Friday, October 30, 2009

Update: "Stimulus" Can Not Work and Reality is Still What It Is

In previous posts [1, 2], I explained why it is logically impossible for government "stimulus" programs to generate real economic growth. In short, a dollar spent by the government is a dollar that will not be spent by someone else. The government is not a productive enterprise. It obtains funds through taxation, borrowing, or indirectly through the inflation of the money supply and simply redistributes these funds to others. "Stimulus" spending is at best a zero sum game and, in fact, profoundly destructive as it distorts capital markets and replaces productive spending, such as saving and investment, with consumption.

To help illustrate this point, here is an interesting chart from Clusterstock that shows the effect of the federal government's "cash for clunkers" program. The chart shows that a significant portion of the currently reported GDP is a result of this program:
according to the BEA the spike you see [in the chart] added 1.66% to the U.S. GDP growth figure reported. Thus without it, GDP growth would have been only 1.89% (3.5% - 1.66%) in Q3.
However, they correctly point out that all the program did was rob from future demand. In other words, individuals that would have purchased cars next quarter, purchased them now. Therefore, although current GDP is up, future GDP will be correspondingly down.

Next quarter, we won't just be returning to business as usual for auto output. Don't forget that Cash for Clunkers pulled future auto demand, ie. some of Q4 demand, into Q3. Thus Q4 is likely to be very weak since many people who planned to buy a car in Q4 probably took advantage of Clunkers and bought in Q3.

Next quarter, not only are we unlikely to get Q3's boost, but motor vehicle output data could subtract from GDP as well.

Another interesting CNN article reports that auto sales analysts at Edmunds.com performed a study which shows that the government actually spent $24,000 per car - not the $4,500 per car that was the headline per car subsidy. Why? Because many of these people would have bought new cars anyway at some point in 2009. They calculate that only 125,000 of the cars sold under the program were cars that would not have ultimately been purchased with the subsidy. Therefore, the government's expenditure of $3.0 Billion divided by 125,000 cars works out to $24,000 per car.

Thanks government. Good work!

Thursday, October 29, 2009

Update on Deflation Confusion

John Browne makes the same point I made in my last post but in more detail. Here is a quote:
In the popular mentality, however, inflation is simply defined as prices rising. After decades of steadily rising prices, people seem to have forgotten that prices sometimes fall. In light of the bursting of a number of record-breaking, government-fueled asset bubbles, prices should be declining across the board (as they did in the Great Depression). The fact that prices are stable, or have even rallied in some sectors, indicates that inflation is already spreading across the economy.

Wednesday, October 28, 2009

The Fed's Wish Part III: Exit Strategy and Deflation Confusion

In two previous posts, The Fed's Wish, and The Fed's Wish Part II: Coup D'Etat?, I explained the recent activity of the Federal Reserve including the explosion of its balance sheet and its unprecedented creation of excess reserves. I also noted that In the process of this expansion, it has taken on unprecedented power and is "now threatening even greater usurpations of our liberty in the name of promoting financial 'stability'".

What has happened since?

In essence, the Fed has continued to purchase government securities and mortgage backed securities in the open market using money it creates out of thin air. As of October 21, 2009, the Fed's balance sheet reveals that reserve balances total $1.056 Trillion. Since "currency in circulation" has not changed as dramatically this year, these reserve balances represent the money created by the Fed in the past year. Analysts expect this number to go to $1.4 Trillion if the Fed stays committed to its treasury and agency purchase programs which are supposed to end in March 2010.

Typically, these excess reserves would be used by financial institutions to make loans to the public. Due to fractional reserve banking, this trillion dollars could be multiplied to perhaps as much as 10 trillion dollars by the banking system. Such an increase in the quantity of money would lead to hyperinflation and perhaps the total collapse of the monetary system. However, the Fed has induced these banks to leave these excess reserves at the Fed by paying them interest for the first time in history.

The problem now concerns what the Fed will do with these excess reserves? They could remove reserves by selling securities from their portfolio. However, this would put upward pressure on interest rates. They could raise the rate they pay banks to hold the excess reserves but this would only delay the inevitable and would require ever more credit expansion. They could allow the money into the banking system and cause a hyperinflation.

In addition to my first two posts, I recommend two more articles that nicely detail this problem. The Fed's Dilemma by Professor Philipp Bagus discusses the origin of the problem and possible solutions. Does the Fed Need an Exit Strategy by Robert P. Murphy provides good overview and, in particular, rebuts Paul McCulley's recent argument that the Fed can simply increase the rate they are paying banks to hold reserves.

Ultimately, there is no way to cheat reality. No matter how many PhD.'s and Nobel prize winning economists try, reality will win.

