Miller's Genuine Draft

Struggling to Keep the Housing Bubble Afloat

2012-03-12T15:49:00.001-07:00

LvMIC:

For those versed in the Austrian business cycle theory, it’s become common to encounter critiques levied on the theory which question the propensity of businessmen and investors to buy into a bubble knowing full well that it could burst at any time. Perhaps the most famous of this criticism was issued by Gordon Tullock in “Why the Austrians Are Wrong About Depressions”

The second nit has to do with Rothbard’s apparent belief that business people never learn. One would think that business people might be misled in the first couple of runs of the Rothbard cycle and not anticipate that the low interest rate will later be raised. That they would continue unable to figure this out, however, seems unlikely.

But as Gene Callahan thankfully points out, Gerald P. O’Driscoll and Mario Rizzo addressed this issue long ago:

“[T]here are profits to be made from exploiting temporary situations. . . . Though entrepreneurs understand [the macro-aspects of a cycle] they cannot predict the exact features of the next cyclical expansion and contraction. . . . They lack the ability to make micro-predictions, even though they can predict the general sequence of events that will occur. These entrepreneurs have no reason to foreswear the temporary profits to be garnered in an inflationary episode. . . . From an individual perspective, then, an entrepreneur fully informed of the Austrian theory of economic cycles will face essentially the same uncertain world he always faced. Not theoretical or abstract knowledge, but knowledge of the circumstances of time and place is the source of profits.”

Their rebuttal centers around the always-true phenomena that market participants lack all available knowledge. Given that central banks often deliberate and choose monetary policy in secret (to maintain the sanctity of counterfeiting is the stock justification), businessmen aren’t always aware of changing policy and whether interest rates changes reflect increased savings on the part of the public. And just as central bankers can’t precisely control where newly created money flows into, neither can business people make the same calculations to know what sectors are being manipulated.

And then of course there is continual desire by entrepreneurs to seek a profit wherever the opportunity may exist. Austrian trade cycle criticism often assumes that businessmen are rational actors who wouldn’t buy into obviously bubble-like industries. What these detractors seem to conveniently forget is that time must necessarily play a role in the formation and eventual popping of market bubbles. Majority opinion could conceivably recognize that, say, internet stocks are way overbought and that central bank manipulation may be driving investment into that industry. But due to a lack of information, the time needed for a mass sell off, a potential hike in interest rates to put a damper on further inflationary expectations, or general market reorganization, there may still exist a chance to buy in and ride the wave before cashing out. The “buy low, sell high” mentality will always manifest itself into potential opportunities.

And with that, there is a new report by the Financial Post that big banks in Canada are lowering mortgage rates even further to stimulate home buying in an already heated sector:

After a string of warnings from policymakers about the perilous state of household debt in this country, it hardly seemed like a good idea.

But this week the big banks launched the latest round in the mortgage war, with Bank of Montreal rolling out its rock-bottom 2.99% five-year home loan, one of the lowest rates on such a product. BMO’s peers quickly followed suit, breathlessly unveiling their cut-price mortgages, available for a limited time.

In public comments the banks wrapped themselves in the maple leaf, claiming the special rates are aimed at bolstering the finances of consumers, since the new products come with fixed rates and shorter amortizations designed to allow borrowers to pay down debt faster. “We think this is totally consistent with the debate about stability of [household finances],” said Frank Techar, head of BMO’s domestic retail bank.

Unlike the U.S. housing bubble which was still not recognized by many “experts” even after the bubble began to deflate around 2006, the Canadian housing bubble has been reported on and talked about by numerous mainstream media publications. Bank of Canada Governor and professional finger pointer Mark Carney has expressed worry over the accumulation of consumer debt in recent years. Something about pushing interest rates to 1% and below for the past three years may have had something to do with that.

With Carney and co. holding the BoC’s key interest rate at 1% last week and this recent attempt to bolster home sales by many big banks, one last desperate attempt to keep the housing market from correcting and ridding itself of malinvestment is being engineered. Since human action is unpredictable, it is entirely plausible that this attempt could work for the time being. Carney could succeed in printing to suppress rates and bolster lending but that means inflation will likely begin spreading to other industries as the Canadian dollar accelerates in losing purchasing power. If Carney wants to abstain from completely destroying the currency, he and the rest of his crew will have to raise interest rates and induce a recession.

The reality is and will always be that inflation is no free lunch. Savers and those on fixed income are ravaged at the benefit of savvy speculators, debtors, and exporters. The boom in equity prices and capital goods which translates to the consumer industry is not provided free of charge by money printing. At the onset of a boom provided via easy credit, the choice for fiat manipulators and central bankers is clear: either attempt to prolong the effect by further debasement or allow the market to reset itself. As Hanz S. Sennholtz writes:

It is true that inflation can never be permanent, for it must come to an end with the total destruction of the currency.

The real solution to the perpetual boom-bust cycle caused by central banks is a little thing called capitalism and allowing the market to control interest rates. The wonderful Jim Grant recently explained this simple concept in a recent must-see CNBC interview:

Maria Bartiromo: “What are the alternatives?”

Jim Grant: “Capitalism is an alternative for what we have now. I highly recommend it.”

Maria: “We all do.”

Grant: “No we don’t.”

Maria: “The Federal Reserve may not.”

Grant: “We ought to be discussing an intelligent move to a sound currency by which i mean a currency that is based on a standard and not at the whim and the discretion of a bunch of mandarins sitting around Washington D.C.”

Canada, as well as the rest of the world, should heed Mr. Grant’s advice.

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Last week I had a few posts published on other sites I want to quickly archive here:

"Is State Capitalism Winning" at LvMIC Daily

"War With Iran is Coming" at Zerohedge.com

"Mitt? Rick? Newt? Neither Will Save Us From Disaster" at the Middletown Press and Journal

Should Iceland Adopt the Canadian Dollar?

2012-03-09T17:20:00.000-08:00

LvMIC:

Picture a man huddled on the ground being kicked repeatedly by a couple of ex-military type fellows wearing steel toed boots. Less the man is a masochist, relieving the pain of an relentless barrage of injury should be his number one priority. Now imagine the man has a chance to opt out of this dilemma but instead has the jack booted thugs replaced with aged men wearing open toed sandals who still proceed to kick him into submission.

Sure, the pain may be have been relieved to slight degree but the agony exists nonetheless. The symptom for the disease was identified but the remedy was far too ineffective.

Now take Iceland, still recovering from the crisis of 2008, which is looking to adopt the oft-neglected Canadian dollar. From The Globe and Mail:

Iceland’s newfound love for the loonie is sparking a wave of controversy, from Reykjavik to Ottawa.

For 150 years, the rest of the world has shown scant interest in the Canadian dollar – the poor cousin to the coveted U.S. greenback.

But now tiny Iceland, still reeling from the aftershocks of the devastating collapse of its banks in 2008, is looking longingly to the loonie as the salvation from wild economic gyrations and suffocating capital controls.

Canadian ambassador to Iceland Alan Bones had planned to deliver remarks to a conference on the future of the Icelandic Krona, making it clear that if Iceland decided to adopt the Canadian dollar, with all its inherent risks, Canada was ready to talk.

Sounds like a plausible plan at first glance. The Canadian dollar has been semi-resilient compared to the dollar over the past few decades.

Given that Iceland may want a slightly more stable currency, the Canadian dollar appears to be a sound choice. See the krona volatility over the past decade, via Credit Suisse

According to The Globe and Mail article

The krona soared nearly 90 per cent between 2001 and 2007, only to crash 92 per cent after the financial crisis in 2008.

But of course adopting the Canadian dollar only brings the illusion of stability that all fiat currencies do. According to the inflation calculator provided by the Bank of Canada, what cost $1 in 1935 (when the BoC was established) now costs $16.76 in 2012 dollars. This is in comparison to the U.S. dollar where what cost $1 in 1913, the year of the Federal Reserve’s creation, costs $22.90 according to the inflation calculator at the Bureau of Labor Statistics.

Some stability.

While Iceland has applied to join the Eurozone, this opportunity continues to lose its attractiveness as the sovereign debt crisis drags on. Ironically enough, Iceland was one of the only countries to partially embrace that crazy concept of privatizing losses when its banking system went to hell (with the exception of the nation’s three largest banks being nationalized in the fall of 2008). Agence France-Presse notes:

Three years after Iceland’s banks collapsed and the country teetered on the brink, its economy is recovering, proof that governments should let failing lenders go bust and protect taxpayers, analysts say.

“The lesson that could be learned from Iceland’s way of handling its crisis is that it is important to shield taxpayers and government finances from bearing the cost of a financial crisis to the extent possible,” Islandsbanki analyst Jon Bjarki Bentsson told AFP.

“Even if our way of dealing with the crisis was not by choice but due to the inability of the government to support the banks back in 2008 due to their size relative to the economy, this has turned out relatively well for us,” Bentsson said.

Nobel Prize-winning US economist Paul Krugman echoed Bentsson.
“Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net,” he wrote in a recent commentary in the New York Times.

Of course expanding the safety net has only put a limit to the amount of dollars left in private, productive hands but Krugman is smart enough to get a 50% on the quiz.

Another fact Krugman would likely dismiss is that Iceland’s banking collapse was a product of central bank mismanagement and artificially low interest rates resulting in the typical boom bust cycle. This case is documented in Philip Bagus’s and David Howden’s Deep Freeze: Iceland’s Economic Collapse. From Chapter 1:

During the several years leading up to the collapse, Iceland experienced an economic boom. The Icelandic financial system expanded considerably; a nation with a population only slightly larger than Pittsburgh, Pennsylvania and a physical size smaller than the American state of Kentucky erected a banking system whose total assets were ten times the size of the country’s GDP. The prices of housing and stocks soared, and consequently so did Iceland’s wealth.

Iceland’s particular crisis, and the world’s in general, was caused by the manipulations of central banks and intergovernmental organizations. Thus, in the final analysis, it was the actions of governments that brought about Iceland’s financial collapse. While some point to the supposed independence of central banks from their nations’ governments, few could argue that the Central Bank of Iceland, with two of its three governors direct political appointees, could be anything other than a cog in the political machine. In short, the causes of Iceland’s financial collapse are the same causes that explain the worldwide financial crisis of 2008. The main difference in Iceland’s case is their magnitude. In Iceland, the economic distortions were extreme, making the country’s financial structure particularly prone to collapse. Moreover, the Icelandic case contains a special ingredient that made an exceedingly rare event for a developed nation, sovereign bankruptcy, possible in the first place.

Monetary debacles are a dominant feature in central banking as anyone versed in Misean economics should know. However it doesn’t look like the government of Iceland is going to learn its lesson as it looks to replace its already failed currency with another that will ultimately meet the same maker. Michael Babad of The Globe and Mail recently gave a few reasons on why adopting the Canadian dollar would be a smart move. Here are a few of the most egregious:

3. Respected central bank
Iceland would of course have no say in monetary policy, but it would have a currency overseen by a very strong central bank and governor, who led Canada out of the recession admirably.
Mark Carney is also respected on the global stage, having recently been named to head up the Financial Stability Board.
“Dear Canada: If Iceland wants you rather than their own inept central bank to earn their seigniorage, accept the deal,” Mr. Wolfers said on Twitter.

4. Fiscal, economic stability
Iceland has no reputation in the wake of its banking collapse.
Who would you prefer at that point, a euro zone crippled by recession and a two-year-old debt crisis, or Canada?
With Canada, you get a stable, if lukewarm, economic outlook, a government that’s still rated triple-A, and a fiscal standing to die for (if you’re Greece or Portugal).

Obviously Mr. Babad has yet to hear of Canada’s looming housing bubble. As I have documented numerous times, the run-up in Canada’s housing prices is unsustainable. The bubble will burst soon enough leaving not only pain in wealth terms but in moral sentiment as well. And as Chris Horlacher points out, the Canadian Mortgage and Housing Corporation, like its equivalents Fannie Mae and Freddie Mac in the U.S., guarantees a large part (90%!) of the country’s housing market. Being leverage 100:1 means that come the collapse, the CMHC will likely need to be bailed out via the federal government. This doesn’t bode well for Canada’s fiscal future.

So while Iceland is smart to begin looking elsewhere for a stable currency outside its own inept central bank, choosing another paper standard controlled by the few will not fix the underlying problems associated with cyclical downturns. Rather than “choose” a national currency, the government would be better off keeping its hands off the entire affair and let the market decide what makes a sufficient unit of transaction. But then again, politicians would be limited in the votes they can buy so hence the squashing of any true monetary freedom.

This is why fiat money will not see a death anytime soon. Canada may gain in international influence as others look to its dollar as a reserve currency but it will drag those down foolish enough to trust the whims of its central bankers.

Yes, It Is Time to Panic Over Canada’s Housing Bubble

2012-03-07T17:43:00.001-08:00

LvMIC:

And no, this bubble won’t be any different.

Yesterday Macleans asked the pertinent question of whether or not it’s due time to start fretting over Canada’s looming housing bubble.

Here in Canada, we patted our backs for not falling into the same trap, and basked in the spotlight as the world’s new beacon for financial stewardship. It’s a compelling narrative that has been promoted by the federal government and the Bank of Canada as they encouraged Canadians to spend their way through global economic turmoil.

But pry through the pocketbooks and bank accounts of the average Canadian and the country looks remarkably like the America of 2005—or even worse by some measures—complete with record house prices and unprecedented debt. “One of the really terrible narratives we’ve allowed to develop in the minds of Canadians is that somehow we are better than the U.S. and so that means we have nothing to be concerned about,” says Ben Rabidoux, who runs The Economic Analyst website and parlayed his obsession with watching the housing market into a job with a Wall Street firm that advises institutional investors on how not to get caught up in the Canadian miracle/disaster.

What Rabidoux and others have seen is just how much Canada’s economy has come to rely on the country’s housing boom—and how much consumers have been digging themselves into debt just to keep it going.

While the housing bubble burst in the United States literally brought the world economy to its knees, the suspicion over its true cause has sparked a renewed interest in the Austrian school as many considered to be within the “mainstream” of financial commentating actually had their fingers pointed at the Federal Reserve for keeping interest rates too low for too long. Thanks to the 2008 presidential campaign of Texas Congressman and Austrian disciple Ron Paul, the Fed has faced a degree of scrutiny unseen in its nearly century long existence. The public is becoming more enlightened to the fact that interest rate manipulation may yield short term gains but the cost will ultimately be paid for with recession and/or depression. Ludwig von Mises figured this out back in 1912 with the publication of The Theory of Money and Credit. Thanks to the ineptness of former Fed chairman Alan Greenspan and his fetish with printing dollars to prop up asset prices, more are catching on to Mises’ business cycle theory.

Macleans is thankfully no different in regard to Canada:

Banks themselves can only be blamed so much for offering consumers mortgages for next to nothing. The Bank of Canada has held its key interest rate at one per cent since September 2010, and most economists expect the bank to keep it there until well into next year.

It’s a dangerous game. Low interest rates might sound great for anyone looking to take out a loan, but they can have a perverse effect on an economy when they stay low for years.

Low interest rates had as much to do with the U.S. housing bubble as subprime mortgages, even working to make such lending more popular, says Stanford University economist John Taylor. He argues there never would have been a housing boom or a bust at all if the U.S. Federal Reserve and its chairman, Alan Greenspan, hadn’t slashed interest rates in the wake of the 2000 dot-com bust and then held them low until 2005. Not only did low rates encourage Americans to take on larger mortgages, but they pushed banks to make more aggressive loans in search of profits and increased demand for higher-yielding—and therefore riskier—debt.

Being that human action is unpredictable and the amount of variables involved within complex market economies are vast in number, isolated case studies based off methodological positivism and empirical evidence alone are impossible to conduct and apply universally within the science of economics (thymology is the appropriate term for making predictions based on axiomatic truths- as demonstrated by this post in particular). This doesn’t stop one from observing “after the fact” data and deducing logical interpretations. Up until this point, the correlation of the Bank of Canada’s low interest rate policies with the growth in household debt and home prices has been uncanny.

In a recent post at his highly popular financial blog Mish’s Global Economic Trend Analysis, Mike Shedlock provides some astounding examples of the housing bubble in what looks like the ground zero of rising prices otherwise known as Vancouver.

2119 East 3rd Ave, Vancouver
MLS® Number V934050
Listing Price: $899,500

2564 East Pender Street, Vancouver
MLS® Number V930595
Listing Price: $899,000

And here is my favorite

1016 East 7th Ave, Vancouver
MLS® Number V930461
Listing Price: $899,000 (notice the boarded up windows!)

As I have written previously, Bank of Canada head Mark Carney has acknowledged the run up in household debt but has been reluctant to admit that the housing industry is experiencing bubble like activity. Like an alcoholic addicted to the slosh, Carney admitting his reliance on cheap credit to keep certain sectors of the Canadian economy afloat at the expense of an eventual asset bubble bust would start raising questions over his competence and would necessarily strike a serious blow to his legacy. Carney, like Alan Greenspan before him, is playing with fiat fire which will leave his, and the rest of Canada’s, hands burnt after the housing market corrects itself. His only hope will be resigning in time to pass the buck on to a hapless Ben Bernanke-type to pick up the pieces; thereby exacerbating the true cause of the business cycle when money printing is used as another band aid. And Mises’ important lesson will continue fall onto the deaf ears of central bankers believing themselves endowed with enough intelligence to dictate the prevailing borrowing interest rate for millions.

True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression.

- Ludwig von Mises writing in Omnipotent Government

The U.S. Ready to Attack Iran According to Defense Secretary

2012-03-06T17:12:00.000-08:00

LvMIC:

The path to what could be World War III showed no signs of stopping today.

You know it’s kleptocracy when one of the heads of the federal government openly appeases perhaps the most influential and financially flush lobbying groups in the country.

In what amounts to a grotesque instance of outright pandering, Department of Defense head Leon Panetta spoke today at the American Israel Public Affairs Committee’s annual conference and assured the audience that “we will keep all options – including military action – on the table to prevent (Iran) from obtaining a nuclear weapon.” This assurance has confirmed what the majority of Americans have long feared- that their government stands ready and willing to involve itself in another war despite public opinion being in opposition of such an excursion.

If the Republican presidential primary has proven anything, besides the propensity for politicians to offer only vague pronouncements and crowd pleasing sound bites on complex issues, it’s that the bloodthirsty urges of the GOP are incapable of being quenched. For years, the neoconservatives who make up the Republican establishment have been pounding the war drums over Iran. About 33,000 American military deaths in Iraq and over 1 million Iraqi casualties have done nothing to dissuade the warmongering rhetoric of the candidates (with the exception of Ron Paul).

Today, presidential candidate Mitt Romney laid out a “comprehensive” plan to prevent Iran from acquiring a nuclear weapon in the Washington Post. What does this “comprehensive” plan entail the reader may ask? Simple; just throw more money at a defense department already blowing through its coffers at a sum higher than the top 14 military spenders in the world combined. Armed with political theorist Frederic Bastiat’s invaluable concept of the “unseen,” one can only begin to imagine the technological breakthroughs and consumer satisfying goods such money could have been invested towards if not being pilfered into nation building, military contractor boondoggles, and supporting imperial aggression abroad.

While Romney is busy trumpeting the image of a towering, maniacal Iran on the precipice of waging world war, as syndicated columnist Eric Margolis points out, Iran’s military, in actuality, is quite weak and utilizes dated equipment.

The mainstay of Iran’s air force remains about 60 ancient US-built F-14 naval fighters, F-4 Phantom strike aircraft dating from the Vietnam era, and some old US F-5 trainers. Iran also has a grab bag of some 25 Soviet/Russian Mig-29’s, a similar number of capable SU-24 strike aircraft, and some 20 Chinese outdated F-7 fighters. The US-supplied aircraft all suffer from metal fatigue and are more of a danger to their hapless pilots than an enemy.

Romney is far from alone in his prodding Iran into war to stoke public fear and win the White House. GOP candidate hopefuls Rick Santorum and Newt Gingrich have long admitted their desire to launch a military strike over Iran’s pursuance of nuclear arms.

The Obama administration has continued to stress it’s preference for abstaining from a military strike despite its track record of continued interventionism abroad. Well known to any fair minded observer, the Obama presidency hasn’t been one of foreign peace as promised during the 2008 campaign but has embodied the same perpetual warfare that defined the Bush administration and virtually all presidencies dating back to the time of the Spanish-American War. From ousting Libya leader Muammar Gaddafi and bombing the country’s China-provided oil infrastructure to deploying troops in Africa to hunt down the leader of a rag tag militant group no bigger than a small Amish community which posed no threat whatsoever to the U.S., the devotion toward military imperialism remains alive and well within the White House. Unmanned drone strikes which have escalated under Obama’s leadership are thought to cause more civilian deaths than actually fulfilling their goal of killing terrorists. This includes at least 168 children. Last Friday, March 2, 2012, the Pentagon admitted that U.S. forces are now operating and fighting within Yemen.

Since when was war declared on Yemen? When were the American people told their blood and treasure were being spilled in yet another country? None of these excursions were Constitutional but that slight conditionality has long seen been forgotten by the three branches of Leviathan.

In regards to Iran, the administration’s “diplomatic” approach of sanctioning is quite unfitting for a man once bestowed with the Nobel Peace Prize. Only in our world of Orwellian speak would sanctions, that is the barring of individuals to trade goods with other individuals in another country, not be considered an act of war. Starving a populace to induce change is no more humane than starving a dog so it will fight more aggressively when pitted head to head in a match with another canine. Sanctions are only exacerbating the pain of the Iranian people and “are turning into a form of collective punishment” according to Hooman Majd writing in the New York Times.

History has shown that countries backed into an economic corner, such as Japan after Franklin Roosevelt’s oil embargo, often react in an aggressive fashion to the presumed perpetrators. This is why Iran recently threatened to close the Straight of Hormuz, which almost 40% of the world’s oil passes through, after the threat of enhanced sanctions by Western nations. Given the fact that the U.S. has over 40 bases surrounding Iran, it doesn’t take a tie die wearing beatnik high on hallucinogenic drugs to see who really controls the power dynamic.

(Each star approximately represents a U.S. military base though the map may be slightly inaccurate due to changing policy)

With the administration now seeking to provide assistance to the opposition forces in Syria, intervention and war with Iran is only an eventuality at this point.

The worst apart about this whole affair is the fact that there exists no proof that Iran is really pursuing nuclear weapons. After Panetta’s declaration that the U.S. will take military action against Iran, one wonders if the Defense Secretary simply forgot that he let slip on CBS’s Face the Nation that Iran wasn’t pursuing nuclear arms back in January. The same goes for the Israeli lobby which conveniently ignores the head of Massad, Israel’s intelligence service, admitting that Iran possessing a nuclear bomb would not pose an “existential threat.” It’s even more disingenuous that the likes of the American Israel Public Affairs Committee and Christians United for Israel continue to lobby for a U.S. lead war in lieu of only 19% of Israelis supporting a military attack. Israeli Prime Minister “Bibi” Netanyahu has no interest in the desire of the people he was elected to represent as he pushes for military assistance from the U.S. He is the typical politician obsessed with his own legacy of heroism even if it means the loss of his countrymen.

When it comes to warmongering and increasing the size and authority of the state, the opinion of the people matters little. This has always been the golden rule of statism. War with Iran is coming despite all opposition. The certainty that a nuclear Iran attacking Israel is the equivalent of mutual self destruction won’t stop the war propaganda. The election of Romney/Gingrich/Santorum or reelection of Obama will not bring a different result. If Ron Paul were to somehow reach the presidency, the pressure from war lobbyers would be overwhelming. As messianic as the Texas Congressmen is, being Chief Executive alone doesn’t guarantee the rest of the bureaucrats won’t pursue their own agendas.

As Jeffrey Tucker writes

Nor is it the case that any of the elected officials have the power to do serious damage to this system. This goes for the president, too. They can often influence the way the state grows, but they can’t actually fundamentally threaten the apparatus itself. The longer they are in office, the less personal power they realize that they have. The reason is simple. The system is not structured to permit them to dismantle it, even if they wanted to. They are temporary managers of a ruling class, and the members of this class mostly scoff at these people, treating them like actors on a stage that the class itself owns.

The truth amounts to very little on the eve of war. Iraq and the lies surrounding weapons of mass destruction proved this lesson almost a decade ago. Unfortunately for the people of America, Israel, and Iran, the political class and power wielders of their respective governments refuse to learn. Their desire is for more authority and prestige; no matter how many bodies it costs.

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I should also mention that I had an earlier post of mine over at The Dollar Vigilante yesterday titled "IMF Head Christine Lagarde Saving the World?" Hopefully it will be the first of many!

Matthew O’Brien Thinks Currency Wars Are A Good Thing

2012-03-04T17:40:00.000-08:00

LvMIC:

“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”
-Murray Rothbard

Pummeling criticism, in most instances, should be reserved for those who espouse such nonsense that it strikes even the most unlearned reader as illogical. While some economic commentators have an impeccable talent for twisting the facts in a way that makes their argument seem as the only sound alternative (Paul Krugman and Robert Reich come to mind), some thinkers are so utterly confused on the complexity of a market economy that their preferred policies border on infantile.

The latest perpetrator of this crime is associate editor of The Atlantic Matthew O’Brien. In yesterday’s column titled “Currency Wars Are Good!” O’Brien commits an economic fallacy dating back hundreds of years.

A currency war begins, simply enough, when a country decides to push down the value of its currency. This means either printing money or just threatening to print money. A cheaper currency makes exports cheaper, and more competitive exports means more growth and happier people. Well, everybody except people in other countries who were just undersold and lost exports. That’s why economists call this kind of devaluation a “beggar-thy-neighbor” policy: Countries boost exports at the expense of others.

This sounds bad. Rather than cooperating, countries are fighting over trade. But in this case, some fighting is good, and more fighting is better. Countries that lose exports want to get them back. And the best way to do that is to devalue their own currencies too. This, of course, causes more countries to lose exports. They also want to get their exports back, so they also push down their currencies. It’s devaluation all the way down.

Correct so far. The global currency race to the bottom has only accelerated after the financial crisis hit and central banks turned their liquidity machines on high. Countries devaluing their currencies at an accelerated rate to boost exports prior to the crisis, such as China and Brazil, have had to ramp up their printing presses to keep their economies from teetering. This hasn’t worked so well in China.

But as a mathematical truth, not all countries can export their ways to prosperity if competitors all engage in devaluation at once. O’Brien recognizes this but then goes on to make this absurd pronouncement:

The downside of devaluation is that no country gains a real trade advantage, and weaker currencies means the prices of commodities like oil shoot. But — and here’s the really important part — devaluing means printing money. There isn’t enough money in the world. That’s the simple and true reason why the global economy fell into crisis and has been so slow to recover. It’s also the simple and true reason why the Great Depression was so devastating. We know from the 1930s that such competitive devaluation can turn things around.
A currency war is good because it leads to more money.

Say what?

There isn’t enough money in the world? Here is the big question for Mr. O’Brien: what is the correct amount of money in the world? How does one determine such a number?

First off, the amount of money within a currency system is irrelevant. Whether it be a hard money market or a fiat-imposed regime, the size of the money supply is a non-issue. What matters is prices. You could have a workable gold standard with only one ounce in existence.

Now O’Brien unequivocally declares that more money equals more prosperity. But if that were the case, then central banks around the globe could simply print off trillion dollar bills for everyone and the great recession would be over. Using O’Brien’s logic, this man from everyone’s favorite hyperinflation capital, otherwise known as Zimbabwe, would be living in a lap of luxury:

But of course Robert Mugabe destroyed Zimbabwe’s economy with hyperinflation and left its citizens with nothing but worthless pieces of paper to eat. This writer can only float a guess that O’Brien is completely unfamiliar with this well known history.

The core of O’Brien’s confused thinking stems from his misunderstanding of what money truly is. Money’s only purpose is that of a medium of exchange to facilitate transactions. Under uninhibited market conditions, gold and silver have historically emerged as currencies due to the fungibility, durability, divisibility, and ease in recognition. Fiat systems, with no limit on the amount of money that can be created, ended up replacing hard currency systems by government decree. This in turn resulted in paper unbacked by anything but the promises of politicians being used to facilitate transactions. In terms of overall utility, small paper bills have virtually no practical use outside the government forcing their use as money. Yet O’Brien believes that if everyone had more of what amounts to simply paper, then somehow the whole of the population would be better off because, well, everyone wants more money, right?

Over two hundred years ago, political and economic theorist David Hume exploded the “more money= more wealth” myth. Rothbard summarizes in An Austrian Perspective on the History of Economic Thought Vol. 1

Hume’s most important contribution is his elucidation of monetary theory, in particular his clear exposition of the price-specie-flow mechanism that equilibrates national balances of payments and international price levels. In monetary theory proper, Hume vivifies the Lockean quantity theory of money with a marvelous illustration, highlighting the fact that it doesn’t matter what the quantity of money may be in any given country: any quantity, smaller or larger, will suffice to do money’s work of facilitating exchange. Hume pointed up this important truth by postulating what would happen if every individual, overnight, should find the stock of money in his possession to have doubled miraculously:
For suppose that, by miracle, every man in Great Britain should have five pounds slipped into his pocket in one night; this would much more than double the whole money that is at present in the kingdom; yet there would not next day, nor for some time, be any more lenders, nor any variation in the interest.

If O’Brien’s dreams were to come true and money was simply printed nonstop in a way where the new funds were instantaneously within the whole of the population’s possession (an impossibility due to scarcity and physics), the end result would no net gain for anyone once prices adjust accordingly. Anyone who makes the slightest effort to study economics should realize this; which speaks volumes on the amount of thinking O’Brien dedicates to the subject.

Those who believe that all of society’s ills can be cured through inflation confuse money with every other good available. While the increased quantity of consumer or capital goods lowers the price of each available unit, thus enriching consumers as a whole, an increase in the supply of money only erodes the value of each unit. There is no never any net benefit on the whole when it comes to inflation.

