Faith in the free market isn’t something that the United States has a lot of right now – with government stepping in with bailouts, stimulus packages and the like at any sign of a downturn. It’s even become fashionable to think of free markets as dangerous, an idea the government is in no hurry to dispute. After all, taming the markets with regulation gives government a raison d’etre and plenty to do. Never mind that what the government does often amounts to folly (and we are hard pressed to think of an instance when it doesn’t).

Government follies were a big topic of discussion at last week’s Freedom Fest, where Addison Wiggin’s new documentary Risk! had a focus group screening. Risk! picks up where Addison’s last film, the critically-acclaimed I.O.U.S.A left off – in the wake of the financial crisis. The documentary features insights from some of the world’s top economic minds, including Harvard professor and author of the Innovator’s Dilemma, Clayton Christiensen, economic blogger and pundit, Alex Tabborok; and Gary Shapiro author of The Comeback: How Innovation Will Restore the American Dream.

Using Odyssey Marine Exploration, a commercial shipwreck salvage company, as a case study, Risk! explores what has happened to the uniquely American model of risk, reward and failure in the current economic environment – an environment where the role of government has mutated into something the founders of the United States would never have imagined.

While Odyssey Marine has a set of very unique obstacles standing in the way of their innovative business model (and ultimately, their success), as the film unfolds it becomes clear that all entrepreneurs and small businesses are facing similar challenges. Though the U.S. government keeps reminding the public that job creation will get us out of this financial mess, over-regulation, litigation and a barely-understandable tax code make it almost impossible for entrepreneurs–the biggest contributor of wealth creation and jobs–to make an impact on the economy.

“The government does not create jobs,” Shapiro tells us in Risk!. “They take money from one person to give it to another person.  That’s not creating a job. Government’s role is to encourage people, and make sure we have the raw materials of innovation, which are bright people challenging the status quo.”

Shapiro – and the entrepreneurs featured in the film – remind us that the role of government is to “get out of the way” and to provide these wealth creators with a level playing field–one that punishes theft and force, but otherwise allows competition–so that they, and the country as a whole, can reap the rewards of their innovations.

The focus-group screening was well-received by the audience at Freedom Fest, and during the Q&A with Addison afterwards, many members of the audience echoed the frustration that the entrepreneurs featured in the film feel.

“It’s not too late for the U.S. to get it right,” said Addison during the Q&A after the film. “But if the rules of the game keep changing, and the incentives for small business aren’t there, we are looking at a long road ahead of us.”

Doug Hill, Business Manager
Laissez Faire Books

P.S. Risk! is scheduled to be released to the public before the end of the year. Stay tuned for updates. In the meantime, if you’re joining us at the Agora Financial Investment Symposium in Vancouver next week, you’ll get to attend a special focus-group screening. We hope to see you there!

P.P.S. Gary Shapiro will be speaking and holding a book signing at next week’s Symposium – and to hold you over until then, check out his excellent new book The Comeback: How Innovation Will Restore the American Dream. Click here now to see a special sneak peek at what Gary has to say in Risk! – and for a 20% discount on his book.

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

Despite its great complexity and rapid development over the last 10 years, the web community works largely without state intervention of any sort. Web designers did not need the hand of government to develop the skills to create ever more complex websites; IT professionals did not wait to read official reports saying they had to adapt as the technology changed; and companies were quick to offer the ever-evolving range of services needed for the web to run smoothly.

In other words, the private sector adapted, and adapted very quickly. Free-market mechanisms did what they always do – they rushed to meet consumer needs. This is reflected not only in the wide range of products available but also in the rapid drop in prices of almost every aspect of the web. Ten years ago, a personal website was an expensive proposition, especially if you needed anything professional or polished. Today, in the form of blogging software or services like Facebook http://www.facebook.com/WhiskeyandGunpowder, it is free. The overall cost of entry – taking into account the cost of training needed only a decade ago and now no longer necessary – has not so much dropped as evaporated. This low cost of entry has allowed a wide variety of individuals and companies to trade online, providing considerable choice for consumers.

Although the growth we have seen online is exceptional, it is still only a faster version of something capitalism does well: meeting a myriad of needs in a diverse society. It is difficult to imagine a better example of the free market at work.

Equally important is what has not happened. The web is largely divorced from government control and provides private-enterprise examples of large-scale undertakings that many statists claim can only be accomplished by the public sector. We routinely hear that the guiding hand of the state is required for complex projects. But the Internet itself, with its vast number of interconnected computers, is one of the most complex entities ever created by human beings, and much of it has grown without any central planning at all.

Similarly, government often steps in whenever there are perceived dangers to the public; hence pharmaceutical testing, standards regulation, and antifraud laws. But it is evident that the Internet, as an example of a relatively free market, often derails these arguments. The roaring trade in pharmaceuticals online – from antibiotics to endless adverts for Viagra – demonstrates the willingness of many to make their own informed decisions about personal risk.

Statists have often argued that the government must regulate standards. But the web itself is built using commonly agreed-upon standards that allow any Internet browser to make sense of any page published online. Again there were few central sources for this; the market, in the form of web designers, programmers, and users agreed upon common methods for tackling the immense variety of different websites, from streaming video to secure shopping carts to plain text. None of it required laws or regulation, and its extremely fast development was voluntary and benefited all.

Conversely, attempts to create agreed-upon, written standards by various web organizations have often emerged but are typically years behind actual practice. The lesson is simple: many competing players interacting with the public will hammer through a myriad of alternative options as a natural process whose end result will by definition reflect the direct choices people wish to make.

Fraud is a criminal activity and is therefore seen as the natural domain for government intervention. But even here we see how a free market deals with this activity. Despite vigorous attempts by fraudsters, the public has largely learned to cope with online rackets. Spam emails are quickly deleted, assuming they make it past the specially designed spam filters developed by software engineers and sold to Internet service providers and individuals. Profit-oriented private companies have reputations to protect, prompting many of them to explicitly state to customers that they never communicate using insecure channels such as email, and that they will never ask for sensitive information unless elaborate protection is in place, such as on their own custom-designed, secure websites.

In other words, the market has adapted, partly with information campaigns to educate, and partly through voluntary changes in behavior. One thing is certain: no government intervention was required. But it is not difficult to imagine a statist proposal to limit the harm of fraudulent emails and other online scams. It would no doubt involve a set of regulations controlling who can send these dangerous electronic messages to innocent and technologically inept people. The pitch would emphasize the inability of individuals to understand the complexities of online systems – hence the need for government-approved expertise.

A key charge of those statists who focus on the Internet is the ostensible role government can play in controlling access to disturbing material such as child pornography or depictions of violent rape. Current legislation covering print and broadcast material is pointed to as an example of necessary intervention; surely it should be updated and transferred to encompass the web? But in a free market, goods and services are determined by customer demand, and demand for obscene material as defined by the existing legislation is virtually nonexistent. The web as it currently stands certainly contains illegal content, but it is not readily available; it must be specifically hunted down, and we can assume such knowledge requires a preexisting network not dependent on the Internet.

