Monday, June 13, 2016

Is Islam a Religion?

[author's note: the below is a summary of several posts I published in 2010]

During World War II, if the Emperor of Japan or Adolph Hitler had attempted to set up a recruitment office in the center of New York, the U.S. government would have had every right to shut it down. Whether the recruiters were motivated by Shinto or Nazism would not have made a difference, i.e., free speech was not an issue since these persons were actively engaged in an actual war with America.

So, at what point does a "religion" or any doctrine move beyond a mere body of abstract thought or ideas, deserving protection under the First Amendment, into a philosophical or legal area wherein a proper government has objective moral and legal grounds to prevent followers from pursuing recruitment, dissemination, assembly or political organization? To me, this is the essential question underlying the refugee crisis in Europe and the United States as well as the broader question of how to defend civilization from radical Islamists.  In this context, the question is whether Islam is a "religion" in the sense that it is meant within the Constitution or more broadly construed under the principle of individual rights, or whether it should be considered a "political movement" that is actively at war with America and/or the broader legal and cultural framework of western civilization.

Philosophically, faith is the acceptance of an idea in the absence of evidence and is the characteristic which distinguishes religion from science. The concept of "faith" is not relevant in a legal context, i.e., the essential epistemological foundation for a view point is not relevant. What is relevant is whether a body of thought or set of doctrines espoused by some organization can exist within a broad legal framework founded upon rational definitions of individual rights such as free speech, freedom of the press, property rights, and basic civil liberties. Whether or not a certain ideology takes issue with applications of these principles is not important. However, if an ideology by its nature opposes the very foundation of this framework AND its adherents actively seek to undermine the system through violent means, i.e., the initiation of physical force, the movement goes from the status of "religion" or "ideology" to an active enemy of civilization. Whether or not the state has formally declared war on such an ideology is not important as many instances of this type of organization could exist or spring up.

Although I am not an expert on Islam, from what I understand, there is very little separation between its doctrines and their manifestation in the political life of its adherents. It's followers advocate Sharia law which is a set of legal traditions that stand in complete and total opposition to western precepts of individual rights. Husbands can beat and rape their wives. Stonings and hangings are common to those who speak out against the religion or convert to another (apostasy). It is intolerant and hostile to non-believers in the most vile, racist, and violent ways imaginable. Its goal is the complete enslavement of mankind under a global caliphate, i.e., global theocracy, and it has killed tens of thousands in this effort.

Rather than be seen as a "religion of peace" with a few extremists tarnishing its essence, it should be seen as a global political and military force that seeks to spread throughout the world. If this movement were contained to other nations, I would argue as a matter of foreign policy that we have no interest in opposing it militarily. However, as this movement has repeatedly attacked western interests and made its motivations and goals crystal clear to anyone who will listen, the U.S. government should officially regard Islam as our ideological enemy and take any steps towards thwarting its spread within our borders and by supporting allied efforts to do the same.

Some argue that only some Muslims are "radicals" and it is a gross mischaracterization to regard Islam as a violent and evil political force. However, just as every Nazi was not a Hitler or Goebbels, and not every Japanese citizen was a kamikaze during World War II, this argument is not relevant. What is relevant is the actions of its most consistent advocates and its leadership alongside the inaction of its so-called silent majority. It is up to them to rise up and moderate or reform their "religion" in such a way that it can co-exist with the West while broadly respecting the basic principles of individual rights. If, by its very nature, it can not exist in this way, then we should not respect the rights of its followers as they do not respect ours.

What principles should be considered when identifying an objective threat? First, the ideology by its nature must be antithetical to the principles of individual rights and a constitutional republican form of government. Second, the ideology must be actively engaged in attempting to subvert or overthrow our government, i.e., advocating for or actually engaged in the use of force.

Shinto is an ancient Japanese religion and did not present a threat to the United States until it received state sponsorship and became part of a nationalist movement which sought global domination and attacked the United States in 1941. Communism actually began as a religious movement in the centuries before Marx secularized it in the 19th century. Even then, it was still not a "threat" until it too received state sponsorship and it's followers made their goal military conquest and global domination. Once an ideology receives state or some form of organized sponsorship and actively seeks to overthrow western governments, it becomes a criminal enterprise. Any offshoot, whether it is actually sympathetic or not to the more radical leadership, is then fair game to be investigated by our government. Certainly, it should be a cardinal issue in determining immigration status.

During World War II, any organization sympathetic to the goals of the Japanese Empire or the Nazi's would have rightly been shut down or arrested by the U.S. government and treated as enemy combatants depending on the extent of their activities. Communism was merely a philosophy until the Bolshevik revolution of 1917 followed by other movements which swept Europe and Asia, i.e., it was not a threat until it found state sponsorship and attained the goal of global domination, threatened our interests, or engaged in either outright or proxy wars with the United States. At that point, communist organizations which espoused this ideology ceased to be protected under the First Amendment, and became an objective threat to the existence of our government.

Many have said that the fact that there is not an obvious state sponsor of Islam and the fact that it seems to have many degrees of radicalism makes it more difficult to identify whom we are to fight.

First, once the proper principles are identified, the task becomes much easier. One needs to ascertain the state sponsors in terms of organization, finances, and training starting with the most radical first. Once these sponsors are crushed, the various offshoots become marginal, just as some random sympathetic Communist, Nazi, or Shinto organizations were neutered once the Soviet Union, Nazi Germany, and the Japanese Empire fell. Until the time at which state sponsorship and a global threat is neutralized, anyone identifying themselves with Islam must be regarded with suspicion and there should be an objective legal framework for investigating any ties to more violent organizations as we did with Communists in the 1950's or the Japanese and Nazi's during World War II or British loyalists during the American Revolution. I would make the same argument against Catholics if the Vatican declared its goal to be world domination under the rule of the Pope and Vatican law and were to actively fund and train an army in this effort.

