"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Wednesday, December 21, 2011

One More Detail about Bitcoin

The latest claim is that bitcoin is ALREADY a money, or a medium of exchange at the very least, and so of course bitcoins very existence proves Mises wrong. Take that, Mises, with your stuffy old logical thinking, Mike is saying. Your regression theorem claims to prove bitcoin cannot exist as a money, because it is a money coming into existence with no intrinsic value, but here it is, existing and a money.

Here's what these guys don't get. To be a medium of exchange, and certainly to be a money, a thing has to  generally accepted by a wide audience. Now ecoomists have not given precise numbers for this, but bitcoin certainly isn't acepted enough, as I will make crystal clear.

I guess the best way is to just copy what I wrote in the forums. So here it is:

Time to spell out what people don't seem to grasp.
Pete thinks 10,000 people owning a bitcoin makes it a medium of exchange. Sorry Charlie, and no way Jose.
And why not? Let's go back to first principles.
A man works hard and produces something, say he's a carpenter. He wants to buy all kinds of stuff in exchange for the chest of drawers he has built. There is a mortgage to pay, food to buy, cable TV bills, dozens and dozens of things he needs and stores he will have to go to.
Along comes Pete and offers to buy his work for 30 bitcoins.
"What the heck can I do with this garbage?" says the carpenter?
"Plenty," says Pete. "If you go to the bitcoin convention we had a month ago, you could have bought a beer. Even now, there is a store in NYC that will sell you a pizza, and hundreds of tiny online stores you never heard of and have no reason to trust that will sell you flawed software and crappy trinkets. There are 10,000 people all over the world who will buy your bitcoin at widely fluctuating prices, maybe. We're talking about the most versatile medium of exchange in the history of the world."
What will the carpenter say, if he is polite? "I don't need that right now, thank you very much. Come back when I can buy anything with it, from anybody. Or at least from enough people that I can buy whatever I want. Until then it's not a medium of exchange, but a fraud. Have a good day."
Generally accepted. Widely used. Write it down.

The above scenario also refutes Mike's claim that bitcoin has already done what Mises claimed was impossible, to wit, become money. No. It hasn't done anything. It's current situation is not one of being money.

Tuesday, December 20, 2011

Was Mises' Regression Theorem a Mere History Lesson?

That's what some silly folks are saying over at the mises.org forums. That the theorem only says what happened, not what must always happen. [Look at my article, Bitcoin Takes a Beating, for info about what the theorem says, complete with chapter and verse and Smiling Dave's exposition].

Let me enlighten them.

First, let's appeal to authority, shall we. Here are a few respected Austrians talking about the Theorem, and what it claims. All emphases mine:

Rothbard: On the other hand, while money had to originate as a directly useful commodity, for example, gold, there is no reason, in the light of the regression theorem, why such direct uses must continue afterward for the commodity to be used as money. Once established as a money, gold or gold substitutes can lose or be deprived of their direct use function and still continue as money; for the historical reference to a previous day's purchasing power will already have been established.*53 
Note he says HAD to originate, not historically did by accident.

Professor Shostak: The theorem shows that money must emerge as a commodity.

Tim Terrell: One of the consequences of the regression theorem is that money must arise from a commodity already in general use. If there is no nonmonetary use for the good, it will not develop the widespread demand that must precede its use as a medium of exchange. As Mises’s student Murray Rothbard wrote, money "cannot be created out of thin air by any sudden ‘social compact’ or edict of government."[2] But once a good develops a monetary nature, it is there to stay. The nonmonetary uses are no longer necessary to maintain the good’s monetary value, because there is already a set of prices based on that good.

[Note to the bitcoin folks: Yes, money must first be "in general use" with "widespread demand". which bitcoin lacks. One Pete Sudra thinks that a couple of guys at a small convention using bitcoins for a couple of days is enough to prove bitcoin is money. Grow up, Pete. General use and widespread demand is more than you and your drinking buddies.]

And now, the coup de grace, Mises himself in Money and Credit:

The Necessity for a Value Independent of the Monetary Function
before an Object can serve as Money

If the objective exchange-value of money must always be linked
with a pre-existing market exchange-ratio between money and
other economic goods (since otherwise individuals would not be in a
position to estimate the value of the money), it follows that an object
cannot be used as money unless, at the moment when its use as
money begins, it already possesses an objective exchange-value
based on some other use. This provides both a refutation of those
theories which derive the origin of money from a general agreement
to impute fictitious value to things intrinsically valueless,
[like those stupid bitcoins] and a confirmation of Menger's hypothesis concerning the origin of the use of money.

This link with a pre-existing exchange-value is necessary not only
for commodity money, but equally for credit money and fiat money.'
No fiat money could ever come into existence if it did not satisfy this

There you go. He mentions bitcoins explicitly. Of course, you guys know it's a gag. Bitcoins didn't exist in Mises lifetime. I inserted the piece in brackets tio show exactly where bitcoins fit into the scheme of things.

And guess what? Mises laid out the logic of the theorem here like it was an Aristotelean syllogysm. Impeccable logic. Apodictically certain. [An in joke, don't worry about it]. Which means George Selgin and Pete Kinsella and Phil Bagus goofed on this one. Sorry guys.

One last minor note in this head hunting piece, written under the influence. Whenever I use the phrase "intrinsic value" over at the forums, some newbie will say sanctimoniously that nothing has intrinsic value, it's all subjective as Mises taught me, bla bla. Well Mises right here used the phrase intrinsic value. Put that in your pipe and smoke it.

Bitcoin and Mises Regression Theorem.

Link: http://www.libertariannews.org/2011/07/07/the-economics-of-bitcoin-challenging-mises-regression-theorem/

One M. Suede has posted a challenge to Mises Regression Theorem. His purpose is to prove bitcoin is a viable currency, and anyone who disagrees is just stamping his feet in frustration at the facts.

For Smiling Dave's take on the regression theorem, with lengthy quotes from Mises, see here.

We quote Mike's words in italicized font, and our commenst will be in normal font. Here's what Mike has to say:

There is a lot of disdain for Bitcoins by the Austrian gold bugs for a few reasons.  The primary reason is that, well,  they are all holding gold!  It stands to reason that they don’t like potential threats to their investment holdings. 

Ad hominem strikes again! C'mon, Mike, you can do better than that. And to think the existence of 32 million dollars worth of bitoins is going to threaten the price of gold is a good laugher.

I’m going to come right out and say it – Mises was wrong.

But first, he explains to us why, even if Mises was right, bitcoins are great stuff:
The essence of the argument is that

1. bitcoins started their existence as having a well defined rate of exchange, and...

2. that's all you need to satisfy the regression theorem, as he quotes Rothard to prove.

I concede 2., but 1. is a big mistake. Let's quote the man:

The very first businesses in the Bitcoin economy were exchangers (NewLibertyStandard, BitcoinMarket, BitcoinExchange,….).  This is not an accident, but flows from the analysis above.  In order for Bitcoins to serve as a medium of exchange without commodity value for uses besides indirect exchange, there must be a translated knowledge of money prices.  Market exchangers fill this gap and give Bitcoin users access to this knowledge.  Bitcoins may therefore currently serve as a money intermediary for paypal dollars\pecunix\euros.  But why is there demand for Bitcoin over USD??  This is a subjective valuation arising from properties such as anonymity, decentralized system of clearance, cryptographic trust, predetermined and defined rate of growth, built in deflation, divisibility, low transaction fees, etc…. inherent to the Bitcoin system.

Those who read Smiling Dave's blog all the way down to the comments already know why this is an ignorant blunder. Here's the argument, reprinted for your convenience:

If you and your kid sister set up a system of paying each other for lollipops with tarot cards, that doesn't make tarot cards money, right? And why not? Because money has to be something accepted
1. by a whole community
2. in exchange for anything and everything.
That's what medium of exchange means.

When everything can be bought with tarot cards, from a large group of people, not just a few close friends, then they can be legitimately called money.

Bitcoin is not money yet, because there is no community, [even if we call a group of people connected by computers a community], who will buy and sell everything for bitcoins. A few geeks is not a large enough population to count. Even all the bit coin users alive today is not enough. And a few slices of pizza and some software is not enough. EVERYTHING has to be buyable in bitcoins.

