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Sound Money for a Sound State

February 26, 2009 1 comment


Every day we see signs of waning confidence. The politicians pontificate and the markets plunge. Talking heads rile the trading floors. People are panicking, but are unsure as to what drives the panic. Lying behind this turmoil is the fundamental flaw in our economy: our money. The antidote is gold.

Over the last few months we have seen gold rally up to $1000. Suddenly it is being heralded as the investment (if you held it since 2001, you’d really be laughing at this), and rightfully so. Even mindless stock jockeys speak to the fact that in times of uncertainty, gold is the place where people should park their cash. It is the asset of last resort. Yet if this is considered the only safe place to put our money when times are hard, then why not just make this our currency? Why do we have a paper dollar whose intrinsic worth is equivalent to that of paper and ink, or alternatively your faith in Nancy Pelosi?

As the always pithy Daily Reckoning notes, over the last 2,500 years, an ounce of gold has maintained a value roughly equivalent to 350 loaves of bread. Seems like a pretty safe store of wealth to me. Alternatively, the value of the dollar has dropped over 95% since the government (under the auspices of the Federal Reserve) took control of our money less than one hundred years ago. You have to ask yourself, would you rather have your government constrained in the money it creates by a tangible asset that has always held its value, or a government that holds its heavy hand on the cranks of the printing press?

This brings into question another issue. The government does not control the bread supply, the iPod supply or the Kudlow supply. But when it comes to money, a good exchangeable for these other goods and services, we give the government free rein. Sure, one might argue that the central bank is technically private, but this is just the deceitful nature in which the government bends the rules of its Constitution. It is akin to Fannie and Freddie being “quasi-public” entities. But why should the government grant itself a monopoly on this product, while subjecting all private firms to its anti-trust laws?

And how does the government maintain this monopoly on money? Why, legal tender laws of course. There was a time when money was coined privately, but those days are long gone. The question is, why shouldn’t the government allow a little friendly competition for the paper that it prints? The answer is that the power to control the money supply is great. Mainly, it allows the government to plunder the people. Here are a few politicians on the matter:

“Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money.”

Daniel Webster’s disdain is matched by that of Thomas Jefferson:

“The evils of this deluge of paper money are not to be removed until our citizens are generally and radically instructed in their cause and consequences, and silence by their authority the interested clamors and sophistry of speculating, shaving, and banking institutions. Till then, we must be content to return quoad hoc to the savage state, to recur to barter in the exchange of our property for want of a stable common measure of value, that now in use being less fixed than the beads and wampum of the Indian, and to deliver up our citizens, their property and their labor, passive victims to the swindling tricks of bankers and mountebankers.”

On the other hand, he asserts,

“Specie is the most perfect medium because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands, and it is the surest resource of reliance in time of war.”

What of Woodrow Wilson, the man who signed the Fed into existence?

“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.”

How about an economist for good measure? Perhaps our old friend Mr. Keynes:

“The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Thanks for that one, Johnny.

If paper money through inflation impoverishes the citizenry and destroys capitalism, then one has to wonder why the people continue to allow this system to hold sway across all nations. Further, the historical track record of paper monies shows that every single one has failed. But we continue to entrust our money to our politicians. To be sure it is great for some — for the bankers, the war-profiteers and the debtors, inflation is a boon. Not to mention the fact that it allows the government to do whatever it wishes — to run up unlimited debts, fight endless battles and further extend its largesse to its favored sons. This is an immoral process and one that undermines the integrity of our nation.

As we see the flood of people to gold as the only safe asset, in a time without price inflation no less, it behooves us to question the paper money through which our politicians pilfer. Restore power to the rightful hands of the people to produce their own currencies, and we can give the central bankers a run for their money. Our liberty depends upon it.

