Excellent Report by Chris Martenson on Debt Monetization

An excellent report was posted by Chris Martenson on surreptitious debt monetization by the FED, which I encountered as a link, once again, on Gary North's website:

The Federal Reserve has effectively been monetizing far more US government debt than has openly been revealed, by cleverly enabling foreign central banks to swap their agency debt for Treasury debt. This is not a sign of strength and reveals a pattern of trading temporary relief for future difficulties.

This is very nearly the same path that Zimbabwe took, resulting in the complete abandonment of the Zimbabwe dollar as a unit of currency. The difference is in the complexity of the game being played, not the substance of the actions themselves.

It actually is a relatively complex process, and I would imagine that the report will be difficult for most people to understand without a fairly good grasp of central banking. I will try to give a reasonably good summary:

• The Treasury of the US government raises money to finance its deficits by selling debt certificates at auctions
• Because the Treasury is running such high deficits in a period of recession, there is concern that there will not be enough buyers at these auctions, which will cause interest rates to rise, the costs of deficit spending to increase, and could spark a panic on the dollar
• The FED, therefore, would like to buy the Treasuries with money created out of thin air, e.g. "monetize the debt," in order to artificially increase demand for these certificates and ensure that these auctions go smoothly
• For a number of reasons, the FED cannot directly buy Treasury debt at auction
• Instead, the FED prints money to buy other forms of debt called "Agency Debt," which includes mortgage backed securities and foreign central bank debt, under an agreement that the sellers of these securities will use the money to buy Treasury debt on behalf of the FED

In this fashion, the FED effectively monetizes the debt without making it look like the FED is monetizing the debt. In reality, the credit market is like any other: certificates swap hands among buyers and sellers on the basis of their perceived value by market participants. It doesn't matter which certificates the FED prints money to buy, it will increase the prices of all certificates in the market (e.g. lower interest rates) so long as the issuer of the particular certificate in question is still considered financially sound. So this doesn't necessarily mean that any grand conspiracy is in play here, with the exception of the fully public and accepted conspiracy of central banks to suppress interest rates in general rather than for their own Treasuries in particular. And as debt certificates go, government debt is generally trusted more so than private debt, for obvious reasons, so the plan works so long as the solvency of government in particular does not come into question. As he notes, nobody else has yet written that they thought the goal of the massive purchases of various debt instruments by the FED was to fund government deficits. That hasn't changed the fact that this has been the result, for the reasons discussed above. On the other hand, and as Martenson reports, the FED has refused every attempt to audit it. This would, naturally, imply that there is more to the story than the FED would like to admit. Who knows? At the end of the day it doesn't really matter. The government will eventually face bankruptcy; with present deficits, sooner rather than later. At that point, the FED will have to inflate these debts away or face governmental collapse. The dollar and the US government cannot both survive.

Paul Krugman the Zombie

I don't really like Paul Krugman. He's pretty much the opposite of me. But an old friend seems to think he is great, so when I saw an article of his in a newspaper sitting on a lunchroom table, I took a moment to read it through. I came back home and found it online. Thought I'd break it down a bit, line by line:

The debate over the “public option” in health care has been dismaying in many ways. Perhaps the most depressing aspect for progressives, however, has been the extent to which opponents of greater choice in health care have gained traction — in Congress, if not with the broader public — simply by repeating, over and over again, that the public option would be, horrors, a government program.

I'm not going to get too much into this, as I know few of the details of Obama's "plan," except to note the way the "healthcare program" is couched in the term "greater public choice." Let's be honest: choice is not what this is all about. We are not simply adding one more choice to the pool. "Conservatives" and libertarians are not hypocrites for opposing choices when they are the product of government coercion.

Washington, it seems, is still ruled by Reaganism — by an ideology that says government intervention is always bad, and leaving the private sector to its own devices is always good.

Call me naïve, but I actually hoped that the failure of Reaganism in practice would kill it. It turns out, however, to be a zombie doctrine: even though it should be dead, it keeps on coming.

Let’s talk for a moment about why the age of Reagan should be over.

Really? Washington ruled by an ideology that says government intervention is always bad? Politicians that abhor meddling in our lives? Either Krugman must be living on another planet, or I must. Is he talking about some other Washington? I don't know that Reaganism succeeded or failed; one thing I do know is that the 20th century has been dominated by an erosion of free-markets and the consolidation of power in central banks and national governments. 20th century America is far less free than 19th century America, economically speaking, and it is getting Progressively worse, so to attribute the supposed failure of our markets to supposed deregulation, free-marketeering and the like as supposedly endorsed by Reagan is a bit preposterous. Said another way: how is the failure of an unfree market evidence that Reagan was wrong? But in a sense, some of what he says is true: classical liberalism is a zombie philosophy. It is long dead, but people like Krugman like to pretend it is still alive so that they can blame it for every observable evil.

First of all, even before the current crisis Reaganomics had failed to deliver what it promised. Remember how lower taxes on high incomes and deregulation that unleashed the “magic of the marketplace” were supposed to lead to dramatically better outcomes for everyone? Well, it didn’t happen.

To be sure, the wealthy benefited enormously: the real incomes of the top .01 percent of Americans rose sevenfold between 1980 and 2007. But the real income of the median family rose only 22 percent, less than a third its growth over the previous 27 years.

Moreover, most of whatever gains ordinary Americans achieved came during the Clinton years. President George W. Bush, who had the distinction of being the first Reaganite president to also have a fully Republican Congress, also had the distinction of presiding over the first administration since Herbert Hoover in which the typical family failed to see any significant income gains.

