Sunday, May 31, 2009

Fresh produce + what lies ahead 5.31.09

1. Germany may amend its constitution to ban budget deficits.

2. Russian perspective on American Marxism in 2009.

3. Bond vigilantes. Excerpt:
“There’s becoming an embedded inflationary premium in the bond market that wasn’t there six months ago,” Gross said yesterday in an interview at a conference in Chicago.
The US government is stuck in a very dangerous situation. They have chosen to prop up existing financial institutions with trillions of dollars, yet there are only three ways to get that money: raise taxes, borrow it, or print it. After decades of deficit spending the USA is now unable to raise taxes without strangling growth, borrow money without investors demanding higher interest rates, or print money without risking severe inflation.

The simplest solution is to face the reality that there is no money left for entitlements. The people and the government are to blame for attempting to live beyond their means for so many decades. Germany is cutting spending massively - Obama is spending $634 billion as a down payment on universal health care entitlements. It does not appear to me that the US government is even considering facing the reality that there is no money left for entitlements.

4. The government took on $6.8 trillion in new obligations in 2008, pushing the total owed to a record $63.8 trillion.

Someone will have to pay for this. Maybe this generation, maybe the next generation, but reality will eventually make its presence felt. Unfortunately in this case it will not be gentle.

Friday, May 22, 2009

Fresh, fresh links 5.22.09

Moody's making some realistic assessments, good sci-fi reads, Peter Schiff marginalized, and a lively exchange between a lefty pundit and Ron Paul (as T.O. would say, get your popcorn ready!).

1. The top 10 libertarian science fiction stories.

2. Time Magazine doesn't take kindly to Peter Schiff.

3. Ed Schultz (who?) "debating" Ron Paul on the merits of the Department of Education and Department of Agriculture.

4. Downgrade, downgrade, downgrade, and then maybe downgrade some more!

Thursday, May 21, 2009

What is seen and what is unseen for May 21, 2009

In keeping with the general theme of this web log, I would like to illustrate the principle that Frederic Bastiat so keenly illustrated in his parable of the broken window. A good economist will take into account the effects of an action or policy on all groups, across all time scales. With that in mind, let's take a look at a new policy proposed by Rep. Alan Grayson (D) from Florida.

The Paid Vacation Act will:

"...require companies with more than 100 employees to offer a week of paid vacation for both full-time and part-time employees after they’ve put in a year on the job. Three years after the effective date of the law, those same companies would be required to provide two weeks of paid vacation, and companies with 50 or more employees would have to provide one week."

Sweet! Who doesn't like vacation, right? The idea here is that more vacation days increase worker productivity and happiness, and result in people using less unnecessary sick days. These developments are claimed to stimulate the economy. They certainly sound good. What worker wouldn't want more paid vacation time? These workers would most probably be happier and may be more productive as a result.

Here is what we'll see if the bill is passed: more people on vacation and a boom in the travel industry. Will overall productivity increase? Let's look at what is unseen:

  • Requiring businesses to provide paid vacation raises the costs for business because workers are being paid not to be productive. If the cost of business increases, it becomes more difficult for employers to hire new workers. Some workers might even have to be fired for the business to continue running at a profit. We don't see the workers retained or barred from entry.
  • Employees are currently producing during what would become paid vacation. The money they earn from their production may not go to the travel industry, but it would go somewhere - and the community will be richer for it. For example, the workers in a TV manufacturing plant will have produced 100 televisions and have money in their pockets to spend on home improvements. Now the community has more TVs and job growth in the home building sector. We wouldn't see either of them.

Just for kicks, lets examine unintended consequences as well. Mandatory paid vacation time effectively subsidizes an unproductive activity, and doesn't remove the incentive for people to use sick days. This is what happens when subsidies are introduced into the marketplace: demand goes up because the good is perceived as "free". Once workers get a taste of paid vacation time they are likely to demand more of it. Thus a more likely scenario is that people will begin to use both paid vacation and sick days, and in time demand an increase in the number of paid vacation days. The article cited unwittingly points out the truth of this.
"France currently requires employers to provide 30 days of paid leave."
The Paid Vacation Act will restrict employment capacity, lower productivity, and restrict the community's ability to accumulate wealth. At least we'll see more Americans taking vacations during these tough times.

