Wednesday, December 29, 2010

Inflation is Not "Recovery"

"Housing Recovery Stalls."  I love headlines like this, because in a few simple words are embedded virtualy every economic fallacy of the last hundred years or so.  (It also ties into my recent series of posts on the Federal Reserve.)  According to this article: "A new bout of declining home prices is threatening to hamper the U.S. recovery, just as consumers and the overall economy have been showing signs of healing."


What if the headline read "Food Recovery Stalls" or "Microwave Oven Recovery Stalls" and the article bemoaned the fact that food prices or microwave oven prices had decreased?  When prices go down, doesn't that make us richer?  Isn't that a cause for celebration since we can buy more food, ovens, and houses with the same amount of work? I'll repeat what I wrote in a previous post, "Houses are Not Investments":    


As Dr. Reisman has pointed out in Capitalism and in his recent post, houses should not be regarded as investments. (I'm referring to houses purchased to live in, not to rent to others.) Houses are depreciating consumer goods although the rate of depreciation is slower than many consumer goods. So why do people regard houses as investments and often see equity in their home as a primary savings vehicle? Quoting Dr. Reisman:
Only decades of inflation and credit expansion could make it possible for people to think of the houses they occupy as an investment. In reality, a house is a consumers’ good, just like an automobile or a refrigerator. The only difference is that it depreciates more slowly than they do. Only a long string of years in which inflation took place more rapidly than houses depreciated enabled their prices to rise every year and people to come to regard them as a source of financial gain. If not for inflation and the rise in prices that it produces, it would be very clear that housing is a wasting asset, a slowly wasting asset to be sure, but a wasting asset nonetheless.
In fact, housing price declines should be seen as the recovery.  Housing price declines reflect liquidations of a massive misallocation of capital that took place during the preceeding boom, viz., investment in the expansion of housing.  Only when this misallocated capital gets liquidated, can a true recovery take place.  To the extent the government props up housing prices through inflation of the money supply, subsidies to homeowners and the like, actual recovery will be delayed and we will once again divert critical capital to a superinflated supply of housing that no one actually needs or desires.   

Tuesday, December 28, 2010

The Federal Reserve: Heart of Tyranny #4. Fractional Reserve Banking, Inflation, and Boom-Bust

#1. Introduction
#2. What is Money?
#3 An Introduction to Paper Money

#4 Fractional Reserve Banking, Inflation, and Boom-Bust

In the last post in this series, I discussed some general concepts underlying fractional reserve banking (FRB), and I argued that it should not be upheld by the courts since it necessitates the recognition of a contradictory legal condition, i.e., it enables the the simultaneous possession of the same physical asset by more than one owner.  But why is this even important?

FRB actually predates the modern concept of the central bank, i.e., FRB can exist even under a gold standard.  In fact, various catastrophes emanating from FRB throughout the 19th century and early 20th century helped set the stage for the modern central bank.  Furthermore, FRB continues to be a major economic force.  It is responsible for most of the money creation that has occurred since the advent of the Federal Reserve System and therefore, is a major factor in causing the boom-bust cycle.  For example, today the total money supply is in the neighborhood of $6T, while the total creation of money by the Federal Reserve (the "monetary base") is about $2T.

For an excellent overview of the topic of FRB, see the recent article, The Faults of Fractional-Reserve Banking, by Thorsten Polleit (HT: Per-Olof Samuelsson).

To review, let's take a simple example. 

1) Joe deposits 100 oz. of gold in Bank A.  Bank A sets aside 10 oz. of gold in a vault and lends out 90 oz. to a farmer. 

Joe: "I have 100 oz. of gold available to me at all times"
Farmer: "I have 90 oz. of gold available to me at all times"
Total Money Supply = 190 oz. of claims to gold
Actual Money = 100 oz. of gold 

Note that two parties now believe they have title to the same physical asset.  Joe thinks he has 100 oz. of gold and the Farmer thinks he has legal title to 90 oz. of gold.

2) Continuing, let's say the farmer deposits the 90 oz. of gold in Bank B.  Bank B sets aside 9 oz. of gold in its vault, and lends out 81 oz. of gold to a grocery store.

Joe: "I have 100 oz. of gold available to me at all times"
Farmer: "I have 90 oz. of gold available to me at all times"
Grocery Store: "I have 81 oz. of gold available to me at all times"
Total Money Supply = 271 oz. of claims to gold
Actual Money = 100 oz.

This process can repeat until there is 1000 oz. of total money supply, all backed by the original 100 oz. of gold. (Ludwig von Mises would call the 900 oz. of claims "circulation credit.") 

In other words, through FRB with a 10% reserve ratio, the banking system can create 10 times as much money as is on deposit.  The increase in the quantity of money over the increase in quantity of precious metals is inflation.  In the same way, if banks stop lending, or their loans lose value, or customers choose not to borrow, then FRB can result in a decrease of the previously created money by up to 10 times.  This decrease in the quantity of money is deflation.

