Thursday, November 21, 2013

No money, no problem

Have you ever lusted for a Lamborghini?  I have.  Specifically, the Lamborghini Aventador LP 700-4 Roadster Convertible.  There’s only one thing stopping me from getting one.  

With options, it sells for just under half a million dollars.  That’s for a car, albeit a special car but by no means the most expensive.  If I wanted to I could try talking the company into producing another Lamborghini Veneno that sold for $4.5 million earlier this year.  Zero to 100 kph (0-62 mph) in 2.8 seconds. Of course one buys a Veneno for reasons other than low 0-60 times.  Yet I wonder how the owner of one would feel if he or she came up against, say, a Suzuki GSX-R1000 or a Kawasaki Ninja ZX-14R, both street-legal motorcycles that could blow the polish off a Veneno.  If you sink $4.5 million into your wheels and come up short against a machine costing 1/300th of yours but which still draws attention to its sound and looks, that’s not good. 



Lamborghini only made three Venenos, one in each color of the Italian flag.   They sold all three sight-unseen.  You billionaires will shrug at that, but I don’t. 

No money, no Veneno.  But wait—I don’t actually need to own $4.5 million, do I?  I could always try borrowing it.

I could talk to a bank loan officer, just to see the look on her face.  I bet at least one of us would laugh.  And of course even if she went insane and loaned me the money I still couldn’t convince Lamborghini to sell me a car.  

So, no money, no loan, no Lamborghini.  End of story.  I stick with my paid-for truck or some other bourgeois four-wheeler. 

Never say never

But I can’t quite give up.  I could sublimate the craving for automotive power into some other realm.  I decide to run for political office.  

I run on the slogan, “No money, no problem.”  In debates with my opponents I point out that John Maynard Keynes is the most influential economist in the world, and Keynes said money ideally should be interest-free to stimulate investment.  There were those who were upset with this simplistic interpretation, but since no one knows what Keynes meant the interpretation is up for grabs.  Assuming the economy is at less than full employment — and when is it not? — money should be available free of interest.  Interest meant capital was scarce but how preposterous is that when government is part of the picture.  “Let each become all he is capable of being,” I add, recalling a slogan from my college days.  

This sounds good to most ears.  My strongest supporters, most of whom are college-educated, consider this an enlightened position.  So do most trained economists, some of whom endorse me.  On election day I win by a landslide.

Years pass.  I write a book.  I go on TV talk shows every chance I get.  I don’t talk about Lamborghinis.   I talk about the economy and how accommodation is the key to making things better.  I make a name for myself.  My political party likes my prospects for the presidency.  So do other people not directly associated with politics, people with a large stake in the status quo.  People who could buy a Veneno with a nod of their head.  My enemies charge me with favoring unlimited government debt.  I reply with a crisp So What?  We’ve always had an astronomical debt, and it hasn’t hurt us.  What hurts us is thinking it will hurt us.  We keep our creditors happy, so why worry about debt?  We cannot be the country we are capable of being if we shun debt.

Commoners feel a little uneasy about embracing inconceivable levels of debt, but they’re in debt themselves and haven’t fallen off the planet yet, so they’re okay with it, sort of.  Any fears they have about the arrival of a reckoning day are soothed by government economists who tell them government debt is a good thing.

I run for the presidency.  It’s a tough campaign, full of the usual dirt, but I win.

I’ve become president of the United States and commander-in-chief of the armed forces.  Let me assure you — I have power, real power.  Keep your 0-60 times.  When I go places I travel on Air Force One.  Air Force One!  You don’t think about Lamborghinis or Kawasakis when you have a plush monster jet at your disposal.  Besides, I have other interests.

I want to leave a legacy.  I want to be remembered as a great president.

I’m comforted by the thought that the greatest presidents in U.S. history have been war presidents — Lincoln, Wilson, FDR.  I’m also comforted by the knowledge that they were complicit in getting the enemy to fire the first shot.  They knew war was good for the country even if the countrymen they represented strongly disagreed.  And there was one other advantage they had most people don’t acknowledge.

One day trouble erupts in some Asian backwater.  Few Americans have even heard of it but CIA agents stationed there tell me it’s a threat to national security.  I do the right thing and intervene — no boots on the ground, though.  Everything is done with drones.  

Our rival Russia gets upset.  President Buturovich issues ultimatums.  Who is he kidding?  The rest of the world, that’s who.  I give him a call.  We agree to have a limited war in a neutral theater.  Military people talk about theaters all the time.  

