Monday, December 23, 2013

The Cure

This is the time of year when people make wishes.  They beseech mankind to end war, eliminate poverty, and cure dangerous diseases.  Almost no one does anything beyond making the wish or writing a check to some charity, but even that little bit makes them feel better.  

If I were to make a wish, I would wish for people to re-examine their state indoctrination — or as Ayn Rand used to put it, to check their premises.  War, poverty, and dangerous diseases can be overcome, and the means to their cure is right in front of us, which is why most people don’t see it.  Most people think the means to the cure is more and better government programs.  It is not more and better government programs.

What is the means?  Freedom.

Turn loose the ultimate resource, as Julian Simon termed it.  Let human ingenuity flourish.  Get the state out of our lives.  Get rid of the government bureaucracies that drain our wealth and sap our energy.  Get rid of the income tax, the federal reserve, get rid of the spooks and the growing police state.  We don’t need a monopoly enforcer of laws that violates property rights for the alleged purpose of defending property rights.  Repudiate egalitarianism.  The state’s imposition of favors means some group is forcibly sacrificed to provide those favors, on net.

Human freedom has never flourished under a state because a state by its nature is in the business of abridging that freedom for its own security.  Let the voluntary arrangements of the market be the expression of our release from domination.  Let the voluntary arrangements of the market select the medium we use to facilitate trade, which for centuries has been gold and silver coins.

Ron Paul calls for ending the Fed.  I like Ron Paul but we don’t need to end the Fed. It will die on its own without the support of the state.  So will every other state-privileged organization.  It took government as we’ve known it to create the Fed.  Let’s end government as we’ve known it so it can’t create a second Fed, as it did with the Bank of the United States.  Ending government as we’ve known it will put an end to the cartelized aspects of our economy.  No more protection from competitive forces.  Ending government as we’ve known it will put an end to the institution responsible for initiating war.  Ending the threats to our liberty is a matter of ending the predatory state.

Where is the evidence that the market cannot provide for all our needs, when providing for our wants and needs through voluntary exchange is exactly its nature?  Where is the proof that we need coercion to establish a free society?  Let adult humans act like grown-ups and take responsibility for their lives and the lives of their children, and if they choose to do so, responsibility for the lives of others who are incapacitated in some way.  The human spirit is self-interested but it is also highly charitable.

Traditional patriotism is allegiance to a state that has worked tirelessly over the years to take control of our lives in myriad ways, usually in the name of some high-sounding but corrupted virtue.  What is virtuous about pledging allegiance to our masters?  We do not want or need masters.  What do Marxists, socialists, Republicans, Democrats, Independents, Greens, and every other interventionist group have in common?  They all seek control of the state’s levers of power to force their views on the rest of us.  When we’re implored to be patriotic, we’re being urged to swear allegiance to those levers.  Allegiance to power is the only constant of our history, not some intransigent set of principles.  Let’s remove those levers.  Let’s resolve to deal with people voluntarily instead of through state force.

The cure to our problems is to eliminate that which prevents us from solving them.  The culprit is the state.  Let’s work to end it.

Merry Christmas and Happy Holidays!

P.S.  The title of this essay is a dedication to a good friend of mine.

Tuesday, December 17, 2013

Has the Fed made the world a safer place?

With the 100th anniversary of the Federal Reserve Act approaching libertarians will mark its passage as one of the darkest moments in U.S. history.  At least, Rothbardian libertarians will.  And what does this say about the rest of the population, most of whom couldn’t care less about monetary matters or what happened a century ago?  It says the state’s indoctrination efforts have been hugely successful.  

Since the victors in monetary matters are obviously not the Rothbardians, I decided to chat with someone from the winning side to try to improve my understanding of their position.  I managed to secure an interview with the author of the monetary classic, The Glorious Federal Reserve: How the Printing Press Has Saved Our Collective Hides.  Since his book is published under the pseudonym Jolly Roger, I refer to him by his pseudo-initials JR in what follows.

Me: What was wrong with the gold coin standard we had used for much of the 19th century and early 20th century?

JR: It was deeply flawed.  It was obviously flawed because of the destructive Panics that kept cropping up, such as the big one in 1907.

Me: So the solution was to . . .

JR: To provide a more elastic currency, as the law says.  Gold is not elastic because it can’t be created on demand.  Though more plentiful, silver fails the elasticity test too.  To eliminate the Panics, we needed money that can be created on the spot — out of thin air.  We needed the paper money already in use but without the gold or silver it stood for.

Me: Weren’t those paper bills promises for real money?