The defense rests. Now Mike is going to tell us why Mises is wrong, to boot.
Tell you what, I'll paraphrase, because he is very long winded. You have the link if you want further clarification, or to see if I am summarizing him correctly.

1. He begins by saying that mankind understands the need for money. Having money is so much more convenient than having to barter directly. [Agreed]

2. And then they will realize what makes a good money, fungibility etc, as economists have listed in their works. [Agreed].

3. Finally, they will understand that bitcoin has all the requirements of a good money par excellence, except for that insignificant unimportant detail that it is actually usefull for something or other besides handing over to the next guy. [Agreed]

4. Therefore bitcoin will be accepted as money, and Mises has been shown wrong. [Disagree].

Here's where Devil's Advocate protests vehemently.

DA: Dave, you agreed with all the assumptions, so you must agree with the conclusion. He's got you now, mwahahaha.

SD [=Smiling Dave]: I disagree with one tiny thing in point 3, which destroys his whole argument.

DA [suspiciously]: Oh? And what would that be, pray tell?

SD: Being useful for something besides handing it over to the next guy is not an insignificant unimportant little detail. It's the very DEFINITION of money.

DA: Says you.

SD: Yes, says me, and I have explained it and proven it at great length in two of my previous posts. One of them was actually a rebuttal of Mike's earlier writings, where he said the same thing he is saying now.

DA: And where are the links to these so called proofs?

SD: I'm glad you asked. Here ya go:

Short short version, cuts to the chase: http://smilingdavesblog.blogspot.com/2011/07/bitcoin-yet-again-in-simple-language.html

Rebuttal of Mike's earlier article, and explanation of the regression theorem: http://smilingdavesblog.blogspot.com/2011/06/bitcoin-takes-beating.html

A wonderfull analogy to make it all clear, based on The Emperor's New Clothes:

Tuesday, November 29, 2011

Steve Keen as Santa Claus

Steve Keen, an Australian [not Austrian] economist, has a great idea to save us all. Bring in a Santa Claus with a big bag of money and hand out cold cash to everyone.

Sounds like a great idea, no? Over at mises.org, someone asked about it, and I quote his q in full:

Steve Keen gave an interview on Hard Talk a few days ago in which he called for a "modern debt jubilee" where the government "gives money" to the citizenry who are required to use it to pay mortgage debt if they have any, and can spend it however they wish otherwise. He claims this is the way we can avoid the  "grinding twenty years" and associated social unrest needed to unwind the current global mess. He doesn't give any numbers, just the concept and qualitative arguments for it.

I have a lot of respect for Austrian economics, what little I know of it. I wonder if a learned Austrian could comment on the wisdom or folly of Keen's proposal. I can imagine it would be politically very popular with voters.

His explanation of the plan starts at about 7 minutes into the above You Tube video.

What can I say? That Santa Claus is really a Grinch in disguise. Here's my answer to his q:

You don't have to know much AE to see the folly of this scheme.

Let me paste a bit from my blog about what money is:

How does one make money? By working. In other words, you only have money  if you have first produced something worthwhile, which is what working is . After you have done your share, being productive, then you get money. The money in your wallet allows you to go out there and reap the rewards of your productivity, by consuming what you want. 
The point of this obvious little exposition is that before you spent any money, you have contributed to the wealth of the nation by producing something. Otherwise you wouldn't have the money to spend.
In short, having a dollar in your wallet is at once a Certificate of Productivity [a proof that you actually contributed to the nation's wealth],  and a License to Consume [which is why we want money in the first place, to spend it]. Your consumption will not reduce the wealth of the nation, because you have already increased the wealth [by working for the money] before you ever took any wealth for yourself [by spending the money].
But what happens if the supply of money is increased? This means, in practice, that the govt prints new money for itself, either paper money or digital money. They are giving themselves a License to Consume with that new money, but it certainly is not a Certificate of Productivity. They did not contribute anything to the economy to get that money; they just printed it up for themselves.

So what happens if we do as Keen suggests? Without having produced, everyone will go out and consume. It will be like a plague of locusts hit the country. There will be little left of anything. Prices will then naturally go up, by the law of supply and demand.

After the initial spending binge, we will be worse off than before, because there will be less to go round. Every day will be like Black Friday, with people fighting in the stores over what little is left.

Now there might be one earthly place we can look to salvation in such a situation, and it's called China. Maybe they will be stupid enough to take our piles and piles of dollars and sell us things in return. After all, they have been doing it for years. But if our economic policy is going to be "Let's pray the Chinese keep on playing the fools", then we are being fools ourselves.

Wednesday, November 16, 2011

Copying Some English History from Macaulay

It's about Charles the Second, whom the people had brought back from exile in France to be their king, after deciding they hated the military dictatorship of Cromwell's army.

Charles could not care less about the people, or about keeping his word, and in 1670 decided that he would secretly join France and make war on the Dutch, despite England's popular treaty with that country.

But war needs money, and they were under a gold standard then. He could not print as much as he wanted, nor could he tax the people without consent of Parliament.

We give the floor to Macaulay, my words of explanation in brackets:

The first object of Charles was to obtain from the Commons supplies which might be employed in executing the secret treaty...They [Charles' lackeys] soon perceived, however, that, though the House of Commons was chiefly composed of Cavaliers [the party loyal to the King], and though places and French gold had been lavished on the members, there was no chance that even the least odious parts of the scheme arranged at Dover [where the treaty with France was signed] would be supported by a majority.

It was necessary to have recourse to fraud. The King professed great zeal for the
principles of the Triple Alliance [with Holland], and pretended that, in order to hold the ambition of France in check, it would be necessary to augment the fleet. The Commons fell into the snare, and voted a grant of eight hundred thousand pounds. The Parliament was instantly prorogued; and the court, thus emancipated from control, proceeded to the execution of the great design.

The financial difficulties however were serious. A war with Holland could be carried on only at enormous cost. The ordinary revenue was not more than sufficient to support the government in time of peace. The eight hundred thousand pounds out of which the Commons had just been tricked would not defray the naval and military charge of a single year of hostilities. After the terrible lesson given by the Long Parliament [that the Parliament would behead you if you messed with their power of the purse], even the Cabal [=Charles' Cabinet] did not venture to recommend benevolences [=forced contributions to the sovereign] or shipmoney [an obsolete tax going back to Saxon days to pay for defense of the country].

In this perplexity Ashley and Clifford proposed a flagitious [look it up] breach of public faith. The goldsmiths of London were then not only dealers in the precious metals, but also bankers, and were in the habit of advancing large sums of money to the government. In return for these advances they received assignments on the revenue, and were repaid with interest as the taxes came in. About thirteen hundred thousand pounds had been in this way intrusted to the honour of the state. 

On a sudden it was announced that it was not convenient to pay the principal, and that the lenders must content themselves with interest. They were consequently unable to meet their own engagements. The Exchange was in an uproar: several great mercantile houses broke; and dismay and distress spread through all society.

Meanwhile rapid strides were made towards despotism. Proclamations, dispensing with Acts of Parliament, or enjoining what only Parliament could lawfully enjoin, appeared in rapid succession.

OK, fascinating bit of history, but what's it doing on this blog? It spoke to me, that little story. It brought to life all I've been reading about these last few years about govts and money.

Tuesday, November 15, 2011

One guy at ESPN Gets It a Little, Michael Wilbon.

Here's what he writes [emphasis mine]:

Please, stop with how the players are looking for a "fair deal."
What's fair is what the market will bear. If you don't have control, which is to say if you don't own the means of production, you can't alone define what is fair.

Couldn't have said it better meself.

His whole tone, but for a few things here and there, shows an understanding of what America is about. Good on you, Mr Wilbon.

Child Rape Used to Promote Socialism at Grantland.com

Here are the key lines, from grantland.com:

It happens because institutions lie. And today, our major institutions lie because of a culture in which loyalty to "the company," and protection of "the brand" — that noxious business-school shibboleth that turns employees into brainlocked elements of sales and marketing campaigns — trumps conventional morality, traditional ethics, civil liberties, and even adherence to the rule of law. It is better to protect "the brand" than it is to protect free speech, the right to privacy, or even to protect children.

Sigh. Where are the facts to back this up? This is the age of internet, Charles P. Pierce, provide a link.