Of course, such a process of money creation and destruction causes the notorious boom-bust cycle. Inflation, among other things, distorts the investment of capital throughout the economy and causes a general increase in the price level (or increase in prices above what they would have been otherwise).  The corresponding liquidation of this malinvestment and consequent decrease in the quantity of money, or deflation, corresponds to the bust phase of the cycle - a phase for which most of us are now well versed.  See my post, Boom-Bust Part 1, Reisman's Capitalism: A Treatise on Economics or his recent post "Boom Bust in Microcosm", or Jesus Huerta de Soto's Money, Bank Credit, and Economic Cycles, for more on this.  As Reisman writes (see Capitalism p. 542):
...depressions are caused by government sponsorship of a fractional-reserve banking system, which increases the quantity of money unduly, thereby artificially reducing the demand for money and raising its velocity of circulation, thus setting the stage for a subsequent financial contraction, deflation of the money supply, and depression. 
Now, as a further practical consequence, what if all these people come to the bank at the same time demanding to redeem the paper notes in gold?  Of course, it would be impossible for the banks to redeem 1000 oz. of gold when they only have 100 oz.  As I argued in the last post, the conflation of the legal concept of deposit with the concept of loan results in a situation where many independent parties are legally entitled to the same physical asset - a situation which would not arise if deposits were treated separately from loans.  When all these parties simultaneously demand their gold, it is known as a run on the bank.  
 
Generally, FRB leads to the business cycle and an untenable legal condition in which many parties have rightful claim to the same asset.  Historically, this practice led to one disaster after another throughout the 19th century, even when the U.S. was on a gold standard.  As I discuss in more detail in my post, Boom-Bust Part 3, when banks endured runs as investors panicked, states allowed banks to suspend redemption in specie, thus introducing profound form of moral hazard into the monetary system, as banks who pushed the envelope were effectively bailed out.  Friedman and Schwartz quote Clark Warburton in a footnote (p. 328):  
By the middle of the 1830's most of the states had adopted or were in the process of developing general banking codes, with the insertion of provisions for severe penalties for failure to pay note in specie, or had placed such provisions in bank charters when renewing them or granting new ones.  Under such provisions, suspension of specie payments meant forfeiture of charters, or at least curtailment of business until specie payments were resumed...We know of no instance where any legislature or bank supervisory authority declared bank charters to be forfeited as a result of a general restriction of convertibility.  Instead, legislation was enacted postponing or relieving banks of the penalties the law imposed for suspension of specie payments.
Although I will discuss this in more detail in a later post, it should be noted that the various panics set off by this process ultimately led to a political movement, not to insist that the state serve its proper function which is to enforce banks' contractual obligation to redeem, but rather, a drive towards the establishment of a central bank to act as "lender of last resort" or to increase the currency's "elasticity" - all code for a central statist authority to backstop the banks (at taxpayer expense) when they got in trouble. Such a movement served the ends of both the turn of the century progressives', who sought inflation as an economic elixir (or a means to not be crucified on a "cross of gold"), and groups of statist bankers, who sought to profit from FRB without subjecting themselves to risk.    
 
Looking ahead, it should be noted that FRB is a major factor in the determination of the total money supply.  FRB provides the means to multiply and decrease a monetary base by orders of magnitude.  The connection to the central bank is as follows.  In the absence of a gold standard, a central bank that controls the monetary base, controls the fundamental base of that multiplication.  In other words, the creation of money can be thought of as emanating from two central causes:  1) the central bank (the Fed) which creates money out of thin air that serves as the so-called monetary base and 2) the private banking system, which multiplies this amount as it lends money to its customers or contracts money as loans go out of existence.  The recent history of monetary growth in the United States can be thought of as an ever increasing curve (as the Fed continuously adds to the monetary base) with additional cycles of expansion and contraction caused by the banking system's shorter term lending behavior.        

Further looking ahead, this is the reason why the Fed can, at times, create money but not actually increase the total money supply if this money creation is met by an offsetting contraction in lending from the private banking system.  Such a state is exactly what has been happening over the past year as the Fed finds new ways to increase the monetary base (expand its balance sheet) while private banks and individuals "deleverage" or pay off debt and raise cash.

FRB has been and is today an integral part of the banking system and warrants close re-examination if we are ever to fully and properly establish a private banking system based on the legal and moral principles of laissez faire.

Wednesday, December 15, 2010

The Federal Reserve: Heart of Tyranny #3. An Introduction to Paper Money

#1. Introduction  

#2. What is Money?


#3. An Introduction to Paper Money

Before delving into the origins, history and nature of the Fed, I'd like to offer some more general background to go along with my last post.  This section will set the stage for understanding, in principle, how the current financial crisis is not a random event but an endemic feature of the current monetary system created and overseen by the government's central bank, i.e., the Federal Reserve.   


In the last post, I argued that exchanges of value are necessary to advance human life and that, due to their unique properties, precious metals have been the objective money choice of the market for thousands of years.  Contrary to the claims of modern economists, gold and silver are not “barbarous relics” from a bygone age, but vital and necessary tools of exchange, which allow for an advanced division of labor economy and an increasing quality of life.        

The first stage in human economic development was the advent of barter.  The next stage was the adoption of a standard asset to serve as a medium of exchange, i.e., precious metals.  The next stage was the use of paper money. 

Most people do not want to carry valuable hunks of gold and silver with them at all time in order to execute various transactions.  For simple or small everyday trades, it might make sense to carry coins of gold or silver, but for any larger transactions, it becomes impractical, and perhaps dangerous, to haul around precious metals.  Historically, individuals stored their holdings of precious metals with goldsmiths who could provide safe storage, in effect, acting as the first bankers. The idea was simple: gold is deposited and stored in the goldsmith’s safe in exchange for a receipt entitling the holder to receive the gold upon demand.  Then, when when the receipt holder buys something, he pays the seller with the receipt rather than walking to the goldsmith to get gold and hauling it back to the store. The seller is fine with the receipt since he can use the receipt to pay for other things or just take the receipt and get the gold from the goldsmith.  Hence, people began accepting paper receipts rather than exchanging the actual gold, i.e.,  the paper receipts functioned as money.  However, keep in mind, this is just a convenience.  The paper is “as good as gold” since the receipt entitles the bearer to immediate withdrawal of an actual value, i.e., the gold. 