Second, I think the primary state sponsors of totalitarian Islam are obvious. Iran, Saudi Arabia, and Syria are the heart and soul of this movement. Rather than focus on rogue tribes hiding in the mountains of Afghanistan, we should be confronting the elephant in the room - these countries and their countless financial and military allies which fund, train, and support radical Islamic groups throughout the world. While this occurs, Islamic organizations in the United States should not be treated as a protected "religion," but as sympathizers to America's enemies and since they identify with our legal and objective enemy, the burden of proof must be on them to show that they are not sympathetic or do not in any way directly aid and abet these global sponsors.

Third, because the freedom to speak and practice religion are sacred pillars of the American system, it is vital to objectively define and delimit the government's function as it relates to defense, i.e., define precisely when it is necessary for the state to use force in the protection and furtherance of individual rights. I have no illusion that the current American regime has any ability to fulfill this obligation, and I understand those who are concerned that such powers could be used as a precedent to persecute any political opponent of the state arbitrarily deemed to be "dangerous." I suggest the above as a blueprint precisely because the situation calls for a strictly objective formulation in order to delimit this use of force.

While one could debate the particulars related to the legal and practical application of the above principles, it is clear that this is the debate that should be taking place. For libertarians like Ron Paul to argue that Islam is only incidental to the 9/11 terrorist attacks or any of the various terrorist attacks against Western targets over the years or as incidental as their preference for "soccer," is a massive evasion. It is on exactly such grounds that anti "profilers" tells us that 90 year old grandma's are just as likely to be terrorists as young Muslim males leaving a madrassa run by the Taliban.

But why does Paul make such an error? Fundamentally, I believe it has to do with not grounding the concept of liberty in a more fundamental philosophic framework. To the libertarian politician, "liberty" is the fundamental concept by which all policy applications are evaluated. However, without a more fundamental basis, this concept becomes an out of context abstraction and it can not be properly applied except in the most trivial circumstances.

For example, objectively identifying threats and understanding what constitutes an act of coercion is essential to actual liberty, that is, the proper application of the principle of individual rights. If someone is walking around with a bomb and a bag of cash from the Iranian government, chanting "Death to America", could Paul not bring himself to usurp this man's "liberty" until he actually explodes the bomb? At what point should an organization be considered a criminal organization? At what point should another country be considered an objective threat? At what point should we declare war? Do they have to be in Manhattan harbor shooting at us before we take action? Of course, this is not a simple question and does involve a lot of legal philosophy, context, and evidence, but it should at least be clear that we should be debating these kinds of legal standards.

For Paul and others to simply dismiss these issues as "demagoguery" or a form of racism is not only wrong - it is suicidal.

Thursday, September 24, 2015

The Pope and the Religious Left

In the wake of the Papal visit to America and his support for left wing causes, I am linking to an article I wrote in 2008 titled, "The Religious Left."


Friday, August 28, 2015

Principles of Immigration in a Free Society

The issue of immigration is a hot button issue in the U.S. and has even caused a rift among Objectivist and libertarian minded activists who typically agree on a great many things. There are disparate views ranging from those who argue for open borders, with nothing but a welcome sign, to others who advocate more restrictive policies.

When many generally reasonable, thoughtful people disagree vehemently over some topic, it is a sign that the topic is complicated and requires difficult, principled analysis where it is easy to make honest mistakes.  Furthermore, the horrendous state of the world and our statist government makes the situation even more complicated to analyze.  Consequently, it makes sense to analyze a simpler context, e.g., immigration policy within a free country with a rights respecting government.  If we can establish these principles within a simpler context, it becomes a little clearer how to deal with the current actual mess. So, for example, since the very real concern over those seeking to come to the U.S. for welfare benefits exists as a consequence of welfare statism, it will not be addressed here, nor will primitive economic claims of the "they're stealing our jobs" variety be analyzed since those arguments have been debunked a thousand times.   It is always beneficial economically to have more hard working, law abiding people than less, i.e, have an even greater division of labor.    

The first principles of government in a free society is that it exists to protect individual rights.  Objectivists hold that the government should consist primarily of police to protect individuals from local criminals, an army to protect against foreign threats, and a court system to settle disputes.  The pertinent aspect of this principle for immigration is how it relates to the government's obligation to protect individuals from foreign threats.  

While individuals have inalienable rights by their nature, not as a privilege bestowed by government, it is a fact that the government which protects those rights must exist somewhere within proximity to those it represents.  Local governments are necessary because they are closer to the people they represent.  A government, by its nature, is limited to a certain jurisdiction, i.e., a geographical boundary within which it may apply the laws agreed to by individuals within it.  The purpose of such a boundary is that it provides an objective legal demarcation line within which it can define and execute its legal jurisdiction. Anyone residing within that jurisdiction accedes to its laws and agrees that issues pertaining to the jurisdiction as a whole are managed by elected representatives.  This allows its representatives to engage in agreements with neighboring jurisdictions over various issues.

For example, the sovereign states joined together to form the United States with the Constitution as the legal framework for dealing with cross border or national issues.  The states within this union broadly agreed on the nature and scope of government, and a byproduct of this union was unrestricted travel across state lines.  Texas and other states joined this union while other jurisdictions, such as Mexico, did not.

Since other countries exist outside this jurisdiction, and may or may not agree with our principles of government and may or may not be a threat, one of the functions of the government, the body of representatives that deal with issues of state, is to provide for a common defense.  With respect to immigration, essentially, the problem boils down to the question: is the person a threat or not?  It is important to emphasize that this question must be asked if the government is to perform its proper function. That is why there must be some immigration policy.  The idea of a completely open border with nothing but a welcome sign would represent a violation of this principle.  Such an "open" policy provides no means for the government to ascertain whether persons are invading or immigrating, much less whether they are known criminals or carry infectious disease.      

If the government's proper foreign policy endeavors to identify and eliminate existential threats from overseas by procuring intelligence and launching attacks against enemy states, why wouldn't its foreign policy seek to identify existential threats from those on its border seeking to enter the country?  Why wouldn't we apply at least as much scrutiny if not more to those actually entering the country?  Would a proper foreign policy have to wait for Iran to actually launch a nuclear bomb before taking action against them?  Would we have to wait for an armada of jihadists in the New York harbor to actually fire their guns before apprehending them or granting them visas?  Can the government prevent a business from selling military secrets to our enemies?

