free market economics Archives - Page 5 of 9

There’s No Political Freedom Without Economic Freedom

Can we have political liberty without first having economic freedom? Is the form of government predetermined by the form of economic organization? At first blush the opposite would seem to be self-evident, i.e., that our form of government determines all else, including our economic structure. But Mises advises otherwise. In Human Action (page 283 of the Mises Institute’s scholars’ edition), Mises explains (my emphasis):

“Freedom, as people enjoyed it in the democratic countries of Western civilization in the years of the old liberalism’s triumph, was not a product of constitutions, bills of rights, laws, and statutes. Those documents aimed only at safeguarding liberty and freedom, firmly established by the operation of the market economy, against encroachments on the part of officeholders.”

Likewise, in The Law by Frédéric Bastiat (page 49 of the Mises Institute edition),
Frédéric Bastiat has this to say (my emphasis again):

“Political economy precedes politics: the former has to discover whether human interests are harmonious or antagonistic, a fact which must be settled before the latter can determine the prerogatives of Government.”

Economic Freedom Is the Foundation of All Freedom

These insights counsel us that attempts to pass laws — or even constitutional amendments — to ensure our political liberty will be wasted as long as our economic freedom continues to be usurped by government. In other words, limited government will fade in the face of the modern regulatory state, and no laws can protect us from its deprivations. Economics not only trumps politics, it determines its very form.

The root cause of economic interventions is the mistaken belief that government can improve our lives by making economic decisions for us. As I explained in an earlier essay, by their very nature, economic interventions by government are coercive in nature. Voluntary cooperation in the marketplace, on the other hand, requires only access to an honest criminal justice system to enforce contracts and protect property rights.

Government mandates require government coercion for their enforcement, including, for example, the mandate that everyone contribute to the government’s Social Security and Medicare programs. Although the public requires no government mandate to buy any of the wide ranging retirement savings and health insurance products available on the free market, government must force us to participate in its Social Security and Medicare schemes.

Absent the mandates, few would participate, because many understand that these programs are fatally flawed transfer taxes — Ponzi schemes of sorts — posing as retirement savings and healthcare plans. There are no real profit-producing assets from which to pay the plans’ distributions, merely the promise by government that it will continue to force others to pay you in the future as it forces you to pay others in the present.

These programs must be maintained by the police power of the state, and what may appear to be widespread acceptance of the Social Security and Medicare mandates is really the vociferous support of those receiving benefits. Meanwhile, the taxpayers who understand the reality of the program continue to pay to stay out of jail.

Economic Regulation Requires Coercion

The more government meddles in the economic sphere — which should require no regulation at all, since it is completely voluntary — the more police power is necessary to force us to comply. All government agencies possess huge enforcement mechanisms that not only can confiscate our property but take away our freedom. The Occupational Safety and Health Administration (OSHA) is little more than a government-supported extortion racket, finding nebulous health and safety violations in the workplace that apparently do not concern the actual workers themselves, who haven’t been chained to their machines for quite some time now.

The Environmental Protection Agency (EPA) shuts down businesses and threatens entire industries for violations of arbitrarily established environmental standards that are of little concern to the people affected. Smokestack emissions and the like are local environmental issues for which one would expect a wide variety of standards across the nation. Undoubtedly the people employed by the giant steel mills of Gary, Indiana tolerate smokestack emissions that Beverly Hills residents would find unacceptable. These arbitrary EPA standards are depriving Americans of the opportunity to work at higher paying jobs: their freedom to tolerate more pollution in order to enjoy a higher standard of living has been usurped by government.

Speaking of jobs, just try practicing some profession that requires a government issued license, even if the parties using your service do not care whether you have one or not. Better yet, employ someone who is willing to work at a wage rate below the proscribed minimum or who is willing to work without healthcare or family leave benefits. The police power of the state will descend upon you, even though there is no dispute between you and your employee. Want to reclaim discarded furniture, refurbish it, and sell it out of your house? Better not try to do that without a business license and a store front in an area that is properly zoned. Do you want to hire “an able bodied man” to do some heavy lifting at your place of business? Uh, oh! The discrimination police will put you in your place, which may be a jail cell if you cannot pay their fine.

No truly limited government can perform these police functions, so expecting a limited government in a world where such regulations are common falls into the category of a cognitive dissonance. In laymen’s terms, we are just kidding ourselves that we are a truly free people with a government that is subservient to our wishes and exists primarily to protect our life, liberty, and property. Keep this in mind the next time you hear that some new economic regulations have been proposed or implemented. Concomitant with these regulations comes an ever more powerful and coercive government.

Article originally posted at Mises.org.

How Economic Aggregation Hides the Problems of Interventionism

by Gary Galles
Article originally published in the March issue of BankNotes.

I was going through the textbook for my economics principles course recently, thinking about how I could better reconcile the fact that since only individuals choose, the logic of economics is about individual choices facing the fact of scarcity. Yet macroeconomics is generally presented directly in terms of aggregates and how to control them, as if aggregates were the
relevant measures.

