Ahead of the Herd Blog

by Peter Schiff

There is an old adage on Wall Street that no one rings a bell at major market tops or bottoms. That may be true in normal times, but as many have noticed, we are now completely through the looking glass. In this parallel reality, Ben Bernanke has just rung the loudest bell ever heard in the foreign exchange and government debt markets. Investors who ignore the clanging do so at their own peril. The bell’s reverberations will be felt by everyday Americans, whose lives are about to change in ways few can imagine. While nearly every facet of America’s economy has been devastated over the past six months, our national currency has thus far skipped through the carnage with nary a scratch. Ironically, the U.S. dollar has been the beneficiary of the global economic crises which the United States set in motion. As a result, our economy has thus far been spared the full force of the storm.

This week the Federal Reserve finally made clear what should have been obvious for some time – the only weapon that the Fed is willing to use to fight the economic downturn is a continuing torrent of pure, undiluted, inflation. The announcement should be seen as a game changer that redirects the fury of the financial storm directly onto our shores.

In its statement, the Fed announced its intention to purchase an additional $1 trillion worth of U.S. treasury and agency debt. The purchases, of course, will be made with money created out of thin air through the Fed’s printing presses. Few can doubt that they will persist with these operations until the economy returns to its former health. Whether or not this can ever be accomplished with a printing press alone has never been seriously considered. Bernanke himself admits that we are in uncharted waters, with no map or compass, just simply a hope that more dollars are the answer.

Rather than solving our problems, more inflation will only add to the crisis. Falling asset prices, the credit crunch, declining consumer spending, bankruptcies, foreclosures, and layoffs are all part of the necessary rebalancing of our economy. These wrenching movements, however painful, are the market’s attempts to resolve the serious problems at the root of our bubble economy. Attempts to literally paper-over these problems will lead to disaster.

Now that the Fed has recklessly shown its hand, the mad dash to get out of Treasuries and dollars should not be far off. The more the Fed prints to buy bonds the less the dollar is worth. Holders of our debt (read China and Japan) understand this dynamic. We must expect that they will not only refuse to buy new bonds, but they will look to unload those bonds they already own.

Under normal circumstances, if creditors grew concerned that inflation was eating into their returns, the Fed would raise interest rates to entice them to buy. However, the Fed will avoid this course of action as it fears higher rates are too heavy a burden for our debt-laden economy to bear. To maintain artificially low rates, the Fed will be forced to purchase trillions more debt then it expects as it becomes the only buyer in a seller’s market.

Just last week, Chinese premier Wen Jiabao voiced concern about his country’s massive investments in U.S. government debt. In the most unequivocal statement yet by the Chinese leadership on this issue, Wen made it plain that he was concerned with depreciation, not default. With his fears now officially confirmed by the Fed statement, we must wonder when the Chinese will finally change course.

There is a growing consensus that if China no longer wants to buy our bonds, we can simply print the money and buy them ourselves. This naïve view fails to consider the consequences implicit in such a change. When the Treasury sells bonds to China, no new dollars are printed. Instead, China prints yuan which it then uses to buy treasuries. This effectively allows America to export its inflation to China. However, now that we will be printing the money ourselves, the full inflationary impact will fall directly on us.

With such a policy in place, America has now become a banana republic. It won’t be too long before our living standards reflect our new status. Got Gold?

Peter Schiff is president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets and Crash Proof: How to Profit from the Coming Economic Collapse.

http://creativecommons.org/licenses/by/3.0/us/

Is Gold Money?
by William Rees-Mogg
www.lewrockwell.com

As someone who has been interested in gold for the last forty years, I have always been interested in the definitions which can be applied to gold. Is gold money? It often has been, but it is not at present. I suspect it may become money again. Is gold a commodity? I think the answer to that question is “yes”. Gold used in chemical reactions, or in jewellery, is plainly a commodity which can sometimes be replaced by another commodity.

However, the question I find most interesting is whether gold is a real asset. One of the problems of investment is that there are two variables, reality and liquidity. Land or property are relatively illiquid, but are also real, in that they have a use which does not depend on their value in exchange. Gold is highly liquid, indeed it is more liquid than paper money. In extreme circumstances, paper money can lose all its value, when gold is still acceptable as payment. In 1940, when the French Army was defeated, many French people took to their automobiles to escape the advancing Germans. They found that petrol stations would not accept paper francs, but would sell their petrol in exchange for gold coins.

Gold also remains an acceptable currency in periods of high inflation, when paper money can lose all its value.

What does “reality” mean, when applied to an investment? Obviously we talk about “real estate” to describe the legal possession of property. I think that means property with a permanent character and at least a potential use. In the same way, the traditional theorists of the gold standard would say that gold was a real currency, because it has permanence and a potential non-monetary use.

I accept that reality in an asset is a relative factor. In an ideal world, we would all like to hold our financial needs in a currency with a high degree of permanence, strong alternative uses and high liquidity. We have to make do with currencies which fall short of perfect “reality”, and fall short of perfect liquidity as well. We make do with imperfect currencies because we have no choice.

Gold makes one think about these issues, but it makes one even more uneasy about electronic money. In book publishing, I am well aware of the library demand for archival books which can reasonably be expected to last for centuries, like the printed works of earlier centuries. We need also to have permanent money, which can be relied upon to survive, even though its value may decline over time. The historic value of gold has been astonishingly stable over centuries.

In an extreme example, one could be worried about the issue of money and about its preservation. Mr. Madoff has shown that fraud can reach the unbelievable level of $50 billion. Might there not be still larger frauds, so large as to achieve what the wartime German operation attempted, a complete takeover of a targeted currency?

Cybercrime is already operating on a huge scale. Suppose that Al Qaeda, instead of attacking the twin towers, had attacked the electronic systems which record all the monetary holdings of New York. No lives might have been lost, but an electronic pulse might have erased one of the central counting houses of world finance. The world might have been ruined.

Is there not some element of this cybercatastrophe in the present world crisis? Reality may be a variable concept, with nothing 100 per cent real and hardly anything zero per cent. When I was born, in 1928, gold was money, and gold was over 90 per cent real. In 1970, when I was in my forties, money was paper, and even the convertibility into gold of the Bretton Woods Agreement was breaking up. Now money is a largely unidentifiable electronic pulse, itself vulnerable to attack by electronic means. Virtual money has very low reality, much lower than paper.

Surely this is a system which could be blown away because there is nothing in it to gain confidence. Even a return to paper money would raise the level of reality attached to world currencies. There is a problem of raising the reality level of all currencies – a problem which nineteenth century economists solved by convertibility to gold.

by William Rees-Mogg
www.lewrockwell.com

March 10, 2009

William Rees-Mogg is former editor-in-chief for The Times and a member of the House of Lords. He has been credited with accurately forecasting glasnost and the fall of the Berlin Wall – as well as the 1987 crash. His political commentary appears in The Times every Monday. His financial insights can only be found in the Fleet Street Letter, the UK's longest-running investment newsletter.

Masterful Masters on Our Masters

by Becky Akers

Meet Tim Masters, an American of superior insight. After DNA evidence forced the State of Colorado to overturn his conviction for murder and free him from its cage, Mr. Masters knew precisely whom to blame for his ruined, stunted life. When CNN asked, "Any hard feelings toward the Fort Collins Police Department or the prosecutors in the case?", Mr. Masters responded, "Oh, absolutely. They locked me up for a decade for something I didn't do."

Yeah, take a moment to recover from such stunning brilliance. I, too, sat thunderstruck as I thought, Wow, someone finally gets it! But the perspicacious Mr. Masters wasn’t done: he holds government accountable not only for the years it stole but also for depriving him of basic human relationships ("I think they're very much responsible for me not having a family right now, a wife and kids"), of employment ("The first thing that comes up on a background check is ‘charges dismissed – first-degree murder’"), and of his youth ("…my high school days when they labeled me a murder suspect among all my peers and my teachers and everything"). He even blames the State for tormenting the murdered woman’s family ("It's a damned shame that [the police] did this to them, too, telling them they got the guy when they didn't have the right person").

Contrast that with the pass Leviathan’s other victims almost always grant the beast. The economy’s tanking thanks to Wall Street’s greed and your spendthrift neighbors rather than politicians who print money willy-nilly while taxing everybody and everything – including the air. Three thousand Americans died on 9/11 because Muslims are crazy Islamofascists; the Feds’ unconstitutional, unconscionable meddling in the Middle East had nothing to do with it. Government’s minions incinerated families at Waco, not out of psychopathic brutality but to save abused children. Public schools graduate illiterates because selfish homeowners refuse to fork over enough taxes for decent classrooms and teachers.

Et cetera, ad nauseam. However laborious or far-fetched, the sheeple prefer to excuse rather than indict their god, the State.

Not Tim Masters. He was a boy of 15 in Fort Collins, Colorado, when someone murdered vivacious, redheaded, 37-year-old Peggy Hettrick on February 11, 1987. The killer knifed her from behind with such force that it "splintered" one of her ribs, then mutilated her corpse with a "partial vulvectomy." Dr. Warren James, an obstetrician-gynecologist from Fort Collins, would later describe this desecration as "requir[ing] ‘a high degree of surgical skill and high-grade surgical instrument. … I find it highly unlikely that a 15-year-old could perform this precise surgical procedure.’" Ms. Hettrick’s butcher also "carefully removed" her "left nipple and areola" before sponging the blood from her body and dragging its 115 pounds into a field near the trailer where Tim lived with his widowed father.

Neither you nor I would figure a 110-pound teen-ager for a suspect in a crime calling for extensive knowledge of anatomy, surgical skills, expensive equipment, and Samson’s strength. That’s one reason we don’t leech off taxpayers at the Fort Collins Police Department. The whiz-bang sleuths who do fixated on Tim largely because he passed the corpse as he cut through the field on his usual route to school that morning. He even paused to look at the body. But the lady’s naturally pale coloring combined with her loss of blood had rendered her so white Tim thought she was a mannequin someone had dumped there as a prank. So did the bicyclist who saw her from the road about 30 yards away a few minutes later – until he noticed a puddle of gore at the curb. Then 38-year-old Linwood Hodgdon called 911.

Tim didn’t. He continued on to school. He was a quiet boy who "was known to keep to himself" – perhaps because his redheaded mother had died four years earlier almost to the day. Yet Fort Collins’ Finest let neither sympathy nor common sense impede them. They wondered why Tim hadn’t reacted as did the older Hodgdon, who glimpsed the body from a different angle and immediately reported it.

Worse, another older man who should have protected the boy didn’t, thanks to his faith in government. Tim’s father, Clyde, had been in the Navy for 22 years "’and felt you should obey authority,’" as Tim explained in an interview with CNN. Clyde "thought police were there to help." So he "initially told [his son] to cooperate with police, a decision that ultimately would be his undoing. … ‘We'll cooperate with them and give them anything they want and then they'll see that you didn't have anything to do with this and they'll move on,’ Masters recalled his father telling him in 1987. ‘It turns out that by cooperating with them it just encouraged them, because I was the easiest suspect to go after. … It's just a shame Dad didn't know how the system was.’"

Clyde so worshipped the State that he allowed cops to search his home. They found the sort of stuff in Tim’s room that typically fascinates teen-aged boys: six survival knives as well as "violent" sketches Tim had drawn and stories he’d written. His "artwork," including depictions "of dinosaurs with arrows through them, gruesome war scenes described by his Vietnam veteran dad and horror flicks such as ‘Nightmare on Elm Street’ that father and son watched together," had so "disturbed" a teacher that Tim wound up in a "special-ed class …. The younger Masters loved to write, and his goal was to be another Stephen King. Judith Challes, the special-ed teacher who knew him best, told his reading teacher, ‘You know, I'm not at all concerned about them (his writings and drawings).’ Most of her kids scrawled horrific images."

But Tim’s creativity and his knives had the cops off and running. "It's just unbelievable," Tim says, "because here's all these stories and drawings that have no nexus with the crime. There's no one being stabbed in the back. There's no one being sexually mutilated. The only thing they had in common with this crime is there was violence."

Clyde left his son alone with the cops and their videotaped interrogation for ten hours. If that isn’t child abuse, it’s tragically close. And it demonstrates that those who blind themselves to the State’s evil unleash catastrophe, not only on themselves but on the innocents around them. Meanwhile, Tim’s dignified, heroic silence as the cops badger, insinuate, accuse, and threaten him earns this boy my nomination for "Man of the Year." He simply, searingly shows them for the bullies they are.

And I’ll bet the cops knew it. Perhaps that’s why Tim remained their chief suspect for twelve years. Their obsession kept them from investigating other leads and far likelier killers.

In 1999, after Lt. Jim Broderick unearthed "a forensic psychiatrist who testified that Masters’ boyhood doodles were evidence of a ‘fantasy rehearsal’ for the murder," Tim finally stood trial. Supposedly, he had "single-handedly murdered Hettrick in an ambush while she was walking past Masters’ house after a night of drinking. He killed her at the curb on Landings Drive, then dragged her into an adjacent field where he mutilated her genitals and breast by the light of a military flashlight. He managed this without leaving a trace of evidence behind, or bringing back into his house any evidence from the scene. Police never found any blood, body parts, hair or fibers that could connect Masters to the crime." Instead, they relied on "circumstantial evidence to paint a picture of an anti-social youngster so wracked by abandonment from the untimely death of his mother that he took sadistic revenge on a passing woman who resembled her." That was enough to convict Tim and sentence him to life in prison.

"They won their case by assassinating my character," Tim says. Once again seeing officials as they are rather than as they want us to, he added, "My opinion is that Jim Broderick, the guy in charge of [the investigation of the murder], has a very big ego and would not allow anything or anyone to convince him that he was wrong. He made up his mind in the beginning, from day one when he walked into my bedroom and saw my horror drawings and war stories, that I was guilty. Nothing would change his mind."

From his cell, Tim filed appeals. Courts either affirmed his conviction or refused to hear his case. But when new DNA evidence exonerated him in 2007, a judge vacated his sentence – as Tim did prison in early 2008.

Ever the sore loser, Leviathan begrudged its prey his freedom. "Though out of prison, Masters still carries the label ‘suspect.’ District Attorney Larry Abrahamson made that clear in his order to dismiss charges against Masters. The new DNA doesn't vindicate Masters, Abrahamson wrote, but it ‘clearly warrants a complete re-examination of the evidence related to the murder of Peggy Hettrick.’" Tim mentioned his "[relief that] the charges were dismissed" while also noting, "I didn't care too much for the language of [Abrahamson’s] motion." CNN reported that Tim’s "attorneys voiced a stronger reaction. ‘They're still trying to keep him on a leash,’ said attorney Maria Liu. ‘They know there's not one single shred of evidence against Tim Masters and they don't have the backbone or integrity to acknowledge it.’"

Tim recently sued his local Leviathan for "unfair, malicious prosecution." While private citizens showered money and other gifts on this wronged man, the City of Fort Collins asked a federal judge to dismiss the claim – and, for good measure, also requested that the court force Tim to pay the city's legal costs. That doesn’t faze the victim. At this point, he understands the devil so well he can quip about his horns and pitchfork: "Right now, it looks like [the City]’ll spend millions to not give me one." Gitmo’s prisoners have received no compensation for the crimes committed against them, and Tim probably won’t either, though he estimates he lost half a million dollars in wages as well as his house, a ’46 Harley, and other property.

No, the best the State can do is investigate – and clear – Lt. Broderick, though he "illegally taped a conversation between Masters, then 15, and his dad, Clyde Masters, at police headquarters 20 years ago." (Which skullduggery backfired since "Masters repeatedly tells his dad he's innocent." No problem: Broderick never divulged his recording’s results to Tim’s attorneys.) Leviathan iced this foul cake when it "censured" two of the prosecutors who secured Tim’s wrongful conviction. David Wymore, the attorney in charge of Tim’s victorious appeal, dismissed that as "a slap on the wrist. … This man spent 10 years in prison, and the prosecutors who put him there aren't even being sentenced to an ethics class?"

Leviathan’s mauling of this motherless boy offers many lessons. First, it exposes the monster’s satanic ugliness. We should study it well despite the stench so we understand what we’re fighting.

The second lesson is for parents. When you teach your kids that poison, fire, playing in traffic, and strangers will hurt them, tell them the State will, too. Warn them that anyone on its payroll is the strangest of all strangers, a dire and often lethal enemy. Sure, government boasts a good guy now and then; some of them worked to clear Tim and win his release. But mixing sugar with cyanide only masks the fatal flavor, making it even more dangerous.

Then there’s the reminder that hundreds of thousands of Tims languish in prison, whether Leviathan frames them as it did him or whether they’re genuinely "guilty" of non-crimes. Barie Goetz, an investigator who helped prove Tim’s innocence, says, "Look, the system took his life and, in a way, his future. We all want him to make it. But … he's got this stigma. The truth is that I've asked people, 'Would you hire him?' 'Would you let him date your daughter?' The answer's always the same. You get this pause. . . ." Let those of us who have thus far escaped the fiend’s clutches employ and embrace, nourish and nurture those who haven’t.

Looking back at his dad’s veneration of Leviathan, at the years and grief it cost him, Tim advises, "You shouldn't always submit to authority. Our country wouldn't exist if everyone submitted to authority."

Sheer genius.

Becky Akers
libertatem@netzero.com

March 9, 2009

Becky Akers writes primarily about the American Revolution.

James Howard Kunstler

Isn’t that a question, though…

The Peak Oil story was never about running out of oil. It was about the collapse of complex systems in a world economy faced by the prospect of no further oil-fueled growth. It was something of a shock to many that the first complex system to fail would be banking, but the process is obvious: no more growth means no more ability to pay interest on credit… end of story, as Tony Soprano used to say.

There was a popular theory among Peak Oilers the last decade that the world would enter a “bumpy plateau” period when the global economy would get beaten down by Peak Oil, would then revive as “demand destruction” drove down oil prices, and would be beaten down again as oil prices shot up in response - with serial repetitions of the cycle, each beat-down taking economies lower - the only imaginable outcome being some sort of quiet homeostasis. This scenario did not play out as expected. It was predicated on a mistaken assumption that all systems would retain some kind of operational resilience while ratcheting down. Anyway, the banking system was mortally wounded in the first go-round and the behemoth is dying hard.

The last desperate act of the banking system in the face of Peak Oil’s no-more-growth equation was to engineer species of tradable securities that could produce wealth out of thin air rather than productive activity. This was the alphabet soup of algorithm-derived frauds with vague and confounding names such as credit default swaps (CDSs), collateralized debt obligations (CDOs), structured investment vehicles (SIVs), and, of course, the basic filler, mortgage backed securities. The banking system is now choking to death on these delicacies.

The trouble is that the EMT squad brought in to rescue the banking system - that is, governments - can’t remove these obstructions from the patient’s craw. They don’t want to drown in a mighty upchuck of the alphabet soup.

The collapse of complex systems is actually predicated on the idea that the systems would mutually reinforce each other’s failures. This is now plain to see as the collapse of banking (that is, of both lending and debt service), has led to the collapse of commerce and manufacturing. The next systems to go will probably be farming, transportation, and the oil markets themselves (which constitute the system for allocating and distributing world energy resources). As these things seize up, the final system to go will be governance, at least at the highest levels.

If we’re really lucky, human affairs will eventually reorganize at a lower scale of activity, governance, civility, and economy. Every week, the failure to recognize the nature of our predicament thrusts us further into the uncharted territory of hardship. The task of government right now is not to prop up doomed systems at their current scales of failure, but to prepare the public to rebuild our systems at smaller scales.

The net effect of the failures in banking is that a lot of people have less money than they expected they would have a year ago. This is bad enough, given our habits and practices of modern life. But what happens when farming collapses? The prospect for that is closer than most of us might realize. The way we produce our food has been organized at a scale that has ruinous consequences, not least its addiction to capital. Now that banking is in collapse, capital will be extremely scarce. Nobody in the cities reads farm news, or listens to farm reports on the radio. Guess what, though: we are entering the planting season. It will be interesting to learn how many farmers “out there” in the Cheez Doodle belt are not able to secure loans for this year’s crop.

My guess is that the disorder in agriculture will be pretty severe this year, especially since some of the world’s most productive places - California, northern China, Argentina, the Australian grain belt - are caught in extremes of drought on top of capital shortages. If the U.S. government is going to try to make remedial policy for anything, it better start with agriculture, to promote local, smaller-scaled farming using methods that are much less dependent on oil byproducts and capital injections.

This will, of course, require a re-allocation of lands suitable for growing food. Our real estate market mechanisms could conceivably enable this to happen, but not without a coherent consensus that it is imperative to do so. If agribusiness as currently practiced doesn’t founder on capital shortages, it will surely collapse on disruptions in the oil markets. President Obama at least made a start in the right direction by proposing to eliminate further subsidies to farmers above the $250,000 level. But the situation is really more acute. Surely the US Department of Agriculture already knows about it, but the public may not be interested until the shelves in the Piggly-Wiggly are bare - and then, of course, they’ll go crazy.

The recent huge drop in oil prices has left the public once again convinced that the world is drowning in oil - if only the scoundrelly oil companies were forced to deliver it at reasonable prices. The public has been consistently deluded about this for decades. What’s missing so far is for the president of the United States to lay out the reality of the situation in a dedicated TV address. I know a lot of you think that Jimmy Carter already tried this and failed to make an impression (and ruined his presidency in the process). I guarantee you that Mr. Obama will have to do this sometime in the next few years whether he likes or not, and he’d be well-advised to get it done sooner rather than later. And by this I don’t mean just vague allusions to “energy independence” or “renewables” in speeches devoted to many other issues. I mean telling the public the plain truth that we’ll never offset oil depletion and the intelligent response is to do everything possible to transition to walkable towns and public transit, not to sustain the unsustainable.

The alternatives - i.e. what we’re trying now - is to further delude ourselves into thinking that we can run Wal-Mart and the suburbs by some other means than oil. Despite all our investments in these things, we won’t be able to run them by other means, and the news about this had better get out before enormous disappointment turns into titanic rage. If Americans think they’ve been grifted by Goldman Sachs and Bernie Madoff, wait until they find out what a swindle the so-called “American Dream” of suburban life turns out to be.

This week, in the power centers of America, attention is fixed on the never-ending fiasco of AIG - a company whose main product turned out to be credit default swaps, and is now choking on them. Kibitzers on the sidelines of finance are forecasting a king-hell bear market suckers’ rally in the stock markets followed by a belly flop to Dow 4000 or lower. I myself called for Dow 4000 two years ago - and was obviously a bit off on my timing. All this is surely trouble enough. But while your attention is focused on Rick Santelli in the Chicago trader’s pit, or Larry Kudlow desperately seeking “mustard seeds” of new growth in financials, try to let one eye stray to the horizon where these other complex systems are working out their next moves. Farming. The oil markets. These are the coming theaters of alarm and distress.

http://www.kunstler.com/

They Done Us Wrong: Spending Our Way Into Greater Depression

by Michael S. Rozeff

If you like economic depression, Obama is your man. The stock market is shouting this message loudly and clearly. The S & P 500 (measured by the security SPY) made a little high at 100.41 on November 4, 2008. The election was the next day. It has been downhill ever since. The close on March 2, 2009 was 70.60. This 30 percent decline qualifies as what used to be an ordinary bear market!

Congress and the President could not construct better measures, proposed and enacted, to deepen this depression if they tried. Congressional Democrats intend to ensconce Democrats as the majority party for the next 25 years or so. Their chosen method is wasteful pork sold as rational investment. But by gilding the nests of their chosen constituencies and supporters with huge taxpayer-funded giveaways, they will deepen and lengthen the depression.

The stock market tells us this, but it is easy for stimulus supporters to explain away the stock market’s drop in other ways. Obama supporters are likely to extol the good things that his program is doing to revive spending in the economy, and to regard the stock market as an aberrant den of gamblers and thieves who deserve their Bush-induced fate.

Very few men on the street, including my doctor, understand that spending, whether private or government, does not get rid of economic depression; and the lack of spending does not cause it. They do not fathom that government spending, borrowing, and taxing will further gash the sinking economy below the water line and send it to its watery grave. They are more inclined to believe, along with prominent economists, that government spending should be increased by trillions more. There cannot be too much of a good thing.

People automatically think that if everyone does not spend, then how can businesses keep going and hire people? How can the economy work? Then they think, if people only have money, then they can spend. If the government spending will only put that money into their hands, this will cause people to spend. It will jump start the economy, restore business confidence, and all will be well.

This story has a firm hold on the public imagination, but things don’t work that way. People in the aggregate can only earn money to spend by working productively. Money still doesn’t grow on trees.

The government doesn’t have a money tree either. Without resorting to inflation, it can only shift money around. America’s federal government is a group of Americans who are empowered to tax the rest of us and borrow from anyone in the world. This money is collected from you, me, and others. We then have less to spend. Shifting money from the left pocket to the right pocket doesn’t enhance the total amount.

Americans are not unwise enough to accept government money that is rolled off a printing press with absolutely nothing to back it up. Our government does not do things so crudely. Its money is printed up for it only after it issues government bonds that promise to pay interest. For all practical purposes, these bonds are perpetuities on which the promise is made to pay interest forever. There is no government money tree in this process because the government taxes Americans to pay the interest. If the government borrows from us and spends more now, we have less to spend now. The money goes from one pocket to another with no aggregate gain.

The government has another way to borrow. The central bank (the FED) can take the bonds and credit the government’s bank account. This exchanges one credit for another credit. The taxpayer must still pay interest. The credit created for the government has not directly diminished the taxpayer’s wealth on his personal account. There has been no money transferred from taxpayer to government. The taxpayers have a new liability, nonetheless. They will be made to pay the present value of the interest payments, which is the value of the bonds. This may or may not crimp their spending. It probably will not. They are unlikely at first to realize that they owe this money. As time goes on and they have to pay higher taxes, they might realize it. When the government relieves many people of direct taxes, it hides this burden of the debt for as long as it can.

So what do we have? The government can get money from the FED and spend it. It will seem to many people like money that grows on trees because they do not see the eventual taxes or the current hidden taxes. The government can spend this money. It will stimulate people into working at various government-selected projects. There is, however, no such thing as a free lunch. If people do not value these projects (which is usually the case) or the projects lose money (which they usually do), the welfare of people does not go up. It goes down, for they are paying for useless work. Furthermore, the government spending raises costs and prices by bidding labor and materials away from others. And this prevents those prices from adjusting to levels that make it profitable for businesses to employ people in making stuff that people really want.

There are those who contest the notion that government spending is largely waste. They imagine brand new bridges, newly-paved roads, and intercity rail transport. Even if these projects paid off, they are a tiny fraction of all government spending. And most of these do not pay off. Government spending only creates wealth if it spends money on things whose return exceeds the cost of the capital used. The government’s own operating costs are so high that, viewed as a business, it gets a return on its investments that fall far short of its capital costs. In other words, the government is like a gigantic money-losing business. One reason for this is that interest groups get the money. The image of public-minded officials dispersing the money efficiently is unreal.

Everyone who has spent any time at all looking into the matter of government spending, all regular readers of LRC, all readers of Ideas in Liberty, all readers of the publications of the Independent Institute, etc., and all those who have not looked into it, but have merely had experience with government, take it for granted that every $1 spent by government costs the taxpayer $1.25 or more. Governments routinely destroy wealth. The case is so overwhelming that anyone who believes otherwise can only be willfully ignorant or blinding himself. One scholar (Martin J. Bailey), who was far from a radical anti-government person, but who spent many years studying government and trying to write an improved Constitution to mitigate problems with representative government, wrote as follows:

"The leader, if truly well-informed, will know about several barriers to sound government. We may summarize these as follows. In existing nations the clash of interests often has powerfully wasteful and detrimental effects, among other reasons because elected professional politicians with almost unlimited authority to enact and administer laws are subject to enormous rent-seeking pressures. Indeed, they seek out groups that have been unable to solve their own organizational free rider problems and solve them through legislation – e.g., for labor in the 1930s through the National Labor Relations Act and more recently for the poor and the ‘homeless.’ Political discourse in all venues is routinely filled with fraudulent claims, slander and other misrepresentations. Even if they might wish to enact perfectly constructive, statesmanlike legislation, politicians have no reliable conduit with which to collect valid information about the preferences and values of their constituents. A fundamental reason for these symptoms is that citizens have no incentive to seek out the truth on public issues, but instead choose rational ignorance and, often, rational non-participation. See Downs (1957: 238–274). From this core problem emanate others that permeate government. Finding a corrective mechanism for this core problem is a necessary condition for overall improvement."

It helps the cause of liberty when polite and well-mannered experts, people who have studied the matter for years and speak in restrained tones, inform us that politicians cater to interest groups and not the public welfare, that they routinely lie, that they organize interest groups and shake them down, that even if they wanted to, they could not serve the public interest, and that our representative government is wildly dysfunctional.

The image of government restoring confidence by raising and spending money could not be more mistaken. This is the fantasy of Keynes. It is the rhetoric of FDR ("the only thing we have to fear is fear itself"). If business confidence depended on government spending, there would not have occurred any of the last 5 recessions in the U.S., for government spending rose both before and during these recessions. And there would have been a recession during the Clinton years when government spending moderated. The confidence of a businessman depends on the anticipated demand for his goods and services. He does not invest in plant and hire labor on the basis that the government is spending money on its favorite interest groups.

There are unemployed resources in a depression. Doesn’t the government improve matters by putting these to work? There is a large vacant building for lease in a nearby commercial strip. It used to be a shoe store. At the same time, there are unemployed men and women in the area. So far, no business has seen fit to rent the building. Does the government have a viable business in view? This is highly doubtful. It is not how the government operates. If it directly hires the building, the chances are that it will hire people to do make-work. The operation will run a loss, paid for by taxpayers. Why should they be taxed to pay the unemployed and lose money in the process? Nothing is accomplished but a transfer of wealth from taxpayers to the unemployed and an additional loss. Meanwhile, when business recovers and seeks to satisfy needs of consumers, it finds that its costs are higher because the government has rented the building and hired labor. The government’s actions inhibit recovery. Why should wealth be taken from taxpayers? If they would have spent the money on goods, they no longer can. If they would have invested it, that too is no longer possible.

Meanwhile, there is another effect of government borrowing from the FED. When the FED credits the government, it creates bank reserves. This typically sets off a multiple credit expansion among banks. This stimulates business, but it is a process of credit inflation that leads to a recession or worse. Ordinarily, business demand for labor and materials is constrained and rationed by the supply of savings. The FED’s credit creation, however, causes a lowering of the interest rate. That relaxes the constraint. The stimulation causes economic distortions and imbalances and eventual recession.

Imagine that IBM is induced to borrow and to produce a new supercomputer because it thinks that its cost of capital is lower. It hires people, builds a new production line, and starts churning out new supercomputers. Other businesses do the same. But their planned selling prices and costs are predicated on spending, saving, and hiring patterns that no longer exist – the credit inflation changes all of that. The business activity that comes into the economy affects particular people first and not others, and their spending and saving behavior is not what would have occurred had they not been employed and paid in this new activity. Furthermore, people change their economic behavior when they observe the activities of others and experience price changes.

The result is that somewhere along the way, some businesses find that their costs are rising beyond what they planned and expected. Some businesses also find that people are not buying the newly-produced items in the anticipated volume. The costs are rising because IBM is competing with Apple and many others to hire factors of production. Some products are not selling because the stimulus is uneven or not neutral in its effects. To sell their products, some firms have to lower their prices. Since they still have to pay their debts, they find themselves caught in a squeeze. This leads to cutbacks. This affects other firms. A recession or depression starts.

Government credit inflation is not a free lunch. The Obamaniacs are not overtly promising more depression via increased government spending, but that is inherent in their program. If they borrow from the public, it has no net stimulating effect. If they borrow from the FED, it produces temporary stimulation and inflation and then further depression. Credit creation through the central bank ultimately sends the economy on a downward course.

The stimulus story is that if people only can get money, they can spend and the economy will rise. People only can earn money by working. They earn money by providing something of value to others, like their labor or a good or service. The money they get entitles them to cash in on the value of their service by choosing to buy the goods or assets that others make available.

The image of money making the wheels of commerce turn is misleading. The money is a counter, a ticket that allows one to buy an array of goods. Money is a chit or a voucher. Money is a credit that can be cashed in against society’s goods and services; it is a credit that you can use up as you choose. When you make money, that money measures something else that is more basic, which is that you have supplied a valuable service or good. The money is an option to get goods in return at a later time and place of your choosing.

Money is not the problem. We do not have a depression for lack of money. The official M1 money supply at this time is almost $1.6 trillion. It was $1.4 trillion when the depression began. The problem is much more subtle. It has to do with prices and the price system. It has to do with overcoming problems caused by bad credits that arose when the price system was distorted by inflation. We have a depression because of the distortions and imbalances in the economy that arose over many years when too many people were induced by the FED to borrow too many credits and use them to buy and produce goods and services.

The image of government spending putting money into people’s hands is misleading. When the federal government spends money on windmills, it has to get that money from taxes or borrowing. When it borrows from the public, it has to raise taxes to pay the costs of the debt. So we may as well say that all the federal spending is paid for with taxes. This takes money out of the hands of those who might otherwise spend it or invest it. The government isn’t jump-starting anything.

If people want to trade goods and do not have enough money to carry out their exchanges, they can always create more. Money itself is not the problem, as the spending and stimulus story suggests. What you spend is what you produce. You can only spend what you produce. (If you borrow and spend, you must eventually pay that back with your production.) If Iowa corn farmers want to buy Chinese pots and pans, they have to produce corn. If the Chinese want to buy Iowa corn, they have to produce pots and pans. They don’t want our dollars to eat anymore than we want their yuan to cook with; these currencies are only media of exchange. We can always arrange means of paying each other. The real problem is that the production of goods has been dis-arranged and that many firms have to restructure. Many will go bankrupt and liquidate. Many will lay off workers. The adjustments take time. This is not now a problem of money and credit, although it was brought about by central banking’s excessive money and credit. It is now a problem of real production being interrupted because it is not geared to producing what people want to and can buy at current prices. When a lot of us do not have the means to spend, it is because we are not producing enough product that others want at prices they are willing to pay. That happens because inflation has distorted the price system and production.

In this situation, government spending does not restore the production system to one that caters to people’s wants and demands. Government spending does the opposite. It induces men and materials into work that is not in demand. This lengthens the period of adjustment back to normal production. It causes even more distortion by bidding labor and materials away from businesses and into lines of work promoted by government. It creates a new inflation and price distortions that must cause more depression. Furthermore, as we know, the government spending itself is on wasteful activities.

The government spending under Bush and Obama is piling up immense new liabilities and debts. Americans are trying to save more. The data on their private account show this clearly. The personal savings rate in January of this year is 5 percent. From 2005 to April of 2008, it averaged just under 0.5 percent. Meanwhile their government is frustrating their actions by incurring immense new debts.

Sadly, spending is not the end of the story of the Obama administration. Its tax and regulatory policies are equally destructive. It is certain that higher capital gains taxes, estate taxes, income taxes, and carbon taxes will provide new depressing effects on the American economy. The federal government’s projects now include a growing array of wealth-destroying investments that include AIG, Citigroup, Fannie Mae, Freddie Mac, the auto industry, and other major banks.

Since the Democrat victory in November, the stock market has been discounting these negatives. It will continue to do so as long as these negatives continue and worsen. At present, the Obama administration is still serving up a daily diet of negative shocks to the economy and the stock market. It is frustrating the recuperative powers of Americans, just as it is frustrating their attempts to save and put the American house in order. If this is not an example of the evils of our federal government and of our form of representative constitutional government, I don’t know what is.

Michael S. Rozeff
msroz@buffalo.edu

Michael S. Rozeff is a retired Professor of Finance living in East Amherst, New York.

By: Michael S. Rozeff
first posted on www.lewrockwell.com

There are many slips betwixt cup and lip, and thus this introduction before getting to the FED’s unsound theories.

Neither the federal government nor its Constitution have a moral or rightful foundation over any person residing in America who does not consent to them, for civil and political rights include the right of association. If men and women cannot associate with those whom they will in governing themselves, then they have no liberty. They are governed by others against their will. They are slaves. The existing Union is a product of force, including the American Civil War (1861–65), also known as the War Between the States and the War for Southern Independence, and including laws we are made to obey today that lack our consent. Force is not a moral or rightful foundation for government.

But even if the federal government and Constitution had moral authority, the Constitution provides that government with no legal authority and power over any of us. Lysander Spooner has argued this case persuasively and at length in No Treason. For one thing, none of us has signed the document or made a contract with the federal government. Spooner’s many arguments have never been refuted, although some, like Colin Williams, have tried and failed. Even the manner of its passage makes the Constitution lack authority. See Hologram of Liberty by Kenneth W. Royce. The present-day states of the union have little or no viable legal or moral authority either, dating, as they do, from nothing more than monarchical and territorial claims of old. But, if the states did have such rights, the Constitution, as it has been interpreted by the Supreme Court (a body within the federal government that judges the power of the federal government), would still lack authority in nearly all of its actions. A good many state legislators understand this and wish for their states to maintain these rights, as in this resolution introduced into the New Hampshire legislature.

But even if the Constitution did have legal authority, the Federal Reserve (FED) is unconstitutional. Article 1, Section 1 says "All legislative powers herein granted" vest in Congress. The powers are granted in the document. The Constitution enumerates or lists the powers of Congress and confers no others except those necessary and proper to their execution. It is not within the enumerated powers of the Constitution to establish a central bank with the FED’s powers, nor is the FED necessary and proper to achieve any of its listed powers. Indeed, the FED contradicts the articles that mention money. Section 8 gives Congress power "To coin money, regulate the value thereof,..." This does not preclude the right of any person to issue money, so that legal tender laws for private transactions are unconstitutional. And it does not allow government to do anything other than coin money, which the FED does not do. Congress may regulate the value of these coins by stating the gold or other metal content, which is why the article goes on to say "fix the standard of weights and measures."

In sum, the FED lacks any moral and legal authority.

But even if the FED were constitutional, its actions are pragmatically unsound. And because they are unsound, they damage the interests of many Americans. The rest of this article focuses on the practical failings of the FED.

It is really not up to me to prove that what the FED does is unsound in practice or that the theories that found its maneuvers are unsound and lead to damaging consequences. It is up to the FED and the FED’s supporters to prove that the FED’s theories and practices are sound. I am aware of no such proof or evidence that the FED does any good, either in achieving aims that one might attribute to it or in achieving its own aims. If someone will point me to this proof, I shall happily consider and evaluate it.

The closest thing to a defense of the central bank is that it can supply credits when the banking system needs them either seasonally or due to some crisis. Banks would, however, operate more soundly without having this backstop. They would be forced to. They’d also find ways to backstop each other. They were doing this before the FED was instituted. The supposedly limited and restrained backstop initial capabilities of the FED (to provide an elastic currency on short-term collateral) at decentralized reserve banks have long since wilted in favor of legal amendments to the 1913 act creating the FED that have given the FED almost unlimited (and centralized) power to discount almost any collateral and issue credit against it. This is a development that parallels the constitutional relaxations of the Supreme Court. In addition, it did not take the FED long to discover the power of open-market operations that it had. The foot in the door has become a ferocious tiger in the room.

