Wednesday, March 31, 2010

Skin Graft

"Watch money. Money is the barometer of society's virtue. When you see that trading is done, not by consent, but by compulsion--when you see that in order to produce, you need to obtain permission from men who produce nothing--when you see that money is flowing to those who deal, not in goods, but in favors--when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you--when you see corruption being rewarded and honesty becoming a self-sacrifice--you may know that your society is doomed."
--Ayn Rand

Nice review of the rise of state run health care by a keen observer who was on the ground during much of the period. Germany, under Bismark, has to be considered the early 'pioneer' in this area.

Key takeway is that socialized medicine has always been driven by desire for more political power.

Fixer Upper

Maybe someday
Saved by zero
I'll be more together
Stretched by fewer
Thoughts that leave me
--The Fixx

Interesting comparison of US versus Japan monetary response early in the game. One thing not discussed is how much of the money created so far in the US is actually making it into credit system where it can be pyramided.

If, as proposed in the article, the difference between US and Japan outcomes thus far is one of savers vs debtors, then if former users of credit in the US are no longer borrowing but saving instead, then the end result may be the same no matter how much 'money' is created.

Make no mistake, however, the huge money creation is benefiting one entity: the banks. Getting money free from the Fed, then investing it in bonds, is a pure carry trade gift.

That said, I must admit that I've been upping my chances of the inflationary scenario a bit. Perhaps risk seeking behavior increases again and credit does significantly expand. There's anecdotal evidence, for instance, that house flippers are back. Moreover, econometrics continue to improve toward a 'recovery' theme. And bullishness continues to escalate.

Boo is saying the setup is perfecting for tipping a one sided boat. Sentiment and demark indicators are getting pretty extreme. And if somehow we get another wave higher in borrowing and risk taking, then the decline that follows will likely make the recent downleg look tiny.

I hear you my ursine friend. But I'm adding a bit of upside exposure just in case. My vehicles of choice are the commodity ETFs. I see no value in stocks here. In a world of currency debasement, the better bet is likely hard assets and their proxies.

positions in DBA, DBC, GLD, SH

Tuesday, March 30, 2010

Blue Pill Blues

"Experience should teach us to be most on guard to protect liberty when the goverments' purposes are beneficent. Men born to freedom are naturally alert to repel invasion of their liberty by evil-minded rulers. The greatest dangers to liberty lurk in insidious encroachments by men of zeal, well meaning but without understanding."
--Justice Louis Brandeis

Two nice observations here by sociologist Robert Nisbet. The first is the proposition that the primary vehicle for driving increases in state power over the past century has been largely invisible. It is found thru the labyrinth of commissions, bureaus, oversight bodies largely charged with humanitarian directives (oxymoron?). Provides a Matrix-like effect that folks have trouble seeing thru.

The second is that strong positive relationship between the 'ethic' of equality and centralization of power. Nisbet cites a number of writers who 'saw' this clearly by the 18th century. Tocqueville, for example:

"The foremost, or indeed the sole, condition required in order to succeed in centralizing the supreme power in a democratic community is to love equality or to get men to believe you love it. Thus, the science of despotism, which was once so complex, has been simplified and reduced, as it were, to a single principle."

btw, there are two primary definitions of equality. One is sameness under the law. No favorites or bias. The law has no 'interest.' This is the definition implied by Jefferson ('...all men are created equal'). All can pursue happiness under law that grants favor or that burdens some at the expense of others.

The other definition of equality is one of sameness of result. Leveling of income, for instance. This is the type of equality the Nisbet treats here. Under a democracy, a drive for equality of income consolidates State power in attempts to make it so.

Liberty is negatively correlated to such a progression.

Monday, March 29, 2010

Salad Days

If you leave I won't cry
I won't waste one single day
But if you leave don't look back
I'll be running the other way
--OMD

The Cobb Salad Question of the Week last Saturday was, "If all inteference was miraculously removed on interest rates, and free market forces were permitted to do their thing, where do you think US long bond yields would be?"

We know that rates are being held artificially low not only in the US but worldwide by central banks to encourage credit growth. Why the forced suppression? Because we're nearing completion of a multi-decade debt super cycle, and after years of gorging on cheap credit, the market's natural tendency here is to raise the price of borrowing and wipe out the imbalances that have grown with excess.

But bureaucrats and their constituents don't want to cope with the downside of this excess. Borrowers are lugging more debt than they can service, and lenders are looking at big time defaults. So the bureaucratic solution is another fix (multi meanings here) of cheap credit.

Right now troubled sovereign debt (Greece, Portugal, etc) is trading in 7-9% range but such 'junk sovereign' yields would trade lots higher if intervention was removed from the mix.

We thought that perhaps 7-8% would be about right for the US in a free market world, although I wouldn't be at all surprised to see higher.

Personally, I'm not sure where long bond rates would have to be to find me buyin' 'em. The first number that came to mind was 15%. But as Don suggested, if rates are 15%+ then that may mean the dollar's value is getting smoked, thus crushing real returns on fixed income. Recall that late 70s, early 80s period w/ 18% CDs?

Gold remains a reasonable hedge in an unpredicatable world that teeters between inflationary and deflationary extremes created by government force.

position in CDs, gold

Saturday, March 27, 2010

Palm Sunday Justice

It's Palm Sunday in the Catholic church. The reading of the Passion has always been frustrating for me. I tend to imagine being there and stepping in to help Jesus when he was in trouble. Of course, Peter thought the same. The story tells us it's easier said than done.

One thing that struck me this time around is the decision making process that led up to Pilate's verdict. Pilate is usually painted as the bad guy as he was the one who passed judgement. But he wasn't alone. Although Pilate was the ultimate 'judge' who rendered the sentence, essentially he was merely following thru on the jury's verdict. The jury was the people.

Based on his review of the evidence, Pilate proclaimed that Jesus had not broken the law, that no 'capital crime' had been committed. But the people didn't care about the law. They didn't like Jesus and wanted him dead.

So Pilate caved. He 'washed his hands' to symbolize that he was merely executing the Will of the People.

It struck me today how the closely this situation resembles modern government process. The Founders understood the dangers of democracy, of majority rule. Perhaps they even studied the Passion for how extremely wrong things can go when large groups exact their brand of justice thru the instrument of State power. The Founders knew government is full of Pilates more than willing to cater to these interest groups.

This is why the Founders designed our country as a republic rather than a democracy. The word democracy, btw, appears in none of America's founding documents. Instead, the point of reference for right and wrong, for justice, was The Law. The Constitution provided the general framework and idea for the law and what it should represent. Their idea was that law would rule, not people's desires or wishes as expressed by majority vote.

It's interesting that Rome was the first republic. As the Founders knew, Rome collapsed when they quit following the law, when they quit being a republic. The Passion demonstrates the consequences.

Today, we seem much like that angry mob in Jerusalem, demanding bread, circuses, and our own brand of arbitrary 'justice' from the government. We have our modern-day Pilates and Roman soldiers, acting as compliant agents on behalf of their principals with coercive force.

A moral of the Passion story that I hadn't considered before: the dangers of government driven by majority rule rather than The Law. Mix majority rule with State power and you get a situation that produced the single worst event in the history of the world.

Friday, March 26, 2010

Reform Movement

We always wish for money
We always wish for fame
We think we have the answers
Some things ain't ever gonna change
--John Waite

Whenever times get tough, politicians jump out of the woodwork with proposals for 'reform.' To them, reform represents a ticket to political power punched by special interest groups.

That said, this to-do list offered under auspices of banking reform contains some good thoughts. The items are more in the spirit of true re-form the sector towards naturual market state. Most reform movements actually de-form market structure.