Those who call for more regulation of the Internet often state that their aim is to prevent hapless citizens from seeing this kind of extreme pornography. The main charge is that we need to ensure the innocent will not stumble upon it by chance. As noted, this scenario ignores the fact that output (in this case, web content) is determined by the market. Objectionable content is difficult to find online for the same reason it is not broadcast on primetime TV – because almost no one wants it.

The statists’ claim also ignores the role content providers play. Every major online player that accepts content from the public has strict rules governing what is considered acceptable. No company can afford to be associated with anything the public finds disagreeable, whether it is legal or not.

Many confuse a desire for law enforcement with a desire for the government to find a way to take control of an information medium because some people use it for illegal purposes. This is analogous to the state controlling roads on the grounds that they are sometimes used by bank robbers: no one would take this seriously, but nonetheless the same idea is proposed for the web.

Legislation designed to protect web users from casual exposure to child pornography would do nothing to stop the storage of the material, because it is already illegal and happens anyway. Content providers, however, have every incentive to control access to it because they rely on the goodwill of their audience. That is, the free market provides a more efficient method of regulation, because content providers have a strong incentive to self-regulate based on the distasteful nature of extreme pornography. Any attempt by the state to target this narrow area, such as installing government-controlled firewalls, would target us all, and it would simply use the potential for illegal activity as an excuse to monitor everyone.

The meteoric success of the web is almost a textbook case for libertarians on the benefits of unfettered markets. When people understand they are in the driving seat and that their actions count, things happen. The market provides, and people choose from their options. The more options they have, the more competition there is for our business, and the more likely we are to have our needs met. In addition, individuals are not static creatures. Something that 15 years ago was the exclusive domain of advanced computer users has become a simple everyday experience for many – one no more challenging than using the phone or a microwave oven.

This explosion in growth of the web should put to rest the criticism often expressed about libertarian ideals – that they are a fantasy because ignorant citizens interacting with the private sector cannot be trusted to provide for society’s needs, and that the important stuff can only be managed by those who work for a higher ideal and not for profit.

There are many examples like the web, where government either does not or cannot intervene, and things work out just fine. The success of the web, and the clear role the consuming public has played in developing it along lines that it approves of, demonstrates the ability of society to get what it needs from a free market.

As we begin to hear distant rumblings from the political class for the need to regulate the Internet in order to protect us from pornography, jihadism, or attempted fraud, we must resist their calls for more control. Governments are not competent to control the web, and their tinkering would diminish our ability to make our own choices. They would move decision making away from our own tastes and preferences toward their state-approved model, ostensibly to protect us. As the web has shown, whatever protection we need in the future will soon be provided as if by magic, precisely because a free market responds directly to people’s needs.

Regards,

Gerard Docherty

Gerard Docherty is a software designer and writes on a number of topics, including the free market, civil liberties, and technology. He is based in the UK.

The Free-Market Lesson of the Web was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Free market disciples (like me) believe that government intervention is anathema to a healthy economy. On the contrary, we believe genuine government stimulus comes from low taxes, stable prices, reduced regulation and low debt. Our economic policy makers have scrupulously avoided such remedies. However, in the short term, it is possible for government central planning to artificially boost GDP. But as the short term is coming to an end, Washington’s heavy hand is sending this artificial recovery down the drain.

When a country spends in order to stimulate growth it sources money from three methods: taxing its citizens; borrowing from the existing pool of capital, or borrowing newly created money from its central bank. All three options are economically poisonous.

The act of taxing one sector of the economy in order to redistribute wealth to another can never be considered stimulus. How can taking money from Citizen A and giving it to Citizen B improve the outlook for both? To think that it could assumes that the government knows the best way to allocate resources. But everything I have ever seen tells me that this is not so.

A government could instead distribute money borrowed from the private sector’s existing pool of capital into targeted areas of the economy. But this type of “stimulus” is simply a deferred tax with interest. Any money borrowed by government could have been utilized by the private sector to expand business and grow the economy. Instead, money spent by government makes no lasting economic impact.

Some liberal economists argue that funds left in the private sector would likely be saved, rather than spent, during an economic downturn—thus exasperating the recession–if not for government activism. This may be true, but necessity, in the form of weak balance sheets, is the factor that usually drives the private sector to save. Any interference with that deleveraging process has dire consequences in the long term. Government borrowing only delays the eventual pain because a significant tax increase will eventually be needed to pay down the added debt associated with public liabilities. If the private sector is prevented from paying down debt, the debts will simply be transferred, with interest, to the public ledger. Therefore, borrowing to spend should not be considered a genuine stimulus.

Finally, a government can acquire spending power from outside the existing domestic savings pool by borrowing newly printed money. That new money enters the economy in the form of deficit spending. However, the inflation created by the central bank printing has its downside.

At first, the economy experiences a combination of higher prices and growth. Producers raise prices as the domestic currency loses its value, while others are deceived into believing the value of money has remained unchanged; and so they increase their production and expand real GDP. However, the greater extent and duration in which the central bank perpetuates their printing, the less real growth and the more inflation the economy will experience.

This is precisely the recipe that we are currently following. Between 2008 and 2010, the Federal government borrowed over $3.1 trillion. It is expected to run-up another $1.5 trillion in debt this fiscal year. Meanwhile, the Federal Reserve has increased their balance sheet by nearly $2 trillion in order to accommodate the massive increase in public sector borrowing.

By borrowing printed money, the government had been able to perpetuate our consumption driven economy, while simultaneously levitating most asset prices—even home prices have been prevented from falling to a level that can be supported by the free market. The Fed’s desire to create inflation and support prices had at last driven up industrial commodity prices like copper to all-time nominal highs. Once oil prices crashed through the $100 per barrel level, the Fed was forced to ratchet down its inflationary rhetoric. The question now is whether actions will follow.

The Fed and administration have now reached the point of diminishing returns. Whatever anemic and temporary growth that was generated by borrowing and spending printed money is now being superseded by rising prices. Any further monetary stimulation from this point on will only serve to send aggregate price levels surging higher, as GDP growth falls. The bottom line is that borrowing and printing money can never increase productivity and labor force growth, which are the only ways to increase real GDP. Government intervention can only temporarily circumvent the deleveraging process that is necessary for viable growth.

The government’s window to artificially drive real GDP growth by borrowing and spending has closed. The U.S. economy now faces another recession head-on, as the private sector deleveraging process resumes and the public sector deleveraging process begins. Alternatively, the Fed can keep expanding their balance sheet and sending the economy deeper into stagflation. The salient question for investors is whether the next recession will be accompanied by inflation or deflation. But only Mr. Bernanke can answer that.

Regards,

Michael Pento

Michael Pento is Senior Economist and Vice President of Managed Products at Euro Pacific Capital. Besides blogging daily at europac.net, he writes a weekly market commentary that is carried by Forbes and the Huffington Post. Michael is a regular guest on CNBC, Bloomberg, and Fox Business, as well as regular guest host of The Peter Schiff Show.

