Category Archives: Monetary Issues

Paul Krugman — A Failure To Rise To The Challenge

Paul Krugman, who doesn’t believe the spending is big enough, on the politicians:

And I don’t know about you, but I’ve got a sick feeling in the pit of my stomach — a feeling that America just isn’t rising to the greatest economic challenge in 70 years. The best may not lack all conviction, but they seem alarmingly willing to settle for half-measures. And the worst are, as ever, full of passionate intensity, oblivious to the grotesque failure of their doctrine in practice.

So who are the best, and who are the worst? In Krugman world, the best are those advocating spending, and the worst are those vociferously opposed to it on ideological grounds.

But I’d disagree. The best* are those opposed to it, but tremendously lacking conviction because they were grotesque in trying wasteful spending while they were in power. The worst are those advocating spending, dreadfully unaware that the previous administration spent us into this mess.

As Krugman states:

In both the House and the Senate, the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration’s tax cuts is more Bush-style tax cuts.

And the Democrats rally behind the idea that the appropriate response to the abject failure of the Bush administration’s easy credit and deficit spending is for the Obama administration to push more easy credit and bigger deficit spending.

Face it, folks. The easy-credit deficit-spending team, pleading for us to follow them into the abyss, are rather sure of themselves. The Republicans, in the knowledge that they got their tax cuts but proceeded to push for easy-credit deficit spending anyway, are getting the comeuppance that we libertarians predicted during the entire Bush administration.

The Democrats are blind to the fact that their plans have been tried and have failed for the last eight years. The Republicans may have suddenly returned to their stated ideology, but after eight years of waste and incompetence are not trusted.

Like Krugman, I have a sick feeling in the pit of my stomach. Because while his pains may be allayed by vast spending which he may get, my personal Pepto-Bismol — the contraction of government — isn’t on the menu.

Hat Tip: Ezra Klein
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Resist The Stimulus

Now that the members of the United States Congress have ignored the American people and are set to steal and borrow around $800 billion for a “stimulus” package which benefits left-wing special interests, political machines on the state and local level, and other vote buying programs in general; those of us who actually believe in the free market must continue to resist this plan to the end. Just because we have likely lost the fight in the Congress does not mean this fight is over. “Yes We Can” still defeat the stimulus or at least make it as costly to the Democratic party and the “moderate” Republicans who supported it as possible.

The battlefield, once the Obamessiah signs the bill into law, now shifts to the states who must decide whether or not to accept the “stimulus”. Here in the states, we can have more impact because governors of the states and our state legislators in most cases, are respsonsive to fewer people than our Congresscritters and are up for reelection before 2012. Therefore, we can have more success fighting this on the state level.

The plan now needs to be to call our state representatives and to call our governor offices and tell them to refuse to accept the money from the stimulus AND to refuse to implement any unfunded mandates and any other regulations that the “stimulus” calls for.

The second phase of the plan is to use our little rebates that the Obamessiah is giving us to fund the organizations that led the fight against the stimulus AND give money on top of that to fight the continued march toward socialism that the Obamessiah and the Democratic Party will lead us toward.

As an added bonus, your contributions to some, but not all of these organizations are tax deductible.

Americans for Prosperity

Cato Institute

Citizens Against Government Waste

Club for Growth

Heritage Foundation

Finally, in 2010 and 2012, vote the politicians that created this new mess out of power, if we still can.

I’m one of the original co-founders of The Liberty Papers all the way back in 2005. Since then, I wound up doing this blogging thing professionally. Now I’m running the site now. You can find my other work at IJ Review.com and Rare. You can also find me over at the R Street Institute.

Feds to Launch New Comedy Site

From FinancialStability.gov (props):

Banner: Financial Stability.gov

This site is coming soon.

On Tuesday, February 10th, Treasury Secretary Timothy Geithner outlined a comprehensive plan to restore stability to our financial system. In the address, Secretary Geithner discussed the Obama Administration’s strategy to strengthen our economy by getting credit flowing again to families and businesses, while imposing new measures and conditions to strengthen accountability, oversight and transparency in how taxpayer dollars are spent. And Secretary Geithner explained how the financial stability plan will be critical in supporting an effective and lasting economic recovery.

For more information, please visit http://www.treas.gov/initiatives/eesa/


I think it’s safe to assume that this website will provide as much sarcasm and laughter as when Obama officials  met with federal legislators the other day:

Administration officials were greeted with sarcasm and laughter Monday night when they briefed lawmakers and congressional staff on Treasury Secretary Tim Geithner’s new financial-sector bailout project, according to people who were in the room.