The Limits of Macroeconomics

Perhaps in over-reaction to the paltry discussion such issues received in my undergraduate and graduate training, I spend a substantial amount of class time on the limitations of macroeconomic aggregates. For instance, I emphasize that not a single macroeconomic variable measures what we would like to know accurately. This is why we often evaluate more than one imperfect measure to see if the “story” they tell is consistent. We do this to estimate how much confidence can be placed in a particular “fact” (like what the official unemployment rate or a measure of inflation-adjusted output did over a given period). This is why I feel the need to drive home problems aggregation can cause more clearly to my students.

With that in my head, I read the textbook’s introduction to “net taxes.” It struck me how “looking behind the curtain” at that category illustrate how aggregation can hide information and distort important conclusions.

“Net taxes” equals taxes paid to the government minus transfer payments from the government to recipients, for the household sector as a whole. It is a useful category for looking at the net effect of government programs on the disposable income of the sector as a whole. But it can paper over massive amounts of income redistribution and substantial supply-side effects on productive incentives.
Say that the government taxes one subset of the population $3 trillion, and provides $2 trillion in transfer payments (food stamps, unemployment insurance, Social Security, etc.) to another subset. The net effect on households’ aggregate disposable income is a reduction of $1 trillion. But to consider only that net number in an analysis is to ignore very important considerations.

What’s Behind The Big Numbers?

Most obviously, the net number ignores what can be vastly different treatment of different households. And that is crucial to any moral or ethical evaluation of the effects. That is particularly true when we want to know the extent to which government offers “liberty and justice for all,” as we say in the Pledge of Allegiance — that is, how much it honors individuals’ self-ownership and their derivative rights to their own production. A state that steals from Peter to pay Paul on a massive scale violates our inalienable rights in ourselves, but aggregating the effects into “net taxes” hides those effects from view.

The adverse supply-side effects that such policies have also disappear from view when we overlook the redistribution. The reason is that when we “tax the rich and give to the poor,” we reduce both parties’ productive incentives. The higher tax rates faced by higher income earners reduces the fraction of the value they produce for others that they take home, so they shelter more and earn less income. That is, they do less for others with the resources at their disposal than they otherwise would have.

Less noticed is that the aid given to the poor is also conditional on them staying poor. For instance, people lose 30 cents in food stamps for each dollar of earnings counted by the program. They, too, therefore keep a smaller fraction of what their efforts produce for others, and will also produce less for others than
they would otherwise.

Hiding redistribution — and the extent to which it reduces jointly-beneficial production by focusing on “net taxes” — is not the only way in which aggregation distorts. For example, it is notable that those who back policies such as higher minimum or “living” wages because they will “help the poor,” primarily argue for it because they assert lower income earners, as a group, will have greater incomes.

Now, there are a host of issues involved in deciding whether that is true, but a focus on that question ignores that there will be a substantial number of lower skill workers who will lose their jobs and/or hours worked, fringe benefits, on-the-job training that builds future income potential, etc. They will be worse off. And arguing that the group in the aggregate might have higher incomes, which only means one subset’s increased earnings will be at least somewhat greater than another subset’s decreased earnings, in no way justifies harming large numbers of that group who are also poor, in the name of helping the poor.

Aggregation Provides Little Useful Knowledge

As Friedrich Hayek notes in “The Use of Knowledge in Society” (and elsewhere), the aggregation that is part and parcel of central planning by its nature throws away a great deal of valuable information. The “particular circumstances of time and place” which enable value creation and that only some individuals know (i.e., not the central planner), can be utilized only by decentralizing decisions to those who are most expert in those details, in combination with the information others provide via their market choices. But such knowledge by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the “man on the spot.”

Aggregates used in constructing gross domestic product (GDP) have severe limitations as well. They rely on prices paid to assign values to goods or services exchanged. This demonstrated preference approach makes sense for purely market driven behavior, as the value for each unit would have to be greater than the price paid for self-interested individuals who make the
purchases. Even here, however, the excess value over what was paid that motivated the purchases (termed consumer surplus) is ignored. But where government intervenes, accuracy is severely degraded.

For example, if government gives a person a 40 percent subsidy for purchasing a good, all we know is that the value of each unit to the buyer exceeded 60 percent of its price. There is no implication that such purchases are worth what was paid, including the subsidy. And in areas in which government produces or utilizes goods directly, as with defense spending, we know almost nothing about what it is worth. Citizens cannot refuse to finance whatever the government chooses to buy, on pain of prison, so no willing transaction reveals what such spending is worth to citizens. And centuries of evidence suggest government provided goods and services are often worth far less than they cost. But such spending is simply counted as worth what it cost in GDP accounts.

Other Aggregation Sins

These aggregation issues do not do more than scratch the surface of the problems that arise with aggregation. There are plenty more once we dig into the details. For instance, the way employment and unemployment data are aggregated and reported, it is possible to have a job but not be officially employed or unemployed (e.g., workers under age 16), to have a job but be officially unemployed (e.g., workers in the underground economy), and to be officially employed but not currently working (union members on strike). Further, one person can be counted as multiple employees and employment and unemployment rates can move in the same direction at the same time.

