I'm Back; Great Depression

I've been gone for a while as school came to an end, but it ended last week (I got two A's for sure, including one in Macro Economics) so I'm back. I've encountered a crap load of idiocy lately so hopefully will have a lot of things to write about, and my only problem will be to figure out how to separate the subjects into manageable and readable articles.

Until then here is the research paper I wrote for my English class this semester.

For a little back ground, the paper is on the Great Depression, a topic I choose because of its relevance today with the current depression, blah blah blah. The length assigned was six pages, I wrote 8. I separated it into four sections: Causes of the Great Depression, Hoover, FDR and WWII.

We went over Keynes a lot in my Macro class so I couldn't stop from writing about four pages on Keynes and the the causes, I also wrote about 3/4th of a page on the Austrian Theory of the Business Cycle, which I talk about a lot on this site but don't explain very often. Because, of the long first part I skimped on Hoover, FDR and WWII giving each of them only about a page. I believe this is alright because as the paper evolved it turned into two parts: how the government caused it through the bank credit expansion and then how the government prolonged it, where I used opportunity cost

(which was borrowed from about 7 different books I read. In the class we had to give presentations on the sources we would use in the paper, my presentation was basically explaining five books no one had ever heard of and then saying I know about 40 others no one has ever heard of [other than economists, hard-core Austrians, etc.] and I don't know how to narrow it down. I then preceded to handle 15 minutes of non-stop questions which somehow morphed from gov. intervention in the Great Depression to the plausibility of anarchy, suffice it to say I doubt anyone who was truly paying attention will look at things in the same light again)

to show how markets weren't allowed to correct themselves. (How'd you like that blockquote idea with the huge parenthesis thing there, genius idea, huh.)

The paper is in PDF form, you can download a reader here and read it here

Mike

Liveblogging Meltdown Ch.1 The Elephant in the Room

When I went to Florida on Spring Break this year I tried to buy Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse, By Tom Woods (my favorite author by the way) for a few relatives at three different book stores, well all of them were sold out and the last even mentioned the publisher is completely sold out.

So these posts (one for each chapter) will be mainly for those relatives for whom I could not buy the book, remember these will in no way live up to the book, not even close, so make sure you buy a copy as soon as it comes back out.

Chapter 1 - The Elephant in the Living Room

The stock market has been falling since last fall, and, predictably, just about everyone is blaming it on too much free markets and not enough regulation.

Woods shows that no one even mentions the Fed or the one percent interest rates, that is except for Jim Rogers, James Grant, Peter Schiff and the members of the Austrian School of Economics - those who predicted the crisis that is.

The government's cure for the crisis? More of the same of course, bigger government and more regulation masquerading first a s republican and then as ' hope and change.'

In the book Woods promises to show how the Fed screwed up the economy by manipulating interest rates and how the only school that predicted the crisis, the Austrian School, is also the only one which has a viable solution.

Defending Peter Schiff

Peter Schiff is probably, right now, the fore most advocate of Austrian Economics, so when I saw one of the financial bloggers I read ripping him, I thought I'd need to post a reply.

What if one hundred years later: the little town has expanded to take up a whole country, and as the government took control of money and made it illegal for anyone else to produce money the majority of the citizens in the country stopped saving and got jobs in the service industry, contracting out most of the manufacturing jobs to another country across the sea, as they were doing this a lot of them paid for this using money obtained on credit from the second country.

Also, while all of this was happening, the government who had a monopoly over the money forced billions of it into the banking system and bullied them into lending it to people to buy houses who could not pay it back.

Then, the banks repackaged the loans and they were sold as AAA debt?

A bubble would be created in housing prices, because so many people would be bidding for them that the prices would shoot up, then as a result of the prices shooting too high builders would build even more houses, and people would start trying to speculate on the houses, using mortgages with no money down.

Once the housing prices dropped even a little all the speculators who had 'bought' houses with no money would just walk away and foreclosures would spiral upwards, then the money would start coming due to those who would not afford them in the first place.

As the housing prices were falling and foreclosures were mounting the idiots who bought the repackaged debt would face huge losses, which in the free market is the only signal that says stop doing what you're doing the market thinks the resources should be allocated elsewhere.

This is what happened in America, and Peter Schiff, Ron Paul, Lew Rockwell, Tom Woods, Walter Block and every other Austrian Economist predicted it starting in 2002 when the fed started decreasing the interest rates.

Yes, a broken clock can be right twice a day, but when a group of hundreds of economists and hundreds of thousands of their students have used logical theory to predict every recession or depression in the 20th century in any country and to explain all those before, it is most likely because they are correct.

