The present political system is clearly insane. It suffers from schizophrenia. Around the world, almost no one trusts the politicians, yet almost everyone votes for incumbent politicians who promise to reform the government.

Voters now suspect (correctly) that all Western governments are headed for bankruptcy because of the pension programs and government-funded medicine, yet these two programs are politically untouchable. Voters demand them.

For four decades, soft-core critics of the pension/Medicare systems have come to voters with this announcement: “The two systems can be reformed, but we must act now. If we delay, they will bankrupt the government.” Yet the systems are never reformed.

Then, a decade later, the next group of optimistic reformers comes forward with this same promise: “The systems can be reformed if we just act now.” Nobody believes them. Nobody should. If the programs really can be reformed “if we act now,” then the previous warnings were mere scaremongering. There really was no hurry. So, Congress asks rhetorically: “Why should we believe that we need to hurry now?” Result: the systems never get reformed. Congress kicks the can.

The Great Default

The federal government really is headed for default. The numbers don’t lie. This fact produces pessimism in some circles. People who look at the numbers conclude, accurately, that the federal government will not muddle through this crisis. All over the world, national governments will not muddle through. They will no longer be able to kick the can.

I have good news and bad news. The bad news first. If you are dependent on the government for your old age security, you have only one hope: an early death. The good news: when Washington’s checks bounce, the bureaucrats will have to go into another line of work. Millions of them. All over the world.

I am now going to present a scenario that is not widely shared. The process that undergirds it is not widely recognized. Yet this process is relentless.

If I am correct about it, judgment day is coming. Not the final judgment. A liberating judgment.

There are self-proclaimed optimists who say Medicare will muddle through. Similarly, there are self-proclaimed optimists who say the present Keynesian system will muddle through. These people are in fact pessimists. They argue that moral evil and economic irrationality can be made to work. That is a pessimistic message. Fortunately, they are wrong.

People will muddle through. The Keynesian system won’t. Neither will the finances of the people who have bet the farm on the Keynesian system’s ability to muddle through.

The Law of Empires

Empires disintegrate. This is a social law. There are no exceptions.

The first well-known social theorist to articulate this law was the prophet Daniel. He announced it to King Nebuchadnezzar. You can read his analysis in Daniel 2. Verses 44 and 45 are the key to understanding the law of empires.

The Roman Empire is the model. But there is a serious problem here. There are at least 210 theories of why it fell. There are so many that even my 1976 Ron Paul office colleague Bruce Bartlett gets credit for one of them – on Wikipedia, no less. He has made the big time! In any case, Rome did not collapse. It wasted away over several centuries, wasting the treasure of its citizens along with it.

I suppose there were highly educated people who came to the voters in the late Roman republic and said something like this: “Unless decisive action is taken now, Rome will go bankrupt.” If so, they were right. But it took a lot longer than they thought.

These days, it does not take nearly so long.

An empire grows at first almost unconsciously. No one goes to the powers that be and says, “Hey! Why don’t we create an empire?” It is more like the person who says this: “I’m not greedy. All I want is to control the land contiguous to mine.”

In military affairs, there are economies of scale. An army of warriors makes conquest cost-effective. There are also taxation advantages. An army of tax collectors makes tax collection cost-effective. “Hand over your money” is more effective. Pretty soon, you’ve got an empire.

But there is a law of bureaucracy that applies to empire. At some point, it costs more to administer the bureaucracy than the bureaucracy can generate through coercion. Then the empire begins to crack. It cannot enforce its claims.

So, the growth of empire has economics at its center: economies of scale. The fall of empire also has economics at its center: economies of scale.

I think this process is an application of the law of increasing returns. In the initial phase of the process, adding more of one factor increases total output. But, as more of it is added, another law takes over: the law of decreasing returns.

Example: water and land. Add some water to a desert, and you can grow more food. Add more water, and you can grow a lot more food. There is an accelerating rate of returns. The joint output is of greater value than the cost of adding water. But if you keep adding water, you will get a swamp. The law of decelerating returns takes over. Add more water, and the land is underwater. You might as well have a desert.

This law applies to power. Add power, and you generate more income. But if you keep adding power, expenses of the bureaucracy will begin to eat up revenues. Resistance will also increase: internal and external. The system either implodes or withers away.

With only one exception in history – the Soviet Union in 1991 – empires have not gone out of business without bloodshed.

In the case of the Soviet Union, the senior politicians privatized the whole system in December 1991. They handed over the assets to what immediately became the ultimate system of crony capitalism. They divvied up the Communist Party’s money and deposited it in individual Swiss bank accounts. The suicide of the USSR was “Vladimir Lenin meets David Copperfield.” Now you see it; now you don’t. In the history of Marxism, no event better illustrates Marx’s principle of the cash nexus. It seduced Lenin’s vanguard of the proletariat.

Notice the pattern of empire. It begins slowly, building over centuries: the Roman Empire, the Russian Empire, the French Empire. Then the empire either erodes or else it is captured by revolutionaries, as was the case in France (1789-94) and Russia (1917). But this only delays the reversal. It does not overcome it.

The Modern Nation-State

Economies of scale shaped the development of the modern nation-state. In 1450, the governments of Western Europe were small. They controlled little territory. They were remnants of the medieval world, which had been far more decentralized.

By 1550, this had begun to change. The beginnings of the modern nation-state were visible.

Tax revenues flowed into the centralizing kingships. Trade was growing. Revenues were increasing. Weaponry was advancing. All of this had been going on for half a millennium. But, like an exponential curve, the line began to move upward visibly around 1500.

Maritime empires grew: Spain, Portugal, England. They challenged each other on the seas. Then came the Netherlands and France. The fusion of naval power and trade monopolies lured nations into competition for trade zones. The idea of free trade was centuries away, except in the academic enclave of the school of Salamanca.

The law of increasing returns was evident in this process. It paid rulers to tax more and extend the jurisdiction of the nation-state at the expense of local governments internally and foreign governments externally. The benefits accrued mostly to the political hierarchy and its system of connected families.

Economies of scale drove the process. The division of labor favored centralization. Local units of civil government could not compete.

Let me give an example from the field of historiography. The historian of colonial America can write about lots of topics: immigration, technology, family structure, town planting, economic development, intellectual trends, and so forth. He writes about the issues of life that affected people’s daily lives. He cannot write about national politics until after May of 1754: the “battle” of Jumonville Glen.

The Battle of Jumonville Glen is unknown to all historians except specialists in colonial America. This is a pity, because that battle was the most important military event in the history of the modern world. It literally launched the modern world. It led to (1) the French & Indian War (Seven Years’ War), (2) the Stamp Act crisis, (3) the American Revolution, (4) the French Revolution, (5) Napoleon, (6) nationalism, (7) modern revolutionism, (8) Communism, (9) Fascism, and (10) the American Empire. It was started by Virginia militia Major George Washington, age 22.

Before the ratification of the U.S. Constitution, it is both possible and wise to write about America without tying the narrative to politics. After 1788, every textbook writer is drawn like a moth to the flame: Presidential elections. He cannot narrate the text without hinging everything on the outcome in the four-year system of national covenant renewal-ratification.

We are fast approaching a day of judgment. It has to do with economies of scale. It has to do with the law of decreasing returns.

The best account of this process is a book by Israeli military historian Martin van Creveld: The Rise and Decline of the State (Cambridge University Press, 1999). He traces the history of the Western nation-state from the late Renaissance until the late twentieth century. He argues that there will be a break-up of nation states and a return of decentralization. I have discussed this here.

Capitalist Production

Another manifestation of the economies of scale is the development of the factory system. In 1750, most production was home-based. Most people lived on farms. Most farms were close to self-sufficient.

Cities were few and far between. They were located on the coasts or along great waterways. They were based on trade. Perhaps 10% of the West’s population lived in cities.

This began to change around 1800 in Great Britain. It may have been in 1780. It may have been in 1820. But the economy began to change. No one has a plausible explanation for why it happened, but it changed the history of man’s lifestyle as nothing else ever has. The economy began to grow at 2% per annum, compounded.

This process soon spread to the United States. The world began to be overwhelmed by a wave of gadgets.

This process was driven by price competition. A few business owners got rich by serving the needs of the masses. The masses got richer. They got more productive.

The feature most hated by the older producers was capitalism’s relentless service of the poorer buying public. The division of labor is limited by the extent of the market, Adam Smith had correctly observed, and in order to use the newer, more specialized techniques of production, capitalists had to broaden their markets. The most efficient means of gaining access to new markets was price competition.

All of the British troops who marched off to India and the Far East in a quest for new markets in the day of England’s “glory” never matched the market-broadening effects of a 25% discount at home. The producer who could not match this discount steadily was forced out of the market, that is, was forced to give up control of scarce economic resources that could better be used to satisfy the demands of the public in the hands of more efficient producers.

How could poor, uneducated buyers compete against the entrenched wealth of the English landed aristocracy? How could their meager purchases compete against the wealthy man’s competition for the services of producers? How could some dust-covered miner hope to bid scarce economic resources away from the men of wealth? Simply because there were so many of them!

