Monday, September 30, 2013

Debt Ceiling Drama

I'm traveling down the road
And I'm flirting with disaster
I've got the pedal to the floor
And my life is running faster
--Molly Hatchet

Two years ago I still held some hope that politicians would come to their senses and pull the system back from the brink. It didn't happen. The debt ceiling was raised as it had been every time the issue had previously come before Congress. My hope pretty much vaporized at that point.

There is little chance that it will be different this time. The media is merely elevating the drama factor. The drivel spewed last time is just louder.

Even those politicians who know that we are headed for disaster are feeling social pressure to cave. They don't want to be the ones that the addicts point to and say, "Curse him! He took our drugs away."

That drug is debt, the great enabler of spending beyond one's means.

As valiant as the efforts of some Tea Party types have been, the task before them is herculean. Our addiction is so strong that it seems unlikely that we can be coaxed to voluntarily kick the habit.

Instead, as we have noted many times on these pages, it is more likely that the outcome will not be grounded in voluntary choice. Either creditors no longer lend, or residual resources are simply consumed and there is nothing left to 'borrow.'

We will have then reached the chaos endpoint of socialism.

Sunday, September 29, 2013

Saving, Education, and Prosperity

Maybe someday
Saved by zero
I'll be more together
--The Fixx

Among the many salient points Mises makes here is the superior position of saving on the road to prosperity.

It is commonly held that formal education is the most important factor in advancing standard of living. But formal education itself requires resources to be set aside (i.e., saved) to feed the teachers and build the school buildings. Moreover, knowledge and skills can often be conveyed in less capital intensive ways such as observational and experiential learning channels.

Mises observes that the binding constraint holding back underdeveloped countries is not education. "Know how" can be transferred. What holds these countries back is insufficient capital. Capital cannot be transferred if nothing has been saved.

The United States was once an underdeveloped nation. What made America the most prosperous country in the world were relatively unhampered market conditions that encouraged voluntary production and trade. People set aside part of their production and invested some of those savings in productivity improvement projects. It was the process of capital formation that made this country wealthy.

As we have discussed many times on these pages, US market conditions no longer favor capital formation. Instead, they encourage capital consumption. Savings rates are negative. People are even borrowing money to go to school. College student loan debt recently crossed $1 trillion and now exceeds credit card debt.

Saving, not education, is the goose that lays the golden eggs. We are eating the goose.

Saturday, September 28, 2013

Lengthening Unemployment Lines in Cali

Plenty of room at the Hotel California
Any time of year
You can find it here

California legislators recently voted to raise the state's minimum wage to $10/hr, thereby guaranteeing more compulsory unemployment for people in The Golden State. Professor John Taylor pictures the situation in ECON 101 terms.

In unhampered markets, the prevailing price occurs at the intersection of supply and demand. Minimum wage laws place a floor on price such that markets cannot 'clear.' The result is a gap, or 'surplus,' of labor. Quantity of labor demanded by employers at the minimum wage rate is lower than the free market price. Moreover, there are people willing to contract for less than the legal minimum but they are prohibited from doing so.

It should also be obvious from the above picture that the higher the floor set by the minimum wage, the greater the 'surplus' of labor.

California just lengthened its unemployment lines.

Friday, September 27, 2013

Slanting the Tea Party

I know I could break you down
But what good would that do?
I could surely never know
That what you say is true
--Information Society

This article proposes biased reporting of recent Gallup survey data that gauged support of and opposition to the Tea Party. The Gallup headlines read to the effect that Tea Party support has recently dropped to near all time lows. Is this an accurate message or does it reflect bias?

Here is the historical series associated with the study:

A few things can be observed. When data are plotted over time, the resulting series is well viewed as output of a process. In the case of psychometric data, the process can be viewed as thinking about a subject (whether that thinking is shaped by reason, emotion, or some other driver) and the output as the rendering of some form of judgment, attitude, or perception about the subject over time. The above series can therefore be seen as the output of a thought process that renders judgment concerning the Tea Party in either a positive (% Supporter) or negative (% Opponent) manner.

Of course, there is also a group of people who have rendered neither positive or negative affect about the Tea Party. In fact, this 'neutral' group constitutes a significant majority in this case. That this group is not plotted on the graph or considered in the analysis is a hint of bias. As suggested by the article, why shouldn't the headlines read, "Survey continues to show that over 70% of Americans do not oppose Tea Party?"

When data series are viewed as a process, then the focus of analysis is rarely on a new data point itself. Instead, the focus is on how the data point fits in with previous data points and whether any patterns can be observed. In quality control, which employs such process-oriented analysis routinely, the objective is on whether the process is 'in control' or 'out of control.' Usually, this means assessing whether the process mean has significantly shifted up or down over time.