As soon as I hang up China gives me a call.  Those ingrates!  Those snoops!  They won’t let us have our war.  They’re threatening to stop loaning us back our dollars if we pursue a military option, as they put it.  Something about disrupting their markets. 

I tell them they can continue making iPhones.  Americans will buy them, even if a few Asians will be too busy dodging drones to stay in the market.  They grudgingly accept it.  I’ve got a legacy to pursue.  They understand.

I meet with my Treasury Secretary.  I appointed him.  We’re old pals.  I ask him what he thinks war with Russia will cost.  He wonders why I ask.  I tell him.  He resigns.  He doesn’t want that legacy.

I go to another friend and ask him if war without a tax increase is feasible.  He laughs.  He used to head the federal reserve bank of New York.  He’s an expert at arranging deals of any size.  He’s good friends with the Chairman of the Fed.  So I appoint him Treasury Secretary.  The two of them assure me there will be no monetary impediments to my plans.

How could there be?  It takes money to fight a war, and the Fed controls the money supply.  And I appoint the guy who runs the Fed.  Neat.

Then I think: I once had monetary impediments when I dreamed of buying a Lamborghini.  Insurmountable impediments.  No money, no Lamborghini.  

How different life is at the top.  I’ve got the Fed at my side.  I can join the other war presidents.  No money?  No problem.  

Saturday, November 16, 2013

The lost world of the barbarous relic

It’s one of the greatest ironies of history that gold detractors refer to the metal as the barbarous relic, when in fact the abandonment of gold has put civilization as we know it at risk of extinction.  

The gold coin standard that had served Western economies so brilliantly throughout most of the 19th century hit a brick wall in 1914 and was never able to recover, so the story goes.  Europe turned from prosperity to destruction, or more precisely, to the prosperity of a few and destruction of others, as the Great War got underway.  The gold coin standard had to be ditched for such a prodigious undertaking.  

If gold was money, and wars cost money, how was this even possible?  

First, people had been in the habit of using money substitutes instead of money itself - paper bank notes instead of the gold coins for which they could be redeemed on demand.  People found it more convenient to carry paper around in their pockets than gold coins.  Over time the paper itself came to be regarded as money, with the gold it represented a clunky inconvenience from the old days.

Second, banks had been in the habit of issuing more bank notes and deposits than they had gold in their vaults and would on occasion arouse the suspicion of the public that the notes were making promises the banks couldn’t keep.  The courts sided with the banks and allowed them to suspend note redemption while otherwise staying in business, thus strengthening the government/bank alliance.  Since the deposits really belonged to the banks once they were deposited — said the courts — bankers could not be accused of embezzlement.  The occasional bank runs that erupted were interpreted as a self-fulfilling prophecy.  If people lining up to pull their money out believed their banks were insolvent, the banks soon would be.  Most people had no idea their banks were loaning out most of their deposits.  They didn’t know fractional reserve banking, a form of counterfeiting, was the norm.

We need to remember that a counterfeiter is not criminal because he’s printing his own notes; he’s criminal because the notes he prints don’t represent real money though they are accepted as such.  To expose the criminality of a counterfeiter and lay the blame on those who expose him is where the mainstream economics profession has stood for a long time.  But there are solid reasons for their position.

The requirement of gold coin redemption put limits on the extent of fractional reserve banking.  Such limits are not welcomed by the banks.  Since the banks can loan to the government, it means a limit on government spending.  Government doesn’t like the limitation of gold coin redemption either.

Which brings us to the wall gold allegedly hit.

Preparing for war means preparing for inflation

In his 1949 book, Economics and the Public Welfare, economist Benjamin Anderson tells us:
The war [in 1914] came as a great shock, not only to the masses of the American people, but also to most well-informed Americans — and, for that matter, to most Europeans. [Ch. 2]
And yet, Germany, Russia, and France began accumulating gold prior to the war — with Germany starting first, in 1912.  Gold was taken “out of the hands of the people” and carried to the reserves of the Reichsbank, the German central bank.  People were given paper notes “to take the place of gold in circulation.”

