It is their explanation for why things go wrong, however, that I find most illuminating. Both Schumpeter and Sowell write about “intellectuals” who have academic credentials of some sort but are lacking in knowledge that would make them particularly valuable to the market. Incapable of commanding significant wealth and status through voluntary market mechanisms, these intellectuals resent the wealth of more-successful people. As a result, they envy and resent the entire market system that has failed to reward them as they believe they deserve to be rewarded.

Others have also explored this theme. Another Austrian, Helmut Schoeck, wrote the book that is widely considered a masterpiece of sociology, Envy: A Theory of Social Behavior (Der Neid: Eine Theorie der Gesellschaft). You can go back even further, if you like, to the Tenth Commandment’s proscription on “coveting.”

Intellectuals who consider inequalities in wealth evidence of injustice often seek political remedies. These take the form of legislation and, more often, regulation. In the process, of course, they are able to portray themselves as heroic opponents of injustice. If they have sufficient support, they are also able to acquire significant power, wealth and status. We know from experience, however, that these intellectuals rarely consider their own wealth evidence of injustice.

In Europe, these intellectuals have been far more successful in the past than in America. For this reason, American intellectuals in academia, politics and media have for decades told us that the U.S. is woefully unsophisticated and behind the times. In fact, economists have shown consistently that quality of life is higher for Americans at all income levels than it is in most European nations. It is difficult, however, to compete with a movement that has had, until recently, a near monopoly on pulpits, podiums and programming.

That’s all changed. Not only has the United States seen Keynesian policies on steroids crash and burn, but the European model has been revealed as the house of cards that it is. For decades, governments have propped up living standards by borrowing to appease voters. In effect, nations have consumed at artificially high levels by sending their children the bill.

Naturally, governments run by these intellectuals have tried to raise taxes to support their habits. Many succeeded, but then discovered the reality of the Laffer curve. Taxes necessarily transfer resources from the private tax-generating sector to the public tax-consuming sector. At some point, taxes depress economic growth, which reduces government revenues. This point is usually much lower than the critics of capitalism assume. Moreover, their targeting of the wealthiest individuals is most damaging to the economy. The wealthiest are also those with the most money to invest in the innovations that create all net new jobs.

So we’re seeing tax recipients rioting in Greece and elsewhere. These riots will spread, but it will do no good. The money doesn’t exist to support the intellectuals’ schemes, no matter how bloody their tantrums. Times will get hard enough to create a generation that hates the intellectuals who promised that everybody would be able to retire young with no worries.

We are in the midst of a historic transition. The intellectuals got their way. Now the consequences of their ideologies are going to be painful enough to allow market reforms. That’s how self-equilibrating market mechanisms work.

This is all very good news for North Americans. Canada, by the way, is way ahead of America in learning the limitations of government. America, however, is learning quickly. Three years ago, the intellectuals were gloating that they could use the forthcoming economic downturn for their advantage. The public, they predicted, would blame free markets and give even more power to the planners.

That, as you know, has not happened. Despite the orchestrated efforts of the Occupy Wall Street crowd and other fans of socialism, the American public is far more wary of government than it is of business:

An overwhelming 64% of people surveyed said big government was the biggest threat to the country, compared with just 26% who said big business is their gravest concern and 8% who picked big labor.

Government debt schemes are failing. This is creating remarkable opportunities for investors. It amazes me, in fact, that more people don’t understand this.

On those rare occasions when I watch financial shows, I’m always surprised by the never-questioned assumption that up markets are good and down markets are bad. This is nonsense.

The name of the game for investors is “Buy low, sell high.” Given the inevitable fluctuations of the market, we know that markets have always gone through this sort of big cycle. They always will.

If this were not the case, “Buy low, sell high” would be nearly impossible. Sure, selling high is more fun, but you can’t do it if you haven’t bought low. This seems awfully obvious to me, but it’s clear that most people just don’t get it.

We are at an incredible historic juncture. The world is, once again, realizing it has been duped by fast-talking political scam artists. This is not a new story. In fact, we’ve actually gotten off pretty easy this time. By necessity, market-killing programs will be cut back, freeing investors and innovators to create wealth once again. This liberation of capital will come just as the greatest scientific revolution in history swings into high gear, delivering extended healthy life spans and new levels of wealth. I know it doesn’t always feel like it, but these are wonderful, extraordinary times.

Someday, some younger investor is going to say something to you like this: “You were so lucky to be investing back then, when prices were at rock bottom but the whole world was changing for the better. I’d be rich too if I were investing in those days.”

In fact, they will probably be wrong. Most people never see the big picture while it’s happening. This type of once-in-a-lifetime situation is always easy to see in hindsight. When you’re living through it, though, it takes real character and vision to grasp the opportunities.

Regards,

Patrick Cox

The Ongoing Recovery from the Folly of Intellectuals was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The last time there was talk about this issue was more than 30 years ago, after the devastating inflation of the late 1970s robbed an entire generation of their savings, upended American family life and launched a debt addiction that has destabilized economies all over the world. The Nixon administration promised a rose garden after the paper dollar; the results were very different.

The crisis in our times is not (yet) hyperinflation, but it is just as serious. The problems of the Fed-managed paper dollar system are too many to name, but they can be reduced to three that hit the average person most seriously.

First, it is no longer possible to earn a conventional return on saving money. That reality pretty much undermines the whole practice and ethics that built prosperity as we know it. The reason is directly related to the quality of money: Lacking any independent substance at all, its value and yield is managed by a small group of technocrats in a marble palace. They have used that power to impose the ultimate price control on the relationship between time and money.

Second, the problem of unemployment and the ever-shrinking labor participation rate has hit the young generation in a way that we’ve never seen before. This has terrible economic effects but just as devastating cultural ones. It attacks the core hope that people have for the future. Again, the paper dollar, as the generating force behind the bust and boom, is a cause.

Third, there is a growing movement against the power, secrecy and insider racketeering by the Federal Reserve, which prints and throws around inconceivable volumes of loot to its friends and clients in total disregard for the political process or the fate of the American middle class. This angers people of all political persuasions. The opening up of the records and dealings of the Fed has not calmed people down, but rather has confirmed the worst possible fears.

In the 1970s, writers like Henry Hazlitt struggled mightily to get people to see the connection between monetary policy and the falling value of the dollar. While the Ford and Carter administrations lashed out at business and speculators, Hazlitt and others pointed to the real cause. His message stuck. By 1980, even the Republican platform included a call for a sound dollar. Congress formed a gold commission.

The connection between the Fed’s paper money and our economic plight is even more difficult to make this time around. But the intellectual foundations have been in place for years, and they have been given voice in the relentless hammering away at this issue by Ron Paul in interview after interview. He never misses a chance to talk about this previously unspeakable subject.

A tricky issue for the movement now is dealing with the diverse political coalition coming together against the current monetary system. The biggest critics of the Fed, for example, agree that the current system is a mess but don’t seem to agree about what to do about it.

This week in D.C., I debated Dean Baker of the Center for Economic and Policy Research. The setting was fantastic: a speak-easy environment sponsored by the beautifully named Empire Unplugged. Baker is a strong critic of the Fed for reasons both good and bad. On the good side, he is as appalled as Ron Paul at the insider racketeering of the central bank. On the bad side, he would like to see its powers transferred to a body with more political oversight and democratic influence.

This is the exact opposite of what I argued for: the complete depoliticization of the entire system. We went back and forth for an hour on these topics, agreeing on the great evil, but disagreeing on what should replace it. As is typical of progressive critics of the Fed, he raised fears that market control of money and banking would revive the wildcat banking of the 19th century. This camp conveniently forgets that the age of the gold standard (which was never perfectly adhered to) also happened to produce history’s largest and most-positive economic transformation, propelling the creation and entrenchment of what is called the middle class.

Do these debates matter that much? On the level of theory, yes. In practice, not so much. These mirror the kinds of debates in the middle stages of the collapse of socialism in Eastern Europe. Recall that the movement against Polish central planning began not as a movement for private ownership of capital, but rather as a labor union protest against power and privilege of state-connected oligarchs.

