political debates, these debates turn from a straightforward evaluation of property rights to one of weighing in the balance means and perceived ends. Yes, it is nice to see children engaged in constructive activities, and it is true that many folks who can afford to contribute to the recreation center would opt not to do so. Nevertheless, no one can ethically balance the program and center against the property of others. No one.

It seems pretty straightforward to me that using force to take property from one party and giving it to another is inherently unethical, whether it is done by a thug in the street armed with a gun, or a thug in a courtroom armed with a lawyer, or a thug from the government bureaucracy armed with a shiny badge and the power to imprison, or a thug in a corporation armed with all of the above. The government variation seems to be the hardest for people to understand. It shouldn't really matter whether their actions have been "legitimized" by the democratic process, as the democratic process doesn't have the authority to render ethical legitimacy to anything. In a nation composed almost entirely of nominal Christians, who ought to understand that only God has the authority to render ethical legitimacy to an action, you would think that such behavior would come under a bit more scrutiny. It also seems pretty straightforward to me that when such behavior is on the rise, regardless of which party is responsible, the overall prosperity of a civilization should be hurt. Perhaps that is why I have yet to do a good post on it. Someday, I'll write a better post on the topic. Someday...

Rebecca Sticks it to Neo-Liberal Economics

In response to being mentioned in my post Truth vs. Predilection, Rebecca wrote:

Please understand that I, too, want what's best for everyone, but I want people to deserve it. I want everyone to have a warm meal and a place to live, but only after they come home from work. People need to earn what they have, not only for the warm fuzzy feeling you get inside from working for your achievements, but also so that I don't have to give them what I have to make up for them not working for it. If someone has the money to pay the rent, but decides to buy some fly duds instead (okay, so maybe I am a poser wanna-be) then they don't deserve a place to live. Maybe that makes me a cold-hearted bi... ahem, person... but that is what's fair. I don't believe in being nice to people, I believe in being fair.

(Emphasis mine...) Which is, of course, exactly the point. In my opinion the success of "liberal" economics isn't primarily a result of "liberty," so much as ethics. It rewards productive behavior which satisfies consumer demand, and, well, doesn't reward laziness. Without this "economic justice" it doesn't perform properly. The "modern" economies of the world now practice what a lot of folks call "neo-liberal" economics. It is characterized by relatively open markets, but uses fiat currency under the direction of a central bank, heavy taxation and welfarism. Basically, the Keynesian welfare-state is more or less another word for neo-liberal economics. It is an attempt to get the benefits of liberalism, namely, material prosperity, without the "downside" of actually letting people fail when they screw up. This is done through "democratic theft" through mechanisms so dense and convoluted that most people don't see or understand them well enough to know what they are. So a lot of people celebrate its modern "triumph," glossing over its dark side. In a sense it is an attempt to square the circle, and, naturally, doesn't work all that well, as it weakens ethical cause and effect in the marketplace and reduces individual productivity and growth. It also breeds resentment. It does, however, work a lot better than totalitarianism, so for the time being Asia appears do be doing pretty well under it. But I suspect that without major changes, they will plateau shortly. Without ethical advancement, the economy will only get so productive. America and Europe are fine examples of this. And with America's accelerating ethical decline, we can expect more poverty here. I expect fascism within 10 years. Some would argue it has already happened. Once again, I am reminded of a famous thought advanced by the great C.S. Lewis. Put first things first, and we often find second things come along naturally. But put second things first, and we find ourselves losing both second and first things. America put ethics first back when she was founded. The colonists who came here did not do so seeking material prosperity. They came here to live in the way they thought most fit. They didn't get everything right, but they tried, and they took their ethics seriously. They had no intention of creating the wealthiest nation the world had ever seen; they had every intention to be right with God in the way they lived their lives. But in the end, material prosperity was the unintended result of their efforts. They got second things and first things. We put prosperity first, ethics second. We squandered both. This is not to say that there is no place for private charity in a liberal economy. Charity ought to be just that. Let's count the cost, and mark it up honestly for what it is: a loss, but hopefully for a good cause. Allowing people, and let's be honest, it is often ourselves, to pretend that we earn our keep through deceitful machinations of the state is dishonest and disgraceful. And the results are predictable.

A Softer World: 361

Everyone seems a bit tense about the current economic situation. I think we could all learn something from these guys: A Softer World: 361 There's more where that came from at www.asofterworld.com.