I have looked at the FED’s web site for proof that it does good. At the very top of the page, the FED characterizes itself as follows: "The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system." The states met, in one way or another, and united to create a federal government governed by a Constitution. It is not clear whether the FED thinks of itself as the central bank of these 50 states (the United States) or as the central bank of that federal government (also called the United States). In either event, as noted above, the Constitution does not provide the Congress with the power to create a central bank. It does not even charge the Congress with the duty of creating a monetary and financial system, other than to coin money. And if Congress did coin money and regulate its content properly within the Constitution, the nation would be able to create a monetary and financial system that is sound, safe, flexible, and stable. And because Congress is enjoined in the Constitution from destroying contracts, the federal government could not arbitrarily alter the metal content of coins or seize the metal that goes into those coins, as the federal government did in 1933.

So, does the FED provide the nation with a monetary and financial system? If that is the FED’s claim, that claim is false. The FED provides nothing of the sort. The FED began in 1913. The nation developed its monetary and financial system long before the FED existed and has continued to develop it after the FED came into being. The evolving institutions of banking, clearing houses, correspondent banks, credit, money markets, stock markets, bond markets, foreign exchange markets, forward markets, commodity markets, futures markets, and derivatives markets pre-date and post-date the FED. The FED is one institutional development within much broader arrangements of many kinds that constitute money, credit, and capital markets. The FED is a central bank with particular powers, but it by no means provides the nation with a monetary and financial system. It has the power to alter, transform, regulate, and interfere with that system, and it has done so; but the basic system is not of its making. If there were no FED, the nation would still have a monetary and financial system.

If the FED’s claim, contrary to its expansive language, is that it makes the system safe, flexible, and stable, that claim too is false. It is up to the FED to prove that what it says is true, but it has never done so. If it has and I have missed it, which is surely possible, I will happily consider its claim. We know for a fact that the value of the paper dollar, which is the FED’s direct liability and note of issue, has experienced a long-term deterioration and that the nation has had to deal with and suffered from long-term inflation. There is hardly stability in this. We know that within that long-term downtrend, the dollar has fluctuated violently in value at times, both up and down. We know that these fluctuations have caused and/or contributed to violent fluctuations in employment, prices, and the production of goods and services. Where is the claimed stability for our economy? At times, the nation has endured severe depression under the FED, as in the 1930s, and that lengthy episode was preceded by the FED’s mismanagement of the dollar during the 1920s. The same thing is happening at present, again preceded by the FED’s inflation of bank reserves; and it is likely to occur again. Where is the safety in the FED’s monetary management? We know that inflation raged during the 1970s as a consequence of the FED’s loose monetary policies, and that the result was a series of severe recessions.

The FED makes no attempt to prove its claims, and it cannot prove them for they are false. The FED claims to be doing good for the nation. The Congress acts as if the FED is doing good for the nation. The system continues on its way with the powers-that-be acting as if the FED does good for the nation. Congress even wants the FED to have more powers. But there is no evidence that the FED has done good for the people at large who constitute the nation. The evidence, past and present, suggests the opposite.

The reason why this institution persists, which is to the detriment of many Americans, is that it benefits certain interests within the State and the banking industry, as well as certain Americans at large. Central banks benefit the States that create them. Historian Edwin J. Perkins writes of the Bank of England: "During the eighteenth century the British national debt had risen steadily in order to finance a series of overseas military campaigns, and the Bank of England had regularly accommodated the Exchequer [the Treasury] in financing budget deficits through the direct purchase of numerous fresh issues of government bonds running into the millions of pounds. Indeed, the Bank of England had been created in the seventeenth century for the explicit purpose of assisting Parliament in floating new debt issues." (From Perkins on U.S. Financial History and Related Topics.)

One may argue that the British military ventures that created the Empire benefitted the nation. One may similarly argue that the American military ventures, which could not have occurred in their frequency and size without the FED, also have benefitted the nation. This, however, is a thesis that is extraordinarily difficult to maintain. Great numbers of persons in the nation came to understand that the Vietnam War was wrong and that the Iraq War is wrong. As time passes, greater numbers may come to understand that these wars are not exceptions but the general rule, and that other American wars have equally borne bitter fruit in the making, the executing, and the aftermath.

Ben Bernanke knows that the FED mismanaged money in the past. For example, in a 1995 article he writes: "First, exhaustive analysis of the operation of the interwar gold standard has shown that much of the worldwide monetary contraction of the early 1930s was not a passive response to declining output, but instead the largely unintended result of an interaction of poorly designed institutions, shortsighted policy-making, and unfavorable political and economic preconditions."

In referring to "poorly designed institutions," Bernanke refers to various problems of the gold exchange standard and how central banks operated in the 1920s. For example, he writes "...for a majority of the important continental European central banks, open market operations were not permitted or were severely restricted." But in the current situation, central banks have had no such restrictions. They have been merrily inflating for a very long time. Why then has the world suddenly been plunged into depression? Why have commodity and asset prices fallen so sharply? This cannot be blamed again on a lack of power of central banks to inflate.

Will the next generation of central bankers and economists like Bernanke continue to ignore the connections between prior major inflations and subsequent depressions? Will they come up with yet another set of particular circumstances and blame the depression on them? There is never any shortage of such factors. In this case, there are hedge funds, derivatives, leverage, ratings errors, low loan standards, and securitization to name a few.

"Shortsighted policy making" refers to the errors of the FED and other central banks. Bernanke proposes to do better, but will he and can he? His own research only tentatively endorses two of the three main policies that he is now using, which are a huge expansion in the FED’s balance sheet, and the large-scale open market purchases of specific securities such as mortgage-backed bonds. In 2004, he wrote:

"Despite finding evidence that alternative policy measures may prove effective, we remain cautious about relying on such approaches. We believe that our findings go some way toward refuting the strong hypothesis that nonstandard policy actions, including quantitative easing and targeted asset purchases, cannot be successful in a modern industrial economy. However, the effects of such policies remain quantitatively quite uncertain."

Is it right that he and the FED have the power to experiment with these untried solutions on a massive scale? Should we be made to bear the risks of this enormous gamble? How can this gamble possibly be reconciled with the notion that the FED is bringing us a safe and sound monetary policy? That policy is certainly flexible, but is that good? Not if it is an ongoing and untried work-in-progress whose results may prove disastrous. If the FED still exists in a few years, another chairman will probably look back and cite the poor institutions and shortsighted policy making of the current FED and its officials. We can do that now merely by applying sound economic analysis to those policies.

Bernanke has a peculiar blindness to causation that is difficult to understand. His thinking about the Great Depression starts in the 1930s. He does not seek its roots in the FED’s actions in the 1920s and in the boom that the FED promoted that eventually came to grief. Similarly, in 2008, Bernanke has not gotten to the roots of the current depression. He acts as if depressions suddenly spring full-blown upon us and we need only deal with them at that point or before – with more inflation.

Bernanke’s answer to depression prevention and control is incredibly simple and naïve: "Thus we believe that policymakers should continue to maintain an inflation buffer and to act preemptively against emerging deflationary risks."

The simple fact is that policymakers maintained inflation at high rates for decades on end. There has been a very large inflation buffer! They have acted preemptively against deflation for decades! Bernanke has to be wrong, because after all of that, the deflation in prices has occurred anyway. The inevitable depression has arrived.

Bernanke’s erroneous ideas would be a matter of indifference to me if Bernanke had no power. I would ignore his flawed ideas; and if I did stumble across them, I would dismiss them. Unfortunately for us, we have elevated him (and others) to power whose ignorance and bias can and will harm us greatly. We need to learn that we should never allow people to have such unchecked power, no matter how capable or learned we think they are.

In his 1995 article on the macroeconomics of the Great Depression, Bernanke argues that deflation (he means price deflation) propagated the depression and that inflation (here he means monetary inflation) alleviated it. His solution to a depression is therefore the inflation of money, and this is what he is now fostering to the best of his ability. Bernanke is not interested in basic causation. He thinks that the results of basic causes can be circumvented or thwarted by subsequent actions. He thinks that deflation (in prices) is the proximate cause of depression. Even in that regard, his thinking is wrong. Deflation in prices is a phenomenon during a depression that is correcting a variety of prior imbalances that have been built up. It is a liquidation that needs to occur in order to establish a firm basis for economic growth. That basis has to be rooted in prices. Businesses cannot begin to operate again and hire people unless they have some reasonably stable expectations about future prices and demands.

Deflation in prices is not a never-ending or self-propagating mechanism as some believe. Falling prices do not cause more falling prices. This is no more true than the opposite view that rising prices cause more rising prices. Some believe that everyone who observes falling prices will expect them to fall even more and hoard money as a result rather than spend it or invest it. This cannot happen on a broad scale by itself any more than prices can rise on a broad scale by themselves because they have already risen. If prices kept on falling, someone with a given amount of money would eventually be able to buy Rembrandts for small amounts or be able to buy factories and hire labor at small amounts. And he’d be able to sell the products to other people who had also hoarded their money. In other words, for a given stock of money, there would be immense profit opportunities to use capital assets to produce products in demand if prices kept falling. The existence of that stock of money prevents prices from falling indefinitely. Furthermore, given the monetary freedom and opportunity and not restricted by federal law, people will create their own money and scrip. They will see the profit opportunities presented by unemployed labor and unemployed capital goods, and they will create their own credit and payments mechanisms in order to bring them back into employment.

Bernanke emphasizes that bank runs cause a collapse in bank reserves and the money supply, and that withdrawal of money from foreign banks with questionable currencies does the same. He mentions the failure of Austria’s largest bank, Kreditanstalt, as a trigger in May of 1931. There is no doubt that a run on American gold began after Austria failed and after England unnecessarily went off gold. That action brought all currencies into question. Confidence in paper currencies plummeted.

But Bernanke does not raise the central questions. Why were these currencies questionable? How it is that banks with questionable practices could thrive and prosper, before they collapsed? Why have central banks in the first place? What might a stable monetary system look like? How is a depression related to and caused by monetary causes that occur in the boom? Bernanke is very concerned about the monetary cause of deflation in the 1930s but relatively unconcerned with the monetary and other causes that preceded the 1930s. He has very much ignored those, having made up his mind that both central banks and inflation are good things to have around.

Price deflation and depression in the 1930s, Bernanke fails to acknowledge, are the consequences of a severe prior central bank inflation that took place on three separate occasions when the FED, during the 1920s, stimulated the economy with the means of excessive credit. These were in 1922, 1924–25, and 1927. The third of these stimulated the stock market to an excessive degree, whereupon the FED reversed policy during 1928 and raised the rediscount rate in 3 steps from 3.5 to 5 percent. The boom went on for another 14 months. The FED could not have continued its inflation indefinitely without creating a severe inflation that would have disrupted the economy and sent stock prices lower in real (and perhaps nominal) terms. Contraction becomes a necessity at some point, the only alternative being an even worse contraction later. The 1920s money-induced boom would have come to an end anyway as it was associated with imbalances, unrealistic and uncoordinated prices, excessive leverage, attenuated balance sheets, and mal-investments. But these are common features of credit-induced booms. They were recognizable in the last 10 years, had Bernanke only looked, rather than turned a blind eye.

Bernanke has not yet addressed what it is about today’s central banking and the monetary system, with all of its powers, that has contributed to the current depression. He ignores the biggest question: why, despite the fact that central banks are not using the gold standard, has the world again been plunged into a depression? If, as he has written, it was the adherence of central banks to the gold standard that brought about the worst of the Great Depression, why is another depression in progress when central banks no longer adhere to a gold standard?

Bernanke criticizes the FED’s contractionary policy in 1928, but he is blind to his own contractionary policy. For the two years after he succeeded Greenspan, he kept the monetary base to a 1 percent growth rate. For most of that period he held the Fed Funds rate at 4.5 to 5.25 percent. This policy became something of a necessity in view of the mounting imbalances in the American economy, which included a stock price bubble and a housing and real estate bubble, both identifiable by using traditional value criteria. The imbalances included a massive credit expansion, extensive leveraging, loss of the country’s manufacturing base, a huge trade deficit and massive government debts. The FED’s easy money policy had gone on unabated, not just in 3 episodes as in the 1920s, but for decades. The monetary base increased from 70 billions to 800 billions between 1972 and 2006, when Bernanke took over. This was at a rate of over 7 percent a year, which is far in excess of what might reasonably be needed in an economy growing at 3 percent a year. The FED could not continue to pump out money without destroying the dollar or otherwise disrupting some part of the fragile system that its own actions had created. The illusion of a safe, flexible, and stable monetary system had eventually to give way to the reality that is now upon us. Eventually the imbalances had to be corrected.

Bernanke has now reinstated the FED’s inflation with a vengeance.

The FED’s policies are unsound in numerous ways, some of which I will mention.

The FED operates on the unsound theory that the economy is demand-driven. A sound economy is supply-driven, that is, production driven. Every person who produces goods and services has thereby produced the means to purchase (demand) goods from others who have also produced goods and services. Demands (wants) are always infinite. They can only be satisfied (and price-rationed) when there is supply (production.)

The FED operates on the unsound theory that it can affect demand in a sound and stable manner by influencing credit and by influencing the prices of certain assets. Typically the FED stimulates by buying short-term Treasury bills and raising their prices.

The reality is that there are no stable and sound connections between the FED’s influences and the economy at large. The FED hits buttons but the economy, not being a machine, does not respond immediately or in stable ways over time. The markets in an economy are very diverse and very complex in their interconnections, and all that happens in them arises from human actions, valuations, and expectations that cannot be contained in Bernanke’s favorite vector autoregression models. Anyone who looks at the data will find that many inexplicable things happen in the inter-market relations among wages, rents, consumer good prices, wholesale and commodity prices, exchange rates, interest rates, and the prices of capital assets. On a disaggregated basis, even more inexplicable changes occur. There are numerous frictions, costs of adjustment, shifts in demand, and lagged effects that are always occurring and shifting. There are industries that are dying and industries being born. There are industries going overseas, and there are overseas industries coming ashore. There are constant regulatory and tax and policy changes. There are wars.

The FED thinks that it can create stability by using its influence on short-term interest rates. This is a pipe dream. This is not to say that the FED’s actions will have no effects. They will. But they are unlikely to be what the FED expects and they are likely to cause more harm than good.

The FED can drive down short-term interest rates. If people expect this to continue, one effect is that the economy will shift to the cheaper short-term financing. This will move many people and businesses away from sound financing by long-term means.

Alternatively, long-term rates will come down, and this will distort the allocation of capital. There will be investment in uneconomic projects that would be rejected if the interest rates reflected real saving.

When the FED inflates, it creates uncertainty over future prices and interest rates. The FED is able to alter inflation expectations as well as the uncertainty of those expectations. It creates the instability that it claims to avoid. The FED is a large and powerful player. Its every statement causes assets to change price. Its every move can change the value of the currency we use. There is nothing more basic than the standard of value. If this is altering at the FED’s whim, where is the stability?

When the FED inflates, money is not neutral. It affects certain prices and not others in ways that lack a basis in the realities of demand and supply. This disrupts the economy by altering price relations and disturbing the coordinating effects of prices. Business firms alter their production as these effects ripple through the economy. When the inflation ceases, they find that their plans cannot be fulfilled.

The FED’s actions cause a lack of coordination with foreign economies, which have their own central banks and go their way with their own policies.

But, to a great extent, many foreign central banks are on a dollar standard. They use dollar assets as reserves. They amount to branches of the FED that create derivative currencies off of the dollar assets. The problem then becomes that the FED induces worldwide instability, worldwide bubbles, worldwide imbalances, and worldwide mal-investments.

The FED’s actions usually prevent prices from falling due to productivity increases. The benefits of production then do not feed through to the pocketbooks of those who produce and consume.

The FED’s current zero-interest rate policy will probably cause speculators to issue credit in dollars at vanishing cost by selling federal securities short or by borrowing at low bank rates. Having received dollars, they can buy other assets with them and create bubbles. This is exactly what the FED wants to happen. It will be the yen carry trade revisited. It will be a dollar carry trade. It is highly likely that the yen carry trade (having arisen from a zero-interest policy in Japan) that has gone on for years now, has contributed to the current financial market crashes and depression by having supported worldwide financial bubbles. Hedge funds, investment bankers, and many other investors and speculators have ended up buying overpriced assets using cheap borrowed funds. And they did this in part in an effort to obtain yields that could no longer be found in ordinary markets that had become overpriced. The FED is now encouraging a repeat performance.

The FED’s focus on the quantity of credit ignores the quality of credit. We have seen that a vast increase in the quantity leads to a lowering of credit standards. With credit widely available and a boom expected to continue, the quality of credit declines. We then observe the system accumulating loans that fail when the boom slows down or reverses. Again, the FED promotes instability.

Economics students are routinely taught that central banks are a good thing or that they are the highest stage to which banking has now evolved. This is a presumption offered without proof. There is no proof that I know of that central banks are a good thing. The FED offers none. This article presents a few of my reasons why the FED is a bad thing.

It may be thought that I am indirectly arguing here for 100% reserve banking. Those who do not know my position may think that is the only alternative to the FED. It is not. The alternative that I favor is known as free banking. I favor monetary freedom, and that may include fractional reserve banking without a central bank. The works of Larry Sechrest, George A. Selgin, and Kevin Dowd will provide a good idea of what free banking is about. One might start with Free Banking by Larry Sechrest.

February 28, 2009

Michael S. Rozeff msroz@buffalo.edu is a retired Professor of Finance living in East Amherst, New York.

Copyright © 2009 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.`

Fake Money, Dead Money and Fake Leaders
15 January 2009

Thanks to reading one of the websites (www.aheadoftheherd.com ) on which some of my articles are published; I’ve recently discovered the benefits of water purifiers, for drinking as well as showering water. Since using these purifiers, my skin and hair is not so dry anymore as well as my breathing is much improved. I am hoping to see more improvement in other areas in the future.

Basically these water filters take out chlorine, among other things, which is added to water to “purify” it, or take out other harmful substances.

Chlorine does a good job in killing or taking out these harmful contents in our water, however, it comes with its own problems. I have found these quotes that explain the use of chlorine in water purification as well as some of its associated problems:

“Why we use chlorine is not because it's the safest or even the most effective means of disinfectant, we use it because it is the cheapest. The long-term effects of using chlorinated drinking water have been recognized only recently. According to the U.S. Council of Environmental Quality, "Cancer risk among people drinking chlorinated water is 93% higher than among those who use non chlorinated water. The highly controversial book titled "Coronaries/Cholesterol/Chlorine” by Dr. Joseph Price, written in the late sixties concluded that nothing could negate the incontrovertible fact, the basic cause of arteriosclerosis and resulting entities such as heart attacks and stroke, is chlorine. Dr. Price later headed up a study using chickens as test subjects, where two groups of several hundred birds were observed throughout their span to maturity.

One group was given water with chlorine and the other without. The group given chlorine water, when autopsied, showed some level of heart or circulatory disease in every specimen, the group without had no occurrence of disease. In winter conditions the group with chlorine showed outward signs of poor circulation, shivering, drooped feathers and a reduced level of activity.

The group without chlorine enjoyed rapid growth and displayed vigorous health. This study received well by the poultry industry then, continues to be used as a reference even today. As a result, most large poultry producers use de-chlorinated water. It would be a common sense conclusion to think for that regular chlorinated tap water if not good enough for the chickens, then it probably is not good enough for human consumption either.” [1]

“It (chlorine) has a disagreeable, suffocating odor that is detectable in concentrations as low as 1 ppm, and is choking and poisonous.” [2]

Chlorine gas was also used by the Nazis, among other, as a chemical weapon.

Chlorinated water looks basically just like pure or de-chlorinated water; however it does not have exactly the same effects as water, as explained above. Our world is filled with things that appear like the real thing, but in reality is anything but the real thing. Either they optically look like the real thing or people accept or use them as the real thing. These things, instead of working like the real things, they work in opposite of the real things or they cause other problems (side-effects).

Herburt Moolman

by George F. Smith

First published on www.mises.org

Studying Jörg Guido Hülsmann's latest book, The Ethics of Money Production, is a vastly enriching experience. After building his case for natural money on the inviolability of an individual's right to his own property, he then shows us how the state has spent the last 400 years usurping this right for the benefit of a privileged few through its protection of fractional-reserve banking.

It is the state's insatiable appetite for revenue, he argues, that is the motivation behind the various monetary schemes it imposes on us, which on an international level begins with the classical gold standard and runs through today's paper-money agreements. Although he doesn't discuss the current economic crisis directly, his observations provide a much-needed correction to government's "do something" approach.

In this essay, I will touch on some of Hülsmann's more salient points, beginning with the origin of money.

Natural Money versus "Forced Money"
We know that in a barter economy the division of labor is primitive because trade is limited by the double coincidence of wants. A carpenter who needs shoes finds a shoemaker who needs a chair, and they enter into a mutually acceptable trade. But trade is also limited by the makeup of the goods themselves — how will the carpenter acquire a small amount of flour with the chair he has built?

Over time, market participants devised better ways to trade. Certain consumer goods were found to be highly marketable and possessed physical characteristics conducive to trade, such as homogeneity, divisibility, and portability, and came to be acquired not for consumption but to serve as media of exchange. Such goods are called money; more than that, they are natural monies because they originated through the voluntary cooperation of acting persons.

The production of natural money is ethical because it involves no violations of property rights and is the corollary of a completely free society in which private property is inviolable. The economy of such a society, Hülsmann tells us, may then be called a "free market," which would likely harbor a variety of natural monies. With this understanding, the claim that the culprit of the current crisis is the free market puts its proponents in the awkward position of having to show causality from something that doesn't exist.

Natural monies come and go; they exist because they satisfy human needs better than any other medium of exchange. When this is no longer true, market participants will stop using them and find something better. Natural money thus becomes a product of grass-roots democratic action, where people have the freedom to choose the best available monies.

"Forced money," by contrast, "owes its existence to violations of property rights." It satisfies the requirement of facilitating trade, but superior monies can't be used without exposing the user to some degree of violence.

Gold, silver, and copper have been the natural monies of many societies for thousands of years. Though they possess physical characteristics that make them superior to other commodities for use as money, they are natural monies only because they were selected through voluntary human action.

Paper Money and the Free Market
If commodity money is the best available money, why do virtually all countries today use paper money instead?

First, as Hülsmann notes, in no period of human history has paper money spontaneously emerged on the free market. "Whenever and wherever it came into being, it existed only because the courts and the police suppressed the natural alternatives."

Hülsmann also points out that no Western writer before the 18th century seemed to think paper money was even a possibility, nor did any philosopher of money ever criticize the then-existing commodity money on utilitarian grounds. For example, in The Laws, book 5, Plato wanted to outlaw natural money to make citizens more dependent on government, but he didn't say it was inadequate as a money. Neither did Aristotle, the Church fathers, or the Scholastics. Before the 16th century, furthermore, there was no problem with hoarding or sticky prices, and apparently no need to stabilize the price level, purchasing power, or aggregate demand.

MP3 CDOf course, none of these observations persuades the paper-money crowd. According to them, the capitalist economies that emerged during the Renaissance required a different kind of money, one whose supply could keep pace with the fast action on the market. After 1500, new theories explaining this need "swamped the world," as Hülsmann puts it — but so did the rejoinders. In other words, in the 20th century, when Rothbard observed that the supply of money, like all other goods, is best left to the free market, it was "anything but a novelty in the history of thought."

We must ask then what was the rationale for imposing paper money on the economy? Hülsmann addresses some of the most widespread errors in attempting to justify government intervention in monetary affairs.

Paper-Money Fallacies
By far the biggest fallacy is the belief that a growing economy requires a growing money supply. If an economy grows by five percent, then the money supply must grow by the same amount, the argument goes, otherwise the additional goods cannot be sold. Since a growth rate as high as five percent is exceptional for precious metals, they must be rejected as money for a modern economy. Paper money, on the other hand, can be produced in any quantity cheaply and quickly.

Economics teaches that any quantity of goods and services can be exchanged with virtually any quantity of money. If the economy grows but the money supply remains constant, prices will have a tendency to fall. It's sometimes argued that if prices fall entrepreneurs will not be able to recover their costs and will face bankruptcy. But entrepreneurs have invariably shown the ability to anticipate future price reductions and compensate by lowering their expenditures. This, in fact, is the normal state of affairs in periods of a stable or falling price level, and was the experience of Germany and the United States during the last three decades of the 19th century.

A variation of the above fallacy is the alleged need to fight deflation. Though it can be defined in several ways, deflation most frequently refers to a sustained fall in the price level. In a deflation, bank customers will have difficulty repaying their debts, and this, in turn, will reduce bank liquidity and curtail credit.

Deflation, however, does not threaten the whole of society because, as credit does not create resources, neither does a curtailment of credit destroy resources. Deflation amounts to "a redistribution of productive assets from old owners to new owners," Hülsmann writes, with the net impact on total production likely to be negligible.

"By far the biggest fallacy is the belief that a growing economy requires a growing money supply."If this is true, why does Ben Bernanke regard deflation as the great devil he must fight at any cost? Because deflation emphatically is a threat to those institutions responsible for inflationary increases in the money supply: fractional-reserve banks and their customers, which means "debt-ridden governments, entrepreneurs, and consumers." Deflation tends to liberate "the underlying physical resources for new employment. The destruction entailed by deflation is therefore often 'creative destruction' in the Schumpeterian sense." (William Greider noted that bankers championed "creative destruction" when it was affecting other people, but when it came knocking on their doors, the bankers were "not so accepting of their own fate.")

Stabilization of the purchasing power of money (PPM) has been another excuse for abandoning natural money for paper money. On a free market, the best monies will prevail and will have a relatively stable PPM. If the money should experience violent fluctuations, people will abandon it and switch to a different money — if they're free to do so.

Irving Fisher and others said that's not good enough; government should fine-tune the PPM, and that requires paper money. But this is another instance of putting the fox in charge of the chicken coop; the result has been a complete disaster. In the modern era, managed currencies everywhere have depreciated and fluctuated as never before in the history of monetary institutions.

Adam Smith and David Ricardo popularized the view that paper money could do the job of commodity money, only at much lower production costs. Whatever appeal this might have vanishes when one remembers that money as such is not a consumer or capital good, but a facilitator of exchanges. Increasing its quantity doesn't add to society's wealth. Its utility lies in its exchange value, and increasing its supply tends to lower that value. Thus, the higher production costs of commodity money turn out to be one of its great advantages, because it cannot be multiplied at will. Paraphrasing Hülsmann, commodity monies have built-in insurance against inflation.

Inflation
Most writers today define inflation as a lasting increase in the price level. Hülsmann adopts a different definition, one that was more or less accepted up until World War II: inflation is any expansion of the money supply that violates private-property rights. Unlike natural (voluntary) money production, which is regulated by the market forces of profit and loss, inflation is always an imposed increase of the money supply. With this definition, inflation can be seen as the cause of "unnatural income differentials, business cycles, debt explosion, moderate and exponential increases of the price level, and many other phenomena." Hülsmann sets about to expose the causal connections in some detail.

"The higher production costs of commodity money turn out to be one of its great advantages, because it cannot be multiplied at will."People — mostly governments — inflate the money supply because they profit from it, and the history of monetary institutions is largely the history of inflationary schemes. Early owners of the new money are the winners because they buy goods and services at current prices. Later owners are the losers because they pay the higher prices that the money-supply increase creates.

Inflation began as the debasement of coins, or what Hülsmann refers to as the falsification (counterfeiting) of money certificates physically integrated with the monetary metal. The counterfeiter could either reduce the precious metal content of the coins or imprint a higher nominal figure on the coins.

Compared to fractional-reserve banking and paper money, debasement was a crude method of counterfeiting. Using debasement, English kings could only inflate the money supply by a factor of 0.3 over a 500-year period (1066–1601). When they had access to the advantages of fractional-reserve banking during the subsequent 200 years, however, that factor jumped to 16. And American monetary maestros pumped up the money supply by a factor of 5 in a mere 30 years (January 1973–January 2003) by feeding the fractional-reserve monster.

There were other differences between inflation then and now. When princes of old debased their coins, their subjects considered it a cheat. When today's leaders debauch their currency, they proclaim it as wise and necessary monetary policy, and until recently most people believed them. It has taken the hocus-pocus of massive "stimulus " solutions to begin to shake their faith, though the new messiah is trying to restore it.

The Rise of Fractional-Reserve Banking
The grip of government on our lives cannot be adequately explained without reference to fractional-reserve banking, paper money, and the laws protecting these institutions. Hülsmann provides a compelling explanation of the relationship between government growth and modern banking.

"The history of monetary institutions is largely the history of inflationary schemes."As he tells us, banks developed as money warehouses in northern Italy beginning in the late 16th and early 17th centuries and soon became fractional-reserve banks, meaning they issued certificates in excess of the actual money they had in reserve. Unlike warehouse banks, fractional-reserve banks cannot meet all their obligations at once and are subject to the perpetual nemesis of all fractional-reserve schemes: the bank run.

The usual explanation for the corruption of warehouse banking into fractional-reserve banking is the simple one of bankers' giving in to temptation. While true, this is not the sole cause. Fractional-reserve banking was in part a defense against government confiscation. When Charles V was robbing the reserves of banks in Seville in the mid-1500s, for example, the bankers decided to evade the plunder by loaning a large portion of their deposits to commerce and earning a profit. The threat of confiscation somewhat diminished the bankers' guilt.

Legalizing False Certificates
In an ethical society, laws would punish counterfeiting as an instance of fraud and theft, and, once the false certificates were discovered, market participants would abandon their use and switch to alternatives.

But governments can legalize certain kinds of counterfeiting. This can be accomplished in several ways. One method is for government to spin language in such a manner that certificate imprints can take on any contractually binding meaning. For example, the courts might see nothing wrong with a gold coin marked "one ounce of gold" that in fact has less gold or no gold at all. Legalization here means that the government refuses to enforce the laws against bank counterfeiting. Legalizing false money certificates is the foundation of all other monetary privileges, such as legal monopolies and legal-tender laws.

But even when it holds a monopoly on the supply of coins and banknotes, the government cannot yet open the inflationary floodgates; market participants are still free to evaluate the coins and banknotes and can switch to other monies if their local monopoly supplier is irresponsible. Legal monopoly reduces the range of options and diminishes the full use of one's property, but it does not eliminate choice per se, and that remaining choice continues to keep the government in check.

From the government's perspective, legal-tender laws solve this problem. They attack choice at the root by overruling any contractual agreement a person might make with respect to money.

"In an ethical society, laws would punish counterfeiting as an instance of fraud and theft."There is another sense in which legal tender corrupts choice. If the unhampered market can be thought of as assigning "votes" to money users — one penny, one market vote, as Frank Fetter wrote in 1905 — then the imposition of fractional-reserve banking through legal-tender laws creates votes out of nothing and assigns those votes to the first users of the new money: bankers and government. A privileged money creates a privileged society.

Historically, legal-tender laws usually established a fiat equivalence between the privileged money and other monies. If gold and silver are legal tender, and gold is decreed to trade with silver at 1/20, but will trade at 1/15 on the market, the undervalued silver will gradually disappear from daily transactions. Legal-tender laws inflate the legally privileged money and deflate the others.

With silver scarce, its purchasing power rises, and it becomes difficult to make small purchases. People will be inclined to rely instead on fractional-reserve banknotes and demand deposits, which can be created quickly. If government then makes its notes legal tender, along with gold, the notes increase in demand because no one wants to pay in real money (gold). Notes are consequently redeemed less often, which increases bank reserves of gold. In the fractional-reserve system, this enables banks to issue more banknotes.

For the government, fractional-reserve banknotes are a godsend. It was fairly easy for laymen to distinguish debased coins from sound coins. Paper certificates, though, circulate without any distinctions.

Privileged banknotes entail a "race to the bottom" of worthlessness, but as long as they're redeemable in gold there is a limit to how much they can be inflated. Removing that limit converts them into pure paper money.

The Emergence of Paper Money
Banknotes become paper money through progressive infringements on private property and through breaches of contract perpetrated by central banks. When government grants a monopoly legal-tender status to the notes of a fractional-reserve bank, then allows the bank to suspend the contractually agreed-upon redemption of its notes, it turns those notes into paper money.

"A privileged money creates a privileged society."Paper money, by its very nature, is a form of fiat inflation: it is always and everywhere in greater supply than it would be on the free market, where it could not sustain itself at all. The banknotes of the world became paper money on August 15, 1971 when the United States declared it would no longer redeem its dollars in gold.

While the threat to gold miners is bankruptcy, the threat to paper-money producers like the Fed is hyperinflation. There's really no limit to how much paper money it can produce. As a privileged central bank, it cannot go bankrupt, and neither can the government that appoints the Fed's leaders go bankrupt.

In December 2002, Alan Greenspan claimed that "a prudent monetary policy maintained over a protracted period can contain the forces of inflation." But even "prudent" central bankers can't avoid economic crises. As Hülsmann argues, "the mere possibility of inflating the money supply creates moral hazard" (emphasis added). Users of commodity money do not speculate on the sudden availability of gold and silver miraculously emerging from the mines. By contrast, people do speculate on the "good will" of the paper-money producers, and they're right most of the time.

Inflation's Legacy
Inflation's standard definition is too narrow to provide an appreciation of the extent of its harm; it is far more than a deterioration of the currency's purchasing power. It's also much more than a "hidden tax." Government's perennial fiat inflation is a subtle WMD. Consider the following:

In funding wars, it allows government to ignore the fiscal resistance of its citizens.

It benefits the central government at the expense of secondary and tertiary governments.

It turns moral hazard and irresponsibility into an institution, and guarantees recurring economic crises.

By making credit cheap, it encourages businesses to finance their ventures through borrowing rather than equity. Because of market competition, few firms can resist the offer of low credit, making them more dependent on banks. As Pius XI noted in 1931, it puts a dictatorship in the hands of lenders who regulate the lifeblood of the entire economic system.

Fiat inflation drives people to invest in capital markets where few will have the expertise, time, and inclination to monitor their investments properly. In former times people could save simply by holding gold and silver coins.

Under a perennially increasing price level, the average citizen finds his best strategy is personal debt, which weakens self-reliance and independence.

Under chronic fiat inflation, people will tend to choose their employment based on monetary returns. Money then becomes the prime or only consideration for personal happiness.

Perennial inflation deteriorates product quality. Industries that cannot compensate for inflation with technological innovation turn to other means, such as producing an inferior product under the same name. Lying, which is bound up with fractional-reserve banking, tends to spread like a cancer over the rest of society.

By fueling the exponential growth of the welfare state, fiat inflation fosters the decline of the family. Families become degraded into "small production units that share utility bills, cars, refrigerators, and especially the tax bill." The welfare state drives the family and private charities out of the "welfare market."

As Hülsmann concludes, "fiat inflation is a juggernaut of social, economic, cultural, and spiritual destruction."

The Classical Gold Standard
The myth that governments are servants of their people is fully exposed in the history of money production. From antiquity to the present day, governments have always sought to steal from their citizens through manipulation of the money supply. In modern times, this has taken on the trappings of a science. To oppose it now means to oppose virtually the entire economics profession, most of whose members happen to be on the government payroll in one way or another.

The classical gold standard was ushered in following Germany's victory over France in 1871. Libertarians and monetary conservatives often hail this period as a halcyon era we need to resurrect. But while that standard had desirable results, such as boosting the international division of labor, it was still an imposed standard. As such, it demonetized silver and thus brought about a strong fiat deflation, which in turn reinforced fractional-reserve banking throughout the banking hierarchies.

As Hülsmann makes clear, the inherent fragility of fractional-reserve banking is well known to bankers and motivates them to devise means of postponing the crisis it inevitably produces. The classical gold standard was one such scheme. It was not imposed as a means of limiting inflation. It served as a pretext for national governments to bring the monetary systems of their countries under their control. Rather than "a bulwark of liberty," it was a "breakthrough for the societal scourge of our age — omnipotent government."

Pooling Gold
The onset of World War I in 1914 killed the classical gold standard before it could collapse on its own. An international arrangement called the gold-exchange standard replaced it in 1925 and lasted until 1931. Under the classical standard, the central banks kept their entire reserves in gold, while the commercial banks kept their reserves mostly in central banknotes. The gold-exchange standard took this pooling arrangement to an international level, with the Fed and the Bank of England remaining true central banks and, as the holders of gold, serving as the central banks of the world. Other central banks kept a large portion of their reserves in US and British notes. The gold-exchange standard collapsed following the 1929 Crash when various governments turned to protectionism or imposed foreign-exchange controls. It died in September 1931, when the Bank of England suspended payments.

"The myth that governments are servants of their people is fully exposed in the history of money production."The world suffered through a period of fluctuating exchange rates until the end of World War II, when the Bretton Woods system was adopted. As Hülsmann explains, it amounted to "a gold-exchange standard writ large." Under the classical system, gold was pooled in each nation's central bank; under the gold-exchange standard, the number of pools was cut to two — and under Bretton Woods, one. All the arrangements were devised to facilitate the "flexibility" of banknotes, and each was far more expansionary than its predecessor.

Under Bretton Woods, the participating nations agreed to pool the world's gold reserves at the Fed, which already had the largest gold supply in world history. The Fed continued to redeem its notes in gold to other governments and central banks, which in turn redeemed their own notes in dollars. To a great extent, participants were dependent on the good will of the Fed, which alone had the power to allocate the world's banknotes — dollars — at its discretion.

"Restraint was not part of its mission," Hülsmann tells us, "and the very anchor of the system — the Fed — was particularly ruthless in its inflation of the dollar supply." When it collapsed in 1971, the gold reserves of the Fed were nearing exhaustion. Bretton Woods thus concluded 100 years in which three "cartels of central banks had flooded the western world with their banknotes without nominally abandoning the gold standard."

International Paper-Money Systems
When the United States suspended payment of gold, it converted the world's banknotes to paper money. It also created the horror of fluctuating exchange rates that weakened the international division of labor and brought "misery and death" to millions. Yet paper-money standards have emerged. How is this possible?

We need to consider what government wants — more power and revenue — and the means available to attain it. The easiest way for governments to get additional revenue over and above taxes and debt is to encourage foreigners to make investments in their countries. But to do so they must provide sufficient financial safeguards. A government seeking investors, for example, might float bonds denominated in the paper money of a country whose investments it seeks. The issuing of government bonds denominated in US dollars or euros is today a widespread practice.

The territories with the largest capital markets will be the ones whose paper money will be adopted as international standards, and, in the 30 years following the fall of Bretton Woods, those territories have been Europe, Japan, and the United States. Consequently, the euro, the yen, and the dollar are the three most important monetary standards today.

As Hülsmann notes, the standard money producers cooperate with one another to maintain their positions. In a dollar crisis, for instance, the euro producers will commit to stabilizing the dollar-euro exchange rate so that dollar countries won't switch standards. And since paper-money producers know they can count on their competitors to help them out, they have a strong incentive to collude and expand their production.