This tendency made the champions of free markets squeamish, for good reason. Replacing a state monopoly with a state-protected labor monopoly does not necessarily look like improvement. But that’s not what ended up happening in Poland. Solidarity was the major vehicle that wrecked the regime as it stood. At one point, the major labor organization Solidarity had 9.5 million members. That mass movement upended history. Today, Solidarity is a normal union like any other, with membership at half a million and declining and no serious power. The result was not a labor monopoly, but a beautifully prosperous market society.

The lesson here: Sometimes you have to topple the system that exists and see what happens. This is why Ron Paul has been tolerant of a wide divergence of views within the anti-Fed movement. He is right to be so. Writers at The Wall Street Journal and elsewhere wring their hands about the dangers of political control of money in the post-Fed age. But history shows that the reform is not so easily managed. Breaking up the current monopoly is the most-important priority right now.

If the Fed were an Eastern European socialist government, the year would be about 1987. If the economy takes another dive after the fake boomlet that Bernanke’s printing presses have manufactured, he should make sure that the helicopter on the roof is in good working order.

Regards,

Jeffrey Tucker

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

The great “old right” commentator Frank Chodorov once described the income tax as the root of all evil. His target was not the tax itself, but the principle behind it. Since its implementation in 1913, he wrote, “The government says to the citizen: ‘Your earnings are not exclusively your own; we have a claim on them, and our claim precedes yours; we will allow you to keep some of it, because we recognize your need, not your right; but whatever we grant you for yourself is for us to decide.’”

He really does have a point. That’s evil. When Congress ratified the 16th Amendment on Feb. 3, 1913, there was a sense in which all private income in the U.S. was nationalized. What was not taxed from then on was a favor granted unto us, and continues to be so.

This is implied in the text of the amendment itself: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

Where are the limits? There weren’t any. There was some discussion about putting a limit on the tax, but it seemed unnecessary. Only 1% of the income earners would end up paying about 1% to the government. Everyone else was initially untouched. Who really cares that the rich have to pay a bit more, right? They can afford it.

This perspective totally misunderstand the true nature of government, which always wants more money and more power and will stop at nothing to get both. The 16th Amendment was more than a modern additive to an antique document. It was a new philosophy of the fiscal life of the entire country.

Today, the ruling elite no longer bother with things like amendments. But back in those days, it was different. The amendment was made necessary because of previous court decisions that stated what was once considered a bottom-line presumption of the free society: Government cannot tax personal property. What you make is your own. You get to keep the product of your labors. Government can tax sales, perhaps, or raise money through tariffs on goods coming in and out of the country. But your bank account is off-limits.

The amendment changed that idea. In the beginning, it applied to very few people. This was one reason it passed. It was pitched as a replacement tax, not a new money raiser. After all the havoc caused by the divisive tariffs of the 19th century, this sounded like a great deal to many people, particularly Southerners and Westerners fed up with paying such high prices for manufactured goods while seeing their trading relations with foreign consumers disrupted.

People who supported it — and they were not so much the left but the right-wing populists of the time — imagined that the tax would hit the robber baron class of industrialists in the North. And that it did. Their fortunes began to dwindle, and their confidence in their ability to amass and retain intergenerational fortunes began to wane.

We all know the stories of how the grandchildren of the Gilded Age tycoons squandered their family heritage in the 1920s and failed to carry on the tradition. Well, it is hardly surprising. The government put a timetable and limit on accumulation. Private families and individuals would no longer be permitted to exist except in subjugation to the taxing state. The kids left their private estates to live in the cities, put off marriage, stopped bothering with all that hearth and home stuff. Time horizons shortened, and the Jazz Age began.

Class warfare was part of the deal from the beginning. The income tax turned the social fabric of the country into a giant lifetime boat, with everyone arguing about who had to be thrown overboard so that others might live.

The demon in the beginning was the rich. That remained true until the 1930s, when FDR changed the deal. Suddenly, the income would be collected, but taxed in a different way. It would be taken from everyone, but a portion would be given back late in life as a permanent income stream. Thus was the payroll tax born. This tax today is far more significant than the income tax.

The class warfare unleashed 99 years ago continues today. One side wants to tax the rich. The other side finds it appalling that the percentage of people who pay no income tax has risen from 30% to nearly 50% in this period of economic downturn. Now we see the appalling spectacle of Republicans regarding this as a disgrace that must change. They have joined the political classes that seek advancement by hurting people.

It’s extremely strange that the payroll tax is rarely considered in this debate. The poor, the middle class and the rich are all being hammered by payroll taxes that fund failed programs that provide no security and few benefits at all.

It’s impossible to take seriously the claims that the income tax doesn’t harm wealth creation. When Congress wants to discourage something — smoking, imports, selling stocks or whatever — they know what to do: Tax it. Tax income, and on the margin, you discourage people from earning it.

Tax debates are always about “reform” — which always means a slight shift in who pays what, with an eye to raising ever more money for the government. A far better solution would be to forget the whole thing and return to the original idea of a free society: You get to keep what you earn or inherent. That means nothing short of abolishing the great mistake of 1913. Forget the flat tax. The only just solution is no tax on incomes ever.

But let’s say that one day we actually become safe from the income tax collectors and something like blessed peace arrives. There is still another problem that emerged in 1913. Congress created the Federal Reserve, which eventually developed the power to create — on its own — all the money that government would ever need, even without taxing.

For the practical running of the affairs of the state, the Fed is far worse than the income tax. It creates the more-insidious tax of inflation. In a strange way, it has made all the debates about taxation superfluous. Denying the government revenue does nothing to curb its appetites for our liberties and property. The Fed has managed to make it impossible to starve the beast.

Chodorov was correct about the evil of the income tax. Its passage signaled the beginning of a century of despotism. Our property is no longer safe. Our income is not our own. We are legally obligated to turn over whatever our masters say we owe them. You can fudge this point: None of this is compatible with the old liberal idea of freedom.

You doubt it? Listen to Thomas Jefferson from his inaugural address of 1801. What he said then remains true today:

“…what more is necessary to make us a happy and a prosperous people? Still one more thing, fellow citizens — a wise and frugal government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement and shall not take from the mouth of labor the bread it has earned.”

Regards,

Jeffrey Tucker

Ninety-Nine Years of Evil was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

“It may come as a shock …” wrote John Flynn, “to be told that[you] have never experienced that kind of society which [our] ancestors knew as the American Republic …” Flynn, the editor of the popular weekly the Saturday Evening Post, had already come to this conclusion in 1955. In his book The Decline of the American Republic, Flynn observed that Americans needlessly “live in the war-torn, debt-ridden, tax-harried wreckage of a once imposing edif ice of the free society which arose out of the American Revolution on the foundation of the U.S. Constitution.”

An empire needs a source of income suff icient to fund its military campaigns, regulatory regimes, and domestic schemes. It also needs a strong central authority to direct its ambitious new programs. In one short 12-month span, a year the writer Frank Chodorov calls the “Revolution of 1913,” the empire got the tools it needed. That year—the same year European countries abandoned the gold standard in preparation for World
War I—the old Republic ceased to exist.

WHERE THE MONEY COMES FROM

America’s current system of income tax is a twentieth-century invention. Previous attempts at creating a national tax had failed or had been thrown out because they violated tenets of the Constitution deemed essential by the founders. In its f irst 100 years, the United States supported its federal government with a series of what we would call “sin taxes” today, on

whiskey, tobacco, and sugar. By 1817, all internal taxes were abolished by Congress, leaving only tariffs on imported goods as a means for supporting the government.

The first income tax that citizens of the young Republic were forced to endure came about because Congress had been asked to fund the War between the States. In 1862, a tax on incomes between $600 and $10,000 was assessed at the rate of 3 percent, and the Internal Revenue Service (IRS) was created. The war was costing $1.75 million per day.2 The government sold off land, borrowed heavily, enacted various fees, and increased excise taxes, but it simply wasn’t enough. The income tax seemed like the only way to finance the war and service the country’s then-staggering $505 million debt. That tax was promoted as a temporary wartime measure. Temporary it was. In 1872, after servicing the Reconstruction, Congress yanked the “temporary” tax.

