Sunday, March 31, 2013

Fear of Freedom

"It's all for nothing if you don't have freedom."
--William Wallace (Braveheart)

I have been wondering for some time what drives some people to shun freedom and submit to forced existence under government control. And what causes these same people to want to force others into similar conditions of serfdom?

As such, I found the first two paragraphs of this missive particularly interesting. The author suggests that those who worship centralized authority are seeking to avoid risk at all costs. They live fearful of loss, and their fear drives them to seek control of their environment.

Government, being nothing more than legalized force, becomes an agent for mitigating fear by containing the world and sterilizing it of unpredictability. Because liberty is the embodiment of unpredictability, it is something to be suppressed--in both themselves and in others.

On this Easter Sunday, I am reminded that freedom paves the path to salvation. Pray for those souls who live in fear of freedom.

Saturday, March 30, 2013

Don't Take Anything Personally

Ellsworth Toohey: Mr Roark, we're alone here. Why don't you tell me what you think of me in any words you wish.
Howard Roark: But I don't think of you.
--The Fountainhead

The first agreement was to be impeccable with your word. The second agreement is don't take anything personally. However others act around me, it is not my doing but theirs. They are acting according to their agreements made in their own minds.

Whatever others say about me, it does not matter. If people call me stupid, slow, selfish, ugly, weird, etc. and I take it personally, then they hook me into their problems. Their emotional garbage becomes mine and I eat it up.

The same holds for compliments. If someone tells me that I am smart or that they 'like' something that I write on a web page, then I should not take it personally. There are only two valid assessors of my performance: me and my Maker.

If I feel offended, shame, outrage, guilt, sorrowful, jealous, envy, resentful, etc. based on the actions of others, then I am choosing to let others influence my actions. They are not inflicting pain on me. I am inflicting pain on myself. In turn, I am likely to make agreements with myself that trap me in a hellish, negative state of mind.

The trapping mechanism is personal importance--the ultimate expression of selfishness that assumes everything is about me. Part of this is driven from past programming that taught me that we are responsible for the actions of others. Consequently, I assume that others know my world and I try to impose my world on others.

I am shaking my head in disbelief that I could ever enslave myself to such wasteful behavior. But I do.

By not taking things personally, I do not need to attend to what others say. I only need to trust myself to make responsible choices and to seek the truth to the best of my ability.

I find this agreement--not taking anything personally--to be the most challenging of the Four Agreements. I often waste energy reacting to what others think. I need to more effectively 'mind my own business' rather than someone else's.

Strengthening this agreement with myself--to not take anything personally--could be the most liberating thing that I could do. My initial plan is to read and reflect on this chapter daily, and make some obvious changes that will help me mind my own business.

Friday, March 29, 2013

Easter and Freedom

"You can break a man's skull. You can arrest him. You can throw him into a dungeon. But how do you control what's up here? [taps his head] How do you fight an idea?"
--Sextus (Ben-Hur)

Judge Nap reminds us that Easter is a time to celebrate freedom. Easter is the ultimate story of freedom versus force--the exercise of free will in the face of the worst aggression imaginable in order to reveal truth.

Central to the story is Christ's agony over moving forward with the process and its fateful consequences. We are told that his sweat poured out like blood as he prayed to the Father about the possibility of being granted a pass. Like all of us, Jesus loved life and was not enamored with surrendering his. However, he also understood the consequences of letting the specter of violent aggression influence his decision.

So he chose the path of the cross in order to do what he knew was right..

All other actors (Judas, Peter, the crowd, Pilate, the Roman soldiers, etc) made their choices as well.

Although not the centerpiece of the story, the role of government as the transmission mechanism of force in this case cannot be ignored. The mob could have killed Jesus directly. Instead, the crowd employed strong armed government agents to execute Him.

Instructive, it seems, as this is wholly consistent with how aggression is often legitimized today.

The truth that Christ revealed through his death and resurrection is that there is hope for the dead, and thus for the living, if people choose what is right even when facing the worst aggression imaginable.

In that way, Easter demonstrates that freedom triumphs over force.

Thursday, March 28, 2013

Equality Under the Law and Gay Marriage

We're - so tired of all the darkness in our lives
With no more angry words to say can come alive
Get into a car and drive
To the other side
--Joe Jackson

Variation is axiomatic of nature. As humans, we possess and pursue different capabilities and interests. These differences lead to different outcomes among individuals and among groups of individuals.

Respecting the variety of nature requires equal treatment under the law. As Hayek observed, equality under the law opposes all prescriptive privilege, and all protection by force of any rights not based on rules applicable to all persons. It also denies government the right to limit what the able or fortunate may achieve--whether such government power seeks to perpetuate inequality or force equality.

We are reminded of the principle of equality under the law by the current debate about the legality of gay marriage. Many oppose gay marriage due to religious or other beliefs. While people are free to oppose gay marriage on any grounds, opponents have no right to use government force to prohibit people of the same gender from entering into a marriage contract.

At the same time, proponents of gay marriage have no right to use government force to compel religious or other opposing groups to recognize or write gay marriage contracts.