There is also a little bit of truth to this as well. Wealthy families did find that their wealth increased more so than their middle-class counterparts, but this probably has far less to do with tax cutting and deregulation than with monetary inflation and the trade cycle. Reagan presided over the "tough" interest rate policies of Paul Volcker, which put a temporary dent in the price inflation of the 70's and set off the beginning of a new round of the trade cycle. He was followed by Alan Greenspan, an inflater of the first order. Early in the cycle, capital goods naturally saw their prices appreciate, and as the wealthy tend to have a greater fraction of their wealth tied up in capital goods, like financial assets, they saw their assets appreciate more than families which had most of their assets tied up in consumer goods or lower-order capital goods like houses and cars. Their salaries also likely appreciated faster as well, as they would most likely occupy positions higher up in the division of labor. Therefore, their labor represented a higher-order capital good than their middle-class counterparts, and the price of their labor increased at a correspondingly higher rate. Further, a great many of the so-called free-market policies of late have focused on countering the consequences which appear later in the trade cycle, particularly with masking price inflation. Price inflation generally begins to appear when full employment is approached, as this causes increasing wage competition among employers, so naturally, any force which works to increase the supply of labor will delay the onset of this effect. For example, pushing more women into the workforce and encouraging immigration would help to keep wages down and extend the cycle. Doctoring economic statistics also helps to mask the effect. So does monetary tightening just at the point that labor manages to acquire negotiating clout. We can also easily see how the effect has reversed over the previous twelve months, as capital asset prices have collapsed. The rich benefited most in the run up, and they are now taking the biggest hit in the collapse. But I don't hear Krugman crying for them now. Hoover may have been a Republican, but he was not a free-marketeer, and neither was Bush. Economically speaking, they probably belong in the same category, but this category would also be occupied by none other than Krugman himself: emotionally driven, squishy-leftist socialists. And Krugman can place the lion share of the blame for his income inequalities on the squishy-leftist socialist FED. Shall we hear his clarion call for its abolition soon? I doubt it.

And then there’s the small matter of the worst recession since the 1930s.

There’s a lot to be said about the financial disaster of the last two years, but the short version is simple: politicians in the thrall of Reaganite ideology dismantled the New Deal regulations that had prevented banking crises for half a century, believing that financial markets could take care of themselves. The effect was to make the financial system vulnerable to a 1930s-style crisis — and the crisis came.

“We have always known that heedless self-interest was bad morals,” said Franklin Delano Roosevelt in 1937. “We know now that it is bad economics.” And last year we learned that lesson all over again.

Or did we? The astonishing thing about the current political scene is the extent to which nothing has changed.

Where to begin? The biggest thing the crisis of the 30's had in common with the crisis of the 2000's is the FED. Note too: the roaring 20's and the roaring 90's. It's not a coincidence, and it is a far better explanation than market deregulation. After all, where were the regulations in the 19th century? Or the economic crises? Or the world wars, death and destruction? Ah yes! All that took the advent of central banking and leftist political ideology. Heedless self-interest is bad morals, but it doesn't hold a candle to government coercion and the fraud of central banking, fractional reserve accounting, and fiat money systems. It also doesn't describe the ethics of the free market. But he is right: nothing has changed, and nobody has learned the proper lesson, least of all Paul Krugman.

The debate over the public option has, as I said, been depressing in its inanity. Opponents of the option — not just Republicans, but Democrats like Senator Kent Conrad and Senator Ben Nelson — have offered no coherent arguments against it. Mr. Nelson has warned ominously that if the option were available, Americans would choose it over private insurance — which he treats as a self-evidently bad thing, rather than as what should happen if the government plan was, in fact, better than what private insurers offer.

This is flat-out disingenuous. Krugman has a Nobel Prize in economics. He knows full well that the government plan will have the benefit of every insidious coercive power available to the US government, including taxation, inflation, and subsidy, which will be the source of any "edge" it has over private insurers. Of course people would choose it over private insurance; they don't have to pay full price for what they get by shafting others unfairly! And if they are not the ones doing they shafting, they are the ones being shafted! That's hardly a definition of "better" that most people would be comfortable with. He also surely knows full well that Nelson's argument, however poorly worded, is a reflection of the governments ability to use coercion to bully out competitors, which it most certainly has in the past and most certainly will do again. How can you possibly compete with an entity that is fully capable of operating at a loss indefinitely? The fact that Krugman so casually describes this phenomenon with such a dishonest phraseology is, frankly, scary. If he wants to talk about it plainly for what it is, fine. There is an argument to be made that nationalized healthcare would be better than the horrible mess we have now. If the populace simply cannot politically conscien a free-market in medicine, the opposite may actually be practically preferable to a dysfunctional hodgepodge compromise. But Krugman's line of "argument" here is disgusting.

But it’s much the same on other fronts. Efforts to strengthen bank regulation appear to be losing steam, as opponents of reform declare that more regulation would lead to less financial innovation — this just months after the wonders of innovation brought our financial system to the edge of collapse, a collapse that was averted only with huge infusions of taxpayer funds.

This is such a complete load of garbage that it is not worth addressing. Barney Frank and the Democrats control every lever of power at the national level. If any group were ever positioned better to reinstall New Deal regulations, or more likely to be drooling over the possibility of having their way with the financial systems, I can't imagine it. If it doesn't happen...well, so much for blaming those awful conservative Republicans.

So why won’t these zombie ideas die?

Part of the answer is that there’s a lot of money behind them. “It is difficult to get a man to understand something,” said Upton Sinclair, “when his salary” — or, I would add, his campaign contributions — “depend upon his not understanding it.” In particular, vast amounts of insurance industry money have been flowing to obstructionist Democrats like Mr. Nelson and Senator Max Baucus, whose Gang of Six negotiations have been a crucial roadblock to legislation.

But some of the blame also must rest with President Obama, who famously praised Reagan during the Democratic primary, and hasn’t used the bully pulpit to confront government-is-bad fundamentalism. That’s ironic, in a way, since a large part of what made Reagan so effective, for better or for worse, was the fact that he sought to change America’s thinking as well as its tax code.

How will this all work out? I don’t know. But it’s hard to avoid the sense that a crucial opportunity is being missed, that we’re at what should be a turning point but are failing to make the turn.

There is a lot of money behind the present system -- mostly from entrenched, established, corporatist, leftist-fascist interests who would like nothing more than to continue milking the benefits they presently receive from our corrupt system. People who don't want a free-market, just one that's "free-enough." Obama has nothing in common with Reagan, and no doubt his praise was aimed at mollifying middle-of-the-roaders who feared voting for someone who was an outright socialist, which he no doubt is. But Krugman is right, a turning point has been reached -- a point of no return. It is all ending. America is going to be dethroned. The economy is deep-fried. Debt will do us in. The saddest part of it all is that it is not hard to understand. The important concepts of economics are really quite simple. Grown men should know better than to think they can create wealth by destroying capital and wasting resources. Even something so counter intuitive as the fallacy of neutral money can be grasped with only a little explanation and thought. But the lies and fallacies continue, even among Nobel laureates. It never ends. And as empires built on coercion and theft go, it certainly never ends well.