My favorite is eliminating FDIC insurance. Cloaking banks w/ an FDIC put disengages consumers from critical search for financial service value. As Peter notes, this fosters the moral hazard/too big to fail outcomes that will ultimately, er, break the bank.

Great quote at the bottom: "Over the past 80 years...we've traded bank runs for country runs."

Thursday, March 25, 2010

Upward Bound

Man we were killing time
We were young and restless
We needed to unwind
I guess nothing can last forever, forever-no
--Bryan Adams

Interesting multiyear inverse head and shoulders pattern being perfected on 10 year yields (TNX). Chance favors upside resolution to this pattern, which means higher yields.

Hoofy argues that it's all good, bro. Interest rates typically rise in anticipation of stronger economic activity.

Boo counters that the US (and world) is as leveraged as ever, and high yields are no friend when you're drowning in debt.

There is also thought that bonds are responding to increased supply emanating from Sovereign bailouts (looks like Portugal is up next), and tough talk between Obama administration and China re letting the yuan rise.

On the latter point, a cautionary 'be careful for what you wish' seems appropriate.

In any event, a decisive move above 4% (TNX 40) suggest that, technically, we may be off to the races.

Something to watch, as the Fed can't buy the entire curve...

no positions

Wednesday, March 24, 2010

Tea Time

"Why should I trade one tyrant 3000 miles away for 3000 tyrants one mile away? An elected legislature can trample a man's rights as easily as a king can."
--Benjamin Martin (The Patriot)

The Tea Party movement is a groundswell activist response to big government, fiscal irresponsibility, and diminishing freedom. It is a constellation of local organizations with little structure (example here). There are no dues, signup sheets, or key party positions. Interested individuals pretty much just show up when they care to.

In the eyes of some, lack of structure reduces the Tea Party's legitimacy. It attracts 'fringe' folks with weird agendas that dilute the party's message--so goes one line of criticism. Others argue that without a formal hierarchy, the party can gain no political traction.

There is also belief, it seems, that the Tea Party movement is somehow underwritten by Republicans or conservatives. What exactly there is to underwrite is, of course, a good question. More to the point, however, is that any on-the-ground time spent with folks in local Tea Parties reveals a non-partisan distaste for big government of all makes and models--Welfare and Warfare States alike.

This worries only a few on the Right currently; it would concern many more if big-government conservatives were not so busy exploiting a Democrat-bashing ride on Tea Partier's coat tails. In strategy land, this activity is known as engaging in 'the enemy of my enemy is my friend' tactics. From the Left's perspective, the opposition appears as one. But in reality, the opposition is two groups who don't really care for each other.

What critics fail to realize, or refuse to acknowledge, is that the Tea Party movement emphasizes social power over political power. Social power is mankind's conquest of nature--i.e., harnessing power to produce in relative abundance from nature's condition of relative scarcity. The abundance, or wealth, is obtained via economic means. The other way to acquire wealth is via political means. Political power is wielding the coercive power of the State to acquire wealth. It is dominance of one group over another thru the use of violence.

Many critics like to paint Tea Partiers as a violent lot. Ironically, these same critics systematically enlist government as their agent for conducting violent intervention on a breathtaking scale.

There is little doubt that Tea Partiers are 'angry.' Anger is a strong feeling of displeasure or hostility. Tea Partier anger is in response to the increasingly oppressive force exerted by the State. Oppression is the arbitrary and cruel exercise of power. Axiomatically, oppressive power grows with government size and scope.

Central to the small government, freedom-based mindset that grounds the Tea Party movement is belief in the power of peaceful, cooperative exchange (a.k.a. markets) to advance mankind. Government's role in this situation is limited to assisting individuals in protecting their lives, wherewithall to produce, and property.

Under this arrangement, people seek civil means to settle their differences. However, if civility brings no recourse to signficant and repeated violations of liberty, then peace-loving individuals either submit or push back (see Jefferson).

The entire setup seems remarkably similar to that period over 200 yrs ago. My reading of US history suggests that the last time we had grassroots activism of the Tea Party type was indeed colonial America. In the early/mid 1700s, in churches, taverns, town halls, and elsewhere, the idea of liberty and the casting off of despotism started as small conversation. Over time, more and more people began to 'see' it, which sparked action that the world had not seen before.

My sense is that it may be coming to life again in similar grassroots fashion.

Tuesday, March 23, 2010

Another Brick in the Wall

"If you don't stop [Medicare] and I don't do it, one of these days you and I are going to spend our sunset years telling our children and our children's children what it was once like to live in America when men were free."
--Ronald Reagan, 1961

Many conservative-leaning media outlets are claiming that the health care bill's passage marks the beginning of a big government takeover of the country. While the size of this particular intervention is large and the process used to achieve it extreme, the health care legislation is merely another step away from liberty and toward State despotism that has been in motion for 100 years.

People complain about President Obama's strong arm tactics but we've seen this before. In fact, many of this president's tendencies mirror the actions of FDR during the 1930s.

Progression to this point was quite predictable and was indeed forecast by many.

Absent a reversal of inteventionary policy, future escalation of the situation to the point of meltdown also appears equally clear.

All in all its just another brick in the wall. Until the wall collapses.

The Unglued Option

Welcome to your life
There's no turning back
Even while we sleep
We will find you
--Tears for Fears

Ron Paul has been the most outspoken critic of big government on Capitol Hill. He's also an MD. Nice discussion here on the impact of the health care bill. His main points:

-->New rules increase bureaucracy, which reduces personal relationship between doc and patient.

-->In 'old days' prior to public option, docs did much pro bono work for those who could not pay. Ironically, pro bono has declined w/ rise of gov't intervention.

-->New system reduces choice and increases force. 16,500 armed bureaucrats to force compliance.

-->Rather than bill being repealed, more likely that cost of the system adds to likelihood that entire system comes unglued. (Fleck's main point too)

Dr Paul's last comment is consistent with my growing sense that the theory (and fears) about the inevitability of the arrival of total socialism is misguided. The economic problems that escalate as an economic system moves in that direction likely stop the movement dead in its tracks at some point. Either via an economic meltdown, or people taking back the reigns and reversing course.

Its a consequence of natural laws that cannot be repealed or circumvented.

Monday, March 22, 2010

Health Rap

Wanted to insert a passage from Fleck's missive this evening. Bill is one of the sharpest independent thinkers I know. He's also no fan of the Dems or Reps. His opening rant re health care seemed fit for the archives here.

"To probably no one's surprise (but against the hopes of many) the House passed one of the potentially costliest pieces of legislation in the last 40 years. It's not that I am against reforming the health care system or trying to help those in need. But this bill over time is going to be an epic financial disaster. And, the accounting by which they claim to pay for it sets a new low in financial honesty--or said differently, a new high in government financial chicanery.

"For everyone who loves socialism and all the things that socialism can bring to you, you're going to have the health care system in this country (over the next 20 years) that you've always longed for. And for those of you who don't, it doesn't matter--you're going to have to pay for it anyway.

"This is another version of having the prudent bail out the reckless--thought more like the business owner who promises to 'cheat the other guy and pass the savings on to you.'"...

Thus, at a moment in time where the country has immense financial problems, we've now got another gigantic one--funded (such as it is) by another intergenerational rip-off. I don't know how folks can advocate the pursuit of these policies and look young people in the eye, telling them we're doing the right thing."

from Fleck's 3/22/2010 Daily Rap, "Some Animals Are Created More Equal Than Others"

There Ain't No Bear In There

Don't enter the cage with waving chairs
'Cause I'll tell you something for nothin'
--Who

You'd think that all of the rancor directed toward health insurers over the past few weeks would be reflected in the stock prices of publicly traded insurers. Perhaps it is, but the result has not been plummeting share prices.