Complicating the issue is that government itself has gotten into the business of originating marriage contracts. This is an inappropriate role for government, as voluntary origination of contracts between individuals is none of government's business.

Government's proper role in contracts is to help people defend their person and property from invasion by others who break contracts or enter into contracts by fraud.

Better aligning our system with natural law would require government to step away from the marriage contract origination business, and limit its involvement to assisting in the resolution of marriage contracts gone bad.

Wednesday, March 27, 2013

Coolidge and the Budget & Accounting Act of 1921

I took it all for granted
But how was I to know
That you'd be letting go
--Bryan Adams

The Budget and Accounting Act of 1921 was passed early in the Harding administration to give more control of the federal budget to the executive branch. A special budget bureau, the forerunner to today's Office of Management and Budget, spearheaded the movement for federal thrift.

When Calvin Coolidge became president after Harding's death in 1923, Coolidge operationalized the Budget and Accounting Act to new levels. He quickly named his own budget director (whom he met with weekly prior to cabinet meetings) and went on the offensive, announcing deep cuts in politically sensitive areas such as veterans benefits and public works projects. Coolidge publicly praised executive branch staffers that came in below budget and publicly scorned (and fired) those who spent lavishly.

Coolidge vetoed 50 bills during his tenure. He discouraged the spending of federal funds for disaster relief--even after the great Mississippi River flood of 1927 (the Hurricane Katrina of its day).

In concert with his Treasury Secretary, Andrew Mellon, Coolidge drove the passage of legislation that cut top marginal tax rates from 58% (it was 70% when Harding took office) to 25% in 1926. Other presidents (e.g., Reagan) cut tax rates with assurances to Big Government types that the cuts would increase federal government revenue--courtesy of the famous Laffer Curve argument.

Coolidge, however, did not play this game. His idea was to employ spending cuts in concert with tax decreases to shrink government so that more economic resources remained in the hands of the people.

As one might imagine, Coolidge was not very popular with Washington bureau-philes. His popularity with the public, however, was much higher. In the election of 1924, Coolidge won a landslide--achieving an absolute majority vote over Democratic and Progressive Party candidates combined.

During his presidency from 1923 to 1929, Coolidge sustained a budget surplus and left office with a smaller budget than the one that he inherited. No president has come close to matching his record since then.

The Budget and Accounting Act of 1921 offered a mechanism for the president to control the budget and national debt while establishing clear line of sight with the American people for accountability.

Unfortunately, no president following Coolidge chose to use the law to continue his tradition of economy. Underutilized as it became, the law remained on the books until the 1970s when it was replaced with legislation that tilted budget authority back toward Congress.

The subsequent decline in clear accountability has corresponded to gigantic increases in federal spending.

Tuesday, March 26, 2013

Account Invasion

"They are going to take you."
--Bryan Mills (Taken)

A few years back I broke into my IRA to help pay off my mortgage. Part of my reasoning was that I did not know what the marginal tax rate would be on IRA distributions when I retire. They could easily be higher than my current rate + the 10% early withdrawal penalty levied when I took out the funds.

The recent happenings in Cyprus moves such a proposition closer to reality. In fact, it quickens it. What we are witnessing is the invasion of financial accounts by government. At their discretion, officials can confiscate property from an individual's account.

The focus right now is on bank accounts. But why couldn't such policy be extended to, say, retirement accounts? You could wake up one morning and 30% of your IRA could be expropriated in the name of 'national security,' or 'the greater good.'

The larger your account, the more attractive the target for government theft.

If I had deposits in any EU bank, then I would be withdrawing as much as I could as fast as I could. I would also be considering my options for moving/liquidating investment accounts.

I would then begin pondering my situation w.r.t. US-based accounts...

Monday, March 25, 2013

Deposit Insurance Fraud

Plastic tubes and pots and pans
Bits and pieces and
Magic from the hand
--Oingo Boingo

Rothbard reinforces our recent discussion on bank runs, noting that fractional reserve banking renders banks incapable of delivering all deposits on demand. Such a leveraged scheme, which would be deemed fraud in other lines of work, is wholly dependent on achieving confidence among depositors so that they do not all rush to the ATM at once. If confidence is lost, then the game is up.

Rothbard adds that, to achieve confidence among depositors, governments have instituted 'deposit insurance.' By promising to replace deposits up to a certain substantial amount, governments hope to keep the natives at bay and quell the spectre of large scale bank runs.

This merely swaps one problem for another, however. Deposit insurance cannot possibly cover all deposits with real economic resources. The FDIC, for instance, is only holding about $25 billion in its deposit insurance fund--a sliver of the amount that would be required to make depositors whole in the event of a string of major bank failures.

Instead, the way depositors are made whole is by money printing. This is how the FDIC is primarily funded and how claims would be paid out in the event of a major banking failure.

The deposit insurance facade elevates confidence in the extant banking system to artificially high levels. People have little incentive to scrutinize the health of banks as long as there is an FDIC sign on the door.

As Rothbard observes, the price we pay for this false sense of security is relentless inflation. The highwayman exacts his toll for our indifference invisibly by depreciating the value of our money.

