Category Archives: Federal Reserve

Sympathy for Paranoia

The moon landing was faked by the U.S. government for propaganda purposes to win the Cold War. The terrorist attacks of 9/11 was actually an inside job as a pretext to go to war. Space aliens landed in Roswell, NM but the government has been covering it up. The Sandy Hook massacre was faked to increase support for new gun control laws; the “victims” were actually actors who are all alive and well today. The Illuminati is the secret entity which actually governs the whole world…

The natural response to these statements is to say “these people are mad barking moonbats” and to keep ourselves as distant as possible from the people making them. Those of us in the liberty movement who want to be taken seriously are very quick to renounce anyone who is within six degrees of Alex Jones or anyone else who states any of the above. It’s difficult enough to be taken seriously about legalizing drugs, the non-aggression principle, free markets, and freedom of association; the last thing we need is to be lumped in with “those people.”

While it is very important to defend the “brand” of the liberty movement, it’s also important to recognize the reasons why people believe some rather nutty things.

[W]hen I say virtually everyone is capable of paranoid thinking, I really do mean virtually everyone, including you, me, and the founding fathers. As the sixties scare about the radical Right demonstrates, it is even possible to be paranoid about paranoids. – Jesse Walker, The United States of Paranoia: A Conspiracy Theory, (p. 24) (Read my book review here)

Once one learns about some of the activities governments been proven to have been involved in, some conspiracy theories no longer seem as outlandish. I used to refer to conspiracy theories and wacky beliefs as “black helicopter” stories and I’m fairly certain that others used the same terminology. Once I learned that black unmarked helicopters were used in the assault by the FBI on the Branch Davidians in Waco, TX,(Napolitano, p.110) I stopped calling such ideas “black helicopter.”

Not everything that sounds crazy is.
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Tesla Whines About Protectionist Legislation for Auto Dealers While Using Government Largesse to Compete

Last week, I wrote about rent seeking auto dealers lobbying for protection from competition with manufacturers utilizing direct-to-consumer sales models. I mentioned direct-to-consumer manufacturer Tesla by name, and suggested such legislation would prevent consumers from enjoying the savings that might otherwise be realized from Tesla’s efforts to “eliminate the middle-man.”

I should have taken the opportunity to address Tesla’s own abundant receipt of government largesse.

And to be clear, “government” largesse is always paid for by the taxpayers.

In a piece entitled “If Tesla Would Stop Selling Cars, We’d All Save Some Money,” Forbes contributor Patrick Michaels details all the ways Tesla benefits from government handouts. Michaels concludes that taxpayers shell out $10,000 for every car Tesla sells.

Michaels starts with a claim that purchasers of Tesla vehicles receive a $7500 “taxback bonus that every buyer gets and every taxpayer pays.” Since the tax credit appears to be non-refundable, I would not count it as a cost to other taxpayers, as Michaels does.

But the federal tax credit is only the tip of the crony capitalist iceberg for Tesla.

There are also generous state subsidies paid by taxpayers to the wealthy people who buy Tesla’s expensive vehicles. Purchasers in Illinois, for example, can receive a $4,000 rebate from that state’s “Alternate Fuels Fund,” a $3,000 rebate to offset the cost of electric charging stations, and reduced registration fees. California likewise offers a long list of rebates and subsidies to buyers of electric vehicles.

One of the hidden costs to consumers comes in the form of the increased price tag on cars sold by manufacturers who do not qualify for California’s mandated emissions credits, which they instead have to buy from Tesla, allowing it to earn a profit despite selling cars at a massive loss. As Michaels explains:

Tesla didn’t generate a profit by selling sexy cars, but rather by selling sleazy emissions “credits,” mandated by the state of California’s electric vehicle requirements. The competition, like Honda, doesn’t have a mass market plug-in to meet the mandate and therefore must buy the credits from Tesla, the only company that does. The bill for last quarter was $68 million. Absent this shakedown of potential car buyers, Tesla would have lost $57 million, or $11,400 per car. As the company sold 5,000 cars in the quarter, though, $13,600 per car was paid by other manufacturers, who are going to pass at least some of that cost on to buyers of their products. Folks in the new car market are likely paying a bit more than simply the direct tax subsidy.

Slate’s Scott Woolley details another way in which Tesla has cost taxpayers money. In 2009, Tesla received a $465 million Department of Energy loan that allowed it to weather a financial maelstrom. Unlike Solyndra (and Abound Solar and Fisker Automotive and The Vehicle Production Group LLC), Tesla managed to repay the loan in 2013. According to Michaels, it did so by reporting its first ever quarterly profit (earned from the sale of the emissions credits), which sent its stock soaring and enabled it to borrow $150 million from Goldman Sachs, and then issuing a billion in new stock and long-term debt.