The biggest of them all, United Health (UNH), has been on the move higher with the rest of the market since the lows last March. Charts for others in the sector such as Wellpoint (WLP) show similar patterns.


That market participants have been sanguine in the face of what seemingly is a devastating situation for health insurance operators suggests a few plausible scenarios for the months ahead:

1) The market is discounting that the health care bill will not be enacted as it currently stands. Thus economic models of the insurers will be steady as she goes.

2) The market has yet to fully discount the bad news for whatever reason. Perhaps there's been a short squeeze from bears leaning too hard against these stocks. When the market fully figures it out, prices will crater.

3) The market believes that the bill will pass but doesn't think the impact on the insurers will be bad. Rationale behind such a situation is that regulation tends to protect the franchises of existing players and deters new entry. This creates a context for monopoly profits (plus inefficiency and lack of innovation).

The last one is most interesting to me. Since the 1890s, antitrust regs and other government interventions have done more to raise barriers to entry than anything managers have done themselves. A classic irony, considering that a popular rationale for government intervention is to 'protect' folks from big predatory operators.

Free markets dismantle big operators over time via competition and entry. Intervention perpetuates incumbant operators and their inefficiencies.

Because stock markets are places where people bet real money on various outcomes such as those above, it will be interesting to monitor prices of these issues in months ahead.

no positions

Malfunctioning Safety Valve

We can dance if we want to
We can leave your friends behind
'Cause your friends don't dance
And if they don't dance, well they're
No friends of mine
--Men Without Hats

After yesterday's passage of the health care bill by the House of Representatives, Republican senators have vowed to do their best to bog down the bill's revision in the Senate. Not sure what they can do at this point but little surprises me about our federal government's legislative 'process' (loose adaptation) anymore.

I am pretty sure that if this bill were passed by Congress prior to the 20th century, it would have had a difficult time making it to law. Prior to 1900, sitting presidents turned back most welfare-related legislation on the grounds that it was inconsistent with Constitutional principles of liberty and limited government. Democrat Grover Cleveland alone vetoed hundreds of welfare bills. Back then, it appears, president's took their oath to uphold the Constitution seriously.

If such a bill made it past the president's desk, then it was destined to face the scrutiny of the Court. Prior to 1900, judges were largely disinterested, meaning that they evaluated legislation against a relatively strict interpretation of the Constitution and the Founders' original intentions.

Today, we no longer have a disinterested Court. The Founder's check of judicial review has been rendered almost totally useless.

Without this properly functioning 'safety valve', escalation of State power and a subsequent meltdown seem inevitable.

Sunday, March 21, 2010

The Geometry of Health Care

"I hope Kronsteen's efforts as Director of Planning will continue to be as successful as his chess."
--Rosa Klebb (From Russia With Love)

This BW cover story hits on one reason why a policy of health care as an entitlement breaks the bank over time. An individual's potential need for health care increases geometrically with age. Couple that with tendencies to make decisions with hope that a treatment will 'beat the odds' and keep a loved one around for at least a little bit longer and you have potent mix of physiological and psychological drivers behind perpetual cost increase.

In free market situations, price is the rationing mechanism. In situations where health care resources are granted as entitlements, rationing can only be achieved by central planners, the so called 'death panels,' who determine how resources are to be rationed.

As with all bureaucratic planning, resource misallocation by health care bureaucrats is certain. There will be inefficient distribution among users. Shortages will arise as some suppliers leave the industry in search of better oppportunities. Innovation will be squelched by the increasing bureaucracy.

And costs will rise.

People certainly should have the right to acquire health care resources. But if people are granted capacity to acquire health care resources at others' expense, then we are more likely to collectively achieve poverty than surplus over time.

Friday, March 19, 2010

Bench of Interest

"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them."
--Thomas Jefferson

Weeks back when Senate Democrats first raised the spectre of using the so-called 'reconciliation' process (majority or 51 votes yea required for passage) rather than the 'normal' process (60 yea vote required) to vote on the proposed health care bill, I once more returned to the Constitution to understand what the law specified re congressional legislative process.

Not much there overall. Article 1, Section 5 states that "Each House may determine the Rules of its Proceedings." The only specification is that a majority quorom must be present in order to do business.

Article 1, Section 7 provides more specific requirements on votes that are vetoed by the president and then revised.  Passage of the revised bill requires a 2/3 vote (what is sometimes referred to as a 'super majority') in order to become law.

It turns out that the Senate has been particularly active in changing its rules regarding bill passage. Over time, the bar has been lowered from 2/3, to 60, to the 'reconciliation' 50. Such actions suggest movement toward easing the requirements for interest groups (party or otherwise) to get bills passed.

I was somewhat surprised that the Founders did not specify legislative process in greater detail. After all, what's stopping a corrupt Congress from changing the rules, or from employing some chaotic process to achieve political objectives? (Nothing, as we're currently witnessing.) Perhaps the Founders thought that the people would view such maneuvering as illigitimate and push back--either by not complying with legislation or by 'voting the rascals out.' It remains to be seen whether we witness an expression of public rejection this time around.

However, I suspect that the primary reason that the Founders were comfortable with giving Congress carte blanche in legislative process was the check of judicial review. As conceived, the Court would scrutize the validity of output generated by the legistative (and executive) branches and discard laws that were inconsistent with the Constitution. The thought process may have been, "If Congress and the President utilize unreasonable process for generating law, then it will show in the legal output and the Courts will catch it."

Of course, the effectiveness of this thought process rests on the assumption of a disinterested Court, one that would use as the basis of its decisions the wording and original intent of the Constitution.

Could it not be argued that, if the Founders did not did not believe this, then weren't they wasting their time writing the Constitution as as they did?

The whole thing falls apart if you have an interested Court--which, btw, is something that some smart cookies foresaw before the Constitution was even ratified see here, here, and here for example).

Which explains why politicians in Washington conduct their present chaos with little fear of the Court.

Thursday, March 18, 2010

Let's Pretend

Here come the jesters, one, two, three
It's all part of my fantasy
--Bad Company

Proponents of the health care bill point to today's CBO estimate that the deficit will be cut by $138 billion as validation of the economics soundness of the plan. Of course, given some of the eyepopping tactics exhibited by this bill's backers, cheerleading such fantasy numbers should not be surprising.

Setting aside issues of impartiality of the Congressional Budget Office, inquiring minds are likely asking a few questions, such as:

Has there ever been a large scale government spending program that, once enacted, has even actually cut the deficit? (no)

What happens to the scope of government spending programs once they are enacted? (the scope always expands, as does commensurate spending)

What is the CBO's track record for accurately forecasting costs/savings of future govt spending programs? (don't know but would bet their 'margin for error' is pretty high--and that their error has a directional bias)

Assuming the CBO estimate is accurate (humor me), what is the annual reduction to the deficit? ($138 billion/10 = $12.8 billion/yr, which is a rounding error in a deficit that approaches $2 trillion annually)

Forgetting about the over/under on the deficit, let's consider the forecast cost: $940 billion. That's nearly $1 trillion out of the people's pockets.

By the time we're done anteing up the price tag on this fantasy will surely be higher.

Wednesday, March 17, 2010

A Letter to the Founders

Dear Founders,

Enclosed please find the Constitution of the United States that you developed for us over two hundred years ago. This document is being returned because, regrettably, we no longer find it relevant to our situation.

When first implemented, the ideals of individual liberty and limited government expressed by your design worked pretty well for us. In fact, during the first one hundred plus years of the Constitution's existence, our country became the most productive country on earth. Much wealth was created.

