Poor, Confused Jet Li

While checking on the weather, I encountered this videotaped speech by none other than Jet Li: Ah, poor, poor Mr. Li. Apparently, the stars of Shanghai are just as brainwashed as the stars of Hollywood. He talks of volunteering. He talks of "giving." He talks of the obligations between men as a global family. Mr. Li, I have a few questions for you: 1) If one man may make more money than another, why is this? 2) If one man may produce more with his hands and his skills, why is this? 3) Is it possible that the differences between men may account for the differences in economic output or monetary income which we observe in the real world? Can a genius, or a martial arts master for that matter, really produce so much more for society than the average man, or a man even less than average, that the first ends up a billionaire and the other cannot feed himself? 4) Not including the truly handicapped, which is only a small fraction of the whole population, is it really possible that a man is incapable of producing with his own hands and skills what is required to sustain a reasonably dignified existence with respect to his material wants? 5) If it is not, why is there poverty? Every honest person will know the answers to the first four questions and will answer them in the same way. Those who produce more for society will receive more money, the universal exchange medium for claims to goods in the marketplace. This may result from a variety of differences between them: differences in intelligence, skill, physical strength, etc. However, these differences cannot possibly explain the vast differences in personal wealth we observe. Furthermore, with modern technology and production methods, it is simply impossible that even the least among our "global family" is not capable of supporting a decent and humane existence by his own efforts, save the severely handicapped, for which a humane existence is easily achievable through charity. Nowadays, even quite handicapped individuals can be productive members of society. History has shown that mankind is indeed capable of tremendous levels of productivity, of generating tremendous volumes of material wealth. Even in ancient times, many places enjoyed widespread prosperity. With modern technology, we should be all the more capable of achieving near universal prosperity. Why is it, then, that question #5 stumps so many of us? It is not for lack of giving. It is not for lack of volunteering. If one man may sustain himself with plenty to spare, there is no reason why all might not achieve at least a minimal level of prosperity. Unless, that is, there were more to the story than this. Naturally, there is. If men cannot produce enough for a decent existence, it is either because they are not willing, or it is because they are not allowed. With exceedingly rare exceptions, it cannot be argued that they are not able. When men refuse to respect one another, when they seek to sustain themselves at the expense of others, when they hobble one another's ability and will to seek material prosperity through meddlesome schemes, theft, fraud, and corruption, or when they simply lie about in laziness, only then does poverty raise its ugly head. Charity and voluntarism will not solve such a problem. Only proper human ethics will. Until men decide that they will do what is right by God, themselves, and one another, they will forever wallow in misery. When they fail to abide by even the most basic of their obligations to one another, all the "giving" and voluntarism in the world will be to no avail. Honesty, decency, and respect are far more important to material prosperity than money, and sadly, in far shorter supply. It has been said "Give a man a fish, and you will feed him for a day. Teach him to fish, and you will feed him for a lifetime." To which I would add "But when men steal one another's fish and deprive their fellows of the right to catch fish, all will go hungry." Sorry Jet Li. You can sure do some amazing kung fu, but I cannot get on board with your philosophy. It does not solve the problem.

Fred on Israel

Fred Reed posts a sobering column on the future of Israel:

Methinks a faint smell of doom hangs over Tel Aviv. American power appears to be on the decline, the outcome of its Islamic wars in doubt, its control over its Moslem client states uncertain. Nothing Israel is likely to do looks workable in the long run. The demographics are terrible, regional Arab hostility assured, the military balance only able to deteriorate, the whole enterprise hanging by a lobby. I remember thinking about the Soviet Union, “This can’t last.” I couldn’t see how it could stop lasting either. It did stop. Unless something changes, and I don’t have any bright ideas, I don’t see a happy ending.

He posits two possible alternatives, neither pleasant. Disenfranchisement, to produce an apartheid-like government, or ethnic cleansing. Ominously, he remarks:

Ethnic cleansing? Rounding up a large minority and expelling it would require horrendous brutality. This is the least moral but perhaps most practical solution.

Sadly, I think this is probably accurate. Vox Day recently made a similar assessment:

From the historical perspective, the primary issue is the realization that the situation will remain violent until one of three things happens: 1) The Palestinians accept their conquest and are peacefully digested into a trans-tribal Israeli identity. 2) The Israelis are forced to withdraw to the United States and Europe. 3) The Palestinians are forced to withdraw to the neighboring Arab countries. Given the decades-long failure of various parties to force option (1) through a wide variety of measures, to say nothing of the obvious futility of attempting to construct a modern representative democracy with an electorate that would include a large and understandably bitter tribal near-majority, it's not a reasonable strategy. Option (2) is even less tenable given the military balance of power, leaving option (3) is the only possible solution regardless of one's sympathies or distaste for forced population movements.

I cringe at the thought of this, but I cannot argue with the logic. What is even more scary is the realization that Israel is not unique in its possession of a very substantial minority group that is culturally completely at odds with its host country. This describes a great many places throughout the world. I fear that global depression may bring out the worst in us.

Decivilization And The End of Holiness

Warning: this rather unplanned and incoherent post threatens to prove unusually long and take a winding path through very treacherous waters! It was also assembled in haste, and I apologize in advance for lameness and errors... A couple of tenuously connected things got me stirred up this weekend. The first occurred at my folks' house, where my dad was watching a History Channel show about the changes in architecture that followed the fall of Rome. It was explained that, after Rome fell, the barbarians slew so many people that there was hardly anyone left who knew how to build great structures, like the aqueducts and the Colosseum, and with time the knowledge was forgotten. This is why you don't find many ruins of great buildings dated from this era in Western Europe. I cringed. The second was a visit to a website I had seen once before, which had been updated with even loonier material than on my previous visit, which can be found here. In short, it is a post titled "What Makes People Vote Republican?" on a website written by University of Virginia psychology professor Jonathan Haidt in which he describes his studies attempting to determine, psychologically, what differentiates "conservatives" from "liberals," particularly with respect to issues of morality. I'll share some of the opening to give you the gist of the article, but you really should read it yourself:

What makes people vote Republican? Why in particular do working class and rural Americans usually vote for pro-business Republicans when their economic interests would seem better served by Democratic policies? We psychologists have been examining the origins of ideology ever since Hitler sent us Germany's best psychologists, and we long ago reported that strict parenting and a variety of personal insecurities work together to turn people against liberalism, diversity, and progress. But now that we can map the brains, genes, and unconscious attitudes of conservatives, we have refined our diagnosis: conservatism is a partially heritable personality trait that predisposes some people to be cognitively inflexible, fond of hierarchy, and inordinately afraid of uncertainty, change, and death. People vote Republican because Republicans offer "moral clarity"—a simple vision of good and evil that activates deep seated fears in much of the electorate. Democrats, in contrast, appeal to reason with their long-winded explorations of policy options for a complex world... But with pleasure comes seduction, and with righteous pleasure comes seduction wearing a halo. Our diagnosis explains away Republican successes while convincing us and our fellow liberals that we hold the moral high ground. Our diagnosis tells us that we have nothing to learn from other ideologies, and it blinds us to what I think is one of the main reasons that so many Americans voted Republican over the last 30 years: they honestly prefer the Republican vision of a moral order to the one offered by Democrats. To see what Democrats have been missing, it helps to take off the halo, step back for a moment, and think about what morality really is.

His methodology seems mostly inclined towards asking folks of varying political leanings profound moral questions like:

For example, what do you think about a woman who can't find any rags in her house so she cuts up an old American flag and uses the pieces to clean her toilet, in private? Or how about a family whose dog is killed by a car, so they dismember the body and cook it for dinner?