The Fallacy of Neutral Money

Probably the single most important concept that Austrian monetary theory grasps is recognizing that its rivals, Keynesianism and especially the Chicago school, whether knowingly or not, embrace a false notion which the Austrians call "Neutral Money." In fact, if you are not explicitly an Austrian at this point, you probably believe it, too, though you may not yet know it. This doesn't make you stupid; pretty much everyone who ever thought about it probably arrives at the same false notion, including me. It sounds very simple and straightforward, kind of like the idea that keeping prices stable fights inflation. But both are wrong, and both lead to disastrous economic consequences if embraced. Neutral Money is the idea that an incremental increase in the quantity of money in the economy for a given quantity of goods and services results in an evenly distributed, incremental increase in the prices of all goods and services across the board. This is incorrect. It actually results in very concentrated price increases in certain areas of the economy at certain times, and spreads out in a predictable fashion to different areas. This results in the warped price structures that lead to improper investment patterns and economic development, which we know as economic bubbles and the boom and bust of the business cycle, including the present crisis. Because the other theories don't understand this, the entire process looks disjointed and irrational to them. The Keynesians in particular never seem to be able to wrap their minds around why the business cycle persists despite the best efforts of their beloved central banks. They perpetually find ever more complex and convoluted ways to explain the process, suggesting the creation of ever more Byzantine regulatory and monetary schemes to fight off the imagined ghosts and gremlins that ruin their plans. There are really two good ways that I know of to think about this and understand what is going on. The first, and most strictly Austrian, is to consider interest rates. The money supply of the United States and of other countries which practice central banking is regulated through credit markets. When the central bank begins an "intervention," which is to say, a suppression of the interest rate to "stimulate growth," it lowers targeted interest rates by systematically buying debt instruments, usually loans to banks and US Treasury Debt, with new money. The flurry of buying activity lowers interest rates by artificially increasing demand for those bonds, as I talked about before, which spreads throughout the credit market. As banks are able to borrow at lower rates of interest from the Fed, they bid down interest rates as they compete to lend into the market. Businesses, perpetually in search of opportunities for profit, suddenly find that the interest costs of financing have fallen. This makes many projects, which previously would have not been deemed profitable, begin to look like worthy targets for investment. So they begin to undertake new investment and development activities. To understand this, lets look at a simple, concrete example of a profitable investment: a rental house. Suppose that without intervention by the Fed, an open-market loan is available at 8%. Estimating that the average worker in a neighborhood of $100,000 houses can spend about $1000 per month on rent for such a house, revenue from a rental property will be $12,000/year. So a property with a price tag of $100,000 will cost $8000/year to finance (.08 X $100,000, interest on the debt used to buy the property), and generate $4000 in income, assuming no other expenses. A business typically trades at 8-10 times earnings, so this "business" would be worth about $32,000 to $40,000. Since $100,000 in liabilities would be assumed in such a venture (the cost of the house) this is only a marginal investment at best. However, suppose that through intervention, the interest rate is reduced to 5%. Now the property costs $5000 per year to finance, and revenues are now $7000 per year. The "business" looks to be worth $56,000 to $70,000, a full 30% higher than in the previous scenario and not too far below the asking price of the house. A buyer might think about making the investment. (As an aside, I should also note that a wide range of government interventions make the above scenarios look even more enticing, especially mortgage interest, business expense, and depreciation deductions. Once those are taken into account, the second scenario looks very good indeed, but that gets very complicated and is beyond the scope of this essay. Few people realize just how inflated home prices are as a result of these policies. Housing would be a lot more affordable if the government would stop trying to make it so.) Such increased buying by businesses, then, begins the first cycle of price increases, at least in a form we would commonly recognized. Only those properties and goods which businesses are interested in as investment vehicles appreciate; consumer goods are largely left out of the buying spree. Austrians distinguish between two classes of goods as "consumer goods," goods whose value is derived purely from their consumption value and are therefore destroyed upon the "realization" of this value, and "capital goods," whose value is derived from their capacity to produce consumer goods and other capital goods. A "higher-order" capital good is one that is very far up the production process and is used to produce other capital goods. An example of each might be: a steel mill (high-order capital good), a butter knife (a lower-order capital good), and a sandwich (a consumer good). Businesses, investors, and entrepreneurs predominantly use credit to buy capital goods. One interesting example of a capital good is that well known paper security called a "share" or a "stock," which represents a partial ownership share in a company. Since a share in a company represents a claim to productive capital (ignoring the various and prolific financial shenanigans, of course), e.g. a specific set of "capital goods," stock prices typically increase in response to a reduction in interest rates. In particular, early in the business cycle, those stocks which represent companies producing the capital goods that other business will buy as investments will tend to increase first, as they benefit from interest rate reductions and their products are increasing in demand early in the cycle, making their higher-order capital goods look particularly valuable. IBM shares, claims to higher-order capital goods, will tend to rise more quickly early on in the business cycle in response to interest rate suppression than shares of Coca-cola, which are claims to lower-order capital goods. The Nasdaq will tend to lead the S&P early in a boom. As the prices of capital goods increase, businesses that serve other businesses tend to realize higher profits than businesses that serve consumers directly. The production structure also tends to lengthen, as more convoluted and resource economizing production methods appear reasonable due to increasing sales volumes of these capital goods. In other words, engaging in economies of scale looks more profitable as the necessary investment capital appears cheaper to obtain due to lower interest rates. The division of labor tends to increase and work becomes more specialized as increasing levels of capital are employed. Eventually, in the later stages of the boom, businesses