The main point, however, is that to rely on aggregates as the focus moves attention away from individuals, who are the only ones who choose, act, and bear consequences. Even without further complexities and problems, that approach can hide everything from income redistribution between different groups (net taxes) to income redistribution within groups (minimum and living wage laws) to supply-side effects on production (taxes and means tested government benefit programs) to the impossibility of central planners directing an economy efficiently (with statistics that throw away details that are crucial to the creation of wealth) to the ambiguity of measures of the value of output (government production assumed to be what it cost). That is a lot to disguise or misrepresent, and such issues provide more than ample reason for suspicion whenever someone puts forth an argument from a major premise that “government aggregate X did Y, therefore we know that Z follows.”

Please see the March issue of BankNotes for the original article and others like it.

Don’t Be Fooled by the Federal Reserve’s Anti-Audit Propaganda

by Ron Paul – Ron Paul Institute for Peace and Prosperity:

In recent weeks, the Federal Reserve and its apologists in Congress and the media have launched numerous attacks on the Audit the Fed legislation. These attacks amount to nothing more than distortions about the effects and intent of the audit bill.

Fed apologists continue to claim that the Audit the Fed bill will somehow limit the Federal Reserve’s independence. Yet neither Federal Reserve Chair Janet Yellen nor any other opponent of the audit bill has ever been able to identify any provision of the bill giving Congress power to dictate monetary policy. The only way this argument makes sense is if the simple act of increasing transparency somehow infringes on the Fed’s independence.

This argument is also flawed since the Federal Reserve has never been independent from political pressure. As economists Daniel Smith and Peter Boettke put it in their paper “An Episodic History of Modern Fed Independence,” the Federal Reserve “regularly accommodates debt, succumbs to political pressures, and follows bureaucratic tendencies, compromising the Fed’s operational independence.”

The most infamous example of a Federal Reserve chair bowing to political pressure is the way Federal Reserve Chairman Arthur Burns tailored monetary policy to accommodate President Richard Nixon’s demands for low interest rates. Nixon and Burns were even recorded mocking the idea of Federal Reserve independence.

Nixon is not the only president to pressure a Federal Reserve chair to tailor monetary policy to the president’s political needs. In the fifties, President Dwight Eisenhower pressured Fed Chairman William Martin to either resign or increase the money supply. Martin eventually gave in to Ike’s wishes for cheap money. During the nineties, Alan Greenspan was accused by many political and financial experts — including then-Federal Reserve Board Member Alan Blinder — of tailoring Federal Reserve policies to help President Bill Clinton.

Some Federal Reserve apologists make the contradictory claim that the audit bill is not only dangerous, but it is also unnecessary since the Fed is already audited. It is true that the Federal Reserve is subject to some limited financial audits, but these audits only reveal the amount of assets on the Fed’s balance sheets. The Audit the Fed bill will reveal what was purchased, when it was acquired, and why it was acquired.

Perhaps the real reason the Federal Reserve fears a full audit can be revealed by examining the one-time audit of the Federal Reserve’s response to the financial crisis authorized by the Dodd-Frank law. This audit found that between 2007 and 2010 the Federal Reserve committed over $16 trillion — more than four times the annual budget of the United States — to foreign central banks and politically influential private companies. Can anyone doubt a full audit would show similar instances of the Fed acting to benefit the political and economic elites?

Some fed apologists are claiming that the audit bill is part of a conspiracy to end the Fed. As the author of a book called End the Fed, I find it laughable to suggest that I, and other audit supporters, are hiding our true agenda. Besides, how could an audit advance efforts to end the Fed unless the audit would prove that the American people would be better off without the Fed? And don’t the people have a right to know if they are being harmed by the current monetary system?

For over a century, the Federal Reserve has operated in secrecy, to the benefit of the elites and the detriment of the people. It is time to finally bring transparency to monetary policy by auditing the Federal Reserve.

Article originally posted at The Ron Paul Institute for Peace and Prosperity.

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The Fallacy of Keynesian Stimulus

by Peter St. Onge
Article originally published in the March issue of BankNotes.

One of the great debates today between left and right is whether government stimulus is worth it. The left says “yes, early and often.” And the right says “only in the right circumstances.” Unsurprisingly, both left and right are completely off — stimulus is the quickest way to impoverish an economy.

To see why, we’ll start with America’s most famous burglar, Richard Nixon. Nixon is said to have remarked that “We are all Keynesians.” This is probably true; everybody Richard Nixon listened to was “all Keynesians.” And even today nearly every talking head on TV or in major newspapers is “all Keynesians.” Right-wing, left-wing, it’s just a big pile of Keynesians.

This is important when we see “balanced” debates among prestigious economists — “prestige” in mainstream economics is short-hand for “Keynesian.” Future generations may well find this funny, but today this is where we are.

Why does this matter? Because if the Keynesian orthodoxy is ridiculous, say, then all we get is “balanced” flavors of ridiculous.

Why ridiculous? Keynesians’ original sin is that it proposes that spending makes us richer. The other fallacies flow out of that core error. This rich-by-spending doctrine obviously doesn’t work in real life — if you’re poor, the solution is not to borrow money and have a party about it. The solution is to work hard and save up. It’s not rocket science.

Why the appeal? Why are nearly all economists, left and right, Keynesians? The idea that spending makes us richer is a very old one. It’s not original to Keynes, who wasn’t much of an economic or original thinker anyway. Keynes was just regurgitating the age-old fallacy known as “underconsumption.”