As you know, wealth attracts envy, along with scores of people (big business, social reformers, those with less, even government officials themselves) who wouldn't mind a slice of wealth pie to advance their own desires. Human nature, really. Government, of course, was the ideal agent for redistributing the wealth. However, your original intent and wording of the Constitution did not provide much wiggle room for doing what we wanted to do without breaking the law.

Beginning in the early 20th century, therefore, we embarked on a program to render the Constitution obsolete.

At first, we followed the processes that you had specified for changing the law. In 1913, for example, we passed the Sixteenth Amendment to give the Federal government legal power to appropriate property from the citizenry on a large scale. Evoking the name of Progress, you see, proved to be an effective rationalization for this and other 'reforms' made around this time. 

Going the formal route proved a risky proposition, however. Some people expressed concern that their rights were being violated. And occaisionally the Supreme Court would reject a legal measure as unconstitutional.

All of this slowed Progress.

So we began to subvert Constitutional procedure. It began with a  media campaign that questioned the validity of the Constitution in the modern world. Then, during times of economic or military distress, the government learned that it could greatly increase its scope of operations when people felt fearful or threatened. On such occaisions, of which there have been several over the past century, people were willing to exchange their freedom (which you presumed so highly valued) for security supplied by government (food, housing, health care, physical protection, etc).

Government size grew accordingly--along with people's dependence on State apparatus.

The coups de gras was figuring out how to bypass your clever check of judicial review. Actually, the solution turned out to be pretty straightforward. The executive and legislative branches learned that they could simply pack the court with judges willing to interpret the law in an interested manner. This scheme assured that virtually any law could pass muster if submitted to judicial review.

The upshot of this effort has been that, over the past few decades, we've been able to massively increase the size and scope of government without passing a single relevant Constitutional amendment. And because interest pervades the courts, we hardly bother to scrutinize new laws judicially.

Instead of law, we largely count on political influence to maintain Progress. This has spawned the nation's most lucrative industry, lobbying, which moves $ trillions annually between traders of favor and influence.

We couple that with a democractic voting process that helps the largest special interest groups exert their influence first.

As you can see, we have no practical use for the Constitution today. We realize, of course, that you had our best interests at heart when you wrote it. But you appear to have underestimated two powerful forces of human nature working against your framework from the get go. One, each of us possesses virtually unlimited desires. Two, we prefer to satisfy those desires while expending the least amount of labor possible.

These natural forces, you see, made it irresistable for us to recruit government as the agent for achieving our desires in a parsimonious, get-something-for-nothing fashion. Unfortunately your Constitution does not facilitate this process, so we need to move on.

We would, however, entertain any proposals you might have for managing the country's debt, which in the last few years has become nearly unmanageable.

Best regards,

We The People

Free Pass

"It's the old Potomac Two Step, Jack."
--President Bennett (Clear and Present Danger)

The February 22nd issue of Business Week features a cover story interview with President Barack Obama. A quote from the interview that appears on the cover includes Mr Obama's claim that, "We are fierce advocates for a thriving, dynamic free market."

That few in the media challenge statements like this one indicates either severe bias, lack of critical thinking capacity, or recognition that such a claim is so ludicrous that it isn't worth critiquing.

Let's review the role of government in a free market. Free markets involve voluntary exchange among individuals. Means of production are privately owned. Production and distribution decisions are made by producers. However, it is consumers who ultimately control this process because they signal value thru their purchasing decisions.

In free markets, the role of government is limited to protecting the property rights of people involved in market exchange. Since market exchange is governed by the notion of the contract, government is focused on fraud, theft, and other contract-related violations.

Here are some of the areas that government would not be involved with if it was an advocate of free markets:

-->Bailing out firms such as banks, insurance companies, and automobile firms that get into financial trouble. In free markets, poor decisions are punished by the redistribution of productive resources to those more capable of creating value for buyers.

-->Taking ownership stakes in productive enterprises.

-->Fixing the price of credit via a central bank.

-->Declaring a monopoly on the medium of exchange used by the market.

-->Increased regulation of manufacturing and service sectors. Regulation increases costs which ultimately raise barriers to entry. Entry barriers discourage entry by innovative entrepreneurs. Competition is reduced.

-->Taking investment capital out of private hands and deploying it towards government 'investment' projects such as alternative energy.

-->Seeking more control over production and distribution in the health care sector, and ignoring government's hand in making the current system inefficient and anti-competitive.

There should be little doubt that the interventionist actions of this administration mark a clear path away from capitalism and toward socialism.

Tuesday, March 16, 2010

Design Review

"What are you prepared to do?"
--Sergeant Jim Malone (The Untouchables)

As shenanigans ramp ever higher on Capitol Hill related to the health care bill, it would be interesting to eavesdrop on the Founders as they watch this process from afar. I'm pretty sure there would be many "I told you so"s uttered as they watch the extortion, grandstanding, and thuggery. The Founders correctly anticipated the corruptive nature of the State and tendency of governments to centralize power over time.

However, I wonder if our Founders might not plead guilty to naivety. In the Constitution they sought to capture the spirit and intent of limited government design. In the system of checks and balances, they sought to keep the urge for corruptive power in check.

Presuming that such a system would be followed, and that politicians would not seek ways to circumvent it, now appears to have been a bad bet.

"What could we have done differently?" they may be asking. My guess is that they would have opted for a more decentralized design, more consistent with the Articles of Confederation that the Constitution superceded. Indeed, there were many at the time who thought the Constitution positioned the country for Big Government trouble down the road. A few such 'anti-federalists' walked out of the Constitutional Convention before the document's signing. Some AF writers predicted with astonishing accuracy many problems that we face today (examples here).

A couple Founders appeared to recognize some design defects early on. Thomas Jefferson, who was across the pond in Europe during the Constitution's development, expressed sadness when reading the ratified doc upon his return. One of his motives for running for president in 1800 in attempt to correct some of the design's problems. James Madison, who as the lead author of the Federalist Papers was a leading proponent of the Constitution as written, was expressing regrets as well by the mid 1790s.

So, perhaps the Founders had an inkling as to where this design was headed while they were still alive.

In any event, I sure wish we had their wisdom on-the-ground today.

Monday, March 15, 2010

Sick Day

We don't need no education
We don't need no thought control
--Pink Floyd

The dysfunctional US public school system fosters chronic finger pointing (recent example here). It's the teacher's fault, the parent's fault, the student's fault, the facility's fault, etc. The roundrobin repeats itself in Groundhog Day fashion. Each year, capital by the hundred$ of billions is thrown down the black hole of public school systems with little to show for it.

Such an outcome was easily predictable, and in fact was forecast by the movement's opponents from the outset of the public school endeavor.

Let's see what we had early on. Some number of children and/or their parents unwilling to trade money for schooling at the market rate. Progressives like John Dewey and feminist groups who envisioned 100% of the population educated as part of their plan for society. And politicians who were willing market makers with special interest groups. Favors for votes.

The public school bureaucracy was born. It was decided early that the State would put facilities in the ground to support this initiative (rather than merely subsidize attendance at privately run schools). This significantly expanded the scope of bureaucracy to include operations as well as administration.

The universal consequences of bureaucracy were thus ensured and magnified. Rising costs. Poor quality. Reduced innovation. Facilities decay. Why? Most buyers were unmotivated participants, thus they could not provide market signals based on their choices and taste preferences. And the providers were largely shielded from competition by the State funded publics schools--which essentially amounted to a grant of monopolistic franchise.

One need only look at the chasm between public and private schools to spot the difference. In many ways the public school option served to segment the market. Willing buyers seek motivated providers in the private school sector and often pay a premium price for the services rendered. Unwilling buyers are left with an unmotivated public option funded by taxpayers.