In the end, it’s quite fascinating that a respected magazine like The Atlantic would allow such drivel on its pages. There are plenty of arguments for inflation out there (it lowers real wages and helps the labor market clear, it benefits debtors at the expense of creditors, it aids in the process of deleveraging) but O”Brien makes none of these points. He simply says the world needs more money and leaves it at that. How this passes for thoughtful commentary is beyond the scope of respect for this author.

The Death of the Credit Default Swap

2012-03-03T21:19:00.001-08:00

LvMIC:

Warren Buffet must be crying tears of joy after last week’s announcement where The International Swaps and Derivatives basically destroyed the function of a credit default swap. Via the New York Times:

The International Swaps and Derivatives Association said on Thursday that based on current evidence the Greek bailout would not prompt payments on the credit-default swaps linked to the country’s bonds.

I concur wholeheartedly with Big Picture blogger Barry Ritholtz:

The claim that Greece has not defaulted — despite refusing to make good on their obligations in full or on time — is utterly laughable.

In order to get paid on a default, you need a committee to evaluate whether or not failing to make payments is a — WTF?!? — default? Even more ridiculous, the committee is composed of biased, interested parties with positions in the aforementioned securities?

ISDA: After this ****show, why on earth would anyone EVER want to own an asset class that requires you to determine payout? Indeed, why should ANYONE ever buy a derivative again?

Indeed, who in their right mind would buy a CDS ever again after its sole purpose has now been relegated to the irrelevance due to the decision of one group? It’s the equivalent of purchasing car insurance, being side swiped by another driver, and then having the insurance company renege on paying out. Depending on the contract, such could be fraud punishable by legal arbitration; not to mention a good way to run a company into the ground. This latest decision by the ISDA has most likely put a death nail in the CDS market as we know it. Those who see the financial industry as the embodiment of all that is unholy and in dire need of divine regulation from those elected angels in the halls of Congress, such as George Soros, are ecstatic at this probability.

Yet credit default swaps are in no way shape or form an instrument to be demonized. As Thorsten Polleit and Jonathan Mariano explain:

However, sound economic analysis reveals that CDS are fully compatible with the principles of the free market, and that CDS are not to blame for the disintegration of credit markets—with their tumbling banks, struggling private borrowers and increasingly overstretched government finances. The truth is that CDS provide investors with an efficient and effective instrument for exposing economically unsound and unsustainable fiat money regimes and the economic production structure it creates—which, in turn, provokes a (n intellectual) counterattack from government officials (and their “court intellectuals”), who argue for regulating or even banning CDS.

Credit default swaps, at their core, are a bet against the solvency of an institution. If they are to be criticized and heavily regulated, than any game of chance involving monetary payments is to be as well. The same goes for speculators who risk their own capital in trying to forecast future market signals in an efficient manner. Basically, those who see credit default swaps and speculators as the enemies of mankind have their verbal knives pointed at entrepreneurs attempting to smooth out market fluctuations at a profit.

Since market information is widely dispersed between individuals, preventing the free flow of interaction between market participants cuts down on the efficient allocation of goods and resources. From Freidrich Hayek’s invaluable The Use of Knowledge in Society:

It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation.

If investors purchase credit default swaps, they likely realize something is amiss on the functionality or solvency of the institution they are betting against. In the world of fiat currency and fractional reserve banking, practically every bank in the world operates on the basis of insolvency as their liabilities far outweigh the real assets in their possession. Since governments pursue a monetary policy of constant inflation, (the recent financial crisis only reinforced this notion with central banks around the globe, lead by the Federal Reserve, printing to kingdom come to keep their respective banking systems afloat) continual default is the norm as nominal payments on bonds are made but are worth less in real terms. This may not constitute default by CDS standards (nothing does anymore apparently) but the promises of utopia made by politicians will inevitably bring government balance sheets to their knees the world over. Greece and the rest of the PIIGS are just the beginning.

Since credit default swaps are a weapon against the bad habits of the political class and the special privileges granted to the banking industry, they continue to be regarded as a great evil by those who benefit from the state. If banks refrained from engaging in the practice of extending unbacked credit or governments didn’t spend more than they take in, credit default swaps would not have been widely used to speculate on their solvency.

Now, the CDS market may have just met an early death despite the Greece government clearly defaulting on its debt. One more tool to fight Leviathan’s growth might have been removed but no doubt others will develop as to ensure a market for betting on the solvency of over extended states and banks. Capitalism, when not regulated into the ground, works in spontaneous and mysterious ways. Silver linings exist in almost any situation if you look hard enough. With the CDS market effectively rendered useless, perhaps government bonds will lose their appeal to the investor class. This can only be a good thing as it means less money flowing into the coffers of unproductivity.

*Addendum- As Martin Sibileau points out, the ISDA’s controversial decision over a credit non-event was in regard to not the prospect of private bondholders being forced to absorb a loss on their holdings of Greece debt but on the ECB receiving preferential treatment due to a new swap deal with the Greece government. Bloomberg explains:

The ECB will exchange its Greek debt for new bonds with an identical structure and nominal value, though they’ll be exempt from so-called collective action clauses the government is reportedly planning. That implies senior status for the ECB over other investors, according to UBS AG, and the use of CACs may lead to credit-default swaps protecting $3.2 billion of Greek bonds being tripped.

IMF Head Christine Lagarde Saving the World?

2012-03-02T16:31:00.000-08:00

LvMIC:

Don’t make me laugh.

In what can only be viewed as a glowing and adoring profile, the BBC highlights the efforts by International Monetary Fund managing director Christine Lagarde to contain the ongoing Eurozone crisis.

For the past month Ms Lagarde has given the BBC unusual behind-the-scenes access as she steers her 187-member organisation to manage the biggest financial crisis of our lifetimes – the fiscal nightmare that is the eurozone.

Her conviction that the euro crisis leaves no country immune is what is driving Ms Lagarde to ask the world to help pay for a $500bn (£314bn) global firewall. It is a job that keeps her extremely busy and extremely mobile.

On that travel occasion she was on her way to Mexico City for a meeting of the G20 Finance Ministers and she invited us to join her.

This summit is a chance to pass around the IMF cap for those hundreds of billions of dollars. She uses all her easy charm and lawyer’s training to cajole non-eurozone countries to surrender their domestic interests to the greater global good.

As any adherent to the Austrian school, or common sense in general, should know, the oft-mentioned “common good” or “global good” is a complete non sequitur used by those desperate to throw an appealing facade over their true intentions. Like the public sector union which invokes images of uneducated and starving children or a large corporation painting itself as a fighter for the working man by endorsing further labor regulations such as a raising of the minimum wage, these seemingly noble goals are not so angelic at their core. Public sector unions, like any organization run by men acting purposefully, strive to maintain their relevancy and cash flow. Convincing politicians and Joe Taxpayer that the blood of a million dead children are on their hands if they fail to funnel more funds to their cause- that is employing more government employees- is a clever way to keep the pork flowing. Same goes for the chain of big box department stores which petition for an increase of the minimum wage. Despite all evidence that mandated wage floors perpetuate poverty by pricing less productive members of society out of the labor force, advocates of the minimum wage enjoy the law because it imposes a higher cost on their small time competitors.

When it comes to the Eurozone crisis, those in favor of the bailouts don’t have a shred of concern for the taxpayers footing the bills. As has been pointed out many, many times on LvMIC, the real beneficiaries of the European Central Bank and IMF’s attempt to shove the PIIGS full of liquidity are the banks which hold their debt. Taki Theodoracopulos sums up the situation perfectly in regard to Greece:

The Greeks cannot and will not ever be able to pay the debt and interest simply because even under the cruelest austerity by the year 2020 the deficit will still be more than the GDP. Most likely the economy is in freefall and will continue to fall for years to come. The Euro Scum Elite know this but have an agenda of their own—keeping their perks and positions of power in Brussels—so they are immune to Greek suffering.

The ones suffering are the innocent poor made up of those who work for a salary in the private sector, pensioners, and small businessmen and women.

Lagarde isn’t saving the world; she is saving the governments which fund her employer and the banks which fund those governments that in turn receive all types of special privileges such as cartelizing regulations that cut off entrepreneurial competition and a spot at first receivership of newly printed currency. Since Lagarde used to hold a prominent position in the French government as Economic Minister, was previously chairwoman of the international law firm Baker & McKenzie, and was firmly against any debt restructuring prior to her role at the IMF, it’s not hard to pinpoint where her allegiances lie. To further drive the point home, see this interview where Lagarde openly admits that during times of crisis, which is the only way to accurately describe the situation in the EZ, the IMF grows in authority and influence.

Put simply, there is no such thing as the “global good.” Evaluating positives and negatives is only done on an individual basis. Groups don’t act, only individuals do. As Murray Rothbard writes:

Only individuals have ends and can act to attain them. There are no such things as ends of or actions by “groups,” “collectives,” or “States,” which do not take place as actions by various specific individuals. “Societies” or “groups” have no independent existence aside from the actions of their individual members. Thus, to say that “governments” act is merely a metaphor; actually, certain individuals are in a certain relationship with other individuals and act in a way that they and the other individuals recognize as “governmental.”

The BBC article surprisingly acknowledges that national sovereignty is being choked to a slow death in order to ensure the bailouts keep coming. The fallacy comes when the phrase “asking” is used since the funding for the IMF comes from governments themselves which don’t ask their citizens to pay taxes but merely swindles money by the threat of imprisonment. What Lardge heads is not some divine institution serving as the world’s guardian against fiscal calamities but a blackmailing racket to ensure holders of government debt rarely see any repercussions for their less-than-stellar investing habits and to promote inflation on a global scale.

Thankfully, more and more people are catching on to the scheme as demonstrated by this excellent video of Irish journalist Vincent Browne recently taking on a banker with the ECB. Watch and enjoy:

U.S. Housing Prices Back to 2002 Levels

2012-02-28T16:05:00.001-08:00

LvMIC:

Chalk up another failure for Federal Reserve Chairman Ben Bernanke.

More than three years after pumping an unprecedented amount of liquidity into the global financial system (read: print money), Bernanke’s wild experimentation in monetary policy has failed to bring the unemployment rate down as well as stop the crash course of U.S. housing prices. Graphs via The Big Picture:

—————————————————————————————————————————————–

The past few years have brought a variety of speculation on whether a bottom in the housing market has been reached. Even while the price of rent continues its upward trajectory, to quote a recent New York Times article, “the housing market remains a potent drag on the economy as home prices continue to slip, foreclosed homes fill some neighborhoods and millions of construction workers scramble for jobs.” Those commentators and economists who see spending as the magical elixir for prosperity have been pining for a return to the home prices of the boom years. “If only Americans could use their homes as ATMs again, then the glorious amount of spending which preceded the bust could finally resume,” sums up the prevailing wisdom. Or as Mr. Union Sympathizer himself Robert Reich writes in the Financial Times today:

Has the American recovery finally entered the sweet, virtuous cycle in which more spending generates more jobs, more jobs make consumers more confident and the confidence creates more spending?
Yet the biggest continuing problem for most Americans is their homes. Purchases of new homes are down 77 per cent from their 2005 peak. They dropped another 0.9 per cent in January. Home sales overall are still dropping and prices are still falling – despite already being down by a third from their 2006 peak. January’s average sale price was $154,700, down from $162,210 in December.
The plunge in home values has changed all this. Young couples are no longer buying homes; they are renting because they are not confident they can get, or hold, jobs that will reliably allow them to pay a mortgage. Middle-aged couples are underwater or unable to sell their homes at prices that allow them to recover their initial investments. They cannot relocate to find employment. They cannot retire.

Virtuous? Since when was a clear and unmistakable bubble referred to as virtuous? In the Keynesian dreamland that is! As long as those animal spirits are in full swing, the good times can roll regardless of the unsustainability of the binge!

As many should know, following the crash of 2008 the Fed took unprecedented steps to stop a much needed market correction:

Despite Bernanke’s best efforts of juicing inflation in housing, Mr. helicopter has only succeed in waging a war on savers and those on fixed income with anorexic interest rates and rising food and energy prices. With housing prices back to pre-2003 levels, such speaks to the failure of central bank-driven monetary policy that is directed to a specific cause. Like the now-in-vogue notion that central banks should concentrate on inflation or NGDP targeting, the money printers can’t guide where their newly created currency is funneled into.

It can’t be mentioned enough how puzzled this author is when those who deny the plausibility of the Austrian business cycle theory are usually the first ones to call for suppressed interest rates to fight recessions and create and economic boom. In his infamous 1998 Slate article, Paul Krugman labels the Austrian theory, which he disparages by calling it “the hangover theory, as incoherent for its stipulations that artificially low interest rates cause malinvestment and lead to a bust after inflationary concerns lead to a ceasing of monetary expansion. If the Austrians were wrong, then curtailing low interest rates wouldn’t result in a bust as the investments made during the boom would forever be sustainable and not a product of discoordination between savers, the amount of available capital, and the exuberance displayed by spenders and investors.

While there will undoubtedly be calls for more aggressive action by the Fed or federal government to get home prices riled up again, those “more spending” advocates will inadvertently be recognizing the credibility of the Austrian theory. If the Fed is capable of boosting home prices, in turn setting off a spending binge based on the perceived wealth viability of a home, then a contraction in the money supply must have the same effect but in the opposite direction.

Meanwhile, with home prices still falling, it’s not evident if the clearing state for the housing market has been reached. The past three years of monetary prime pumping has only slowed down the inevitable. In lieu of the Fed’s unprecedented action, the housing market low could have conceivably been reached by now and prices may have even started rising. Instead, the bust has been prolonged which in turn prolongs the suffering of all.

In the immortal words of Mises:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Germany Ready to Send Tax Collectors To Greece

2012-02-26T17:53:00.000-08:00

LvMIC:

It’s been two years since Greece started tilting off the deep end and, despite a deal being reached for a second bailout, problems of social unrest still persist as further austerity is pursued since the first round failed to yield the desired results. That shouldn’t come as a surprise though as the government has only sought tax increases and public expenditure decreases without liberalizing much of its regulated economy. While the private sector still suffers under a needlessly complex regulatory regime, more money was squandered in return for spending cuts. Basically, the government ends up the only benefactor in the agreement.

To make matters worse, it looks like Germany is willing to lend a helpful hand in this process, via The Local:

The German government is prepared to send 160 financial experts to Greece to help the country overhaul its tax collection, the business weekly WirtschaftsWoche reported Saturday.
Hans Bernhard Beus, deputy finance minister, told the magazine that the tax officials are ready to jump in to help the ailing country. They would need to at least speak English, but about a dozen of the volunteers speak Greek, he said.

This maneuver is a blatant attempt for German Chancellor Angela Merkel to save face and her coalition in Parliament as Germans want Greece out of the Eurozone. Instead of representing her constituency, (since when has what “we the people” want ever mattered to public officials anyway?) Merkel is going to do her best to ensure the Greece government actually succeeds in abiding by the terms set in the new bailout package. This means sending a few more highway men over to soak the already suffering people of Greece.

Though fairly well known, the history of tax evasion pervasive in Greece has recently become a hot button issue for obvious reasons. While the government desperately attempts to shore up its own finances, last year’s tax evasion amounted to $11 billion or 4% of GDP. Tax evasion is typically listed as a “problem” for Greece- economist Martin Sullivan calls it “disrespectful”- but evasion is only a problem if one considers the person who flees from a mugger a problem for the mugger himself. Like tax breaks which see their fare share of demonization, tax evasion is simply a means to keep less earned income out of the greasy palms of politicians. Since private individuals who produce and earn their income through voluntary measures are necessarily more prudent in their spending than public officials, tax evasion results in a more efficient allocation of goods. As Rothbard pointed out,

If a tax is onerous and unjust, evasion might be highly beneficial to the economy, and moral to boot.

In actuality, it isn’t hard to imagine that Greece’s economy has stayed afloat not in spite of tax evasion but because of tax evasion itself. That $11 billion not subject to thievery last year was left to those in the private sector to spend and invest as they saw fit. It didn’t go toward funding political causes, crony capitalists, or public workers. In the end, those funds weren’t wasted.

This attempt at further pilfering to mop up the excesses of Greece government shows the lengths bureaucrats are willing to go to to preserve their own unproductive hides. Much like the rest of the circus acts constituting the “saving of the Eurozone,” this attempt by Germany is yet another step in the wrong direction. If Greece really wants to come out of this storm in tact, the key isn’t increasing tax revenues but of leaving more money out of the public sector to actually be used in wealth creation.

Germany’s desire to aid in further robbery is reflective of the same reactionary measures all states use when pressed with financial difficulties. Excessive taxation rates and business stifling red tape causing too many citizens to avoid paying into wasteful government coffers? Send in more jack booted thugs armed with clipboards and the threat of imprisonment as their weapon of choice!

And the cycle of impoverishment continues.

The Lorax and Private Property

2012-02-24T17:40:00.001-08:00

LvMIC (and also a first draft for a Mises Daily piece):

With Dr. Seuss’ classic book The Lorax making its way to U.S. theaters March 2, 2012, now is a good time to address some of the positions the children’s tale takes in regard to environmentalism and industrial production.

The Lorax follows the typical structure of any Dr. Seuss classic as it contains a simple plot structure, a fantasy world, and is laced with imaginative but continually rhyming words. At the time of its publication, The Lorax was seen as a social commentary on the damage ravaged on the environment by corporations. The plot involves a young boy who pays a creature known as the Once-ler to hear its retelling of why the Lorax left a once thriving forest it was supposed to protect.

When the Once-ler first arrived at the land of the Lorax, he was astounded at the beauty of the “Truffula Trees.”

But those trees! Those trees! Those Truffula Trees! All my life I’d been searching for trees such as these. The touch of their tufts was much softer than silk. And they had the sweet smell of fresh butterfly milk.

The Once-ler proceeds to set up shop and begin chopping down Truffula Trees. With the “tufts,” he produces a kind of body suit called a “Thneed.” Immediately, the Lorax appears and declares that it “speaks for the trees” and pleads for the Once-ler to reconsider harvesting Truffula Trees. But the Once-ler finds customers for his Thneeds and expands production while cutting down increasing amounts of trees. Eventually, the Once-ler chops down all the Truffula Trees and ceases production of Thneeds while leaving only pollution behind. It’s easy to see how this fictive can ignite the passions of environmental movement who see capitalism as exploitive over nature.

Though environmentalists have made a habit of petitioning the government for economic intervention to halt environmental decay, the solution to preserving nature is much simpler. The conception of private property serves as a means to both establish ownership over a given area and incentivize sustainable practices.
But in the Lorax’s world, it’s not clear whether or not there exists the institution known as the state. If the state does exist and the Lorax, who displays human-like qualities and acts as a caretaker, has clearly defined rights over the Truffula forest, then it is a failure of the state to enforce private property. In a stateless society, the Lorax could file a grievance for legal arbitration between itself and the Once-ler within a system of competing, independent judges. Whatever the situation, the Lorax would have a case to make against the Once-ler’s use of the forest if it properly acquired the use of the land beforehand. Under a libertarian system, or system built upon the non aggression principle, of laws, the only legitimate way one acquires property of an unowned piece of land is homesteading.

Writing in Economic Thought Before Adam Smith, Murray Rothbard writes on this process which finds its origins in the theorizing of John Locke and St. Thomas Aquinas:

…cultivation and use of previously unused land establishes a just property title in the land in one man rather than in others. St. Thomas’ theory of acquisition was further clarified and developed by his close student and disciple John of Paris… Quidort declared that lay property ‘”is acquired by individual people through their own skill, labour and diligence, and individuals, as individuals, have right and power over it and valid lordship; each person may order his own and dispose, administer, hold or alienate it as he wishes, so long as he causes no injury to anyone else; since he is lord.”
The Aquinas–John of Paris–Locke view is the “labor theory” (defining “labor” as the expenditure of human energy rather than working for a wage) of the origin of property…

The theory of homesteading rests on natural law which holds that man has the absolute right to his body. As Hans Herman-Hoppe puts it in reference to the all-important thought construct of an isolated Robinson Crusoe, “every person is the private (exclusive) owner of his own physical body. Indeed, who else, if not Crusoe, should be the owner of Crusoe’s body?”

The same logical deduction can be applied to homesteading as well for if unoccupied or unused land is to be ascertained and claimed by an individual, how else could it be done outside of mixing one’s labor with it? The state is only made up of self-interested individuals; if those government officials sought to declare a portion of unused land forever more within its jurisdiction, then this constitutes an act of homesteading as well since adequate measures of securing the land would need to be taken. However, considering the state obtains it resources to operate through theft, homesteading can’t ultimately be seen as legitimate when performed by public officials.

Because the Once-Ler set about chopping down Truffula Trees without any regard for previous ownership, there were no defined private property rights as to ensure the Lorax and his fellow animal companions maintained ownership over the forest. This lack of definitive ownership resulted in the Lorax forest essentially becoming public property. Like the overgrazing of land in the American West or the failed experiment of communism in early colonial Virginia, the inadequate enforcement or nonestablishment of private property rights resulted in a wasting of natural resources.

As Mises pronounces,

If history could teach us anything, it would be that private property is inextricably linked with civilization.

Though not a man per say, the Once-ler behaved purposefully by using natural resources to produce consumer goods. In a world of strictly defined property rights, it would have to reach an agreement with the Lorax to make use of the Truffula Trees. Otherwise, the Once-ler would be violently aggressing over the property of the Lorax. The Lorax would then be justified in defending its property.

A common criticism launched against libertarian legal philosophy is that it assumes men act as angels. This is blatantly false as libertarians would be the first to agree that the violent tendencies of man would exist in a free society. The process of rectification and when force is really justified is where libertarians disagree with their statist opponents. The truth is that while private property serves as the best means for man to produce and maintain wealth, its existence alone does not guarantee the owner any safety against the scheming of unscrupulous individuals. If the Lorax had legitimately obtained the rights to the Truffula forest, it would have to act in order to repel the Once-ler’s attempt at using the property instead of merely trying to convince it through words alone.

While Dr. Seuss’ The Lorax serves as intellectual fodder for the environmental movement, it’s overly simplistic plotline is demonstrative of the author’s confused thinking on the issue. Businessmen only destroy the environment if they have little desire to maintain the value of their land or seek to violate the property rights of others and take advantage of undistinguished public property. The Lorax’s failure to establish its ownership over the Truffula forest was its fundamental error. The victims were the Humming-Fish, Brown Bar-ba-loots, and Swomee-Swans which saw their habit destroyed.

On a more interesting and economic note, the Once-ler charges $3.98 for one Thneed which he describes as “It’s a shirt. It’s a sock. It’s a glove. It’s a hat. But it has other use. Yes far beyond that. You can use it for carpets. For pillows! For sheets!” According to the Bureau of Labor Statistics’ CPI inflation calculator, what cost $3.98 in 1971 (the year of publication for The Lorax) costs $22.27 today. It wouldn’t be a stretch to say that Dr. Seuss foresaw the advent of the television infomercial which typically charge $19.99 for a good that promises to solve various ailments!

Carney Once Again Warns on Debt

2012-02-23T16:39:00.000-08:00

LvMIC:

If you want a good analogy on the various admonishments of Bank of Canada head Mark Carney, think of the bartender who tells the local drunk he should really reconsider getting sloshed every night but is still ready and willing to serve him up another. Today, The Globe and Mail highlighted some recent research done by the BoC which issues a warning on a potential housing bubble burst and decline in prices:

The Bank of Canada is warning again that growth in household debt supported by a decade-long increase in home prices means families and the economy as a whole are vulnerable to a correction in the housing market.

“Rising house prices can facilitate the accumulation of debt,” the central bank said Thursday in a collection of its recent research on the subject. “Households could therefore experience a significant shock if house prices were to reverse.”

Governor Mark Carney and his policy team at the central bank have long flagged record levels of household debt as the No. 1 domestic risk to Canada’s economy and financial system. Still, while the report contains little new information and does not include any policy prescriptions, it comes at a time of escalating concern among policy makers about how overstretched many households have become.

In my recent article entitled “Mark Carney and the Art of Deflecting Blame,” I wrote on the blatant hypocrisy emanating from Carney’s mouth asserting that the increase in private debt is not a rational reaction to his own central bank’s monetary policies:

Though Canada saw tremendous growth with public spending reforms adopted in the mid-1990s, the cyclical pattern of private overindebtedness has begun to rear its ugly head. This isn’t unexpected as the BoC, like central banks all over the world, took interest rates to anorexic levels following the financial crisis of late 2008. As I have noted, this orthodox reaction has set the stage for what looks like a housing bubble that will inevitably pop.

While Carney spends a great deal of time laying out the predicaments the global economy is facing, he spends zero time acknowledging the role central banks have in perpetuating these difficulties. The continual and desperate manipulation of interest rates to spur growth is ignored. Carney is a master of pointing the finger at profligate governments and individuals without addressing the core issue at hand. Without a central bank ready and willing to use the printing press to engineer credit expansion, a sustained period of leveraging cannot occur without interest rates spiking. Price signals serve as not only a means to direct investment to those sectors which demand it but also to put a limit on an overextension resources devoted to unsustainable lines of production. The increase in cheap debt can’t continue without further inflationary pressure manifesting itself over the whole economy.

As The Globe and Mail article points out, Carney’s move to keep interest rate at 1% beginning in 2010 has in turn coincided with a jump in debt accumulation with almost 50% of the total borrowing amount using home values as collateral. In what amounts to a laughable degree of double talk, Carney comes off as rest assured of the stability of the housing market yet worried about its growth in prices:

The central bank said Canada’s housing market has not yet shown signs of “the excesses seen in other countries,” such as the United States and the United Kingdom in the years before the global financial crisis, which in no small part was triggered by the bursting of real-estate bubbles. However, other comments in the report reinforce the notion that the central bank – which is not expected to be able to counter a runup in debt through higher interest rates any time soon – is more and more worried about this issue.

Carney and co. want their cake and to eat it too. Whenever the inevitable bust comes, they can point back to these reports and claim they gave adequate warning. Meanwhile, the BoC holds interest rates low to support its banking sector and fuel the boom. When interest rates eventually rise, the result will be the same:

These economists too must admit and do admit that the upswing is invariably conditioned by credit expansion, that it could not come into being and continue without credit expansion, and it turns into depression when the further progress of credit expansion stops. -pg 78 Human Action

This author always finds it peculiar that while mainstream economists are well aware of the damage wrought by rising interest rates after a period of ultra cheap credit, they are still dismissive of the Austrian Business Cycle Theory as if it doesn’t adequately explain this phenomena. Like the collapsing of the housing bubble in the U.S., the prospects of more people coming to the Austrian school once the same happens in Canada are good. Even the grayest of clouds can always have a silver lining.

Just don’t expect central bankers or do-gooder politicians to ever learn their lesson.

Could the U.S. Government Default? It Defaults Everyday!

2012-02-22T18:47:00.001-08:00

LvMIC:

A few days ago, The Economist asks the big question on whether or not the U.S. government will eventually default on its debt. In highlighting a series of papers out of the Mercatus Center at George Mason University, the popular magazine lists some opinions from economists who agree that the long term spending prospect for the U.S. is bleak but can be controlled.

Peter Wallison takes the (fairly widespread) view that a government with debt denominated in its own currency and with access to the printing press will not default on its debt. But he can still envisage a crisis in which repeated failure by politicians to tackle the debt burden means that investors eventually conclude that the debt will be inflated away. This will lead to a weaker dollar, higher prices for commodities and other real assets and a wage-price spiral.

This is the most plausible outcome of a system built upon theft and cronyism, aka the state. Politicians act as drunks addicted to the slosh of pork barrel spending. Though the political class scores electoral points by decrying pork spending, the truth is, to paraphrase Lew Rockwell, the entirety of the government’s budget is pork barrel spending. Down to the very last penny. Wallison’s view is similar to the Modern Monetary Theory school which holds that sovereign nations with their own printing press can never go bankrupt. Sure a loaf of bread may cost $300 but as long as troops remain scattered across the globe and the Social Security checks keep being mailed, then the illusion of solvency can be maintained. But going bankrupt or defaulting are not one in the same as I will get to soon.

Garett Jones thinks that neither outright default nor inflation is likely, in paper because the markets would see such an outcome coming and push interest rates up to prohibitive levels. Furthermore, Americans will be able to see the messy state of Europe and will resolve to avoid the same outcome. Thus a massive deficit-cutting deal will be achieved although Mr Jones thinks this is more likely under the Democrats than the Republicans, because of the latter’s anti-tax philosophy.

Lenders can ditch dollars all they want, the Fed will be there to resupply so it’s kind of hard to see interest rates ever reaching a point to force Congress into action less done purposefully like Volcker’s term as Chairman. Jones acts like Congressmen ever do the right thing which is the equivalent of believing in Santa Claus. Tax increases are unfortunately likely but I have a bridge to sell him if he thinks the increased revenue will be used to pay down the national debt.

In contrast, Arnold Kling argues that neither Democrats nor Republicans will be willing to compromise because of the effect on their electoral prospects. However, a negotiated default would bring in the IMF to broker a deal, which would inevitably involve both tax rises and spending cuts.

I have a lot of respect for Arnold Kling but seeing as how the United States provides a large amount of funding for the IMF and the dollar is still the reserve currency of the world, it would be very peculiar to see the U.S. being bailed out by the international community. If the U.S. were to undergo a fiscal crisis, the potential issues posed to the global economy may override any effort by the IMF to shore up America’s finances. One good outcome of IMF blackmailing (which is what it amounts to) could be the possibility of Congress cutting all funding from the institution; thus posing a serious blow to the banker class which uses it as mechanism to leverage bailouts in its favor.

Perhaps the most provocative paper comes from Jeffrey Rogers Hummel who reasons that default is virtually inevitable because a)federal tax revenue will never consistently rise much above 20% of GDP, b)politicians have little incentive to come up with the requisite expenditure cuts in time and c)monetary expansion and its accompanying inflation will no more be able to close the fiscal gap than would an excise tax on chewing gum. Most controversially, he argues that
The long-term consequences (of default), both economic and political, could be beneficial, and the more complete the repudiation, the greater the benefits.
Why does he take this view? Once allows for the Treasuries owned by the Fed, the trust funds and foreigners, total default could cost the US private sector about $4 trillion. In contrast, the fall in the stockmarket from 2007 to 2008 cost around $10 trillion. In compensation, however, the US taxpayer would no longer have to service the debt; their future liabilities would be lower.