begin to compete for lower-order resources, including workers, and eventually, commodities. Employment of both labor and resources will have reached saturation. When this happens, wages and commodity prices rise. This is where the boom reaches a turning point. If wages continue to rise, eventually the prices of consumer goods will rise as consumers compete with one another for the available consumer goods. The public will recognize the inflation and begin to take countermeasures, driving up interest rates and prices further. But at the same time, business plans are going sour as their costs increase in a way they had not anticipated. Profit projections fall. Companies producing consumer goods, so-called "consumer staples" companies, and their profit projections start to look a lot better, as their products finally increase in price and they did not experience the wild run up in projections early on in the cycle. Coca-cola stock starts to look like a better, safer investment than IBM. At this point, the central bank has a choice: it can either stop suppressing the interest rate, stabilizing the money supply, or it can continue the suppression and increase the money supply even further. If it does the former, it will slow the increasing price of consumer goods, but cause wages to fall and reduce businesses profits further and therefore cause a stock market crash, and potentially a rash of bankruptcies as well. If it does the latter, continuing and exacerbating the inflation, it can keep the boom alive but only at the expense of the legitimacy of the currency. Eventually, the market enters a hyperinflationary boom, and the currency becomes worthless. At any rate, the effect of interest rates on the business cycle was not the purpose of this essay. The point is, with the onset of an inflation, the price increases do not occur across the board, they occur in specific markets in a specific pattern, distorting investment and causing a boom. The pattern is typically capital goods first, then moving on to labor, commodities, and finally consumer prices. New money entering a market is not neutral. The other way to understand the situation, which is the one I have used in the past, is to "follow the money" through the economy. Let's look at it. Monetary expansion begins, once again, at the central bank. The bank buys debt from member banks and from the US Treasury. The money is spent by the Treasury, on things like salaries, road construction, military spending, welfare programs, etc. In any case, the money once initially spent winds up in the bank accounts of the recipients. So by either pathway, it ends up in the banking system in short order. Once in the banking system, a small portion of the money is held as reserve while the remainder is re-lent back into the market through fractional reserve banking. The lent money is spent on whatever it is the borrower desires, at which point, once again, it winds up in a bank account somewhere, ready for the next lending cycle. And on, and on, multiplying itself along the way. Increasing the inflationary effect, I might add. This is old hat to people who know how fractional reserve banking works. The point is, only a select few institutions and markets see the money first. Nobody takes out a loan at a bank to buy groceries, and wages do not rise at first as a result of these activities. The government gets first dibs, then usually businesses close to the government and the banking system. And of course, the banking system sees the money several times. These groups get to spend the money into the market before others, outbidding them in the marketplace for resources. What do they buy? Here, the analysis is the same as before: capital goods, higher-order at first, then later labor and commodities. These entities are typically businesses, not private consumers, so they have the spending priorities of businesses. And once again, those close to where the money enters the market get the gold mine, the wage earner at the bottom of the totem pole wind up with the shaft. By the time consumers see any of the "new money," it is old, and consumer good prices are already being bid up and the Federal Reserve is likely thinking of inducing recession. Both analyses lead to several conclusions. The first is that by the time consumer goods are actually increasing in prices, inflation is already rampant. It has been "baked in" for some time and has been inevitable for years. This is why it is important to identify the increase in the money supply as inflation, not an increase in prices. Austrians understand this, Keynesians and the Chicago school do not. Second, and a bit more subtly, inflation is redistributive. Property is transferred from those last in line to those first in line as the new money moves through markets. The late receivers are outbid in the marketplace by those closest to the entry points. This has the effect of centralizing wealth and power in those institutions closest to the government, especially the banking system, and especially those directly linked to the business activities of the Federal Reserve. This is a list of the "primary dealers" with the Federal Reserve. Perhaps you've heard of a few: BNP Paribas Securities Corp. Banc of America Securities LLC Barclays Capital Inc. Cantor Fitzgerald & Co. Citigroup Global Markets Inc. Credit Suisse Securities (USA) LLC Daiwa Securities America Inc. Deutsche Bank Securities Inc. Dresdner Kleinwort Securities LLC Goldman, Sachs & Co. Greenwich Capital Markets, Inc. HSBC Securities (USA) Inc. J. P. Morgan Securities Inc. Merrill Lynch Government Securities Inc. Mizuho Securities USA Inc. Morgan Stanley & Co. Incorporated UBS Securities LLC. It appears from recent events that the relationships between them are being, "solidified," shall we say. Not for the good of the nation. Expect the trend to continue. Understanding the fallacy of neutral money is one of the key concepts to keeping the forest and the trees in focus. The Keynesians are too shortsighted, focusing on the numbers of the day and suggesting the money supply can be expanded to "stimulate" the economy with no fear of inflation so long as unemployment doesn't get too low, the CPI stays tame, wages do not rise, etc. They are up-to-the-minute statistics mongers and cannot see the bigger picture of the various interrelationships, especially over time. The Chicago school, on the other hand, is actually farsighted, claiming that the best policy is to consistently increase the money supply by a small amount continuously, so that prices rise predictably over time, and everybody can know what will happen and plan for it, thinking that all prices will rise and fall together in response to the general level of money and goods in the marketplace. "Money chasing goods," as it were. While it is true in the very long run that an increase in the money supply results in inflation, they cannot see the intermediate consequences between the increase and the final price increase. They fail to see that new money entering the system distorts the price structure, and therefore leads to the malinvestment, waste, and tragedy of the boom-bust cycle. Both are wrong. Only the Austrians understand the mid-term consequences of an increase in the money supply. Only they have a rational, comprehensive theory of the business cycle with testable, confirmable hypotheses. Only they can keep the whole picture in focus. But they do not run the country. The inflationists do.