The laughter was at its height when Obama officials explained that the White House planned to guarantee a wide swath of toxic assets — which they referred to as “legacy assets” — but wouldn’t be asking Congress for money. Rep. Brad Sherman (D-CA), a bailout opponent in the fall, asked the officials to give Congress the total dollar figure for which they were on the hook. The officials said that they couldn’t provide a number, a response met by chuckling that was bipartisan, but tilted toward the GOP side. By guaranteeing the assets, Geithner hopes he can persuade the private sector to purchase a portion of them.

The major problem is that our overdose of federal financial intervention isn’t really a laughing matter.

“Socialism on Trial” Will Necessitate Republican Defendants

About the direction the Republican Party should take, Craig Shirley said:

“The 2008 campaign was never an honest choice between conservatism and liberalism. Really, it was just a referendum on George Bush,” said Craig Shirley, a consultant and author of a forthcoming book on the 1980 presidential campaign.

Shirley thinks equating Democratic values with socialism is a formula for victory. “What Republicans want to do and need to do is put socialism on trial,” he said.

“Socialism has been a conservative talking point since the late 1880s,” one House GOP aide added.

“As a populist anti-Washington party, we’ve always done best,” Shirley continued.

Being out of power allows Republicans to explore a populist side they were unable to with the previous administration.

While I certainly don’t agree with many other items on the GOP agenda, I found this advice sage enough to try to convince members of the right to heed Shirley’s words.  However, if socialism is to be placed on trial, we should probably take a quick peek at who some of the indicted co-conspirators will be:

Former President George W. Bush

Senator John McCain and Governor Sarah Palin

Governor Mike Huckabee

Governor Bob Riley

A sizable stack of GOP governors

A probable stack of GOP senators

Mind you, this is just a very short list.  For example, one would need to look carefully at each and every Republican legislator who voted for any of Bush’s bloated spending packages.  When John McCain referred to Barack Obama as a socialist, most libertarians I know just laughed.  As the old saying goes, “It takes one to know one.”

H/T to The Other McCain

Socialist Death Throes in Zimbabwe

Socialism/Communism has largely caused the collapse of any nation that’s truly tried it. Russia is the biggest example; China has seen the writing on the wall and has allowed economic modernization and liberalism to creep into their country to keep the system moving. Even most of Europe, who we libertarians would consider democratic socialists, understand that if you want to keep taking the golden eggs in taxes, you can’t quite kill the goose.

What’s always interesting, though, is those countries who try to kill the goose — Zimbabwe is showing us what occurs:

Zimbabwe’s central bank has revalued its dollar again, cutting another 12 zeros off its currency in a bid to tame hyperinflation and avert economic collapse.

Reserve Bank of Zimbabwe Governor Gideon Gono said: “This Monetary Policy Statement unveils yet another necessary programme of revaluing our local currency, through the removal of 12 zeroes, with immediate effect.”

Mr Gono gave no updated inflation figures but said broad money supply growth rose from 81,000 per cent in January to 658 billion per cent in December.

The last time inflation was officially recorded in mid-2008 it had soared to 231 million per cent.

The new government has raised hopes of rebuilding Zimbabwe’s shattered economy, where food and fuel is in short supply and unemployment estimated at 94 per cent.

Africa’s deadliest cholera outbreak in 15 years has also hit the country, killing over 3,100 people and infecting another 60,000.

This is the end result of a government that borrows/prints to pay social benefits that are too large for the costs to be recouped through taxation without destroying economic growth. If you allow government promises to exceed expected revenues by a margin that large*, you start to see inflation — and that inflation can reach runaway levels if not curtailed.

The sad thing, when Zimbabwe is concerned, is that I keep expecting the situation to improve. When Mugabe lost the election, I thought there was a good chance it could turn around. I keep being proved wrong, and it’s the people of Zimbabwe who suffer for it.

Hat Tip: The Austrian Economists
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More Government Spending Required to Stimulate the Economy? At Least 207 Economists Disagree

Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.

[See full list of economists who disagree here @ Cato’s “Fiscal Reality Central”]

Quote Of The Day

From The Economist’s Free Exchange Blog, discussing Boeing’s layoffs and our Fed’s response to the economic crisis:

This is fortuitous—Boeing, as it happens, manufactures helicopters. It would seem that Ben Bernanke is in the market for one.

And yet, somehow I’m sure Bernanke won’t be flying over my house with that chopper…

They Sold Us The Rope… Too Bad They’re Tied To The Other End

I’ve pointed out the old saying — “If you owe the bank $5,000 and can’t pay, you have a problem. If you owe the bank $5,000,000,000 and can’t pay, the bank has a problem.”