“Underconsumption”

Underconsumptionism holds that economies do well when the cash flows. It seems intuitive from the top-down: if people are spending money then times must be good. If they’re not spending money there must be a problem.

Unsurprisingly, this gets it exactly backward. Spending is what happens once you’re rich. It doesn’t actually make you rich. So if an economy is doing well then people do indeed buy more swimming pools. But it’s obviously not the swimming pools
that made them rich.

So what did make them rich? Investment. More specifically, market-led investment. Why the “market-led” part? Because zany bureaucrats define their bridges to nowhere and squirrel-menstruation research as “investment.

Now, it’s not that all government spending is useless — they do build gutters and sewage plants, after all. But we’ve really got no way to know whether some bureaucrat’s “investment” is growing the economy. Hence it’s tempting to say “private investment” is all that matters, but I’ll be open-minded and just
say “market-led.” Meaning that a government that actually did find out market demand (for a bridge from Manhattan to New Jersey, say) would qualify as “market-led” investment and make us wealthier. We can see the role of private investment in the

classic Robinson Crusoe picture. Poor Robinson wakes up hungry, wet, and cold. It rained all night, and he’s picked up a nasty cough. Robinson looks up at the sky, shaking his fist at the Gods of Poverty.

How does Robinson improve his lot? Why, he invests. He builds fishing hooks, fish-nets, berry-shaking sticks. He collects wood, first to build a shelter then to keep a fire going. Investments all.

And over there, in the corner, you can see the Keynesian tsk-tsking, “Why do all that hard work investing when you can just spend more, Robinson?” Remember, these are “prestigious” economists.

So how does this fatal error translate into policy today? The key thing to remember is that when the government increases “spending” it is simply making pieces of paper — known as “dollars.” Not fish hooks. Not firewood. Bidding tickets is what government makes. Why do they do this? Partly to buy votes, of course: if I could print up dollars, I guarantee I’d have a lot of Facebook friends. And partly to “boost” the economy with all that spending.

Fiat Money ≠ Wealth

The problem is, printing tickets isn’t a real resource. You don’t eat paper, as they say. Printing dollars merely bids away resources from other uses.

Let’s say Fed Chair Yellen made an error and printed me up a trillion dollars. Why, I’d use those dollars to buy all — and I do mean all — the beach-front property. I would have the most galactic beach-front party in history. Thing is, Yellen just gave me bidding tickets. She didn’t give me the booze, the DJ’s, the
concrete, or the wood.

So how do I put this party on? Why, I use Yellen’s dollars to bid it all away from you. Yep, you. Building a factory? Too bad: I’ve outbid you for the concrete. Building a back deck? Too bad: it’s my lumber. There’s a party on, didn’t you hear? A Keynesian party.

So is my resource-sucking mega-party making the economy grow? Nope. When it’s all over, when the hangovers along with the ear-ringing subsides are gone, we’ve used real resources. We’ve got no factories. No decks. We’re all poorer. But the politicians did get re-elected, right?

This, in a nutshell, is Keynesian “stimulus.” Whether it comes from government spending (“fiscal stimulus”) or from Federal Reserve money-printing (monetary stimulus). In either case, real resources were bid away from the rest of us and handed out to others.

Stimulus isn’t some magical leprechaun dropping ice cream and puppies from heaven — it’s merely redistribution of resources. Stimulus is taking from those who have and giving to the government’s pals.

So the question “does stimulus work?” is completely missing the point. Putting aside the injustice of redistributive theft, the productivity question is whether the guys who got the bidding tickets did more market-led investment than the guys whose tickets were devalued.

There is no economic reason to think mere redistribution would make us richer. In fact, there are excellent reasons that show redistribution hurts the economy. “Stimulus” itself is nothing more than widespread impoverishment so a clutch of politicians can buy friends.

Please see the March issue of BankNotes for the original article and others like it.

Risk Update: Belief That Gold Will Fall When the Dollar Climbs

by Jeff Clark – Hard Assets Alliance :

Gold and the US dollar typically exhibit an inverse relationship—when one climbs, the other tends to fall. But that relationship disappeared over three months ago.

Why the new romance between gold and the dollar? Primarily because what has been supportive for the dollar has also been good for gold.

This trend should continue. I’m not the only one to think so:

• “The resilience of gold in the face of a surging dollar and collapsing oil price supports our view that the precious metal will recover further this year and next.” (Capital Economics head of research Julian Jessop)

Do you believe there is greater or lesser risk in the financial markets? Will there be more or less fear in the world in 2015?

If you suspect that ever-optimistic government figures are masking far uglier truths… if you understand that the US economy depends on the global economy for far more than exports… if you believe the truly historic amount of money printing in the US and around the world must eventually result in inflation… or if for any reason you doubt that 2015 will be rosy, then the best investment strategy is one that includes a meaningful amount of gold bullion.

Remember: The issue is not inflation vs. deflation, the USD vs. euro, or even supply vs. demand. It’s fear and chaos vs. confidence and stability. Whichever of these you see as the stronger trend in the years ahead should drive your action plan.

In our view, the response we’ve seen thus far in gold has been a small foretaste of the major move we can expect when the wheels come off the global financial system, whatever form that may take.