As capitalist techniques of production steadily increased the output of the laboring classes, the poor became slightly but steadily less poor. A few pennies here, a few yards of cloth there, multiplied a million times over: no aristocracy on earth was rich enough to withstand this relentless economic pressure of slightly less poor men, when so many of those men were being created by the labor markets of England.

As individuals they were poor, especially before 1840, but they were not so poor as they had been in 1780, and here was the new fact of life for producers using the older methods of production.

Men who could not afford fine wool suits could now afford a cheap cotton one, and very rapidly it became obvious to English entrepreneurs that it would pay more dividends to start producing hundreds of thousands of cotton garments than a few thousand high-priced wool or silk ones.

What served as the economic liberation of a whole class of people, anti-free market aristocrats saw as a form of bondage, the grinding servitude of the factory, with its time schedules, long hours, routinized production, and child labor. What they resolutely refused to see was what would have been the fate of these masses under the old system of production: famine and death. It was Ireland, not England and Scotland, that suffered the famine of 1848-50, and it was Ireland which had not seen the “plague” of factory production.

John Ruskin, the conservative literary critic of the mid-nineteenth century, summarized the case against capitalism. Ironically, his words were put on mass-produced cards and inserted into mass-produced picture frames for display on the walls of the highly popular Baskin-Robbins ice cream parlors (31 flavors): “There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man’s lawful prey.” I saw this in a store in 1973. I have not seen one lately. I never go into a Baskin-Robbins store. The chain is nearly invisible today.

Conservative social critics saw not only the hard conditions of the factory system – hard in comparison with the life of social criticism, but not in comparison with low productivity subsistence (or less than subsistence) farming – but they also saw the initial effects of mass-produced goods. They were cheap in price and cheap in quality – again, in comparison to the quality standards of the educated social critic.

Those who did appreciate the new clothes, better housing, and preferable working conditions seldom wrote tracts; they simply went to work and spent their money. Undoubtedly, there was a standardization of production. However, as the productivity of laborers increased, and as their wages increased, this standardization was left behind for those coming up – Irish immigrants, for example – and variety began to be an economic possibility.

This indicates the nature of capitalism’s powers of social transformation. At first, price competition expands the market. New groups gain access to goods not previously available to them, either because prices were too high before, or because the products did not even exist.

As participants in the production process, workers add to other people’s wealth. Producers are buyers; step by step, as output per unit of input increases, as a result of the specialization of production, the wealth of all the participants increases. The initial expansion of buying alternatives itself expands as productivity increases. Some producers may specialize in producing for this newly improved buying public; others may branch out and aim at the still excluded buyers – the next level down.

Henry Ford’s Model T – “available in any color, as long as you want black” – made the automobile available to the masses. But as everyone’s wealth increased as a result of capitalist methods of production-distribution (the two are basically the same process), large numbers of men wanted some other color.

Ford failed to recognize this phenomenon of modern capitalism, and his resistance to change – in this case an upgrading of quality and choice – led to the triumph of General Motors in the 1920s. GM offered more brands and more choices within these brands.

GM’s dominance did not last. The company went bankrupt in 2009. It took a government bailout to save it – and the defrauding of bond holders.

The factory is scaling down in the United States, even as it is getting gigantic in China. Smaller, computerized specialized steel factories have replaced the old steel factories. The old factories are empty. They cannot compete.

We live on the cusp of a new era of manufacturing: 3D production. We will have factories on our desks.

Mass production reduces costs. Production initially is centralized. The era of the factory replaces the era of homespun. The economies of scale take over. This is phase one: the law of increasing returns to centralization.

This does not last. The law of decelerating returns takes over at the factory. The era of the factory is replaced. The economies of scale favor local production. I write this on a $500 computer using a $50 word processing program.

When you think “economies of scale,” think “Post Office.”

Conclusion

I could apply this analysis to the history of urbanization: from villages to towns to huge cities to the suburbs. Urban historian Jack Lessinger has chronicled this in a series of books.

The economies of scale no longer favor centralization. They favor decentralization: in manufacturing, in education, in urban development, in finance, in politics, and even in military affairs. Non-state resistance movements hold the advantage today. So does the terrorist cell. If the urban West is ever threatened by weaponry, it is more likely to be from a home-brew biological weapon than from a nuclear device.

Small may not be beautiful, but it surely is efficient. You don’t see a virus. You can see a mushroom cloud.

For those of us who dread the centralization of anything, our boats have begun to come in.

No ship will come in. Its model is the Titanic.

Regards,

Gary North

The Looming Reversal of Centralization was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

But first, the crisis in Greece didn’t come to a head over night but it can’t be far away. Rival political parties have been unable to form a government. New elections are scheduled for the second week in June. The financial has definitely become political. The people have run out of patience with unsound money and the world built on it.

All that said, the Greeks managed to make a €430 million payment to hold-out creditors last night. Nearly 97% of Greek creditors agreed to the restructuring of the country’s debt in March. That wiped off over €100 billion in Greek debt and resulted in 70% losses for some of the bondholders who accepted the deal. Not all of them did.

Yesterday, the bondholders who didn’t accept the deal got paid in full. There is still about €6 billion worth of debt owed to creditors who refused to participate in the restructuring. You can imagine that the Greek decision to pay the holdouts would anger the creditors who agreed to the deal. They look like schmucks now. Schmucks.

But in the current scheme of things, €430 million is chump change. The real issue is whether the Greeks are going to default on €150 billion worth of government debt. If those bonds are owned by foreign creditors – let’s call them other European banks – then the Greek crisis becomes a European crisis. We’ll come back to this issue of “containment” shortly.

For the Greek people, the most alarming aspect of what’s going on is that their life savings are at serious risk of a massive, overnight, non-voluntary devaluation. There are a lot of words for the magical process of turning one thing into something else: alchemy, transmutation, and transubstantiation come to mind. But to the Greeks it’s going to look a lot like highway robbery.

You’ll go to bed one night with your life savings denominated in euros. You’ll wake up the next day with them denominated in drachma. And your euro savings will be automatically converted to drachma at an exchange rate not of your choosing. For example, your 1,000 euros will become 100 drachma…or even 10,000 drachma. The nominal amount won’t matter. What matters is that the devaluation strips you of 70% or 80% of your purchasing power.

Most people would avoid that kind of value destruction if they could. Maybe that explains why €700 million was withdrawn from Greek banks on Monday, according to remarks made by Greek President Karolos Papoulias and reported in the Wall Street Journal. The Journal reports that between €2 and €3 billion in deposits have been withdrawn from the Greek banking system each month for the past two years. January was a high point, with €5 billion.

A bank run by any other name would look as desperate. And who wouldn’t be desperate now?

Leaving the euro, devaluing the drachma, and defaulting on debt owed to foreign creditors are Greece’s best long-term economic survival strategy. But the unavoidable side-effect is to destroy the savings of the people, not to mention usher in a period of lower standards of living.

That won’t win you many votes. It may start a revolution.

And how do you prevent the Greek precedent from being imitated by the Spanish and the Italians? To be candid, we don’t think it matters much now. Greece can’t afford to stay in the euro. The Spanish and the Italians can’t afford to leave it.

The economies and banking systems of Spain and Italy are indispensable to Europe. If they leave the euro, there is no euro. The Greeks can leave, devalue, default and use a weaker currency to claw their way back to economic competitiveness. If the Spanish and Italians leave, they lose access to private capital, they lose access to the ECB and they take down Europe’s banking system. They can’t leave. More importantly, they can’t be allowed to leave.

This makes the task of the European Central Bank (ECB) much easier. It simply has to guarantee Greek debt owed to all non-Greek creditors. Or, it could simply buy that debt. This would solve the problem of anyone outside Greece taking losses on Greek debt.

This is what corporatism looks like, when the Big State and Big Finance become the Big Power in the economy. Losses cannot be tolerated. Any loss results in lower equity capital at a financial firm would require selling assets. Since everyone owns a piece of everyone else, and owes to everyone else, any major loss in one place results in losses everywhere.

Of course it’s absurd that Europe is moving toward this kind of “extreme socialism”. The people most responsible for the crisis are not accountable and the people who have saved get punished. The elite are enriched and everyone else is enslaved.

This is why the financial crisis could so quickly become a political and social crisis. When people don’t think they can get justice from the courts or the cops, and when they think that cheating is the only way to get ahead in a system, the political and financial order is on borrowed time. The clock is ticking.

Regards,

Dan Denning

The Daily Reckoning Australia

Why Greece Can’t Afford to Stay in the Euro was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The word “austerity,” beginning with the Greek government’s debt crisis two years ago, has been used by the financial media in one sense, and only one sense: reductions in spending by national governments. The word is not used with respect to the economy as a whole.

More than this: the word has been used to explain the contracting economies of Europe. The reductions in government spending are said to have caused the contracting economies. This explanation is based on textbook Keynesianism.

Keynesians call for increased government spending. This is the heart of Keynesianism. Keynesianism rests on a mantra: “Government spending overcomes recessions.” All else is peripheral: monetary inflation, graduated taxation, and free trade. These peripheral issues will always be sacrificed to the supreme economic premise: “Government spending overcomes recessions.”