Before we go further, let’s define several concepts. 


First, say you were to store your purple and green bicycle at a warehouse.  The warehouse gives you a receipt so that any time you want, you can retrieve your purple and green bicycle out of storage.  At all times, the bicycle remains your property.  In other words, at no time did you exchange direct title with the warehouse.  You contractually agreed that the warehouse would store your property and make it available to you any time you asked.  Such a legal relationship is known as a bailment. The contract of this type is known as a “regular deposit contract.”  
  

Second, say that instead of storing a specific and unique bicycle, you wish to store wheat, or sand, or gold, i.e. a fungible good.  Items that all look alike and can’t be told apart when put in a big pile are known as fungible goods. If a bunch of people want to store their grain in one place, often they will just pool all the grain together in a big pile.  Since there is no practical way the storage place could figure out exactly what pebbles of grain are yours, you receive, upon demand,  precisely the same amount and quality of the grain you originally deposited. A contract in which you store a fungible good and retain title to this precise amount, or "tantundem", is known as an "irregular deposit" contract.   


Notice that the principle is exactly the same in the case of a regular deposit contract and an irregular deposit contract. You are storing a good, whether it be something specific like a bike or something fungible like gold (money), and you expect the safe keeper to maintain availability of your actual property or the tantundem at all times.


These two types of contracts should be distinguished from the "loan" contract or mutuum. In a loan contract, you transfer legal ownership of something like money to someone else and allow them to use it in any way they wish (or in a way specified in the contract). In this case, you are transferring title to someone else in exchange for future goods specified in the contract such as an amount of money plus interest

You can see that deposit and loan are based on two very distinct concepts. In one case, you actually pay someone a fee to perform the service of safekeeping but legally retain title. In the other case, you transfer ownership of the property in the present in exchange for future goods, i.e., for payment in the future.  Historically, the function of safekeeping is known as deposit banking, and the function of loan as loan banking. 
 

For example, let's say that you deposit some gold with a goldsmith and he gives you a receipt mandating the gold to be payable upon demand, i.e., upon presentation of the receipt to the goldsmith.  If the goldsmith keeps the gold in a safe as he is contractually obligated to do, there is no problem.   The receipts can be traded over and over in the market, and at some point, if someone presents the receipt to the goldsmith, he simply removes the gold from the safe, and pays it to the holder of the receipt.


But, what if the goldsmith, rather than placing the gold in a safe, lends the gold out in an attempt to earn profits on your gold?  As long as no one shows up with the receipt, he is not in jeopardy.  But, as soon as someone presents a receipt and demands the gold, the goldsmith is in trouble.  He has lent the gold and therefore, does not have it.  In this case, the holder of the receipt could rightfully sue or bring criminal charges against the goldsmith as he guilty of fraud and/or misappropriation.  Transfer of title was never made to the goldsmith, and the gold was not his to lend.           

For another simple example, say that one lends his gold to the goldsmith for one year.  The goldsmith offers the lender a note in which he promises to return the same amount of gold plus 10% interest in one year.  In this case, transfer of title has taken place.  The lender is entitled only to a future payment, not the actual gold.  The court would acknowledge that a loan has taken place, and rely on the terms of the contract to settle any dispute regarding a breech of the loan contract.      


Now, let's take a more complicated example.  As before, let's say that an individual deposits gold with the goldsmith in exchange for a demand receipt.  The goldsmith must make the gold available at all times.  However, this time, the customer believes that he will not need all of his gold, so he freely agrees to let the goldsmith lend his gold at the same time.  In fact, he expects that the goldsmith will pay him some interest on his gold as well as make the gold available upon demand.  Both parties freely agree to this arrangement.  The customer subsequently passes these receipts, stamped as "payable on demand" to others when he pays for goods or services believing that the goldsmith will have enough money on reserve to make good.    

This last example is known as "fractional reserve banking."  That is, a customer simultaneously lends his money to the bank while the bank makes the money available at all times.  In this way, a bank holds back a portion of the deposit in reserve (in case the customer wants to withdraw some) and lends the rest.  When this process is carried forth throughout the banking system as a whole, it results in a state where more money is created than actually exists.  In other words, banks effectively create money through the act of lending.  With a fifty percent reserve ratio, the banking system will create twich as much money as has been deposited.  With a ten percent reserve ratio, the banking system will create ten times as much money as has been deposited This legal relationship is the basis of the modern banking system.   


But, is such an arrangement legally possible?  That is, can a court uphold a contract in which two legally distinct entities have the same property available to them at the same time?  In the words of de Soto: "How is it possible that both parties to the same contract simultaneously intend to retain the availabilty of the same sum? "  

The answer is that such an arrangement is legally impossible.  It does not matter that both parties freely entered this contract.  It is not a matter of freedom of contract.  Just as two parties cannot ask a court to uphold a contract in which they agree to simultaneously paint a house red and blue, two parties cannot ask a court to uphold a contract where they intend to retain the availability of the same entity. The law must distinguish these two concepts, i.e., the courts cannot uphold contracts where two parties conflate these concepts. A deposit is a deposit and a loan is a loan.  They are separate contracts and require different banking functions. 