The idea that we can eliminate the threat by crushing our enemies overseas and therefore allow virtually anyone to subsequently enter the country does not recognize the nature of reality.  The fact is that there are always bad guys out there, and the government's job is to protect its citizens from them.  Although crushing our enemies would help, there will never be a time when the government can cease to police its own border.  Only in some future fantasy world in which all states agreed to some form of union under western principles of law and individual liberty could we contemplate a border less nation.  

The idea that there should be a presumption of innocence with respect to immigrants is a violation of the principle of self-defense for the same reasons one does not grant a presumption of innocence to someone who has rung the doorbell.  The presumption of innocence is a principle applicable in a criminal proceeding where an individual has been charged with a crime.  Prospective immigrants have not been charged with a crime, they are seeking to cross the legally established border from an area which may or may not share the same principles of law, and it is the government's proper function, indeed, primary function, to ascertain whether they represent a threat or not.  The goal should be to define a policy for determining what constitutes an objective threat and decide upon that basis whom to allow into the country.  

The precise policy defining what constitutes a threat could be debated, but generally I think there are a couple of primary forms.  Someone with a criminal record or who carries an infectious disease represents a direct physical threat.  One who directly or indirectly seeks to alter or abolish our form of government is a threat. This does not have to literally be a foreign spy or military agent but could be someone who has supported anti-freedom causes.  Certainly, without any evidence to the contrary, we should be suspicious of anyone immigrating from a country with which we are at war, have limited diplomatic relations or have deemed an enemy. It could be argued that those who possess no regard or understanding of the legal principles of the country, who do not speak English, and have no relation to anyone in the U.S. are less likely to broadly assimilate and should be regarded as more likely to constitute a threat.  This is not to say that there should be blanket prohibitions based on some of these factors, but in the absence of contrary evidence, they are relevant evidential factors.

In this regard, the burden of proof must be on the immigrant.  The easier it is to check someones history then the more likely they are to be granted entry.  A British national with a PhD from Oxford that is coming here to work for an American company whose criminal and medical records can be easily checked should obviously be granted entry.  If someone comes from a third world country with a history of dictatorship and sponsorship of jihadists, with no sponsorship from someone already here and no ability to directly check his record, then he should be at the bottom of the list if not outright rejected for entry.  While there should be a legal process for determining whether someone meets the criterion, the process by which we determine those standards should be a matter of objective policy consistent with the government's obligation to protect the rights of its people.  

Thursday, March 26, 2015

Meet the Left's Newest Capitalist Straw Man: The Shareholder as Mafia Boss

In a recent Washington Post op-ed, Harold Meyerson, an avowed socialist, compares corporations who buy back their own shares to Las Vegas mafia bosses who used to skim casino profits.  The basis for his smear is "a recent paper by J.W. Mason, an economist at the City University of New York and a fellow at the Roosevelt Institute, [who] documents the great shift in what U.S. corporations have done with their money."  Based on this paper, Meyerson writes:
In the 1960s and ’70s, about 40 cents of every dollar that a corporation either borrowed or realized in net earnings went into investment in its facilities, research or new hires. Since the ’80s, however, just 10 cents of those dollars have gone to investment. As a result of the shareholder revolution, the money that once went to expansion and new ventures has gone instead into shareholders’ pockets. 
Ironically, Meyerson decries the lack of capital investment and follows Mason (who follows William Lazonick and others) to imply that this purported lack of investment represents a kind of new class struggle between shareholder activists and employees who apparently stand to benefit only if the company invests its cash in something.  Meyerson writes:
Unlike the Vegas skim, which still allowed for sufficient floor show investment, the new skim, which is both ongoing and nationwide, has greatly reduced productive investment in the United States. The new skimmers have been the nation’s largest investors, and although they haven’t had anybody whacked, they have managed, as the mob never did, to bring America’s middle class to its knees.
So, have shareholders always been just a moral notch above mafia killers who brutally execute their enemies or has something changed?  According to Meyerson, the answer is that modern businessmen have become more greedy. You see, in the good old decades after World War II (you know, back when socialists like Meyerson were great advocates of big business), corporate investment was under the control of "the managers" whose high-minded "investments, chiefly from retained earnings, led to a generation of high productivity growth accompanied by steadily rising worker incomes, thanks to substantial unionization." [emphasis mine].  Then, along came Milton Friedman who "propounded the belief that the sole corporate mission was to reward shareholders" and corporations began linking top managers' performance to stock performance (pay based on performance - those darn capitalists!). This caused a new generation of evil businessmen from Wall Street to replace the good businessmen who used to not care so much about money.  He writes:
In the 1980s,...the managerially controlled firm was challenged by corporate raiders who sought to create leaner firms with lower wages in order to return more money to shareholders. A newly deregulated financial sector encouraged corporations to fund their endeavors more from borrowing — which enriched Wall Street — than from earnings.
These ideas appear to be reflecting throughout various left wing echo chambers and even promise to be a political issue in 2016 as "there are hints that Democrats might revisit it in the presidential campaign next year."  Meyerson and his ilk have created yet another capitalist straw man known as "large investors" (Big Investor?) who they attack for "skimming profits" and bringing "the middle class to its knees" while their leftist brethren surely nod their zombie heads in approval.

So, is it true, as Meyerson suggests, that linking manager pay to stock performance and distributing gains to shareholders is tantamount to violent criminal behavior?  Are the pension funds, 401k, and IRA participants (the middle class!) that benefit from rising stock prices really being brought to their knees?  Is it necessarily bad if corporations, on a relative basis, return a larger portion of earnings to shareholders rather than investing in new projects? What are these wonderful "new ventures" cited by Meyerson that should be funded by "the managers?" Does he presume the shareholders will reinvest the money in worse (less profitable) projects than the new projects he imagines?  Are the benefactors of the shareholders' new investments less worthy than those who would benefit from the projects envisioned by Meyerson?  Are "the managers" of corporations or central planners in Washington omniscient oracles who really know what's best?