There is another interesting aspect to this problem which is rarely discussed. The bust portion of the boom-bust cycle caused by the government's credit expansion must result in a natural deleveraging process. In other words, recession or depression is the recovery process. As malinvestments (investments thought to have been sound on the basis of an expectation of continual credit expansion now revealed to be unsound) are liquidated and as firms and individuals rebuild their cash holdings, businesses go bankrupt, unemployment rises, and consumer prices tend to fall. This is the unfortunate price that must be paid to restore economic prosperity on a sound foundation.

Many economic pundits falsely characterize the path before us as one of either inflation or deflation. In other words, they mistakenly define these concepts as "increasing prices" or "decreasing prices", respectively. Consequently, they mistake the symptoms of economic fundamentals with the cause. Since they mistakenly believe that deflation is "falling prices", this natural deleveraging process described above is characterized as an evil to be avoided at any cost. Rather than understanding that falling prices are the "antidote to deflation" as Dr. Reisman explained, they advocate that the government print money on a massive scale in order to halt the so-called "deflation."

Inflation, properly defined, is an increase in the quantity of money above the increase in precious metals. If the government prints a massive amount of money as they are doing now, even though prices are not rising presently, inflation still has the same deleterious effects. Prices do not have to go up under inflation. They simply have to go down less than otherwise. In other words, in the absence of inflation, prices would naturally tend to go down due to increasing productivity. In the present circumstance, prices should drop precipitously. Due to the Fed's creation of money, prices are not falling as fast as they would otherwise. The Fed is propping up zombie banks that should go bankrupt or restructure. If interest rates were not being held artificially low, house prices would likely drop even further and even faster ultimately restoring growth to the housing market. In effect, the Fed's inflation is causing malinvestment and inducing less savings than would otherwise be the case in the absence of this money creation.

(Note, for example, that many economists currently regard increasing prices in the housing market as signs of recovery. Don't we like it when computer prices go down or when car dealers have sales? Why would rising prices ever be "good" for the economy?)

Furthermore, the Fed's purchase of government securities is enabling the federal goverment to temporarily spend with impunity. Such government spending encourages wasteful consumer spending and crowds out productive private capital investment. Currently, banks are borrowing money at 0 percent and lending to the government at 3 percent. Is this "good" for the economy?

The entire experience of Japan over the last 20 years is analogous. Rather than allowing the system to heal itself by facing reality, the Japanese government has propped up insolvent banks, rewarded politically powerful special interests, and therefore, never restored economic growth. Japan has been mired in stagnation for over twenty years.

The best thing the government could do is to recognize that it caused the problem, stop interfering, let the market heal itself naturally, and commit to a program of sound money, private property, and limited government. Yeah, right.

Stupid Design

The complexity of human physiology is hardly a reason to think humans were intelligently designed. In fact, I believe it is the exact opposite. Machines designed by humans, i.e., by intelligence, are simple. Consider the wheel, the catapult, rope, chariot, spear, gun, all the way to more "complex" machines like the internal combustion engine, the hot air balloon, refrigeration, electricity, or even the semi-conductor which utilizes a system of electric 1's and 0's. Are these "complex"?

If you were God, why in the hell would you have created humans this way? Why would He have created a liquid like blood to convey oxygen to different cells and organs pumped by a heart all governed by an intricate web of electric nerves? Why don't we have 20 arms, eyes in the back of our heads, or wheels for feet? Instead, we are an upright, slow, plodding hunk of fragile flesh and bones that must be constantly nourished by air, water, and food.

If simple, beautiful machines are evidence of intelligence then why would "complexity" also be a sign of intelligence? What would constitute evidence of natural evolution over billions of years?

Wednesday, October 21, 2009

Tales from the History of Money and Banking, Part II

In Part I, I stated the following:
There are many books on the history of money and banking, philosophy and economics but very few if any that integrate these concepts together to show how essential the concept of money is to civilization. The lack of integration directly follows from the disastrous state of the economics profession and of modern philosophy. The result is that most people are left without any understanding of the fundamental economic or philosophical ideas needed to combat the government's assault on money.
Consequently, I said that the purpose of these posts is to "to integrate the history, economics and philosophy of money and banking but in a way that makes the basic concepts intelligible to the non-economist and non-philosopher."

With that in mind, recall that in another post,
The Barometer of the End, I discussed the relationship of hyperinflation to the collapse of civilization, and I referred to a book titled Fiat Money Inflation in France: How It Came, What It Brought, and How It Ended, by Andrew Dickson White (the full paper is available at the previous link or in book form). White wrote this paper in 1912 to chronicle the hyperinflationary chaos of the French Revolution. What is fascinating about this history is that the process by which France went from dabbling with irredeemable paper money to all out hyperinflation, economic collapse, and the imprisonment and guillotining of businessmen all took place in only a five year span. Not surprisingly, this period mirrors the exact process by which virtually every hyperinflation manifests and is completely applicable to what is occurring in the United States today. In the foreword at the above link, Michael Kosares writes:

In 2012, the famous Andrew Dickson White essay you are about to read will celebrate its 100th anniversary. How can something written over 90 years ago describing monetary events occurring almost 215 years ago in France carry relevance for investors in the United States (and the rest of the industrialized world) today? The short answer is that the United States increasingly appears to be travelling a path similar to that of France in 1789 when the debasement of the currency, as Dickson White so matter of factly tells us, left the bulk of the population penniless.
Of course, the United States has actually been on this path for almost 100 years, albeit, at a slower pace. The Federal Reserve established in 1913 still maintained dollar convertibility to gold. In 1933, Roosevelt legally prohibited the private ownership of gold but maintained gold convertibility for foreign transactions. The last vestige of any tie to gold was ended in 1971 when Nixon closed the gold window by refusing to redeem dollars from foreign central banks. What this means is that as of 1971, the United States has been able to print as many dollars as it likes, whereas, on a precious metals standard, an increase would have been limited by the practical difficulty of actually producing the metal.

Without any tie to precious metals, the United States government, via the Federal Reserve system, has been constrained only by the willingness of those in power at any given time to limit the increase. Of course, just as in France during the revolution, politicians today find the power to create money out of thin air, rather than tax or borrow, to be virtually irresistible. Today, the Fed has created over 1 trillion in reserves in just the last year alone! What is fascinating is that, just as now, the politicians of revolutionary France knew full well the dangers of fiat currency. France had been the victim of the boom and bust fraud perpetrated by the notorious
John Law in the 1720's. As White states:

It would be a great mistake to suppose that the statesmen of France, or the French people, were ignorant of the dangers in issuing irredeemable paper money. No matter how skillfully the bright side of such a currency was exhibited, all thoughtful men in France remembered its dark side. They knew too well, from that ruinous experience, seventy years before, in John Law's time, the difficulties and dangers of a currency not well based and controlled. They had then learned how easy it is to issue it; how difficult it is to check its overissue; how seductively it leads to the absorption of the means of the workingmen and men of small fortunes; how heavily it falls on all those living on fixed incomes, salaries or wages; how securely it creates on the ruins of the prosperity of all men of meagre means a class of debauched speculators, the most injurious class that a nation can harbor,--more injurious, indeed, than professional criminals whom the law recognizes and can throttle; how it stimulates overproduction at first and leaves every industry flaccid afterward; how it breaks down thrift and develops political and social immorality.
Even Mirabeau, the French statesmen and "great orator of the Assembly", famously characterized fiat money as "A nursery of tyranny, corruption and delusion; a veritable debauch of authority in delirium."

Notice that here we have White's paper, written 100 years ago about an event, the French Revolution, which had taken place 120 years before its publication, discussing intellectuals who knew better from experience endured 70 years before the revolution! Yet, the French rationalized the issuance of fiat money in the same way Ben Bernanke and his ilk do today.

To give you a brief overview of the story, the French government of 1789, under heavy debt, issued notes called assignats that bore interest and that were secured by confiscated clergy land. This issue was meant to relieve some of the French government's debt and thought to be valid as it was secured by real property, originally worth more than the issue. Essentially, the issue of assignats was really just a convoluted way to sell or redistribute land confiscated by the government.

Originally, 400 million assignats were issued. Despite initial concerns, the new currency was a success. It temporarily relieved some of the government's debt and acted to stimulate the economy as the new notes found their way into circulation. But, the government was still broke. So, violating its initial promise, it issued 400 million more, this time setting a legal limit of 1200 million.

As prices began to rise and the assignats began to devalue, everything and everyone was blamed except the arbitrary creation of this currency. Ultimately, a law called the Maximum was passed which set strict price controls. Anyone caught violating the price controls was subject to fines, imprisonment, or death. Naturally, shortages developed, just as they would if the government forced a BMW dealer to sell his cars for $20, leading to rationing and bread lines. Yet, the government kept printing more assignats. Quoting White:

First, the Assembly had inflated the currency and raised prices enormously. Next, it had been forced to establish an arbitrary maximum price for produce. But this price, large as it seemed, soon fell below the real value of produce; many of the farmers, therefore, raised less produce or refrained from bringing what they had to market. But, as is usual in such cases, the trouble was ascribed to everything rather than the real cause, and the most severe measures were established in all parts of the country to force farmers to bring produce to market, millers to grind and shopkeepers to sell it. The issues of paper money continued. Toward the end of 1794 seven thousand millions in assignats were in circulation. By the end of May, 1795, the circulation was increased to ten thousand millions, at the end of July, to fourteen thousand millions.
You would think at this point they would have stopped, recognized their folly, and reversed course. But, you would be wrong. In 1794, a new government was formed - the Directory - and they drew precisely the wrong conclusion.