Hummel nails it. Default is ultimately in the best interest of the U.S. as it punishes creditors stupid enough to lend to the government in the first place. An outright default would make borrowing costs much higher in the future absent further Fed intervention which would in turn place a limit on future deficit spending. It would also serve as a much needed wake up call to those who still believe the entitlement programs will be there to pay for the good life come retirement. As Hummel mentions:

Reliance upon these government promises constitutes a particularly egregious form of fiscal illusion….The best way to alleviate future suffering is to repeatedly and emphatically warn the American people that these programs will go under. The more accurately people anticipate this inevitable outcome, the better prepared they will be.

When current Presidential candidates speak on “saving Social Security” or “preserving Medicare,” they are doing a disservice to anyone who listens to them. The future unfunded liabilities of the U.S. government amount to over $100 trillion. There is no possible way to pay for them in full.

So there are your choices. Default on the debt in real terms via inflation, default in nominal terms or break the promises made to future benefit recipients. Not an appealing menu but an indication of the likely political battles over the next 10-20 years.

The truth is the U.S. government defaults everyday the Federal Reserve prints a new sheet of crisp dollar bills. When creditors are being paid back a principle nominally but worth less in real terms, that constitutes default. Social Security checks can stay the same amount nominally but will purchase less and less. Eventually the medical industry will likely be nationalized completely as to ensure medical care is given while quality inevitably declines. So yes, the U.S. will default ultimately by continuing to monetize its debt. The grand promises of utopia made by politicians will never be fulfilled. The sooner the overall public and private creditors realize this, the better.

A Dentist Calls Me Out

2012-02-21T16:27:00.000-08:00

LvMIC:

Yesterday I had a piece published at the Ludwig von Mises Institute entitled “Monopoly Dentistry” which highlighted an ongoing trend by states in the U.S. to adopt occupational licensing for mid level dental practitioners as a means to expand the supply of care available. In the piece, I documented the push by the American Medical Association to limit the supply of doctors and medical schools through state intervention during the turn of the 20th century; thus decreasing the competition and driving up the wages of the doctors it represents.

Though I received a number of complimentary emails on the piece, some readers were not so pleased. One practicing dentist found it necessary to email and critique the argument made in favor of open, unobstructed competition in the dental industry. I will address some of his disagreements below, but for the sake of humility and encouraging meaningful discussion, the dentist’s name will remain anonymous. I will refer to him as Mr. Smith only.

Mr. Smith emails:

Mr. Miller,

You do us a disservice. Selling lemonade and restoring teeth are night and day. Yes, yes, it’s an analogy. But the ADA would support mid-level providers if mid-level licensing would be required to go to areas where there is a need (rural), but they are not. So they move down the street and simply undercut pricing with “inferior dentistry”. Now you say, see, you prove my point, but I don’t. I say “inferior dentistry” because I believe four years of dental school after college is not enough time to learn all you really need to know to perform good dental surgery and you want to train people for two years out of high school? Did you know that it is two years of training for a high school graduate for a mid-level license? This would be a disservice to the health of the public. Bring on mid-level and send them to the rural needs but give them the proper training.

What Mr. Smith is referring to when he writes “lemonade” is a brief example I give on the sort of process some businessman go through in order to impose occupational licensing via the state:

To get a good idea of how state occupational licensing works, consider the following example. Imagine Bill runs a lemonade stand in the middle of a bustling city. Instead of facing competition from other street vendors and surrounding eateries and grocery stores, Bill had the foresight to lobby the local city council to outlaw all sellers of lemonade who don’t at first obtain a license from the city. Due to his influence and close ties to select city council members, Bill fast tracked through the application process and was able to secure a license to sell lemonade before anyone else. Little competition stands in his way now. Bill is then able to keep his sale price above the established level of a real free market and reap in profits as consumers are still willing to take the extra hit on their wallet for his delicious lemonade. Profits are up, times are good, and Mrs. Bill is happy. But now the city council is beginning to change its tune on lemonade licensing and is considering an increase in licensing allotments. The free ride is coming to an end so Bill, worried the good life will soon be over, launches a countering lobbying effort on the basis that product quality will decrease if more licenses are given out.

Mr. Smith, like many of his peers who are professionals in specific occupations, regards his practice as above the fray of the lemonade salesman. But that is simply not true. Sure, dentistry is a very specialized field and under a free market, its service would still cost more compared to the selling of basic foodstuffs. But dentistry is a service like any other; nothing makes it unique or worthy of special treatment. While dental work can be vital for overall health and well being, the same can be said for food, water, shelter, or clothing. Yet the clothing industry or food industry, though stifled by overburdensome regulation, don’t experience the kind of degree of state intervention and privilege granting the medical industry does.

Now Mr. Smith asserts that I am an advocate for mid level dental practitioners when I clearly state in my piece that:

It must be stressed, however, that the advent of an increase in licensing for a type of mid-level dentist is by no means a comprehensive solution for the problems that plague the industry. Previous governmental intervention was the cause of a shortage in dentists and an increase in the price of dental care. Further micromanagement of an already overly managed problem will only bring about more unintended consequences.

I have no desire to “want to train people for two years out of high school” to be mid level dentists as Mr. Smith claims. The idea that an arbitrary number of hours or years of training for a specific practice ignores the reality that individuals learn at different paces. What may take George five years to learn may take Fred only three if he is naturally skilled and adaptable enough. The division of labor, which is fundamental to technological development and the raising of living standards, is built upon the inequalities of man where some excel in occupations that others don’t. Like “one size fits all” public schooling that has coerced generations of children into a raw deal of not providing a custom education focused on each child’s inner ability, prohibiting the market from achieving its full potential has disastrous results.

Mr. Smith invokes the term “proper training” without defining it. Is that because what is considered good and proper is ultimately in the subjective views of the consumer? Mr. Smith doesn’t say.

Answer this question honestly; who would you go to to have your teeth drilled by, someone two years out of high school or 5 years (that’s what I recommend) of training after 4 years of college. Yea, I thought so. I rest my case.

Apparently Mr. Smith is a mind reader as he seems to know my answers well in advance. If I were to honestly answer the question, I would prefer the person drilling my teeth to have an adequate amount of training. Whether that is two years or nine years, as per Mr. Smith requests, is beyond the point. I graduated college last May with a large number of people who attended school the same number of years as me. Were we all on the same level intellectually? Of course not. People learn at different levels. If I have the choice of two dentists, there are a number outlets that could develop outside the sphere of government regulation which would vet the merit of every practicing dentist. Like Kelly Blue Book or Angie’s List, market-based rating agencies develop when the demand arises. Unlike governmental licensing, the profit incentive exists for rating agencies to provide accurate information in order to gain market share. There is no need to believe that such wouldn’t develop in absence of state occupational licensing.

You need to see all sides of an issue and not just the economics of it. It’s called dental “care”, “service”, “vocation”, not just economics.
I will be unsubscribing if this is how you research your articles. How can I trust your opinion on other topics when I know you didn’t understand my own?

Economics is a subset of praxeology; which is the science of human action. As Mises wrote, “praxeology, like the historical sciences of human action, deals with purposeful human action. If it mentions ends, what is has in view is the ends at which acting men aim. If it speaks to meaning, it refers to the meaning which acting men attach to their actions.” The purpose of my article was not to just take an economic view of state licensing but analyzing the overall purpose behind the push for government intervention. It undoubtedly is in the best interest of Mr. Smith to restrict the amount of dental service providers as it means a higher-than-market wage for himself. At the same time, intervention not only allows the state to grow in size and influence but also serves as a jobs program for bureaucrats who in turn provide electoral support for the status quo.

Economics ultimately deals with looking at allocation of scarce resources which includes “care” and “service.” Applying praxeological and economic analysis to the dental industry does, in fact, allow an observer to see and consider all sides of the issue.

In the end, I don’t do a disservice to the dental industry; the dental industry and its tight connections with the state do a disservice to its customers. By lobbying to establish occupational licensing, and hence a decrease in the overall supply of dentists, costs necessarily go up for industries with inelastic demand. The narrative Mr. Smith espouses assumes his customers are too ignorant to safely choose amongst a variety of dental services providers. If that isn’t a disservice, I don’t know what is.

I would encourage Mr. Smith to not unsubscribe to the literature of the Austrian school but actually attempt to study the material in depth. By studying Mises, Mr. Smith stands to learn the proper way of analyzing market phenomena. Through Hayek, he can learn how knowledge is widely dispersed throughout society. And through Rothbard he can learn the exploitive nature of the state and how its co-opted by various special interests. Only then will Mr. Smith realize the type of impoverishing system of state licensing he ultimately supports.

Monopoly Dentistry and a Brief History of the Austrian School

2012-02-20T17:35:00.001-08:00

Had a piece published at the Mises Institute today entitled "Monopoly Dentistry." Here is an excerpt:

And so began the downward trend in America's free market in medicine. With fewer medical schools — and thus fewer doctors — wages can be kept higher than would exist in a market dominated by free enterprise and the unobstructed entry into practice. Consumers, who ordinarily determine the success of producers, have lost out as they face higher costs on top of being deemed too ignorant to choose an adequate doctor without the aid of the state. Rent seeking becomes ingrained in an industry that must devote increasing amounts of financial resources to appease public officials.

The American Dental Association's opposition to expanded licensing has more to do with preserving the status quo than looking out for consumer safety. If freedom of entry were maintained in the dental industry, there is little doubt that mid-level dental practitioners, or some cost-efficient form of such, would have emerged as a viable occupation by now.

It must be stressed, however, that the advent of an increase in licensing for a type of mid-level dentist is by no means a comprehensive solution for the problems that plague the industry. Previous governmental intervention was the cause of a shortage in dentists and an increase in the price of dental care. Further micromanagement of an already overly managed problem will only bring about more unintended consequences. Such is the nature of the state: intervention begets intervention, and we forge ahead on the path to socialism.

I received a couple of angry emails from current dentists over this, so I take that as a great sign of my logic and rational.

The director of LvMIC asked me to do a brief piece on the history of Austrian economics and its founders. Below is an initial draft, all suggestions are welcome, including those from current dental practitioners:

Austrian Economics 101

What is Austrian economics and who were its leading theorizers? The following will attempt to answer that question as succinctly as possible.

The Austrian school received its name from the fact that many of its early thinkers hailed from Vienna in the Austrian Empire. This oft-neglected school of thought emphasizes a few key concepts vital to economic analysis including individual methodology, the heterogeneous nature of production and goods, and the incompatibility of applying precise mathematical constructs to unpredictable human action.

The birth of Austrian economics begins with Carl Menger and the publication of his Principles of Economics in 1871. Menger was one of three founders of the “marginalist revolution” along with William Stanley Jevons and Leon Walras. In correcting the Smithian paradox of the classical school, otherwise known as water vs. diamonds, the marginalist position was one of explaining how items are valued by market participants on the margin of their value scales. As an individual trades for preferred goods, their value scales are fulfilled in steps in accordance with perceived marginal utility of each good. The “marginal revolution,” which Menger helped spearhead, set the foundation for establishing individual subjective value as the basis for all economic observances of value. In addition to his rigorous use of individual methodology and deductive reasoning, Menger outlined how commodities become mediums of exchange; which would become a full fledged theory come Ludwig von Mises’ “regression theory.”

Eugen Bohm von Bawerk, who was a devout follower of Menger, made significant contributions in the development of time in its relation to production. In his devastating critique of Karl Marx, Bohm-Bawerk described the “roundabout” nature of production in that capitalists risk their own saved capital to invest and pay workers in the time it takes to yield a final product. Time is ultimately the key determinant of interest rates which are not exploitive but a price paid for present satisfaction.

The leading economist of the Austrian school was Ludwig von Mises. Mises, whose ambitious treatise Human Action is the leading work on the Austrian worldview, embraced economics as a “value-free” science and applied a number of universally true axioms to deduce that laissez faire capitalism was the best economic system for relieving man’s uneasiness within nature. The fundamental Mises axiom begins as “human action is purposeful behavior” through which an entire body of economic thought developed. In addition to his rigorous application of axiomatic truths to economics, Mises developed a number of groundbreaking theories in the sphere of monetary operations and theory. Most famously, Mises applied marginal utility to the inflationary policies of central banking and concluded that abundant credit expansion not backed by an increase in savings on part of the general public leads to distortions in economic calculation and malinvestment. In short, artificially low interest rates perpetuated by a central bank lead to the business cycle- usually called the Austrian Business Cycle theory. Like Bohm-Bawerk before him, Mises dismantled any notion of socialism possibly working by showing that prices act as signals to producers in order to more efficiently allocate goods. Without the pricing system, socialism is doomed to fail. Mises also brought Menger’s theory on money evolvement full circle with his regression theorem which stated that any commodity being used as a unit of exchange obtains its value from its previous usage as a non-money.

Perhaps the most famous of the Austrian economists was Freidrich Hayek. Hayek, being a student of Mises, made great strides in developing the Austrian Business Cycle Theory and the damage wrought by central banking. Hayek’s lasting influence however comes from his theorizing on the disbursement of knowledge throughout society. In arguably the most important economic essay ever written, The Use of Knowledge in Society, Hayek explains how marketable information can never possibly reside in the minds of few central planners and that markets must remain unobstructed in order to work efficiently.

Economist Murray Rothbard took the Misean approach to another level by synthesizing it with a strict adherence to natural rights. Rothbard’s Man, Economy, and State and Power and Market rank along with Human Action as the premier treatise on Austrian economic theory. In addition to elaborating on the theories of Mises in his famously succinct prose, Rothbard made headway in further developing Austrian thought on such concepts as monopoly price and the limited size of private firms amidst dynamic competition. Rothbard was also a rigorous historian and libertarian theorist who developed a substantial body of work in application of the fundamental “non aggression axiom.” Rothbard famously coined the term “anarcho capitalism” to describe his preferred economic system as lacking in a state apparatus.

Though Austrian economics is not as popular or eminent as the Keynesian or Chicago school, it has seen yet another revival with the presidential campaign of Texas Congressman Ron Paul and worldwide economic slump. As interest continues to grow as to the true cause of financial crisis, the Austrian school stands to gain much more attention from a broader audience. This can be seen as the one true silver lining in the devastation brought about by the Federal Reserve.

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It needs some elaboration but it's a start.

Robert "If Only We Had More Unions" Reich

2012-02-19T16:27:00.000-08:00

LvMIC:

At this point in his career, it’s a safe bet that former Labor Secretary and UC at Berkley public policy professor Robert Reich has never met a union he hasn’t liked. Like Karl Marx and the muddled thinking which preceded him, Reich has spent his writing career playing the class warfare card while citing the 1950s as vindication for high union rates being responsible for a robust economy. The solution to all problems economic, according to the former Clinton lackey, is businesses not paying their employees enough. If only Walmart would pay their associates more than, say, $9.00 an hour, those employees would have more disposable income and will subsequently go on a spending spree; hence leading to a boom. Basically, evil capitalist pigs paying their employees a mere pittance for their hard work is what prolongs deep recessions. Sounds simple enough, right?

In a recent Slate column, Reich once again attempts to rationalize this logic while explaining that low skill manufacturing isn’t making a triumphant return to the United States anytime soon.

Suddenly, manufacturing is back – at least on the election trail. But don’t be fooled. The real issue isn’t how to get manufacturing back. It’s how to get good jobs and good wages back. They aren’t at all the same thing.

But American manufacturing won’t be coming back. Although 404,000 manufacturing jobs have been added since January 2010, that still leaves us with 5.5 million fewer factory jobs today than in July 2000 – and 12 million fewer than in 1990. The long-term trend is fewer and fewer factory jobs.

Even if we didn’t have to compete with lower-wage workers overseas, we’d still have fewer factory jobs because the old assembly line has been replaced by numerically-controlled machine tools and robotics. Manufacturing is going high-tech.

Reich is correct about one thing: the underwear and t-shirt factories are not coming back to the U.S. And for that we should all say good riddance. Mechanization often means lower cost for inputs, increased productivity and supply, and leads to lower consumer prices. Lower prices leave more money in the wallets of all consumers which can then be devoted to other ends. Former manufacturing workers can find employment meeting the new demand structure that is a result of a jump in productivity. Fretting over this process misunderstands the role machinery plays in increasing the marginal productivity of labor. Mises explains:

The confusion starts with the misinterpretation of the statement that machinery is “substituted” for labor. What happens is that labor is rendered more efficient by the aid of machinery. The same input of labor leads to a greater quantity or a better quality of products. The employment of machinery itself does not directly result in a reduction of the number of hands employed in the production of the article A concerned. What brings about this secondary effect is the fact that — other things being equal — an increase in the available supply of A lowers the marginal utility of a unit of A as against that of the units of other articles and that therefore labor is withdrawn from the production of A and employed in the turning out of other articles.

Though Reich doesn’t explicitly condemn mechanization, he has the short sighted view of robotic operations being the direct cause of a decline in manufacturing employment. It shouldn’t be a surprise then that Reich, along with many big labor proponents, mistakenly attributes high wages with material abundance.

Bringing back American manufacturing isn’t the real challenge, anyway. It’s creating good jobs for the majority of Americans who lack four-year college degrees.

Manufacturing used to supply lots of these kind of jobs, but that was only because factory workers were represented by unions powerful enough to get high wages.

Reich sees money as an end in itself rather than a means to acquire goods and services. This is his first mistake. Taking his rational to the extreme but logical conclusion, a declared minimum wage for all workers of $1,000 an hour should instantaneously lead to prosperity. After all, “good jobs and “good wages” are the overall goal, correct? But I doubt Reich would advocate for such a policy and recognizes the damage an incredibly high price floor would cause. At least I hope he does given his prominent role in commentating.

Where Reich ultimately falls short is believing that unions are solely responsible for higher-than-market-determined wage rates and that no negative consequences permeate from such. Wages in an uninhibited market are determined by the marginal productivity of labor of each worker. In order to maintain higher than normal wage levels, be recognized by employers, and prevent potential workers from being employed at a lower wage, unions rely on the force of government and threat of judicial lawsuit. Like all market intervention, unions are an inherently violent imposition into the peaceful transactions of individuals (the exception to this rule being trade unions which act as networking aides and are funded through the voluntary payments of their members.) From the utilitarian perspective, implicit compulsion may seem worth it if your goal is promoting an increased standard of living. Unionization would certainly seems beneficial for already employed workers. But the fact is that the financial benefits obtained through unionization and binding collective bargaining go to the union members only. Murray Rothbard shows how unions, rather than assisting the common man, are actually the enemy of all workers:

Consequently, at best, a union can achieve a higher, restrictionist wage rate for its members only at the expense of lowering the wage rates of all other workers in the economy. Production efforts in the economy are also distorted. But, in addition, the wider the scope of union activity and restrictionism in the economy, the more difficult it will be for workers to shift their locations and occupations to find nonunionized havens in which to work. And more and more the tendency will be for the displaced workers to remain permanently or quasi-permanently unemployed, eager to work but unable to find nonrestricted opportunities for employment. The greater the scope of unionism, the more a permanent mass of unemployment will tend to develop.

Higher-than-market wage levels are not the product of utopian fantasy but of government decree only. In order to maintain such rates, resources and capital must be devoted to those industries; leaving less for the rest of the economy. Forced collective bargaining is the anathema of rising living standards and only serves the interest of union members and its administration. A return of the unionization rates of the 1950s wouldn’t bring back to the conditions of the post war boom but would have the opposite effect. Reich either doesn’t understand this phenomena or ignores it all together.

Greece Default Has a Set Date?

2012-02-18T18:57:00.000-08:00

LvMIC:

About two years ago when things started going downhill, the original bailout package for Greece totaled 110 billion euros. The second bailout deal, which has been seemingly put off indefinitely as the troika busybodies try to reach agreeable terms, is set to cost around 170 billion euros. If confirmed, Zerohedge estimates the total of the two packages will likely cost around 320 billion euros or 136% of the country’s GDP.

Meanwhile, the never ending meetings with private creditors over bond haircuts have yet to yield a result that satisfies both parties. Headlines such as “Greece nears deal with private creditors” have become the laughing stock of the financial blogosphere. At this point, the date for a deal to be reached has been pushed back till March where bondholders are being pressured to accept a 70% haircut which will more than likely not be large enough.

Two years of budget austerity and increasingly violent protests have done little to save the country from its fiscal problems. From the beginning, many financial commentators, including this author, have argued the best thing for Greece is an outright and hard default. The endless stream of summits with politicians doing nothing more than wasting taxpayer money on high end hotel rooms and catered food are a clear sign that progress in terms of actually reaching a viable fix to the crisis is not occurring. And now, via The Slog, a rumored timetable appears to be in the works for the country to finally ditch the euro and tell creditors where to stick it (my emphasis added below).

Senior bankers on Wall Street have been given detailed documentation setting out a timetable to Greek default, including firm dates and technical ‘orders’ about last use of the euro as a currency there. The revelation arrived at Slogger’s Roost last Monday, since when I have been trying to obtain corroboration. This arrived in the early hours of today (Thursday). One of the banks is Barclays Capital (Barcap) run by controversial figure Bob Diamond. The other must remain anonymous for the time being, in order to protect sources.

The document asserts that Greece will officially be declared in default by all the ratings agencies after the close of business on Friday March 23rd . At the weekend all Greek bank accounts will be frozen, with emergency measures detailed to prevent the flight of capital. Included in the paperwork is a list of very limited exceptions to the ‘no withdrawals’ order. All major banks ‘are instructed not to deal with euro exchange as of open of business in Greece on Monday 26th march. All Greek markets will close for one day ‘at least’.

It should be pointed out immediately that this so called “document” has yet to be confirmed as real. Still, it’s not a stretch to think that the heads of major banks exposed to Greece debt are preparing for the worst. All along, the talks of “bailing out” Greece were in actuality a justification to bailout the banks who were shortsighted enough to purchase the country’s bonds in the first place. Put simply, Greece wasn’t bailed out, the banks still left holding the country’s debt were. What else would you expect when both the head of the European Central Bank and the appointed Prime Minister of Greece are Goldman Sach alum?

If an outright default is indeed in the works, it will be for the best. The people of Greece could have avoided a great a deal of pain if this decision was correctly made two years ago. Instead, the political class did what it does best and kicked the can of reckoning all the way to the abyss and has no room left to go. When the yield on a 1 year Greece bond hit over 100% just a few months ago, the end was in sight. Today, a one year bond yield is an astounding 629%!

The banker class sees the writing on the wall and, regardless if the supposedly leaked document is real, is likely preparing to finally rid itself of its toxic and debilitating debt holdings. Of course such a consequence is not to be feared but embraced by all those who realize markets can only work if both success and failure are allowed to occur. Like investor Kyle Bass says, “capitalism without failure is like Christianity without Hell.” Preventing the market from ridding itself of unproductive assets not only sends mixed signals to investors but also serves to absorb limited capital. With default looming, it’s become perfectly clear that the billions thrown at Greece over the past two years might as well have been dumped in a pile, doused in gasoline, and set ablaze.

Perhaps more worrisome about a hard default, and nationwide defaults in general, is the prospect of a declared banking holiday. As the leaked document mentions, the planned default will result in “all Greek bank accounts” being frozen, “with emergency measures detailed to prevent the flight of capital.” For well over a year now, there has been a slow but steady bank run occurring in Greece:

Combine this with impending default and capital controls are almost a given. To paraphrase Murray Rothbard, the institution of fractional reserve banking is functionally insolvent and reliant on the public to not do as the citizens of Greece are doing and justifiably reclaim their private property before a potential currency debasement. In Anatomy of the Bank Run, Rothbard describes this process:

It was a scene familiar to any nostalgia buff: all-night lines waiting for the banks (first in Ohio, then in Maryland) to open; pompous but mendacious assurances by the bankers that all is well and that the people should go home; a stubborn insistence by depositors to get their money out; and the consequent closing of the banks by government, while at the same time the banks were permitted to stay in existence and collect the debts due them by their borrowers.

In other words, instead of government protecting private property and enforcing voluntary contracts, it deliberately violated the property of the depositors by barring them from retrieving their own money from the banks.

The answer lies in the nature of our banking system, in the fact that both commercial banks and thrift banks (mutual-savings and savings-and-loan) have been systematically engaging in fractional-reserve banking: that is, they have far less cash on hand than there are demand claims to cash outstanding. For commercial banks, the reserve fraction is now about 10 percent; for the thrifts it is far less.

This means that the depositor who thinks he has $10,000 in a bank is misled; in a proportionate sense, there is only, say, $1,000 or less there. And yet, both the checking depositor and the savings depositor think that they can withdraw their money at any time on demand. Obviously, such a system, which is considered fraud when practiced by other businesses, rests on a confidence trick: that is, it can only work so long as the bulk of depositors do not catch on to the scare and try to get their money out. The confidence is essential, and also misguided. That is why once the public catches on, and bank runs begin, they are irresistible and cannot be stopped.

Given that large financial institutions serve as the middle man between a nation’s central bank and respective Treasury, the government has a keen interest in maintaining the solvency of the banking system at all costs. This means shutting off the people’s access to their supposed property at a time when they need it the most. The most likely outcome of a default in Greece will be the abandonment of the euro and readoption of the drachma. Depending on the size of the haircut bondholders will ultimately face, massive currency debasement will be opted for in lieu of imposing further austerity. The planned bank holiday will thus be used to transfer the deposited euros into drachmas; essentially robbing the people of their already slowly deteriorating store of wealth. Again, the banking system’s interest is being put above the rest of the country’s. Such is the nature of power centers occupied by easily corruptible men who greatest feat in life amounts to lying to more people than their opponent on election day.

Whether or not a hard default is being planned for on March 23rd, the inevitable will come in one form or another. For Greece, the past two years have been nothing more than an exercise in political theater and obfuscation. The heavily regulatory burden, generous welfare benefits, and pro-union policies have decimated the country’s private sector and diminished any hope of economic growth. Wiping the slate completely clean is the only viable option for a country that has defaulted on its debt a total of five times in the past two centuries. Ripping a band aid off in one fell swoop is never the end of the world and neither will be the bondholders suffering the consequences of their actions. The sooner the market is allowed to function properly and allocate capital toward more efficient outlets, the better the whole of the Eurozone will be. Now if only Portugal, Italy, Ireland, and Spain would take the same path.

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On a personal note, I promised someone this today, though it's a tad bit late:

I really liked the card you gave me today! To answer the question inside, which I apologize for not doing so in person, i would love to be!

And to further add to the overall dorkiness, and since I occasionally point out these performances on here as demonstrative of the producer's talent (and this one is exceptionally good), I will stick with the V-Day theme:

And now that I have completely embarrassed myself, I hope you at least email or text me and let me know if you saw this!

San Francisco, Regime Uncertainty, and The Plight of Small Business

2012-02-17T17:29:00.000-08:00

LvMIC:

Back in the 1990′s, economic historian Robert Higgs, author of the popular Crisis and Leviathan, famously developed the concept of “regime uncertainty” as a tool to describe the type of business atmosphere which pervaded during The Great Depression and prolonged the deep contraction in investment. Higgs described “regime uncertainty” as:

To narrow the concept of business confidence, I adopt the interpretation that businesspeople may be more or less “uncertain about the regime,” by which I mean, distressed that investors’ private property rights in their capital and the income it yields will be attenuated further by government action. Such attenuations can arise from many sources, ranging from simple tax-rate increases to the imposition of new kinds of taxes to outright confiscation of private property. Many intermediate threats can arise from various sorts of regulation, for instance, of securities markets, labor markets, and product markets. In any event, the security of private property rights rests not so much on the letter of the law as on the character of the government that enforces, or threatens, presumptive rights.

Though considered groundbreaking at the time, the idea of regime uncertainty should be an innate consideration for any market observer. Investment in the midst of a market economy is always a risky endeavor. Consumers aren’t cogs in a machine and react to stimuli in unpredictable patterns. The 40-something year old putting his life savings into opening a laundromat has a myriad of factors to worry about when attempting to get his business off the ground; least of which is obtaining the initial funding. Competition, price of inputs, hiring competent workers, and finding a suitable location to set up shop are all factors entrepreneurs must take into consideration. There is never a guarantee of success.

But as government, infused with do-gooder politicians and bureaucrats, intervene in this process by setting up a plethora of regulatory obstacles, such serves as a further impediment to any aspiring businessman.
Investment, in addition to being inherently risky, is also time sensitive and requires a great deal of future forecasting. Knowing whether or not you are going to make the bottom line come the end of the month or year is an incredibly difficult thing to do when you are limited in knowledge capacity and rely on attracting consumers who aren’t force to patronize your newly established business. Throw a government into the mix which is continually adding and deliberating further private intervention and tax increases and what inevitably springs forth is a hostile business climate where entrepreneurs are at the whim of a political class which doesn’t rely on voluntarily payment for operation but on violent confiscation.

Case in point, the Worker’s Republic of San Francisco. In a recent New York Times article, the journey of entrepreneur Juliet Pries to open up a small ice cream shop in the famously left-leaning city was documented:

The Ice Cream Bar opened Jan. 21 in the Cole Valley neighborhood — an homage to the classic parlors of the 1930s, complete with vintage soda fountain and lunch counter seating. It has become an immediate sensation, packed with both families and the foodie crowd, savoring upscale house-made ice creams and exotic sodas (flavorings include pink peppercorn and tobacco). The shop also employs 14 full- and part-time workers.
But getting it opened wasn’t easy.

“Many times it almost didn’t happen,” said Juliet Pries, the owner, with a cheerful laugh.

Ms. Pries said it took two years to open the restaurant, due largely to the city’s morass of permits, procedures and approvals required to start a small business. While waiting for permission to operate, she still had to pay rent and other costs, going deeper into debt each passing month without knowing for sure if she would ever be allowed to open.

“It’s just a huge risk,” she said, noting that the financing came from family and friends, not a bank. “At several points you wonder if you should just walk away and take the loss.”