Texas Driving Nazis

Texas has passed a number of new driving laws which go into effect this September. A few of the more insidious:

Seatbelts: HB 537 requires all occupants of a vehicle, no matter their age, to be secured by a safety belt, no matter where they are seated in the vehicle... Driving: HB 55 makes it illegal to use a wireless communication device in a school zone unless the vehicle is stopped or a hands-free device is used... HB 2730 prohibits DPS from issuing a driver license or identification card to a person who has not established a domicile in Texas... Vehicle Inspection: SB 589 requires that a vehicle equipment safety compliance label be placed on a windshield, side or rear window stating that the window tinting complies with the appropriate provisions of the Transportation Code. Failing to place the required label on the vehicle could lead to a $1,000 fine.

You can no longer ride in the back seat of a car without a seatbelt, you cannot talk on a cell-phone while driving in a school zone (which will likely be extended to "while driving, period"), you cannot obtain a driver's license without a physical address (what the heck does that have to do with the ability to drive?) and you must now have yet another stupid sticker on your windshield kowtowing to the gods of the road with the flashing lights just to keep them off your back and out of your wallet. This is insane. I think the one that incenses me the most is the cell phone rule. It is amazing how a cascade of idiotic policies get justified by need to keep a first idiotic idea going that was set in motion long ago, rather than just scrapping the first idiotic policy that nobody really wants anymore, anyway because it has proven such a disaster. For example: the IRS, and the abominable tax burden required to keep Medicare and Social Security going. Think about it: Why must we have school zones, anyway? Why must we have public schools? You know, its a good thing I live in the land of the free and the home of the brave, and don't have some commie dictator breathing down my neck over everything I do and regulating my life into oblivion. I mean, just imagine all the regulations and oppression those poor, poor Chinese must put up with: How they must yearn to be free like us!

China Bulls Recant

Two Austrian China-bulls have recently recanted their opinions. One is Gary North, whose opinion I unfortunately cannot provide a link to, as it is hidden away on his website, while the other is Tim Swanson, who goes so far as to point out his mistake:

Roughly eight months ago, Premier Wen Jiabao announced a $586 billion stimulus package to combat a plunge in economic activity.

At the time, analysts such as James Pressler noted that the stimulus might simply be a rebranding of previously known spending packages rolled into a big fancy plan.[1]

Suffice to say, this is not the case. I was wrong.

Wrong, as in he thought that Chinese authorities' stimulus plans were "stimulus in name only." Rather, they turned out to be the real deal, and a disastrous whopper of a scheme at that, as pointed out by Ambrose Evans-Pritchard in an article I have referenced before. As an Austrian, Swanson recognizes that this is a tremendously bad idea. At the time he gave his first opinion back in January, I opined that I thought all these lovestruck, starry-eyed Austrians were mistaken. Since that time I have more fully fleshed out why I thought things were not going to go as well for the Chinese economy as the Austrians seemed to believe, and, in my opinion, have been proven correct. I even successfully predicted that civil unrest would result from all of this, and indeed it has, though not quite in the way I would have first guessed. OK, OK, my head is starting to swell. Cue the list of screw-ups over the past half-year... Yes, I'll admit I made some pretty bad calls. At any rate, China watchers will never be able to understand Chinese economics if they do not first understand the most fundamental characteristics of Chinese culture. Stop reading the books about "saving face" and Taoism; start doing things like watching the movies they make and -- here's a thought -- talking to them! They're nice folks; most don't bite. And Austrian economists will never get things quite right so long as they persist in acting like Keynesian statistics-mongers and ignore the most fundamental contributing factor to economic development: ethical codes and conduct. It's funny how so many members of the one economic school that argues that economics is not a quantitative discipline but a qualitative one get so caught up in the numbers. The numbers, for what little they are worth, are highly context sensitive. Two practical recommendations for Austrian economists like Tim Swanson who would like to improve their Sino-prognostication:

• marry a Chinese woman
• read this book

Capitalism and Ethics II: Ethics as Capital

Introduction In this essay, I will attempt to present the case that ethics may be considered as a form of capital and look at some of the insights such a consideration will provide. I will briefly describe the principles of economic growth and wealth creation, how ethics fits into this model, and look at how consideration of ethics as capital can help explain some high-profile economic phenomena. I will conclude with a summary and what this line of reasoning reveals about the likely course of future events. The Wealth of Men and Nations The accumulation of wealth occurs through a rather simple mechanism. Wealth is the product of human industry, or effort; without industry, there can be no wealth. Other things being equal, greater industry results in greater wealth. That which multiplies human effort also multiplies the generation of wealth. We call those factors which increase the output of human effort capital, and so the accumulation of wealth over time is achieved through the accumulation of capital. Capital can materially consist of many things, including physical tools, education, and improvements in infrastructure. The erosion of capital or a reduction in human industry necessarily leads to an erosion of wealth. Capital itself is accumulated through thrift, which is the curtailment of consumption for the purpose of saving or investment. Investment is the acquisition of capital through the purchase of a capital good and increases the productive capabilities of some economic actor or actors. Saving also results in the acquisition of capital by other economic actors, as it leaves resources available in the marketplace which may be devoted to other purposes. This activity can benefit the saver through the collection of interest. Higher levels of thrift result in both lower interest rates as savers compete with one another to attract interest-payers, i.e., investors and entrepreneurs, and in lower prices of resources in the marketplace as greater quantities of resources are left unconsumed. Thrift is a measure of the availability of surplus resources and its action results in the allocation of resources away from consumer goods and towards the acquisition of capital goods, which will allow greater future production and consumption. The degree of the presence of these three qualities, industry, capital, and thrift, broadly define the propensity for the accumulation of wealth. The Emergence of Trade and the Division of Labor Finite beings like humans have limited capabilities, and the increasing demands of more complex and more productive capital structures demand that they focus time and attention on activities that are ever more limited in scope. This tendency limits the capacity for individuals to satisfy their own varied consumer wants and needs through their own individual efforts; specialization necessarily comes at the expense of self-sufficiency. Trade with other economic actors becomes increasingly necessary, as individuals focus effort to increase productivity in specialized fields and exchange the fruits of their labor with other highly productive, highly specialized economic actors. A more highly capitalized, wealthy society is therefore necessarily a society in which individuals become dependent on trade with one another for the satisfaction of their needs. Over time, the accumulation of wealth, and therefore capital, results in a restructuring of economic and social arrangements as participating actors become increasingly specialized in their productive activities. The specialization of productive activities, restructuring of social and economic arrangements, and the trade that emerges in response to the accumulation of capital is called the division of labor. A high division of labor is typically associated with a wealthy society. Maintenance of Wealth and Capital Both accumulated wealth and capital require maintenance. Parts wear out, materials rust and decay, and machinery grows old and obsolete as new technologies are developed. Even our own minds become feeble as we age and forget the lessons of our education and experience past. The forces of chaos and erosion are perpetually at work. As an economic actor increases his capital and wealth holdings, greater and greater portions of output will have to be devoted to maintenance of present holdings, reducing that portion available for further capital and wealth acquisitions. The greater the property holdings, the greater these responsibilities become until the point is reached that no greater holdings can be managed sustainably. An economy with a high division of labor will have higher maintenance costs relative to a lower division of labor economy. Resources and Technology Two facets of economic development which are often erroneously cited as the principle source of wealth differentials are resources and technology. Resources which are themselves the products of wealth-generating economic activities, for example, foodstuffs and other finished goods, can hardly be considered the principle causes of said wealth; therefore, in considering resources as a principle cause of wealth, we will limit the discussion to natural resources, those naturally occurring resources which are extracted from the natural world and are not primarily a result of human labor, though some labor may be expended in gathering them together or putting them to use. The tendency to identify natural resources as a principle contributor to wealth probably arises from the observation of highly visible material prosperity in certain locations such as the oil-rich Middle East. It certainly is true that there is a good deal of observable wealth that could reasonably be expected to have resulted purely from the extraction of natural resources. However, it is not true that an absence of natural resources will result in an inability to accumulate wealth, as there are almost always ways of achieving high productivity even in the absence of material resources. For one thing, it is often the case that one resource may be substituted for another, such as the substitution of coal or natural gas as a source of energy for oil. Desired resources may also be obtained through simple trade, or even rendered entirely unnecessary by technological development. The widespread availability of wireless phones has rendered interconnecting communication lines, and the materials needed to produce them, virtually unnecessary for this application in a very short time, freeing up these materials for other uses. The spectacular economic success of resource poor Japan and South Korea is a testament to the ability of economies to develop despite shortcomings in natural resources. These nations import natural resources from more resource rich areas, convert them to final products, and then sell these value-added goods profitably. In effect, they are trading their own labor in exchange for natural resources. Conversely, resource rich Africa and Russia, which have lagged economically behind the West for centuries, are examples of resource rich areas which have historically lagged behind other economies in their degree of development, tragically so in the case of Africa. Examples such as Saudi Arabia tend to be transiently wealthy. Saudi Arabia has had oil deposits for centuries, yet only became wealthy in the last 60 years or so when demand for oil from foreign countries with developed economies began to increase rapidly. It was not able to use its oil resources to enhance wealth on its own, and will probably return to relative impoverishment when the West no longer demands as much oil or when the oil runs out. Both facts point not to oil as the source of wealth in this particular case, but to the developed foreign economies which have devised ways of mobilizing this resource to satisfy consumer demand. Saudi Arabia prospers by happenstance of geography and on the shoulders of the industry, thrift, and capital of others. Technology is the practical application of knowledge to achieve specific ends. Technologically more advanced economies are capable of greater output as their applied capital is more effective at increasing a given input of human labor. However, this statement itself should reveal the falsehood of the assertion that technology is a principle cause of wealth accumulation: technology is itself a form of capital. Technology is one of the results of the accumulation of wealth; highly capitalized and wealthy societies are able to fund the development of better technologies, so again, the result of a well-developed economy can hardly be named a principle cause. Further, most technologies are readily transferable from one population to another, and what is available to one should in principle be available to others in due time. Computers were not invented in China, but they are produced in vast quantities by China today. So, technology and natural resources are both important, but are not in-and-of-themselves the primary, fundamental causes of wealth generation. Ethics as Capital Previously, we saw that proper ethics are critical to the development of a capitalist economy. We saw that in the absence of adherence to an ethical code:

• capital becomes increasingly difficult to accumulate due to persistent erosion through theft and violence and disincentives for its accumulation, resulting in lower productivity
• industry and thrift are discouraged, resulting in lower output and investment
• the division of labor contracts as ethical breaches cause individual actors to find it increasingly difficult to trade or otherwise interact in a constructive, mutually beneficial manner, reducing overall productivity as actors seek greater self-sufficiency
• greater resources are devoted to the maintenance of capital and wealth, which is at greater risk of loss