Moral Hazard at Qdoba

February 15, 2009 2 comments

Americans Could Learn a Lot from Dwight Schrute

Drudge always happens to find a way to capture outrageous stories that reflect the times we’re living in. To this end, I could not believe this nugget regarding a worker at Qdoba. Apparently, in order for one to receive unemployment insurance, one needs to be officially fired. So the brilliant fellow in this story decided that the best way to do this was to wreak havoc on the restaurant, throwing pots and pans along with food all over the place. This is reminiscent of the type of scene one would find in my fraternity house common room on a weekend morning.

What this reflects however is moral hazard at its lowest common denominator. A man is so desperate to receive compensation for being laid off that he tries to intentionally get himself fired. Honestly, what is the world coming to? And I would bet that this is not an isolated incident. Because we have built in a social safety net to our society, we have created the conditions for people to become lazier, less hard working and more profligate. We feel that because the government has X, Y and Z programs that we will have nothing to fear come retirement; or even be rewarded if we rowdy a Qdoba restaurant (why would you ever denigrate an institution that makes such a delectable burrito!?). It is akin to the way a high school student drives a car bequeathed to him, versus a car that he purchases with his own money. Trust me, I speak from experience here.

The fact of the matter is that in the case of the nation, the social safety net devours the very system that was able to support it, until it kills the system from within. The social safety net would have never been considered had we not been able to develop an economy wealthy enough to sustain it. Yet it is this socialist system that has grown so big that it may cause our government to default someday — either that or print up enough money to devalue the massive unfunded liabilities lurking over the next twenty years. Moral hazard has placed a debt burden on future generations. The Ponzi scheme of everyone paying into a system to distribute advantages to certain people will collapse because it will be unsustainable.

Thankfully, the laws of economics are color-blind and class-blind. They are just in that they weed out failed operations, fraudulent schemes and profligate people. They provide pain when a government immorally tries to stop the markets from functioning as they should. In the long run, they reward the savers, the prudent businessmen and the innovators. But you can be sure that until such time as things collapse to the point where we abandon a mixed economy and the welfare state, there will be far more people like the man above who seek to con the system for personal gain. Only after the fall will the deserving people prosper.

Spending Is Not Stimulus President Obama

February 6, 2009 2 comments


Today amid cheers, President Obama showed his true colors when it comes to his plan to deal with the recession (soon to be a depression). Valiantly fighting off all takers on his stimulus, Mr. Obama exclaimed:

Then there’s the argument, well, this is full of pet projects. When was the last time that we saw a bill of this magnitude move out with no earmarks in it? Not one. (Applause.) And when you start asking, well, what is it exactly that is such a problem that you’re seeing, where’s all this waste and spending? Well, you know, you want to replace the federal fleet with hybrid cars. Well, why wouldn’t we want to do that? (Laughter.) That creates jobs for people who make those cars. It saves the federal government energy. It saves the taxpayers energy. (Applause.)

So then you get the argument, well, this is not a stimulus bill, this is a spending bill. What do you think a stimulus is? (Laughter and applause.) That’s the whole point. No, seriously. (Laughter.) That’s the point. (Applause.)

Now I understand that President Obama was speaking in front of a group of Democrats, trying to rally his comrades, but this type of message should outrage American citizens. Mr. Obama promised the people change, yet he makes the argument that since there are always earmarks in bills, the government should get a free pass for porking up its latest monstrosity. Apologies to the already suffering American people that have to pay for this.

When it comes to buying a new fleet of green cars, the true politician in Obama comes out, spinning this ridiculous confiscation of private money as job creation. If this creates jobs, why doesn’t the government buy every taxpayer a Prius? Why not throw in some solar panels for every taxpayer too?

Because this money has to come from somewhere of course. This is a textbook example of the broken window fallacy in action. Basically, Obama will be taking taxpayers’ money and transferring it to the auto sector. All of the taxpayers are going to be subsidizing one particular industry. One interest gains at the cost of all others. This is what American democracy has become. It is not about the public good; it is about the good of a specific set of interests.