Wednesday, May 20, 2009

Elihu Root and the Federal Reserve

Senator Elihu Root (1845 – 1937) in his prescient understanding of central banking and easy credit:
“Little by little, business is enlarged with easy money. With the exhaustless reservoir of the Government of the United States furnishing easy money, the sales increase, the businesses enlarge, more new enterprises are started, the spirit of optimism pervades the community. . . . Bankers are not free from it. They are human. The members of the Federal Reserve board will not be free of it. They are human. . . . Everyone is making money. Everyone is growing rich. It goes up and up, the margin between costs and sales continually growing smaller as a result of the operation of inevitable laws, until finally someone whose judgment was bad, someone whose capacity for business was small, breaks; and as he falls he hits the next brick in the row, and then another, and then another, and down comes the whole structure.”
Who knows if he had heard of the Austrian Business Cycle Theory, but for someone speaking during the creation of the current US central bank, he had a clear vision of what would happen in 2008. This reference was made known to me by a good speech from Thomas Woods.

Fresh produce from the link farm - 5.20.09

Russia's revisionist history, gold coming out of ATM's, our soon to be booming auto industry, and Ron Paul's state of the union address, sort of.

1. "He who controls the present, controls the past. He who controls the past, controls the future."

2. Why auto sales will skyrocket.

3. Where gold comes out of ATM's.

4. Current conditions or just a bad dream?

Sunday, May 17, 2009

What is seen and what is unseen for May 18th, 2009

Borrowing from Fredric Bastiat, here is today's edition.

Take a look at this map illustrating where stimulus dollars are planned to go for highway reconstruction and infrastructure. Billions of dollars are allocated in this map, for the purpose of "jumpstarting the economy". Kind of like stimulus checks, only made of asphalt. Stimulus asphalt.

When these projects are completed, this is what you will see. Smooth new highways and bridges, and we'll all thank the government for it. What we will never see, however, is where the billions would have gone otherwise. You'll never see a new first home being bought, the new small business, the new investments in technology and medicine, or any other choice of the marketplace. Maybe those businesses and investments would have failed, but we will never know.

Thursday, May 14, 2009

What is money? (Part II)

Last time we demonstrated that wealth is only created through production. That eliminated the possibility of money as wealth, but did not shed any further light on what the nature of money is. To continue our investigation we have to consider a new scenario.

The original scenario analyzed the economy of a single man isolated from others. What dynamic emerges when we introduce more people into the picture? There are two possibilites: either each man fends for himself and is responsible for producing all of his needs, from housing to food to health, or there is a division of labor. As society transitions from a single man to a village, each productive citizen specializes in a particular good or service. One man may become a fisherman, another may harvest wheat berries, still another may tailor clothes. This division of labor improves the quality and variety of goods for everyone.

Yet there still exists a logistical problem. How does the fisherman acquire his new trousers (because back then they didn't wear pants they only wore trousers)? He trades his fish directly to the tailor. This is known as barter exchange. This will solve the problem for some cases of exchange, but it soon becomes apparent that not everyone wants what the other party is offering. If the tailor has no taste for fish, then the fisherman will be pressed to find a new commodity that does suit the tailor's taste. So the fisherman finds out that the tailor wants butter, trades some of his fish with the dairy farmer for butter, returns to the tailor and exchanges his butter for the new threads. Problem solved. This process is called indirect exchange and in this case the butter is the medium of exchange.

Notice how the medium of exchange in this case was itself a useful commodity. This is an important point to remember.

An interesting question can be raised at this point. Are all mediums of exchange created equal? Is there any significant difference between the various possible mediums? In his book "What Has Government Done to Our Money?", Murray Rothbard says the answer is no. He explains that the commodities that are chosen as the medium of exchange are more marketable than other commodities. In other words, they are readily sold. He lists several categories that make one commodity more marketable than another: Divisibility, durability, and transportability.

In the example above, butter is used as a medium of exchange with excellent divisibility, poor durability, and fair transportability. A cow might be considered to have poor divisibility, but strong durability and transportability. It is clear that over time certain commodities will rise to the top, and those will be the ones with the greatest marketability. Rothbard argues that gold and other precious metals eventually become the most widely used commodity as a medium of exchange. Gold and other precious metals wind up becoming money. The truth is that all of these various commodities are money, but not all monies are created equal, because they are not all equally marketable.