My friends, buffer your investments and way of life against a growing level of financial risk. I urge you to continue adding low-cost bullion to your Hard Assets Alliance account.

Article originally posted in the February issue of Smart Metals Investor at HardAssetsAlliance.com.

Non-intervention is Comprehensive

submitted by jwithrow.

Journal of a Wayward Philosopher
Non-intervention is Comprehensive

February 27, 2015
Hot Springs, VA

The S&P opened at $2,110 today. Gold is checking in at $1,216 per ounce. Oil is floating around $49 per barrel. Bitcoin is up to $253 per BTC, and the 10-year Treasury rate opened at 2.02% today.

Yesterday we discussed the merits of the non-intervention philosophy specifically as it relates to natural childbirth. We realized what is true about non-intervention in childbirth is just a true about non-intervention in the rest of health care. Non-intervention is just as applicable to the fields of personal finance, economics, education, and the role of government as well. Let’s examine this in a little more detail today.

To start with, think long and hard about what you value in this life. Clear your mind and think about what’s important to you.

Notice the clutter and the conflict?

We are constantly assaulted with polarized messages on a daily basis competing for our support. Every single advertisement you see or read is designed by very skilled people to convince you that you want that particular product or service. The corporate media constantly inundates you with messages designed to drum up your support for a particular idea, policy, or position. The various institutions you are a part of (school/work/church/community service/political party/etc.) all convey different expectations for how you should live and what you should spend your time doing.

When we accept and identify with these external expectations we shift away from self-reference and end up with a piecemeal system of values and a hodgepodge of beliefs. Then we say things like:

-This religion is absolutely right and that religion is absolutely evil.

-People should spend their time doing these things but they shouldn’t be allowed to do those other things.

-Government should force everyone to comply with these policies and it should stop people from engaging in alternatives.

Why do we say these things? Because that’s what our institutions say; we substitute our own values for the values of our chosen institutions when we identify with external expectations.

The non-intervention philosophy is about getting back to what’s best for you. It’s about a self-referential reawakening. Modern society tells us that self-reference is selfish but nothing could be further from the truth. If we look within and decide it is acceptable to stand on our own values and pursue our own wants regardless of what modern culture says then we necessarily recognize that others are free to do the same. This understanding sparks a respect for non-aggression and tolerance in a world that has seemingly forgotten these ideals.

”Do unto others as you would have them do unto you.” “Love thy neighbor as thyself.” “Hurt not others.” “Live and let live.” “Laissez-faire.” Moral thinkers have come and gone throughout history and they each arrived at some variation of this same message. Let’s apply this message to our world today.

Non-intervention in personal finance is about thinking a lot but doing very little. Contrast this with mainstream personal finance which is frantic and disorganized. Jim Cramer epitomizes this on his television show where he runs around screaming “buy, buy, buy” or “sell, sell, sell”. We are sold the idea that a sophisticated financial portfolio involves moving in and out of the right stocks and that this is the key to reaching a retirement “number”. If we don’t want to do the stock picking for ourselves then we can purchase target date mutual funds that are actively managed by professionals who move in and out of stocks for us.

All of this buying and selling churns up commissions and fees and, if we follow mainstream analysis, likely gets us into stocks when they are popular and expensive and out of stocks when they are unpopular and cheap. That is to say we buy high and sell low. The rationale behind this is simple – if a stock is popular enough to warrant coverage on CNBC or in the Wall Street Journal then it is popular enough to draw a lot of attention. It would be far better to buy the stock when it is obscure, hated, and cheap then sell it to someone else if it becomes popular enough for mainstream financial publications.

When it comes to investing in equities, studies suggest it is the beta – the big picture idea – that is more important than the alpha – the individual security. In other words identifying sectors that have been beaten up but are beginning to trend higher, buying those sectors while they are cheap, and then sitting on your hands until the trend changes is the application of non-intervention in personal finance. Of course, stocks should only make up a small percentage of your asset allocation model as we have touched on numerous times here at Zenconomics.

We have also harped on the importance of non-intervention in economics on many occasions. The ‘free market’ is an incredibly complex web of exchanges created by individuals who, by acting of their own free will, engage in production and commerce. The free market sets price levels based on individual activity and these prices fluctuate in response to continued individual activity. This economic system is self-regulating and to intervene in any capacity is to distort the entire free market system.

Simply put, free markets require absolute non-intervention by definition. The moment you intervene is the moment the market ceases to be free. Somehow, however, we have accepted the idea that Ivy League graduates should be pulling strings and pushing levers to manage the economy. We put these “experts” in front of expensive computers in big government buildings and tell them to keep unemployment low and prices stable as if the economy were a simple child’s game of connect the dots. And we pretend like this is still a capitalist system.

I suspect we put up with intervention in our economy largely because our educational system conditions us to accept intervention every step of the way. Public education in the United States very clearly emphasizes invasive authoritarianism. Instead of allowing children to learn naturally by pursuing their interests, discovering their passions, and cooperating with one another, the public school system segregates children by age and lumps them into a classroom where they are told to be quiet and listen to the teacher. In school students are told what they will learn, when they will learn it, and they are permitted very little free time during the day. Then they are loaded with homework that eats up their free time after school and prevents them from pursuing their own interests. Their textbooks are homogenous, boring, and designed to be read and memorized unquestioningly. The textbooks have also been scrubbed by the Department of Education to ensure no politically incorrect material can be found on the pages. In this environment learning is seen as something to be forced on students – such is the interventionist approach.