If Mike McQueary had seen a child being raped in a boardroom or a storeroom, he wouldn't have been any more likely to have stopped it, or to have called the cops, than he was as a graduate assistant football coach at Penn State.

This is just his not so humble opinion,with no evidence whatsoever.  We will soon show that Penn State [the key word here is "state", meaning funded by the taxpayer] is much different from boardrooms and staterooms. But first, let's let grantland ramble a bit more:

With unemployment edging toward double digits, and only about 10 percent of the workforce unionized, every American who works for a major company knows the penalty for exercising his personal freedom, or his personal morality, at the expense of "the company."

Quite a few factual errors here. Charles P. Pierce, we know you are upset, but keep your focus. Check your facts.

First of all, unemployment has long ago passed double digits, if we use the measurements applied during the Great Depression, not the govt propaganda numbers.

Second, among people who have jobs paid for by the taxpayer, like Penn state employees, union membership is at 35%. Private sector membership is a piddling 7%, [because unions always bankrupt the companies they work in, just like they are bankrupting the govts as we speak].

Third, Mr Charles P. Pierce is implying that if only more workers were unionized, then they would be more moral and free. This contradicts the entire history of unions in the United States, which were and are a pack of violent, lying, thieves and often murderers.

But we digress. The main thesis of this humble article is that Penn State is what it is, a safe haven for pedophiles, precisely because it is NOT a business, not a "company". Because a company has to please the consumer, or it goes out of business. At the first hint of scandal, the company will make good and sure it's "brand" is not hurt, not by hushing the situation up for decades, but by firing the pedophile [unless the unions Mr Charles P. Pierce is so fond of don't allow it]. They have too much at stake.

Can you imagine if a McDonald's, for instance, was known to be a breeding ground for pedophiles, who keep their jobs for decades while actively doing their thing? It would instantly go out of business.

Contrast this with Penn State, which gets it's money parasitically from the taxpayer. They have a known pedophile in their ranks, and they think they can get away with a prayer and a football game to end the incident. And why? Because they get their money no matter what the consumer thinks.

So Mr Charles P. Pierce, your anger is justified, and I share it. But don't toss the baby with the bath. Pedophiles at Penn State have nothing to do with free market companies, and with the blessed decline of unions in the private sector.

[P.S. I was unable to inform Mr Pierce about my article, since I am not a member of Facebook]. 

Friday, November 11, 2011

Important Point from Human Action about Marxism

Mises gets the italics [with all emphasis mine], I get the regular font,:

Socialists and interventionists call profit and interest unearned income,
the result of depriving the workers of a considerable part of the fruits of their
effort. As they see it, the products come into existence through toiling as
such and nothing else, and should by rights benefit the toilers alone.

I'm sure we have all seen that argument, right?

Yet bare labor produces very little if not aided by the employment of the
outcome of previous saving and accumulation of capital.

In other words, the worker is offering his work right now, true. But the capitalist worked hard in the past, and what's more, did without. He saved his hard earned money, meaning he did not go out and party with it, but rather under consumed in order to buy things for his business. It is thanks to his efforts and his suffering that the worker does not have to work with his bare hands, which would earn him little to nothing.

The products are the outgrowth of a cooperation of labor with tools and other capital goods directed by provident entrepreneurial design.

In other words, brains are worth money, too. Besides the worker and the capitalist [the guy who underconsumed so the worker would have tools to work with], there is another partner here who deserves a little something, the entrepreneur. He is the brains behind the whole scheme, the Steve Jobs, if you will. If not for him, the worker would sit there picking his nose, and the capitalist would have a pile of money and not know what to do with it.

The savers, whose saving accumulated and maintains the capital, and the entrepreneurs, who channel the capital into those employments in which it best serves the consumers, are no less indispensable for the process of production than the toilers.

At this point all those Marxists out there should toss away their red flags and look for jobs. But for some reason I doubt this will happen.

It is nonsensical to impute the whole product to the purveyors of labor and to pass over in silence the contribution of the purveyors of capital and of entrepreneurial ideas. 

What brings forth usable goods is not physical effort as such, but physical effort
aptly directed by the human mind toward a definite goal. 

The greater (with the advance of general well-being) the role of capital goods, and the more efficient their utilization in the cooperation of the factors of production, the more absurd becomes the romantic glorification of the mere performing of manual
routine jobs

Tell it like it is, Ludwig!

The marvelous economic improvements of the last two hundred
years were an achievement of the capitalists who provided the capital goods
required and of the elite of technologists and entrepreneurs. 

The masses of the manual workers were benefitted by changes which they not only did not generate but which, more often than not, they tried to cut short.

The only possible response to this by a Marxist, I am guessing, is what they always answer with, irrelevant name calling. We look forward to hearing something logical, lefties. Have at it.

Thursday, November 10, 2011

The Paradox of Thrift

There is a great discussion going on at reddit, and since I have my own blog, Iĺl discuss it here. The first post:

From what I understand of Austrian economics, you guys use praxeology, or the study of human action using pure logic, to come to conclusions.
I also understand that you guys believe that humans act in their own self interest, rationally, with intent.
Keynes believed the same thing. He said that during a recession, people lose money and jobs (by definition), and that if a person is losing money, or fearing his job, he will cut back his budget. Since one man's spending is another man's income, another person will lose income as a result of this. That person will cut back on his spending, and will cause another person to lose income as a result. This is referred to as the paradox of thrift.
So let me ask you: why haven't Austrians deduced the paradox of thrift using Austrian methods?

Good stuff, no? If I don´t spend my money, someone will be out of a job, which will put someone else out of a job, and so on forever. This never ending downward spiral can shut down the whole country, or even the whole world. No wonder the Keynesians insist that spending makes the world go round.

Is there a flaw here? There sure is, in the very first sentence. Letś look at it again.

During a recession, people lose money and jobs, by definition.

Note that there is no attempt whatsoever to explain  why people are losing money and jobs. Indeed,  Keynes writes in his famous book that it is just sheer human stupidity that suddenly affects large masses of humanity, and makes them stop spending money. These things just happen, he says. Must put a stop to it, or those silly asses will bring down the whole country with their ridiculous thrift.

Thus economics is the study of mass hysteria, a branch of abnormal psychology.
They didn´t spend.

Aren´t you glad Smiling Dave is here to explain the real reason recessions happen? AE [=Austrian economics] says recessions are caused by what common sense says they are caused by, money and resources wasted. Just as if you threw your money out the window you would have a personal recession, so too if the country as a whole throws its money out the window creating parasitic jobs as opposed to productive jobs, the wealth of the nation decreases. And what causes people to create vast amounts of parasitic jobs? Money printing, as Austrian business cycle theory explains. This article goes into it a bit.

In short, a recession begins before we even know itś there, when people are getting jobs that spell their own doom. They are being hired to parasitic, non productive jobs, which will lead to their getting fired sooner or later. Parasitic jobs cannot last.

In other words, Keynes' so called paradox of thrift description of people getting fired left and right is 100% correct. Except that far from describing a problem in the economy, it is describing a solution to a problem, the problem of too many people having parasitic jobs. Those guys being fired ¨deserve" to be fired, in the sense that they are in unproductive jobs.

Thatś the first flaw in Keynes' paradox of thrift. He is seeing something with out knowing what it is. To him all those people getting fired is a disaster to be averted at all costs; to someone who knows whatś what, it is a healthy economy fixing itself by eliminating useless parasitic jobs.

The second flaw is that he didn´t think through what will happen to all those people out on the street. He assumed they are all doomed forever to be unemployed. But actually what will happen is that they will get productive jobs, probably at a lower wage than their inflated parasitic salary, and they will make us all richer. [Unless there are laws preventing this from happening, such as FDR introduced in the 30ś and Obama is doing now].

There is a final flaw, one we have talked about repeatedly in this humble blog. Job losses are not caused by lack of spending in general, but rather by lack of spending in some particular area, the one where the parasitic jobs are. Because if Mr A. doesn't spend his money, the money doesn't disappear. He puts it into a bank. The bank doesn't hide it under a mattress either, it lends it out to people [or nowadays to the govt, which is a whole 'nother problem]. I discuss this at length, with appropriate quotes from the greats, Hazlitt and Rothbard, right here [see point 2].

So back to the original question. Why didn´t those Austrians figure out the paradox of thrift, using the very methods they are so proud of? We know the answer now. They did indeed figure it all out, and put it in the proper context as well.