Well, the bank has a problem:

What he might have said was that the nations funding the majority of America’s public debt — most notably the Chinese, Japanese and the Saudis — need to be prepared to sacrifice. They have to fund America’s annual trillion-dollar deficits for the foreseeable future. These creditor nations, who already own trillions of dollars of U.S. government debt, are the only entities capable of underwriting the spending that Mr. Obama envisions and that U.S. citizens demand.

These nations, in other words, must never use the money to buy other assets or fund domestic spending initiatives for their own people. When the old Treasury bills mature, they can do nothing with the money except buy new ones. To do otherwise would implode the market for U.S. Treasurys (sending U.S. interest rates much higher) and start a run on the dollar. (If foreign central banks become net sellers of Treasurys, the demand for dollars needed to buy them would plummet.)

In sum, our creditors must give up all hope of accessing the principal, and may be compensated only by the paltry 2%-3% yield our bonds currently deliver.

So as a spin on the old [perhaps mis-attributed] Lenin quote about rope, the Chinese, Japanese and Saudis sold us the rope to hang ourselves. But we tricked them. We paid for that rope with nothing.

We may be hanging ourselves, but the other end of that rope is still tied to them with our dollars — if we go down, they’re coming with.

Maybe this is just one of my more pessimistic days, but I think that we’re actually reaching a major tipping point. I don’t know what that will entail, but it won’t be pretty. You can only sweep the dust under the rug for so long; eventually you trip over the big bump in the rug.

Hat Tip: Reason Hit&Run

MV = Py

So, as evidence that I’ve never taken a true macroeconomics course, today was the first time I’ve ever seen this equation…

M – Monetary base
V – Velocity of money
P – Price level
y – Real GDP

People have asked my how I can claim the Fed/Treas are inflating when P and y are decreasing, and it’s all about V…

So I saw this comment over at Econlog today, and it deserves a response:

MV=Py, so V’s decreased lately caused by decreasing P and y. If we feed M steroid, how sure are we that y will go up more than P?

I think that’s backwards. V is decreasing which is CAUSING the decrease in P and y. It’s not the other way around.

V, in my limited understanding of the world, appears to be pretty closely act as the debt-fueled consumption loop we embarked on during the housing bubble. Asset prices rose, so we took on debt against those assets, used it to bid up prices, causing asset prices to rise, causing more debt, etc etc. V was expanding, and that expansion fueled huge increases in P and y.

When the housing bubble burst, the credit markets (V) went with it. Housing dropped. The Dow dropped. Oil dropped. Housing was demand-driven, but the drop in oil prices was far too large to be attributed to demand destruction. With M being (relatively) constant, and y being (relatively) constant, the two most mobile factors were V and P, and I think the drop in V caused the drop in P, not the other way around.

So the commenters question — “if we feed M steroids”, what will happen? — seems to assume that V is a minor factor, not a major factor, in the equation. I think this is exactly backwards, as V is far more mobile of a factor than M.

And that belies that point that we’ve started feeding M steroids, but haven’t seen the resultant rise in P or y yet! As fast as the Fed/Treas is trying to increase M, V is dropping faster. But if V is a very mobile — rather than sticky — factor, once it increases to a more normalized level acting on a much larger M suggests that P will explode.

This, anyway, is how I see this playing out. The Fed/Treas is setting the stage for hyperinflation, and once the economy starts to gather up “confidence” it will be too late to stop it. But, again, I’m not an economist — and although I felt like I understood the concepts at stake — today was the first time I’ve ever seen this equation. So if anyone can possibly assuage my fears, please tell me why.

Bailouts Are Not Sexy

Photo credit TopNews.in

Photo credit TopNews.in

Extreme obesity could be defined as an abnormally large accumulation of body fat. Consequences of obesity include illness, disability and death. While treatment options vary (i.e. dieting, liposuction, medications, surgery), increasing caloric, fatty or carbohydrate intake clearly isn’t the correct solution. In other words, you aren’t going to shed 10,631,467,593,243.45 pounds by consuming a 7,940,000,000,000.00 calorie cake.

Marie Antionette was known as Madame Déficit because the “people blamed her for the bad economics in the country and claimed that she alone was the one to have spent all the money on her own pleasures.”

The still controversial statement “let them eat cake” is often attributed to Antoinette. It seems that both the previous and current administrations and Congresses want to distribute bread to the masses while bailing out (or even nationalizing) the major corporate bakeries. Unfortunately, local mom-and-pop bakeries aren’t “too big to fail,” so many of them will indeed fail because of the political preference for corporate courtiers. History is filled with examples of financial crises caused by excessive government spending.  History is indeed repeating itself now, as it also did during the reign of Louis XVI.