JR: You guys are so amusing. Money is what you use in exchange.  People were using paper bills in exchange.  Therefore, paper, not gold, was money.

Me: If paper was real money why did people hoard gold?

JR: As a friend once remarked people are dumb as hell.

Me: But even with gold and silver demonetized we still have crises.

JR: But we don’t have Panics!

Me: So we solved that problem by using money that stands for — what?

JR: Nothing.  But don’t get the wrong idea.  To make it work, money creation had to be assigned to a legal monopoly — a cartel.  That’s why government got involved.  The Fed needs guns and badges to make it a cartel, to give it teeth.  Only of course we never refer to it as a cartel or a monopoly because of the negative connotations those terms have.

Me: Yeah, it wouldn’t do to call a spade a spade, would it?  People flock to gold naturally, but to get them to use paper you had to put a gun to their heads.

JR:  A government gun.  There’s a big difference.  

Me: You took money out of the voluntary arena of the market and put it into the authoritarian hands of government.  To eliminate Panics, you claim.

JR: Like people everywhere, Americans need to be tricked for their own good.  Most people are idiots, and idiots vote.  The Fed exists independent of the voting public, thank goodness.  Not one in a million understands how it works, but what would you expect from idiots?  With trustworthy people in charge of money creation we can strengthen our economy without the shocking setbacks.

Me: So, the lesson here is, don’t trust gold, even if it did evolve from the free choices of individuals acting in their self-interest to facilitate trade?

JR: Right!  Instead, trust the country’s top experts with the exclusive power to create money, who, because they’re under scrutiny from government — the voice of the people — would never, ever exercise this power for any but the most scientific of reasons — even if sometimes they get the science wrong.  

Me:  The people being the idiots who elected the congressional watchdogs. 

JR:  Yes.

Me: And these unelected monetary experts would never, ever use this power to help their friends or to fund dubious government operations, such as foreign wars bearing no relation to national defense. . .  Hello? 

JR:  Okay, okay, so right off we did get involved in a European war that took the lives of over 100,000 young Americans, and yes, this new cartel — organization — did play a crucial role in making foreign intervention possible.  But those boys were shipped over there for a good cause.  They probably thought they had full, rich lives ahead of them but fortunately Wilson, Congress, and J. P. Morgan knew better.  The dead and maimed helped make the world a safer place, and for that we honor them.

Me: A safer place?  Let’s see, since World War I we’ve had the Russian Revolution, the rise of the Nazis, the Great Depression, World War Part II, Korea, Vietnam, etc., up to the Financial Crisis of 2007-2008.

JR: That’s the trouble with you right-wingers — you try to pin everything on the Fed or the government.  

Me: I always thought war was an act of government and financial crises were brought on by Fed monetary policy.

JR: Let me tell you, we’re certainly a lot safer now than our ancestors were a century ago.  A dollar today is about equivalent to a nickel in 1913.  Except for the early days of the Depression the Fed has steadfastly cheapened the dollar.  Scientifically, of course.

Me:  Help me out here — why does a depreciating dollar make us safer?

JR: Because falling prices means deflation, which as any trained economist will tell you is public enemy number one.  Take a look at 1913.  A dollar then would buy almost twice as much as a dollar in 1813.  What a nightmare!  Something had to be done.

Me:  So if the dollar I hold in my hand loses buying power that’s a good thing?

JR: In an aggregate sense, yes.  

Me: And where has that dollar’s buying power gone?

JR: To people who aren’t idiots.  Who know what to do with the money the idiots earn.

Me: Isn’t that theft?

JR: When you steal from idiots it’s not theft.  It’s for their own good.  Besides, economics is not about individuals, it’s about aggregates.  Aggregate analysis shows that some inflation is necessary for a robust economy.  No real economist disputes this.

Me: It’s hard to see how the world is a safer place.  Since the Fed’s founding we’ve had perpetual war, steady inflation, stagflation, depressions, recessions, unemployment, bubbles—

JR: (Sighs) Look, the Fed wasn’t hatched at full maturity.  It takes time to get things right.  Consider what it has to deal with.  We know, for example, that there are unpredictable downsides to capitalism.  Inherent but mysterious flaws.  Keynes said that, so did Marx, and so do most economists who don’t have their head stuck up their behinds.  Remember this: The Fed is dealing with mysteries that are unsolvable.  Ask almost any professional monetary economist, most of whom are well-acquainted with the Fed, and he or she will tell you that as bad as things might get, they would be far worse without the Fed.  The Fed is there to rescue us.  Who in their right mind would not want the Fed on standby to pull the economy out of a disaster?

Me:  In the crisis of 2008 we saw the big guys get the bailout money, not the little guys.