When viewed in this light, it becomes clear that the possession of a strong, functioning ethical code has the result of increasing the output of human industry. In practice, an ethical code requires the devotion of resources to its maintenance to ensure its fidelity and proper function. Such an economic analysis of ethical codes reveals that it might be constructive to view ethics as capital. In fact, an economy's ethical code might be properly regarded as its most fundamental capital asset, as it is this capital asset which allows the others to function properly and efficiently and will eventually determine the limits to which an economy can develop by placing limits on trade, capital accumulation, and the division of labor. Artificial Divisions of Labor: Command Economies In principle, the above discussion applies equally to both market economies and command economies. In a market economy, individual economic actors attempt to maximize the benefits of trade by producing products and services in highest demand by other economic actors. This is an expression of consumer sovereignty, i.e., forces of production and the division of labor are marshaled towards satisfying consumer demand as a result of the free, voluntary decisions of participating economic actors. In a command economy, production and the division of labor are structured by decree of the state. Consumer sovereignty is replaced by state sovereignty in the marketplace. Many theories have been proposed to explain the relative outperformance of command economies by market economies. One of the more important is the role that prices play in allocating resources and investments. A command economy generally has difficulty structuring prices in such a way that resources are allocated efficiently. Pricing systems that result from individual actors assessing their own, personal situations typically function better than pricing systems that result from the economic calculations of so-called experts working on behalf of the state. This theory and other similar theories have merit, however, as this discussion is concerned primarily with non-monetary aspects of economics, they will not be considered further. Another frequently cited problem faced by command economies is "corruption." In a command economy, conflicts of interest will arise more frequently as those with decision-making power will be less likely to have individual ownership over the resources in question, and are therefore more likely to make wasteful decisions as the losses incurred by these decisions will be borne by others rather than suffered by the decision maker himself. Along similar lines, I would propose that command economies suffer from an artificial division of labor which is insensitive to considerations of ethical capital. In a market economy, each actor has a strong incentive to minimize potential losses to himself and will therefore refrain from interactions with others that place his own capital and resources at risk of loss due to ethical breaches, such as theft, fraud, negligence, waste, and the like. If such a relationship is entered into, once discovered it will rapidly be adjusted or eliminated altogether to reduce such risks; if it is not, the actor in question will have his economic "footprint" eroded over time, and others will take his place in importance to the economy. The overall economy thus takes ethical capital into account in determining its eventual production structure and the division of labor. Such constraints are much weaker in a command economy, as decisions are typically made on the basis of political considerations. Command economies also typically have large administrative structures as part of their division of labor which are much reduced or absent in market economies. The result is a politically driven division of labor structured more independently of considerations of ethical capital and which is far less flexible and more difficult to reform when discrepancies between proper behavior and actual results are observed to occur. These structures will typically have much higher maintenance costs that take the form of various corruptions, waste, and inefficiency. These costs reduce productivity, and more importantly, sap the available thrift, reducing resources available for capital investment. Economic stagnation results from this failure to account for shortages in ethical capital. Most, if not all, of these theories are likely contributing factors to the relative under-performance of command economies, as they are not mutually exclusive. China's Thrift Conundrum Economists the world over are in awe of China's spectacular economic growth over the last 20 years. In truth a great deal of this growth is a legitimate reflection of improvements in basic social attitudes and ethics. The revolutionary fervor of such destructive episodes as the Cultural Revolution has died down, and a more pragmatic mindset has since begun to prevail. Greater latitude in individual ownership of property and its disposition has become the accepted standard of behavior over time, and this has naturally resulted in more capital accumulation, increases in productivity, greater industry, and economic growth. However, it is equally true that a great deal of this growth is a reflection of contrived arrangements with the rest of the world which were unsustainable. Manipulations by the central bank have had the effect of distorting monetary exchange rates, causing Chinese exports to appear far more competitive in foreign markets than they actually are. Mobilizing China's high levels of thrift to extend artificially generous credit terms to foreign buyers further fueled exports at a level that would not have been achieved on an open market. Both of these strategies have resulted in extensive growth in very narrow markets that would not have been achieved otherwise, and I believe it is likely that this strategy was specifically chosen by the Chinese government as a way to achieve a level of industrialization and technological advancement that would not have been possible had the market been left to its own devices. The West had been urging the Chinese to cease market manipulations, which would presumably have had the effect of turning Chinese productive capabilities towards satisfying consumer demand in domestic markets rather than foreign markets. China has now decided to adopt this strategy, and has also started a massive increase in infrastructure development, since the credit lines of her former buyers have now run out and many of the industries which were formerly developed to satisfy foreign demand have become idle. I believe this strategy will not work, at least with anything resembling the present levels of division of labor. Why? I believe the answer lies once again with ethical capital. Have you ever been in a room full of loud and rambunctious people who were suddenly quieted when a particular person entered the room? Perhaps they sat up straighter in their chairs, and looked around nervously or sullenly at one another. The person who entered the room might have been their supervisor, an older relative, or one of those "churchy" people. In any case, the effect was a sudden increase in discipline of the rowdy group, presumably out of fear of incurring the judgment of the "straight man" who had just entered the room. I believe a similar phenomenon took place between Western markets and Chinese producers. By using foreign markets as "straight men," China was able to "piggyback" on top of Western ethical capital. It tapped into foreign distribution and financial systems which were less prone to corruption than its own, stacking its own production structure on top of well-developed foreign divisions of labor that would not tax its own ethical capacities and would therefore require less discipline on its own part to profitably produce and market such goods. It leveraged foreign market discipline for its own purposes. More importantly, in serving Western customers, Chinese products were subjected to far more rigorous and less corruptible quality control systems. Because of such detailed inspections, and the relative sureness of getting caught in a violation, a far higher level of discipline was enforceable than would have otherwise been possible, straightening out behavior far up the supply chain. Even a normally corruptible market actor enforces a strong ethic on himself and on others if he is sure to be punished in the event of getting caught in a violation. It is usually easier to bribe inspectors and purchasing agents than it is to produce quality goods at a low price that sell themselves, but when the bribery option becomes unavailable, the only alternative is to play by the rules or go out of business. In short, the costs that come with a high division of labor in an ethically corrupt environment were vastly reduced by contact with relatively more disciplined foreign markets, thus "ethically subsidizing" China's division of labor in highly focused markets far beyond what would have been feasible if left to the country's own devices. Without the demand of foreign "straight men" as a large share of China's economy, I do not think that China can continue with its present level of division of labor without substantial ethical reform. Maintenance costs of its production structure