What about money market funds in which customers write checks against their holdings in the fund?  Is this an example of fractional reserve banking since one has their money in a "checking account" yet earns interest?  No, it is not an example of fractional reserve banking.  In this case, one loans his money to the fund and the fund in turns lends the money in the money markets.  When one writes a check, he is asking the bank to liquidate a certain amount of his holdings and to use the proceeds to pay the holder of the check.  A check is not cash, that is, a check is not the same as a deposit receipt marked "payable on demand."  Cash is a "final payment," a check is a promise to pay cash in the future - the immediate future, but the future nonetheless.     

As long as it is legally clear whether a contractual relationship is a deposit or a loan, a court should be able to clearly and objectively uphold the terms of a contract.  If these concepts are conflated, as they are in a fractional reserve banking relationships, it is metaphysically impossible for a court to uphold such a contract.  A simple example will suffice.  Say that there is a run on the bank, i.e., all the depositors show up at the same and rightfully, by virtue of the claim on the receipt, demand their gold, yet, the bank has rightfully, by virtue of the same contract, lent out the money.  Who should prevail in court?  Who has rightful title in this case?   


These issues eventually came to a head.  In past posts, particulary here and here, I have analyzed this issue in some detail.  I followed the work primarily of Jesus Huerta de Soto (see Money, Bank Credit, and Economic Cycles) and Murray Rothbard to offer historical examples to illustrate these concepts.  The first major theme of those posts is that various 19th century common law cases established precedents that deemed "deposits" to become the property of the bank once deposited, thus validating fractional reserve banking and setting the stage for the modern system. 

The second major theme of those posts concerned banking panics throughout the 19th century.  Fractional reserve banking periodically led to runs on the banks as panicked depositors all attempted to withdraw their gold at the same time.  If these insolvent banks had been allowed to fail, the practice would have necessarily been limited, however, the state governments consistently allowed banks to suspend their obligation to redeem their notes in specie (precious metals).  Then, once the panic subsided, banks continued the same cycle of money creation until disaster struck, leading state legislatures to allow suspension, and so on.  As we will see, this disastrous cycle of panics was a major impetus to the drive first, for a national system of banks and then, a "lender of last resort," which would stand ready to bail out these banks in times of stress, i.e., the stage was set for the creation of the Federal Reserve. 

Looking ahead, fractional reserve banking is economically destructive in that it allows banks to create money ex nihilo (out of thin air) and thus sets the boom-bust cycle in motion (since actual savings are not used to fund investment). As Hayek said of these paper money substitutes, they "give to somebody the means of purchasing goods without at the same time diminishing the money spending power of somebody else.”   It is not surprising that bad law leads to bad economics, as it always does.  


We will see that fractional reserve banking further compounds the creation of money ex nihilo by the Federal Reserve system, which creates money when it purchases securities on the open market. These two factors, the Federal Reserve's creation of money combined with fractional reserve banking led credit expansion, is responsible for the boom-bust cycle and the current financial crisis. The solution is a private banking system based on a 100% reserve hard asset standard under laws that maintain a legal distinction between the concept of deposit and loan, i.e., effectively mandating a 100% reserve gold standard.      

Tuesday, December 14, 2010

Not Increasing Taxes is Not a Tax Cut

The so-called tax bill compromise represents a total failure by Republicans to uphold the ideas they championed in the campaign.  Charles Krauthammer rightly argues that, although this has been characterized by liberal democrats as a sell out, it is actually a profound victory for Obama. 

This bill did not "cut" taxes as has been alleged by the dems.  All it did was preserve the same tax rates in existence right now.  Only in the Obama Bizarro World could not increasing taxes be considered a tax decrease.  In fact, the bill raises the estate tax from 0% to 35% so it is actually a net tax increase.  Not only was this a tax increase, no spending was cut.  In fact, in order just to preserve this net tax increase from being an even worse tax increase, the Republicans had to agree to extend unemployment benefits to encourage people not to work and had to agree to countless billions in earmarks and pork barrel spending attached as "sweeteners."  In reality, this bill is a trillion dollar stimulus bill.  As Krauthammer says: "If Obama had asked for a second stimulus directly, he would have been laughed out of town."  Yet, he writes:
Obama is no fool. While getting Republicans to boost his own reelection chances, he gets them to make a mockery of their newfound, second-chance, post-Bush, Tea-Party, this-time-we're-serious persona of debt-averse fiscal responsibility.

And he gets all this in return for what? For a mere two-year postponement of a mere 4.6-point increase in marginal tax rates for upper incomes. And an estate tax rate of 35 percent - it jumps insanely from zero to 55 percent on Jan. 1 - that is somewhat lower than what the Democrats wanted.
If Republicans had just said no, they could have waited a few weeks until they have a majority and proposed a bill that permanently reduces taxes while cutting spending.  This program of cutting taxes, spending, and reducing the size of government is why we elected them.  Their leaders have already begun to fail, and they haven't even been sworn in.    

Monday, December 13, 2010

The Federal Reserve: Heart of Tyranny #2. What is Money?

#1 Introduction.  

#2. What is Money?

If you lived in a simple civil society, how would you survive?  First, you’d have to do something -  like make a tool, cut down some wood, harvest some food, catch some fish, etc.  Otherwise, you would just lay there and die. 


If you wanted something from someone else, you would not go up to them and say “give me your stuff!” without starting a fight – remember, this is civil society.  You would offer them something in exchange. From time to time, if you wanted to give something away or someone gave you something for nothing, fine, but that would be the exception, not the rule.  If you keep asking for free stuff, that usually doesn’t go over very well.  If you demand free stuff, it leads to fights and wars.            

This brings us to a cardinal rule of economics, and life: there is no such thing as a free lunch.  Someone has to do something in order to survive. 