Would a single global paper money such as the one Keynes proposed at Bretton Woods avoid the pitfalls of competing paper monies? Absolutely not, Hülsmann answers. All paper monies, whether national or global, are subject to moral hazard. They will either collapse in hyperinflation or invite increasing government control over all economic resources.

Is There Any Hope?

$24 $20

"We need to sweep aside privileged money and let the market work."We need to sweep aside privileged money and let the market work. It might seem an impossible goal, but history provides some encouragement. As the author notes, China used paper money for 500 years and suffered from hyperinflations and other monetary problems. When political leaders stopped suppressing silver and copper coins, monetary sanity returned. In US history, the framers repudiated the inflationism of the country's past in the Constitution's very first article; and Andrew Jackson defeated his inflationist foes during his presidency.

An ideal order of natural money production based on a universal respect for private property could exist today, he says, "technically at a moment's notice." With it so close at hand, it remains only to convince others that it should exist. Students of Hülsmann's book will find it a rich resource for such an undertaking.

George F. Smith
http://www.barbarous-relic.com/Welcome.html
george@libertyasylum.com

George F. Smith is the author of The Flight of the Barbarous Relic, a novel about a renegade Fed chairman.

http://creativecommons.org/licenses/by/3.0/us/

by Paul Craig Roberts

The US Constitution has few friends on the right or the left.

During the first eight years of the 21st century, the Republicans mercilessly assaulted civil liberties. The brownshirt Bush regime ignored the protections provided by habeas corpus. They spied on American citizens without warrants. They violated the First Amendment. They elevated decisions of the president above US statutory law and international law. They claimed the power to withhold information from the people’s representatives in Congress, and they asserted, and behaved as if, they were unaccountable to the people, Congress, and the federal courts. The executive branch claimed the power to ignore congressional subpoenas. Republicans regarded Bush as a Stuart king unaccountable to law.

The Bush brownshirt regime revealed itself as lawless, the worst criminal organization in American history.

Now we have the Democrats, and the assault on civil liberty continues. President Obama doesn’t want to hold Bush accountable for his crimes and violations of the Constitution, because Obama wants to retain the powers that Bush asserted. Even the practice of kidnapping people and transporting them to foreign countries to be tortured has been retained by President Obama.

The civil liberties that Bush stole from us are now in Obama’s pocket.

Will it turn out that we enjoyed more liberty under Bush than we will under Obama? At least the Republicans left us the Second Amendment. The Obama Democrats are not going to return our other purloined civil liberties, and they are already attacking the Second Amendment.

Rep. Bobby L. Rush (D, IL) has introduced the Blair Holt Firearm Licensing and Record of Sale Act of 2009. As the British and Australians learned, once firearms are registered, the government knows where they are. The government’s next step is to confiscate the firearms.

Moreover, the Act would permit the government to negate Second Amendment rights by refusing to issue a license. Any parents who bequeathed family antique or historic firearms to heirs would be in violation of the act, as it bans any transfer of a firearm other than via a licensed dealer.

William Blackstone, the revered 18th century defender of liberty whose Commentaries on the Laws of England was a bestseller in colonial America, wrote that "the last auxiliary right" of free men is "having arms for their defense." Blackstone, England’s greatest jurist, said that the right to bear arms enables the "natural right of resistance and self-preservation, when the sanctions of society and laws are found insufficient to restrain the violence of oppression."

The Bush regime’s reversion to medieval methods of incarceration and torture are an indication that we now live in a time "when the sanctions of society and laws are found insufficient to restrain the violence of oppression." Why do the Democrats desire Americans to be helpless in the face of oppression by the armed state? How can it be that Democrats want Americans to be free from the threat of being thrown into dungeons and locked away without a court ever hearing evidence, but are prepared to deny Americans the ability to resist such horrendous treatment should it come their way?

In response to my question, one progressive acquaintance said that he wanted to reduce "gun violence." As guns are inanimate objects, I assume he meant violence committed by people who use guns instead of knives, fists or some other weapon.

"Gun violence" is not something committed by the vast majority of gun owners. "Gun violence" is the preserve of the criminal elements, such as gangs fighting over drug turf. Criminals are already prohibited from owning guns, but criminals pay no more attention to this law than they do to laws against robbery, rape, and murder. Why do Democrats think that disarming law-abiding citizens will disarm outlaws? For how many decades have drugs been banned? Does any Democrat think that the ban on drugs has succeeded?

All the ban on drugs has done is to make the drug trade profitable. Now people fight over it. How can guns be successfully banned when the war on drugs is a failure? All a gun ban would do is to create a new criminal activity.

England, in violation of its unwritten constitution, banned ownership of pistols and rifles. But now the police have to be heavily armed, because criminals are now armed, but not law-abiding citizens. When I lived in England, the police were not armed with firearms. I remember reading a few years after the passage of England’s gun ban that criminals were selling submachine guns on London street corners. The police discovered a warehouse in London filled to the brim with machine guns that were being sold to all comers.

So much for gun bans. They only disarm the law-abiding and leave them defenseless.

Gun bans also greatly increase the crime rate. When households are armed, robbers prefer houses where no one is home. In England, criminals are no longer deterred from entering an occupied home. The more people at home the better. There might be someone to rape and someone to beat up. There is little to fear from a disarmed household.

When I lived in the metro area of Washington DC, I resided on the Virginia side of the Potomac. There was no problem with owning a gun in Virginia, but in DC, until the recent Supreme Court ruling, the only way a person could have a firearm was to keep it disassembled and unloaded.

The Washington "gun control" ordinance benefitted criminals. The crime rate in DC was much higher than across the river. Despite, or because of, the gun ban, DC was the murder capital of the US.

Police seldom, if ever, prevent a crime. Their job is to appear after a crime is committed and to investigate with a view to identifying the perpetrator. A large number of careful studies show that private gun ownership prevents far more crimes than police ever solve. Criminals are routinely deterred, apprehended, and sometimes killed, by armed private citizens.

In contrast, police, especially the notorious SWAT teams, accidentally kill more law abiding citizens than they do criminals. If anyone should be disarmed, it is the police. When police become militarized, as they increasingly are in the US, their attitude toward the public changes from protective to hostile.

Militarized SWAT teams have established a record of showing up at the wrong address.

In Maryland recently, a SWAT team mistook the mayor and his wife for drug dealers. A large number of armed men in black, and not identified as police, broke into the mayor’s home, killed the family’s Labrador dogs, and held the mayor and his wife spread eagled on the floor with loaded automatic weapons a few inches from their heads. Fortunately for the mayor and his wife, a local policeman happened by and informed the paramilitary unit that it was the mayor and his wife whom the SWAT team was terrorizing.

Many progressives oppose gun ownership because they have sympathy for animals and oppose hunting. However, most gun owners are not hunters. Most members of gun clubs are content to shoot holes in paper targets or at clay pigeons. They enjoy hand-eye coordination, the study of ballistics, and reloading for antique rifles. An outing is really just a chance to get together, to talk about history and the load they are working up for their 1873 Winchester, and to enjoy each other’s company.

There is a vast number of small businesses that exist because of gun ownership. Repairs, customizing, parts, sights, brass, bullets, primers, and powders for reloading, reloading equipment, targets, cleaning, refinishing, engraving, it goes on and on. What would happen to these hundreds of thousands of people, to the family businesses and to the skills accumulated, if Americans are deprived of their Second Amendment rights? We would have another million people deprived of livelihood and on the streets. Would they turn to crime?

The progressive canard is that the Second Amendment, unlike the rest of the amendments to the Constitution, is not a constitutional right for citizens. Rather it is a right for a defunct organization known as the militia. Why in the world would the Founding Fathers, when laying out the rights of individuals, confound the point by sticking in among individual rights a right for a military organization?

But so what if they did. Americans have had squatter’ rights to firearms since 1776.

In 1992 when the Supreme Court revisited Roe v. Wade, the justices acknowledged that the legal argument behind the 1973 decision legitimizing abortion was flawed. However, the justices ruled that women had exercised abortion rights for 19 years, and the passage of time had given women squatters’ rights to abortions.

Americans have exercised Second Amendment rights for 234 years. Regardless of the meaning of the Second Amendment, the right of adverse possession makes gun rights final. To assault such a well-grounded right is an act of tyranny.

Paul Craig Roberts
paulcraigroberts@yahoo.com

Paul Craig Roberts is a former Assistant Secretary of the US Treasury and former associate editor of the Wall Street Journal, has been reporting shocking cases of prosecutorial abuse for two decades. A new edition of his book, The Tyranny of Good Intentions, co-authored with Lawrence Stratton, a documented account of how Americans lost the protection of law, has just been released by Random House.

by Frank Shostak

We live in an age of grave economic ignorance, if central-bank policy is an indication of prevailing economic theory. It is apparent that we've learned nothing from several millennia of monetary destruction. The persistent demonstration that capital, not paper, is the basis for prosperity has fallen on deaf ears. Daily, we face the sad spectacle of government officials, pundits, and even Nobel laureates telling us that printing money is the answer to an economic downturn.

Consider that since the eruption of the financial credit crisis in the second half of 2007, all major central banks have embraced an irresponsibly loose-interest-rate stance.

For instance, the policy rate of the Bank of England (BOE) was lowered from 5.75% in November 2007 to the current level of 1%. The sharp decline in the BOE policy interest rate is in line with policies of other central banks.

The US central bank (the Fed) has lowered its policy rate (the federal-funds rate target) from 5.25% in August 2007 to around zero at present.

Also, the relatively "conservative" European Central Bank (ECB) has been aggressively lowering its policy interest rate. The rate was lowered from 4.25% in September last year to the present target of 2%.

Similarly, the Bank of Japan (BOJ) has visibly eased its interest rate stance. The policy rate was reduced from 0.5% in September 2008 to the current level of 0.1%.

Given that, so far, already extremely low interest rates have failed to revive economic activity, central bankers are now considering another approach.

Last Wednesday, February 11, the governor of the Bank of England said that the UK central bank is going to embrace a quantitative easing policy to revive the economy. The idea here is to flood the economy with money by buying government bonds. US central-bank policy makers are currently contemplating a simliar idea.

We shouldn't overlook the fact that, since embracing the aggressive lowering of rates, central banks have been aggressively pushing money into the banking system without succeeding in reviving economic activity. So why should aggressive money pumping work now?

The yearly rate of growth of the US central-bank balance sheet (money pumping) jumped from 3.9% in August last year to 152.8% in December 2008 before falling to 127.5% in January. The yearly rate of growth of the balance sheet of the Bank of England jumped from negative 7.2% in May 2007 to positive 179.4% by October 2008 before easing to 157.6% in November last year and 129% in January.

The growth momentum of the European Central Bank balance sheet has accelerated in January. Year on year, the rate of growth jumped from 7% in July 2007 to 45.5% in December and to 56.5% in January.

Also, the yearly rate of growth of the BOJ balance sheet follows a visible uptrend. The rate of growth climbed from negative 0.8% in August last year to 10.3% in December before easing to 5.7% in January.

What permits real economic growth is an improvement in the investment infrastructure of the production process. What makes the improvement possible is real savings. It is real savings that fund the enhancement of infrastructure through various tools and machinery, i.e., capital goods. With better tools and machinery, a better quality and a greater quantity of goods and services can be produced.

In a free, unhampered market economy the established infrastructure is in accordance with the tendency toward harmony between various activities. This means that the flow of real savings is sufficient to fund various lines of production without any disruption.

On this Murray Rothbard, paraphrasing Ludwig Lachmann, wrote,

Capital is an intricate, delicate, interweaving structure of capital goods. All of the delicate strands of this structure have to fit, and fit precisely, or else malinvestment occurs. The free market is almost an automatic mechanism for such fitting; … with its price system and profit-and-loss criteria, [it] adjusts the output and variety of the different strands of production, preventing any one from getting long out of alignment.[1]

As a result of the artificial lowering of interest rates and massive money pumping, an additional demand for various goods and services emerges. This leads to an attempt to expand the infrastructure.

This attempt is bound to fail since the flow of real savings is not large enough to support the expansion of the capital structure. Consequently, the attempt to expand the infrastructure leads to the diversion of real funding from various activities that make the present flow of real savings possible. Thus, the flow of real savings comes under pressure and the rate of real economic growth follows suit.

Neither an artificial lowering of interest rates nor monetary pumping by central banks has direct input in the production of capital goods and the production of goods and services that are required to promote and maintain human life and well-being.

The artificial lowering of interest rates and monetary pumping only give rise to various false activities by diverting a portion of the flow of real savings to these activities. The more false activities that emerge on the back of the artificial lowering of interest rates and monetary pumping, the less real savings will be available for wealth-generating activities.

The fact that economic conditions have continued to deteriorate despite the aggressive lowering of interest rates and massive money pumping by central banks raises the likelihood that the flow of real savings is in trouble.

Note again that monetary pumping and the artificial lowering of interest rates can't replace nonexistent real savings. Without additional real savings, it is not possible to undertake various new projects without weakening the existent structure of production.

$60 $50

Remember that the interest rate is just an indicator of the state of demand and supply for real savings. The falsification of this indicator cannot expand the flow of real savings.

Likewise money is just a medium of exchange. Its function is to permit the exchange of the products of one specialist for the products of another specialist. More money cannot generate more real savings or real economic growth.

On the contrary, a further planned expansion in monetary pumping by central banks can only weaken the flow of real savings and undermine prospects for a sustained economic revival.

Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. He is chief economist of M.F. Global. Send him mail fshostak@manfinancial.com.au

Article first posted on www.mises.org

http://creativecommons.org/licenses/by/3.0/us/

by William Thomson

Business Times Singapore 13 February 2009

FAR from being at, or even near, the trough of the economic and financial system crisis, are we still staring into the abyss? And if things have to get worse before they get better, how much worse, and for how long? Is a 'relief rally' likely in equity markets before long? The Business Times invited a group of experts (who correctly predicted that the crisis would be far worse than most people expected) to tell us where things are likely to go from here - and what kind of investment portfolio to build against an uncertain future.

Panelists

Ernest Kepper: Former official of the International Finance Corporation and Wall Street investment banker who now heads an Asian financial consultancy
Jesper Koll: President and chief executive officer at Tantallon Research, Japan
William Thomson: Chairman of Private Capital Ltd in Hong Kong; Director Finavestment Ltd., and Advisor to Axiom Alternative Funds London.
Christopher Wood: Managing director and equity strategist at CLSA Asia-Pacific Markets in Hong Kong

Moderator: Anthony Rowley, Tokyo Correspondent, The Business Times

Anthony Rowley: We are very pleased to welcome you back, gentlemen, at this critical junction in global financial and economic affairs. I would like to start by asking each of you how far you think activity is likely to recover this year in the world's major economies, and how effective the various stimulus packages announced so far are likely to be?

William Thomson: The next few years are going to be very difficult with high unemployment, possible stagflation and social unrest - as we are seeing in Iceland and some of the Baltic nations. Already we are hearing protectionist voices and the future continuation of globalisation could be severely tested. This year will almost certainly see negative growth overall in the G-7 countries and, at best, we will see some stabilisation in the second half of the year.

But I look for a more L-shaped recovery, rather than a typical V-shaped recovery. There is a very real danger that we could be going to follow a modified Japanese scenario of the 1990s.

The outlook is extremely opaque as we are in the accelerating point of the downturn. While both monetary and fiscal policies have become very relaxed in the US, the UK and elsewhere, funds have mostly been going to recapitalise the banking systems, where they are hoarded rather than re-lent, awaiting the next set of losses and the next recapitalisation. US President Barack Obama's major fiscal stimulus has still to be passed and whilst any tax cuts will have an immediate effect, the spending on infrastructure, etc, will take a considerable time to filter into the economy.

Jesper Koll: The real problem facing global business managers and investors is not so much what will happen in the next couple of months, but what will happen in the next couple of years. Sure, tax cuts and increased public spending are poised to boost demand so that by April/May the global economy will stop contracting. But the problem of excess capacity will not be fixed. Whether in steel, cement, cars or computers, the world has built capacity to supply for 4 or 5 per cent global growth. Unfortunately that may be at least one or 2 per cent too much. So a fair bit of the global productive capital stock is poised to stay idle for quite a while. Governments' focus on supporting demand is very important, of course. But reducing supply is even more important at this stage. Creative destruction is a necessary condition for the next real recovery.

Christopher Wood: I think economic activity in the major Western economies will not recover this year.

Ernest Kepper: I'm doubtful about prospects for the next two to three years as the authorities have failed to get to grips with the financial crisis, resorting to a series of hasty measures to try and support the banking system. The money has been given ineffectually and hasn't worked. So far, the crisis is worsening and little has been realised in terms of getting the banking system working normally again. The current economic model, driven by deregulation and the financial markets, will require radical changes. The future model will have to look dramatically different.

Perhaps what we are seeing is the downside of globalisation, where a crisis that began in the United States can infect all of the world's major economies. It is this dynamic that is having a global impact because the US consumer alone has been accounting for 20 per cent of global GDP - twice that of the entire Japanese economy. Over the past 15 years, businesses in the US, Europe and Japan relocated their manufacturing capacity to places where operating costs were the lowest, for the most part being in the Asian region, especially China, making Asia the manufacturing heartland of the world. The cheap money and easy credit of the last 10 to 15 years led to a bubble in fixed investment in Asia, especially in China.

Meanwhile, what I call the abstract global financial system goes on for the sole reason that players agree on the rules - but the paper or cyber money value for these real goods has become an abstract or intellectual value, and there is no longer a direct link to real goods. These financial instruments/vehicles are so abstract that their valuation is no longer understood, and is corrupted.

Rather than increased bank regulation we need a regulatory agency to control the creation and issuance of financial instruments. This would prevent the introduction of instruments such as financial derivatives and sub-prime mortgages that do not make any positive economic or financial contribution.

Anthony: How much more trouble do you see on the financial horizon?

William: I would hope that most of the damage has been done. After all, the big institutions in the US and the UK are now mostly on state life support. The only real question is how many will eventually have to be nationalised and the form that takes. The financial sector has to shrink as a proportion of GDP in the developed world and the adjustment is going to be painful, especially in the UK, which became over-dependent on the City and financial services. There are huge uncertainties for the future. Questions such as whether investment banking and commercial banking should co-exist in the same institution need to be revisited and how the regulatory system will and should adapt. It failed miserably in the last cycle and needs to be modified to account for globalisation. One thing we can be sure of: we will not be going back to status quo ante.

Jesper: The global banking crisis is now over in the sense that all governments are committed to save depositors, prop-up money markets and, if necessary, nationalise weak banks. What remains, however, is the almost complete lack of new profit opportunities for banks. So banks will have to break up and sell those businesses that are not part of their core competence. At the same time we'll see much more aggressive consolidation of global banking and finance. How long before a Chinese bank buys a European or American one?

Ernest: No industry or institution will be spared in the downturn and the biggest impact will be felt by companies in banking, construction, entertainment and the automotive business. Government and central bank action will not be enough to save either the financial system or the global economy. If the crisis was brought on by too much borrowing and spending you can't solve it by increased government borrowing or by paying off all the bad loans with taxpayer dollars.

The economy will continue to slow down; more jobs will be lost, businesses will go bankrupt and real estate fall into foreclosure. It is doubtful that the attempts to stop this momentum will show any signs of success over the next 12 months. This is a global depression that will touch everyone.

Around the world many banks will amalgamate with each other in order to survive. The US dollar will continue to lose its value. The Obama administration's measures would provide artificial life support for the banks at considerable expense to the taxpayer, but would not provide them the margins and yield curves that enable them to resume lending at competitive rates Another ceiling on banks' growth is the danger of excessive regulation due to the large losses suffered by the general public. All this means that financial institutions and banks will be less profitable, and lose their level of importance in the economy.

Anthony: How big a 'debt mountain' are governments creating by their fiscal stimulus plans, and how will it be paid down - by the sweat of the taxpayer's brow or through inflation?

Jesper: Let's be clear about one thing: the size of public debt build-up that we are now experiencing is simply unprecedented. Basically, most major economies will see debt-to-GDP ratios double this year and most G-7 countries will be left with debt ratios well in excess of 140 per cent of GDP. At those levels, a little inflation does basically nothing to fix the problem. Only inflation rates well in excess of, say, 10 per cent or 15 per cent could start to make a dent. In other words, we are not looking at a little inflation but at hyper-inflation as a real risk. Another solution would be debt default. Either way, I expect a sharp divergence between sovereign debt interest rates in the coming years.

Christopher: We are facing a debt mountain reflecting years of above-trend credit growth. This debt mountain is deflationary, although the policy response does create a risk of hyper-inflation.

William: We are definitely in a bond bubble and the interest rates that investors are prepared to accept on long- term sovereign debt are quite irrational. The UK and the US, unlike Japan, are not high-saving economies and it seems likely that the eventual result of the debt mountains and quantitative easing, alongside the run down in commodity inventories, will lead to considerable inflation in the medium term - say, by 2011/12.

Ernest: The basic question here is, how high is the debt mountain and what is it made of? Some estimates indicate that total global debt is in the range of US$750 trillion, and the total financial derivatives outstanding are in the range of US$450 trillion. This brings up two significant underlying issues - the lack of transparency in the markets (the fact that we don't know what's going on or even who the players are), and the lack of the basis to determine the true value of financial instruments. Because of these two issues alone, we can expect a very significant transformation of the financial system as we know it.

The size of the US-dollar derivative market may never be fully revealed. However, it can be expected that the current billion-dollar bailouts of banks will lead to extensive restructuring of the global financial system without ever determining the value of many of these derivative financial instruments.

Anthony: So, are government bond markets safe any longer, given the huge fiscal deficits that are being built in the US and elsewhere?

William: The bond markets are becoming the latest financial casino. Who rationally believes that a 2 per cent yield on 30-year US Treasury debt makes sense when the country faces massive unfunded pension and other liabilities for the baby-boomers now entering retirement? US government indebtedness, including such social security liabilities, amounts to over four times US GDP as opposed to the frequently quoted sovereign debt figure of 60-70 per cent of GDP.

The US, with its miserable savings rate, is dependent on the willingness of foreign central bankers to fund these deficits. The Chinese are already nearing the end of their patience as they face losses on their holdings and enormous domestic needs. If US Treasury Secretary Timothy Geithner makes good his threat to name China a currency manipulator, then the US bond markets will face real trouble sooner rather than later. Of course, that may have been just a ploy (for Mr Geithner) to get confirmed, in which case the Ponzi finance game will continue for a little longer.

Ernest: With the financial system bailouts, US public debt has spiralled. It is expected that at some point in time foreign holders of some US$15 trillion to US$20 trillion of US paper could start asking questions regarding whether the yield is sufficient to allow for the perceived risks.

Moreover, China, the Middle East and other sovereign wealth funds may have greater priorities in funding and bailing out their own economies than investing in US paper. If these holders do lose their appetite for Treasury paper, US authorities could be forced to raise yields to a substantially high level - in the range of 10 per cent or so. China, for instance, may suffer from a severe drop in trade and foreign capital inflows. Because of its structural over-reliance on exports and manufacturing, China may be required to utilise its extensive stock of international assets to boost domestic demand and this could cause reduction in its purchases of US Treasuries. As a result, foreign demand for US government bonds could shrink drastically as the US requires increased funding for its bailout and stimulus programmes. This could lead to extreme downward pressure on the US dollar.

Jesper: Government bonds will continue to be the benchmark against which all other assets are measured. The big opportunity is to play one issuer against the other. Simply put, all governments have responded to the crisis at more or less the same time and in the same manner. This uniformity is poised to end. Cycles and policy will now start to differ from country to country, so I expect interest rate differentials to start to widen - and fluctuate - quite substantially.

Anthony: Do you foresee any signs of a 'relief rally' in equity markets or has investor psychology been so badly bruised as to rule out any forays into equities in the short term?

William: A relief rally seems quite likely before too long. The markets were severely oversold in late 2008 and we have had a tentative bounce since then. A greater bounce may require confidence that the financial crisis has been sustainably contained. However, some sort of bounce seems likely in 2009 given a historical context. After all, the 2008 declines were similar in magnitude to those in 1929 - 47 versus 48 per cent. 1930 saw a better than 50 per cent rally before the markets collapsed again to their ultimate lows in 1932 - not that I am predicting that 2010 will be as bad as 1931/2.

There are great values around at present but at the same time some securities are still overpriced based on likely earnings outcomes. The returns on carefully selected equities should far exceed that in government bonds. The main caveat to all this is the structure of US President Obama's tax changes. An increase in marginal tax rates, especially on capital gains and dividends, would almost certainly be interpreted negatively by the market and at best moderate any rally.

Christopher: Wall Street-correlated world stock markets are still overdue more for a short-term, policy-driven relief rally than that which occurred between November and early January.

Ernest: I would not put much weight on any rally because the recession will be much worse than expected. Even the IMF expects the global economy to come to a virtual halt. Any such rally would likely be the result of short-term trading or speculation. There are too many speculators in the market who buy merely on the chance that they can sell higher, and not enough long-term investors who would like to see a company's profits go up and be paid out of dividends.

If stocks can be considered cheap, that is only relative to their values over the recent past when they were grossly over-valued. Current price earnings ratios can be expected to fall well below their long-term average of 16 before a turnaround kicks in. As corporate earnings start to drop, stocks would have to fall in order to maintain a price earnings average. I would expect stocks to fall another 15 to 20 per cent before bottoming out, and don't expect any sort of serious rebound until the credit markets recover from the greatest creation of liquidity over the last 10 years that the financial system has ever seen. That will take years. Therefore, the next 12 to 24 months or so will likely be a period of a lot of confusion in the equity markets.

A model portfolio

Given the sober outlook that they envisage for the global economy and the international financial system, how would our experts recommend constructing an investment portfolio for the short to medium term?

William: First of all, the insurance position in gold remains a vital cornerstone of any medium-term portfolio. After that, diversification is the key. If fixed income is a necessity for the portfolio, then high-grade corporate and emerging market bonds would be favoured over G-7 sovereigns.

Within a US equity portfolio I believe one should get exposure to sectors that will benefit from any economic restructuring and investment in the coming years - areas such as health, infrastructure and clean energy. But I would emphasis high-quality dividend-paying companies in the US and elsewhere. I do not think the world has gone ex-growth in the medium term and so commodities still warrant exposure, especially after their extreme sell-offs since last summer. Beyond that, I also favour selected emerging market equities.

Emerging markets have been almost indiscriminately hammered as foreign cash has been repatriated and the de-leveraging story has unwound. As a result values exist there, especially in Asia. For instance, the Korean market sells for about the same as it sold for at the time of the Seoul Olympics whilst the economy in won terms is six times as large. The stock markets there, in Taiwan and Thailand sell for low single-digit multiples and around 6 per cent yields. Assuming no great reversal of globalisation, greater growth in Asia will continue and these are compelling values. The only developed market with similar values is Germany. Emerging markets are much better long-term equity investment based on relative valuations and growth potential.

Jesper: This is a great time for a stock picker, a hard time for an asset allocator. I do not think it wise to focus on so-called asset classes, bonds, stocks, or cash. Rather, all focus has to be very company-specific. For example, car companies are offering very interesting opportunities right now. It really is darkest before the dawn. A Japanese car company stock may very well do two or three times as well as a German one. But then even among the Japanese ones, one may go bust and another one move to total world domination. More so than ever, focus on stocks, on companies, on their managers and their real competitive edge.

Another thought is on the US dollar. It is tempting to be a dollar bear, given all the problems in the US. I am the opposite, more a dollar bull. The reason is simple. America's policy and corporate management response to the crisis is poised to be more focused and more decisive than anywhere else in the world. Wall Street will remain the dominant global financial centre and America will offer the most compelling investment opportunities in the world. America has become cheap, with lots of super- cheap assets now for sale. The world will start buying more aggressively into America. That's where the real value is. So the dollar should rise

Ernest: I recommend acquiring gold in whatever form. Gold was, and is, a form of cash, and it probably always will be. Paper currency, on the other hand, is a promise to redeem in terms of something else - and as national debts mount higher, the chances of default mount with it. Further, though the US prints increasing numbers of dollars, the amount of gold backing those dollars up is small - and will probably get smaller. With the dollar's value falling, people will begin to buy gold; its potential upward rise will then be unlimited. I also recommend a strong currency, such as the Japanese yen or Swiss francs, as a good place to hold liquid reserves.

Christopher: My recommended long-term US dollar-denominated global portfolio is to have 5 per cent in German physical property, 5 per cent in Japan physical property, 10 per cent in Asia ex-Japan physical property; 35 per cent in domestic demand-oriented Asia ex-Japan equities, 15 per cent in Japanese equities; 15 per cent in unhedged gold mining stocks and 15 per cent in gold bullion.

William R. Thomson
Chairman of Private Capital Ltd.

William Thomson, Chairman of Private Capital Ltd., an advisory company in Hong Kong. He is also a senior adviser to Franklin Templeton in Hong Kong and Axiom Alternative Funds in London.

Mr. Thomson is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

The Patriotic and Moral Imperative for Owning Gold and Silver

Johnny Silver Bear
www.silverbearcafe.com

(Editors Note: One of the perks of editing "the Bear" allows me to post my own rants. I originally published The Patriotic and Moral Imperative for Owning Gold and Silver in October, 2004.)

I pledge allegiance to the flag...

Remember when you learned those words? It was back when everything was simple. The Pledge of Allegiance was written in 1892 by Francis Bellamy, the circulation manager of the Boston based "The Youth's Companion" magazine. The end of the Nineteenth Century was a much simpler time. The world was a much simpler place. It is not so simple anymore.

When we recite those seemingly patriotic words, what are we really pledging our allegiance to? To the flag? To the United States? To the Republic for which it stands?

If we are to pledge our allegiance, let it be to an ideal. That ideal should be the American way of life as prescribed by the Constitution. The Constitution was designed to provide the essential ingredient in the recipe for the American Dream. It provided the "roadmap" that gave our forefathers the opportunity to make this country great. That greatness was born out of the sweat and blood of a liberated citizenry.

...of the United States of America.

Freedom as a concept and an ideal is under attack in America. Liberty has lost its meaning for many Americans. It often appears far less valuable than it really is. All too often, the unthinking trade liberty for the seductive illusion of security and stability. Just as Benjamin Franklin warned us, in the end they are left with neither.

We have reached a point where, once again, we must rely on the guidance of our forefathers and their patriotic initiative.

Upon reflection, it would seem that the "patriotism" exemplified by the founders of the American Republic consists, in part, of an allegiance, not to persons, not to offices, and not even to institutions, but rather to political and moral ideals. Such ideals as self-determination, the social contract, inalienable human rights, and additional ideals such as those enumerated in the Declaration of Independence and the Bill of Rights.

An attempt at the decimation of the ideals of freedom and liberty is currently being explored by an "Evil Corporation" that now plans to rule the world.

And to the Republic for which it stands,

History tells us that, twenty-six-hundred years ago, in Athens, Greece, the first two candidates ran for office. Athens is credited as being the birthplace of Democracy. Each of those first two candidates spent some of his own money buying votes. In every Democratic election in history, there have been candidates who used their own money to buy votes. Buying votes has always been an intrinsic part of every Democratic System. It may not be right, but it is a result of "the human condition". That is to say there is, and always has been a temptation to "rig the system". It is one of the reasons why Democracies are fundamentally flawed.

Everything evolves. Everything changes. For better or worse, nothing remains the same.

During Franklin D. Roosevelt's terms in office, things changed substantially. F.D.R. figured out a way to, in his mind, improve the system. Instead of using his own money to buy votes, he would use the taxpayer's money. This would change the face of American politics forever. By inventing more and more social welfare programs, he effectively bought more and more votes with the taxpayer's money. You can always find a bunch of folks willing to vote for a handout. He, more than any other person in our Nation's history, instigated a collectivist paradigm that would mislead our country, and place us in the precarious position that we find ourselves today.

Our present day politicians have embraced the collectivist ploy of social welfare, used it over and over again to get themselves elected and re-elected, adopted it as "business as usual", and gone about their ignoble pursuits with a "job security is job one" mentality.

"Government is the great fiction, through which everybody endeavors to live at the expense of everybody else." -- Frederick Bastiat

Our present system is a radical departure from the vision of the Founders. They understood the ultimate folly of Democracy and rejected it as unworkable. They knew that the majority would always vote for a free ride. They knew that the herd mentality is not compatible with anything nobel, and that conformity is the greatest single threat to liberty.

Freedom and individualism, are the only ideological tenets that can lend to our Country's salvation. It is the individual states that make up a Republic. It is the individual persons that make up the state. Mankind's potential is held within the core of every individual person, but that potential becomes diluted exponentially as the collective mind set is imposed and adopted.

Our country is now controlled by Fabian Socialists. The "Neo conservatives" are perhaps the most blatant perpetrators of the Fabian Socialist agenda with their totalitarian legislation and their reckless redistribution of our Nation's wealth through sovereignty degradation with agreements like NAFTA and FTAA. This is the ultimate result of the one world vision of Cecil Rhodes.

Our flag no longer seems to be standing for, or concerned with "the Republic."

one Nation,

The name of the game is collectivism, the basic precepts of which promote an ideology which dismisses nation, sovereignty, and individual liberties. It also suppresses notions of an omnipotent presence which stand in the way of our subservient indoctrination.

The world is crumbling down around us. And not only economically. We have allowed the orchestrated demise of the world as we know it by a group of misguided, irresponsible power mongers.

Why are these guys bad? Why do I often refer to these banksters as "the Dark Side?" Is it simply due to the fact that they are driven solely by a lust for power? While lust, avarice and greed are indeed Basic Biblical Sins, many people lacking moral stamina fall prey to the various turpitudes of modern society. While failure to resist the temptations of the Basic Sins is a mark of diminished character, it is, in itself, not all-damning.

No, it is because of their lack of cohesive vision. They have attempted to install themselves as the sole shot callers, attempting to rule the world, with no other qualifications other than their membership in the various "lucky sperm clubs." The passed down institutional wealth that they have amassed, through generations of corruption and successful financial manipulation, has skewed their sensibilities. The ideals that may have seemed noble to their grandfathers have been set aside. Their sole motive for world domination has digressed to one of the lowest common denominator. Absolute greed, like absolute power, corrupts absolutely. With no benevolent vision for the future, they have systematically decimated the planet's resources. The resulting imbalance is one that can now only be righted by the severe suffering of all of humanity, including themselves. They are maniacs who have painted humanity in to a corner that is, for all intents and purposes, inescapable.

under God,

In June of 1954 an amendment was made to add the words "under God" to the Pledge of Allegiance. Then President Dwight D. Eisenhower said "In this way we are reaffirming the transcendence of religious faith in America's heritage and future; in this way we shall constantly strengthen those spiritual weapons which forever will be our country's most powerful resource in peace and war."

As I stated above, the collectivist paradigm intentionally suppresses notions of an omnipotent presence. How many of our cherished institutions have been challenged, by law, to abandon the notion of an Almighty?

The greatest problems to consider, when attempting to deal with the Evil Corporation, are three fold. First, the people that are calling the shots, the Puppet Masters, stay behind the scenes and are rarely accessible. Secondly, the front line individuals that serve this alliance, (politicians, bureaucrats, academics, union organizers, mainstream media, etc.), have been, for the most part, kept in the dark when it comes to a real understanding of the ultimate agenda which guides their labors and the subsequent dismantling of the U.S. Constitution. And third, a pandemic apathy, which is the product of a ninety year misinformation campaign, has brought about a lack of opposition to this movement and has rendered the country, almost hopelessly, in the grip of the abomination which is the New World Order.

indivisable,

Indivisable! The Declaration of Independence spelled out, in no uncertain terms, our right to division. "When in the course of human events," and so on. So now we must insure that the group prevails? That we do everything in our power to keep the herd together?

But wait. Enough of my ranting and raving. If you need evidence that the afore mentioned facts are true, and that collectivism is our main enemy, please refer to the research of an expert, G. Edward Griffin. His series, The Future is Calling will provide the foundation for most of what I have previously stated.

There are solutions to the problems we face. Most will require commitment, dedication, and sacrifice. But there is one part of the solution that is relatively painless. Although relatively painless, it is incredibly important. It is a simple act and it will only require your passive involvement. No armed insurrection necessary. Once you understand the source of their power, you will understand this part of the solution. So let me pose an analogy.

Suppose you go to a casino. If you are paying attention, you will notice that everyone is playing with chips. Why? Because the owners of the casino know that their customers, (marks), seem to be more willing to play their games with chips, rather than cash. They have, at least temporarily, demonetized Federal Reserve Notes, (FRNs), by substituting chips. Now let's take this situation to the extreme. Suppose you could buy everything you needed in the casino. Food, clothing, shelter, everything. And you could pay for everything with chips. Now lets additionally suppose that you could also work in the casino, and they paid you with chips. Stay with me here. Let's additionally suppose that you lived there all your life, that you raised your family there and that your kids raised their families there. Eventually, no one would have any need of FRNs. The casino would have successfully demonetized cash and would obviously be in control of the manufacture and issuance of chips. With the production of more chips, they could easily dilute the value of the chips you had already amassed. With that control they would have achieved absolute power in the casino. No matter whether you won or lost, they would win. They would rule the microeconomic world of the casino.

Hey, that's exactly what the collectivist owners of the Federal Reserve started doing in 1913. For an update on that debacle please see The Nature of Money by yours truly. Instead of a casino, they used a whole country to get it started. They progressively got everyone to forget about gold and silver, to dismiss them as, in the words of John Maynard Keynes, "barbarous relics". John Maynard Keynes was a puppet pretending to be an economist. Those that prescribe to "Keynesian Economic Theory" are, IMHO, either idiots, or criminal economic predators. Those predators include every member of every Federal Reserve Board this country has had in the last eighty years! They didn't want people to use gold and silver for money because they couldn't manufacture it themselves.

They could, however, manufacture as many FRNs as they wanted. At the Breton Woods conference of 1945, they expanded the size of their "casino" to include most of the world.

The verdict of history must be that the Federal Reserve has failed dismally. Far from making financial crises impossible, as it initially promised, the Fed, in league with the Bank of England, intentionally engineered the first Great Depression, and it is about to present us with a Super Depression, which will ultimately result in worldwide economic disintegration.

As the economic disintegration unfolds, all forms of savings will be decimated. Notional long term obligations like pensions are already failing as the underwriters fail. Institutional debt will be next. Social Security and Medicare are no longer sustainable. In the next two years we will watch as FRNs are so radically diluted that our economy will begin to mirror the Weimar Republic. This is all part of of the Collectivist's ploy for world domination. Tear the whole thing down and rebuild it in the Fabian Socialist's vision.

"The only difference between Communists and Fabians is a question of tactics. They may compete over which of them will dominant the coming New World Order, over who will hold the highest positions in the pyramid of collectivist power; they may even send opposing armies into battle to establish territorial pre-eminence over portions of the globe, but they never quarrel over goals. Through it all, they are blood brothers under the skin, and they will always unite against their common enemy, which is any opposition to collectivism." --Taken from G. Edward Griffin's essay The Grand Deception, a second look at the war on terrorism.