Also, a few more things:

Schiff does not think everything in our economy would be going to zero if the government stayed out of it, he believes the malinvestment, which you mentioned as an overabundance of investment that didn't perform, would be liquidated and we would be out of it, this is what happened in 1920 and even after production dropped 21% in one year the downturn only lasted about a year and a half.

By 'plowing' money into the system the only thing that happens is price inflation and a perversion of incentives that tells bankers they can take whatever risk they want because the government will be there to back them up. These companies that are being propped up are too big to be allowed to stay alive, our already screwed up economy cannot take so much money being wasted on crap, when the money should be allowed to be allocated to more efficient firms and people who if they earn a profit would be, by definition, helping society.

With your debt in a 'real' economy, that would be correct, but in America we are no longer manufacturers so the money we borrow from China goes back to China and other Asian countries to produce things or to service industries who will in turn spend it on more service industries or more things from outside the US. When this happens the debt is not invested in anything, so a lot of won't be paid back.

We had the gold standard for a few years of the depression, but ti wasn't effective because FDR and Hoover did bank holidays and effectively canceled it out before FDR killed the gold standard and just banned owning gold at all outright in 1934.

The War did not get us out of the depression, it was the end of the war and the end of government spending that got us out of the depression in 1946.

And as for Schiff's investment record, he cannot reveal it because he was not an investment adviser until this year, but from what I've read most of his clients fell less than the stock market did last year the guy who showed Mish his portfolio invested like a week before the peak and sold out his whole portfolio like two weeks after the trough.

In his book Schiff said that the foreign markets would likely fall with the US until they decoupled, and he advised holding a lot of cash until then, so to imply he was totally wrong with his investment advise because he had a bad 6 months, which he predicted would happen, and got a chance to average into his investment is not very logical, especially for a value investor.

Also, Schiff is effectively a value investor, a few weeks back on his podcast one of his researchers at his firm was interviewed, and they do fundamental analysis on each stock they recommend, forecasting its cash flows and only buying those with low multiples and high dividends.

-

More to come later, I will be 'live blogging' Tom Woods' new book Meltdown.

Say's Law; Job 'Creation'; Private Defense; Profit & Loss

Free Speech Board

The question has yet to be changed, so a new answer was very poignant this week:
I’ll tell you what is not (desirable) this question still being up here.

Also, someone wrote that people should get rid of the delusion of equality because people are inherently unequal, which is a huge positive.

Macro

This week we talked about Say’s Law, which basically says in a market system: as an entrepreneur supplies things he creates his demand for what other’s supply. At first savings (Some deluded Keynesians still believe this, including one of my more ignorant roommates) was thought to be a leakage in the system, until it was shown that savings creates the capital which businesses use to create supply, this is correct.

However, a guy named Malthus came said there is still a leakage in the cycle, when money is hoarded, however this is also incorrect.

Those who read this blog should be familiar with the fact that inflation is an increase in the money supply, this pushes the prices up. Conversely, when money is taken out of a system deflation is the result and prices fall correspondingly.

But, the amount of money taken out is so infantile it would take a while for the market to respond, you may say. This is possibly true, but then it must also be true that money hoarded does not represent a big enough amount of the money supply to create a depression as well.

Government Job Creation

A lot has been talked about in the news lately about the ‘jobs that Obama will be ‘creating.”
This is a huge fallacy, and an easy one to see. As Henry Hazlitt and Frederic Bastiat observed to create a correct economic framework, one must not look only at the short range consequences for one group of people, but at all the consequences for every group of people.

For the supposed job creation it is necessary to remember that government cannot create any sort of wealth it can only redistribute wealth. In the same vein the government certainly cannot create any jobs; it can only redistribute the jobs from where the free market thought they should be, so by definition the jobs will be unproductive and contribute nothing to society.

Private National Defense

I’m skipping the movie review this week, to finish my review of Bob Murphy’s Chaos Theory
In his private defense essay Murphy again uses insurance as his basis for how a free market could provide defense.

He stars with the example of an earthquake, if people lived in an area with earthquake risk, they could get insurance to protect their interest if there was an earthquake. To protect itself the insurance company would charge lower rates to those who had home that would serve better in an earthquake and would make sure people went to a safe place in the event, or forfeit their claims.

The same theory can be used for national defense, people could get insurance against attack, where the insurance company would pay for any damages and would pay money to their estate if they were killed.

With competition defense companies would be created and used by insurance companies to lower the risk of attack.