To go beyond mere survival, to flourish, people have to do even more work and succeed at living to such an extent that they can survive while spending time thinking, inventing, and producing.  For example, if one guy figures out how to produce the same amount of food that used to take 10 guys, then the other 9 guys can work on other things besides just food.  This is how human beings advance – how they live longer, healthier, and happier.             


If you thoroughly understand and integrate this principle into your thinking, you will be able to detect about 90%-100% of the b.s. that flows from the modern economics profession.  When a PhD tells you that there is a magic way to create economic growth and prosperity without work or production, you will know something is wrong, even if he has a lot of formulas and pie charts.

When people begin advancing, it becomes a hassle to offer a random chicken or piece of wood in exchange for a carrot or some tobacco or whatever.  What if you don’t have exactly what the other guy wants just then?  What if you don’t want to carry a chicken around with you?  It is much easier to offer a standard asset that is valuable to everyone all the time.  If an asset has certain properties, it can serve as this asset.  What properties? 


First, the asset would have to be universally recognized as a value, i.e., just about everyone could find a use for it.  It would be nice if it was found to be so valuable that a small amount would generally be accepted for just about anything.  This way, you could carry it in your pocket instead of in a wagon.  It would have to be something that could last a long time so you don’t have to worry about it vanishing.  It would have to be divisible so you could cut it up into different sizes to correspond to other goods that have differing values.  It would have to be something that doesn’t change in value constantly due to dramatic changes in its supply.  It would be best if the material was homogeneous, or the same throughout, so that people could agree easily on its value without having to evaluate it every time you want to trade.

For thousands of years, humans have chosen precious metals like gold and silver since they meet all of these criteria.  Again, these are not arbitrary criteria set by me or some government agency.  They are criteria that follow from the nature of reality, i.e., the marketplace.  This doesn’t mean people shouldn’t barter good for good.  It just means that using a standard asset is much easier most of the time, and people freely choose to use them since it makes trade and life easier and more productive.  Quoting George Reisman (Capitalism, p. 142):                  
Thus, an economic system operating under the constraints of barter exchange would obviously offer only very limited opportunities, for division of labor and would thus be extremely primitive.  In essence, to live in such an economic system, one would either have to be a farmer or produce the kinds of things that could be readily exchanged with farmers, such as blacksmithing services.

What is required for the existence of a division-of-labor society is the existence of money and monetary exchange.  Money is a good readily acceptable in exchange by everyone in a given geographical area, and is sought for the purpose of being reexchanged.

So, the need for production and trade follows from man’s basic nature and the nature of the world in which we live.  The exchange of value for value is a requirement of human life.  The usage of barter or a standard asset such as precious metals in these exchanges is not arbitrary, it is an objective necessity of human survival.  Money, such as gold and silver, is preferable to barter if you want to live a more productive, happier life.        

Friday, December 10, 2010

The Unnecessary and Absurd Issue of "Recycling"

I want to point out an excellent post that was linked inside another post on the same topic by Amit Ghate at Thrutch.  He has a fantastic insight regarding the concept of "recycling." Ghate writes:
In fact, in a free society one wouldn’t distinguish recycling from other kinds of for-profit exchanges. That is, just as today when you re-sell your car or your house, you don’t think of it as “recycling”, so too in a free market you wouldn’t distinguish returning bottles or newsprint for credit from other types of trade – provided that these actions were taken because it was in your own economic interest, not because the government or society was compelling or haranguing you in to doing so.
In other words, in a truly free society the issue of recycling would disappear because deciding whether it is best to re-use an item represents just another allocation of resources that the free market routinely (and silently) takes care of in its normal course.
I highly recommend reading his entire post. 

Thursday, December 9, 2010

Pelosi's Wish

I got a kick out of this Hill.com report on the House Democrats rejecting the tax cut deal.  Says Pelosi:
“Democratic priorities remain clear: to provide a tax cut for working families, to create jobs and economic growth, to assist millions of our fellow Americans who have lost their jobs through no fault of their own, and to do this in a fiscally sound way.”
Think about that statement.  Her "clear" priorities are: 1) cut taxes 2) spend more money 3) be fiscally sound

This is more than just a political CYA type of statement.  I think it is a profound expression of her fundamental orientation to reality.  That is, she does not start with reality and go forward.  She starts with her wish, and then proceeds.  Her wish is that reality is not what it is.  That she can really have all these things.  This metaphysical view is the essential philosophical premise of the modern left. 

Wednesday, December 8, 2010

The Left's War on Free Speech Continues

In a series of previous posts (particularly, this one), I have attempted to document and analyze the left's continuing attempts to abrogate the right to free speech. If you are concerned about preserving the right to think and speak freely, two recent FCC proposals should be of concern.  

One new regulation is designed to promote "diversity in news programming." FCC commissioner Michael Copps has suggested making "a broadcaster's license renewal contingent upon proof that they meet a prospective set of federal criteria."  
He said outlets should be mandated to do the following: prove they have made a meaningful commitment to public affairs and news programming, prove they are committed to diversity programming (for instance, by showing that they depict women and minorities), report more to the government about which shows they plan to air, require greater disclosure about who funds political ads and devote 25 percent of their prime-time coverage to local news. 
Is it the government's function to "regulate" news programming?  By what standard?  Who should decide what is "diverse" and why that is even a value?  Once again, we see the fingerprints of "choice architect", Cass Sunstein, Obama's head of the White House Office of Information and Regulatory Affairs, who wants the state to decide what is the best way to condition its "Ideal Citizens," i.e., determine what is best for you.   