To illustrate the properties of money lets examine one more scenario. Assume we live in a society where gold is the preferred medium of exchange. Lets say that a new technology emerges which confers a tremendous social benefit but must use gold. If the net effect of this new technology sufficiently damaged the marketability of gold, a different commodity would inevitably take its place. Perhaps platinum, or maybe tungsten carbide. In other words, the marketplace would choose a new medium of exchange to compete with gold. History does bear this out with the emergence of silver and copper coins.

To summarize: Money is always a commodity in itself, and the commodity that finds itself in greatest favor for use as the medium of exchange is one that is most marketable at that time. Money is not confined to one commodity, the marketplace will use whatever varieties of money necessary to expedite trade.

This is a satisfying account of the origin of money, but there are still questions. What is our money? How do we make the leap from commodity money to paper money? Lastly, we still haven't gotten any closer to understanding John Adams' statement. We will look further into these questions next time.

Fresh produce from the link farm

Today's produce has an artistic flair: choir, acting, drawing, and literature. They are plays on the theme of "totalitarianism" and control, a topic which has always fascinated me.

1. We're gonna spread happiness and freedom, we're gonna change it, we're gonna rearrange it, we're gonna change the world. Yes we can! (Other leaders have cheering squads to greater and lesser degrees obviously, but I couldn't find anything for other US presidents. If anyone does please send me a link.)

2. Fred Thompson absolutely kills it here breaking down exactly why spending more money will get us out of debt. He summarily ends the debate between Austrians and Keynesians. Hilarious.

3. A satirical look at the "Glorious Revolution of 1917", using the medium of cartoon.

4. A powerful short story about individuality, by Kurt Vonnegut.

PS - here's a fruit bat. So cool.

Strange but true

I'm of the opinion that we don't need to read science fiction (though I do love to) to be in awe of strange possibilities in this universe. Here's a good example of one such wonderful possibility.

"The most recent twist in this strange tale comes from Monash University in Australia. Researchers there have theorized that some unexplained ship sinkings may have been caused by giant bubbles of methane. These bubbles are released occasionally when methane hydrate melts. If one of these bubbles comes up underneath a ship, the ship will briefly lose buoyancy (since its sitting on gas instead of water). Depending on the location of the bubble (experiments suggest that off to one side is the most dangerous), the ship may capsize. In fact, a sunken vessel has been found in the North Sea in the center of a large methane eruption site called the Witches Hole. As if drowning isn't bad enough, imagine your last sensation being the overpowering smell of rotting eggs..."
The author is referring to sewer ice. Oh and just for fun here's a picture of a rogue wave:

Wednesday, May 13, 2009

Too much to keep up with!

Man things are happening fast these days.

1. Meet your new cyber czar! He's just getting polished up before he makes his entrance.

2. Apparently cutting taxes does save businesses.

3. I thought Google was a "do no evil" guy.

4. Do economists believe American democracy is working?
Economics it is said, presumes that status-quo policy has some sense behind it, that it emerges from a political process that works. Has economics come to a status-quo orientation from a widespread attitude that the political process works?

Interview with Israel Kirzner at

Thank you Jake for helping me find this. The interview makes some very solid points about Austrian economics and its relation to other schools of economic thought.

On Keynesian economics:

I have never really seen myself as a macroeconomist. Of course I've taught macro for many years, yet I felt I never understood Keynesian economics. It assumes that decision making doesn't matter. All that matters are the relationships between totals. While I often pointed out what seemed to me gaping holes, I had no great desire to counter this with a separate macroeconomic theory of some sort.
On the Austrian Business Cycle Theory:'s one thing to develop a theory which could explain a downturn. It's quite another to claim that historically every downturn is to be attributed to that particular theory. That does not necessarily follow. If one were asked, does this theory necessarily explain each and every cycle, I would say no.
On human action:

The fundamental Misesian insight into human action is that it involves a tendency to be right rather than to be wrong. People have an interest in being right. They do not have an interest in being wrong. This definitely, distinctively weights the tendency of human action in the direction of being right.
Each of these points is incredibly interesting in its own right. I think they speak for themselves, but I would like to add to the third point.