Ms. Pries said she had to endure months of runaround and pay a lawyer to determine whether her location (a former grocery, vacant for years) was eligible to become a restaurant. There were permit fees of $20,000; a demand that she create a detailed map of all existing area businesses (the city didn’t have one); and an $11,000 charge just to turn on the water.

New York Times columnist and resident Keynesian Paul Krugman has been dismissive on the effects of regime uncertainty in recent years. In a column written in 2010, Krugman declared there is no truth to the claims that the Obama administration has created an anti-business climate and those who consider such a possibility are merely “peddling scare stories.” Krugman puts the cart in front of the horse and blames the weak economy for low business investment when a weak economy is a byproduct of low business investment. As Mises showed, “the ultimate goal of human action is always the satisfaction of the acting man’s desire.” Since man does not act less all desires are fulfilled, human demand can be thought of as infinite since action never ceases on the part of fulfilling various ends.

As Robert Higgs recently pointed out, private investment has failed to recover from the downturn of 2007-2008 while consumer expenditures have returned to their pre-recession level. With broad and encompassing legislation like Obamacare and the Dodd-Frank financial regulatory bill still not in full effect, it should not come as a surprise to any observer why entrepreneurs are thinking twice about investing scarce capital. The Obama administration’s newly proposed budget alone contains increases of the capital gains tax, estate tax, dividends tax, and elimination of state and local bond interest deductions. It even introduces new fees for airline travel and security. Though the budget has little chance in making it through the U.S. Congress, such policies emanating from Washington certainly aren’t a welcome sign for investors.

Combined with the Federal Reserve’s unprecedented intervention and interest rate suppression, policymakers are attempting to throw the future to the wind in order to speed up consumer spending now. Entrepreneurs are being told that long term investment is a dangerous game where your return, which wasn’t guaranteed to begin with, may be subject to further thievery if Washington feels so inclined. Put together with needlessly complex regulatory stipulations at the state and local level and you have the makings of Ayn Rand’s anti-capitalist dystopia of Atlas Shrugged.

While there has been evidence of regime uncertainty holding back entrepreneurial capital, economic logic tells us that if more barriers are erected between a man attempting to fulfill an end, he may divert his energies elsewhere. As long as the trend of creeping statist intervention continues at all capacities of private life, sustained recovery and technological innovation will continue to stagnate as market signals are prevented from operating efficiently.

Mises and Free Love

2012-02-16T17:06:00.000-08:00

LvMIC:

Quite a Valentine’s Day-esque controversy has erupted over Mises’ stance toward birth control and feminism over the past week. The affair began when Mike Konczal of the Roosevelt Institute, writing under the pseudonym rortybomb, took libertarians to task by pointing out that Mises was supposedly against the birth control contraceptive. Thanks to Gene Callahan, we can see that Mr. bomb didn’t take the time to actually read and figure out that Mises was, in fact, in favor of birth control:

“It is not the practice of birth control that is new, but merely the fact that it is more frequently resorted to. Especially new is the fact that the practice is no longer limited to the upper strata of the population, but is common to the whole population. For it is one of the most important social effects of capitalism that it deproletarianizes all strata of society. It raises the standard of living of the masses of the manual workers to such a height that they too turn into ‘bourgeois’ and think and act like well-to-do burghers. Eager to preserve their standard of living for themselves and for their children, they embark upon birth control. With the spread and progress of capitalism, birth control becomes a universal practice. The transition to capitalism is thus accompanied by two phenomena: a decline both in fertility rates and in mortality rates. The average duration of life is prolonged.” — Human Action

From this cited passage however, it isn’t clear whether or not Mises is talking directly about the contraceptive of birth control or the practice of less sexual intercourse in order to prevent the chance of impregnation. If Mises was actually referring to birth control as the contraceptive, it begs to be asked why he didn’t refer to it as such instead of invoking the word “practice.” As he points out, a rise in the standard of living tends to lead to lower birth and fertility rates. Given that people are living longer and experiencing more material comfort, there is less of a need to reproduce in order to have support once the body deteriorates to a point where its labor becomes less productive.

Whatever the case, it’s clear that Mises was not opposed to the practice of birth control whereas he saw it as a natural progression of capitalism and humanity’s purposeful behavior.

At this point, Brooklyn College political science professor Corey Robin jumped into the fray to denounce Mises, not for his position on birth control, but his opposition to the “free love” doctrine. He writes:

The real reason Mises’s arguments about women are so relevant, it seems to me, is that in the course of making them he reveals something larger about the libertarian worldview: libertarianism is not about liberty at all, or at least not about liberty for everyone. In fact, it’s the opposite.

Here’s Mises describing the socialist program of “free love”:

Free love is the socialists’ radical solution for sexual problems. The socialistic society abolishes the economic dependence of woman which results from the fact that woman is dependent on the income of her husband. Man and woman have the same economic rights and the same duties, as far as motherhood does not demand special consideration for the women. Public funds provide for the maintenance and education of the children, which are no longer the affairs of the parents but of society. Thus the relations between the sexes are no longer influenced by social and economic conditions….The family disappears and society is confronted with separate individuals only. Choice in love becomes completely free.

Sounds like a libertarian paradise, right? Society is dissolved into atomistic individuals, obstacles to our free choices are removed, everyone has the same rights and duties. But Mises is not celebrating this ideal; he’s criticizing it. Not because it makes people unfree but because it makes people—specifically, women—free. The problem with liberating women from the constraints of “social and economic conditions” is that…women are liberated from the constraints of social and economic conditions.

I am going to go out on a limb here and assume Robin has not read the full breadth of theory contained in Socialism. When Mises writes on socialism presenting the possibility of “freedom” from the duties of parenthood or motherhood, it is within the context of what socialism itself encompasses. Specifically, free love through socialism doesn’t bring freedom but rather imposes different duties on other individuals through the force of the state. The worker’s paradise envisioned by socialism is not a free utopia but a top down, forcefully planned vision of those who make up whatever grand council appoints itself to carry out the task. Like Mises said, “Socialism means full government control of every sphere of the individuals life and the unrestricted supremacy of the government in its capacity as central board of production management.”

In a sense, the parenting dynamic present in market economies characterized by private property does present a burden on the mother and father who procreate. Such is human nature as newborns and children are unable to provide for themselves till a certain point in their respective lives. Stripping away the parenting aspect within socialism would indeed lead to a state of free, and most likely, promiscuous love. But invoking the word “free” to describe this new societal relationship is misleading; nothing about socialism is “free.” The burden of childcare must fall on someone or someones.

Robin does not understand this truth as he goes on to write:

But the underlying logic of Mises’s argument—in which the redistributive state is criticized not for making men and women slaves or equals but for making them free—cannot be so easily contained. It can easily be applied to other realms of social policy—labor unions, universal health care, robust public schools, unemployment benefits, and the like, which the left has always seen as the vital prerequisites of universal freedom—suggesting that the real target of the libertarian critique may be the proposition that Mises articulates here so well: that all men—not just the rich or the well born—and all women will in fact be liberated from the constraints of their “social and economic conditions.”

The disconnect between libertarians and other political ideologies comes down a definition of what freedom really entails. Though not an anarchist or proponent of natural rights, Mises recognized “Government is beating into submission, imprisoning, and killing.” Government owns no resources and must siphon all it has from the private sector through taxation. Given that taxation is not voluntary or else it would fail to then be taxation, the state’s role as the monopolizer of violence and conflict arbitration is based purely off the force it yields over a given citizenry. Therefore, the wealth redistributive functions of government are not some corollaries of “freedom” but a process through which one taxpayer is denied his freedom to keep a portion of his own income for another to receive the confiscated money. In Power and Market, Murray Rothbard cites an important passage from John C. Calhoun on the myth that taxation is not a winners and losers game:

Such being the case, it must necessarily follow that some one portion of the community must pay in taxes more than it receives back in disbursements, while another receives in disbursements more than it pays in taxes. It is, then, manifest, taking the whole process together, that taxes must be, in effect, bounties to that portion of the community which receives more in disbursements than it pays in taxes, while to the other which pays in taxes more than it receives in disbursements they are taxes in reality–burdens instead of bounties.

All of the examples of social policy Robin cites, such as universal health insurance, unemployment benefits, and public schools, are not prerequisites for freedom as their existence as tax funded endeavors necessarily means the economic freedom of some was violated for their provision. Curiously, Robin mentions labor unions as vital for some type of freedom when the ability of any union to be recognized by an employer relies on the guns and courts of government to back them up.

As much as it breaks the hearts of egalitarians, the human condition is one of inherent inequality. Market economies defined by the division of labor demand specialization in certain industries and production. Put simply, the ability for man to excel in certain fields above his fellow man is not something to abhor but celebrate. Knowledge is dispersed across a wide range of occupations. Specialization allows for greater resources of labor and capital to be devoted toward specific lines of work to both improve production and develop technological advances.

Why anyone would want to promote egalitarianism in face of the fact that diversity in physical and mental attributes allows each of us to devote our energies toward specific professions is beyond this writer. The loss of an opportunity to be server at Hooters or a coal miner is not a tragedy of capitalism but one of its enriching and endearing aspects.

How Robin comes to the conclusion that “libertarianism is not about liberty at all, or at least not about liberty for everyone” shows a complete and total lack of understanding for what liberty truly is. Freedom is not the ability to loot your fellow man from his earned income via the state’s confiscation apparatus otherwise known as taxation. It is merely the ability to obtain property by peaceful means, live, and establish working relationships with those whom you ultimately choose to. The interference of such activities, whether it be through forcing the recognition of certain individuals on private property or the violent confiscation of wealth, negate freedom.

Mises long understood this (though to some Rothbardians didn’t take it far enough!) and actually attributed one of the hallmarks of liberty, the right to contract, to a woman truly seeking to liberate herself:

The woman may deny herself to anyone, she may demand fidelity and constancy from the man to whom she gives herself. Only in this way is the foundation laid for the development of woman’s individuality.

So much for Mises being a closeted woman oppressor.

*Also of note, Brian Doherty does a fantastic job of refuting rortybomb’s initial post.

Are Weddings in India Really Driving Gold Prices?

2012-02-15T19:10:00.000-08:00

LvMIC:

n a fascinating 60 Minutes report, correspondent Byron Pitts documents India’s cultural affinity with gold but ends up making the dubious assertion that the country’s thriving precious metals market is driving record gold prices. See the report below:

Though it goes back and forth with China, India remains the top gold consuming country in the world. As the report shows, gold is incredibly important for the business of arranged marriages. Families begin accumulating the metal for their young as an investment in their future wedding prospects. But Pitts jumps to the brazen conclusion that, “people in the West can think what they want. The folks in London can set prices as much as they want. What happens in India is what determines what happens with gold.”

Obviously Pitts hasn’t a clue as to the value and use of gold in a global economy wrought with continual inflation and monetary debasement. Even in a country like India which has 21 official languages, gold is universally recognized as valuable. That fact speaks volumes of the precious metal’s use throughout history. Writing in Gold, Peace, and Prosperity, U.S. Congressman and current presidential candidate Ron Paul notes why gold makes the perfect money and store of value:

Gold is scarce; it is portable; it is easily divisible; it is durable; it is desirable for non-monetary purposes; and it is impossible to counterfeit.

This is why gold was the market’s choice as money for thousands of years before the advent of government imposed fiat currency. To claim, like Pitts does, that India affinity for gold drives the world’s market without making a peep about central banks shows a real lack in education of history and economics. Though the cultural attraction for gold has been ingrained in India for a long time, this hardly explains the run-up in gold prices over the past decade. What Pitts doesn’t reveal is that India’s government has been engaging in the nasty habit of rupee (India’s currency) debasement for almost half a century, via Business Today:

In early controlled exchange rate regime, the rupee exchange rate hovered around Rs 4 in the 1950s, Rs 5 in the 60s, Rs 7 in the 70s, and Rs 8 in the 80s. The liberalized era of 90s was different, the rupee moved in the Rs 20s (the rupee was also partly decontrolled in early 90s) and Rs 40 in the decade of 2000.

Not to forget two major devaluations by the government in between. The rupee was devalued first in 1966 by a massive 60 per cent from Rs 4.76 to Rs 7.50 against the US dollar. Twenty five years later in the 90s, the rupee was again devalued by 20 per cent from Rs 20.5 to Rs 24.5 against the US greenback.

The reasons for the two devaluations were not too dissimilar; twin deficit (current account and fiscal), soaring inflation, insufficient foreign exchange reserves, and the developed world demanding decontrol and liberalization to allow them to do business in India.

You can see the devaluation compared to the dollar below:

What may have been a simple cultural fondness for gold has more than likely become a desperate attempt to obtain some store of value in light of the heavily used government printing press. Just a few days ago, the rupee was devalued yet again:

The Central Bank (CB), as the Sunday Times reported last week, is changing tack in its foreign exchange management direction and allowing free market forces to operate. Soon after depreciating the Rupee by 20 cents on Friday, February 3, the authorities have been pushing down the local currency against the US dollar this week and limiting its intervention compared to wide-scale pumping in of dollars in the past year.

Keep in mind, this decision was justified as the inflation rate fell to an annual rate of 6.5%. This is the lowest level the country has seen in two years amidst a global recession. With such a history and tendency toward currency destruction, India’s attraction to gold will not only continue but will become much more difficult to maintain for those on the lower rungs of receiving newly printed rupees. With central banks all over the world ready to open the monetary spigots yet again, Pitts and 60 Minutes have a lot to learn on the barbarous relic’s true use outside jewelery and wedding collateral.Like witty investor Jim Grant says,

“To me the gold price takes the form of a very uncomplicated formula, and all you have to do is divide one by ‘n.’ And ‘n’, I’m glad you ask, ‘n’ is the world’s trust in the institution of paper money and in the capacity of people like Ben Bernanke to manage it. So the smaller ‘n’, the bigger the price. One divided by a receding number is the definition of a bull market.

The people of India have long realized the metal’s protective qualities against central banking debauchery and counterfeiting. Why can’t the supposed “enlightened” media establishment?

Ontario’s Keynesian Stimulus: Another Case of Failed Econometrics

2012-02-14T17:57:00.000-08:00

LvMIC:

On the heels of U.S. President Barack Obama’s newly proposed, $1.33 trillion adding budget, Terence Corcoran takes Ontario’s efforts in government stimulus to school in his latest Financial Post column:

The province’s massive deficit spending, announced in 2009, would be creating hundreds of thousands of jobs and adding to the provincial growth rate. According to the Conference Board’s 2010 report — commissioned by the Ontario government to document the impact of its multi-billion dollar Keynesian stimulus effort — the deficit spending on infrastructure would also boost productivity, offset the recession, and set the stage for recovery.

Two years later, the Conference Board returned to the scene of the crime to report that Ontario is in rough fiscal shape, growth isn’t happening, spending will have to be cut, taxes raised and the province needs “transformative changes.” Missing from the Conference Board report was any acknowledgement that Ontario might be sinking under the weight of the stimulus gold star the board had awarded the province.

The same tired narrative once again repeats itself: politicians looking to save the world are told by economists still mystified by John Keynes’ General Theory that they must do what they do best and spend squandered money on special interests. Savers are thrown to the wind and precious capital is spent on highways to nowhere as all the resources Leviathan distributes remain unused by the private and more prudent sector. And like Obama’s stimulus package of 2009, the projected effects of massive government expenditures predictably fell short of meeting expectations.

That the forecasters and theorists turned out to be dead wrong comes back to haunt no one. In Ontario’s 2009 budget, the province predicted that its total debt would rise gently to just over 30% of the province’s gross domestic product before beginning a decline. GDP growth, according to a consensus of Keynesian private-sector economic modellers, would rise to 3.3%, in part under the stimulus helium provided by the deficits. As it turned out, within two years forecasts had turned sour. The new debt-to-GDP ratio looked set to top 40% (see graph above). What happened is (a) the deficits kept growing and (b) the forecast growth rates began to look a little rosy. Rates of 3% and 3.5% were expected, presumably the result of all the infrastructure spending and productivity gains. Now, however, the forecast average growth rate is said to be unlikely to exceed 2%.

Like Gary North says, “Governments lie. They cheat. They steal.” If the political class is going to buy more pork, they better make it, or find someone to make it, sound worthwhile. But the evidence is clear even in Ontario as the promised short-term boost in the deficit is not a one off event:

In his important Nobel acceptance speech “The Pretense of Knowledge,” Fredriech Hayek laid out exactly why such precise economic prediction models are bound to fail (my emphasis added):

But when we are asked for quantitative evidence for the particular structure of prices and wages that would be required in order to assure a smooth continuous sale of the products and services offered, we must admit that we have no such information. We know, in other words, the general conditions in which what we call, somewhat misleadingly, an equilibrium will establish itself: but we never know what the particular prices or wages are which would exist if the market were to bring about such an equilibrium. We can merely say what the conditions are in which we can expect the market to establish prices and wages at which demand will equal supply. But we can never produce statistical information which would show how much the prevailing prices and wages deviate from those which would secure a continuous sale of the current supply of labour. Though this account of the causes of unemployment is an empirical theory, in the sense that it might be proved false, e.g. if, with a constant money supply, a general increase of wages did not lead to unemployment, it is certainly not the kind of theory which we could use to obtain specific numerical predictions concerning the rates of wages, or the distribution of labour, to be expected.

Why should we, however, in economics, have to plead ignorance of the sort of facts on which, in the case of a physical theory, a scientist would certainly be expected to give precise information? It is probably not surprising that those impressed by the example of the physical sciences should find this position very unsatisfactory and should insist on the standards of proof which they find there. The reason for this state of affairs is the fact, to which I have already briefly referred, that the social sciences, like much of biology but unlike most fields of the physical sciences, have to deal with structures of essential complexity, i.e. with structures whose characteristic properties can be exhibited only by models made up of relatively large numbers of variables. Competition, for instance, is a process which will produce certain results only if it proceeds among a fairly large number of acting persons.

At best, stimulus spending provides a short term boost for favored interests. At worst, it devotes resources toward unprofitable and inefficient industries which yield no long term wealth enhancement at a time of needed market correction. Stimulus spending is a mere excuse for the wealth distributors to try and buy more votes in the midst of a crisis. Meanwhile, economists looking to find themselves in the good graces of the state not only promote stimulus packages but fall back on the tired excuse of “it wasn’t big enough” when the results fall short.

As Henry Hazlitt noted, “there is no more persistent and influential faith in the world today than the faith in government spending.” As long as the mythical free lunch continues to exist in the writings of the mainstream commentariat, counter cyclical stimulus spending will find an appetite by those wishing to oblige the money handlers.

Do Government Regulations Create Jobs?

2012-02-13T17:16:00.000-08:00

LvMIC:

The obvious answer is, of course, yes. If bureaucrats are put in charge of enforcing the latest and greatest scheme dreamt up by politicians deluded enough to believe themselves capable of utopian engineering, than employment rolls invariably increase. And when mandates are placed on businesses to acquire certain inputs in order to meet criteria of over ambitious regulators, those devices of compliance have to be produced by someone. So in a sense increased, regulation into the private sector does create jobs. In a new Bloomberg Businessweek column, Elizabeth Dwoskin and Mark Drajem not only recognize what should be common sense, but actually question why President Obama doesn’t run on his record of employing all sorts of paper pushers in Washington D.C.:

Government regulations do kill jobs, often by the thousands. Although it’s too early to tell how many layoffs may result from health-care and Wall Street reforms, there is a body of research going back decades detailing what has happened time and time again when Washington handed down sweeping environmental regulations: Costs increased, prices went up, and workers were fired. Supporters and opponents of the EPA’s new power plant rules agree that they will almost certainly result in dozens of coal plants shutting down and hundreds of workers being laid off.

But that’s not the whole picture. Government employment figures also show that those same regulations usually wind up creating about as many jobs as they kill. “We find there is no net impact,” says Richard Morgenstern, the EPA’s director of policy analysis in the Reagan and Clinton Administrations and now a researcher with Resources for the Future, a nonpartisan energy think tank in Washington. “The job creation and the job destruction roughly cancel each other out.”

In 2002, Morgenstern and his colleagues published a landmark study detailing the effects of regulations on jobs in four polluting industries: paper, plastics, petroleum, and iron and steel. Drawing on more than 10 years’ worth of U.S. Census data, the study found new regulations led to higher production costs that pushed up prices, resulting in lost sales and layoffs. Yet those job losses were offset by new jobs in pollution abatement. “There’s always someone who is helped and someone who is hurt,” says Roger Noll, director of the Program on Regulatory Policy at Stanford University. “Which is why you have to look at the net effect on the economy.”

Even if you buy into the shady assertion that job destruction on the net is roughly a zero, this doesn’t take into account for what any amateur economic analyst should already suspect; that is the unseen. Human bodies need to fill the seats of regulators and hence create jobs. But the damage done by regulation is not something to be determined conclusively by tenured academics and mathematical formulas. It requires a bit more imagination. Productivity increases can be estimated numerically for specific firms but there is no way to accurately predict how they will ripple through the rest of the economy. Certainly a breakthrough in natural gas drilling technology has the potential to increase the supply of energy and thus lower prices for grateful consumers. But since every consumer is necessarily a producer in a specialized field, lower energy costs translate into greater income left over to invested or spent elsewhere. The next Steve Jobs could certainly use a cut in the heating bill for his garage acting as a work station.

There is also the more relevant truth of job creation itself which assumes that jobs in themselves are a good thing. As Mises pronounced in Human Action:

What produces the product are not toil and trouble in themselves, but the fact that the toiling is guided by reason. The human mind alone has the power to remove uneasiness.

Man produces in order to obtain sustenance to both live and improve his existing conditions. Unlike the Garden of Eden, scarcity dominates this world and requires survival through working on part of anyone who wishes to eat, clothe themselves, put a roof over their head, or even own a television. Jobs are a necessary evil and only a means in themselves; not an end. Simply praising the creation of jobs misunderstands their true function.

The real fatal flaw in Dwoskin and Drajem’s analysis is the fact that not all jobs are created equal. When evaluating the productivity of any given occupation, the first place to look is the income it derives from consenting purchasers. The coal plant which produces electricity earns a profit by utilizing its acquired resources effectively. Government regulators don’t receive their salary based off serving any consumers willing to spend their own limited funds. It is therefore impossible to determine the given value of a government regulator who must be paid via taxation. If taxes were voluntary, they would no longer be taxes but merely service charges. Putting the cashier at McDonald’s in the same category as the director of the Environmental Protection Agency commits a fatal error in understanding how wealth is really created.

The same concept can also be applied to those businesses which feed at the trough of increasing amounts of economic management coming from Washington. If a manufacturing plant must conform to new workplace regulations, materials must be purchased from a supplier. This means greater amounts of investment and resources are subsequently devoted to these industries as less capital is left over for those enterprises which don’t benefit by government decree. Again, it is futile to determine the value of those companies which piggyback off Leviathan’s grip.

If jobs in themselves were reflective of increasing societal wealth, the ditch digger paid with tax money would be on par with the inventor the incredibly popular smart phone game Angry Birds. But production can only be measured in terms of consentual transactions. Attempting to do otherwise is no better than to determining the value created from a thief by accounting for all his stolen loot. If Bob the bank robber stole and hoarded 1 million dollars over the course of a year long crime spree, it would sound downright absurd to say Bob has creat a million dollars worth of value in society. Intervening force in the market economy distorts the process of evaluation ultimately in favor of those who make a living off the state. Intervening force in the market economy distorts this process of evaluation ultimately in favor of those who make a living off the state.

Larry Fink of BlackRock: Go 100% in Stocks

2012-02-12T16:43:00.000-08:00

LvMIC:

In what has to be the biggest bull call in three years, Larry Fink, CEO of the world’s largest asset management firm known as BlackRock, recently made the call for investors to seriously consider going all in on stocks. Via Business Insider:

Be 100% in equities.
Chairman Bernanke is telling you I’m going to keep bond yields so low you can’t make a return to meet your needs owning bonds.

It’s no secret the ongoing zero bound interest rates from helicopter Bernanke have put savers and those on fixed incomes in a tough spot. The first lesson in the instruction book on central banking is to throw reckless spenders a life raft while pushing overboard the more frugal of society which attempt to save for a rainy day or, God help them, retirement. U.S. government bonds, which are often seen as virtually risk-less, aren’t bringing guaranteed returns anymore as low yields fail to keep up with inflation. The current yield on a 10 year U.S. bond is 1.99 according to Bloomberg whereas the Consumer Price index is running at 3% and the core CPI comes in at 2.2%. Given the Fed’s recently announced, but already well known, inflation target of 2% per year, any Treasury bond less than the 30 year actually brings the purchaser a loss.

So it would only make sense for someone to dump all bonds and go into equities like Fink advises, right? While bond yields aren’t bringing positive returns in real terms, there is more working behind the scenes to back up Fink’s call. It shouldn’t be a surprise to any Austrian-minded market observers that Bernanke and co. have been printing at an astounding rate; which accelerated mid 2011:

Unfortunately for Ben, money velocity has not kept up:

Despite their best efforts, central bankers can only affect money supply. They can’t force banks to lend, investment to occur, and consumers to spend. There is a a certain precipice however when time preferences change and the money begins to work its way through the system. And as Mises points out:

The moderated interest rate is intended to stimulate production and not to cause a stock market boom. However, stock prices increase first of all. At the outset, commodity prices are not caught up in the boom. There are stock exchange booms and stock exchange profits. Yet, the “producer” is dissatisfied. He envies the “speculator” his “easy profit.” Those in power are not willing to accept this situation. They believe that production is being deprived of money which is flowing into the stock market. Besides, it is precisely in the stock market boom that the serious threat of a crisis lies hidden.

The stock market is reflective of capital goods and inputs of production which are usually one the first stop for newly printed funds. Hence the announcement of new rounds of money printing having a tendency to ignite stock rallies as displayed by Calculated Risk:

The only way for the stock market to produce new highs without prices falling elsewhere within the economy is for an increasing supply of money. If Fink is really expecting a bullish stock rally, he must also believe some serious money filtering from the Fed is starting to occur; thereby juicing the animal spirits. He is not alone in this sentiment as contrarian investor and Austrian school sympathizer Marc Faber expects further global inflation which will boost equity prices nominally.

At this point, it’s become obvious that Chairman Bernanke’s efforts to goose the economy relies on boosting investor sentiment with higher stock prices. Such is an illusion as the bust is already sown in the seeds of the farce growth produced via the printing press. Rather than enjoying her golden years, the best retirement advice you can give Grandma is to take out a subscription to the Wall Street Journal and start watching CNBC 24/7. Otherwise her hard earned savings will go down the drain just as the dollar’s value has since that fateful day in 1913.

*This should go without saying, but what is presented above should not be construed as investment advice.

Greece Police Ready to Arrest IMF Officials?

2012-02-11T18:56:00.000-08:00

LvMIC:

What happens when two groups used to having the guns of government as their backing start disagreeing? From Reuters:

(Reuters) – Greece’s largest police union has threatened to issue arrest warrants for officials from the country’s European Union and International Monetary Fund lenders for demanding deeply unpopular austerity measures.
In a letter obtained by Reuters Friday, the Federation of Greek Police accused the officials of “…blackmail, covertly abolishing or eroding democracy and national sovereignty” and said one target of its warrantswould be the IMF’s top official for Greece, Poul Thomsen.

From the austro libertarian perspective, it’s hard to know who to root for in this instance. On one hand you have a government police force which uses the fine art of collective bargaining (read: the threat of violence to achieve higher wages, restrict entry to competition, and in some cases, the outright physical abuse of “scabs” or men who wish nothing more than to work in place of another man who refuses to accept a given wage) to suck Joe Taxpayer dry for a service he could easy obtain on a free and open market. And then you have the International Monetary Fund which acts as a type of blackmailing force by major governments to try and impose top down measures for distressed states to bring budgets into balance for the sake of acquiring funding. This doesn’t get to the heart of the matter however as the IMF acts as a lender of last resort and perpetuates moral hazard for the political class. Also as Henry Hazlitt pointed out in 1963, the IMF “has proved, in practice, a gigantic machine for world inflation. In the nearly 20 years of its existence, more and greater devaluations have occurred in national currencies than in any comparable period.”

So in the sphere of potentially choosing between the lesser of two evils, who could be seen as more in the right here? Greece has spent roughly the past two years in austerity due to being bailed out in order to remain in the Eurozone. The Greece police force who, along with their fellow public sector workers, has certainly had it with cuts in salary and pensions. But of course it was because of the generous retirement benefits that the Greek government spending has skyrocketed. According to the New York Times, as of March 2011, 580 job categories were identified as warranting early retirement due to hazardous working conditions. This early retirement age comes in at an astounding age 50 for women and 55 for men- so much for the egalitarian notion of treating genders as equals. Though the hazardous job categories includes occupations like coal mining and bomb handling, it also covers:

radio and television presenters, who are thought to be at risk from the bacteria on their microphones, and musicians playing wind instruments, who must contend with gastric reflux as they puff and blow.

Somehow I fail to see the dilemma of wind instrumentalists not being able to retire early.

This IMF vs. the unionized Greece police force is very reminiscent of the recent debacle between the Wisconsin government and public sector workers in the United States as newly elected governor Scott Walker sought to eliminate their collective bargaining rights (with the exception of police and firefighters because they happen to have given him generous campaign donations). At the time, Walter Block welcomed the fight as it would only decrease the power and influence of both sides in the long run:

I favor the union thugs, not the government thugs. For me, it’s like Stalin versus Hitler: a pox on both of them. But, I like to root for the underdog, the weaker of the two bad guys, and that’s the union in this case. I do so because I want the fight to long continue, so that both are weakened as much as possible. The state has more guns, better public relations (they have bought off more journalists, intellectuals, clergy, and others of Hayek’s “second hand dealers in ideas”) than the unions.