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

But just days ago, the Petersen/Pew Commission on Budget Reform warned in a new report that “over the past year alone, the public debt of the United States rose sharply from 41 to 53 percent of gross domestic product (GDP). Under reasonable assumptions, the debt is projected to grow steadily, reaching 85 percent of GDP by 2018, 100 percent by 2022, and 200 percent by 2038.”

And long before the debt reaches such staggering levels, the commission tells us: “Fears of inflation and a prospective decline in the value of the dollar would cause investors to demand higher interest rates, and shift out of U.S. Treasury securities. The excessive debt would also affect citizens in their everyday lives by harming the American standard of living through slower economic growth and dampening wages, and shrinking the government’s ability to reduce taxes, invest, or provide a safety net.”

All of this financial tragedy is the direct and highly predictable legacy of our Federal Reserve System and their bankster cronies on Wall Street. Ben Bernanke and Alan Greenspan were the men in charge — and these are the very people who failed us every step of the way. Under Fed leadership, the U.S. financial system has buried our hard working middle class under a mountain of debt for the benefit of Goldman Sachs and a handful of “too big to fail” banks. It seems more than a coincidence that virtually every government official in charge of making these decisions, both here in America and around the globe, are former Goldman Sachs executives (and usually partners).

Yet Time magazine singles out Bernanke as the man to be recognized for his good deeds. We’re sure Ben’s supporters would say “Give him more time.” Well we agree. We suggest 15 to 20 years…in prison. A warm spot in a jail cell would be more appropriate for worldwide king of counterfeiters. Every day that the Federal Reserve prints more money, it is robbing the American taxpayer — and future generations — of our wealth, property and financial stability.

On the other hand, one politician has been fighting to protect the American taxpayer for over 30 years…demanding accountability from the Fed…trying to save the American economy from the Bernankes of the world. For more than 30 years Congressman Paul has been looking out for the little guy. For more than 30 years, Congressman Paul has been trying to get Congress to think about our children’s financial future, not just today’s re-election campaign. For more than 30 years, Dr. Paul has been dogging the heels of our runaway Fed and calling them to account for their despicable practices.

Congressman Paul has been sponsoring bills to audit the Fed ever since he first entered Congress in 1976, and on six occasions Paul has introduced bills that would have ended the Fed entirely. Standing largely alone, yet seeing clearly into the future, Ron Paul has challenged a rotten to the core Fed over a period of decades, while Congressional colleagues and a mainstream media, asleep at the switch, were busily applauding people like Bernanke and Greenspan as masters of the universe and oracles of the modern world. So who was right all this time . . . and who was wrong? The answer, we’ll tell you, is crystal clear: It wasn’t the Ivy League bankers or Wall Street masters of the universe. It was a country baby doctor named Ron Paul, by a country mile. If Time magazine cared at all about the American taxpayer, its true “Person of the Year” in 2009 would certainly have been Texas Congressman Ron Paul.

When Paul ran for president in 2007 and 2008, he was genuinely surprised to find that his youthful audiences were responding powerfully to his message about ending the Federal Reserve. An audience of college students at the University of Michigan went so far as to burn “Federal Reserve Notes” (otherwise known as dollar bills) as Congressman Paul spoke about the Fed and its counterfeiting. These students figured out what the adults in charge were doing to their financial future — burning it.

By 2009 these students were no longer alone. Everyone, it seems, was catching on, and even our palace courtier “mainstream” economists began to notice that the Federal Reserve was responsible for inflating the housing bubble and otherwise dumping our once great country into the throes of imminent bankruptcy. Even Barack Obama seems to be catching on — speaking just days ago about the imminent financial disaster of the costs of Medicare and Medicaid. Even a big spending, big taxing leftist like Obama agrees that unless we act fast America faces insolvency and bankruptcy due to a tsunami of debt. Unfortunately, Obama’s solution to “government-gone-wild” and government-run healthcare programs bankrupting the country…is bigger government and expanding government-run healthcare to everyone.

Unlike a real doctor like Dr. Paul, President Obama’s prescription will kill the sick patient. Obama believes that if a patient suffers from obesity, diabetes and a mouth full of rotting teeth, the prescription is ice cream for breakfast, lunch, dinner and dessert. Not just any ice cream, but triple orders of Ice Cream Sundaes covered in chocolate syrup for EVERYONE! And it’s all free to eat as much as we want, as many times a day as we’d like. How will we afford it? The Fed will print all the money we need. That may be how a corrupt politician bribes the public to get re-elected, but it’s also the exact economic model of the Roman Empire…or the Greek Empire…or Argentina at the turn of the 20th century…or the Weimar Republic before World War II…or Zimbabwe today. All of those countries and empires ended badly. Unfortunately America is on the same path to economic ruin.

More and more “respectable” voices are picking up Ron Paul’s “End the Fed” mantra every day, and you ain’t seen nothing yet. The truth is that our criminal Fed is already a dead man walking, and Ron Paul, more than any other single American, killed it. What an achievement for a lonely Congressman, armed with nothing more than common-sense, courage and honor. Perhaps Don Quixote isn’t so helpless or hapless after all. Perhaps one lonely man tilting at windmills is exactly what is necessary to save our great country (and economy).

Ron Paul introduced two bills in the House during 2009, which will one day finish the job and end the Fed’s misery (and ours) forever. House Resolution 1207 generated more than 317 co-sponsors reflecting widespread bipartisan support for a Fed audit which would go far beyond the narrowly defined scope of Government Accountability Office reviews presently allowed. Specifically, H.R. 1207 would allow auditors to report on Fed dealings with foreign banks and nations, actions on monetary policy matters, and operations of the Federal Open Market Committee. For the first time, the Fed in 2009 faced a very real prospect that the American people will find out what it’s been up to, and while the bill has been temporarily stifled by bankster cronies and Goldman Sachs alumni, there can be no doubt that a line in the sand has finally been drawn.

Dr. Paul’s second bill, the “Free Competition in Currency Act of 2009” is even more far-reaching than H.R. 1207. Dr. Paul’s new bill proposes that the money monopoly of the banksters be ended forever and competing currencies be established to bring financial sanity back to the marketplace. America became the greatest nation in world history because of our economic freedom. Free markets worked. [They still do.–ed.] Here Congressman Paul is proposing free markets in money! It’s not a radical idea at all, and ending the money monopoly is an idea whose time has come. The “Free Competition in Currency Act of 2009” stands as the starting point for a new era of financial freedom and prosperity for America. A big thank you, Ron Paul — you’re far and away our “Person of the Year.”

Yes, the Fed needs to be ended. Until that happens, there are many other important steps that can be taken to restore fiscal sanity and encourage economic recovery for this great country. Let’s start with limiting the power of government; dramatically reducing government spending; cutting, instead of expanding entitlements; drastically cutting taxes, so that the people who earn the money get to keep more of it and will be encouraged to invest it in homes, stocks and opening small businesses (thereby creating jobs); restore the gold standard, so we limit the money that politicians can spend and waste; and perhaps most importantly, holding the politicians and bankers who caused this mess accountable. Let’s start limiting the politicians to two terms: one term in office…and one term in prison. Then we can start to put America back on track, and Americans back to work.