Friday, October 21, 2011

9-9-9, Peter Schiff, and Bob Wenzel.

There's been a lot of back and forth about Herman Cain's 9-9-9 plan over at the mises.org forums, at Bob Wenzel's blog, on Peter's radio show and other places. It's all deep stuff, if theoretical [cause Cain won't get elected, and if elected will not set up his 9-9-9 program], so here is Smiling Dave to lay it all out.

Just a note before we begin. If you don't even know how to find the source for the stuff I will attribute to the various people, then this whole thing is way over your head anyway. That is my excuse for not linking to everything.
[Second note: Had to rewrite parts of this, after JJ over at mises.org made some trenchant comments].

First, here are the points everyone agrees on:

1. The scheme will will not reduce the amount of taxes actually being collected. Cain said this himself, in Orwellian language, of course.

2. A much bigger problem than how the taxes get divvied up is the total amount of taxes being collected. If we think of the economy  as a human being, and the govt as a vampire, what counts is not so much whether the vampire bites one in the arm or the leg, but how much blood he sucks out. The govt is collecting way too much money for a healthy economy [without even entering into moral considerations]. Cain's 9-9-9 scheme ignores this vital question completely.

3. Cain's scheme is not a triple 9, but a quadruple 9, because there is a hidden payroll tax he is trying to pretend isn't there. Peter has gone into the details in his articles.

4. The scheme is not ideal by any means. The topic of discussion is merely whether it is an improvement, however slight, over the train wreck we have now.

5. The scheme will, to some extent, replace part of the income tax with a new sales tax, at least on paper. More on this in what follows.

OK, now for things they disagree on.

1. Peter argued that a sales tax is better than an income tax because that means if you don't spend, but save or invest, you won't get taxed. And what our mess of an economy needs is to increase production, which happens if there is saving and investment. Thus, the 9-9-9 scheme is giving an incentive to people to do the right thing, meaning save their money.

Bob Wenzel quoted Rothbard at length, who argued that every sales tax is really an income tax, because the business will not be able to pass on the tax to the consumers, since the consumer has only so much money, but will have to go to his landlord and his workers and tell them he cannot afford to pay them what he used to, because his profits are less due to the sales tax. [This is in keeping with Rothbard's thesis, which sounds reasonable to me, that it's not the costs of production that determine the final price of the good, but vice versa. But this is getting off our main topic].

In other words, the sales tax will "turn into" an income tax, meaning the money to pay the tax will really come out of the income the workers and landlords were going to have.

Note that Wenzel is not saying that the 9-9-9 scheme is worse than what we have now [by this reasoning], only that it is not an improvement.

Well, did Peter have a reply? I don't think so. Both sides seemed to understand that the reasoning is too subtle to get across in a sound byte. Indeed, there was a lot of confusion, both sides not really understanding each other for a while.

Wenzel said he would post Rothbard's argument in writing and at length over at economicpolicyjournal.com, which he did. Peter said he'd try and take a look.

I think Wenzel wins this round, at least till we hear a rebuttal from Peter.

2. Peter argued that Cain's plan has a huge advantage if carried to its furthest conclusion.

The thing, is if we get rid of the income tax totally and replace it with a sales tax only, even if there is no decrease in the amount taxed, and even if we concede that every sales tax wounds up being an income tax in the sense Rothbard argued above, it would still be great for the economy. The reason? Much less red tape. As it stands now, billions of dollars and and untold amounts of time get wasted filling out those tax forms, and of course keeping the records needed to fill them out.  So we save a lot of money, and thus improve the economy, right there.

In addition, lawyers, accountants, tax preparers, and tax collectors, all gobble up a lot of money from businesses and individuals, with nothing produced. Those are all parasitic jobs that would be eliminated and the job holders sent off to do something productive. The economy benefits from that, as well.

Bob did not reply, because he was discussing the 9-9-9 system as Cain wants it, which preserves an income tax and adds a sales tax.

So I see this round as a tie.

Bottom line: As it stands now, Wenzel wins his point that in theory every sales tax winds up being an income tax, because of Rothbard's argument.

But Peter came up with a surprise argument that in practice switching to a sales tax [completely] could save us all a lot of money, even if the amount of taxes collected was the same. Of course this applies to eliminating the current system as well as 9-9-9.

A footnote: Wenzel links to Bob Murphy's piece, which he admits was written in haste. I think he did not remember Rothbard's argument correctly, because he seems to present something that Wenzel showed to be unrelated to the topic at hand.

Tuesday, October 11, 2011

UnAmerican ESPN [and Fox] Writings, the NBA, Lockouts and Bailouts.

There is a new fiction going round at ESPN [and Fox], a very unAmerican one, that the NBA owners want the players to bail them out. And that by asking the players to take a pay cut, they are "overreacting" by "pillaging" the players.

J. A. Adande writes, "It was always about people saving themselves: owners asking the players to bail them out of bad business moves..."

Bill Simmons writes, "The owners need to realize that, instead of overreacting by pillaging the players, they should be working with them while also creating a smarter business model."

Jason Whitlock [who contributes to ESPN, but wrote this on Fox] writes, "Rather than accept and deal with their culpability for its financial mess and look within for solutions — as its conservative philosophy dictates — NBA ownership has simply proposed sticking its hands in the players’ pockets for a seven-percent/$400-million kickback/bailout."

Jeff MacGregor of ESPN, in particular, gets very passionate about this.
Talking about the NBA bargaining, he writes:

Because between the lines of all this basketball madness is just another example of the nitwit super rich expecting their employees and/or the government and/or the general public to bail them out.
Save us from ourselves! they cry. Save us from our cartoon greed and our lurid excesses!
These credit derivatives are a win-win-win right down the line!
These credit default swaps are in no way a ticking time bomb!
This Eddy Curry contract will never blow up in my face!

Is he right to call the owners foolish for giving Eddy Curry a fat contract?


Is he right to compare the NBA owners to those who want bailouts from the govt and the general public?

Nope. They aren't asking for bailouts at all.

Is he right in saying that expecting the employees to take a pay cut is the same thing as asking for a govt bailout? After all, it's asking somebody else to foot the bill for your mistakes, right?

Nope. And right here is why Adande and MacGregor are sportswriters, not economists. They don't grasp the simple distinction between taking money and giving money.

Let us consider the case of Joe Sportsfan. For the last few years he has been buying season tickets for his favorite teams. But this year, due to totally foolish business decisions on his part, he is broke. As a result, he decides not to buy season tickets anymore.

Instantly, a sportswriter writes a passionate article attacking Joe Sportsfan. Why should the local team suffer just because Joe is a fool? Is it their job to save Joe from himself? Why does Joe expect a bailout from his favorite team? If Joe was stupid enough to go broke through his own fault, why does he expect the team to bail him out? If he had any sense of decency, Joe would keep on buying season tickets, whether he can afford them or not, whether he had the money or not.

I hope everyone realizes how ridiculous such an article would sound. Joe is not taking money from anyone. He is not asking for bailouts from anyone, and he's not getting any. He is just not giving the team money anymore. His money. Not the team's money, not Jeff MacGregor's money. It's Joe's money, to do with as he pleases. If, for any reason whatsoever, he decides not to spend it buying tickets, that is his own affair.

And guess what? The exact same thing is true of the owner of the team. By deciding not to give his money to the players this year, he is not taking money from anyone. He is not asking for bailouts from anyone. He is just not giving away money anymore. His money. Not the team's money, not Jeff MacGregor's money. It's the owner's money, to do with as he pleases. If, for any reason whatsoever, he decides not to spend it hiring basketball players, that is his own affair.

And it's incredible gall on Jeff MacGregor's part to presume to tell other people what to do with their money.

Guys, that's not what America is about. It's what Soviet Russia was about. And you know what happened to them.

Reading through articles about the NBA lockout, I get the impression that the writers think the owners and/or the players owe the fans something; that since the owners are all rich, they should be willing to lose money so the fans can watch the games; that the owners deserve our contempt for making fool decisions, but the players who make millions of dollars a year and and wisely invest it all on gambling and drinking and feeding "posses" deserve our pity; that it is sad to see noble athletes reduced to haggling like fishwives; that since sports speak to the child in us we are offended when grown up concerns intrude; that the loss of money the popcorn vendors suffer by the lockout is sufficient reason for the owners to pay the players any salary, whether they like it or not.