Am pretty sure this is not what the reformers envisioned a hundred years ago but the outcomes were predicatble nonetheless.

There is little motivation for entrepreneurs to innovate at the 'low end' of the market because of the public school's monopoly position. Sadly, we've lost many years of innovation potential in this segment.

It is hard not draw parallels between this situation and what might come to pass should the proposed health care bill become law. We can forecast a couple of certainties a) efficiency and standard of living will fall, and b) a new ocean of ink will be spilled to write columns pointing fingers at various factions of a burgeoning health care bureaucracy.

Speed Kills

When the walls come tumblin' down
When the walls come crumblin' crumblin'
When the wall come tumblin' tumblin' down
--John Mellencamp

The below charts are taken from John Mauldin's fine piece on the velocity of money.


Note that velocity falls during economic slowdowns and was negative during the Great Depression (note also that we're on the cusp of negative velocity right now). When velocity falls, so do prices.

Why should falling prices freak people out? Shouldn't we welcome falling prices?

For those with little or no debt, the answer should be a resounding 'yes,' because falling prices increase purchasing power. Prior to 1900, the US saw multiple periods of such 'deflation' while standard of living ripped higher as businesses became more productive.

But in a world lugging massive debt, falling prices are a curse. People borrow money using assets or income as collateral. Falling prices reduce the value of collateral, thereby increasing leverage ratios. At some point, debtors face margin calls from creditors. Or defaults.

In a free market, responsibility for handling this situation lies in the hands of debtors and creditors. Borrowers and lenders have to manage the risk of slowing velocity and falling prices by correctly sizing their loans. They bear the consequences of poor decisions (read: excessive risk taking).

In an interventionary world, responsibility for this situation lies with central banks and government. Each time money velocity falls, bureaucrats intervene to pump money supply higher.

Such a situation invites two chronic conditions. One is that people are motivated to borrow and take more risk than they otherwise would (read: moral hazard). Saving is discouraged. Standard of living appears to be higher than it otherwise would be, convincing people that interventionary policy must be the right thing to do. The chart below expresses this condition.


The other chronic condition is inflation. More money printed means decreased purchasing power per monetary unit . People have larger banks accounts but their money buys less.

It's the Jedii Mind Trick of inflation.

Critical thinkers should be asking whether there might not be a supercycle to this moneyprinting scheme that collapses under its own weight at some point. They should also be considering plausible conditions that could drive the collapse--and where we currently stand vis a vis the list.

Friday, March 12, 2010

Wordsmith Wonders

"Hey kid, you can stay."
--Eddie Wilson (Eddie & the Cruisers)

I saw a video clip this morning of a Democratic senator boasting about former Democratic President Clinton achievement to balance the budget in the late 1990s. This balance was subsequently lost when Republican President Bush to over.

Let's make sure we understand a few things.

In the business world, a budget is simply a spending target. In the world of the politics, a budget is the difference between receipts and expenditures. A 'balanced budget' means that you took in more than you spent.

Using CBO data, during the Clinton yrs (and in most yrs of any administration, Dem or Rep), receipts never declined. And expenditures never declined. In 1999 and 2000, receipts merely exceeded expenses, resulting in the infamous 'balanced' situation.

What economic/market phenomenon corresponded to this period? The tech bubble yrs, which resulted in a captial gains windfall for the Clinton folks (you can bet bureaucrats understand the benefits of market prosperity on their livelihood).

The real bogey is government spending. The table I'm looking at here only goes back to 1970, and spending has never declined YOY since then. I know there are older series out there; I believe the last time government spending declined with any significance YOY preceded, unsurprisingly, the rise of the Progressive movement.

The point here is to not get caught up in the budget mumbo jumbo. Think spending.

List and Learn

All you need is your own imagination
So use it that's what it's for
--Madonna

Adding once again to the list of 'natural laws':

Threat rigidity. Under conditions of threat, individuals are prone to think less critically and to centralize decision-making authority.

Specialization mypopia. The more specialized people get in their activities, the less prone they are to monitor their environments. Call it 'specialization myopia.'

Again, plan to consolidate these various lists. Might group using a 'lower order or basic' to 'higher order' type of scale.

Thursday, March 11, 2010

Split the Series

Take that look of worry
I'm an ordinary man
They don't tell me nothin'
So I find out all I can
--Phil Collins

Minyanville's Peter Atwater alerted readers to this chart.

The red line is credit, the blue line is spending. The question is how spending can increase w/ declining credit--particularly given our lack of savings. Notice how previously these two lines correlated well.

The obvious follow-on question is whether this divergence can continue.

Wednesday, March 10, 2010

Convertsation

Now that your rose is in bloom
A light hits the gloom on the gray
--Seal

Just finished Rose Wilder Lane's Give Me Liberty. This delightful little book was originally published in 1936 and then expanded for a 1954 republication.

Lane grew up in farm country and lived thru the Panic of 1893. The subsequent depression opened the doors for socialist thought in the US. By the late 1910s Lane had become a communist and like NY writer and colleague Jack Reed espoused the utopian virtues of socialism. Like others, she admired the Bolshevist overthrow of Russia as proof of a new world order.

Her faith in communism weakened when she began to think thru the proposed 'economic revolution' phase of the playbook, where the State supposedly takes over the economic decision-making of capitalists. Her reasoning told her that a group of planners in a room could not cope with the dynamic nature of markets, and their decisions would be far inferior to those operating in free markets. She concluded that standard of living under State authority was certain to languish. Personal visits to Russia helped validate her thinking.

Emerging from this period, she became a staunch advocate of individualism and liberty as the mechanism for social progress.

The last few chapters are interesting in that they were added ten yrs after New Deal policies (and World War II) took effect. She expressed grave concern that Americans were compromising their freedom for the sake of security as promised by the socialists. The last chapter reads as a wake up call to freedom loving Americans that, like many other contrarian works from the time, could have been written yesterday.

An insightful book written by someone who became a champion for liberty after having observed the alternative.

Reference

Lane, R.W. 1954. Give me liberty. Caldwell, ID: The Caxton Printers, Ltd.

Around the Horn

It's a shakedown cruise
And I was just another tool
There ain't no easy way out
They're gonna shake you 'til you shout
--Jay Ferguson

In his renewed efforts to push his health care plan thru, President Obama has once again targeted his rhetoric on the health insurance sector. Demonizing sectors to jam thru government programs has at least a century's worth of history behind it here in the U.S.

The president seems to be banking on the lack of reasoning capacity of American citizens. He paints premium increases by insurance companies as bad without taking a balanced view of the situation. Let's offer a couple here that are unlikely to be offered by the president.

Cost shifting. About 40% of health care expenses in the U.S. are covered by Medicare/Medicaid. Providers (hospitals, docs, pharmacies, etc) bill Medicare/Medicaid patients at the governent's reimbursement rate. These prices are fixed below the market. If you're a provider, how will try to recover those losses? You'll jack up the prices to the non Medicare/Medicaid sector. Higher private sector bills mean higher private sector premiums. 

Regulation. Health insurance companies operate under a mountain of regulations and oversight, including restrictions in doing business across state lines. The dirty little secret about regulations from a strategy standpoint is that regs generally reduce competition--which benefits incumbent operators. For instance, complying with government regulations is a large expense; high costs discourages entry. Less competition reduces motivation for improvement and innovation.

Clearly Mr Obama hopes people do not think the situation thru. And based on the historical success of demonization strategies perhaps he's placed a good bet.

However, if citizens do apply their reasoning capacity to the situation, they'd conclude that root causes for current health care concerns can be traced to past government intervention in this sector.