After this explanation, Murphy shows how the Calculation Problem (which I used in my defense of Anarchy) makes it so government defense cannot work efficiently (what would you rather have? A private company defending you to as efficiently as possible or people you don’t know forcibly taking your money and using it to spend $600 on toilet seats?).

Profit & Loss

Profit & Loss is a three-part, 56 page essay by Ludwig von Mises.

In the essay Mises shows that those who condemn profit without referring to loss are missing the point; entrepreneurs must face profit and loss in their business, in order to have the privilege to allocate scarce resources away from other uses they must earn a profit, if they do not they are run out of business, by operating at a loss.

This system makes it so that those who run big businesses can only stay that way by satisfying the public (which in a voluntary economy earning a profit would mean that one satisfied his customer, or they would not do business with him) and earning a profit, instead of condemning big business it should be revered, if the business was not making the lives of society better it would no longer be a big business.

Profit & Loss is a good quick read, especially good for those who wish to convert ignorant Keynesian or socialist friends to the correct economic way of thinking.

Quote of the Week

Life, liberty, and property don't exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place. ~Frederic Bastiat

Sources, this week

Equality; Price Controls; Chaos Theory; The Patriot

Free Speech Board

The question was is equality good.

The only answer as of this writing was, “Equality is always desirable, but maybe not always attainable.”

I believe one thing should be equal: everyone’s property rights. Nothing else can be held equal without initiating force.

Also, I do not understand what the fetish is with equality, people were made differently, and can do different things better than others. That’s just how it is! This stupid idea that there should be equality of opportunity or equality of outcomes is absolutely contrary to nature and should be dropped for a more logical philosophy that will have better logical outcomes.

Macro

We just took the test on the market model, so I thought I’d talk about artificial price ceilings and floors.

Ceilings

A price ceiling is when the government says no one can charge more than a certain amount for an item. For example the government may say that gas cannot cost more than $2 per gallon.

What then happens is the firms who sell the gas will supply the amount they would have if the
actual market price was $2, so some companies who could only profitably sell gas at $3 per gallon will stop selling. At the same time consumer demand for the gas will go way up because they can buy it at only $2 per gallon, so people who would only buy $20 before will fill up their tanks and people will speed up faster and drive more, thus more gas will be bought than before. So as the supply falls because firms cannot make money of the current price, the demand will sharply rise and buy up all the gas, thus there will be a shortage. Anyone who lived through the ‘70’s should remember this happening.

Floors

The best example for a price floor is minimum wages; currently the government says no one can sell his labor for less than $6.25 per hour.

So what happens is many people go out and try to find jobs paying this amount or more, upping the supply, but the firms who before purchased the labor for less than $6.25 will no longer demand the labor, and a surplus, or unemployment, of labor will be created.

Maybe, an easier explanation would be corn: (I have no idea what the price of corn is) say the government puts a price floor on corn saying people cannot charge less than $200 for it. Farmers would then en masse start growing corn to earn the higher profits on it, while at the same time people would change to eating green beans and other things instead of the expensive corn, the result, way too much corn than is needed and many farmers who need money to buy clothes and water, but instead have a crapload of corn.

The lesson: anytime government screws around with prices it takes away the proper market signals that show how much should be supplied of products and create shortages or surpluses of those products.

Chaos Theory

Chaos Theory is a little known book by Robert Murphy, who is the author of the PIG to Capitalism, it is just 55 pages and contains two essays by Murphy on the mechanicals of a stateless society.

The essays are on Private Law and Private Defense.

So far I’ve only had time to read the Private Law essay, but I’ll post on the Defense part next week.

In a stateless society everything would be owned privately, by definition, Murphy says that it would be in the interest of everyone who owns property to put in a contract that everyone who enter the property cannot steal, murder, assault anyone, etc. If anyone breaks the contracts they would be subject to a fine, considering the trial of a private court or arbitration firm.
To make sure all the fines would be paid it would be likely that ‘crime’ insurance companies sprang up, and businesses would only allow those with this insurance on their property.

The insurance companies would proceed to only grant policies to those who they believed would not commit crimes (if someone already did commit the insurance company may say we’ll only give you the policy if you stay in a private jail).

I have some objections to this (what’s to stop people from just entering the property without signing a contract, and what about rich people who could just afford the fines) so I’m going to re-read it, but at least form what I now understand its seems logical and plausible.

The Patriot

The Patriot is a story of Benjamin Martin, a character partly based on the “Swamp Fox,” Francis Marion, who is considered the founder of modern Guerilla Warfare.