But that was not the end of it. The income tax appealed to empire builders because it alone offered enough cash to finance the enterprise. But it had another appeal—to the larceny and envy in the hearts of ordinary citizens. Following a banking panic in 1893, Senator William Peffer of Kansas, supported the progressive income tax in this way:

Wealth is accumulated in New York, and not because those men are more industrious than we are, not because they are wiser and better, but because they trade, because they buy and sell, because they deal in usury, because they reap in what they have never earned, because they take in and live off what other men earn… . The West and the South have made you people rich.

That sentiment was puffed up by Nebraska’s bellicose worldimprover William Jennings Bryan, who argued against the “equal taxation” requirement in the Constitution, in favor of the current progressive one:

If New York and Massachusetts pay more tax under this law than other states, it will be because they have more taxable incomes within their borders. And why should not those sections pay most which enjoy most?

This logic is simple. People who are more productive should be forced to pay a bigger share of their common expenses. But this kind of logic had no place in a free republic where all men were supposedly created equal; if they were equal they could each carry their own share of

the burden of central government. Under this new regime, men were no longer equal, but given differing loads to carry based on the whims of elected hacks.

With considerable foresight, one member of the House of Representatives predicted:

The imposition of the [income] tax will corrupt the people. It will bring in its train the spy and the informer. It will necessitate a swarm of off icials with inquisitorial powers. It will be a step toward centralization.

… It breaks another canon of taxation in that it is expensive in its collection and cannot be fairly imposed … and, finally, it is contrary to the traditions and principles of republican government.

When the tax was again introduced in 1894, a challenge went to the U.S. Supreme Court. In 1895, even among the cacophony of appeals in Congress to “soak the rich,” the Supreme Court declared the bill unconstitutional in a 5-to-4 ruling. In writing the majority opinion, Justice

Stephen J. Field quoted another case to support his conclusion:

As stated by counsel: “There is no such thing in the theory of our national government as unlimited power of taxation in congress. There are limitations, as he justly observes, of its powers arising out of the essential nature of all free governments; there are reservations of individual rights, without which society could not exist, and which are respected by every government. The right of taxation is subject to these limitations.”

But when the winds of empire blew, the old yellowed paper of the U.S. Constitution went f lying. Following The Panic of 1907, President Theodore Roosevelt sided with a faction in the Democratic Party that wanted to amend the Constitution to allow a national income tax. In

1909, President Taft stated that he had “become convinced that a great majority of the people of this country are in favor of vesting the National Government with power to levy an income tax.”

Of course, politicians are always able and willing to argue that “the people” want a government to have more power. If the voters see a free lunch in the deal, they’re for it. By 1913, just in time for Wilson’s emergence on the world stage, the Sixteenth Amendment had been ratified by enough states to put the income tax into law. The Amendment states:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.

It wasn’t long before Congress exercised its new powers. Wilson even convened a special session of Congress to rush through the f irst tax law under the Sixteenth Amendment, in which earnings above $3,000 were subject to a 1 percent tax, gradually moving up to 7 percent on higher income levels.

With its rather modest rates, the original income tax was viewed as a benign inconvenience. As early as 1916, however, the top rate was more than doubled from 7 percent up to 15 percent. Then as cash was needed to send Pershing to France, the rate was hiked to a staggering 67 percent in 1917 and 77 percent by 1918. Even the low rates were raised. From their microscopic origin of only 1 percent, the rate settled into a “modest” 23 percent by the end of World War II. But by that time, the people of the old republic had grown to accept an income tax as a necessary evil. Now that the nation was an empire, it needed the money.

In our present era, the complexity of the Internal Revenue Code (IRC) has created an army of specialized lawyers and accountants. Even attempts at reform are out of control. A “technical corrections” bill exceeds 900 pages of adjustments. In fact, by the beginning of the twentyfirst century, the tax codes exceeded 7 million words, about nine times longer than the Bible; and the IRS was sending out about 8 billion pages of forms and instructions every year—at the cost of about 300,000 trees! All this effort translates to about 5.4 billion hours spent every year by Americans just complying with the tax rules.

From 1913 to 2005, the income tax has enabled, entitled, empowered, and engorged the federal government, states, and local governments, private enterprises, and millions of private citizens. Spending has grown by more than 13,592 percent.

The income tax gives the federal government a blank check to spend money, even money it does not yet have. The federal government lays a claim on all future economic activity of its citizens; its massive debts are a lien on the earnings of people who have not yet even drawn their first breaths. What’s more, the income tax could be used as both an economic tool and as a political weapon. Tax rates could be manipulated, for example, to punish or reward favored political groups.

When the Constitution was ratified in 1789, the colonists in the New World believed they had won for themselves a measure of freedom and independence. “A republic, if you can keep it,” Benjamin Franklin warned.

But by the end of 1913, a scant 124 years later, Americans were happy to lose their republic; an empire was what they wanted.

Regards,

Bill Bonner

Addison Wiggin

The Revolution of 1913 was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

They all ask some version of the same question, in any case. It’s the cocktail-hour question asked of every economist: What does the future hold and what should be done about it? The problem is that Bernanke doesn’t know more about the future than the markets know. Actually, looking at the transcripts of the 2006 FOMC meetings, the Fed knows much less than the markets know.

But at least we now know what Bernanke thinks he knows. A short summary of the flurry of news from the Fed yesterday: The economy is still in the tank, it will stay that way for years, interest rates will be held at zero and savers can go to hell.

That last part we can glean from the most-interesting question posed to Bernanke yesterday. Greg Robb of MarketWatch pointed out to him that he has some severe Republican critics. The Fed has been a major issue in the debates and on the campaign trail. Mr. Robb had a theory about why: Many Republican voters lived on fixed incomes that depend on some return on their money. For this crowd, zero interest rates are a disaster. Robbery, really.

Bernanke’s first response was to say that he was not going to involve himself in politics because he “has a job to do.” It is a credit to the press corp that they did not double over in laughter at the ridiculous claim that the Fed’s job has nothing whatever to do with politics! After 100 years of Fed service, it is pretty obvious that the Fed serves two clients: the big banks and the government. The Fed certainly doesn’t serve the class of people who save and invest.

So how did Bernanke deal with the second part of the question? This was interesting. He said that he was very sorry for savers and those who depend on interest income, but they need to understand that they too have a long-term interest in a healthy economy. If investment and productivity are rising, they create the conditions for growth down the line, and surely this is good for everyone.

That’s some crazy kind of circuitous reasoning going on there. It’s a bit like the thief who steals the silverware and then explains to the former owners that a wider distribution of beautiful tableware is surely good for everyone in the long run. Even if you buy the argument, it would be nicer if the owner had some choice in the matter.

And there’s another problem that is so incredibly obvious that no one at the press conference even dared point it out. The problem is that the zero-interest-rate policy has not worked to boost economic growth. What possible basis is there for thinking that two more years of this extermination of the saving class is going to do what the last three years have not done?

Of course, it depends on what you mean by “worked.”

Let’s say that the Fed wants to drive all investors away from government bonds and into riskier instruments in an attempt to artificially boost financial markets. Check.

Let’s say that the Fed wants to punish anyone who wants to sock away money for a rainy day and, instead, prod them into buying more plasma TVs, digital gizmos and summer homes. Check.

And let’s say that the Fed wants to artificially suppress the government’s own costs of borrowing in order to reduce pressure on the political class. Check.

In all these ways, abolishing interest rates works for the Fed and the political elites. But there are at least three downsides.

First, banks depend on interest payments for profitability, and low interest removes the financial incentive for banks to lend money in a normal way. This is why commercial bank loans remain low, with the latest data showing the volume at mid-2007 levels. One might suppose that this is contrary to the Fed’s aims, but it is a price that it is willing to pay.

Second, a low interest rate agenda requires that the Fed try to control not just the short-term rates over which it has the most influence, but also rates across the entire yield curve. This means removing risk premiums on longer-term loans by implicitly guaranteeing bailouts, just like those of 2008-10. This entrenches more moral hazard and drives a wedge between risk and result.

Third, this policy of low rates is similar to — but even worse than — the very policies that created the bubble of the 2000s that burst in 2008 and prompted the worst financial and economic calamity of many generations. The Fed has learned absolutely nothing from even its own most-recent history. If people can’t earn money through interest, financiers will find some other way to market risk, leading to crazy investments schemes and misallocated capital.