Tuesday, March 9, 2010

Breaking Away

"I have to believe that when things are bad I can change them."
--Jim Braddock (Cinderella Man)

Like many (most) in this country I was largely ignorant/apathetic to political process. Then came the 2000 election, 9/11, the Afghan and Iraq wars, the housing bubble. All the while massive imbalances--well expressed by quantity of debt at personal, corporate, and country levels--continued to escalate geometrically. Recent attempts by market forces to rectify these imbalances have been met with more interventionary measures to restrain them.

These events motivated self study into government and political process. I've read the Constitution at least 100 times over the past 5 yrs. I've studied the founding context to better understand the forces that drove the framers. A grasp of government:banking links also seemed prudent. More recently I've tried to gain better understanding of the 1910s-1940s--a period that ushered inflectionary change for the US. And I've tried to get a better handle on socialism because government control of productive assets has clearly been increasing for the past 100 yrs.

One of the many conclusions I have reached, and I'm certainly not the only one who has reached it, is that we've been moving away from the founding intent of this country. The Founders sought a republic that would permit individuals to live in a free manner. Although some believe the door was left open for reversal by the Constitution's wording, the intent was clearly to limit central government power. Via their own (and I should add quite remarkable) study of government and politics, the Founders understood that the best, and perhaps only, prospect for liberty lay in a decentralized design where social power would outweigh authoritarian tendencies of the State.

While the framers clearly understood State opportunism, I'm not sure they adequately stress tested the design to withstand crisis conditions. It is under conditions of real threat that people are more prone to cede liberty in favor of security. And it has been under the auspices of crisis over the past 100 yrs that the State has appropriated large chunks of power.

The problem for the State is that imbalances grow with the power it amasses. The State is a destroyer, not a creator, of economic value. The State can employ debt and inflation to mask deterioration in standard of living but their effect is illusory--and temporary. Why? Because debt and inflation drive the imbalances, and at some point the system will no longer tolerate additional debt or currency debasement.

We may be close to that point. Politicians are increasingly brazen as they go about their business to manipulate the system. For current examples, look no further than the health care 'reform' episode, where overt actions of political bribery and thuggery have surprised even me. That the constitutionality of such interventions is rarely questioned anymore provides a good indication that our system is out of control.

History suggests that regaining control is less likely than system failure.

Monday, March 8, 2010

Take Back Attack

You know I'll give you television
I'll give you eyes of blue
I'll give you a man who wants to rule the world
--David Bowie

China's government will nullify guarantees made by local governments on funds borrowed from banks. Bulls will argue that this is good--the national government is trying to keep borrowing in check. Bears will argue that $2 trillion of risk is already in the system and that much of that was likely taken with the guaranteed payment pledge.

Seems like one to keep on the radar...

Cold as Ice

"I'm tapped out, Marv. American Express has got a a hit man looking for me."
--Bud Fox (Wall Street)

Iceland citizens voted thumbs down to covering losses of foreign creditors from sovereign bond defaults. Total US public debt currently exceeds $12 trillion, or about $40,000 per US citizen. Foreigners hold less than $2 trillion of that.

Imagine that we defaulted on it all. And that foreign creditors demanding that each citizen comes up with ~5 grand to make them whole on their share. (Also implies, btw, that each of us would be out ~$40K)

This is why some folks wonder why people buy sovereign bonds. Country bonds are unsecured and backed only by promise to pay. Yet, sovereign debt defaults run rampant.

Of course, in our case, the chances of default are pretty low as long as the US dollar is the world's reserve currency. Instead, chance favors a paper blizzard at some point.

King's Count

We're leaving together
But still it's farewell
And maybe we'll come back
To earth, who can tell?
--Europe

Yesterday I heard a local radio ad encouraging people to take part in the upcoming census because of the (paraphrasing slightly) 'huge amounts of money on the line.' In other words, get counted so that our locale can get more funds from the government. A land grab...

As Ron Paul notes, today's census has grown way beyond its original Constitutional scope.

People have been wary of the motives behind census-taking since at least Herod's time. And, of course, politicians, census, and gerrymandering have long been bedfellows.

In authoritarian welfare states, stakes behind the census increase to new heights.

The fact that no one is willing to challenge the Consitutionality of the current approach is a sad indicator of how far we've drifted from our founding intent.

Sunday, March 7, 2010

Capital Punishment

"It was great the way her mind worked. No guilt, no doubt, no fear. None of my specialties. Just the shameless pursuit of immediate gratification. What a capitalist."
--Joel Goodson (Risky Business)

Capitalism, an economic system grounded in private ownership of the means of production, is public enemy #1 to socialists who want to abolish private property. Thru propaganda campaigns, they seek to paint capitalism in a negative light. By and large the propaganda campaign, which has been in force for about 100 yrs, has been pretty successful. My guess is that, even in the US, capitalism currently sparks negative connotations in 50% or more of Americans.

Reason suggests otherwise.

The progression goes like this:

1) Humans have nearly unlimited wants. Once basic needs are met, they pursue other wants. The quest for filling human desires never ends.

2) Nature in its raw form provides scarce means for basic subsistence--let alone the stuff capabile of fulfilling advanced human desires.

3) Creating a more abundant situation requires production--combining nature's raw materials with labor to produce consumable output.

4) Humans have an aversion to labor. They seek as much satisfaction as possible from the least amount of work.

5) Humans thus create tools that serve to reduce the amount of labor required for production. These labor saving devices are known as capital.

Capital is essential to improving labor related productivity, which equals the amount of output produced per unit of labor. Higher productivity is necessary to achieve a higher standard of living, which of course aligns with 1) above.

As such, individuals have been capitalists since cavepeople fabricated primative axes, knives, and other tools in the early days of human existence.

There should be nothing unnatural or undesirable about capital formation in the hands of individuals.

States Rights

Welcome to your life
There's no turning back
Even while we sleep
We will find you
--Tears for Fears

Just finished Chodorov (1959). Another book that I plan to re-read a few times. In the final chapter, Chodorov considers whether it's possible to break the cycle of freedom-->State power growth-->lower standard of living-->collapse

He suggests that America may have a chance to reverse things because its memory of freedom is still relatively fresh. He suggests two primary to dos:

Decentralize government. Local government is more prone to social power (surveillance and sanctions) than remote government. As the Federal government as grown, social power has declined and State power has risen. Increasing local authority would revive social power.

Repeal the 16th Amendment. Chodorov suggests that a primary difference between a free society and a dominated one is in the percentage of property the State lays its hands on. Until we reverse the State's ability to tax, Leviathan grows.

To those, I would add a return to sound money. A State that controls the currency can print its way to power. The Fed needs to go away, and the currency needs metal backing, in order to maintain discipline among those who govern.

Chodorov notes that all societies that have failed have done so bearing burgeoning States on their backs. He fails to note that, in all cases, inflation was a central lever of State apparatus.

Reference

Chodorov, F. 1959. The rise and fall of society. New York: The Devin-Adair Company.

position in gold

Fourth Set

Will you stand above me?
Call me name or walk on by
Rain keep falling, rain keeps falling
Down, down, down, down
--Simple Minds

Two more natural laws to add to the list:

Tolerance of restraining conditions. Humans are inclined to tolerate conditions imposed on them under which they have found comfortable adjustment. Thus cries for 'Long live the king...', etc.

Loss of social power with distance. Surveillance and social sanctions are easier to apply to the State when government is local (decentralized). The more remote (centralized) the government, social power declines and State power rises.

Saturday, March 6, 2010

State of Thieves

"Pay no attention to the man behind the curtain."
--The Wizard (The Wizard of Oz)

Chodorov (1959) observes that government size and power are proportional to a country's wealth, because that wealth can be appropriated. In 1789, for example, the scope of political interference in the US was limited by the country's lack of wealth. Intervention subsequently escalated with the productive energy of the country.