Regards,
Wayne Allyn Root
Rick Williams

January 7, 2010

Wayne Allyn Root is a small businessman, home-school father, and citizen politician. He was the 2008 Libertarian Party Vice Presidential candidate, and is a frequent guest on FOX News, FOX Business, CNBC and media across the country. His newest book is, “The Conscience of a Libertarian: Empowering the Citizen Revolution with God, Guns, Gambling & Tax Cuts.” Wayne’s web site is RootForAmerica.com.

Rick Williams is a lawyer in Los Angeles, and is Chairman/CEO of Basic Media, Inc. and BreakTheMatrix.com.

Time Magazine Blunders with Bernanke was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Not even I, dear reader, chained by love twelve, fourteen, and more hours a day to my magical window to the world, a cyborg of mind and machine, can keep up with all of the stupidities, deliberate destruction, insider deals, power plays, empire-building, and redistribution of wealth into the hands of the least able and most corrupt going on in Washington, Chicago, New York, the “great” banking houses, new additions to the slime pool, and foreign capitals, so I cannot put my finger on a sponsor or a bill number at this time.

I know only that there will be another Smoot-Hawley because there must be a new round of high tariffs and protectionism. This is one of the universal decrees of history and only the details change, and then only slightly.

Those of you who keep in the loop with the Whiskey Bar’s Ranch Correspondent–particularly through private and group correspondence–know that more and more I am to be found in Philosopher mood than Analyst fervor these days; analysis tells us what is wrong and what may come to pass. Philosophy tells us why it is wrong and how it is wrong, and offers faint possibilities of identifying key factors which can skew the classic equations of oppressors occasionally.

Why must there be another Smoot-Hawley, an action that seems devastating to the point of suicidal in a nation that has destroyed its industrial base through catering to the prophets of Baal, Unions, and crooked politicians? Because that is the last major source of rapine and manipulation left to the in-crowd around classics such as debasing the currency, setting the Sheriff of Nottingham on the people, and King John conspiring with the nobles. They have mortgaged the future, devoured the stored goods of the past, turned much of the seed corn into Ethanol, and are busy reducing as many as possible to the sick concept of “economic justice” where no man may have more than another–except the elite, of course. Forget good King Richard; he isn’t around this time, and neither is Richard of Locksley or even an Ivanhoe.

If you are surprised…why? I told you months ago what must come to be because it is the same war we fought 160 years ago for the same reason. Beneath what may have appeared to be colorful banter I was quite, quite serious, my dears. It is quite bad enough being Designated Cassandra without being dull about it, too, but I never joke about the evil loose in our world again.

In the late Eighteen Fifties, as now, politicians faced the same problems (of their own making) and had the same limited range of solutions. Congress was–as is usually the case–under the control of the power brokers and opportunists. As usual, it had been too free-handed with tax revenues. As usual, the true producers had ignored the snares set to bind them. “We’ll just work a little harder.” “They’ll never pass that; the people won’t stand for it.” “Any Johnny Reb can whup six to ten Yankees.” Sure, kids, you keep on thinking that and think about how more heavily we are taxed, millions of pages of restrictions that cause our businesses to fail, and how worthless our beleaguered fiat currency is.

There were only two solutions: close the United States out at the Mississippi and rape those in captivity at their leisure, or inflate their way out of the problem. The latter course was chosen, as it always is, because it offers more opportunities for enrichment. The immediate problem was to raise revenue to maintain control and line pockets further, and our founding fathers, in their great wisdom, had limited fund-raising to taxes and tariffs on goods. Life is far simpler for King John these days. In that halcyon time Uncle Sugar was not able to impound over a third of a man’s wages before they were handed over. A man’s wages could not be touched at all. Consequently, the “solution” was to raise import and export duties, thus robbing those who wished to sell products in the USA and those whose livelihoods depended upon exporting crops.

Do not be naive and bleat about “the industrialized North;” there are always little “arrangements” to be made, the kind that are expressed these days as “excepting corporations doing business in American Samoa,” so that Nancy Pelosi’s power base of the Star Kist empire is not subject to inconvenience and sees the wisdom of supporting her always, or the special favors being arranged for Monsanto, the connection there being how Representative Rosa DeLauro’s husband keeps Kobe beef on the table, and guarantee enormous bonuses slipped quietly in a budget bill so that politicians can rail against them dramatically later–and courts agree they must be paid. The fuss over raw milk–far, far safer and more nutritious than the odd fluids hawked by Borden–is designed to ensure that you either buy milk and other products from Agribiz or you do without; it is to deny you the right to possess your own cow…and your own garden…and your own chickens, beef, and sheep. The sheer cruelty and audacity takes my breath away, the concept of denying as basic a right as ever existed, that to hunt, gather, and engage in agriculture, and doing it in the name of “safety.” Starving to death is a very unsafe activity. The trick is that the restrictions will not harm the big fellows at all but will make it impossible for small farms and individuals to sell or even use what they raise.

The situation only appears to have changed due to FICA and a host of “taxing authorities,” fees, fines, sales taxes, federal and state income taxes, head taxes, and so forth. Funds have dried up significantly (tax revenues were down 17% earlier this month and I anticipate on the order of 22% losses by January) in a time when both New York and California are openly bankrupt and most other states are teetering on the edge of being unable to meet unfunded mandates and deliberate vote-buying schemes and graft. The system is floating momentarily on a flood of fiat money not even the government pretends to believe is other than very transitory. Timmy Geithner’s ugly product isn’t quite “use it once and throw it away,” but the gilt comes off each new issue very quickly and reduces the value once stored in older currency. The “Bernanke” ($100 bill) of today does not buy what an Andrew Jackson did a quarter of a century ago.

We are gearing up for the Tax and Tariff War Between The States all over again, with precisely the same causes and actions. No, of course I do not know if some portion(s) of these “united” states will attempt to withdraw from a contract that benefits only one side, although quite a few are rattling the Tenth Amendment. I do not recommend it, because this time all of the troops are under the control of Washington, as well as control of communications, utilities, transportation, the courts, the media, and the treasury. Open rebellion, no matter how justified intellectually and under the Constitution, would very probably end as Pancho Villa’s final irregular cavalry charge into a nest of the new Thompson machine guns did.

The great “moral” camouflage fluff this time is socialized medicine, amnesty, racism, domestic “terrorists” and the machinations of foreigners turning out “man-made disasters,” and the general moral degeneracy of producers. Same old war, same old issues, same old outcome, and time to hide the smoked hams and plow horses because this time the March to the Sea will be a matter of closing the interstates. Starve those rebels into submission and destroy everything under the slogan of “Never again!” Dictatorship will prevent the threat to freedom posed by “dissidents,” Obama and Janet Napolitano are the ones who define dissidence and “civil unrest,” and the Supreme Court just ruled that those who rebel against the USA are stripped of basic rights (“torture being an accepted part of…”) and “personhood.” You will have neither rights nor Constitutional protections if you protest if Washington declares there is a war, martial law, or that you are guilty of sedition.