When war broke out in August, 1914, Gary North explains, the pre-World War I policy of gold coin redemption was 
independently but almost simultaneously revoked by European governments . . .  They all then resorted to monetary inflation. This was a way to conceal from the public the true costs of the war. They imposed an inflation tax, and could then blame any price hikes on unpatriotic price gouging. This rested on widespread ignorance regarding economic cause and effects regarding monetary inflation and price inflation. They could not have done this if citizens had possessed the pre-war right to demand payment in gold coins at a fixed rate. They would have made a run on the banks. Governments could not have inflated without reneging on their promises to redeem their currencies for gold coins. So, they reneged while they still had the gold. Better early contract-breaking than late, they concluded.
Without breaking their promise to redeem paper notes for gold coins, governments would have had to negotiate their differences rather than engage in the deadliest war in history at that point.  Abandoning the gold coin standard, which had always been under control of governments instead of the free market, was the deciding factor in going to war.

Though the U.S. didn’t formally abandon gold during its late participation in the war, it discouraged redemption while roughly doubling the money supply.  From War and Inflation, Blanchard Economic Research:
"In World War I, the American people were characteristically unwilling to finance the total war effort out of increased taxes. This had been true in the Civil War and would also be so in World War II and the Vietnam War. Much of the expenditures in World War I, were financed out of the inflationary increases in the money supply." (See "American Economic History," Scheiber, Vatter and Faulkner)
Wikipedia: missing in action

It’s more than strange that Wikipedia’s entries for World War I and the gold standard make no mention of the connection between an easily inflatable currency and war.  Under their entry for gold standard, for example, Wikipedia says, “By the end of 1913, the classical gold standard was at its peak but World War I caused many countries to suspend or abandon it.”  This is wrong.  Governments had a choice: fight a long, bloody war for specious reasons or retain the gold coin standard.  They chose war.  U.S. leaders found their decision irresistible.  It wasn’t J.P. Morgan, Woodrow Wilson, Edward Mandell House, or Benjamin Strong who would be fighting in the trenches.  

Of course, the war was only the first of many government catastrophes resulting from the abandonment of gold.  In their entry for ”20th century,” Wikipedia tells us that “Terms like ideology, world war, genocide, and nuclear war entered common usage.”  Nor was it uncommon to hear terms like “fiat money, central bank, Federal Reserve, debt, and accommodation,” but the article makes no mention of these.

It’s true, the gold standard utterly fails when governments want to kill selected populations and control the rest.  Gold is an honest money, a value offered in exchange for another value, but governments by nature are not honest because they acquire their resources by theft and intimidation.  In light of what we’ve witnessed since the rejection of gold, it’s difficult to imagine an honest humanitarian regarding the precious metal as barbarous.  

When we hear about “going off gold” as a prerequisite to peace and harmony among men, we should remember places such as the Meuse-Argonne American Cemetery in France, where grave markers seemingly extend to infinity.  These are the graves of mostly young men who died for nothing but the lies of politicians and the profits of the politically-connected.  Gold wanted no part of the slaughter.  But politicians and bankers knew a paper fiat standard is the monetary means to accommodate it.



Conclusion

John Maynard Keynes, who coined the term “barbarous relic” in reference to the gold standard, wrote about the world that was lost when gold was abandoned:
What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914! . . . The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep. . . He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighboring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable.
If Keynes had read what he wrote he might’ve been a better economist.  And we might be living in a better world today.

Sunday, November 3, 2013

The dead end of interventionism

“Government Exits Health Care Market” says a headline we’ll never see.  Nancy “Are you serious?”/“pass the bill” Pelosi and her allies could tell us why.  Their statements about the poor and uninsurable notwithstanding, the whole point of the law was not to solve a problem, but to get a bill passed in the name of that problem.  Laws rarely if ever achieve the stated aims of the lawmakers, but once a law is on the books it becomes another foot in the door of the economy.  Even if it produces spectacular havoc and failure, the intervention itself will not be surrendered.  Why?  The people who championed ObamaCare are people for whom government is their raison d’etre.  To surrender the intervention would be to surrender power, and that kind of thinking has not produced the massive state we live under.

Besides, if the people who support government-mandated health care were serious about solving a problem they would not turn it over to the world’s number one problem-creator.  

ObamaCare is already showcasing the inevitable effects of bureaucracy and interventionism.  If its level of incompetence is anything like FEMA’s Americans will fear routine health checkups more than they do Cat 5 storms.  You’ll recall it was Hurricane Katrina that launched FEMA from the pages of Catch-22 as we read about rescue personnel diverted to Atlanta for two days so they could be given classes in sexual harassment and FEMA history while people were dying in New Orleans and the U.S. president was telling FEMA head Michael Brown he was doing “a heck of a job.”  To satirize government one need only report on it, as we saw last year when first-responder FEMA made a first response to a nor’easter by closing its offices.