If people generally have more of an interest in being right, or getting something right, then in the long run we will all be better off economically. In trading it is often said that when you're losing money the market is trying to tell you that you're wrong. Every person has a different threshold of pain, but once that point is reached people adjust and strive to be right.

Moody's Approval

Mark Zandi is the head economist of credit rating agency Moody's. Here's what he said about the government's response to the current economic mess:

The end to this long painful economic downturn is coming into view. The recession has more to run. Unemployment, which hit 8.9 percent last month, is headed towards 10 percent, but the worst is over. The turn in the economy is largely due to the unprecedented policy response by the Federal Reserve, the Obama administration and Congress and policymakers across the globe. Central banks have slashed interest rates to zero and are printing money to restart lending. It is working. Businesses can raise short-term money again to finance their day-to-day operations and mortgage rates are at record lows allowing homeowners refinance and putting a floor under the beleaguered housing market. The fiscal stimulus package passed just a few months ago is already helping as tax cuts get into checking accounts and the infrastructure spending ramps up. Efforts to buoy the banking system appear successful. The stress tests the nation's largest banks just completed were indeed very stressful. While the banks have more work to do, they can withstand the darkest of economic scenarios. Policymakers aren't done. Efforts to entice mortgage investors to modify loans to forestall still mounting foreclosures have proved disappointing. And the economy will surely not speed directly back to health. It may even stumble again requiring another round of stimulus. Nonetheless, it is fair to say that policymakers learned a key lesson from the great depression, namely that when everyone is panicked, government must act forcefully. It has and thus the current great recession will soon, too, be history. I'm Mark Zandi.
I wonder if Moody's has changed their rating of municipal and corporate bonds as a result of this new optimism.

Tuesday, May 12, 2009

Browse away... you can browse away...

That's like the Pixies' song, you know... "Gouge Away". Anyway, enjoy:

1. Not a very happy story (video).

2. The risk of debt.

3. Actual facts about Canadian health care.

4. Socialists feel the time is ripe.

Do we live in a capitalist country?

And can we blame the recent fallout on "market failure"? Well, first we should define capitalism. The answer according to this well (and vehemently) argued case, is no:

"Nobody's abandoning capitalism here."

True. Capitalism was abandoned -- destroyed, actually -- long ago, beginning around 1913, when the last of free banking was destroyed with the creation of the Federal Reserve and the imposition of a fiat money supply controlled by that Fed.

Since that point in time, what has existed in the United States is a "mixed economy", with continuously-diminishing elements of freedom mixed with continuously-growing elements of statism in the form of fascist controls and regulations on business and economic activity as well as socialist welfare-state looting and redistribution-of-income schemes.

It is true that a whole host of non-government entities and players have helped urge on this destruction of freedom. Lots of big businesses have lobbied for regulations to strangle their competitors -- labor unions of all sorts have lobbied for regulations that permit them to coerce higher-than-market wages. "Special interest group warfare" -- as Ayn Rand called it -- is an inevitable result of government having the power to regualate the economy and dispose of the citizen's money, against their will.

But the main point is that what exists in the U.S. at this time is not capitalism. Capitalism does not feature, among other things:

1) Capitalism does not feature fiat money.

2) Capitalism does not feature a central bank -- the Fed -- with total control over that money, with power to expand it or contract it at will -- with the power to dictate interest rates and enforce capital requirements for fractional-reserve banking that leverages commercial banks at 20-to-1, investment banks at 50-to-1, and government-sponsored entities at 1000-to-1.

3) Capitalism does not feature bank regulators that enforce legislation like the Community Reinvestment Act, the Fair Housing Act, the Equal Credit Opportunity Act, the Community Development and Regulatory Improvement Act and the American Dream Down Payment Act, regulations which banking regulators can and did use to pressure lenders to make billions in loans to people who, under capitalism, would not have qualified for those loans.