What happens when people are forced to act to their own detriment? Eventually they go out of business, move, or are crushed. How does gpvermemt stop them? Close the borders. (Penalties for investing currency outside the nation, penalties for emigrating, literal demands that anyone seeking to leave must have a Passport–a “privilege,” not a “right”–or a “Trusted Traveler Document.”) You mandate an annihilatingly expensive new “health care” program with fines and jail sentences. By what economic insanity can having some portion of medical expenses paid ever be considered worth as much as 20% of a family’s income? I am forced to pay for Medicare, and in this, the year I have been most ill in my life, the actual outlay for my “free” medical insurance is still $400/office visit plus a co-pay. I would be far better off simply paying the doctor $100 in the first place, but that option is denied to me. Those who are old or have chronic conditions may need coverage against myriad problems, but the average family neither needs nor can afford any such thing. We may insure against our car needing a new motor, but we do not seek insurance to cover fill-ups and oil changes. Socialized medicine is not about “health,” it is simply a very imaginative grab for power and funds to keep the national socialists in power.  Announce a host of new taxes and increase fees, fines, and requirements for “stamps.” The outrage over the Stamp Act wasn’t against raising postage; it was about requiring the sort revenue stamps which seal my cigarettes and bottles of Maker’s Mark.

What will be the outcome of increasing taxes and government “giveaways” in a time of falling employment and expansion of the “entitled class,” in a similarly foolish and shakey world eager to destroy our fairy gold and exploit our dependence upon foreign goods? Gloom, desolation, and increasing loss of liberty culminating in a world of food shortages and repressions. All the while those who grow rich shrieking “climate change” labor relentlessly to finish bleeding out the corpse of America for the “benefit” of third world nations and tax us relentlessly to force a 17% reduction in our standard of living lest the dreaded Carbon Footprint Monster destroy the polar ice caps, a much bigger piece of nonsense than asserting the existance of the Yeti and the Little People. Al Gore is the Abominable Snowman, and it pays very, very well. Today here are many new devices of economic depression and a population brain-washed by “free” public schools and the MSM, but Smoot-Hawley, whatever it is called at any given time, is a tried and true method of putting the hands of some into the pockets of others to the detriment of those not filling their coffers or increasing their power. It will prove irresistible.

The most immediate action you can take is to inspect your portfolio carefully and analyse your business needs. Are there duties/taxes/tariffs which could be levied which would make your business more expensive to conduct? Can you stock amply parts made abroad? Are there political costs which could damage the ability of an investment to remain perceived as profitable? Current P/E values are such that I can’t think of a single traditional sector–commodities do not count in this area–where any company is likely to provide a genuine ROI. Just as silver is valued, traditionally, at between 16:1 and 30:1, making it a magnificent choice at 65:1, just so we do not buy shares in companies that at best will return a tiny fraction of the cost in the best of years.

If you can’t eat it, store dense amounts of current value in it, or protect yourself with it in some way or another, don’t buy it. Not for your stockmarket portfolio, and not in your personal lives.

What you snatch from the spreading fires may have to last you a very long time.

Regards,
Linda Brady Traynham

December 29, 2009

Smoot-Hawley Must Ride Again was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Last week, Ben Bernanke got the nod for another stint as head of the world’s most important central bank. Yes, he completely misunderstood the implications of the hugely negative US trade balance, believing that America did the world a favor by spending its “global saving glut.” And, yes, he missed the approach of the biggest financial disaster in three generations. Then, when it arrived, he mistook it for a routine recession, until finally, panicked by the collapse of Lehman Bros., he insisted that Congress pass a $750 billion spending bill – or “we may not have an economy on Monday.”

But except for things that really matter, he’s been a pretty good Fed chief. Besides, he has the right credentials. He was a professor of economics at Princeton and holds a Ph.D. from MIT – just like the most recent Nobel Prize winner in economics, Paul Krugman.

The United States has just averted the Second Great Depression, say the papers. “What saved us?” asks Krugman in a recent New York Times editorial. “Big government,” is his answer. Specifically, the big government of Ben Bernanke.

But the ghost of Milton Friedman haunts the central bank. Bernanke borrowed a phrase from Friedman, saying he’d even “drop money from helicopters,’ if necessary, to prevent deflation. This led to one of the surest trades of the Bubble Era was the so-called on the ‘Bernanke Put.’ Investors thought they could count on him. Buy stocks. If they went down, Ben Bernanke would make sure you didn’t lose. He’d add liquidity until the market bounced back. But the Bernanke Put trade went bad in ’07. The market fell. Ben Bernanke added liquidity. But so far, stocks have yet to regain 50% of what they lost. Meanwhile, consumer prices are falling. And yet, he does not drop money from helicopters. Why not?

Few people would have more authority on the subject than the group gathered at the Beverly Hilton in Los Angeles earlier this year. Michael Milken, the Junk Bond King, gathered them thither and picked up the tab for Gary Becker, Myron Scholes, and Roger Myerson…each of their names is preceded by ‘Nobel Prize winner.’ With that kind of brainpower on hand, you’d think you could come up with a good explanation. But the best they could do was a simple analogy. Gary Becker (Nobel awarded ’92) took the Friedman line; he argued that by putting out the little forest fires, the recessions of the ’90s and the early ’00s, the feds inadvertently created the conditions for an even greater conflagration. Instead of burning off the underbrush, the tinder built up until a huge blaze was inevitable. And in a speech honoring Friedman, Bernanke accepted Friedman’s criticism of the Fed in the ’30s. Yes, Bernanke admitted, the Fed made mistakes; but we won’t do it again, he said. The burden of today’s rumination is that he was wrong; he will do it again.

“Inflation is always and everywhere a monetary phenomenon,” said Friedman. But deflation doesn’t seem to be a monetary phenomenon at all. Despite huge inputs of new money from the Fed, prices are still going down. The Fed’s balance sheet more than doubled in the last 18 months. It will probably double again – to $4 trillion – before Bernanke’s next term is over.

Friedman won a Nobel Prize for his work. And he drew around him a community of scholars that won so many Nobel Prizes they ran out of room in the University of Chicago trophy cabinet. But it only makes you wonder about the Nobel committee. Friedman’s acolytes won their prizes for elaborating a series of mathematical proofs for things that were either self-evident or self-evidently absurd. Most of them were later shown to be wrong, irrelevant or misleading. Modern Portfolio Theory, Black-Scholes Option Pricing Model, Dynamic Hedging – the farther afield the scholars went, the more they lost touch with home. The more scientific their work became, the more it resembled alchemy or phrenology.