I have seen his work actually complimented by religious conservatives on other sites, notably Eternity Road where I first encountered it, as his conclusions tend towards "hey, these religious-conservative types have some insights on things that maybe we liberals ought to pay attention to." However, I have to respectfully disagree, particularly after reading a bit further. Both encounters saddened me, and made me think about the impending doom of our own civilization. I happened to read commentary along a similar vein on Mises.org, which further cemented the idea in my mind. Inspired by Dr. Haidt's morality quizzes, I thought I'd make my case in the form of an exam. First, some reading comprehension. Here is a significant article for your perusal. Warning: it is quite graphic, and may be difficult for some to read. You need not read it thoroughly, just to get the gist of what is going on is sufficient. There will be a battery of three questions to test your comprehension when you get back. Go ahead, I'll wait. Finished? OK. Question 1: Why were the South Africans setting people on fire? a) The people being burned had committed grievous crimes against others. b) The attacks were politically motivated. The victims belonged to an opposition party. c) Mobs formed spontaneously when the national soccer team lost, and went on a rampage looking for an outlet for their frustrations. d) The victims were immigrants looking for jobs, and the South Africans saw them as competition. Basically, it was an act of xenophobia. Question 2: Why did the burning victims leave their native Zimbabwe? a) The scenery in South Africa is better. b) They were tourists. c) Zimbabwe is so old fashioned. South Africa is the hip place to be. d) Zimbabwe is run by a democratically elected, murderous brute named Robert Mugabe. The economy there is in shambles, the government violent and hopelessly corrupt, and people are fleeing the country looking for work and to escape the misery and brutality. In both cases, the answer is d). Now that you understand the basics of the situation, here is the crucial question. Question 3: Why doesn't sub-Saharan Africa have a successful space program? a) A lack of natural resources. b) Apartheid. c) They have burned to death all the people who knew anything about spaceflight, and no longer have the knowledge for a successful space program. Other than that, they'd be golden. d) Their societies have staggering social problems, particularly with respect to violence, corruption, and basic interpersonal ethics. In short, they simply haven't achieved a level of civilization that would support the requisite division of labor, economy, and technology that would be needed for a successful space program. Answers a) & b) are incorrect. If you answered c), you might have a future hosting a show on the History Channel, educating America's couch potatoes. But if you subscribe to rational thought, hopefully your answer was something along the lines of d). Folks, the fall of Rome was marked by staggering, staggering levels of violence and chaos that would make pretty much anything going on today pale in comparison. It lasted for centuries. Nobody builds or does large-scale, fantastic anything in the midst of large-scale, fantastic slaughter. Lesson: basic social ethics is critically important to human achievement. You'd think that'd be obvious, but it is amazing how frequently it is overlooked. Now, for my critique of Dr. Haidt's work. Hopefully, you've read his basic premise. I'll go directly to the questions this time. Rate each of the following from 1-7, 1 being completely disagree, and 7 being completely agree. 1) It is morally acceptable for me to privately raise my own children to eat their food off the floor next to the dog bowl without utensils, so long as the floor is exceptionally clean and that it is certain that they will not get sick or otherwise be physically harmed. 1 2 3 4 5 6 7 2) It is morally acceptable for me to have my children color in pictures of violent images of people being killed, so long as I am very clear that actually doing such things is not acceptable. 1 2 3 4 5 6 7 3) No harm, moral or otherwise would come to a child raised in such a way. 1 2 3 4 5 6 7 Finally, a few true or false questions: (T/F) Harm is the sole determinant of the morality of an action, and the human ability to perceive the harmfulness of an act is perfect. (T/F) Behavior is to be judged purely in terms of its outcome, and the physical cause-and-effect of the universe is so fully understood by all human beings that all outcomes can be determined beforehand. Therefore, all behaviors may be pre-judged moral or immoral by considering their effects in advance. Because this is a psychology exam, no questions or answers should be judged right or wrong. They should simply be pondered ponderously. My biggest beef with all of this isn't so much what the good Doctor has to say, though I will disagree with that in good time. It is the fact that this is what passes for high-level inquiry in the field of psychology. Have we truly fallen this far? It is as if Dr. Haidt, in possession of a Ph.D. in psychology, is under the impression that human beings are indistinguishable from robots. He finds this uncanny, bizarre notion possessed by conservatives that symbolically or ritually repulsive behavior ought not to be undertaken to be, simply, illogical, and yet so very fascinating, like some kind of strange alien mating ritual. He wonders at the way they might actually think that human behavior might contain, dare I say it, not completely rational undercurrents, that engaging in such behavior might actually have results that may not be obvious at this time. They might affect the way a person "sees things," or the way they "think about the world." It may even be possible, however unlikely, that human beings may not possess infinite control over themselves. Who knows? This might have (gasp!) tremendous ramifications! But no, clearly this cannot be the answer:

This research led me to two conclusions. First, when gut feelings are present, dispassionate reasoning is rare. In fact, many people struggled to fabricate harmful consequences that could justify their gut-based condemnation... The second conclusion was that the moral domain varies across cultures. Turiel's description of morality as being about justice, rights, and human welfare worked perfectly for the college students I interviewed at Penn, but it simply did not capture the moral concerns of the less elite groups—the working-class people in both countries who were more likely to justify their judgments with talk about respect, duty, and family roles... Drawing on Shweder's ideas, I would say that the second rule of moral psychology is that morality is not just about how we treat each other (as most liberals think); it is also about binding groups together, supporting essential institutions, and living in a sanctified and noble way.

His strange concoction of a theory, rambling and incoherent as it is, still manages to somehow stumble onto the beginnings of an inkling of notions that wiser men than he have known in far more depth for upwards of three millenia. Yet they are so new to him that he can't contain his excitement. Is this the breakthrough research conducted in the modern university, most likely at taxpayer expense? And with all this new insight, he still fails, completely, to realize that for the most part he is not even talking about morality at all! You'd think he do the slightest, tiniest bit of research into the actual belief systems he claims to be intent on studying. Most of what he is talking about is actually only a tangentially related concept called holiness. Holiness is, to put it most simply, being or acting in one's proper "place." Thus it is not immoral to eat off the floor like an animal, it is unholy, as this is not behavior fit for a human. To do so is to to violate one's holiness, and is an act of defilement. But it is not necessarily wrong. Treating an American flag like garbage is to violate its holiness. Eating the family dog is to violate its holiness. And making a habit of violating holiness eventually has its consequences! Sadly, it appears the closest any of his "subjects" got to explaining this to him was the one who said "Your dog is family, and you just don't eat family." Most people have trouble distinguishing between the two concepts, even those that are nominally religious. I hope that, someday, given the opportunity, you'll be able to explain why you shouldn't eat the family dog at least as well as he did. You'd think this would be easy... This is what we have sunk to. The brightest among us cannot even understand very simple, ancient concepts. We hand out Ph.D.'s in psychology to people who clearly don't know the first thing about how the mind works. Even us religious folks do not know holiness when we see or hear about it. How can we hope to explain it to folks like Dr. Dense? At one time, we knew this. At one time, the law was The Law, and it was treated with the respect it deserved, not changed on a whim. Now, it is a means to an end. It's holiness has been violated, nobody cares about it, nobody could possibly follow it if they tried for its endless complexity, and, unsurprisingly, it doesn't work very well. At one time, it was well known that government was corrupt and to be feared. Now we have treated it as holy, and it has grown out of all proportions. It threatens to ruin us. At one time, money was gold. We understood the threat of Isaiah, when he said "Thy silver has become dross." We knew it had consequences. Now money is paper, printed at will by the government. Look what has happened. Guess what's to come. The list goes on, and on, and on. You can check up on it by perusing the magazine rack at your local grocery store's check-out counter. Or on TV. Or any other number of places. My friends, you are witnessing the advanced stages of decivilization. Students of history ought to know how it ends. Unless they watch the History Channel. Is it any wonder we are in such trouble?

