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Don’t Say We Weren’t Warned

August 30, 2010 Leave a comment

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

-Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802)

This is why they have to convince you that the founders were all just racist jerks….

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“Japan Battles Soaring Yen”

August 30, 2010 Leave a comment

That was the headline on today’s Wall Street Journal.  This is a preview of what’s to come here.  By the way, the fact that Japan is a little farther down this road than we are is propping our currency up for the time being but this raises other disturbing issues.  For instance, the way our global monetary system works causes every country to want to devalue their currency relative to other countries.

Any effort by Japan to change the direction of the yen through direct intervention in foreign-exchange markets would be unlikely to succeed without the support of the U.S. and Europe. But neither appears likely to lend a hand—something that could increase tensions among three of the world’s largest economies.

Washington and the EU have both welcomed gradual declines in the value of the dollar and the euro, which have helped make their exports more competitive. The Obama administration, while it formally endorses a strong dollar, hasn’t objected as the currency has weakened.

In fact, the U.S. needs a weaker dollar if it is to come close to meeting President Barack Obama’s goal of doubling exports. Fred Bergsten, director of the Peterson Institute for International Economics in Washington, said U.S. policy is to “welcome the gradual decline of the dollar, but not be seen as pushing the dollar down.”

This is a sort of prisoner’s dilemma.  And everyone knows that the only way to resolve a prisoner’s dilemma is to form some kind of governing body to impose the correct behavior on the players (it’s not necessarily the only way but it’s what they will do).  Coincidentally, at the top of page two today was a story titled “Inching Toward World-Wide Accord on Bank Rules.”

Krugman to Keynes: Mission Accomplished

August 28, 2010 1 comment

For those of you who haven’t read my post about Keynes’s Marxist tendencies here is a reminder from the General Theory.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.  Interest to-day rewards no genuine sacrifice, any more than does the rent of land.  The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce.  But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.  An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run except in the event of the individual propensity to consume proving to be of such a character that net saving in the conditions of full employment comes to an end before capital has become sufficiently abundant.  But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work.  And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change.  It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

This is Keynes opining that there is no real reason for capital to be scarce even though we have observed that it has carried a positive price at virtually all points in history.  Because of this, he is advocating that the state should take actions to make capital not scarce because this will eliminate the oppressive rentier class (bourgeoisie).  And he says that this will happen gradually (progressively) through peaceful tweaking of the system.  A thing that isn’t scarce should have a price of zero.  This means that if capital is not scarce, the interest rate should be zero.  What they have done in an attempt to make capital not scarce is essentially to seize the power to set its price (the interest rate) and set it equal to zero.  Genius huh?

Now here is Krugman declaring “if you take standard economic forecasts seriously, they point to near-zero short-term rates for a very long time.”

Fiat Money

August 26, 2010 Leave a comment

It is common among “real money” types like myself to claim that our currency is not backed by anything.  This is in fact incorrect.  Our currency actually is backed by real assets.  The confusion seems to stem from a misconception about the mechanism by which money is created.  People seem to imagine that the government or the Fed or someone just prints money and releases it into the economy in some sort of Friedman-style helicopter drop.  This is not just a misperception among laymen, it penetrates deep into economic circles and is embodied in many macro models including the Keynesian IS/LM model. 

If the above were true, then it would be true that money is not backed by anything.  It is, I think quite uncertain whether or not a system like this would be sustainable and to my knowledge we’ve never observed one.  What we actually observe is money being printed and loaned out in exchange for a promise to pay later.  The promise to pay later is backed by real assets – the assets of the borrower.  If they can’t pay back the dollars the lender takes their real assets.  In this sense dollars are convertible into the real assets which are put up as collateral for the loans that create the dollars.

In the old days, a dollar was backed by gold.  That meant you could take a dollar to the bank and get a certain fixed amount of gold in exchange for it.  The dollar represented a debt from the bank to you.  Our current system is fundamentally similar except that a dollar represents a debt of real assets from you to the bank.  Everyone who has debt has the ability to escape that debt by acquiring dollars.  In this way the dollars are convertible into real assets but instead of people being contractually allowed to buy a certain amount of gold back from the bank, they are contractually allowed to buy a certain amount of their own assets (house, car, boat, business, etc.) back from the bank. 

This debt is what maintains the value of the currency.  As long as there are always people with debts to pay off, they will always be willing to trade some real assets for dollars because they will be able to use those dollars to pay off their debts (and keep their real assets).  The value of the dollar, to some extent (there are certainly other factors involved) depends on how many dollars are out there compared to how much debt there is. 

