Ahead of the Herd Blog

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/