Intervention in education promotes group-think and dependency. Non-intervention promotes self-education and self-responsibility. There is a reason why many wise and ‘successful’ people prior to the 20th century never went to school at all and it is the same reason that numerous prominent people since the 20th century dropped out of school before becoming ‘successful’ in their own way. Even Albert Einstein loathed the interventionist approach to education: ”Education is what remains after one has forgotten everything he learned in school”, said he.

Which brings us to the role of government. Regulatory democracy works hand in hand with coerced collectivism to convince people that government is some type of benevolent service organization. People have been sold the notion that the U.S. government should take care of everyone from cradle to grave, regulate all aspects of the economy, prohibit immoral or unhealthy behavior, maintain a military empire with 300 bases in 170 countries, and fight wars on poverty, drugs, and terror.

Government is more than happy to oblige by intervening in virtually every aspect of your life and the lives of those living in foreign nations that become a “strategic interest” for the military-industrial complex. The corporate news stations (CNN, MSNBC, Fox News) work diligently to promote public support for all of this government intervention and their success is nothing short of amazing. The corporate media’s marketing genius is the promotion of the left-right paradigm. These stations divide the public into a “blue” team and a “red” team and they promote the idea that the other team is the enemy. The fact is each “team” supports government intervention on a massive scale; they differ only in the prescription and distribution of this intervention.

The predictable result of all this government intervention is poverty and misery as the economy is wrecked and the currency is destroyed. F.A. Hayek pointed this out way back in 1944 in ”The Road to Serfdom” as central planning and government intervention really began to rise in popularity.

How different is this from that which is truly American? The American vision was a divergence from the mercantilist statism and bureaucratic despotism of the ancien régime. The best of the American revolutionaries envisioned a society free from politics and indeed free from any visible signs of government. They called this Liberty.

“Government is not reason; it is not eloquent; it is force”, said Washington. “Like fire, it is a dangerous servant and a fearful master.”

Sure the American experiment wasn’t perfect – there were prejudices and inconsistencies – but there was a vibrant and healthy respect for non-intervention. We would be wise to rekindle this understanding and respect.

More to come,

Joe Withrow
Wayward Philosopher

For more of Joe’s thoughts on the “Great Reset” and the paradigm shift underway please read “The Individual is Rising” which is available at http://www.theindividualisrising.com/. The book is also available on Amazon in both paperback and Kindle editions.

Central Banks Perpetuate Boom-Bust Cycles

excerpt from High Alert: How the Internet Reformation is causing a financial hurricane – and how to profit from it:

Central Banks Protect Private Banks from the Market

To prevent such a breakdown, the supply of the paper money must be managed. The main purpose of managing the supply is to prevent various competing banks from overissuing paper certificates and from bankrupting each other. This can be achieved by establishing a monopoly bank, i.e., a central bank-that manages the expansion of paper money.

To assert its authority, the central bank introduces its paper certificates, which replace the certificates of various banks. (The central bank’s money purchasing power is established on account of the fact that various paper certificates, which carry purchasing power, are exchanged for the central bank money at a fixed rate. In short, the central bank paper certificates are fully backed by banks’ certificates, which have a historical link to gold.)

The central bank paper money, which is declared as the legal tender, also serves as a reserve asset for banks. This enables the central bank to set a limit on the credit expansion by the banking system. Note that through ongoing monetary management, i.e., monetary pumping, the central bank makes sure that all the banks can engage jointly in the expansion of credit out of “thin air” via the practice of fractional reserve banking. The joint expansion in turn guarantees that checks presented for redemption by banks to each other are netted out, because the redemption of each will cancel the other redemption out. In short, by means of monetary injections, the central bank makes sure that the banking system is “liquid enough” so that banks will not bankrupt each other.

Central Banks Take Over Where Inflationist Private Banks Left Off

It would appear that the central bank can manage and stabilize the monetary system. The truth, however, is the exact opposite. To manage the system, the central bank must constantly create money “out of thin air” to prevent banks from bankrupting each other. This leads to persistent declines in money’s purchasing power, which destabilizes the entire monetary system.

Observe that while, in the free market, people will not accept a commodity as money if its purchasing power is subject to a persistent decline. In the present environment, however, central authorities make it impractical to use any currency other than dollars even if suffering from a steady decline in its purchasing power.

In this environment, the central bank can keep the present paper standard going as long as the pool of real wealth is still expanding. Once the pool begins to stagnate — or, worse, shrinks — then no monetary pumping will be able to prevent the plunge of the system. A better solution is of course to have a true free market and allow commodity money to assert its monetary role.

The Boom-Bust Connection

As opposed to the present monetary system in the framework of a commodity-money standard, money cannot disappear and set in motion the menace of the boom-bust cycles. In fractional reserve banking, when money is repaid and the bank doesn’t renew the loan, money evaporates (leading to a bust). Because the loan has originated out of nothing, it obviously couldn’t have had an owner. In a free market, in contrast, when true commodity money is repaid, it is passed back to the original lender; the money stock stays intact.