Sustainable Living

I was waiting for Scott to write a post about how he would survive the oncoming crisis. I have been thinking along similar lines for some time, and I happened to come across this website today. I'm sure there are others doing similar things, but these guys have a pretty cool website. They also explain in detail their plans. I particularly like their guiding principles:

• Live simply.
• Be happy and at peace.
• Start with the basics.
• Make do with what's available now.
• Avoid going into debt.
• Keep tax liabilities as low as possible.

Take a look and enjoy!

How I'm Preparing for the Crisis

I've been asked a few times lately how I'm preparing for the coming crisis. Sadly, I would have to answer not too well, considering all my commentary here. I'm renting a tiny apartment now, and it looks like I'll be moving soon to another state and living in a new, tiny apartment. This lifestyle is not conducive to the acquisition of stuff and planning for economic meltdown, especially with a job that is not necessarily a stable one. Nevertheless, we play the hand we're dealt, so I'm doing what I can with what I've got. The very best resource on this, in my opinion, is Gary North's site, Specific Answers. If you are serious about planning for this, you will fork over the $15/month. Yes, most of what I say is along the lines of what you'll find there, but a great deal is omitted, and a great deal is in direct opposition. The plain fact is: you'd be better of by leaps and bounds listening to him than me. He's an expert, I'm an amateur. Don't be cheap. You WILL regret it. That being said, here's my list, as applied specifically to me:

• Got a subscription to Gary North's site; read every day
• Buying silver and gold
• Doing my best in this crazy stock market (no, I haven't done as well as I'd like, in case you wanted to know. But I certainly haven't lost money like pretty much everyone else has. No, I won't tell you my portfolio).
• Buying up lots of canned and dried food for storage (wish I had a house so I'd have more room...)
• Bought up a lot of dried seeds for a garden, just in case. Also bought an organic gardening book. Personally, I think the organic movement is gay, but in a meltdown I'm not gonna have access to pesticides and fertilizer. Better know how to cope.
• Buying up large, tradable supplies of goods that would be perceived as being valuable during a serious crisis. If you can't figure out what that means, I'm not gonna elaborate.
• Basically trying to spend down my cash reserves on items that I can easily resell or trade. I expect inflation. I don't want to be sitting on a lot of cash. This is very difficult for me, as I'm a spectacular tightwad.
• Plan on buying food preservation (e.g. canning and jarring) literature and supplies, but haven't done this yet.
• Keeping an eye out for desirable real estate: cheap, out of the way, large enough for subsistence farming.
• Buying up storable consumer goods (clothing and the like) before prices rise. See the fantastic (and free!) book, The Alpha Strategy for a guide to doing this.

That's pretty much it. Also, I guess psychologically, I'm preparing myself for the reality that life is really not going to turn out the way I or anybody else would have hoped, and there's really nothing I can do about it. It probably will not even be bearable for some. But the sad fact is that probably 99.9% of all humans that have ever lived through all of human history lived under brutish social structures and in terrible poverty. We of the modern, liberal West (and a few other places) are the aberration, not the present unfolding crisis and its aftermath. This will actually be a return to normalcy. We become so accustomed to the status quo that it is difficult to think along what are actually more realistic lines when our own existence has been such a large departure from what has dominated most of human history. We're really pretty lucky to have seen what we have, and we should be thankful for past blessings. We have to remember that life really isn't about material well being, or even human happiness. We have to remember that the world is really an evil place, and always has been. We're not going to fix it, and we're not going to escape it. When it is all said and done, life is really about fulfilling the role which God has made for us in this time and this place, however much we may dislike the role and the circumstances we find ourselves in. That is the best that we can hope for. If we can manage that, despite whatever else befalls us, we are to be counted eternally successful.

We're All Gonna Be Millionaires!

And broke...at the same time! Another prediction: in 5 years time, even baggage boys at the grocery store will be making 6 figures, minimum. But they'll still be poor. Time to check in on the AMB once again: We can see that it is still shooting up dramatically. This is inflation folks. Insane, insane inflation. If you hear anybody talking about deflation, show them this graph. This is the stimulus we keep hearing about. It is a very, very bad thing. The dollar is dead. The poison has been taken. The body just hasn't finished twitching yet. It is now starting to show up in M1: Not quite the same percentage growth (18% vs. >100%), but once lending starts up again, you can expect nosebleed inflation, until the dollar finally collapses into worthlessness in some year's time. It's not going to be pretty. This is fall-of-Rome stuff if you ask me. So, the good news: if you can keep your job, you'll probably be getting a raise. Lots of raises. The bad news: you're going to be broke, no matter what. Your savings and retirement will be wiped out. Thanks to the inflation, you will not be able to accumulate more easily. You will have no choice now but to work for your entire life. Probably. Or the entire system could collapse into anarchy and you will die of starvation, gunshot wounds, some gruesome disease or the like associated with such calamities. If you survive, you'll probably be a subsistence farmer. That's the name of the game folks: work till you die. Poor and miserable.

Obama's first minutes in office full of mistakes

While 43 will likely be known for his many mistakes, and even a new lexicon known as Bushisms, 44 is off to a roaring start with his own mistakes.  Starting with the Presidential oath, followed by his inaugural address.  It is good to see that Obama is fallible, although I'll give you that the first error really wasn't his.  As a chemist giving opinions on politics, I say let the experiment begin.  The results certainly can't be worse then some of the intractable tars I made in grad school; a big waste of time, money and resources.  At least I learned a lot.  Lets hope the same is true with this experiment and the resulting product is the correct and desired one.  

Must Read by Eric deCarbonnel

Eric deCarbonnel writes a wonderful piece on his predictions for the future of China.

The conventional wisdom on China is dead wrong. Specifically, there is a widespread belief, as expressed by Goldman Sachs, that "China will keep the yuan trading within a narrow range in 2009 due concerns about exporters." Worse still, others are even predicting that China will devalue its currency! The sheer wishful thinking is astounding! The idea that "China will keep the dollar peg to help its exporters" ranks all the way up there with "Housing prices always go up" and "You can spend your way to prosperity".