Friedman’s work itself was flawed in the same way. The general principle was correct – that the government that governs the markets least governs best. But when he got into the mechanics of ‘monetarism,’ he got lost. He believed that if the Fed kept its eye on the money supply; the free market would take care of everything else. But the free market didn’t take care of everything, at least not as people hoped. Economist Murray Rothbard explained why in 1971. You cannot expect the free market to function perfectly if you leave in the hands of the government the power to control money. Either markets are free or they aren’t, was Rothbard’s point. If they’re not free, you can’t blame freedom when they fail.

But free market economists are now blamed for everything. The free- market Chicago boys are out. The MIT crowd is in. And investors are buying the Bernanke Put again, confident that the Fed chief will keep pushing money into the system and stocks will continue rising. But Ben Bernanke, for all his bluster, is a victim of the trade. Everyone knows what he is up to. They can’t help but look ahead and see where it leads.

As soon as Bernanke starts his helicopter engines, bond buyers get out their missiles; the Chinese – the biggest single customer for US debt – have warned that they will shoot him down. What can Bernanke do? He is damned if he doesn’t. But even more damned if he does. He can’t guarantee increases in either CPI or stocks. All he guarantees is that Big Government will play a larger role in the economy…and that Milton Friedman’s history of the Great Depression will turn out to be prophecy:

“The Fed was largely responsible for converting what might have been a garden-variety recession… into a major catastrophe…”

Ultimately, Bernanke does what his predecessors at the Fed did in the ’30s…and what the Japanese did in the ’90s. He hesitates. He makes mistakes.

And he wonders why he took the damned job in the first place.

Regards,
Bill Bonner

September 1, 2009

Bernanke to Keep Blocking the Free Market was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Predictably, we’re likely going to see the addition of another big bureaucracy in reaction to a crisis partially caused by a poorly structured banking system and toothless enforcement of existing regulations. The answer to the sloppiness of bureaucratic regulators is, apparently, another layer of bureaucratic regulators. Regulatory reform will not be effective if its architects incorrectly diagnose how the system blew up under the existing system of oversight.

The popular narrative is that that the financial crisis was a failure of the free market, but this narrative glosses over the fact that banking is far, far from a free market. Those who describe the banking business as a wild, woolly free market simply do not understand how banks operate — especially how, with government subsidies and backstops giving them the confidence to make insane loans, banks had grown large enough to blow up the entire global economy.

Last year was less of a failure of free markets than it was the failure of the “shadow” banking system built on a weak foundation: bankers’ lack of connection with the risks they underwrote, government guarantees and tax incentives for mortgages, and misapplication of statistics to exotic fixed income securities, to name just a few things. The shadow banking system could not have grown as large and dangerous as it did without banks’ subsidies from taxpayers and the Fed’s manipulation of the price of money. The Fed’s interest rate targeting creates illusions about default and liquidity risks and distorts the natural relationship between savings and capital investment.

The banking system shares much in common with the federal government, especially in their common isolation from the discipline of the free market; Free market discipline refers to the fact that if you make mistakes, your customers will let you know about it by leaving, and if you don’t reform and improve your product or service, you’re out of business. By promoting competition, free market discipline imposed on business has done more for “the little guy” than any government handout by spurring advances in productivity and living standards.

The banking system hasn’t been subject to free market discipline for decades, and it’s still not. Case in point: Bank bondholders and shareholders were bailed out — at taxpayer expense — from the consequences of their poor lending and investing decisions.

Unlike most businesses, banks don’t earn their profits by serving customers, but mostly by extracting huge economic rents from savers and borrowers. Otherwise, the financial system couldn’t have grown to be such a large percentage of GDP.

Banks are supposed to be intermediaries between savers and borrowers, allocating credit in a manner at prices (interest rates) in line with default risk. But they largely failed in this role. Most banks — especially the “too big to fail” banks — did a horrifically poor job of pricing credit risk at the peak of the credit bubble. Credit spreads were ultra low in early 2007, when it was one of the riskiest times in history to be making loans.

How did the banking system make such colossal errors in judgment about credit risk? I described a few critical weaknesses in the banking system in a September 2007 Whiskey & Gunpowder article (see link here). It wasn’t rocket science to figure out how interest rates were sending a distorted signal about credit risk; all you needed to do was follow the new credit back to its ultimate source and ask the right questions about the connections (or lack thereof) between saver and borrower. One would think thousands upon thousands of federal banking regulators — and those responsible for designing our financial regulations — would have the resources at their disposal to identify the structural weaknesses in our financial system.

Unfortunately, instead of providing a road map to designing a system that connects savers with borrowers in a more sane, responsible manner, it looks like the proposed banking reforms will give us more of the same. Such economic power concentrated in the hands of banks not subject to enough free market discipline is a problem, and the real economy will likely suffer from it.

Regards,
Dan Amoss

June 23, 2009

Banking, the Federal Government and the Free Market was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Richard Layard from the London School of Economics, offered a way forward:

“We should stop the worship of money and create a more human society,” he writes. “Happiness has not risen since the 1950s in the US or Britain,” he points out, despite big increases in wealth. “Modern happiness research can help find answers,” he believes.

“Old fashioned socialist planning is the only coherent alternative to a collapsing capitalist economy,” an alert FT reader added.

Given the depth of these insights, we decided not to dive into this discussion headfirst. Instead, we will simply mock the swimmers from the bank. Brazil’s president, Lula da Silva, for example, could only come up with a campaign slogan: “The future of human beings is what really matters.” But who can blame them? They want a capitalism that makes people happy…fairer, gentler, greener… they want to reform it…to housebreak it…to cut its balls off so they can safely put it on a leash and introduce it to their daughters.

But they miss the point of it altogether: we can’t reform capitalism; it reforms us. Capitalism punishes mistakes and rewards virtue (or good luck) – not necessarily quickly or gently…but roughly and imperfectly, like a hanging judge in a frontier town. On paper, of course, we can do better. Imagine a world where public employees are saints and geniuses who do such a swell job of allocating capital that we want for nothing. But then, when we get a chance to see them in action, we find that they are bigger rascals than the capitalists themselves.

This week, under pressure from its new proprietor – the U.S. government – AIG released a list showing who had gotten more than $100 billion of its bailout money. At the top of the list of recipients was a familiar name – Goldman Sachs. In a truly astonishing co-incidence, Goldman is the firm that had been run by the very person who headed up the AIG rescue – former Treasury Secretary Hank Paulson. And what serendipity! Lloyd Bankfein – Goldman’s top man now – was actually in the room with the feds when the AIG rescue plan was put together.

In the room; in the deal. But the big scalawags ducked out of the press almost immediately. Instead, the headlines focused on the small fry. AIG paid bonuses of $450 million – some charged it was $1 billion – to its executives. These guys shouldn’t get bonuses, came the popular outcry; they should get a firing squad.

You’ll recall the story. The insurance giant AIG lost money on a series of gambles. For example, it gambled that it could insure the mortgage payments of people who couldn’t afford to buy a house. During the bubble years, people bought houses at outrageous prices. They could borrow 80% of the purchase price from government-backed debt mongers Fannie Mae and Freddie Mac. Buyers were supposed to put up the other 20% themselves, giving lenders a margin of safety in case the transactions didn’t work out as planned. But, if an insurance company would guarantee the other 20%, Fannie could cover 100% of this “enhanced” mortgage loan. AIG found that insuring this part of the loan was profitable – as long as nobody asked questions. But then the market price for the collateral dropped – by as much as 50% in some areas. Suddenly, people were walking away from their houses. Defaults on these “enhanced” loans ran at 5 times the rates on normal Fannie-backed mortgages.