The Hill.com also reports on the FCC's continuing effort to enforce so-called "net neutrality." 

The Federal Communications Commission (FCC) has a Christmas gift in store for the phone and cable industry: it may move ahead on its controversial net-neutrality regulations three days before Christmas
Since it has not been able to win this case in an open forum, it is trying to ram it through outside the normal channels of public scrutiny. 

The timing of the meeting is already raising eyebrows. Some see it as a way to move the matter along before the GOP assumes the majority and while Congress is not in session to criticize the effort.
This is an outrage.  That a government agency has the unilateral authority to impose this kind of sweeping regulation on an entire industry is bad enough, but to hold a bogus meeting outside the parameters of even its own public show meetings, is despicable. 

Would you expect anything less from power lusters who believe they know what is best for you? 

Tuesday, December 7, 2010

Federal Reserve: The Heart of Tyranny, #1

From the byzantine assortment of evil federal government agencies, if you were to ask me to single out the most appalling, the most menacing, the most sinister of them all - the one political cornerstone of the welfare state against which all defenders of freedom and individual rights should press their activist energy - I would answer that it is the one upon which all the others depend, i.e., its financier.  I would say it is the one that is not a federal government agency at all, but instead designed to exist in perpetual legal limbo in order to offer its leaders the full power of the leviathan federal apparatus while simultaneously shielding it from public scrutiny.  I would say that It is the one that serves its master, not through a conspicuous, petty kind of thievery, but by levying a mysterious and almost unknowable tax - inflation - a tax so insidious that some brilliant minds regard it not as a parasitic malady to be razed as an economic matter of life and death but as a benefit - an elixir able to "stimulate" the economy while conjuring the confiscation of wealth out of thin air.  Of course, I would single out the Federal Reserve.   

Why? 

"Give me control of a nation's money, and I care not who makes its laws" was said to be a maxim of the House of Rothschild.  This statement captures a fundamental truth, that a nation's money is woven into the fabric of society, touching every facet of an individual's life.  In a sense, its history is the history of virtually everything.  The soundness of money in a society is in a sense a barometer - a barometer not only of the nation's economic health, but necessarily, its political and philosophical health. 


The history and theory of central banking has been chronicled in excruciating detail.  Yet, fully appreciating the nature and role of central banking in your life and in the life of the nation's economic system does not necessarily require a technical treatise or even expert knowledge.  It takes integration - the integration of knowledge from many different specialized fields along with an ability to distill essential principles in such a way that a lay audience can fully appreciate the scope and importance of this institution on their daily lives and what it means for the future of civilization itself. 


To fully appreciate the destructive potential of the Federal Reserve, one needs to understand something about the history and nature of money and banking.  What is money?  What role does a bank play in a free market economy?  Historically, how and why has government policy resulted in the monetary framework we have today?  How are the actions of the Federal Reserve today going to affect the future?  And, what can be done about it?  


I hope to take on some of these questions in forthcoming posts to go along with previous posts on the subject.  I'm even considering setting up a separate blog only about this topic, but not sure.  Stay tuned.  In the meantime, here is an index to a three part series I did on the boom-bust cycle.  I never completed part 4, but instead decided to open this up as a continuing series. 

Part 1 - Today's crisis as an instance of the classic inflation-depression or boom-bust cycle

Part 2 - Positivism, empiricism and the self-induced myopia of the economics profession

Part 3 - Brief review and analysis of 19th century monetary history; gold the hero, government the villain

Monday, December 6, 2010

You Say Iran, I Say Iraq, You Say Japan, I say Japaq

The essence of modern diplomacy is pretending that facts do not exist.  That is why diplomats around the world are scurrying for cover after the recent WikiLeaks dump has provided detailed evidence that diplomats know what everyone else in the world has known for the last decade. Iran's military "took advantage of the vacuum" left in the aftermath of the fall of Saddam and is a state sponsor of Islamic terrorism?  Wow!  Saudi Arabia is a "cash machine" for terrorists?  Bombshell!  Iran procured advanced missiles from North Korea?  Oh my God!  Russia is a "mafia state" and not a democracy? Dios Mio!  Ok, I have ran out of expletives.      

At least the WikiLeaks cables have provided a kind of foreign policy catharsis, like catching a pathological liar red handed.  In other words, at least they now know that we know. It turns out, that is very important to them.     

If you want to gauge the practical difference between a mind that acknowledges reality and a mind that doesn't, consider the difference between America's military technology and America's foreign policy, that is, between the physical sciences and the modern social sciences, or between reason and modern philosophy. 

Scientists, those that integrate their observations of nature to form abstract generalizations, can hurl rockets into space and explore the cosmos.  Our military can fly unmanned drones to attack our enemies or use an arsenal of nuclear bombs to destroy a continent. 

Meanwhile, the foreign policy crowd, educated in modern philosophy, are taught that generalization is impossible, that there are no black and whites, that ethics are relative and judgment impossible.  They are taught that reality is a fluid construct and that only pragmatic consensus can temporarily ameliorate conflicting geopolitical visions.  These are minds that literally watch the same thing happen over and over throughout history and in front of their eyes, yet draw no conclusions. 