If a business believes their capital is best deployed in X rather than Y then they will move their capital to X from Y.  Any one businessman or company can make egregious errors in their calculations, but the market will punish them with losses, and if they continue to make errors they will be put out of business.  In the long run and in aggregate, capitalism, ensures that capital will be allocated as profitably as human beings are capable of allocating.  Only government policies, in many different forms, can divert capital from its highest and best use.  So, if Meyerson is truly concerned that capital is being misallocated, he should start by analyzing Marxist inspired political policies themselves as the explanation.

For starters, Mason's own paper suggests that Meyerson (and perhaps Mason) has his logic backward.  Rather than view the 1980's as a turning point from the management practices of high minded businessmen to the vicious tactics of corporate raiders, it could be argued that it was various legal and regulatory changes which finally liberated shareholders to force stodgy corporations into being more productive and accountable. Mason provides a very good synopsis of the intellectual, legal, and institutional changes in financial markets that made the takeover movement possible.  For example, he cites "a number of legislative and administrative reforms that made it more feasible for shareholders to assert their notional power over management:"
Among these were legal challenges to laws limiting hostile takeovers of corporations, including the Supreme Court’s 1982 decision in Edgar v. MITE striking down Illinois’s anti-takeover law and similar laws in other states (Davis 2009). Also important was the revision of anti-trust regulations by the Reagan Justice Department, also in 1982, which relaxed the limits on concentration within industries. This opened up new possibilities for intra-industry mergers and undermined the logic of conglomerates, the major initial target of hostile takeovers (Roe 1996).
The "adoption of Rule 10b-18 by the SEC in 1982,... made large-scale share repurchases legal for the first time (Grullon and Michaely 2002)" and "made shareholder value the operational principle of corporate finance,  He notes that "institutional changes in financial markets...made takeovers and other changes of control more feasible." For example, the relaxation of "the rules on the classes of investments permissible by various institutional funds" resulted in a "broadening of the funds available to finance changes in corporate control" while compensation practices like stock options put top executives closer to the "worldview" of shareholders.

If anything, these changes should be seen as positive developments that utterly transformed the corporate landscape, and ironically, served as a factor in causing real wages to ultimately rise. Since it is productivity that actually raises real wages for labor, any policy which constrains or restricts productivity, diminishes the increase in real wages, a principle about which Meyerson is surely ignorant. The disruptions caused by intellectual, regulatory, and institutional changes in the 1980s actually benefited all to the extent that these changes resulted in more freedom, more productivity, and higher real wages.  To his credit, Mason recognizes this possibility:
Supporters of the shareholder revolution would argue that this is a change for the better and that the high level of internally funded projects under the old managerial regime included a large proportion of white elephants whose expected returns were too low to justify their expense. Whether or not the shareholder-dominated firm chooses its projects more wisely is beyond the scope of this paper.
So even Mason admits that shareholders actually can prevent managers from investing in "white elephants," a conclusion that Meyerson not only doesn't acknowledge in his diatribe, but contradicts when he claims "it was the coming of both globalization and the shareholder revolution in the 1980s that undid the broadly shared prosperity that Americans had enjoyed in the mid-20th century."    

Perhaps Meyerson was referring to the main theme of Mason's paper centered upon his empirical observation of the "weakening correlations of cash flow and borrowing with investment and a strengthening of correlations with shareholder payouts" - a development he attributes to a "shift from managerialism to rentier dominance."   In other words, he argues that since the managers lost control to the shareholders, there has been an increase in shareholder payouts and a decline in corporate investment.  He recognizes that "when profits are low and credit is expensive, there will not be much difference between the two regimes." However, he recognizes the role of cheap credit in creating this regime shift: 
[W]hen profits are high and credit is cheap, it’s a different story. If the cost of borrowing is less than the rentier opportunity cost, it will make sense for the rentier dominated firm to incur debt simply in order to increase payouts to shareholders — something the managerial firm would never do. [emphasis mine]
In other words, he identifies the distinguishing characteristic between the two regimes as an economic state in which profits are high and credit is cheap.  What causes such a state?    We know that credit expansion, brought about primarily by the government, affects the interest rate by creating a larger pool of funds and creating less demand for money holding in the short run.  It also boosts profits by inflating business revenue relative to costs which are depreciated over a longer time period.  Of course, credit expansion can affect the share buyback process by artificially decreasing interest rates and creating less demand for cash holding.  If interest rates are low and profits are high then it can pay for a company to borrow cheaply and buy back its shares and return profits to investors now versus investing in some longer term project.  Can this go on forever? 

In a free market, as corporations issue more and more debt to buy the shares, interest rates would tend to rise, while rising stock prices would result in higher (less attractive) valuations at the same or declining profit levels.  At some level of interest rate, it would no longer pay for a corporation to buy back its own shares.  The government can short circuit this natural process only by artificially keeping interest rates low by accelerating its credit expansion.  This is exactly what the Fed has accomplished through its various QE programs, and stock buybacks funded through corporate debt issuance have been taking place at an unprecedented rate.  

The creation of money out of thin air does not create real wealth, but it massively distorts the capital markets and enriches holders of assets in nominal terms relative to everybody else. The actual source of capital misallocation is credit expansion which distorts the interest rate and sends false signals to investors putting businessmen in the position of a doctor who takes an x-ray while some other force distorts the output. 

Rather than focusing on the causes of a persistent state of high profits and cheap credit, Mason attributes the empirical data to the conflicting interests (hurdle rates) of managers and shareholders. This leads to his arbitrary claim that payouts to shareholders are "something the managerial firm would never do."  Why?  Maybe it's true that managers would not borrow to buy back shares.  Maybe they would invest the capital instead.  But, in what?  Why are we to assume that investment, any investment, is necessarily good and that share buybacks are necessarily not as productive?    When the Fed distorts the market, there is no way to know. Even Mason seems to acknowledge the Fed's role in this mess but is at a loss to explain the outcome: 
In particular, the fact that low interest rates have encouraged increased corporate lending and borrowing without any accompanying boom in real investment should raise doubts about whether we can expect to achieve full employment through measures aimed at increasing the credit supply.
So, creating money out of thin air doesn't lead to real output and employment gains?  Mountains of government regulations, spiraling government debt, and the highest corporate tax rate in the developed world isn't working?  So will Meyerson argue for abolishing the Fed and returning to a system of private banking and laissez faire?    