JR: And as you well know, if the big guys sink the little guys go down with them.

Me: But the big guys wouldn’t be sinking if they didn’t practice fractional reserve banking.

JR: No fractional reserve banking!?  You Rothbardians . . . if banks didn't practice fractional reserve banking we’d be back in the Stone Age.

Me: Fractional reserve banking means promising two people the same dollar at the same time.  Not only is it a gross ethical violation, it creates booms leading to busts, as seen by bank runs and speculative excesses.  On these grounds fractional reserve banking is a fast-moving freight back to the Stone Age.

JR: If you were a banker you’d know better.  It’s only when fractional lending gets out of hand that the banks run into trouble.  That’s why we have the Fed, to make sure the banks don’t go under.  When banks go under depositors lose.  At least they did prior to the days of the FDIC.  Things are much better today.    

Me:  And the FDIC gets its money by selling Girl Scout cookies.  Nothing like moral hazard to ensure a sound banking system.

JR:  No one complains about the FDIC, except you guys.  

Me: The Fed is effectively stealing money from our bank accounts when it creates money.  It gives that money to the government so it can send our young people overseas to fight unnecessary wars, which are certainly profitable to some.  Since the wars create enemies, they serve as cover for a domestic police state.  Government also uses the money to buy votes without raising taxes.  I think the Fed is a dangerous racket that survives only because of public ignorance.

JR:  That’s why no one listens to you, my friend.

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.


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.

Tuesday, October 15, 2013

Monetary policy? Child’s play

The promise made a century ago that the U.S. central bank would eliminate economic crises is not raised very often.  To raise it would question the need for government’s most untouchable monopoly.  So it is not raised.  The Fed is the heart of the economy, we often hear.  It is the government’s ATM machine.  It bails out the big players when the roof caves.  It’s ridiculous to think the government could “do something” about crises without massive amounts of money at its disposal.  

Today, the Fed is stronger than ever as a result of the financial crisis of 2007-2008, the biggest since its other major failures, the artificial boom of the late 1920s and its role in the Great Depression, and the stagflation of the 1970s.  The Fed’s twin mandates of keeping inflation and unemployment low has been only half-successful.  According to one line of thought, the Bernanke Fed’s policy of buying close to $1 trillion a year in government debt may be too moderate to ease the pain of unemployment.  Fed chairman nominee Janet Yellen said in a speech earlier this year that the 7.3% unemployment rate is really 14.4% when you include part-timers who would prefer full-time positions and discouraged workers who have given up looking for jobs.  Since she’s expressed concern for workers excluded from the official (lower) unemployment rate, most analysts believe she will keep monetary policy “easy” for the foreseeable future if she’s confirmed.

The blessings of easy money

The Fed’s distinguishing characteristic is its grant-of-privilege to buy assets with money it doesn’t have.  No other person or institution can legally do this in the United States.  At the very least you might think this would raise eyebrows, but it doesn’t except in fringe quarters.  It is simply part of modern monetary gospel, never to be examined too closely.  Another part of that gospel is fractional reserve banking, wherein commercial banks normally loan money they don’t have. 

This monetary structure, blessed by all schools of economic analysis except the Austrian school, underlies the global economy. 

There’s a theory somewhere that says it is literally impossible to buy something with money you don’t have.  The Fed and other central banks have an answer to that theory: It creates the money in the act of purchasing something, what we might call a monetary deus ex machina.  If this isn’t clear, imagine a child playing make-believe who simply invents something on the spot to make her fantasy work.  When politically-appointed adults who are certified in economics conjure money on the spot it makes the economy work.  And it does.  If you don’t believe it check the profits of the biggest banks.  The only problem, seemingly, is the annoying unemployment rate.  In the fantasy world of political whim, where economic law is ignored, why not take the next step and let each person print dollars?  Unemployment would become an obsolete term.  Crimes against property would vanish.

Of course this wouldn’t fly because the big guys make the rules, and one of their rules is Thou Shalt Not Print Our Money.  Unauthorized currency creation in today’s fiat money world is counterfeiting, and governments go after counterfeiters with a vengeance.  It’s simply a turf issue, as Gary North wrote.  Governments regard counterfeiting as a high crime because it competes with its own counterfeiting activities.

Recall that the original purpose of money was to facilitate barter.  Money was the most marketable commodity, as Ludwig von Mises wrote over a century ago [pp. 32,33].  People bought it with goods they owned and sold it for other goods they wanted.  Money enables trade for people who are both producers and consumers, and allows them to specialize in their preferred occupations.