As David Malpass writes in The Wall Street Journal:

Near-zero interest rates penalize savers and channel artificially cheap capital to government, big corporations and foreign countries. One of the most fundamental principles of economics is that holding prices artificially low causes shortages. When something of value is free, it runs out fast and only the well-connected get any. Interest rates are the price for credit and shouldn’t be controlled at zero. It causes cheap credit for those with special access but shortages for those without — primarily new and small businesses and those seeking private-sector mortgages.

The big take-away from the Fed’s day in the news is its new policy benchmark of keeping inflation at 2%. This is sheer silliness. There is no such thing as a price level, as even recent CPI releases illustrate. Some prices went up (food, education, health), and some prices went down (oil, software, services). Mash them together and you get a single number that applies to absolutely nothing in particular.

In any case, the Fed can’t control prices in this way. It is always driving while looking in the rearview mirror. When the crash comes, there is nothing the Fed can do about it, despite Bernanke’s repeated promises to rescue the world from any bad effects of his policies.

As Bloomberg’s Caroline Baum says, it’s almost as if the Fed itself has completely forgotten the existence of the “long and variable lag” that separates its policies from their effects. She recalls Milton Friedman’s own analogy of the “fool in the shower” who keeps turning the water from all hot to all cold and wonders why he is either scalded or frozen.

Baum concludes that under Bernanke’s own plan, we would have “eight years of 0% interest rates. There will be a revolution in this country before then if the economy is lousy enough to warrant 0% interest rates for that long.”

Really? One would hope.

Regards,

Jeffrey Tucker

Zero Percent Uber Alles was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

We don’t have a government-created central repository that plans and manages shoe distribution. The market takes care of that. We don’t have one for cabbage, keyboards or curtains. Somehow, we get books, clothes, tree-cutting services and everything else we need and want without a central planning agency that manages the quantity available, fixes the prices of the products and bails out the firms when they overextend themselves.

Why should money and banking be any different? Money is a commodity. Banking is a business. They both originated in the market, not the state. They should have been left that way, so that the quality of the product could be subject to market discipline. In a market economy, things work themselves out. There is supply and there is demand. Entrepreneurs take notice of profit opportunities and jump in to pull the two together.

This is how the world works for us. This is how it has always worked. This is how we get our software, coffee, sheet music and beef. It’s how we get our cars, the parts that keep them running and the gas that fuels them.

The world is man-made in every respect, and the hands that made it productive, efficient, dynamic and socially beneficial operated within the market matrix. The simple relationships of learning, exchanging and competing gave rise to a glorious system that manages to sustain a global population of 7 billion people.

The Fed is a nonmarket institution, much like public housing and the space shuttle. It is a Dark Age creation that still exists for no apparent reason. By Dark Age, I mean, of course, the world before 1995, when the Web — meaning all information — became accessible to the world. Before that, the world remained mostly in the dark, when government controlled the information we could access and private truth had to be shared through paper sent through the government mail system.

During the Dark Age, only geniuses like Ludwig von Mises and F.A. Hayek knew that the Fed was a hoax. Most everyone else imagined that the people at the Fed were doing magical, wonderful things inside hallowed walls so that the economy would be stable and grow. Its board of governors was populated by people who knew the economic future and held the power to steer it in a way that benefited everyone.

Thanks to the digital age, we now have access to what really goes on. In the last 12 months alone, we’ve been inundated by reports of what actually goes on at the Fed. In 2006, according to released transcripts of its board meetings, its wise men were busy reassuring themselves that absolutely nothing was fundamentally wrong with real estate and that all other economic structures were humming along beautifully.

It is fascinating to read those candid transcripts. Far from being an open forum for discussion, Greenspan and Bernanke preside with all power to determine results, practically daring any of their subordinates to disagree with the consensus they arrive at beforehand. The Fed economist sometimes pops up his head to say that all is not well, but it’s like a game of Whac-A-Mole: He gets the hammer on the head every time.

It’s the worst case of bad corporate management you can find on record. It makes Dilbert’s world look like a paragon of management success. There is no openness, no truthfulness. If the chairman makes a joke, you must laugh. If the chairman says all is well, you must agree. If the chairman says he knows the future, you must be in awe of his insight. All dissent must be coached within a puffy framework that raises only a slight and probably irrelevant concern, and it is still likely to be punished.

Then there is the problem that it is not entirely clear, even to the people in the room: what precisely they can do about anything. They know what they are doing is important and want to believe that they have tremendous power. But here’s the problem…The Fed really has only one significant power: to create the conditions intended to encourage a change in the supply of money and credit.

That’s a huge power, but it is not a precise one. The money supply is a lot like an unruly child. Lots of times, the kid will obey you. Sometimes, and unpredictably, it will not. It depends on the mood, the context, the prevailing temperament, the rewards and punishments. And even when the kid obeys, the results are not always what you intend. The council of parents can meet and plan all day, but in the end, the kid has a mind of its own.

Two notable examples follow. In the early 1930s, the Fed was desperate to expand the money supply as a matter of both policy and practice. There was no intention to let the supply collapse, as Murray Rothbard has shown. The problem was that the Fed had to depend on the banking system to make it happen through the loan markets. But the system was broke, and it never happened.

The same thing happened again from 2008 and forward. The Fed did everything possible to manufacture a far-reaching monetary inflation, but failed to make it profitable for the banking system to cooperate. Contrary to the Fed’s wishes, it never fully materialized. Their efforts only ended up subsidizing failure and preventing a much-needed and deep market correction.

The sheer power of the Fed was in full display in 2008, and all the public records indicate what it was used for. The Fed provided liquidity for its friends. They said that they did it all for the nation, but it is unclear that the nation got anything at all from the deal. What is clear is that its friends survived and thrived, whereas many institutions should have gone belly up, as the capitalist system would dictate. That’s the essence of its power and the core of what the Fed does.

This is nothing new at all. It’s just that it is now on full display for all the world to see. And this is one reason that the Fed is now under fire as never before. The digital age has pulled back the curtain. Instead of the mighty Oz, we find a few people pulling levers with smoke and mirrors.

Before 1989, the world was strewn with such central planning agencies. They were all over Eastern Europe and the old empire called the Soviet Union. Then one day, the whole thing melted away and the absurdity and arrogance of the central planners were revealed to the world. The Fed is no different in structure from these institutions. The whole thing is based on a lie that it takes government power to have a good monetary system.

In what sense is it good? The depreciation of the dollar since 1913 has been catastrophic for prosperity. The dollar is now worth less than a nickel. Savings have been expropriated. The Fed’s interest rate policy has negated any real advantage of saving money. Business cycles have become national, international and extended, rather than local and short-lived as they were in the 19th century. The moral hazard that the Fed has built into the system is that financial systems no longer take proper account of risk.

In the digital age, the opportunity costs of the money monopoly have been huge. We might have had a competitive money system emerge by now. It could have been based on gold, silver or any other commodity. But the market has not been allowed to work. The Fed, working with the government that created and sustains it, has cracked down hard on every attempt by the market to make something better than the Fed-managed dollar. People now languish in jail for the crime of trying to restore money and banking back to the market.

What is the worst cost of the Fed? It has made the federal government, no matter how big it gets, beyond failure. This is the ultimate moral hazard. It has puffed up the leviathan state beyond anything that should ever exist in the world. It’s not taxes that have done this. It is the Fed. In this way, it has made itself the ultimate enemy of freedom itself. And as goes freedom, so goes human rights.

The whole catastrophe is no longer possible to ignore. Ron Paul has made it a political issue. Newt Gingrich has jumped on the bandwagon to scrap the Fed. The former CEO of BB&T gave an interview in which he said, “As long as the Fed exists, Congress can effectively print money. And it doesn’t matter whether they are Democrats or Republicans, they would rather print money than tax people. They want to spend because that effectively buys votes, and they don’t want to tax people because that loses votes.”

The problem of ending the Fed is not a technical one. It is not much of an intellectual one, either. It takes only a few minutes to figure out that the whole thing is rooted in myth. The problem of ending the Fed is entirely political. The government is dependent on its powers. So yes, it makes some sense that the political class and its friends — let’s call them the 1%, for short — think the Fed should exist. The rest of us should know better by now.

Regards,

Jeffrey Tucker

The Fed’s Men Behind the Curtain was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

“Joe Lieberman is not a Democrat. He is an independent, as he resigned from the Democratic Party. Don’t you ever check things out before stating them as facts?