Meyerson's and Mason's inability to reach the conclusion that it is government intervention in the economy that distorts capital markets, destroys productivity, and leads to declining real wages stems from a deep underlying premise - the Marxist premise that profit seeking behavior is necessarily exploitative, i.e., that one person's gain necessitates another person's loss. Meyerson's corporate raider (the term is a smear) is likened to a Mafia kingpin who crushes and destroys his enemy for personal gain and now serves as the latest capitalist straw man for pundits like him to justify, yes, more government intervention.   To them, the non-profit manager is a kind of omniscient caretaker looking out for the good of everybody, who would have the good sense not to buy back shares, and certainly not foolish enough print money to keep interest rates artificially low...   

Monday, March 9, 2015

The Deception of Central Banking - A Parable

Let's say a guy is about to counterfeit millions of dollars and spend it in his town (he's been empowered by secret government commission) with the goal of producing a perceived economic boom.  To have the greatest effect, would he be better off publicly announcing his intention to counterfeit with the proviso that if prices go up too much he will stop, or would he be better off spending the counterfeit money in secret?

If he announces his intentions, banks and businesses in the town will immediately begin to factor his future spending into their prices and inventory decisions.  His promise to stop counterfeiting if prices go up too much will also be taken into account.  Knowing that an indefinite counterfeiting operation will ultimately force prices higher, they will conclude that it is unlikely he will counterfeit indefinitely and will regard the increased spending as temporary.  As he buys more of their goods, they will experience an improved bottom line in the near term, but they will not be incentivized to expand their operations or hoard inventory in the hopes that prices will just keep going up and up as he spends and spends.  The boom is unlikely to ever materialize.    

On the other hand, if he secretly counterfeits and begins spending the money, businesses will notice that they are selling more and more.  Even if they raise their prices a little they will see their sales increase and conclude it is part of a new trend.  As prices go up everywhere, they will realize they can purchase more inventory and just wait for prices to go up further.  Banks will be flush with deposits and able to make loans on more generous terms.  Businesses will expand their operations.  The town will believe they are experiencing a boom.

Notice that for his counterfeiting to result in a perceived boom, he had to trick everyone into thinking that the increased spending volume is real and would continue indefinitely.  It needed to appear that the increased deposits in the bank reflected the real desire of individuals to save more money for longer periods so that businessmen would be fooled into pursuing longer term projects that consume massive amounts of capital.  Conversely, when the businesses anticipated the end of counterfeiting, the whole effect of his actions was relatively inconsequential.  As Ludwig Von Mises wrote in his economic treatise Human Action:
The boom-creating tendency of credit expansion can fail to come only if another factor simultaneously counterbalances its growth.  If, for instance, while the banks expand credit, it is expected that the government will completely tax away the businessmen's "excess" profits or that it will stop the further progress of credit expansion as soon as"pump-priming" will have resulted in rising prices, no boom can develop.  The entrepreneurs will abstain from expanding their ventures with the aid of the cheap credits offered by the banks because they cannot expect to increase their gains.  
Unless the businesses believed they could continually gain from the trend, they will not act to expand their business.  In this way, the example shows that even if the man had kept counterfeiting, he would have had to accelerate his pace of counterfeiting to keep the boom going (increasing the gains of the gains) and eventually he would have destroyed the town's monetary system. Von Mises wrote:
The boom can last only as long as the credit expansion progresses at an ever-accelerated pace.  The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market.  But it could not last forever even if inflation and credit expansion were to go on endlessly.  It would then encounter the barriers which prevent the boundless expansion of circulation credit.  It would lead to the crack-up boom and the breakdown of the whole monetary system.  
Von Mises's principles relate to recent events.  In the housing bubble leading up to the 2008 crisis, it was believed that home prices would rise indefinitely.  Credit expansion supported by central bank rate policy, fractional reserve banking, and the federal government's underwriting of mortgages through GSE's caused a massive boom in real estate prices.  More credit begat home price increases and house price increases begat more credit.    

Since that bubble burst in the 2008 crisis, global central banks such as the Federal Reserve, ECB, and Bank of Japan have embarked on an effort seemingly to create another phony credit boom.  But this time, they have maintained a policy of publicly announcing their so-called "quantitative easing" efforts in advance.  They have generally pledged to buy their government's bonds (with fake money) of a certain magnitude for a certain period of time with the goal of increasing consumer prices along with the proviso that if prices rise too quickly then they will stop and potentially even go in reverse, i.e., remove money from the monetary system.    As we would expect based on the above, despite their best efforts, these central banks have been unable to create the kind of phony boom they so desperately crave.

Central banking requires that government bureaucrats act in a way to distort the entire economic system by introducing counterfeit credit into the monetary system in such a way that businessmen are continually fooled into acting in a way that mimics the behavior of businessmen operating in an actual economic boom.  The fact that central banking requires deception does not imply that we should advocate deception. On the contrary, the point is that central banking, by its nature, requires massive deception and is a symptom of its evil and impracticality.  

Thursday, March 5, 2015

The Real Problem is Strong Central Banks - Not Strong Currencies

One myth driving the irrational policies of central planners is the idea that a depreciating currency is good for a domestic economy.  Presently, this myth is fueling a so-called "currency war" in which each country attempts to depreciate its own currency relative to others.  In essence, the idea is that if you make your currency cheaper relative to other currencies, then people in the other country will buy more of your stuff.  In turn, this will help the export industry in your country thus constituting an economic advantage.  Of course, this idea is hundreds of years old and a major feature of the infamous economic theory known as mercantilism.

Bastiat and Hazlitt taught us that most economic myths persist because people only focus on one direct effect of a policy rather than on all the direct and indirect effects or unintended consequences.  In fact, the value of currency depreciation can be debunked with a simple example.  Let's assume on Day 1,  the currency exchange rate between euros and dollars is 1 to 1 and let's focus on the German company BMW selling one car for 100 euro:

Day 1

     Exchange rate = 1 $/Euro
     BMW (euro) = 100 Euro
     BMW (dollar) = 100 euro * 1 $/euro = $100

Say the Germans depreciate their currency, and further assume that BMW produces all of its cars in Germany and uses all of its inputs from other German companies, and maintains its euro price at 100.