The movie can be looked at very well from a libertarian perspective. It starts out with Martin’s son joining the Revolutionary army and being taken by the agents of the big British government, who proceed to kill another of his son who runs after the soldiers.

Martin then takes vengeance finding the road on which the British soldiers were and, with two of his younger sons, killing all of the Brits guerilla style and taking his oldest son back.
Martin joins the army and throughout the movie he uses his wits and knowledge of the land to cripple the British Big Government army in his area.

It is important to point out that the Revolutionary army was basically anarchic in the Revolutionary war, there was, as of yet, no government for them to follow. And as Murray Rothbard pointed out if a bunch of farmers and blacksmiths could voluntarily join an army and beat the best army and navy in the world who could possibly take over the whole of Americans, all of which will know their land better than any attacking force.

Quote of the Week

Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way out for himself if society is sweeping towards destruction. Therefore, everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hangs on the results. Whether he chooses or not, every man is drawn into the greatest historical struggle, the decisive battle into which our epoch has plunged us.
– Ludwig von Mises

Worst Crime; Keynes; Inclined to Liberty; Stimulus

New Article Layout

I’ve been using a layout for the articles for a while; I thought I’d show what will go into the articles each week, from now on (not in any discernible order):

• Free Speech Board
• Macro Economics Class
• Economic Subject
• Short Book of the Week – Eventually this will just become book of the week
• Libertarian Movie of the Week – This will be a new feature where I examine a current or past movie that has libertarian leanings
• Quote of the Week

Free Speech Board

The question this week was, “What is the worst crime a person can commit?”

There were a bunch of heinous answers, like, “Download music illegally,” or, “Be a member of the Republican party,” along with some obvious ones including molestation, rape and murder.
My opinion?

I believe the worst crime that can be committed is to forcibly steal money from workers, under the penalty of imprisonment or death, and use that money to go half way around the world and murder civilians in a country the majority of the workers could not even point out on a map.

Then again, the State commits or has committed the most heinous crimes imaginable many more times than any one person has.

Macro

I got into a (very) minor scuffle with my Professor today (don’t worry it was all words), when he asked if anyone knew who Maynard was (he was talking about Keynes). Here’s how it went down:

Me – He was a dumb economist.

Prof – DUMB! You can’t get by in this class thinking that.

Me – You were talking about Keynes, right?

Prof – We won’t be talking about anyone dumb in this class. How can you say that? He was named one of the 6 most influential intellectuals of the last century.

Me – By who though?

Prof – Sigh…. Economists.

After that he went back to reviewing for our test. I have a number of points on this:
It’s possible (probable) that I should have held back on my amazingly quick wit, and said, “The guy whose theories prolonged the depression by twenty years,” or, “The guy whose every work was demolished by Austrians, mainly F.A. Hayek and Henry Hazlitt.” Unfortunately in my haste to be the first one to answer the question (in a class where I doubt anyone else had any idea what the hell was going on) I just said, ‘dumb.’

Keynes changed his mind basically every two years, F.A. Hayek destroyed his Treatise on Money to the point that Keynes agreed that it was wrong. Hazlitt wrote a line by line refutation of Keynes’ General Theory. Also, he misstated Say’s Law then proceeded to say it was wrong and base his whole theory on it.

Every single time Keynes’ theories have put into practice bad economic things have transpired.

Finally, Keynes may have had a high IQ or been intelligent in areas other than Economics, but economically he was a fool, and one who has caused many lives to be lost. Calling him a genius, or calling any other wrongheaded idiot a genius for that matter, just distracts from the fact that he was wrong and serves little or no benefit to anyone, what so ever.

Inclined to Liberty


Louis E. Carabini believes there are two types of people in the world: those who wish to live their lives on their own minding their own business and those who wish to rule over other people.

He’s shows in his book that those who say, “No one should be allowed to own a Yacht,” or “CEOs get paid way too much,” or “no one should be allowed to inherit wealth,” are in effect saying, “The government should not allow people to own a yacht,” “The government should not allow people to choose how and when they interact with each other,” and “The government should not allow people to choose how to allocate their wealth.”

Carabini applies this theory to many topics, in the book’s 35 chapters, but only 107 pages. The book can be read in probably an hour or two, but still leaves the reader with much more ammunition with which to fight the crazies than he had before.

Mall Cop

TJ and I ironically both saw Mall Cop on the same weekend, even though we live several states apart and did not communicate about seeing the movie.