[The Directory] found the country utterly impoverished and its only resource at first was to print more paper and to issue even while wet from the press...Complaints were made that the array of engravers and printers at the mint could not meet the demand for assignats--that they could produce only from sixty to seventy millions per day and that the government was spending daily from eighty to ninety millions.
According to a later report "the entire amount of paper money issued in less than six years by the Revolutionary Government of France had been over forty-five thousand millions of francs--that over six thousand millions had been annulled and burned and that at the final catastrophe there were in circulation close upon forty thousand millions."

White aptly concludes:
Such were the results of allowing dreamers, schemers, phrase-mongers, declaimers and strong men subservient to these to control a government.
Unfortunately, it wasn't over.

The new government discontinued the assignat and "decreed" that a new paper money "fully secured and as good as gold" be issued under a new name - "mandats." If you think decreeing a paper money to be "as good as gold" to be the height of absurdity consider what they did next. Not only was it made illegal to refuse this currency as legal tender, it became illegal to even think that the "mandat" was not legitimate.
The old plan of penal measures was again pressed. Monot led off by proposing penalties against those who shall speak publicly against the mandats; Talot thought the penalties ought to be made especially severe; and finally it was enacted that any persons "who by their discourse or writing shall decry the mandats shall be condemned to a fine of not less than one thousand francs or more than ten thousand; and in case of a repetition of the offence, to four years in irons."
In addition to all of the usual effects of inflation, there is another interesting subplot. Inflation induces illiquidity as individuals tend to save very little as they anticipate the continued devaluation of the currency and cash is readily available. The wild fluctuations provide incentives for speculation and investment schemes designed to profit from continual nominal price appreciation. For example, those who obtain the new money early in the cycle can purchase physical goods which retain their value or participate early in booms in particular types of investments. Rather than thrift, hard work, and productivity leading to wealth, inflation rewards those simply clever enough to profit from the price inflation. Consequently, while "the vast majority of the wealthy classes suffered from impoverishment, the laboring classes, salaried employees of all sorts, and people of fixed income and of small means, especially in the cities, underwent yet greater distress" subsisting "mainly on daily government rations of bread", a certain class had accumulated extraordinary wealth by profiting from the inflation which led to wide disparities in wealth.
A few years before this the leading women in French society showed a nobility of character and a simplicity in dress worthy of Roman matrons. Of these were Madame Boland and Madame Desmoulins; but now all was changed. At the head of society stood Madame Tallien and others like her, wild in extravagance, daily seeking new refinements in luxury, and demanding of their husbands and lovers vast sums to array them and to feed their whims. If such sums could not be obtained honestly they must be had dishonestly.
This aspect interested me, because I recall a post by Dr. George Reisman detailing how credit expansion is actually responsible for increasing income disparity. Quoting Reisman:
The truth is that credit expansion is responsible not only for the boom-bust cycle but also for another major negative phenomenon for which public opinion mistakenly blames capitalism. Namely, sharply increased economic inequality, in which the wealthier strata of the population appear to increase their wealth dramatically relative to the rest of the population and for no good reason.
White provides a great summary of the entire process of inflation:

New issues of paper were then clamored for as more drams are demanded by a drunkard. New issues only increased the evil; capitalists were all the more reluctant to embark their money on such a sea of doubt. Workmen of all sorts were more and more thrown out of employment. Issue after issue of currency came; but no relief resulted save a momentary stimulus, which aggravated the disease. The most ingenious evasions of natural laws in finance which the most subtle theorists could contrive were tried--all in vain; the most brilliant substitutes for those laws were tried; "self-regulating" schemes, "interconverting" schemes--all equally vain. All thoughtful men had lost confidence. All men were waiting; stagnation became worse and worse. At last came the collapse and then a return, by a fearful shock, to a state of things which presented something like certainty of remuneration to capital and labor. Then, and not till then, came the beginning of a new era of prosperity.
And how did this end? Partially, through a phenomena discussed in Reisman's Capitalism - the "spontaneous remonetization of the precious metals." Quoting White:
but when all was over with paper money, specie began to reappear--first in sufficient sums to do the small amount of business which remained after the collapse. Then as the business demand increased, the amount of specie flowed in from the world at large to meet it and the nation gradually recovered from that long paper-money debauch.
And how long did it take?
But though there soon came a degree of prosperity--as compared with the distress during the paper-money orgy, convalescence was slow. The acute suffering from the wreck and rain brought by assignats, mandats and other paper currency in process of repudiation lasted nearly ten years, but the period of recovery lasted longer than the generation which followed. It required fully forty years to bring capital, industry, commerce and credit up to their condition when the Revolution began, and demanded a "man on horseback," who established monarchy on the ruins of the Republic and thew away millions of lives for the Empire, to be added to the millions which had been sacrificed by the Revolution.
Of course, the "man on horseback" was Napoleon Bonaparte. This period ended in dictatorship and world war just as the hyperinflation of Weimar Germany ended with Adolph Hitler and world war. Today, as we hear every reason given for the financial crisis except the correct one, as Nobel Prize winning economists and panels of the most educated statesmen clamor for more currency debasement, I point to White's 1912 paper about the 1789 French Revolution in which French intellectuals evaded the lessons of the 1720's. Will the intellectuals ever learn the lesson?

