about all economic

Corresponding bear market

2012-05-08T00:38:00.001-07:00

For stock and/gold oriented trader/investors, there is an article contrasting past performance of the two vehicles entitledPaperbugs Won’t Get It Until It’s Too Late. The author’s immediate view is as follows:

A brutal cyclical common equity bear market within this secular bear market for common stocks has already begun. Meanwhile, the parabolic phase in the uncommon Gold secular bull market has just begun with the latest thrust higher. Please don’t mistake the forest for the trees: Gold should be correcting now and common stocks are due for a dead cat bounce higher. But these shorter-term considerations are not where the big money is made for retail investors …

His longer term view is as follows:

And for all those who say that this is not a replay of 2008, I agree. Things are much, much more serious now and the corresponding bear market has the potential to be even more devastating. When the banking system is broke plus many nations in the world are broke and at the breaking point, you are talking about a replay of the last year or two of the 1929-1932 bear market. It will be more drawn out this time (will it end in 2014?) due to endless apparatchik interventionism, which will fail again and again, as it always has in the past. Being a bear will become dangerous, as events in Europe this week related to abrupt banning of short selling demonstrate. Paper Gold may be banned or curtailed as things spiral out of control, so don’t say you weren’t warned.

The piece contains good historical information. As always, make up your own mind.

Improve the economy

2012-05-05T06:08:00.000-07:00

Hapless Ben Bernanke, in an effort to save the unsaveable, continues to pour liquidity into the system.

Liquidity is the only thing that keeps the economy and the government from imploding. It accomplishes nothing other than to “pretend and extend.” The economic debacle ahead cannot be avoided, only deferred. It provides those willing to understand more time to prepare. It also means most will be poorer in terms of purchasing power as a result.

The banking system is insolvent, headed for collapse. Bernanke cannot change this ending, only its timing. In the meantime, he destroys the savings and the standard of living of the middle class. His inflationary policies drive food costs up around the world. Many believe this pressure on food prices precipitated the riots in the poorer nations.

QE3 is coming because the political class has nothing left with which to escape the debacle. Regardless of whether it is announced or what it is called, this “field of dreams” strategy of “print it and they will spend” will not improve the economy. Few believe that myth anymore. The purpose is to stave off the inevitable.

Liquidity will continue to drive prices up and impoverish the middle class around the world. Unrest and rioting will be the response by the lower classes who will have difficulty affording food.

James Quinn provides comments on Bernanke and this policy:

The storyline being sold to you by Bernanke, his Wall Street masters, and their captured puppets in Washington DC is that deflation is the great bogeyman they must slay. They make these statements from their ivory jewel encrusted towers as the real people in the real world deal with reality. The reality since Ben Bernanke announced his QE2 policy in August 2010 is:

Unleaded gas prices are up 45%.

Heating oil prices are up 46%.

Corn prices are up 71%.

Soybean prices are up 26%.

Rice prices are up 13%.

Pork prices are up 31%.

Beef prices are up 25%.

Coffee prices are up 38%.

Sugar prices are up 48%.

Cotton prices are up 13%.

Gold prices are up 42%.

Silver prices are up 115%.

Copper prices are up 23%.

Banking system is headed for collapse

2012-05-04T00:55:00.001-07:00

Warren Buffet committed $5 billion to Bank of America today. The stock opened up more than 20%.

Buffet’s commitment may be considered good news, especially for shareholders of Bank of America. Ultimately, it is probably bad news for all of us, including B of A.

In my opinion, it is merely another confirmation that our banking system is headed for collapse. It indicates that more Federal funds (your taxes) are headed for the banking system. Buffet would not have made this commitment without assurances from government that they would backstop him.

In Tyler Durden’s opinion:

Goldman bailout part 2 is here. And so the Octogenarian of Omaha doubles down on another taxpayer bailout.At least we can put aside all the lies that Bank of America did not need capital. It needed capital: $5 billion of it. It also confirmed it was completely locked out of both debt and equity public capital markets – the bank’s only recourse was a private raise with a crony capitalist who is once again doubling down on the global ponzi.

Buffet’s play was not made without knowledge (and/or commitments from the government) as to what to expect. He is part of the ruling class, regardless of the Omaha folksiness. He knows how to get his bread buttered.

Is Mr. Buffet getting senile? His views on taxation are bizarre and overexposed but he still appears sharp in interviews. He backed President Obama (or at least was used by President Obama during the campaign), but has showed enough sense to disappear from political view after the election.

Is it possible he has major needs elsewhere where future government assistance will be required? Possibly, but it is difficult to tell. He knows how to use Washington to his advantage.

There are many questions that could be asked. I don’t know all the questions or most of the answers; nor do I think they matter. The issue comes down to this — is government capable of bailing out the banking system? If the answer to that question is No, the Mr. Buffet has likely made a terrible error with his involvement with B of A.

Big government types always assume that government is big enough to solve (or, more properly termed, “cover up”) any problem. It is not. The banking system will be the Waterloo of this concept. The banking system is insolvent. In my opinion, the amount of money necessary to solve the problem exceeds government’s resources. This cancerous growth on the economy will eventually kill the economy and the government.

Buffet’s input of funds indicates he either needs support down the road or does not understand that “Too Big to Fail” is morphing into “Too Big To Bail.”

Working within the system

2012-05-03T03:08:00.002-07:00

In their opinion, we have lost in the sense that there is no way out of our current situation:

To put it simply, America is nearing a checkmate scenario. Like the final torrid maneuvers of a rigged chess match, we have been pressed, manipulated, and attacked into the last remaining corner of the “grand global chessboard” left to us; centralized control of all social and economic power into the hands of an unworthy elite. If we continue playing the game by their rules, we will lose. There is no doubt. There have been many solutions presented to us in the past to combat this development, but nearly all of them function within the constraints of Federal politics. Working within the system has earned us no quarter, and frankly, no results. Our only recourse (and, frankly, the best recourse all along) is to STOP relying on the rules of their game, and to walk away from the chess board completely…

There will not be a pleasant ending:

We also need to face the reality that an economic collapse is very likely to come before such a renaissance of preparedness will see the light of day. We must accept that in many parts of modern day America, we will not be able to wake up enough people in time to prevent a U.S. version of what we now see in the riots of England, as well as what we saw here in the aftermath of Hurricane Katrina, but on a national scale – unprepared people who are desperate and scared, or those who are willing to take advantage of the situation to loot, rob, rape, assault, and even kill their fellow citizens.

For those living in metropolitan areas, these problems may become unbearable and life-threatening. We see problems of this sort breaking out around the world. In the US innumerable “flash riots” occur which mostly involve looting but also physical assaults. These are merely precursors to the real thing. These reflect frustration, the sense of entitlement that dependents have and a 50% unemployment rate among the youth.

To the extent possible, have some means to leave these areas when matter turn difficult. In these economic times a back-up location is probably not economically feasible for most. Consider relatives, friends and other alternatives. You should have this and other strategies carefully thought out. When chaos ensues it will be too late to either think clearly or possibly even communicate easily.

Do I think this might happen? Yes, I am afraid so. A year or so ago I thought this ending might be avoided. No longer.

Prepare and hope that you have wasted time doing so. There may be some links in the above referenced article that might help you. The internet is filled with scenarios and preparations. Some may appear too extreme, but do yourself and your family a favor and “waste” some time looking at them.

We all hope matters never come to this. Most of us are incapable of imagining the possibilities. Please prepare! Just in case.

Market is ready for a long bear market

2012-05-02T03:58:00.000-07:00

Bill Bonner at The Daily Reckoning wrote this before today’s $100+ drop in the price of gold. Interestingly, he also thought gold might go down, perhaps for some period. Is he discouraged? Hardly, he believes it would be crazy to divest of gold and expects one ounce of gold to eventually be equal to the Dow Jones at some point.

His guess is as good as mine or yours. Here are some other guesses:

We’re also guessing that…

…the weight of so much debt is depressing growth…and will soon depress stock prices too…

…that the economy is becoming zombified from too much government money…especially the military…

…that Mr. Market is ready for a long bear market anyhow; he’s tanned, rested, and ready to go to work

…that the US is following in Japan’s footsteps…towards a long period of on-again, off-again recession

…that the recession of ’08-’09 in the US never actually ended…

…and that stocks will go down over the next 5-10 years until they finally hit a real bottom.

But wait. Here comes the San Francisco Fed. Can you believe it? It agrees with us.

My opinion is worth what you pay for it. I believe gold is in a correction (FINALLY!!) and intend to buy more. Perhaps not right away. Regarding the points above, I believe in them even more strongly than I do the continued rise in Gold. You make your own decisions.

Describe the current economic strategy

2012-05-01T22:30:00.001-07:00

The bloated, self-serving political class can usefully be understood as parasites feeding off the private sector of the economy.

