Friday, October 8, 2010

What I'm Thinking #1

Well, glad to be back after a few weeks of tending to some political activism, a very pregnant wife, and this thing I call my JOB. Thanks for checking back. To help clean my plate of an overwhelming pile of articles and topics, I've decided to create a new feature called "What I'm Thinking" as a less formal roundup of various topics to go along with my longer more formal posts.

First, this blog was chosen as one of the 30 Best Blogs for Exploring Objectivism. Yeaahhhh! I'm honored to be included in this great list!

Now to less nice stuff...

The economy is a disaster, and part of the reason is that the folks who dedicate their lives to studying the economy do not understand the rudimentary principles of the subject and mostly because they, uh, eschew the method of thinking in principle. To begin to gauge the economic illiteracy of the nation's economic professionals, consider the following quote from an article related to why CEOs are presently unwilling to hire:

"They [corporations] are lean and mean and they have laid off lots of people. They are very efficient and their output is enough to meet demand, so results look good," said Keith Springer, president of Capital Financial Advisory Services in Sacramento, California. "That doesn't help the overall economy because it doesn't help more people get jobs."
So, according to Springer, efficient productive corporations do not help the overall economy. Ok. Then, let's consider the opposite scenario. Say corporations were bloated, inefficient and unproductive. Would that be good for the overall economy?

One of the most consistently egregious offenders is Paul Krugman. In this post, he once again tells us that too much saving is the problem, not the solution, and accuses those who think "only a moron could believe that the answer to a problem created by too much debt is to create even more debt" to be committing the fallacy of composition. Ironically, in trotting out the Keynesian "paradox of thrift" argument, it is Krugman that commits the fallacy of composition (see, for example, page 693 of George Reisman's Capitalism: A Treatise On Economics, The Hoarding Doctrine as an Instance of the Fallacy of Composition and p. 884 Critique of the Paradox of Thrift, and p. 838 Critique of the Investment-Opportunity and Underconsumption/Oversaving Doctrines.) Among other factors, this is because "what some individuals save by means of adding to their cash holdings other individuals have had to dissave" so an individual can hoard, but the economic system as a whole can not! One of my favorite Reisman quotes:
The Keynesians' preoccupation with the utterly fictitious problem of saving as a cause of poverty bears major responsibility for the very real problem of growing poverty as the result of a lack of saving.

Furthermore, as George Reisman shows in this outstanding paper, it is savings, not consumption, that is the main source of spending in the economy. Krugman, please...just read this...please!

One of my favorite commentators, Bill Frezza, explains that he is optimistic because the Washington "giveaway game" is bankrupt, and he points to the actual way out:

The only way to escape this death spiral - if it can be escaped - is economic growth. We've done it before and just maybe we can do it again. And the only way our economy is going to start growing again is to unleash the power of the American people, not doing make-work projects but responding to the needs of businesses each charting their own path through the competitive thicket in search of real profits. No subsidies, no kickbacks, no mandates, no handicaps, no shackles. Just go create more wealth than you consume.
But why would would anyone endeavor to "create more wealth?"

Businesses are sitting on enough capital to fund a return to growth but they have gone on strike, just as they did after Herbert Hoover and Franklin Roosevelt teamed up to drive them into the bunkers last time an easy-money speculative orgy turned spectacularly sour. Cranking up the printing presses to push low interest government loans on companies that don't want to borrow money is idiotic. Building high speed trains to nowhere is idiotic. Demonizing the two percent of the populace that makes the vast majority of the business decisions in this country is especially idiotic. Only removing the boot of uncertainty and the burden of jacked-up taxes, promising to GET OUT OF THE WAY, will revive the spirit of industry and commerce that made us who we were.
But, will Obama and his ilk "get out of the way?" Of course not. In fact, the Federal Reserve announced recently that they are gearing up to shower even more counterfeit money on the banking system - the very cause of the boom-bust cycle. These expectations are causing the dollar to fall in value while precious metals prices explode. As another of my favorite economists, Robert Murphy, explains in The Meaning of Gold in the News, rising commodity prices (or prices rising more than otherwise to be more precise) are the inexorable consequence of this inflation of the money supply. So, who will the government blame for rising gold prices caused by the government? The gold market of course. In a move which should dredge up eerie memories of FDR's confiscation of gold in 1933, Congressman Weiner and Waxman are starting hearings - but just to investigate the "relentless advertising" of gold dealers...not as a precursor to something more nefarious...

As an Austrian economist, Murphy clearly understands basic principles of economics which prove why "stimulus" can not work to restore real economic growth. To illustrate, he provides an interesting empirical analysis of the deleterious effects of government stimulus.

