Love of Liberty

The Free Market Isn't "Dead"

ChrisR — Tue, 07 Oct 2008 19:19:00 GMT

Over and over I keep reading about how the free market has died...how our current crisis is the result of free market forces. Of course, nothing could be further from the truth. The crisis that we are experiencing is one of interventionism. It always strikes me as comical when I read that our financial markets have been operating on a basis of 'raw capitalism.'

But how can this be? Raw capitalism would not have a central bank. It would not have legal tender laws. It would not have regulations forcing banks to make loans to uncreditworty individuals. Unfortunately, these facts do not stop those who are just salivating at the possibility of another New Deal.

Could the free market ever be dead?

My response is: "It's not likely." We've seen many times that when governments regiment economic activities to a high degree, black markets begin to form. And black markets are actually free markets. Haven't you ever noticed that when hyperinflation occurs somewhere in the world, you always read the "official" inflation rates followed by the black market rates? The black market rates are always higher because the free market can't lie.

I even remember reading that were it not for the black market in the old Soviet Union, the poor Soviet people would have been much worse off. So if the free market wasn't even stamped out in the Soviet Union, I think it's kinda silly to already pronounce its death here.

All of the people making such proclamations may be jumping the gun a bit. It is during times of crisis that people become open to new ideas. When the Dow was trading at 14,000 and housing prices were doubling and tripling, trying to persuade people to free market ideas was tough...After all, they were comfortable.

But with the Dow plummeting, housing prices plummeting, and grocery bills climbing, openness to free market ideas are now on the table. Ears that were once closed are at least open. I'm not talking about the media or the news (even though Ron Paul has been on a lot lately) I'm referring to everyday people.

Those who yearn for another New Deal may be thinking they have another slam dunk ahead of them....and they might. But America in 2008 is not the same economically as it was in 1933...and the people may just be open for something that's really new:

A real free market.

A Call for Lower Taxes & Higher Taxes

ChrisR — Tue, 07 Oct 2008 05:40:00 GMT

Larry Kudlow put together some debate tips for John McCain.

After reading the recommendations, I noticed a significant contradiction.

Mr. Kudlow states:

"...McCain needs to stress that tax hikes of any kind would be a total disaster during this economic emergency, and that letting folks keep more of what they earn is a recovery prescription. He needs to emphasize the need for across-the-board tax cuts for individuals and businesses. Lower marginal tax rates will reward work, investment, and risk-taking. They also will put money in people’s pockets as they keep more of what they earn."

Sounds pretty good....People would have to forget about the $700 billion bailout that just passed....but taking that statement at face value, so far so good.

But then the contradiction:

"McCain also should state that the Federal Reserve needs to keep expanding the money supply."

Ron Paul has repeatedly pointed out that inflation is a tax! In fact, Fed Chairman Bernanke even agreed with Ron Paul in this video, saying "Congressman, I couldn't agree with you more that inflation is a tax."

So Mr. Kudlow is calling for lower taxes *and* higher taxes at the same time.

Peter Schiff on the bailout

ChrisR — Mon, 06 Oct 2008 17:42:00 GMT

I remember reading one of Gary North's older articles where he was discussing shortages. Mr. North wrote that whenever you hear of a shortage, the first question that should come to mind is: "At what price?"

Well, Peter Schiff uses the same line of thinking when discussing the $700 billion bailout...with the shortage in this case being buyers of mortgage bonds.

Mr. Schiff writes:

"We are being told loudly and repeatedly that the gargantuan mortgage bail-out package is necessary because illiquid mortgage-backed securities are clogging our financial arteries, threatening the economic equivalent of cardiac arrest. The idea of the plan is to transfer these supposedly valuable, but currently unmarketable, assets to the government so that private institutions can freely lend once more. The monumental flaw in this argument is that the mortgage backed securities are in fact highly liquid, just not at the prices the owners would like to receive.

Mortgage bonds are just like houses. They won’t sell if the owners stubbornly refuse to drop the price. However, they can find buyers if they acknowledge reality, and lower their expectations accordingly.