In the meantime, corporate welfare is neither sexy nor healthy. Why the mainstream media refuses to paint an accurate picture of our federal extravagance is beyond me. Hopefully, this photograph will help illustrate the fact that the only thing a stimulus package will ever stimulate is an ever-increasing appetite for even more stimulus packages.

It’s Good To Be The King

From The Economist’s Free Exchange blog, the Brits are learning that you can’t play the King when you’re only a Duke:

Do not do as America does, unless you are a very big country (or economic bloc). That seems to be the lesson Britain is learning as the pound weakens and confidence in the credit worthiness of the country slips. If you have a global reserve currency, if private demand for your debt is strong, if the flight to safety means that government borrowing costs remain low no matter how profligate the central bank, well, then you can do as America has done. If not, better prepare to have your capital dubbed “Reykjavik-on-Thames”.

I don’t think many Americans understand the fortunate position our currency holds in the world. I don’t think they understand that we’ve been taxing the world for decades, but that the world is so intertwined with our monetary system that we’re the de facto “gold standard” of the world.

Hopefully for America, the rest of the world doesn’t wise up and realize the tribute they’ve been paying. I think it’s too late, though. Even if they realize it, they [and we] are still screwed.

How Many of Your Tax Dollars Will Be Used to Pay for Obama’s Big Party?

MSM advice about Obama’s inauguration:

So you’re attending an inaugural ball saluting the historic election of Barack Obama in the worst economic climate in three generations. Can you get away with glitzing it up and still be appropriate, not to mention comfortable and financially viable?

To quote the man of the hour: Yes, you can. Veteran ballgoers say you should. And fashionistas insist that you must.

“This is a time to celebrate. This is a great moment. Do not dress down. Do not wear the Washington uniform,” said Tim Gunn, a native Washingtonian and Chief Creative Officer at Liz Claiborne, Inc.

“Just because the economy is in a downturn, it doesn’t mean that style is going to be in a downturn,” agreed Ken Downing, fashion director for Neiman Marcus.

And if anyone does raise an eyebrow at those sequins, remind them that optimism is good for times like these. “Just say you’re doing it to help the economy,” chuckled good manners guru Letitia Baldridge.

Of course, inaugurations cost significantly more than is raised though voluntary means.  In this case, DC Councilmember Jim Graham uses the pages of the “conservative” Washington Times to beg for federal dollars to assist with party expenditures.  It shouldn’t be considered a surprise that President Bush was more then willing to help out.  He’s declared “a state of emergency” to help cover the tab.  Of course, it is the taxpayers who will really foot much of the bill for the nation’s most extravagant party.

In “Our permanent state of routine emergency,” Mark Steyn observes:

In just about his last act as president, George W. Bush has declared Washington, D.C., a federal disaster area.

No, seriously. I’m not setting up some lame-o punchline here, like we used to do a decade back in the good old Monica days: “President Clinton today declared his pants a federal disaster area,” etc. What happened last week was that the Bush administration formally declared a federal emergency in the District of Columbia.

So what was it? An ice storm? A hurricane?

No, it’s the inauguration of his successor. The inauguration is scheduled to make landfall on Tuesday and wreak havoc all night long, as Category Five conga lines buckle highways round town, and emergency busboy crews find themselves overwhelmed as they struggle to clear drained champagne flutes. So the mayor, Adrian M. Fenty, put in a request for more federal money, and, apparently, the easiest way to sluice the cash to him no questions asked was for the president to declare a state of emergency in the District and funnel however many extra gazillions he wants through FEMA – the Federal Emergency Management Agency.

If Obama really wants to create the “change” he has so often promised, he could declare a state of Federal Budgetary Disaster and refuse to sign any spending bill which doesn’t immediately balance the federal budget.  Alternately, he could spend even more money on a silly party than his predecessor did.

Kevin Drum — Why Can’t We Have It All?

Kevin Drum is looking at the benefits of massive fiscal stimulus as well as tax cuts… And he wonders why we don’t do both?

Stimulus spending can (we hope) help keep the economy afloat over the next couple of years, but then what? When the economy starts to recover, it will certainly be helped along if bank balance sheets are in better shape than they are today. Likewise, it will be helped along if consumers have paid down some of that credit card debt and put a few dollars aside. Right? We can’t keep running a negative savings rate forever, after all.

So: what’s wrong with government spending to stimulate the economy now, combined with tax cuts and bank recapitalizations to help get the economy in shape for recovery a couple of years down the road? This isn’t so much a suggestion as a question. Does this make sense, or is there some fundamental misconception at its core? What say the economists?

What’s wrong? I guess it’s reductio ad absurdum time.

If fiscal stimulus is good, and tax cuts are good, why don’t we simply spend more and eliminate taxes entirely?