Day 2

     Exchange rate = 0.25 $/Euro
     BMW (euro)  = 100 Euro
     BMW (dollars) = 100 euro * 0.25 $/euro = $25

In the U.S., the BMW now only costs $25!  The total American demand for cars was $100 and at the previous rate, Americans could afford to buy 1 car.  But now, Americans can afford 4 cars at $25 each and be no worse off.

     BMW revenue (Dollars) = 4 cars * $25 = $100
     BMW revenue (Euro) = $100* 1/0.25 Euro/$ = 400 Euros

BMW and its employees are thrilled!  They have made $100 which is now worth 400 Euros whereas before, they were likely to only make 100 Euros from the sale of 1 car. BMW's stock price (in euro) may even go up as would other company's stock who are similarly affected.  BMW is better off, but is the German economy better off in aggregate?

Well, what does BMW do with the $100 it received?  It can only spend the $100 in the U.S.  Even if BMW converts the currency and gets the 400 euros, then the exchanger paid out 400 euros to BMW and now has the $100.  What can the $100 buy?  The $100 can only buy the same amount as before in the U.S., even though it costs 4 times as much for a German in euro.   For example, let's look at this from the perspective of a German who wishes to buy a US Farm Tractor.    


Day 1

     Exchange rate = 1 $/Euro
     US Farm Tractor (dollars) = $100
     US Farm Tractor (euro) = $100 * 1 euro/$  =  100 euros


Day 2

     Exchange rate = 0.25 $/Euro
     US Farm Tractor (dollars) = $100
     US Farm Tractor (euros) = $100 * (1/0.25) euro/$  =  400 euros

The German tractor buyer's cost has gone up to 400 Euros.  While BMW is thrilled that it is making 4 times more money selling its cars, the German farmer has to pay 4 times as much for the same American tractor.  BMW benefited, but the German farmer lost.

In general, the $100 received by the Germans will be spent in the U.S. for something - if not by BMW or a farmer, then by someone further down the line in Germany who exchanged the euros.  If the purchaser of the $100 does not want a consumer product, they would deposit it in a U.S. bank or more likely, buy a U.S. dollar bond.  But whether they buy $100 worth of U.S. bonds or $100 worth of U.S. products, since it now costs them 400 euros, they get 1/4 as much U.S. stuff on day 1 as on day 2.  On Day 1, in aggregate, Germans produced 1 car in exchange for 1 tractor.  Now they have to produce 4 cars in exchange for 1 tractor.  How is this good for the German economy?

Even from this contrived example, you'd have to conclude that currency depreciation is at best a zero sum game in which some (exporters) benefit at the expense of others (non-exporters).  In fact, it's much worse than a zero sum game as Robert Murphy and Patrick Barron demonstrate in more detail. In Bad Idea: Devaluing Currency to Help Exporters, Frank Hollenbeck demonstrates the negative effects of currency depreciation on workers who must "pay higher import prices resulting from depreciation" reaching a familiar conclusion when analyzing central banking:
Few journalists seem to understand that a policy to reduce the foreign exchange value of a currency is, in reality, a policy to transfer wealth from workers — the middle class and the poor — to the wealthier owners of export industries. It is another example of the central bank acting as a reverse Robin Hood, taking from the have-nots to give to the haves.
So why would the central planning bureaucrats engage in "currency wars?"  The reason is that central planners are politicians who do what is in their own short term best interest.  In this case, they seek to politically appease their domestic export lobbies cheered on by Keynesian cranks like Paul Krugman.

As central banks engage in currency depreciation and the so-called "race to the bottom" goes on, it becomes even more clear that the real threat to any economy is not a strong currency, but a strong central bank.  The solution is to end the regime of central banking and to replace political control of our money with a private banking system based on a 100% reserve gold standard.  

Monday, February 16, 2015

Americans Should Support Freedom and Individual Rights Rather than Democrats or Republicans

I am always amazed at how inconsistent people are when it comes to their political views. 

For example, many of the same people who fight for repealing marijuana prohibition, based on the correct premise that people have a right to their own body, at the same time support draconian government regulation of drug companies by the FDA or support laws giving bureaucrats power to control what health insurance they can buy. 


Many of the same people who decry government interference in the economy, under the correct premise that individuals have a right to own and freely trade property, seek to give the government power over women's bodies to coerce them into unwanted pregnancies or support trampling civil liberties in the name of "fighting terrorism."    


Many of the same activists who attack the power of the so-called "evil corporations" and support anti-trust measures, supposedly to prevent the concentration of power, turn around and seek to create the largest monopoly of all - a socialist government, backed by the power of an armed military, to confiscate and nationalize private property.    


Many Democrats properly denounced the Bush administration for usurping individual freedom under the guise of fighting terrorism yet look the other way when perpetrated by Obama's intelligence apparatus. They oppose government censorship of their own ideas but seek government regulation of right wing talk radio through the fairness doctrine or the implementation of so-called speech codes.  Many Republicans cheered the establishment of the Department of Homeland Security and the implementation of policies aimed at neutering civil liberties under Bush but now, correctly, vilify the NSA and other intelligence agencies for comprising an Orwellian police state.


The root of the problem is ignorance of the true nature of individual rights and the proper function of government.  Freedom means the right to think, produce, and own private property as long as you do not violate another's rights by initiating physical force.  The function of government is to secure these rights by banishing the use of force except in self-defense. Broadly applying the concept of individual rights was the essence of the Founding Father's achievement.

Ignorance or evasion of the meaning and nature of rights is why both the mainstream political parties seek to violate individual rights, just at different times and in slightly different forms.  According to a recent report from Gallup, perhaps American are waking up. "Forty-two percent of Americans, on average, identified as political independents in 2013, the highest Gallup has measured since it began conducting interviews by telephone 25 years ago." While this poll is a step in the right direction, it's important for those seeking alternatives to understand the nature of freedom and individual rights and to uphold a non-contradictory platform of ideas.