As to Mr. Obama’s final point that spending bills and stimulus are synonymous, one has to wonder how much longer this country will be able to stay afloat. Can Mr. Obama explain how taking $800 billion or most likely more money out of the private sector, and using some of it for pork, some for income redistribution and the rest for “shovel-ready” projects is stimulative? Can Paul Krugman or Larry Summers point to a situation in which wealth taken from the hands of the people has ever been used more productively by the government?

Government spending has NEVER — not once pushed an economy out of a recession or depression. Even amongst those who acknowledge that the New Deal failed to bring us out of the Depression, most argue that it was only World War II that got the economy back rolling. Yet even this is false, another example of the broken window fallacy that somehow you can mobilize all resources under a command economy, and by allowing the government to channel them towards specific uses (in the case of war, towards bombs and fighter planes) leave yourself better off. As Robert Higgs shows, our productivity did not recover until after the war, when productive forces were released into the free market.

The government cannot plan our economy and allocate resources profitably. Let me repeat this: THE GOVERNMENT CANNOT PLAN OUR ECONOMY AND ALLOCATE RESOURCES PROFITABLY. Not in the Soviet Union, not in Nazi Germany, not in Cuba, not in the United States.

Even if I leave out the moral issue that people should have the right to choose how they use their money, productively or unproductively, and grant that somehow, some way, President Obama can spend the money as the people would, it is a proven fact that we are going to have to issue hundreds of billions of dollars in Treasuries to fund this. As George Melloan notes in the Wall Street Journal today, this will inevitably prove inflationary. Our friends in China and Japan, already strapped for cash given their own economic problems will not be able to subsidize our profligacy much longer. They might even sell some of their existing Treasury holdings to raise cash. As has been noted repeatedly, Ben Bernanke may have to come in and buy Treasuries issued by his own government. Quite a queer concept.

To carry out this plan, helicopter Ben will have to print up more dollars and thus we will see inflation in prices. You can also bet that with the collapse in demand for treasuries abroad, and the government’s inflationary actions, interest rates will rise for all of us. We will suffer from stagflation, and the government will have no way to pay for all of its entitlements without printing more money, generating more inflation and higher and higher interest rates. We will be crushed under our own debt.

While the proper solution to all of this would be to allow ourselves as a nation to deleverage, paying off our debts and liquidating the bad assets, and forcing the government to reduce its spending and cut taxes, instead the President and the congress are sealing our fate to depression. The above steps would be the true stimulus. What the President proposes is no stimulus. As the Wall Street Journal quips, “The spending portion of the stimulus, in short, isn’t really about the economy. It’s about promoting long-time Democratic policy goals, such as subsidizing health care for the middle class and promoting alternative energy. The “stimulus” is merely the mother of all political excuses to pack as much of this spending agenda as possible into a single bill when Mr. Obama is at his political zenith.”

One has to wonder if the reason Mr. Obama keeps telling us that things are going to get worse is intentional, a self-fulfilling prophecy. Perhaps he knows the true history of the Depression, that the more the government intervened the worse things got. He knows that this crisis will allow him to cement his place as President for at least eight years. As is the government’s wont, it will exploit any situation to gain more power.

Every single citizen must realize that in allowing our representatives to pass this bill, we are dooming our children and our children’s children to pay for our mistakes, sacrificing our property without just compensation and allowing our representatives to further imperil our economy. This is taxation without representation. This is immorality. This is the death knell of a once great nation.

Citi Field Chicanery

February 4, 2009 Leave a comment


First let me state a few qualifiers when it comes to the Mets’ now infamous Citi Field. Citi Field is gorgeous. The team that will inhabit it is not as gorgeous. It is outrageous that the taxpayers are backstopping the bank which made the naming deal with the team. It is embarrassing to an organization that has already suffered epic collapses the last two seasons to be going into a new stadium dealing with this kind of headache. With this in mind, let me proceed to the broader controversy regarding the naming deal.