He predicts hyperinflation in China and a collapse of the US dollar. I disagree with a very little bit of it. For example, it is difficult to criticize "others" for "predicting that China will devalue its currency" when one is arguing that China will begin printing money like crazy and inducing hyperinflation. Same-same, no? But that is okay. Mr. deCarbonnel is clearly not an Austrian. He persistently describes inflation and deflation in terms of prices instead of money supply, which is pretty much a giveaway. He is probably looking at "devalue" in terms of forex rates in isolation, not in broader terms. He's a "straight economist," whatever that may mean. But he does seem to understand foreign exchange and central banking better than most, and his arguments flow logically and are well backed by details and facts. I'm always short of those... He also talks about passing along increased costs, which is an Austrian no-no. One doesn't pass along costs. Higher oil prices, other costs, etc. cannot and do not cause inflation, whether defined as price increases or in terms of money supply. Buyers bid for goods. If they cannot or do not pay, for whatever the reason may be, the seller must lower his prices or forfeit the sale. End of discussion. China will become "less competitive" in US markets, but it cannot force American buyers to part with money they do not have. They might get higher prices for a time, simply out of desperation buying, but this would not be a sustainable market. They will sell at a loss or not sell at all. My guess is that they will not sell, and will lose market share to other suppliers, probably American. So its back to the factories for us, assuming we want to keep buying goods. (I would also wager that overall "consumption" in terms of volume of physical goods will be down, and prices higher as the standard of living for Americans contracts.) The other possibility, of course, is the currency devaluation that Mr. deCarbonnel could not conscien. I will not exclude that as a possibility. It could happen if China determined that it must maintain its export hegemony at all costs. But they would be high costs, as Mr. deCarbonnel points out, and quite possibly politically unsustainable. That's really the choice here: China sucks it up and accepts America's massive default, or China decides it doesn't need American business anymore because it isn't worth the headache and packs it up and leaves. Mr. deCarbonnel seems to be coming down on the side of the second possibility. China's actions hint that this is the way it is leaning. It does seem the more plausible. That does not mean it is correct. It could turn out that a few years down the road China finds out that it cannot go it alone, as its domestically driven consumption needs cannot be satisfied by its own markets (i.e. it needs access to American/foreign financial instruments because it simply cannot produce acceptable substitutes on its own, thanks to, shall we say politely, domestic business practices.) But by then the US dollar will be toast, as will our financial systems. I do not know how China would re-establish a trade relationship at that point. This would mean that China would not be the powerhouse that most are predicting even as the US collapses, just as Mr. deCarbonnel says, though not exactly by the route he lays out. At any rate, this one is definitely well worth the read, even with the flaws.

Bailouts Don't Work

British financial markets took it in the chin today:

LONDON (AP) -- Britain announced a second rescue plan for the country's ailing banks on Monday, hoping to thaw frozen lending by offering to insure banks against large-scale losses on bad assets they already hold. Stock investors, however, were spooked by fears that the second bank rescue plan in three months was a step toward full nationalization of one or more banks. Fears focused on the Royal Bank of Scotland, which disclosed that it is likely to report a record full-year loss -- its shares closed down 67 percent.

I guess that since the first round of bailouts worked so well, they'll now try another. Typical. There's never enough money printing and spending for Keynesians. I'm sure there will be more, also to no avail. In America it's no better. Early on in the crisis, Bank of America, Wells Fargo and JP Morgan Chase were all actually on pretty sound financial footing. But thanks to mergers with unsound firms, much of it incentivised by the Feds, B of A is now on government dole as a result of losses incurred by Merrill Lynch and Countrywide, and Wells Fargo is looking green around the gills thanks to larger than expected losses in its purchase of Wachovia. Before too long, we may have no sound banks left. Better to let a few go under individually than let them take the whole ship down.

Just What We All Needed...

A tax increase:

Several states are considering the rare step of raising gasoline taxes to help fill growing budget gaps and potholed roads.

Politicians in California, Massachusetts, New Hampshire, Illinois and Oregon, for example, are introducing bills that would raise gasoline taxes for road and bridge repair, as state legislatures around the country begin their new sessions.

No, this is not going to help. There's been a lot of talk about what the government should do to help fix the mess, and an awful lot of disagreement. Most talk centers around "stimulus." Unfortunately, the discussion is mostly about exactly what the stimulus should look like, i.e., who are to be the "beneficiaries" of the government largesse, instead of a debate about the efficacy of the policy of profligate government in a period of recession. The short answer from the Austrian school is that it actually makes the situation worse. For more detail, Robert Murphy of the Mises Institute does an excellent job of explaining why. The reasons are pretty straightforward: resource misallocation and the "crowding out effect," where government competes with private enterprise for limited resources. He relates a particularly good analogy given by the late, great Milton Friedman for explaining the "waste" of capital that is nonetheless idle:

In the comments of a recent blog post, Mario Rizzo relates how in class Milton Friedman used the example of dress shirts on the shelves of department stores. Adopting Krugman's viewpoint, these shirts are "idle" inventory and are clearly being wasted in the sputtering private sector. Clearly the government ought to raise the deficit and spend a few billion dollars buying up these shirts, even if just to use them as rags on construction sites. Some critics might object that this is a "waste" of precious resources, but what good is a shirt on a store shelf?

Basically, if it doesn't make sense to shred a bunch of expensive dress shirts to use as industrial rags just because they are sitting idle on a store's shelf, it doesn't make sense to employ highly skilled workers at just anything to keep them busy. They are valuable. They need to find the best place for themselves in the economy, producing goods that people actually want to buy and being as productive as possible. Flooding the market with arbitrarily allocated government expenditures doesn't accomplish that. It is a waste, and it hurts the private sector as well, which tends to be far more sensitive to the needs of consumers (and less sensitive to political interest groups and vote-mongering!) So what's a good government to do? Several things:

• Cut spending
• Stop the confounded money printing
• Reduce taxes
• Resist the urge to interfere in markets, especially price fixing, large public works projects, etc.
• Reduce regulation

All of these help make the painful adjustments which are necessary to find more stable economic footing more rapid and efficient. Even better, it could adopt the more permanent solutions:

• converting to gold as money
• outlawing fractional reserve banking
• dissolve the Federal Reserve System

But I'm not holding my breath on any of these. Vox Day, in his infinite wisdom, has pointed to another, less harkened to, point in history which has parallels to today in his blog post for the most recent reading of Voxiversity:

Immigration, higher taxes, larger government, vast public works, increased government spending, and even currency devaluations didn't suffice to get the economy back on track in Constantine's day. Depending upon your perspective, it's either fascinating or depressing to note that central government's response to economic crisis has changed so little in 1,700 years. The jargon and the justifications may differ, but the fundamental actions remain the same.

Yes, he's talking about the 4th century, near the time of the fall of Rome. One particular part of a passage of a Medieval history text that he cites is hauntingly similar to things I have written in the not-so-distant-past:

Serious economic difficulties have moral causes, and there was no radical cure short of a complete change in the temper of society.

As I have said before, ultimately this is an ethical problem, not an economic problem. All the knowledge and understanding of how to fix the situation is worthless in the face of a population that is dead set against doing any such thing. If it is politically impossible then it is just not going to happen. It's the people that we have to somehow fix. On this, I must admit, I am somewhat confounded, though I do have a few ideas which I have yet to lay out. Someday, someday... In the meantime, any thoughts from others?

No More Fresh Milk...

Vox points out an ominous parallel:

Lawmakers are looking for ways to use the forthcoming stimulus bill to help dairy farmers, and the number one priority is to dampen milk supplies and prop up prices.

Earlier I pointed out that we hadn't yet seen the worst policies of the Great Depression being implemented. Yes, we were/are inflating. Yes, we are bailing out failed institutions. Now, it seems, the trade groups are clamoring for price fixing, just as they did back in the day. And the government seems willing to oblige, surprise of surprises. Why is it always the farmers? Why aren't the organic chemists demanding wage support and price support for commodity chemicals? This is bad news, folks. Bad, bad news. No matter how many times these policies fail, no matter how much misery they inflict, it seems that people never fail to resort to them when things go south. As a dog returneth to his vomit, as the saying goes.

Chavez Abandons Socialist Principles...

...to Save the Socialist System!