Wednesday, February 12, 2014

To the Offended Generation, With No Apology

When MSNBC host, Martin Bashir, declared that "someone should defecate and urinate in [Sarah] Palin's mouth, a punishment delivered to some slaves," he immediately issued an on-air apology declaring: "My words were wholly unacceptable. They were neither accurate, nor fair. They were unworthy of anyone who would claim to have an interest in politics."  Then, a few weeks ago, "MSNBC host Melissa Harris-Perry offered an unreserved and tearful apology on her show...for remarks she made last week about Mitt Romney’s family and his recently adopted African-American grandson" tweeting: "I am sorry. Without reservation or qualification. I apologize to the Romney family." Most recently, it was reported that "MSNBC President Phil Griffin apologized to Republican National Committee Chairman Reince Priebus on Thursday for a tweet suggesting conservatives “hate” interracial marriages and “dismissed” the staffer who authored it."

Why were these apologies deemed necessary? For example, the Bashir incident was not a spur of the moment reaction. Evidently, he thought Palin's equation of America's budget deficit to slavery was inappropriate and suggested Palin endure the actual suffering of a slave, and he meant exactly what he wrote. These MSNBC pundits are left wing activists and their statements genuinely reflect their beliefs. While many might disagree with them, what's wrong with expressing their viewpoint on their political talk shows? Why can't these pundits "own" their beliefs and proudly profess them even in the teeth of vehement criticism?

The "controversial statement" followed by "The Apology" appears to be a kind of phenomenon sweeping American culture whereby momentary outbursts of actual thought are swiftly followed by denials and soulful public remorse. To "offend" another by speaking your mind is regarded as a criminal transgression mitigated only through the issuance of a perfunctory apology, a process which serves as a kind of ritualized public catharsis. Rarely is the actual meaning of the "offending" words ever considered or analyzed. Instead, the mere tone of the words and their presumed ability to offend the victim is regarded as the primary concern. Modern intellectuals have replaced objective communication with introspective assessments of feelings to which they modulate their indignation - or apologies.

Contrast this with comedian Natasha Leggero who recently refused to apologize after a joke that targeted Pearl Harbor veterans during a New Year's Eve telecast on NBC. She explained her non-apology on her Tumblr page:
I’m not sorry. I don’t think the amazing courage of American veterans and specifically those who survived Pearl Harbor is in any way diminished by a comedian making a joke about dentures on television. Do we really believe that the people who fought and defended our freedom against Nazis and the Axis powers will find a joke about Spaghetti O’s too much to bear? Sorry, I have more respect for Veterans than to think their honor can be impugned by a glamorous, charming comedian in a fur hat.
In this rare case, rather than succumb to politically correct pressure, Leggero stood her ground and actually intelligently analyzed the nature and intention of the joke ultimately demonstrating more respect for her supposed "victims" than her critics could likely ever conceive.

The progress and vitality of a free society is founded upon vigorous open debate, not retreat and evasion. Consider America's founding generation in the tumultuous 1790s, a period Jefferson dubbed "the reign of witches", when Benjamin Franklin's grandson, Benjamin Franklin Bache, and William Duane poured invective from the pages of their Aurora newspaper characterizing George Washington, the Father of our Country, as a "coward, a traitor, and a murderer" and John Adams "a blind, bald, crippled, toothless, dotard." Bache was ultimately arrested under the Alien and Sedition Acts where he died of yellow fever in captivity.  He never apologized nor did Washington or Adams.          

It is easy to cynically dismiss The Apology as spin doctoring or damage control in the social media age, but I hold that there is a deeper cause. Modern philosophy's assault on reason and objectivity has led to the idea that there is no truth, that nothing is black and white, that there is no right and wrong and no provable standards of morality or achievement.  Ironically, it is the left's own subjectivism that underlies their MSNBC apologies. They are such subjectivists, they cannot even bring themselves to stand by their own criticism. As soon as they utter even a semblance of actual belief, rather than attempt to defend their remarks with a logical argument, they ignominiously retreat into the morass of neutrality and snarky evasion.

The total collapse of objective standards is the essence of today's culture. The core of modern progressive education appears not to be teaching children how to ascertain truth by thinking objectively and analytically, but rather making them feel good by intentionally eschewing standards. Rather than striving to meet an objective standard of excellence, educators are concerned only with propping up the students' pseudo self-esteem inculcated through years of undeserved praise , trophies for all, and smiley faces on "fuzzy" math tests. Rather than teaching that pride is earned through actual achievement and willingness to suffer the consequences of failure, parents and educators construct a psychological house of cards ready to crumble at the first whiff of criticism.

While the left cannot bring itself to acknowledge objective individual achievement, there is one attribute they do urge us to celebrate - our membership in a group. Since the subjectivist left denies the possibility of rational, independent judgement and thus eschews the precepts of individualism, they regard people, not as individuals, but as members of collectives whose identities are determined by the attributes of their group. Rather than see individuals as unique products of choices exercised through freewill, to be judged according to "the content of their character", the multiculturalist left adopts the racist premise that individuals are products of their genetic linkage to some group, conditioned by their circumstances, their "environment", or their race, socio-economic class, or gender.

When individualism is replaced by collectivism, one's identity and sense of self-worth becomes tied to membership in a particular group.   Rather than seek individual goals and achievements by meeting and surpassing objective standards of excellence, individuals are encouraged to "celebrate" their group identity. Note that multiculturalism emphasizes "cultural diversity" rather than "individual" diversity. The implication is that actual differences can only be found within differing ethnicity's - not within different individual minds (see, for example, "whiteness studies").  Since individuals are essentially regarded as interchangeable members of a social organization, any affront to the group is a challenge to the member's pseudo self-esteem derived from membership in the collective - a notion that gives rise to the entire political correctness movement.    