What this episode shows is that if politicians have the power to print money - they will. All that can constrain them is a legal prohibition of this power, i.e., a fully free and private banking system as would occur under a system of full laissez-faire capitalism. And the only thing that can bring about laissez-faire and a government dedicated to protecting individual rights is a
philosophy of reason, egoism, and capitalism.

The Essence of Socialized Medicine Exposed

Rarely do we hear a blatant exposition of the essence of egalitarianism from the left. Their ideology is usually cloaked in banal platitudes and ad hominem smears of any who dares to oppose them. That is why this video of a recent Robert Reich speech, linked over at Wealth is Not the Problem, is so startling. Beth Haynes subtitled her post "No Additional Comments Needed". Indeed, no comments to her comment about no comments needed either.

Wednesday, October 14, 2009

Blogs Under Attack By Our Choice Architect

In a previous post, I discussed Obama's horrifying nomination of Cass Sunstein to head the White House Office of Information and Regulatory Affairs concluding:

As a Platonist, Sunstein views himself as a Philosopher King able to divine the ideal forms of morality and politics which he and the chosen few must convey to the masses otherwise distracted by celebrities and sports news. As a pragmatist (or regulator), he must execute concrete actions to bring about the ideal world as revealed to the Left. As a behaviorist, his plans are predicated on the idea that humans must be herded like cattle to partake in "shared experiences" and "unchosen exposures" which will transform them into "ideal" citizens.
Recently, Sunstein, the self described "choice architect", was successfully nominated, and it is therefore not surprising to me that internet freedom is now under attack. Beth Haynes has a great roundup of various articles on this topic.

Freedom of speech, perhaps the last pillar holding up the remnants of Western Civilization, is under assault. I documented this in a different context in my previous post Trial Balloon of the Century saying:

...if freedom of speech were to be abrogated in the United States, it would be the final straw for advocates of freedom and should lead to an all out revolution. This is because without the freedom to think, all other rights are meaningless.
Anyone who values their freedom should understand the precedents being set by these regulations and act to stop them before it is too late.

UPDATE:
* See this re the Obama's administrations co-sponsoring of a UN resolution (with Egypt!) to limit freedom of expression (HT: Beth Haynes) (will have more to say on this later, it is right out of Cass Sunstein's playbook)

* See this excellent op-ed re the FTC's attack on bloggers (HT: Ari Armstrong, OActivists)

Government Debt Explosion

http://link.businessinsider.com/view/898.1vx/a2c8c25c

Monday, October 12, 2009

Sacred Scriptures of the Human Race

Robert G. Ingersoll was part of the Freethought movement of the 19th century and an outspoken opponent of religion. In 1894, he wrote a brilliant piece titled About the Holy Bible that not only provides a thorough expose of biblical contradiction but more importantly recognizes the fundamental conflict between religion and liberty, or, more specifically, between religion and man's happiness on earth. As the left, in addition to the right, turns towards religion, it is important to understand this conflict. The below excerpts represent a partial reprint of a previous post, but I believe his writing is so outstanding I am posting this part again. I enjoy his writing more for its style than any technical philosophy (he was a famous orator) and his ability to articulate the essence of this conflict in such a passionate and eloquent way:

There are many millions of people who believe the Bible to be the inspired word of God -- millions who think that this book is staff and guide, counselor and consoler; that it fills the present with peace and the future with hope -- millions who believe that it is the fountain of law, Justice and mercy, and that to its wise and benign teachings the world is indebted for its liberty, wealth and civilization -- millions who imagine that this book is a revelation from the wisdom and love of God to the brain and heart of man -- millions who regard this book as a torch that conquers the darkness of death, and pours its radiance on another world -- a world without a tear.

They forget its ignorance and savagery, its hatred of liberty, its religious persecution; they remember heaven, but they forget the dungeon of eternal pain. They forget that it imprisons the brain and corrupts the heart. They forget that it is the enemy of intellectual freedom. Liberty is my religion. Liberty of hand and brain -- of thought and labor, liberty is a word hated by kings -- loathed by popes. It is a word that shatters thrones and altars -- that leaves the crowned without subjects, and the outstretched hand of superstition without alms. Liberty is the blossom and fruit of justice -- the perfume of mercy. Liberty is the seed and soil, the air and light, the dew and rain of progress, love and joy.
In a section titled Is Christ Our Example?, Ingersoll writes:

He never said a word in favor of education. He never even hinted at the existence of any science. He never uttered a word in favor of industry, economy or of any effort to better our condition in this world. He was the enemy of the successful, of the wealthy. Dives was sent to hell, not because he was bad, but because he was rich. Lazarus went to heaven, not because he was good, but because he was poor.