If you are not already familiar with the Fabian Society and its aspirations, please refer to Carroll Quigley's examination, The Anglo-American Establishment. The essence of the Fabian's agenda was incorporated in a stained glass window that hung in the Web House, a location that served as the group's original headquarters, in Surrey, England. It is that famous line from Omar Khayyam: "Dear love, couldst thou and I with fate conspire to grasp this sorry scheme of things entire, would we not shatter it to bits and then remould it nearer to the hearts desire?" Please read that line again. It is the key to modern history, and it is the key to the war on terrorism: "Dear love, couldst thou and I with fate conspire to grasp this sorry scheme of things entire, would we not shatter it to bits and then remould it nearer to the hearts desire?"

A further dissection of the Collectivist's agenda provides us with a glimpse of their vision; "War is the best way to remold society. War! Shatter society to bits. Break it apart. Then we can remold it nearer to the heart’s desire. And what is our heart’s desire? Collectivism."

The ramifications of the their actions are so mind blowing in scope, that confronting them is beyond the capacity of most, including those who mindlessly abetted the implementation of their plan.

The only thing that "We the People" can do is to take on the individual responsibility of recognizing the problem and dealing with it at the source. Admittedly the problem has become almost insurmountable, but it still must be dealt with at the source.

The source of the problem was the initial demonetization of gold and silver which took place between 1913 and 1945. A large part of the solution is the remonetization of gold and silver today. Ownership of gold and silver is what empowers a bold and contrarian few to take control of large amounts of capital. Ownership of gold and silver is what will empower the masses to throw off the tyrannical bonds of fiat, and replace them with our Constitutionally mandated monetary system, thus protecting the tenets of freedom and liberty, and insuring a future for our children and grandchildren.

with Liberty and Justice for all.

The time has come for us to step up to the plate and do our patriotic duty.

Patriotism is a love of and loyalty to one's country. A patriot is someone who loves, supports, and is prepared to serve their country.

The word patriotism comes from a Greek word meaning fatherland. For most of history, love of fatherland or homeland was an attachment to the physical features of the land. But that notion changed in the eighteenth century, when the ideals of personal freedoms and liberty strongly emerged into political thought. Patriotism was still a love of one's country that included connections to the land and people, but then also included its customs and traditions, pride in its history, and devotion to its welfare.

Today most people agree that patriotism also involves service to their country, but many disagree on how to best perform such service. Some believe that the national government speaks for a country; therefore, all its citizens should actively support government policies and actions. Others argue that a true patriot speaks out when convinced that their country is following an unwise or unjust action.

"Throughout history, it has been the inaction of those who could have acted; the indifference of those who should have known better; the silence of the voice of justice when it mattered most; that has made it possible for evil to triumph." -- Haile Selassie

When was the last time that you acted in a manner that would help insure your personal liberties and freedoms? When have you acted in a manner that did not simply depend on the Government to protect and take care of you. The solution will come as a result of our individual actions. There are no groups on our side. The larger the group, the larger the problem.

I will be forever imploring you to own up to your individual patriotic responsibilities. One easy way is for you to do this is to purchase physical gold and silver bullion. In reality, compared to the amount of fiat currency in circulation, there is so little bullion available for purchase, that a concerted effort on your part could send the value of gold, and just as importantly silver, to the moon.

By participating in this simple, passive action, we can be part of the solution and avail ourselves a chance to survive the mind-boggling catastrophe that lies ahead. We are faced with an epic struggle against the tyranny of false money. Gold and silver are assets that are not borne out of someone else’s debt or liability. Debt based money is abusable and will, therefore, always be abused. Like the children in a dysfunctional family, we have been severely abused. Denial is not a river in Africa.

History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and it's issuance. -- James Madison

Besides enriching ourselves through the exercise of buying and owning gold and silver, we can passively bring about some very important changes in one way that will really make a difference. As the price of bullion subsequently rises, more and more people will begin to see Federal Reserve Notes for what they really are; fake money, and recognize and appreciate precious metals for what the really are; real money.

If one half of one percent of Americans each went out and bought ten ounces of silver, that would amount to 14,000,000 ounces of silver. COMEX has much less than 100,000,000 ounces of silver available. That much buying pressure would have an explosive effect on the price. This could force the hand of the cartel and help change the world for the better.

Get the word out. A candle loses nothing by lighting another candle. Consider it your patriotic and moral imperative.

Buy gold and silver.