Somebody Almost Gets It!

Wow! Somebody almost gets it! If only he'd mentioned Austrian theory, the suppression of interest rates, the fallacy of neutral money, and the fallacy of stable prices, I might actually think about voting for this guy! Thanks to Gary North for the link!

A Glimmer of Hope

The Auto Bailout is happening, as we all knew it would.  The money is coming out of the “Treasury’s $700 billion financial stabilization fund,” which does not need approval from Congress (but they can reject it if they feel like going back to work during Christmas). 

 The big surprise is that only 2 of the Big 3 took it!  Ford said NO!….sort of.

 I wish Ford president and CEO Alan Mulally would have said, “Screw you, government.  I don’t want your damn money.  I am a responsible businessman.  Now, get off my ass and let me run my business!  By the way, I will not be car-pooling back to Michigan with those GM and Chrysler pansies.  I am taking my 3 jets.”  But, alas he said:

"We do not face a near-term liquidity issue, and we are not seeking short-term financial assistance from the government,"

Woo-hoo!

Ford said it hoped to restructure its business without government assistance but requested the nine billion dollar line of credit as a "critical backstop or safeguard against worsening conditions."

Doh!

Well, like I said, it was only a glimmer.

The Roads to Tyranny

Thanks to Scott for the link to Friedrich Hayek’s “The Road to Serfdom.”  I encourage anyone who is not familiar with it to read or at least take a look at the related YouTube videos.   Thank God for YouTube.  

 His main thesis was new to me, although something that was always in the back of my mind.  I had always thought that when taken to extremes communism and fascism ended in essentially the same result.  Hitler and Stalin had very similar regimes (one party rule, dictatorship, secret police state, loss of individual liberty, government control of everything, mass genocide), even though they were based on two opposing ideologies.

 Hayek’s thesis is (If I may be so bold as to paraphrase) that any collectivist model of government, no matter how well intentioned or whatever it is called, will in the end result in tyranny of the rulers, and hence, serfdom for the masses.

 It always seemed odd to me that there is a certain mainstream perception of the difference between fascism and communism.  Fascism is pure evil.  It conjures visions of Darth Vader and Storm Troopers.  It is to be feared and despised.  Yet, somehow, communism is pretty bad, but has some redeeming qualities.  It’s based on the noble goal of equality.  Cuba is a poor country.  That is bad.  But, they get free healthcare!  That is enlightenment.  I have not seen the movie, but I understand that is the basic thrust of Michael Moore’s Sicko.  And of course, he is nominated for an Academy Award.  He will win, of course, too.

 I decided to do some quick research on fascism, so I went to Wikipedia.  The Wiki entry on fascism is quite thorough and well-cited.  Here are a few interesting snippets pertaining to economics:

 “Their [fascist] policies manifested as a radical extension of government control over the economy without wholesale expropriation of the means of production.  Fascist governments nationalized some key industries, managed their currencies and made some massive state investments. They also introduced price controls, wage controls and other types of economic planning measures.  Fascist governments instituted state-regulated allocation of resources, especially in the financial and raw materials sectors.”