This is where every analysis of Keynesianism should begin. Any economic doctrine, any economic policy, any proposed solution to the present crisis should be assessed in terms of the mantra. Anything that does not begin and end with the mantra is not Keynesianism. Anything that does, is.

It is a mark of the supreme triumph of any ideology when the self-professed critics of the ideology adopt both its conclusions and its rhetoric, and do so unknowingly. This means that the promoters of the ideology have set the terms of public discourse. It is very difficult to replace an ideology or worldview, once its promoters have established the terms of discourse.

It can be done, of course. But to do this, the promoters of a rival outlook must expose both the errors of the existing system and the implicit agreement of its supposed critics. This wins no friends among the hapless troops who think they are scoring significant victories by arguing against peripheral aspects of the enemy ideology, while accepting its central presuppositions and main policy prescriptions lock, stock, and barrel. They have been taken in hook, line, and sinker.

PHARAOH AND THE FROGS

A recent example of a well-meaning but conceptually confused anti-Keynesian was published in Forbes. It had a powerful headline: “Keynesianism Is the New Black Death.” It suggested that the great tragedy of Europe today is “austerity.”

As I have already said, the financial media universally define austerity as cuts in government spending. I have never seen the word used in any other way over the last two years. Any author who uses the word in any other way owes it to his readers to explain this new usage. The Forbes article offered no such distinction or alternative definition. I therefore take it at its word: austerity.

If austerity is the great evil, then the implication is inescapable: that which restores government spending and therefore overcomes austerity is positive.

This reminds me of the Pharaoh who decided not to let the Israelites journey for a week to sacrifice to God. Moses and Aaron then attempted to persuade him by way of a series of plagues. One of them was frogs. The land filled up with frogs. Everywhere anyone walked, he stepped on frogs.

The court magicians had to do something about this. They responded by a public display of the power of their magic that matched what Moses and Aaron could do. “And the magicians did so with their enchantments, and brought up frogs upon the land of Egypt” (Exodus 8:7).

Somehow, I imagine Pharaoh screaming at them: “No, no, you blockheads: not more frogs! Fewer frogs!” But the text does not record this.

The solution to the frogs of European recession is not increased government spending. Rather, it is the opposite: reduced government spending. In short, the solution is greater austerity.

AUSTRIANISM’S MANTRA

The Austrian economists also have a mantra: “Reduced taxation increases liberty.” Liberty is necessary for economic growth.

If a contemporary government cannot reduce taxes without going bankrupt, then it must cut spending if it chooses not to go bankrupt.

Europe’s national governments are all going bankrupt. Japan’s is, too. So is America’s. The solution is to cut taxes and cut spending even more.

“Not more government spending. Less government spending!”

“Not larger government deficits. Reduced government deficits!”

“Not higher taxes. Lower taxes!”

“Not more fiat money. Reduced fiat money!”

In short: “Let my people go!”

With this in mind, let us examine an article that argues that austerity is the great threat to Europe’s prosperity.

A DEATH SPIRAL?

The article begins with a survey of European politics. It points out that voters are tossing out politicians in nation after nation. Sarkozy was number eight over the last year. Why is this happening? Here is the proposed answer:

The voters of Spain, Greece, France, etc., understand that their governing elites have pushed their economies into austerity death spirals, and they have been expressing their unhappiness at the ballot box.

The more fundamental question is this: Why did these elites push their respective economies into this supposed death spiral? Why would faithful Keynesian elites do such a thing?

Let us not be naive. The West has been run at the top by Keynesian elites, or politicians holding Keynesian ideas, ever since 1930 – six years before Keynes offered his unreadable justification of politicians’ policies: “The General Theory of Employment, Interest, and Money.”.

The Keynesian central bank pushed Europe’s economies into a boom, 2001 to 2007. The voters loved it. Interest rates were low. There was lots of money to buy houses. The economies of the south – “Club Med” – were booming. So was the honorary member of Club Med: Ireland. Ireland’s property values quadrupled. It was all going to last forever. The elites – especially the economists – issued no warnings, except for Austrian economists, who were dismissed, as always, as dinosaurs.

Then came the bust phase. What the European Central Bank did before 2007 – inflate – it has done more aggressively ever since 2008. Governments ran even larger deficits. They all implemented Keynesian stimuli. This did not work. Europe is falling back into a recession.

In the spring of 2010, investors in northern Europe caught on to the fact that Club Med residents could not compete economically. They kept running deficits with the North. Those easy-going populations were living on money borrowed from the North. So were their governments. They had no intention of ever paying back these loans.

Any why not? This is what Keynesianism teaches. Government loans will not be paid off. Ever. Government debt will grow. So will prosperity.

Two years ago, Greece’s Socialist Party found out just how far in the debt hole the government was. Interest rates then started to rise in PIIGS nations. PIIGS governments were trapped. They could not run ever-larger deficits, because the cost of loans were rising.

That was when the reality of Keynesianism hit: deficits do matter. Money is not free. Debts must be rolled over at market interest rates. The horror!

That was when governments in the South started cutting back on spending. Not much, you understand. The deficits are still unprecedented: above 6% of GDP.

Keynesians labeled this “austerity.”

It is not austerity. It is deficit spending on a massive scale. Austerity is where national governments run surpluses and use excess revenues to pay down the national debt.

There has not been austerity in Europe since approximately 1914.

The gold coin standard enforced austerity, 1815 to 1914. That was its chief function and its great service to mankind. It kept the West’s governments austere. This enabled the private sector to dine at an ever-expanding feast.

Keynesians hate the gold coin standard. That is because they believe that high government spending is the basis of high consumer spending, and consumer spending – not private thrift – is the foundation of prosperity.

The public, which prefers consumer spending to the austerity of thrift, cheers on the politics of Keynesianism. Deficits without end, borrowing without pain, growth without ceasing: Keynesians promise, and voters believe.

But the day of reckoning arrived in 2010. The free money got expensive. The party did not stop, but some of the guests were sent home, to join young adults, who have sat and watched TV, because there are no jobs.

The public feels betrayed. Voters believed in the Keynesian dream, which was articulated by the original Keynesian, who said, “If thou be the son of God, command that these stones be turned into bread” (Matthew 4:3). When the target of this challenge refused to rise to the bait, the Keynesian went looking for other takers. In the second half of the twentieth century, he found them. Lots of them. Millions of them. Politicians promised to accomplish the feat. Voters applauded.

But times have changed, the article tells us.

Unfortunately for Europe and the world right now, there are no pro-growth candidates and/or parties on the Continent to offer relief from the austerity programs that are grinding their economies to dust. With no one to vote for, all that European electorates have been able to do is to vote against. They have sought to register their protest by defeating incumbents.

The incumbents over-promised. They had long told the voters that deficits don’t matter. Deficits did not matter for as long as banks in northern Europe kept lending to PIIGS at rates associated with German frugality. But then came reality.

Europe as a whole is in recession, and Greece, Spain, and Portugal are in depressions. What are the people supposed to do if the economic chefs on both the political Left and the political Right are offering the same poisonous “austerity” menu?

Balanced budgets remain mirages a far as the eye can see. Token spending cuts, which are made in the name of reducing deficits to about 3% of GDP in ten years, are part of a “poisonous austerity menu.” Put in a more familiar terminology, there are too many stones and not enough bread. The voters will not tolerate this.

The reason why there are no economic chefs promoting growth is simple: somebody has to bankroll the growth of government spending. Who will that be? Who wants to trust PIIGS?
The louder the voters scream about austerity, the fewer the number of lenders, meaning lenders at rates under 10%.

PLAGUE!

The article eventually gets to the point.

So, what happened in Europe? The short answer is, “plague”. The Black Death of the 14th century was caused by the Yersinia pestis bacterium, which was spread by rats. Today’s plague is the result of Keynesianism, which is being spread by the economics departments of major universities and The New York Times. Unfortunately, unlike Yersinia pestis, Keynesianism does not respond to antibiotics.

How does the article define Keynesianism? Erroneously. It says that Keynesians favor tax increases and spending cuts.

Austerity, as currently being practiced in Europe, is based upon the Keynesian belief that tax increases and government spending cuts have the same effect upon both the government deficit and the economy. In fact, the most virulent strains of Keynesianism cause people to believe that raising top marginal tax rates and increasing government spending can actually boost GDP, because “the rich” have a higher “marginal propensity to save” than do the recipients of government handouts.

Fran‡ois Hollande, the winner of Sunday’s election in France, is a Keynesian. He believes that raising France’s top marginal tax rate to 75% while hiring 60,000 more unionized teachers will make things better.

Excuse me? What does an avowed socialist politician have to do with Keynesianism? Keynesianism is what Paul Krugman proclaims, which is greater deficit spending, plus sufficient central bank money expansion to finance this expansion.

Which Keynesian economist or politician has come out forthrightly for spending cuts, i.e., austerity? Austrian economists have. Ron Paul has. This is why Austrians and Ron Paul have been marginalized by the Keynesian media as cranks.

To a leader whose mind is infected by Keynesianism, it makes sense to try to close a budget deficit with a combination of tax increases and spending cuts, with the balance between them determined by some combination of political considerations and “fairness”.