The government tells us that if these assets are held to maturity their full value will eventually be realized, and that it is only because of a lack of current liquidity that their value is not reflected in the market. However, as many private transactions have shown us in recent months, these assets will find buyers at the right price. These are not overly exotic assets but relatively straight forward mortgage obligations. The inability to find buyers is not a function of liquidity but simply of price. The government is seeking to 'create liquidity' by overpaying."

Don't miss Lew Rockwell's podcast with Peter Schiff.

It's a powerful 12 min.

Re: Beware The Chartist

ChrisR — Sat, 04 Oct 2008 14:57:00 GMT

Burt Blumert wrote an interesting article on LRC about chartists (or market-technicians).

While I certainly understand Mr. Blumert's sentiment, I don't entirely agree with him.

I think a major error that many chartists make is that they think they "know" what will happen next. When someone says they "know" Google shares will reach $500 tomorrow, I move on without taking that person seriously.

The reality is that the future is uncertain...and any of an infinite number of variables can alter the outcome.

However, if a chartist states that there is a "high probability" of a certain outcome, I see no wrong in making such a statement. There are individuals who make a very good living reading charts and making decisons based on them. People do tend to act a certain way in certain situations. I don't see how having knowledge of that can be a detriment. However, a good chartist (in my opinion) is one who undertands that the future is uncertain and all decisions are based on probabilities.

To me, this is not much different from decisions that are made in other lines of business. For example, let's say that after a hurricane, there is a high probability that people will want bottled water. A company like Wal-Mart knows this, and stocks up on thousands of bottles before the storm. There is no guarantee that Wal-Mart will sell these bottles...any number of events can occur to change the outcome. But based on past actions of individuals, Wal-Mart is willing to speculate.

A chartist makes decisions based on how people have acted in the past. So no matter how a person comes to their conclusion, I believe it's wise to accept that anything can happen and every move is a speculation...whether it be Wal-Mart buying bottled water, or Joe Trader buying shares of Apple.

So unlike Mr. Blumert, I'm not willing to dismiss all chartists.

However, if I hear someone say that they "know" what will happen next, I agree with Mr. Blumert wholeheartedly: Beware The Chartist.

Those Small Government Republicans

ChrisR — Tue, 30 Sep 2008 02:27:00 GMT

Arianna Huffington writes:

Ronald Reagan, in his first inaugural address, famously declared that "government is not the solution to our problem; government is the problem."

Twenty-seven years later, in the midst of the worst economic crisis since the Great Depression, and seven-plus years into the reign of Bush and Cheney, Reagan's anti-government battle cry should be on trial. But, stunningly, it is not.

Yet, when I bring up a chart of the federal budget, I have a hard time seeing even the hint of a downtrend.

The Federal budget under Reagan was around $0.5 trillion.....We're now over $3 Trillion!

It appears the Democrats are trying to re-live the New Deal years.

But will Americans buy it this time?

Will Americans believe that it is lack of government spending and regulating that is the problem?

Ron Paul - Beyond The Election

ChrisR — Sun, 28 Sep 2008 18:21:00 GMT

In 1962, Mises wrote in the preface of The Free and Prosperous Commonwealth:

“...I did not indulge in the vain hope that my account would prevent the impending catastrophe to which the policies adopted by the European nations were manifestly leading. All I wanted to achieve was to offer to the small minority of thoughtful people an opportunity to learn something about the aims of classical liberalism and thus to pave the way for a resurrection of the spirit of freedom AFTER the coming debacle.”

Replace "European nations" with "America" and you almost can't help but think of Ron Paul.

Perhaps winning the Presidency wasn't the major issue. After all, Ron Paul is getting more attention now by the media then ever...and his Campaign for Liberty is growing in leaps and bounds.

Debate Reactions

ChrisR — Sat, 27 Sep 2008 13:21:00 GMT

I did not watch the first "debate" last night. But, I have read a bunch of reactions from both the left and right.

100% of them thought that 'their guy' won the debate. I didn't see one defector from either side.

This brought up a few thoughts:

First, people see what they want to see. They have their beliefs and the "debate" merely conforms to them.