 Sound familiar?

 "Other than nationalization of certain industries, private property was allowed, but property rights and private initiative were contingent upon service to the state."

 Historian Gaetano Salvemini argued in 1936 that fascism makes taxpayers responsible to private enterprise, because "the State pays for the blunders of private enterprise... Profit is private and individual. Loss is public and social."

 Getting warmer?

 According to sociologist Stanislav Andreski, fascist economics "foreshadowed most of the fundamental features of the economic system of Western European countries today: the radical extension of government control over the economy without a wholesale expropriation of the capitalists but with a good dose of nationalisation, price control, incomes policy, managed currency, massive state investment, attempts at overall planning (less effectual than the Fascist because of the weakness of authority).

Ah, there are those socialist mommy-state laws I was looking for.

 “Fascism is a more subtle form of government ownership than socialism. While socialism is a system in which the government owns and controls the means of production, fascism is a system in which government leaves nominal ownership of the means of production in the hands of private individuals but exercises control by means of regulatory legislation and reaps most of the profit by means of heavy taxation. The owners nonetheless bear all of the risks involved in entrepreneurship.”

 Scared yet?

 One could argue that the US is blindly marching down both roads of fascism and socialism simultaneously.  Recent events do not bode well.  Hayek would argue that this will ultimately lead in tyranny.  I would have to agree.

Debunking Keynesianism With a Single Sentence

It was a long journey from following mainstream economics in publications like The Economist and columns by Ben Stein to becoming an Austrian. But it began with a single thought, which eventually led inexorably to the Austrian conclusion:

If intervention is necessary for a particular transaction to take place, then the transaction is inherently unsound.

This should be one of those self-evident axioms. The Keynesians will immediately chime in with ten-thousand "not necessarily!" situations, which will be isolated and contrived examples, but the Austrian knows that these are rabbit trails which lead to nowhere. The Keynesians instinctively ignore the big picture. They just can't see the forest for the trees. Or the tangled snarl of equations. Free exchange results in increase in wealth precisely because both parties view the received goods as being worth more than the proffered goods. Otherwise, they don't make the exchange. Sure, there are exceptions, sometimes people do something stupid or get ripped off, but by-and-large, most exchanges result in net benefit for both parties. So nearly all transactions in a regime of free exchange are rational and beneficial, and lead to increased societal wealth. Where there is intervention, exchange will therefore be less than optimal, as some of the exchanges which take place would not have occurred otherwise. Some will be counterproductive for one or both parties, but this fact is covered over by the intervening process that pushes the transaction through. Therefore, a system with intervention will always underperform a free system, all other things being equal. In extreme cases, a system with intervention could actually be grinding itself down into poverty without even knowing it. I think that has been happening for about the last 10 years. To the entire world. I first encountered this concept when trying to understand the trade relationship between the US and China. It didn't make any sense for China to be providing the US with so many goods, while receiving so few in return. For untold tonnage of cheap stuff, China accepts a few 747's every year. Yet the exchange rate never rose. Here I encountered the "currency peg." That idea scared the living daylights out of me, because it meant that the two countries were locked into a fixed set of transactions, that would continually flow regardless of whether they were rational transactions or not. Somebody was getting ripped off. Big time. I read a lot of commentary that tried to justify the situation. It sure seemed like things were going well for both parties, but I could never buy into any of the arguments. Eventually I came to the realization that there was no way to justify unfree exchange. It just doesn't make sense. At the end of the day, economics is about exchanging stuff for stuff. You can't force an exchange to be profitable if it is not. Period. I spent a brief stint as a Chicago school follower, as Milton Friedman was the guy who put forward the idea of floating exchange rates and is generally far more freedom-oriented than anybody in the mainstream, but eventually figured out he was wrong too. I often comment that it can be useful to look at transactions as if money didn't exist, as it tends to reveal the unsound nature of many irrational economic processes. The reason that this works ought to scare us to the core: the money system is now phony and contrived. It does not function properly at all, thanks to years and years and layer upon layer of accumulated "intervention." Removing it reveals the insanity that the manipulators are trying to cover up. It reveals the irrational processes that will soon destroy us. The sad fact is, money is supposed to do precisely the opposite. Money is supposed to help us make rational decisions in a very complex world by providing a common medium of exchange. But humans just can't leave well enough alone. They have to tinker. They shouldn't.