That could have been the title of a recent article in the New York Times.  Obviously, that phraseology is in reference to Bush's remarks that he abandoned free market principles to save the free market. And more recently, that he "Chucked aside" his free market principles.

Aside from a good news article and joke, which Venezuela's Hugo Chavez consistently provides, there are a few interesting facts that the article mentions.

Nationalizations in other sectors, like agriculture and steel manufacturing, are fueling capital flight, leaving Venezuela reliant on oil for about 93 percent of its export revenue in 2008, up from 69 percent in 1998 when Mr. Chávez was first elected.

In the past year, with higher oil prices paving the way, Mr. Chávez also vastly expanded Petróleos de Venezuela’s power, inextricably linking it to his political program. He directed the oil company to build roads, import and distribute food, build docks and shipyards and set up a light-bulb factory. He even expanded it into areas like milk production, soybean farming and the training of athletes after a weak performance at the Beijing Olympics.

As laughable as it may be, the article further states that that oil production may be as much as 100,000 barrels a day LESS than when Chavez took power.

One oil executive claims "An agreement on a piece of paper means nothing in Venezuela because of the way Chávez abruptly changes the rules of the game."

Perhaps a better title to the article would be "Atlas Shrugs in Venezuela."

Its Worse Than I Thought...

A particularly interesting entry on a very interesting website for China watchers:

To prevent excess liquidity and offset the rise in money supply resulting from intervention, a central bank must opt for "sterilization" policy. The most typical method (sterilization in a narrow sense) is to withdraw base money through open market operations: selling of government and/or central bank bills in the market (see note 3). The simultaneous conduct of intervention and sterilization (open market operations) is called "sterilized intervention," whereas intervention unaccompanied by sterilization (open market operations) is called "unsterilized intervention."

I was unaware of this. Probably because I'm still an amateur. But it makes sense...terrible, terrible sense. You've already read about how China keeps its currency down. Basically, the Chinese import US Treasury debt instead of actual goods, flooding forex markets with their own currency to keep their currency down. This is necessary because the US floods the same forex markets with its own currency to buy imports in excess of its own exports, leaving lots of dollars laying around. The Chinese currency used to buy the debt is "printed" by the People's Bank of China (PBoC, China's central bank). (Remember, when a central bank buys an asset, it does so with money which did not exist before. This is the unique quality of a central bank.) Blah, blah, been there done that. Of course, the printing of currency causes domestic inflation. Naturally. China has had a bad case of inflation for quite some time. Which is bad. But it is worse than that, as my own stupid self is just now finding out. The "sterilizing" that this article is talking about is the selling of debt by the PBoC to "re-absorb" that same currency it printed to buy the US Treasury debt! Just as when a central bank buys assets, it puts more currency into the money supply, when it sells assets, it takes money out of the money supply. Do you understand just how insane this is! This is not like normal debt. All governments sell bonds to raise money for various purposes. These actions are neither inflationary nor deflationary, because the money passes from the buyer of the bond to the government, then back into the economy for whatever it is the government is buying. So the money supply is not changed. It's just a way of raising money to do something that presumably needs to be done. This is completely different. These bonds are being sold, and the money used to buy them IS BEING DESTROYED! The government pays interest on money it borrows TO DO NOTHING! The "borrowing" is solely for the purpose of removing money from the money supply. If it wasn't crazy enough that the PBoC printed money to buy debt, they are burning money for the purposes of reducing inflation! Does it get any crazier than this? So, to sum up, net effect is that the PBoC is buying US Treasury debt, and borrowing the money of its own people to do it. This is the arbitrage that the article refers to. China is buying the debt of a soon-to-be-bankrupt country, and borrowing the money to make the purchase. The market for debt is therefore completely artificial. It is not bought or sold due to estimations of intrinsic value. It is done to keep goods flowing in the way China's government would like for them to flow, regardless of price. This is necessary for China to remain competitive in our markets. And of course, the US takes full advantage of this, printing its own money and running up its own debts because it knows China will suck it up and buy more just to keep its position intact. At least, it has up until now. This folks, is "free trade." This is the true nature of globalization. I am beginning to have my doubts that China is truly poised to become a superpower. Its main claim to fame, its success with "command capitalism," is completely artificial. Without these manipulations, China would not be competitive at all. On top of that, anyone should be able to look at this scenario and know how foolhardy and dangerous the pursuit of this policy is. This will come unwound. It will not be pretty when it does. Sadly, it is very likely that China could emerge from the next few decades the premier world power. But if this behavior is any indication, and if indeed it does happen, it will not be due primarily to China's intrinsic economic competitiveness. Not that I have anything against them; I wish them the best. Personally, I would like to see them and everyone else grow wealthy on their own merit, as it is only fitting for virtue to find reward. More virtue and wealth in the world is always a good thing. But this outcome will not have been the result of merit. It will be due to a fall from grace on the part of the US.

Atlas Shrugged

I finally finished reading (actually listening by audiobook) the book Atlas Shrugged by Ayn Rand, which was recommended to me by Scott a couple months ago.  Yes, it took me that long to finish, but it was well worth it.  

And coincidentally there was an interesting article in the Wall Street Journal a few days ago, comparing the plot of the book to our current economic woes and the government's attempt to fix things.  As I was reading (er, listening to) the book, I couldn't help compare the plot of the nationalization of the US economy and various other "People's States," the looters taking over the government, and the ensuing economic crisis to what is happening right now in the real world.  It is quite timely and relevant, and that analysis has been done by Stephen Moore at the WSJ in the above article.

I have no other commentary other than that I highly recommend the book.  Even if you do not agree with every aspect of the underlying philosophy, it is worth the intellectual stimulation.  And it is not a philosophy that is readily heard today.

Are You Deviant?

Found a neat link on Vox's blog:

Now we can see why blogging and the Net matter so greatly in political journalism. In the age of mass media, the press was able to define the sphere of legitimate debate with relative ease because the people on the receiving end were atomized— meaning they were connected “up” to Big Media but not across to each other. But today one of the biggest factors changing our world is the falling cost for like-minded people to locate each other, share information, trade impressions and realize their number. Among the first things they may do is establish that the “sphere of legitimate debate” as defined by journalists doesn’t match up with their own definition.

In the past there was nowhere for this kind of sentiment to go. Now it collects, solidifies and expresses itself online. Bloggers tap into it to gain a following and serve demand. Journalists call this the “echo chamber,” which is their way of downgrading it as a reliable source. But what’s really happening is that the authority of the press to assume consensus, define deviance and set the terms for legitimate debate is weaker when people can connect horizontally around and about the news.

And thank goodness for the Internet!

This is one of those articles that, once you read it, you realize, "Oh my goodness! That is exactly what people do! That is exactly what is going on!"

There really are such things as conspiracies, folks. They just don't look like what we expect; there's no meeting in dark alleys and secret handshakes. It turns out they're freakin' obvious, if we'll just pull our heads out of wherever we've stuck 'em and think a little. Our knee-jerk, government educated selves are usually a big part of the problem.

On a personal note, it's just too bad I came across all this stuff so late. I waited too long to get on the Internet bandwagon. But better late than never, I suppose.

Oh well. I'm still doing better than the liberal-by-twenty, conservative-by-thirty. I was conservative-by-twenty, libertarian-by-thirty.

But, come to think of it, these days that's really just two ways of saying the same thing...

Capitalism Runs on Ethics

Laura Rowley writes an insightful column on possible future trends as a result of the present economic crisis, with some very good observations. However, at the end of the column, she makes some particularly good comments, but I think some could use some elaboration and modification:

Finally, as Warren Buffett once said, "Trust is like the air we breathe. When it's present, nobody really notices. But when it's absent, everybody notices." That giant sucking sound you hear is the American investor, gasping for breath.