Drum misses a key point: money has to come from somewhere. We can tax for it, we can borrow for it, or we can print it out of thin air. But it has to come from somewhere. Each way that you obtain that money has negative consequences.

So why can’t we do it all? We can. It’s just replacing a visible tax with an invisible, inflationary tax. The GDP growth, on paper, would probably look fairly impressive. Unfortunately it would be in ever-devaluing dollars.

Another Permanent State of Emergency

Many people have expressed a hope that Barack Obama will be an improvement over George Bush and that he will roll back some of George Bush’s excesses.  They see in Obama a man who understands nuanced argument, who at least acknowledges that those who oppose his policies can have good reasons and arguments for doing so.  However, those who are so hopeful are doomed to have their hopes dashed.  Barack Obama may give of good vibes, but a review of his policy papers show nothing more than a few crumbs of freedom thrown to the people.  Make no mistake, under Barack Obama’s leadership, the federal government will seize more wealth, violate more liberties and wreck the economy more thoroughly than George Bush did.  The Obama administration will permit, nay encourage, the looting of the treasury by their cronies to a degree that not even the Bush administration dared to.  Reading his policy aims, I see that he offers us no quarter, no accommodation.  He demands that the American people hand over more of the wealth they create, and threatens them with more pervasive monitoring and violence in order to ensure their compliance with his edicts.  He wishes to rework society – to impose his vision of how society ‘ought’ to be organized – using the state security apparatus to impose his dreams.

In every policy proposal, one sees the same theme, the expansion of government, in size, in scope and power.  Typical is his proposal as to how the government will begin respecting civil liberties:  rather than ordering the justice department to respect civil liberties in the court system by voluntarily complying with historical precedents governing government power, rather than announcing his intention to rip out the listening rooms used by the NSA to eavesdrop on the communications of the citizenry, he announces his intention to create a ‘civil liberties board’, with subpoena powers.  If the attorney general of the United States lacks the power to enforce respect for civil liberties, or even worse, is disinclined to respect them, how will the addition of this board alter the calculus?  No, this board will provide sinecures to political allies and something to point to when questioned about his respect for civil liberties while allowing the Justice Department, the Defense Department and the Department of Homeland Security to continue the business as usual, that of exercising their powers lawlessly and without limit, in furtherance of the public and private aims of the officials staffing them.

Nowhere in his policies does he announce his intention to relinquish control of anything that the government currently controls.  That which the Federal Government controls today, the government will continue to control under the new administration.  Much of which is currently out of its control today they will seek to bring under its control.

According to the Obama administration, the current economic crisis warrants expanding government spending well beyond George Bush’s record-breaking levels.  Only in passing does he acknowledge the need to raise money for this spending, which will have to be either through increased taxation, borrowing or via the printing of new money.   The U.S. economy will not provide enough in taxes or in loans to pay for this spending.  It is incapable of it.  Thus, we will see the Federal Government borrowing from anyone who will loan it money, and when those sources of funding dry up, from the Federal Reserve, which pays for the bonds it purchases with newly printed money.  The ‘inflation rate’, so called, already near 10% according to the calculation method in use in the 1970’s will rise to much higher levels.  In the meantime the standard of living will stagnate, and in all likelihood decline.  Nor is there any plan to end this spending once the economy exits the crisis.  This, like the Global War on Terror, is yet one more open-ended emergency.

And when these policies fail to have their intended effects, as unemployment continues to soar and prices continue to rise, it is inevitable that the Obama administration will blame people who it sees as standing in the way of their policies.  The Obama administration will be tempted to go after bankers, intellectual opponents, industrialists, and corporate offices in exactly the same manner as when FDR excorciated bankers and industrialists.  And, like Wilson, FDR, Nixon, Clinton, and many others, the Obama administration will be tempted to use the state security apparatus against these enemies, citing the economic state of emergency to justify it. So now the U.S. will not only be under a permanent state of emergency against external enemies, it will be in a state of emergency.  This time the enemy won’t be people living a continent away…  It will be us.

I am an anarcho-capitalist living just west of Boston Massachussetts. I am married, have two children, and am trying to start my own computer consulting company.

Why Haggle Over What Goes Where?

Felix Salmon sees an odd silver lining in 7.2% unemployment:

Maybe the only real upside to this report is that it should light a fire under Congress to pass a stimulus package sooner rather than later — including the release of the second tranche of TARP funds. Let’s start getting money out the door now: that’s more important than haggling over what goes where.

Here, for once, I agree. Let’s not haggle over accountability or where this money actually ends up… That just introduces needless delays.