“Wish you the best with your paranoia,”

“– Steve K”

This comes from one of our most-faithful, unswerving, persistent critics. A man who has dutifully read our material for years so he can tell us why we’re wrong about the economy, politics, art, science and love.

Our copy editing department called us on this, too. In our rush yesterday, we copied and pasted the pre-edited version of Jeffrey’s article…instead of the one that the copy editors had edited. So our apologies for that.

But if we were to be honest with you (and we always are), we would have to admit that while it may be technically inaccurate to count Lieberman among the Democrats, it is a matter of semantics that doesn’t amount to a hill of beans.

These political labels can be distracting. Personally, we don’t care what Lieberman calls himself. We care about what he does. The man is as well intentioned as he is clueless…which makes him especially dangerous. He bends most of his energy to coming up with more powers for the state under acts with comically Orwellian names.

Note that the reader who pointed out our error also wished us well with our paranoia. We suppose he means our worry about things like Lieberman’s insistence that the state should strip Americans of citizenship based on no evidence, should the state feel it necessary.

We are amazed at how the state grows from an annoying goblin into a sulphur-spitting archdemon…how it can start biting people in half (figuratively, of course) and spear infants on its trident, while its victims shrug their shoulders and mutter, “I really don’t see that there’s any cause for alarm.”

But that’s not what we’re here to talk about today. As disagreeable as it may be, we turn our attention to yet another political figure…

Mitt Romney recently released his tax information for the past couple of years. Wouldn’t you know it, he managed to lower his effective tax rate to 13.9%…by giving away millions to things he cares about.

That’s not what the headlines blare, however. What you see is that this man who earned millions of dollars per year paid far, far less a percentage of that income to the feds than middle-class suckers.

This is supposed to rouse the rabble. That’s certainly what the impressively eyebrowed Sage of Omaha, Warren Buffett, meant to do when he compared his tax payments with those of his secretary.

During our regular morning confab, LFB executive editor Jeffrey Tucker said of this, “The only really fair tax would be a fixed-dollar head tax. Like $1,000 per year. Or whatever.”

We had to push our seat back away from the table to give ourselves the room to laugh uproariously. A fixed-dollar head tax? Ha!

Sure, it makes perfect sense. But this is modern America. We are all progressives now, comrade. From each according to his ability. To each according to his need.

A man who makes more can afford to pay more. And he must. At least until he makes enough to employ some impressive loopholes in the purposely convoluted tax code.

“Of course,” Jeffrey pointed out concerning the progressive tax payment model, “if private enterprise did this, we would all see this as unfair exploitation.”

And of course, Jeffrey is right. Could you imagine if you had to pay more for your gas, meat and bread because you earned more?

Now, individual merchants can discharge their goods as they see fit, giving discounts to whomever they wish based on whatever criteria they wish: height, age, looks, degree of familiar relation…

A butcher may give his elderly widow neighbor endless credit that he never means to make her pay (like the Fed does for the U.S. government). Or that same butcher may give the shapely, unattached 20-something with the playful smile an extra cut of meat at no charge.

But those are the minute decisions of the free market based on factors that only the individual players know and can adjust to. Government with its heavy hand — and with eyes that can’t see all the details — just across the board charges more for its “services” based on the “customers’” ability to pay. And it’s not like you can take your business elsewhere if you don’t agree…

The individual seller’s rationale for any progression in pricing will reflect his intimate knowledge of conditions surrounding the sale and the marginal benefit to him of the price variance. And it’s important to note that the market itself will bear only so much progressive pricing. Most folks won’t mind that the butcher gives the widow a free ride…or even that he gives the prettiest girls a bit more meat…

But should that butcher charge the higher earners more, he would quickly lose the business of those higher earners. That’s the market at work. Buyers and sellers determining what’s fair. This kind of market democracy we like! (It’s the political kind that leaves us cold.)

The government’s pricing rationale (taxes are the price we pay for government…which is not synonymous with civilization), however, is not quite so sound…

The government says that it should take more from the rich than the poor on grounds that the marginal dollar is actually worth less to the higher earner than it is to the lower earner. But how can we know this for sure? Value is subjective, and you can’t compare the worth of money between any two people.

Further, one could argue with more substance that there is even less reason to take money from the wealthy since that money is likely to be invested, saved or donated. Taxing the rich thereby taxes society more directly than when you tax poor people who mostly consume all they earn.

So back to Jeffrey’s fixed tax on each person…

“$1,000 per person per year would yield,” he notes, “about $300 billion all together. That was the cost of government during the Ford administration. Was government too small then?”

“Not sure,” we replied, “We’d say it was already too big by the Washington administration. And that the wooden-tooth bastard ought to have been hanged for treason after the Whiskey Rebellion…

“But I’m assuming that children would be subject to the tax, too,” we continued, “and that either parent would have to pay for them…?”

“Precisely so, but not that it matters that much. Say it’s only on everybody over 18 or some arbitrary age at which the state allows people to sell their skills in the marketplace. There were only about 75 million persons under 18 in the U.S. in 2011. So you still have very nearly $300 billion in taxes collected with just $1,000 per eligible taxee.”

“Hell, even panhandlers can come up with that,” we said. “Or would they even have to pay? They certainly don’t file income tax forms now…”

“Fine, reduce it to official households. There are over 130 million of those. So $130 billion in tax revenue. Which puts us squarely in the middle of LBJ’s crazed plan to bankrupt the country with guns and butter: 1966.

“One thing I want to make clear,” Jeffrey said. “Say you have a tax of 10%. Flat, right?

“No. 10% of $1 million is far more — 10 times more — than 10% of $100,000. High-income earners are punished far more. That’s why a head tax — as strange as it may seem to some — is the only flat tax.”

And we’re not really offering solutions. Because our suggestions amount to theorizing for now. We do, however, try to make sense of the degrees of our disgust.

We never saw a tax we actually liked. But there are taxes that make us want not quite want to revolt. If we had to pay some centralized warmongering nannies (and we do), we could live with a fixed tax like the one described above.

We hate when the government tries to incentivize anything, but a truly flat, fixed tax would indeed incentivize people to try to earn more. Earning more would reduce the impact of a fixed tax as a percentage of their incomes.

Of course, this won’t fly in modern America. The rich can pay more for the government we all get. So pay more they shall!

Local and even state taxes are another good example of taxes we can’t hate as much as the progressively looted chunk we send off to the feds every quarter. With more local taxes, we are clearly getting something of use for our money after all.

We can argue till our brown face turns blue about how much more efficiently the market would provide every single service the government does (though the shape of these things would likely be quite different)…

But concerning local government services — and the money extracted to pay for them — at least we can overwhelmingly agree with what our tax money pays for. This includes things like the sidewalks and roads we use and the police and fire protection.

Federal taxes are quite a different beast, however. The bullets used to tear into foreign brown skins…the guns used to fire them…the food and clothing of the soldiers holding the guns…the bombs dropped on insurgents and collateral wedding party attendees and teenage goatherds.

Which brings us to a letter we received today…

“Hi Jeffrey, Gary et al.,

“As always, I love your articles and critiques of how the America we love is slowly eroding away.

“I have a query, but first a little background…

“I am an Irish-American citizen living and working in Ireland since 2006…so I have seen this Irish economy collapse in sync with the economy I left in Michigan back in that hazy summer…

“To cut to the chase, my wife and I were blessed with our first child, born December 2011…

“Now she is eligible for Irish citizenship and she has her birth certificate to prove this. BUT she may also obtain her U.S. citizenship, care of me..

“My query?

“Given the near- and long-term future of the U.S….endless wars, increased poverty, insurmountable debts, increased taxes (and filing taxes even if she never lives/works in the U.S.) destruction of the middle class and the $$…etc.

“Why should my daughter become an American citizen?

“What are the reasons, given the glum future of the USA, to become one of us?

“Do the same reasons, land of the free and the brave, still hold through, or should she just stay Irish till her dying days?

“Would love to get your and your readers’ views on this..

“Cheers,

“Tim”

We would love to get views from the Whiskey patrons as well! Good patrons, please send those views here. ggibsonagora@gmail.com

And a hearty congratulations on the arrival of your daughter, Tim! We’ll buy you a shot should the chance present itself.