And...

In a recent op-ed, 'The Wall Street Journal' suggested that "capitalism runs on trust." But the truth is, capitalism runs on self-interest.

Finally...

If there is an object lesson that will shape this generation of savers and investors, it's one of betrayal. Capitalism runs on self-interest. Guard yours carefully.

I would say that this chain of thought is not quite accurate. Capitalism requires trust. Trust is absolutely necessary for the entering into of contracts and the expansion of the division of labor. We must trust others in order to take the "leap of faith" in signing a mortgage, investing money, or learning and practicing specialized skill sets which leave us vulnerable to the whims of others in trading for the goods we need to survive. However, trust does not ensure that contracts are fulfilled upon signing and that trade is open and honest, as we have recently learned.

And capitalism certainly does contain an element of self-interest. Quite a large dose, in fact. There is nothing really wrong with that. It keeps us motivated at improving our own situations, and I should hope that people would universally be motivated to improve their situations. It's really the whole basis of the American Dream. Nothing wrong with that.

The important thing here, or rather, the important thing that is missing, is ethics. As I have said before, capitalism is absolutely, utterly dependent on ethics. Self-interest is a perfectly wonderful thing so long as it exists and acts within an ethically structured framework. Ethical capitalism has usually bent the already virtuous quality of self-interest towards the service of others in an efficient and free economy.

It doesn't get any better than that!

And Warren Buffet or anybody else can spend any number of words expounding the necessity of trust and be perfectly correct, but this is really to point out the obvious and misses the key element has soured and is sinking the global economy. Trust does not spring from some bottomless well somewhere that we must somehow figure out how to tap into once again. Trust grows on the foundation of the experience and practice of sound ethics. With an ethical foundation, trust will grow and flourish, but without it, it withers and dies. The ethical foundation which sustained American prosperity is now crumbling, and has been for some time.

So trust withers, and markets decay.

Capitalism does not run primarily on self-interest. It runs primarily on ethics. Without ethics, self-interest turns to theft, fraud, and violence. This is not capitalism, it is its opposite. Ethics is the more fundamental parameter.

Ethics are not produced by rules and regulations. We have rules and regulations. They didn't stop Bernie Madoff or Ken Lay. Changing them won't fix things.

Government doesn't produce ethics either. It reflects popular sentiment. Which is probably why it is beginning to resemble American Idol or some reality show, and doesn't work very well, its actions resting on silly popular sentiments and notions far detached from reality, but which are nevertheless politically popular.

Reality doesn't care about what is politically popular.

God is the source of ethical mandate. I hate to sound like some wanabe Isaiah, but as America has turned away from God, well, it has had consequences.

That's the real problem here, but nobody wants to admit it. Nobody wants to say so. People will talk about economics, or the stock market, but not ethics or their relationship with God. Especially not in public. It certainly won't get you good ratings on TV or radio.

It's not cool. It's not hip. It makes you sound like a kook, or a pious jerk. So it is neither spoken nor heard.

So don't expect a solution any time soon.

Obama the Deficit Hawk?

A story I found on Vox Popoli:

WASHINGTON (AP) - Pointing with concern to "red ink as far as the eye can see," President-elect Barack Obama pledged Wednesday to tackle out-of-control Social Security and Medicare spending and named a special watchdog to clamp down on other federal programs - even as he campaigned anew to spend the largest pile of taxpayer money in history to revive the sinking economy.

And...

On Wednesday, he made good on a campaign promise and introduced his choice for a new White House post he is creating: chief performance officer. Nancy Killefer, a professional efficiency expert, is charged with scouring the federal budget to eliminate programs that don't work and improve those that do. Obama called her appointment "among the most important that I will make."

"We committed to changing the way our government in Washington does business so that we're no longer squandering billions of tax dollars on programs that have outlived their usefulness or exist solely because of the power of a lobbyist or an interest group," Obama said.

It's often remarked that the biggest changes in government occur when a President betrays his party's policy preferences. Nixon went to communist China, not a Democrat, etc. Kudos to Vox for predicting Obama might turn out to be a budget hawk.

Will Obama be the guy who balances the budget and breaks the bad news to retirees? Certainly next year it will be pretty much impossible. I'm not sure he can do it even if he gets 8 years. I do not think it is possible. I think the US and the dollar is already doomed. But we shall have to see..

Central Banking Kills

RIP.

BERLIN – German billionaire Adolf Merckle threw himself in front of a train after his business empire, which included interests ranging from VW cars to pharmaceuticals to cement, ran into trouble in the global financial crisis, his family said Tuesday.

Dr. Siegel Has At Least One Intelligent Critic

Dr. Siegel has produced another sunshiny column for Yahoo!Finance:

All of this means that, although the first quarter of 2009 will see negative growth, GDP should stabilize in the second quarter, earlier than most economists now anticipate. In real terms, housing prices have already retraced most of their gains from 2000, and by midyear prices should stabilize in this low-interest-rate environment. Year-over-year inflation should sink to zero, especially in the first half of 2009.

This year, as the economic slide abates and investors realize a catastrophe has been avoided, stock prices should enjoy a 20 percent or higher return. All equity sectors should recover.

It appears he's sticking to his guns on the 20% increase in the stock market. But compare that with his confession about his predictions for 2008:

Ouch!! That's how I felt when I read my stock market prediction for 2008. Not only did I think that the market would do well last year, but I thought financial stocks would lead the way. Instead, 2008 turned into the worst year for the markets since the Great Depression, and financial stocks led the way down, not up.

Most of the rest is standard permabull boilerplate. "How could a $3 trillion dollar market take down the global economy?" he asks (my words, not his).

The total value of subprime and Alt-A (slightly better) mortgages was about $3 trillion. This is a hefty sum, but even if all these securities went to zero, the capital markets could have absorbed such losses without undue economic stress.

His statement overlooks the obvious answer: that clearly, it must not have caused the crisis! It's a bit more involved than that, and once again, a Keynesian confuses an effect for a cause. The very best part, though, is the comment I found just below the column:

Dr. Siegel, you should stick to teaching your socialist agenda, not try to predict the market. We are in a deep recession and with the far left dems. in control of government, the economy will sink into deflation worse than Japan did. Keynesian economics is nothing more than socialism, and it will fail as it has everywere in the world. Greenspan has blood on his hands, his easy money policy caused the housing bubble. There will be no recovery until housing prices bottoms.

A bit on the caustic side, even for my taste, but it does bring me some hope that at least one lowly commenter on Yahoo!Finance seems to understand things a bit better than most. He's wrong about deflation, wrong about the Dems (they're more likely to inflate than deflate, but hey, its not like the Republicans are any better), wrong about the recovery, and unnecessarily crude and abusive. But at least he knows where to look to find the source of our troubles: the Fed.