The Current Financial System is Terminal

excerpt from High Alert: How the Internet Reformation is causing a financial hurricane – and how to profit from it:

Despite the talk of rosy numbers, of deficits coming down and jobs being created, citizens of the West, especially in the US, face an uncertain outlook and a challenging future. Many Americans live from paycheck to paycheck — highly leveraged and bereft of any honest money. They are overwhelmingly exposed to whatever it is that those who are the most powerful believe appropriate or profitable to themselves in the sociopolitical or economic arena.

The current financial system is not salvageable. It is entropic, prone to decay. Central banks have to print more and more money to keep up with the spending of the politicians who, in turn, spend more and more to buy the favor of increasingly disaffected voters. Fiat money devalues more and more quickly, and the printing presses run day and night. Prosperity is just around the corner but never arrives and, in fact, recedes despite official pronouncements to the contrary.

The productivity isn’t there any longer, yet in the USA, certainly more than Europe as of this writing, the average household is loaded to the eyeballs in debt and is still urged to take on more. Why? Because foreign buyers continue to purchase American debt, allowing US citizens, even if they don’t know it, to fund their lifestyles at least in part with overseas loans. Who could blame the Chinese for trying to unload some of its dollar reserves by buying resource companies that help to ensure they have enough control over their own productive destiny?

As the currency devalues, the US middle class will be squeezed even harder. The public sector will continue to swell, just as it has overseas. The money and credit in the system continue to expand until the volume simply can’t be contained by economic activity. It becomes overwhelming — triggering hyperinflation and sweeping revaluations. Today, this very scenario is taking place — and tomorrow, as the financial hurricane bears down, it will be even worse.

Again, these results are predictable. Anyone who studies money knows how government fiat-money systems end up. History tells us they always collapse. And we are facing a collapse now.

Individual Solutions: Building Financial Resiliency

submitted by jwithrow.

Journal of a Wayward Philosopher
Individual Solutions: Building Financial Resiliency

February 12, 2015
Hot Springs, VA

The S&P opened at $2,071 today. Gold is down to $1,226 per ounce. Oil is floating around $49 per barrel. Bitcoin is hanging around $221 per BTC, and the 10-year Treasury rate opened at 2.03% today.

Ten central banks have cut interest rates so far in 2015. The list includes: Australia, Canada, China, Denmark, India, Egypt, Pakistan, Peru, Russia, and Turkey. Additionally, both the Bank of Japan and the European Central Bank are actively buying sovereign debt… with counterfeited currency created from thin air. The Federal Reserve is taking a break from this exercise after nearly six years of creating currency to shop at the U.S. Treasury and go yard-saling on Wall Street. Of course the $4.5 trillion worth of sovereign debt and mortgage-backed securities still sits on the Fed’s balance sheet in the interim.

All of this economic intervention is a concerted effort to stave off a major credit contraction. The central bankers talk about hitting certain GDP and unemployment rate metrics but that is all part of their dog and pony show. If creating currency out of thin air could actually grow an economy and create jobs then we would already live in a utopian paradise. But that’s just not how the world works.

Try as they may to avoid it, the coming credit contraction is inevitable. You see, the global monetary system has been fraudulent for a little more than four decades now. Gold officially anchored the global monetary system for two centuries prior to 1971. Then, in 1971, President Nixon’s administration acted to break away from two hundred years of tradition and the U.S. ended direct convertibility of the dollar to gold. Of course the “Great Society” welfare programs and the Vietnam War had a lot to do with this decision.

“Your dollar will be worth just as much tomorrow as it is today,” Nixon proclaimed on television with a straight face. “The effect of this action, in other words, will be to stabilize the dollar.”

Of course the exact opposite happened: the U.S. dollar fell off a cliff. Anyone living during the 70’s can attest to this. What was the price of a new home back then? A new car? A hamburger? The difference between what those items cost in 1971 and what they cost today represents how far the U.S. dollar has fallen in purchasing power.

How did this happen?

Well, with all ties to gold removed governments and central banks discovered they could conjure currency into existence to pay for anything they wanted. Tanks, fighter jets, food stamps, Medicare part D, $800 trash cans… no problem! So they embarked upon this historic credit expansion armed with a magical monetary system that provided them with money for nothing.

But governments weren’t the only beneficiaries. The companies making the tanks and the bombs made out like bandits. So did all of the bureaucrats who were hired as government expanded. And the people receiving welfare benefits found the system quite palatable as well. Pretty soon smart people learned that the best business in the world was to sell something to the U.S. government because it had unlimited money to spend. So they descended upon K Street like buzzards on road-kill and pretty soon the suburbs surrounding D.C. claimed home to six of the wealthiest ten counties in the U.S.

The champagne has been flowing up on the Hill and in the lobbyist offices on K Street for four decades now thanks mostly to the fraudulent fiat monetary system in place since 1971. The establishment hails their elastic currency system as a major success but theirs is a self-serving and short term view. Credit has been constantly expanding since 1971 but do we really think this can go on forever? Can we continue to run up debt, print money to pay interest on that debt, and then buy all of the fighter jets, disability checks, politicians, and cheap junk from China without ever having to think twice about it? If not, what happens when the credit contracts and we can no longer afford all of these expenditures?