None of that is what America is about. America is about freedom. Meaning your money is your money, not someone elses. You have no obligation to feed popcorn vendors and athletes, nor to cater to the infantile fantasy worlds of some strangers.

Sunday, October 9, 2011

What Determines Interest Rates?

I got some insight into this question from reading America's Great Depression [available free at mises.org].

We are going to talk, yet again, about liquidity theory versus time preference theory. A search of this humble blog will reveal a few earlier articles we have written on the subject. This time, armed with new insight, we will lay it all out, Smiling Dave style.

All economists agree that when a man takes home his newly earned money, he can do three possible things with it.

1. He can just leave it in his wallet. This is called "hoarding" if you think it's a bad thing, as Keynes did, or "increasing ones cash balances" or "increasing ones demand for money" if you think it's OK.

2. He can spend it on things he wants to consume.

3. He can try and use the money to make more money. This is called investing his money.

Obviously, he need not put all his eggs in one basket. He can use part of his money to invest, part of it to consume, and part of it he can just keep in his wallet for now.

OK, where do interest rates fit into all this? Very simple. What if you, dear reader, have money sitting in your wallet, and I want to open a shoe store, and need your money to help me get started. How do I convince you to part with your hard earned money and lend it to me? The obvious method is to promise to pay you interest. If you agree, you have changed what you do with your money from hoarding to investing.

How much interest should I offer you? Keynes said, "Whatever it takes. Mr. Dear Reader obviously wants to keep his money in his wallet for now, and your job is get him to change his mind. You have to overcome his 'liquidity preference', meaning his desire to just keep it right there in his wallet, unspent and uninvested, by making it worth his while, in his opinion, to give it to you."

And whatever it takes to convince the dear reader to lend me his money is what the interest rate is going to be. This is the liquidity preference theory of the interest rate.

Mises has said about the liquidity preference theory of interest that it is
...a view, indeed, of insurpassable naivete. Scientific
critics have been perfectly justified in treating it with con-
tempt; it is scarcely worth even cursory mention.

Which raises an obvious question, to wit, why does this theory deserve to be treated with contempt?

I can think of one reason. First of all, I will not pay you whatever it takes. There is a certain amount of profit I can expect to make if I open my shoe store, [say 10%] and I cannot possibly offer you more than that, obviously. Second of all, what will make you happy is also determined by how much the shoe store can make. If, after reading through my business plan, you see I expect 10% profits before repaying you, you will not be content with the same interest rate as would be the case if my forecasts were that I will make 2% profits, or [on the other hand] 50% profits.

Thus, both from my side of things and from your side, the interest rate depends on how much profit is to be made from my shoe store.

Which leads right in to the Austrian theory of interest rates, that indeed the profits to be made from the shoe store [called the "natural rate"] will determine what the interest rate will be on loans.

Then the question arises, what determines how much profit the shoe store will make? This leads us to deep territory. Which is beyond my abilities for now. Luckily, we have mises.org to help us out with this, so I place you in their gentle hands.

Wednesday, October 5, 2011

Where Does Dave Go From Here?

Well, dear readers,with 100 published posts, it's time for a rethinking. Here's what's going on:

1. While writing part two of the gold standard, I felt that although I could refute the rest of that article in a general way, it behooved me to learn a bit more before publishing. And so, I feel it's time to hunker down and hit the books.

2. I fear I may start repeating myself.

3. I'm not sure what my loyal audience [and I mean you, the fellow who seems to be reading all I ever posted, and you, the people who come here from mises.org, and of course my faithful four followers] wants me to write about.

4. Bottom line, until inspiration comes either from within, in the form of an urge to write, or from without, in the form of a request from my dear readers, Smiling Dave will hit the books.

5. And I'll tell you what's stopping me from finishing the gold standard article. The National Review argues that returning to the gold standard will bring about deflation. Now normally, deflation is a good thing. But as I pointed out in my articles on deflation [the good, bad and ugly], when it happens because of a return to the gold standard, it can be ugly indeed.

I've seen Rothbard write that the ugliness happens because the return is not done correctly, but did I not see what the correct way is.

So for some unspecified while, I'm going to educate meself, one eye on the laptop to see your feedback.

EDIT: Today, 11/16/11 I heard an answer on the Peter Schiff Show from his guest, James Rickards. He said that the wrong way to return to a gold standard is how Winston Churchill did it when he was Chancellor of the Exchequer in 1925. He set the price of gold too low compared to the mountain of paper money the govt had printed during WW1.

Sadly, I don't remember the continuation of Rickard's thinking. Time to hit the books some more.

Tuesday, September 27, 2011

Return to the Gold Standard, a Disaster?


The New Republic claims it would be a disaster. Here are their reasons, with Smiling Dave's replies. Now I notice that many of my replies make economic assumptions that need to be elaborated on. Standard Austrian Economics will fill in the gaps, and of course you, dear reader, can ask any question you wish.

1. The United States would be unable to respond quickly and effectively to sudden economic shocks.

First of all, the really big shocks, the ones that ruined whole countries, such as the Great Depression and The Mess We are In, and of course every war we ever had, were all caused by the govt spending unlimited amounts of money, which they did by going off the gold standard and printing paper money. So that most of the shocks would just not exist if we were on a gold standard.

Second of all, the last thing we want is the "United States", meaning the govt, "responding" at all to sudden economic shocks. Because "responding" here means printing money, which is just a way of robbing our purchasing power and giving it to their friends. Which is the last thing we need when a shock comes along, to have our pockets picked.

2. Recessions would be deeper and longer, and the economy would be biased towards deflationary spirals. 

No, they would not be deeper and longer. Deep, long recessions are caused by govt meddling as they fumblingly try to "fix" the economy. The whole point of a gold standard is to limit the ability of a govt to meddle. Ergo recessions would, if anything, be shorter under a gold standard.

As for deflationary spirals, that is just a myth. If the govt is unable to print money at will, then of course prices will get lower as productivity naturally improves due to capital accumulation and human ingenuity. Like the price of cell phones and computers have gone down all the time. But that is not a defaltionary spiral. that is a blessing.

3. Witness the fact that the United States, which remained on the gold standard till 1933, had a much longer and deeper recession than Britain, which had gone off gold in 1931.

 This is like saying the rooster crowing causes the sun to rise. The US had the meddling FDR, the British tried to balance their budget. In any case, they too, went off the gold standard, and had high unemployment until WW2 gave them all jobs getting killed.

4. Milton Freidman himself (often cited as the supreme authority by gold-standard bearers) warned about just this problem in his magnum opus, Monetary History of the United States, 1867-1960, instead advocating a steadily-expanding supply of paper money.

This fallacy is known as appeal to authority. And I don't know which gold standard bearers he means, but Austrian Economists are not stupid enough to think someone who believes in constant money printing is a supreme authority.

5. It would increase government regulation of the economy. With no Fed, inexpert Congress will bear the onus of alleviating economic suffering.
As opposed to the expert Fed, hey? All the Fed can do is print money, meaning steal our purchasing power. What great expertise is needed to do that? And how can stealing our money alleviate economic suffering [except of course the economic suffering of Obama and his pals]? Notice how effective they have been getting us out of our current mess. Meaning totally ineffective.

6. With deeper, longer recessions, Congressmen will inevitably succumb to pressure for more spending and regulation of the economy--as they did during the Great Depression.

A few fallacies here. We already said there would not be deeper, longer recessions. Also, the Fed totally regulates the economy right now, by setting interest rates. And all that money they print, guess what is done with it? It's spent. Finally, the govt always wants to meddle in the economy, Fed or no Fed. Witness all the horrors we are seeing right now, such as Obamacare, "stimulants", "jobs creations" and on and on.

I haven't the tools to deal with the rest of the article as it deserves, so that's all folks.
This week in sports
                                         [eyes on the ball]

                                         [if those smelly shirts didn't wake him, falling off the stretcher won't either]

                                          [man literally dumps daughter to catch foul ball; best part is last few seconds]

Sunday, September 25, 2011

How Smiling Dave Will Strike it Rich, With Your Help.