It's not what you don't know that will screw you up, it's what you know that is wrong. The spin you hear from the mainstream media is intended to mislead you. Open your eyes and face the future. If you leave your head in the sand and ignore it, you are only leaving your butt exposed for the world to kick. This all may sound like gloom and doom, but when you get a handle on what is going to happen, you will have a future filled with opportunity. Fortune favors the Informed.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
~~~~~~~~~~~~~
Kenneth Parsons, aka Johnny Silver Bear, is an IT professional in Texas and the President of Silver Bear Communications, Inc. Mr. Parsons has been involved in the advertising and promotion industry for over twenty-five years. He is the editor of the Silver Bear Cafe and, as such, is responsible for shaping the content of "The Bear." Mr. Parsons has served as CEO for Fiberscape Communications, Inc., a web site development / hosting and streaming multi-media company in Richardson, Texas since 1997. He is a Jeffersonian and a passionate supporter of the U.S. Constitution. He is also an outspoken advocate of gold money and equal tax rates. You can contact Mr. Parsons with questions or comments via email.

johnny@silverbearcafe.com

Ship of Fools
Paul Craig Roberts

Is there intelligent life in Washington, DC? Not a speck of it.

The US economy is imploding, and Obama is being led by his government of neconservatives and Israeli agents into a quagmire in Afghanistan that will bring the US into confrontation with Russia, and possibly China, American's largest creditor.

The January payroll job figures reveal that last month 20,000 Americans lost their jobs every day.

In addition, December's job losses were revised up by 53,000 jobs from 524,000 to 577,000. The revision brings the two-month job loss to 1,175,000. If this keeps up, Obama's promised three million new jobs will be wiped out by job losses.

Statistician John Williams (shadowstats.com/) reports that this huge number is an understatement. Williams notes that built-in biases in seasonal adjustment factors caused a 118,000 understatement of January job losses, bringing the actual January job loss to 716,000 jobs.

The payroll survey counts the number of jobs, not the number of employed as some people have more than one job. The Household Survey counts the number of people who have jobs. The Household Survey shows that 832,000 people lost their jobs in January and 806,000 in December, for a two month reduction of Americans with jobs of 1,638,000.

The unemployment rate reported in the US media is a fabrication. Williams reports that

"During the Clinton Administration, 'discouraged workers', those who had given up looking for a job because there were no jobs to be had, were redefined so as to be counted only if they had been 'discouraged' for less than a year. This time qualification defined away the bulk of the discouraged workers. Adding them back into the total unemployed, actual unemployment, [according to the unemployment rate methodology used in 1980] rose to 18% in January, from 17.5% in December."

In other words, without all the manipulations of the data from a government that lies to us every time it opens its mouth, the US unemployment rate is already at depression levels.

How could it be otherwise given the enormous job loss from offshored jobs. It is impossible for a country to create jobs when its corporations are moving production for the American consumer market offshore. When they move the production offshore, they shift US GDP to other countries. The US trade deficit over the past decade has reduced US GDP by $1.5 trillion dollars. That is a lot of jobs.

I have been reporting for years that American university graduates have had to take jobs as waitresses and bartenders. As over-indebted American consumers lose their jobs, they will visit restaurants and bars less frequently. Consequently, Americans with university degrees will not even have jobs waiting on tables and mixing drinks.

US policymakers have ignored the fact that consumer demand in the 21st century has been driven, not by increases in real income, but by increased consumer indebtedness. This fact makes it pointless to try to stimulate the economy by bailing out banks so that they can lend more to consumers. The American consumers have no more capacity to borrow.

With the decline in the values of their principal assets-their homes-with the destruction of half of their pension assets, and with joblessness facing them, Americans cannot and will not spend.

Why bail out GM and Citibank when the firms are moving as many operations offshore as they possibly can?

Much of US infrastructure is in poor shape and needs renewing. However, infrastructure jobs do not produce goods and services that can be sold abroad. The massive commitment to infrastructure does nothing to help the US reduce its massive trade deficit, the financing of which is becoming a major problem. Moreover, when the infrastructure projects are completed, so are the jobs.

At best, assuming Mexicans do not get most of the construction jobs, all Obama's stimulus program can do is to reduce the number of unemployed temporarily.

Unless US corporations can be required to use American labor to produce the goods and services that they sell in American markets, there is no hope for the US economy. No one in the Obama administration has the wits to address this problem. Thus, the economy will continue to implode.

Adding to the brewing disaster, Obama has been deceived by his military and neoconservative advisers into expanding the war in Afghanistan, a large mountainous country. Obama intends to use the draw-down of US soldiers in Iraq to send 30,000 more American troops to Afghanistan. This would bring the US forces to 60,000-600,000 fewer than US Marine Corps and US Army counterinsurgency guidelines define as the minimum number of soldiers necessary to bring success in Afghanistan-and less than half as many as the army that was unable to occupy Iraq.

The Iranians had to bail out the Bush regime by restraining its Shi'ite allies and encouraging them to use the ballot box to attain power and push out the Americans. In Iraq the US troops only had to fight a small Sunni insurgency drawn from a minority of the population. Even so, the US "prevailed" by putting the insurgents on the US payroll and paying them not to fight. The withdrawal agreement was dictated by the Shi'ites. It was not what the Bush regime wanted.

One would think that the experience with the "cakewalk" in Iraq would make the US hesitant to attempt to occupy Afghanistan, an undertaking that would require the US to occupy parts of Pakistan. The US was hard pressed to maintain 150,000 troops in Iraq. Where is Obama going to get another half million soldiers to add to the 150,000 to pacify Afghanistan?

One answer is the rapidly growing massive US unemployment. Americans will sign up to go kill abroad rather than be homeless and hungry at home.

But this solves only half of the problem. Where does the money come from to support an army in the field of 650,000, an army 4.3 times larger than US forces in Iraq, a war that has cost us $3 trillion in out-of-pocket and already incurred future costs. This money would have to be raised in addition to the $3 trillion US budget deficit that is the result of Bush's financial sector bailout, Obama's stimulus package, and the rapidly failing economy. When economies tank, as the American one is doing, tax revenues collapse. The millions of unemployed Americans are not paying Social Security, Medicare, and income taxes. The stores and businesses that are closing are not paying federal and state income taxes. Consumers with no money or credit to spend are not paying sales taxes.

The Washington Morons, and morons they are, have given no thought as to how they are going to finance a fiscal year 2009 budget deficit of some two to three trillion dollars.

The practically nonexistent US saving rate cannot finance it.

The trade surpluses of our trading partners, such as China, Japan, and Saudi Arabia, cannot finance it.

The US government really has only two possibilities for financing its budget deficit. One is a second collapse in the stock market, which would drive the surviving investors with what they have left into "safe" US Treasury bonds. The other is for the Federal Reserve to monetize the Treasury debt.

Monetizing the debt means that when no one is willing or able to purchase the Treasury's bonds, the Federal Reserve buys them by creating bank deposits for the Treasury's account.

In other words, the Fed "prints money" with which to buy the Treasury's bonds.

Once this happens, the US dollar will cease to be the reserve currency.

In addition, China, Japan and Saudi Arabia, countries that hold enormous quantities of US Treasury debt in addition to other US dollar assets, will sell, hoping to get out before others.

The US dollar will become worthless, the currency of a banana republic.

The US will not be able to pay for its imports, a serious problem for a country dependent on imports for its energy, manufactured goods, and advanced technology products.

Obama's Keynesian advisers have learned with a vengeance Milton Friedman's lesson that the Great Depression resulted from the Federal Reserve permitting a contraction of the supply of money and credit. In the Great Depression good debts were destroyed by monetary contraction. Today bad debts are being preserved by the expansion of money and credit, and the US Treasury is jeopardizing its credit standing and the dollar's reserve currency status with enormous quarterly bond auctions as far as the eye can see.

Meanwhile, the Russians, overflowing with energy and mineral resources, and not in debt, have learned that the US government is not to be trusted. Russia has watched Reagan's successors attempt to turn former constituent parts of the Soviet Union into US puppet states with US military bases. The US is trying to ring Russia with missiles that neutralize Russia's strategic deterrent.

Putin has caught on to "comrade wolf." He has succeeded in having the president of Kyrgyzstan, a former part of the Soviet Union, evict the US from its military base. This base is essential to America's ability to supply its soldiers in Afghanistan.

To stop America's meddling in Russia's sphere of influence, the Russian government has created a collective security treaty organization comprised of Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Tajikistan. Uzbekistan is a partial participant.

In other words, Russia has organized central Asia against US penetration.

To whose agenda is President Obama being hitched? Writing in the English language version of the Swiss newspaper, Zeit-Fragen, Stephen J. Sniegoski reports that leading figures of the neocon conspiracy-Richard Perle, Max Boot, David Brooks, and Mona Charen-are ecstatic over Obama's appointments. They don't see any difference between Obama and Bush/Cheney.

Not only are Obama's appointments moving him into an expanded war in Afghanistan, but the powerful Israel Lobby is pushing Obama toward a war with Iran.

The unreality in which he US government operates is beyond belief. A bankrupt government that cannot pay its bills without printing money is rushing headlong into wars in Afghanistan, Pakistan, and Iran. According to the Center for Strategic and Budgetary Analysis, the cost to the US taxpayers of sending a single soldier to fight in Afghanistan or Iraq is $775,000 per year!

The world has never seen such total mindlessness. Napoleon's and Hitler's march into Russia were rational acts compared to the mindless idiocy of the United States government.

Obama's war in Afghanistan is the Mad Hatter's Tea Party. After seven years of conflict, there is still no defined mission or endgame scenario for US forces in Afghanistan. When asked about the mission, a US military official told NBC News, "Frankly, we don't have one." NBC reports: "they're working on it."

Speaking to House Democrats on February 5, President Obama admitted that the US government does not know what its mission is in Afghanistan and that to avoid "mission creep without clear parameters," the US "needs a clear mission."

How would you like to be sent to a war, the point of which no one knows, including the commander-in-chief who sent you to kill or be killed? How, fellow taxpayers, do you like paying the enormous cost of sending soldiers on an undefined mission while the economy collapses?

Paul Craig Roberts
paulcraigroberts@yahoo.com
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Paul Craig Roberts was Assistant Secretary of the Treasury during President Reagan's first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand. He is the author of Supply-Side Revolution : An Insider's Account of Policymaking in Washington; Alienation and the Soviet Economy and Meltdown: Inside the Soviet Economy, and is the co-author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice. Click here..... http://www.vdare.com/pb/death_of_due_process.htm for Peter Brimelow's Forbes Magazine interview with Roberts about the recent epidemic of prosecutorial misconduct.

Road Trip

"We will not apologize for our way of life...."

This unfortunate phrase from President Obama's otherwise sturdy inaugural address, echoed through my mind last week as I cruised the suburban outlands of Montgomery, Alabama. All the usual commercial furnishings of consumerist America hugged the flattish ochre and dusty-green landscape of played-out cotton fields where thirty feet of topsoil has washed away in the two hundred years since the mainly English settlers shoved out the native Alabamu, Coosa, and Tallapoosa. Along the low horizon, mall followed strip mall followed "lifestyle center," book-ending the "one house" failed subdivisions of otherwise empty unsold lots in a cavalcade of floundering enterprise. It seemed at times as if the terrain was a kind of sea-like expanse, and all the retail boxes ghost ships drifting to oblivion.

They say that the banks have stopped calling in their loans on the commercial real estate, even though the owners of the malls and strip malls have arrived firmly in default. Calling in the loans would only pin another horrifying liability on the banks' balance sheets. So all parties join in a game of "pretend," that nothing has really happened to the fundamental equations of business life. Something similar goes on at the next level down, where the tenants of the malls and strip malls sink deeper into rent arrears every month, and the eviction process is simply postponed, while the stores themselves put off paying their vendors and suppliers – as the whole system, the whole way of life, enters upon a circle-jerk of mutual denial in a last desperate effort to forestall the mandates of reality .

How long will these games go on? This is the primary question that haunts the republic as we wait for new TARPS, and "bad banks," economic stimulus packages, infrastructure renewal roll-outs, and other policy life-lines thrown out in guarded hopefulness to haul America out of a ditch.

The center of Montgomery was instructive, too. Not unlike any other city in the USA (pop. about 200,000), the former main artery of downtown commerce – Dexter Avenue, rolling out like a red carpet below the state capitol hill, where Martin Luther King's early career kicked off in a modest red brick church, and where Rosa Parks famously refused to move to the back of her bus – this "main street" presented a sad sequence of empty shopfronts interrupted here and there by rather creepy amateur murals depicting the cruelties of slavery, as if a remonstrance to the politicos up the hill. Most of the buildings lining the avenue still stood burdened by the clownish facade re-doos and ghastly claddings of the 1950s, which had replaced the ordered classical-vernacular decorum of the original 19th century frontages. Once the malls had landed in the old cotton fields, and MLK moved on to Atlanta, Dexter Avenue was just left to rot in the memory trunk.

Here and there around the rest of the downtown, other weird experiments in American post-war anti-urbanism presented themselves, most notably a "building" designed to look like a small-scaled Death Star, all black reflective glass, canted concrete and steel walls – which turned out to belong to Morris Dees' renowned Southern Poverty Law Center -- deployed directly across the street from the modest white clapboard-with-green-shutters house once occupied by Jefferson Davis after Richmond fell and the Confederate leadership skeedaddled further south. There were a few recently-built government towers that looked like Nascar trophies. But the rest of the downtown – the parts not dedicated to surface parking – was the ubiquitous array of muffler shops, or restaurants and churches that looked like muffler shops.

With the city center thus nearly dead, and the asteroid belt of malls and strips on their knees financially, this emblematic sunbelt metro area finds itself in a pickle. Cotton being well-past decline, and having wrecked the soil, the "new" economy of recent decades dedicated itself to building car-dependent air-conditioned suburban sprawl – the perceived perfect antidote to a previous economic order based on serfdom, hook-worm, and inescapable heat. That now-not-so-new economy of sprawl, in turn, has come to a screeching halt, as a cruel destiny threw sand in the mechanisms of reliably cheap oil and revolving credit, and the gears seized up. A mood of ominous watching and waiting pervaded the city, but many of the movers-and-shakers had pinned their hopes on the chance that Mr. Obama's stimulus bill would allow them to commence building a new freeway to the ocean on the Florida panhandle.

My journey continued on the Jesus-haunted blue highways, to that selfsame place, Walton County, Florida, where some of the most famous experiments in the New Urbanism were conducted beginning in the 1980s with the new town of Seaside. I had been there many times over the years, and I was called down to get a prize in the service of the movement, but it was a little disconcerting to see how the build-out had progressed.

The Seaside experiment began very modestly as the idea for a bohemian village of architects and artists in what was then an almost empty quarter of piney woods owned by the St Joe timber company. Seaside was designed so beautifully that it attracted the attention of every thoracic surgeon and corporate lawyer between Nashville and New Orleans, and pretty soon Seaside became the Riviera of the sunbelt's economic elite – and came in for gales of criticism for becoming that. The newer houses and commercial structures grew ever grander, as a Boomer generation status competition ramped up into the new millennium. Several more, ever-grander New Urbanist towns sprouted along the adjacent beaches, some of the most recent composed of immense mansions embarrassing in their opulence. The outcome was a little scary, especially now that the fortunes behind many of these mansions may be threatened by the multiplying fiascos of finance and economy overspreading the nation like a vicious plague.

The New Urbanists had not set out to build monuments to Yuppie-Boomer consumerism, but a peculiar destiny shoved them into that role for a while – even while they toiled elsewhere around the nation to reform town planning laws and generally provide an antidote to the fatal cultural cancer of sprawl, that is, of a settlement pattern guaranteed to comprehensively bankrupt our society. Anyway, the collapse of the housing bubble has affected the New Urbanists' business, too, and this may turn out to be a very good thing because they can put aside the distractions of building very grand places to sop up ill-gotten wealth and focus on the issues that Mr. Obama's people should have been paying attention to all along, namely, how are we going to reform the way we live in this country and what will be the physical manifestation of how we live in the decades to come.

The New Urbanists have preached for years that conventional suburbia would fail America in the long run, and that we'd have to prepare for this failure by restoring traditional modes of occupying the landscape. So far, the Obama team has not been willing to identify the suburban system as the heart of our economic problem. They can't recognize it for what it truly is: a living arrangement with no future – and an economic, ecological, and spiritual disaster. It is, of course, the primary reason why we find ourselves in the deadly predicament of importing over two-thirds of the oil we use every day.

But then, more than half the population lives the suburban way of life, with its deadly mortgage traps, its mandatory motoring, and its civic disengagements. Nobody in power dares tell the truth: that we can't live this way anymore.

But there are scores of places like Montgomery, Alabama, and thousands of traditional main street small towns that are sitting out there waiting to be re-activated. We need to do this much more than we need to build new freeways to the beach. Suburbia is not going to be abandoned overnight (even if it fails logistically and economically !) but we have got to arrive at a consensus about rehabilitating our forsaken small cities and small towns. The New Urbanists have gathered, organized, and codified all the principle and methodology needed to carry out this campaign. This should be their moment. Mr. Obama and his team should get with the program.

James Howard Kunstler
www.kunstler.com

by Michael S. Rozeff

Up a great deal. More than at any time since World War II. How much is a great deal? Probably far more than you expect. Read on.

We’d like to know what’s going to happen in the future to a host of variables, such as stock prices, commodity prices, the price of gold, short and long-term interest rates, consumer goods prices, real estate prices, gross domestic product, employment, etc. This article focuses on the prices of consumer goods.

Instead of examining theories, this article uses an FAQ format to answer the question: where are consumer goods prices headed? This provides a degree of simplicity and clarity. Calculations do not always add because of variations in dating, seasonal adjustments or not, rounding, etc. The specific references are all to U.S. data.

1. What is the monetary base?

The monetary base is the sum of notes and coins in circulation and in bank vaults and reserves held by banks on deposit with the central bank. In the U.S., the central bank is the Federal Reserve (or Fed) and the notes primarily are Federal Reserve notes.

2. What is the current size of the U.S. monetary base?

Approximately $1,774 billion, as of 1/14/09. This consisted of about $951 billion of bank reserves and $823 billion of currency in circulation.

3. What are bank reserves?

Bank reserves consist of currency banks hold (vault cash) and reserves they hold on deposit at the Fed. Their reserves at the Fed are like a checking account they hold at the Fed.

4. At what level are current bank reserves, and what is the usual level?

Bank reserves as of 12/1/08 were $821 billion. Bank reserves were $40–$44 billion from late 2005 until August of 2008.

5. What are excess reserves?

Excess reserves are bank reserves (or deposits) held at the Fed in excess of reserves required by the Fed’s regulations.

As of 12/1/08, total bank reserves were $821 billion; required reserves were $54 billion; and excess reserves were $767 billion.

6. What is the usual level of excess reserves?

Prior to September of 2008, excess bank reserves were about $2 billion.

7. What is the importance of excess bank reserves and, by extension, the monetary base?

Excess reserves and the monetary base provide banks with the capacity to make loans to customers. In the fractional-reserve banking systems that nations have today, the loans are a multiple of these reserves.

8. What is a money multiplier?

A money multiplier is a ratio with a measure of money in the numerator and the monetary base in the denominator.

The M1 money multiplier is the ratio of the M1 money measure divided by the monetary base. The M2 money multiplier is the ratio of the M2 money measure divided by the monetary base.

9. How large is the M1 money multiplier and what is its recent behavior?

The M1 money supply is currently less than the monetary base. M1, which is primarily currency plus demand deposits, is $1,602 billion. The multiplier is about 0.9 as of 1/14/09.

The M1 multiplier has been about 1.6 in recent years. The drop to 0.9 has occurred starting in late September of 2008. It is due to the greater rise in the monetary base than M1. M1 has risen from $1,392 billion in early September to $1,602 billion at present, or at an annualized rate of about 36 percent a year. The monetary base has risen from $870 billion to $1,774 billion. The annualized rate is about 249 percent.

10. How high would M1 rise if the M1 multiplier were to return to its level of 1.6?

M1 will rise to about $2,563 billion if the multiplier of 1.6 is restored. That is an increase of about 84 percent over its early September level of $1,392 billion.

11. What are borrowed and non-borrowed reserves?

Member banks can borrow from the Fed via the "discount window" or by other "facilities." This borrowing is analogous to going to a teller’s window in a bank and borrowing from the bank. When the banks borrow and do not withdraw the amounts they borrow, it goes into their checking accounts (reserves) at the Fed. That borrowed portion of their reserves is borrowed reserves. The rest is non-borrowed reserves.

12. What are the levels of borrowed and non-borrowed reserves?

As of 12/1/08, borrowed reserves were $654 billion. About $407 billion of this were reserves obtained through the Term Auction Facility (TAF), and the rest were mostly from discount window borrowing (about $210 billion). Non-borrowed reserves were $167 billion.

13. What are the usual levels of borrowed and non-borrowed reserves?

Total bank reserves were $40–$44 billion from late 2005 until August of 2008. This approximated required reserves, and excess reserves were small. Non-borrowed reserves also approximated total and required reserves during this period. Borrowed reserves were small or nil.

14. In what forms have banks borrowed from the Fed?

Borrowing from the discount window has traditionally been negligible (often under $100 million.) Starting in March of 2008, this borrowing shot up to $19 billion. By October of 2008, discount window borrowing reached a peak level of $404 billion.

The Fed offered a new way to borrow using a different form of collateral in December of 2007. This is the TAF. The TAF borrowing maxed out at $150 billion in June of 2008. The Fed expanded the program in October, at which point TAF borrowing rose sharply. It replaced some of the discount window borrowing.

15. Why did bank borrowing from the Fed increase so sharply?

(i) Bank borrowing increased because banks wanted financing (cash inflows). Banks faced a sharp rise in loan losses and nonperforming loans that reduced their cash inflows. They faced declining demand for the commercial paper that they use as a means of finance. Inter-bank lending slowed. The banks needed to pay out cash to meet their obligations, but their cash flows were falling. Some banks obtained long-term sources of cash by issuing long-term debt and equity, but this source of cash is much more expensive that borrowing from the Fed.

(ii) The Fed provided hundreds of billions of dollars of loans at low cost to the banks.

(iii) The Fed took questionable bank loans as collateral. The banks were able to dress up their balance sheets. They were able to inventory cash for future use at low cost.

16. Why have banks kept much of the bank reserves and not loaned them out?

Loan demand declines during and for 2 to3 years after recessions. This occurs as households and businesses retrench and business activity slows. Banks may also be reluctant to make loans aggressively because they want to rebuild their balance sheets. After several years, loan demand picks up and then continues to rise.

17. What has been the past behavior of the consumer goods prices (as measured by the CPI) after recessions?

There have been 12 recessions since 1945. The CPI usually stabilizes, rises more slowly, or occasionally declines during these recessions. Most typically, it rises more slowly during the recession but still rises. In the recovery period, prices tend to rise much more. For example, from 1975 to 1980, the CPI advanced by 55 percent.

18. What determines the rate of increase of the CPI?

An important factor is prior rates of growth in money supply over periods of 5 to 10 years. The CPI rose by 33 percent between 1945 and 1950, reflecting high money growth during World War II. Money growth was subdued in the 1950s and so was CPI growth. Money growth accelerated in the 1960s and 1970s, and so did CPI growth.

19. What is the prognosis for future rates of increase in the CPI?

The current M1 growth is the steepest in 25 years. Past accelerations in M1 growth were accompanied or preceded by rates of growth in the monetary base of almost 12 percent a year. The M1 growth rates were at least as high as the growth rates in the monetary base.

The current rate of growth of the base is 249 percent a year. The M1 money growth rate can rise from its current 20 percent year-over-year rate to a substantially higher rate. This typically leads to higher CPI growth.

The prognosis is for much higher rates of CPI growth than at any time in post-World War II U.S. history.

These price increases are not going to be immediate. There are lags. There is no smooth or mechanical relation between today’s money growth and today’s consumer prices. These things take time. General price level increases depend on both the growth in money supply in past years and on whether that growth is sustained over many years. The Obama administration and the Fed have both told us that they intend to sustain their stimulus for years to come. Add that to the fact that the existing rate of growth of the monetary base already is at a rate that is typical of a banana or coconut republic. Similar results are highly likely.

Michael S. Rozeff is a retired Professor of Finance living in East Amherst, New York.

msroz@buffalo.edu

by Naufal Sanaullah

The historic wealth destruction of 2008 was obviously deflationary. Defaults strip away wealth. Institutions respond by selling assets to raise capital. Widespread deleveraging leads to supply expansion in assets and contraction in money and credit. Deflation.

Nevertheless, the response has been unprecedented in its own right. Government debt held by the public was $5.51 trillion when September began; by the end of 2008, it had risen to $6.37 trillion. The more than $1 trillion expansion in Treasury borrowing surely partially serves to offset the $438 billion budget deficit. But what about the additional half a trillion dollars?

On September 17, the Treasury announced the creation of the "Supplementary Financing Account" in the Federal Reserve. This is a capital reserve in the Fed financed by the Treasury selling new debt, but its excess capital is "trapped" and does not immediately reach currency in circulation. As of January 2, $259 billion is in this cash pool and $365 billion counting the Treasury's "General Account." The capital itself is money borrowed by the public, so its immediate net effect is deflationary.

On top of that, the Fed in an unprecedented gesture has started incentivizing excess bank-reserve deposits by issuing interest on these holdings, trapping liquidity. The Fed is essentially issuing debt, and banks are engaging in what amounts to a dollar-based Fed vs. interbank carry trade. Banks borrow money from the Fed, deposit it back into the Fed, and profit from the differential between the federal-funds and overnight rates. Less than $40 billion a year ago, the excess reserve deposits held by the Fed have ballooned to $860 billion. These deposits comprise another huge pool of excess liquidity on the Fed's balance sheet that doesn't immediately affect circulated currency.

Another Fed-induced cash trap has been in the form of increased reverse repurchase agreements, which are up to $88 billion. Reverse repurchase agreements are the offering of collateral in exchange for a cash loan. The Fed has utilized reverse repurchase agreements in its liquification of banks. It buys off toxic defaulting assets in exchange for cash and immediately reclaims the cash by selling the banks' T-bills. The Fed printed money to pay for these T-bills, so there is excess liquidity that is trapped in time-sensitive debt.

The Fed's risk transfer to the taxpayer is only worsened by its lack of transparency in doing so. The $2 trillion in lending is going to unknown places in exchange for unknown collateral. This leads me to believe the Fed has been busy buying up all of the toxic assets held by banks. This explains why it let the congressional bailout funds be used for equity purchases and not toxic debt. It hides the huge toxic-asset purchases — which it paid for with printed money — in its balance sheet's opacities. Bloomberg recently made a Freedom of Information Act request for details on bailout fund appropriations, but the Fed refused to comply and is being sued. This secrecy by the Fed in its appropriations of taxpayer money and the most-likely worthless collateral it exchanged it for represents inflationary risks the Fed is attempting to conceal.

The Fed's balance sheet suggests it has been cranking the printing presses like mad. Fed liabilities have expanded to $2.26 trillion, up over 140% since September. However, currency in circulation is up only 7% in that same time period. Where is this "trapped" $1.37 trillion? The answer is it's confined in temporary cash pools, whether in the Supplementary Financing Account or excess reserve deposits or in time-sensitive T-bills. The Federal Reserve seems to be sequestering all of this cash to buy time for the Treasury to finish its funding activities.

But who is going to keep funding this expansion of Treasury debt issuance? The American public is broke and cannot offer its capital in return for terrible yields. Foreign nations don't have the means or will to continue financing our debt. Commodity prices have collapsed, cutting deeply into foreigners' export revenues. Oil is down from highs around $150/barrel this past summer to around $40/barrel now.

In November, China announced a $585 billion economic stimulus package to be fully invested by the end of 2010. The Chinese government agreed to provide only $170 billion of the funds. How will China raise the other $415 billion for continuous use until the end of 2010? Surely, local governments and private banks and businesses can't finance such a large package in the midst of a historic recession.

The only reserve China can tap into to finance its stimulus package is its $1.9 trillion foreign exchange reserves, $585 billion of which is in US Treasury securities. Financing its stimulus package would require selling Treasury securities, but becoming a net seller of US debt could have disastrous economic, political, and even militaristic consequences for China, so it will be interesting to see how events unfold. What seems certain, however, is that China can no longer purchase more American debt to finance the US Treasury (and consequently the Fed).

This is a problem echoed by the rest of the big creditor nations. After China, the biggest holders of American debt securities are Japan, the United Kingdom, Caribbean banking centers, and OPEC nations. Japan is facing enormous headwinds as its quality-focused exports are suffering massive demand destruction as its consumers abroad lose wealth at epic proportions. Japan was a net seller of US Treasuries in 2008 and it is highly unlikely it will switch to being a net buyer anytime soon. The British demand for American debt represented Middle Eastern oil-financed investment, but with oil prices collapsing, it will be next to impossible for this proxy demand from the UK to rise and finance additional debt. The demand for US debt by Caribbean banking centers is because of their tax laws but as the credit crunch leads to liquidity destruction in Caribbean banks, these banking centers will no longer be able to buy additional debt. OPEC nations' US debt demand, similar to the UK's, is tied to Middle Eastern oil revenues financing American consumption (of their oil exports). As oil prices tank, so will OPEC nations' economies and they too will have no wealth to buy up more American debt.

Bernie Madoff is well recognized as the perpetrator of the biggest Ponzi scheme in history, at $50 billion. I beg to differ with that assessment. The United States has financed debt with debt since the late 1980s, when its external debt/GDP broke the 0 mark. Since then, it has risen to over 100% of its GDP (which in itself is quite artificially inflated because of manipulated hedonics-adjusted inflation figures), and now stands at $13 trillion. That is what's called a debt bubble. Bernie who?

But the debt bubble appears ready to collapse. The pyramid scheme is finally running out of investors, and many Treasury ETFs (like SHY, TLT, IEF, and IEI) are showing classic parabolic topping patterns and the next few weeks should confirm or deny my suspicions. Interest rates are at an obvious floor at zero, so there is nowhere to go but up. That means bond prices have nowhere to go but down, and the falling prices will cascade into more selling until the debt bubble deflates and all the spending is financed by quantitative easing. Judging by gold backwardation (discussed later) and the bearish charts on the bubbly debt ETFs, I think the debt monetization and dollar devaluation will begin within the next six weeks. The ProShares UltraShort Lehman 20+ Year Treasury Bond ETF (TBT) and ProShares UltraShort Lehman 7–10 Year Treasury Bond ETF (PST) are good ways to play this debt-market collapse.

With an insolvent public and no foreign demand for Treasuries, the Federal Reserve will monetize debt to finance its continued bailouts and economic stimulus. This is purely created capital pumped right into the system. This is not anything new for the Fed — for the past two decades, it has kept interest rates artificially low and created massive artificial wealth in the form of malinvestment and debt financing. In the past, the Fed has been able to funnel the inflationary effects of its expansionary monetary policy into equity values with its low rates, which discourage saving, causing bubble after bubble. The excess liquidity was soaked up by the stock market, which gave the appearance of economic growth. With inflation being funneled into equity and real estate over the last two decades, illusory wealth was created and the public remained oblivious to the inflationary risk and the great disparity between real returns and nominal.

Now that the "artificial-wealth bubble" of the past two decades is finally collapsing, one of two scenarios can occur: capital destruction or purchasing-power destruction. Capital destruction occurs when the monetary supply decreases as individuals and institutions sell assets to pay off debts and defaults and savings starts growing at the expense of consumption, otherwise known as deleveraging. This is deflation and the public immediately sees and feels its effect, as savings accounts, equity funds, and wages start declining. Deflation serves no benefit to the Federal Reserve, as declining prices spur positive-feedback panic selling and bank runs, and debt repayments in nominal terms under deflation cause real losses.

Purchasing-power destruction is much more desirable by the Fed. Its effects are "hidden" to a certain extent, as the public doesn't see any nominal losses and only feels wealth destruction in obscure price inflation. It breeds perceptions of illusionary strength rather than deflation's exaggerated weakness. The typical taxpayer will panic when his or her mutual fund goes down 20% but will probably not react to an expansion of monetary supply unless it reaches 1970s price-inflationary levels. In addition, the government can pay back its public debt with devalued nominal dollars, which transfers wealth from the taxpayers to the government to pay its debt. Inflation is essentially a regressive consumption tax, which the government wants and the Fed attempts to "hide." Not only is the Treasury's debt burden reduced but the government's tax revenues inherently increase.

The Fed, in an effort to minimize inflationary perception, has for the last two decades supported naked COMEX gold shorts to keep gold prices artificially low. The Fed, as well as European central banks, unconditionally supported these naked shorts to deflate prices and stave off inflationary perception, as gold prices stay artificially low. This caused gold shorts to be "guaranteed" eventual profit, by Western central banks offering huge artificial supply whenever necessary, causing long positions in gold to be wiped out by margin calls and losses.

Now that the economy is contracting, the Fed won't be able to funnel the excess liquidity into equities or other similar assets. It also can't allow the unprecedented excess liquidity of today to be directly injected into the economy, as that would be immediately very inflationary, with more than three times the money chasing the same amount of goods, technically leading to 300% price inflation. These figures are strictly based on monetization of the Fed's current liabilities, not including any future deficit spending (which is sure to dramatically increase, especially with Barack Obama's policies), the American external debt, or unfunded social programs that need payment as Baby Boomers retire.

In order to funnel the excess liquidity into a less harmful asset, the Fed appears to be abandoning its support for gold naked shorts, causing shorts to suffer their own margin calls and cause rapid price expansion in gold. On December 2, for the first time in history, gold reached backwardation. Gold is not an asset that is consumed but rather stored, so it is traditionally in what is called a contango market, meaning the price for future delivery is higher than the spot price (which is for immediate settlement). This is sensible because gold has a carrying cost, in the form of storage, insurance, and financing, which is reflected in the time premium for its futures. Backwardation is the opposite of contango, representing a situation in which the spot price is higher than the price for future delivery.

On December 2, COMEX spot prices for gold were 1.99% higher than December gold futures, which are for December 31 delivery. This is highly unusual and it provides strong evidence for the theory that the Fed is abandoning its support for gold shorts. Backwardation represents a perceived lack of supply (in this case, the artificial supply the Fed would always issue at strategic times no longer exists), causing investors to pay a premium for guaranteed delivery. I consider gold's backwardation as a leading indicator to a dramatic increase in prices. In fact, crude began its most recent backwardation in August 2007 at around $75/barrel and increased dramatically over the next nine months to $133/barrel at contango levels.

"Inflation is essentially a regressive consumption tax, which the government wants and the Fed attempts to hide."But why would the Fed abandon its support for naked COMEX shorts? The unique nature of gold and precious metals provides its desirability in this Fed operation. Gold has little utility except as a store of value, unlike most commodities (like oil, which is consumed as quickly as it's extracted and refined), so its supply/demand schedule has unusual traits. Most commodities and assets go down in price as the public loses capital, because the public has less to consume with and that is reflected in demand destruction that leads to price deflation. Gold is not directly consumed and has much less industrial use than most other commodities.

As a result, gold is relatively "recession-proof," as evidenced by its relative strength in 2008. Gold prices rose 1.7% last year, which is quite spectacular considering equity values went down 39.3%, real estate values went down 21.8%, and commodity prices went down 45.0% in the same period (as determined by the S&P 500, Case-Shiller Composite, and S&P Goldman Sachs Commodity Indices, respectively). Because gold is not easily influenced by consumer spending, highly inflationary gold prices don't do any direct damage to the public and are a good way to funnel excess liquidity without economic destruction.

Federal Reserve Chairman Ben Bernanke is a staunch proponent of devaluing the dollar against gold and is very supportive of President Franklin D. Roosevelt's decision to do so in 1934. In the past, manipulating gold prices to artificially low levels was beneficial because it prevented capital flight into a nonproductive asset like gold and kept production, investment, and consumption high (even if it was malinvestment and unfunded consumption).

Bernanke's continued active support for gold-price suppression would lead to widespread deflation that would collapse equity values and cause pervasive insolvencies and bankruptcies. Insolvency in insurers removes all emergency "backups" to irresponsible lending and spending, which would surely ruin the economy. Bernanke's plan seems to be to devalue the dollar against gold with huge monetary expansion, causing nominal equity values to rise. I've heard estimates of 7500 and 8000 in the Dow Jones Industrial Average as being minimum support levels that would cause insurers and banks to realize massive losses, causing widespread insolvencies in them and other weak sectors like commercial real estate that would irreversibly collapse the economy.

This gold-price expansion, set off by the massive short squeeze, will continue until gold prices reflect gold supply and Federal Reserve liabilities in circulation. The "intrinsic" value of gold today (called the Shadow Gold Price), calculated dividing total Fed liabilities by official gold holdings, is about $9,600/oz, compared to the actual spot price of around $850/oz today. This gold-price calculation essentially assumes dollar-gold convertibility, as is mandated by the US Constitution and was utilized at various periods of American history.

The US dollar's strength as the equity and commodity markets collapsed was due to deleveraging and an effect of the Fed's temporary sequestration of dollars, taking dollars out of supply. That is over. Oil seems to be putting in a bottom on strong volume, no one is left to buy any more negative real-yield securities the Treasury is issuing, and gold has started looking very bullish.

But a good speculator always considers all situations. Even if deflation is to occur, which I see as next to impossible, the price of gold should still rise to $1,500/oz levels next year, because it has shown relative strength as one of the most viable assets left to invest in. In addition, the short squeeze occurring in gold will provide substantial technical price expansion, even in the absence of dollar devaluation. A rise in nominal values in deflation represents an ever greater rise in real values, so I think gold's price ascent in real terms will be nearly identical in inflation or deflation.

I see the market breaking down from these levels to about the November lows, with commercial-real-estate stocks like Simon Property Group (SPG), Vornado Realty Trust (VNO), and Boston Property Group (BXP) leading the way, as well as retailers like Sears Holdings (SHLD). I recommend short positions (including leveraged bear ETFs) against these stocks for the very near term. If the market indeed breaks down but shows bouncing/strength around 7500–8000 in the Dow Jones, that would confirm to me that the Fed is able and willing to inflate its way out of this crisis and I will sell my bearish positions and buy into bullish gold positions.

Because in inflation the dollar is devalued, I am a proponent of owning bullion and avoiding gold ETFs, but I do believe gold and gold-miner stocks will provide great returns over the next few years. Royal Gold (RGLD), Iamgold (IAG), Jaguar Mining (JAG), Anglogold Ashanti (AU), Newmont Mining (NEM), Randgold (GOLD), Goldcorp (GG), and Barricks (ABX) are among my favorite gold equities at this early stage in the process.

$74 $63

15% discountI leave you with this, a quote from Fed Chairman Ben Bernanke about President Franklin D. Roosevelt's 1934 Gold Reserve Act, which was the greatest theft of wealth I'm aware of in American history:

The finding that leaving the gold standard was the key to recovery from the Great Depression was certainly confirmed by the U.S. experience. One of the first actions of President Roosevelt was to eliminate the constraint on U.S. monetary policy created by the gold standard, first by allowing the dollar to float and then by resetting its value at a significantly lower level … With the gold standard constraint removed and the banking system stabilized, the money supply and the price level began to rise. Between Roosevelt's coming to power in 1933 and the recession of 1937–38, the economy grew strongly.

My predictions: gold at $2,000/oz by the end of the year and $10,000/oz by 2012 and silver at $30/oz by the end of the year and $130/oz by 2012.

Naufal Sanaullah is a student at the University of Michigan and a derivatives trader. He is in the early stages of development of Dorm Room Derivatives, a stock-selection blog and newsletter service with daily updates and a customized stock-report service

Naufal Sanaullah
naufal@umich.edu

First posted on www.mises.org
http://creativecommons.org/licenses/by/3.0/us/

Bruce Stratto

Dear Employees & Suppliers,

Congress and the current Administration will soon determine whether to provide immediate support to the domestic auto industry to help it through one of the most difficult economic times in our nation's history. Your elected officials must hear from all of us now on why this support is critical to our continuing the progress we began prior to the global financial crisis...As an employee or supplier, you have a lot at stake and continue to be one of our most effective and passionate voices. I know GM can count on you to have your voice heard. Thank you for your urgent action and ongoing support.

Troy Clarke,
President General Motors North American

Response from:

Gregory Knox, Pres.
Knox Machinery Company
Franklin, Ohio

Gentlemen:

In response to your request to contact legislators and ask for a bailout for the Big-Three automakers, please consider the following and please pass my thoughts on to Troy Clark, President of General Motors North America.

Politicians and Management of the Big-Three are both infected with the same 'entitlement mentality' that has spread like cancerous germs in UAW halls for the last countless decades, and whose plague is now sweeping this nation awaiting our new 'messiah', Pres-elect Obama, to wave his magic wand and make all our problems go away, while at the same time allowing our once great nation to keep 'living the dream'. Believe me folks, the dream is over!

This dream where we can ignore the consumer for years while management myopically focuses on its personal rewards packages at the same time that our factories have been filled with the world's most overpaid, arrogant, ignorant and laziest entitlement minded "laborers" without paying the price for these atrocities...this dream where you still think the masses will line up to buy our products for ever and ever.

Don't even think about telling me I'm wrong. Don't accuse me of not knowing of what I speak. I have called on Ford, GM, Chrysler, TRW, Delphi, Kelsey Hayes, American Axle and countless other automotive OEM's throughout the Midwest during the past 30 years and what I've seen over those years in these union shops can only be described as disgusting.

Troy Clarke, President of General Motors North America, states:

"There is widespread sentiment throughout this country, and our government, and especially via the news media, that the current crisis is completely the result of bad management which it certainly is not."

You're right Mr. Clarke, it's not JUST management...how about the electricians who walk around the plants like lords in feudal times, making people wait on them for countless hours while they drag ass...so they can come in on the weekend and make double and triple time...for a job they easily could have done within their normal 40 hour work week. How about the line workers who threaten newbies with all kinds of scare tactics...for putting out too many parts on a shift...and for being too productive (We certainly must not expose those lazy bums who have been getting overpaid for decades for their horrific underproduction, must we?!?)

Do you folks really not know about this stuff?!? How about this great sentiment abridged from Mr. Clarke's sad plea: "over the last few years ...we have closed the quality and efficiency gaps with our competitors." What the hell has Detroit been doing for the last 40 years?!? Did we really JUST wake up to the gaps in quality and efficiency between us and them? The K car vs. the Accord? The Pinto vs. the Civic?!? Do I need to go on? What a joke!

We are living through the inevitable outcome of the actions of the United States auto industry for decades. It's time to pay for your sins, Detroit .

I attended an economic summit last week where brilliant economist, Alan Beaulieu, from the Institute of Trend Research , surprised the crowd when he said he would not have given the banks a penny of "bailout money". "Yes, he said, this would cause short term problems," but despite what people like politicians and corporate magnates would have us believe, the sun would in fact rise the next day... and the following very important thing would happen...where there had been greedy and sloppy banks, new efficient ones would pop up...that is how a free market system works...it does work...if we would only let it work..."

But for some nondescript reason we are now deciding that the rest of the world is right and that capitalism doesn't work - that we need the government to step in and "save us"...Save us my ass, Hell - we're nationalizing...and unfortunately too many of our once fine nation's citizens don't even have a clue that this is what is really happening...But, they sure can tell you the stats on their favorite sports teams...yeah - THAT'S really important, isn't it...

Does it ever occur to ANYONE that the "competition" has been producing vehicles, EXTREMELY PROFITABLY, for decades in this country?... How can that be??? Let's see... Fuel efficient... Listening to customers... Investing in the proper tooling and automation for the long haul...

Not being too complacent or arrogant to listen to Dr. W. Edwards Deming four decades ago when he taught that by adopting appropriate principles of management, organizations could increase quality and simultaneously reduce costs. Ever increased productivity through quality and intelligent planning... Treating vendors like strategic partners, rather than like "the enemy"... Efficient front and back offices... Non-union environment...

Again, I could go on and on, but I really wouldn't be telling anyone anything they really don't already know down deep in their hearts.

I have six children, so I am not unfamiliar with the concept of wanting someone to bail you out of a mess that you have gotten yourself into - my children do this on a weekly, if not daily basis, as I did when I was their age. I do for them what my parents did for me (one of their greatest gifts, by the way) - I make them stand on their own two feet and accept the consequences of their actions and work through it. Radical concept, huh... Am I there for them in the wings? Of course - but only until such time as they need to be fully on their own as adults.

I don't want to oversimplify a complex situation, but there certainly are unmistakable parallels here between the proper role of parenting and government. Detroit and the United States need to pay for their sins. Bad news people - it's coming whether we like it or not. The newly elected Messiah really doesn't have a magic wand big enough to "make it all go away." I laughed as I heard Obama "reeling it back in" almost immediately after the final vote count was tallied..."we really might not do it in a year...or in four..." Where the Hell was that kind of talk when he was RUNNING for office.

Stop trying to put off the inevitable folks ... That house in Florida really isn't worth $750,000... People who jump across a border really don't deserve free health care benefits... That job driving that forklift for the Big 3 really isn't worth $85,000 a year... We really shouldn't allow Wal-Mart to stock their shelves with products acquired from a country that unfairly manipulates their currency and has the most atrocious human rights infractions on the face of the globe...

That couple whose combined income is less than $50,000 really shouldn't be living in that $485,000 home... Let the market correct itself folks - it will. Yes it will be painful, but it's gonna' be painful either way, and the bright side of my proposal is that on the other side of it all, is a nation that appreciates what it has...and doesn't live beyond its means...and gets back to basics...and redevelops the patriotic work ethic that made it the greatest nation in the history of the world...and probably turns back to God.

Sorry - don't cut my head off, I'm just the messenger sharing with you the "bad news". I hope you take it to heart.

Gregory J. Knox, President
Knox Machinery, Inc.
Franklin, Ohio 45005
January 24, 2009

Bill Bonner

When Ben Bernanke gave his speech to the London School of Economics on Tuesday, our reporter was on the scene. Terry Easton put a tough question to America's central banker: aren't your interventions just making the situation worse, he wanted to know.

Amid the blah...blah...blah...of Bernanke's response was this:

"The tendency of financial systems to boom and bust ...is a very long-standing problem... but I think it's very important for us to try to put out the fire...then you think about the fire code."

In his 1988 book, The Collapse of Complex Societies, Joseph Tainter argued that all societies – like all organisms – are doomed. Tainter studied ancient Rome as well as the Mayan civilization. He noticed that problems always blaze up. Each one – whether climatic, political or economic – rings the firehall bell. And each solution – and readers may substitute the word "bailout" for solution – brings more challenges and takes more resources. Finally, the available resources are worn out.

Tainter observes that when the costs become high enough, people seem to give up. By the end of Roman era, for example, the burdens of empire were so heavy that people sold themselves into slavery to get free of them. So many people did so at one point that the authorities had to come up with another solution; they outlawed the practice. Henceforth, Roman citizens were required by law to remain free!

Another philosopher, Giambattista Vico, writing in the 18th century, put the beginning of the decline of Rome roughly at the time of the Great Fire during Nero's reign. Nero, partly to pay for his post-fire reforms and reconstruction, began taking the gold and silver out of the coins. All civilizations go through three stages, Vico said – divine, heroic, and human. The divine period is ruled by the gods. The heroic period is adorned with victories and statues. Then, comes the human era. (Here, we permit ourselves to add a footnote to Vico's oeuvre: the coin of the realm in early periods is the gods' money – gold. Later, people switch to money of their own invention – the kind of money you make from trees.) This last stage, says Vico, is when popular democracy arises, along with rational thinking and what Vico delightfully calls the "barbarie della reflessione" [the barbarism of reflection]. In earlier eras, people do what their gods and leaders ask of them. In the final era, they ask, "what's in it for me?"

Even as late as the early ’60s, John F. Kennedy could still appeal to heroic urge without drawing a laugh. "Ask not what your country can do for you," he said in his inaugural address, "ask what you can do for your country."

But 11 years later, Richard Nixon, like Nero before him, began the process of debasing the country's money. That was a solution too; the United States had spent too much. Nixon could worry about the fire code later. First he opened up with the fire hose; he defaulted on America's promise to exchange dollars for gold at the statutory rate.

Barack Obama tried a Kennedyesque appeal to civic high-mindedness last week. We need to "insist that the first question each of us asks isn't 'what's good for me' but 'what's good for the country my children will inherit,'" said the president-elect. But now, like Doric columns in a trailer park, the words are ornamental, not structural. They are the homage that one age pays to a better one.

We are in the 21st century now. Barbarous reflections rise up like swamp gas. The whole place stinks of them. Bernanke and Obama offer solutions. But their plans to save the world from a correction are little more than a swindle. They offer to bail out the mistakes of one generation with trillions of dollars' worth of debt laid onto the next.

"Regarding the current financial meltdown," writes Rony Teitelbaum, "it is very clear that two main factors underlie the political reactions to the crisis, the first being pressure originating from ties between the financial and the political elect, manifested by taxpayer bailouts of large institutions that continue to deliver bonuses to the executives and donate to political campaigns. For those of us who are not blind, these are clear signs of political corruption which would have made the worst Roman emperor blush. The second factor is political pressure originating from the mass public. The kind of solutions offered so far, and I may add which were received with very warm enthusiasm, were tax rebates and gasoline tax holidays. These are actions aimed at a public who "impatiently expected quick and obvious results," to quote Cary's description of Roman society in AD300. (A History of Rome)."