The Austrian School of Economics tells us what the result of this madness will be: a “crack-up boom” followed by a monstrous bust as all of the bad debt and malinvestments are finally liquidated.

The crack-up boom occurs as the prices of assets and real goods are driven up to the moon by enormous amounts of excess currency conjured into existence in an attempt to perpetuate the credit expansion. After all, that new currency has to go somewhere. This scheme will work to stave off the credit contraction… until it doesn’t. Then cometh the bust.

While Austrian Economics can make the diagnosis, the timing of the bust cannot be predicted. There are too many interconnected factors at play. What’s important is that there is still time to build financial resiliency in advance. The cornerstone of financial resiliency is knowledge and understanding. Understand fiat money is an illusion. Understand the difference between money and wealth. Study Austrian Economics to get a feel for what’s really going on in the economy.

Once you understand how the monetary system actually works you can formulate a customized asset allocation model based upon your personal circumstances.

A resilient asset allocation model will consist of cash (20-30%), precious metals (10-30%), real estate (30-60%), and strategic equities (10-15%).

At minimum you should carry enough cash to cover at least 6-12 months of expenses. Distressed assets will go on sale when then bust hits so any cash in excess of your reserve fund can be used to acquire these distressed assets (real estate, stocks, businesses, etc.) when they are cheap.

Your precious metals allocation should consist of physical gold and silver bullion stored at home or in a legal segregated account overseas. Never store precious metals in a domestic bank vault – Americans learned this the hard way back in the 30’s when the banks closed and FDR raided the vaults to confiscate gold. Remember, precious metals are insurance not speculation. The price of gold (and silver) will skyrocket in terms of fiat currency, but its purchasing power will remain relatively constant just as it has for thousands of years. Those who save in fiat currency will see their wealth evaporate as the credit contraction unfolds while those who hold precious metals will weather the storm. J.P Morgan testified before Congress in 1912: “Gold is money. Everything else is credit.” Don’t be fooled.

Real estate presents a unique opportunity currently as we are living during a period of historically low interest rates and lenders are willing to offer long term mortgages at these low rates. This provides a tremendous opportunity to lock in these low rates on real estate for thirty years during which time interest rates will inevitably rise significantly.

We firmly believe stocks should make up the smallest percentage of a resilient portfolio under current economic conditions. Stockholders have been the primary beneficiaries of the massive credit expansion and all of the easy-money chicanery over the past several years. Financial institutions have poured new money into the equities markets and publicly-traded companies have used a ton of excess cash to buy back shares of their own stock. As a result current stock valuations do not reflect the underlying health of the economy. Though stocks will run for a bit longer, we are closer to the end than the beginning of the bull cycle. We think the exception is in the resource and commodity sector, however. The stocks of well-managed companies in this sector could do extremely well over the next few years as the global financial system continues to falter.

Nobody can control macroeconomic conditions but we can each control our individual response to them. Building financial resiliency by constructing a diversified portfolio across several asset classes is an individual solution to a collective problem. Financial resiliency is just half of the picture, however. Tomorrow we will look at what we call home resiliency.

Until the morrow,

Joe Withrow

Wayward Philosopher

Fourteen Lessons for the Federal Reserve

submitted by jwithrow.

Excerpt from The Folly of the Fed’s Central Planning:

1. Increasing money and credit by the Fed is not the same as increasing wealth. It in fact does the opposite.

2. More government spending is not equivalent to increasing wealth.

3. Liquidation of debt and correction in wages, salaries, and consumer prices is not the monster that many fear.

4. Corrections, allowed to run their course, are beneficial and should not be prolonged by bailouts with massive monetary inflation.

5. The people spending their own money is far superior to the government spending it for them.

6. Propping up stock and bond prices, the current Fed goal, is not a road to economic recovery.

7. Though bailouts help the insiders and the elite 1%, they hinder the economic recovery.

8. Production and savings should be the source of capital needed for economic growth.

9. Monetary expansion can never substitute for savings but guarantees mal–investment.

10. Market rates of interest are required to provide for the economic calculation necessary for growth and reversing an economic downturn.

11. Wars provide no solution to a recession/depression. Wars only make a country poorer while war profiteers benefit.

12. Bits of paper with ink on them or computer entries are not money – gold is.

13. Higher consumer prices per se have nothing to do with a healthy economy.

14. Lower consumer prices should be expected in a healthy economy as we experienced with computers, TVs, and cell phones.

All this effort by thousands of planners in the Federal Reserve, Congress, and the bureaucracy to achieve a stable financial system and healthy economic growth has failed.

It must be the case that it has all been misdirected. And just maybe a free market and a limited government philosophy are the answers for sorting it all out without the economic planners setting interest and CPI rate increases.

A simpler solution to achieving a healthy economy would be to concentrate on providing a “SOUND DOLLAR” as the Founders of the country suggested. A gold dollar will always outperform a paper dollar in duration and economic performance while holding government growth in check. This is the only monetary system that protects liberty while enhancing the opportunity for peace and prosperity.