Which led to my second thought: I wonder how many of the people watching are 'on the fence' about the two candidates? How many are actually being persuaded by one or the other?

Can you use the handy 80/20 rule here? Is it safe to say that 80% could have turned off the TV and done something else with their time...like visit Mises.org? They're probably already set on voting for 'their guy' and nothing will change that. Maybe 20% are on the fence? If I had to guess, it's probably even lower than that.

In any case, it would be interesting to know.

Short Sellers & Liquidity

ChrisR — Mon, 22 Sep 2008 19:15:00 GMT

Short sellers cover their positions by *buying*.

Let's say that a stock falls in price. Those who shorted at higher prices provide buying pressure (i.e., liquidity) for those who are looking to sell right now.

By removing short sellers from the picture, you are removing buying pressure when stocks fall once again. In fact, I believe this creates a situation where price drops can be much sharper since there is no short covering to act as a buffer.

Someone else must now take the risk of providing the liquidity and acting as a buyer.

Perhaps this is one of the reasons that the ban is temporary.

For a further defense of short-selling, click here.

Thoughts on the upcoming Ron Paul Announcement

ChrisR — Mon, 08 Sep 2008 23:50:00 GMT

The latest press release shows that:

Dr. Paul will announce his intentions for the fall presidential election and will be accompanied by several special guests.

This could mean anything. However, it doesn't sound like an endorsement, since the title of the press release calls this a "major" announcement.

I'm hoping Dr. Paul will run for the Presidency...perhaps on a 3rd Party ticket. I am not a political expert (and never will be); so I don't know all of the rules. Perhaps there is no way for Dr. Paul to run....I don't know.

But if it's possible, I think the news would be huge.

I've been against a 3rd party run from the beginning. However, after seeing McCain's acceptance speech and what the entire Republican Party has become, I think it's time for Dr. Paul to separate himself once and for all. His name should no longer be associated with the Republicans...even if it means losing his Congressional seat.

McCain has been on a roll. His VP pick and convention bounce have given him the lead in several polls. I'm starting to see some Democratic writers actually getting worried that Obama might lose the election. I think this is wonderful news for a Ron Paul candidacy. I believe there are many Obama supporters who can be swayed to vote for Ron Paul; especially if Obama continues to lose steam.

There is a Liberty & Peace vaccuum, and there's no better man then Dr. Paul (and his passionate supporters) to step in and fill it.

Those are my amateur political thoughts.

Can a soundbite really capture market action?

ChrisR — Wed, 03 Sep 2008 11:21:00 GMT

Each day, the financial news channels tell us why the markets were up, or why they were down.

But do they really know why?

Can it be summed up so nicely in a simple soundbite?

Let's think about it for a second: Every day there are millions of different people making decisions based on their own value scales. Some are thinking about the next decade. Others are concerned about the next week or month...Then you have the daytraders who only care about the next 30 minutes....or 30 seconds!

The *reasons* are way too complex for the mind to comprehend: One person may buy because he likes the P/L statements...another because he likes the charts. The sellers are thinking the exact opposite. Some people don't even make their own decisions; instead they use automated systems, or a financial advisor. It's also important to point out that at any second, every person can change his/her mind.

Can a soundbite capture all of this?

Does the financial news factor in all time frames? Or do they only talk about today?

The soundbites often resemble the following:

Stocks were up today because oil was down.
Stocks were down because traders were on vacation.
The Fed moved the markets higher.
XYZ dropped because of disappointing earnings.

I believe it's impossible to pinpoint so precisely...especially since for every buyer there is a seller who thinks the opposite.

It is true that the financial news channels know what their viewers expect. It's only logical to supply what is demanded.

But for those who want to go below the superficial surface...I recommend turning off the tube and thinking for yourself.

Technology Entrepreneurs & Statism

ChrisR — Sat, 30 Aug 2008 16:13:00 GMT

I just read Tim Swanson's latest post on LRC. It talks about Obama's proposal for a Chief Technology Officer, and how several key people in the tech industry are supporting it.