I’ll even offer to help. Drop a billion or so off with me, and I’ll guarantee that at least $900M of it gets distributed quickly across all sorts of people I see. I’ll drive through South Central dropping it on street corners.

What about that left over $100M? You object to me keeping it? Again, why haggle?

Hat Tip: Kevin Drum

Grievous, That’s What

Kevin Drum, in response to a Tyler Cowen post explaining that we have very little evidence that fiscal stimulus actually works, suggests we try it anyway:

But do we need examples? I’d argue that we’re basically in terra incognita today. In the postwar era, we’ve virtually never seen an industrialized country, let alone the whole world, stuck in a liquidity trap before. The only example that comes to mind is Japan in the 90s, and their experience with fiscal stimulus was pretty mixed. Depending on your preconceptions, you could take the Japanese experience either as proof that massive stimulus doesn’t work or as evidence that not enough was done. And either way, it’s only one example, so it would hardly be proof enough for skeptics anyway.

That leaves us with theory, which suggests that government spending when monetary policy has lost traction helps to stimulate the economy. But even if doesn’t, my question to Tyler is this: what harm does it do to try? Assuming that stimulus spending is implemented even modestly well, it will, at a minimum, help out a bunch of people with continued employment and produce a bunch of infrastructure improvements that will enhance our future welfare. The downside is more debt, and I’m open to the argument that this is a bad thing to the extent that this debt is funded from overseas and produces further deterioration in our current account balance. But is that the argument against spending? Or is it something else?

“what harm does it do to try?”

Believe it or not, folks, that’s actually a serious question. So let’s take one moment to ask what harm would occur. We’re left with a few simple questions.

  1. Where is the money going to come from?
  2. What are the negative effects of the provisioning of this money?
  3. What better things could the money be doing?

The answer to #1 can be threefold. First, that it is raised by spending offsets elsewhere. No, stop laughing! Second, it can be raised through taxation. Third, it can come from borrowing. Fourth, it can be printed out of thin air.

So based on the answer to #1, you can comprehend an answer to #2. If it is raised through taxation, that results in money being siphoned away from the productive economy at a time when it desperately needs liquidity. Especially due to the fact that most taxes are either on income or profits, and taxing the hell out of the portions of business who are actually earning during the downturn is not helpful. If it is raised through borrowing, you run into the same problem. You’re taking money away from productive enterprises who may have some risk in their needed borrowing by offering huge amounts of “safe” investments to the people with money. Essentially, you exacerbate the “liquidity trap” as the government soaks up the little liquidity that exists. Arguably, the printing press is the best of bad options, especially in a deflationary debt spiral, because it may stop the bleeding. But as I mentioned a mere two months ago, I don’t think they’ll know when to shut off the pump.

Based on all the negative answers to #2, you get a sense of the problems with #3. The real productive part of society is the private sector. Siphoning money away from that portion of the economy through taxation or borrowing hampers the ability of the private sector to operate. Trying to create make-work projects using printed money has the appearance of being much better, but it is only a matter of appearances — the economic activity is not “real” and every dollar spent makes everyone poorer through an inflation tax.

Drum’s argument is similar to one often used regarding FDR: “His small-scale socialism is what kept people fed and clothed enough to keep them from overthrowing the whole system.” It’s a nice claim, because it cannot be disproved, but the inherent claim is much simpler — “Doing nothing would be far worse than doing something.”

Drum suggests that even though we do not have any evidence that a massive fiscal stimulus program would work, it’s better than nothing*. He wants to put the burden of proof on us to show that massive fiscal stimulus is worse than doing nothing. But I think that the party who wants to either tax, borrow, or print anywhere between hundreds of billions to a few trillions of dollars for stimulus should carry the burden of proof. The default position is not to spend this money, and an absence of evidence of the utility of doing so is only further reason that we should do nothing.
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A Primer on Money

Money is critical to civilization. Without it, the capital improvements and complex economic processes are impossible, and there will be a very weak form division of labor. Money allows humanity to rise above the savagery of stone age existence. Yet most people don’t understand what money is, how it is created and how it can be abused by elites in a society to plunder the common men.

What is money?

Imagine you are a farmer. You want to purchase some shoes. You grow grain. To purchase shoes in a barter economy, you must find a shoemaker who wants some grain. If you want to purchase some eggs, you must find an egg farmer who wants grain. If you want to make a tractor, you have to find a tractor maker who wants to be paid in grain, or failing that, you have to find the tools and materials you need to build the tractor from scratch, finding suppliers who are willing to be paid in grain.
Of course, grain is perishable, so you can’t amass too much grain with which to pay for really expensive stuff. And of course, you are not likely to find a supplier who is willing to be paid in large amounts of grain since they fact the same problem. As a result, you will be limited to purchasing small items that are worth small amounts of grain.