But Tesla paid the U.S. taxpayers back at a rate far below what venture capitalists would have earned on the same loan. As an example, Tesla’s CEO Elon Musk also made a loan to Tesla. Musk got a 10% interest rate and options to convert the debt to stock, which he did, resulting in a 3,500% rate of return on his investment.

In contrast, the U.S. taxpayer received a 2.6% rate of return.

In other words, in our crony capitalist system, taxpayers take the loss on bad loans like the one to Solyndra, but do not enjoy commensurate reward on good loans like the one to Tesla.

But there is still more. Tesla cannot keep earning emissions credits, which allow it to earn a profit despite selling its cars at a loss, unless it can keep selling those cars. Josh Harkinson, writing for Mother Jones, writes that:

Its first-quarter profit, a modest $11 million, hinged on the $68 million it earned selling clean-air credits under a California program that requires automakers to either produce a given number of zero-emission vehicles or satisfy the mandate in some other way. For the second quarter, Tesla announced a $26 million profit (based on one method of accounting), but again the profit hinged on $51 million in ZEV credits; by year’s end, these credit sales could net Tesla a whopping $250 million.

Tesla’s ability to continue selling the cars that earn the credits is in question. The market for $80,000 cars has a limited number of buyers. Tesla must expand its customer base with a more affordable product.

One way to achieve that would be to cut the vehicle’s range. But subsidies, credits and fuel savings notwithstanding, consumers have little taste for lower ranges—even at a much lower price. Another way for Tesla to lower the cost of its vehicles is to cut the cost of its batteries without sacrificing the range. As Harkinson observes:

That, however, may again depend on massive subsidies—in this case funding to battery researchers and manufacturers by the governments of Japan and China. Over the past five years, Japan’s New Energy and Industrial Technology Development Organization, a public-private partnership founded in 1980, has pumped roughly $400 million into developing advanced battery technologies. Tesla’s Panasonic cells also might be pricier if not for subsidies the company received to expand its battery plants in Kasai and Osaka.

When Republican Gov. Rick Snyder signed the bill reaffirming Michigan’s protectionist legislation for traditional automobile franchise dealers, auto blog Jalopnik reported GM’s position as follows:

“Competition is always healthy,” GM spokeswoman Heather Rosenker tells Jalopnik. “But it needs to be on a level playing field.”

In the context of the substantial aid Tesla receives from federal, state and foreign governments, it is easier to have some sympathy for the plight of traditional manufacturers—and their dealers.

Ultimately, that sympathy shines a spotlight on the problems created when government starts “tinkering” in the market. Inevitably, that initial, well-intentioned tinkering necessitates ever more intrusive secondary tinkering aimed at remediating the unintended side effects of its initial foray into the market.

Consider health care. Inflation in the cost of U.S. health care began to outpace the general rate of inflation when the government began subsidizing health care costs. Nobel laureate economist Milton Friedman has estimated that real per capita health spending is twice what it would be in the absence of third party payments, and that Medicare and Medicaid are responsible for 43% of that increase. The remaining portion can be blamed in large part on the third party payments from mandated employer health care coverage, further separating patients from the cost of their care and eliminating the market forces that would otherwise keep costs down. Add to the foregoing the government-enforced monopolies on health care education, leading to 22% fewer medical schools in the United States now than one hundred years ago, despite a 300% increase in population, and attendant provider shortage. All that well-intentioned tinkering created a whole host of ugly, unintended side effects, necessitating more tinkering. The federal government responded with the Affordable Care Act and its accompanying thousands of pages of new regulations.

Everywhere the pattern repeats. The cost of higher education outpaces general inflation precisely because the government wants to help people pay for it. The unintended side effect is increasing numbers of graduates with useless degrees and few job prospects, necessitating further tinkering in the form of loan relief, jobs programs and minimum wage hikes. The Federal Reserve suppresses interest rates to artificial lows in the well-intended effort to speed recovery from the bust of the dot-com bubble. The unintended (in this case, it may actually have been intended, at least by Paul Krugman) side effect is a new bubble in housing. When that bubble bursts, the government must step in to bail people and banks out of their bad investments, create new bureaucracies and new regulations making it harder for people to qualify for loans (in contrast to previous tinkering designed to make it easier).

Lather, rinse, repeat.