In this case, the Federation of Greek Police can be seen as the underdog for challenging the NWO and faceless institution of the IMF. As bad as democracy is, top down authoritarian rule attempting to maintain the inherently unstable banking system otherwise known as fractional reserve banking isn’t much better; especially when it imposes higher taxes. Yes, government spending in Greece needs to be cut drastically. Yet the real solution for the financially distraught country is outright default for the creditors ignorant enough to lend to the profligate government in the first place. The IMF is demanding some reforms that could go a long way in fixing Greece’s finances but there is no reason it has to be holding a bag of taxpayer bailout money over the country’s head. Given the lack of action on the part of lawmakers to impose the necessary cuts, this exercise in prolonging the inevitable default does nothing but ignite hatred between both sides. This hatred will not likely manifest into the much needed change Greece needs, such as a dramatic relaxing of workplace regulations, but is revealing of the leech-like nature of the country’s public sector unions and the banker class’s incredible influence over national governments. The longer the fight goes on and the more people who realize this dynamic, the better.

Krugman Misses the Plain Truth Right in Front of His Eyes

2012-02-10T14:59:00.000-08:00

LvMIC:

In another welfare-state praising column, Nobel Laureate and vulgar Keynesian mudslinger Paul Krugman attempts to deduce the real downfall of American society. Forget the fact that Krugman called for the creation of the housing bubble in the early part of the decade which has since caused an incredible amount of economic and emotional damage for now; we are talking about the dependency creating welfare state here. On the contention that income mobility and wealth creation are suffering due to a loss in family values, Krugman actually comes close to nailing the real cause of a downtrodden economy:

So we have become a society in which less-educated men have great difficulty finding jobs with decent wages and good benefits. Yet somehow we’re supposed to be surprised that such men have become less likely to participate in the work force or get married, and conclude that there must have been some mysterious moral collapse caused by snooty liberals. And Mr. Murray also tells us that working-class marriages, when they do happen, have become less happy; strange to say, money problems will do that.

Admittedly, Krugman’s logic is pretty sound to a point. Certainly the lack of jobs and ability to be productive and make a living certainly weighs down a man’s ability to raise a family. But money, which is simply a medium of exchange, is not the real issue here as Pater Tenebrarum demonstrates:

However, we must never lose sight of the fact that what every one of us is producing is not actually money. We produce goods and services that can be exchanged for money, but not money as such. What is spent is money and what is saved is money. However, what really happens when we decide to save is that we forego consumption. We may do so by not spending a certain amount of money we have received in exchange for our production, but this means that for the money saved, there is now an equivalent amount of consumer goods that remain unconsumed.

Money represents the ability to obtain goods so it’s not a lack of money that limits man’s potential but his lack of a means to achieve sustenance and beyond.

But where does this barrier to achieve the ability to demand goods come from? Krugman blames stagnating wages (aren’t wages supposed to be cleared and then boosted through inflation?) and a lack of health insurance. In short, growing economic inequality is driving the poor man down while the Wall Street fat cats laugh all the way to the bank. Hence Krugman’s fetish with raising taxes on the rich despite that such an economically ignorant policy goes against the Keynesian narrative that deficits should be increased during downturns.

Still, Krugman misses the real point: why is there growing economic inequality and why can’t those on the lower rungs of society’s ladder find job opportunities?

The answer is simple- the imposition of the minimum wage which keeps those whose productivity falls below the artificially established wage floor. As Rothbard states in Making Economic Sense:

All demand curves are falling, and the demand for hiring labor is no exception. Hence, laws that prohibit employment at any wage that is relevant to the market (a minimum wage of 10 cents an hour would have little or no impact) must result in outlawing employment and hence causing unemployment.

And as Mises points out in Human Action:

All that minimum wage rates can accomplish with regard to the employment of machinery is to shift additional investment from one branch into another. Let us assume that in an economically backward country, Ruritania, the stevedores’ union succeeds in forcing the entrepreneurs to pay wage rates which are comparatively much higher than those paid in the rest of the country’s industries. Then it may result that the most profitable employment for additional capital is to utilize mechanical devices in the loading and unloading of ships. But the capital thus employed is withheld from other branches of Ruritania’s business in which, in the absence of the union’s policy, it would have been employed in a more profitable way. The effect of the high wages of the stevedores is not an increase, but a drop in Ruritania’s total production.

And then of course there is the seemingly indefinite prolonging of unemployment benefits:

Assistance granted to the unemployed does not dispose of unemployment. It makes it easier for the unemployed to remain idle. The nearer the allowance comes to the height at which the unhampered market would have fixed the wage rate, the less incentive it offers to the beneficiary to look for a new job. It is a means of making unemployment last rather than of making it disappear.

How Krugman misses this simple fact is demonstrative of his glaring ideological bent. Human demand never ceases; that is man acts continuously till all needs are sufficed. That means that the ability to produce to meet man’s indefinite desire shows that prolonged unemployment can’t occur in a truly uninhibited market. But Krugman will have none of it as it flies in the face of his statist agenda. Despite empirical studies claiming that minimum wage laws don’t lead to an increase in unemployment (such as the infamous one by former Obama economic adviser Alan Krueger), logical deduction overwhelmingly says otherwise. There are too many variables in constant human action to make such a claim. In other words, correlation doesn’t automatically mean causation. One of my favorite examples of this is a short though construct used by an old college professor of mine. In looking at increases in rapes committed, there is also a growth in ice cream sales. From the empirical positivism perspective, surely ice cream sales cause instances of rape, right? But of course that is completely wrong and one can easily figure out that the change in weather, from cold to warm or hot, tends to mean more people are outside and thus at risk for kidnapping, rape, and other violent incidents than during colder months.

As long as Krugman keeps trumpeting on about government intervention to fix income inequality, he will never see the true cause of prolonged unemployment and lack of job opportunities. Unfortunately, his sphere of influence probably won’t shrink as false logic continues to be spilled across the editorial pages of the New York Times.

Foreclosure Settlement in the U.S.- The Proper Course of Action?

2012-02-09T16:20:00.000-08:00

LvMIC:

After years of litigation, the United States government, along with the governments representing the fifty states, has reached a joint settlement with the country’s five major banks and mortgage lenders over their questionable practices of mortgage foreclosure. Via Financial Times:

US regulators are preparing to announce a settlement, worth up to $39.5bn and covering nearly all 50 states, that would resolve allegations that five leading banks systematically abused borrowers in their pursuit of improper home seizures.

Under the proposed agreement, Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial would be forced to improve their mortgage procedures; reduce borrowers’ loan balances and monthly payments; and make about $4.2bn in cash payments to an estimated 750,000 aggrieved homeowners and state governments, people with knowledge of the matter said.

In exchange, officials would promise not to pursue certain mortgage-related legal claims against the targeted banks.

From an austro-libertarian perspective, this settlement can be looked at in a variety of ways. Depending on your view of the legitimacy of government, federal regulators and state governments filing suit over fraud in mortgage practices or wrongful foreclosures could be seen as the correct avenue to pursue. This is especially so for minarchists and classical liberals who see the state as justified in righting instances of fraud. For those of the more anarchist or Rothbardian variety, legal arbitration such as this can be handled by private courts, enforcement, and even company directed boycotting. Whatever the case, if the banks were in the wrong, than the rule of contractual law dictates concessions to be paid toward the victims.

Unfortunately, the foreclosure mess and infamous robo-signing scandal is anything but a simple, black and white issue to resolve. In fact, the Federal Reserve, in a report release almost a year ago, found no evidence of wrongful foreclosure practices by the big banks. Given the Fed’s, let’s just say “close,” relationship with the financial sector, some discretion should perhaps be applied when considering the report. And it’s precisely because of this public-masquerading-as-private affiliation between the mortgage market and federal government that the housing bubble was exacerbated and the process of sorting through the jumble has been met with so many roadblocks.

In the Ethics of Liberty, Murray Rothbard points out that, “the perfectly proper thesis that private persons or institutions should keep their contracts and pay their debts.” But according to Doug French,

the mortgage market is anything but private. Grant’s Interest Rate Observer, in its May 14, 2010, edition points out that Fannie, Freddie, and the FHA “accounted for 97% of new mortgage lending in the 50 states. That is, they either purchased or guaranteed all but 3% of new homes secured by American dwelling places.”

So much for the mortgage market being a product of private, and thus purely market, forces. When looked at through the lens of private vs. public, the government’s settlement with the big banks ends up being an exercise of preserving the status quo under the guise of appearing to be doing something. As Yves Smith of Naked Capitalism shows, this settlement deal really isn’t all that it’s cracked up to be:

The total for the top five servicers is now touted as $26 billion (annoyingly, the FT is calling it “nearly $40 billion”), but of that, roughly $17 billion is credits for principal modifications, which as we pointed out earlier, can and almost assuredly will come largely from mortgages owned by investors.
That $26 billion is actually $5 billion of bank money and the rest is your money. The mortgage principal writedowns are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401 (k)s.
That $5 billion divided among the big banks wouldn’t even represent a significant quarterly hit. Freddie and Fannie putbacks to the major banks have been running at that level each quarter.

The settlement hardly puts a monetary dent in the balance sheets of the prosecuted banks; another sign that the deal is simply a farce and a handy tool for President Obama to wave around when campaigning for reelection.

In the sphere of ethical law, aggressive violations of property rights and commitment of fraud are to be prosecuted. The state however doesn’t play by those same rules as it yields coercion over a given citizenry and commits fraud on an almost daily basis either through taxation, currency debasement, or just plain use of public funds for the purpose of enriching politicians and their friends. With the Federal Reserve System overseeing the whole of the banking sector, banks “should really be seen as a highly regulated public utility” according to Don Luskin of Trend Macrolytics. This says nothing about the enormous amount of money some firms use to finance the campaigns of their preferred Congressmen or Presidential candidate who in turn legislate on their behalf.

The real danger behind this foreclosure settlement is that it’s a perpetuation of the moral hazard which plagues the financial industry and the lifeblood of the economy. Though the evidence is shoddy, there are no concrete examples of wrongful foreclosure of those who were making their payments on time. The string of foreclosures appears to have emanated from those who couldn’t work out a reduction of their principal owed as their house went underwater due to a fall in home prices. This settlement simply amounts to a bailout of those who can’t afford their mortgages and haven’t been making payments. Dick Bove of Rochdale Securities explains why in a CNBC interview:

The talking heads here miss the dominant issue within this whole mess: the fact that the Federal Reserve’s monetary policy, aided by the housing policy of the federal government and its GSEs, created the housing bubble to begin with. Had interest rates not pushed down to unprecedented levels at the beginning of the 21st century, the housing market would not have experienced such an inflationary boom. The mortgage foreclosure crisis is only a byproduct of the central planners at the Federal Reserve. Once the core dilemma of continual fiat boom and bust is recognized and put and end to, widespread calamities such as wrongful foreclosure lawsuits are more likely to be contained in the future.

If interested, here is a breakdown of the settlement payout via the New York Times/Big Picture:

Here is another breakdown via FT:

Nationally:
– Servicers commit a minimum of $17 billion directly to borrowers through a series of national homeowner relief effort options, including principal reduction. Servicers will likely provide up to an estimated $32 billion in direct homeowner relief.
– Servicers commit $3 billion to an underwater mortgage refinancing program.
– Servicers pay $5 billion to the states and federal government ($4.25 billion to the states and $750 million to the federal government).
– Homeowners receive comprehensive new protections from new mortgage loan servicing and foreclosure standards.
– An independent monitor will ensure mortgage servicer compliance.
– States can pursue civil claims outside of the agreement including securitization claims as well as criminal cases.
– Borrowers and investors can pursue individual, institutional or class action cases regardless of agreement.

Bernanke Proves Critics Wrong? Don't Make Me Laugh

2012-02-08T19:04:00.000-08:00

LvMIC:

With relatively tame inflation and a recovering, almost bullish, economy, Caroline Salas Gage of Bloomberg has come out heaping praise upon money printer extraordinaire Ben Bernanke today:

The numbers are proving Federal Reserve Chairman Ben S. Bernanke’s critics wrong.
More than a year after Republicans from House Speaker John Boehner of Ohio to presidential candidate Ron Paul of Texas warned that the Fed’s second round of asset purchases risked a sharp acceleration in prices, the surge has failed to materialize. The personal-consumption-expenditures price index rose 2.4 percent for the 12 months ending in December, near the central bank’s 2 percent target.

Even though the economy is showing signs of strengthening and inflation appears in check, Republicans Mitt Romney and Newt Gingrich, who also are running for president, have said they wouldn’t keep Bernanke, 58, when his second four-year term as Fed chairman expires on Jan. 31, 2014. Gingrich said in September that Bernanke was “the most inflationary, dangerous and power-centered chairman” in the central bank’s history.

First of all, Gingrich wouldn’t understand the nuances of monetary policy, or the Austrian school, if it was served face-to-face to him by a divorce lawyer. The man’s disingenuous call for a gold standard commission is nothing but pathetic vote pandering and a childish attempt to co-opt Ron Paul supporters. How would a President Gingrich be able to pay for a moon base with the Treasury tied down by a dollar fixed in gold rather than the politically helpful whim of central bankers?

With that small rant out of the way, Gage’s extolling of Bernanke misses one key aspect: where was the great bearded one in the midst of the deflating housing bubble? Laughing it up with his equally blind central planning cohorts apparently. That transgressions aside (an economically crippling transgression on a global scale, mind you), let’s look at the true inflation data in the U.S. As of December 2011, the Consumer Price Index (CPI) is running at 3% annually with food at 4.7% and energy at 6.6% according to the Bureau of Labor Statistics. The Producer Price Index (PPI) is running at 4.8% annually. These stats are of course accurate if you buy into the flawed methodology the government uses in calculation. Still, the fact that the core-CPI measure the Fed uses is running at 2.4%, above the target level of 2%, shows that Bernanke doesn’t have the whole world in his hands, as it were. Central banks can’t precisely control inflation, just try to influence it by printing money. As a recent post at Cato@Liberty demonstrates, the trend of core-CPI is trending up (ht Bob Wenzel):

In fact the core CPI continued its fairly steady increase. Since September 2011, core CPI has been, on an annualized basis, above the Fed’s target of 2 percent (let’s set aside, for the moment, whether this is the right target or if it is even measured appropriately). Remembering that monetary policy works with “long and variable lags” the time to worry about inflation is before it hits, not after. Given the clear upward trend in the government’s own charts, I’d say we are already past the point where we should start worrying.

And then there is the all important consumer debt and credit trend which is also on the rise, via Wall Street Journal:

U.S. consumers ramped up borrowing in December. Consumer debt outstanding rose at a seasonally adjusted annual rate of 9.3% from November to $2.498 trillion. Behind that was a seasonally adjusted 11.8% rise in nonrevolving credit, which includes car and student loans. Revolving credit, mainly credit-card debt, climbed a seasonally adjusted 4.1% in December from the previous month.

So let’s sum up Cage’s argument: after three years of prime pumping and effectively zombifying the banking system, the U.S. economy is showing more signs of life as the money supply has been increasing at annual double digit rate for the past 6 months. Isn’t there a theory out there which stipulates that easy money and artificially suppressed interest rates have something to do with causing an economic boom and boosting stock prices nominally as well as the capital goods sector? Even CNBC, an outlet for many “experts” who missed the housing bubble in spades, gives credit to the Fed for the stock market’s recent strong performance

Federal Reserve easing has helped fire up one of the strongest stock market rebounds ever, and the promise of more is keeping it going.
The chart of the S&P 500‘s more-than-100 percent run—from its March 2009 low of 666 to its current 1340-plus level—generally depicts the most powerful comeback of the past seven cyclical stock market recoveries, Wells Fargo advisors analysts say.

Like Maestro Greenspan before him, Bernanke is given credit (no pun intended) for engineering an accelerating recovery. Problem is, if inflation expectations continue to stay on an upward trend, Bernanke may have to allow interest rates to rise, thus curtailing the current boom, forcing the U.S. government’s budget deficit to intensify as interest payments increase in size, and perhaps reveal any malinvestments hidden by easy money. The second, and maybe more concerning, issue with Bernanke winding down the Fed’s balance sheet is summarized by David Howden at Mises Daily today:

The problem that few considered was simple: what would happen if the Fed’s new assets lost value before they were sold back to the banking system? A qualitative mismatch was made. The Fed bought assets of uncertain value and paid for them with assets fixed at par value by definition (reserves). Any loss of value in the Fed’s new assets would translate into new money that the Fed could not purchase back from the banking system. In other words, inflationary pressures will appear if the Fed realizes a loss on its assets (which it has not had to do, as they remain largely unsold). Alternatively, to bring expectations into the picture, inflationary pressures can build today on the expectation that in the future the Fed will have to realize a loss on its assets.

Bernanke is playing with fire. It’s becoming more and more apparent that the massive liquidity injection of 2008 and subsequent inoculations were temporary fixes to postpone the inevitable market correction. The political, financial, and media establishment still regards the printing press as the tool of the Gods and central bankers as miracle workers. Cheerleaders of central banking were lulled into the exuberance and over confidence of the Fed-induced housing bubble almost five years ago; is there any reason to believe they won’t be blind to the next bubble and the assured bust?

Like Mises declared:

The inescapable consequences of credit expansion are shown by the theory of the trade cycle. Even those economists who still refuse to acknowledge the correctness of the monetary or circulation credit theory of the cyclical fluctuations of business have never dared to question the conclusiveness and irrefutability of what this theory asserts with regard to the necessary effects of credit expansion. These economists too must admit and do admit that the upswing is invariably conditioned by credit expansion, that it could not come into being and continue without credit expansion, and it turns into depression when the further progress of credit expansion stops.

San Fran Fed Finds Problem with Econometric Multipliers

2012-02-07T17:08:00.000-08:00

LvMIC:

Despite the obvious bias which engulfs the incestual working relationship between the Federal Reserve System, the U.S. financial sector, and the U.S. government, occasionally some grains of truth trickle out from these Ministries of Truth. In a new report by Daniel J. Wilson out of the Federal Reserve Bank of San Francisco, it turns out that fiscal stimulus, get this, might actually vary upon effect in implementation and thus the multiplier effect!

The severe global economic downturn and the large stimulus programs that governments in many countries adopted in response have generated a resurgence in research on the effects of fiscal policy. One key lesson emerging from this research is that there is no single fiscal multiplier that sums up the economic impact of fiscal policy. Rather, the impact varies widely depending on the specific fiscal policies put into effect and the overall economic environment.

With this kind of groundbreaking research being produced by PhD’d economists operating as fellows or researchers at Fed banks, what other explanations or theories could we possibly need? The serious question still remains on how is this a new discovery? Money doesn’t transverse through millions of economic hands in a predictable fashion. The idea that economists aided by mathematical formulas and supercomputers are able to foresee how market actors will proceed in spending funds confiscated and given away by the political class is afflicted with conceit. Human action can’t be observed as a constant such as in the physical sciences. Murray Rothbard explains in The Mantle of Science:

Finally such staples of mathematical economics as the calculus are completely inappropriate for human action because they assume infinitely small continuity; while such concepts may legitimately describe the completely determined path of a physical particle, they are seriously misleading in describing the willed action of a human being. Such willed action can occur only in discrete, non-infinitely-small steps, steps large enough to be perceivable by a human consciousness. Hence the continuity assumptions of calculus are inappropriate for the study of man.

This, of course, doesn’t stop some economists from presuming the infallibility of their formulas. It’s already well known that President Obama’s first stimulus package, put into effect in early 2009, did not meet its goal of keeping unemployment below 9%. The standard response from Keynesian proponents of fiscal stimulus to counter a cyclical downturn was that “the government didn’t spend enough.” That is, it didn’t spend enough to jump start the fiscal multiplier and get those animal spirits shopping.
But as Wilson reveals, the alleged fiscal multiplier is hardly ever accurate:

What does this literature tell policymakers and others trying to assess the impact of fiscal policy changes? It is an inconvenient reality that this literature provides an enormous range of multiplier estimates, ranging from –1 to 3. However, this range is not so much a reflection of disagreement over an underlying parameter as it is a reflection of one of the key lessons of this research—that there is no single multiplier that can be applied mechanically to all situations. The impact depends on the type of fiscal policy changes in question and the environment in which they are implemented.

The sphere of human action is ever changing; of course there can be no one true multiplier. With fiscal stimulus acting as the equivalent of a dart board for bureaucrats and economic mathematicians to calculate a multiplier, is it any wonder that grand promises of free lunches are never delivered upon with the enactment of a large increase in government expenditure?

As Frank Shostack shows (channeling Say’s Law), the free lunch doesn’t exist and any “extra” spending generated by fiscal stimulus backed by multipliers must come at the expense of future or existing production:

In the Keynesian multiplier story the initial consumer expenditure creates new income for the next person, who in turn creates income for another person and so on. However, to have income for consumption one must first produce something useful that can be exchanged in the market.
Through the production of goods an individual can secure the produced goods of other individuals in an economy. His production backs up, so to speak, his demand for the goods he wants to secure. For instance Bob the farmer secures one loaf of bread from John the baker by paying for the loaf of bread with five tomatoes. Bob also secures a pair of shoes from Paul the shoemaker by paying for the shoes with ten tomatoes.
Let us examine the effect of an increase in the government’s demand on an economy’s overall output. In an economy, which comprises of a baker, a shoemaker and a tomato grower, another individual enters the scene. This individual is an enforcer who is exercising his demand for goods by means of force.
Can such demand give rise to more output? On the contrary, it will impoverish the producers. The baker, the shoemaker, and the farmer will be forced to part with their product in an exchange for nothing and this in turn will weaken the flow of production of final consumer goods. Again, as one can see, not only does the increase in government outlays not raise overall output by a positive multiple, but on the contrary this leads to the weakening in the process of wealth generation in general.

Rather than justifying the multiplier effect, Wilson’s report is demonstrative of the kind of muddled thinking and practice behind such a concept. There can never be a true multiplier just as there can never be a perfectly static economy. The process of the market is dictated by human action outside the bounds of predictive mathematics. You don’t need to peruse a bunch of time studies to figure out what should be common sense.

Just don’t expect this truth to stop the countless retorts of “we didn’t spend enough.”

Joe Stiglitz Thinks the ECB is Beholden to Special Interests...

2012-02-06T17:37:00.000-08:00

LvMIC:

Though I find it excruciatingly hard to agree with Nobel Laureate Joseph Stilgitz on anything, I can’t say he is wrong on his latest hunch. In his Project Syndicate column today, Mr. Whither Socialism suspects that perhaps the European Central Bank doesn’t have the “public’s” interest at heart in its attempt to resuscitate the Euronzone and guide Greece through what looks like an impending default. He writes:

The ECB’s insistence on “voluntary” restructuring – that is, avoidance of a credit event – has placed the two sides at loggerheads. The irony is that the regulators have allowed the creation of this dysfunctional system.

The ECB’s stance is peculiar. One would have hoped that the banks might have managed the default risk on the bonds in their portfolios by buying insurance. And, if they bought insurance, a regulator concerned with systemic stability would want to be sure that the insurer pays in the event of a loss. But the ECB wants the banks to suffer a 50% loss on their bond holdings, without insurance “benefits” having to be paid.

There are three explanations for the ECB’s position, none of which speaks well for the institution and its regulatory and supervisory conduct. The first explanation is that the banks have not, in fact, bought insurance, and some have taken speculative positions. The second is that the ECB knows that the financial system lacks transparency – and knows that investors know that they cannot gauge the impact of an involuntary default, which could cause credit markets to freeze, reprising the aftermath of Lehman Brothers’ collapse in September 2008. Finally, the ECB may be trying to protect the few banks that have written the insurance.

Surprisingly, Stiglitz recognizes the need for a “deep restructuring” of Greece’s debt; no doubt alluding to a hard default. Where he was making this call two years ago when the crisis started gaining steam in the home of democracy, no one can say. In reality, Stiglitz at first denied Greece would need a bailout and then became a supporter of the measure to prevent a default. So much for appraising the behavior of culpable political institutions.

As anybody who has looked into the history of central banking knows, these established systems of regulation are never the product of an altruistic political class but merely an implicit maneuver to cartelize the banking system in favor of banker elites. Like Hayek said, “Socialism has never and nowhere been at first a working-class movement.”

From the beginning of the Eurozone crisis, those who understood the symbiotic relation between central banks, their respective governments, and the financial institutions which fund the state, realized that the exercise in bailout futility, otherwise known as kicking the financial can, was done on part not to bailout countries such as Greece and Italy but to save the banks which hold large portions of their debt. In short, the governments weren’t being bailed out, the banks were. Stigliz finally seems to get it:

In fact, the ECB may be putting the interests of the few banks that have written credit-default swaps before those of Greece, Europe’s taxpayers, and creditors who acted prudently and bought insurance.

Better late than never.

Despite his economic accolades, Stigliz may finally be grasping on to the true nature of central banking:

The final oddity of the ECB’s stance concerns democratic governance. Deciding whether a credit event has occurred is left to a secret committee of the International Swaps and Derivatives Association, an industry group that has a vested interest in the outcome. If news reports are correct, some members of the committee have been using their position to promote more accommodative negotiating positions. But it seems unconscionable that the ECB would delegate to a secret committee of self-interested market participants the right to determine what is an acceptable debt restructuring.

News to the Columbia U. Professor, power centers attract powerful special interests. Angels don’t occupy public offices; those who take great pleasure in wielding coercive authority over their fellow man do.
Though Stiglitz believes the Eurozone crisis is a product of a lack of regulation (by easily bought bureaucrats, which he grudgingly admits), he is correct that a hard default is the correct path through the storm. If the EZ wants to retain any credibility of free market capitalism, losses must be taken by those who took the risk.

Perpetuating moral hazards by papering over the bad decisions of market participants creates further disasters down the road. But with a hard default must come a triggering of credit default swaps which the ECB wants to prevent. Credit default swaps, for all their demonization by the anti-Wall Street crowd, are merely a means for investors to hedge themselves against potential default through risk assessment. Take away this function and the market will find inevitably find another way to protect itself against recklessly spending governments. For all the faith thrown bestowed upon faceless regulators by those who wish the hand of government in every affair of life, these bureaucrats have specialized in always chasing the last market innovation. Despite increases in staff and funding, regulators simply don’t have the vast amount of knowledge to attempt to plan an economy.

The economic fact is that credit default swaps don’t cause fiscal destabilization. The profligate spending of governments and continual interest rate manipulations by central banks are what wreak havoc on normal working order. Markets are self correcting when left to their devices. An emboldened political and regulatory class that sees itself as omniscient in the face of the complex phenomena known as an economy only ever burdens this process. Allowing the triggering of credit default swaps, like the financial meltdown in the fall of 2008, won’t be the end of the world. Even Stiglitz recognizes this:

The one argument that seems – at least superficially – to put the public interest first is that an involuntary restructuring might lead to financial contagion, with large eurozone economies like Italy, Spain, and even France facing a sharp, and perhaps prohibitive, rise in borrowing costs. But that begs the question: why should an involuntary restructuring lead to worse contagion than a voluntary restructuring of comparable depth?

If an auto insurance company sees a large, but uncorrelated, jump in claims, the government shouldn’t step in to protect its losses by stopping a payout to insurance holders for the sake of financially saving the company. Those who insured themselves were acting prudently; why should they by punished? What kind of message does this send for future drivers?

Stiglitz naively believes that “democratic” institutions are too beholden to wealthy special interests. Until he realizes that institutions given monopolies on a specific industry or over force and legal arbitration themselves attract the most unscrupulous of men, he won’t see the true cause of societal impoverishment and decay.

Marc Faber Mentions Canada Housing Bubble

2012-02-05T17:13:00.000-08:00

LvMIC (considering I blog here predominantly, I figure it's important to cover the looming housing bubble in Canada):

In another interview filled with dire predictions of money printing and inept central banking, the always great Marc Faber makes a passing mention of housing bubble in Canada- see around the 4:00 mark.

Faber:

Previous to that I was in Canada. In Canada, in the cities, you have boom conditions and real estate prices are very high, four or five times as in Arizona. In Arizona you can buy a beautiful house for $150,000.

In a recent Bloomberg article, Andrew Mayeda mentioned the similarities between the U.S. housing market during the heyday of the boom years and Canada’s market today (my emphasis added):

Canadian lenders are loosening standards, offering mortgages similar to U.S. subprime loans that pose an “emerging risk” to financial institutions, according to the country’s banking regulator.
Banks and other lenders are becoming “increasingly liberal” with mortgages and home-equity credit lines that don’t require individuals to prove their income, according to 152 pages of documents obtained by Bloomberg News under freedom of information law from the Office of the Superintendent of Financial Institutions. The mortgages, typically granted to the self-employed and recent immigrants, “have some similarities to non-prime loans in the U.S. retail lending market,” the documents show.

When Bank of Canada head Mark Carney and his board of central planners flooded the market with liquidity in 2008, the easy credit appears to have financed a speculative bubble in housing. Since November 2007, the variable mortgage rate in Canada has dropped from about 6.25% to a low of 2.25% in May of 2009 and has increased slightly to 3% as of January of 2012. In the same time period, the 5 year fixed rate has dropped from 6% to 3.79%. At the same time, M3 money supply in Canada has jumped from $1,110,823,000,000 in 2007 to $1,448,852,000,000 in 2011- an increase of about 30%.

As Austrian economist Joseph Salerno documents, this correlation bears a resemblance to the conditions of the housing market in the U.S. (my emphasis added):

From the beginning of 2001 to the end of 2005, the Fed’s MZM monetary aggregate increased by about $1billon per week and the M2 aggregate by about $750 million per week. During the same period the monetary base, which is completely controlled by the Fed, increased by about $200 billion, a cumulative increase of 33.3 percent.

The Fed Funds rate was driven down below 2 percent and held there for almost three years, pegged at 1 percent for a year. Rates on 30-year conventional mortgages fell sharply from over 7 percent in 2002 to a low of 5.25% in 2003 and, aside from brief upticks in 2003 and again in 2004, fluctuated between 5.5 percent and 6.0 percent until late 2005. Perhaps, more significantly, 1-year ARM rates plummeted from a high of 7.17 percent in 2000 to a low of 3.74 percent in 2003, rising to 4.1 percent in 2004 and to slightly over 5 percent in 2005. In addition, credit standards were loosened and unconventional mortgages, including interest-only, negative equity, and no-down-payment mortgages, proliferated.