As the economy spirals toward collapse and the government toward bankruptcy, the necessity of spending cuts and downsizing of government should be obvious. However, the recent debt ceiling debacle indicates that the political class is not interested in saving the economy.

The term Kevorkian economics is used to describe the current economic strategy pursued by the political class. Like Kevorkian, the strategy involves managing death – the death of the US economy (and likely other economies).

The parallel between Dr. Kevorkian and the political class is not perfect, however. Kevorkian engineered quick, painless deaths for patients. All patients requested his assistance. Regardless of your moral judgment, Kevorkian did not coerce anyone. He provided service per their requests.

The political class differs from Kevorkian in that they have parasitically preyed on citizens from the inception of government. Now they have refused to pursue remedies to save the economy. Instead the economy has been committed to hospice, unbeknownst to citizens.

“Extend and pretend” is a commonly-used term to explain what is meant by Kevorkian economics. The phrase implies that no attempt is being made to cure the problems. Instead, the political class extends the life of an economy placed in hospice while pretending to the public that conditions are normal and improving.

Dying: The Economical Way to Go

In 1975, Richard B. McKenzie and Gordon Tullock wrote a book entitled The New World of Economics. Tullock is one of the founders of the Public Choice School of Economics. The book expanded economics to non-market aspects of life, much like the recent Freakonomics. It was in the spirit of Gary Becker’s pioneering work of explaining non-market behavior with economic principles. Becker won a Nobel Prize for his contributions.

A short chapter in the book was entitled “Dying: The Most Economical Way to Go.” According to the authors, the way to maximize the utility of living is to have all your bodily systems fail simultaneously. If, for example, you died of a heart attack with healthy lungs and liver, it indicated that you could not have maximized the pleasures of life. Presumably, you under-consumed cigarettes, booze and other unhealthy pleasurables.

Their colorful and somewhat tongue-in-cheek treatment of dying demonstrated utility maximization. It illustrated the utility maximization principle. Maximization is achieved when the marginal value (or utility) of all products/resources are equalized.

They concluded:

The economist’s advice is that a person should so employ his human and nonhuman resources that the world ends for him not with a whimper but with a bang.

In other words, the optimal solution is to expire precisely at the time that all resources are exhausted.

Politicians, generally ignorant and dismissive of economics, seemingly grasp the dying concept, at least with respect to the death of a country. Their behavior has been consistent with it during the latest crisis and arguably for decades. Their actions steer us to an eventual economic ending “not with a whimper but with a bang.”

Assuming that politicians understand the principle of economic maximization may seem far-fetched because it implies intelligence and understanding usually considered beyond the political mind. Yet political behavior conforms nicely to the maximization conditions set forth by McKenzie and Tullock as discussed below.

For those who find it implausible to accept that the political class is following such a strategy, let’s rephrase the economic maximization strategy into more crass political parasite terms: “the longer we can keep the host alive, the more we can plunder.” That is more consistent with the average citizen’s view of political behavior.

Regardless of how political motivation is expressed, the actions to achieve it are the same. The economic principle merely defines the conditions under which the goal is achieved and maximized.

Economic Sub-systems

The dying analogy can be extended to the economy by assuming that economic sub-systems are akin to human organs. Comments on some of these follow:

The banking system is insolvent and near collapse.
Government debt is approaching its maximum; at least as far as arms-length buyers are concerned.
The social welfare system is unsustainable with record numbers of people on food stamps and extended unemployment benefits.
Government revenues shrink due to actual and potential diktats from Washington. The uncertainty these create is not conducive to private initiative.
The Social Security Fund is now cash-flow negative. Unless provisions are changed, it is unsustainable in the longer-term.
Medicare is broke and bankrupting the country. ObamaCare will dramatically worsen this black hole. Massive changes in these programs are necessary.
Fannie Mae and Freddie Mac are insolvent and require continuing bailouts from taxpayers. The FHA is not far behind.
The Student Loan Program will be the next big bailout. Students are graduating with unprecedented levels of debt and unable to find employment.
Government-run organizations like Amtrak and the Postal Service lose money consistently. They cannot be effectively managed in a political environment.
“Green Energy” jobs are a myth and a new potential bubble. Subsidizing these jobs or “investments” is merely another political boondoggle and misallocation of resources. Ethanol subsidies are a prime example of this green uneconomic engineering.

Every one of these sub-systems is under the control of government. Even the shelter of monopoly, afforded the postal service and Amtrac, is not enough to enable government ineptness from resulting in bankruptcy.

Every one of these subsystems is on the verge of collapse. This condition is exactly what the economic maximization principle for dying efficiently calls for.

Not all sub-systems are of critical importance. The failure or cessation of “green jobs” would be trivial (other than from a political posturing standpoint). The failure of Amtrak or the Post Office would be akin to a skin rash. The failure of any one of the other sub-systems, however, would likely be fatal for the economy.

An economic collapse would also be fatal for the parasite class. That is why politicians manage the demise so carefully. Ultimately it will be impossible to avoid collapse.

Current Condition

Every sub-system is on the verge of collapse. Some reached this condition as a result of blatant incompetence. Others because they were originally set up to be, or quickly became, Ponzi schemes – nothing more than scams intended to purchase current votes to be paid for by future voters. We are the generation when the music stops. We will suffer the consequences of past and current political nonsense.

Bernie Madoff and Enron executives must wonder why they are in jail. Compared to government they appear highly ethical and moral, and certainly more competent.

Conditions in Europe are at least as bad as the US. Problems there could trigger the downfall of our banking system and economy.

Decades of short-run political fixes have finally caught up with us. The process was summarized by Urs Paul Engeler:

By following today’s apologists of the British economist John Maynard Keynes (1883-1946), the so-called ‘welfare’ states pumped too much money (which they didn’t have) into consumption: into pensions for all (Europe), exorbitant armament (US), endangered industries (both), and finally bailouts for ailing mortgage banks (also both). This intervention was celebrated by Keynes’ disciples as the ‘return of politics’. In reality the hopelessly over-indebted states only exacerbated the crisis.

We are on the precipice of economic and societal collapse which the political class has chosen to accept so as to maximize their time in, and spoils from, office.

Despite their criticism of economics, politicians practice the concept of self-interest better than economists or anyone else. Unfortunately politicians are not encumbered with constraints like a Hippocratic Oath, ethics or principles.

Elites don’t need constraints. That is why we face this threat to the very foundations of civilization itself.

Incessant hammering of free markets

2012-05-01T05:09:00.000-07:00

George Bush did it; the Republican obstructionists in the Congress who were wary of approving another $2 trillion in debt did it; the Tea Party did it; Standard and Poor’s did it; the Japanese earthquake did it; the Japanese tsunami and nuclear accidents did it; the Middle East unrest did it; the European debt crisis did it; new technology like ATM machines did it. Obama has cited these culprits and many more — though never either himself or his advisors who took a weak recovery and turned it into a near recession.

You see, The One is not responsible for a thing. His efforts would have had us back on “easy street” had it not been for the above.

But it is worse than that. His incessant hammering of free markets, businessmen and “success” is creating a bit of John Galt in all producers:

Of course, one Huey Long–like “fat cat,” an occasional adolescent “millionaires and billionaires,” a once-in-a-while juvenile “corporate jet owners,” a few 1960s-like “spread the wealth” or “redistributive change” slips, a single petulant “unneeded income,” or a sole pop-philosophizing “at some point you’ve made enough money,” or even on occasion the old socialist boilerplate “those who make over $250,000 should pay their fair share” in isolation are tolerable. But string them together and even the tire store owner and pharmaceutical rep are aroused from their 70-hour weeks, and start to conclude, “Hmmm, this guy doesn’t like me or what I do, and I better make the necessary adjustments.” And, believe me, they are making the necessary adjustments.

“Going Galt” behavior is beginning to surface. More corporations freeze spending and hiring. More decide to invest abroad, if at all. Money and capital quietly leave the country. Gold is soaring as a a store of wealth and a fear investment.

Mr. Hanson’s column is a good read and he nails our current situation:

… what we are witnessing is a sort of shrug, a pause, best summarized millions of times over as something like “I’m hoarding cash, hunkering down, and am going to wait this bad bunch out.”

So the globe is tottering as the tired-of-it-all American Atlas has finally sorta shrugged.

The government must do somethin

2012-04-30T22:01:00.002-07:00

On Thursday, the Dow was off about 500 points in the first hour, presumably based on fears of European bank and sovereign failures.

The talking heads on CNBC were beside themselves, rationalizing what was happening and what should be done — the Federal Reserve should initiate QE3, more fiscal stimulus should be used, etc. etc. All spoke of the need for government solutions and quick actions.