All of these problems can be solved by trading your grain not directly for the stuff you want to consume, but for something that is
a) more long lasting than your grain
b) in wider demand than your grain

Whereas you might only find one shoemaker who is willing to trade shoes for your grain, you might find three shoemakers who are willing to trade shoes for this mystery substance. This allows you to chose the lowest cost supplier of shoes, who is willing to trade the most shoes for the least amount of your grain.

Additionally, you can stockpile this substance, storing it for later consumption, allowing you to save years of productions in order to purchase some very expensive item like a tractor.

Finally, if this substance is popular enough, you will be able to find many people willing to buy your grain by trading you this substance. This allows you to maximize the payment you get for your product.

Of course, given a choice between two substances that have these qualities, you will naturally choose the substance that has the best qualities you are looking for, choosing the more popular substance over the less popular one if you are looking for something to trade in the near term, and choosing the more durable item over the less durable one if you are looking to stockpile it.

If you are not a farmer, but a tractor maker, selling one tractor every few months, but needing to buy food daily you will of course have an additional quality you demand: you want something that is divisible.

Any human society where people engage in trade, some substance or small group of substances that are
a) homogeneous or fungible
b) durable
c) in wide demand

will come to dominate the trade. These substances are what we call money.

Inflation in a free market

Since money is merely a commodity that is widely demanded for trading purposes, it is produced like any other commodity. Farmers grow tobacco. Distillers distill whiskey. Chemists produce cocaine paste. Miners produce gold. The production is dictated by the demand for the commodity.

Of course, the larger the supply of money that is available for trade, the lower the price of the money in terms of other commodities. In other words, if the supply of gold expands, everything else being equal, the number of bushels of grain an ounce will purchase will go down. Of course, to a persons seeking to purchase things with the money, they see this as each bushel of grain having a higher price.

Rising prices erode savings. The faster the supply of a money commodity is increasing, the less useful it is as a way of saving. This reduction in the usefulness of the commodity translates into a reduced demand for it. The reduction in demand means that people will be less interested in trading other goods for it, which again results in a rise in prices, since a a grain seller will want even more of the stuff before he is willing to risk a trade.

There are two outcomes of rising prices due to inflation in a free market. The first is that production is reduced. As the money commodity becomes worth less, its production becomes less profitable. The production eventually slows until the effort involved in producing money is once again justified by the profit earned by selling it for other goods and services.

The second is that people look for more stable substitutes, and start switching to using alternate money-commodities for their transactions.

Deviation From Free Markets

Money standards
Of course, the producer of the money commodity would prefer that this not happen. Many would see an opportunity for great profit if they could produce the commodity as rapidly as possible without having to worry about people abandoning the money.
So they call for laws to force people to do business in that commodity. These laws are known as legal tender laws. These laws force people to settle debts in the commodities whether they want to accept them or not. The force is to the detriment of consumers and money users, who are forced to forego a better money in favor of the standard.
Taxation
Taxation can confine people to using a particular commodity just as legal tender laws do. If the government routinely levies taxes that are to be paid in fish-heads, for example, people will have to procure a certain number of fish-heads annually to pay the tax. The fish-heads being in wide demand, naturally they are used in indirect exchange. Other commodities are at a substantial disadvantage as far as their usefulness as a money.
Discriminatory Taxation
A government can also make alternate commodities even less popular by taxing transactions or saving in other commodities more heavily than the government approved money commodity. Her in the United States, for example, if you keep your savings in gold rather than in U.S. dollars, when you trade the gold for something else, you are levied a capital gains tax on the difference between the prices in dollars of gold on the day it was traded away and the day you acquired it.

The dangers of government control of the money supply

There are two properties that make governments especially destructive:

1)Governments are able to seize resources by force and to compel people to do buainess with them allowing them to continue economically unprofitable activities for far longer than free market enterprises.

2)Governments, being controlled by people who have little incentive to take a long term view, and a great deal of incentive to use their offices for short-term personal gain

When governments seize control of the money supply, the result is usually disaster. They overproduce money, usually by debasing coinage. They force people to use the state approved currency to the exclusion of all else. In extreme cases they wreck the economy so badly that saving because impossible, and the economy reverts to a barter economy.

Today, the United States government has engaged in massive amounts of spending. They are not getting this money through taxation. Rather they are borrowing it, and a good porioin of what is being borrowed is money created by the Federal Reserve. The production costs of U.S. dollars being almost nonexistent, the Federal Reserve can continue to create money profitably through a Zimbabwe like hyperinflation. The Soviet Union and Nazi Germany were founded upon the ruins of nations whose economies had been strangled by government mismanagement of money. Will the United States similarly succumb to tyranny? Time will tell.