Ending inflation requires not just the abolition of central banks, but also the abolition of government-sponsored deposit insurance. Banks, then, would be treated like firms in industries driven by market forces. Customers would scrutinize banks' capacity to make good on deposits. Banks who cannot do so go under and are liquidated.

Absent such a measure, we are destined to live in a world of perpetually devalued currencies and bank bail outs.

Sunday, March 24, 2013

Is the Charade Ending?

Hold tight
Wait till the party's over
Hold tight
We're in for nasty weather
--Talking Heads

Cyprus banks, which remain closed, have curbed ATM withdrawals to pocket change. This cannot go on indefinitely. If you were a depositor, when the controls are finally lifted/eased, how much would you be prone to withdraw?

That's right...M-A-X-I-M-U-M.

Meanwhile, outsiders looking in begin to ponder how they would handle a similar situation. The answer for many is preemptive withdrawal.

Hard not to wonder whether we are approaching the end of this charade. Does this gigantic house of cards collapse in a global bank run?

Saturday, March 23, 2013

Contagion of Capital Controls

And time respects no person
What you lift up must fall
They're waiting outside
To claim my tumbling walls
--John Mellencamp

Pending capital controls in Cyprus have sparked speculation about capital controls across the EU. Government attempts to control capital that wants to move is a loser's game.

If people doubt that they will be able to withdraw their deposits, then banks runs commence. The longer government locks the vaults, then the stronger the urge among depositors to leave. As soon as the doors open, a run commences.

Controls to prohibit capital from fleeing increase the urge to escape.

Do bureaucrats not understand that confidence is the only thing holding the bank Ponzi together? If confidence is lost in the capacity for banks to deliver deposits on demand, then the house of cards that is modern banking comes tumbling down.

Friday, March 22, 2013

Reinforcing Loop of Chaos

There's a place where the light won't find you
Holding hands while the wall come tumbling down
When they do
I'll be right behind you
--Tears for Fears

As Cypriot legislators cobble together capital controls ahead of the weekend, I am reminded of the ever increasing force applied by governments seeking to stabilize an unstable system.

The system slips. Government applies force seeking to regain control. This causes the system to slip further, which invites more government force.

A classic reinforcing loop with a chaos endpoint. As Mises aptly observed.

Diminishing Returns to QE

Better get yourself together
And hold on to what you got
Once the music hits your system
There's no way you're gonna stop
--Miami Sound Machine

Updated graph marking movements of the S&P 500 (SPX) in relation to various FOMC intervention programs since 2008:

Suggests diminishing returns to the Fed's stimulus programs.

Would be interesting to see a plot of SPX vs Fed balance sheet expansion. Would think the the Fed is surely getting less SPX pts per dollar as they ramp QE.

position in SPX

Thursday, March 21, 2013

Impeccable Word

"Always with the negative waves, Moriarity."
--Oddball (Kelly's Heroes)

I recently read an insightful little book called The Four Agreements (Ruiz, 1997). The author suggests that each of us lives in our own world. We make various agreements with ourselves as we navigate our world. Many of these agreements are self-destructing, and shaped by our willingness to admit negative thoughts conveyed by others into our world.

For example, if someone tells me that I am stupid, then I might choose to believe it. I make an agreement with myself that I am incapable of being smart. Subsequently, I think and act in ways that honor the agreement.

Negative agreements reduce our freedom as they constitute self-imposed restrictions on our capacity to live fully.

The substance of the agreements that we make with ourselves is completely within our control. No one else can force us to make these agreements. We can choose to make new agreements and break old ones.

The author proposes four inter-related agreements that, if we make them with ourselves, lend positive energy to one's worldly journey and expand personal freedom.

The first agreement is to be impeccable with your word. This is seen as the most important agreement because what we say and write about ourselves and others forms the basis for other agreements. Do I speak about myself and others with respect, or do I scorn and belittle? Do I discuss what I know to be true or do I spread 'half truths' and gossip?

Do I write thoughts with the objective of getting closer to the truth regardless of who agrees or do I write thoughts that make me popular? Do I revel in positive achievement, or do I take pleasure in discussing failure? Do I engage in building people up or breaking people down. Do I prefer honest debate or back-biting satire?

Do I absorb criticism, or do I retaliate?

Do I keep commitments that I have made, or do I break my promises?

I can do much better here. I am working to be more impeccable with my word.


Ruiz, D.M. 1997. The four agreements: A practical guide to personal freedom. San Rafael, CA: Amber-Allen Publishing Inc.

Wednesday, March 20, 2013

Compound Error

And every little thing the reflex does
Leaves you answered with a question mark
--Duran Duran

Many believe that the solution to the unnatural skew in distribution of wealth is to tax the wealthy. To forcefully take from some and redistribute to others.

These people are ignorant of the aggressive forces already in the system that are driving the unnatural skew. Monetary policies that enable the carry trade and fiscal policies that line corporate coffers exemplify the aggression at work.

Adding more aggression to the system compounds the error.

The best way to solve a problem is to remove the root cause. Instead of adding more force to the system, the proper action is to remove extant force from the system.