Depression with a Side of Hashbrowns

First of all, let me be the first to congratulate Ben on an excellent post. He's exactly right. And so is Ron Paul. Not a whimper. We're sprinting headlong down the Road to Serfdom, and not a whimper. On a related note... My wife and I had breakfast with some old friends the other day. It was a lot of fun to see them, and I really enjoyed the time. But it was also quite depressing. There were three others, a couple and a single friend, plus me and my wife. Two are consultants with a major consulting firm, one a software specialist who writes code for banking applications. No slouches here: I would wager there wasn't a single person at the table with an IQ under 120. Quite possibly, 140. All are highly successful, youngish folks on the 20-30 borderline. Very decent, kind, well-meaning people. They are wonderful folks. All have extensive business experience, and the two consultants have extensive economics training. My wife and I, on the other hand, are only chemists. Naturally, the sorry state of the economy came up. Could you expect any less of a conversation I was involved in? This drew a rousing discussion in which a great number of opinions were expressed. Sadly, all opinions except mine were predictably mainstream. The fault of the crisis lies with banks who made stupid loans. Of course, those people who took the loans were stupid, too, but they're not the real problem. On and on. No mention of the Fed, or monetary policy, or Fannie Mae or Freddie Mac. No mention of currency manipulation. No mention of government subsidy, supression of interest rates, or price-distorting market intervention. Alas, they are not Austrians. The unanimous solution, it seemed, save my lonely vote: there's gotta be more regulation. Its the only way. This has gotten out of hand. When I suggested that the blame was with the Federal Reserves manipulation of interest rates and flooding markets with easy credit, I drew mostly blank stares. My comment that fractional reserve banking should be outlawed was accepted in that way that one accepts the rantings of a crazy man, or a professor rattling off some equation on a subject far removed from anything anyone had ever begun to consider prior to his rash outburst. Simply leave him be, there's no help for him. Maybe he's right; who could possibly say with a statement like that? The conversation continued amicably, but I could tell I was not speaking their language. I must say, I now have greater sympathy for the Mogambo Guru. This does not bode well. These are smart people, sophisticated people, yet honest people, the best the business world has to offer. But they don't get it. They're hopelessly sucked into the Keynesian delusion. They can't see the forest for the trees. They believe the deflation talk, that we need monetary stimulus to stabilize prices. They want to preserve the system as it is. They want to go back to the boom, the boom that didn't work. They now see that the system is broken; what they don't see is that the system has been broken for a long, long time. There is no fixing it. There is no going back. It will be replaced, or it will be destroyed, and then replaced. My guess is the latter. Sadly, their recommendations would almost precisely mirror the actions of Herbert Hoover as a previous generation wrestled with similar questions. Wage and price controls. Tighter regulation. We need planning and leadership to get things back under control. It'll work about as well today as it did back then. But nobody knows, because they don't study their history. To the world, Herbert Hoover was a defender of laissez-faire. It doesn't matter what the record is, because nobody reads it. Herbert Hoover was actually a brilliant man. He was a mining engineer, and actually managed to rather successfully streamline food distribution during WWI, as I mentioned before. But he didn't understand that economics is not the same type of problem as the flow of a fluid through a system of pipes, or the workings of an engine. It is not physics. There is a lot of faith placed in folks like me, engineers and scientists, the techies and supposed experts of the world. Even economists are considered part of the priestly sainthood, capable of incredible feats of taming the natural world. It is a myth. I am a scientist, and I am telling you: we don't know as much as is claimed, and are not capable of half of what we are credited with. If we knew what we were doing, we wouldn't still be blowing up chemical plants and space shuttles. On top of that, we are just as prone to delusion as anybody else. Many Ph.D.'s believe in global warming. Before that they believed in eugenics, at least until the Nazis took it "a step too far." Go back as far as you like, you'll find one discredited delusion after another. They attempt to bury their faults, but you can find them if you look. These people should know better, but they don't, and they never learn. They are only human. Just like everyone else. Ben Bernanke and Hank Paulson, the modern high-priests of the church of economics, have about as much hope of fixing the current mess as Ozzy Osborne. Less, actually, as Ozzy would probably just let everybody do as they like, and go off to have a beer for himself. The sad thing is, we had it pretty good. Things weren't so bad not too long ago, back when we ran things on the basis of legal rights and natural law and the like, and just let the chips fall where they may. It was a decent life. Not perfect, but decent. But we thought we could do better. We thought we could engineer a better world than the one God gave us. John Maynard Keynes told us we could. Karl Marx concurred. We engineered ourselves one nightmare after another, and yet still cling to the notion that we can engineer our way out. We can't do it. It's not in our power. Engineering and regulation are the problem, not the solution. Who will do the regulating? Barney Frank?

"These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis," said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

Chris Dodd?

Just last week, Senate Banking Chairman Chris Dodd (D-CT), who has taken more money from Fannie and Freddie than any other politician, again defended Fannie and Freddie and advocated for their resurrection.

Who will stop folks like Bernard Madoff? The SEC?