As for her citizenship…your Whiskey editor is torn on the subject. And far from qualified to offer any real advice. Especially in a legally binding sense. But we can share our biased, but considered opinion, for this is a matter we struggle with all the time.

We aren’t even U.S. citizens. Merely a legal resident who has lived here since he was a toddler. Many of the people we respect have been cutting their ties to the U.S., either just leaving physically…or actually giving up the legal right to live and work on these shores indefinitely.

Our own situation is different. Our own native land is small, poor and given to collectivist politics. We thus effectively possess refugee status. Our options for a long-term home should we fling our green card at a border guard and spit, “Here! Take it, for I no longer want any part of your warmongering, police-nanny state!”…well, those options are limited and poor.

We wouldn’t go back to the Caribbean. We suppose we could bounce around South America as long as someone paid us to write…and we could afford to leave various countries every few months to satisfy the visa requirements.

We are not experts (and we suggest you talk to one about this)…and we hesitate to be hypocrites. We do not even have U.S. citizenship, yet we remain in the U.S. Our first inclination is to tell you to spare your daughter of the burden (for the benefit-to-cost ratio of U.S. citizenship may continue to mount for the worse as she approaches adulthood).

But note that despite it all, we remain in the U.S. unwilling to break the inertia of our own living habits. We cast about the nation in search of a comfortable, quiet corner to call home. But we’re not quite ready to leave just yet…though each outrage brings us closer to the limits of our tolerance…

There is a good case for you to keep your daughter from ever becoming a tax cow for the U.S. Again, let’s put this to our Whiskey Shooters and see what we can come up with. We’ll probably run your responses this weekend. So get cracking: ggibsonagora@gmail.com.

In the meantime, let us consider this letter, which we received just minutes later…

“Mr. Gibson.

“It appears that you use the words citizen and national synonymously. They are not.

“The 14th Amendment (proposed by a Congress that lacked a quorum) was a solution to the 1850 Dred Scott decision, wherein the Supreme Court ruled that negros of African descent could not be citizens. The amendment granted a form of citizenship to those who were born in the United States and completely subject to its political (lawmaking) power. (It was a subsequent decision in which the court ruled that the subjection of the 14th Amendment was complete subjection in the feudal sense.)

“Before the 14th Amendment, citizens of the states established the qualifications for citizenship within their respective states, not the federal government. Citizens of the United States were so because of their immediate citizenship in the political body known as a state of the union. The sates of the union created the United States, so these sovereigns could not be completely subject to the lawmaking power of the United States in the feudal sense. Under certain circumstances, they could be subject to its civil, but not its political, jurisdiction. The United States was not their sovereign liege lord; sovereignty was vested in them, not in the government, state or national.

“As the court ruled in the Slaughter-House cases, the 14th Amendment gave nothing to state’s citizens. What it did do, and what you evidently do not see, is that the 14th Amendment created a new class of citizenship: citizen-serf, a human resource, part of the capital of the federal government, PROPERTY of the United States, aka, U.S. person.

“National is the word used by government today to describe what was formerly known as a state citizen, the person in whom the sovereignty is vested. He may or may or may not elect to be treated as though he is the property of the United States. According to the 13th Amendment, he has a choice.”

Wait a minute. Are you trying to tell us that the U.S. government, like every government everywhere else all throughout history, see itself in a feudal relationship with its citizens? That to the political class, we are not “purchasers of order and civilization,” but instead nothing more than cows to be milked for tax money?

OK, yeah, we see where you’re coming from.

Regards,

Gary Gibson

Hooray for the Rich Who Don’t Pay Taxes was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

He’s ponied up $49,000 to help pay down the national debt. He’s simultaneously matching voluntary contributions already made by Rep. Scott Rigell of Virginia.

Yes, $49,000 to Mr. Buffett is the equivalent of 49 pennies to the rest of us (Mr. Buffett is a billionaire and most Americans are thousand-aires or hundred-aires at best, so this is actually pretty accurate).

Buffett had issued a challenge in Time Magazine recently in which he promised to match voluntary contributions for reduction of national debt made by all Republican members of Congress an impressive three for one.

The image below is of the actual letter from Warren to Scott.

Buffet claims that rich folks and politicians competing to see who could donate the most to the feds is a form of competition the American people would applaud?

A competition to see who can throw the most of their money down the grand canyon of federal government deficits? That’s worse than watching reality tv and finding out which sap can make the biggest ass of himself in front of millions of viewers.

And what sort of example is this setting? What is the message? That if any of us have any extra cash lying around you ought to send it to the government? The same government which already takes around 40% of your nominal income off the top? We suppose if wrapping foreign aggression and subjugation to a police state in patriotism works, then making this sort of inanity seem patriotic will work, too.

We know there are those who defend taxes no matter what. We hear these people on the radio, see them on political talk shows and read their words in print (mostly in the New York Times). A few of them regularly read this letter and send us notes to stop whining about paying our “fair share”.

Of course our own decidedly Austrian stance feeds our love or the agora, the market place, as the best use of all funds, including those funds we can no longer use because the government took them under pain of imprisonment and death…

We maintain in our free market zeal that all needs would be met and all goods and services improved upon via the free market far, far better than they could by taxation and central planning.

(We also call upon history to lighten our burden of proof. The more centralized the economy, the poorer and less sustainable it has been. The freest economy the world had ever seen has become poorer and poorer the more centralized it’s become.)

Many would even agree. To a point. Except for things like infrastructure, national defense, public safety and security. And education. And medical services. And retirement income.

Ah, see. That list can keep growing. But let’s pretend that most of us can agree on just infrastructure and national defense (the things that even many libertarians would let the feds handle). Do we really buy that the federal government needs nearly half of most of our incomes in order to maintain infrastructure and an army?

Most of us normally don’t question how much of our money disappears down the federal maw. Because it generally does no good. We accept that what we supposedly get in return – highways and not going to jail – makes those taxes money well stolen.

But what happens when the cry comes to give even more of our earnings voluntarily? Might not a few us wonder why the enormous chunk we’ve already been forced to part with proved to be not enough? Just what is happening to all that money? Why are the central government’s debt equal to the amount of money the private sector upon which it relies generates every year…while that private sector has already been handing over nearly half its income to the selfsame central government?

We’d warn Mr. Buffett that therein lies the danger in encouraging “voluntary” contributions. People might be willing to let the government take as much as the government decrees it legally can…

They may be willing to lie to themselves about how that legally stolen money is being used…because if they don’t pay it, they will surely lose their property and freedom. So they wrap themselves in a comfortable fable in order to blunt the psychological trauma. In this respect they are like the prison punk who after each episode of forced buggery tells himself that his rapist cellmate really actually loves him.

But suggest that what the government needs is the voluntary offering of as much more as possible…and then people might start wondering what they’re getting for their money. After all, in every other area of their lives when they voluntarily hand over their money, they get something in return, something that they value more than the money they just handed over.

It could be a cup of coffee, a sandwich, the use of a space for living or to conduct business, a car, a piano, or a laptop, repair of an existing item or building of a new one, performance of a song, and so on. But there was something that the money-giver wanted more than a given amount of money he had on hand. Thus the voluntary exchange was made.

Heck, it could even be an act of charity like the one Warren is trying to encourage among rich people and Republican Congresspersons. But even then the voluntary contributor commits a charitable act, he gets something he values more highly than the money he parts with: the sense of having helped someone far less fortunate than himself. It’s the same reason he would give to a relative or other loved one in need. And – this is very important — we assumed that he’d want the money to be used responsibly, and not enable the recipient to remain eternally dependent.

Note that Mr. Buffett has sheltered the bulk of his billions in a charitable foundation, sheltered from federal tax. Even Mr. Buffett feels that this sort of charity is a better way to give the vast majority of his money away. Else he would have taken those billions out of the foundation and handed it over to the Treasury. He could have added this to any amount he’d match from Republicans who met his challenge.

But it’s not like the federal government is some hard luck case who deserves our sympathy and help. If it were a person, the federal government would be the guy in a natty suit, who comes to your store every few weeks to collect “protection” money from you. He would then use that protection money to keep his favorite prostitutes well fed and happy and to make turf war on the other guys running protection rackets.