Tuesday, March 19, 2013

Planning for a Cyprus Syndrome

"You're thinking of this place all wrong--as if I had the money back in the safe. The money's not here."
--George Bailey (It's a Wonderful Life)

What would you do if you perceived the threat of a Cyprus style depositor haircut to be significant in your locale? "Simple," you say, "I'll just empty my bank account ahead of the threat."

Make sure that you understand how modern banking works before you get too comfortable with that plan.

Suppose you deposit $1000 at a conventional bank. Even today, many people assume that the money goes into the vault and that your $1000 can be withdrawn on demand.

In the early days of banking this was true. Banks were simply  'money warehouses' with the core competence of keeping property secure. Depositors paid banks fees for doing so.

However, it didn't take bankers long to learn that they could make more money by lending some of the money that they were holding for others. As long as good credit risks were identified and depositors didn't all rush to withdraw their deposits at the same time, this could be a lucrative business model.

Bankers also soon learned that they could use depositor funds as collateral to borrow from other lenders and trade financial securities for their own accounts.

Deposits were no longer just liabilities; they became assets.

And banks became leveraged. To the depositor, this leverage means that all deposits are not available for withdrawal on demand. Only a fraction of the money is in the vault; the remainder is essentially loaned out to others (those 'others' could include the bank itself). The fraction of funds available to depositors depends on the bank's reserve ratio.

Suppose that your bank has a 10% reserve ratio. On average, only $100 of your initial $1000 deposit would be available. To get more than that, you'll have to beat most other depositors to the window.

In the 10% reserve ratio situation, then you'll have to been in the fastest 10%. This is a best case scenario, however, as it is likely that the distribution of deposits is skewed--meaning that a couple of large depositors who reach the window ahead of you could clean out the vault all at once.

Moreover, most banks are operating at effective reserve ratios well below 10%--meaning that less than $100 of your original $1000 is available on average.

The bottom line is that if you have money in a bank and you plan to manage risk of a Cyprus Syndrome by withdrawing your funds before the onset of crisis, then you better be fast.

Or you better have a Plan B.

Monday, March 18, 2013

Depositor Repression

"Don't look now but there's something funny going on over there at the bank, George. I've never really seen one, but that's got all the earmarks of being a run."
--Ernie Bishop (It's a Wonderful Life)

As the chaos level escalates in Cyprus (the parliamentary vote has been pushed back again and now AP is reporting the Cyprus banks will remain closed until Thursday, the following questions must be entering the minds of depositors around the world:

1) What is the likelihood that my deposits will be confiscated similar to the plan unfolding in Cyprus?

2) Could bank deposits become the basis for a 'wealth tax'--where larger bank deposits are confiscated at a progressively higher rate?

3) How can I manage risk surrounding these issues?

Sunday, March 17, 2013

Cyprus Swamp

Hey now, hey now, don't dream it's over
Hey now, hey now, when the world comes in
They come, they come, to build a wall between us
We know that they won't win
--Crowded House

This weekend Euro-area finance ministers and officials of the Cyprus government reached tentative agreement on a rescue plan for the country. As has been the case in past EU bailouts, the focus is on bailing out insolvent banks and sovereign bondholders. The eye-opener of the plan is a proposed levy of 6-10% on depositors.

Needless to say the proposal has not sat well with Cypriot citizenry. Depositors have been hitting the ATMs to drain their bank accounts. Local media are cranking it up too:

There is also growing doubt about whether there are enough votes in Cypriot parliament to pass the plan. The specter of a thumbs down vote certainly has major banks around the world a wee bit nervous.

Perhaps this is much ado about nothing. After all, the tiny Cyprus economy is just a fraction of a percent of EU GDP.

On the other hand, it is straightforward to conjure a path to EU contagion. After all, how much money would you keep in a European bank if you know that there was potential for government to skim 10% off your balance at a moment's notice?

Saturday, March 16, 2013

Social Pressure

Duke of Norfolk: Why can't you do as I did and come with us, for fellowship?
Sir Thomas More: And when we die, and you are sent to heaven for doing your conscience, and I am sent to hell for not doing mine, will you come with me, for fellowship?
--A Man for All Seasons

Unlike the pressure felt when benchpressing barbells in the weightroom, social pressure is not physical force. It is not force at all. Social pressure does not even come from external sources.

Social pressure is a construct. It reflects a state of mind. We tell ourselves that we need to act or think a certain way because others want us to.

We make a choice to 'feel' social pressure. No outside influence is effective unless we admit it into our person.

We can also choose to not let others dictate our existence.

Whether we live our lives on our terms or on someone else's terms, in the end each of us alone will be accountable for the choices we make. We cannot lay off accountability on someone else.

Friday, March 15, 2013

Savings and Corporate Profits

When my back is broken
When the mountain moves away
All the dreams and promises
That we give, we give away

John Hussman's weekly comments are always insightful, but this week's letter is among his best. While the entire letter is worth reading (twice), I wanted to focus on the section titled "The deficit of one sector must be the surplus of another."