By 10:30 I could take no more of “the government must do something.” Governments cannot solve this problem. They caused it! Intervening will only make the problem worse.

There is an inherent problem in government, all governments. It leads to situations like the current one and then progresses to much worse. This problem, discussed below, eventually leads to the collapse of economies if not civilizations.

Politics As A Form of Parisitism

The definition of a parasite is “an organism that spends a significant portion of its life in or on the living tissue of a host organism and which causes harm to the host without immediately killing it.” Parisitology is the study of parasites.

The definition of a parasite sounds like a perfect description of what government has become. The political class, its cronies and its dependents are parasites. The host is the productive sector of the economy. One lives at the expense of the other. One is “taking,” the other “making.”

Parisitology appears to be a subject that should be an added requirement for Political Science (one of my favorite oxymorons). The notion of government preying on the productive is hardly a new concept. Cautions are easily found:

Thomas Jefferson observed:

If we can prevent the government from wasting the labors of the people, under the pretence of taking care of them, they must become happy. … I think we have more machinery of government than is necessary, too many parasites living on the labor of the industrious.

It is easy to understand why the law is used by the legislator to destroy in varying degrees among the rest of the people their personal independence by slavery, their liberty by oppression, and their property by plunder. This is done for the benefit of the person who makes the law, and in proportion to the power that he holds.More than 150 years ago, Frederic Bastiat commented on what he saw happening in France:

Even the fall of Rome, widely attributed to “bread and circuses,” attracted Will Rogers’ attention:

Ancient Rome declined because it had a Senate, now what’s going to happen to us with both a House and a Senate?”

The parasite-host analogy would seem to be a reasonable basis for a general theory explaining the rise and fall of civilizations. Assuming someone has not already milked it, it could make an interesting dissertation topic. However, in most academic settings implicating the State in the failure of civilizations could jeopardize your career.

The State of the US

In the US, as in Europe, parasites have increasingly drained vitality from the productive class. This process began virtually from inception of the country. Initially the efforts and effects were imperceptible. Over time the boldness and number of parasites increased. Today, under the guise of social welfare and military adventurism, the productive host’s survival is in jeopardy. Economic death is looming unless current trends are reversed soon and dramatically.

The recent debt ceiling debacle was an opportunity to address the problem. The effort, instead, became a political charade. Ultimately it strengthened the parasites, again, by further weakening the host. Zerohedge pointed out:

This debate is not about saving our economy or our global credit standing. This debate is about choosing our method of poison, and nothing more. That is to say, the outcome of the current “political clash” is irrelevant. Our economy was set on the final leg of total destabilization back in 2008, and no amount of spending reform, higher taxes, or austerity measures, are going to change that eventuality.

Rejuvenation of the host is possible, but it will not happen. The reasons are not economic but political. Even if control of Congress and the Presidency shifts to the Republicans, it will not matter. Both political parties are parasitic. Only their genus differs, and that is more marketing than substantive.

One may reasonably infer from the outcome of the debt charade that an implicit decision was made to kill the host. There were no spending cuts. There was hardly a slowdown in the planned rate of spending. Nor was any mechanism put in place to ensure that real cuts, if agreed upon, would be implemented by future Congresses.

Politics and Motivations

Politicians, unlike actual parasites, generally understand the ramifications of decisions. Other than those with IQs below room temperature (make your own estimate of how many that be), politicians know the precarious condition of the host.

Is it rational for an understanding parasite to destroy the host upon which it feeds? After all, if the host dies, so do the parasites.

Public Choice theory argues that politicians behave no differently than ordinary people. Motivations are not suddenly changed upon entering government. Self-interest is still the driver whether in or out of government.

Self-interest in government is especially troublesome because constraints imposed by markets are absent in government. Those in power are constrained only by the laws they impose upon themselves and periodic ballot box judgments. The power of incumbency suggests the latter is of limited effect. If self-interest conflicts with public service and laws are ineffective, self-interest is served.

Non-economist David Brin suggests politicians have less character than the average citizen. He attributes this to a perverse self-selection process:

It is said that power corrupts, but actually it’s more true that power attracts the corruptible. The sane are usually attracted by other things than power.

Albert J. Nock preceded David Brin and was even more damning in his assessment of the political class:

Taking the State wherever found, striking into its history at any point, one sees no way to differentiate the activities of its founders, administrators and beneficiaries from those of a professional-criminal class

Public Choice theory does not depend upon the political class being evil. The argument rests on self-interest, regardless of the character of the person.

Parasite Irrationality

If Public Choice theory is valid (and it is), how does one explain the unwillingness of the political class to save the host? When the host dies, so do the parasites. Do we have an instance here where politicians are not acting in their own self-interest?

The answer is that political parasites are acting rationally by allowing the host to perish. The key to understanding this anomaly is that curing the host would require radical medicine in the form of massive spending cuts. These cuts would require dismantling of various entitlements and much of the welfare state. Even with this medicine, it might be too little, too late to succeed.

The reason that the cure will not even be tried is that any attempt to do so would be politically fatal for whoever proposed it. Voters believe that government is the source of free goodies. Too many believe they are entitled to be supported by government. Anyone proposing meaningful spending cuts would likely be subjected to political execution at the earliest election.

Nothing is more valued to the political mind than attaining and retaining office. That is why the debt ceiling deal was such a fraud. Neither party pushed for meaningful spending cuts. Both postured for voters. Both wanted a new credit card and got the largest one ever issued.

Political parasites rationally chose to continue the plunder and exploitation knowing that it ensured long-term death of the host. In classic Keynesian short-termism (“in the long-run we are all dead”), politicians chose to remain in the trough to continue feeding on the host.

The decision to destroy the host may not seem rational to the rest of us, but it is clearly in the best interest of the current parasites. Death for them at some future uncertain date is a better than death at the next election. They chose what was in their best interest but not the country’s.

Until the host dies, the current parasites will exploit for as long as they can. They have chosen a form of Kevorkian economics, managed suicide for the host economy. Unlike Kevorkian, they intend to keep the host alive as long as possible, enabling them to maximize their time in the trough.

The rest of us will be left to pick up the pieces when the collapse occurs. The parasites will be dead in a political sense but likely living in a different country.

Government is the problem, everywhere.

Politicians like zombies

2012-04-29T21:49:00.001-07:00

So, what’s the difference between an angry zombie and a person who is angry because he’s tired of supporting zombies?

In economic terms, a zombie is a parasite. He contributes less to the economy than he takes from it. He lives at the expense of others.

Almost any profession or career can be a nest for a zombie; an auto mechanic who rips off his customers, for example, is a zombie…at least in a sense. But most often, zombies are created, enabled, and supported by government. Government transfer payments create whole armies of zombies. Government bailouts turn whole industries into zombies. Government programs and

government employment turn millions of otherwise reasonably honest and reasonably productive people into leeches. A guy who might have been a decent gardener, for example, becomes an SEC lawyer or a Homeland Security guard.

Politicians like zombies. Zombies are cheap. If you buy a vote from a man who is independently wealthy, it’s gonna cost you. And the bourgeoisie – which earns its money from honest toil and enterprise – is hard to buy. But zombie votes? They’re a dime a dozen. Just increase Social Security or Medicare; the zombies will line up to vote for you.

It’s relatively easy to turn people into zombies. And it’s fairly easy to support them when an economy is healthy and expanding. But when an economy goes into a contraction, you can no longer afford to give the zombies their meat. Then what?

Then, watch out. The zombies rise up.

Germany was the success story of Europe. Until this week. The latest numbers show the German economy has stopped growing. In fact, it is now trailing the rest of Europe…which is said to be growing at a very slow rate.

Friends in Berlin tell us that young people have gotten used to living off the government. Youth unemployment is high. Everybody wants to earn money and status in the easiest way possible. Even well-educated young people find they can live better by taking government support payments than by working a regular job.

What will they do when the checks no longer come? Look out.

The riots in Europe will increase as austerity is imposed. There is no other choice there or here. Things are going to get ugly, especially in our metropolitan areas.