3) Capitalism does not feature government-sponsored entities, like Freddie and Fannie and Ginny Mae, that create secondary markets to help encourage nervous lenders to continue making shaky loans. Nor does it feature federal agencies like the Federal Department of Housing and Urban Development (HUD), the Federal Housing Authority (FHA), the, the Federal Housing Enterprise Oversight Office and the Federal Home Loan Bank -- all of which were created because those selfish, stingy lenders wouldn’t give money to people they suspected would not pay it back.

4)Capitalism does not feature a government-controlled cartel of investment rating agencies, which all issuers of securities are required by law to use -- and which are still in business, and whose "services" are still being forced on the investment community, even after these ratings agencies disastrously rated securities containing sub-prime loans as "AAA".

5) Capitalism does not feature “bailouts” of failed companies in the form of taxpayer-financed loans or loan guarantees -- bailouts that insure the incompetent remain in business to further waste capital and further bleed the taxpayers..

6) Capitalism does not feature government-takeovers of failed companies, with government intervening to head off bankruptcy.

7) Capitalism does not feature massive labor regulations such as the Equal Employment Opportunity Act and the agency that enforces it -- the EEOC; or the Americans with Disabilities Act; or the Occupational Safety and Health Act; or the Family Medical Leave Act; or the state laws mandating Workman’s Compensation Insurance; or the state laws mandating Unemployment Compensation Insurance.

11) Capitalism does not feature corporate welfare programs, like the billions of dollars given to farmers who are paid not to produce or who are guaranteed prices -- all paid for by taxpayers who don’t have, and cannot afford, the lobbying power that such corporations or interests can bring to bear.

12) Capitalism does not feature an income tax and welfare system that rewards the lazy, the incompetent, the shiftless, the foolish, the ignorant and the just-plain-no-good by providing them free economic goods and services, paid for by seizing the earnings of the most rational, most productive, most responsible, most creative and most entrepreneurial members...

13) Capitalism does not feature a “code of Federal Regulations” -- now 75,000 pages in length -- that dictates the details of virtually every aspect of our financial and economic life -- a set of regulations that has steadily increased under every president and which, at present, would stretch for over 1.5 miles if its pages were laid end to end -- 1.5 miles of double-columned, small print, both-sides-of -page regulations.

14) Capitalism does not feature a government with departments designed to interfere, intervene and overrule the market in housing, transportation, healthcare, education, energy, mining, agriculture, labor, and commerce.

15) Capitalism does not feature a government in which the actions of the aforementioned departments are amplified by more than one hundred federal agencies and commissions, the most well-known of which include, besides the IRS, the FRB and FDIC, the FBI and CIA, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, and NASA.

As this quick overview of our current system shows, whatever else one may argue about, the claim that what exists in the U.S. today is capitalism is ludicrous beyond belief -- fully as ludicrous as the corollary claim that said non-existent capitalism is to blame for this “financial crises”.

Capitalism is dead -- long dead. What you are witnessing is the self-destruction and failure of the fascistic regulatory/welfare state that killed it -- a fascistic regulatory/welfare state that, in its death throes, is being vastly expanded in one last desperate attempt to loot whatever else can be looted from the remaining productive American taxpayers.

Martin wrote:

"We're not abandoning capitalism, because capitalism is all about protectionism and bailouts. It always has been. Capitalists don't want free markets."

That’s nonsense, Martin. The meaning of the term “capitalism” does not change because those participating in what’s left of the system are advocating destroying still more of it.

If the police and judges stopped enforcing the law -- and instead began advocating allowing more and more criminals to go free, that would not mean that the term “law enforcement” now means, “not enforcing the law”. “Law enforcement” is a term which, like “capitalism”, has a specific meaning that is not a function of what those participating in the system happen to advocate at any one time.

Posted by: Michael Smith | May 12, 2009 6:58:06 PM
From Cafe Hayek. I tried to throw some funny links in there. This was edited for brevity's sake. However, he does make a compelling case for the extent of generalized intervention in normal market processes. Just click on each one of those links for Federal agencies. It's staggering. Maybe we should begin to start blaming our troubles on a "mixed economy" instead of "capitalism"... Kinda like the first step in AA, you know? Admit that you have a condition, and it's not what you thought it was.