Further, this shameless gangster would also be hopelessly indebted because of an impressive gambling habit! Never mind that the protection racket he’s running is a scam at gunpoint…He’s simply a horrible credit risk!

So here is the message:

“Help our government stop having to be in constant debt for its worldwide military presence (among other outright destructive redistributions). Give them more than they already demand from you.”

That’s right, citizen. Forget buying patriotic war bonds. In times like these, lending the government your savings isn’t enough. You ought to give the money and never ask for it back. We’ll start by asking the rich.

Granted, Mr. Buffett is only asking this sacrifice of those who actually have significant amounts of money left to spare. We suppose it’s assumed that “the rich” have tons of money that they’re not putting to good use, even after gold-plating their billion-dollar mansions. So why not throw it at the debts the government has run up?

Further he’s issued his challenge to Congressional politicians, people who draw paychecks from the government credit card.

But there are plenty of “progressive” thinking people who applaud the example Mr. Buffett is supposedly setting. Entire Web sites are devoted to garnering support for a Buffett-inspired increase in taxes on “the wealthy”.

We’d recommend all income earners who aren’t already at Mr. Buffett’s level of wealth to be very wary of this. The federal income tax itself started as a tiny burden on only the richest in the U.S. Within a century it grew to consume nearly half the income of the middle class as well. The truly wealthy, meanwhile, managed to find ways to shelter most of their money from the income tax after setting the initial example and bearing the initial burden.

Mr. Buffett even uses this point to make his own…that the situation must be re-addressed so that they wealthy are once again paying their “fair share”. We note with dismay that the first attempt to soak the rich via the IRS resulted, over time, in those of us making anything above subsistence wages having to fork over half our earnings to the feds.

Not that we think anything particularly sinister is at work here. Though we do find it less than coincidental that this $49,000 show of support comes the day after a popular uprising against wholesale federal-corporate control of the Internet.

Maybe Mr. Buffett really is a paid shill, but we suspect that he’s more likely simply an enthusiastic one. He believes. For all his financial and investing acumen, Mr. Buffett rests his economic understanding on some faulty foundations. Like we said, he believes. He honestly believes that money generated privately ought to be then funneled through the central planners to find its best use.

Those who get excited about Mr. Buffett’s suggestions and find inspiration in his example also imagine that the federal government would do a better job with the money…that the federal debt as it stands is just a matter of bad luck and not the inevitable result of economic law (As sure as gravity causes objects with mass to be attracted to each other, money stolen by elected officials at gunpoint will allocate resources worse than private interests working under pressure of profit and loss).

You can’t really argue with someone who would say these things. Well, you could, but you’d be wasting your time and theirs. It’s like the old joke. Don’t try to teach a pig to sing. It wastes your time and annoys the pig.

It’s not a matter of facts for the facts support liberty and free markets if you want to abolish poverty and raise standards of living across the world. It’s a matter of philosophy. Just as it is hard to argue about the nuances of evolutionary biology to a fundamentalist holding his holy text, it is equally hard to talk to a true believer in central planning about why the nuances of human freedom and free markets to improve everything…and why they shouldn’t so enthusiastically hand the central planners their money.

Regards,

Gary Gibson

Buffett Puts His Loose Change Where His Government-Kissing Mouth Is was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

And what is the evidence of this failure? It is everywhere. Household income continues to fall all over the developed world. Unemployment is persistent, and to the extent that it is being fixed, it is by dramatic reductions in living standards, one paycheck at a time. Debt is egregious. Young people face terrible prospects. Complaints about inequality resonate in this environment not because the financial sector has bred such paper wealth, but because life is such a struggle for everyone else.

All of this begs the question: What exactly is this “system”? Our times are constantly being compared with the Great Depression, and plenty of people are hoping for an analogous ideological shift toward ever more state control of economic life. J.M. Keynes urged the destruction of the gold standard and the “end of laissez-faire.” Strongmen all over the world complied.

But back then, it was easier to bamboozle the public into believing that capitalism was the source of the problem and that the new scientific managers of the state machinery would restore prosperity. The Jazz Age was surely a time of free markets, was it not? Not entirely — there was the important matter of Prohibition as well as the central bank and its capacity to blow bubbles, such as the one that burst in 1929. That message did not stick, because only a handful of people truly understood, and they didn’t have the microphone. So the strongmen had a field day.

But today? The state machinery is the lumbering leviathan that leaves no part of life untouched. It taxes and regulates all things and uses the central bank as its unlimited credit card to pass out welfare to all classes and maintain a worldwide empire rooted in military violence and executive privilege. It takes chutzpah to claim that this has anything to do with a capitalist crisis. This is a crisis of a system of state-based social and economic management

This might explain why the socialist left has yet to gain much traction in the post-2008 environment. Does any living soul doubt the role of the government and its friends in generating the housing and financial bubble? It has been demonstrated 10,000 times, and this information is available to one and all in a world of digital information delivery. We are no longer hunkered down by the radio, waiting on a homily from the high priest in Washington. This guy no longer controls what we are allowed to read and think.

Writing as part of the series, former Clinton Treasury Secretary Lawrence Summers points out that a recent survey demonstrated that “among the U.S. population as a whole, 50% had a positive opinion of capitalism while 40% did not.” I’m not sure what the take-away from that survey really is, however, because it presumes a shared understanding of what “capitalism” really is. Is it a system of privileged protection for the financial elite at the expense of everyone else or it is a synonym for the free economy? These are two very different things.

What is especially striking about Summers’ article is his admission that Keynesian-style solutions seem pointless in this environment. He writes that, concerning the crisis, “there is no obvious solution at hand.” He further points out that some of the largest existing social anxieties are focused on three sectors in particular: education, health care and old-age provision. All three are run or lorded over by the state. He concludes with an honest admission: “It is not so much the most-capitalist parts of the contemporary economy but the least…that are in most need of reinvention.”

Another contribution to the series comes from Gideon Rachman. He presents a fascinating typology of the four ideological divides of our time. He says that public and intellectual opinion can be divided as follows: 1) right-wing populist, 2) social democrat, 3) Hayekian libertarian and 4) anti-capitalist socialist. This sounds right to me.

The right-wing populist camp (alive in the U.S. and Europe) is the warmongering contingent that opposes immigration, wants war on Islam, favors restrictions on civil liberties, obsesses over demographics, clamors for its own kind of income distribution and longs for a strongman to arrive to impose some kind of order. This penchant has a long history in politics, probably dating to the ancient world.

The social-democratic tendency is found in the Obama constituency, and it wants more of the same that got us into this mess: Keynesian fiscal management, union privileges, an ever-larger public sector, piecemeal planning and regulation, central bank-backed stimulus, democracy-spreading imperialism or some random combination of this list. This is the party in power here, there and nearly everywhere.

The anti-capitalist/socialist element is obvious enough. It consists of a strange coalition of intellectuals and down-and-out young people leading the Occupy movement, together with media idiots always looking for a splashy and simple story to tell. It is a ridiculously simple-minded view of the world that all would be well if we could just take the income from the tiny group at the top and spread it around the population. To them, the market-based social order is little more than a scam to rob and loot the iPhone-carrying workers and peasants and benefit the financial elites.

What’s most interesting is the emergence of what Rachman calls the Hayekian-libertarian tendency, represented most conspicuously by Ron Paul but actually encompassing a global intellectual and popular movement that sees through the fog of propaganda. Here we find total coherence: both realistic explanations of our current plight and clear answers for what to do about it.

Of the four groups, this is the only group that sees the importance of the issue of monetary reform. Keynes saw back in the 1930s that the most-important step to modifying the market system in favor of state management was the destruction of the gold standard. He hated it and dedicated himself to convincing all governments to give it up in favor of paper money. Without this step, there was no hope for Keynesian policies.

In a similar way, the libertarians recognize that the most-important step toward restoring economic vitality and a free market is to repair the quality of money. The gold standard would be wonderful but unlikely, since its reinstitution requires enlightened statesman and bankers who do the right thing. A more-viable path toward the restoration of sound money is through total monetary freedom: Let the market reinvent sound money in our time through the free use of any and all monetary instruments.