Remarkable group of economists

2012-04-28T02:45:00.000-07:00

Who were these people?
They were like scientists trying to address a convention of witch doctors.
They gave up career and fame to stick with the truth and say what had to be said.
… it is very dangerous for an economist to seek fame and fortune and to work closely with political establishments, simply because, in [Hayek's] experience, the most important trait of a good economist is the courage to say the unpopular thing. If you value your position and privileges more than truth, you will say what people want to hear rather than what needs to be said.
They chose freedom even when it was at the expense of their own bank accounts and even though their choice brought professional decline and risked failure in the eyes of their colleagues.
… the man who is willing to do what is right regardless of the circumstances.
It takes more than technical knowledge to be a good economist. It takes moral courage, and that is in even shorter supply than economic logic.
These were a remarkable group of economists that valued truth over fortune. In our materialistic, relativistic world, there are few like them today in any field. Too many economists have become “rent-an-economist,” willing to say or do anything for advancement and income. Other professions, including the physical sciences,
have their whores as well, but the nature of the social sciences provides greater opportunities for such behavior.
To find out more about these people and their counterparts, read the following article.
Economics and Moral Courage
Mises Daily by Llewellyn H. Rockwell Jr. | Posted on Wednesday, September 16, 2009
Hans Mayer (1879–1955)
It must be really painful to be an economist of the mainstream today — at least, it should smart to some extent. In a financial and economic calamity of the current scale, people naturally want to know who issued the warnings about the real-estate bubble and its likely aftermath.
When private-sector jobs have not grown at all in ten years, and when ten years of domestic investment is systematically undone in the course of 18 months, when housing prices in some sections of the country collapse 80 percent, and when formerly prestigious banks go belly up or receive many billions in rescue aid, people want to know which economists saw this coming.
Perhaps it is these economists — the ones who had long issued the warnings, and not the ones relentlessly consulted by the media — who should be giving the guidance about going forward. Maybe they ought to be weighing in on whether the new stock-market boom is a reflection of reality, or another bubble developing within a bust that could lead to a secondary depression.
Among the mainstream, however, no one saw it coming. That is because they have never learned the lesson that Bastiat sought to teach, namely that we need to look beneath the surface, to the unseen dimensions of human action, in order to see the full economic reality. It is not enough just to stand back and look at points on a chart going up and down, smiling when things go up and frowning when things go down. That is the nihilism of an economic statistician who employs no theory, no notion of cause and effect, no understanding of the dynamics of human history.
So long as things were going up, everyone thought the economic system was healthy. It was the same in the late ’20s. In fact, it has been the same throughout human history. It is no different today. The stock market is going up, so surely that is a sign of economic health. But people ought to reflect on the fact that the highest performing stock market in the world in 2007 belonged to Zimbabwe, which is now home to a spectacular economic collapse.
Because of this tendency to look at the surface rather than the underlying reality, the business-cycle theory has been a source of much confusion throughout economic history. To understand the theory requires looking beyond the data and into the core of the structure of production and its overall health. It requires abstract thinking about the relationship between capital and interest rates, money and investment, real and fake saving, and the economic impact of the central bank and the illusions it weaves. You can’t get that information by watching numbers blow by at the bottom of your TV screen.
Then when the crisis hits, it comes as a complete surprise every time, and economists find themselves in the role of forging a plan to do something about the problem. This is when a crude form of Keynesianism comes into play. The government spends what money it has and prints what it doesn’t have. Unemployed people are paid. Tricks to prop up failing industries abound. Generally, the approach is to gin up the public to engage in some form of exchange, in order to keep reality at bay.
Austrians counsel a different approach, one that takes account of underlying reality during the boom phase. They draw attention to the existence of the bubble before it pops, and once it goes away, the Austrians suggest that it does no good to blow another bubble or otherwise keep uneconomic production and plans going.
The Austrians in the late 1920s and early 1930s found themselves having to explain this again and again, but it was the onset of the age of positivism — the method that posits that only what you see on the surface really matters — so they had a very difficult time making points that were more sophisticated. They were like scientists trying to address a convention of witch doctors.
The same is true today. The Austrian account of economic depression requires thinking on more than one level to arrive at the truth, whereas economists these days are more likely to be looking for obvious explanations and even-more-obvious solutions, even when these neither explain nor solve anything.
This puts the Austrians in an interesting position within the intellectual culture of any time and place. They must go against the grain. They must say the things that others do not want to hear. They must be willing to be unpopular, socially and politically. I’m thinking here of people like Benjamin Anderson, Garet Garrett, Henry Hazlitt, and, on the Continent, L. Albert Hahn, F.A. Hayek, and, above all, Ludwig von Mises. They gave up career and fame to stick with the truth and say what had to be said.
Later in life, when speaking before a group of economics students, Hayek bared his soul about this problem of the moral choices economists must make. He said that it is very dangerous for an economist to seek fame and fortune and to work closely with political establishments, simply because, in his experience, the most important trait of a good economist is the courage to say the unpopular thing. If you value your position and privileges more than truth, you will say what people want to hear rather than what needs to be said.
This courage to say the unpopular thing marked the life of Ludwig von Mises. Today, his name resonates around the world. The tributes to him pour out on a monthly and weekly basis. His books remain massive sellers. He is the standard-bearer for science in the service of human freedom. Especially after Guido Hülsmann’s biography of Mises appeared, the appreciation for his courage and nobility have grown.
But we must remember that it was not always so, and it did not have to be so. This kind of immortality is granted in no small measure because of the discrete moral choices he made in life. For if you had asked anyone about this man between 1925 and the late 1960s — the bulk of his career — the answer would have been that he was washed up, old school, too doctrinaire, intransigent, unwilling to engage the profession, attached to antique ideas, and his own worst enemy. They called him the “last knight of liberalism” as a way of conjuring up images of Don Quixote. When Yale University solicited opinions on whether it should publish Human Action, most people answered that this book should never see the light of day because its time was long past. It was thanks only to the intervention of Fritz Machlup and Henry Hazlitt that Yale bothered at all.
“The most important trait of a good economist is the courage to say the unpopular thing.”
Mises was as undaunted then as he had been throughout his life, and as he remained until his death. He had made a moral choice not to give in to the prevailing winds.
Before going into that choice more, I would like to speak of another economist who was a contemporary of Mises’s. His name was Hans Mayer. He was born in 1879, two years before Mises. He died in 1955.
While Mises worked at the Chamber of Commerce because he was denied a paid position at the University of Vienna, Mayer served as one of three full professors there, along with socialist Othmar Spann and Count Degenfeld-Schonburg.
Of Spann, Mises wrote that “he did not teach economics. Instead he preached National Socialism.” Of the count, Mises wrote that he was “poorly versed in the problems of economics.”
It was Mayer who was the truly formidable one. Yet he was no original thinker. Mises wrote that his “lectures were miserable, and his seminar was not much better.” Mayer wrote only a handful of essays. But then, his main concern had nothing to do with theory and nothing to do with ideas. His focus was on academic power within the department and within the profession.
Now, people outside of academia may not understand what this means. But inside academia, people know all about it. There are people in every department who expend the bulk of their efforts on the pettiest form of professional advancement. What is at stake? Not that much. But as we know, the smaller the stakes, the more vicious the fight.
Among the prizes are better titles, higher salaries, the ability to get the best possible teaching times, to reduce one’s teaching load (ideally to zero) and office hours, to advance one’s favorite people, to get a larger office with a puffier chair, to know all the right people in the profession, and, best of all, to lord it over others: to be able to reduce the influence of your enemies and increase the influence of your friends in a way that can cause people to become your lifetime minions and supplicants.
With the state, there are even more prizes: to be close to politicians, to get outside gigs in which you serve as an expert in drafting legislation or in legal proceedings, to testify before Congress, to get called by the mainstream media to comment on national affairs, and the like. The point is not to advance ideas, but rather to advance oneself in a professional sense.
Outsiders imagine that university life is all about ideas. But insiders know that the real battles that take place within departments have very little to do with ideas or principles. Strange coalitions can develop, based entirely on the pettiest of issues. Professional ambitions are the driving force, not principles. There are people in every department who are highly accomplished, but whose accomplishments have nothing to do with science, teaching truth, or pursuing a vocation as a real scholar.
This has been the case for many centuries in academia, but it may be worse now than ever. These pursuits are often well rewarded in this life, while those who eschew them in favor of truth are pushed aside and relegated to a permanent low status. These are just some of the facts of life. This is what Hayek was referring to. And Mises’s life illustrates the point perfectly.
“Outsiders imagine that university life is all about ideas. But insiders know that the real battles that take place within departments have very little to do with ideas or principles.”
But let’s return to Professor Mayer. The main energies of Mayer were spent on an open war against his rival for power, Othmar Spann. This consumed him almost completely. He believed that he had to keep Spann at bay in order to advance himself. Mayer smeared Spann in every possible place and way, in a war to the knife. Note here that Mayer and Spann did not disagree on any matter of policy in any substantive way. It was all about position and power.
When he wasn’t consumed with passionate hatred for and plots against Spann, Mayer spent the remainder of his energy building up his power base within the University of Vienna. It began well for him as the acknowledged successor to Friedrich von Wieser, who was the previous power broker. Mayer had established himself as the most groveling student of Wieser’s. His reward was that Wieser named him as his successor, bypassing not only Mises but also the remarkable Joseph Schumpeter.
Then began Mayer’s march. He called the shots. Mises himself was on the enemies list, of course. Mayer was in part responsible for denying Mises a full-time teaching position and salary. But that wasn’t enough for him. He treated Mises’s students very badly during examinations. For this reason, Mises even went so far as to suggest that his seminar participants decline to be officially registered, if only to prevent them from being harmed by Mayer. Mayer also worked to make it nearly impossible for any student in the department to write a dissertation under Mises. The politics were vicious and relentless.
What was Mises’s attitude? He writes in his memoir, “I could not be bothered by all of these things.” He just kept on doing his work. One can easily imagine scenes from this period. Mises is in his office writing and reading, trying to hammer out and perfect the theory of the business cycle or reflect on the problem of economic methodology. A student would come in to let him know about Mayer’s latest antics. Mises would look up from his work, sigh with exasperation, and tell the student not to worry about it, and then go on with his work. He refused to be drawn in.
The Mises Circle was aghast by the goings-on, but the members did their best to make light of it all. They even made up a song, set to a traditional Viennese melody, called the “Mises-Mayer Debate” that featured the two economists talking past each other and sharing no common values at all.
At one point, Mises’s circle grew into a full-blown economic society associated with the university. Mises could only be vice president, since Mayer would, of course, be president, since he was the master of the universe as far as economics in Vienna was concerned. And he never missed a chance to underscore who he was and what he could do.
Mises’s position as vice president would not last. The time came when Nazism grew in influence in Austria. As an old-time liberal and a Jew, Mises knew that his time was limited. Sensing the possibility of even physical harm, Mises accepted a new position in Geneva and left for his new home in 1934. The society declined in membership and otherwise floundered.
In 1938, Austria was annexed to the German Third Reich. Mayer had a choice about what he would do. He could have stood by principle. But why would he do that? It would have meant sacrificing his self-interest for the greater good, and that is something that Mayer had never done. Quite the opposite: his entire academic career was about Mayer and Mayer alone.