will be far too high to operate profitably, and the system will collapse. China displays an abundance of the traits associated with wealth generation, namely, industry, capital, and particularly thrift. However, I believe the absence of a strong, disciplining code of ethics as a reliable source of ethical capital absorbs and wastes away a tremendous share of the benefits that should be conferred by China's other virtues. China's high thrift implies high capital investment and a highly productive economy with a high division of labor, but it is not matched with strong market ethic and therefore goes to waste in paying the costs of corruption. The present "stimulus" program and mass monetary inflation taking place is one visible manifestation of this effect. I hope this changes for the better. Evidence From the Index of Economic Freedom In previous discussion of the Index of Economic Freedom, it was noted that there appears to be evidence of a significant relationship between the degree of libertarian-oriented policies and economic outcome that corresponds well with the expected fraction of the population that subscribes to a libertarian economic model. Even more revealing is an analysis of each individual component of the index. Several showed very little correlation with per-capita GDP: "Fiscal freedom" is a measure of the "soundness of money," primarily a reflection of measured inflation, and government size is a measure of the size of government in relation to the economy. The low visible correlation is likely due to either poor measurement criteria, a relationship which is overwhelmed by other, more important determinants, or to the absence of a causal relationship altogether. Given the importance of both these factors in the functioning of an economy, the first two alternatives are the more likely reasons that a clear relationship is not visible. Several of the other index components give somewhat more clear correlations: However, the relationships are still murky and there is still considerable "noise" in these data. Two components of the index show the highest correlations: Although the exact mathematics have not yet been worked out, the "freedom from corruption" index has consistently given the highest correlations by the methods I have tried, with "property rights" coming in second. Both leave the other components far behind. This result tends to support the contention that the "ethical climate" of an economy is the key determinant of economic outcomes, even more so than libertarian leanings. Economies which are relatively free from corruption and in which property rights are respected have a strong tendency to perform better than economies which do not. In fact, the consideration of ethics as an important determinant of economic outcomes helps to explain the otherwise unexpectedly high performance of several relatively unfree economies, particularly Scandinavian countries such as Norway and Sweden. These countries have highly planned, socialist economies, yet have per-capita GDP's that are similar or even higher than many economies which are considerably more free. They also typically score in the very lowest levels of corruption. This analysis would tend to suggest that because corruption in these countries is so low, the maintenance costs of an artificial division of labor are much reduced and the economies perform better than they would under more typical circumstances. Religion, Philosophy, and Ethical Capital Religion and various philosophies have long served as as the primary caretakers of ethical codes and their expression in societies throughout history. Several have distinguished themselves for having produced exceptional economic achievements in their followers, implying that, on average, these belief systems contribute to human productivity more so relative to others. China under the influence of the philosopher Laozi achieved spectacular success in ancient times, surpassing in wealth all its contemporaries. One of the principle beliefs espoused by this ancient philosopher was the concept of wuwei, or "action through inaction." Success was best achieved through respect for the autonomy of others and the forces of nature. The idea of the futility of coercion no doubt did much to promote the development of ancient China, as it encourages economic actors to seek mutually beneficial cooperation rather than coercive power in persuading others to help them attain their goals. When this philosophy was eventually replaced by a more regimented, feudal mindset, economic growth stagnated. Similarly, other religions and philosophies through history have proven to have widely varying influences on the tendency of their practitioners to achieve material prosperity. In modern times, two religions in particular have distinguished themselves more than any other in this regard: Judaism and Christianity. Several of the important characteristics of Judaism that contribute to this tendency are the importance of the keeping of covenants, i.e. contracts, a strong emphasis on observance of moral codes, and the composition of those codes themselves. The Ten Commandments, for example, contain three very economically significant prohibitions: covetousness, theft, and fraud, or "bearing false witness," are all strictly forbidden. Other, more specific codes include the keeping of honest weights and measures and equal judgment before the law. As a result of their ethical beliefs and the behaviors they produce, Jews throughout history have become so overrepresented in positions of high prominence and material wealth in proportion to their makeup of the population that it has almost become conventional wisdom to believe that, as a religion, they must have conspired together to "take over the world." They have frequently become targets of mistreatment and violence throughout history for just this reason. As inheritors of the Jewish tradition, Christianity maintains many of Judaism's ethical traditions, but has been markedly more successful at evangelizing foreign populations and in producing prosperous societies more so than individuals, as in the case of Judaism, which has not generally produced expansive nations but isolated islands of success spread across many different nations. Conclusion Economic growth and increase in material prosperity are primarily driven by industry, capital accumulation, and thrift. Technological advancement is part and parcel of capital accumulation, and the possession of vast natural resources generally has little bearing on the longer-term economic development of a nation; therefore, these two aspects of economics are not to be considered principle determinants of wealth generation. Increasing capital accumulation as a result of thrift results in specialization and trade. Both of these activities are critical to increasing individual productivity and furthering economic development. They describe the division of labor which makes up the structure of an economy. Ethics can be considered a capital asset as it displays many of the properties associated with capital. It is a critical component to the activities of accumulating and maintaining other forms of capital, trade, and developing a more complex, more productive division of labor. Observation that lower corruption and respect for property rights predicts higher economic development far better than many other measurable characteristics supports this theory. Command economies suffer from artificial divisions of labor that are typically driven by political concerns rather than legitimate economic concerns, including conflicts of interest and ethically suboptimal relationships between actors. This results in waste and corruption which saps the available thrift and causes economic stagnation. China in particular suffers from these effects, and has used contact with foreign markets to temporarily overcome some of these shortcomings. These relationships have recently become untenable, therefore China will likely not grow as much as mainstream economics would predict purely on the basis of traditional capital, thrift, and industry considerations. It is more likely to suffer a short term economic collapse and stagnation without substantial reform. Specific religious beliefs and their ethical codes have had very different economic outcomes. Among the more successful, Judaism and Christianity stand out as the most successful religions of the modern world for producing prosperous individuals and societies. Biblical ethics provides a strong foundation for economic development along capitalistic lines. Final Thoughts These observations tend towards an inescapable conclusion. We live in a world of ethical cause and effect, where beliefs have consequences. As Biblical ethics have slowly been eroded in the West over the preceding century, and continue to erode, the West has experienced a string of economic calamities, including the Great Depression, two World Wars, and the present crisis. Unlike China, the West has become accustomed to a high division of labor, which puts its standard of living at greater risk in the face of an erosion of ethical capital. A severe contraction in the short term is unavoidable at this point, and without significant and immediate reform, the West is likely to experience decline rather than stagnation in the longer term.