As I have said before, the housing market in Canada appears to be in a bubble. Unlike, the blindness that pervaded the housing bubble in the U.S., there is a lot more awareness of the looming downturn this time around. Even Mark Carney has acknowledged that the housing market may be “overvalued.” Unfortunately for him, it’s his own policies that have created the boom in the first place. Should Carney need to reverse the historically low interest rates to curtail higher inflation expectancies, or should the malinvestment finally reveal itself in the form of capital unknowingly consumed due to an inflation fueled equity mirage, Canada will likely fall back into recession. As the Austrian school teaches, accurate predictions can’t be made in the sphere of human action but trends can be analyzed and applied to possible future events. The day of reckoning must come for the Great Northern White as Mises pronounced:

Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.

------------------------------------------------------------------------
Also of note, I had an article at the American Thinker today entitled "The Tobin Tax: Stealing From Not Just The Rich." It's is a reiteration of an older post of mine.

Candian Savers Aren’t the Only Ones With a Sinking Feeling…

2012-02-04T19:02:00.000-08:00

LvMIC:

With three straight years of anorexic interest rates, it looks like The Globe and Mail finally realized the winners and losers of central banking:

It’s the saver’s dilemma. Life for these Canadians has become an uncomfortable squeeze between weak returns on their investments, stagnant incomes and the steadily rising cost of everything from food to fuel to housing.

Bank of Canada Governor Mark Carney, among other central bankers, has kept interest rates near historic lows since the onset of the global economic crisis in an attempt to stimulate the flagging economy, and there’s no sign of a rate hike any time soon. But some critics say the playing field is now tipped too far in favour of borrowers rather than savers. Canadians in droves have piled on debt to buy new homes and make other purchases, prompting warnings from Mr. Carney of the dangers of carrying too much debt – even as his policies encourage borrowing and provide little ability for savers to generate substantial low-risk income.

Congratulations to the writers for recognizing that money printing isn’t neutral in its effects. As Carney and his peers, including helicopter Bernanke who wants zero bound rates till at least 2014, continue to prop up the global financial sector with cheap liquidity, it was bound to have some nasty effects on those who try to live frugally. What central bankers have effectively done since the financial crisis of 2008 is wage a war on savers while aiding the same profligate spenders whose debt filled escapades drove the boom. But of course these spenders were only obeying the whim of governments and central banks that took great delight in a seemingly thriving economy and influx of tax revenues.

Like all government action, the proceeds which flow from the coffers of the public chest and hands of easily bought politicians are a boon to some at the expense of others. The benefits of government are never neutral as money changing bureaucrats merely take wealth from one or more persons and give it to another. The same concept holds for money printing which can’t enter an economy uniformly due to ever present time and space constraints. The method for which central banks influence the interest rate and create money is normally conduced in coordination with large financial institutions in their respective countries. These big banks, such as the 21 primary dealers in the U.S., get the freshly computer generated funds first before anybody else. Then of course comes the credit expansion which leads to intertemporal discoordination depending on the degree to which the central banks feel like screwing up the economy.

So as The Globe and Mail writers have observed, the ultra low interest rate policies of the Bank of Canada are having a negatively disproportionate effect on savers who wish nothing more than to try and maintain some sense of financial security in the future without having to risk their capital in the more uncertain areas of the market. Meanwhile, low interest rates embolden spenders who seek high value goods and wish to go into debt to purchase such. The rational behind the Keynesian cure of recessions lies in the false belief that consumption drives the economy. Yet this puts the cart before the horse as one must produce first in order to acquire the funds to consume. Bringing money or credit into existence at the click of a computer mouse creates value only until the illusionary boom ends in a bust lest a complete destruction of the currency.
The saver’s dilemma is not a dilemma limited to those who wish to guarantee themselves a comfortable retirement. Abstaining from consumption and adding to the supply of loanable funds is the only means by which capital can be available for investment to grow the capacity base of the economy. Mike the gas station attendant may not have the entrepreneurial insight to make a sustainable market investment but if he wishes to place a portion of his wages into a bank to be recovered sometime in the future at a fixed maturity (in accordance with a 100% reserve requirement) and earn interest while doing so, his money is then available to be lent out by aspiring businessmen.

Carney, Bernanke, and their money printing friends have put the kabosh on this process by doing the only thing they know how to do: print money to suppress interest rates. This monetary manipulation is never neutral as it creates conflict between the beneficiaries of new funds and those who see the money last. Per Mises:

The notion of a neutral money is no less contradictory than that of a money of stable purchasing power. Money without a driving force of its own would not, as people assume, be a perfect money; it would not be money at all.

Changes in the money relation, i.e., in the relation of the demand for and the supply of money, affect the exchange ratio between money on the one hand and the vendible commodities on the other hand. These changes do not affect at the same time and to the same extent the prices of the various commodities and services. They consequently affect the wealth of the various members of society in different ways.

The Importance of Individual Methodology as a Tool for Argument

2012-02-03T18:00:00.000-08:00

LvMIC:

I got into a verbal discussion/debate with a coworker today. As anyone who follows the Austrian school or the doctrine of natural rights may know, a casual discussion on the efficiencies of a market can be unpleasant when speaking with someone who holds the unfortunately conventional view that capitalism is defined by systematic exploitation. Proponents of this Marxist-based ideology typically fall back on declarations that corporations “rip you off” and will do “anything for a dollar.” Even worse, these statist advocates ceaselessly trumpet the cause of the “public good.”

But therein lies the true fallacy behind this type of thinking as it can easily be refuted through the use of individual methodology; a defining attribute of the Austrian school of economics.

One thought construct utilized in the treatises and work of such prominent Austrian economists as Ludwig von Mises, Murray Rothbard, and Hans Herman-Hoppe is that of the deserted island and Robinson Crusoe. Human action, the underlying basis for all economics, is best analyzed when put in the context of simplicity and in its barest conditions. Rothbard described this construct as “highly important” and “indispensable” in its uses. The very reason that the Crusoe construct is valuable is that while it’s based on an imaginative situation, the lessons derived from its use have greater implications when applied to a market economy. This is why the Crusoe model is often “derided” by those who take a collective or inherently conflictual view of economics. The notion that applying individual action or exchanges between individuals to complex system of billions upon billions of transactions a day takes the proverbial weight out of arguments coming from the point of view of “public” necessities and worker exploitation.

By using the Crusoe construct, we can observe how man’s action, completely unobstructed from modern day conveniences, must operate in the context of nature’s dominance. The choices Crusoe makes in order to better his well being can be deduced to the fundamental Mises axiom “human action is purposeful behavior.” Carried on to a broad sense, applying individual methodology is a requirement for fully understanding how a market economy can ultimately work efficiently.

Now back to the story of the debate with my coworker. After the baseless accusations of corporations ruthlessly taking advantage of hapless consumers and slave-like workers, I quickly gave an example of a remunerative transaction by pointing to his wrist watch and offering him a price of $20.00. I explained that if he went forth with the exchange, then he obviously valued the $20.00 more than the wrist watch and that I valued the watch more than the price I offered. The transaction must be mutually beneficial for if it wasn’t, then one or both of us would refuse to engage in the trade.

His immediate response was something along the lines of “what if I was greedy and charged $10,000 for the watch.” After taken aback at his quick and clearly not thought out reaction, I informed him that I wouldn’t purchase the watch for such a large sum and that if he had any desire at all to sell the wrist watch, he would have to lower his price in order for me to meet him at some agreed to margin. There is no force involved in this self adjusting procedure.

This example is taken from the simple transactions Crusoe and Friday, once introduced to the island, engage in. Crusoe may have a stash of berries he has accumulated that he may wish to trade for a few of Friday’s recently caught fish. If each came to an agreement that they will transact at a ratio of 5 berries per 1 fish, then each has their value scaled fulfilled in accordance with their subjective preference. Applied in the extreme broad sense, it becomes much easier to understand how the global economy composed of 7 billion individuals functions. What appears to be an overly complex system is nothing more than the culmination of individual transactions.

And then of course was the oft-incurred notion of the “public” good. According to my coworker, corporations have no incentive toward looking out for the public good; certainly not a new argument used by government apologists. But as I tried to explain, the notion of the “public” good is simply a metaphysical idea which bears no relation to accurately describing what people may actually desire. After all, only individuals ever act. Therefore only their needs can be satisfied by the actions of others. Mises explains:

First we must realize that all actions are performed by individuals. A collective operates always through the intermediary of one or several individuals whose actions are related to the collective as the secondary source. It is the meaning which the acting individuals and all those who are touched by their action attribute to an action, that determines its character.

Unfortunately, this point did not sink in for my coworker who stuck by his ideals about the common good. Ironically, our conversation preceding this debate was on the modern state of music which he denounced as basically garbage and lacking in even the remote amount of talent. According to him, overly produced pop hits shouldn’t get the radio play or attention they garner from the public. For someone who is clearly out of sync with what the general public demands in the form of popular music, making grand statements on what the public needs is incredibly revealing of an inner contradiction in thinking. Because I immensely enjoy modern pop music, obviously my coworker does not know what is best for me. If he doesn’t know what is best for me in this narrow field of preference, then how can he possibly know where billions of other individual preferences lean toward?

Despite my failure in transforming my coworker into a full fledged Austrian disciple, the tool of methodological individualism provided a guiding light through fog and deceitful invocations of the non existent “public” good. The construct of Crusoe on the island with a subsequent alliance with Friday is insightful not just for individual action but when attempting to comprehend how a market economy operates. In the end, the debate was fruitful from the standpoint that it made that portion of the workday fly by (while arguing, we both worked on our respective tasks) and as any foray into a specialized task goes, practice makes perfect. It was certainly more casual than intellectually rigorous but changing minds won’t occur through infighting of blogs and academic journals only.

One mistake I am willing to concede is perhaps I should have picked a different way to describe the adoption of mandatory civil service for all high school graduates rather than “a horribly disgusting idea” and “the equivalent of slavery” when my coworker suggested it. Though I unapologetically believe those descriptions to be true, there is probably a more sophisticated way to describe what boils down to conscription.

Bill Gross Semi-Endorses Ron Paul for President?

2012-02-02T16:48:00.000-08:00

LvMIC:

When Bill Gross speaks, many people listen. He doesn’t head the largest bond investment company in the world, PIMCO (Pacific Investment Management Company), for nothing. Though not an Austrian or Austrian minded by any means, Gross has been critical of the Federal Reserve and recently made a surprising almost-endorsement of Congressman Ron Paul for U.S. president (watch around the 6:24 mark):

With someone of Gross’ financial stature, such a mentioning would normally play well for the Texas Congressman. Unfortunately, the general public is not nearly as money minded as Gross. This doesn’t mean Gross has perfect market foresight however given his role in the financial mainstream and some recent missed calls but this off hand endorsement of Paul should certainly be examined in the broader sense.

Take a look at this portion of Gross’ recent newsletter (my emphasis added):

Letting your pet retriever roam the woods might do wonders for his “animal spirits,” for instance, but he could come back infested with fleas, ticks, leeches or worse. Fed Chairman Ben Bernanke, dog-lover or not, preannounced an awareness of the deleterious side effects of quantitative easing several years ago in a significant speech at Jackson Hole. Ever since, he has been open and honest about the drawbacks of a zero interest rate policy, but has plowed ahead and unleashed his “QE bowser” into the wild with the understanding that the negative consequences of not doing so would be far worse. At his November 2011 post-FOMC news briefing, for instance, he noted that “we are quite aware that very low interest rates, particularly for a protracted period, do have costs for a lot of people” – savers, pension funds, insurance companies and finance-based institutions among them. He countered though that “there is a greater good here, which is the health and recovery of the U.S. economy, and for that purpose we’ve been keeping monetary policy conditions accommodative.”
My goal in this Investment Outlook is not to pick a “doggie bone” with the Chairman. He is makin’ it up as he goes along in order to softly delever a credit-based financial system which became egregiously overlevered and assumed far too much risk long before his watch began. My intent really is to alert you, the reader, to the significant costs that may be ahead for a global economy and financial marketplace still functioning under the assumption that cheap and abundant central bank credit is always a positive dynamic. When interest rates approach the zero bound they may transition from historically stimulative to potentially destimulative/regressive influences.
Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.

Unfortunately, Gross gives a lot of credit to Bernanke for juicing the economy in the video. But of course papering over a bunch of losses and effectively zombifying banks to prop up the stock market doesn’t fix the core issues of the economy which has become even more dependent on the printing press. Still, Gross has become wary of the Fed’s actions recently. He recognizes that suppressed interest rates and cheap money create distortions though probably doesn’t understand the full nuances of the business cycle and its causes.
There is also the fact that treasuries aren’t going up in value anytime soon thanks to Bernanke’s promise to keep rates low till at least 2014. Though he won’t lose a great amount of money as interest rates remain zero-bound for years to come, Gross admits:

Most short to intermediate Treasury yields, however, are dangerously close to the zero-bound which imply little if any room to fall: no margin, no air underneath those bond yields and therefore limited, if any, price appreciation.

So what are the real implications of Gross admitting that he is “a little Ron Paulish”? It should come as no surprise to anyone who visits LvMIC that Ron Paul, and the Austrian School from which he is a disciple, is marginalized continuously by the mainstream press and modern academia. Paul is often slandered and labeled the equivalent of a crackpot and unelectable. The Austrian school, despite its analytical functions and teachings on economic theory which provide a comprehensive understandability on the causes of the business cycle, is still regarded as fringe. Yet here is arguably the most respected money manager in the world (again, you don’t control that much wealth for no reason) admitting that he is leaning Paul’s way. It’s a testament to the kind of impact Paul’s ideas are having on those who hold influence. As Mises pronounced,

Both force and money are impotent against ideas.

Though he may not fully understand Paul’s views or how damaging the Fed’s policies really are, we can rejoice in the fact that Gross realizes the pathetic contest of Democrats vs. Republicans is not really a contest at all as there lies little room in differences between the two.

Does McDonald's Using "Pink" Meat Filler Matter?

2012-02-01T19:30:00.000-08:00

LvMIC:

A few days ago, reality star Jamie Oliver celebrated a victory over one of the world’s most popular food franchises- McDonald’s. From The Telegraph:

After years of trying to break America, Jamie Oliver has finally made his mark by persuading one of the biggest U.S fast food chains in the world to change their burger recipe.
McDonald’s have altered the ingredients after the Naked Chef forced them to remove a processed food type that he labelled ‘pink slime’.
The food activist was shocked when he learned that ammonium hydroxide was being used by McDonald’s to convert fatty beef offcuts into a beef filler for its burgers in the USA.
The filler product made headlines after he denounced it on his show, Jamie Oliver’s Food Revolution.
Now after months of campaigning on his hit US television show McDonald’s have admitted defeat and the fast food giant has abandoned the beef filler from its burger patties.

From a libertarian, free market perspective, Mr. Oliver’s endeavor is not something at all to despise. He simply used his television show as an outlet to educate the public on an ingredient McDonald’s adds to its food. He didn’t force the fast food giant to stop using ammonium hydroxide; McDonald’s simply bowed to public pressure and wanted to save face. This is how free enterprise keeps itself in check. There is no need for government oversight or intervention as long as private and specialized watchdogs are around to police certain industries. Unfortunately, Mr. Oliver is looking to take his campaign one coercive step further:

US Department of Agriculture microbiologist Geral Zirnstein agreed with Jamie that ammonium hydroxide agent should be banned.
He said: ‘I do not consider the stuff to be ground beef and I consider allowing it in ground beef to be a form of fraudulent labelling.

Ironically, Zirnstein might not agree agree that the pink goo is meat but the U.S. government views it as safe.
Ammonium hydroxide may look unpleasant but one should consider why McDonald’s would use such an ingredient in their products. Take a look at beef prices in the U.S. over the past 20 years. Though the chart is unable to be replicated here, the price of a pound of beef has increased from about $1.10 in 1992 to almost $1.90 today. That’s almost a 75% increase! Meanwhile, according to the inflation calculator at the U.S. Bureau of Labor Statistics, what cost $1.10 in 1992 now costs….$1.76! Now of course economics is not a game of closed, static experimentation and correlation doesn’t always equal causation but certainly inflation has something to do with increased beef costs. Other factors can be attributed to the increase in the cost of beef as well such as cattle shortages and less than desirable weather.

But this again begs the question on why McDonald’s would use beef filler. This answer is quite simple as inflation not only robs savers and acts as a stealth tax but also gives producers an incentive to develop means to offset the increased price of their product by altering the size or makeup to offer a similar product under the guise of it being identical to the original. This is often called “stealth inflation.” How better to offset an increase in beef costs than mixing in a cheap substitute? Government aggregate data on inflation doesn’t ever account for such discrepancies. As John Williams, purveyor of the alternative government data measurement site Shadowstats.com, points out, such neglect on the part of calculating the true effect of inflation is purposeful:

In the early 1990s, press reports began surfacing as to how the CPI really was significantly overstating inflation. If only the CPI inflation rate could be reduced, it was argued, then entitlements, such as social security, would not increase as much each year, and that would help to bring the budget deficit under control. Behind this movement were financial luminaries Michael Boskin, then chief economist to the first Bush Administration, and Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System.
The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that. (my emphasis added)

Now it isn’t clear how long McDonald’s has been using beef filler in its hamburgers but one can float an educated guess and assume that doing such was done to offset an increase in the cost of beef. With the abandonment of the filler, there is no telling how long the famous dollar menu will last.

While Jamie Oliver used his professional credentials as a means to influence McDonald’s into changing its business practices (the fast food giant denies this but the PR campaign launched against them suggests otherwise), such is the market process. Both Oliver and McDonald’s forced no one into changing, listening to them, or purchasing their products. Unlike the government, neither utilized the threat of violence to garner certain results. And for that we should rejoice as the situation serves as evidence that peaceful engagement still trumps government intervention in efficiency and empowering consumers.

Mark Carney and the Art of Deflecting Blame

2012-01-31T17:05:00.000-08:00

Had this article posted at LvMIC Daily today, here is an excerpt:

In what has to be one of the most nonsensical and counterintuitive statements since Lawrence Summers, former economic advisor to U.S. President Obama and former President of Harvard University, declared that though the financial crisis was caused by too much confidence and debt run-up, the cure involves more of the same imprudent spending habits, Carney offers this muddled statement:

The challenge for the crisis economies is the paucity of credit demand rather than the scarcity of its supply. Relaxing prudential regulations would run the risk of maintaining dangerously high leverage—the situation that got us into this mess in the first place.

Read it twice for the full effect. You see, the problem isn’t a deficiency of available credit; central banks around the world have made sure of that. It’s the demand for credit that remains an albatross on a robust spending boom. Yet, and this is the best part, regulations that ensure that credit expansion, a driving force in fractional reserve banking, doesn’t finance more reckless debt amassing can’t be expunged as it would lead to another deleveraging bust.

Carney wants his cake and to eat it too. While he warns of lack of credit demand, he also worries that an increase will lead to another boom and bust. This double talk- wanting success while worrying about too much success- is typical central banker speech.

Carney is not alone in this sentiment. Public officials all over the world, namely in the U.S. and Europe, are desperate for a return to the boom years. The drug of easy credit and debt monetization had them addicted to the good times.

Like any good central planner, Carney speculates on how to best unwind the private debt load in order to run it up again. He paints himself as a deep thinking central planner struggling to find the exact formula where the BoC can use its printing press and discover the perfect equilibrium for credit expansion without blowing up another bubble.

Over the same period, Canadian households increased their borrowing significantly. Canadians have now collectively run a net financial deficit for more than a decade, in effect, demanding funds from the rest of the economy, rather than providing them, as had been the case since the Leafs last won the Cup.
It cannot entirely be business as usual. Our strong position gives us a window of opportunity to make the adjustments needed to continue to prosper in a deleveraging world. But opportunities are only valuable if seized.
First and foremost, that means reducing our economy’s reliance on debt-fuelled household expenditures.

Though Canada saw tremendous growth with public spending reforms adopted in the mid-1990s, the cyclical pattern of private overindebtedness has begun to rear its ugly head. This isn’t unexpected as the BoC, like central banks all over the world, took interest rates to anorexic levels following the financial crisis of late 2008. As I have noted, this orthodox reaction has set the stage for what looks like a housing bubble that will inevitably pop. Even Carney alludes to such as he states one of the hallmarks of the Austrian Business Cycle theory where the discoordination brought on by credit expansion leads to malinvestment in specific capital ventures and consumer goods:

Moreover, much of the proceeds of these capital inflows seem to be largely, on net, going to fund Canadian household expenditures, rather than to build productive capacity in the real economy. If we can take one lesson from the crisis, it is the reminder that channelling cheap and easy capital into unsustainable increases in consumption is at best unwise.

When the day of reckoning arrives, the market correction will undermine an already flimsy recovery. Not only will private balance sheets containing mortgages and real estate take a hit due to reduced prices but also the Canadian Mortgage and Housing Corporation will be ravaged as it guarantees about 90% of the whole housing market. As Chris Horlacher points out, the CMHC’s leverage stands at almost an astounding 100:1. A burst of the housing bubble will likely require a massive bailout via the Canadian government to keep the CMHC functional which in turn will require further debt monetization. The probability of this chance event coming to past is further emphasized by Carney’s earlier comments on the inseparable nature of the private sector from governmental dominance.

Some Problems with the Tobin Tax

2012-01-30T16:50:00.000-08:00

LvMIC:

With backing from both the George Soros-supported Occupy Movement and French President Nicolas Sarkozy, the tax on financial transactions, otherwise known as the Tobin Tax, is looking more and more like a real possibility. Though the proposed rate is seemingly miniscule (Sarkozy wants a .1% rate starting in August), the economic implications are disastrous. From the Peterson Institute for International Economics:

The Swedish Social Democratic government enacted a transaction tax on stocks, bonds, options, and some other securities in 1983. The tax, named after the economist James Tobin, was abolished by the new nonsocialist government in 1991.
The tax rates varied from 0.1 percent on ordinary stock trade to 0.15 percent on treasuries and 1 percent on options.
1. The expectation had been that the tax revenues would be 1.5 billion Swedish krona (SEK), but they stopped at SEK80 million.
2. Most Swedish trade in securities disappeared and went abroad, mainly to Oslo and London, and never returned. Soon after, the previously tiny Oslo stock exchange overtook the Stockholm stock exchange, and it is still the larger of the two stock exchanges.

And from the Adam Smith Institute:

Almost 60% of trading volume of the 11 most actively traded Swedish shares migrated to London during Sweden’s attempted Tobin tax. The temptation, and indeed relative ease, with which capital flight and cross border arbitrage can occur would spell disaster for the UK.

Sweden is the only country to have tried a “pure” Tobin tax, of 0.5%. It raised only one thirtieth of the proceeds predicted by its proponents and was scrapped after five years. The taxes sparked an exodus of financial activity from Sweden. By 1990 60% of the trading volume for the top 11 most traded Swedish stocks had moved to London. Trading for over 50% of Swedish equities had moved to London by 1990.

All market participants would be subject to the tax; a Tobin tax is unable to discriminate between de-stabilising trades and those which provide liquidity, information and tradefinancing. With short-term trading providing invaluable liquidity to the market, an incapability to segregate individual trader motivations will therefore lead to a reduction in both liquidity and welfare-enhancing trade, in addition to increasing market susceptibility to individual shocks.

Financial Atlases shrugging is no surprise. There are plenty of other developed countries out there that would gladly welcome an influx of capital from countries with politicians delusional enough to believe a predictive model based on static behavior. It’s as if public officials truly believe people are submissive and will take their various attempts at pilfering with little, if any, protest. Should the Tobin Tax be enacted in France, or worse yet the U.S., the short term trading industry will suffer a serious blow. Since short term trades occur more frequently, they are disproportionately affected by such a tax. As the study from the Adam Smith Institute shows, the Tobin Tax drove away short term liquidity traders who provide much-needed relief during downturns.

But the core issue with a financial tax goes much deeper than the immediately observable effects. Market transactions aren’t just exchanges of goods or services, they convey vital market information as prices which represent profits and losses. As Mises noted:

Profits and losses are essential phenomena of the market economy. There cannot be a market economy without them. It is certainly possible for the police to confiscate all profits. But such a policy would by necessity convert the market economy into a senseless chaos.

The Tobin Tax starts small but one should never doubt the extent to which such taxes are increased in times of fiscal stress. The income tax enacted in 1913 in the U.S. was first levied at 1% for most incomes and between 2% and 7% for higher incomes. There is no telling the kind of economic growth America could have seen had these rates been kept.

So while the Eurozone continues to implode and the Occupy Movement campaigns on the behalf of increased taxes, the Tobin Tax should be feared by all market participants, not just investors. The greater the chains of burden placed on the market, the greater the long term impoverishment for all.

(ht to Mike Shedlock for the studies)

Keynesian Mercantilism In Action?

2012-01-29T16:43:00.000-08:00

LvMIC:

In the New York Times “Economix” blog, Binyamin Appelbaum writes (in reference to the U.S.):

Foreign buyers purchased more than $2 trillion in goods and services, the first time exports have topped that threshold. And those exports accounted for almost 14 percent of gross domestic product, the largest share since at least 1929.

Source: Bureau of Economic Analysis

The reason for this jump in exports?

The value of the dollar has declined, so that foreigners save money when they buy American. Businesses, struggling to find customers here, are focusing on foreign sales. And a boom in commodity prices, which has raised the price of life for most Americans, has produced a windfall for those who trade in commodities.

Now has the dollar really seen that much of a decline relative to other industrialized competitors which has in turn served as a boon to exporters? Take a look at some dollar exchange ratios with major economic players such as Canada, Japan, the Eurozone, and Sweden:

From the above charts, it’s clear the Federal Reserve’s multiple engagements of quantitative easing and dollar debasement have succeeded in lowering the dollar’s value in terms of other major competitive currencies (China of course has an active currency peg whereas it keeps the yuan undervalued compared to the dollar). With financial crisis hitting in late 2008, the dollar saw a boost in terms of investors looking for a save haven. It has since seen a downward trajectory albeit few bumps along the road.

Orthodox Keynesiansim suggests that inflation is the correct remedy for downturns as it empowers exporters whose goods are cheaper in foreign markets. As Paul Krugman wrote last May:

First, what’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed.

But of course this came at the expense of a 3% annual increase in the Consumer Price Index, an almost 10% annual increase in gasoline prices, and a 4.7% increase in food prices according to the Bureau of Labor Statistics. Funny how Krugman claims to care for the poor yet advocates for policies that disproportionately affect them on a negative basis.

But as Henry Hazlitt points out, inflation isn’t all that it’s cracked up to be:

An inflation is initiated or continued in the belief that it will benefit debtors at the expense of creditors, or exporters at the expense of importers, or workers at the expense of employers, or farmers at the expense of city dwellers, or the old at the expense of the young, or this generation at the expense of the next. But what is certain is that everybody cannot get rich at the expense of everybody else. There is no magic in paper money.

Inflation through government decree is nothing more than glorified mercantilism on the part of politicians looking to buy votes and campaign donations from bankers and favored industries. Nothing better brings rounds of dimwitted applause from ignorant votes than speaking on the importance of “manufacturing” or “boosting exports.” Inflation impoverishes the public which thinks it’s getting a free lunch. Even the manufacturing worker who takes comfort in a briefly secure job potentially pays for it with every gallon of gas or loaf of bread he buys.

If John M. Keynes endeavored at duping the public into thinking that economic cures spring froth from the printing press, consider him a success. Meanwhile, the dollar devaluation seen over the past three years will inevitably hit a cliff of no return where inflation will take off and lead to more misallocations of resources and distortions and thus paving the way for another bust.
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Also of note, had an article at the American Thinker today entitled "How China Transformed Its Economy." It is a reiteration of a previous post of mine.

Krugman Sinks to a New On-Star Guided Low

2012-01-28T18:32:00.000-08:00

LvMIC (and possible draft for the American Thinker):

With every New York Times column, it’s getting harder and harder to differentiate Princeton economist Paul Krugman from an unabashed political hack. Certainly Krugman has always played the role as champion of the Democratic Party, but this latest attempt to defend President Obama takes the cake. This week’s crime in unsound economics? Offering nothing but praise for the bailout of General Motors and Chrysler. Krugman writes:

The case for this bailout — which Mr. Daniels has denounced as “crony capitalism” — rested crucially on the notion that the survival of any one firm in the industry depended on the survival of the broader industry “ecology” created by the cluster of producers and suppliers in America’s industrial heartland. If G.M. and Chrysler had been allowed to go under, they would probably have taken much of the supply chain with them — and Ford would have gone the same way.
Fortunately, the Obama administration didn’t let that happen, and the unemployment rate in Michigan, which hit 14.1 percent as the bailout was going into effect, is now down to a still-terrible-but-much-better 9.3 percent.

So how many jobs did the bailout really save? Paul Roderick Gregory at Forbes estimates around 4,000. Obama and the White House claim at least 1 million jobs saved. Somehow I doubt their sincerity on such a rosy number. Whatever the number of jobs supposedly saved, the cost to taxpayers has been an estimated loss of $14 billion according to Obama’s ex-Auto czar. What’s $14 billion among friends? And by friends, I am of course referring to the United Auto Workers whose price tag has been satisfied in return for some much needed votes come this November.

What Krugman doesn’t, or won’t mention, is the real reason GM and Chrysler survived- that is a successful bankruptcy process. There is absolutely no reason in the world to believe that had Uncle Sam not come to the rescue with a sack of taxpayer dollars, that GM and Chrysler would have ceased to be auto companies today. Markets have tendency to self correct when push comes to shove.

Yet even the bankruptcy procedure initiated by the Obama administration wreaked of favoritism. From David Skeel, law professor at the University of Pennsylvania, writing in the Wall Street Journal:

But the “sale” also ensured that Chrysler’s unionized retirees would receive a big recovery on their $10 billion claim—a $4.6 billion promissory note and 55% of Chrysler’s stock—even though they were lower priority creditors.
If other bidders were given a legitimate opportunity to top the $2 billion of government money on offer, this might have been a legitimate transaction. But they weren’t. A bid wouldn’t count as “qualified” unless it had the same strings as the government bid—a sizeable payment to union retirees and full payment of trade debt. If a bidder wanted to offer $2.5 billion for Chrysler’s Jeep division, he was out of luck.