"Middle Class Collapse"

Here is an interesting video I found on Gary North's site: Its really a great talk and makes some great points, but it is very long (a 1 hour lecture), so I'll try to hit the highlights. A professor studies the effects on the middle class over the period 1970 to 2005 of moving from being composed primarily of one-income families to two-income families. The more interesting findings:

• while average household income increased significantly, savings actually dropped dramatically and debt skyrocketted
• when looking at how the money was spent, it was found that almost all expenditures adjusted for inflation either remained the same or decreased, except for five, which skyrocketted. The five were: childcare, taxes, healthcare, cars, and by far the largest, servicing mortgage debt
• when these five costs are compared between 1970 and 2005, it is found that they absorb the entirety of the increase in income of having both parents in the workforce. All other expenditures were almost identical
• Because these costs are "fixed," and because the second income is "already spent," families are now more vulnerable to financial shocks such as a sickness or death in the family or the loss of a job. There is no "fallback" wage-earner, and the lion's share of the bills are fixed costs which cannot be cut easily
• Single parent families are even worse off
• Income volatilities and family bankruptcies are much higher than 30 years ago
• She predicts the destruction of the middle class

Yes, yes, I have a tendency to post very depressing things. But there are several important points here that I can think of. First, by knowing what is happening to the family, folks can avoid many of the mistakes. Notice the specific costs which increased. Three are related directly to the choice of having both parents work: childcare, taxes, and car expenses. The cost of owning a single car actually went down, but since most families now have two of them so that everybody can get to work, the cost increased substantially. Childcare is completely unnecessary if somebody stays home with the kids. And taxes are going to increase substantially thanks to the progressive income tax. Earn more, fork over more. The other two, healthcare and housing, are a direct result of government meddling! Housing was by far the biggest burden. I've talked at length about how Uncle Sam drove up house prices in the name of making housing more affordable. Everybody knows, or at least thinks they do, how the government drives up healthcare costs. It's not exactly controversial, so I won't bother going into it. Food costs went down. Clothing costs went down. Most others did the same. These non-controversial, politically insensitive markets are functioning just fine. The free-market appears to be satisfying these needs pretty darn well. But in those politically hypersensitive markets where the government finds every excuse to interfere, and the free-market is not allowed to operate, costs are skyrocketing. The point is: meddlesome government is largely to blame for immiserating the public and destroying the middle class. Which is to say, that "we the people" are largely to blame. Having said that, I'll try to leave you with a silver lining. If you think about it, many of these costs could be contained by making one simple decision: have one parent stay at home and homeschool the kids. The professor also talks at length about education and how it impinges on the family finances, but this can also be offset in large part with this same decision. It is not necessary to live in the most expensive neighborhoods to have your kids go to the best public schools if you are educating them yourself. It is also not necessary to attend all four years of a good college if you already have the background to study on your own. Gary North has a great book and a website on ideas to help cut the costs of going to college. So really, by taking responsibility for your and your family's future with this one simple, though still very great and difficult decision, you have cut out almost every cost associated with the middle-class bind she has talked about! The only one left is healthcare. And I appologize, but I have no solution for this. Furthermore, the reader of this blog will hopefully have acquired at least a passing sense of the economics of incentivization at this point. If the decision to homeschool is increasingly paying off and looking like a better and better way to do things over time, it stands to reason that more and more people should be doing it. As it turns out, that is exactly the case! I can think of nothing better for America's future than a movement such as this: the strengthening of the family, cutting the state out of education and family life, and increased self-reliance and independence of the people as a result of a burgeoning homeschooling movement. So in the larger sense, this is really very good news indeed.

How the US Escaped the Great Depression

Ben sent me a link to an NPR debate between two economists, an Austrian and a Keynesian, on getting out of the present financial crisis. Thanks Ben! The interview/debate was insanely short and superficial to cover such an important and complex topic, and I would imagine that the average listener walked away with the impression that economists don't know what the heck is going on and can't agree on anything. Which is fairly accurate of the economics community as a whole, and is at least a heck of a lot better than what I would have expected from such an interview: that Austrian/free marketeers are barbarian, inhuman, bloodthirsty capitalists who don't care if the whole world goes to pot and all the poor starve to death so long as they wind up with all the money. However, the whole idea of complete disagreement and confusion over crises like the Great Depression is not entirely accurate. At least within the Austrian community, there is pretty fair agreement about how the Depression got started, why it lasted so long, and how the US got out. The other schools also have their own theories; it is only between schools that there is disagreement. But you wouldn't know it from the interview. The "Austrian" comments boiled down to "its not fair for the government to decide how the money gets spent. That should be left to the consumer." This is a strange argument to put up that, although true, is really a diversion from the larger point that a) spending or a lack of it is not the problem, and b) government spending is not the solution and wouldn't work anyway. But I kinda doubt the guy was actually an Austrian. Austrians do not "hyphenate" themselves or affiliate with the Chicago school, which they consider to be barely separable from Keynesians. Either that, or his arguments got ripped apart in the editing, and this was the only thing he said that the program producers thought the audience would latch onto. Neither would surprise me. Just for the record, I'll do my best to lay out at least my understanding of the Austrian perspective on the Great Depression. Once again, be mindful that I am only an amateur at this, and probably won't get it all right, but I think I can at least do better than this dreadful interview. First, we got into it pretty much the way I've already explained things: excessive inflation in the 1920's, stabilization of the money supply in 1929. Unsustainable malinvestments revealed, etc. etc. Second, we got mired down in it for so long because of heavy government intervention. But specifically, some interventions were far more deleterious than others. Inflation is always bad, but I do not think that inflation of the time hurt nearly so much as government fixing of price structures. That was really the killer. Inflation erodes savings and therefore capital formation and the ability to make the investments required to restore rising productivity. Without inflation, the changes will occur quickly. With inflation, they will take a little longer, but they will still happen. But when wages get locked in at artificially high rates, and prices are held at levels that simply cannot produce a profit, changes do not occur at all. Unemployment of capital and labor increases to ghastly levels, and the entire system goes into lockup. The big question: how did we get out? From the previous assertion, it appears that we must have somehow "unlocked" the price fixing. Indeed, that is just what happened, at least according to the brief explanations I have encountered thus far. WWII led to a massive overhaul of the entire economy as wartime production ramped up, basically, through government diktat. No, this is not what "fixed" things. What "fixed" things was that the government stopped fiddling with wage and price fixing as it had larger issues to deal with. It also rationed private consumption and inflated like crazy through the whole ordeal. Once the other side of the war had been reached, wages had not been tampered with, at least in nominal terms, but thanks to inflation, prices had been allowed to adjust. The inflation and the war had been the enforcer of the wage cuts and consumption adjustments necessary to achieve sustainability. It therefore became profitable once again to run a business. Basically, the war provided a politically acceptable rationale for doing what needed to be done from the beginning: allow wages and prices to adjust to sustainable levels. Enduring "wage cuts" and a "reduction in the standard of living" in the name of profits would have appeared intolerable. But not to do so in the name of "freedom" and slaughtering Japs and Nazis would have just been un-American. So WWII "tricked" the country into doing what it should have done from the beginning: suck it up and accept painful short-term adjustments, shake the silly notions and dreams of the 20's from our minds, and then get on with our lives. At least, that is my understanding of it. Let's hope history won't repeat itself in this case.

The Growth Prediction Gauntlet

The Economist has a chart of predicted growth for 2009:

ICELAND will be the world's worst economic performer in the coming year, according to the Economist Intelligence Unit, a sister organisation to The Economist. The tiny country will see growth shrink by nearly 10% following the spectacular collapse of its banks in the global financial crisis. Countries with free-falling currencies, burst housing bubbles and a heavy reliance on finance and trade will also suffer.

China is predicted to grow at almost 8%. You've seen my predictions. Let's come back in about 6 months and see who gets closer: the professional economists at the worlds premier publication on the subject, or the libertarian lunatic on this site!

William Anderson Absolutely Nails It!