An ordinary person would look at these facts and pronounce the same judgment as the capitalist market: AIG and Fannie both deserve to go broke. But give him enough higher education in the economics department, or a job in government, and the fool rushes in –with someone else’s money.

In the theory of bailouts, an ailing firm is given a helping hand when it needs it. This gives it time to get back on its feet, and prevents it from dragging down its employees, lenders, investors and counterparties. But what actually happens is much simpler. Money goes from the pocket of the person who earned it…to the pocket of someone who didn’t…from the innocent bystander to the fellow who caused the accident. Capitalism takes money away from erring capitalists; the capitalism improvers give it back to them.

And who decides who gets the loot? Ah…as soon as you hold them up to the light, the angels’ wings fall off. By and large, these are the same cherubim and seraphim – such as Hank Paulson – who were supposed to be leading…regulating…and controlling capitalism when it ran into a ditch. Not a single one raised a warning. Instead, they whooped for the free market and passed the whiskey bottle to the driver! And now, thanks to their bailouts, AIG continues writing insurance against mortgage loans. Seventy-three AIG executives continue getting $1 million bonuses. A long line of reckless counterparties goes unpunished. And Hank Paulson offers advice to Financial Times readers on how to make capitalism work better.

But that is always the problem with improving capitalism…even in the slapstick American way. The reformers promise a ‘new deal,’ but they’ve always got an ace up their sleeve somewhere.

Enjoy your weekend,
Bill Bonner

March 27, 2009

The Capitalism Reformers Caper and Prance was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Obama as Prime Mover will have to turn the chaos in America’s housing and mortgage market into harmonious order. Then He has to single-handedly leap a tall legacy of toxic assets in a single bound, freeing up banks to lend by buying all of their dodgy assets.

It’s a big ask. But if anyone can do it, He can. Especially when He’s got America’s credit rating to abuse!

Reordering the financial universe is not cheap. It takes a lot of energy and a lot of matter in the form of new U.S. dollars. Reuters reports that, “Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included.”

How much is $4 trillion? “At $4 trillion, that would be the equivalent of nearly 1/3 of U.S. gross domestic product. If the government had to fund that amount by issuing additional debt, it would intensify investor concerns about massive supply scaring off demand.”

Yes. You can imagine the world’s main owners of dollar-denominated reserve assets (China, Japan, the Petro states) would be intensely concerned about a $4 trillion increase in dollar denominated debt. But wait a tick…

It’s one thing to say you might need to float as much as $4 trillion in debt to fund your bad bank. It’s another thing to sell that debt? Who will buy it? Even these days, $4 trillion is a lot of capital to loan. Maybe that number has been floated to make a smaller number, say $2 trillion, look small by comparison.

Good news everyone! The Bad Bank is going to cost us half as much as we thought!

If the ‘big bang’ goes off this week, what will it mean for Planet U.S. Dollar? Or Planet Gold? Well, as our friend Steve Belmont in Chicago reported on Friday, gold is moving toward a day of reckoning after trading in a range for the last ten months. It will either break out much higher, Steve says, or buckle. We’ll be watching.

Did you notice the obnoxious change in political rhetoric this weekend? You knew Barrack Obama was going to give it to Wall Street, calling executives “shameful” for getting bonuses while their firms received TARP money. Remember, by the way, the TARP money was forced on some firms in an effort to boost confidence in the overall plan.

We normally try to keep a reserved, ironic, and sceptical air when reading the statements of politicians. Most of them are not worth taking seriously. But every once in a while, you get the scent of something so noxious and dangerous that you have to put aside humour and call it what is. Today is one of those days.

Now, the populist shame game is to be expected. That’s not a big deal. What’s more alarming is the bilge and claptrap spilling from Kevin Rudd’s gob and what it may mean for your ability to preserve and create wealth in the coming years.

In The Monthly, Rudd plants a Neo-Marxist flag in the ground of the current debate with the kind of jargon-laden elitist preening that makes academic critics of the free market (who’ve never spent a day in the business world creating value) so nauseating.

Specifically, Rudd writes that, “The time has come, off the back of the current crisis, to proclaim that the great neo-liberal experiment of the past 30 years has failed, that the emperor has no clothes. Neo-liberalism, and the free-market fundamentalism it has produced, has been revealed as little more than personal greed dressed up as an economic philosophy.”

Why not proclaim, since he is apparently in the position to make such proclamations, that the experiment in paper money and the deliberate policy of inflation it implies is theft? It is bureaucratic lust for power and authority disguised as monetary policy? It’s also, at its heart, the belief that one or a few people in government know better than you how you should lead your life.

Leave it to Rudd and the resurgent global Left to use the present crisis as an occasion to expand their political ideology of government power and wealth confiscation. Despite the fall of the Berlin Wall in 1989, Marxism never really went away. It ensconced itself in Western universities and colleges, and in the careerism of the political class, which believes it is entitled to govern by virtue of its intellectual superiority and the moral justness of its anti-market position.

Their strategy, as always, is to control the rhetorical high ground by framing the discussion in populist terms and making an enemy of “greedy capitalists.” Don’t get us wrong. There are plenty of greedy capitalists to go around, or to go to jail. In fact, many more of them would be going out of business if the government would quit propping them up with taxpayer money. This generation of corporate executives shares plenty of blame for playing fast and loose with the corporations they were supposed to be stewards of. They over-levered, over-speculated, and over-paid themselves.

But Rudd is an ignoramus of the lowest order to say that current events somehow negate the last thirty years of globalisation, or three hundred years of economic growth and the division of labour. Tens of millions have been lifted out of poverty. Hundreds of millions have more economic and political freedom than ever before.

These results can only be the product of a system in which risk taking entrepreneurs have access to capital and savings, allocated through competitive markets where firms that deliver real value to consumers thrive and those that don’t fail. That system has worked for 300 years of Western history to create wealth, choice, and opportunity.

Shame on Kevin Rudd for calling that “market fundamentalism”, as if belief in the institutions that create wealth and liberty is akin to the same kind of religious fundamentalism that permits suicide bombing. If there is a more offensive use of rhetoric to equate two vastly different things, we haven’t seen it.

But the Neo-Marxists are back on the march. And they are probably coming for your wages and pension sometime soon. Make no mistake about it. 2009 is the year the Neo-Marxists have been waiting for.

It is their chance to undo all the perceived evils of Thatcher and Reagan. There would be plenty of those to undo, of course, not least the idea that deficit spending is morally permissible. But the real push by the Neo-Marxists is to use the present occasion to expand the scope and reach of government power into your private life, so they can tell you what to do, what to watch, what to eat, what car to drive, and ultimately, what to think or say.