Of course, the big story today related to all of this is the so-called "race to the bottom" as countries compete to devalue their currencies faster than the next under the mercantilist notion that they must prop up their export industries. I love the following quote from an article by Robert Blumen related to the mercantilist efforts by China (and implicitly Japan) to keep their currencies from appreciating:

Most writers presume that the so-called “export-lead growth strategy” has something to do with economic growth because of its name. But naming something incorrectly does not prove cause and effect. If I drank a dozen beers before getting in my car and called it the “beer-lead safe driving strategy”, that would not make it so. In terms of its actual effects it should be called the “export subsidization savings-wasting strategy”.
If you still think the government can borrow and spend its way to prosperity, you might want to consider Meredith Whitney's recent 600-page report on the state of the states "entitled 'The Tragedy of the Commons,' that rates the financial condition of America's 15 largest states, measured by their GDP. Whitney claims that the study is the most comprehensive, in-depth analysis of the states' murky patterns of spending, revenues and benefits programs ever assembled by the government, foundations, or another research firm." Quoting the article:

What Whitney found reminds her of the poor disclosure and arcane accounting rules that hid the fragile condition of the banks and monoline insurers that she unmasked. "The states represent the new systemic risk to financial markets," says Whitney. "I see a lack of transparency and an abundance of complacency on the part of investors and politicians, just as we saw before the banks imploded."
As I have predicted before - don't be surprised if the Fed ends up stepping in to buy the debt of these states as a backdoor way of enabling states to print money. It is already happening since many of these states are receiving bailout money from the federal government - money financed to some extent with the Fed's printing press. I'm increasingly convinced that unless legally prohibited, the politicians will try and "inflate away" this problem, i.e., debase the dollar to such an extent that it renders the nominal value of this debt to be less debilitating. In simple terms, through inflation, the government is trying to make trillions of dollars not seem like so much money...Of course, such an approach is politically palatable because it acts as a hidden tax and is distributed arbitrarily and unequally over an unclear period of time, i.e., no one can blame it directly on any one politician...
To wrap this up and get a good overview of the financial climate, take some time and enjoy yet another of my favorite hedge fund managers and another.

Now, if you fear that Obama is not taking these concerns seriously and that his agenda of heaping trillions of dollars of debt on the American taxpayer and fostering government dependency, while demonizing, shackling, and punishing the productive is immoral and impractical - then according to Obama and the Democratic Party you must be:

A) A racist
B) Part of a powerful, special interest lobby
C) "influenced by a simple slogan rather than the facts or the truth or what's happening"
D) A racist
E) All of the above
In fact, according to Warren Buffet, the policies don't need to change - you just need to get over it and be happy. Not so fast. Scott Rasmussen has some news and some poll data for Mr. Buffet and Obama.
[T]he Tea Party movement has been one of the most derided and minimized and, frankly, most disrespected movements in American history. Yet, despite being systematically ignored, belittled, marginalized, and ostracized by political, academic, and media elites, the Tea Party movement has grown stronger and stronger.
He must be an uninformed, racist, corporate lobbyist.
To Obama's eternal chagrin, we are not yet quite as advanced as our European comrades. You see, in Europe, they don't allow all that crazy free speech stuff. In fact, outspoken Dutch politician, Geert Wilders, is currently on trial for having the audacity to criticise Islam.
Prosecutors say Wilders incited hatred against Muslims with remarks comparing Islam to Naziism and by calling for a ban on the Quran. Wilders argues he has a right to freedom of speech and his remarks were within the bounds of the law.

If convicted, he faces up to a year in prison. He could keep his seat in parliament.
I'm sure Molly Norris could talk some sense into Wilders - once she comes out of hiding from Muslims who have threatened to kill her over the Muhammad cartoons.

Here is another great idea from Europe:
The UK's tax collection agency is putting forth a proposal that all employers send employee paychecks to the government, after which the government would deduct what it deems as the appropriate tax and pay the employees by bank transfer.
Nice, what better way for the government to remind us peasants: "we own your life."
While Obama tries to impose socialism - he should pay attention to those who know better - Sweden and Cuba which may even be turning away from socialism! And, an "Austrian informed member of the U.K. parliament" wants to do away with fractional reserve banking!
Signs of life.


Anonymous said...

Yay! You're back!
I just had a preview before bed. Will return through the weekend to dig in and read.
Thanks for all the links!

Galileo Blogs said...

I like the style of this post. It provides a quick, opinionated review of current issues. Nice job!

Doug Reich said...

Thanks for the feedback! Feels good to get going again.

Per-Olof Samuelsson said...

I don't think Paul Krugman is literate enough to understand a word of what George Reisman has written.

Doug Reich said...


Funny. I hesitated when I wrote that since, of course, Krugman would never read or grasp Reisman's position. He is epistemologically and perhaps, psychologically, incapable of grasping that type of argument, viz., an argument based on facts, logic, and reason.

mike said...

good to have you back. Hopefully you don't leave us in the dark this time. your articles are a gem and pleasure to read and understand from. I think you should do more articles on environmentalism and going green. As a chemist I see this very prevalent throughout my field.

Doug Reich said...


Thanks for the comment!

I have written pretty extensively on environmentalism - so if you go to the 'search' box on the home page and put in environmentalism, etc. you will see a lot of posts

thanks again!

mike said...

perhaps you can expand on multiculturalism a bit.

Lemming Master said...

I agree with Galileo Blogs. It reads like an opinionated news review. I'll be back.

Rogue Operator said...

Good review of some economic issues from an Austrian perspective. Much appreciated.

Richard said...

I'm absolutely sick to death of hearing the words "the economy" used as if it were a monolithic deity by many politicians and intellectuals. Considered in such terms as what is good for *the economy*, not what's right or wrong, or good for *people*.

I don't give a damn about the economy as far as it goes. Unfortunately the economy is bound up in politics and altruism and has potentially devastating consequences for us all.