Basically, if private creditors looking to use their own funds wanted to save either auto company, they had to appease the UAW’s retirement fund. Funny how bailouts, financed by money not belonging to bureaucrats, work.

Krugman goes on to cast a blanket over capitalism itself as being wholly reliant of government to exist.

But the current Republican worldview has no room for such considerations. From the G.O.P.’s perspective, it’s all about the heroic entrepreneur, the John Galt, I mean Steve Jobs-type “job creator” who showers benefits on the rest of us and who must, of course, be rewarded with tax rates lower than those paid by many middle-class workers.

Unfortunately for Mr. Keynesian, capitalism does not exist in a vacuum of rugged individualists in a constant state of ruthless competition. Certainly producers fighting for market share and profits are great in terms of seeking innovative ways to lower costs for consumers. But markets are always the product of social cooperation no matter how reclusive or self reliant an entrepreneur wishes to be. Just like in tango, it takes two in order to offer remuneration for a consensual transaction.

The idea that free market types remain entranced with the fantastical entrepreneur as the building blocks for a productive economy is a blatant smear on Krugman’s part. No surprise from him there. What he fails to specify is that every participant in the complex system known as the market acts as an entrepreneur in forecasting their own financial conditions. Steve Jobs and the teenager at McDonald’s both make subjective decisions based on their own ability to satisfy demand. Capitalism is a function of economic actors collaborating en masse in the constant pursuit of improving their own standards of living. Starkly dividing a free economy’s success by individual or collective factors is pure demagoguery.

Not only does Krugman disingenuously define a system of free enterprise, but he fails in accounting for the unseen consequences and price of the bailout. While to shallow eyes it may seem like the bailout saved the auto industry, it merely papered over some losses for the sake of buying votes. The ultimate price paid won’t be the bill forced on the balance sheets of taxpayers but the perpetuated system of cronyism and corporatism that is has become the Obama legacy. Bankruptcy ends up not being a process to fear but embrace as it serves as a clearing mechanism for inefficient production. Like investor Peter Schiff notes, “Bankruptcy is a good thing. It’s the way the market cleanses the economy of companies that shouldn’t be there.” Krugman not acknowledging this phenomena speaks volumes on his credibility.

And the Global Liquidity Binge Continues

2012-01-27T16:59:00.000-08:00

LvMIC:

Forget Fed chairman Bernanke and his central planning cronies “considering additional asset purchases,” the unsettling truth is right before your eyes (charts via Bianco Research at The Big Picture):

Here are some comparative charts (note the first is scaled in terms of U.S. dollars):

And perhaps the most worrisome chart of all:

Prior to the 2008 financial crisis, the eight central bank balance sheets were less than 15% the size of world stock markets and falling. In the immediate aftermath of Lehman Brothers’ failure, these eight central bank balance sheets swelled to 37% the capitalization of the world stock market. But keep in mind that the late 2008/early 2009 peak was due to collapsing stock market values combined with balance sheet expansion via “lender of last resort” loans.

Recently, the eight central bank balance sheets have spiked back to 33% of world stock market capitalization. This has come about not by lender of last resort loans, but rather by QE expansion (buying bonds with “printed money“) even faster than world stock markets are rising.

The fundamental question needs to be asked: after punting on a necessary market correction following the U.S. housing bubble and financial crisis, has the world economy been solely propped up by major central banks alone? Is it even possible to determine an answer to such an incredibly complex question?
Because money disperses through hands and economies in an unpredictable manner, one can’t possibly have enough knowledge to give an exact answer on the proposed question. While the banking sector has been practically zombified with multiple adrenaline shots of liquidity, it is certainly possible that some sectors are seeing market-driven growth despite increasingly crippling government regulation and cheap money slowly, but surely, finding its way to investors. Markets are forever resilient to some degree. But with all this cheap liquidity running amok, there is little doubt subsequent distortions in relative prices and production structures have occurred and will continue to till another correction inevitably manifests itself.

This is already apparent as governments, predisposed to rakish spending in economic times good and bad, are still able to fund themselves cheaply (with the exception of the Eurozone which still fumbles along despite increased cost of borrowing not including Greece) and draw more and more amounts of already precious capital from a deprived private sector.

Though inflation remains comparatively low in terms of consumer goods for most of the observed countries, excluding China whose falling prices are even more evidence of the property crack up boom presently occurring, eventually a turning point will be reached where the demand to hold cash balances falls in favor of accumulating goods and investments as time preferences heighten. This occurs on an individual subjective basis but behaves as a type of domino effect as increasing amounts of dollars/euros/yen/yuan etc. chase fewer goods. The chain reaction, while boosting some prices first, could very well be seen as a savior-like bubble that will be celebrated as a sign of a growing recovery. By the time the purveyors of the printing press realize what’s up, it could very well be too late. This is even further suspected given the recent disclosure of FOMC minutes from 2006 showing the complete incompetence Fed officials displayed with a bursting housing bubble right in front of their supposedly well-educated eyes.

As the global currency race to the bottom continues, one can be sure that the path to reaching sound economic footing will be further avoided as these policies remain in place. Much like Hayke ironically observed in 1932:

“Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

“To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection – a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end.

“It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression. We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.”

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I should also mention my piece published at the Mises Institute today entitled "Mr. Rubenstein, You're No Adam Smith" which has gotten a load of compliments as well as my first piece published at PolicyMic.com yesterday entitled "Ron Paul's Impact Will Last Long After the Florida Debate." I am not overly satisfied with the Paul piece as what I saw as the best parts were edited out but the editor asked me to write it so I took a couple of hours to do so.

The New Soros Plan on How to Save Italy and Spain

2012-01-26T17:44:00.000-08:00

LvMIC:

Much like his last plan, Mr. Oligarch Insider once again makes another plea for the European Central Bank to intervene on behalf of the governments of Spain and Italy. Writing in the Financial Times, Soros stays infatuated with infinite liquidity provided by the printing press:

My proposal is to use the European Financial Stability Facility and the European Stability Mechanism to insure the ECB against the solvency risk on any newly issued Italian or Spanish treasury bills they may buy from commercial banks. This would allow the European Banking Authority to treat the T-bills as the equivalent of cash, since they could be sold to the ECB at any time. Banks would then find it advantageous to hold their surplus liquidity in the form of T-bills as long as these bills yielded more than bank deposits held at the ECB. Italy and Spain would then be able to refinance their debt at close to the deposit rate of the ECB, which is currently 1 per cent on mandatory reserves and 25 basis points on excess reserve accounts. This would greatly improve the sustainability of their debt. Italy, for instance, would see its average cost of borrowing decline rather than increase from the current 4.3 per cent. Confidence would gradually return, yields on outstanding bonds would decline, banks would no longer be penalised for owning Italian government bonds and Italy would regain market access at more reasonable interest rates.

Soros’ scheme amounts to nothing more than backdoor monetization at a more aggressive rate than is happening currently with the ECB’s LTRO program. Take one look at the rise in the ECB balance sheet since the program kicked into gear (ht Zerohedge)

The resulting backdoor quanto easing in Eurozone is clear from the recent surge in the ECB’s balance sheet relative to the Fed’s. Thus, the ECB’s total assets have risen by 38% from €1.94tn on 1 July 2011 to €2.69tn on 6 January 2012. While the Fed’s total assets have risen by only 1% from US$2.87tn to US$2.9tn since July 2011.

And Soros wants more of this? Just think about it, in order for Spain and Italy to refinance their debt “at close to 1%,” the ECB must be willing to buy treasuries from Eurozone banks. These banks must be guaranteed virtually risk-less profit to play along, hence keeping the rate above the .25% currently paid for excess reserves at the ECB (which took a page from Bernanke’s play book). With the ECB ready and willing to eat up more government bonds, suppressing yields shouldn’t be a problem outside a hyperinflationary event. With fresh funds flowing from the banks, which have pretty much become wards of the state at this point, debt will be effectively monetized to the happy benefit of bailout out member state governments and banks looking to dump toxic securities. As Martin Sibileau points out, this process can be aided in part with the Federal Reserve’s recent advent of cheapening dollar swap lines.

The new Soros plan is the same kind of bailout, money printing extravaganza that central bankers, politicians, and their friends love to resort to in times of fiscal trouble. Not only does it direct further capital away from capital constrained banks into bloated and unproductive bureaucracies, it would further perpetuate the belief that mistakes bear no consequences in the world of central banking. Soros wants economic growth in the Eurozone but also wants the resources to fund such increases in productive capacity to instead be directed toward governments. If the authorities just have enough “sufficient resources” to deal with their overspending, then all will be well. Never mind that their profligate spending, overregulation, and inability to recognize the boom-bust cycle engineered by central banks lead to this crisis. The plan is essentially one long punt to give these so-called leaders a chance to come up with further band aids to save their own jobs.
Soros wants an end to the “deflationary vicious circle” but, like any good Keynesian, doesn’t have the courage to admit such deflation is only in response to previous inflationary practices. He surprisingly concedes his true intention at the close:

The stimulus must come from the EU because individual countries will be under strict fiscal discipline. It will have to be guaranteed jointly and severally – and that means eurobonds in one guise or another.

And with that Soros admits his desire for fiscal integration; the very next step toward centralizing statist power. Elitist puppeteering has a name, and it's George Soros.

More Evidence That The Housing Bubble Has Yet To Be Liquidated

2012-01-25T20:15:00.000-08:00

LvMIC:

Government interference with the present state of banking affairs could be justified if its aim were to liquidate the unsatisfactory conditions by preventing or at least seriously restricting any further credit expansion. In fact the chief objective of present day government interference is to intensify further credit expansion. This policy is doomed to failure. Sooner or later it must result in a catastrophe. (p 445 of Human Action)

Despite claims from some confused commentators, the malinvestment built up during the boom years of housing is still weighing down a significant portion of the economy some five years after the bubble burst. From Reuters:

In a letter sent on Friday to the Republican and Democratic leaders of a U.S. House of Representatives government oversight panel, the Federal Housing Finance Agency explained why it has long opposed principal reductions for borrowers who owe more than their homes are worth.
It said it had determined that such reductions would be more costly for the two firms than allowing those troubled borrowers to default.
The regulator has been under pressure from Democrats to permit the write-down of principal by the two government-controlled mortgage finance providers as a way to help some of the millions of U.S. homeowners who are “underwater.”
About 22 percent of U.S. homes have negative equity totaling about $750 billion, according to CoreLogic.
Fannie Mae and Freddie Mac were taken over by the government in 2008 as mortgage losses mounted. Millions of soured loans issued during the housing bubble remain on their books and delinquencies on those loans continue to rise.
Fannie Mae and Freddie Mac own or guarantee roughly half of all outstanding mortgages in the United States. Out of the approximate 30 million mortgages guaranteed by the two firms, close to 3 million of those loans were held by underwater borrowers as of last summer, according to analysis provided in the letter.

With these toxic mortgages still on the books, it should come as no surprise that financial capital remains tied up in money losing assets such as underwater mortgages. This is just one of the consequences of stabilizing nationalization maneuvers which rather than setting the foundation for a sustainable correction continues to exacerbate the problem. Fannie and Freddie have effectively become zombie institutions forcefully backed by taxpayers when cutting their life line was the truly sensible course to take. Despite close to $200 billion in tax funds used to prop up the housing giants, further writedowns will put more public funds at risk. The vicious cycle continues precisely due to the unwillingness of politicians and regulators to embrace short term pain now in return for long term growth.

As grating as it is to hear, the run up of prices in the boom must inevitably be met with a fall in prices. The propping up, or the attempted propping up, of prices via the government prevents the market from clearing and a sound footing from being reached in order for increasing growth to take place. Shoving wads of cash onto the hemorrhaging balance sheets does nothing to solve the core problems associated a central bank engineered boom. It leaves less capital to be invested in actual sustainable lines of production.

Even the Fed recognizes the moral hazard associated with such a policy:

The Federal Reserve, in a white paper to Congress earlier this month, said writedowns “had the potential to decrease the probability of default” and “improve migration between labor markets.”
However, the Fed stopped short of endorsing such an initiative and noted concern that writing down loan balances would create a moral hazard – the concept that rescue efforts breed further behavior that exacerbates the existing problem – and could prompt other borrowers to stop making timely loan payments.

Ironic words coming from the institution which drives perhaps the biggest moral hazard of all as the lender of last resort to both Wall Street and the federal government. As President Obama pushes for further writedowns, such a policy is more about buying votes than an actual understanding of how markets liquidate themselves. If Obama really wanted to clear the housing market, he would have let it occurred years ago when he assumed office.

While writedowns will be expensive, they would have been much less expensive for taxpayers had they occurred years ago such as the market dictated. The housing market would have been much healthier by now. Defaults will happen; it’s only a matter of time. The longer the children in the FHFA continue to not take their medicine, the longer sluggish progress continues. And the art of can kicking continues much to the detriment of everyone involved.

An Austrian Arguing for Deflation?

2012-01-24T17:09:00.000-08:00

LvMIC:

Austrian economist Antal E. Fekete has an interesting piece out arguing that many modern day Austrians misunderstand the relationship between speculators and central bankers and the means for which inflation takes hold in a credit-based economy. This misunderstanding has lead some to incorrectly predict hyperinflation in the U.S. following the 2008 financial crisis and unprecedented expansion in the Federal Reserve’s monetary base . Here is the relevant excerpt (emphasis mine):

These views hang the picture upside down. In actual fact, the Fed and the U.S. Treasury desperately want to beat down the value of the dollar. The greatest obstacle frustrating their effort is the stubbornly high and still increasing value of U.S. Treasurys. Captains of the world’s monetary system are yanking levers and twisting throttles which are no longer connected to anything. The captains are no longer in control. Yet they continue to wave their batons feverishly and pretend that the orchestra is paying attention. They want Jim Willie, Jeff Nielsen and everyone else to believe that the falling interest-rate structure is the outcome of their deliberate monetary policy. In fact, the Fed and the U.S. Treasury are trying to stop the rate of interest from falling further. They instinctively realize the threat of falling interest rates brings deflation and depression in its train. The dollar is much too strong, contrary to the wishes of policy-makers.
Like Mises, I also object to the use of the word hyperinflation, albeit for a different reason. It suggests that the phenomenon is linear and follows the laws of the Quantity Theory of Money. The more money is printed, the higher do prices go.
However, we are here facing highly non-linear phenomena. Our economy is torn to pieces by runaway vibration. We are victimized by the self-destruction of the monetary system subjected to oscillating money-flows boosted by the resonance of fluctuating interest rates resonating with fluctuating prices.
When the central bank intervenes in the market to control the rise of interest rates, it inadvertently makes prices fall; and when it intervenes to stop prices from falling, it inadvertently makes interest rates rise. The upshot is that the central bank intervention, rather than tempering movements, aggravates them.
At the present junction the Fed is buying bonds to combat deflation. Bond speculators know this, will buy the bonds first, driving down interest rates in the process. The result is more deflation, not less.
The Keynes-inspired central bank action is counterproductive. Policy-makers are blind and don’t see this. They stick to their selfdefeating monetary policy. They actually become the quartermaster general of the depression they are trying to avoid. As if cursed by a particular kind of madness, policy makers saddle society with the vampire of risk-free speculation.
The majority of hard-money analysts call for a hyperinflationary collapse of the dollar. Their analysis is faulty. Like a cornered rat, the dollar is capable of putting up a vicious fight for survival. In the words of Mark Twain, all the obituaries on the dollar are premature. The dollar is not a push-over. A yen-yuan coalition (or any other combination of existing or yet to-be-invented fiat currencies) cannot send it into oblivion.

Fekete’s position is interesting to say the least. One of the main criticisms of the Austrian Business Cycle Theory (proposed by Tyler Cowen) is that market participants are endowed with perfect knowledge to preempt central bank monetary policy and not be induced into a false exuberance over a bubble. The intertemporal discoordination between various structures of production can’t happen as investors and speculators are supposed to know exactly what central planners will attempt next. Of course perfect knowledge can never be held by any market actor but Fedekete seems to be implying the same concept here. If investors and speculators knew Bernanke was going to send interest rates plummeting and engage in a couple of rounds of bond easing, they could take advantage now by purchasing bonds before their price goes up as rates drop. From another Fekete article on the same subject:

When a central bank increases the monetary base three-fold in three years, this is a clear invitation for bond speculators to move in and make a killing. But what the central bank utterly fails to understand is that, contrary to its hopes, new money is not going to the commodity market. Speculative risks there are far too great. Instead, new money is going to the bond market where the fun is. Bond speculation is risk-free. Speculators know which side the bread is buttered.

Fekete assumes, like Cowen, that all market participants hold enough information to gauge exactly what direction the Fed is going in order to make an easy buck off the bond market. To some extent, he is correct in that central bankers have a tendency to resort to the printing press when things look dire. Also consider the fact that Bernanke has made it clear he intends to keep interest rates low till at least 2013 which means bond buying will continue if rates start to inch up. With the chaos going on in Europe, and to a certain degree China, the dollar is seen as a safe haven which gets in the way of Bernanke’s dreams of a weakening it further. All of these factors combined lead to a disincentive on the behalf of banks to lend to businesses and consumers and thus extend credit and gin up inflation- which says nothing about the rotten mortgages still dragging down some consumers.

None of this is a positive endorsement of Fekete’s theory however, but his ideas are certainly worth considering. He is correct in that some Austrian minded folk were incorrect in predicting a large degree of inflation to take hold after the Fed’s shenanigans of 2008 (including even this author). This wasn’t expected:

There are some stubborn facts that don’t play into Fekete’s theory however. The CPI is currently running at 3% annually, the core CPI is at 2.2% (above the Fed’s unofficial target), energy is up 6.6%, and food is up 4.7% according to the Bureau of Labor and Statistics. These are not exactly sure signs of impending deflation given a continually expanding money supply.

All of this just adds to the kind of complex factors which encompass a market economy composed of billions upon billions of individual transactions every day. Unfortunately for Keynesians, monetarists, and believers in econometrics, economics is not a science to be analyzed in closed experiments. That pesky thing called “free will” often gets in the way of central planners trying to engineer a perfect society: or at least one that is perfect from their point of view. If there is one thing we can all agree on, the Keynesian cure of cheap money and fiscal deficits certainly isn’t bringing the prosperity promised by Paul Krugman and the like. As Fekete writes:

Cheerleaders for fiat money in academic circles, in the media, and in financial journalism will not be able to live down the shame that will be their lot when the world economy collapses. The excruciating economic pain that people will suffer as a consequence will be their responsibility. The break-down in law and order will be their fault. As history and logic conclusively prove, fiat money is not a viable monetary system. It is prone to succumb to the sudden death syndrome. Whether caused by inflation or whether caused by deflation, sudden death is assured.

(H/T to Mish for pointing these articles out)

Fed Readying Inflation Target Strategy- Will It Matter?

2012-01-23T16:22:00.000-08:00

LvMIC:

Rumor is abuzz this week as Federal Reserve chairman Ben “Helicopter” Bernanke may be ready to announce a strategy of specific inflation targeting to boost the market’s confidence in the central bank. From Reuters:

The Federal Reserve could take the historic step this week of announcing an explicit target for inflation, a move that would fulfill a multi-year quest of the central bank’s chairman, Ben Bernanke.
An inflation target would be the capstone of Bernanke’s crusade to improve the Fed’s communications, an initiative aimed at making the central bank more effective at controlling growth and inflation. It would, at long last, bring the Fed into line with a policy framework used by most other major central banks.

For decades, the unofficial inflation target of the Fed has been 2%. The 2% rate isn’t the rate calculated as the Consumer Price Index but the “core” rate which excludes volatile prices such as food and energy. What Bernanke appears to be doing is setting the stage for further rounds of explicit bond purchasing sometime down the road if inflation should fall short of the newly established target.

Inflation targeting however presumes the Fed is capable of reaching an exact target that is only ever dictated by the billions of actions committed by market actors. Central banks can only ever flood the monetary system with newly created funds, they can’t force banks to lend by creating credit out of thin air.
The idea that inflation can somehow be targeted to an exact degree is pure central planning fantasy. Like Hayek wrote in The Use of Knowledge in Society:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

But of course inflation targeting also presumes that inflation in itself is a good and necessary thing for economic growth. Yet historical evidence shows that growing economies which experience robust increases their productive capacity and general living standards are marked by falling prices. Falling prices of course lead to raises of wages in real terms. The real, more insidious purpose of monetary inflation was revealed in Keynes’ General Theory:

“the escape will be normally found in changing the monetary standard or the monetary system so as to raise the quantity of money, rather than forcing down the wage-unit and thereby increasing the burden of debt.”

When Keynes refers to escape, he is speaking on the best means to put an end to recessionary conditions. Like central bankers who celebrate inflation targeting as some great tool to further their dominance over an already overly regulated economy, Keynes ignores any unintended consequences of credit expansion or Cantillon effects which distort prices and wages heterogeneously as newly created money makes it way across the market spectrum. Inflation is treated as solution with immediate effect that doesn’t take time to fully pan out. It’s true purpose is to clear the labor market by raising prices and thus lowering real wages without inducing outrage over a nominal effect. Keynesians assume Joe the Assemblyman is a neanderthal too ignorant to realize he is being duped by prices rising all around him and his paycheck, though still the same numerical amount as last year’s, falling in real terms.

While a nice gesture in transparency, the Fed’s potential new inflation target strategy will likely have little effect unless the newly established target is something radically different than the unofficial rate of 2%. Bernanke will still print his way out of any disaster, come hell or high water. And by hell or high water, I mean the next speculative burst caused by cheap money invariably finding its way into another bubble.

How China Transformed Its Economy

2012-01-22T17:08:00.000-08:00

LvMIC (and possible draft for the American Thinker):

I will give you a hint: it had something to do with adopting private property over communal living. As Mises noted:

The continued existence of society depends upon private property.

In a recent National Public Radio report, the real story behind the monumental land reforms which transformed the communist dystopia was revealed.

In 1978, the farmers in a small Chinese village called Xiaogang gathered in a mud hut to sign a secret contract. They thought it might get them executed. Instead, it wound up transforming China’s economy in ways that are still reverberating today.
The contract was so risky — and such a big deal — because it was created at the height of communism in China. Everyone worked on the village’s collective farm; there was no personal property.
In Xiaogang there was never enough food, and the farmers often had to go to other villages to beg. Their children were going hungry. They were desperate.So, in the winter of 1978, after another terrible harvest, they came up with an idea: Rather than farm as a collective, each family would get to farm its own plot of land. If a family grew a lot of food, that family could keep some of the harvest.

This secret meeting, though innocuous to anyone accustomed to the benefits of private property, was dangerous in the then wholly communist country. Most importantly, the agreement was hashed out with a document that goes hand-in-hand with private property: a contract. With a formal contract established and plots of land assigned to each family, the incentive was now in place in order for those farmers wishing to improve their own standard of living to do so by virtue of their own labor. While a certain portion of food still had to be given over to the collective, surplus quantities could be kept for private consumption.

And with that, the tragedy of commons mentality vanquished and starvation ceased to be an issue. The simple rule of “keep what you make” had transformed the barren economy over night. The hallmarks of capitalism which brought hundreds of years of increasingly material prosperity to the West were ironically established in a hut that lacked both plumbing and electricity. The results were immediate as that year’s harvest was bigger than the last five years combined. According to one farmer, “we all secretly competed- everyone wanted to produce more than the next person.”

As men obtain the means of production, whether it be factory equipment, the contractual pledges of workers, land, etc., he becomes both an entrepreneur and speculator. If he has any interest at all in maintaining the value of his assets, he will use them efficiently and judiciously to maximize their output.

In collectives however, the mindset is much different. Man loses his right to the sweat of his brow. He therefore loses any incentive to produce beyond a certain threshold as he can no longer enjoy the excess of his labors. The mindset envelops the whole community as performing the least amount of work necessary and living off the labor of others becomes commonplace.

This communal syndicalism is what nearly brought an early end to the American experiment. When European settlers first arrived at the colony of Plymouth, they established a communist-like agrarian economy where all harvested food was kept at a common storehouse for members of the community to enjoy at their pleasure. And like China, rampant starvation forced a change in practice. After two years, privatized farming was adopted which in turn lead to an abundance of food production and the very first Thanksgiving.

The message here is crystal clear- private ownership necessitates prudence. If there is a choice between hard work or less work, and the subsequent amount of consumption enjoyed by either remains the same, man tends toward offering little work. Risk and investment aren’t considered in an environment where high time preferences are necessary for survival. Without capital investment, economies don’t progress above a level of minimal subsistence. It’s a deadly and impoverishing cycle.

Early American colonists learned this lesson well over two centuries ago. The government of China only adopted the reforms necessary for enrichment a few decades ago after holding Xiaogang as a model for success. With hundreds of millions rising above poverty since 1978, the country ranks among the world’s leading economies. Sure things are far from perfect in the once-communist giant, but China could easily become the economic phenomena of the 21st century if the government further eases its overbearing strangulation on the private economy.

Sanjay Paul- Central Banking Apologist

2012-01-21T16:07:00.002-08:00

LvMIC:

The following is a piece I wrote as a response to an editorial written in the Harrisburg Patriot News by Elizabethtown College economics professor Sanjay Paul. The piece, unfortunately, didn’t get picked up so I will reproduce it here. It’s written for the layman as a simple critique of Paul’s commendation of the Federal Reserve during the financial crisis- enjoy!

Elizabethtown College economics professor Sanjay Paul’s recent Patriot News article on presidential candidate Ron Paul, though favorable to the Congressman’s stance on intervention abroad, misconstrues his position on the Federal Reserve. Like many orthodox economists, Professor Paul sees the nation’s central bank as a force of mitigation in the event of an economic slowdown. Nothing could be further from the truth however.

First a short history lesson. The campaign for the Federal Reserve and legal cartelization of the banking industry dates back to the election of President McKinley who was supported by wealth bank interests. The Panic of 1907, caused by the inflationary policies of U.S. Treasury Secretary Leslie Shaw, provided the catalyst for a full blown crusade carried out by academics, public officials, and the banking elite. The Federal Reserve was ultimately a product of scheming for a governmental privilege by special interests including the Morgan and Rockefeller families. With the aid of Senator Aldrich of Maryland, the Federal Reserve Act was secretly hashed out at Morgan’s vacation estate known as Jekyll Island Club. As Nobel Prize winning economist Freidrich Hayek observed, “socialism has never and nowhere been at first a working class movement.”

Professor Paul characterizes Ron Paul’s objection to the Fed on dollar debasement alone when the Congressman’s opposition is far more complex. Yes, the Federal Reserve inflates and debases the value of the dollar through interest rate manipulation. That is the only tool the Fed, like all central banks, has at its disposal.

In 1912, economist Ludwig von Mises laid out a groundbreaking theory on the cause of the business cycle. In The Theory of Money and Credit, Mises identified that artificially low interest rates, not backed by an increase in savings and decrease in the public’s consumption level, entices investors to engage in otherwise unsustainable production lines. Central banks, which receive a legal monopoly over currency creation from their respective governments, use their printing presses to flood the market with money to suppress interest rates. Simple supply and demand dictates that as supply increase, the price of purchase falls. This money printing leads to asset bubbles like that recently witnessed in housing. Mises called the bursting of the bubble “the crack up boom” which is an unavoidable consequence of credit expansion.

When Fed chairman Alan Greenspan cut the federal funds rate from 6.5% in December of 2000 to an unprecedented 1% in June of 2003 and kept it there till June 2004, the stage was set for unsustainable boom in housing. The monetary base expanded, pushing down long term mortgage rates, and financed the inflationary bubble. Ironically, Greenspan’s housing bubble was a reaction to the bursting of the dot-com bubble he engineered years earlier by interest rate cutting in 1998 and subsequent monetary base expansion.

Despite clear evidence that the Fed is responsible for the boom-bust cycle, it has a more insidious role in the affairs of Wall Street. Whenever the New York branch of the Fed engages in open market operations (purchasing government bonds to expand the monetary base) it conducts transactions with 21 elite financial institutions known as “primary dealers.” These “dealers” include such saintly firms like Goldman Sachs, JP Morgan, and Citigroup.

Central banking apologists never mention this as they would be forced to rationalize their support for a system built on crony capitalism. After all, the whole point of monetary policy is to goose the economy. If money printing was neutral, it would affect all prices at once and not create a boom. But that’s not how an economy works and the purpose of the Fed’s open market operations is to inject Wall Street with newly created funds first before the rest of the economy sees it. This creates distortions, what economists call “Cantillon effects,” that boost some prices in terms of others and enriching the few as the money disperses.

Now Professor Paul claims inflation is currently a non issue despite the fact that the consumer price index is running at an annual rate of 3.4%. Energy prices are up 12.4% and food is up 4.6% compared to a year ago according to the Bureau of Labor Statistics. Inflation is only a non issue for those who don’t eat, drive, or heat their homes.

Though it’s true that current Fed chairman Bernanke carried out unprecedented monetary policy to fight the financial crisis, injecting the big banks with $16 trillion in loans is no better than giving a heroin junkie another fix. Papering over losses doesn’t solve the core problem of a financial sector addicted to easy money.

While Professor Paul rightly praises Ron Paul’s stance on foreign policy and civil liberties, he misses an all-important feature of the Congressman’s antagonism toward central banking. It goes far beyond currency devaluation as it involves the direct cause of the impoverishing business cycle.

Like the Ron Paul, Professor Paul could learn a thing or two by cracking open an Austrian economics treatise on a given Saturday night.