Islamic terrorists continue to attack Israel and her western allies.  Maybe next time, the diplomats tell us, they won't.  History teaches that appeasement only emboldens the enemy.  Maybe this time, the diplomats tell us, appeasement will work.  Iran and Saudi Arabia support Islamic terrorism militarily, logistically, and financially.  There is nothing we can do, they tell us, so we can only allow Iran to build a nuclear bomb and acquire missiles from North Korea (a country that periodically lobs missiles into South Korea with impunity), while considering Saudi Arabia to be an ally in the war on terrorism!  A war, it should be noted, that began when America attacked the wrong country, Iraq, and continues to engage in hand to hand combat with tribesmen in the mountains of Afghanistan, a country where a recent poll shows that 92% of the population doesn't know that 9/11 occurred.

Reasoning minds can produce high tech weapons that can destroy the enemy in minutes.  Minds deadened in the abyss of post-modern realpolitik can not even determine who our enemy is!

Iran, Iraq.  It's one letter of difference.  If our foreign policy establishment intellectuals were around during World War II, would we have fought a war against Japan or Germany?  Who knows, right?  But, these intellectuals have united in their judgment of one enemy and will marshal all of their resources to bring him down - WikiLeaks beware.
                

Friday, December 3, 2010

Does the Earth Have Rights?

Speaking at a U.N. sponsored climate summit in Cancun, [Bolivian President] Morales "has fingered capitalism as the root of many of the problems facing the world and has urged his fellow leaders to explore alternatives, such as a declaration of rights for the earth as a means of tackling climate change."

Can an inanimate object have rights?  (I cannot believe I have to write that last sentence outside of an insane asylum.)

In my last
post, I argued that only a system of actual capitalism, i.e., a system in which all property is privately owned, could justly and objectively deal with actual environmental problems, that is, problems which can be proved to pose a threat to human beings.  The key word and phrase is "prove" and  "threat to human beings."  This is critical, because true concern with human life, i.e, holding human life as the ethical standard of value, necessitates a system which upholds an individual's right to think, produce, and pursue his own happiness, free from coercion.  In other words, the concept of rights presupposes man's nature as a reasoning being who needs to think in order to survive. It makes no sense to discuss "rights" apart from rational beings. 

But what if human life was not regarded as the standard of value?  In that case, the value of human life would become secondary to the non-human standard, if a value at all. The purpose of the government would not be to protect individual human rights, but instead, it's primary function would be to protect the "rights" of this non-human entity. This is precisely the logic underlying Morales's call to grant rights to the earth.     

Man's nature as a reasoning being requires that he use and modify the earth to serve his needs.  An ethical standard which holds man's life as the ultimate value, leads to the celebration of man's productive achievement, i.e., the transformation of his environment into useful products.  However, if the earth is regarded to be the standard of value, man's nature puts him in direct conflict to the highest value, earth.  Consequently, rather than celebrating man's technological and economic progress, the environmentalist regards man as sinful by nature - his carbon footprint is his Original Sin - something he can only minimize but never escape.  Morally, it follows, he must spend his life paying penance for the crime of being human.    

Back to Cancun...The Telegraph
reports:
In one paper Professor Kevin Anderson, Director of the Tyndall Centre for Climate Change Research, said the only way to reduce global emissions enough, while allowing the poor nations to continue to grow, is to halt economic growth in the rich world over the next twenty years.
This would mean a drastic change in lifestyles for many people in countries like Britain as everyone will have to buy less ‘carbon intensive’ goods and services such as long haul flights and fuel hungry cars.
..The Second World War and the concept of rationing is something we need to seriously consider if we are to address the scale of the problem we face,” he said.
In other words, man must sacrifice and lead a life of self-abnegation supposedly in deference to the goal of some arbitrarily defined average climate condition which would occur absent man. 

However, if global warming could be proved, is wrecking the economy and making everyone poor really the solution? Wouldn't wealth and technological progress give man the best chance of coping with these circumstances?  Wouldn't economic freedom allow for migration to less harmful areas and for profit to provide incentives for innovations to serve as a defense from these conditions? Of course, but the environmentalist is not concerned with bettering man's life.  The environmentalist is not interested in saving man from the earth, he is interested in saving the earth from man.   

If this leads you to conclude that environmentalism borders on religion, well, it is a religion. It is a new age religious-socialist political movement predicated largely on pseudo-science with the essential judeo-christian narrative at its core - only God is replaced by Mother Earth and St. Paul by Al Gore. 


I have argued previously, that if environmentalism is a kind of new age Christianity, then the U.N. IPCC (inter-governmental panel on climate change) is a kind of modern Council of Nicea, a motley gathering of various bureaucrats and church elders held to define and enforce environmentalist orthodoxy. Of course, everyone knows about the climategate scandal which blew the cover off of this charade, but its important to follow this cabal as it attempts to make a resurgence.  Recently, this article reported on the head of the U.N. panel, Rajendra Pachauri, as he and others expressed "regrets" over the scandal.  The article quotes Arnold Schwarzenegger:
"Last year we had a tremendous setback because some of the science and some of the numbers were manipulated and that is very damaging because it gives the other side a way in," Schwarzenegger told his summit this week.
(Yeah, except for the science and the manipulated numbers, the report was rock solid!)

What's striking is that, just like a religious zealot who is confronted with irrefutable evidence, these revelations of fraud and data manipulation did not give them pause for a second. In fact, Pachauri "insisted the controversy had not set back efforts to secure action on climate change."

And, finally, what would a new age religious gathering be without offering prayer to Ixchel, "the ancient jaguar goddess" - goddess of the moon as well as "reason, creativity, and weaving." The Washington Post reports:
"Excellencies, the goddess Ixchel would probably tell you that a tapestry is the result of the skilful interlacing of many threads," said Figueres [Christiana Figueres, executive secretary of the U.N. Framework Convention on Climate Change], who hails from Costa Rica and started her greetings in Spanish before switching to English. "I am convinced that 20 years from now, we will admire the policy tapestry that you have woven together and think back fondly to Cancun and the inspiration of Ixchel."
If she has her way, and people are still talking about this in 20 years, the discussion will not take place over cocktails in a Cancun resort. It will take place in a cave while the shivering humans offer prayers to Ixchel for a tapestry to protect them from the cold and for "creativity" in procuring rodent meat. 