A fabulous article by William Anderson is posted over at Mises.org. He shows exactly what Americans need to see: that the housing crisis and financial shenanigans on Wall Street are not the cause of the present economic downturn, they are an effect. It begins with a criticism of Paul Krugman, a typical mainstream pundit and modern voice of the deceased John Maynard Keynes.

Like so many other economists and pundits, Krugman sees the effect and interprets it as the cause. He writes,

The financial services industry has claimed an ever-growing share of the nation's income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it's not just a matter of money: the vast riches achieved by those who managed other people's money have had a corrupting effect on our society as a whole.

Let's start with those paychecks. Last year, the average salary of employees in "securities, commodity contracts, and investments" was more than four times the average salary in the rest of the economy. Earning a million dollars was nothing special, and even incomes of $20 million or more were fairly common. The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.

Translation: the financial services industry is the cause of wage stagnation elsewhere, as Wall Street has "diverted" wealth that would have gone to other workers. How did "they" manage to pull off such a scheme?

According to Krugman, and everyone else it seems, it was deregulation and those darned Republicans that caused the crisis:

But that was not enough for these greedy free-marketeers. They then promoted free trade and outsourcing, which meant that hard-working Americans were thrown out of work in manufacturing industries and forced either to go on welfare or work at — horrors! — Wal-Mart, which then further abused them by holding down their pay and denying them medical insurance. The destruction of the American economy being complete, these capitalist despoilers then managed to divert all of the new wealth to themselves and their Wall Street friends, a scheme that worked, but only for a little while until it, too, collapsed under its own weight, leaving wreckage behind. Krugman writes,

Meanwhile, how much has our nation's future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?

(I love the stab at too few bright minds devoted to science and public service. Even with massive government subsidy? How could that possibly be the case? Trust me, it isn't. There are far, far, far and away too many folks, brilliant and not-so-brilliant, devoted to these pursuits.) Then...

Now, Krugman never explains just how free markets lead to the kind of speculation we saw on Wall Street; we are supposed to accept his explanation on faith (Krugman's version of "faith-based political economy").

Then he runs off on what I thought was a tangent on regulation and outsourcing. I almost didn't follow him. "What the heck is this doing on Mises.org?" I thought. "He's supposed to be talking about the monetary expansion which was used to fund the bubble." Thankfully, I read on anyway. He makes the case that America has effectively made it unprofitable to produce goods here through over-regulation. This puts us at a severe competitive disadvantage.

Start multiplying this regulatory nightmare across an economy and one starts to understand how government manages to force costs without appreciable economic benefits (except to the politically connected firms that produce the goods required by regulators). Over time, this means that an economy produces fewer and fewer goods that people want.

This creates an ever increasing incentive for monetary expansion:

Such a regulatory and legal regime also reduces opportunities for investment, which means even more economic stagnation. To offset stagnation, the Federal Reserve has attempted to pump new money to "stimulate" the economy. In the 1990s, new money went into the short-lived "high-tech" boom in which the computer-savvy kids of Seattle were made temporary millionaires. In this decade, it went to the infamous "housing boom."

Which Austrians know has predictable economic consequences:

Thus, the only game in town in which the government could give an illusion of prosperity was through aggressive action by the Fed to pump up bank reserves, stimulate lending, and then watch Americans send dollars overseas for consumption goods (as Peter Schiff is fond of saying). In other words, as long as people overseas would accept American IOUs, they would send their goods to this country, but the dollar's recent slide tells us that Uncle Seller is running out of suckers.

Which, in turn, leads to the the overt consequences, finally visible to the mainstream economic commentariat, which are only now raising hackles but have been in the process of sending the world into financial tailspin for some time:

It should not be surprising that when the Fed engineered these financial bubbles, those on the front lines in financial services would be the main beneficiaries. However, here again, Krugman misses the boat on causality. His statement that high salaries and bonuses to financial executives caused pay "inequality" in the economy is a non sequitur. The high pay and bonuses was the result of government monetary policies, which funneled new money directly to Wall Street and the banks.

Wall Street executives did not suddenly decide to enrich themselves and then change the direction of investing in order to do so. Instead, they were able to direct large sums of money for their own compensation precisely because the government was channeling gargantuan amounts of new cash into their firms. For that matter, much of the money was channeled into the purchase of now-worthless "mortgage securities," which were created by the quasi-government entities of Fannie Mae and Freddie Mac.

He also makes what I consider a pretty astute observation to support this hypothesis, especially about the business strategies of companies like GM and GE:

Given the fact that government piles on the business costs and destroys economic opportunity, perhaps we should not be surprised that the one profitable area was financial services. General Motors might not have sold enough vehicles to turn a profit, but its financing division made money. The same goes for General Electric and other companies that have turned profits from credit cards. For the time being, people could make money in the money markets, but as the US dollar now plunges in value, even those last profitable ventures have dried up.

As government has destroyed one business opportunity after another, perhaps we should not be surprised that investment money has left domestic production and was diverted to financial markets. Investors want a return, and government agents and the political classes seem determined to destroy free markets — and the opportunities they present for economic growth.

By far the best sentence in the entire piece is the following:

If ever a financial crisis had "Made in Washington" stamped on it, this was it.

That one says it all. I've sliced and diced this one up to its detriment. It is better in full. I would encourage anybody interested in the present fiasco to read it. I would have liked to see it a bit more direct and concise; a newbie might get a bit lost in the twists and turns. But it is a wonderful piece and a very good rebuttal of the arguments currently circulating in the mainstream press.

We need more financial columnists like Mr. Anderson.

Financial Clawback

I had never heard of this.* Apparently, bankruptcy law allows for investors who lose their money in a bankruptcy to go after other investors who sold their stakes in the bankrupt firm BEFORE it went belly up:

The Fort Worth plan and other Madoff investors who got out before the operation imploded may yet be snared by the bankruptcy proceedings. Under federal law, the trustee in the case can sue former investors to force them to return their profits and principal, a process known as a clawback.

I love the "theoretical justification:"

The legal theory is that investors who stick around to the bitter end shouldn't bear all the pain.

Perhaps this is just bad writing by a journalist who is in over his head. Or is just a lousy writer. In any event, this is an outrage. Just think of the incentives such a legal scheme produces, especially at at time like this. Don't invest your money, folks. Don't ever invest again. The financial world is so friggin' complicated, not even the SEC, your regulatory protector, could tell that a guy like Madoff was fleecing America blind. You have no hope of figuring it out on your own. Bury your money in the backyard, or just spend it all now so at least you'll get to enjoy it before it is stolen from you. And if you decide to get out, too bad. It won't matter. You'll still have your money taken. Just stay away. Avoid financial markets like the plague that they are. You'll get fleeced no matter what. If you think you've invested badly, for heaven's sake, don't get out. Don't take you money out of the hands of the irresponsible jerks. If you do, you'll just lose it all down the road, paying for all the other folks who invested poorly and stuck with the guy. If you give your money to a con-man, best just to let it ride. Let him keep it until the entire operation reaches critical mass and the entire world is in meltdown. That way, it won't just be one firm going down like the Titanic. It'll take the whole civilized world with it. That's the ticket. That's the ticket to prosperity. This is just as stupid as banning short selling. This is a way to ensure that any crisis reaches elephantine proportions before something is done to pull the rug out from under it and straighten things out. It is to place absolute faith in a bureaucracy which has proven itself utterly incompetent. It will eventually result in also entrusting it with absolute power. Any civilization that embraces this kind of governing philosophy deserves what it gets. *Once again, thanks to Gary North for an interesting and informative link.