This will be disguised as better more “parental” regulation to achieve more equality and social justice. But behind the false populist outrage and the elevated language of idealism, it’s just another push for government elites to expand their ability to compel you to live the life they think you should lead.

The simple regulatory response to all this is to reduce the amount of leverage available to financial players. Reduce margin lending in shares. Let bankers get back to making prudent loans in the housing market based on what a buyer can actually repay, rather than letting the government subsidise subprime lending because it’s politically desirable.

There are other sensible regulatory responses to the mess. But they will be discarded in favour of grandiose and over-reaching plans to redesign the entire world in some utopian image. A “big bang”? Really. Does that mean they’re going to blow things up and call it a “fix?”

What we’re getting at is that it’s going to be a tremendous challenge to withstand this push in the next few years, mostly because it will have so much popular support from people with no brains who believe in fine sounding speeches and appreciate getting tax rebates/credits/handouts from the government. The first battle in the war on wealth creation is wealth redistribution, whether you like it or not.

It would be more honest if the Left just came out and said something like, “The last ten years have been a huge wealth transfer from the middle class to Wall Street and from the developing world to the developed world. We’re going to try and reverse all that now because we know it’s our best shot in the last thirty years to get some back. So here we come! Open your wallet and shut your mouth!”

Neo-liberalism isn’t the culprit in all this. What does that word even mean? Isn’t Rudd using it because it sounds like Neo-Conservatism? And everyone knows that Neo-conservatism is evil, therefore Neo-Liberalism must be evil too!

The real evil of the last thirty years is the vast expansion of credit in the world that changed personal and corporate incentives. The plunge in the cost of capital-encouraged by governments and Central Banks-set of an orgy of bad risk taking, quietly condoned by regulators and politicians who all benefitted in some way from housing/commodity/trade booms.

But now the credit cycle has turned. The Credit Depression is upon us. And Comrades Rudd and Obama will try and use it for the next great push in the Neo-Marxist dream, one world government with one world currency. More on that tomorrow!

Regards,
Dan Denning

February 4, 2009

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

John Maynard Keynes, an early 20th century economist, was the most influential advocate of government influence in the economy. Thanks to him, an entire generation of voters thinks the president “manages” the economy. Keynes’ followers, who populate the halls of government and academia, think the government needs to act when the free market “fails.” They propose government solutions to problems like “liquidity traps” and “insufficient demand.”

These alleged problems became so feared that the U.S. government decided it was necessary to move the dollar to a completely paper, faith-based system — despite historical evidence that every paper money system fails. The Federal Reserve has cemented its role as price fixer for short-term interest rates. It fuels speculative bubbles when the economy slows, and denies all responsibility when bubbles burst. The cycle then repeats.

The New Deal was Keynes’ idea. The era of colossal government — the New Deal — began as a popular reaction to the Great Depression. The Depression started when an inflation-fueled bubble popped, and worsened in the mid-1930s, when the government taxed capital away from entrepreneurs and reinvested it into “make work” programs.

This is one of many examples in which government power grew at the expense of the more efficient free market. These ideas, and the proposed solutions to them, distort the free market’s investment cycles and have gotten the U.S. to the point where it simply cannot function without asset inflation.

Today, the government proposes solutions to problems caused by government interference. Specifically, it and the Fed are throwing more money and credit at a problem that was caused by their own past initiatives to stimulate money and credit. Even a mere recession has become politically unacceptable.

China’s Success Hinges on Its Support for Free Markets

Keynesian economists tend to deny the free market the respect it deserves. It has had an amazing track record in recent centuries. Despite the destructive influences of nutty paper money schemes, deficits, taxation, regulation, and wars, most countries have progressed from subsistence farming to modern living standards at a stunning pace.

The free market rests on a foundation of mutual trust, price signals, profits, free trade, and property rights. It’s important for government to respect this foundation. Communist governments simply destroy it and, predictably, get chaos and poverty. Even in some capitalist countries, popular support for this foundation is shaky.

The Chinese, still Communist in name, but hardly in action, have gained some respect for the foundation of free markets. Their leaders are executing policies that promote better living standards, and they are using free market principles to achieve it. As a result, they prosper. But prosperity doesn’t advance without occasional setbacks. China is dealing with one right now: A shortage of above-ground coal.

In China’s highly publicized winter storm delays, we see an example of how slower economic growth can lead to higher consumer price inflation. Most economists would have you believe that growth causes inflation, when in reality, it’s the opposite. Real economic growth increases the supply of goods and services. So consumer prices would fall if the money supply were held constant. The Wall Street Journal recently reported:

The coal shortage has rippled through other commodity markets, hurting China’s output of steel, copper, zinc, and aluminum as electricity is being diverted for domestic industry and household heat and electricity. China’s largest copper producer, Jiangxi Copper Co., shut down some plants, contributing to higher U.S. copper futures:

Even though the Chinese government supports free markets to achieve its political goals, it still distorts investment cycles with monetary inflation and regulation. Its manufacturing capacity has grown beyond its power grid capacity. This slows real economic growth, which is cutting the supply and raising the price of copper in the U.S. futures market.

Chinese monetary policy, like that in the U.S., ensures that money supply can grow limitlessly at zero cost. No wonder prices for nearly everything are going up. Central banks have pushed inflationary policies beyond all reasonable limits. A recent issue of Grant’s Interest Rate Observer explains why this could be the top financial market story in 2008:

In the dollar and its institutions, there is a deep-seated contradiction. The Fed is America’s central bank, but the dollar is the world’s currency. More than a billion people work and save and spend in the non-American portion of the U.S. dollar bloc. It seems fair to guess that more than a few of them are fed up, if not with the distant institution that sets an interest rate, then with an inflation problem over which they seem to be powerless.

One of the top financial stories for 2008 just might be the dawning of this unwelcome truth on the average American central banker, bondholder, and consumer. Recently, The New York Times, in a dispatch from Shanghai, speculated that China was now exporting inflation, not deflation, and that, on account of this sea change, the American CPI would presently begin to tick higher.

The onset of recession would likely push back the return of what economists will eventually learn to call the “21st century secular inflation” (mark my words). A friend of mine muses that the dramatic re-pricing of ultra-cheap oil transformed the markets and economies of the 1970s. So, too, he speculates, will the dramatic re-pricing of ultra-cheap Asian labor deliver a seismic jolt to the markets and economies of the present day. If so, the dollar, no less than the euro, is likely to suffer impairment against the kind of assets that central banks just can’t print.

If you’re a regular reader of Whiskey & Gunpowder, you probably agree that individuals make better spending and investing decisions than governments. Yet Keynesian plans to “fix” the economy — whether through regulation or inflation — remain uncomfortably popular. The conditions are set for a dramatic consumer price inflation reawakening — if not in 2008, then over the next decade. Long-term bonds are priced to provide negative real after-tax returns over the next decade. Invest accordingly.

Regards,
Dan Amoss, CFA
March 19, 2008

How Paper Money Distorts Investment Cycles was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.