A U.S. House of Representatives panel plans to convene an inquiry in January into the failure of securities regulators to unearth an alleged $50 billion securities fraud by Wall Street veteran Bernard Madoff, a key lawmaker said on Wednesday. Madoff, a former Nasdaq Stock Market chairman, was arrested last week and charged with running a massive Ponzi scheme. He is accused of defrauding banks, investment funds, charities and wealthy individuals who invested in funds he controlled. The Securities and Exchange Commission has come under fire for not uncovering the scandal until senior employees of Madoff went to authorities.

This stuff cannot be stopped. It doesn't matter who is in charge. It doesn't matter what the rules are. Human nature cannot be regulated. It cannot be engineered. It is what it is. We deal with it as it comes. We had a system that worked. At one time, we dealt with it pretty well. We are not dealing with it well now. I'm glad I saw my friends last weekend. It makes me happy to see them. They are really great people. They really are the best the world has to offer, but they are just as lost as all the rest. They don't get it. If they don't, nobody does. The best don't get it. There is no hope left.

The Slaughter of the Free Market

Take your pick of any mainstream media source and see what they say about our economic troubles.  What you will see and hear is some sort of vague sense of blame being cast on the demons of unfettered de-regulation or capitalistic greed.  The implication that follows is that Bush is the real culprit because he is the President (and because everyone loves a good Bush-bashing).

 You’ve heard this all before.  I know.  Here is the logic in case you missed it:

 1. Bush is a Republican

2. Republicans believe in free-market capitalism and de-regulation

3. The US economy is in a recession/crisis

 Therefore,

Bush’s policies of free-market capitalism and de-regulation have brought on the recession/economic crisis.

 This makes a convenient script for the media to follow, but it is unfortunately untrue.  Not only is the argument unsound (just because it’s raining today and I’m wearing Santa Claus underpants, it does NOT follow that my Santa undies caused the rain), but premise 2 (or is it premise 1?) is now false as well:

 Drum roll please… 

 President Bush has officially slaughtered the free market.  It happened in a CNN Interview on December 16, 2008.  This article calls it a “sacrifice.”  Call it what you will.  He said:

 “I've abandoned free-market principles to save the free-market system.”  Furthermore, “I’m so sorry we’re having to do it.”

Not only is this statement a complete contradiction, it is also pure massacre.  The follow-up question this butchery prompted from the interviewer was,  “Who do you blame?”  Bush goes on to mumble something about regulation and greed…  You’ve got to be kidding me.

 The Auto Industry bailout/nationalization is inevitable, yet there is one crackpot still calling it like it is.  Here is something that is not getting much if any attention in the media.

 Here is Ron Paul on the Bailout.  LISTEN TO THIS SPEECH.  You won’t regret it. 

 This is sad.  For all of the fear-mongering that Obama is going to “change” us all the way to Marxism, let me remind everyone that Bush is still president.  What, is he giving Obama a head start?

 I am not alone in noticing this.  Robert Sheer makes the same observation in this article.  The rest of Sheer’s analysis seems to follow some version of Santa underpants logic, yet he does admit that all this is “enough to drive one back to the invisible hand of Adam Smith.”  Finally some common sense.

 The real loser in all this is of course free-market capitalism and that pesky little scrap of paper we like to call the Constitution.  My question is how will we ever undo this?  

Truly Frightening News from the Fed

I know that I post a lot of scary stuff here. I have been frightened for some time. I sold all my US stocks in the spring of 2007, and foreign stocks in the fall of that year. Things were beginning to look bad back then. The first event that really had me scared, though, was the failure of Bear-Stearns and the massive Fed interest rate cut that occurred nearly simultaneously. For a month, I literally stockpiled canned food. I was scared witless. I've calmed back down since then. Even the crash of October did not scare me much, as I had been short the market and prepared for it since March. I was handling things rather swimmingly, all things considered. Until today. I am now even more frightened than I have been at any point since the crisis started. What did it? This report.

Dec. 16 (Bloomberg) -- The Federal Reserve cut the main U.S. interest rate to as low as zero for the first time and shifted its focus to the amount and type of debt it buys, seeking to revive credit and end the longest slump in a quarter- century.

Even worse:

Today’s vote was unanimous. In a related move, the Fed lowered the rate on direct loans to banks and securities dealers to 0.5 percent. It set the payment on the reserves that commercial banks hold at the Fed at 0.25 percent, down from 1 percent.