So, to his ever-lasting disgrace, he wrote to all members of the Economic Society that all non-Aryans were hereby expelled. This meant, of course, that no Jews were allowed to continue their membership. He cited “the changed circumstances in German Austria, and in view of the respective laws now also applicable to this state.”
So you can see, then, that all of Mayer’s power over his underlings was bested by the greater power of the state, to which he was unfailingly loyal. He thrived before the Nazis. He thrived during the Nazi takeover. He helped the Nazis purge the Jews and the liberals from his department. Note that Mayer was no raging anti-Semite himself. His decision was a result of a series of discrete choices for position and power in the profession against truth and principle. For a time, this seemed harmless in some way. And then the moment of truth arrived and he played a role in the mass slaughter of ideas and those who held them.
Perhaps Mayer thought he had made the right choice. After all, he maintained his privileges and perks. And after the war, when the Communists came and took over the department, he thrived then too. He did all that an academic was supposed to do to get ahead, and achieved all the glory that an academic can achieve, regardless of the circumstances.
But consider the irony of all this power and glory. In the bigger picture of Continental economics in general, the Austrians were not highly regarded by the profession at large. Since the turn of the century, the German Historical School had captured the mantle of science. Their empirical orientation and stance against classical theory had, over the decades, melded nicely with the rise of positivism in the social sciences.
Never forget that the phrase Austrian School was coined not by the Austrians but by the German Historical School, and the phrase was used as a put-down, with overtones of a school mired in scholasticism and medieval deduction rather than real science. So our friend Mayer thought that he was master of the universe, when he was a very small fish in an even smaller pond.
He played the game and that was all he did. He thought he won, but history has rendered a different judgment.
He died in 1955. And then what happened? Justice finally arrived. He was instantly forgotten. Of all the students he had during his life, he had none after death. There were no Mayerians. Hayek reflected on the amazing development in an essay. He expected much to come out of the Wieser-Mayer school, but not much to come out of the Mises branch. He writes that the very opposite happened. Mayer’s machine seemed promising, but it broke down completely, while Mises had no machine at all and he became the leader of a global colossus of ideas.
If we look at Mark Blaug’s book Who’s Who in Economics, a 1,300-page tome, there is an entry for Menger, Hayek, Böhm-Bawerk, and, of course, Ludwig von Mises. The entry calls Mises “the leading twentieth-century figure of the Austrian School” and credits him with contributions to methodology, price theory, business-cycle theory, monetary theory, socialist theory, and interventionism. There is no mention of the price he paid in life, no mention of his courageous moral choices, no mention of the grim reality of a life moving from country to country to stay ahead of the state. He ended up being known only for his triumphs, about which not even Mises was ever made aware during his own life.
And guess what? There is no entry at all in this same book for Hans Mayer. It is not that his status is reduced, not that he is noted and dismissed, not that he is put down as a minor thinker with enormous power. He is not called a Nazi collaborator or a Communist collaborator. Not at all. He isn’t even mentioned. It is as if he never existed. Mayer’s legacy vanished so fast after his death that he was forgotten only a few years later.
It is so bad for Mayer today that Wikipedia doesn’t even have an entry for him. In fact, this talk has given more attention to him and his legacy than probably any other in 50 years. You might wait forever for another mention.
The Mayer line ended. But the Mises line was just beginning. He left for Geneva in 1934, accepting a dramatic pay cut. His fiancée followed and they were married, but not before he warned her that though he would write much about money, he would never have much of it.
“It is so bad for Mayer today that Wikipedia doesn’t even have an entry for him.”
And in Geneva he stayed for six years, having left his beloved Vienna and watched the world go through a shredding of civilization. The Nazis ransacked his old apartment in Vienna, and stole his books and papers. He lived a nomadic existence, unsure of where his next position would be. And this was the way he lived in the prime of his life: he was in his mid-50s and he was nearly homeless.
But as he dealt with the Mayer problem during those years in Vienna, Mises would not be distracted from his important work. For six years, he researched and wrote. The result was his magnum opus, a massive treatise on economics called Nationalökonomie. In 1940, he completed the book and it was published in a small print run. But how intense was the demand in 1940 for a book on the economics of freedom written in German? This was not destined to be a bestseller. He surely knew this while writing it. But he wrote it anyway.
Instead of book signings and celebrations, Mises faced another life-changing event that year. He received word from his Geneva sponsors that there was a problem. There were too many Jews taking refuge in Switzerland. He was told that he needed to find a new home. The United States was the new safe haven.
He began to write letters for positions in the United States, but think what this would mean. He was a German speaker. He had a reading knowledge of English, but he would need to learn it to the point that he could actually lecture in it. He had lost his notes and files and books. He didn’t have any money. And he didn’t know any powerful people in the United States.
There was a serious ideological problem in the United States too. The country was completely enthralled with Keynesian economics. The profession had turned. There were almost no free-market economists in the United States, and no academic to champion his cause. There were a few leads he had on jobs, but they were only promises and there was no discussion of pay or any kind of security. He ended up having to leave with no assurances at all. He was almost 60.
But in the United States, Mises did have a major champion outside of academia. His name was Henry Hazlitt. Let me review Hazlitt’s history here, too. He began his work as a financial journalist and book-review editor for New York papers. He became so well-known as a literary figure that he was hired as the literary editor for The Nation before the New Deal. His free-market views were not a special problem for him in those days. But after the Great Depression, liberal intellectuals had to make a choice: they had to adhere to free-market theory or embrace the industrial-planning state of FDR.
The Nation went with the New Deal. This was a major reversal for this organ of liberal opinion that had long championed freedom and condemned industrial statism. The New Deal was nothing if not the imposition of a fascist system of economics, but The Nation set a precedent for the American Left that this ideological tendency has followed ever since: all principles must eventually yield to the one overriding imperative of opposing capitalism, no matter what.
Hazlitt refused to go along with the change. He argued with his colleagues. He pointed out the fallacies of the National Industrial Recovery Act. He patiently tried to explain to them the absurdities of the New Deal. He wouldn’t give in. They fired him.
H.L. Mencken saw the greatness of Hazlitt’s work and hired him as his own successor at the American Mercury before turning over full control. Sadly, this didn’t work out either, because the ownership of that publication did not like Hazlitt’s Jewishness or free-market bent, and sent him packing yet again.
In different ways, in different sectors, and in different countries, it seemed like Mises and Hazlitt were living parallel lives. At each crossroad in life, they had both chosen the path of principle. They chose freedom even when it was at the expense of their own bank accounts and even though their choice brought professional decline and risked failure in the eyes of their colleagues.
Hazlitt moved to the New York Times, which back then did not have nearly the prestige it has today, however undeserved. He used his position to write about Mises’s books like Socialism. This grabbed the attention of a handful of American business people like Lawrence Fertig, who later became — like Hazlitt — a very generous donor to the Mises Institute. It was Fertig and his friends who knew of Mises’s arrival in America, and they were thrilled. They had seen what a devastating blow FDR and Keynesianism were for free-market ideas. They put together a fund that would provide Mises a position at New York University, where he could teach and write. He was not paid by the university, where he was always a visiting professor, but through a private endowment.
Do you see how all of this links up? Hazlitt took the moral road, the courageous road, the road of sacrifice and principle. It was because of this that Mises, who had taken a similar road, could find safe haven in the United States. It was not the position that he deserved. He would be treated much worse than the Keynesians and Marxists. But it was something. It was an income to pay the bills. It was a chance to teach and write. He had the freedom to say what he wanted to say. That’s all he needed.
So we see how these two men of principle, worlds apart, ended up being drawn to each other because they recognized a type: the man who is willing to do what is right regardless of the circumstances. Each could have gone another way. Mises might have been every bit as famous and powerful as Mayer had been, but he would have thrown away the immortality of his ideas in the process. Hazlitt could have been a high-status writer with a major outlet, but he would have had to surrender every ounce of integrity in order to do so.
Working together, they were able to overcome.
One of the people who had been drawn to Mises through Hazlitt’s writing was the head of Yale University Press, Eugene Davidson, who had approached Mises about doing an English-language edition of his magnum opus from 1940. Mises had already dedicated six years to that book and it had sunk without a trace. Now he was being asked to translate it into English. It was a daunting task, but he agreed in principle. Yale then set out to find referees to approve such a huge publishing risk. Yale first went to Mises’s old colleagues, and they were about as disappointing as referees as they were in other aspects of their careers. They wrote that there was no need to publish the book. Mises’s ideas were old and superseded by Keynesian theory. But Yale persisted. Hazlitt finally managed to assemble a group of people who would endorse the book’s translation, and Mises got to work again.
We all know the frustration that comes with losing a file on one’s computer and having to recreate it. Imagine what it was like for Mises to lose a 1,000-page book, lose it to history in dark times, and to be asked to recreate it in another language.
But he was undaunted. He got to work, and the result appeared fully nine years later. The book was called Human Action. By academic standards, it was a best seller and remains so sixty years later.
Even so, Mises remained at his unpaid, unofficial position. He gathered around him students for his seminar, even though other professors warned the students not to take the class or attend the sessions. They discouraged their students from having much to do with him at all. The dean seconded their hostility. For Mises, who had navigated the wars at the University of Vienna, this was small potatoes, nothing to pay attention to at all.
Slowly his fame spread, but we need to remember that even at its height then in the United States, it was tiny compared with what it is today. In fact, Mises died a year before what is usually considered the Austrian revival, which is often dated from 1974 when Hayek received the Nobel Prize, a prize that was entirely unexpected and that had to be shared with a socialist — and that shocked a profession that had no interest in the ideas of either Mises or Hayek, whom they considered to be dinosaurs.
It is interesting to read Hayek’s acceptance speech, which the Mises Institute published this year. It is a tribute to a profession to which he wanted closer ties. But it was not a loving presentation of the glories of academia. In fact, it was the opposite. He said that the most dangerous person on earth is an arrogant intellectual who lacks the humility necessary to see that society needs no masters and cannot be planned from the top down. An intellectual lacking humility can become a tyrant — and an accomplice in the destruction of civilization itself.
It was an amazing speech for a Nobel Prize winner to give, an implicit condemnation of a century of intellectual and social trends, and a real tribute to Mises, who had stuck by his principles and never given in to the academic trends of his time.
A similar story could be told about the life of Murray N. Rothbard, who might have become a major star in an Ivy League department but instead decided to follow the lead of Mises in economic science. He taught for many years at a tiny Brooklyn college instead, at very low pay. But as with Mises, this element of Rothbard’s life is largely forgotten. After their deaths, people have forgotten all the trials and difficulties these men faced in life. And what did these men earn for all their commitments? They earned for their ideas a certain kind of immortality.
What are those ideas? They said that freedom works and freedom is right, that government does not work and that it is the source of great evil in the world. They proved these propositions with thousands of applications. They wrote these truths in scholarly treatises and popular articles. And history has vindicated them again and again.
$50 $43
We are living now through another period of economic planning and we are seeing economists split on both sides. The overwhelming majority is saying what the regime wants them to say. To depart too much from the prevailing ideology of power is more of a risk than most want to take. A small minority, the same group that warned of the bubble, is again warning that the stimulus is a fake. And they are going against the grain in saying so.
I’m with Hayek on this point. To be an economist with integrity means having to say things that people don’t want to hear and especially to say things that the regime does not want to hear. It takes more than technical knowledge to be a good economist. It takes moral courage, and that is in even shorter supply than economic logic.