Over at the Economic Policy Journal I found out that the Fed is going to set up a spy system that will find those who criticize that wicked institution, and reach out to them:

Most importantly, the "Listening Platform" should be able to "Handle crisis situations, Continuously monitor conversations, and Identify and reach out to key bloggers and influencers."

Well! With your help, by spreading the word and dropping my name all over the internet, the Fed will realize that I am a key blogger and influencer. They will then "reach out" to me. And the hand they extend to reach out had better be full of hundred dollar bills, if they know what's good for them.

So if you see me suddenly turn round and defend the Fed, praise the upcoming QE3, and in short, join hands with Warren Buffet and sell out, you will be able to feel a glow of satisfaction. You will sleep contentedly, knowing you have done your work of making me famous.
Smiling Dave, who will own that sailboat too, thanks to you.

The Problem according to Keynesians, Scrutinized from All Angles.

As promised, Smiling Dave will now address what the Keynesians think the problem is [that taxing the rich is supposed to solve]. We quote someone from mises.org, who put it very well:

I was browsing through some blog posts from keynesians and they were arguing that there is not enough demand in the economy to get business' to invest and to encourage growth. This is an argument that I encounter a lot.

There is not enough demand, so they say. And why is there no demand? Because people are hoarding their money. Yes, that's the problem.

Luckily, checking his notes, Smiling Dave finds that he has refuted this one many times over right here:


We have also refuted other possible meanings of "lack of demand" in this blog:
http://smilingdavesblog.blogspot.com/2011/08/myth-of-aggregate-demand.html and its follow up:

We took on Marx's version here, that the problem is that the workers are being ripped off, thus creating a lack of aggregate demand:

We even took on Malthus' version, that of general glut, in this one:
and the articles following it.

We also promised to describe what the problem really is, and what the solution really is, and I see that we have already kept our promise in the series of articles that begin here:

Tax the Rich

As Mises was so fond of pointing out, every govt "solution" to a problem always makes the problem worse.

The latest example is Obama's Tax the Rich scheme. To be honest, Obama is showing very original thinking by proposing this solution. No one, Keynesian or otherwise, has ever suggested taxing investments as a way of making people invest more. We'll lead into this topic with a question from the Mises.org forums:

What do you say to people who argue that if there are not enough people consuming e.g. buying cars then there is no incentive for entrepeneurs to invest?

And Smiling Dave's answer:
The Problem: Entrepeneurs have no incentive to invest.
Proposed Solution:Tax those entrepeneurs heavily if they do invest.

You get the idea. If you want entrepeneurs to invest, you have to make it worth their while. And I don't mean give them other peoples money, as Obama is doing for his friends. I mean just letting them keep the profits of their investments.

At this point, our old pal Devil's Advocate [=DA] feels he must intrude. Smiling Dave [=SD] will reply.

DA: You forgot the rest of the question from that mises.org forum. Allow me to quote it in full:
I was browsing through some blog posts from keynesians and they were arguing that there is not enough demand in the economy to get business' to invest and to encourage growth. This is an argument that I encounter a lot. They argue that money should be redistributed from the wealthy to poorer people (i.e. taxes) who are more likely to spend it due to a higher marginal propensity to consume, raise demand in the economy and hence encourage investment. How would you respond to this argument? Is there not some truth in it?

SD: We'll talk about the Keynesian version of the solution in this article, then about their version of the problem in a future article, and finally about what the problem really is and what the solution really is in an article after that.

This is the first time that Tax the Rich has ever been proposed as a way of stimulating the economy. Not even Keynes was stupid enough to think that taxing someone who invests will make him invest more.

His answer was to tax the poor, actually. Because in his day, there was no unemployment insurance and no welfare. He understood that if there is high unemployment, it is because workers are insisting on more pay than they are worth. His solution was to create inflation, thus reducing their wages. In other words, tax the poor.

Problem: Too many poor people.
Solution: Tax them.

Nowadays, it is impossible to tax the poor in any case, because they are living for free off the rich and the middle class. They have no jobs, and are not interested in getting any. It's not their fault, of course. The govt just makes it very comfortable to be unemployed, and very uncomfortable to have a job. Naturally, all this leeching from the middle class and the rich will create new circles of poverty, as more and more of the middle class lose their jobs and the rich are punished for hiring them.

If we carry Obama's new policy to it's logical conclusion, there is only one avenue left, mainly tax the middle class.

Problem: More and more people are dropping from the middle class into poverty.
Solution: Tax the middle class.

Tax the rich. Duh. Tax the poor. Duh. Tax the middle class. Duh.

DA: If this idea is so stupid, why did Obama wait three years to come up with it?

SD: Until now he didn't have to do any thinking. Ben Bernanke was taxing everyone secretly by printing money. But such a howl was raised that he decided to do the smart thing and lie low. His recent speeches have said, "Guys, I've done all I can to help you. It's up to Congress now to stop bickering with the President. In other words, you're on your own, Mr. Obama."

What's going to happen is that the Republicans, for reasons of their own, will prevent Obama from taxing anyone. But since most of them don't understand what the problem really is, because they have not read Smiling Dave's upcoming article, they certainly will not realize the solution.

The stock market is terrified of Bernanke's inactivity. His Twist, they realized, while it may help the govt a little bit, delaying its inevitable day of reckoning, does not help the private sector in the least. "That's all you've got, Bernanke? Then we see no future for the economy. We are selling out of everything and moving into dollars, which you have sworn not to devalue. And we believe you."

Obama is totally freaking right now, which scheming Ben Bernanke knows. He is tired of being everyone's punching bag, tired of looking foolish when Ron Paul questions him in Congressional hearings, tired of hearing End the Fed from those uppity college kids. "OK then, you don't like QE's? Then you won't get any! So there! But don't come crying to me afterwards."

And he knows full well that the whole country, from Obama right on down to the average guy in the street, will come crying to him. There will be rallies, protests, television talking heads, all screaming, "We want QE! We want QE! Save us, oh Fed. Save us, Uncle Ben."

And, like the kindly uncle who let the foolish child get himself into trouble to learn his lesson the hard way, Ben Bernanke will not bear a grudge. He will shower us with his munificence.

Tuesday, September 20, 2011

Mark Matson "Destroys" Peter Schiff

http://www.markmatson.tv/ , the Sep 16, 2011 episode.

His arguments:
1. The markets have already taken into consideration everything Peter Schiff says about the govt being a disastrous influence on the economy. Billions of people around the world already know and agree with everything Peter Schiff is asserting. Therefore all prices already have his knowledge factored in.
Only random, unpredictable events can possibly change prices from now on.

But Peter Schiff is saying the market has it wrong, and that he, Peter Schiff, knows what the real price should be, and that he can predict the future and say what the price will be. Which is a big mistake. The world, including the Fed, is just too unpredictable and chaotic etc. to be predictable at all. Saying one knows what will happen next is saying one has The Mind of God. Chuckle chuckle.

Rebuttal: Top quality foolishness. Peter is not talking about the price of anything in the clip Matson shows, but rather saying that the economy will be in a recession despite govt attempts to fix things, which certainly came true.

As for the philosophy that the world is too unpredictable, what evidence does he give for that? Will he deny the predictions of Sir Isaac Newton that F=ma because the world is too unpredictable? Just asserting that the world is unpredictable does not prove someones predictions wrong. So we await hard evidence that Peter Schiff was wrong. Let's see more of the show: 

2. Schiff's early 2009 prediction was wrong. He predicted that the market would crash, and it didn't.   Chuckle chuckle.

Rebuttal: Nowhere does Peter say in the clips that the market would crash. Matson equates the country being in a recession, which Peter said would continue through 2009 and on, with the stock market crashing. They are not the same thing. Ask the unemployed people you know about this. Ask Obama if he is confident of re-election because the stock market did not crash.

3. March 5, 2009. Peter says to get out of US assets and out of the US dollar. [US dollar index then at 85.50. Today, Sep 20, 2011 it's at 77.47, down 9%. Dow Jones Industrial Index was at 6,627, now at 11,335, up about 100%. Not sure how foreign markets did in that time period. Then the Dow was worth about 8 ounces of gold. Today it is worth about 6.]

4. Matson says he believes in a portfolio that has "the highest expected returns", but does not believe in "forecasting the future".

Rebuttal: Huh? What do you think the word "expected" means?