The simple 'accounting identity' that Dr J notes is that corporate profits go up when people spend more--i.e., when savings go down. Since the credit market meltdown and subsequent 'stimulus,' government plus household savings has plunged to historic lows:

While the trend down in savings has been a secular one, the step change lower since 2008 primarily reflect deficit spending by government the likes of which the world has never seen. That spending winds up in corporate coffers. Indeed, the correlation between corporate profits as a % of GDP and government plus household savings as a % of GDP is striking:

It is also mean reverting. The ultra high level of corporate profitability currently in force cannot persist because the current deeply negative savings rate cannot persist. People will either save more voluntarily, or credit markets will force them to by cutting them off from more borrowing. As savings normalize, corporate profits will follow lower. John shows the correlation between growth in savings and growth in corporate profits here, with profits lagged two quarters:

John estimates that because current corporate profits as a % of GDP are about 70% above the long term average of about 6%, we can expect corporate profits to decline at roughly a 12% annual rate over the next four years:

I was somewhat surprised at the consistency of the relationship between profits and total saving. Would think that this relationship would break down at some point in a downward trending saving environment like the one that we've been in. A dearth of savings means little capital for productivity improvement which should grate on productivity (and profitability) at some point. Unless corporations fund all project out of retained earnings (which they are no where close to doing), then the system is gradually starved of capital.

One implication of Dr J's work is that big government types who disdain corporate welfare are supreme hypocrites, as it is government sponsored stimulus that lines corporate pockets in an unnatural manner.

Along with the cheap credit carry trade, government stimulus programs are State-sponsored transfers of wealth. In both cases, those who own corporate securities have been getting richer in an unnatural manner.

Thursday, March 14, 2013

Giustra's Inflation Bet

Molly Brown: Hey, who thought of the name Titanic. Was it you, Bruce?
Bruce Ismay: Yes, actually. I wanted to convey sheer size. And size means stability, luxury, and, above all, strength.

Interesting comments from billionaire Frank Giustra on inflation. In his view, inflation is a "self-fulfilling prophecy" because policymakers stuck in high spending, high debt situations are unlikely to respond in manners that avert disaster.

"It's like everyone is on the Titanic right now. And they can see the iceberg on the horizon, but the system is too difficult to veer away from that right now because you have special interest groups that are driving policy right now at the government level. And anybody who steps outside that party line is not going to get elected in the 24/7 campaign cycle like we are seeing today."

I clicked thru to another interview with Giustra from last September in which he elaborates his thinking behind his current bet on an inflationary outcome. These remarks are also interesting. Would very much recommend the snippet from 11:10 to 12:35 for a lucid explanation of why/how current policies skew the distribution of wealth in an unnatural manner.

The short version of his explanation is that it is easy to make money during inflation if a) you suppress the price of credit below market, b) you get access to cheap credit, c) borrow a ton of it and buy assets whose prices are not being suppressed by current policy, d) 'educate' the public to accept this type of behavior.

Because it is the path of least resistance to wealth for those with influence, inflation is the odds on bet.

Wednesday, March 13, 2013

Death by Government

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

Nice little video on the perils of surrendering guns to government. It cites data from University of Hawaii professor Rudolph Rummel who has spent much of his research career studying murder committed by government (what he terms 'democide').

In the 20th century, leading democidal regimes included:

Communist China 76.6 million killed
U.S.S.R. 61.9 million
Nazi Germany 20.9 million
Nationalist China 10.0 million
Imperial Japan 5.9 million
Sino Soviet China 3.5 million
Cambodia 2.0 million

The video cites that in the 20th century 4x as many people (290 million) were murdered by government than those who died in all international and domestic wars combined. Of course, most of those ~60 million casualties of war can also be attributed to lethal government aggression as well.

As aptly stated in the video, "It's time to realize that when government takes your guns, people die."

Tuesday, March 12, 2013

Shades of Red

Now what are we all to do
When the money's got a hold on you?
--Simply Red

The House Budget Committee headed by Paul Ryan has released its latest budget proposal. Like previous proposals, spending is not cut. Instead, the rate of spending increase is set below the Obama administration's budget such that, given some generous assumptions about things like economic growth, tax revenues, state of the world, etc, the budget might theoretically balance 10 years from now.

Anyone with the faintest sense of history, much less capacity for reason, knows that the likelihood of achieving federal budget balance 10 years from now (i.e., 2.5 presidencies and 5 congresses in the future) is zero--particularly given our field position.

Similar to its behavior over the tiny cuts of the recent 'sequester,' the Left's reaction to this modest budget approaches hysteria. The Huffington Post index page headline associated with this article read "FULL EXTREME AHEAD."

The difference between two shades of red is often only discernible when the colors are placed next to each other.

Monday, March 11, 2013

Capitalism, Socialism, and Unemployment

Standing in line, marking time
Waiting for the welfare dime
'Cause they can't find a job
--Bruce Hornsby & the Range

I posed this question to my students recently. What should be the theoretical employment level under capitalism and socialism? Under capitalism, employers and employees are free to negotiate work contracts. Moreover, the dynamics of competitive environments, Schumpeter's creative destruction, will cause some people to be out of work when existing producers are supplanted by innovative approaches of entrepreneurs.

Such unemployment should be temporary, however. Those seeking work (not everyone will) should be able to find it. Under pure capitalism, then, involuntary unemployment should be limited to frictional unemployment--those people transitioning between jobs.