Christ cared nothing for painting, for sculpture, for music -- nothing for any art. He said nothing about the duties of nation to nation, of king to subject; nothing about the rights of man; nothing about intellectual liberty or the freedom of speech. He said nothing about the sacredness of home; not one word for the fireside; not a word in favor of marriage, in honor of maternity.

He never married. He wandered homeless from place to place with a few disciples. None of them seem to have been engaged in any useful business, and they seem to have lived on alms.

All human ties were held in contempt; this world was sacrificed for the next; all human effort was discouraged. God would support and protect.

At last, in the dusk of death, Christ, finding that he was mistaken, cried out: "My God My God! Why hast thou forsaken me?"

We have found that man must depend on himself. He must clear the land; he must build the home; he must plow and plant; he must invent; he must work with hand and brain; he must overcome the difficulties and obstructions; he must conquer and enslave the forces of nature to the end that they may do the work of the world.

Here is my favorite excerpt:

For thousands of years men have been writing the real Bible, and it is being written from day to day, and it will never be finished while man has life. All the facts that we know, all the truly recorded events, all the discoveries and inventions, all the wonderful machines whose wheels and levers seem to think, all the poems, crystals from the brain, flowers from the heart, all the songs of love and joy, of smiles and tears, the great dramas of Imagination's world, the wondrous paintings, miracles of form and color, of light and shade, the marvelous marbles that seem to live and breathe, the secrets told by rock and star, by dust and flower, by rain and snow, by frost and flame, by winding stream and desert sand, by mountain range and billowed sea.

All the wisdom that lengthens and ennobles life, all that avoids or cures disease, or conquers pain -- all just and perfect laws and rules that guide and shape our lives, all thoughts that feed the flames of love the music that transfigures, enraptures and enthralls the victories of heart and brain, the miracles that hands have wrought, the deft and cunning hands of those who worked for wife and child, the histories of noble deeds, of brave and useful men, of faithful loving wives, of quenchless mother-love, of conflicts for the right, of sufferings for the truth, of all the best that all the men and women of the world have said, and thought and done through all the years.

These treasures of the heart and brain -- these are the Sacred Scriptures of the human race.

Friday, October 9, 2009

Iran Builds Bomb, America Bombs Moon, Obama Gets Prize

Awarding the Nobel Peace Prize to Obama is entirely consistent with the underlying ideology of modern intellectuals.

President Barack Obama won the 2009 Nobel Peace Prize on Friday in a stunning decision designed to encourage his initiatives to reduce nuclear arms, ease tensions with the Muslim world and stress diplomacy and cooperation rather than unilateralism.

To understand this ideology and how it applies in this context, consider the meaning of the term "unilateralism". This term is defined as follows:

the doctrine that nations should conduct their foreign affairs individualistically without the advice or involvement of other nations

Notice that this term is used pejoratively as if any country who acts "without the advice" of other nations is necessarily wrong. Obama's willingness to "stress diplomacy and cooperation rather than unilateralism" is why he was awarded the prize. Recall that the charge of "unilateralism" was exactly the accusation leveled at Bush when he decided to act without the consent of the United Nations. Whether Bush's polices were valid is another question. I certainly do not endorse everything he did. However, my point is that these intellectuals did not necessarily disagree with Bush's policies as much as they disagreed with his methodology, i.e., that he acted unilaterally or asserted American interests without their consent and endorsement.

The doctrine that a nation must subjugate itself to the will of other nations follows directly from modern pragmatism - a point I also addressed in my post, Obama Takes The Tiger Out of Paper Tiger. Since these intellectuals replace objectivity with moral relativism, which in this context means multiculturalism, they do not regard any country as being morally superior to any other. In their view, a free country is not necessarily better than a dictatorship. This is why a nation like Cuba holds a membership on the U.N.'s Human Rights Council. When one abandons reason, he must to turn to a group and seek consensus and compromise. To prostrate yourself before a motley council of amoral bureaucrats is the hallmark of virtue to the modern intellectual.

And what exactly would a pragmatist seek to achieve in foreign policy, i.e., what would be the standard by which he would determine what "works"? Since "peace" is their ostensible goal, this means that any action in the short run that seems to be a step towards non-fighting would be regarded as good. Therefore, "easing tensions with the Muslim world" or appeasement of our enemies is regarded as worthy of praise and even a Nobel Prize. In the long run, will appeasement of those who overtly seek our destruction result in "peace"? To them, who knows? They must be pragmatic which means making everyone feel good right now.

In a prior post related to Obama's position on Israel, I wrote

...as a pragmatist, Obama must act. What should he do? Should he recognize the objective distinction between Israel and her enemies and relate the interests of Israel to the objective interests of the United States which you think might include freedom and individual rights? Of course not. There is no objective truth. No "culture" is better than any other. He is "not concerned with ideology but with facts." He seeks "peace" - without ever understanding what peace actually means.