Wednesday, December 1, 2010

Capitalism: The Actual Pollution Solution

The Center for Public Integrity reports that "the Obama administration has doled out billions of dollars in stimulus money to some of the nation’s biggest polluters and granted them sweeping exemptions from the most basic form of environmental oversight."  Their website reports:
The administration has awarded more than 179,000 “categorical exclusions” to stimulus projects funded by federal agencies, freeing those projects from review under the National Environmental Policy Act, or NEPA. Coal-burning utilities like Westar Energy and Duke Energy, chemical manufacturer DuPont, and ethanol maker Didion Milling are among the firms with histories of serious environmental violations that have won blanket NEPA exemptions.
The typical modern intellectual reaction to a report of this kind is that it represents a prime example of how capitalism results in environmental disaster as greedy businessmen callously pollute the atmosphere in search of profit.  Furthermore, the common wisdom goes, the solution to such wanton disregard for man's environment is to reign in these evil polluters by force, i.e., subject these businesses to a litany of preventative government regulations in addition to publicly admonishing Americans to turn away from industrial technology and return to a more natural, organic lifestyle, i.e., make do with less.

But, is this the right way to interpret such a report?

First, let's assume that we are dealing with actual environmental problems, i.e., environmental conditions or factors which actually pose a potential threat to human beings. In other words, the more philosophical question related to nature's so-called "intrinsic value" - a concept which I have previously analyzed and rejected - will not be considered here.  Second, to rationally consider this report, it is critical to define what exactly is meant by capitalism. Ayn Rand properly defined capitalism by means of essentials: "Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned." 

Why is this important? 

If all property is privately owned, it would mean that land, rivers, and even the air would be privately owned and violators of property owner's rights would be subject to tort or liability law, or even criminal law depending on the circumstances. For example, your neighbor cannot legally dump garbage on your lawn. Or, for example, say your neighbor was experimenting with dangerous chemicals in his garage, and the fumes injured you. Under a system of private property, you would certainly have legal grounds to prevent him from injuring you either through the threat of lawsuit or criminal prosecution if his actions were deliberate.  Such a system is predicated on the recognition of individual rights, particularly property rights.  Morally, such a system recognizes that each individual has a right to exist for his own sake, pursuing his own values free from coercion by the state or other individuals.

In other words, a true capitalist system, a system in which all property is privately owned is the most just and the most efficient way to prevent and control actual environmental disasters, since claims related to violations of property owners' rights can be adjudicated in courts of law under objective standards of evidence.

On the other hand, socialism is a system in which individual rights and private property are not respected.  Consequently, the government retains a monopoly on the disposal and use of property of all kinds.  Under such a system, if the rulers decide that environmental concerns, such as breathable air, are not important to the rulers' goals, then individuals have no recourse under such a regime.  Clearly, the horrendous pollution evident in communist China and in Eastern Europe under the old Soviet regime were primary examples of this principle. 

Now, I do not know anything about the particular regulations referenced in the report in question.  In fact, I assume that many of these regulations are an unnecessary and non-objective approach to dealing with actual environmental problems. Consequently, I do not know if the regulations for which exemptions were granted would result in unnecessary costs to the businesses in question, nor do I know if the exemptions will result in the release of intolerable amounts of dangerous pollutants.  But, that is exactly the point!  To the extent that property rights are not defined, and to the extent that the state determines the scientific parameters related to environmental factors, individuals are at the mercy of government bureaucrats who may or may not be motivated by short term political concerns, bribes, or some other whim.

If one is truly concerned about protecting his own property and person from violations in this regard, there is no worse possible course of action than ceding property rights to the state or relying on government agencies to regulate these matters.  Only a capitalist system where all property is privately owned can result in actual objective solutions to problems of this kind.

Additionally, this case is a prime example of the importance of definitions by essentials - an idea I posted about in detail previously.  In that post, To Know Capitalism is to Love Capitalism, I wrote that "the meaning of capitalism has become completely blurred by modern academics who do not think in principles or essentials." For example, the most routine non-essential definition of capitalism is that capitalism is "anything America does or has done" followed by "capitalism is anything in which it seems like businessmen are granted some government benefit at the expense of someone else."  I wrote:

In all of these instances, the concept of capitalism is implicitly being defined in terms of non-essentials. Such definitions blur the essential distinguishing characteristics of capitalism and have the effect of packaging the concept of capitalism together with concepts that represent its antithesis. In these cases, because capitalism is defined improperly, it is literally regarded as its opposite and held accountable for the deleterious effects of its opposite. Therefore, before arguing over capitalism versus socialism one should understand and clarify what exactly capitalism is.
Rand's definition of capitalism recognizes the fundamental distinguishing characteristic of capitalism, namely, the recognition of individual rights and private ownership of all property. Any system in which vast swaths of land and property are owned and maintained by the government, either de facto or de jure, or where one party is granted special government favors at the expense of another, cannot be regarded as a fully capitalist system and therefore, the disasters that logically follow should not be laid at capitalism's doorstep. The first step in advancing the cause of individual rights and human happiness, i.e., the promotion of capitalism, is to understand exactly what it is - and is not.