As someone who pays close attention to the technology industry, I've always been intrigued by the statist policies that Silicon Valley types seem to embrace.

What fascinates me is the fact that these are some of the finest capitalist entrepreneurs in our society. After all, the technology industry is (in relative terms) one of the least regulated sectors of the economy. If you know how to code (and anticipate future consumer demands) the sky's the limit.

So here we have some very smart individuals who: a) use their own minds, b) make their own decisions, and c) use their own private property...to create some of the finest, life-changing innovations. They then put their creations to the market test. There are no worries about licensing, or permits, or red tape.

Oftentimes, these individuals give their software away for free. They do so for various reasons, but no matter what the reason, they don't worry about anti-trust laws, or being hassled for "dumping", or "predatory pricing."

Since a relative free market has been the greatest blessing for these entrepreneurs, it has always fascinated me when I read their political and economic opinions. In my opinion, if there ever were a sector of entrepreneurs who desperately need exposure to Mises and Rothbard, this would be the one. They're already sitting on "acres of diamonds" and don't even know it.

In Defense of Advertising

ChrisR — Mon, 25 Aug 2008 13:59:00 GMT

Advertising receives a lot of criticism.

So I decided to put down my thoughts. Below is a fictional conversation that tries to get my views across:

Don't you hate how these big corporations make us buy their junk?

What do you mean by "make us"?

You know, they make us buy through advertising.

Hold on a second.

You mean to tell me that with the hundreds of milions of consumers out there, with:

different thoughts,
different experiences,
different tastes,
different personalities,
different value scales, and
different budgets

...are being forced to buy things through advertising?

You mean to tell me that corporations have somehow cracked the code, and individuality itself has been abolished?

OK...you make a good point, but what if you're wrong? What if advertising could make us buy?

Then there would be no such thing as a business failure.

Every company would be a smashing success. They could make anything they want...advertise it....and become multi-millionaires overnight. No need to worry about what the customers want. No need for questions, surveys, focus groups, trial balloons....No need for profits and losses...Just advertise, and the people will buy.

Does that sound like the world we live in?

So why is advertising such a huge industry? Obviously, many companies see an increase in sales afterwards. Isn't that proof that advertising makes us buy their stuff?

No.

One of the main purposes of advertising is to bring an awareness to consumers that a new product or service is available. If sales go up, it is an indication that the company has guessed right. Their projection turned out to be correct, and they've identified a way to satisfy customer wants.

Keep in mind that everyone doesn't see an increase in sales. Some companies project correctly, while many others miss the mark.

But don't advertisements try to persuade us to buy?

Of course!

However, there's a huge difference between persuading someone and forcing them. One involves a voluntary transaction; while the other doesn't. And if a customer is persuaded (i.e., convinced that the product will solve a problem, or fulfill a desire) then the situation is still a win-win. The customer values the product more than the money used to pay for it, and vice-versa for the company.

Why do companies have to put on such a circus? Isn't that proof that they're trying to manipulate us? I mean, just show us the product and move on. Why the big song and dance?

Let me ask you a question: What if Nintendo simply put a picture of the Wii on the TV screen...and that's it!

Would you know what it is? Would you know what to do with it?

No, of course not.

So instead, Nintendo shows people playing games on the Wii and having fun....and in the process explaining what the Wii is.

Companies want to show you how their product can satisfy a problem that you may have. And they want to do it in a memorable way.

How about when companies play an advertisement over and over? Won't people eventually cave-in and buy?

Not necessarily.

Have you ever heard of the Eddie Murphy film titled "The Adventures of Pluto Nash"? Well this movie had a production budget of $90 million dollars and an advertising budget of $20 million. And do you know how much the movie earned?

$4.41 million. About a quarter of the advertising budget!

Bombarding people with ads is not "the road to riches". Companies can lose a lot of money just throwing advertisements out there willy-nilly...which is why the more successful ones carefully choose where and when they will advertise, and pay attention to who will be watching.

In the end, without advertising, our standard of living would be much lower. We'd have very little idea as to what products or services are available...and thus many satisfactions that we take for granted would cease to exist.