Circa 2009, there is hardly a soul in the entire world who has not been corrupted by the barbarie della reflessione of the late imperial period. Both patricians and plebes are for bailouts. Both business and labor back stimulus programs. The taxpayers and the politicians who rule them are of one mind. Liberal, conservative, rich, poor, Republican, Democrat all speak with a single voice: "Screw the next generation!"

The golden age is over, in other words. In the space of 40 years it passed from gold, to silver, to paper...and is now somewhere between plastic and navel lint.

January 20, 2009

Bill Bonner
dr@dailyreckoning.com
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Bill Bonner is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007).

by Art Carden

One of the things that first attracted me to economics is that its logic leads us sometimes to counterintuitive conclusions. A perfect example of this is the regulated workplace. The minimum wage raises incomes for some workers and lowers incomes for others. Workplace safety regulations advantage those who are very risk averse at the expense of those who are willing to accept higher risks in exchange for higher incomes. Laws against "child labor" benefit the relatively well off at the expense of the needy.

The tragic irony of the regulated workplace is that it most adversely affects those on the margins of society. Beyond their disemployment effects on those whose labor is rendered submarginal by regulations on wages and working conditions, regulations in the workplace also exacerbate and perpetuate inequities that would otherwise be mitigated by the market process.

Racism and sexism have been ugly facts about the human social environment since time immemorial. Commentators and critics hypothesize that members of the dominant cultural and ethnic group have advantages stemming from their membership in the dominant ethnic group or socioeconomic class.

I'll use myself as an example. As much as I would like to pride myself on having worked hard to get where I am, my skin color, cultural/religious background, and relatively stable upbringing made for a much less bumpy road to travel than that traveled by those who are less fortunate than I.

It does not follow from this that well-intentioned government intervention that aims to raise wages by legislative fiat is an appropriate corrective. Tragically, a higher minimum wage and workplace-safety regulations are likely to exacerbate rather than mitigate social inequalities by removing the penalties that discriminatory employers would have to pay in a competitive market and by eliminating an important margin on which disadvantaged groups could compete.

When people aren't allowed to compete on the basis of price, quantity, and quality, firms can discriminate on the basis of something other than productivity.

A racist employer would suffer a penalty (lower profits than his competitors) if he insisted on indulging a "taste for discrimination" in a competitive market. When prices are fixed, and labor conditions are set by law, that same employer can indulge his racist preferences without receiving his capitalist comeuppance.

Further, the higher minimum wage takes away a possible advantage for historically disadvantaged groups, and we can illustrate this with a thought experiment that I use in economics 101. Imagine that two people apply for a job at a fast-food restaurant. The first is Crackhead Carl, a middle-aged African-American male who was just released from jail, where he had spent the last few years after stealing from a former employer. Carl has seen the light, or so he claims. He has gotten off the drugs, has seen the error of his ways, and sincerely wishes to better his position in spite of having made a gigantic mess of things.

"Many valuable skills that are learned in the workplace cannot be learned in a classroom."The second applicant is Tad Vanderbilt Rockefeller, a flaxen-haired white teenager from an affluent suburb who parks his BMW, breezes through the door in an Armani suit, and flashes a perfect smile as he fills out a job application with his monogrammed fountain pen. His references are impeccable. So who gets the job?

The answer is, "it depends."

Carl knows that he needs some way to convey his sincerity and fidelity to a prospective employer, and having shredded his credibility through a life of riotous living, people who want to give him the benefit of the doubt nonetheless remain skeptical even though he promises that this time, things will be different. In an unregulated market, Carl could accept lower wages or relatively riskier working conditions in order to compete with Tad.

When wages and working conditions are heavily regulated, however, the law cuts off Carl's ability to compete. In all likelihood, Tad would get the job and Carl would again be shoved out onto society's fringes. One of the unintended consequences of the minimum wage and workplace regulations is that they perpetuate inequality.

One might respond that what Carl needs is education, not a dead-end job mopping floors at McDonald's. This may be true, but many valuable skills that are learned in the workplace cannot be learned in a classroom. It is the development of this tacit knowledge and these valuable skills that Carl misses out on by being regulated out of the workplace.

In this case, the choice was pretty clear. Tad appears to have been a less risky choice than Carl whether the employer is a racist or not. But racism is an entrepreneurial error, and one that should be quickly punished in the marketplace. With restrictions on the way the labor market functions, the entrepreneurial error (and moral abomination) that is racism can go uncorrected.

Milton Friedman openly argued that minimum-wage laws are racist in effect if not intent; in the early 1960s, he pointed out that, as a result of higher minimum wages, black teenage unemployment was much higher than it would otherwise be. Denied the opportunity to earn incomes and to acquire valuable skills, those adversely affected by the minimum wage were not allowed to share in the general prosperity that a market economy produces. Empirical evidence reported by economists David Neumark and William Wascher suggests that among the long-run effects of minimum wages are lower degrees of educational attainment, less on-the-job training, and lower lifetime earnings.

In The Fatal Conceit, F.A. Hayek said that "[t]he curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

In an imperfect world, we suffer from a "fatal conceit" when we imagine that we can make justice roll down like waters and make righteousness like an ever-flowing stream just by passing laws that say "make it so." Indeed, laws like this will more often than not make justice and righteousness roll more slowly by perpetuating the inequalities that have historically worked against disadvantaged groups.

Art Carden is assistant professor of economics and business at Rhodes College in Memphis, Tennessee and an adjunct fellow with the Oakland, California–based Independent Institute. He was a summer research fellow at the Ludwig von Mises Institute in 2003 and a visiting research fellow at the American Institute for Economic Research in June, 2008.

His research papers can be found on his Social Science Research Network author page..... http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=508839

He is also a regular contributor to Division of Labour and The Beacon.

Art Carden
CardenA@rhodes.edu

This article was first published on www.mises.org

Farming Our Way to Famine
Robert Morley

A tale of three farms reveals how American agriculture is following in the footsteps of doomed agricultural societies.

Huls Farm, Gardar Farm and Easter Farm: Located thousands of miles apart, these three farms have some very eerie similarities. And as far-flung as these farms might be, they contain a lesson for America.

Huls Farm and Gardar Farm were the largest, most prosperous and most technologically advanced farms in their respective territories. Farming operations centered around spectacular state-of-the-art barns for sheltering and milking cows. Both farms let their cows graze on lush pastures during the summer and harvested their own feed to provide for their cattle through the winter. Both increased their hay production by irrigating their fields. Both farms were similar in size and kept roughly the same number of cows (165 vs. 200).

Easter Farm was prosperous too. Its many poultry houses housed thousands of chickens. Resourceful planting techniques made sweet potato production another major contributor to the farm's successful operation.

The owners of these farms were leaders in their respective communities. Each considered himself a religious person. On Gardar and Easter, the owners even led the community's religious services. And each farm was very open to receiving visitors. Similarly located in magnificent rural settings, Gardar and Huls attracted tourists from great distances. Easter Farm was also set against a beautiful, lush backdrop. However, despite its tropical setting, its owners received few - if any - guests.

But what distinguishes Hul from Gardar and Easter isn't these farms' past; it's their present.

Huls Farm is a family-owned enterprise now operated by five siblings in the Bitterroot Valley of Montana, in the western United States. It is currently prospering, selling milk to thousands of people each year. The farm's neighbors are likewise prospering, and the county boasted one of the highest population growth rates in the country not long ago.

After a look at its high-tech operation, computer-guided machinery and modern amenities, it might seem inconceivable that Huls Farm could collapse in the foreseeable future. But agricultural collapse is exactly what Huls - and America - may be headed for. At least, that's what Pulitzer Prize-winning author Jared Diamond and a growing body of concerned agricultural experts and soil scientists say.

But sometimes it is easy to be blinded - even when collapse is on the doorstep.

Meanwhile, Back at the Farm ...

Huls Farm, Gardar Farm and Easter Farm, as described by Diamond in his book Collapse, How Societies Choose To Fail Or Succeed, are described in detail and foreshadow a troubling future on America's farm horizon. Gardar Farm, the former estate of the Norse bishop of Greenland, was abandoned over 500 years ago. Greenland Norse society "collapsed completely," says Diamond. "[I]ts thousands of inhabitants starved to death, were killed in civil unrest or in war against an enemy or emigrated, until nobody remained alive." The remnants of the Gardar barn's stone walls and those of the nearby Gardar Cathedral, along with the foundations of hundreds of other homes, still stand - testifying to the progressive society that once flourished.

Easter Farm also stands as a warning. Located 2,300 miles west of Chile and 1,300 miles east of Polynesia's Pitcairn Islands, this once-prosperous tropical island lies virtually abandoned in the middle of the Pacific Ocean. But plenty of stone testaments still proclaim its inhabitants' former grandeur. Who can gaze on the treeless, deserted shores of Easter Island and not wonder where such monuments came from: almost 400 gigantic stone statues - up to 40 feet tall, weighing 70 tons? Not to mention thousands of stone chicken houses dotting the countryside. It was a puzzle the first Europeans couldn't comprehend. When they arrived on this treeless island, they met a couple thousand starving savages living in caves.

Easter Farm is another story of dramatic collapse

Yet when Norse Greenland and Easter Island were prospering, their decline seemed as inconceivable as does the decline of high-tech Huls Farm and U.S. agriculture today.

Here's the worrying part: Norse Greenland, Easter Island and Huls Farm share one very dangerous common denominator.

Though one may be tempted to believe that the name "Greenland" was just a clever marketing technique, palynologists, biologists and archaeologists now believe that green may actually have been an apt description of the land at the time of Viking settlement. When the Norse arrived, they found a place that, although colder than most of Europe, was teeming with reindeer, musk ox, seals and ocean life. The Norsemen had discovered a virgin landscape that had never been logged or grazed. Tall grasses covered much of the coast and fjord inlets. At higher elevations, sedges and shrubs dominated the landscapes.

The land was prosperous enough to attract 5,000 Vikings by a.d 1000.

But even though initially affluent, the Greenland Norse eventually starved.

The inhabitants destroyed their own soil

When the settlers arrived, they immediately implemented slash-and-burn agriculture. They cut down even more trees for construction and fuel. More wood yet was used for fuel to smelt iron. Widespread livestock grazing and trampling prevented trees from regenerating. Pigs especially damaged the forests, causing so much trouble that the settlers eventually got rid of them. The Norse deforested the land.

Perhaps the most damaging to Greenland were the sheep and goats. As the settler population grew, the number of sheep and goats required to feed the populace exploded. But from a soil perspective, intensive sheep grazing was disastrous.

In the cool, windy climate, with short growing seasons, overgrazing exposed the soil to the gusty arctic blasts. Whole valleys lost their topsoil to erosion. In the area surrounding the once-prosperous Norse farm, to this day all that remain are stones.

The demise of Greenland's soil is well-chronicled. From lake mud, scientists can identify the types and the relative abundance of plant species. Dating techniques help confirm the date estimates. A picture emerges: Prior to the Viking arrival, the remainders of plants and leaves, as well as seeds and pollen counts, show that trees dominated the landscape.

For thousands of years there were few changes in vegetation, and few or no signs of deforestation and erosion - until the Vikings arrived. Then layers of charcoal from Viking fires to clear pastures are found. Pollen of willow and birch trees is replaced with pollen from grasses, sedges, weeds and pasture crops introduced by the Norse. Greater and greater amounts of topsoil were deposited in lakes, and as the topsoil was blown away, greater amounts of the underlying sand became deposited in the lakes too.

Interestingly, according to Diamond, all of these changes later reversed, indicating a recovery of the environment after the Viking settlements became extinct in the 1400s. However, the environmental changes that accompanied the Norse set in again in 1924 after the Danish government reintroduced sheep farming to Greenland.

As Greenland soils eroded and the trees disappeared, there were other consequences. No more timber for ships. No more timber for construction, furniture or fuel. Food could not be easily imported. Fewer Greenland ships left their ports. Trade dwindled and then disappeared.

But a starving people are resourceful, so collapse didn't happen all at once. They began burning livestock dung and bones for fuel, but this reduced the amount of fertilizer they had for their fields, causing more food problems. They then began digging up and burning peat from the few peat bogs that were present. Because there was no wood, planks became a prized possession. They built homes of sod. Some homes were estimated to have required 10 acres of turf. More turf yet was burned for fuel. And in the cool climate, it took many, many years for that turf to be replaced, if it ever was.

But the end result was that throughout this process, the Greenland Norse were destroying the most important thing their survival depended on: their soil.

Without fertile soil, you have no grass, no trees, no fuel, no food.

Eventually it got so bad that the Vikings were too weak and too few to defend themselves. After a couple of bad years, the last ones were killed off by Inuit raiders in the 1400s. The Viking society had collapsed.

Easter Farm

The collapse of Easter Farm - though just as avoidable - was far more dramatic. Easter Farm involved the virtual extinction of a culture that may have involved a population of over 15,000 at its peak. And in this case, no cold climates or outside invaders could be blamed.

Today, Easter Island is a dry, treeless, unproductive island. But it wasn't always that way.

When its first Polynesian inhabitants arrived, they found a lush, forested island complete with a diverse ecosystem of many different birds, reptiles and other species. When cleared, the land produced abundant quantities of sweet potatoes, and was ideal for raising poultry - two sources of food the islanders brought with them.

But soil erosion destroyed Easter Island just as effectively as it did the Greenland Norse.

In Easter Island's case, religious competition led to the complete deforestation of the island, the soil's destruction, and thus societal collapse.

Everyone wanted to have the biggest idol. Tribes competed to carve, transport and erect massive stone statues. Some of the statues weighed tens of tons. The bigger, the better - the more prestige the tribe had. But all that work required a lot of trees for levers, sleds, rollers, support structures and rope. It also required intensified food production to feed all the workers, who were racing to erect the biggest, best and most statues.

The whole focus of society was geared toward carving the massive stone heads. So they cut down all the trees to put up a bunch of rocks.

The forests were burned for cropland. And when that soil was depleted of its minerals and nutrients, the islanders moved on to the next patch.

When environmental collapse came, evidence suggests the people of Easter Island didn't even see it coming.

If you visit the island today, you can still see all the stone tools - the hammers, chisels, picks, etc. - the islanders used to carve the statues, just lying around haphazardly as if one day they just stopped work and never came back.

Many of the massive stone heads are still in the quarry, in various stages of completion. Other stone statues dot the countryside - still in transit to their intended resting place.

One day everything just fell apart

Just like with the Greenland Norse, as the trees disappeared, there was nothing to hold the soil. Wind and rain did the rest. As the topsoil eroded, soil fertility dropped and production plummeted. It wasn't long before the islanders were starving. Also, without trees, they could no longer build boats or nets, which meant they couldn't catch fish either.

It is quite amazing when you think about it. They were so focused on their stone idols that they didn't realize they were killing themselves.

Norse Greenland and Easter Island are just two of many past societies - including the Pitcairn, the Anasazi, the Mayan - that have collapsed or vanished due at least in part to poor agricultural practices. Anybody who has traveled through the dusty, barren, rock-strewn nations of Spain, Greece, Lebanon, Egypt and 4,000 miles of North Africa has personally witnessed how poor agricultural practices can destroy a once-productive land! Because of unhealthy farming practices, Gardar Farm and Easter Farm did just what Diamond described: Collapsed.

Unfortunately, America is plowing this same row.

Farming Like There's No Tomorrow

The era of cheap and abundant food is drawing to a close. America's soils are facing a crisis.

This last year, Iowa - the corn basket of America - was ravaged by some of the worst soil erosion in its history. The New York Times called the rainstorms of last June "catastrophic." They created gullies 200 feet wide. Ten percent of Iowa's cropland suffered "severe" erosional damage during just this one event.

As catastrophic as the flooding was, it was made much worse because of America's everyday farming practices, which often promote soil erosion. In some areas, topsoil has been reduced to practically nil. Back in the mid-1980s, Norman Berg, the former head of the U.S. Department of Agriculture's Soil Conservation Service, said that one third of America's "really good cropland" was suffering net soil loss, with some of it eroding at 10 times the sustainable limit.

And although some progress has been made with low- and no-till techniques, most farming techniques continue to force the land. Removing vegetation cover promotes erosion. And it doesn't take massive floods to steal away the soil. Each and every day, exposed cropland steadily allows more soil to be washed away into lakes and rivers during normal rain events.

Massive monoculture farming operations plant the same crops year after year after year, depleting the soil of vital nutrients.

Animals have been taken off the farms

To maintain productivity, farmers dump increasing amounts of pesticides and fertilizers on the land. Meanwhile, the natural, healthy soil-dwelling microbes get chemically burned.

Soils are so damaged that little would grow if not for pesticides and fertilizers. Fertilizers may have pushed yields up for a while, but they will only work for so long. Each year a little more is required.

Now some scientists wonder if we are reaching a tipping point.

But is it too late? Even if poor farming techniques were halted, soils would take many years to fully recover - if they ever could.

America is facing the same agricultural problems that many other societies have faced - and we are destroying our soils even faster. The only difference is that America was blessed with some of the most fertile and extensive soils in the world to begin with, so we have been able to get away with greater abuse. But, just as the Bible prophesied in passages such as Leviticus 26:19-20, that agricultural prosperity is being stripped away.

Did you know, however, that the Bible also talks about very specific agricultural practices that would prevent soil erosion and degradation, yet promote superior yields? Some recent studies have already illustrated that organic farming techniques can produce yields that are comparable to and even greater than those produced by conventional methods. And that does not take into account all biblically described practices.

The Bible also predicts that a dramatic revolution in agriculture is just around the corner! To see a vision of what this agricultural utopia will look like, read The Wonderful World Tomorrow - What It Will Be Like, by Herbert W. Armstrong.

January 13, 2009

www.silverbearcafe.com

by Vin Suprynowicz

“The Bush administration last month gave the National Rifle Association a parting gift by lifting a decades-long ban on concealed weapons in national parks. …

“These harmful new rules could take years to undo,” warned the suntanned statists. “Make no mistake, though, they must be taken off the books before they can do too much damage. …

“Beginning on Jan. 9, Everglades and Biscayne national parks … and the dozens of federal wildlife refuges and forests in Florida will be open to visitors packing guns. Under the new rule, anyone in Florida with a concealed weapons permit qualifies to bring a gun into a national park. There are more than 537,000 Florida residents with concealed weapons permits.

“Allowing visitors to carry firearms into these national treasures makes no sense. The weapons ban has worked well all these years. It has reduced poaching of endangered species and kept the level of violence between people to a minimum.”

The new rules, partially restoring a guaranteed civil and constitutional right, “were promulgated by the Interior Department but clearly came straight from the White House,” the Herald complains. “So the department that is charged with protecting our legacy of federally owned parks, refuges and wildernesses instead has been forced to put these lands and the people who visit them at greater risk. …”

Goodness; where to begin?

Surely the top priority of the federal government (the reason “governments are instituted among men”) is to protect and defend our liberties, among which one of the foremost is our right to keep and bear arms. (Even the current “rules change” restores this right only in part. Since most national park visitors come from far away, what are the chances most will have the slightest idea how to obtain the required “state permit?”)

The statists at the Herald reply, “The weapons ban has worked well all these years. It has reduced poaching of endangered species and kept the level of violence between people to a minimum.”

First, since we’re talking primarily about the kind of self-defense weapon for which I might receive a state “concealed carry permit,” I find the inclusion of this reference to “poaching” rather odd. In fact, this supposed gun ban did little to limit the nearly industrial levels of gator poaching by the locals which continued for decades in the Everglades. The population of big cats down thataway also seems suspiciously small, if no “poaching” or trapping has been going on since the 1930s. (Fewer than 100 Florida panthers are believed to persist in the wild.)

The federals – who also operate the Corps of Engineers, which has been diverting water away from the glades for 60 years – haven’t even done a very good job of keeping most of the wetlands wet, for heaven’s sake.

Second – while in an emergency you use what you’ve got – anyone intent on “poaching” a bear or other large animal with a small, concealable handgun might, I suppose, get pretty much what he or she deserves.

But what really puzzles me is what on earth these minions of Washington City mean when they say, “The weapons ban has worked well all these years. It has … kept the level of violence between people to a minimum.”

Did going unarmed “work well” for unarmed hikers Mary Cooper, 56, and her daughter, Susanna Stodden, 27, whose bodies were found, shot in the head, alongside the Pinnacle Lake Trail in the Mount Baker/Snoqualmie National Forest, east of Everett, Wash., by a hiker on July 11, 2006?

Technically, since the National Forests are administered differently from the National Parks and Monuments (though the folks at the Herald don’t seem to know that), the Seattle mother and daughter could have gone armed in that National Forest, so long as they’d obeyed Washington state law.

Perhaps it would have helped to encourage them, had as much signage as they use to warn about forest fires been devoted to warning hikers “We’ve only got a handful of rangers to protect an area the size of a small state, here. Your protection is your own job.”

(According to Washington Trails magazine, there were only five armed law enforcement rangers working the entire Mount Baker/Snoqualmie National Forest – a patch of public land larger than the state of Delaware – when the women died. Was that number adequate to protect public safety? Forest Supervisor Rob Iwamoto told the magazine “No.”)

Our parks “today are some of the safest places in the country,” the Herald editorialists insist.

Tell that to Barbara Schoener, who in April of 1994 was attacked by an 82-pound female lion … as she was jogging along a park trail in the Sierra foothills northeast of Sacramento. The lion bit her neck and crushed her skull. Then it dragged the unarmed woman three hundred feet down a hill and ate her face, upper back, lungs, spleen, pancreas, kidneys, stomach, liver and small intestines.

In the Great Smoky Mountains National Park in 2006, one man was stabbed to death by a drunk and, in a separate incident, a woman was shot dead. Also that year, on the Blue Ridge Parkway, a woman parked at an overlook and wearing headphones while studying for final exams “was killed by a handgun by a suspect on a killing spree,” the Park Service reports.

How did the ban on carrying self-defense weapons “work well” for them?

And the “relatively small” count of 11 violent deaths in the national parks in 2006 didn’t include rapes, other non-fatal assaults, or places from which law-abiding citizens are now de facto excluded, such as the Saguaro National Monument west of Tucson, where locals say the stream of illegal immigrants being hauled north by their “coyotes” can make the place resemble an old-fashioned stock car track.

Yes, you could say our parks have been “some of the safest places in the country” – if you want to compare them to such other victim-disarmament zones as the District of Columbia, New York City, Los Angeles, Chicago, Detroit …

“If you’re hiking in the back country and there is a problem with a criminal or an aggressive animal, there’s no 911 box where you can call police and have a 60-second response time,” explains Gary Marbut, president of the Montana Shooting Sports Association.

“While park rangers now use bulletproof vests and automatic weapons to enforce the law, regular Americans in states where conceal-and-carry laws exist are denied the opportunity for self-defense,” explained Sen. Tom Coburn, R-Okla., back before the departing Bush administration finally decided to help us law-abiding victims even up the odds against our would-be assailants, just a little.

January 16, 2009

Vin Suprynowicz is assistant editorial page editor of the daily Las Vegas Review-Journal and author of The Black Arrow.

vsuprynowicz@reviewjournal.com

by Ron Paul

With attention turning to the next big economic stimulus package, questions are still swirling about our economic troubles. How did we get here? How do we get out? As usual, Washington has all the wrong answers. According to many politicians, we got here by not spending enough, not consuming enough, and not regulating enough. Now government, like some mythical white knight, is going to ride in to save the day by blanketing the economy with dollars, hiring an army of new bureaucrats, creating make-work jobs, and sending everyone some form of a bailout check. The debate seems to focus on whether this will cost enough to save the economy, or if this is just a “down payment” with much more government spending to come. Talk like that would be comical, if the results weren’t going to be so tragic.

The results will be worsening economic woes until we learn our lesson. But instead Congress is behaving like drug addicts who must hit rock bottom before they are ready to face reality. They are playing foolish games with the economy now because they are thinking only of political expedience. This talk of job creation is a perfect example.

Contrary to the belief of many, the goal of the economy is not job creation. Jobs can be a sign of a healthy economy, as a high energy level can be a sign of a healthy body. But just as unhealthy substances can artificially give the addict that burst of energy that has nothing to do with health, artificially created jobs just exacerbate our problems. The goal of a healthy economy is productivity. Jobs are a positive outcome of that. A “job” could be to dig a hole one day, and fill it back up the next, or perhaps the equivalent at a desk. This does no one any good. But the value in that paycheck ultimately has to come from taxing someone productive. Some think this round-robin type of economic model is supposed to get us somewhere.

Politicians and bureaucrats have already done their fair share to ensure that jobs in the private sector are prohibitively complicated and expensive to create. They are now shocked that the economy is shedding jobs, and want to simply create hundreds of thousands of jobs to make up for the job losses, through another so-called economic stimulus package. The private sector must be permitted to do that, but instead they are massively burdened with taxes and webs of red tape and regulation. Washington’s band-aids will only prolong this agony. The Austrian school of economics teaches that only a free market economy, unencumbered by onerous government controls, creates long-term prosperity. Politicians, however, tend to be notoriously short-sighted.

I am left with these questions – who is going to be left standing to tax in the private sector to pay for all these public sector make-work jobs? Is Washington really to be considered some sort of savior for creating unproductive jobs in place of the productive jobs they eliminated?

We are at an economic dead-end and those in power are in denial. The truth is, our economic problems are due to loose monetary policy, central economic planning, and the parasitic expenses of government. Unless we assess these problems honestly, we unfortunately have a long way to go until, like the junkie, we hit rock bottom.

Fraud, Free Markets, and the S & Ls

by Michael S. Rozeff

We choose between the liberty of market exchanges and the government control of production and distribution. In both cases, we want fewer criminals and losses. In both cases, we want policing, adjudication, and enforcement. Low or no criminality is a free market norm. It is not a norm exclusive to government.

We therefore face this question: Which system better controls wrongful behavior and losses? Which system has stronger incentives for people to behave properly?

The savings and loan (S & L) industry was a creation of the New Deal, regulated by the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation. By 1980 the industry as a whole was insolvent. The government did not want to close down these institutions as the insurer (FSLIC) didn’t have enough money. It did not want to give up its control, and it did not want to fund a bailout. The "solution" it chose contained several elements, detailed by George Akerlof and Paul Romer in their article Looting: The Economic Underworld of Bankruptcy for Profit. The government changed the accounting rules pertaining to net income and net worth. It removed interest ceilings on deposits. It allowed the thrifts to make much riskier investments, including direct real estate and real estate development. It allowed thrifts to concentrate more assets on one borrower. It allowed a single owner to own a thrift. It weakened capital requirements drastically. It allowed land to be contributed as capital. It allowed goodwill created by acquisitions to remain on the books and be depreciated over a 40-year period (as compared with a previous maximum of 10 years.) It removed the limit on the ratio of a mortgage loan to the underlying value, so that loans could be made with no down payments. The FSLIC insurance limit increased from $40,000 to $100,000.

In common parlance, the government deregulated the industry by loosening certain restrictions. The deregulation was far from complete. The government maintained control over rules and much else.

Again, using the language of the critics of deregulation, the government had made the S & L industry much more "free." This way of thinking is actually dead wrong, because an absolutely critical element of a free market was not present, despite all the other regulatory changes.

The one thing that the government did not do, which was essential in view of its other measures, was to remove the government-insured deposits. By retaining government insurance, the government created an extremely weak control structure for these companies, the result of which was that many savings and loans were looted. The government’s insurance of deposits severs the link between those who supply capital and those who use that capital. The suppliers have no interest (incentive) to control how the capital that they supply is used; and the users of that capital (the owners of the S & L) can use that capital without satisfying the suppliers. If the owners can extract more money from the S & L (by deploying the deposits on their own behalf) than its value to them as owners, then they can loot the S & L and personally profit while it goes bankrupt (since they face limited liability.)

The subject of company control structures was not well understood then, and is still not a matter of common knowledge. Those who supply the financing of firms ordinarily put in measures to control its use that have evolved in markets over the centuries. These include extensive bond covenants, loan agreement terms, boards of directors, board composition, the financial structure, limitations on management actions, approval by votes of critical actions, and compensation agreements. If the deposit insurance had been removed, lenders would not have supplied capital to these thrifts without this panoply of financial, operational, and legal safeguards. The thrifts would then have turned into mortgage loan companies, or else into real estate development or some such types of companies. Instead, with deposit insurance left in place, the S & Ls attracted vast amounts of capital from all over the nation in search of high interest rates, capital that knew it was insured no matter what the owners did. The deposit insurance eliminated the role of capital-suppliers acting as controllers of both the owners and the managers. Without these controls, with large cash inflows, and with the possibilities of investing them in land and land development projects whose values are not well-known, the government had created companies that were perfect targets for abuse and fraud.

The result was extensive fraud. Calavita, Pontell and Tillman document and analyze all sorts of S & L frauds and abuses in their book Big Money Crime: Fraud and Politics in the Savings and Loan Crisis. In some states (like Texas), abuses were rampant as S & Ls made various fraudulent deals with dishonest real estate developers and appraisers.

The effects of these deals were felt in widening circles. Some honest real estate developers at the time observed that S & Ls were extending loans to newcomer builders who were overbuilding in the face of high vacancy rates. They withdrew from the market. But other honest developers were enticed into more building because they thought that the building activity and higher prices (often the result of fraudulent sales flipping and appraisals) signaled a greater demand. In this way, the S & L abuses affected the honest market exchanges of honest developers and customers. This led to real estate bubbles, overcapacity, and eventual crashes.

The proponents of the deregulatory changes had exulted in their triumph of deregulation and free markets, not realizing that they had set in motion a catastrophe. They simply did not understand the full economic implications of their partial deregulation. When the S & L industry came totally unglued, they had egg on their face. It was very easy for free market critics to argue for the restoration and maintenance of government control. Indeed, government control did look better than the alternative that the government had (probably unwittingly) created. The solution that was politically unpalatable but correct in these circumstances was to have entirely deregulated, including the elimination of deposit insurance. The lesson to be learned is not that the free market malfunctions, but that the free market cannot be free without being free in its most critical aspects, one of which is that capitalists must have the freedom to control their capital. Whenever the government comes between the supplier of capital and the recipients of capital, it paralyzes and subverts the market. The same happens when the government comes between the producer of income and goods and his disposition of that income and those goods.

Akerlof and Romer note

"Bankruptcy for profit occurs most commonly when a government guarantees a firm's debt obligations. The most obvious such guarantee is deposit insurance, but governments also implicitly or explicitly guarantee the policies of insurance companies, the pension obligations of private firms, virtually all the obligations of large banks, student loans, mortgage finance of subsidized housing, and the general obligations of large or influential firms..."

Looting is an apt and succinct term that covers various control frauds and abuses that occur when the owners or controlling interests in a financial (or other) firm use the company corruptly for their gain while destroying the value of the enterprise. Bankruptcy for profit means a perverse economic situation in which owners find it profitable to maximize their cash withdrawals from the company now, which process is enhanced by twisting accounting rules and using fraudulent devices and unprofitable deals that end up bankrupting the company.

The S & L abuses were seen in the market and affected it, but they were not of the market. They were of dishonest persons doing dishonest things as a result of bad government policies that provided incentives to benefit from being dishonest. These facts do not imply that dishonest persons do not do dishonest things in markets that are free from government rule-making. They do. Both free markets and government-control must contend with people doing bad things. But, as I argue next, free markets are less prone to fraud and widespread fraud than government-controlled economies because, for one thing, they provide stronger incentives for wealth-creating behavior and weaker incentives for wealth-destroying behaviors like fraud.

If we understand the incentives built into social arrangements, then we can forecast potential abuses. Some social or contractual arrangements encourage abuses (perhaps inadvertently) or fail to control them, as when S & L owners could aggregate huge amounts of money and dispose of them without effective controls over their spending or by fraudulently bypassing the remaining accounting controls. Millions of property owners turn over vast sums of money to school districts and local governments without a great deal of monitoring and control over how that money is spent, although there is of course some. A rather high degree of official abuse (including waste, incompetence, bureaucracy, poor education, and poor service) is a predictable consequence.

Depositors in S & Ls turned vast sums over to bankers and paid no attention to how that money was used. They did that because they relied on the guarantee of a government agency (the FSLIC) that the money was insured. That reliance, over the course of years and decades, has other major negative effects. There are very few or no innovations in the monitoring of financial institutions, and the monitoring by private persons atrophies. Everyone takes for granted that their money is safe. Meanwhile, unless the investments of the S & Ls are strictly controlled, their incentive is to take on a higher degree of risky investments since losses are shifted to society (the government guarantor) while gains are kept by owners. When the investments are not controlled, the incentive to bankrupt the bank for profit is strengthened.

Who then monitored how these deposits were used when the government deregulated the S & Ls? That lay in the hands of those whom we customarily call government regulators (in this case the FHLBB and state bodies).

The term regulator actually covers six or more distinct functions and responsibilities. They include rule-making, oversight and monitoring (such as inspection and auditing), responding to complaints, policing and detecting rule-breaking, adjudication, and enforcement. We rely on our government agents, the regulators, to do all these tasks when there is no free market. But who regulates the regulators? Who makes the rules for them? Who monitors them? Who polices them? Who controls their behavior and sees to it that they do their jobs? Who brings cases against them when they misbehave and/or respond to political forces and not our welfare? Who controls them when the rules they make cause us to lose? What do we do when the regulators who are supposed to police and enforce fail to do so? What do we do when they make rules that encourage fraud? We pay the price, and it is a very high price.

We the people do not directly control the regulators, and since there are no markets involved for their services, we do not have an impact on them via our market exchanges. Typically our elected representatives control (or attempt to control) the regulators and also make important rules that affect the institutions that they regulate. The politicians find that controlling (regulating) the bureaucracies and agents that they have created is a formidable task. They do so through their staffs, whom they then must control. Both the politicians and their staffs have just as hard a time regulating the regulators as we have regulating the representatives.

Our control system has at least four layers: people control their representatives; representatives control staffs; staffs and representatives control regulators; and regulators control S & Ls. If we bring in the state regulators and federal and state enforcement authorities, then there are even more layers. There is nothing per se wrong with layers, but when the people in each layer fail to have adequate incentives to do their jobs, then the system must deliver poor performance. Voters have almost no incentive to monitor and control their representatives, and most voters do not do so. Huge numbers, who realize the futility of it, do not vote at all. The representatives, who have power, need not be responsive to the voters; but they are responsive to interest groups who feather their nests. Staff members have incentives to control information and access to their bosses. They may, at times, form cozy arrangements with regulators. The regulators, often in secure lifetime jobs, have little incentive to be responsive to the public or to provide full information to politicians. The politicians divide up the oversight of the regulators among themselves, creating fiefdoms, and then they scratch each other’s backs and fail to monitor each other’s behavior.

Business firms often face similar issues, but, in addition to control structures, the important difference is that their customers have an immediate say and large influence on their behavior. The customer directly controls the money that a business gets from him in return for a good, so that the businessman has a direct incentive to satisfy the customer. By contrast, the voter has no direct control over his representative via an exchange of an identifiable good. What’s more, the government takes money from the voter at its discretion, so that it has no monetary incentive whatsoever to satisfy the voter. Furthermore, a business faces competition. People can start up new businesses or expand existing ones when old ones fail to serve public wants efficiently. When is the last time a group of people started up a new government?

The governmental regulatory system would fail miserably if it were not for a good many conscientious and honest people in government who attempt to do their jobs responsibly. Frequently it does fail miserably and, when it does not, the outcomes of this arrangement range from bad to worse. Rarely are we treated to a truly good result. (My opinion is that this system never works to the public’s benefit, but since the public puts up with it, who am I to say that they shall not have the system they prefer? The problem here is that they are saying what system I must live under. They have forced me into their game.)

There are those who set up a straw man version of a free market and then criticize it. They think that freedom means freedom to abuse others, behave dishonestly, and commit fraud. They think that a free market has no monitoring, controlling, policing, adjudicating, and enforcing. They think that freedom means chaos, a dog-eat-dog world, and the liberty to starve. None of this is what proponents of liberty think freedom means. Furthermore, this straw man is a really strange way of thinking, since these same persons often defend what they call "personal" freedom and various rights that are frequently impositions on other people. But freedom does not mean freedom to commit crimes and abuse others. Proponents of free markets want such behavior controlled just as much as do proponents of government, although they have different prescriptions for such control.

We do not have to look far to find those with these sympathies who blame free markets and deregulation for such problems as the S & L failures and now the failures of various financial institutions. They then call for government re-regulation and/or greater government regulation.

As we have seen accusations of deregulation muddy the understanding when deregulation is partial and makes matters worse. Deregulation should be thought of as the complete removal of government controls from an industry. After supposed deregulation, the U.S. financial industries were and still are among the most heavily controlled in our society. Since regulators have six or more distinct functions, deregulation typically means changing some rules and functions, wholly or partly, while leaving others in place. This changes incentives. The overall result may induce more fraud. Similarly, calls for re-regulation are actually calls for changes in some aspects of the existing system of regulation.

Neither deregulation nor re-regulation, as used in conventional discourse, alter the basic government control. Neither one addresses the fact that the existing structure of regulation by government is deeply flawed. We do not have a market system that is controlling, monitoring, policing, adjudicating, and enforcing honest behavior of financial firms. We have the four-layer and more governmental system outlined earlier. When this system of government regulation fails so miserably, as in these cases of financial institution failure, it cannot be blamed on free markets and deregulation.

Akerlof and Romer warned of government guarantees in 1993. Unfortunately, past government guarantees remain in place and new ones have grown up beside them. It is not surprising then to find that fraud or at least abuses of various kinds have played a major role in the most recent financial vicissitudes. There are already numerous reports and investigations of mortgage fraud on the part of borrowers, mortgage brokers, and mortgage companies. As time passes, forensic loan and financial statement audits will probably provide evidence of the involvement of more major lenders as well. The AIG company, which already has a record of fraud, is a reasonable case in point. Its rapid growth, earnings manipulation, and especially its intra-company accounting among its subsidiaries, all make it a prime candidate for further revelations. The entire financial industry of the U.S. has had its capital control incentives distorted by a variety of government measures favoring housing, by deposit insurance guarantees, by past bailouts, by friends in Congress, by campaign contributions, by lobbying efforts, by loose controls over its lending practices, and by creative accounting practices.

Wrongful behavior, abuses, and fraud by officials and people in high positions are serious matters both in markets and in government. When people in high places enrich themselves through criminal and criminal-like behavior, they can impose far greater losses on the general public than the amounts of their own gains. By distorting prices, they can induce honest consumers and producers into mal-investment, causing costly bubbles and crashes. Government has not only not been proven to be adept at controlling these matters, the theory and the evidence tell us that it causes and encourages them. The incentives provided in free markets should prove superior in controlling and mitigating frauds and associated abuses.

January 12, 2009

Michael S. Rozeff is a retired Professor of Finance living in East Amherst, New York.

msroz@buffalo.edu

What must our Creditors be Thinking?

By Christopher G Galakoutis
Jan 9 2009 12:05PM
www.murkymarkets.com

I read an article recently about problem gambling. You can’t help but notice all the poker on television these days. Gambling, lotteries, and all forms of speculation become more popular in inflationary times, as more people have difficulty making ends meet. Problem gambling has been known to strain relationships, interfere with responsibilities at home and work, and lead to financial catastrophe, as more good money is thrown after bad.

Throwing good money after bad is precisely what the folks in Washington D.C. have been doing for years. And just like the addicted father, it is the next generation that pays the price. In many ways politicians are no different than addicted gamblers, and this latest bunch, planning to spend trillions with money they don’t have, are the cream of the crop. I was delighted by Barack Obama’s election to the office of President, given his statements on foreign policy during the campaign. However spending trillions and adding to the debt mountain, without allowing for the natural forces of an ailing free market economy to heal itself, will be futile.

We have been chronicling the US debt problem for years. An article titled “China Losing Taste for Debt From U.S.” in the New York Times this past week suggests that our foreign creditors might finally be figuring things out for themselves. The State of California’s Controller John Chiang warning lawmakers the state will be out of money by February without a budget in place, and worthless IOU's sent out to taxpayers instead of income tax refunds, might certainly have opened some eyes overseas as to exactly what their IOU’s, also backed by nothing, are worth.

There should be no doubt that any government, present or future, when confronted with a fiscal and/or currency crisis, can and will implement draconian policies. From the types California is contemplating, to excessive profits taxation on certain investments, foreign exchange controls and outright confiscation of assets, governments have been known to do whatever they can to survive.

Of course unlike California or any other state, the US government through the US Federal Reserve has the power to print money. They will do so to bail out the states as well as finance the US government’s deficits, by way of the US treasury department. The floodwaters that make up the enormous US market for treasuries will not recede for a long time.

One might say the parabolic growth of that market, and the consequences for the US dollar, is akin to raising a pet tiger in your Manhattan apartment. In the early going life goes on quite normally, although there may eventually arrive a point where things can get dangerously out of hand. One could do a whole lot worse at that point than being able to walk away with just your shirt torn to shreds.

It is why gold bullion did as well as it did in 2008, and why it as well as gold stocks should perform nicely in 2009.

Christopher G. Galakoutis
CMI Ventures LLC
Westport, CT, USA

****

Christopher G Galakoutis is an independent investor and commentator, who in 2002 re-directed his attention to studying the macroeconomic issues that he believed would impact the United States, and the world, for many years to come. He works diligently to seek out investments for his own portfolio that align with his views, and writes about them on his website. With a background in international tax, he also works with clients holding foreign investments (ExpatTaxPros.com), ensuring their global income tax costs are being minimized.

Run, Rabbit, Run! The Importance of Monetary Velocity
Justice Litle
8 January 2009

How can deflation fears be on the rise even as the Fed pumps trillions of dollars into the system? To answer that question, let’s examine the concept of “monetary velocity.”
The e-mails flooded in for Tuesday’s piece on whether or not GM should be saved. There were so many you set a new record – thanks for that – with strong opinions on both sides. I’m still reading through all your comments, many of which are excellent. So we’ll dig into the mailbag next week.

Today I want to talk about the concept of monetary velocity. (I know, I know... monetary what? You’ll see the importance by the time we’re done.)

Let’s start with some background. In Wednesday’s Taipan Daily we noted that short-term interest rates have fallen to multi-year lows. The flip side of falling interest rates is rising bond prices. When bond prices rise, interest rates fall and vice versa.

This means investors and traders have an impact on interest rates through their buying and selling decisions. When investors pile into bonds, for example, they push bond prices up – and interest rates down.

We can see this by looking at a chart of the 2 year treasury note, which went into lift-off mode in mid-2007 (right around the time the credit crisis began).

As you likely know, investors are piling into U.S. treasuries now (particularly short-dated ones) because they are scared out of their wits and don’t know where else to go.

And right now they are scared of deflation.

The Dreaded “D” Word

For the month of October, the Wall Street Journal reports the Consumer Price Index (CPI) saw its largest single-month decline since World War II.

This dramatic drop has the word “Deflation” on everyone’s lips.

It’s quite the switch, actually. As recently as this summer, everyone was worried about Inflation.

Now, according to some estimates, use of the word “inflation” in the popular press has dropped by nearly a third... and use of the D word, deflation, has more than tripled in the past two months.

This is a head scratcher, especially in light of what we’ve been hammering on this past week. How can the markets be worried about deflation when the Fed is printing money like there’s no tomorrow?

Better still, how is it even possible to see the specter of deflation on the horizon when trillions of dollars are being pumped into the system?

To answer those questions, let’s delve into the concept of “monetary velocity.”

Run, Rabbit, Run

Everyone knows about the basic concepts of inflation and deflation. They are often described in terms of supply and demand: inflation is “too much money chasing too few goods,” deflation is “not enough cash to go around,” and so on.

But it’s important, too, to recognize that the inflation/deflation equation depends not just on the quantity of money in the system, but also how fast that money is moving through the system. This is where monetary velocity comes in.

It’s a slightly challenging concept to explain – the best analogy I’ve found is a bit goofy, but it works. So here we go...

Imagine you’re standing in front of a large tree trunk. There is a brightly colored marker on the trunk, and there are rabbits running in circles around the tree itself. Every time a rabbit passes the marker on the trunk, you note it down on your clipboard: one X per pass.

Now let’s say you tally up your results and note you made twenty X’s in the space of 60 seconds. Assuming you had your reasons, how could you double the number of X’s in the same amount of time?

There are two ways you could double the number of X’s on your clipboard (to forty per minute in this case). You could increase the number of rabbits running around the tree... or you could go with the same number of rabbits and try to make them run faster.

(Remember, you don’t care if it’s the same rabbit or a different rabbit when you jot down your X. You’re just counting the number of passes.)

As you might have guessed, the rabbits are analogous to money in the system. Money that’s just there is inert... In order to have an affect on the economy, the money has to move.

So when money is “hot” and the rabbits are running at top speed, fewer rabbits are needed to fill up the clipboard with X’s. The rabbits speed around the tree very quickly – analogous to high turnover, or money changing hands very quickly.

When money is “cold,” on the other hand, the rabbits are lethargic, and you need more money (i.e. more rabbits) to get a decent number of X’s on the clipboard. If money stops changing hands entirely – as it seemed to have for a brief span in late September and early October – it’s like the rabbits coming to a dead stop. They aren’t moving at all.

So when the Fed pumps the system full of money, it’s the equivalent of dumping more and more rabbits into the equation. As the Fed gets desperate, maybe they round up dozens or even hundreds of rabbits.

But if all the rabbits are half comatose, the clipboard stays blank (or fills up much too slowly). The Fed’s efforts fail to have the desired effect.

So the upshot is that the Fed can have a direct impact on the quantity of money in the system, but not the velocity of money in the system. It can’t make the rabbits run.

You’re a Rabbit, I’m a Rabbit

The “rabbits” can also be thought of as entities that buy and borrow and lend – banks and businesses and consumers (like you and me). When banks refuse to lend and consumers stop buying and borrowing, monetary velocity goes down – even as the dollars in the system pile up.

Over the years you may have heard comments like, “The Fed has absolute control over the money supply.” That is misinformation. The Fed has zero control in some very important areas. What’s more, they don’t even have the tools to properly measure many of these areas.

When we talk about the velocity of money, for example, we’re not just talking about visible dollars. We’re talking about abstract concepts like people’s willingness to borrow and lend. That kind of thing is impossible to measure on any kind of precise basis.

For example, if five million Americans wake up tomorrow with a sense the world is okay and an urge to go buy something, then that cheery mindset will positively impact the velocity of money in the system – even though you can’t put “optimistic mindset” on a balance sheet.

Conversely, if five million Americans wake up fearful for the future and determined not to borrow another dime if they can help it, that translates into a negative impact. Again, there’s no way to precisely gauge these moods. We can only make rough guesstimates.

So why do we have a grim outlook for deflation right now, even as the printing press money piles up? Because monetary velocity has crashed. Bank balance sheet woes and consumer debt overhang are such that the new attitude towards buying, borrowing and lending – creating turnover, moving cash through the system – is “Thanks, but no thanks.”

Simply put, the rabbits are tuckered out.

So Why Buy Gold?

Okay, some of you may be thinking now, so the dollars are piling up because the velocity of money has crashed. The Fed’s stimulus remains untapped, like an idle oil tanker filled with cash. But if that’s the case – and if deflation worries could worsen – then why buy gold?