Objectively, "peace" is a state or condition that exists in the absence of war but it can not mean simply the momentary cessation of hostilities. If this were the case, every time soldiers stopped shooting it would be considered a state of "peace". "Peace" also implies "harmonious relations" or "freedom from dispute" which implies a long term political resolution based on two governments recognizing the right of the other to exist and respecting each others territorial boundaries. This does not mean you necessarily agree with everything the other country does, but it does imply a certain fundamental relationship between the two parties.

Based on this fact, how can there be "peace" between Israel and Hamas if Hamas is dedicated to the destruction of the Israeli state and the imposition of Islamic law? The pragmatist can not think in such terms. "Peace" to the pragmatist means absence of fighting right now. Therefore, the goal must be to get the parties to stop fighting - at any cost. Logically, since Israel is stronger militarily, Obama must ask Israel to sacrifice itself to its enemies in order to achieve "peace". After all, if Israel were to continue to destroy its enemies it will result in death and that must stop right now. Won't stopping the fight now allow Hamas to regain its strength and lead to further attacks on Israel in the future leading to even more death in the long run not only of Palestinians but of our Israeli allies? Of course, but Obama must be pragmatic.

The same principle underlying this argument could be applied to Obama's call for nuclear disarmament and for his decision to abandon a European missile defense program.

As Iran continues to build a nuclear bomb, as Chavez seeks Russian help to realize his own nuclear ambitions, as troop morale hits an all time low, what is clear is that Obama's weakness and pragmatic appeasement is making the world more dangerous not less. Obama has given a tacit green light to every enemy of the United States by implying that we will not defend our values either morally or practically. Moral agnosticism is why he was given this prize. Although, he is willing to bomb the moon.

Wednesday, October 7, 2009

Africa's Big Brother versus the "Masters of Light"

Two recent events struck me as representing something of a contrast - the contrast between life and death.

First, according to this
article, "African bishops attending a Vatican meeting are speaking about the election of Barack Obama in divine terms" and "Archbishop Gabriel Charles Palmer-Buckle of Accra, Ghana said Wednesday that there was 'a divine plan behind' Obama's election." "The archbishop of Kinshas, Congo, Monsignor Laurent Monsengwo Pasinya, told the formal synod itself that it would be wise to not ignore what he called a 'primordial event' in recent times." Finally, "Archbishop John Onaiyekan of Abuja, Nigeria gave more tangible reasons for praise in meeting with reporters" saying:

"Obama has the authority to talk straight to our bad leaders and tell them they are messing up our countries," he said. Besides, he added, "In Africa we are always happy when our brother is big." [emphasis added]
Meanwhile, about 1200 miles north, the Royal Swedish Academy of Sciences announced that the 2009 winners of the Nobel Prize in physics were three Americans, Charles K. Kao, 75, Willard S. Boyle, 85, and George E. Smith, 79.

They helped develop fiber-optic cable and invented the "eye" in digital cameras — technology that has given rise to film-free photography and high-speed Internet service, revolutionized communications and science, and utterly transformed the way we live, work and amuse ourselves.

...These three Americans, the Royal Swedish Academy of Sciences declared, are "the masters of light" whose work "helped to shape the foundations of today's networked societies."

The African bishops represent all of those who have abandoned reason, who rely on mystic revelations from authority, and yearn to be subjugated and dictated by a Big Brother. The bishops and their masters in the Vatican are a stark reminder of the fact that faith and force are corollaries - that when reason no longer provides the framework for human discourse - only a gun or a burning stake remains.

The physicists represent all of those who embrace the life giving power of the independent, reasoning mind. They represent those who pay heed to Bacon's admonition that "nature to be commanded, must be obeyed." They represent those who have the courage to follow their own convictions born from ruthless objectivity and years of relentless, painstaking effort.

Isn't it ironic that men who suspend reason, zealously performing cultish rituals while dogmatically adhering to the dictates of ancient scriptures, claim the mantle of the enlightened spirit? Isn't it ironic that it is supposedly through faith, not reason, that man attains a state of grace and fulfillment, yet, it is religion that brought man into the Dark Ages, substituting superstition for knowledge, self-sacrifice for happiness, and subjugation for freedom?

As we witness the left turning more (HT: Rabiera, OActivists) and more and more to religion to justify the morality of altruism upon which welfare statism and despotism depend - as conservatives on the right vainly attempt to justify freedom on religious grounds (HT: Ari Armstrong, OActivists) - as we observe the daily barbarism of the Middle Eastern theocracies and the wholesale poverty and slaughter in an African continent mired in primitivism - as you read these words on your computer screen or on your cell phone's web browser, say a silent thank you to the real "masters of light."