If one asks why should this relationship should be so, then the underlying driver of State power becomes more apparent:

"When the nature of political power is put under the microscope of analysis, its incorrigible penchant for predation becomes understandable. For then one see that political power is not 'in the nature of things' but in the nature of man. It [political power] is not, like the force of gravity, self-operating and inexorable, but is an expedient devised by man to facilitate his urge for acquiring satisfactions with the last expenditure of labor. In essense, political power is physical power, of the threat of it, that one man or a group of men may bring to bear on other men to affect behavior. It may originate in a body of social sanctions, but it is hardly political power until these sanctions are implemented with a police force. In any case, it is exercised by human beings and therefore must be related to the all pervasive law of human action, the drive to get the most for the least." (p. 85)

Because they  have an aversion to labor, individuals construct and support political regimes perceived capable of satisfying their needs thru non-economic (read: predatory) means.

The State is nothing more than a hired thug for thieves.

"But there must be some means of restraining Cain from going after Able's hide and property, lest human life go the way of the dinosaur. There cannot be a Society until there is a market place, and there cannot be a market place unless security of possession is assured. Without that assurance the individual will not strive to improve his circumstances and production will drip to the level of mere subsistence; man will be little better than an animal, a status against which his primordial compulsions revolt. It is for that reason that he sets up a machinery for the protection of life and property, even against himself, a machinery to which he gives the name of Government.

"'To secure these [inalienable] rights [to life, liberty, and the pursuit of happiness],' says the best phrasing of the subject, 'governments are instituted among men.' It follows that if there were some way of securing these rights without Government, man would not institute it. And it also follows that when Government employs its monopoly of coercion for purposes which violate these rights it ceases to be Government. It is some other kind of concern, even as a merchantman who turns to piracy cannot be classified as a merchantman. So that, when the committee in charge of the power of compulsion uses it to confiscate property they cannot lay claim to the name of Government. It is a corruption, and its name is the State." (p. 88)

Reference

Chodorov, F. 1959. The rise and fall of society. New York: The Devin-Adair Company.

List Serve

"Just another clue"
--Benjamin Franklin Gates (National Treasure)

I've been working on the collection of natural laws that any economic system would have to cope with. Chodorov (1959) has nicely framed a couple that I've noted before, and added a couple I hadn't thought of.

Insatiable desires. Individuals constantly seek a more abundant life. When 'basic' wants are satisfied, individuals will then seek satisfaction of higher level wants. Essentially, human desires are unbounded.

Necessity of labor. Living requires production, or the application of labor to raw materials that make things to satisfy human desires.

Aversion to labor. While some forms of labor may provide enjoyment or satisfaction, humans do not partake in labor for labor's sake alone.

Law of Parsimony. Humans seek the greatest amount of satisfaction related to the labor given up. Essentially follows from the three previous axioms. a.k.a. something-for-nothing tendency.

Valuation choices. Unlike others in the animal kingdom, humans can prioritize their wants vis a vis their costs. Human possess unique capacity for evaluating desires--a consciousness of comparable desires--and making choices based on them. Humans seek satisfaction where the most return is offered.

Unique wants. Each individual's taste preferences differ and cannot be accurately generalized.

Once past the period of discovery, we'll consolidate these list.

Reference

Chodorov, F. 1959. The rise and fall of society. New York: The Devin-Adair Company.

Out of Cite

"I said that. I told him to say that!"
--Jack Ryan (Clear and Present Danger)

Am chewing thru Chodorov (1959), another essay by a 'mid century' commentators on our movement away from our roots. This is another author who knows how to write.

He makes an interesting comment in the intro about his lack of citations and footnotes. He suggests that shoring up arguments with citations is often meant to impress gullible readers with a viewpoint's validity--knowing full well that counter citations can be found for nearly any argument. Instead, Chodorov provides a general acknowledgement to all of the writers/thinkers that in some way contributed to his 'not authoritative' and 'unoriginal' work. And then presents his arguments pretty much citation-free.

An interesting approach that runs counter to my research training.

In the context of his essay, however, and what he's trying to do--which is to present his blend of reasoning--it works well.

Reference

Chodorov, F. 1959. The rise and fall of society. New York: The Devin-Adair Company.

Friday, March 5, 2010

Rainbow Bridge

"I'm afraid those no denyin', I'm just a dandy-lion, a fate I don't deserve."
--The Cowardly Lion (Wizard of Oz)

The US government has been engaged in inflationary policies for nearly 100 yrs. Citizens have silently consented, by and large. I wonder, however, whether would people actually vote for currency debasement were it part of a candidate's platform.

What if FDR, for instance, ran this video during his presidential campaign, rather than once he was in office? Would people actually vote in favor of inflation?

There may certainly have been others, but the only presidential candidate that I know of who campaigned on an inflationary platform was William Jennings Bryant. During the 1896 campaign, the Democratic candidate proposed changing the dollar's backing from gold only to gold + silver. While by today's standards, such a policy would likely be considered tied to 'hard money fanatics', back then this represented a radical scheme to inflate the money supply--presumably for the benefit of farmers and others lugging lots of debt.

Bryant was soundly beaten in the 1896 election by William McKinley.

My sense is that, if placed on a ballot in front of them, voters would give the thumbs down to inflationary policies. Inflationary policies seems more likely enacted thru means that voters do not directly control.

Thursday, March 4, 2010

Our Own Greek Tragedy

Living on a lighted stage
Approaches the unreal
For those who think and feel
In touch with some reality
Beyond the gilded cage
--Rush

The author sets the cast:

Greece as General Motors
EU as Washington
Greek electorate as the UAW

Or is the cast backwards?

My increasing sense is that, contrary to the beliefs of Marx, Schumpeter, et al, a socialist state can never be completely attained because it will fall apart economically while in transition.

An interesting point proposed by the writer here is that the entitlement state disincentivizes even the will to survive--as reflected by declining birth rates.

Words of Wonder

Who knows how long this will last
Now we've come so far so fast
But somewhere back there in the dust
That same small town in each of us
--Don Henley

A tactic for facilitating change away from capitalism and toward socialism, particularly it would seem by Fabian gradualists, is creating chaos with the language. Take old, valued words, change their meaning, but keep the old valued words.

Some of the words that have undergone metamorphosis include:

liberal
free markets
capitalism
democracy
justice
inflation
deflation

The idea is to get people to gradually accept new concepts while not alarming them. Rather than saying, 'Down with capitalism!' just say that we need 'managed capitalism' to keep people on board.

Creating positive substitute symbols...I think that's one term for it.

Government Work

And the men who spurred us on, sit in judgement of all wrong
They decide, and the shotgun sings the song
--The Who

There are other truths that we can add to our list. These truth are related to government.

Power. Governments have a natural appetite for power.

Intrusiveness. Governments possess passion to act upon people's lives.

Self-perpetuation. Governments possess a will to live. They never dissolve voluntarily.

Inflation. Governments have a proclivity toward inflation. Inflation buys power.

Any economic system must cope with these realities.

Wednesday, March 3, 2010

Blue Pill Blues

"You know, I know this steak doesn't exist. I know that when I put it in my mouth, the Matrix is telling my brain that it is juicy and delicious. After nine years, you know what I realize? Ignorance is bliss."
--Cypher (The Matrix)

Garrett (1953) suggested if, in 1900 the massive increase in government that would occur over subsequent decades could have been foreseen thru a crystal ball, then the American citizen would have staunchly resisted and endeavored to change history. And yet, as Garrett observed, the citizenry did indeed consent to expanding government power. Or, more accurately, first it happened then they consented.