That last sentence, coupled with the Fed purchasing assets, should scare the living daylights out of us. If it follows through with this, the end of the Republic could be at hand. I have remarked before about the stratospheric increase in the AMB as a result of the TARP program. I have also remarked that this money has not made it into circulation as a result of the problem of "pushing on a string," which has been aided by the new policy of the Fed paying interest on reserves held in its vaults. Now the Fed has cut that rate, reducing the incentive for banks to keep that money out of the credit markets. If the Fed begins buying other types of assets, such as and especially Treasury debt, it will pump money directly into markets, short circuiting the banking system and the string that temporarily kept inflation at bay. Both will set off a gale of inflationary forces. Up until this point, I must confess I've had a bit of faith in Ben Bernanke, especially considering the fact that I think the Fed should be abolished and fractional reserve banking outlawed, and the US dollar discontinued and replaced with gold. So I'm not likely to be the biggest fan a Fed chairman has ever had. Many people call him "Helicopter Ben," after comments he made during Senate hearings prior to his confirmation. I think a better name would be "Tricky Ben." The guy has managed to do unimaginable monetary summersaults with the money and banking system without setting off inflation, and, more importantly, without some of the smartest financial guys in the world realizing he wasn't actually doing much of anything at all. Everyone remembers the interest rate cutting campaign of 2007, when the rate fell from 5.25% all the way down to 1% (and now 0.0-0.25%). What almost every commentator failed to notice except Gary North (where I learned about it, and pretty much all the rest of what I know about Austrian theory. All credit for these observations goes to him) was that the Fed was not intervening in markets to achieve the rate cuts! This is clearly seen by the utterly flat AMB graph throughout 2007 and most of 2008. The failure of the AMB to rise implies that assets were not bought to induce the rate cuts. So "Tricky Ben" simply announced rate cuts, then did nothing to make them happen! They occured on a free and open market, which implies that natural rates were really already that low. Bernanke was simply saying what the market already knew to be true, and pretending that it was Fed policy. For almost a year, commentators talked about an easing monetary policy because they were all transfixed by the overnight rate, when in reality, Bernanke was being one of the greatest tightwads in Fed history. Next came the TAF program, in which Bernanke traded Treasuries held by the Fed for the bad debt held by banks. This helped keep banks solvent, at least on paper, again without increasing the money supply. Banks were propped up, while the AMB was unchanged. Then there was the TARP program, which finally sent the AMB to the moon. The Fed bought bank assets with freshly printed money, but then offered to pay interest on that money to hold it in its own vaults. Yet again, the Bernanke props up the banks, this time increasing the money supply, but without allowing that money to leak into markets and drive up prices. This is clearly visible in my previous post on the AMB. AMB skyrockets. M1, mostly flat. So, thus far, Bernanke has conducted a flying trapeez of a central banking policy without unleashing a whirlwind of inflation. Yet. But the actions mentioned here would cause all inflationary hell to break loose. I hope this is more jawing with the market, less action. I hope he doesn't actually intend to do this stuff. Many (OK almost ALL) observers are saying that with the CPI down, there is plenty of room for loose monetary policy without causing inflation. Many are welcoming this announcement with open arms. In fact, as we observed in my previous post, quite a few are worried about deflation. This, of course, is because they are Keynesians and don't know what inflation or deflation means. Little do they know they are embracing financial suicide. Prices are falling because Americans are finally, finally, accumulating savings and reducing the rate at which they take on new debt. Prices were inflated because people were spending beyond their means. They were induced to do this by insanely low, government-subsidized interest rates and the consequent monetary expansion of the 90's and early 2000's clearly visible on the AMB and M1 graphs. Rates rose, the monetary base stabilized, and now they have stopped taking on debt quite as readily, and cut back spending in favor of paying down debt and saving. This is not deflation. This is sanity returning to overstretched markets. This is a perfectly sensible, rational, healthy response to being overstretched and financially strapped in uncertain economic times. It is what our economy needs. We need the savings to make the investments that will be required to turn the economy around. Almost every commentator further agrees that one of the biggest problems with markets is excessive levels of debt. Now that that situation is reversing, they want to take precisely the policy that would induce the same irrational, debt-happy behavior that got us into this mess in the first place. These stupid Keynesians want to flog savers over the head for doing the right thing by inflating the currency right out from underneath them, withdrawing purchasing power from their accounts and spending it into the market for them to prop up prices at their boom levels. The boom busted because it was not sustainable. We don't need to return to it; we need to fix it. This is like having a fifth of Jack Daniels for breakfast because you have a hangover. It is not going to make things better, it is going to make things much, much worse down the road. Do not be fooled by the talk of deflation. Look at the GDP. We are in recession. GDP is falling. Production is falling. Look at the AMB. Look at M1. The money supply is rising. Production is falling, money supply is rising. This is inflationary. It is not too bad so far, but if Bernanke follows through with this, rest assured it will be. I hope, I pray, that Bernanke understands this. I hope he does not follow through with what he has stated today.