What’s critical is that the libertarians have put the money issue on the map. We are living under a form of monetary prohibitionism today, forbidden to use any means of payment other than that maintained by the state. And it is not unlike the alcohol prohibition of old. It redistributes wealth, steers gains to the unscrupulous, strengthens the state and promotes various forms of criminality.

In introducing this series, John Plender writes, “F. Scott Fitzgerald chronicled the moral vacuity of Jazz Age capitalism in The Great Gatsby.” Nonsense. Fitzgerald nowhere slams capitalism in his great novel. Jay Gatsby made his fortune as a bootlegger, a profession that would not have existed in absence of state Prohibition.

Our own age is filled with Gatsbys, people who have done well for themselves by manipulating a failed system. It is the system that must change, not the right to do well.

Regards,

Jeffrey Tucker

Capitalism or Money in Crisis? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Concerning national government debt, Detlev Schlechter said, “Wouldn’t touch it with a bargepole.” And who could blame him?

Just a couple of days ago, the debt of the U.S. government reached a symbolic level. This week we read in USA Today [emphasis ours]…

“The amount of money the federal government owes to its creditors, combined with IOUs to government retirement and other programs, now tops $15.23 trillion.

“That’s roughly equal to the value of all goods and services the U.S. economy produces in one year: $15.17 trillion as of September, the latest estimate. Private projections show the economy likely grew to about $15.3 trillion by December — a level the debt is likely to surpass this month.

“‘The 100% mark means that your entire debt is as big as everything you’re producing in your country,’ says Steve Bell of the Bipartisan Policy Center, which has proposed cutting nearly $6 trillion in red ink over 10 years. “‘Clearly, that can’t continue.’”

Now there are those who say that the U.S. doesn’t really owe that much money. The article continues…

Many economists, such as the Brookings Institution’s William Gale, say a better measure of the nation’s debt is how much the government owes creditors, not counting $4.7 trillion owed to future Social Security recipients and other government beneficiaries. By that measure, the debt is roughly a third less: $10.5 trillion, or nearly 70% the size of the economy.

Of course many economists also insist that the road to economic utopia is paved with money printing and war…so you have to take the opinions of these professionals with a handful or two of salt.

In this case they’re asking you not to consider the debt as all that high simply by ignoring some of the debt. That’s like a doctor not considering a morbidly obese patient not quite so morbidly obese by ignoring some of the fat.

We’ll continue counting all the fat if it’s okay Mr. Gale of the Brookings Institute. The fact is the U.S. government owes as much as its subjects can produce in a year. How would you feel if you owed as much as your pre-tax yearly income?

Or even better, how do you think your creditors would feel? And would you expect anyone to lend you more money at anything resembling a favorable rate of interest?

What’s more, nation state governments tend to spend their “income” — a polite term to describe the tax money they take from their subjects at gunpoint — on things that either do nothing to increase future income or entirely disrupt the productivity of their populations. We simply cannot look at lending these governments money as a good investment.

But it’s not just federal debt you may want to avoid. In the U.S., the states and their local municipalities are facing the same problems. They, too, are debtors who’ve made too many promises and written too many checks they won’t be able to cash.

Like overextended government everywhere, U.S. cities are having trouble making income match expenses. The case of Central Falls, Rhode Island, is the example that’s been making the news. The municipal bond market has been following the bankruptcy case closely for the last year since the tiny city of 19,000 souls may set the precedent for other struggling areas.

Today comes news that a federal bankruptcy court has allowed Central Falls not to pay its retired police and firemen as much as promised. This is so that the people who’d lent the city money in the first place can get paid in full.

Some precedent. Simply break the too-large promises made to one group to make good on the promises to another. Luckily for Central Falls, the pensioners are playing nice. According to the Financial Times:

“Rather than challenging the new law, a majority of retired police and firefighters in December accepted a deal that will cut their annual pay-outs by up to 55 per cent. However, the deal is contingent on the state setting aside at least $2m to reduce the annual pension reduction of any retiree to 25 per cent for five years to help ease the financial blow.”

You see, unlike the federal government, municipalities actually have to worry about deficits that increase to unpayable levels.

We’ve often pointed out that the federal government has a couple of benefits that state and local governments don’t. The federal government has a chummy central bank that will manipulate interest rates downward to make borrowing easier…and then buy up federal government debt — that is, lend it money — when no one else will.

States and municipalities have to worry about default and the resulting rises in interest rates for future borrowing. And they actually have to worry about not being able to afford basic services if there’s simply not enough money.

Those basic services are something that everyone living in a U.S. state or municipality (and that’s pretty much everyone in the U.S.) needs to worry about.

We’re not yet at the point where the general populace accepts that “basic services” like infrastructure, education and safety can be effectively, economically provided by the free market. So by and large local governments still have a monopoly on those things. And the people living in these jurisdictions rely almost exclusively on their state and local governments to provide these basic services.

So what happens when states and municipalities can’t find the money to pay for all these things?

Well, we’re nothing if not hopeful here in the Whiskey Bar. We see every retreat of the state toward bankruptcy as ultimately a good thing. It leaves room for the market to advance and show the world how private interests provide goods and services of increasing quality at lower costs.

In the case of the “basics” like roads, education, policing and fire protection, you need a good collapse to shake people from their rabid faith in the government’s ability to provide.

But there’s a lot of pain between here and there. The markets won’t just magically pick up the slack overnight.

In the meantime, trash could stop being picked up, police may not bother responding to “minor” crimes like burglary, and fires may not be put out before they cause massive amounts of damage.

And don’t think that desperately indebted states and municipalities will go down without swinging…and trying to find new ways to pick your pockets.

This is something we’ve been looking at for a while here at the Whiskey Bar. And it’s why we’ve been directing readers to this special report…

From Addison Wiggin’s Apogee Advisory:

“Can you imagine being the victim of a robbery… and knowing the police won’t be there to answer your 911 call?

“That’s the reality more and more Americans will be facing… because America as you know it is an illusion — built during an era of easy credit.

“Without that credit card, certain states are already trying every money-grabbing scheme they can dream of…

“According to U.S. News & World Report, ‘Over the last two years, 36 out of 50 states have raised taxes or fees.’ Aside from already collecting property, sales and income taxes, they’ve also put in place separate streetlight fees… fire hydrant fees… and new booze taxes. Nevada is even considering a new $5 surcharge on its legalized prostitution.

“A deadly combination — low tax revenue and massive pension and retirement promises — has forced certain states into a “lose-lose” situation. They’ll be the first to cut police… try desperate money grabs… and break promises.

“It’s a process that’s already under way. That’s why the first thing you need to do to prepare is to find someplace safe for your family to work and live.

“We’ve spent several months researching which states are best equipped to ride out the storm… and which you want to do everything to avoid.

“If you’re considering a retirement location, or if you have the flexibility to move your workplace and family out of harm’s way, we’ve assembled a list of five states — American Oases — where you’d be best situated.”

As long-suffering Whiskey Bar patrons know, your Whiskey Bar editor has been on the lookout for a while for a place to call home.

We are weary of the news of how the U.S. slouches into a dreary combination of economically declining paranoid police state and has-been empire. We thought seriously about setting up shop somewhere freer, cheaper, friendlier to business and less antagonist toward nuclear powers in the East…

But despite what the U.S. government does, America itself remains home.

We cannot ever forget, however, that America is also in for a rough time. if we’re going to stay, we want to do it someplace least prone to disruption.

There are the big things you can’t control and which will affect us all. We speak specifically of military actions overseas and central bank shenanigans…

But then there are the things that affect your everyday life. We speak specifically of the goings-on in the town you choose to call home…and how much you end up paying your local governments for your immediate quality of life.

We suspect that many of you Whiskey Shooters are in the same boat we find ourselves in. You either can’t or won’t run too far. The costs of expatriation may outweigh the benefits. It may simply not really be an option for you.

You simply may want to find a place to find a place in the country you know (and love despite its faults) where you can ride out the coming storm.

This doesn’t mean you shouldn’t internationalize your financial exposure. But while you shelter some of your labor’s fruits elsewhere, you yourself may want to remain here.

We certainly wouldn’t blame you. In fact, we mean to join you.

Just be sure you have the tools to pick the best possible place. Odds are very good that you won’t have to travel too far.

Regards,

Gary Gibson

Why Federal Deficits May Not Be the Ones That Matter Most to You was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.