World War I, New Deal Spending, World War II. The people voted for none of this. In fact, we voted presidents into office ahead of these events who ran on platforms that promised the direct opposite of what they subsequently did.

A number of factors can lead to such a phenomenon. Some people may not understand or care what is going on (ignorance and apathy). It is also well understood that many folks who do disagree with government actions tend to go along and submit anyway. Finally, there is the idea to expand the government's scope first, then seek popular support if/when certain segments of the population like what they experience.

All three were certainly at work to some degree--as they always are when government expands. Bureaucrats understand these mechanisms.

Specifically to the 'let's try it, they might like it' mechanism, Garrett (1953: 100) quotes Secretary of State Cordell Hull who explained the New Deal's doctrine of corrupting people for their own good to a US senator. "My boy, this follows a bent of human philosophy. At first people will demur at the idea of subsidies and accept them very reluctantly, and then after a while they will accept them in good grace, and later they will demand them." 

References

Garrett, G. 1953. The people's pottage. Caldwell, ID: The Caxton Printers, Ltd.

Port Authority

Trying to make sense of it all
But I can see that it makes no sense at all
Is it cool to go to sleep on the floor
'Cause I don't think I can take anymore
--Stealers Wheel

Because many of those who inhabit the left side of the Left/Right political spectrum often chastise those on the far right for employing authoritarian tactics, it seems likely that those leftists do not view themselves as authoritarian in nature. After all, folks on the left often voice disdain for violence, and advocate democracy over dictatorial edict.

Yet their policies are as authoritarian as their counterparts. As Trenchard and Gordon wrote in their early 1700s publication Cato's Letters:

It is a mistaken notion in government, that the interest of the majority is to be consulted, since in society every man has a right to everymans' assistance in the enjoyment and defense of his private property; otherwise the greater number will sell the lesser, and divide their estates amongst themselves; and so, instead of a society, where all peaceable men are protected, become a conspiracy of the many against the minority. With as much equity may one man wantonly dispose of all, and violence may be sanctified by mere power.

Tyranny by the few, or tyranny by the many.

Reference

Trenchard, J. & Gordon, T. 1965. "Cato's letters," In D.L. Jacobson (ed.), The English libertarian heritage. Indianapolis: Bobbs-Merrill Co.

Point of Order

"Now, I had some pretty good coaching last night. and I find that if I yield only for a question or a point of order or a personal privledge, that I can hold this floor almost until doomsday. In other words, I've got a piece to speak, and blow hot or cold, I'm going to speak it."
--Jefferson Smith (Mr Smith Goes to Washington)

Folks who somehow believe that Democrats and Republicans widely differ in their actions need only observe their joint reaction to Senator Jim Bunning's filabuster of a recent spending bill. Bunning held up the bill arguing that Congress should finance the bill in a manner that doesn't add to the deficit.

Both sides lit up against Bunning, and, unfortunately, he backed down.

So, slap another $100+ billion on the deficit as the addict scores another fix.

Big Government lives on both sides of the aisle.

ADDENDUM: Ron Paul on the Bunning situation. btw, Stuart Varney is emerging in my eyes as one of the sharper cookies in media. 

Tuesday, March 2, 2010

Freedom Lost & Found

"It means if there's something wrong, those who have the ability to take action have the responsibility to take action."
--Benjamin Franklin Gates (National Treasure)

Why do people choose to give up a large amount of personal freedom? Some individuals are willing to trade personal freedom for security. Classically, this meant physical security. Individuals were will to serve others in exchange for the protection that rulers could provide from physical attack. Today, however, the security many folks seek is social in nature. They would like to be fed, have a house, a job, health care. And they are willing to give up personal freedom to the State in exchange for social security.

Other individuals may just feel comfortable in an unfree state. Perhaps they become 'institutionalized' like old Brooks from Shawshank. Perhaps they believe in the age old idea of the feudal state, and that they belong to the servant class. Some may not understand what freedom is, or maybe they place a low value on it.

But there are a great many people who understand freedom and value it highly. They believe that the right to personal freedom is self-evident. Yet, over time, they cede personal freedom in lieu of a more powerful State. This, to me, is the most curious group.

Of course, regaining liberty that has been appropriated by government may require physical countermeasures. And given the State's tendency to accumulate power, liberty-minded people might be in a constant state of revolution in order to maintain/regain freedom.

It turns out that many have written about this problem. John Locke, in his Two Treatises of Government (1690), observed that:

"Such revolutions happen not upon every little mismanagement in public affairs. Great mistakes in the ruling part, many wrong and inconvenient laws, and all the slips of human frailty will be borne by the people without mutiny or murmur. But if a long train of abuses, prevarications, and artifices, all tending the same way, make the design visible to the people...tis not to be wondered that they should then rouse themselves."

btw, if the 'long train of abuses' piece sounds familiar, it's because Thomas Jefferson adapted it  for the Declaration of Independence.

The answer, then, appears to be that liberty loving people are willing to put up with some appropriation of their freedom by government. A point will be reached, however, where they will push back.

Given the long train of abuses that have been accumulating over the past 100 yrs, I wonder whether that point of pushback is upon us.

A reclaiming of freedom.

Monday, March 1, 2010

String Music

"Sun don't shine on the same dog's ass everyday, but mister you ain't seen a ray of light since you got here."
--Opal Fleener (Hoosiers)

Chart borrowed from John Mauldin' fine missive showing negative money multiplier effect (M1:M0 < 1). A rare phenomenon.


Translation: money being printed by the Fed is not being pyramided thru the system in the form of credit. In even simpler terms, the Fed is currently pushing on a string in its attempts to inflate.

Altho John notes that the multiplier is at its lowest level ever, would guess that if this series went back to the 1930s we'd observe a similar pattern.

Implications here are deflationary.

One other thing I found interesting is that the multiplier has been in secular decline for 25 yrs. Why? Perhaps it's been getting marginally tougher to leverage the system as the absolute size of debt/credit grows.

Same As It Ever Was

Letting the days go by, let the water hold me down
Letting the days go by, water flowing underground
Into the blue again, after the money's gone
Once in a lifetime, water flowing underground
--Talking Heads

Check out this inflation propaganda crafted by the FDR regime in 1933 (Pep refreshed my memory of it today in #5 here). Notice implicit backing by MGM brand (a.k.a. reputable mainstream media source).

Jaw dropping stuff in some ways, until one considers present day extreme action and how it's spun by bureaucrats.

Vuja de.

Natural Rights vs Natural Law

"Meg's gravy is famous. It's practically a food group."
--Dustin 'Dusty' Davis (Twister)

The idea that individuals arrive on this planet with with a set of 'natural rights,' including freedom to pursue their own destinies, is a compelling one that has marshalled considerable advancement in human thought and action over the past 300+ years. Jefferson, for example, evoked these 'unalienable rights' in documenting America's rationale for seeking its independence.

While many (myself included) indeed view these natural rights as true and self-evident, there are those who disagree. Any debate on the issue inevitably boils down to one's philosophical and religious viewpoints. Such viewpoints will always be contestable, leaving issues grounded in them unresolved by reasoned thought.

To obtain better resolution, I prefer to think things thru using a 'natural law' rather than natural rights perspective. Nature grants no rights. Instead, it grants scant means of substinence while people's wants are practically unlimited (Mises, 1951). In their efforts to survive and prosper, people must cope with a set of natural laws that axiomatically govern economic behavior.

While this approach is not without weaknesses (e.g., ignorance of some natural laws, potential for laws to evolve over time), it helps me come to more reasonable conclusions when engaging in critical thought.

Reference

Mises, L. 1951. Socialism: An economic and socialogical analysis. New Haven: Yale University Press.