Recommended Reading

What has government done to our money? by Dr Murray Rothbard

Milton Friedman and the Case against Currency Monopoly by G Selgin

I am an anarcho-capitalist living just west of Boston Massachussetts. I am married, have two children, and am trying to start my own computer consulting company.

Condemning Those Who Forget History

Financial analysts are starting to notice a disturbing correlation between the present economic crisis and the roots of the stagnation that gripped Japan for the better part of a decade starting in the 1990s.

In today’s New York Times, for example, Martin Flacker notes a surprising similarity between what the Federal Reserve has been doing and the actions that the Bank of Japan took in response to it’s crisis:

The Bank of Japan first lowered interest rates to zero in 1999 for a year and then again in 2001 for five years. The Japanese central bank was trying to contain a domestic financial crisis not unlike the one now crippling global markets, in which collapsing real estate and share prices caused the bankruptcy of large financial companies, like Yamaichi Securities in 1997.

The central bank’s hope was that by lowering borrowing costs to virtually nil, it could encourage commercial banks to lend more money to businesses and consumers, rekindling demand.

Sound familiar ? It should, because it’s essentially the same thing that the Federal Reserve Board has been doing since September.

And the similarities don’t end there, Anthony Randazzo at Reason notes the five mistakes that Japan made when faced with a bursting asset bubble:

First mistake. The Bank of Japan tried to ease economic pains during their downturn through the 1990s by loaning large amounts of money to businesses. However, such attempts to recapitalize the market were counteracted by underlying management problems endemic to the dying firms.

According to Shigenori Shiratsuka, Deputy Director and Senior Economist at the Bank of Japan, even though firms became unprofitable, the government still encouraged lending to them to prevent losses from materializing. There were heavy concerns about a failing firm increasing unemployment.

(…)

Fifth mistake. With the Japanese government enabling lending to zombie businesses, taking cash away from productive ventures, and passing tax laws and other regulations that did not promote growth, the private sector was actively discouraged from investing.

Again, sound familiar ? The United States started doing that in September with the financial services bailout — which quickly expanded beyond the financial services industry as more and more companies sought to redefine themselves as banks in order to be eligible for government largesse — and continues today in the just-announced auto industry bailout.

Rather than letting the market liquidate these zombie companies in an orderly fashion, the Japanese government instead sought to prop them up, which only served to delay the inevitable day of reckoning, and divert money from more productive uses.

But if you thought the similarities between late 80’s Japan and America 2008 ended there, you’d be wrong; the Japanese also tried a healthy dose of Keyensian pump-priming:

As January 20 nears, Barack Obama’s ambitions for spending on the likes of roads, bridges and jobless benefits keep growing. The latest leak puts the “stimulus” at $1 trillion over a couple of years, and the political class is embracing it as a miracle cure.

Not to spoil the party, but this is not a new idea. Keynesian “pump-priming” in a recession has often been tried, and as an economic stimulus it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment.

In the Age of Obama, we seem fated to re-explain these eternal lessons. So for today we thought we’d recount the history of the last major country that tried to spend its way to “stimulus” — Japan during its “lost decade” of the 1990s. In 1992, Japanese Prime Minister Kiichi Miyazawa faced falling property prices and a stock market that had sunk 60% in three years. Mr. Miyazawa’s Liberal Democratic Party won re-election promising that Japan would spend its way to becoming a “lifestyle superpower.” The country embarked on a great Keynesian experiment:

Over a period from 1992 through 1999, the Japanese injected 118.2 trillion Yen (the equivalent of about 203.4 billion US Dollars at current exchange rates) into the economy, and it didn’t help move the economy one bit. Japan’s economy was stagnant for a decade and didn’t start moving again until 2003:

Japan’s economy grow anemically over that decade, but as the nearby chart shows, its national debt exploded. Only in this decade, with a monetary reflation and Prime Minister Junichiro Koizumi’s decision to privatize state assets and force banks to acknowledge their bad debts, did the economy recover.

Do Barack Obama, George W. Bush, Hank Paulson, and Ben Bernanke really think that the United States can succeed where the Japanese so obviously failed ?

More importantly, can American’s learn from the mistakes committed by what was once the most dynamic economy in the world ?

We’d better hope so, otherwise we could be looking at a pretty long and bleak decade.

Cross-posted from Below The Beltway

Quote Of The Day

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
Ludwig Von Mises

After Great Depression I, a well-known economist was quoted* to say “We are all Keynesians now.”

Perhaps the refrain after Great Depression II will be “We are all Austrians now”?

Hat Tip: to herd or not to herd
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