There are many politicians in Europe who have imposed taxes on the rich. The voters have cheered them on, as always. The voters are outraged by the spending cuts. Spending cuts reduce the flow of funds to government bureaucrats and welfare state clients. This is why Greek union members riot.

Traditional Keynesianism calls for increased spending, more borrowing, and – if private lenders demand high rates of interest – monetary expansion by the central bank to purchase government debt. The article wisely rejects monetization. But it does not call for a gold coin standard. Rather, it defends the euro.

As damaging as tax increases are to an economy, monetary depredation is worse. Only a Keynesian could think that replacing the euro with a new drachma could be a solution for Greece. The result would be a new currency backed by the full faith and credit of a government in which no one has faith and to which no one will extend credit. In reality, the collapse of the Greek economy would not even wait for the introduction of the new currency. It would not be possible to keep preparations for a new drachma a secret, and even rumors of such a move would be enough to create a cataclysmic run on the Greek banking system. Capital, and people with capital, would flee.

The article suffers from an illusion: that the euro is not just another medium for inflation, that it is anything more than drachmas for Keynesians.

The Keynesian political hierarchy imposed the euro on the voters in 1999. The elite’s spokesmen have decried the departure of Greece from the eurozone. The unelected Greek technocrats, like technocrats all over Europe, were either former Goldman Sachs employees or wanna-be’s. They are now being tossed out by the voters. The voters are populists and socialists. They are fellow travelers of Keynesians only in the boom phase of the Keynesian welfare state. When the bills come due, they revert to locally issued fiat money, taxation of the rich, trade unionism, and increased government spending.

CONCLUSION

Keynesianism is in a death spiral. So is populist socialism. So is fiat money fascism. They are all in death spirals because they all reject this premise: “Lower taxes increase liberty.”

Liberty will prevail. This is an eschatological affirmation. One of the ways that it will prevail is through the bankruptcy of the Keynesian social order: high taxation, high regulation, high deficit spending, and high inflation.

Let’s put government on a diet. Let’s have austerity where it belongs: government spending.

That is what Europe’s voters do not want. That is what they are going to get.

“Not less austerity. More austerity!”

Regards,

Gary North

The Case for Austerity was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Not to be outdone, Buffet’s partner in crime Charlie Munger recently declared “gold is a great thing to sew onto your garments if you’re a Jewish family in Vienna in 1939 but civilized people don’t buy gold – they invest in productive businesses.”

And now, Bill Gates went on CNBS today to try and explain the great error in investing in the barbarous relic. It’s like they’re trotting out the billionaire boys club to scare people back into Berkshire and Microsoft stock.

As they should. Bill’s Microsoft has been absolutely decimated vis-a-vis gold for 12 years straight and running.

Both Buffet and Gates concede that paper money will continue to be debased as long as central banks hold the legal monopoly to print it. What they won’t mention is that such blatant fraud is conducted to finance government deficits and prop up a virtually zombified banking sector.

Gates in particular tries to tie his bumbling rant together by declaring gold has a kind of psychological value to it. That those who buy it are motivated by it because “people in the future will think it’s worth more than it’s worth today.” Gates goes on to point out that as more people flood to the gold market, the more the gold mining sector will develop which will subsequently increase the supply and put downward pressure on prices.

Congratulations Bill, you have stumbled onto some of the most basic lessons of economics.
First, since the value of all goods and services are determined solely by the purely subjective perceptions of utility amongst market participants, gold is no different from any other investment. Many perceive it is a viable currency alternative to the current state of affairs.

Those who put their money in equities do so because they believe it will yield them a return. “Psychological” factors play just as much of a part in this thinking than they do in those who purchase precious metals.

Second, if an investor’s marginal profit is exceedingly high, this is a signal to other market participants that there is money to be made in whatever sector in paying out at such a rate. People move to where they can make a profit. They don’t sit idly by making negligible returns. Supplies increase, prices adjust, and so does the market.

None of that diminishes the purpose of gold which not only acts as an investment but a hedge against the profligacy of governments. The pressure on central banks to flood the world with liquidity is enormous. The practice of fractional reserve banking has left much of the world’s major financial institutions insolvent. Central bankers know of no other solution from their Keynesian instruction guide than “print, print, and print some more.”

If Gates really wants to speak to psychological factors, why not say a word on why inflationary monetary policies are employed to begin with? Indeed, if money printing actually created just one iota of wealth, then Emperor Diocletian (whom Paul Krugman looks to for policy advice) would have led Rome into a period of material abundance rather than wreak havoc on a once thriving market economy.

But of course inflation is purposefully resorted to in order to both aid the first receivers of money and create the perception of prosperity. With some prices boosted relative to others, there is the appearance of ‘feeling richer.” The overall supply of goods hasn’t increased; only the amount of pieces of paper with dead Presidents in circulation. The short term boost in confidence comes at the cost of long term stability as capital is consumed with little savings being accumulated for replenishment. The inevitable bust, as Ludwig von Mises showed, cannot be avoided.

THE END OF THE MONETARY SYSTEM AS WE KNOW IT (TEOTMSAWKI)

As governments continue to binge on endless servings of liquidity financing, there is little threat to gold’s price in the long term. Short term fluctuations are an inherent feature of a market system based on the ever-changing value judgments of billions. There is no conceivable end in sight to inflating currency supplies. If central banks were to stop inflating the house of cards that is the global banking system would collapse.

The question is where you put your trust? In the promises of highway robbers who climb their way into public office through lies and vicious personal attacks? Or in a commodity that has thousands of years of historical usage to prove its functionality as a means of exchange?

Bill Gates puts his faith in the goodness of scoundrels.

IMITATOR, FOLLOWER AND SEARCHING FOR A PURPOSE

The fact of the matter about Bill Gates is that he has never innovated. The only thing he has ever done that paid off incredibly well is this: he finagled his way decades ago into the position of being the sole accepted computer operating system at the very start of the personal computing revolution. Since then he has lived off of having that incredibly powerful position.

He was incredibly slow to realize the power of the internet, he was always second to the party with inferior products like Internet Exploder, Zune and countless other copycat, failed products. He installed a completely insane man to manage Microsoft after he left. And now that he has some extra time on his hands he has decided that

a) the planet needs to be depopulated and

b) he will use a significant amount of his time and power to help depopulate it.

He is pathetically searching for a purpose. And, since he has no idea how economics works, nor money, as he shows in his interview on gold above, he has decided to make depopulation his purpose as he shows in this awkward, ridiculous speech given at TED where he uses all kinds of incorrect premises such as manmade global warming being real to come up with this unbelievably absurd “mathematical” formula:

CO2 = People x Services x Energy Per Service x CO2 Per Energy Unit.

Then he adds that in order to get CO2 to zero, “probably one of these numbers is going to have to get pretty close to zero.” And given that he is spending much of his free time with famous misanthropes such as Ted “A total population of 250-300 million people, a 95% decline from present levels, would be ideal,” Turner, it is pretty clear which one will be the top priority.
It’s the most absurd premise based on the most absurd assumptions I think I have ever heard in my entire life. And his understanding of gold is just as flawed.

Bill Gates, Warren Buffet and Charlie Munger may have once had some sort of relevance. But, today they are globalist shills pathetically trying to keep an immoral and violence/theft based system alive by which their importance and life’s work are tied. The world is leaving them behind… and they will work to enslave it (the Buffet Rule) or genocidally kill it if they have to in order to maintain their sense of self-importance.

Buy gold, sell MSFT and Berkshire Hathaway and fiat dollars, sit tight and be right. The fact they are all running to CNBS in the last few days must mean they are getting desperate.

Regards,

Jeff Berwick

Stick to Depopulating the Planet, Bill Gates was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Sweet! Only one thing — this passenger car is for the U.K. You can’t drive this car in the United States. We have a Passat, but it gets nowhere near this excellent mileage. Even stranger, many of the engines in these, which are driven all over Europe, are actually built in the U.S. The trouble is that it can’t jump through the regulatory hoops in the land of the free.

This fact was first brought to my attention by a video blogger who had been driving a van version of this amazing car in the U.K. He came home to ask his Volkswagen dealer about it. The dealer quickly informed him that this model is not allowed on U.S. roads. The Passat in Europe runs on a 54.1-fluid ounce common-rail four-cylinder engine. The standard in the U.S. is a 67.6-fluid ounce engine. For this reason and a few others, the version you can drive here gets 45 miles per gallon.

The blogger was furious as he reported this, and he further explained the absurdity. It seems that the emissions regulations are calculated based on a per gallon basis. The U.K. Passat does not pass because its emissions pollutants are slightly over regulation.

The blogger further pointed out the silliness: The car goes much farther than the American version on a single gallon, resulting in less overall pollutants. But that doesn’t matter, given the manner in which fuel-efficiency happens to be calculated. In the U.S., a car with low emissions could get 1 mile per gallon and pass, but one with slightly higher emissions couldn’t get through, even if it went 100 miles on a gallon.