My students and I were pretty much in agreement on this.

On the socialism side, we were also of the general opinion was that unemployment under socialism should be lower than under capitalism. After all, because it makes the production decisions under socialism, government should be able to give everyone a broom if it wants to and call them employed.

After further reflection following our class discussion, however, I am no longer confident that this is a generalizeable rule.

One reason is that the goals of a socialized economic system do not necessarily include full employment. Production decisions may be socialized because a few people sense that they can siphon off wealth from the system at the expense of others. This may be possible if those in control of government can convince people that the current arrangement is in the best interests of all (i.e., for the 'greater good'). Propaganda avenues that make such an approach feasible include a complicit media and public schools.

In addition, if the welfare system is attractive enough, many people will choose not to work--or at least not work up to their capacity. Voluntary unemployment and conditions of underemployment are certain to rise under socialism.

As unemployment and underemployment increase under socialism, the system depends on fewer and fewer workers to support the system. To pay for government programs in a situation where high productivity is discouraged, socialistic systems must increasingly resort to consuming all production and then and borrowing resources from others. As a consequence, savings and productivity decline in vicious circle fashion.

As productivity declines, wages for those who want to work stagnate as well. If government resorts to inflation to fund its social programs, then real wages will decline.

Many people will get discouraged and cease working.

There is an argument to be made, then, that under pure socialism unemployment will not be zero. Instead it will be significant. Moreover, unemployment should trend higher over time as motivation to work declines.

Increasingly, reviews (here and here) of employment and wages reflect trends that are consistent with this argument.

Of course, pushing this logic to completion leads to the Misesian chaos endpoint of socialism.

Sunday, March 10, 2013

Lincoln's Drones

Dance into the fire
To fatal sounds of broken dreams
--Duran Duran

Tom DiLorenzo suggests that the recent debate over whether government has the authority to assassinate American citizens on US soil was settled years ago by Lincoln.

Because Lincoln never recognized the secession of Southern states, Southern civilians constituted non-combatant citizens of the US. Using the drones of his day, the generals in command of the Union Army, Lincoln presided over the killing of hundreds of thousands of non-combatant US citizens in the South, not to mention the destruction of hundreds of billions (in today's dollars) of property of non-combatants.

These actions violated the Fourth, Fifth, and Sixth Amendments.

After Lincoln's death, many of those same drones went on to murder tens of thousands of Indians during the country's thrust west.

When push comes to shove (or kill), presidents, thru their armed agents, will want to throw off rule of law in favor of rule by gun.

Saturday, March 9, 2013

Princely Moment

I thought it was clear
The plan was we would share
This feeling just between ourselves

In 2007, then CEO of Citigroup Chuck Prince made a statement that goes down in the annals of moral hazard history. Despite the increasingly visible problems in the mortgage market, Prince placed his confidence in the Fed's efforts to 'liquify' the markets, saying:

"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance."

This of course, is just another way of saying that you have to be long as the Fed has your back. During the Greenspan regime, this became known as The Greenspan Put. As long as the Fed is pumping easy money, you want to take risk. If there's a problem, then your friendly neighborhood central banker will bail you out.

The Fed's efforts since have only reinforced this notion. As the Dow marks daily all time highs, I have heard multitudes of opinions that go like this:

"We know that the Fed wants to levitate assets higher by printing money and monetizing debt, and that this will likely end badly, but right now you have to be long."

They're playing Chuck Prince's tune...

position in SPX, Treasuries

Friday, March 8, 2013

Friending Enemies

And the parting on the left
Is now parting on the right
And the beards have all grown longer overnight
--The Who

Three years ago, the Republican Party rode the coat tails of the Tea Party to broad victory in the midterm elections. We noted at the time that this was classic 'enemy of my enemy is my friend' strategy, as old school Republicans needed to partner with Tea Party types in order to secure critical mass for defeating Democrats.

We also observed that this relationship would surely be temporary, as Tea Party ideals threaten the GOP establishment. The cracks have since been forming with old school efforts to co-opt Tea Party freshman have met with marginal success at best.

The relationship may have been officially severed this week with Rand Paul's filibuster. Alongside the Left, the Right is stepping up to deride RP and Tea Party ideals.

This is to be expected.

In the upcoming political cycle, the Tea Party threatens to overthrow the old guard GOP. The Tea Party is now the old guard's enemy rather than its friend.

Because liberals and conservative are relatively close together on the political landscape, it is likely that Democrats and old school Republicans will seek to join forces to destroy the Tea Party. They will portray the Tea Party as radical--which is surely is compared to traditional Democratic and Republican politics.

Because the Tea Party threatens big government of all stripes, it is the enemy of big government liberals and conservatives alike.

Dow 36,000 Redux

Hear my song
People won't you listen now?
Sing along
You don't know what you're missing now
--Led Zeppelin

With the Dow now marking all-time highs, the bulls are becoming emboldened. Even James Glassman, who penned the 'Dow 36,000' epitaph in 1999, is back.