I am not a radical free-marketer because I dislike poor people or have a special love for corporations. I am a radical free marketer because I know no amount of tinkering ever produces results as beneficial as what the market produces, naturally and efficiently, all on its own.

Sarah Baker is a libertarian, attorney and writer. She lives in Montana with her daughter and a house full of pets.

Cost is NOT Price, and Neither Cost, nor Price, are Value

Prices Provide a Misleading Measure of Dollar Devaluation
Forbes Magazine Online – Keith Weiner

There’s not a human being alive who doesn’t know the dollar is falling. Everyone over 25 has stories of what prices were like, way back when (and younger people have heard them). I remember when gasoline was 60 cents a gallon, and my mom remembers when it was 20 cents.

Federal Reserve Chair Janet Yellen acknowledges the official objective to push the dollar down by 2 percent per year. This intention is behind the Fed’s ill-conceived loose money policy.

It’s important to measure each drop. This is not just to keep a scorecard on the Fed, but because a change in the dollar skews historical comparisons and distorts business decisions, like giving increases to workers and pensioners….

Read the whole piece, and then come back…

The thesis statement of the piece is correct, in that prices provide a misleading indicator of currency valuation (and that our weak dollar policy, as pursued by every administration since Bush 1 to some degree or another, is fundamentally wrong and destructive for that matter).

Unfortunately the author suggests that simply using a different price denomination and comparison (to gold) is a less misleading indicator… In this, he’s absolutely incorrect.

What you really want to compare is purchasing power parity (PPP) as measured by equivalent standard of living, expressed as a dollar cost in constant dollars normalized to average labor hour wage or compensation.

i.e. this item costs 5 minutes of average labor, this costs 8 hours, this costs 20 years; the cost to maintain this equivalent normalized standard of living across an aggregate population is 1940 hours of median labor wage etc… etc…

Note, this is NOT an expression of the fallacious labor theory of value, it is an explicit measure of purchasing power parity as actual cost, INCLUDING opportunity cost (in terms of time), not currency denomination.

The critical function isn’t price, and it isn’t wage… it’s cost, in this case expressed as a cost to value ratio as a normalized dollar (to make it easy to relate to wages and prices).

Cost is not price; it’s a totalized measure of inputs including resources, time, and opportunity.

I am a cynically romantic optimistic pessimist. I am neither liberal, nor conservative. I am a (somewhat disgruntled) muscular minarchist… something like a constructive anarchist.

Basically what that means, is that I believe, all things being equal, responsible adults should be able to do whatever the hell they want to do, so long as nobody’s getting hurt, who isn’t paying extra

“Bad” or “Wrong” or “I don’t like it” is not equivalent to “Unconstitutional”

In a comment on someone elses post, another reader wrote “The DEA is an unconstitutional and illegal agency”.

This bugs me… We frequently see these sorts of statements made about the DEA, the ATF, the federal reserve (where ok, there’s at least a rational and reasonable though flawed argument to be made… most of the people shouting stuff like that above aren’t making those arguments, but still)… Basically any federal agency that they don’t like, or which enforces laws, or uses delegated powers which they personally don’t like.

No, the mere existence of the DEA is not unconstitutional or illegal. It is perfectly constitutional in that it is an executive agency chartered to enforce the laws promulgated by the legislative branch.

The fact that the federal government has no constitutional authority to outright ban or criminalize such substances as the DEA is chartered to regulate, or to ban or criminalize their manufacture, use, or possession (and only limited power to regulate their sale. No, sorry, regulating interstate commerce and making such laws as necessary for the general welfare does not grant them such broad and deterministic powers… and Wickard v. Filburn is bad law and needs to be overturned), does not mean that all laws relating to such substances are illegal or unconstitutional. There are legitimate regulatory powers that such an agency may lawfully and constitutionally exercise.

AS CURRENTLY EXTANT AND IN THEIR CURRENT ROLES AND ACTIONS… The DEA often engages in unconstitutional behaviors, and acts to enforce unconstitutional laws. That much is certainly true. But they are not inherently unconstitutional, or illegal.

Those are actually really important distinctions. Not just semantics or distinctions without difference.

This is so, because you go about addressing the issues, and solving the problems, differently. Things which are blatantly and directly illegal or unconstitutional are best addressed in one way. Things which are peripherally so, are best addressed in a very different way.

You have to shoot at the proper target, with the proper ammunition.

Also, it’s really important to remember, that “bad and stupid” or “harmful” or “undesirable”, or “pointless”; does not necessarily mean “unconstitutional”. Nor does “constitutional” mean “good”, or “useful” or “effective”.