Infuriating, yes. But because the video was widely circulated, the revisionists started getting to work to debunk the claim. One blogger called Volkswagen. The spokesman made several salient points. A gallon in the U.K. is actually slightly larger than in the U.S., thereby reducing the mileage disparity between the U.K. and U.S. models. Further, these 54.1 engines are actually not that popular in the U.S. market because Americans don’t really care that much about mileage. Finally, mileage is actually calculated differently in the U.K., so the cars aren’t quite comparable in this sense.

Now, that’s all very interesting, and provides an interesting corrective, but it begs the critical question: Can this record-breaking, high-mileage car be sold in the U.S.? It would appear that the claim of the original video blogger stands: It cannot. You might want this car. VW might want to sell it. Europeans love it. But we, as Americans, are not permitted to buy it, and VW is not permitted to sell it. Regardless of the details, these are facts. The VW spokesman was really just talking around the point, as all corporations do when they are confronted with the awfulness of regulations.

The original blogger suggested conspiracy. But then, there is Hanlon’s razor: Never attribute to conspiracy what can easily be explained by stupidity. Regulations are inherently stupid because they presume the perpetuation of an existing technology and production model. They can never account for change or improvement.

No matter how you write them, no matter how smart you are, there will come a time when the intended results of all regulations will reverse themselves. They will inhibit, rather than advance, progress. They will degrade, rather than improve, products. They will block, rather than inspire, technological improvement. This is an unavoidable fate, no matter how smart the regulators are.

In a private market, rules and standards adapt to change. This is because private parties get that the point of a rule or standard isn’t the rule or standard but the results. The point is to achieve results. If the exact reverse of the point is observed, the rule is changed over time. In this way, private markets are flexible in ways that government regulations can never be.

Let’s raise a point about another incredible and wonderful thing: the flying car. It appears that the Terrafugia “roadable aircraft” is finally going into production and might be available for purchase sometime next year. It has recently been subjected to vast media attention, and that’s all to the good.

Now, one might suppose that the journalism on this car would focus on what an amazing thing this really is, how it takes us a step toward the Jetsons’ world, how it might make a contribution to unclogging highways and so on.

But no, that’s not what the stories have been about. It seems that the major “work” that has gone into the engineering behind this flying car has nothing to do with making it amazing for you and me. It is all about the endless government regulations that have stood in its way. The bureaucrats, not the consumers, rule the day.

Imagine: It’s hard enough to build a car that complies with regulatory bureaus. It’s hard enough to build an airplane that complies with the mandates of regulatory bureaus. It appears to be darn near impossible to make something that complies with both! It has to pass emissions tests, crash tests, navigation tests, design tests, mileage tests and a million other tests. Then there’s the problem of licenses for the drivers and fliers and the compliance with airport and road regulations. What a nightmare! It seems that the bulk of the energy of the company has been spent on this.

The actual reality of the flying car has been around since the 1930s. It keeps being revived again and again. What’s making it flounder? The problem is that this innovation is neither fish nor fowl from the point of view of government bureaucrats. Therefore, they don’t know what to do with it.

The results are, quite frankly, rather disappointing. The Terrafugia is a small plane with foldable wings so that you can drive it around. That’s it. There will be no levitating out of traffic. There will be no landing in your driveway. You have to drive it like a car to the airport, and then take off, fly, land and drive home again. That’s kind of cool, yet it raises the question: Why not just park your car and hop in your airplane?

You have to have a wild imagination to see the world that would exist were it not for government controls. These controls wreck innovation. They deny us access to seeming utopias. They kill the entrepreneurial spirit and set society back. They thwart progress and forbid us from working toward a future that is better than the past.

We will never know what we are missing so long as we continue to allow government to throw the whole of society into a regulatory thicket. Life is pretty amazing, true, but it could be far more so. Instead, we suffer in ways we don’t know. This is the big, horrible picture.

Regards,

Jeffrey Tucker

The Case of the Missing High-Mileage Car was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Nearly four years on the country finds itself in the midst of difficult times that have taken their toll on millions of Americans through job losses, home foreclosures, unserviceable debt, and ever dwindling retirement savings. By all accounts, Americans are worse off today than they were ten years ago, and the state of our nation, despite what Washington’s media masters report, is fiscally, economically, and socially dire.

With an estimated national debt that will approach $20 trillion in just a couple of years, some $200 trillion in unfunded liabilities over the next twenty five years, scores of millions of Americans dependent on overburdened government safety nets to survive, and a rapidly shrinking domestic economy, the key question becomes,”what is America’s economic breaking point?“

The answer to this question becomes apparent in a recent documentary from Future Money Trends, which suggests that the breaking point for the U.S. economy comes when the cheap energy we have enjoyed for the better part of a century finally dries up.

Future Money Trends is expecting the U.S. to face the perfect storm of events that, when combined, will send gas prices past the breaking point for the average American.

There are three major catalysts that will cause gas prices to reach this breaking point.

Number one, the dollar is in a state of collapse caused by a continuous increase of the money supply by America’s central bank.

Two, instability in the middle east and a potential war with Iran would great[ly] disrupt the supply of oil.

Three, the supply of cheap, recoverable oil is dwindling along with a major increase in demand.

…

America is built for $50 oil and $2 a gallon gasoline. The seriousness of our situation should not be overlooked. We have multiple forces that will drive gas prices past America’s $5 per gallon breaking point… Rising gas prices caused by these three catalysts will break the backs of the American consumer, spiking prices to the point where present day normalcy is no longer the reality.

Via Future Money Trends

Though there is evidence that the peak oil theory of physical shortages is accurate, it’s not even so much that the world will run out of oil per se, as it is that we simply don’t have the technology to extract that oil at a cheap enough cost to maintain our current way of life.

If you consider the significant pressures currently facing the United States financial and economically, it’s not too much of a stretch to suggest that even a minimal rise in the price of gas could seriously hamper the consumption habits of the majority of our population, which in turn will further reduce economic growth. As Future Money Trends‘ Daniel Ameduri notes, even a $1 gas price move has a significant impact with the potential to extract $100 billion from the broader economy.

With gas prices at or above $4 in most parts of the country, we’re quickly approaching 2008′s breaking point. And for those who don’t think prices could exceed those historic highs of 2008, consider that most Europeans are already paying nearly $10 per gallon.

With rising demand from BRIC nations like China and India, tensions in the middle east and unprecedented monetary expansion, ten dollars may very well become a reality. Such a swing in prices would immediately shave some $600 billion in direct consumer consumption and shrink our economy by 5% almost instantly. And that doesn’t even include the consequences that will inevitably hit small businesses and their employees in the months following.

Going into 2008 Americans felt fairly confident about their savings, their ability to find work, and their overall outlook. After four years of malaise, the majority of Americans have lost that confidence, as their ability to maintain the standard of living to which they became accustomed over decades of rampant government spending and easy money has been seriously undermined.

At this point, as suggested by Ameduri, even a one or two dollar increase in the price of gas could be the breaking point that sends our economy and global financial markets into an unrecoverable tailspin. The psychological impact of $5 or $6 gas may cause more of a panic than the price itself, because the only thing keeping the system afloat at this point is confidence in our leadership and that the best-and-brightest will be able to mitigate the crisis.

We were able to suspend the worst when governments around the world stepped in previously and let loose everything in the quiver to abate a collapse. This time, however, with our debts piling up at unsustainable levels and our lenders rapidly diversifying out of U.S. based assets, we will not be so lucky.

Whether the breaking point has been breached is up for debate, but there’s a strong possibility the die has already been cast. With trillions of dollars in capital flows, government intervention and financial machinations behind the scenes, it’s impossible to predict the exact timeline or occurrence of events, but we may well have already crossed the Rubicon.

Assuming that a breaking point is inevitable simply because of our failure to fundamentally change anything since the original crisis took hold in 2008, we should look to history as a guide as a way to anticipate the consequences that follow unsustainable governance and monetary policy.

If history surrounding such events has taught us anything, it’s that we must presume whatever is coming will be brutal, violent and it will transpire so quickly that most people won’t realize what happened until they’re walking the streets with worthless paper money in their pockets looking for morsels of food to stock their pantries – we’re talking end of the world type stuff.

The collapse of nations and conventional paradigms is never an orderly thing.

Regards,

Mac Slavo

What Is America’s Economic Breaking Point? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

I often get this question after I presented my case against our fiat money system, and I sense there is a trace of frustration in it, a bit along the lines of, you are telling us that we are in quite a mess but you offer no policy prescriptions. That is a fair point, I guess. Most writers who lament the economic ills of our time usually have a bag of policy advice on offer. Indeed, whispering new policy ideas into the ears of those in power is what most of these writers aspire to. I reckon what separates them from me is that they believe in government and I don’t.

The mess we are in is the result of policy, of the very idea – the silly idea – that the field of money and finance would work better if it were supervised, managed, guided and controlled by the state; that if we had clever, powerful and astute policymakers, consulted by economist philosopher kings, we could enjoy a smoother, better functioning economy. And if ever things were not running so smoothly, we would change the policy.

“So what is your policy, Mr. Schlichter? Could you not be a bit more…constructive?”