ObamaCare of course is government’s answer to government failure.  As an intervention, ObamaCare is the suppression of certain voluntary acts and the compulsion of other acts.  It’s one more area where other people, not you, are in control of your life.

The key to the advancement of interventionism is how each stage is publicly perceived.  When interventions bring on a crisis, it’s critical for interventionists that the free market take the blame.  Blame speculators, blame greed, blame Original Sin, blame the other party, but don’t blame the government unless you’re reprimanding regulators while calling for more or better regulation.  The reasoning behind this is straight-forward: If the free market is allowed to breathe, what would it do to the careers of people like Nancy Pelosi, Hillary Clinton, and Kathleen Sebelius - for that matter, any politician or bureaucrat?

Thomas DiLorenzo cites a 1992 study by Milton Friedman in which Friedman concluded that the problems in the American health care system are entirely due to government intervention.  DiLorenzo writes:
Friedman documented how, at the beginning of the 20th century, about 90% of all American hospitals were private, for-profit enterprises. State and local governments then began taking over the hospital industry. So, by the early 1990s only about 10% of all American hospitals were private, for-profit enterprises. Socialism characterizes at least 90% of all hospitals. Many other hospitals have received government subsidies, and with the subsidies come reams of regulation, making them fascist by definition. 
The effect of this vast government takeover of the hospital industry, Friedman documented, is what any student of the economics of bureaucracy should expect: the more that is spent on hospital care, the worse the quality and quantity of care become, thanks to the effects of governmental bureaucratization. According to Friedman, as governments took over an ever-larger share of the hospital industry (being exempt from antitrust laws), hospital personnel per occupied hospital bed quintupled, as cost per bed rose tenfold. 
Friedman concluded that "Gammon's Law," named after British physician Max Gammon, "has been in full operation for U.S. hospitals since the end of World War II." Gammon's Law states that "In a bureaucratic system, increases in expenditure will be matched by a fall in production.… Such systems will act rather like 'black holes' in the economic universe, simultaneously sucking in resources, and shrinking in terms of … production." Dr. Gammon surely knew what he was talking about, having spent his career in the British National Health Service.
Orthodox historians have always treated the Progressive period (roughly 1900–1916) as a time when free-market capitalism was becoming increasingly “monopolistic”; in reaction to this reign of monopoly and big business, so the story runs, altruistic intellectuals and far-seeing politicians turned to intervention by the government to reform and to regulate these evils. [Gabriel] Kolko’s great work [The Triumph of Conservatism] demonstrates that the reality was almost precisely the opposite of this myth. Despite the wave of mergers and trusts formed around the turn of the century, Kolko reveals, the forces of competition on the free market rapidly vitiated and dissolved these attempts at stabilizing and perpetuating the economic power of big business interests. It was precisely in reaction to their impending defeat at the hands of the competitive storms of the market that big business turned, increasingly after the 1900s, to the federal government for aid and protection. [p. 38; emphasis added]      
With this understanding it’s hardly surprising to find that health care industry lobbyists influenced and wrote the health care law. 

What blessings does intervention bestow?  It keeps headline writers busy.  Today it’s ObamaCare’s website and the cronyism behind its creation (health care intervention), yesterday and today it was and is NSA spying (privacy intervention), before that it was Putin trumping Obama over Syria (foreign intervention), sometime earlier it was IRS targeting of liberty nonprofits (economic intervention), then we have the pseudo-austerity of budget sequestration, the czars, Fast and Furious, Benghazi, the ongoing wars, student debt - youth unemployment, etc. ad infinitum throughout American history.  Government meddling also produces government debt, both official and unofficial, which according to economist Laurence Kotlikoff reached $222 trillion in 2011, an increase of $11 trillion from 2010.  But the headline writers don’t talk about this.

Since 1913, a large part of the funding for an expanding government has been brought to us by the monopoly money producer of the U.S., the Federal Reserve, along with its partner in coerced wealth extraction, the Internal Revenue Service.  Since their creations both agencies have fine-tuned their craft, with the IRS benefiting from a war to get permanent tax withholding, and the Fed benefiting from a depression it inaugurated when FDR made it a felony for American citizens to own gold money.

Taxes, inflation, and debt do not profit most taxpayers.  For now the pain is tolerable for most.  But there will be a time when it isn’t, and they will need an understanding of free markets if they are not to be conned into a new system of economic enslavement to replace the one that goes belly up.