Evidence continues to mount.

position in SPX

Thursday, March 7, 2013

Mr Paul Goes to Washington

"Great principles don't get lost once they come to light. They're right here. You just have to see them again."
--Jefferson Smith (Mr Smith Goes to Washington)

Last night Rand Paul ended a 13 hour filibuster in protest of the Obama administration's lack of answers about its authority to execute discretionary assassinations of US citizens. In 2011, the president dispatched agents to kill an American (which also took out the American's son and son's friend) while they were in Yemen.

Last month, the administration released legal papers seeking to justify the president's discretionary use of lethal force.

Paul's filibuster overshadowed a previous eyebrow raising exchange between Rep Ted Cruz and US Attorney General Eric Holder, where Holder refused to directly answer repeated questions about the constitutionality of killing citizens who do not pose an imminent threat to the United States.

As the Judge explains, doing so is clearly unconstitutional. The president may only lawfully kill after due process, in self-defense, or under a declaration of war (in which case the target must be a belligerent).

Rand Paul's filibuster resonates with many people because he made a stand for the Constitution and against expansive executive power. It reflects growing sentiment that has found few outlets in behavior on the Hill.

RP's actions reflect a symbolic gesture of sorts. He has set an example that hopefully others will learn from and follow.

Wednesday, March 6, 2013

$118 Million Per Hour

"That's the press, baby. The press! And there's nothing you can do about it. Nothing!"
--Ed Hucheson (Deadline U.S.A.)

At $85 billion worth of bonds purchased per month, the Fed is creating $118 million per hour. This of course does not count the credit that they create out of thin air for the banks or subsequent pyramid effects.

If you are not privy to using that newly printed cash first, then that money printing is making you poorer.

position in Treasuries

Tuesday, March 5, 2013

Distributing Wealth by Force

"It's the story of the greatest wealth transfer in the history of the world."
--Jake Moore (Wall Street: Money Never Sleeps)

Income inequality is a natural and desirable feature of a free society. Precisely what the distribution of wealth looks like in a free society is unpredictable. We know that it will be dynamic, however, for it reflects voluntary cooperation among people to improve their circumstances--whatever their capacity for doing so.

When the scope of government expands beyond helping people protect their property to taking property from some people for the benefit of others, then the distribution of wealth becomes unnatural. It is a distribution shaped by force rather than by freedom.

Various policies shape the distribution of wealth unnaturally. The policies aim at doing one of two things: a) forcing wealth to be more even between people, or b) forcing wealth to be more uneven between people. Let's consider an example of each type of policy.

a) Forcing wealth to be more even. The centerpiece of US tax policy is the progressive income tax, which takes increasingly larger fractions of a person's production (i.e., the more you produce, the greater the percentage of production taken) for the benefit of others. If the production is redistributed to those who have less, then the result should be a leveling of wealth among people.

Political mischief, of course, may reduce the likelihood of that unnatural outcome in favor of another unnatural outcome--that of the politically connected siphoning off a significant share of the tax receipts for their own interests (which perversely could make this policy more type b than a).

b) Forcing wealth to be more uneven. Monetary policy also shapes distribution of wealth in unnatural ways. Current zero interest rate policy (ZIRP) of the Federal Reserve gives large financial institutions access to ultra cheap credit. Those institutions borrow as much as they can and then lever up to buy financial assets of all shapes and sizes--with the implicit backing of the government to do so. Because they are first users of newly minted money, these institutions can take control of assets while prices are relatively unchanged. By the time that money trickles down to the rest of the population, prices have been bid up. The late users have lost purchasing power and have gotten poorer vs the first users of printed money.

In addition to the bankers, those who own financial assets (stocks, bonds, real estate, etc) benefit from stimulative policies of the Fed. The Fed has said as much. However, most financial assets are owned by a small fraction of the population (i.e., the wealthy), meaning that policies aimed at elevating asset prices are likely to skew the distribution of wealth unnaturally toward the rich.

Although both types of policies are at work in the US, type b policies appear to have the upper hand. The rich are getting unnaturally richer.

This has proponents of type a policies shouting for more taxes on the rich. They want to add to the force already in the system. As in war, opposing forces do not cancel each other out. The damage done is additive.

The proper response is to remove force from the system.

Monday, March 4, 2013

Short Treasuries

Oh, a storm is threatening
My very life today
If I don't get some shelter
Yeah, I'm gonna fade away
--The Rolling Stones

Finally started a Treasury short position today via TBT. Technicals suggest a decent near term entry point after the recent pullback.

Super small initial position. Will see how it feels.

Currently planning to build it rather than trade it (long horizon).

position in TBT

Base Money and Fed Bailout

In violent times
You shouldn't have to sell your soul
In black and white
They really, really ought to know
--Tears for Fears

In his always insightful weekly piece, John Hussman updated his graphic of 3 month T-bill yield vs base money as a % of GDP.

The value relative to the x-axis alone should give cause for pause. Base money as a fraction of GDP has never been higher.

Why hasn't this translated into huge increases in prices? Because with ultra low returns on cash being suppressed by the Fed (y-axis), people (including banks) have been holding onto most of the money that's been printed out of thin air rather than using it in transactions.

Stated differently, the velocity of money has slowed way down.