My conclusion is straightforward. There should be no policy. The existence of policy is already the problem. What we need is proper capitalism in money and finance. We do not have that now. What we have is limitless state fiat money, quantitative easing, systematic market manipulation, bailouts, regulations, the IMF, the World Bank, the FSA, FDIC, TARP and LTRO. We need proper markets, not more policy, not more manipulation, and not more bureaucracy. And not more fiat money. We need the state to exit the field of money and banking. Completely.

The main problem with monetary policy is that there is such a thing as monetary policy.

The state is the problem. It will not be part of the solution.

Before I tell you what I think should be done, let me give you another reason why I have been so reluctant to offer policy advice. The aim of my book Paper Money Collapse was to expose widespread fallacies and debunk erroneous common wisdom concerning money. It was not to provide a program for reform. The book is meant to be an eye-opener.

Almost the entire discussion on money and banking today is based on deeply flawed theories. This is true of the financial markets industry where I worked for 19 years. It is equally true of most of the discussion in the media and, as far as I can see, academia. The book was meant to debunk a lot of this misinformation.

My intention was to challenge the present consensus and the established orthodoxy. I think this is what needs to happen before we can even talk about the drastic changes that our system requires. Any policy debate of the type you read in The Economist or The Financial Times occurs within the boundaries of the established consensus. Questions of a more fundamental nature cannot be addressed in the context of policy debates.

But I am not going to evade the question about policy. So let me talk a bit about policy and reform.

The big mistake has already been made. The gold standard was abandoned, in a step-by-step process that began around the time of World War I and that culminated in Nixon’s closing of the gold window in August 1971. For more than 40 years, gold has played no official role in global monetary affairs. State paper money ruled. Everywhere.

This was the era of the central banker, the monetary bureaucrat, of artificially cheap credit, of stimulus, of big equity rallies, of bigger real estate bubbles, of constant debasement, of the quick buck and the big bonus, of growing banks and of ever more sovereign debt. The global financial system got unhinged. After four decades of persistent inflationism we have an overstretched finance industry gravely addicted to the constant drip-feed of cheap money and an out-of-control public sector constantly issuing debt that will never get repaid. Capital misallocations and asset mispricing are gargantuan. The establishment prescribes itself ever more easy money to keep the show on the road.

So the first conclusion is, there is no painless exit. The cleansing crisis is inevitable. Simply being honest about the mess we are in would not be a bad starting point for policymakers.

And to acknowledge that this can’t go on forever. Because it certainly won’t go on forever.

Okay, but what next? If you could design policy, what would it be? What is the number one thing that we need to change to restore financial sanity?

Fiat money critics have floated a whole range of policy proposals. There is the return to some form of gold standard. Also, there is the rather fiercely contested debate about whether fractional-reserve banking should be banned or at least restricted. Recently, colleagues of mine at the Cobden Centre in London have introduced a bill to Parliament that would make board members of banks personally liable for bank losses, which is supposed to reduce or eliminate moral hazard. Thus we are already faced with a range of policy proposals. What is my position on them?

I think we can have it much easier. My proposal is more effective and more easily communicated: Let us separate state and money completely. That is the one thing that needs to change. Capitalism is the only economic system that works in the real world [at least if you want to keep on improving the human condition--Ed.]. But what we have today is monetary socialism, albeit a socialism predominantly to the benefit of the rich and well-connected.

We need to get the state out of the economy completely. To achieve this we must get the state out of ALL monetary affairs. The monetary sphere of society should be a no-go area for politicians and bureaucrats. State involvement in finance is the problem. Let us get the state out. Period. That is the one goal we should have. That is the one policy I recommend.

My enthusiasm for any other policy proposal varies considerably and is dependent on how much state intervention the policy still allows or in some cases even requires.

As an opponent of fiat money I am naturally positively inclined to a return to a gold standard. I believe that Mises was right when he wrote:

“If in the coming years or decades our civilization is not to collapse completely the gold standard will be restored.”

But what type of gold standard should be implemented? Would there still be central banks that would ‘administer’ that gold standard? Under any form of gold standard, the central bank would most certainly be more confined in its monetary operations than central banks are today but there could still be considerable room for manipulation. The US Fed was founded in 1913 under what was officially still the Classical Gold Standard but that didn’t stop it from funding the US government’s military spending in World War I and from initiating credit bubbles and business cycles.

By 1933, the dislocations introduced by cheap money were so big that their dissolution – mandatory and normally automatic under a gold standard and indeed inconceivable under a proper gold standard – had become politically unacceptable. The Fed’s mission was accomplished and the gold standard was abandoned. The rest is history as they say.

An official, government-directed return to a gold standard also raises a lot of questions about implementation that would invite lobbying and horse-trading by various pressure groups.

* How much of the existing money stock – obscenely inflated after decades of money printing and fiat money debasement – should be backed by gold, or to put the same question in a different way, what should the new exchange rate between the money in circulation and gold be?

* How much should the existing money stock be devalued? Should banks be allowed to create deposits that are not backed by gold? Should fractional-reserve banking be permitted?

Questions over questions, and the room for political maneuvering and for political abuse are massive. Do we really want politicians, central bankers, bureaucrats, and their economic advisors make all these decisions? I don’t think so.

I know somebody who is best equipped to make all these decisions.

Mr. Market.

We may not all agree on the merits or demerits of fractional-reserve banking but as capitalists we should agree on the benefits, indeed the necessity, of free competition.

So how do we get from A to B? How do we get from the present system of finance socialism, of interest rates fixed by the central bank and asset prices manipulated by the central bank, of nominally private banks operating with the protection of a lender-of-last resort, to a system that again deserves the label capitalist?

Step 1: Privatize the central bank.

Do not even introduce a gold standard. Just transfer ownership of the central bank officially to the banks that have an account with the central bank. This is the first step for the state to exit the sphere of money. The central bank is no longer a public institution run by bureaucrats and politicians but an entirely private undertaking. It is owned and operated by the banks.

The central bank administers bank reserves and provides certain clearing functions. The banks need this, for now at least. Shutting the central bank down is not that easy. But its most pernicious aspect is that it is a policy tool. This would end abruptly with its privatization.

Step 2: The state revokes with immediate effect ALL laws and policies that relate specifically to banking and money.

From this moment on, banks are capitalist enterprises just like any other normal business. There is no lender of last resort (at least not one run by the state), there is no inflation target or other official monetary policy for which the banks function as conduits, which under the present system puts them in the strange position of being profit-seeking enterprises and policy-transmission mechanisms simultaneously. But equally, there is no backstop for the banks from the state any longer. No guarantees, no deposit insurance or taxpayer bailouts. If a deposit insurance institution exists, it is handed over to the banks, similar to the central bank. Again, the state has exited the business of regulating, supervising, licensing, subsidizing and backstopping the banking industry.

Entry into the field of banking is now free. You do not need a license. You do not need an account with the now privately owned central bank (although without such an account clearing with other banks might be difficult). There are no legal tender laws anymore, so if anybody has any bright new ideas about money (Liberty Dollars, bitcoin) they are most welcome to try them. The consumer alone will decide over success and failure.

Monetary policy has ended. Bernanke testimonies on TV will be replaced with reruns of old Simpson episodes. Senators and congressmen will have to find new soapboxes from which to propound their personal economic theories.

Step 3: The state’s gold hoard is handed over to the banks.

What? A gift to the bankers? – I do not consider this a gift to the banks but more a return of property to the bank depositors. The bank depositors are the ones that should benefit from this transfer most.

The present monetary system could only have come about because it was once based on gold. Deposit banking spread at a time when banks still promised to repay deposits or banknotes in specie, and when all banks were thus required to hold (some) gold reserves – reserves that no political entity could create at will. Only slowly and gradually was the gold backing removed and replaced with various implicit or explicit state guarantees, all of which are now practically failing.

Of course, just like investment genius Warren Buffett, the bankers may not know what to do with a pile of gold and may thus be tempted to simply put it on a big heap. I suspect, however, that the bankers will have a very good use for the gold. Their customers – the holders of bank deposits – may be very unsettled by the exit of the state and thus the taxpayer from the business of underwriting the banking industry. Most people only consider their bank deposits safe because they believe the state would not allow Bank XYZ to default, not because they have any confidence that Bank XYZ is run prudently. Now that the state has exited the field of money and banking, the banks are likely to use the gold as additional backing for their balance sheets. They will use the gold as it has been used for thousands of years – to gain trust. And to avoid bank runs.

Will the gold hoard be sufficient?

I don’t know.

Presently, the US government sits on 260 million ounces of gold. At the present gold price of $1,655 per ounce, we are talking $430 billion. The monetary base is presently $2,673 billion; M1 is $2,220 billion and M2 minus money market funds is $9,163 billion. The gold hoard is thus only 16%, 19%, and 5% of these money stocks, respectively. Hardly a proper gold standard but it could be a start. Through proper balance sheet deleveraging and through additional gold purchases the private banks are obviously free to improve these ratios. (Again it is not for bureaucrats or economists to decide what is appropriate. This is the role of the banking entrepreneur.)

But now that the private banks own the central bank, would they not put the printing press into overdrive and create inflation?