You may recall that the process of lending money at a positive nominal interest rate means that under normal conditions there is always more debt than dollars in circulations.  New money has to keep entering the system to retire old debts and this new money creates even larger debts to be paid in the future.  The mechanism to keep money flowing into the economy in larger and larger quantities is to keep lowering interest rates.  When rates hit zero, they can’t get enough money into the economy for everyone to pay off all of their debts.  At this point competition for the existing dollars becomes more fierce and prices fall. 

Now it’s time to consider how this situation might correct itself.  To do this I must elaborate on what I meant by “normal conditions” above.  By this I mean conditions of no (or low) default.  This is because, when people default on their loans it causes money to leak into the economy in the sense that instead of that money being pulled back out, real assets get absorbed.  It may be the case that these assets are then sold for some amount of money which gets pulled back out in that way but this amount must be less than what was actually owed or else the debtor wouldn’t have defaulted in the first place.  So in this way debts get reduced by more than the reduction in the money supply.  Every time someone defaults on a loan, some pressure gets relieved — the debt to dollars ratio gets reduced. 

The phenomenon of default and falling prices is the economy trying to relieve the pressure that builds up due to the creation of money as debt.  If we let prices fall and people default, eventually we would get to a place where things would stabilize, the people who survived would have some money and prices would be low, people would start borrowing again, prices would start to rise and we would begin blowing up another bubble that would bring “prosperity” for anther thirty years or so before bursting again. 

Of course this process would be highly destructive, and many people would be hurt (and a few banks would make fortunes…).  So there is another way to get money out there.  You can have the government borrow it and spend it.  It doesn’t matter what they spend it on, it just has to get out there.  This will prop up prices for the time being.  The problem is that this still creates debt, it just creates collective debt.  If the government could really just print money and spend it, it would actually relieve pressure but they don’t .  They borrow this money as well.  So you just end up putting the problem off for a while and in the process the government gets bigger and bigger.  They own more land, have more employees, and control more of the real wealth in the economy because they had to buy it to prop up prices.  Then eventually all that government debt comes due and the bill falls upon whoever was lucky enough to survive until that point with any wealth. 

The problem cited by bankers when creating the Fed was bank runs.  In other words, they created too much money for the amount of assets they had to back them and this eventually caused them to have to default.  All their solution did was turn the tables.  It created a system where there is too little money in circulation to buy back all of the assets backing up that money.  This means that when it eventually collapses, it’s not them that default, it’s you.

Privatize It: Roads

August 26, 2010 5 comments

This post is sort of directed to my best customer who has asked about this but it’s a question that libertarians get a lot: What about roads? People seem to take it for granted that only government can provide roads but this is not the case.  John Stossel has compiled some evidence to that effect. 

Part 1

Part 2

Part 3

Small Business Bill

August 25, 2010 Leave a comment

Democrats are here to save you small business.  You didn’t realize they were on your side did you.  But don’t worry, they’ve got a new bill  with a bunch of goodies in it for you including the following.

In addition to the lending program, it would allow certain small businesses to apply tax credits to the previous five years, instead of the current one year, and let investors avoid capital gains taxes on certain small business stocks.The legislation also would increase the limits on a variety of Small Business Administration loans.

So basically they are going to give money to “certain small businesses” probably for engaging in certain behavior of which they approve.  We need to wake up to the reality of the 16th amendment.  They can use the tax code to control anything they want.  They are creating a world where only businesses they like will survive, just like they have done with the state governments.  I will leave you with a quote from Keynes.

Thus we might aim in practice (there being nothing in this which is unattainable)… at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward.

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Discrimination II

August 25, 2010 1 comment

Today the discrimination story is a Muslim worker at Disneyland who is demanding the “right” to wear a hijab even though it’s against their dress code.  Once again it’s the same story.  Disney is engaged in actual discrimination.  That is, they are looking at some part of reality and making a judgement about it.  They think it’s better for their business to not let people wear these garments.  There seems to be no evidence that Disney secretly hates Muslims and just wants to dishonor them by making them change their clothes.  You should have the right to wear whatever you want but exercising your rights has real consequences.  You don’t have the right to do whatever you want and not take any responsibility for the consequences making everyone else in society accommodate you to whatever degree you think is fair.  We can argue all we want about whether this policy is in their interest or not, but it’s not our decision to make.  If we keep trying to make every decision collectively,

I kind of hope I get bored with this because there’s a story like this practically every day.  In the meantime, there’s a lot of other stuff to talk about today.

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