It’s a good question. Most of the talking heads don’t bother thinking the answer all the way through. They stop at step one without progressing to steps two or three. “Gold’s no good in a deflationary environment,” they say. “Prices are going down and that’s that. So why would you want gold?”

Well, let’s see.

First recall that deflation is every central banker’s worst nightmare. (Particularly central bankers who spent the bulk of their academic lives studying the Great Depression.) That’s why Fed Chair Ben Bernanke gave a defining 2002 speech titled, “Deflation: Making Sure ‘It’ Doesn’t Happen Here.”

If you’ll indulge this quick recap, here is the key paragraph from Bernanke’s deflation speech:

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost... We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

The underscore emphasis is mine. What Bernanke believes amounts to this: The printing press is an irresistible force. There is no deflation so immovable that the printing press cannot smash through it.

An irresistible force sounds most impressive. When we think back to the velocity problem, though – recall the lethargic rabbits – the printing press starts looking like the wrong cure for the wrong ailment.

This is because as far as money in the system goes, a velocity problem is different than a quantity problem. The printing press speaks to quantity, but on the question of velocity, it remains mute.

Going back to our tree trunk analogy: Bernanke could round up a thousand rabbits, he could round up ten thousand rabbits, or he could round up fifty thousand rabbits. If the rabbits don’t feel like running around the tree, quantity does nothing. If banks and consumers cannot be goaded into the old patterns of buy, spend, borrow and lend, then it just doesn’t matter how much the Fed pumps in.

Except for one thing: To say it “just doesn’t matter” is not wholly correct. The Fed’s stimulus-pump actions do matter in one particularly awful way. The more money a desperate Fed pumps into a non-responsive US economy, the closer we edge to systemic breakdown for the fiat currency system as a whole.

Breaking Down the Breakdown

My use of “breakdown” in this case refers to the point at which the world loses faith... the point at which investors realize in dawning horror that the world’s reserve currency is doomed.

The trouble lies in the fact that the Federal Reserve has staked its whole crisis-response plan on the power of the printing press. The Fed, in other words, has but one play in the playbook... the play outlined in Bernanke’s deflation speech.

If deflation’s grip is not broken soon, then Bernanke will double down on the printing press strategy... and then double down again. The Fed will pump and pump until the total pool of dollars in the system makes the United States look like a banana republic.

It is this scenario, by the way, that keeps Jerome Whitehead awake at night. Whitehead, now 86 years old, is a former chairman of Goldman Sachs.

"I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America," Whitehead says. “Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds... Eventually U.S. government bonds would no longer be the triple-A credit that they've always been."

Mr. Whitehead is right to worry.

Wake Up and Smell the Bullion

Recall too, in case you’ve forgotten, that in times of crisis gold serves a proxy for cash. And in times of deflationary crisis, gold is the only form of cash not subject to the ravages of a printing press. (This might explain why there is a run on gold coins taking place. The U.S. Mint has been forced to ration them out.)

It may take a bit longer for Wall Street (and the world) to wake up and smell the bullion. But as to what happens in the medium to longer term, the distribution of outcomes is pretty cut and dry.

If deflation is vanquished and money starts to move again, interest rates will stay low for a good long stretch of time (so as not to cripple a convalescing economy). In this scenario inflation returns, much to the Fed’s relief, and gold resumes its upward climb.

If, instead, the Fed fails utterly, Bernanke will not go gentle into that good night. He will print his way into spectacular oblivion (as all but promised in his 2002 speech)... and Mr. Whitehead’s bad dream will be realized... and gold will respond accordingly.

Justice Litle
Editorial Director
Taipan Publishing Group
www.taipanpublishinggroup.com

by Vin Suprynowicz

“Corruptissima republica plurimae leges,” warned Publius Cornelius Tacitus, the Roman senator and historian: “The more corrupt the republic, the more numerous the laws.”

“If you have ten thousands regulations, you destroy all respect for the law,” agreed the similarly pragmatic Winston Churchill, a few millennia later.

Few would wish to live in a completely lawless land. (Whether we need “government” is a different question.) But our ancestors seemed to understand that laws were best kept simple, few and clear, maintained primarily by a voluntary consensus among the governed.

It was left to the perverted genius of our modern era to invent the career of “lawmaker,” and to adopt the weird notion that the quality of our elected representatives is best judged not by their efforts to keep us FREE of entangling new skeins of regulations, but rather by how energetically they weave new webs to ensnare us.

Take the state Legislature in neighboring Sacramento. Please.

Having been involved, in a small way, in book publishing, I once joined the Independent Book Publishers Association. The most amusing account that I recall from their newsletter was that of a mom-and-pop operation who received a small order from one of the library systems maintained by the state of California.

Of course the small publishing house would be glad to send along a few copies of their titles. I dare say they even offered a modest “standard library discount.”

“Great!” the minions of the State of California replied. “Just fill out this brief form so we can certify you as a properly accredited Vendor to the State of California.”

Needless to say, the “brief form” turned out to be more in the nature of a booklet. What percentage of your work force is Native American/Pacific Islander? What affirmative action program do you have in place to increase your staff representation from the aforementioned races? What amounts of money have you spent making your place of business more accessible to the handicapped? What is your “family leave” policy and what steps have you taken to make sure non-married Life Partners and Significant Others enjoy the same benefit as married spouses? What percentage of the energy your company uses is derived from alternative energy sources, as opposed to fossil and nuclear fuel? How many of your vehicles run on alternative fuels?

Et blooming cetera.

I’m working from memory, here. But the questions – most completely inapplicable and thus unanswerable by a small family firm without “employees” of any race, state of health, or sexual persuasion – went on for page after page.

I’m sure the addition of each of these stipulations to the list of requirements entitling one to sell anything to the state of California seemed like a good and noble idea at the time. Add them all together, though, and the small publishing couple finally laughed, threw up their hands, and decided they could do without the attorney consultation necessary to answer some of this stuff under penalty of perjury … and that the educations of the California students in question would simply have to limp along without the books in question.

This is the context in which we need to view the news that – starting Jan. 1, 2009, thanks to California Assemblyman Ed Hernandez, D-West Covina – companies that have business operations in Sudan will be prohibited from bidding on any California state contracts.

The measure is presumably intended to discourage the central government of that African nation from pursuing its ongoing genocide in the province of Darfur.

First, let us note the inherent absurdity. Since there’s no test for whether you’re making “good, pro-freedom” investments in the Sudan, such a ban (presuming you answer honestly) would also punish and thus discourage those who either do sell or are foolishly tempted to sell food, guns and ammunition to the residents of Darfur, so they can defend themselves AGAINST the genocide of their Muslim rulers.

Gee, that’s going to help.

Meantime, is there any firm listed on the New York Stock Exchange with the proud motto “Helping tyrants commit murder and genocide worldwide”? The nastiest guys in the world are past masters at covering their operations under the guise of selling baby food to Nigeria or farm implements to the Maldive Islands. Some of their stuff went astray and ended up in Khartoum? Why, we’re as outraged as anyone! Procedures will be reviewed, let me assure you!

Beyond that, go back now and imagine trying to fill out the aforementioned California state vendor’s application forms, when it asks under penalty of perjury whether you have any investments in any firms that do business in the Sudan.

Are you sure? Most of us have money in some kind of brokerage account, 401(k) account, or other retirement annuity, fund, or trust.

Care to swear – on penalty of perjury – that you don’t own, through such investments, albeit unknown to you, a single share of a single company that sells crackers or fertilizer or flip-flops or light bulbs in the Sudan?

Yet – perhaps we should not pretend amazement – this isn’t even the worst new law to take effect in California last week.

This year’s actual winner is …

Courtesy of state Sen. Jenny Oropeza, D-Long Beach, California’s bureaucrats, apparently being now too few in number and without enough to do, are to set up a certification system to distinguish legitimate massage therapists from massage parlors that serve as fronts for prostitution.

Therapists will have to take 500 hours of training and pass a criminal background check and an exam approved by a nonprofit organization that will be created by the bill. A therapist or massage practitioner who is convicted of prostitution will lose his or her certification.

Wow.

Does it take 500 hours to learn how to give a decent massage? Of course not.

Will this brilliant scheme cause a career change for anyone currently selling hand jobs, blow jobs, or any other “jobs” they currently find to be in demand?

Let me go out on a limb here, and suggest it will do just the opposite.

This is clearly just another protection racket, setting expensive hurdles to limit entry by new competitors to the “industry leaders” who will design and administer the new “courses” and “exam.”

Meantime, who’s likely to have the money necessary to finance the “training” now necessary (or to buy the appropriate “exemptions” from the nearest politician, whichever proves easier) to garner crisp new gold-sealed certificates for their employees to hang on the wall – a legitimate start-up “mom and pop” back rub enterprise … or Fancy Dan, Suburban Pimp Extraordinaire?

Someone page the Institute for Justice.

January 8, 2009

Vin Suprynowicz is assistant editorial page editor of the daily Las Vegas Review-Journal and author of The Black Arrow.

vsuprynowicz@reviewjournal.com

by Sterling T. Terrell

What is Austrian investing? Is the way an Austrian invests different than any other? Can Austrian principles be formed into an investing method? As one who is profoundly interested in the financial markets, I believe these are questions worth asking.

Equity markets have collapsed in value, bond yields are off, real-estate markets are (in many places) in a state of disarray, monetary devaluation through government inflation is a constant dilemma, bailouts occur weekly, and wars and rumors of wars seem to lurk in the distance. Investing of any sort is enough to make one's stomach turn in times such as these. The hole in the backyard and that spot between the mattresses keeps looking better and better.

Given all this, we can say one thing for sure: there is a lot of uncertainty in the world around us. And given enough time in investment and finance classes, you learn that in the end all an asset manager is really good for is managing that uncertainty — managing risk. The appropriate mix of assets in your portfolio will depend on your level or tolerance for risk. An endowment fund, a 35-year-old attorney, a pension plan, and a 65 year old retired professor do not share the same level of risk tolerance; consequently, they will have very different looking portfolios.

Conventional investing today falls into two categories. The first group says it is best to be as diversified as possible (passive investing). One should buy into an index fund (or some other broadly diversified fund) and hold on for the long term. Coupon payments, dividends, interest, and the passing of time will do the job for you. The second group thinks that the best strategy is to outsmart the market (value or growth investing): find out where the market is going to go by forecasting it, and constantly position your portfolio to profit from it.

Problematically, both of these methods address risk from the same perspective. Under each, there is a high probability that on a given day the portfolio will see a small return and a very small probability that the portfolio will show a large return — due to the unexpected.

Austrians know that the future is uncertain and the uncertain is just that — not known or knowable (i.e. unforecastable). Rather than just diversifying (and hoping for the best) or trying to predict the future (with a crystal ball, or a regression), why not use the fact that the future is uncertain as an investing strategy in and of itself? Develop an investing strategy that has, on any given day, a high probability of a small negative return, and a small probability of a very large positive return.

Rather typically, this idea is not original and Nassim Nicholas Taleb of Empirica Lab is already doing exactly this. More famously, Dr. Taleb is the author of Fooled by Randomness and, more recently, Black Swan — both New York Times bestsellers.

For an excellent bit of background information and a better description of his views, see the Mises Daily Article "Fools Put Faith in Data Alone" by James Sheehan. In addition, Dr. Gary North also has a well written (and scathing) critique, "How Mr. Taleb Got Utterly Fooled by Randomness," available at LewRockwell.com. (The latter article is more theological in nature.)

More specifically, Dr. Taleb advocates putting the majority of a portfolio in less-risky-to-riskless assets, and a much smaller portion of the portfolio in extremely risky assets that have a limited downside.

Simply put, Dr. Taleb makes money by only buying options. On most days, the options expire worthless. On a few days, an unexpected shock is realized, the market moves wildly, and large amounts of money are made. This is identical to finding a volatile industry (or equity) and doing a "long straddle" with it: within a narrow trading range, maximum losses are known in advance and fixed, while a large price movement (positive or negative) can show a virtually unlimited profit.

To further explore Austrian investing, one might look at the nature of Austrian Business Cycle Theory: how can the role of the Federal Reserve in setting interest rates, causing shortages and surpluses in the market for loanable funds, the nature of malinvestment, and the inevitable boom and bust that follow, be formulated into a successful investment process?

But as for Dr. Taleb and the nature of risk, what can be more Austrian than an investment strategy that is based entirely in the notion that the future is uncertain and accurately forecasting it is impossible?

First posted on www.mises.org

http://creativecommons.org/licenses/by/3.0/us/

A prankish fate put George W. Bush in the oval office to keep America stupid. The nation was far from ready to see where it was going in the 21st century, and he was just the figure to keep it that way, with his void of curiosity, his allergy to reading, and his panderings to wealth-worshipping, Ponzi-loving, science-hating Jesus cultists. He goes out of office broadly regarded as an object of horror and loathing while the nation, now facing wholesale bankruptcy, struggles to imagine a plausible future, like someone who has just awakened from a cheap red wine drunk into the grip of a vicious hangover.

GWB was reputed to be an appealing personality off-camera, relaxed among his cohorts, full of fun, warmth, jokes, and nicknames. He was not quite as bad on-stage as his critics complained -- his natural obtuseness sometimes came off as candor -- but he was programmed by handlers with a range of poor locutions that eventually amounted to a world-view. For instance, the idiotic "war on terror," which served mainly to portray our adversaries as abstractions. His insistence on the term "victory" when speaking of our situation in Iraq actually fooled even his worst critics into thinking we were engaged in a "war," when for years it has been more accurately an awkward and lethal occupation.

I never believed that GWB actually tricked the nation on the "weapons of mass destruction" rationale for invading Iraq. Rather, the nation fooled itself into thinking that the war, in the first place, was anything but an act of vengeance for the gross injury of 9/11. After a couple of years, the public adopted the stupid narrative that they were "lied to," rather than recognizing the difficult truth that 9/11 had to be answered with lethal force, that international hostilities are far from wholly rational, and that Saddam Hussein got whacked because he was the Arab head-of-state who was the best candidate for getting whacked. A nation in thrall to psychotherapy, and self-esteem building programs, and the "win-win" bullshit of business Babbitry, couldn't imagine a tragic dilemma when one was staring them in the face.

GWB won reelection in 2004 -- running against the weak John Kerry, "a haircut in search of a brain," as Kevin Phillips put it so memorably, who was not smart enough to pander successfully (though he tried) to the dominant, Jesus-soaked Nascar fans who inhabit the Moron Crescent that runs from West Virginia south through Dixie and then west into Idaho. GWB was still riding pretty high when Hurricane Katrina slammed into the swamps and beaches east of Lake Ponchartrain, and the president failed to direct anybody to so much as air-drop bottled drinking water for survivors dying on rooftops and highway overpasses in New Orleans. The Left, once again, adopted an idiotic narrative to explain the event -- that Bush acted to punish African-Americans -- when plain incompetence combined with grandiose expectations for a televised happy ending to instead produce tragedy.

The fiasco in New Orleans was matched by the apparent failure to police Iraq back to stability, making the whole project appear feckless and futile, and GWB began his long swoon into discredit. But two other conditions were intensifying in the background, one the consequence of the other: peak oil and peak credit. As the primary resource of industrial capitalism reached its all-time production peak in 2005, the managers of the US economy allowed borrowing-from-the-future to replace productive activity as the basis for everyday life.

GWB barely acknowledged this compound problem. He asserted that America was addicted to oil, but he failed to take the idea a step further and say that our vaunted "way-of-life" could no longer be taken for granted. If anything, he endorsed the popular idea that a suburban lifestyle and WalMart consumerism was a Jesus-driven entitlement, and his circle in governance did everything possible to replace the industrial economy with an economy based on suburban land development and credit card spending -- which was enabled by fantastic experiments in finance that proved to be nothing more than an impenetrable web of swindles.

Those swindles began to unwind in 2007 and they now threaten to sink the USA as a viable enterprise. Their exact extent and nature still remain obscure, like the algorithms used to engineer the "alphabet soup" of fraudulent securities and recondite derivatives. In this stupendous failure, GWB is joined by his cohorts and minions in Republican polity, whose flamboyant misfeasance continues to make the credit blow-up worse by the minute. He leaves his successor, Mr. Obama, a predicament so dismal that the secession crisis of 1860 begins to look like a mere procedural quarrel in comparison. And despite the temporary crash of oil prices, the peak oil problem still looms very large in the background and has barely begun to work its hoodoo on what's left of the US economy

The same prankish fate that elevated GWB may end up excusing or papering over his current ill-standing. Decades from now he might be remembered as the last national leader who presided over an orderly transition of power in a cohering federal system. The fickle public that longs for the last symbolic photo op, when Mr. Obama waves at the helicopter bearing GWB into the Texas gloaming, may soon turn on the new president for failing to return them to the Blue Light Special nirvana of days gone by.

To me, GWB will remain the perfect representative of his time, place, and culture. During his years in Washington, America became a nation of clowns posturing in cowboy hats, bethinking ourselves righteous agents of Jesus in a Las Vegas of the spirit, where wishing was enough to get something for nothing, where "mistakes were made," but everybody was excused from the consequences of bad choices. The break from that mentality will be very severe, and we may look back in twelve months and wonder how we ever fell for the whole package. The answering of that question will occupy historians for ages to come.
____________________________________
My 2008 novel of the post-oil future, World Made By Hand, is available in paperback at all booksellers.

By Joe Average
January 2009

The Madoff "Ponzi" Scam...Con of the Century

When I read that 70 year old Bernard Madoff... variously called the "Wizard of Wall Street" , "the man with the Midas touch", and "the Jewish bond" ... was arrested on December 11th 2008 by FBI agents in relation to a US$50 billion dollar fraud I was astounded.

The shocks and scandals just keep on coming out of Wall Street.

How was it possible that this former chairman of the Nasdaq stock exchange and pillar of U.S. financial high society was able to carry out what may end up the biggest fraud in Wall Street's history through what appears to be another "systemic failure" of U.S. regulators.

On his own admission his investment business was "just one big lie... basically, a giant Ponzi scheme" that had been insolvent for years. Not only had he defrauded notable members and charities of the Jewish community, but also other high profile "sophisticated investors" including some of the largest banks and institutions around the world.

My astonishment turned to anger soon afterwards when an email popped up on my screen from my son who works in London. I was dismayed to learn that the investment firm my son works for had just discovered that their investors had almost certainly lost U.S.$1 billion in the Madoff scam. He described how the shock waves had reverberated through the entire office with some fellow workers breaking down in tears.

He explained that following on the heels of the defection of some key sales people some months earlier, and the recent loss of twenty five per cent of funds under management when investors pulled out and fled to the safety of cash, this final blow would almost certainly cost him his job and possibly result in the entire office being shut down.

When I asked about his chances of finding another job in financial services he pointed out that London recruitment agencies had already been inundated by more than 200,000 workers who had recently been fired. Jobs were scarce. People more experienced and qualified than him were taking huge pay cuts in lesser positions just to secure a job... any job. Others were turning to retraining as plumbers or trades people in the hope of picking up work in the building and renovation industry (even as house prices continue to slump). Besides, some employment agencies are themselves in trouble and shedding staff as they report a drop in income of up to seventy percent in their struggle to find placements for the newly unemployed.

My disgust grew more intense as the various media ran article after article about all the ordinary people around the globe whose lives had been ruined and their savings wiped out....aged grandparents who had lost everything; husbands and wives who'd been fired and lost their retirement entitlements; charitable institutions that have been devastated. The magnitude of this financial disaster is mind-numbing. Hundreds of thousands of investors will have been hurt or had their lives ruined by this fiasco.

"It's flabbergasting that nobody can nail the bums in the SEC who turn their backs on and/or aid and abet people who defraud investors."

Peter Scannell (former whistle blower against mutual fund giant Putnam).

The Regulators Have Failed Us

Steven Roach (Morgan Stanley) once described how "Alan Greenspan was the pied piper of the New Paradigm and the equity bubble it spawned." Greenspan embarked on a bold economic experiment of laissez-faire where deregulation promised to usher in a "new American economy". Instead, it resulted in a series of asset bubbles that are now in various stages of bursting or deflating and brought the world to the edge of the financial abyss.

Now Ben Bernanke is conducting his own experiment as this self-proclaimed "expert on the Great Depression" tries to avert an American and global financial meltdown.

"Given his middle name is Shalom (Hebrew for "hello" and "goodbye"), it seems appropriate that Bernanke is the one that waved goodbye to 95 years of traditional interest rate-only monetary policy and welcomed in a new era of "unconventional", yet potentially high-risk policy. Americans will be hoping it delivers a much needed economic recovery rather than serve as a real-time experiment aimed at proving - or disproving - an academic theory."

Robert Guy, Australian Financial Review, December 20-21, 2008.

"By cutting interest rates from 1 per cent to zero, the Fed opened the door to a completely new world of possibilities where many traditional rules vanish or go into reverse - a sort of economic wonderland in which money can be distributed free to citizens and where governments can spend and borrow at will, without any increase in borrowing costs. Now that the Fed has blazed the trail, other central banks are likely to follow. The sooner they do this... the greater the chances of averting a depression."

Anatole Kaletsky, The Times, 18th December 2008.

And just how are all those Trillions of taxpayers' money that is being splashed around so lavishly to prop up failing U.S. institutions being spent?

Not too well according to Hugh Son (Bloomberg Dec.13, 2008);

"American International Group Inc., the insurer under fire for paying 168 executives not to quit after a government takeover, is giving retention awards to at least 2,000 more employees... The "retention bonus" equals as much as a year's salary and recipients were ordered to keep the payment secret...because the plan was labelled confidential.
...a government package that now totals $152.5 billion... with some (executives) getting as much as $4 million.
Representative Elijah Cummings, a Maryland Democrat...has criticized the retention pay, saying AIG misled taxpayers who now own most of the company and that it's unnecessary to give so much cash to retain people when job markets are weak."

Associated Press estimates that the amount spent on these bonuses, perks and lurks (like corporate jets, club memberships, lavish conferences, etc) have so far totalled some $1.6 billion of the taxpayer's bail-out money. House Speaker Nancy Pelosi called it "outrageous that those institutions cannot - or will not - provide information on how they are spending billions of taxpayer dollars."

Little wonder then that the mood on Main Street is getting meaner by the day as struggling middle and lower classes see big rewards still going to many "fat-cats" (their snouts still in the trough) when in many cases these so called "masters of the universe" caused much of this mess in the first place.

The lyrics to a song (Tobacco Road - 1960) written by John Loudermilk spring into mind when pondering on the state of affairs in today's American Capitalism;

Bring dynamite, and a crane,
Blow it up start all over again.
Build a town, be proud to show.
Give the name of Tobacco Road.

"I'm sorry" Doesn't Cut It

Anatole Kaletsky (economics editor in the influential London Times) has a confession to make;

"I hereby confess that on or about January 14, 2008, acting on my own free will, not under the influence of any drug (attempt at humour)...I wrote the following statements in The Times: "The global credit crisis, far from taking a turn for the worse, is now almost over" and "There will be no US recession" and "Stock markets will rise in 2008".

Regarding his "basic misjudgement" he then goes on to say "I must apologise to anyone misled by my analysis".

I'm sorry but "I'm sorry" doesn't cut it. Anyone misled by that analysis has most likely seen his or her savings decimated and some had lives ruined.

Kaletsky then tries to excuse his blunder by rationalising that "Almost everyone underestimated this year's disasters - apart from the Jehovah's Witness economists (what religion is he?) who had been predicting the end of the world every year for the past decade".

He is wrong of course. Quite a few more astute analysts could see the writing on the wall.

Kaletsky says "There are two kinds of economists - those who don't know and those who don't know they don't know". I suggest he is the latter. Most people get fired for doing a lousy job and replaced by someone who can do better. Apparently not in this case.

Hammer Hank: "Did you see George W. dodge that Iraqi's shoes? I knew he was good at dodging issues but was his reaction brilliant or what?"

Helicopter Ben: "What really scares me though is just how angry that guy was ... to an arab that's the greatest insult ... even called G.W. a mangy dog."

Hammer Hank: "Yeh... now that arab's become some kinda hero... some Saudi business type is said to be offering a cool $10 million bucks just for one of those shoes!"

Helicopter Ben: "I only hope all those lower and middle-class Americans feeling the pain out on Main Street don't end up turning their anger on us like that... just 'cos we're spending all their money to bail out our buddies on Wall Street and U.S.A. Inc."

Hammer Hank: "What if they do? We'd better keep a sharp lookout... I don't wanna get taken out by no flying shoe!"

www.lifetoday.com.au

Disclaimer: This newsletter is written for educational purposes only. It should not be construed as advice to buy, hold or sell any financial instrument whatsoever. The author is merely expressing his own personal opinion and will not assume any responsibility whatsoever for the actions of the reader. Always consult a licensed investment professional before making any investment decision.

by Vin Suprynowicz

As usual, it was initially reported as unmitigated “happy news.”

“Your Metered-Dose Inhaler is Changing to Help Improve the Environment,” is how the U.S. Food and Drug Administration chooses to present word that the inhalers used by those who suffer from asthma and other respiratory ailments are being pulled from the shelves as of Jan. 1.

Back in 1987, representatives of the federal government signed the “Montreal Protocol,” in which 27 major industrialized nations agreed to halve their use of chlorofluorocarbon gases, which some believe could damage the earth’s ozone layer.

Real-world experiments to prove the theory have been in short supply – it’s hard to imagine how one would be devised, since it would first have to be shown how chlorofluorocarbons, which tend to be heavier than air, could reach the ozone layer in the first place.

Nor did the Montreal deal actually call for banning the propellant from the inhalers, since that use represents only about 1.5 percent of all CFC uses (it was less than 1.0 percent at the time), and signatory nations get to choose what uses to change. (Car air-conditioning systems were the first use targeted – Greens hate cars – whereas the Environmental Protection Agency saw no immediate need to go after document-preservation sprays, foam insulation for coaxial cable, or CFC-based fire extinguishers.)

But the U.S. Food and Drug Administration ruled the switch would be mandatory as soon as a viable replacement could be marketed.

So 22.9 million American asthma sufferers now face a changeover to more expensive brand-name alternatives that use the “environmentally friendlier” propellant hydrofluoralkane – which can be three times as expensive, raising the cost to about $40 per inhaler.

Why not wait to make the change after generic alternatives become available? Skeptics point out that changing now could mean billions more dollars for the three drug companies that hold patents on the replacement HFA-albuterol inhalers, according to Emily Harrison, writing in the August issue of Scientific American.

At least one member of the FDA advisory committee, Nicholas J. Gross of the Stritch-Loyola School of Medicine, has publicly regretted the decision, recanting his support and requesting that the ban be pushed back until 2010, when the first patent expires, Ms. Harrison wrote.

Meantime, multiple studies have shown that raising costs leads to poorer adherence to treatment; one study found that patients took 30 percent less anti-asthma medication, for instance, when their co-pay doubled. There are also concerns about patients getting proper instruction on use of the new inhalers, which need to be primed more often than the old models, and which also tend to clog and need to be cleaned more often.

Considering that asthma and other respiratory diseases disproportionately strike the poor, is it possible that what seemed to be a good, responsible environmental decision might in the end exact an unexpected human toll – leading to more asthma deaths? How should that risk be weighed against the risk of the chlorofluorocarbons to the ozone layer, and the subsequent health risks to all mankind?

To answer that question, we’d need to know whether CFCs really damage the ozone layer, and by how much – the kind of real-world scientific data (as opposed to jury-rigged computer models, dubbed “GIGOs” in the trade) that the radical greens show little patience for gathering, prone as they are to shout: “The debate is over! No time to dilly-dally! By the time we know, it’ll be too late!”

Funny how that always works out.

January 3, 2009

Vin Suprynowic is assistant editorial page editor of the daily Las Vegas Review-Journal and author of The Black Arrow.

vsuprynowicz@reviewjournal.com

by Michael S. Rozeff

I have earlier argued that choosing one’s government is a basic choice or decision right that follows from Thomas Jefferson’s ideas of rights contained in the Declaration of Independence; and that following out Jefferson’s reasoning we arrive at the concept of panarchy (see here). Rights arguments do not persuade everyone. The arguments in this article make no use of the concept of rights.

The question arises: What is government? Government must be defined by some quality that it uniquely has that distinguishes it from other things that are not government. That quality has to do with principles or rules that govern action. But what rules and what actions? Governments vary greatly in the scope of actions they govern, in their methods of governing, and in their relations to the persons governed.

There are all sorts of governments at many levels. To simplify the discussion, let us think only of national governments associated with States. Let us suppose for a moment that the reason that these governments vary is that the nations that they rule also vary. The Russians have their form of government and the Chinese have theirs. This is, at least in part, a matter of taste. Although these governments may have originated in conquest or in other ways, they found stability, at least in recent centuries, in ruling over amalgamations of people with some sort of identity or focal and shared points of belief and value and often religion and language. Insofar as an entire people had a say in the form of their government, that government may reflect that say. There is a kind of crude collective choice that either has been made or agreed to in some way or else brought about by force and custom, at least to some degree. I am not saying that governments come about by collective choice. I am saying that it plays a part, and that this helps explain variation among governments.

In some sense, the existence of a variety of states and governments shows that we acknowledge variations of preferences for government among large aggregations of persons. But if a part of the choice of government is collective, then we should recognize also that collective choice glosses over the vast variation we have as persons by aggregating in some way over our personal preferences and beliefs. If government is government of a population of people, it suppresses the expression of preferences for government among a large range of sub-populations and sub-groups of people. One cannot logically contend that a national government rests upon the consent of the governed without simultaneously recognizing that it does not rest upon the consent of sub-groups among the governed who express preferences not to be ruled by that national government.

Despite the state-by-state variation, there really are not too many different kinds of government to choose from. Yes, there is a large difference between being ruled by Mugabe and Bush. And individual governments do not all have the same mix of programs; but the fact is that if one tries to escape a land with big government and find one with small government, one is apt to have a difficult time of it without having to move out of one’s native land. Choosing a government that is different from one’s current one is apt to be very costly. It is even more costly to notify the world that you belong to no State or to renounce the State of your birth. Governments use force to keep people under their rule. Such force includes majority rule in democracies. The costs of getting out from under the rule of force are high. Each of us is apt to go along to get along. The result is that governments tend to be more homogeneous in appearance than they otherwise might be and that our choices among existing governments are not as broad as they might otherwise be.

The point is that if each of us could voluntarily choose the government we wanted without having to move or move very far away or without having to move to a foreign land, the range of government options could only rise and probably rise substantially. To put it another way, the 8 million people in New York City, if given a choice of government in that region, will likely exhibit a vastly greater range of preferences than the single one that they now have. They have many different ideas of what the scope of government should be, what its rules should be, how it should enforce those rules, and what its relations to those it governs should be. In a nation of 300 million people, it is obvious that there are vastly more personal preferences about government than are reflected in the existence of one national government for all. Personal preferences for different kinds of governments are not finding expression in our current arrangement. We have far more choice of fruit juices and drinks in a supermarket aisle than we do of government, and yet the choice of government probably has a far greater impact on our lives than whether we choose grape or cranberry juice.

If you think that you should have your choice of cereal, or spouse, or mode of transport, or job, or religion, even if the reason is simply that this is what you want, then, by the same token, you should have your choice of government if that is what you want. In these cases, I am speaking of making peaceful choices that do not oppress others. It is not necessarily your rights that come into this. It is simply your will, that is, the expression of who you are. To be human is to act, and to act is to choose; and to choose is to choose freely (still in the sense of peacefully). I am not saying at this point that choosing and expressing your personal humanity is a good or right thing (although I believe that and say that in my conclusion). I am saying that if you choose products and services, and nearly all of us do, then you logically can think of choosing government inasmuch as government purports to provide various goods and services. Phrases like "consent of the governed" and "no taxation without representation" express this choice. Voting is also said to be an expression of this choice, and, even if it is not in reality such an expression, the idea of choosing one’s government is still present in the rationales for voting.

In general, your choice of cereal disagrees with your neighbor’s choice but since you each choose what you want, you each get what you want without harming each other. Choosing government can be the same kind of thing. You each can be better off by making your own choice. At present, this is not the case, and it is hard to imagine it as a reality because both you and he are now presented with only one cereal and you must both eat it, whether you like it or not. At best, you may vote for a person, the effect of your vote on that cereal being nil. This is all you and he have ever seen. You do not choose a government itself or a method of governing or rules of governing; you express yourself, to no effect, concerning a few people who may or may not run that government. An alternate reality, that you actually choose your own governance, seems quite unnatural in the present state of affairs, even though it is as natural as the fact that you and your neighbor choose different churches, or that two members of the same church choose to attend two different universities. America was inhabited by hundreds of Indian tribes with different forms of government, and even today there are hundreds of Indian nations within the borders of the U.S.A. If they can have their governments, there is little reason why other sub-groups cannot have theirs.

The disagreements over government that you may have with your neighbor can be and are far greater than the disagreements over cereal because they are over more serious matters that each of you values. He may wish to make war on Iran, while you may wish to build rockets to Saturn. He may ardently desire Social Security, and you may want a strictly limited government. You may want a monarch, and he may want no government at all. The greater these differences are, the stronger the argument is that you should each have the government of your choice, for then you will each gain more from getting what you want and each of you will experience less harm by being made to endure policies with which you disagree.

But I neither want to overstate the differences among people nor make them seem so great as to render life impossible without relying on a strong man to rule over them. The existing pattern of government by states engenders and amplifies differences and plays upon them. Political leaders of states create loyalties to their states by finding and exploiting differences both between states and within states. They find and also create and encourage rival groups and play them off, one against another. Their "solutions" to differences involve force, fraud, and payoffs (economic and psychological) that make them as much indispensable as possible. They are the exclusive priests of their religion of the State which makes them and the State appear to be the indispensable means of social cooperation and economic benefits. They would have us believe that we are unable to cooperate without them and unable to work together in a productive economy. Their system of rule depends on inculcating and educating us in the belief that without them and the State, we would be at each other’s throats. They pose to us an unnecessarily restricted (and thus false) range of choice: the State or chaos. They educate us to be divided and reliant upon them for our welfare. They play upon our insecurities while holding out promises of generous amounts of security at a low and reasonable price; but these are promises that they cannot keep. They are Ponzi schemes in which they return to us our own contributions after deducting large amounts for themselves and their favorites. They are schemes in which the returns produced by one segment of the population are transferred to another segment, without there being any genuine increases in returns brought about by the State and with all such increases being brought about by ourselves and made to seem as if they are bounties of the State.

Judging from the frequency and severity of civil wars, it seems conclusive that disagreements over government are strong. The rulers of ruling states greet secessions and independence movements with dismay and force. They mobilize public opinion to support the State. A typical litany of rationalizations can be found here, as Putin defends Russian attacks on Chechnya. Chief among these is the fear of chaos and the opposing idea that the State brings unity, strength, and order. The Framers of the U.S. Constitution used similar arguments, and this occurred immediately after a confederation of states without a strong central power defeated a major European power! What does Russia, which already occupies one-seventh of the earth’s land surface have to fear from Chechnya? The fear of Putin and all leaders of states is that one concession to one breakaway district or group will lead to further concessions to other groups. This position of Putin is clearly expressed in that news article. The implicit and unexpressed value is that the State of Russia must be maintained. Russia is a value in and of itself, they believe. Lincoln’s glorification of Union is quite similar. If pressed, the statists like Putin do not peacefully argue that all Russians will gain by a united Russia, and still less do they offer this as a voluntary choice to Russians. Instead, they resort to force. The Chechnyans (and other breakaway groups in other lands) clearly do not see the value in remaining under Russian rule. An independence movement speaks for itself. It expresses its own values. Those who wish to suppress it do not. This is entirely obvious. The strength and success of statist thought is evidently remarkable if something that is so obvious needs to be spelled out and emphasized. The American independence movement that broke with Great Britain expressed its own values, and they did not include submission to King George. No argument of his could have held up against the revealed preferences of the rebels who had not consented to his rule. Force is not an argument. It is what we resort to when argument fails.

The propaganda of the ruling states is so strong that it seems novel to raise the possibility of non-territorial governance, as well as governance arrangements that cover a wider scope of possibilities that are yet to be discovered and realized. This is the idea of panarchy, namely, that there can be (as John Zube writes): "The realization of as many different and autonomous communities as are wanted by volunteers for themselves, all non-territorially coexisting, side by side and intermingled, as their members are, in the same territory or even world-wide and yet separated from each other by personal laws, administrations and jurisdiction, as different churches are or ought to be." If we maintain the fictional idea that is drummed into us by the State that we cannot agree to live side by side while having our differences, then we cannot even imagine panarchy. The State has then cut our thinking off at the root. It has replaced independent thought, voluntary and free choice, peaceful expression of personal values, and peaceful association with others by force, fraud, fear, and falsity. The State cannot logically maintain that it is of prime important for the welfare of all of those within its borders when persons within those borders express clearly that they are worse off being ruled by that State and wish to dissociate from it. The State’s force is neither persuasion nor argument nor an expression of what a dissenting person values. It is a suppression of that dissent.

The basic reason why government should be voluntarily chosen is that in this way, each of us can get more of what we want and less of what we do not want. The fact that we personally disagree over what government is and should be counts as a reason why it pays us to agree to have rival governments in and on the same land (with one major exception to be noted shortly). The fact that we, to some extent, have coalesced into different kinds of governments as in nation-states (even if the equilibrium is held together by force and deceit), counts as a demonstration that cooperation among rival governments is possible. The earth is one great territory that contains many governments within its limits. There is no reason why the territory of the United States or any government cannot contain many more independent jurisdictions, up to and including the very smallest, which is a single person. Government should be a matter of personal choice.

The argument that it pays each of us to agree to have rival governments has one important exception, namely, except for those people who gain by ruling over other people. Some of us want a government that rules other people than ourselves even when they do not want to be so ruled. Some of us not only want to tell others how to live and govern themselves, they want to force them to live in a particular way. This kind of person we may, following James Ostrowski’s analysis, call a fascist. I quote him:

"What shall we call this broad-based statist coalition? It is apparent that there are two basic political mindsets: libertarian and fascist, the latter term being used here in its colloquial sense to mean imposing your will on others. Even a more academic definition is not far from my usage. Fascism involves ‘the glorification of the state and the total subordination of the individual to it. The state is defined as an organic whole into which individuals must be absorbed for their own and the state’s benefit.’ (Columbia Encyclopedia, 6th ed.)"

Panarchy is unalterably opposed to the fascist idea, which is the imposition of a government (or state) upon a person who does not want that government. The libertarian idea explained by Ostrowski is similarly unalterably opposed to the fascist idea. If the fascists do not give ground peacefully and if ways are not discovered to get out from under their rule, then there is no alternative except for the panarchists and libertarians to resort to defensive force as the American revolutionists did.

A truly American ideal is that of Jefferson, which is the voluntary choice of one’s government. This ideal was radical in the eighteenth century and it is radical now. It is the idea of liberty extended to choice of government. The idea of liberty is the polar opposite of the idea of fascism. The idea of liberty has not yet been achieved. We have drifted far, far from it in the direction of fascism. Fascist ways of thought are prevalent in America, so much so that the resurgence of liberty seems at times but a dream. And yet liberty will prevail because the fascist idea is basically an evil idea inasmuch as, among other things, it suppresses humanity and human beings. Fascism rules by force and fraud, but it will not withstand exposure to truth or to the aspirations of living life fully that are within each and every human being. The latter statements are value-laden. In neutral terms, the same idea can be expressed as follows. There are very large opportunities present when people are suppressed and unable to achieve their preferred values. The people can achieve much higher returns by re-organizing and removing the suppression. The system in place that suppresses these values and returns maintains itself because there are high costs of effecting the change. Sooner or later, however, the good people of this world will find ways to lower those costs in order to get the returns. They will end or at least reduce the domination of the fascists.

Many of us are being held captive by the State under a government that we do not prefer. I refer, not just to libertarians or anarchists or minarchists or greens or socialists or democrats or republicans or any political classification, narrow or broad, but to all of us who are not fascists. Instead of combating each other, we should recognize that we are all prisoners being held in the same prison. Our common enemy is the fascist who refuses to allow us the freedom to choose our own governments. Our common enemy is the fascist who insists on herding us all into the same wars and the same programs under the same rules enforced by a monopoly government. And when we succumb to the temptation to make the other guy have the kind of government that we demand, then we become the fascist.

Let us demand our liberty and free ourselves from fascist thinking, no matter what our political persuasion is. Let us understand that this means not imprisoning others within the walls of our own parochial beliefs by the fetters of a national monopoly government or any other monopoly government. Let us understand that we cannot have our liberty without the other fellow having his. Let us recognize that our enemy really is the fascist idea of "imposing your will on others." As soon as we attempt to rule others and attempt to bring about a system in which our views prevail and prevent others from choosing, we contribute to our own defeat. We are imprisoning ourselves and allying ourselves with the fascists. We are intolerantly dis-allowing the voluntary choice of government.

January 2, 2009

Michael S. Rozeff is a retired Professor of Finance living in East Amherst, New York.

msroz@buffalo.edu

by Art Carden

As 2008 draws to a close, we do well to reflect on the lessons we have learned. A new president has been elected and will be inaugurated in a few short weeks. The outgoing president claims that he must abandon free-market principles in order to save the free market. Somehow, this has translated itself into a multibillion-dollar bailout for politically favored carmakers. Should the current turmoil cause us to abandon hope and forsake the market economy?

The financial crisis is causing many — among them former Federal Reserve Chairman Alan Greenspan — to question their faith in the power of the free market. Unfortunately, the idea that the current unpleasantness has its roots in unfettered, unrestrained capitalism has gained some traction in the popular media. Two immediate responses come to mind. First, the crisis is not the product of unregulated capitalism. Second, if anything, the crisis should strengthen rather than temper our zeal for the free market. As economist Thomas Sowell once put it, we do not have "faith" in the power of the free market. We have evidence. And I expect that once all of its root causes are discovered and analyzed, the current crisis will be another data point supporting the case for free markets.

The incoherence of political rhetoric and the impotence of political solutions has been evident throughout the debate. We are to believe that "affordable housing" is a worthwhile and noble policy goal, but not if it comes at the expense of falling home values. Senator John McCain argued in the third presidential debate that Joe Sixpack (and Joe Lunchbucket, Joe the Plumber, Average Joe, GI Joe, Trader Joe, and other assorted Joes) are "innocent victims of greed and excess on Wall Street and in Washington," which suggests that if we could just get people to be less greedy and less excessive, we wouldn't have these problems.[1]

For the last few decades, the term "housing crisis" has been used to describe the run-up in home prices that has created a supposed shortage of affordable housing. To correct the modern housing crisis, Senator McCain proposed spending $300 billion to buy bad mortgages to prevent home prices from falling further.

Rhetoric from Senator Obama was similarly depressing. In the third debate, Obama referred to the revised bailout as a "financial rescue plan" and a "rescue package for the middle class," which is much more politically palatable, no doubt, than "giveaway to favored political constituencies." He argued that the country should try to "save jobs" with mercantilist policies and "get homeowners in a position to be able to renegotiate their mortgages."

Left unsaid is the fact that these mortgages will be "renegotiated" at gunpoint. The government will have to either strong-arm or bribe lenders into renegotiating bad mortgages. In the first case, the government's use of force would be very bold, perhaps too bold to be politically feasible. In the second case, the government's use of force involves an unassuming third party: the American taxpayer.

Political rhetoric about taxing corporations fails to grasp two things. First, it fails to consider who actually owns corporations. Second, it doesn't heed what we know about tax incidence. Senator Obama argued that large corporations like ExxonMobil can afford to pay more so that Joe the Plumber can have a tax cut. Taxing corporations makes a lot of voters think that the government is taxing top-hat-wearing, cigar-chomping plutocrats, but the burden of the tax falls on all shareholders in the corporation. This means that anyone who owns stock in ExxonMobil — which would include probably anyone with a well-diversified stock portfolio comprised in part of market-index mutual funds — will bear the burden of taxes on corporations, to say nothing of the people who work for these companies. To add insult to injury, taxes on corporations might fall disproportionately on Joe the Plumber rather than on Tad the Plutocrat. Joe doesn't have the wherewithal to hire high-priced tax attorneys and accountants to shield his 401k from taxes, while Tad can invest considerable resources in avoiding taxation.

As George Bernard Shaw wrote, "A government which robs Peter to pay Paul can always depend on the support of Paul."[2] In the short run, taxing Rich Peter to pay Poor Paul looks very attractive, politically, and this is precisely what Senator Obama proposes doing with his plan to tax the top 5% of income earners while cutting taxes for the rest of us. In the third debate, Obama pointed out that his supporter and advisor Warren Buffett is willing to pay higher taxes to do what is needed, and so too is Senator Obama. Their intentions are noble, no doubt, but there is no one stopping them from writing a check to the US Treasury right now. The rest of us, seeing the wastefulness of government "stewardship" of our earnings, are understandably hesitant.

Acclaimed minister Adrian Rogers once said that you cannot multiply wealth by dividing it. Trying to spread the wealth via a tax-and-redistribute scheme will not bring prosperity. It will only share misery (albeit perhaps more equitably). The solution is to pursue more market-oriented reforms that remove obstructions on entrepreneurs. As theory and evidence suggests, market-oriented reforms are not faith-based initiatives. They are our only hope for the long run.

Art Carden is assistant professor of economics and business at Rhodes College and an adjunct fellow of the Independent Institute. He has been a visiting research fellow at the American Institute for Economic Research, and a summer research fellow at the Ludwig von Mises Institute. Send him mail CardenA@rhodes.edu

Notes
[1] The "Joes" idea is from a cartoon that's circulating. Thanks to Jeremy Horpedahl for the pointer.

[2] George Bernard Shaw, Everybody's Political What's What?

First published on www.mises.org

Reproduced here with permission from author.

http://creativecommons.org/licenses/by/3.0/us/

by Larry W. Reaugh

The world always or ultimately operates on the fundamentals of supply and demand. To reinforce this, my understanding of the demand from the BRIC (Brazil, Russia, India and China) countries has always remained positive. These countries will continue their modernization regardless of the recession in the West.

That leaves the supply side — the question is: What has been happening to disrupt the supply of metals? Taking a cross-section and focusing on mine shutdowns and cut-backs in production, I had two huge surprises. First, I was astounded by the proliferation of new producers in the past one to three years. Second, I am shocked by the rapid response to the downturn reflected in the number of recent production shutdowns. Over the past few weeks, the number of shutdowns has accelerated considerably.

Also, major small and mid-size producers are cutting back their production in all metals. The immensity of that combined extinguished supply demonstrates that a tilt in the supply/demand equilibrium is just around the corner and a spike up in commodity prices is not far behind.

In 2003, I conducted a supply-and-demand analysis for molybdenum. As a result I moved to create a pure molybdenum company and to achieve the advantage of a head start towards production.

I have been involved in the stock market and the mining industry for the past 45 years. In that time, I have never experienced such a terrible meltdown in the markets. Even the stagflation of the 1970’s would be welcome at this point in time. The value of my mining stocks during the mid to late 70’s neither went up nor down but remained at pretty much the same prices, as compared to today where my portfolio is down by 80% to 90%. Although most markets have lost 60% to 80%, resource stocks particularly, have been hit hard. My entire working life has been in the resource sector.