Today in the New York Times, representative Dennis Kucinich argues regarding naming deals that “Treasury has the power under TARP to make broad changes, They have to. It’s not whether they can or should; they have to. The legal issues are very easy to maneuver.” According to Kucinich, Citi Field represents “an egregious example. But we have a list of other banks we’re working our way through. We’ll hold hearings.” I do agree with Kucinich that naming deals such as Citi’s with the Mets represent extravagent, and probably poor expenditures. I don’t know how Citi projected that it would recoup their $400 million investment in the naming rights to the stadium, but investment banks made all sorts of investments far more ridiculous over the last decade to be sure.

Further, given that taxpayers are the ones who are responsible for propping up the company responsible for this deal, it should anger all of us. But what Congress (Mr. Kucinich excluded given his populist rhetoric against the bank bailouts) fails to realize is that were it not for the government’s decision to bail out these institutions, these types of issues would not exist. As Citi unwound its assets during its bankruptcy, the naming rights deal could be nixed and purchased by another company. Where were Kucinich’s angry colleagues when it came to bailing out Citi in the first place?

The outrage amongst politicians when it comes to naming deals not only masks their lack of appreciation that this would not be an issue were it not for propping up failing ventures, but also masks the greater implications of their intervention. Since we all are now shareholders in these institutions, the government will tinker with their management. This begins with caps on executive pay, but who is to say that it will end there?

As poorly as some of these institutions were managed, and granting that a lot of their poor management was due to incentives created by government intervention, I would guarantee that government control of the banks will be even worse. Do you think that Nancy Pelosi knows how to create a DCF model in Excel? Does Barney Frank know how the market for CDO^2’s works, let alone what a CDO^2 is?

Much as I think that President Obama could give a hell of a pitch to investors on the virtues of a closed-end real estate fund, there is no way that the government can ever run these businesses properly. Command economies have always failed. The government lacks the profit motive and the knowledge to successfully manage these companies. Putting the firms under the purview of government represents the greatest moral hazard of them all.

Remember, these are only the direct effects of strict government regulation of the banking sector. There would also be a great effect on the markets. If the government is to have say over the operating activities of the major banks, what kind of implications will this have for retail and institutional investors? Will money flood out to less-regulated private equity and hedge funds? Will those shops then become as regulated as the (remaining) big banks? What kind of confidence will exist in the markets when the biggest broker-dealers are being managed by politicians? Will people not recall what happened to all of the other GSE’s?

There are a plethora of problems with these institutions being managed by the government. The Citi Field naming rights deal is very small relative to the big picture, but it exemplifies the direction the government is going. I am just as angry as everyone else that we are responsible for keeping the Citi naming deal alive, but we must remember that it was because of government intervention that we got ourselves into this mess in the first place. As if it wasn’t bad enough that the Mets aren’t going to pursue Manny Ramirez, now us tortured fans have to deal with this pathetic situation.

A Taste of Subtle Ivy League Indoctrination

February 4, 2009 7 comments


As you may have come to expect at this point, I am not entirely fond of the education I have received at Columbia University. One of the major reasons for this is because of the bias inherent in almost every class I have taken here, from the most seemingly apolitical math course to the inherently political social science course. An example of the type of indoctrination one receives at an Ivy League institution was center stage this week in one of my courses.

Having completed a discussion on torts, we moved on to its application in emissions regulation. Emissions prove highly relevant because one party may cause damage to another party’s property because of the pollution one gives off. However, according to my professor, there is a solution to this that is equitable for all sides. My professor proclaimed, “It is the job of future economists like yourselves to solve these types of problems…otherwise what’s the point of studying economics?”