5. Peter has minions, one of which is Michael Pento, whom Matson "always calls Pinto Bean". In June 2009 [when Pento was not working for Peter Schiff, but was somehow one of his minions nonetheless], Matson predicted on national television that the American character will lead us out of the recession, and Pento says that the basic problem plaguing the economy, huge debt to the tune of 34 trillion dollars, has not gone away. Matson replies that since this an investing show, that proves that the stock market will improve in the long run. [Yes, he said this!] The market has gone up 40% since the beginning of the year, and all that Pento is saying is already included in the price.

Matson's minions on his TV show say that Pento was wrong about his prediction. They point out that since so many people have made incorrect predictions over the years, therefore all predictions by anyone are unreliable. [Exercise for the reader. What logical fallacy is this?] They also mock people who buy gold.

Rebuttal: Are we watching the same video of Michael Pento? What was he wrong about? Has the recession ended? I know people who have just been told their work week is being reduced to four days from five, with corresponding reduction in pay. Obama is terrified that the economy will be his downfall. How is Pento wrong?

Later, Matson says that Pento "obviously said that the market couldn't continue to go, that stocks are going to be terrible". Which of course he didn't. Same fallacy of confusing rising stock market prices with an end of recession.

By the way, Peter shows in his book, Crash Proof, how the govt figures about inflation are totally wrong. He has stated many times that stocks may retain their nominal value due to inflation, but since the dollar has lost real value, so have the stocks. He uses the price of gold as a rough measure of the value of the dollar. note that stocks have declined using that metric.

6. He shows a video from "last week" where Matson says gold is a terrible investment long term. It's only for speculators. He mentions a few statistics that prove stocks and bonds are a better investment. Gold was $1,757 an ounce that day, down from $1,900. Peter replies that you have to look at the length of time we are talking about. He says that, compared to ten years ago, gold went up and stocks went down. [Gold was $280 and ounce and is now $1,800. The Dow was at about 10,000 and is now at about 11,400].

Peter says Bernanke will print more money. Matson misquotes him as saying "Bernanke will SAY he will print more money."

He mocks Peter's assertion that equities did not make any money over the last ten years. [The official govt stats say inflation from 2001 to date is 28% [source: http://www.usinflationcalculator.com/]. So that the rise in the Dow of 10% is more than wiped away by 28% official inflation].

He says that Peter "cherry picked" ten years to measure gold prices. Rebuttal: Here is a chart of gold prices going back 20 years:

Pick any time segment you wish ending in the present. What do you think?

BTW, heres a chart for the Dow from 2000 to date:

7. One of the minions.... but you get the idea. It's late. Nighty night.

About them Auto Plants

This is a continuation of the previous article. My good friend was bemoaning [correctly] the current state of affairs, but in my humble opinion, had things misdiagnosed. We are up to his fifth assertion.

5. Modern auto plants use automation to such an extent that there are almost no people there. Clearly, they are not interested in people, or in giving them jobs.

1. For a free market to succeed, meaning make everyone wealthier, there is no need for anyone to be interested in people, or in giving them jobs. All you need is greedy people, and a check on these people commiting fraud or violence. Thus, the only way they can make money is by giving people what they want. If they are good at giving people what they want, they will find it profitable to hire workers to churn out what the people want. This is how jobs have always been created throughout history.

In fact, how else can someone have a job? If the worker is not making a profit for his employer, how can that job last? A clear instance of trying to create unprofitable jobs is the current US economy. The federal, state, and local govts "created" jobs that did not pay for themselves through profits, and drove themselves into bankruptcy. Exactly where we are now.   

People are sorry to see all these govt jobs go, but the reality is they were all parasitic jobs and we are all [but for the parasites who held the jobs] better off without them.

2. On a moral level, it is certainly immoral to expect Mr A. to provide a job for Mr B. What right do we have to place such a burden on Mr A? Why do we not reverse things and say Mr B. has a responsibility to provide a job for Mr A?

3. The auto plants resorted to animation because the govt has made it unprofitable hire people. Ask any small businessman what his main concern is these days, and he will tell you that he wants to avoid hiring anyone if possible. This is particularly true in the auto industry, where unions have been allowed to run riot and leech money from the workers and the owners alike. [GM has admitted it is making its Volt at a cost that makes it unprofitable]. Add to that the minimum wage law, and is it any wonder that auto plants are automated?

4. Ever since the Luddites, some people have feared technology and automation. While those who will lose their jobs to automation may have some justification for this fear, the rest of the world only gains by automation. Because the automation was introduced to reduce the costs of production, meaning that the final product will be cheaper for us all.

As for the fear that machines will someday make everything and we will all be unemployed, are we really all that pathetic that we have no useful skills whatsoever? The idea is absurd.

Summing it all up, we are certainly in a mess now. Sadly, very few people have any clue what the mess we are in really is, how we got there, and how to get out of it. For example, some say the nature of our mess is "lack of aggregate demand" [Keynesians]. Others say it is not enough paper money in circulation [Monetarists and MMTers]. Still others say it's some inherent flaw in the free market, which is predicated on exploitation of the worker [Marxists]. The latest nonsense asserts that we are all drowning in debt because money in the USA is "created" as debt [Whatever they are called]. Many think that the problem is Capitalism Gone Wild [Statists and fascists, but I repeat myself].

Well guys, become one of the enlightened. Smiling Dave has written almost a hundred articles for your enjoyment and education, all based on rock solid Austrian Economics. Read them, think on them, chuckle at their gentle sarcasm, ask questions.

And to you, my good friend who I hope is reading this, good to be chatting with you again through this medium. Just like old times. 

Monday, September 19, 2011

Random Myths.

A very good friend of mine posted some thoughts on his blog which saddened me. The only way he could make such statements, I imagine, is because he was fed the official party line and has never heard the other side. Smiling Dave has to help him out. So, in no particular order, his thoughts in italics, and my responses in normal font:

0. The disparity between rich and poor is rising.
This may be true, but makes two assumptions. One that it's a bad thing, which remains to be shown. Say that everyones wealth goes up 1,000%. The disparity has increased, but everyone is much better off.

Second, we have to distinguish between a free market and fascism, which is the economy we have here in the USA. It's economic fascism and its consequences that people are really complaining about [rightfully], although they do not know it. [I know my good friend is not complaining about fascism, because he later says that the govt has helped the people by its meddling in the economy.]

Oddly enough, many other aspects of fascism are also noticeable in the US. The militarism, the secret police, the death of freedom. George Orwell would be homesick for the world he envisioned in his classic 1984 if he would somehow land in ours.

To quote Wikipedia:
Fascists thought that private property should be regulated to ensure that "benefit to the community precedes benefit to the individual." Private property rights were supported but were contingent upon service to the state. For example, "an owner of agricultural land may be compelled to raise wheat instead of sheep and employ more labour than he would find profitable."

Fascists opposed the laissez-faire economic policies that were dominant in the era prior to the Great Depression. After the Great Depression began, many people from across the political spectrum blamed laissez-faire capitalism, and fascists promoted their ideology as a "third way" between capitalism and communism.

According to historian Tibor Ivan Berend, dirigisme [=intense govt meddling] was an inherent aspect of fascist economies. The Labour Charter of 1927, promulgated by the Grand Council of Fascism, stated in article 7: "The corporative State considers private initiative, in the field of production, as the most efficient and useful instrument of the Nation", then continued in article 9: "State intervention in economic production may take place only where private initiative is lacking or is insufficient, or when are at stakes the political interest of the State. This intervention may take the form of control, encouragement or direct management."

In short, Fascism is the govt "directing" private businesses. The govt doesn't actually own businesses, but just tells them what to do. Add to this the fact that big businesses routinely and legally bribe the govt to give them all kinds of economic advantages, which is just another guise of Economic Fascism, and we have the mess we are in.
1. The very rich want high interest rates. 
This depends on whether they are borrowing or lending money. Rich borrowers, such as someone running a business who needs money to expand, will want low interest rates. Rich lenders, etc.

2. The govt is helping the economy by keeping interest rates low.
This is really saying [unknowingly] that the govt is helping us by taking all our money away.

Let me explain. How does the govt lower interest rates? By the Federal Reserve Bank lending money at very low rates. But the Fed is not sitting, Uncle Scrooge like, on piles and piles of money. Every loan it makes comes from money that did not exist before the loan took place. It is all [digitally] printed money.