The movie was surprisingly good, it stars Kevin James as mall security cop, Paul Blart.
Blart is still in the mall when a group of bad guys take it over and attempt to steal the ATM receipts from all of the stores. Though he is in no way a traditional action hero, Blart manages to use his own form of Guerilla warfare to take out all of the bad guys, except the leader.

At the end of the movie he catches up with the leader at an airport, as he is trying to leave, and it is shown that the S.W.A.T. team leader, who had been interfering with Blart (or at least attempting to) throughout the movie and was a bully to Blart during High School, is in with the bad guys.

It was extremely refreshing to see a movie that did not have the same cliché genius government cops and idiot criminals. When government has a monopoly on defense two things are always bound to happen:

1. Inefficiencies abound because the government has no profit/loss to calculate how and when to spend money. Because of this policemen are not paid what a market rate would be for the risk and skill involved in their profession, so many of them will need to get money on the side.

2. When a government troop goes bad, the only people who can stop him are other government troops. Everything and anything will be done to make the situation less embarrassing to the government.

Stimulus Bull

Robert Murphy has a great analogy for the stimulus:

If an allergic man is stung by a bee what should you do? Give him the freedom to go to the hospital and give him some a Benadryl or hold him down on the ground, don’t let him move, and take blood out of his leg and inject it into his arm?

The reason we are in a depression and have inflation above 16% is because government screwed around with the money supply in 2002. Right now the market needs to be free to go through a recession to get rid of all the mal investment made because of the false interest rates.

This is not what is happening, instead the government is propping up all the failing companies, the crappy companies that the market needs to kill and then redistributing money to try to ‘stimulate’ the economy.

At a time when more savings is desperately needed in a country with a negative savings rate, the government is taking the money away from those who save the most and redistributing it to those who will just spend it, thinking this will somehow help the economy.

God help us.

Quote of the Week

When the government fears the people, it is liberty. When the people fear the government, it is tyranny.

– Thomas Paine

Thomas Aquinas is the pseudonym of a free-market loving college student located in Salt Lake City, Utah.

Don't Get Excited Over House Republicans Unity

By TJ Madison

All I've been hearing on talk radio the last few days is how great the House Republicans are, because none of them voted for the so-called "stimulus package" proposed by Barack Obama.

I can guarantee it that if John McCain had won the presidency and proposed a very similar bill in Congress, most of the House Republicans would have voted for it.

And how do I know that? Because approximately 99% of those Republicans were in the House of Representatives at the same time George W. Bush was signing bills that called for extravagant levels of spending the past eight years.

What!? Do You actually think that all Republicans in the House had a sudden attack of 'common sense' and 'frugality' at the same time? Don't get me wrong, I want this 'stimulus bill' to fail, but if you can't see this as mostly political posturing, you're just a shill for the Republican Party.

There is only a handful of 'Ron Paul Republicans' in the House that are still purveyors of constitutional-limited government. Most of the Republicans consider themselves conservative when they want to get re-elected; other's are just RINO's (Republican in name only) mainly from the northeastern part of the country.

Even as I consider myself Republican, I would probably give more credit to the eleven Democrat members of the House who voted against the bloated stimulus package. It took a lot more 'marbles' for a Democrat to vote against Barack Obama than any Republican.

I hope I'm not the only person on the Right to be cynical about the House Republicans. I'm going to need more than just one vote opposing the "worst piece of legislation in the history of the universe".

As for the Senate, they have yet to pass their version of the bill, but you can bet that the the Republicans in that body of government will vote about the same as the House Republicans. They won't get 100% of Republican Senators to vote against Obama and the stimulus package, but most Republicans will vote against it, and we on the Right will praise them, too. Conveniently forgetting they're the same Republicans that voted in favor of socialism over capitalism the last eight years.

Is this news? Maybe not, but it's very disturbing to me that capitalism has taken such a big blow under a Republican administration. I realize that no Republican administration in the last century has been ideologically 'pure' when it comes to free markets, but I never thought that it would be a Republican president who thought it be best to "abandon capitalism in order to save capitalism".

Honestly ask yourself this: why now do the House and Senate Republicans think this stimulus bill (and government in general) are too big? Is it because it's a Democrat proposal? Or is it because they've 'magically' remembered that they're supposed to be the defenders of capitalism, and not the enemy?

TJ Madison is a pundit living in Fond du Lac, WI. He works in the health-care industry and fights 'creeping socialism' on a daily basis. He hopes this criticism of Republicans will score some points with his blogging partner, Thomas Aquinas.