I don’t think so. Through quantitative easing the central bank accumulates assets from the banking sector and expands the money supply. The central bank leverages its own balance sheet in the process. The Fed is already levered more than 50 to one, which is more than Lehman and Bear Stearns were when they collapsed. But now the banks own the capital of the Fed. They foot the bill, not the taxpayer. The banks can no longer dump unwanted assets on the central bank. They own the central bank. They cannot transfer risk to it.

Additionally, the public will be very suspicious of an overtly expansionary central bank. They know it is operated by the private banks and entirely for their own benefit. Any inflation concerns will translate into higher interest rates and that is detrimental to the highly leveraged banking sector. I would expect the private banks, now operating without any safety net from the state but under the suspicious gaze of their own customers, to be very cautious about how much money they print.

Easy money is great for the banks for as long as they can lower reserve and capital ratios. That was much easier when they could rely on government backstops or when meeting official regulatory requirements already gave their balance sheet policy an official seal of approval. Now that they are on their own, monetary expansion and thus debt accumulation and leverage are a double-edged sword. It will pay again to run a bank prudently and even advertise your higher capital and reserve ratios.

Furthermore, the relatively sounder banks (if we assume for a moment that those indeed exist) have little interest in running the jointly owned central bank for the benefit of the weakest banks. To the contrary, it is in the interest of the stronger banks to see weaker banks fail and exit the market. At the same time, it is not in the interest of even the strongest banks to see widespread bank runs or a general distrust in banks as that could quickly come to haunt them, too.

I think it is very reasonable to assume that under my plan of complete privatization the key challenge of allowing corporate failure in banking on the one hand but avoiding a complete collapse of the banking system on the other will be managed much better. The reason is that this task is now given to bankers as entrepreneurs who have a keen interest in getting that balance right. As long as banking is under the protection of the state, monetary and banking policy will be conducted for the benefit of the weakest banks, and the strongest banks will simply reap windfall profits.

Does the state get off too lightly?

The state no longer has any responsibility for the banks or money. No more setting of policy, no big hearings in Washington, no bailouts, no IMF, no World Bank. A lot of money will be saved and many explicit and implicit claims on the taxpayer will be eliminated. But also, the state can no longer tell the banks that government bonds are safe and encourage the banks through bank regulation and official capital requirements to invest in them.

There is no longer any bank regulation from the state. Banks will be regulated by the market, which means ultimately by the consumer. The state also loses the central bank and can thus no longer create an artificial demand for its securities. Remember, last year 61% of new Treasuries were placed with the Fed. Why should the banks, which now own the central bank, continue to accept this?

Government bonds everywhere benefit from the idea that states can’t go bankrupt because they can always print the money. This idea is fundamentally wrong as I have argued repeatedly. Once the debt load reaches a certain level, it can no longer be inflated away. If this is still tried, currency disaster will ensue. Be that as it may, with the state officially separated from the field of money and banking, it would have to manage its finances like any other entity, like a private corporation or a household (or almost like any other entity as it still benefits from the privilege of taxation). We would certainly see higher state borrowing costs, lower levels of spending and smaller deficits. This would be an important step to what Doug Casey calls “starving the beast”.

Of course, in such an environment we would not have to worry at all about how the banks arrange their executive pay, how their bonus schemes work, or if bank shareholders hold their board members at all responsible for their mistakes and failures. These are internal affairs of entirely private and capitalist enterprises. If bank shareholders get this wrong and set the wrong incentives, only they will bear the consequences. The idea that banking is a public service for which a specific set of rules and regulations must be designed and administered by the state does no longer apply.

Come to think of it, this proposal looks much better in terms of consistency and clarity than any other, in my humble opinion. Those who argue for an official gold standard are asking the state to design and implement a new monetary order. Those who ask for a ban on fractional-reserve banking ask the state to define what constitutes legitimate banking business and then enforce it. Those who want to introduce new legislation in response to executive pay and bonus schemes, ask the state to interfere in the relationship between shareholder (principal) and manager (agent).

I ask the state to do just one thing: Get the hell out of money and banking! Now!

Regards,

Detlev Schlichter
Paper Money Collapse

The Separation of Money and State was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

You see, to do serious business in America requires vast campaign contributions to several layers of elected politicians, an army of lobbyists in Washington, retired government employees on your board and public devotion to the American civic religion. It goes on every year and restarts every election cycle.

Even then, it is hard to know if you are going to get what you pay for.

It’s easier and more efficient in Mexico. You pay bribes directly. The decision maker gets the money. He or she clears the path for you to do the thing. The facilitator takes a slice. People mostly keep their promises. The deal is done.

Apparently, bribe paying in the United States is a sign of a healthy, functioning democracy; doing the same thing in Mexico in a more streamlined way is a criminal violation of the standards of good corporate governance.

Here we have The New York Times “exposing” the shocking and presumably ghastly fact that over several years, Wal-Mart paid out some $24 million in payoffs to politicians, bureaucrats and petty gatekeepers in Mexico, all in the hope of employing people who need jobs and bringing goods and services to those who need them.

The breathless and bloviating Times expose is written as if these intrepid reporters were exposing a violent mob engaging in killings to get its way. You never quite get that Wal-Mart would much rather have used the money to expand its business, hire more employees or beef up its inventory. Money used for bribes is a loss to any company, a terrible price of doing business under the state.

In any case, the trove of information was shoveled on the paper by disgruntled employees. And it is hardly unusual. It’s how business is done. Regardless, the Times is out for blood — not from the extortionists who run the system, but the victim, Wal-Mart.

At last count, there were 1,200 news stories about this on the wire. Forbes reports: “Wal-Mart Stores will likely face the wrath of the U.S. Department of Justice for reining in an internal investigation into bribery allegations at its Mexican subsidiary.”

I’m sure that congressional investigations are around the corner, with all the named executives hauled before committees and harassed by regulators.

The bitter irony is that it will transfer more of the Mexican system to the U.S. To survive, Wal-Mart will be forced to spend more than the $12 million-plus it already spends every year on campaign contributions and lobbying.

All that enforcement of the Foreign Corrupt Practices Act (FCPA) does is increase the amount of domestic corrupt practices. Indeed, that is the way the system is supposed to work. Truly, if the FCPA were actually enforced as written, business around the world would come to a grinding halt.

Under the well-known Mexican system, people called “gestores” specialize in interfacing between business and bureaucracy. They deal with inspectors, permit issuers, environmental bureaucrats, labor officials and zoning regulators. If the gestores can make the deal, they keep 6% as a matter of convention. Even average citizens use these people to stand in line for them — all in an effort to find nonviolent means around the bureaucrats.

Given the ridiculous barriers in place, it’s not a terrible system. Corrupt government that you can buy your way around is far better than “good government” that blocks all progress.

The rap on Wal-Mart is that it did far worse. When the company discovered this was going on, it buried it, rather than go public. No kidding. Maybe the company imagined that it would be smeared and attacked?

Bribing officials is illegal in Mexico, just as it is in the United States. But of course, that is just the gloss. Anywhere there is government, there is corruption. That’s the purpose of barriers to enterprise, to extract wealth from those who want to get past them.

Is it worth it? It is either pay or don’t do business, which means lasting poverty. Today, Wal-Mart Mexico employs 209,000 people and is the country’s largest employer. It has provided a fabulous example of the merit of private enterprise in this country, which is finally getting on its feet economically. It has brought food, goods and services to millions of people who otherwise would not have them. It has done more in 10 years for Mexico than all the government bureaucrats have done in one hundred or a thousand years.

For its crime of bringing economic development to this country, it must be smeared, beaten and forced to pay obeisance to the American political class. Why should Mexico enjoy such largess when there are millions of American bureaucrats who need to be part of this gravy train?

You can read thousands of academic papers on the problem of “corruption” in countries around the world and completely miss the central point. The way to eliminate the corruption is to eliminate the barriers to enterprise. Why is this not obvious? Because many people imagine a utopian ideal that does not now and never has existed: good government. They imagine that government rules can be enforced impartially based on science or the public good.

It’s sheer nonsense. As Ludwig von Mises writes in Human Action:

“Unfortunately, the officeholders and their staffs are not angelic. They learn very soon that their decisions mean for the businessmen either considerable losses or — sometimes — considerable gains. Certainly, there are also bureaucrats who do not take bribes, but there are others who are anxious to take advantage of any ‘safe’ opportunity of ‘sharing’ with those whom their decisions favor… Corruption is a regular effect of interventionism.”

But here’s the part that upsets me so much. Somehow, private enterprise is always and everywhere blamed for perpetuating corruption, when the truth is obviously that the blame rests with government. It’s like watching a mugging and blaming the mugged for carrying too much money. It’s like telling anyone who faces the demand “Your money or your life” should always choose to give up his life.

The background here is nothing short of anti-capitalist resentment. The elites loathe Wal-Mart for its achievement in putting on display the incredible reality about capitalism that you never hear about in school: It is a system that is maniacally focused on the well-being of society in service of the common man.

Go to Wal-Mart and you see the workers and peasants not rebelling against the system, but buying stuff that makes their lives better. It looks rather mundane. It’s how civilization is built: one economic exchange at a time. The people who stand in the way don’t deserve a dime, but private enterprise is kind enough to cough it up, anyway. Wal-Mart deserves sympathy, not condemnation.