Wondering About Inflation?

Have you been wondering where the inflation would be coming from? With high unemployment, it seems inconceivable that consumer prices should inflate. After all, who is going to bid up those prices if nobody has a job or money in his pocket? Here we see part of the answer, courtesy of Vox Day:

"It's free money!" said Alecia Rumph, 26, who waited in a Morris Park, Bronx, line 300 people deep for the cash to buy uniforms and book bags for her two kids. "Thank God for Obama. He's looking out for us." Thousands of people lined up at banks and check-cashing shops to withdraw the cash that magically appeared on their electronic benefit cards. ... Every child between 3 and 17 was eligible for $200, which worked out to 813,845 kids across the state - including 498,866 in the city. ... Billionaire philanthropist George Soros gave $35 million toward the program, with $140 million in federal stimulus funds routed through state government making up the rest.

Just so you know, it's not that federal spending or George Soros giving money away is inflationary. Its that Treasury gave money to average Joes instead of investment banks and bankers that means that this money will inflate consumer prices. Up until now, Treasury money freshly printed up by the FED has been going to uber-wealthy bankers, who don't spend quite the fraction of their "free" money on "back-to-school" goodies for their kids that these recipients will. Instead, as you might have guessed, they usually buy things like stocks and other financial assets. Perhaps you've seen a little of that sort of inflation of late. Free money to bankers = inflation of financial assets. Free money to average Joes = consumer price inflation. Eventually, money will flow down to the masses through programs like this and others, and to some of the masses and not others, and the money will go towards driving up consumer prices irrespective of unemployment. It's just a matter of time.

Great Economics Videos

Be sure to check out these videos by Chris Martenson. I have embedded the first video below. Watch the first, then each video provides links to the later videos, though some of them didn't work for me. There are quite a few, and they'll take you an afternoon to see them all, but they are quite good and eminently worth it. I don't know that much about some of his environmental claims, but the economics is pretty much spot on as far as I can tell. Be sure to check it out:

Let Them Eat Healthcare

I believe we are rapidly approaching America's "Let them eat cake" moment. The government is running trillion dollar deficits. GDP is contracting. The FED is monetizing new debt, surreptitiously according to some reports. Unemployment is rising, though the statisticians are lying about it. Tax revenues are falling. Interest rates will soon be rising on treasury debt, cutting even further into revenues. What is our response to these problems? Here are men destroying perfectly good cars for the "Cash for Clunkers" economic abomination: This is not a clunker. This is a perfectly fine vehicle being destroyed. It will never be driven again. Its parts will not be available for repair of other cars. Tax money, or rather, deficit spending, is being used to buy middle-class people brand new cars and destroying perfectly good used cars that might have been put to good use by those who could afford to buy them. People are being payed by the government to do this. The Obama administration is proposing universal healthcare, draconian and economically debilitating global warming legislation, and green energy initiatives. People are having trouble staying in their own homes, finding jobs, paying their bills, and putting food on the table, but they are being asked to pay for vast, expensive new programs and willfully destroying capital while their hands are tied behind their backs by "green legislation." This is a disgrace, and it will have dire consequences. Lessons From the French Revolution: "Let Them Eat Cake" Marie Antoinette is famously known for supposedly having callously said "let them eat cake" in response to famine and food riots. But few know the true story. Jonah Goldberg explains:

Let's start from the top. First, "Qu'ils mangent de la brioche" doesn't mean, "Let them eat cake." It means, "Let them eat some fancy egg-based bread" — i.e. a brioche. Second, Marie Antoinette never said it. The story comes from Rousseau's Confessions and, according to historians, he couldn't have been talking about Marie Antoinette, because she was only 10 years old when the book was written and still living in Austria. Some believe that perhaps Marie Therese, another queen, had said, "Let them eat brioche," 100 years before the French Revolution.

Other historians think Rousseau just made it all up. Whatever.

What's far more bogus is the moral behind the story. You see, back then France had a law on the books that required bakeries to sell expensive breads — including brioche — at the same price as cheap bread if the baker ran out of cheap bread. So, saying, "Let them eat brioche" is actually pretty rational. It's like saying, "Let them enforce minimum wage laws" or "the government should do something about those profiteering bakers who aren't selling their fancy bread at an affordable price!"

And here is where we get to the heart of things. The rule about selling expensive bread at a loss if necessary to feed the poor was just one of a whole tangle of crazy regulations established by bleeding-heart French nobles to do "right" by the lower classes. From medieval times until the 1980s, the price of a baguette had been fixed to a specific formula. And, even today, bread prices, baking techniques and bread sizes are regulated in minute detail in France.

The intention behind these laws was largely goody-goody, nice-nice. In fact, Marie Antoinette was something of a limousine liberal (gilded carriage liberal?) who offended her fellow nobles by disdaining royal excess.

The problem was that since French bakers were denied the ability to make cheap bread at a profit, and forced to sell expensive bread at a loss, they did the only rational thing possible: They made very little bread at all. That's how we got bread riots and maybe even the French Revolution.

America's response is similar. Do the people suffer? Has government become such a burden that their economic backs are breaking?

Let them eat healthcare, windmills, the chill wind, and broken cars.

A Turning Point

American civilization, and indeed global civilization, appears to be reaching a turning point.

Participation in the labor market is making a half-century reversal. I believe this is permanent. The division of labor is contracting. As government depredations increase, it will pay ever more to work for one's own family despite losses to productivity, as this avoids cash transactions and therefore taxation and the erosion in purchasing power of paper assets. Mothers will begin staying home again. In the future, fathers may, too. It is already beginning.

Government borrowing is eating into private markets, not just here, but across the globe. Japan is in dire straights. Some are predicting radical changes. Click that last link. Do not read further until you click that link. Watch the whole video. European politics have recently taken on a disquieting nationalist bent. China has deep, fundamental economic problems, and old ethnic grudges are boiling to the surface. Russia faces an uncertain future as it returns to unhealthy levels of deficit spending. Fascism is on the rise. Protectionism soon will be. Do not be fooled by the rising stock market. Do not be fooled by talk of "green shoots." Do not be fooled by the monetary shenanigans of the market manipulators. Remember that that which is consumed must be produced, by somebody, somewhere. Remember that capital accumulation is necessary for increases in productivity and requires the increase of the division of labor. Where you see these activities being eroded and hamstrung by government policy and poor ethics, expect poverty to follow. No manner of shell game or deceit or any quantity of lies can bend this ironclad law in the slightest. This is what is going on today. Prepare for the worst.