Government gradually muscled in on the money business, and eventually the paper dollars that had served as claims to deposited gold coins became money itself, by decree.  Also by decree the paper dollars were no longer claims to deposited gold coins or anything else.  Fiat paper money makes wealth transfers to the government invisible to most people.

Since the price of producing fiat paper money is negligible compared to the price of mining and minting gold, it performed the magic of filling the government’s coffers without legislating an unpopular tax increase.  It thus became the preferred method of financing wars and buying votes.  When money is cheap to produce it also attracts unauthorized producers, from government’s enemies as well as its citizens.

The U.S. Secret Service, in fact, was authorized by Lincoln on the day of his assassination, April 14, 1865, and commissioned on July 5th of that year “with the mission of suppressing [the] counterfeiting” of U.S. currency.  Following the passage of the Legal Tender Act of 1862, which “mandated that paper money be issued and accepted in lieu of gold and silver coins,” unauthorized counterfeiting became a serious problem for the government.   By 1865 between one-third to one-half of all U.S. currency in circulation (“greenbacks”) had been produced by someone other than the Union government. 

Let the market define money and control its supply

When gold coins circulated as money private citizens, as miners or owners of gold ore, largely determined the growth in the money stock.  Market forces determined monetary inflation.  When Lincoln forced greenbacks on the economy, only the government could legally control the money supply.  Political considerations determined monetary inflation.*  For political money to work, all other producers of money had to be eliminated.  

The one problem of fiat money from the government’s perspective is having it accepted as money, but this is solved through government’s defining tool, coercion, along with its vast propaganda apparatus.  Hence, the modifier “fiat” in “fiat money.”

The distinction made between government issues of money and private issues is of political importance only.  It’s a matter of cui bono - who benefits. Assuming the private issue is indistinguishable from the public issue in normal, day-to-day transactions, it will circulate as if it were in fact issued by the public authority.  Economically, the source of the issue is irrelevant.  The privately-issued currency will increase the money supply and redistribute wealth in the same way as the government-issued money.

When a fiat money producer, whether government or private, takes his newly printed money into the market to buy something, he is not offering sellers an economic good in exchange, as he would do in barter.  Both the government and private counterfeiter are consuming economic goods without producing economic goods first.   People who take the goods of others at gunpoint are thieves.  People who print fiat money and use it to buy things are no less criminal.

But notice this difference: In the first case, we have no trouble identifying the victims as the ones who are robbed.  In the fiat - counterfeiting case, the victims are emphatically not the ones who surrender their goods in exchange for money.  In the short run at least, they are beneficiaries.  Because the whole of society is forced to accept the notes, the first recipients of the new money can spend it at current prices.  Only much later are prices affected negatively. 

In practice there is a further distinction.  Private counterfeiters do not as a rule announce their counterfeiting activities to the public.  Their goal is to counterfeit without getting caught.  They are likely to spend the new money in such a way that it disperses through the economy undetected.  Government too can’t announce its counterfeiting to the public.  But rather than try to keep it a secret, government calls it monetary policy, and many highly-educated and brilliant people with financial connections to the Fed devote their lives to rationalizing it. 


Milton Friedman once wrote that monetary policy under a commodity standard was simple - there is none. [p. 251] The commodity money takes care of itself.  It also to a large extent takes care of politics. 

*One could argue that it was necessary to print money to pay for a war to free the slaves but this raises many objections, such as how other countries ended slavery without war.  Nor did Lincoln invade the South for that purpose.  It’s also hard to imagine hundreds of thousands of northerners and southerners fighting to the death to free people for whom they had little respect.

Monday, September 9, 2013

What we're told

We’re told that the War on Terrorism is a war against “militant Islamists, al-Qaeda, and other jihadi groups” and in the words of President George W. Bush will not end “until every terrorist group of global reach has been found, stopped and defeated.”  We have no idea when this will be.

We are told that the government has to treat many Americans as potential terrorists, especially those who support peace and liberty.

We’re told Obama does not “believe that people should own guns,” yet he raises no objections to the DHS purchase of 1.6 billion rounds of hollow-point bullets, which would give the bureaucracy “the means to fight the equivalent of a 24-year Iraq War.” We’re told the DHS is acquiring these bullets for target practice, though they don’t specify the nature of the targets.

We’re told that FEMA camps are disaster response facilities, not concentration camps.

We were told the Iraq invasion would be a cakewalk, that it would pay for itself, that it was not about oil, that it would cost under $50 billion, that Americans would be greeted as liberators, etc., etc., etc.