The Commodity Correction

ChrisR — Sun, 24 Aug 2008 00:57:00 GMT

I've been reading a lot of great pieces on whether or not the commodity bull market has come to an end.

Here are links to some of my favorite writers:

Peter Schiff (Bull)

Jim Rogers (Bull)

Gary North (Bear)

Marc Faber (Bear)

If I had to throw my hat in the ring, I'd side with Peter Schiff and Jim Rogers. I believe this is a correction, albeit a sharp one. But commodities (and commodity stocks) have to break further for me to believe it's more than a correction. However, I always take everything Gary North says very seriously, so his great analysis is always in the back of my mind.

Do People "Naturally" Desire Gold?

ChrisR — Wed, 20 Aug 2008 20:25:00 GMT

This writer seems to think so. He states:

Gold's 'value' is embedded in human history and collective psychology.

Gold derives its economic value from the basic human urge to possess it. It is this natural ability of drawing human possessiveness that makes gold as the natural currency of the world, and helps gold display characteristics quite similar to that of 'ordinary money'.

The first statement is a bit confusing. I don't see how gold's "value" can be "embedded in human history"....unless the author meant to say that 'at specific moments in time (in the past) some individuals chose to value gold as money.'

There is also no such thing as a "collective psychology." Individuals think...Individuals act.

But I think the second statement deserves further scrutiny. Do humans have a "basic human urge" to possess gold? And does this urge make gold "the natural currency of the world"?

My answer to both questions is No.

To say that all people have a "basic human urge" for a commodity is to say that all people value that commodity. But values are subjective. Some people value gold, some can care less, and others (the authoritarian types) actually hate it. So a person's individual value scale determines whether or not he/she values gold.

If a "basic human urge" for gold does not exist, why (for thousands of years) did individuals choose to use gold as money?

The answer is because gold fits every quality suitable for a money commodity:

Gold is relatively scarce.
Gold is transportable.
Gold is imperishable.
Gold is easy to store.
Gold is easily divisible.
....and most importantly, gold is marketable.

It is because gold meets the above requirements (better than any other commodity) that it has been used as money throughout history. It is also the reason that many people today protect themselves financially by owning gold. When the 'fiat era' comes to a close someday, gold will still meet all of the above requirements....and it is already accepted throughout the world.

Even Mr. Alan Greenspan said before the U.S. House Banking Committee in 1998: “The U.S. should hold on to its gold stock…Gold still represents the ultimate form of payment in the world...Fiat money, in extremis, is accepted by nobody. Gold is always accepted.”

We're all Speculators

ChrisR — Tue, 19 Aug 2008 16:07:00 GMT

Whenever the price of something moves in the opposite direction of what the establishment would like to see, you can count on 'speculators' taking the blame. After all, 'speculators' seem like such an easy target. The term refers to no one in particular. After all, who speaks for the 'speculators'? They're a perfect scapegoat.

I personally think the whole point is moot...because in my opinion, everyone is a speculator. The main difference that I see between a long-term investor and short-term trader is the time frame of the speculation.

Otherwise:

Both are taking a risk.
Both are dealing with an unknown future.
Both are making decisions based on limited knowledge.
Both are trying to buy low and sell high.

The long-term investor, however, is risking more of his valuable time in the hopes that he is correct. Since time is something that can never be made up, the stakes are much higher for long-term investors.

I personally take the longer-term view; but at the same time I don't look down on those who take the shorter...I believe they are valuable to the marketplace and help paint a complete picture of the market price. I also respect the fact that they are free individuals, making decisions based on their own assessments of the situation. Who am I to say that they should be 'regulated' or 'controlled' or 'curbed'?

At every price there is a buyer and a seller...both of whom are making voluntarily decisions. At the same time, both believe that they are correct in their assessments. So, to me, it's total nonsense to start pointing fingers at 'speculators' when the market price doesn't match what the establishment thinks it ought to be.

I'd like to close with a quote from Mises:

“Every action refers to an unknown future. It is in this sense always a risky speculation.” (my emphasis)