The majority of the forecasters on commodities today are predicting a several-year bear market in the prices of metal commodities across the board. My fundamentalist point of view, resulting from hands on research, is the exact opposite of the popular consensus for several reasons:

1. The worldwide recession is well into its second year. I believe a financial meltdown scenario has been averted for the interim and once the new U.S. government is in place markets will establish or have already hit a bottom from which to build.

2. The U.S. and European economies are being vigorously reinflated.

3. Commodity prices have fallen too far, too fast.

4. The shutdown of several coal-fired power generating plants in China during the Olympics contributed to the metal price collapse. The shutdowns sidelined demand and led to the stockpiling of metals, for a five month period. The shutdown put China in the driver’s seat on negotiating long-term metal contracts, especially in iron and coal. As commodity demand was weakening, the final blow was the planned slow down in China, which helped accelerate the downturn, certainly a onetime event. Definitely a huge long-term benefit for China.

5. Forced liquidation of commodities by commodity traders compromised the stability of the supply/demand factor of metal commodities. London Metal Exchange (LME)-traded commodities, especially copper, will take longer to rally due to the heavy manipulation by funds, whereby much larger stockpiles existed than were apparent.

6. More producers are currently operating at or below their cash cost. Those companies with large debt are being forced to shut down their marginal operations. The reaction to this sudden market downturn by producers has been to shut down, curtail and reduce production of copper, aluminum, iron, nickel, zinc, lead, manganese, uranium, molybdenum, cobalt, tantalum, etc. Even the market for raw diamonds has shown a significant drop in price. This has been immediate and I believe it will result in a faster recovery of the prices for these commodities.

7. Literally hundreds of small to medium producers worldwide, in all categories, have been forced to shut down production of metals. Some of these producers will not re-open.

8. China will be stimulating its economy with a package amounting to $600 billion over the next three years. I believe the first beneficiary will be the steel industry, which will lead the way out of the recession in base metals. The first steel related metals to recover will be molybdenum, cobalt, manganese, tungsten, niobium and chrome.

9. Dozens of mining projects slated to begin construction have been postponed indefinitely.

10. Infrastructure replacement and expansion to be implemented in Western countries, particularly in the United States.

11. Yunnan province in China has announced a one million tonne purchase of commodities for stockpiling namely, copper, aluminum, lead, zinc and tin, a $3 billion dollar investment. The central government is also looking to stockpile all metals as a result of low prices. This would be a wise move to convert U.S. dollars into tangible assets.

I have been steadfast in my belief that all commodities are strictly governed by supply and demand with the exception of LME-traded metals, which are heavily influenced by speculators, funds and large investor trading. My theory about a bounce back in metals was reinforced when researching a large cross-section of current and near-term producers, in conjunction with a list of several operators now on care and maintenance that currently influence or could influence the supply of all categories of metal.

Due to safety regulations, China alone will be shutting down 6,000 of its 16,000 coal mines over the next two years. Forty-five out of 75 copper/ cobalt producers have shut down in the Democratic Republic of Congo. Shut downs are also widespread in Australia, South Africa, South America and India, etc.

To me, the conclusion is obvious—those companies that have recently commenced production or have advanced projects on stream to go into production are being severely punished by the market with some market caps decreasing as much as 90% to 99%. There is no avenue for them to raise money to streamline operations in order to turn the corner on new production.

At the present market stage bridge loans are a particularly difficult scenario with which to deal and any company having to repay those bridges is at severe risk of failure. It is a “damned if you do and damned if you don’t” scenario. My sympathies go out to those companies as I understand the hard work and focus required to bring on new production today. The old adage of having production to see you through the lean times has not held up this time around for a vast number of companies and appears to be a liability rather than an asset for most of them.

The entire resource sector has been ravaged with the share prices of junior explorers down 95% to 99%, intermediate producers down 60% to 90% and some majors down close to 85%, especially in the steel industry. The total resource sector has had approximately $1.5 trillion knocked off of its market cap with household names losing 85% of their market cap in the past 6 months.

In my opinion, the way all categories of mining stocks are now viewed by the investment bankers and the investment community will change radically as follows:

1. Geopolitical risk will become a major factor. A year ago it was not heavily considered in the investment strategy.

2. Bridge loans are now considered toxic by the investment community and no one is stepping up to re-finance even good projects, especially those exposed to bridge loans.

3. Bond issues and debt financing are impossible and probably should not be pursued at this time.

4. Obviously, most of the advanced-stage projects have been rendered unfeasible at current commodity prices.

5. Overwhelming reluctance to do equity financings at this point in the market.

6. Feasibility studies by new producers will have to be economical at close to current commodity prices.

7. Close attention will be focused on strip ratios, continuity of deposits, bulk testing, proven metallurgy and road access.

8. Mergers and acquisitions will only occur between strong companies. In this market weak companies will tend to bring down the strong company. The take-over candidate must be able to generate the price of the acquisition.

9. Balance sheets will be scrutinized. Companies having large debt loads will be evaluated on their ability to continue servicing that debt. Companies cannot service debt when they are losing money.

10. Companies with large commitments will face tougher evaluations.

11. Financings will get back into a selective positive mode once commodity prices move up significantly from today’s lows.

Through previous observation and current research I have identified certain trends which indicate that prices will again head north in the next 6 – 18 months and eventually break most historic highs. This commodity Bull market will break all previous cycles as the BRIC countries continue to modernize their infrastructure. The massive amount of metal supply that has been extinguished in the last 6 months will very quickly have a positive effect on metal commodity prices once again.

Some of the benefits derived from the financial meltdown are as follows:

1. Cheaper cost of production as fuel, replacement machinery, power, transportation, floatation additives and consumables go down in price.

2. Drilling and exploration infrastructure costs will go down. Drilling companies are now readily available.

3. Availability of geologists, mining engineers and engineering firms is now prolific.

4. Availability of large mining and milling equipment is readily accessible. Lead-time is dramatically reduced.

5. Availability of mining and milling personnel.

I have pretty much focused on base and minor metals in my review and it goes without saying that precious metals have a similar driving force and are experiencing closures as well. With gold being the exception, silver, platinum and palladium have a solid industrial base and will follow the direction of the base metals. Conversely, gold is the ultimate currency and will lead all metals out of this current recession. The disconnect between gold and other precious metals will become more evident going forward. My observation is that gold will play a much more important role as we become awash in all the world’s currencies and seek value that cannot be destroyed by banks or governments.

I believe the deck is stacked in favor of all commodities, surviving mining companies and explorers over the next three years. We will look back on the last two months of 2008 as the greatest buying opportunity of the century.

I am more enthused now about the prospects for our industry than I have been in the last 18 months. Caution is the direction I choose for the interim and as the market signals, I plan to become more aggressive in the future.

In conclusion, I have been investing and continue to invest at these dramatically lower prices. Due to the current market my retirement has been postponed several years and I believe the only way I will be able to recoup is to take advantage of the current low share values. This is the tax selling season, which creates further discounts from current low prices, definitely an advantage to the contrarian buyer. Look for companies that will survive the current market as these companies will be the strongest emerging from this recession. It’s a new world out there but the emerging economies need our products. Daily, more and more casualties are appearing in our industry and this will continue until well after commodity prices once again head north.

Mines cannot operate at losses so supply will diminish much faster in this cycle, once more creating runaway prices in the next leg of the commodity Bull market.

I encourage everyone to do their own due diligence as there are great opportunities in the market today with excellent projects, low-cost production and don’t forget the junior companies that are trading at less than cash value.

---------------------------------------------------------------

Larry W. Reaugh is not an investment advisor and any reference to specific securities in this commentary referred to in the article does not constitute a recommendation thereof. For email updates from the author, contact him at lwreaugh@rdminerals.ca. The opinions expressed herein are the express personal opinions of Larry W. Reaugh. Nothing in this article should be construed as a solicitation to buy or sell any securities referred to in the list or in the article. The author bears no liability for losses and/or damages arising from the use of this article.

Johnny Silver Bear
www.silverbearcafe.com

(Editors Note: One of the perks of editing "the Bear" allows me to post my own rants. I originally published Paradise Lost in January, 2005. At the time Alan Greenspan was the FED Chairman. I have taken the artistic license to update the illustration with Ben Bernanke's likeness, although Greenspan was primarily responsible for getting us into this mess (economically). Consequently, Bernanke is in the proverbial "drivers seat" now, and I have serious doubts as to whether or not he's up to the task. The only person that I am aware of that is up to the task is Ron Paul.)

I continue to receive ever increasing numbers of email from readers who request a clarification of my views about our current economic condition, how it got this way, and what, if anything, we can do about it.

I often feel faced with a dilemma akin to telling someone it's raining, and have them not only refuse to believe me, but to also refuse to walk outside.

My views are simply an amalgamation of insights provided by the wisdom of the Constitutional pundits, economic sages, financial gurus, and free market thinkers that I have come to read every day. The Libertarian / Contrarian editorial slant I provide is as much a result of their thoughts and experiences as my own personal feelings. I depend on their insights to temper my own.

We have, in general, become oblivious to the realities of human nature and corruption. We have been placated to the point of disinterest. After all, why should we be concerned with the direction that we are being led? It seems to have worked up until now. This, I think, is the gist of the problem. It's an illusion. Smoke and mirrors. We are all being set up for a fall. The tragedy of it is that it will be our children and their children who will be hit the hardest. Whose responsibility is it to insure some kind of decent future, Alan Greenspan's? Pu-leeze!

I will remain ever vigilant in my quest to achieve some sense of clarity, and to communicate whatever clarity I can through the Silver Bear Cafe and other gracious forums that are kind enough to post my essays. Whatever clarity I have here-to-fore attained is, to say the least, disconcerting. So, in order that I may vent my concerns and spread some of my frustration around, I will attempt to dissect one major travesty.

Practically all of the problems in our country can be attributed to the continuing subjugation of the U.S. Constitution. Had the remedies for such actions, which are provided in the text of the Constitution, been applied, many of our former, (as well as current), leaders would have been prosecuted and removed from public office. One of the main reasons that the American people have allowed the wholesale dismantling of their freedoms and liberties stems from the effectiveness of the all pervasive misinformation campaign that has been waged for over 100 years. Most of us believe that we live in the land of the free. A place where every child has the opportunity to grow up and be President of the United States. This belief is, in the best-case scenario, a stretch. In the worst case, a bald faced lie. Our political leaders are increasingly sourced from a pool of self-perpetuating elitists whose main concern is to distance themselves from the masses. When Constitutional law stands in their way, they ignore it. We are not being shepherded by altruistic wise men, but, rather, herded by megalomaniacal desperadoes.

If you asked Joe Six Pack if our society continues to be based on freedom and liberty, he would probably recollect his 9th grade American History teacher and respond "Yes, of course." If you were to ask him if our society was now based on a Stalinesque model of central planning, a totalitarian system in which the Government claimed all power, and there were no freedoms that the government did not allow, he would probably say, "No way." Joe hasn't got a clue. Hey, believe me. I've been trying to get across to Mr. Six Pack for years. He has been issued blinders by the state. He hasn't got a clue.

It appears to me that the markets are rigged. All games that can be rigged will be rigged, sooner or later. The Fed, working in league with the U.S. Government, rigs the U.S. markets. But don't think for a second that the Fed has some kind of monopoly on a situation where rapacity pervades honest reason. All markets are rigged. Central bankers, the world over, are primarily involved in fleecing the people. The fact that the Fed is the most powerful of the Central Bankers, and that they are primarily responsible for perfecting the insidious contrivance called inflation, has not kept the rest of Central Bankers of the world from entering into a game of "catch up". As far as they are concerned, there is only one motive, and that motive is economic world domination. Which Central Bankers will dominate will depend on which ones end up with the most. That's just the nature of absolute corruption. That is the reason that whole world is currently strapped with a fiat system. The ability to create money, out of thin air, provides for absolute economic power. Absolute power equals absolute corruption. It's as simple as that. By rigging the markets, through various forms of intervention, the central bankers have set up a scheme whereby the wealth of the world could be siphoned off at will.

The reason that this fiat system has become so all pervasive in the world is the lure of an uncapped, unending source of credit that is availed to all governments who are willing to play the Central Banker's game.

One instance is the game that we are playing with Iraq. Why are we not buying our oil from Canada for $45 per barrel, but instead, stealing it from the Iraqis at a cost of around $1,100 a barrel? Information gained from the Energy Information Administration, (http://eia.doe.gov/) provides this data. When the number of barrels of Iraqi oil that we have imported is divided into the $300 billion we have spent on the war so far, the number comes to about $1,100 per barrel. From an accountant's standpoint, this doesn't seem like a very good deal.

According to British Petroleum's Statistical Review of World Energy 2002

Middle Eastern oil accounts for one quarter of America's imports. Iraqi crude for less than one tenth. A back of the envelope calculation reveals that Iraq quenches less than 6 percent of America's Black Gold cravings. Compared to Canada (15 percent of American oil imports), or Mexico (12 percent) - Iraq is a negligible supplier. Furthermore, the current oil production of the USA is merely 23 percent of its 1985 peak - about 2.4 million barrels per day, a 50-years nadir.

During the first eleven months of 2002, the United States imported an average of 449,000 barrels per day (bbl/d) from Iraq. In January 2003, with Venezuela in disarray, approximately 1.2 million bbl/d of Iraqi oil went to the Americas (up from 910,000 bbl/d in December 2002 and 515,000 bbl/d in November).

It would seem that $200 billion - the costs of war and post bellum reconstruction - would be better spent on America's domestic oil industry. Securing the flow of Iraqi crude is simply too insignificant to warrant such an exertion.

Admittedly, there are those that would suggest far loftier goals in Iraq than simple petroleum exploitation. Personally, I have yet to be shown.

Who's getting the $1100 per barrel? Certainly not the Iraqis. The money is going to Haliburton, Ratheon, Boeing, Northrop Grumman, and Lockheed Martin, (among many others). Where is the $1100 a barrel coming from? Why it’s coming from continuing loans to the Government by the Federal Reserve. Where does the Federal Reserve get all this money? Why, they invent it, (the term counterfeiting comes to mind.) Who's responsible for paying back the billions and billions of funny money that the Government is spending, and the interest accrued on that funny money? Good question. If your answer is "the American People", you are not entirely correct.

There are two groups in the U.S. that don't pay taxes. Those two groups consist of the very poor, and the ultra rich. As a result, the middle class has been bestowed with the sole economic responsibility of repaying the obscene abomination known as the national debt. It's not enough for the middle class to support those who are unable to work as well as those who choose not to, but to also provide the a major source of wealth that is being siphoned off by the Central Bankers and distributed to the elitists. I believe their motives have always stemmed from a desire to redistribute the wealth of the middle class to the ultra rich. This is a basic ploy right out of the collectivist's handbook. In this way they are, in the words of Omar Khayyam, attempting to "tear it down, and rebuild it in their own image." They are preparing for the intended eminent worldwide financial Armageddon.

In order to continue to supply the Government with more and more funny money, the Fed has to keep creating it. Obviously, the more they create, the more it is diluted and the less valuable it becomes. They have positioned the U.S. dollar on a huge playground slide, placed a piece of waxed paper under it, and let it go. Its accelerating decent has become big news. Even the sycophantic rah-rah rooters on CNBC are talking about it. The dollar is visiting lows not seen in almost twenty-five years.

"Bubbles" Greenspan would have us believe that this is an engineered devaluation designed to reduce our trade deficit. Hooey. The Fed has lost control of the dollar. Their mindless creation of credit has insured a mind-boggling meltdown of the entire financial system. This is not a good thing for anyone, anywhere. The dollar is the world's reserve currency. Seventy-five percent of all dollars in existence are in foreign hands. Whatever their value was when those foreigners got them, that value is evaporating right before their eyes. It's like buying ice by the pound and watching it melt away before you have time to use it. "Joe Six Pack" doesn't seem to mind. He can still buy a beer for $2.50 at the pub. Five years ago they were $1.25. By the end of next year they will be $5.00.

But it’s not just the irresponsible creation of debt that has brought us to the economic gates of hell, but also the Fed’s botched attempt to control the markets through manipulation and intervention. Their attempts to "play God", in an otherwise free market, have exacerbated, skewed, and distorted market realities to such an extent that its function has become one of dysfunction.

The turn of the century brought with it a paradigm shift in economic policy in America. With the flight of the domestic manufacturing sector, America’s balance of trade rapidly became extremely unbalanced. In an attempt to keep the economy afloat, the Fed targeted the American Consumer as a replacement for the American Producer as the chief contributor to the U.S. economy. To insure the American Consumer would be, at least temporarily, capable of such a task, "Bubbles" lowered short-term interest rates to their lowest level since 1958. This action, combined with the introduction of a plethora of reckless mortgage products, (ARMS, interest only loans, etc.), provided for an unprecedented number of new home purchases. Over thirty percent of those purchases were made by lower income individuals who had previously been unable to qualify for mortgage loans. The result was a boom in residential construction, and all related industry. The domestic housing market had effectively filled the void that resulted from the flight of the manufacturing sector and, in doing so, became a primary contributor to the American economy. That, coupled with a wave of refinancing, spurred on by the lure of cheap credit, allowed homeowners to bury themselves in debt. The application of this new found cash provided borrowers the means to buy new SUVs and invest in stocks, which effectively held up the automotive industry, as well as helping to keep the markets inflated.

Fast forward to the present. Real unemployment is running around 12%. Wages have been stagnant for the past four years. Almost everyone who wanted to refinance has already done so. Their refi money has already been spent. The automotive industry, and the housing industry are both beginning to feel the pinch. Rising energy costs, which are a result of a growing scarcity, as well as inflation, are exacerbating the situation. The DOW, which has remained basically flat over the last three years when valued in U.S. dollars, is substantially down when valued against the Euro, the Rand, the Yen and several other major currencies. The continuing devaluation of the dollar has provided the DOW with the appearance of strength, at least to the American public. More smoke and mirrors. In order to continue to lure foreign investment, the illusion that the economy is healthy and robust is of paramount importance. This presents a big problem considering our economy is in the throes of a terminal illness. The Fed is desperate to come up with a new source of support.

Enter, Social Security Reform. Now politicians are suggesting that federal withholding revenues be redirected into the stock market. Wow! What an idea. That should keep the markets inflated for a little while longer. It could certainly give the Fed a new a new source of wealth to siphon off. But wait. One of the biggest myths about Social Security is that there is any money in the Social Security trust fund. The fund has been systematically tapped and squandered by every administration since its inception. It was an unconstitutional sleight of hand to begin with. It is, and has always been a Ponzi scheme, which depends on new workers to pay the old workers. Maybe that is why the present administration is doing everything in its power to tear down the borders and accommodate as many illegal aliens as possible. Maybe that's why they're attempting to raise the age of retirement. The privatization of Social Security is simply one more scheme to siphon off the wealth of the middle class through commissions and fees, and keep the stock and bond markets inflated for a little while longer. Do you see a pattern emerging here?

What’s next? What new source of wealth will be found to target? What if there isn't another source. How about those foreigners? How can the Fed keep them buying treasury paper, which allows the Government to keep on borrowing? When approached from this perspective, we realize that keeping the bond market inflated is the primary aim of the Central Bankers, (the Fed). To what lengths will they go to keep the bond market inflated? What new legislation will they dream up for their puppet politicians to pass? If it never occurred to you that the Federal Reserve, (a private corporation), owns the U.S. Government, please read the following statement made by Fed Governor Ben Bernanke.

"By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.“

What in blazes is positive inflation? And why would anyone, representing the people, want the price of goods and services to rise? Who, but a banker could benefit from inflation? Inflation equals rising prices. Rising prices equal more loans. More loans equal more interest. The natural evolution of man would have provided for a continuing improvement in the standard of life for all persons, if it wasn't for the heinous contrivance called inflation. Technology has provided new and improved ways to produce and deliver almost everything. Without inflation almost everything would be cheaper, or at least remain the same price. Let me restate that last part. If it wasn't for the Federal Reserve, everything would become cheaper, instead of more expensive. Most people believe that inflation is a natural economic occurrence. This is simply untrue.

Constitutional mandates insist that American currency be backed by precious metals. Adhering to those mandates would insure inflation and deflation would only occur if the quantity of precious metals was significantly altered, thereby skewing the supply/demand equation. Because of the energies necessary to locate, mine, refine, smelt and coin precious metals, the value will always be relatively maintained. Because of the fact that practically no energy is necessary to produce "funny money", there is no value to begin with. Producing more of it makes it worth less than nothing, as it becomes a liability and the biggest threat in the world to liberty, freedom, peace and justice. Any devaluation of American currency is a direct result of the money that the Federal Reserve is stealing out of your pocket.

Consequently, there are other ways, besides inflation, that the Fed can cloak reality and present the appearance of a robust economy. One of these ways involves direct intervention in all three major indexes. The Fed has created a fund called the repo pool, which can exceed $30 billion. When the Federal Reserve temporarily supplies these funds to the market by buying securities from dealers with a commitment to resell, the transaction is called a repo, (repurchase agreement). The Fed uses this cash to purchase securities from primary government bond dealers. This action circumvents natural free market pressures and pumps unnatural liquidity to the banking system. Member firms, at the direction of the Fed, use this liquidity to make major purchases in the futures markets or to purchase select market weighted stocks. Through the continual manipulation of a basket of major stock issues, they can effectively hold the markets up with their "funny money". All activity of this nature is covertly inflationary, and obviously unconstitutional. Because the shareholders of the Fed, complicit banks, and dealers also profit from these deals, anti-trust statutes are broken on an hourly basis. Wall Street has devolved to nothing more than a den of thieves.

Yet another way that the Fed utilizes "smoke and mirrors" to maintain the appearance of a healthy economy, rather than allowing the specter of "black death", which hangs heavily over the real situation, to become apparent, is through the use of clandestine offshore accounts. Through these accounts, agents of the Fed buy up the treasury bonds that are not bought by hedge funds, elitist transnational corporations, or foreign central banks. During a routine sale of U.S. Treasury bonds in early September 2004, an unprecedented event took place. Foreigners, who, up to that point, had been regularly buying nearly half of all debt issued by the U.S. government, didn't buy any. This could be the Fed's biggest nightmare.

The afore mentioned usual suspects, (the hedge funds, elitist transnational corporations, or foreign central banks), could be buying US Treasury notes and bills via the Bahamas, Bermuda, the Cayman Islands, the Netherlands Antilles and Panama, but I find that highly unlikely. These bankers and fund managers aren't stupid. Why buy into an asset whose value is destined to decline. Robert McTeer, head of the Dallas Federal Reserve Bank, stated in October of 2004;

"Over time there is only one direction for the dollar to go – lower.”

Our Government finances itself through the collection of taxes, (which basically go to pay the interest on the national debt), and the sale of treasury instruments, (i.e., bonds, bills, notes), which are effectively IOUs from "We the People". In its first term the Bush administration increased the Federal debt by $2.2 trillion. Congress raised the Treasury debt ceiling three times, by $450 billion in 2002, by $984 billion in 2003, and by another $800 billion on November 19, 2004, to $8 trillion 184 billion. The ready willingness, of the members of the House and Senate, to finance such deficits is a clear indication of the political and ideological makeup of most members of Congress.

More disturbing is the fact that the voting public continues to re-elect these people in the glaring face of fiscal insanity. The wars are obviously a ruse to convert the national debt into vast wealth for the elitists, (see $1,100 dollar a barrel Iraqi oil above). Please understand that there is no way that fiscal responsibility, a by-product of a gold backed currency, could ever provide for the reckless levels of debt that the American people, and their descendents, are currently being shackled to.

All the people in the world that hold Federal Reserve Notes are being fleeced. That's usually an occurrence reserved for sheep. How apropos. But, so long as crazy foreigners continue to loan us more of their "funny money" to fight these wars, the game can go on. When foreigners finally wise up to the insane nature of our economic policies and cease buying our IOUs, where will the money come from?

According to the research of Robert Chapman,

Caribbean Treasury investments soared 54% to $85.2 billion during the first ten months of 2004, seven times the 8.3% increase of all of 2003. The region is now the fourth-largest holder of US government debt, behind Japan, China and the UK. This is not coincidence. It is very significant and it has to be the Fed keeping the dollar afloat.

The previous paragraph might suggest that the Fed has stepped in and is secretly buying government debt. The reason that they are doing it secretly is because when the Fed directly buys government debt, and then uses that debt to create more money, it is immediately inflationary. No trickle down here. It is nothing less than hyperinflationary. Obviously, if the people ever began to realize that, through this action, they were getting royally screwed, they might quit electing these bozos and start to clean up the mess. Hyperinflation will make Government bonds far less attractive. Remember, the bond market is the cash cow that the central bankers depend on to continue to milk the economy. Therefore, the Fed will do everything in its power to insure that the bond market will be the last to deflate.

In order to keep the bond market inflated, the Fed will have to substantially raise rates. They will not do this, however, IMO, until the people finally wake up and start to make some noise. The sheeple are not known for public outcries, so the throes of hyperinflation will already be choking the economy long before the Fed makes any meaningful increase, (read in: double digits). The dollar is in free fall. When it breaks below the USDX .80 there is nothing in the world that can stop it, except for a massive interest rate increase. When they finally do make a meaningful rate increase, the markets will begin overtly crashing, (as I mentioned above, they have been covertly crashing for years), and the panicked investors will stampede to the bond market for security, like lemmings heading for the cliff. The bond market will find new life, and gold and silver will enter "phase three" and explode in price.

Right before the stock market melts down, the real estate bubble will go kabloowie, Fannie and Freddy will go up in a puff of smoke, and the domestic banking system will come to a screeching halt. The Fed will mindlessly continue to keep the presses running for as long as they can, (after all, that's all they know how to do). The erosion of the buying power of dollars will accelerate exponentially. From an American economic standpoint, we will have arrived at "end game".

Everyone, (except Joe), is beginning to get very nervous. Since we are absolutely dependent on the kindness of foreigners in terms of sustaining our current standard of life, their nervousness is, to say the least, very disconcerting. If they don’t continue to hold our dollars, our economy is toast. Unfortunately, people all over the world are beginning to dump their dollars, and for good reason. What would you do, given the same set of circumstances? There are reports that in some places, U.S. dollars are no longer accepted. Where will these dollars end up? Why, right here, where they started. And when they get here, and there’s a glut of them, what will happen? The good new is that there will be so many of them that they will be a lot easier to get. The bad news is that no one will want them because they won't be worth anything. Let me put a time frame on these events and attempt to put them in perspective. I believe it will become apparent to anyone paying attention within the next six months and finally come to a head within 3-5 years.

Get ready for a $10.00 cup of coffee, a $200.00 dinner, water bills that look like your electric bill, and electric bills that look like your mortgage payment. The value of coffee is not going up. The value of food is not going up. The value of water and electricity is not going up. The value of the dollar is going down. A ten-cent candy bar can still be had for a dime, providing that it's a silver dime. If you are using Federal Reserve Notes, a ten-cent candy bar now costs $1.00, and it will soon cost $2.00.

I believe that the powers that be have employed their ability to invent money by using its corrupting influence to cataclysmically screw things up. They have, with the help of their bought and paid for acompli, screwed it up so bad that it won't be easily fixed. I have always believed their plan was to casually strip up of all our liberties before they pissed us off. They have been doing a pretty good job of stripping us of or freedoms and liberties for years, and no one seems to have minded very much. After all, they successfully debased our currency and pocketed the difference, entwined us in a mire of disputes all over the globe and managed to get the whole world pissed off at us, strapped us with untenable debt that will eventually enslave our offspring, dismantled the Bill of Rights through Patriot Acts One, Two, and soon to be Three, are currently scheming to rob us of our retirement by hijacking social security, and still we re-elect them. Apparently, they haven’t pissed us off enough for anyone to do anything about it.

Given the pandemic apathy, that addles the collective mindset of our nation, there is not much hope for a political solution. By the time the sheeple wake up and attempt to politically change things, it will be far to late. We are witnessing the decent of the Phoenix, and she's going down in flames. I also believe that the Phoenix will rise from the flames and soar to new heights. Unfortunately I do not believe it will be anytime soon, and when it does, it will be under far different circumstances.

What can you do? Open your eyes. Identify, for yourself, the signs of the tyrannies of collectivism. The easiest way to identify a collectivist is to observe how he proposes to help those in need. If he advocates true charity (the giving of one’s own money) and freedom-of-choice to give or not to give, he is an individualist. If he advocates pseudo charity (the giving of other people’s money) and the use of taxation to coerce everyone to participate whether they choose to or not, he is a collectivist. The use of coercion for redistribution of wealth is the foundation of socialism, communism, Nazism, fascism, and all other variants of collectivism.

Protect yourself. Get ready now. Sell everything you don't need. Accumulate gold and silver, (most especially silver). Invest in gold and silver mining issues. The day is soon coming when the people demand that precious metals regain their place in a Constitutionally sound economic system. Prepare to defend your Constitution, yourself and those you love. Follow the course opposite to custom and you will almost always do well...

Eliminate as much debt as possible, especially “variable rate” debt, such as credit cards and lines of credit. Interest rates will be rising, so the elimination of debt offers a “real return” of escaping rising rates by creditors.

If you are depending on Social Security, stop.

It’s not what you don't know that will screw you up; it’s what you know that is wrong. The spin you hear from the mainstream media is intended to mislead you. Open your eyes and face the future. If you leave your head in the sand and ignore it, you are only leaving your butt exposed for the world to kick. This all may sound like gloom and doom, but when you get a handle on what is going to happen, you will have a future filled with opportunity. Fortune favors the Informed.

by Michael S. Rozeff

In their attempts to halt credit deflation, the government and the Fed are unleashing a torrent of corruption, inefficiency, misuse of funds, and fraud. If a bank is too big to fail and the government and/or the Fed make sure that it survives, despite the past mis-behaviors of its officers, then they invite those officers to misuse the funds that they infuse.

Any transfer of money (or funds) from stockholders and lenders to corporate officials is accompanied by methods of controlling the behavior of those officials. Transfers of money from taxpayers to governments also necessitate methods of control. Without such methods, officials, bureaucrats, and politicians have an incentive to engage in a range of behaviors that harm the interests of those who are supplying the funds. The control methods include audits, reporting requirements, boards of directors, independent committees, governance methods, arms-length dealings, ethical training, laws concerning fiduciaries, laws against fraud and malfeasance, freedom of obtaining information, and so on. All of these methods also require effective enforcement if they are to do their job.

Much of this control goes on without much publicity, until a highly-publicized breakdown occurs such as in the case of the Madoff fraud. But there cannot be well-functioning markets or well-functioning governance, corporate or non-corporate, private or public, business or non-business, without an extensive set of methods to control the behavior of agents who are entrusted with the money of principals.

Even before the recent bailouts, the federal government and the Fed were supplying enormous amounts of money to a variety of persons. It is common knowledge that their controls over the use of these funds are not anywhere near what they should be. The main reason for this is that these institutions are themselves poorly controlled by their constituencies who are forced to accommodate them. Taxpayers are forced to pay taxes, no matter how badly the funds are used. All of us are forced to accept dollars as legal tender.

The instances of government waste are well-known. The frauds committed against the Medicare program are large and numerous, but these are facilitated by the poor controls that we have over government and then its poor controls over the funds that it extracts from us. The gross over-charging by defense contractors is constantly documented. In a war like that in Iraq, the entire war with its insanely high costs is an example of non-existent control of funds by those paying the bills. The entire war is a fraud in that public officials misrepresent its costs and benefits in order to gain public approval for their misuse of the public’s money. These and more like them are examples of what happens when there are poor controls over the use of money that has been transferred from agents to principals. Bernard Madoff is now famous for having catapulted himself into the ranks of a large-scale fraud that rivals what occurs constantly between government and taxpayers and then, again, between government and its contractors.

The last year has seen government and the Fed ramp up their relatively uncontrolled dispersion of money to new heights. In an extraordinarily brief period of time and acting in great haste, we have seen a $700 billion bailout program passed by Congress along with the nationalization of such huge failures as Fannie Mae and Freddie Mac. We have seen the Fed expand its loans in all sorts of directions, including a private insurance company, foreign central banks, commercial paper, and any number of insolvent U.S. banks. We have seen the U.S. government make any number of new and expanded financial commitments and guarantees that can explode its solvency at any time and lead to very high costs to society.

Once again, the government and the Fed are committing massive frauds. They are intentionally deceiving the public about the necessity and benefits of these expenditures. A great deal of money is being transferred to persons who should be absorbing losses that they are responsible for.

At the same time, we have not seen anywhere near sufficient controls instituted over the uses of these funds. If we did have such controls, the federal government would be electing directors to bank boards across the country. The socialization of finance would come out into the open. Over time, as these funds begin to be misused by those who are receiving them, because the control mechanisms put in by the government are so weak, we can expect to see a gradual tightening of control which will bring the government control more and more into the open. We can also expect a greater politicization of the process.

If proper controls were in place, the Fed would not be releasing funds wholesale and at preferential rates to entire classes of borrowers. It would be carefully negotiating loans with controls over their use with individual borrowers. We have not seen even an accounting for the Fed’s loans. The Fed refuses to reveal information about the nature of its loans.

The government never controls the uses of its money in a way that is acceptable to taxpayers. Its controls are always weaker than even private sector controls, and private sector controls have many problems as it is. But now that the government is bailing out banks and businesses, the problems get even worse. To the extent that the government attempts to control those who receive its funds, it socializes the economy more than ever. The bigger the bailouts are, either the waste due to lack of control rises steeply, or else, if controls are put in place, the socialization of business with all its inefficiencies rises steeply. The public loses in either case.

We have always had these same issues of control of money and socialization before us. The Medicare program wastes huge amounts of money by its poor insurance structure. This represents a failure in control of how taxpayers’ funds are spent. On the other hand, to the extent that Medicare attempts to control how the funds are spent, it tells hospitals, doctors, and patients what they must do. We encounter the same dilemma as in the bailouts and the Fed loans. We are damned if they do not control, for that creates incentives for fraud, waste, misuse of money, and inefficiencies. But we are damned if they do control, for that brings even greater socialization with all of its attendant evils.

The more money that the government spends on bailouts, the more that it maintains already corrupt and inefficient institutions in place. It provides them with greater incentives to laxity, misuse of funds, and even frauds.

Public works spending will be no different. The housing and construction lobbies are powerful. They find many allies in city, education, and state lobbies. The National Association of Realtors, the National Association of Homebuilders, and the Mortgage Bankers Association are powerful. They are sometimes joined by the National Education Association that fears losses of local property tax revenues. They are joined at times by the National League of Cities, the National Conference of State Legislatures, the Council of State Governments, and the National Association of Counties. Does the unorganized public stand a chance against these organized groups?

Public works spending is public fraud. One only need note that there is just as little accountability of the funds spent as with the Fed’s loans. The politicians intend to deceive the public and misrepresent the benefits and costs of public works projects. Graft and kickbacks are present through campaign contributions and gifts. These are the kinds of factors that signal that public works spending is actually a fraud.

The politicians wave job creation numbers before the press, knowing full well that the process is a fraud. Biden is now claiming how carefully projects will be selected. This is totally unbelievable. It is rhetoric to gain support. The money will be dissipated on bike paths, costly earthquake resistant building improvements, devices to save energy that cost more than they return, increases in Medicaid, modernization of classrooms that do not improve education in the slightest, and all manner of environmental fads. Much of the public knows this, but the government uses its media platform to defuse any dissent while it extols the virtues of its actions. This deception is at the heart of the fraud.

When it comes to government and money, we are between two rocks and a hard place. The government’s uses of forced exactions (taxes) are not controlled by the principals (the taxpayers.) In the next stage, which is when government spends the money, it fails to control the uses. Waste, improvidence, and inefficiency are government hallmarks. Earmarking funds for favored interest groups is standard operating procedure, and that induces these groups to laxity, corruption, misuse of funds, and fraud. But when the government attempts to control its use of funds by controlling the behavior of its recipients, then heavy-handed and inefficient socialism and fascism rear their ugly heads.

The largest frauds in our society are the frauds of government. The largest frauds in our society are the frauds of elected leaders. They constantly betray the public trust, a term that has largely disappeared from their lips. Bailouts, Fed loans, and public works projects spread the poison more widely, inducing even more private sector laxity, inefficiency, kickbacks, payoffs, and corporate and business malfeasance. This will not diminish until those who supply the money control the uses of that money.

December 30, 2008

Michael S. Rozeff (msroz@buffalo.edu) is a retired Professor of Finance living in East Amherst, New York.

Forecast for 2009
James Howard Kunstler
http://www.kunstler.com/

There are two realities "out there" now competing for verification among those who think about national affairs and make things happen. The dominant one (let's call it the Status Quo) is that our problems of finance and economy will self-correct and allow the project of a "consumer" economy to resume in "growth" mode. This view includes the idea that technology will rescue us from our fossil fuel predicament -- through "innovation," through the discovery of new techno rescue remedy fuels, and via "drill, baby, drill" policy. This view assumes an orderly transition through the current "rough patch" into a vibrant re-energized era of "green" Happy Motoring and resumed Blue Light Special shopping.

The minority reality (let's call it The Long Emergency) says that it is necessary to make radically new arrangements for daily life and rather soon. It says that a campaign to sustain the unsustainable will amount to a tragic squandering of our dwindling resources. It says that the "consumer" era of economics is over, that suburbia will lose its value, that the automobile will be a diminishing presence in daily life, that the major systems we've come to rely on will founder, and that the transition between where we are now and where we are going is apt to be tumultuous.

My own view is obviously the one called The Long Emergency.

Since the change it proposes is so severe, it naturally generates exactly the kind of cognitive dissonance that paradoxically reinforces the Status Quo view, especially the deep wishes associated with saving all the familiar, comfortable trappings of life as we have known it. The dialectic between the two realities can't be sorted out between the stupid and the bright, or even the altruistic and the selfish. The various tech industries are full of MIT-certified, high-achiever Status Quo techno-triumphalists who are convinced that electric cars or diesel-flavored algae excreta will save suburbia, the three thousand mile Caesar salad, and the theme park vacation. The environmental movement, especially at the elite levels found in places like Aspen, is full of Harvard graduates who believe that all the drive-in espresso stations in America can be run on a combination of solar and wind power. I quarrel with these people incessantly. It seems especially tragic to me that some of the brightest people I meet are bent on mounting the tragic campaign to sustain the unsustainable in one way or another. But I have long maintained that life is essentially tragic in the sense that history won't care if we succeed or fail at carrying on the project of civilization.

While the public supposedly voted for "change" this fall, I maintain that they underestimate the changes really at hand. I voted for "change" myself in pulling the lever for Barack Obama. I regard him as a figure of intelligence and sensibility, but I'm far from convinced that he really sees the kind of change we are in for, and I fret about the measures he'll promote to rescue the Status Quo when he moves into the White House a few weeks from now.

Where We Are Now

Without reviewing all the vertiginous particulars of the year now ending, suffice it to say that the US economy fell on its ass and that the "global economy" did a face-plant as well. The American banking sector imploded spectacularly to the degree that investment banking actually went extinct -- as if a meteor landed on the corner of Madison Avenue and 51st Street. The response by our government was to shovel "loans" onto the loading dock of every organization that pretended to be something like a bank, while "bailing out" an ever-longer line of corporate claimants with a pitiable song-and-dance. The oil markets went on a roller coaster ride. The housing bubble collapse grew to avalanche velocity (taking out whole colonies of realtors, mortgage brokers, and construction contractors in its path), the commercial real estate sector developed hemorrhagic fever, retail drove off a cliff on Christmas Eve, the stock market fell in the toilet, jobs and incomes went up in a vapor, and tens of millions of ordinary citizens addicted to revolving credit found themselves in a life-and-death struggle for the means of existence. None of this is over yet.

The Year Ahead

Much of what has been lost in 2008 will not be recovered: enterprises, personal fortunes, chattels, reputations.

I expect a period of euphoria to mark the early weeks, perhaps months, of the Obama team. It will be a relief to have a president who speaks English correctly and has experienced something like real life prior to politics. Restoring credibility and legitimacy in leadership will be a big deal. If nothing else, we may recover a collective sense of consequence from a president who tells the truth, even the harsh truth. The age when it was enough to claim that "mistakes were made" might be over. A sign of this sort of change may be the commencement of prosecutions for misdeeds in banking and securities that are now destroying the entire system of deployable capital. A good place to start will be an investigation of Henry Paulson for insider trading stemming from Goldman Sachs's shorting of its own issued mortgage-backed securities when Mr. Paulson was the company's CEO. Beyond his case, there should be enough work at Attorney General Eric Holder's office to employ a line of law school graduates stretching from Brattle Street to the planet Mars. It will be salutary for the nation to see those who engineered the banking collapse come to greater grief than the mere surrender of their Gulfstream jets and Hamptons villas. By the way, being allergic to conspiracy theories, I don't believe for a minute that there is some kind of shadow elite of "Bilderburgers" standing in the background to protect these grifters -- and I also believe the reason these paranoid notions persist is because it is otherwise hard to account for the extravagant irresponsibility of the Bush circle and its servelings.

Apart from "cleaning up Dodge," so to speak, and from issues of collective character-and conscience-in-office, I worry that the avalanche of troubles already ongoing will overwhelm Mr. Obama and his people. It's also well worth worrying whether they will pursue policies similar in kind to the ones pursued by Bush, namely throwing money at everything and anything, and it sure looks like they are planning to do just that. I am especially concerned about an "infrastructure stimulus" project aimed at highway improvement at the expense of public transit. This would be the epitome of a campaign to sustain the unsustainable. We need to begin planning right away for a transition away from automobiles, not in order to be good socialists but because Happy Motoring is at the core of our unsustainability trap. The car system is going to fail in manifold ways whether we like it or not, and it will fail due to circumstances already underway. For one thing, it will cease to be democratic as the remnants of the middle class find it impossible to get car loans, or pay for fuel, or insurance, and that will set in motion a very impressive politics-of-grievance setting apart those who are still able to enjoy motoring and those who have been foreclosed from it. Contrary to what you might make of the the current situation in the oil markets, we are in for a heap of trouble with both the price and supply of petroleum (more on this below). And there is no chance in hell that any techno rescue remedy to keep all the cars running by other means will materialize.

A consensus in the blogoshpere says that the stock markets will rebound strongly during the first Obama months. This is possible just on the basis of pure "animal spirits," but the Obama Bounce will occur against a background of continued dismal business and financial news. It will appear to defy that news. By May of 2009, the stock markets will resume crashing with the ultimate destination of a Dow 4000 before the end of the year. Meanwhile, jobs will vanish by the millions and companies will go bankrupt by the thousands, especially in the so-called service sector, and in all the suppliers of such, along with the landlords in all the malls and strip malls. The desolation will mount quickly and will be obvious in the empty storefronts and trash-filled parking lagoons. In the event, two things will become increasingly clear to the nation: that the consumer economy is dead, and that there is no more available credit of the kind that Americans are in the habit of enjoying.

We'll turn around early in 2009 and discover that we are a much poorer nation than we thought because from now on credit will be extremely hard to get for anyone for anything. The businesses that survive will have to keep going on the basis of accounts receivable. This is the area where the crash of giants will be heard. I've been saying since publication of The long Emergency that comprehensive downscaling in all our activities, from farming to business to schooling to governance, will be the categorical imperative of the years ahead. Giant enterprises requiring giant loans to get from quarter to quarter will tend to not make it. Borrowing from the future will become a practical impossibility as past bad debts from previous borrowings continue to unwind, cease performing, and get written off. This argument implies that the federal government will tend to flounder just as General Motors, Citicorp, Target Stores and other gigantic enterprises will tend to flounder. It would be sad to see a President Obama so hamstrung and helpless, and it is largely why I see his role as largely symbolic -- as a reassuring presence encouraging the distressed public to bravely bear their hardships, and to be kind and helpful among their neighbors.

Households, like businesses, will have to pay as they go from earned income. The house as ATM is over. Credit cards are maxed out and credit ceilings are lowering like the ceiling in "The Pit and the Pendulum," preparing to slice-and-dice the old "normal" of family life in America. Bankruptcy will be the new Nascar. A lot of families will lose everything. They will sift and disperse into the housing owned by other family members -- parents, siblings -- and a strange new not-altogether comfortable kind of togetherness will become common. Over time, a lot of people will go looking for casual work "under-the-table"( and probably low-paying). To some degree, these workers will begin to look and act like a new servant class, and before too long they may be absorbed into the households of people who employ them. There will be plenty of room for them there.

Counties, municipalities, and states will join in the bankruptcy fiesta. It would be reasonable to expect collapsing services as a result. This would be a situation fraught with danger -- of rising crime, of public health emergencies as water systems are not kept up and sewage treatment becomes unaffordable. I don't imagine the federal government stepping into every Podunk or Metropolis from sea to shining sea and propping up these services. People will have to cope with danger and deprivation.

2009 may be the point where we begin to understand what kinds of places will be more hospitable to human society further ahead. I maintain that our giant urban metroplexes have way overshot their sustainable scale and will contract severely. With all the economic hardship, we ought to expect a lot of demographic churning, people leaving hopeless places and moving on to something more promising. I believe we will see them move to smaller towns and smaller cities. The reorganization of the rural landscape into smaller-scaled farms has not begun to occur -- though 2009 might be very hard on agribusiness, given the shortage of capital and if oil begins to march up in price by late winter. Eventually, the rural landscape will require the labor of many more people than is currently the case. Whatever else happens, 2009 will surely see a massive return to home gardening as budgets become strained to the extreme. As the New Urbanist Andres Duany said recently, "Gardening is the new Golf!"

The oil scene

Many were stunned this year to witness the parabolic rise and fall of oil prices up to nearly $150 and then back around $36 by Christmas time. Quite a ride. I said in The Long Emergency that volatility would be the hallmark of post peak oil because it was obvious that advanced economies could not absorb super high prices and would crash in response; that at some point after crashing, these economies would respond to the new lower oil price, resume their cheap oil habits, and build to another price rise. . . and crash again. . . in a declension of ever-lower industrial activity.

What I probably didn't realize at the time was how destructive this cycling between low-high-and-low oil prices would actually be in the first instance of it, and what a toll it would take right off the bat. We can see now that our first journey through the cycle took out the most fragile of the complex systems we depend on: capital finance. As a result, a huge amount of capital (say $14 trillion) has evaporated out of the system, never to be seen again (and never to be deployed for productive purposes). It will be harder for the USA to rebound from the grievous injury to this crucial part of the overall system, and Europe has foundered similarly -- though the European nations are not burdened to the same degree by the awful liabilities of suburbia.

Even if these advanced economies -- throw in Japan too -- remain moribund, the price and supply prospects for oil look ominous. My own guess is that the price of oil has overshot on the low end just as it overshot on the high end, and that, when all is said and done, we'll still see