The rejection of objective truth means that modern intellectuals must view ideas as the arbitrary products of conditioned mobs (see identity politics). This philosophy is responsible for pragmatic admonishments for politicians to disregard ideology and just "get something done."  In other words, according to them, it is fruitless to engage in ideological debates over archaic notions of principles related to the purpose of government, individual rights, and the laws of economics, because no such truth is available. Therefore, it is not necessary to reason or offer a policy that is logically consistent with abstract principles. One must forge consensus and compromise, generally through non-cognitive forms of appeal to emotion or fear.  And just what is it they should get done?  When you combine collectivism with the culture's default altruist ethos, it translates politically to egalitarianism - the idea that individuals should receive equal outcomes regardless of their ability, character, or productivity and to statism, the idea that the state must initiate force against individuals to achieve these economic and social outcomes.

America was once a nation of self-confident, resilient individuals eager to freely apply their minds to pursue happiness by overcoming the hardships of life.  The non-objectivity and relativism of post-modern philosophy has spawned an Offended Generation - a pathetic lot of fragile, whining imbeciles demanding a blue ribbon for existing and an Apology for being a victim of everything else that comes with it.

Monday, January 27, 2014

More on Bitcoin: Why It Cannot Replace Money

There has been much debate amongst economists over the nature and usage of bitcoins.  I recently wrote a post in which I briefly summarized the facts that give rise to the need for exchange and the necessary attributes of money, concluding that bitcoins will one day "go to zero" in terms of the gold price.  In the wake of many good comments, this post is a follow-up to that post and elaborates my views on the nature of bitcoins.  

First, it's important to define a few terms related to the meaning of exchange and money.  Following Reisman's Capitalism, a "media of exchange" are goods "sought neither as articles of personal consumption nor as means of further production, but as means of effecting further exchanges."  Media of exchange can be just about anything including cigarettes, cattle, furs, etc.  "The acceptability of the most preferred medium or media of exchange tends to go on increasing, until it or they are universally acceptable-i.e., have developed into money. Money is merely a medium of exchange whose use has grown to the point where it is directly and readily exchangeable against all other goods in a given geographical area." As discussed in the previous post, precious metals became accepted as money due to their unique physical properties.

Another important concept when understanding the nature of bitcoins is "standard money." Again quoting Reisman: "Standard money ...is money that is not itself a claim to anything further.  It possesses ultimate debt-paying power, in that when it is received no further claim to be paid is present.  Under a gold standard, standard money is gold.  Any paper money that exists is a claim to it."  

In a 2013 article, The Bitcoin Money Myth, Austrian economist Frank Shostak wrote: "Bitcoin is not a new form of money that replaces previous forms, but rather a new way of employing existent money in transactions. Because Bitcoin is not real money but merely a different way of employing existent fiat money, obviously it cannot replace it." In other words, a bitcoin is not itself money, because it always relies on an actual form of money (standard money) to underlie it. 

To see this point, consider the following example.  Most people are familiar with Western Union.  It is a way to transfer money to someone in a different place. You can go to a Western Union office, give them a certain amount of cash, and someone in a different city can go to a Western Union office and get the money.  Western Union provides a transferring function and you pay them a fee for their service. 

Let's say Western Union created tickets.  One buys a ticket for say $100.  He can then send the ticket to someone, rather than the $100 bill. The ticket is market "$100 payable on demand at any Western Union office."  When someone receives the ticket, he can take it to a Western Union office and get the $100 in cash. He may be able to trade the ticket to someone for a good or service because the recipient knows he can take the ticket to a Western Union office and get $100.  The tickets in this instance represent transferable claims to standard money payable upon demand to the holders of the tickets.      

The ticket is only valuable for three primary reasons.  First, the ticket is redeemable for $100 in standard money (in this context, the $100 fiat currency is standard money). In other words, the Western Union tickets would have no value in and of themselves.  Their value depends on the existence of, in this case, fiat currency or the $100. Second, the ticket is a legal obligation on behalf of the Western Union company to pay the ticket owner the $100 so that the bearer has a legal claim.  Third, the dollar amount, $100 in this case, is known and not subject to change.         

Bitcoin essentially provides a transfer function.  Like the Western Union tickets, one buys a bitcoin for a certain price and the transaction is recorded.  One can then send a bitcoin to another party to pay for a certain good or service if they are willing to accept it.  With respect to this transfer function, Bitcoin employs sophisticated network technology and appears to be very good at transferring the coins securely and anonymously.    
  
Like the Western Union example, when someone receives the bitcoin, the bitcoin is only valuable to the extent that someone can trade it for a good or can sell it to someone else for standard money.  Again, as Shostak notes, its value depends on the existence of another form of money.  However, unlike the Western Union example, no one is legally obligated to redeem a bitcoin for actual money, i.e., once you buy the bitcoin, no one has a legal obligation to accept it or redeem it, and consequently, the value of the bitcoin may change substantially in terms of actual money, potentially being worthless.  
   
This is why, from an economics standpoint, bitcoins cannot replace actual money. Bitcoin is not money in and of itself. The bitcoin price is essentially the price of transferring already existent fiat currency or, in another sense, it is simply a non-binding "claim" to standard money.   Since the value of bitcoins are not in their usage as standard money but in their usage in transactions, bitcoins are only as good as the fiat currencies in which they can be sold.  In other words, since bitcoins are not redeemable in something physical, if fiat currency goes to zero, bitcoins will go to zero.  Bitcoins may in fact go to zero even if fiat currency does not go to zero, if people just decide to stop using them for some reason. However, if fiat currency goes to zero, in terms of gold, what good is a bitcoin in its present form?    

So why does anyone use bitcoin and what accounts for its popularity in some countries and industries?  Merchants or individuals who accept bitcoins in foreign countries are betting that they can either exchange the bitcoins for something or cash them in for a more stable currency in the future as opposed to accepting local currency.  This is a rational bet if you live in a country with a tyrannical government and/or an unstable currency.  I would rather possess an anonymous potential claim to a valuable currency (in the form of a bitcoin) than possess a currency which is itself of little future value or obtained under monitoring from a government authority (Iran, China, etc.).

While bitcoins may serve a purpose and be of value in this and many other contexts, its actual nature, purpose and value should be better understood by potential buyers and sellers.