If this propensity to hold cash changes, then velocity will pick up and interest rates (and prices of milk and bread) will rise--despite the Fed's best efforts to suppress them.

As Dr J notes, normalizing yields to just 2% would require the Fed to unload half the bonds on its balance sheet (read: it would need to contract the money supply by about $1.5 trillion).

Anticipating that it won't want to do that, Fed Chair Bernanke last week testified that the Fed will create a 'deferred asset' line on its balance sheet to deal with its duration mismatch. As John notes,

"In effect, to the extent that the Fed experiences losses because it overpaid for Treasury securities that it bought from primary dealers (comprising the too-big-to-fail banks and Wall Street investment firms), the US public will pay for those losses without any need for Congressional legislation."

Stated differently, Bernanke is positioning the Fed for its inevitable bailout...funded by we the people as always.

position in Treasuries

Sunday, March 3, 2013

Lever of Aggression

"A king may move a man. A father may claim a son. But remember that, even when those who move you be kings or men of power, your soul is in your keeping alone. When you stand before God you cannot say, 'but I was told by others to do thus,' or that 'virtue was not convenient at the time.' This will not suffice. Remember that."
--King Baldwin IV (Kingdom of Heaven)

It has been said that the State does not hang a man, the hangman does. The State is merely a construct for a group of people exerting force on others. Through their actions, people decide whether they will be part of that aggression.

The hangman who pulls the lever on the gallows has decided in the affirmative. The hangman can not lay off blame for his violent actions on his job description, on the orders of his superiors, or on the expectations of the public. The hangman acts on his own volition, and he alone must answer for his aggression.

In a democracy, voters are like hangmen. They stand in the gallows of the voting booth and decide whether they will pull the lever that initiates violent aggression on fellow men. If they vote in the affirmative, then they become part of the State--that group of people exerting force on others.

These voters might rationalize that they are acting in the name of others--for the public good. They do not view themselves as thieves, slave masters, or murderers.

But this is delusional. By contracting with strong armed government agents, voters are principals of violence.

Each of us decides whether we will pull the lever of aggression.

Saturday, March 2, 2013

Independent Treasury

"Everyone's trying to get out of Washington, and we're the only schmucks trying to get in."
--Julius Levinson (Independence Day)

After Andrew Jackson dismantled the second Bank of the United States in 1833, he transferred federal funds to various state banks. Concerned about the influence of these government funds on banking practices, and about the safety of those funds, the Van Buren administration proposed a system of independent treasuries that would be separated from the banks.

The Independent Treasury Act was passed in 1840 but was repealed by a Whig dominated Congress a year later. Whigs favored the "American System", which included a preference for central banking. They wanted to create a third central bank but were shot down by President John Tyler.

After Democrat James Polk took office in 1844 the independent treasury idea was resurrected. The Act of August, 1846 operationalized the concept. The Treasury and various sub-treasuries warehoused and payed out all of its funds independent of the banking system. All payments by and to the government were to be made in gold and silver.

Thus began the most stable period in US monetary history. A key reason for this is that federal funds could not be used by private banks to pyramid credit creation. Moreover, there was a reduced market for political favor between bureaucrats and bankers.

The Mexican War, fought between 1846 and 1848, was the only war in US history not funded by inflating the currency. This was so because there was no central bank convenient for money printing, and the federal government respected its obligation to collect and pay only in specie.

Dismantling of the independent treasury configuration began under the Lincoln administration. National banks were chartered, and the federal government began printing 'greenbacks' to appropriate resources for the Civil War effort.

After the Civil War, the national banking system began robbing Treasury of its independence. Federal government involvement in banking once again grew--culminated by the establishment of a new central bank, the Federal Reserve, in 1913. By 1920, all sub-treasuries were shut down.

The independent treasury, and the golden age of money and banking in the US, was over.

Friday, March 1, 2013

Subsidizing Moral Hazard

Those days are gone forever
I should just let them go
--Don Henley

Stan Druckenmiller observes that just because stocks look favorable vs bonds does not mean that they are actually cheap. Real estate, stocks, bonds are all being subsidized by the policies of the Federal Reserve.

The commentator asks him whether money managers in general might not agree with him but feel that, unless fund managers are long equities in an environment where the Fed is saying 'take risk,' then investors will pull their investments.

Ah, the potent combination of career risk, the agency problem, and moral hazard. The Fed is subsidizing risk-taking, and if you are not taking risk then you will be out of a job if prices go higher.

As Druckenmiller observes, the subsidy game can't go on forever.

Cutting a New Habit

I keep looking for something I can't get
Broken hearts lie all around me
And I don't see an easy way to get out of this
--Cutting Crew

Absent an eleventh hour deal (which would not be surprising), the dreaded $85 billion 'sequester' goes active today.

The biggest surprise in this process has been that the Republicans have yet to cave. Time and time again the GOP talks tough on spending only to compromise as deadlines loom.

Should Republicans indeed stay the course, perhaps they will learn to savor sticking to principles and returning property to its rightful owners. Perhaps they will enjoy protecting people's freedom as pledged in their oaths of office.

Two percent of an expanding budget is a mere pittance. But it is a start.

Here's hoping that we cut ourselves a new habit.