To help the stock market

2012-04-28T02:24:00.001-07:00

Most people are convinced that QE3 (or its equivalent) will soon be with us. And most of these also believe that it will be good for the stock market.

TF Market Advisors cautions that the assumption that markets will respond may be incorrect:

Maybe all the Fed members can read Winnie the Pooh and the Money Pot prior to the September meeting. It is a simple story of how greed, and gluttony, and doing what feels good now, can have some very negative long term consequences. That story ends well, but maybe the path of printing money won’t. Another round of QE3 may not do much to help the stock market this time since so many of the factors are different, so much has been priced in, and there were many other positives that helped stocks last year that may not reappear.

Euro-scale unemployment

2012-04-27T04:53:00.001-07:00

VodkaPundit has produced one of the best analyses of our current economic and political condition.

Reagan’s approach and results to an economic crisis were described in the article:

After choking off inflation, cutting taxes, and resisting any call for grand, new spending programs, President Reagan oversaw an amazing expansion of the U.S. economy. In just six years, the U.S. — quite cavalierly — conjured up an economy the size of West Germany’s and added it to the one we already had. Building on that base, President Clinton oversaw an even greater expansion, fueled by the entrepreneur-driven high-tech field.

Then Obama’s approach was described:

If you’re going to have a Euro-scale welfare state with a Euro-scale regulatory state while plumping up Euro-scale labor unions and ossified Euro-scale crony capitalists… well… guess what? You’re going to get Euro-scale unemployment.

VodkaPundit maintains that the Obama administration was aware of what would happen to employment, but miscalculated how it could be mitigated. They believed that stimulus could work one more time, not realizing how hollowed out the economy had become after four decades of such extend and pretend. The Administration also misjudged the character of the American people.

An interesting piece.

Greece is broke

2012-04-26T05:06:00.000-07:00

Reader JJC provides some insight on Greece. The same pretensions are going on in other European countries and in the US. Greece is merely further along than others, although all are headed for the same fate. The days of “extend and pretend’ are nearing an end in Europe and in the US.

The Greeks have shown an unflagging ability to obscure and outright lie regarding their finances.

Rumor has it that Finland wanted the Parthenon as collateral before they would loan any more money to Greece. The Greeks balked at that, understandably.

Now the rest of the EU is lining up trying to secure hard assets for their bailout money

earmarked for Greece. The entire agreement is at risk of being delayed indefinitely or blowing up. Yet, who can blame them? Loaning money to Greece is the same as just giving it to them, you’ll never get your money back. so now, in an effort to please the hard asset crowd, German newspaper Handelsblatt reported today that EU leaders were considering bank shares as collateral.

Oh boy. Greek bank assets as collateral? What’s that worth? Probably as much as the change lost inside the seat cushion of my couch. OK, then, what’s next? Cattle, sheep and other livestock? How about olives and feta cheese? A few goats? How about a national garage sale?

Are any of these dolts listening to themselves?

Greece is broke. Bankrupt. Insolvent.

What’s worse is that there is really no means of that nation growing out of its debt or being able to service its debt load in a short, medium or long term fashion.

File national bankruptcy, default on your debt, get out of the Euro, and go back to being a beautiful and pleasant, but sleepy southern backwater.

More spending will correct matters

2012-04-22T03:15:00.000-07:00

The debate over Keynesian economics rages on. The political class, buttressed by their “rented economists,” argues that Keynesian intervention is necessary. When promised outcomes do not develop, it is claimed that the remedial dosages were too small. More spending will correct matters.

Increasingly, the efficacy of Keynesian Economics is doubted. Common sense, rather than sophisticated formulas and models, is all that is required to see through the false claims and reasoning. Mish provides his view of Keynesianism and “stagflation:”

Stagflation is one of those muddled terms that people debate over. The definition I prefer is inflation and recession at the same time. Using that definition, Brazil and parts of Asia are in stagflation now.

Recall that Keynesian theory stated recession and inflation at the same time were impossible. The 1970′s proved that theory to be rubbish.

Keynesianism should have died in the 70′s, totally discredited, but somehow it survived in academia where its nonsensical ideas still haunt us to this day.