American Dental Association Hates Competition

2012-01-20T17:21:00.000-08:00

(The following is a draft for the Mises Institute, Mises Canada has either been down or messed up all day so no post there)

In his magnum opus Human Action, Ludwig von Mises wrote on the type of effect governmental occupational licensing invariably leads to:

Where the government directly fosters monopoly prices we are faced with instances of license monopoly. The factor of production by the restriction of the use of which the monopoly price is brought about is the license which the laws make a requisite for supplying the consumers. Such licenses may be granted in different ways…Licenses are granted to only select applicants. Competition is restricted. However, monopoly prices can emerge only if the licenses act in concert and the configuration of demand is propitious.

Imagine Bill runs a lemonade stand in the middle of a bustling city. Instead of facing competition from other street vendors, surrounding eateries, and grocery stores; Bill had the foresight to lobby the local city council to outlaw all sellers of lemonade who don’t at first obtain a license from the city. Due to his influence and close ties to select city council members, Bill fast tracked through the application process and was able to secure a license to sell lemonade before anyone else. With such little competition standing in his way, Bill is able to keep his sale price above the level which would tend to exist in a real free market and reap in profits as consumers are still willing to take the extra hit on their wallet for Bill’s delicious lemonade. Profits are up, times are good, and Mrs. Bill is very happy. But now the city council is beginning to change its tune on lemonade licensing and is considering an increase in licensing allotments. The free ride is coming to an end so Bill, worried the good life will soon be over, launches a countering lobbying effort on the basis that product quality will decrease if more licenses are given out.

Now apply this simple example en masse to the American Dental Association.

According to a recent article in Governing, many states are considering proposals in order to expand the limits of medical licensing and allow the emergence of “mid level dental providers.” These dental providers would play a role similar to nurse practitioners and physician assistants by providing routine dental procedures while under the guidance of a licensed dentist. States such as New Mexico, Oregon, and Washington are looking into this expansion in licensing in order to increase the supply of dental access to rural areas.

And like Bill the lemonade salesman, the American Dental Associate is lobbying against these expansions on the basis of public safety.

For anyone familiar to the workings of an uninhibited market, such a policy wreaks of further legislative cronyism to amend previous governmental intervention. In a true free market, consumer demand is met by entrepreneurs whenever supply and demand are met at the margin. Demand not currently fulfilled can be through an increase of investment in capital and labor devoted toward those consumers willing to pay the cost. In that sense, there should be no issue with a lack of dental care in rural areas as an open market would ensure that such a demand is met; albeit at higher price than that of prevailing areas with greater access to care.

But like much of the medical industry in the United States, access to care is stifled due precisely to same type of solution being floated; that is occupational licensing. As Mises showed, such licensing must lead to a decrease in supply, monopolistic conditions, and thus a lessening of competition.

Looking back at the mid-19^th century before the advent of medical licensing, the United States had one of the highest per capita numbers of practicing doctors in the world. As Ronald Hawowy points out, medical schools were abundant and inexpensive in addition to being privately owned. Many physicians at this time practiced homeopathy; a sort of natural, laissez-faire approach to healing where the body was to reduce its exposure to negative environmental conditions such as stress and maintain a healthy diet. Those who practiced what was known as mainstream medicine sought to negate this competition by lobbying for medial occupational licensing via the states. This included joining forces with the American Medical Associate to campaign for a broad enactment of licensing. By co-opting with the Carnegie Foundation and Abraham Flexner, a virtual nobody in the medial profession who’s brother was the director of the Rockefeller Institute for Medical Research, the movement found success with the infamous Flexner Report. In Making Economic Sense, Murray Rothbard writes on the Flexner Report and its disastrous effects:

Flexner's report was virtually written in advance by high officials of the American Medical Association, and its advice was quickly taken by every state in the Union.

The result: every medical school and hospital was subjected to licensing by the state, which would turn the power to appoint licensing boards over to the state AMA. The state was supposed to, and did, put out of business all medical schools that were proprietary and profit-making, that admitted blacks and women, and that did not specialize in orthodox, "allopathic" medicine: particularly homeopaths, who were then a substantial part of the medical profession, and a respectable alternative to orthodox allopathy.

Thus through the Flexner Report, the AMA was able to use government to cartelize the medical profession: to push the supply curve drastically to the left (literally half the medical schools in the country were put out of business by post-Flexner state governments), and thereby to raise medical and hospital prices and doctors' incomes.

And so began the downward trend in America’s free market in medicine. By reducing the number of medical schools, and thus number of doctors, wages are able to be kept higher than what would exist in a market dominated by competition and the unobstructed entry into practice. Consumers, who ordinarily determine the success of producers, have lost out as they face higher costs on top of being deemed too ignorant to choose an adequate doctor without the aid of the state.

It must be stressed that the advent of an increase in licensing for a type of mid level dentist is by no means a comprehensive solution for the problems which plague the industry. Previous governmental intervention was the cause of a shortage and increase in price of care. Further micro management of an already overly managed problem will only bring about more unintended consequences. Such is the nature of the state as intervention begets intervention and the path toward socialism forges ahead. As Mises apocalyptically wrote:

All varieties of (government) interference with the market phenomena not only fail to achieve the ends aimed at by their authors and supporters, but bring about a state of affairs which — from the point of view of the authors' and advocates' valuations — is less desirable than the previous state of affairs which they were designed to alter. If one wants to correct their manifest unsuitableness and preposterousness by supplementing the first acts of intervention with more and more of such acts, one must go farther and farther until the market economy has been entirely destroyed and socialism has been substituted for it.

Mark Carney- A Success or Lucky?

2012-01-19T16:54:00.000-08:00

LvMIC:

That is the question implied by Jay Bryan of the Montreal Gazette today who praises Bank of Canada head Mark Carney for guiding the country through the Great Recession with just a printing press.

It’s really hard to manage a big, complicated machine like the Canadian economy when you only have the blunt tool of interest rates. Just ask Bank of Canada governor Mark Carney.
That’s true even though Carney is not only smart, but also lucky.
That combination of skill and luck at the top of our banking system is a very big part of the reason why Canada looks much healthier than the U.S. or Europe these days. But the luck is starting to run a bit thin.
When the financial crisis tanked economies all over the world a few years ago, interest rates were slashed everywhere because that’s how you support a faltering economy; by making money so cheap that consumers will borrow more, mostly for big-ticket stuff like housing.

Notice the great wisdom shared in that last paragraph? The way to offset a market correction brought on by an overabundance of personal debt accumulation financed by cheap, central bank money is….more debt accumulation and cheap money! If I didn’t know better, I would say economic non-extraordinaire Lawrence Summers ghost wrote this piece himself. Mr. Bryan goes on to extol the rebound Canada’s property market saw since the crash of 2008 and cites it as proof of Carney’s masterful central planning.

None of this was true in Canada, whose stodgy, well-regulated banking system hadn’t permitted crazy mortgage lending to deadbeat borrowers, so cheap money worked just fine here. When interest rates were slashed, people hurried to borrow and banks were willing and able to accommodate them.
Very quickly, the late-2008 dip in home-buying and home values turned into a 2009 boom, and Canada’s real-estate market has remained strong ever since.

Indeed, Canada’s housing industry has been enjoying a bull run in recent years despite the global financial calamities plaguing every other industrialized power. But like the two years preceding the financial crisis in the U.S., naysayers are beginning to doubt the robustness of another fiat-financed boom. From a Bloomberg report released just two days ago:

Canadian home sales last year increased 9.5 percent to C$166 billion, the Canadian Real Estate Association said yesterday, as home prices rose 7.2 percent. Toronto-Dominion Bank (TD) estimated in a Dec. 22 report the average Canadian home is overvalued by about 10 percent.
The average resale price rose 0.9 percent in December from a year earlier to C$347,801, the smallest monthly increase since October 2010, the real estate group said.
Other reports last week showed strength in the housing market, with new home construction increasing 7.9 percent in December and residential building permits rising 6.9 percent in November.
Canadian home prices fell by 8.5 percent between August 2008 and April 2009, but have since increased by 22 percent, according to the Teranet Home Price Index (TNBHICP). By comparison, U.S. home prices fell by 33 percent between July 2006 and March 2011, and have since increased by 1.9 percent, according to the S&P/Case-Shiller Composite-20 Home Price Index (SPCS20).
“It looks like a bubble to me, so the collapse of that bubble, that’s dangerous to any economy,” said (Robert) Shiller, who is also an economics professor at Yale University.

And via a Huffington Post report just a few months ago:

One in five houses sold in the Vancouver real estate market this year went for more than $1 million, according to data from the Canadian Real Estate Association.

CREA’s data show the percentage of homes sold above the million-dollar mark has doubles since 2009. The same is true for Toronto, where more than 5 per cent of homes sold this year went for more than $1 million. That’s double the percentage in 2009.

None of this is surprising for those who understand the correlation between asset bubbles and cheap credit; a keystone of the Austrian school. Carney’s only real success has been fighting a deflating bubble by inflating another. The one trick pony has many fooled just as Alan Greenspan had the U.S. putting him on a pedestal in his heyday. Carney, like all central bankers, has only resorted to what he knows best: papering over debts in hopes of avoiding the unavoidable market correction. Austrian minded investors such as Mike Shedlock are predicting that Canada’s housing bubble bust will even be worse than what the U.S. experienced.

While Canada has escaped the financial crisis relatively unscathed (as of now) compared to the U.S. and Europe, its robust economic growth prior to 2008 is a wonderful refutation of orthodox Keynesianism. In 1995, the country was experiencing incredibly slow economic growth and a staggering public debt. The debt-to-GDP ratio peaked at 68.4% and unemployment was around 8.5%. The finance minister at the time even admitted “we are in debt up to our eyeballs.” Instead of further deficit spending and currency debasement to reduce unemployment, Canada took the opposite approach by cutting spending, laying off public sector workers, and allowing its currency to appreciate relative to the dollar. From John Stossel:

Canada fired government workers, but unemployment didn’t increase. In fact, it fell from 12 percent to 6 percent. Canadian unemployment is still well below ours. And the Canadian dollar rose from just 72 American cents to $1.02 today.

Canada also raised some taxes. But the spending cuts were much bigger, six to one: agriculture was cut 22 percent; fisheries, 27 percent; natural resources, almost 50 percent.

See the results for yourself:

Canada’s growth prior to the financial crisis can be attributed to a great reduction in government expenditures and hence, a relief on the private sector to keep much more of its income. Such a policy is blasphemy to Keynesians who regard deficit spending as the ultimate cure for any economic hiccups irrespective of historical evidence. It should also be pointed out that Canada’s foray into stimulus at the onset of the crisis was negligible in size compared to that of the U.S. or China and was much more of a political show than a genuine effort to squander more funds from the private market.

While Carney is lucky to be presiding over a seemingly successful tenure as the head of Bank of Canada, it won’t last forever. Canada’s housing bubble will pop and take his reputation down with it.

This time isn’t different. It will be yet another vindication for the Austrian school which holds that no amount of money printing or interest rate manipulation will ever pave the way for sustained growth. Cheap money is only a languishing band aid that eventually falls apart to once again reveal the cracks of a monetary system addicted to the drug which fuels its own destruction.

SOPA: Who Is To Blame?

2012-01-18T16:24:00.001-08:00

LvMIC:

If you had the pleasure of visiting internet giants such as Google or Wikipedia today, you may have noticed something amiss on their respective homepages. In what has to be the largest internet protest in history, “blackout” symbolism is being used en mass to garner attention for an issue that quite literally threatens the free flow of information on the web as we know it. Even to this author’s surprise, the Stop Online Piracy Act protest has worked; or has at least for the time being.

The Stop Online Privacy Act is of course the controversial bill currently being discussed by our glorious and endowed public leaders in the U.S. House of Representatives. In short the bill:

aims to crack down on copyright infringement by restricting access to sites that host or facilitate the trading of pirated content.
SOPA’s main targets are “rogue” overseas sites like torrent hub The Pirate Bay, which are a trove for illegal downloads. Go to the The Pirate Bay, type in any current hit movie or TV show like “Glee,” and you’ll see links to download full seasons and recent episodes for free.
Content creators have battled against piracy for years — remember Napster? — but it’s hard for U.S. companies to take action against foreign sites. The Pirate Bay’s servers are physically located in Sweden. So SOPA’s goal is to cut off pirate sites’ oxygen by requiring U.S. search engines, advertising networks and other providers to withhold their services.
That means sites like Google wouldn’t show flagged sites in their search results, and payment processors like eBay’s PayPal couldn’t transmit funds to them.

This places a huge burden on large internet companies such as search engines as they are now forced to police themselves for what is essentially a non-crime. It’s the equivalent of fining or imprisoning someone who gives a good recommendation on where to score hard drugs; irregardless of your feelings on whether drugs should be fully legal or intellectual property should be bestowed with the same protections of tangible, physically scarce property.

And like all governmental power grabs, SOPA is financed and supported by big business looking to utilize the coercive apparatus of the state to do its bidding. In this case, major media companies and groups such as Time Warner and the Motion Picture Association of America are throwing their weight behind the measure. But as any student of revisionist history realizes, this is a predictable course of events when considering the conniving dynamics and mutual relationship between wealthy special interests and government power centers. One look at the events leading to the inception of the Federal Reserve or America’s unnecessary foray into global conflict reveals as much. Like Hayek said, “socialism has never and nowhere been at first a working class movement.”

While the movie, record, and television industry deserve much condemnation for their colluding with the den of thieves, also known as Washington D.C., the finger of blame isn’t squarely on them. For it is the natural tendency of leviathan to grow in leaps and bounds as it inserts its parasitic tentacles further into the reaches of private life and civil society. It is those who give credence to the institution known as the state to which blame for acts such as SOPA reside. The pamphleteer who rallies on the Capital steps for such vices as public housing, universal healthcare, and food stamps paves the way for SOPA. The editorialist who pens heart wrenching pleas for increased tax rates or a bigger public education budgets is guilty of clearing the path toward serfdom.

The state lives and grows much like weeds in an unkempt garden. It is only the gardener who values his cherished plot of life that remains ever vigilant to ward off intruding sprouts. And like the ever alert gardener, it is the job of those classical liberals or anarcho-capitalists to remain steadfast in their belief of a very limited role of the state or support for its abolition all together. As long as men remain fallible, public office will be a tempting outlet to wield power. It is up to those who place liberty, a strict protection from coercion, and the freedom of man to do as he pleases without infringing on the right of his fellow man as their highest ideals to stay vigilant and not give into temptation of using the state further ends outside these. Prosperity breeds from these ideas. General destitution comes in their absence.

SOPA is a byproduct of the negligence paid in part by a public that seeks to use the state as a means to transfer themselves the wealth or liberty of another. Blame for the act’s consideration rests firmly upon their shoulders.

Eugene Robinson and the Luddites

2012-01-17T16:23:00.000-08:00

LvMIC (also a draft for the American Thinker):

Few syndicated columnists abrade this author much like Eugene Robinson of the Washington Post. Despite his plethora of literary honors including a Pulitzer Prize and twice weekly column in one of the nation’s largest newspapers, Mr. Robinson oft-displays an elementary view on the workings of a market economy. Robinson, like many of his less esteemed peers in the commentariat, sees the world as a perpetual power struggle between the haves and have-nots. This view, which dominated and clouded the thinking of Karl Marx, disallows Robinson from seeing true capitalism for what it really is: that is a system of mutual and remunerative transactions by willing participants.

Case in point- Mr. Robinson’s latest WashPo column.

Presidential front runner Mitt Romney is currently receiving a large amount of flack from his opponents on his role of heading the private equity firm Bain Capital. Bain, like any firm acting on behalf of its investors, sought to reorganize those companies which it purchased and set about revitalizing. This included wage cutting, lay offs, and disposing of withering asset weight.

Robinson pounces on this clear demonstration of evil capitalism and writes:

But as for heartlessness, well, it comes with the turf, right? Bain was just serving as an instrument of “creative destruction,” and if workers lost their jobs, if they had to raid their children’s college funds to pay their mortgages, if perhaps that money ran out and they ended up losing their homes, in the long run they’ll still be better off. Or the country will be better off. Or something.

The world will never be one of abundance no matter what those infatuated with governmental interference give credence to. Scarcity in means and capital necessitate the prudent use of resources. Nobody, including workers, investors, or top management, benefits when the company in which they share a vested interest hemorrhages money. Businesses don’t exist to provide employment opportunities; jobs are only a happy byproduct of entrepreneurs looking to enrich themselves by complementing consumer demand.

But to the horror of radical free-market ideologues, the myth of no-fault capitalism is under scrutiny.
No one is arguing that investors who risk their capital in a company should not be able to reap rewards. What the ideologues ignore, however, is that workers also have “capital” at risk — in the form of mind and muscle, creativity, loyalty, years of service. Why is this investment so casually dismissed?

By lamenting over the unemployed, Mr. Robinson spins the private-equity business as one of callous disregard for the human condition. Those who experience short term unsettlement from a dynamic market process are the hapless souls; those who execute layoffs are of another being lacking in any recognizable human traits. Or so goes the narrative. Like the language which pervaded the Progressive movement of the early 20^th century, battle lines must be drawn to separate the wicked image of capitalism from a system of social cooperation conceived by purposeful men. The former is spread through universities and public classrooms. The latter is relegated for use by radicals.

Robinson labels the adherence to free markets as an unsubstantiated belief in “no fault capitalism.” This assertion presumes that champions of capitalism ignorantly shrug off the notion that displacement is a consequence of the market. But it is really this assertion which is misguided. Taste and preferences change as man is not the cog in the machine societal engineers wishes he be. This means some services and goods fall out of favor. Adjustments in business practices are required before income losses exacerbate and overwhelm any possibility of salvaging a floundering enterprise.

Interference in this process not only introduces coercion into a once peaceful development, it is also distortionary in the economization of resources. Market corrections are just that- corrections that must occur for new equilibriums between marginal supply and demand to be met.

Mr. Robinson may not realize it, but his demonization of capitalism is reminiscent of the Luddite movement which sought to limit industrialization by destroying mechanized looms in 19^th century England. The idea of decrying or putting a limit on creative destruction, though palatable from a populist stance, lacks reason from a historical perspective. In the film Other People’s Money, Danny Devito plays the character of “Larry the Liquidator” who, like Mitt Romney, has the reputation of a corporate raider. In a speech to the shareholders of a company he looks to take over and downsize to profitability, Devito declares:

You know, at one time there must have been dozens of companies making buggy whips. And I’ll bet the last company around was the one that made the best ***damned buggy whip you ever saw. Now how would you have liked to have been a stockholder in that company? You invested in a business and this business is dead. Let’s have the intelligence…let’s have the decency to sign the death certificate, collect the insurance and invest in something with a future!

No doubt Robinson would be issuing the same complaint on behalf of buggy whip producers if he were alive just a few hundred years ago.

The famed Pulitzer winner ends up falling back on the false gospel of the 1980s being a time of wild west deregulation. In spite of the dramatic increase in the size, scope, and spending levels of the federal government in the past thirty years, Robinson remains convinced that the country is still suffering from capitalism run amuck. He is blind to the damage wrought by government intervention and accumulation of authority which provide the catalyst for seeking political favors, crony capitalism, and staggering income mobility.

Robinson is still correct in one contention; capitalism doesn’t have a heart. That’s because capitalism isn’t an entity but a term to describe men, possessing hearts, who engage in enriching trade and production. If Robinson and his like-minded peers fail to understand the market process, what hope do they have offering suggestions in the first place?
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To watch the excellent Danny Devito speech, see here:

Mercantilism and Ontario’s Wine Industry

2012-01-16T19:04:00.000-08:00

LvMIC:

The policies of mercantilism that harken back to the days of the 17th century are alive and well in modern day Ontario. But in this case, the industry in favor of the so-presumed enlightened public officials is not one normally considered of great need or “public necessity.” It’s one of simple recreational enjoyment known as the wine industry. Via National Post:

In Ontario’s wine industry, the grapes have all the gravitas. It took John Rufa three decades to grow his passion for fruit wine from a basement-dwelling hobby to a thriving small business producing more than 20,000 litres of 100% Ontario-made product each year.Now that the retired Toronto public school teacher has hit the limits of foot traffic into his winery in Buckhorn, Ont., he has received an unofficial message from the province: This is as far as you go.
“They limit our access to markets, they stifle it, they completely suffocate it,” says the founder of Kawartha Country Wines.
The “they” he is referring to is the Liquor Control Board of Ontario, which monopolizes all alcohol sales in the province, and the Vintners Quality Alliance of Ontario (VQA), which certifies certain wines as “made-in-Ontario”; a distinction that comes with major economic privileges.
It is because of them, he says, that he must offer a 10% discount to any bar or restaurant willing to buy his wine and give 58% of every LCBO sale – which includes all direct commercial sales from his own store – to the government.

It is laws such as the 1999 VQA Act that allow VQA-member wineries to keep the cash from their sales to bars, restaurants and LCBO locations and force non-VQA members to pay.

To qualify for the VQA, wineries must use only grapes grown on the Niagara Peninsula, Prince Edward County, the north shore of Lake Erie or Pelee Island. Non-grape wines don’t qualify and in addition to giving up the majority of the revenue they generate outside their own vineyards, those who fail to qualify for VQA status cannot put “made in Ontario” on their labels.

What better way to gain a competitive edge than lobbying for governmental privilege over outproducing and outwitting your competitors? Government power centers, rather than acting in the “public good” (a dubious term in itself) which they are often formed under the guise of, are the perfect tool for intervening in the free transactions of individuals. As Mises showed, such policies, though beneficial for those in political favor, are always strikes against the overall welfare of an affected society:

Restriction of production means that the government either forbids or makes more difficult or more expensive the production, transportation, or distribution of definitive articles, or the application of definitive modes production, transportation, or distribution. The authority thus eliminates some of the means available for satisfaction of human wants. The effect of its interference is that people are prevented from using their knowledge and abilities, their labor, and their material means of production in the way in which they would earn the highest returns and satisfy their needs as much as possible. Such interference makes people poorer and less satisfied.

There is no doubt that the policies of the Liquor Control Board of Ontario fall under Mises’ apt summation. By privileging one group of wine producers over others in terms paying taxes, free competition is stifled. As the article points out, the seal of approval from the Vintners Quality Alliance of Ontario (VQA) brings “major economic privileges.” Rather than relying on the true indicator of economic superiority, that is customer satisfaction, aspiring wine producers must direct their efforts and resources toward appeasing those who are bestowed with a governmental monopoly and have little stake in customer vindication.

The simple question must be asked: what legitimate role does government have in the wine industry? The obvious answer to the rational observer is none. Its involvement is based on placing a coercive barrier on aspiring entrepreneurs to enrich current producers. Hillary Dawson, president of the Wine Council of Ontario, claims that the VQA “is important enough and has driven value enough that we don’t want to dilute it.”

But who, in actuality, determines value in market economy? If a wine is judged as inferior to similar brands, is it not the consumer and wiling purchaser who holds final say over that which he chooses to trade his income for? Thoughts and tastes are unique to individuals. Certainly councils, acting as rating agencies, can develop in a free economy to offer specialized recommendations on specific products. Like producers, these agencies must develop a reputation among its audience. Monopolistic grants of franchise to these types of agencies distorts the market process by mandating that public officials and council members are above the distinction of rendering their position of authority from willing market participants.

As long as such a policy remains in effect, the people of Ontario are limited in choice of wine and therefore limited in their freedom to engage in mutual transactions to improve their current lot. Impoverishment such as this is invariably the result of governmental economic interference.

Japan's Debt Finally Catching Up to It?

2012-01-15T16:01:00.000-08:00

LvMIC:

There is a fatal flaw that permeates every conceivable scheme of government enterprise and ineluctably prevents it from rational pricing and efficient allocation of resources. Because of this flaw, government enterprise can neverbe operated on a “business” basis, no matter what the government’s intentions.

What is this fatal flaw? It is the fact that government can obtain virtually unlimited resources by means of its coercive tax power.

—Murray Rothbard writing in Power and Market

A few weeks ago, economist attack dog Paul Krugman once again declared government debt, unlike that of private parties, is irrelevant because “we owe it to ourselves.” Well it looks like the citizens of Japan are about to pay back some of that great debt to themselves. Via Bloomberg:

Prime Minister Yoshihiko Noda said containing Japan’s public debt load, the world’s largest, is critical after Standard & Poor’s downgraded credit ratings on France, Austria and seven other European nations.

Europe’s fiscal situation “isn’t a house burning on the other side of the river,” Noda said on TV Tokyo Holdings Corp.’s program on Jan. 14. “We must have a great sense of crisis.”

Noda reshuffled his cabinet last week, aiming to win support for doubling Japan’s 5 percent national sales tax by 2015 to trim the soaring debt. S&P said in November Noda’s administration hadn’t made progress in tackling the public debt burden, an indication the credit-rating company may be preparing to lower the nation’s sovereign grade.

It’s all fun and games till the bill shows up. For years, Krugman and his Keynesian cohorts have given ideological cover for politicians to play big spender. With Japan’s, quite frankly, unbelievable debt to GDP ratio reaching epic heights; the Prime Minister is looking to take proactive steps to outwit potential bond vigilantes. Take a look at the projected increase in the country’s debt to GDP ratio:

For almost two decades, Japan went on a public spending spree to get itself out of a sharp economic downturn and prop up its banking sector. This accomplished little however when nominally comparing its stock market recently to that of twenty years ago:

It should be emphasized that despite conventional wisdom, Japan’s so called “Lost Decade” was not so lost. Even so, the country’s spending is finally catching up with it as taxpayers may be looted to pay off bond holders.

Keynesians have a habit of emphasizing aggregation when trying to explain economic phenomena. The rational behind Krugman’s “we owe it to ourselves” claim is that while the government is indebted, that debt, which is often in the form of bonds and treasuries, is held by the same public. So when debt is passed down between generations, so too are those same bonds and treasuries. Put simply, debt is passed down but so are financial assets; so no net loss on the aggregate. As Austrian economist and overall funny guy Bob Murphy recently showed though, that is not always the case.

Even holding true that there is no net loss on the aggregate in regard to public debt, the fallacy of believing no harm done lies in relying on such all-encompassing measures. Just because government debt is owed in large part to domestic holders (Krugman admits the “we owe it to ourselves” case doesn’t apply to foreigners) doesn’t mean that everyone benefits. If John Q. Public owns no government bonds and taxes are raised to pay off debt holders, clearly he does not benefit. He is forced to partially pay for the previous borrowing.

Purchasing government debt is a voluntary action where the investors believe themselves to be better off through purchase. But taxes aren’t voluntary. Whenever the day of reckoning comes, someone must pay the piper. Government owns no resources, only what politicians and bureaucrats take from the public to distribute accordingly. The people of Japan should be wary of their skyrocketing public debt and whatever attempts public officials take to keep the Ponzi Scheme intact.

The Libertarian Case Against the Civil Rights Act of 1964

2012-01-14T19:12:00.001-08:00

LvMIC:

With Martin Luther King Jr. day just around the corner in the U.S. (1/16/2012), now is a good time to bring up what is often construed as racism by strict libertarians who hold property rights as sacrosanct. MLK is widely acknowledged to have played a key role in promoting the passage of the Civil Rights Act of 1964 by leading massive protest marches. This includes the famous “Great March on Washington” and even more notable “I Have a Dream” speech.

The Civil Rights Act of 1964, regarded as controversial at the time of passing, desegregated much of the federal bureaucracy and public accommodations at the state and municipal level in addition to eliminating poll taxes and literacy tests used to disenfranchise minorities in the southern United States. None of these stipulations are controversial from a libertarian perspective per say. Public facilities, funded by money acquired through forceful acquisition, should be open to those who have no other choice but to fund them. The existence of these public institutions is what tends to irk libertarians.

The problematic aspects of the Civil Rights Act come down to Title II and Title VII which outlaw discriminatory hiring and selling practices by private employers. Such an egalitarian mandate, admittedly, sounds wonderful from a social engineering perspective. If your idea of what constitutes a just society is one where everyone treats all races and genders equally, how better to accomplish such a utopia then literally forcing people to behave accordingly with threat of monetary penalties and imprisonment?

From a liberty perspective however, such a policy is a direct affront on basic property rights.

Property rights, despite the opposition from those on the radical left side of the political spectrum, are a fundamental and necessary arrangement for societal order, conflict mediation, and the efficient use of scarce resources. The means of economization are best achieved when resources are firmly in the ownership of an individual or group of individuals. As economist Ludwig von Mises declared:

If history could prove and teach us anything, it would be that private ownership of the means of production is a necessary requisite of civilization and material well-being. . . . Only nations committed to the principle of private property have risen above penury and produced science, art and literature.”

While not horrendously damaging economically, the Civil Rights Act is a violation of a principle responsible for the great standard of living many of us enjoy today. Forcing an individual to serve another is no better than the sanctioning of slavery. Whenever someone decides to open a business, they invest their time, capital, and various resources into what they see as an end-fulfilling endeavor. When a storefront is acquired, such is necessarily private property whether it be in the ownership of a buyer or financier. There is absolutely no difference between a business or place of residence. And just like how I have the right to exercise my preference in allowing certain individuals into my home, this extends to whatever property I maintain control of.

Therefore, it is concluded that Title II and Title VII are in direct violation of basic property rights. Mandating that private business owners sell their goods and services to certain individuals is no better than putting a gun to their head and enforcing the practice. The libertarian opposition to the Act has nothing at all to do with racism; implying so demonstrates a deep ignorance on the views of those who value property rights.

To come full circle on the case against Title II & VII of the Civil Rights Act, the irrationality of restricting one’s customer base to certain genders or races must be pointed out. Business owners are in pursuit of a profit; this provides an incentive to acquire as much market share as possible. Greedy capitalist pigs are greedy capitalist pigs; are they not? Even if a given community has a number of businesses that practice discrimination in selling their wares, the opportunity exists for an entrepreneur to open a business and reject this trend to steal away market share.

Overall, the libertarian opposition to certain portions of the Civil Rights Act is based on private property rights enforcement only. Whether a business owner refuses to sell to someone based on racial prejudices, hatred of certain hair colors, or disapproval of bone structure is irrelevant. The ability to reject an individual from one’s property is a fundamental aspect of private property. Begin chipping away at this crucial axiom of liberty and there is no telling how far down the road to serfdom a society will go.