In other words, "keeping interest rates low" is just a euphemism for "printing lots and lots of money".
We are all familiar with the law of supply and demand. In particular, it applies to money. The more money there is, the less its value, meaning its purchasing power. So keeping interest rates low means reducing the purchasing power of the money we have saved up, and that we earn by working.
There you have it. "Keeping interest rates low" is not helping us at all. It is taking all our money away.

3. The govt cannot keep interest rates low indefinitely. 
Yes and no. In theory, there is nothing to stop them, nothing to prevent a flood of newly printed money to keep on being lent at next to nothing. In practice, there might be something that will stop them, meaning riots in the streets when hyperinflation hits. But that is contingent on intelligent rioters who understand how the hyperinflation happened. They might foolishly believe it is China taking away all our oil that is making oil prices rise. Or price gouging oil companies. Or Republicans who are out to destroy us all.

4. A business has a goal of making money for the shareholders and owners. Thus, their goals are anything but being "for the people".
Here we will use that wonderful website, fmylife.com, to help us out. Here's a typical entry from their workplaces stories:
Today, I was working when I delivered the standard "Hello, how are you?" to a customer. He took the opportunity to tell me about his deceased wife, his estranged children, and his anal tearing. After a while, I tried to help someone else, and he complained to my manager. I was written up. FML.

The point of the story, and of hundreds like it, is that businesses bend over backwards to keep the customer satisfied. Because although they may be greedy and only interested in making money for the shareholders and owners, they cannot just walk out into the streets and shovel up the money from some pit. They have to take it out of our wallets. And they can only do that if we are so happy with what they offer us in exchange that we gladly, voluntarily, give them our money.

You see where this is going. Like the horse who drags the cart and master because of the carrot dangling before his eyes, a business does everything it possibly can to please us because of the carrot. We have cleverly hooked up their greed and turned it into a mighty engine for giving us what we want.

To sum up, a business has a goal of making money for the shareholders and owners. Thus, their goals are precisely being "for the people", because that's how you make money.

[Of course, govt meddling can ruin this, but that's another story]

5. Modern auto plants use automation to such an extent that there are almost no people there. Clearly, they are not interested in people, or in giving them jobs.

These are true statements, but the hidden implied statements they hint at are very wrong. There are so many of those that we will have to continue in a future blog.

Wednesday, September 14, 2011

Peter Schiff Tells it Like it is to Congress

A masterpiece.

Amazing how he deflates Cummings' bombastic flag waving last refuge of the scoundrel speech.

Go Peter go!

Friday, September 9, 2011

Bitcoin, We Hardly Knew Yeh.

A picture is worth a thousand words. Here are two pictures of what's happening with Bitcoin.

Dropping like a stone.

Or, to be more scientific:

From $30 to $5 in three months. Over at the Mises forum, we were ridiculed for claiming the Mises Regression Theorem proves Bitcoin is doomed. Now I know how Peter Schiff feels.

Karl Marx was Right? Part Three

Here we are again, talking about why lack of aggregate demand is not the cause of a recession.

Lack of aggregate demand means people are not buying what is being offered for sale. The old time economists described it as so much stuff being made there just isn't enough money to buy it all. Keynes described it as so much money being hoarded under the mattress there isn't enough in circulation to buy everything. Roubini, following Marx, describes it as so much was ripped off from the worker by the capitalist that the worker cannot afford to buy everything.

Luckily, we are dealing with Roubini's version now. I say lucky because it's late at night, I'm tired, and want to polish this off quickly. And Roubini's idiocy can be polished off in a few words.

The problem is that the capitalist is making such a huge profit, right? But what is he profiting from? Sales, right? He got the workers to work for pennies on the dollar, and thus is going to sell his stuff at a huge profit, since his costs are so low. But he can't sell anything, because the workers he ripped off have so little money in their wallets. That's why we have a recession now, says Roubini.

Anybody see why this isn't a problem? Obviously, what going to happen is that the capitalist will have to lower his prices till his workers can afford stuff. End of story.

Karl Marx was Right? Part Two.

This is a continuation of the previous blog. for the lazy, we will copy what you need from there.

Roubini : KARL Marx was right
Nouriel Roubini : "Karl Marx had it right. At some point capitalism can self-destroy itself because you cannot keep on shifting income from labour to capital without not having excess capacity and a lack of aggregate demand, and that's what's happening." - in an interview with The Wall Street Journal this week

Smiling Dave breaks it down. I'll make explicit the silly notions, then show why they are ridiculous:
  • Capitalism can self-destroy itself because it creates excess capacity.
From Wikipedia: Excess capacity means that insufficient demand exists to warrant expansion of output.
Nu, so what's so terrible about that? Nothing. To be fair, I think Roubini is using excess capacity here in a different sense than Wikipedia, as a synonym for lack of aggregate demand. So we move on to that ole chestnut.
  • Capitalism can self-destroy itself because it creates a lack of aggregate demand.
And what does that mean? That so much stuff is out there [=excess capacity] nobody can afford to buy it all [=lack of aggregate demand] because they have been ripped off by the capitalists [=shifting income from labour to capital].

Let us note here that this is not the same as Keynes' reason for lack of aggregate demand. In fact it's exactly the opposite. Keynes argued that what happens with capitalism is the following: So much stuff is out there [=excess capacity] nobody wants to buy it all [=lack of aggregate demand] because they are so incredibly wealthy, workers included, that they have everything they could possibly want already, and so just hoard their money under the mattress [=you peasants are making too much money for your own good].

We already have shown in an earlier article how ridiculous Keynes' theory is when applied to the world we live in. Nobody is hoarding anything; we are all broke. So maybe Roubini and Karl Marx are right. Maybe there is a lack of aggregate demand because the workers have been ripped off by capitalists by an inherent flaw in capitalism that is hidden in its very nature somewhere.

Let me begin by definitely agreeing that people have been, and are being, ripped off. And yes, a lot of the poverty now is from constant rip offs by the govt and its friends. But the question is, are rip offs an inherent part of a free market? Of course not. Quite the opposite.

In fact, in a free market, the whole idea of there being a lack of aggregate demand is absurd, but that will have to wait for next blog.


Karl Marx was Right? Part One.

Roubini : KARL Marx was right
Nouriel Roubini : "Karl Marx had it right. At some point capitalism can self-destroy itself because you cannot keep on shifting income from labour to capital without not having excess capacity and a lack of aggregate demand, and that's what's happening." - in an interview with The Wall Street Journal this week
Smiling Dave breaks it down. I'll make explicit the silly notions, then show why they are ridiculous:
  • Capitalism shifts income from labour to capital. The simplest thing is to ask where and when this happens. Marx has his well known answer, based on the labor theory of value, which has been proven ridiculous many times. He argues that since the worth of an object comes from how much labor was put into making it, and the worker, by definition, does all the work, then his employer deserves none of the profits.

Here are the well known flaws in the Labor theory of Value, compliments of David Gordon:
First, the value of some goods seems clearly not to depend on the labor time needed to produce them. Böhm-Bawerk noted that wine often increases in value the longer it is stored. The labor required to gather the grapes and turn them into wine contributes very little to the price of wine.

Second, the circular definition involved in "socially necessary". Marx realized that an expert works much faster than an incompetent, yet they both might make identical products. So the amount of labor in otherwise identical objects differs depending on who made it, but the prices are the same. Marx got round this by saying that what counts is the "socially necessary" labor needed to make it. And how much labor is socially necessary to make, say, a pizza? That depends on the market price of the pizza. If it sells for $10, then ten dollars worth of labor is the socially necessary amount.

We have a circular definition here. The market price of a good comes from how much socially necessary labor went into it, and how much labor is socially necessary comes from the market price of the good. Put another way, why doesn't the pizza cost $20, based on the labor of the guy who takes twice as long to make it? On the other hand, why doesn't it cost a buck, based on the labor of the expert who makes pizzas ten times as fast?

[Have a look at Gordon's book to see another variation of this fallacy that Marx makes.] 

Third, Marx admitted that in the real world, the Labor Theory of Value just doesn't work. He tried to weasel his way out of it, but has been shown to be mistaken. We refer the interested reader to Gordon's book.

Continued in Part Two.