We were told to believe the claims of the Bush Administration regarding the need to invade Iraq, yet the Center for Public Integrity’s War Card found that Bush officials lied about WMDs or Iraq ties to Al Qaeda on at least 532 separate occasions prior to the invasion in March, 2003.

We are told that we live under the rule of law, but that the U.S. president can have anyone killed he wants to because of the terrorist-filled world we live in.

We are told that John F. Kennedy was murdered by a lone nut, that 9/11 was the work of “19 Arabs, none of whom could fly planes with any proficiency, [who] pulled off the crime of the century under the direction of a guy on dialysis in a cave in Afghanistan,” and that anyone who challenges these conclusions should be hit with the weaponized term, conspiracy theorist.

We are told that the government does not spy on the personal affairs of Americans.

We are told that a war killing close to 750,000 Americans was necessary to end slavery, while slavery elsewhere - including the Northern states in the U.S. - was ended without violent conflict; that a world war killing over 16 million people, 117,465 of whom were Americans, was necessary to save the world for democracy, and that yet another world war killing between 50-70 million people, most of whom were civilians, was needed because we were the victims of an unprovoked attack on a Hawaiian naval base.

We are told that the presidents who took us into these wars are among the greatest presidents in American history.

We’re told that unprecedented amounts of fiat money injected into the economy has resulted in a fount of prosperity, and it may be time for the Fed to slow down the injections.

We are told that some businesses are so big their failure would produce an economic catastrophe.  As failing enterprises are those that squander wealth rather than produce it, and that the larger the business, the larger the squandering, perhaps such firms are instead “too big to be kept alive.”

We are told that a free market gold coin monetary system is a threat to our well-being, though not so mysteriously "the international gold standard from 1815 until the outbreak of World War I 1914 [was] the greatest period of economic growth in recorded history." Nevertheless, we're told gold money is a barbarous relic.

We are told that a fiat monetary system controlled by a central bank provides macroeconomic and financial stability, notwithstanding such episodes as the recent financial crisis and the Great Depression.

We are told that a massive public debt is nothing to worry about.  A Nobel Prize-winning Op-Ed columnist explains why:
the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources. . . .  Talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children.
In other words we borrow, they pay - or default.  An economist with a different perspective says this:
[It is argued that] a public debt is no burden because we owe it to ourselves. If this were true, then the wholesale obliteration of the public debt would be an innocuous operation, a mere act of bookkeeping and accountancy. The fact is that the public debt embodies claims of people who have in the past entrusted funds to the government against all those who are daily producing new wealth. It burdens the producing strata for the benefit of another part of the people. It is possible to free the producers of new wealth from this burden by collecting the taxes required for the payments exclusively from the bondholders. But this means undisguised repudiation.  [p. 229]
We are told by this same Nobel prize-winning commentator that fractional reserve banking is simply a way for bankers to “improve the tradeoff between returns and liquidity” and can be kept in check with proper government regulation, and the incurably ignorant who have a problem with this hold “Ron Paulish monetary ideas.”

We are told that the most important factor in generating the boom-bust cycle is human emotions, as if these emotions were unrelated to banks’ practice of distorting prices through fractional reserve banking.

We are told that the Great Depression was a failure of capitalism, and that economic fascism was needed to save capitalism.

We are told that our government is of the people, by the people, and for the people, rather than run by the highest bidders

We are told that progressive economic regulations and bureaucracies, such as the Federal Reserve, exist to protect the public weal rather than provide subsidies and privileges to special interests.

We are told that sending children to schools that have no way of protecting them is fine, even though government has no solution other than anti-gun hysteria to the mass murders that occur from time to time.  Few people would consider closing the public schools.

We are told that government will provide for us in our old age, that it will provide for us when we can’t find work, that it will pay for our health care, that it will bestow many other blessings if only we are willing to make the damn one percent pay for it all.

We read that the Syrian government engaged in chemical warfare against Syrian civilians, and that, even if the attack was ordered by someone other than President Assad, he alone is responsible.  Meanwhile, AIPAC and other war hawks are hammering Congress to vote for a strike, even though there is evidence the attack may have been launched by U.S.-backed rebels.  The Administration is hungry for a strike even with a majority of Americans surveyed strongly opposing U.S. intervention, and even though such action has the potential to ignite the World’s Last War.

We are told that we are endowed with certain unalienable rights, and that to secure these rights governments - monopolies of violence - are instituted among men.

Because this is the one coercive monopoly that allegedly serves our welfare we are told government is a blessing, that anarchy would be death and chaos for all but the most ruthless - notwithstanding the brilliant insights of Stefan Molyneux, Robert P. Murphy, Murray Rothbard, and many others.

The State Unmasked

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