What is money? (Part I)

"All the perplexities, confusion and distress in America arise, not from defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation." -- John Adams

What is so mysterious about money? We trade pieces of paper, transfer digital money back and forth and to the average person this system seems to work quite well. We can go into any number of stores and take out some paper which they will gladly accept in return for something useful. What was John Adams talking about? Why do we need to know what money is if we can just know that it works? In order to answer these questions we have to go back to the beginning. Way back.

Consider the case of a shipwrecked man on a desert island. While searching the wreckage for useful items, he finds a suitcase half buried in the sand. Upon opening the suitcase he discovers $1,000,000 in pristine, freshly minted Federal Reserve Notes. He's rich! Now if he could just locate that desert island supermarket, he'd be set for life... Well, he died so lets consider the case of a shipwrecked man on a different desert island. This time, when he opens the suitcase he sees 1000 oz. of neatly stacked pure gold bars. Rockefeller! ... He died too. Some years later a third man gets shipwrecked on this desert island, but when he scours the wreckage he finds a suitcase filled with tools. Hammers, chisels, saws, the works! With these tools and a little labor he was able to start production of a sturdy shelter. Soon afterward he produces buckets to catch rainwater and spears to fish with. After weeks and months of production, he was rich! He had a steady supply of fish to eat, a shelter over his head, a fire pit to keep him warm at night, clean drinking water, and even wooden planks for engraving - to express his artistic sense.

What makes us rich? Is it money? Clearly not. The third man was wealthy due to one thing only - his production. To be even clearer: the source of his wealth lay in his tools, the means of production, also known as capital. If he had no capital, he could have no production. If he had no production, he would be no different than the first two men. He would be dead. Once again, wealth is created through production, which is facilitated by capital.

While we can now see that capital is the source of our wealth and not money, we still have not begun to understand what money itself is. Seeing as how the lone man on a desert island has no use for it, we're left to ask: what is money useful for? When does it acquire value? Perhaps money is more mysterious than we originally thought. Next time we'll dive into "the nature of coin, credit, and circulation" more deeply. If for no other reason than to understand what John Adams' was getting at!

How can we approach economics?

Economics can appear to be an esoteric area of study for those unfamiliar with it. It can even be intimidating, or boring. Yet the news is rife with reports on the state of the economy. We are told that we have a "bad" economy, or that "our economy is fundamentally sound". What do these statements really mean? How do we begin to understand such platitudes?

Henry Hazlitt outlines his approach to economics in his book, Economics in One Lesson:

"...the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." (17)

If we are to be "good" economists, then, we should strive to see as many consequences of actions or policies on as many groups as possible. We would be "bad" economists to the extent in which we fail to envision the consequences of our actions on all groups. This idea is elegant in its simplicity and carries a greater power to explain our world than one might initially think.

I'd like to highlight that Hazlitt characterizes economics as an art. It is a method of thinking more than an exact science. To many in modern academia this is a critical mistake, but his "one lesson" is successfully applied to many areas of life. Oftentimes when we apply this method of thinking we learn that what we intuitively assumed to be truth is revealed to be fantasy. This is where economics ceases to be boring and becomes fascinating - it provides a methodology that illuminates our minds and explains our world, solving many problems that have plagued humanity for thousands of years. Economics is another area where we generally find ourselves looking into Ozymandias' mirror.

Monday, May 11, 2009

Statement of Intent

Ozymandias is a figure in Percy Bysshe Shelley's poem, Ozymandias. He represents at once the height of human arrogance and folly, as well as the truth of his inevitable demise. When Ozymandias' gazed into his mirror he did not merely see his physical image; he saw "the King of Kings". His mirror could never fail to show him the truth, yet he could never see it. How is this possible?

We are a dual creature, both instinctual and intellectual. When instincts inform our opinion we will only see what we want to see. The intellect is a curious journeyman, a relentless effort to peek beyond the boundaries of its current understanding. The metaphor of Ozymandias' mirror is that our assumptions about the world diminish our capacity to see it.

The intent of this blog is to explore the theme of Ozymandias' mirror, that the world is a marvelous and magnificent place but we are constantly limited by our assumptions of it. There are no specific topics that I wish to focus on, but exploring and applying economic theory in history and current events, philosophy, and sharing new and interesting art or music is a good start. I encourage anyone to comment and ask questions. That being said, anything goes really and I hope you enjoy the content.