Eugenics in the News

A couple of eugenics controversies have made the news recently. In an interview with The New York Times, Ruth Bader Ginsburg made the following statement in response to a question about Roe v. Wade and the Hyde amendment:

Q: Are you talking about the distances women have to travel because in parts of the country, abortion is essentially unavailable, because there are so few doctors and clinics that do the procedure? And also, the lack of Medicaid for abortions for poor women?

JUSTICE GINSBURG: Yes, the ruling about that surprised me. [Harris v. McRae — in 1980 the court upheld the Hyde Amendment, which forbids the use of Medicaid for abortions.] Frankly I had thought that at the time Roe was decided, there was concern about population growth and particularly growth in populations that we don’t want to have too many of. So that Roe was going to be then set up for Medicaid funding for abortion. Which some people felt would risk coercing women into having abortions when they didn’t really want them. But when the court decided McRae, the case came out the other way. And then I realized that my perception of it had been altogether wrong.

(emphasis mine)

It has also been belatedly noticed that Obama's science czar has made some fairly controversial statements in the past.

President Obama's "science czar," John Holdren, once floated the idea of forced abortions, "compulsory sterilization," and the creation of a "Planetary Regime" that would oversee human population levels and control all natural resources as a means of protecting the planet -- controversial ideas his critics say should have been brought up in his Senate confirmation hearings. ...

Those plans include forcing single women to abort their babies or put them up for adoption; implanting sterilizing capsules in people when they reach puberty; and spiking water reserves and staple foods with a chemical that would make people sterile.

To help achieve those goals, they formulate a "world government scheme" they call the Planetary Regime, which would administer the world's resources and human growth, and they discuss the development of an "armed international organization, a global analogue of a police force" to which nations would surrender part of their sovereignty.

To which I would reply: how is it that so many people find any of these statements shocking or controversial in the slightest? Eugenics was a global movement a century ago. It was a major plank in the Progressive movement early on in the 20th century, which eventually spawned the fascist/national socialist movements. Woodrow Wilson, Teddy Roosevelt, and frankly, average people of the time, would have found none of these notions controversial in the slightest. Probably the most controversial element would have been the partial surrender of sovereignty to an international organization. It was generally accepted that it would be necessary to the future of mankind that undesirable populations be culled out to prevent their spoiling the gene pool. If you had read Jonah Goldberg's Liberal Fascism, or knew a little bit of history, you would know all of this already. Why should it surprise people that the modern torchbearers of the Progressive movement, who even call themselves progressives for crying out loud, would articulate ideas similar to the ones they advocated not all that long ago? We should expect this behavior, not be shocked by it! Goldberg himself comments on the Ginsburg-Progressive-Eugenics connection:

Regardless, Ginsburg’s certainly right that abortion has deep roots in the historic effort to “weed out” undesired groups. For instance, Margaret Sanger, the revered feminist and founder of Planned Parenthood, was a racist eugenicist of the first order. Even more perplexing: She’s become a champion of “reproductive freedom” even though she proposed a “Code to Stop Overproduction of Children,” under which “no woman shall have a legal right to bear a child without a permit.” (Poor blacks would have had a particularly hard time getting such licenses from Sanger.) If Ginsburg does see eugenic culling as a compelling state interest, she’d be in fine company on the court. Oliver Wendell Holmes was a passionate believer in such things. In 1915, Holmes wrote in the Illinois Law Review that the “starting point for an ideal for the law” should be the “coordinated human effort . . . to build a race.”

Ginsburg wasn't after any sort of shock value, she was simply stating what she saw to be a widely known, completely uncontroversial historical fact. And frankly, she was perfectly correct. It's just the fact that she bothered to say something un-PC that caused the controversy. Most people would simply leave such an idea unsaid, as it would be "impolite." The real scary part of the whole thing is how easily history is whitewashed and how easily we are brainwashed. We practically do it to ourselves! Global warming is the new eugenics. It is completely phony, has no physical basis in reality, but it serves as a useful crisis for those who would like to shape the world in they way they see fit. As they say, those who don't know their history are doomed to repeat it...

Posting, Posting, Posting...

I'm sorry, folks, but I've been lazy of late. I got laid off and now have a job that starts bright and early in the morning. So, now I feel like a zombie most of the time. I may have to start the caffeine habit up again just to get anything done. I heard a saying today, that "excuses are like *deleted anatomical reference*, everybody has one and they all stink." I suppose that applies equally well to me. Anyway, hopefully, I'll adjust soon, and the posting will be better.

Obama's Birth Certificate...

...appears to have been located, IN KENYA, at least according to WND. Of course, it could always turn out to be a fraud:

WASHINGTON – California attorney Orly Taitz, who has filed a number of lawsuits demanding proof of Barack Obama's eligibility to serve as president, has released a copy of what purports to be a Kenyan certification of birth and has filed a new motion in U.S. District Court for its authentication. The document lists Obama's parents as Barack Hussein Obama and Stanley Ann Obama, formerly Stanley Ann Dunham, the birth date as Aug. 4, 1961, and the hospital of birth as Coast General Hospital in Mombasa, Kenya.

No doctor is listed. But the alleged certificate bears the signature of the deputy registrar of Coast Province, Joshua Simon Oduya. It was allegedly issued as a certified copy of the original in February 1964.

WND was able to obtain other birth certificates from Kenya for purposes of comparison, and the form of the documents appear to be identical.

As much as I despise national politics, I figured this story was important enough to post. Have a look at the document in the link. Looks pretty real to me. But who knows... This week should be interesting. ---Update!!--- Looks like you illustrious host has been had. It appears to be a hoax.

Excellent Reading Over At Eternity Road

Fran Porretto has really outdone himself at Eternity Road. He has produced a series on the "End Times for Freedom" that is eminently worth reading: End Times for Freedom 1 End Times for Freedom 2 End Times for Freedom 3 End Times for Freedom 4 End Times for Freedom 5 Go thou and read!