Mish’s observations are correct, but the last one begs for explanation. Why would something so obviously wrong be maintained and expanded?

Quite simply, Keynesianism benefits the ruling class. It does not matter whether Keynesianism works. It is the basis for government controlling the economy and your life. Keynesianism is the source of government growth and power. It provides the motivation and impetus to disregard the Constitution. Keynesianism has made every perceived fault or inequality in life a reason for political action. Keynesianism is an elitist’s dream.

Keynesian economics is wrong in theory and has no empirical support. It slowly impoverishes nations by transferring wealth to the political class from the productive class. It increases the power of government at the expense of citizens. It is evil disguised as necessity and “science.”

Keynesianism, not campaign contributions, is the mother’s milk of politics. Its acceptance was “bought” via an elaborate government bribe system. Grants, the tenure system and Washington employment are all tools used to corrupt young economists. Rewards go to those economists who advocate active and interventionist government. Keynesianism is the tool of Statists.

Reduction is government’s size and power cannot be achieved without an outright rejection of Keynesian economics. That is why the political class defend it so strongly.

Investors expect them to continue

2012-04-18T02:10:00.000-07:00

The Federal Reserve is in over its head. It is trying to solve a fiscal policy created by feckless, cowardly politicians. Monetary policy cannot solve this problem. For a while it was able to cover it up somewhat. That point has been passed.

Today, the Fed will make another announcement. There is little question that they will try to juice markets and the economy in some form or another. For them to announce that they are done would collapse markets and eventually the fiscal policies that cannot be supported without the continuous printing of money. That is why markets and investors expect them to continue.

Surely there must be some constraint on this behavior other than hyperinflation? David DeGraw argues there is:

There are many factors that clearly demonstrate why it would be disastrous for the Federal Reserve to repeat their vicious Quantitative Easing (QE) policy. If you want to know a significant reason why they cannot get away with another round of QE, here is an equation for you:

(Quantitative Easing + Extreme Weather = Revolution + World War III)

From the very beginning we knew that the Federal Reserve’s QE program was going to cause the cost of food to rise and the dollar to decline in value, and that these intended results would lead to an increase in poverty and civil unrest. Now there is a new study that gives us some more proof of this obvious fact…

Mr. DeGraw, in his article, cites a couple of studies to buttress his case.

Suppose DeGraw is correct, do you believe the Fed will discontinue its economic meddling?

I think not and provided the rationale why in Political Parisitology and Kevorkian Economics. All the political class in this country has left is Federal Reserve “bread and circuses.” Even if the politicians knew it was leading to WW III, they would continue their behavior in order to extend their time in office. Stopping the Fed means an economic collapse and a wholesale removal of political vermin from office in 2012. Staying in office is all that matters to these parasites. Damn the other consequences. Full speed ahead.

The political economy would be hopelessly

2012-04-15T22:54:00.000-07:00

Bernanke employs an elementary tactic in rhetorical obfuscation; i.e., presenting a problem without explaining the cause but going immediately into the prescription to be taken to counter its deleterious effects.

This tactic is helpful because it exonerates the FED from being implicated in the cause and, therefore, clears the way for the chairman of the FED to prescribe without excuses.

Picture if you will a doctor, Ben, who has been called into a case. The patient is suffering from severe bodily malfunctioning. Without disclosing that he was the doctor who has been treating the patient with ever increasing doses of heroin, Ben prescribes an even larger dose of heroin. Thus, as the patient’s condition continues to deteriorate, Ben explains that once the dosage of heroin is large enough, the patient would recover.

Alas, the patient dies; and Ben intones with regret—“Our treatment had the patient on the brink of recovery, if only his heart had been stronger!”

Chairman Bernanke also takes full advantage of the ambiguous nature of many words in the English language. For instance, words like significant, improvement, steady, growing, strengthening, positive, etc. imply betterment. But, without quantification, I could say my pulse rate has ‘improved,’ albeit only from 5 beats per minute to 6. Betterment yes, but, to imply significance would be misleading.

The chairman projects the assumption of government’s role as the ‘great intellectual in the sky’ without whose policy actions the political economy would be hopelessly lost in a malfunctioning black hole. Despite the evidence to the contrary.

Bernanke feels very comfortable projecting the role of pontificating High Priest in all matters economic; despite his being culpable for the malfunctioning economy all around him. His professorial tone tends to con his audience into nodding acquiescence.

All of these comments beg the questions:

As smart as he is, does he realize he is using illogical ‘rope-a-dope’ to hoodwink, is he a miscreant practicing intellectual chicanery, or is he just a loyal soldier in the army of political malfeasance?

The stock market’s first reaction

2012-04-15T03:20:00.001-07:00

The charade that is represented by world governments is becoming more strained by the day. Ben Bernanke’s decision to do nothing was ridiculous. Not in the sense that he can affect outcomes in any way shape or form, but in the sense that he can prolong the agony that the economy must endure.

The stock market’s first reaction to today’s non-event was to sell off hard. But after the word got around that this was just a delay (and a short one at that)stocks caught a bid. Basically, the plan by Bernanke to leak his intentions worked.

I think there are two reasons that Bernanke chose not to announce policy changes at Jackson Hole:

I) He wants it to look to the world (and a few Republican politicians) as if the Fed’s actions are being done only after deep deliberation and discussion. That is why the next meeting has been changed to a two-day format.

There will be a two-day circus of Fed Governors looking very serious. But that is just for the TV audience.This is Ben’s show. He has the votes. He is steering the ship. The decisions have already been made. Ben’s going to do something on 9/21.

II) Ben had to put off announcing more monetary oomph today because there is something that has to happen first. There has to be something that comes out of the EU before Bernanke makes his next move.

The facts are that there are no meaningful options left for Ben Bernanke or the European central planners.

Oh, there will be more Fed actions, although they will do nothing except perhaps hold the stock market up a bit longer and drive Gold to $2,000.

At this point, it is all a charade designed to fool as many people for as long as possible. It will end in a collapse worse that will make people wish they could return to the 1930s instead of what they will experience. By that time, the smart politicians (oxymoron?) will be fueling up their jets to leave for safer places. Perhaps some will escape to Quaddafi’s compound.

Capital without labor

2012-04-10T01:33:00.001-07:00

Any good economist will tell you that as complementary factors of production, labor and capital are not only indispensable but hugely dependent upon each other as well.

Capital without labor means machines with no operators, or financial resources without the manpower to invest in. Labor without capital looks like Haiti or North Korea: plenty of people working but doing it with sticks instead of bulldozers, or starting a small enterprise with pocket change instead of a bank loan.

There may be no place in the world where there’s a shortage of labor but every inch of the planet is short of capital. There is no worker who couldn’t become more productive and better himself and society in the process if he had a more powerful labor-saving machine or a little more venture

capital behind him. Capital can refer to either the tools of production or the funds that finance them. It ought to be abundantly clear that the vast improvement in standards of living over the past century is not explained by physical labor (we actually do less of that), but rather to the application of capital.

This is not class warfare. I’m not “taking sides” between labor and capital. I don’t see them as natural antagonists in spite of some people’s attempts to make them so. Don’t think of capital as something possessed and deployed only by bankers, the college-educated, the rich, or the elite. We workers of all income levels are “capital-ists” too—every time we save and invest, buy a share of stock, fix a machine, or start a business.

And yet, we have a “Labor Day” in America but not a “Capital Day.”

Like most Americans, I’ve traditionally celebrated labor on Labor Day weekend—not organized labor or compulsory labor unions, mind you, but the noble act of physical labor to produce the things we want and need. Nothing at all wrong about that!

But this year on Labor Day weekend, I’ll also be thinking about the remarkable achievements of inventors of labor-saving devices, the risk-taking venture capitalists who put their own money (not your tax money) on the line and the fact that nobody in America has to dig a ditch with a spoon or cut his lawn with a knife. Labor Day and Capital Day—I don’t know why we should have just one and not the other.

Happy Capital Day, America!

Fed monetary stimulus is now useless

2012-04-10T01:29:00.003-07:00

Belief that government intervention, as advocated by Keynesian economists, can improve an economy should have ended in the early 1980s. Yet it has not because government power and control is dependent upon perpetuating the myth that government needs to manage the economy.

Continuing intervention eventually cripples an economy by distorting price signals and creating the mis-allocation and waste of resources. Additionally, the general loss of flexibility to businesses reduces their willingness to respond to opportunities. Slowly, capital is destroyed via mal-investment. Entrepreneurs faced with increasing uncertainty are unable to find projects with expected returns that compensate for risk. They refuse to deploy capital, hire workers or expand their businesses. At some point, the system shuts down.