Jeffrey Tucker

Wal-Mart, The Victim of Extortion was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Here’s Obama on the campaign trail: “The problem is … speculators and people make various bets, and they say, you know what, we think that maybe there’s a 20% chance that something might happen in the Middle East that might disrupt oil supply, so we’re going to bet that oil is going to go up real high. And that spikes up prices significantly.”

While blaming economic conditions on speculators is the common stock in trade of demagogues and politicians of all stripes, what is the president actually saying?

People who need energy to keep their businesses working, business that make modern life possible, look around at world events and grow concerned that the U.S. government and others may conspire to interrupt the flow of oil. Behaving like good stewards of their enterprises, they and their agents seek to assure needed oil supplies in an uncertain future by contracting for tomorrow’s oil needs today.

While Obama deprecates the activity, saying that those trying to prepare for future conditions, are “betting,” most oil users would actually prefer stable prices and would just as soon forego the guessing game about future prices. It’s a game that costs them if they are wrong and only allows them to stay in business if they are right. Most are happy that someone – those speculators politicians love to vilify – are willing to take on the risk of being wrong about future price movements for the rewards of being right. The real oil users can then count on liquid markets when they need them and keep their attention – and their capital – focused on delivering the blessings of modern life instead of betting on the movement of prices.

And there is something wrong with this? Hold the phone a moment!

It’s not as though those seeking to secure oil for their future needs are making something up. They’re not concerned about some fantasy development, some exogenous agent like space aliens appearing out of nowhere to suck up all of earth’s oil. This isn’t science fiction. They’re trying to keep things working in the face of very real and very familiar government threats to our way of life.

Maybe they should be praised, not condemned.

While one administration bureaucrat has claimed there is a “Wall Street premium” on the price of oil, it takes government to make a war. Speculators trying to anticipate future prices in the event of a war don’t impose embargoes. Nor do they launch airstrikes.

In The Dollar Meltdown, I estimated that during the constant saber rattling and elective wars of the Bush years, the fear premium on the price of oil may have run from $20 to $40 a barrel, depending on developments. It was, in any case, a huge transfer of wealth from the American people to the oil sheikdoms, Putin’s Russia, and Chavez’s Venezuela.

If Obama is prepared to further de-capitalize the American people and deliver another blow to an economically-depressed world by supporting an Israeli strike on Iran and risking the closure of the Strait of Hormuz, isn’t it a good thing that he has to confront at least some of the cost of such recklessness?

He’s a politician. He should pay a political price.

George W. Bush never did. But we would be better off economically if he had to reckon with the price for his elective war.

Might Bush have been dissuaded from his unnecessary war if he had known that it would cost not under $50 billion, as his administration claimed, but more like $5 trillion?

Would Bush have given up plans for his counterproductive war on Iraq – a war that has only consolidated Iran’s Shi’ite power bloc in the region – if he had known that he would preside over an explosion of the nation’s visible debt from $5.7 trillion to $10.6 trillion?

Would Bush have foregone his wasteful war justified by forged documents and phony intelligence if he had known that its cost would help trigger the steepest downturn in America since the Great Depression, even as the cost of the Vietnam War helped create the stagflation decade of the 1970s?

If he had known the costs and the outcome, would Bush have been capable of better decisions?

Nah. Bush was not capable of forethought or making wise decisions. When he ran for reelection in 2004, Americans still hadn’t come to terms with the monstrosity of his bogus war. And his opponent, John Kerry (“Reporting for duty!”) wasn’t willing to risk defeat by opposing the prevailing war fever. Had he done so, he would have still lost in 2004, but could have easily been elected on the “told you so” platform by the time people began seeing through Bush’s war in 2008.

Whatever Obama’s real view about war with Iran, he at least has enough foresight to know that it will result in even higher gas prices.

At his first press conference of 2012, Obama responded to a question about gas prices with a question of his own, asking the reporter, “Do you think the President of the United States going into reelection wants gas prices to go up higher? Is there anybody here who thinks that makes a lot of sense?”

Obama knows that the price at the pump can cost him the election.

If it is wariness about the political cost of higher oil prices that has Obama preferring “engagement” to bombing Iran, it is a good thing. If it is speculators buying oil against future possibilities that keep Obama from reacting as Romney and the neocon Republicans egg him to start another needless and ruinous war, then we owe speculators a debt of gratitude.

Regards,

Charles Goyette

I Love Oil Speculators was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

I think back to the old Soviet days, which to me typify what it means for a society to be entirely under state control. The government put out a magazine called Soviet Life, and it was filled with pictures of happy, healthy people who were living fulfilling and active lives. The contrast with reality couldn’t have been more extreme. Emigrants told stories of a demoralized population turning to alcohol, drugs and suicide — anything to escape the toxic combination of sinking living standards and the absence of choice due to despotism.

Today we know that the propaganda was a lie. What we fail to realize is that this human tragedy is not unique to a fully socialized society. We can get there in small steps by growing the state and expanding its reach year by year until it envelops us in all our life activities. We have to turn to the state ever more. We are blocked by barriers. Everywhere we go, we encounter bureaucrats who demand our papers, riffle through our belongings, forbid what we want to do and mandate what we do not want to.

The sad and tragic story of Andrew Wordes — the chicken farmer who was driven to despair by government harassment and killed himself last month — continues to haunt me. And it turns out to be just one of millions of cases of similar psychological torment caused by government, directly and indirectly. These are wholly unnecessary events, inflicting terrible loss on the world.

Citizens in every country with an interventionist state face a situation similar to the one Andrew Wordes faced. They may have a dream of starting or growing a business, but they are blocked — not because of their own lack of vision, but because of the thicket erected by public policy. The state acts as a dream killer. It becomes all the more maddening when there is nothing that the citizen can do about it. There is no real choice.

Of course, soldiers in war face this reality every day. They are not their own persons. They must obey orders whether they make sense or not. They see things that no one should have to see and they are ordered to do things that no one should have to be forced to do. It is hardly surprising that people who go through such an ordeal have confused perspective on the value of human life.

For every one person who dies fighting in U.S. wars around the world these days, 25 other soldiers kill themselves. Veterans are killing themselves at a rate of one every 80 minutes. There are than 6,500 veteran suicides every year. That’s more than all the American soldiers killed in Afghanistan and Iraq in the last 10 years, according to a New York Times analysis. Being a veteran apparently doubles your risk of suicide.

Economic conditions wrought by government policies around the world have contributed to the suicide death toll. Europe is undergoing an epidemic of suicide in countries seriously hurt by the downturn. In Greece, the suicide rate among men increased more than 24% since the disaster hit. In Ireland, male suicides have shot up more than 16%. In Italy, economic-motivated suicides have increased 52%.

The big aggregates reported here do not convey the level of tragedy experienced in the lives of every single individual here. They leave behind shattered families and wrecked communities. There is an unbearably sad story behind every single statistic.

Anecdotal evidence suggests that the same is happening in the U.S and that the broad trend follows economic prospects. The difference between the rising prosperity of a free market and economic desperation caused by government is really a matter of life and death. The desperation and sadness wrought by war — an extension of domestic policy and carried out with much higher stakes — is a symptom of the same problem.

These represent both direct and indirect ways that government is spreading misery around the world. The direct way involves war and its psychological effects. Being harassed by regulators is another direct way: The person sees no way out and is thereby driven to desperate measures. The indirect way results from the economic stagnation caused by government: Its recession-spawning policies; its policy responses that do not work; its regulations that makes people crazy; its poverty-inducing taxes and inflation; and, most of all, its wars have driven millions to despair.

Why the state in particular? It all comes down to the sense of having control over your life. The essence of statecraft is the absence of choice and the inability to escape. Many operations of the state try to disguise these features.

Once you develop a nose for this, you see it everywhere. The faces of people in line at the DMV, the sauntering mass in line to be screened by the TSA and even the blank stares you see in the post office lines. There is something about state policy that demoralizes us all. That takes a toll on our health and our outlook on life and even leads to tragedy.

Oh, they tell us that in a democratic system, we can vote and that this is our choice. We have nothing to complain about. If we don’t like the system, we can change it. But this is wholly illusory. The government completely owns the democratic system and administers it to generate the types of results that government wants. More and more people are catching on to this, which is why voter participation falls further in every election season.

The great thinkers of the libertarian tradition have always told us that freedom and the good life are absolutely inseparable. I think of Thomas Jefferson, Frederic Bastiat, Herbert Spencer, Albert Jay Nock, Ludwig von Mises, Murray Rothbard, F.A. Hayek and so many others. Even contemporary authors have addressed the theme. They had long warned that every step away from freedom would mean a diminution of the quality of life. We are seeing these prophecies come true.

Too often public policy debates take place on the wrong level. The core point is not to make the “system” work better or otherwise fine-tune the rules within a bureaucracy. We need to start talking about larger issues about the dignity of the human person, the moral status of freedom and the rights and liberties of the individual in society. The expansion of the state is not just wrong as a matter of “public policy”; it is wrong because it is dangerous to the good life and the quality of life.

To kill freedom is to kill the essence of what makes us human.

Regards,

Jeffrey Tucker

Despair and the State was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.