That’s not even a matter of judges discretion or interpretation… The constitution actually provides far less protection of rights, and limitation of powers, than people believe it, expect it, and wish it to (at least explicitly… the 9th and 10th amendments… there’s much bigger and messier issue).

I am a cynically romantic optimistic pessimist. I am neither liberal, nor conservative. I am a (somewhat disgruntled) muscular minarchist… something like a constructive anarchist.

Basically what that means, is that I believe, all things being equal, responsible adults should be able to do whatever the hell they want to do, so long as nobody’s getting hurt, who isn’t paying extra

Ron Paul: Bitcoin Skeptic

The virtual currency known as Bitcoin is beginning to become accepted by more and more businesses. Once it was limited to underground websites such as the recently shuttered Silkroad but now legitimate establishments have taken up transactions in the coin. For example online casinos like 1xbit allows customers to can pay in and cash out with Bitcoin. Many investment firms buy into Bitcoin and other cryptocurrencies because of the apparent potentials for short-term profit. Internet-based retailers like (one of the more ‘mainstream’ of internet retailers) have started to accept transactions in Bitcoin. On their first day sold $126k in merchandise exclusively in Bitcoin transactions. If you needed an indicator on whether the public are using Bitcoin and not just investing it, that may be it.

On top of this, investors are also investing in cryptocurrency miners like the kd 5 gold in order to maximize their profitability. Instead of buying Bitcoin, they are mining it themselves and cutting out any middle man.

Originally, bitcoins were used for trading and mining. Now, several Bitcoin casinos are available online, where players can utilize this digital currency to leverage their winnings. Crypto Snack and other similar websites recommend a few of the best Bitcoin casinos in the world of gambling. A key reason for its popularity could be that it tends to offer safe and secure playing options. Furthermore, unlike other currencies, they can be easily withdrawn or deposited. Bitcoin has even crossed from online into real life as a few Las Vegas casinos have followed in the footsteps of online ones and jumped on the bandwagon. No doubt there will be even more merchants participate in this experiment in 2014.

Many in the liberty movement are very bullish on what they believe is or will be an alternative to the dollar but there are a few notable skeptics within the movement. Among the high profile Bitcoin skeptics are Peter Schiff and Ron Paul.

Just over a month ago, Ron Paul expressed his skepticism of Bitcoin in his weekly podcast (Episode #43).

I’m suspicious. I don’t fall into the category and say ‘Hey, this is it. This is the solution. This is going to replace the dollar.’

I mean I certainly wouldn’t put all my eggs in the Bitcoin basket, there are other kinds of currencies you can trade on crypto platforms like Independent Reserve after all. But I probably wouldn’t worry about a little experimentation with Bitcoin. Though Ron Paul has something to clarify regarding his position on Bitcoin:

One time somebody quoted me in the media saying ‘I believe that Bitcoin was going to destroy the dollar’ and that’s not quite my position. But the Bitcoin could be a participant in a process where the dollar destroys itself…or that is the Federal Reserve policy destroys the dollar. Then people have to leave the dollar and go into something else.

Ron Paul went on to say that he believes Bitcoin (along with any other medium of exchange) should be legal currency for those who wish to accept it as such but wondered out loud why the government hasn’t cracked down on Bitcoin in a significant way.

The reason I’m hesitant to say ‘Hey, this Bitcoin sounds like the answer’ is that it’s hard for anybody who knows a lot more about Bitcoins than I do to tell me what it really is. If I had to, and you had never heard of gold as money I could show you a gold coin and you could put it in your hand and you could feel it and then we could look at some history. That’s not the case with Bitcoin.


But right now the Fed hasn’t come down hard on Bitcoin so you wonder what’s going on. Why haven’t they? Because I am absolutely convinced that the federal government and our central bank does not permit, will not permit competition in currencies. They’re not going to let you and I mint some gold coins and put them out in circulation. You can go to jail for that. […] It must not seem at the moment to be a threat to the Federal Reserve and to our system.

Paul also expressed some doubts that Bitcoin could become a preferred medium of exchange with a crash of the dollar:

This is why Bitcoin is around is to offer an alternative [to a weak dollar]. […] I’m a skeptic on that but I certainly think it’s fascinating. I try to keep up with it the best I can but I would feel much better having some gold coins in my pocket than a little computer that I can carry around and recover my Bitcoin. I wouldn’t feel very secure doing that.

However one feels about Bitcoin, I think it’s important that Ron Paul’s views on the subject be reported accurately. I’m personally intrigued by Bitcoin and hope it turns out to be everything its supporters hope but I do think some skepticism is warranted (for the reasons Paul gave and more).

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