At that point, further intervention is more than harmful; it becomes downright destructive. Mishbelieves we have reached that point. He describes the desperation of government in attempting to perpetuate a failed system and economics. The failure is certain, the timing is not:

It’s time to face the facts Fed monetary stimulus is now useless at best. It’s also time to face the facts the rally in gold has little if anything to do with inflation.

Gold is clearly reacting to further stimulus efforts by the Fed, Eurozone bank stress, or US bank stress. It is always difficult to say “why” something is happening but in this case, bank stress in both the Eurozone and the US is the likely reason for the renewed push higher.

Gold may become even more volatile as the ECB and IMF attempt more futile efforts to “save the Euro”. These foolish efforts to “save Greece” (in reality save stupid European banks that made foolish loans to Greece) has tripled or quadrupled the pain those banks are going to feel.

What may initially have been a 40 billion Euro boondoggle now likely approaches a 150 billion Euro boondoggle and the EU wants to throw yet another 100 billion Euros at it. In the meantime, Italy looks prepared to blow again.

How much more of this will citizens of Germany, Finland, and Austria put up with? How much austerity can citizens of Greece, Spain, Portugal, and Italy take?

This can easily come to a crisis head as soon as next month, or even next week.

The inability of the US economy to create jobs or to “restart” itself is not puzzling when viewed in terms of overbearing government. To repair the economy, it is only necessary to unleash the creative forces of the entrepreneurial class. That cannot occur via more government intervention. That requires downsizing government’s involvment in the economy and society in general. Spending levels, rules and regulations must be dramatically rolled back if there is to be a recovery. If not, there will be a complete economic collapse.

As pointed out, government downsizing cannot happen via the political process. Thus there will be an economic collapse which will result in great pain, disruption and danger. Politicians refuse to renounce the fallacious economics they practice. It would be an admission that the myth of government — that government can manage an economy — was false all along. Thus they will knowingly or not destroy the economy and in the process probably government itself.

Controlling the economy

2012-04-07T02:42:00.001-07:00

Stagflation is one of those muddled terms that people debate over. The definition I prefer is inflation and recession at the same time. Using that definition, Brazil and parts of Asia are in stagflation now.

Recall that Keynesian theory stated recession and inflation at the same time were impossible. The 1970′s proved that theory to be rubbish.

Keynesianism should have died in the 70′s, totally discredited, but somehow it survived in academia where its nonsensical ideas still haunt us to this day.

Mish’s observations are correct, but the last one begs for explanation. Why would something so obviously wrong be maintained and expanded?

Reduction is government’s size and power cannot be achieved without an outright rejection of Keynesian economics. That is why the political class defend it so strongly.

Exposure to traditional stocks

2012-04-07T02:34:00.001-07:00

Most people are convinced that QE3 (or its equivalent) will soon be with us. And most of these also believe that it will be good for the stock market.

TF Market Advisors cautions that the assumption that markets will respond may be incorrect:

Maybe all the Fed members can read Winnie the Pooh and the Money Pot prior to the September meeting. It is a simple story of how greed, and gluttony, and doing what feels good now, can have some very negative long term consequences. That story ends well, but maybe the path of printing money won’t. Another round of QE3 may not do much to help the stock market this time since so many of the factors are different, so much has been priced in, and there were many other positives that helped stocks last year that may not reappear.

Perhaps TF Market Advisors is correct. My strong belief is that they are correct. Hence I have virtually no exposure to traditional stocks.

After choking off inflation

2012-04-05T00:30:00.001-07:00

VodkaPundit has produced one of the best analyses of our current economic and political condition.

Reagan’s approach and results to an economic crisis were described in the article:

After choking off inflation, cutting taxes, and resisting any call for grand, new spending programs, President Reagan oversaw an amazing expansion of the U.S. economy. In just six years, the U.S. — quite cavalierly — conjured up an economy the size of West Germany’s and added it to the one we already had. Building on that base, President Clinton oversaw an even greater expansion, fueled by the entrepreneur-driven high-tech field.

Then Obama’s approach was described:

If you’re going to have a Euro-scale welfare state with a Euro-scale regulatory state while plumping up Euro-scale labor unions and ossified Euro-scale crony capitalists… well… guess what? You’re going to get Euro-scale unemployment.

An interesting piece.

Greek bank assets as collateral

2012-04-05T00:26:00.001-07:00

The Greeks have shown an unflagging ability to obscure and outright lie regarding their finances.

Rumor has it that Finland wanted the Parthenon as collateral before they would loan any more money to Greece. The Greeks balked at that, understandably.

Now the rest of the EU is lining up trying to secure hard assets for their bailout money earmarked for Greece. The entire agreement is at risk of being delayed indefinitely or blowing up. Yet, who can blame them? Loaning money to Greece is the same as just giving it to them, you’ll never get your money back. so now, in an effort to please the hard asset crowd, German newspaper Handelsblatt reported today that EU leaders were considering bank shares as collateral.

Oh boy. Greek bank assets as collateral? What’s that worth? Probably as much as the change lost inside the seat cushion of my couch. OK, then, what’s next? Cattle, sheep and other livestock? How about olives and feta cheese? A few goats? How about a national garage sale?

Are any of these dolts listening to themselves?

Greece is broke. Bankrupt. Insolvent.

What’s worse is that there is really no means of that nation growing out of its debt or being able to service its debt load in a short, medium or long term fashion.

File national bankruptcy, default on your debt, get out of the Euro, and go back to being a beautiful and pleasant, but sleepy southern backwater.

The gold price plummeted

2012-04-01T00:53:00.000-07:00

In the span of just a few trading days last week, the gold price plummeted from a high of $1,910 an ounce last Monday to a low of $1,712 three days later. The folks who never owned gold in the first place, and who have always held the precious metal in contempt, rushed to declare the “end of the gold bubble.” Many of the folks who did own gold wondered if the naysayers might be right this time.

But a few of the folks who own gold, especially those who have owned it for a while, recognized the selloff as the price of their success. In other words, the selloff was only painful if you were one of those investors who actually owned gold. And if you actually owned gold, you probably purchased it for less than $1,712 an ounce, maybe much, much less.

A $200 selloff in three days is not nothing; but it may not be that much worse than a jellyfish sting in Cannes. For perspective, $1,712 would have been an all-time record high for gold as recently as August 5! And even after the recent selloff, the gold price is up 10% over the last 30 days and 45% over the last 12 months. The S&P 500 Index, by comparison is DOWN 6% during the last 30 days and up only 15% during the last 12 months.

Confidence among world leaders has noticeably deteriorated

2012-04-01T00:50:00.000-07:00

There was no joy in Mudvilc Jackson Hole this year. The central bankers of the world have mucked things up so badly that not even their fancy words and Wizard of Oz pronouncements were enough to penetrate the gloom.

The US economy and Ben Bernanke’s optimism have deteriorated from the prior year. Fed policies have not worked, and there is increasing recognition they are the wrong tool for the job. Economic results, body language and confidence among world leaders has noticeably deteriorated.

Econophile provides an analysis of the Jackson Hole dog and pony show. He describes the outcome:

We are witnessing the failure of contemporary economics on a grand scale. These policies are being played out on the worldwide stage much to the same result. Europe is experiencing a culmination of years of failed policies.

What concerns me greatly is the next step. It doesn’t look likely that the Fed will embrace Austrian theory economics.

Instead they will try the same things again. ZIRP has been continued to 2013. Perhaps the Fed will reduce interest on excess reserves, or not pay interest at all, in order to encourage banks to lend. Perhaps it will pursue “Operation New Twist” and roll its portfolio over into even longer term maturities. Perhaps it will reduce bank reserve requirements temporarily (assuming it could get by Dodd-Frank and Basel III).

Then there is QE3, more monetary stimulus through direct injections of cash into the financial markets.

Despite Mr. Bernanke’s promise to the late Milton Friedman, it (Depression) is happening again. Bernanke is out of tools, resources and apparently hope. That he was using the wrong policies is the cause of his dispirit, although he still does not recognize that. For Ben, the situation and its timing could not be worse:

What this means is that during the presidential election cycle, politically sensitive economic indicators such as unemployment will remain negative. This will result in a lot of pressure on the Fed and Dr. Bernanke to “do something.” Like all former Fed Chairmen, it will be hard for Dr. Bernanke to resist these calls from politicians. He will earn his moniker as “Helicopter Ben” and unleash more quantitative easing, a dangerous and regressive policy. Like most drugs it becomes less effective over time. It will further destroy real capital and delay recovery.

I concur completely with the above paragraph, although would add one more important consideration to the list. Even if economic conditions were improving, this paragraph would still be true. The US will be unable to fund its deficits without the Fed printing money. Until spending is reduced, QE is with us regardless of the state of the economy.