Saturday, October 3, 2009

The "Dreier Model"

In December of 2008, Marc Dreier was arrested for perpetrating an incredible Ponzi scheme. As this riveting Vanity Fair article details, Dreier's tale mirrors the sequence of events, both practical and psychological, that seem to always play out in these schemes. Quoting the article:

Great things were always expected of Marc Dreier, and he expected them for himself. He needed the hotshot litigating career and a life stuffed with rich men’s toys. He needed a Hamptons beachfront house. Thus began a four-year Ponzi scheme—involving audacious impersonations and $380 million stolen from 13 hedge funds—which all unraveled just days before the Madoff scandal broke, bringing the 59-year-old attorney a 20-year prison sentence.
Anyone who reads this account will surely be fascinated by the details of Dreier's scheme. They will marvel at the sheer audacity of Dreier's fraud, ponder his deeper psychological motivations, and wonder how anyone in these circumstances could imagine that such a scheme could end in anything other than ruin, disgrace, and a life in prison.

Let me offer you another angle. If you read this account or the details of countless prior Ponzi schemes and you abstract the essentials from the details, you will notice a pattern.

First, the perpetrator is always at some pivotal point in his life inducing consideration of something nefarious. In this case, Dreier was undergoing a mid-life crisis brought on by the unfulfilled expectations of a prodigious Harvard graduate and the jealousy of his peers that had seemingly achieved so much more.

Second, the scheme is always believed to be only a quick fix or a temporary means to some legitimate end. In Dreier's case, after being denied loans to start his own law firm, he believed that the first theft would enable him to start the business and that he would ultimately return the money he stole.

Third, the first amount was not enough to "fix" the problem and the thief finds the temptation to steal again irresistible. After creating a phony $20 million note which he sold to a hedge fund, Dreier simply did it again. He was able to create money out of thin air, a power that few would be able to resist.

Fourth, the thief achieves some sort of nominal "success" in terms of creating the perception that he has achieved something real and to some extent actually does succeed in creating some actual business. This temporary "success" creates delusions of grandeur. As Dreier expanded his firm with stolen money, he brought in real lawyers who generated real revenue and even opened a Sushi restaurant in Los Angeles. In fact, the legal community took notice of this interesting new model - the so-called "Dreier Model":
Within the legal community, Dreier was viewed as a rising star. He told anyone who would listen that Dreier L.L.P. was a new kind of law firm, one where lawyers could work with freedom, unburdened by old-school bureaucracy and administration, all of which Dreier handled himself. In a 2007 article for The National Law Journal, Dreier argued that the “Dreier Model,” as he christened it, freed attorneys from petty bickering over profits and allowed them to operate as true legal entrepreneurs.
Fifth, the ever expanding business fueled by money created out of thin air, requires ever greater amounts of capital to keep it afloat and to satiate the perpetrator's appetites and need for public glory. At the peak, Dreier created $380 million of bogus notes that he sold to 13 different funds. Among other things, he used the money to buy $40 million worth of art for his lobby, a yacht, and a beach house in the Hamptons.

Sixth, something happens to stop the spigot and the house of cards begins to crash down. To the bitter end, the thief resorts to ever more audacious maneuvers to keep the scheme going although he senses that the game is over. I won't ruin the article for you - just read it.

Seventh, the perpetrator is arrested and sentenced to prison where he discovers what is truly important in life, repents his sins, and spends his remaining days in a semi-trance depressed, humiliated, and suicidal.


What struck me in analyzing this pattern was that it is exactly the pattern followed by the Federal Reserve system in creating the boom-bust cycle.

The Federal Reserve is able to create money out of thin air just as Dreier did when he sold fake notes to hedge funds. The credit expansion, meant only to temporarily ameliorate or "smooth out" an economic downturn, initially masquerades as actual investment capital, lowering interest rates and stimulating capital investment. As this fake money filters through the monetary system where it is mulitiplied by fractional reserve banks, businesses and consumers find themselves awash in easy money and use it to fund virtually every desire. Rather than a system built upon thrift and hard work, easy money creates a kind of moral decadence as everyone and anyone gets money for nothing - one might say that people are "freed from the petty bickering over profits".

Of course, at some point the party must stop. Prices begin to rise and to head off an inflationary panic, the Fed closes the spigot of liquidity. The hangover begins. Investments once thought to be profitable are seen as malinvestments and must be liquidated. Firms and individuals must deleverage to raise cash as loans are called in. Waves of bankruptcy's exacerbate a downward spiral. Ultimately, such a process is necessary and vital to restoring economic growth upon a foundation of real capital, savings, and productivity.

It can be seen that the only difference between the individual perpetrator of a Ponzi scheme and the Federal Reserve is that the former properly receives condemnation, scorn, and a prison sentence whereas the latter receives the imprimatur of Nobel Prize winning economists and encouragement from the government to simply continue the scheme. Economists do not call the Fed's inflation of the money supply and manipulation of credit the "Dreier Model", they call it Keynesian economics.

Unfortunately, I do not see Paul Krugman, Ben Bernanke, Barney Frank, or Timothy Geithner sharing a cell with Marc Dreier or Bernie Madoff anytime soon.