What was my professor’s solution? Well, since the typical Pigouvian tax wouldn’t work, of course we could follow the “market-based” solution of tradable carbon credits. The logic that my teacher put forth seemed infallible – the government can set the emissions level they so choose, and by creating carbon credit shares tradable on an open market, firms could buy or sell off their right to emit based upon their polluting needs. At the aggregate level, pollution will be reduced. Regardless of the initial allocation of carbon shares, trading will allow companies to emit at the level they so choose. Not only this, but the government won’t even intervene in this free market, and there will be total transparency to boot. Even more remarkable to my professor was the fact that this market was able to set the price, without necessary fixing by the regulator. Hooray for the central planners!

To be fair, my teacher did say that it is not necessarily easy to figure out the optimal level of emissions. But leaving out the fact that of course no government official nor any person period can know the optimal level of emission (especially given that this differs for every single individual), there are myriad other reasons why this solution is not “market based,” or socially beneficial. First, the market for carbon credits is being determined by government fiat. The government determines how many shares should be initially allocated to companies, and enforces the market on private companies. To whom does the burden ultimately fall to either pay for producing pollution, or build new plants that emit less? Why the consumer of course. This was not mentioned in the lecture. The question then becomes, are the social benefits of an emissions cap and market imposed by the government greater than the cost consumers will bare as a result of these policies? This writer happens to think not. Not to mention, of course there are going to be certain businesses that will increase their profits off of the push to decrease emissions as well, meaning government intervention will divert the natural flow of capital to specific sectors in the market.

There is of course as always the philosophical issue as well. Why should the government be in the business of controlling emissions? Of course, I’m sure any good politician, or economist for that matter would make the argument that it is for the public good. However, as always, I would argue that the free market provides a better alternative. First, if people are outraged by the emissions in their communities, they can take their cases to the courts and seek compensation from the company. If one’s private property is damaged, it is their right to seek just compensation, and the job of the courts to arbitrate in these disputes. Second, if this proves insufficient, and the company truly is tearing a community apart, the people in the community can boycott the company, making it financially impossible for the company to operate, and thus forcing the company to change its production techniques to emit less pollution. In an age where information is more readily accessible and transmittable than ever before, it should be easier than ever to rally people against a company. For those who challenge this, even with multinational companies, if the consumers are so angry at the producers for their treatment of the environment, it should be worth the effort of citizens to take shots at the bottom line of the polluting producer, or to rally lawyers and interest groups against the firm, as the firm like any defendant is deemed innocent until proved guilty. Further, if there was ever a time that citizens could rally against corporations easily, given the speed at which information can be disseminated today, people are more easily able to rally behind their causes than ever before.

Unfortunately, the professor of this particular class believes that if a divine central planner could accomplish the aforementioned “elegant” solution, this would be perfectly acceptable as well. It is all about “efficiency,” and “optimal allocations” to university professors. But there is never the question of right and wrong. Simple morality, and respect for natural rights is not a factor. It is always the obligation of politicians and economists to solve our problems, not private individuals. The left is able to veil their interventionism in the cloak of the free market. As long as academia continues to pander about the virtues of government, our future leaders will continue to make the mistakes of their predecessors.

On the Memory of Daniel Pearl

February 3, 2009 1 comment

This is a must-read article on the aftermath of the brutal murder of Daniel Pearl, from the WSJ.

For those who have died innocently at the hands of Islam, the times we are living in truly are soiling their memories. Mr. Pearl’s piece should serve as an example of the struggle that all lovers of liberty and humanity should take up against oppressors worldwide. His main argument that the media and academia have inverted morality and common sense in justifying terrorist attacks and specifically the brutal actions of Palestinians against the Israelis is absolutely correct.

Giving these people legitimacy is appalling and outrageous. Everyone needs to wake up and realize that the Muslim world (or at the very least its radical elements and supporters, of which even 10% would be incredibly dangerous), even through democratic means in Europe are fighting a crusade against all that we view as just and right in the west.

On the one hand, we have a people willing to blow themselves up for their cause; on the other, we have a people that are apologetic and conciliatory. Think about the difference in dedication to principles, and then you start to see the grave threat posed to our way of life.