It does appear the % Supporter mean has shifted down over time. One way to test this is via a simple t-test. There are 16 data points in both of the above series, and the eye is attracted to the decline between the 10th and 11th data points in the % Supporter series, which shows a drop from 27 to 21 as measured in Fall 2011. If we compare the mean of data points 1 thru 10 with the mean of data points 11 thru 16, then we get the following results:

The mean of the % Supporter series is about 5 1/2 points lower since Fall of 2011 with that difference being highly significant. The mean of the % Opponent series is also calculated to be lower since that time, but the drop is smaller and not statistically significant.

The point here is that nothing materially new was revealed by the recent round of data. The new data point of 22 merely adds to confidence that a downward shift in Tea Party support as measured by the Gallup approach has occurred. This shift may have happened two years ago. Since then, it is difficult to construe anything other than that support for the Tea Party has been stationary (i.e., not trending).

The salient question to ask is what caused the drop in measured support for the Tea Party toward the end of 2011? Was there a material change in attitude toward the Tea Party? Another possibility, one that we never learn from Gallup, is that there was a material change in survey methodology that made the step change lower in late 2011 an artifact of the measurement system.

In fact, one change in methodology is readily apparent from the above graph. Frequency of data collection has decreased dramatically since late 2011. According the graph above, only 3 of the 16 surveys have been conducted since the beginning of 2012, and the current data point represents the first one obtained in about a year. Decreasing data collection frequency reduces confidence in the meaning of new data points. There is more unmeasured space between points thus making it more difficult to differentiate between natural ebb and flow in the series versus something that is different from usual.

Stated differently, when examining the above graph it should be readily apparent that we know more about the shape of the % Supporter and % Opponents series prior to 2012 than since then.

Yet, the Gallup report suggests no caution with respect to interpreting the recent data. Instead, it suggests that Tea Party support is indeed trending lower. And near the end of the piece it attempts to tie this 'low ebb' of Tea Party support to recent activities of Tea Party activists to restrain the debt ceiling and Obamacare.

This is the stuff of slant. An objective analyst would not make these assertions because they are not well supported by the data.

One other note is that if we compare the means of % Supporter and % Opponent over the entire series, then they are in a statistical dead heat (26.69 vs 27.75 respectively, p = .938). The fraction of people supporting the Tea Party is the same as the fraction opposing it.

Furthermore, as mentioned by the article, the fraction of Tea Party supporters remains higher than the fraction of Americans who call themselves liberals.

That none of this additional perspective was provided in the Gallup report suggests classic liberal slant.

Thursday, September 26, 2013

Purge the Parasites

"From East Egg, then, came the Chester Beckers, and the Leeches, and a man named Bunsen, whom I knew from Yale, and Docter Webster Civet, who was drowned last summer up in Maine."
--Nick Carraway (The Great Gatsby)

Jacob Hornberger observes that, despite fear-mongering to the contrary, laying off scores of federal workers would be very positive for the United States. The public sector is the parasitic sector. To thrive, it must attach itself to the private sector and suck resources from producers.

This results in capital consumption, because resources that could be set aside to invest in productivity improvement projects are devoured by the public sector. General standard of living is worse off because less output is generated per unit of input than would have been produced if those resources were invested in capital projects.

Moreover, people who could be engaged in producing output are instead consuming output when they are employed by the government.

Statists argue that government workers are engaged in productive work. But if that were the case, then they would support themselves rather than needing to confiscate the production of others. Moreover, we would not need to continually borrow ever more debt to fund ever growing government programs. If they were productive, then these programs would self fund.

The economic scoreboard, of course, indicates that this is not the case.

Do not fall for the Statist propaganda. As government gets smaller, wealth gets larger. Standard of living gets better.

Debt Ceiling Hypocrisy

I wear my sunglasses at night
So I can, so I can
Watch you live and breathe your story lines
--Cory Hart

Rick Santelli observes classic hypocrisy of politicians from both sides of the aisle related to the debt ceiling. Examples are many and start at the top with the president himself. This is confirmation bias at its best (worst). When your party is in charge, you see things differently than when someone else's party is in charge.

Wednesday, September 25, 2013

Obamacare, Compromise, and Freedom

--Samuel Girard (The Fugitive)

Rand Paul's 13 hr filibuster in March has now been exceeded by Ted Cruz who has been standing on the Senate floor for over 19 hrs in opposition to Obamacare.

There are many conservatives who think this opposition is misguided. For example, Thomas Sowell thinks that this effort will result in no victory for Obamacare opponents while distracting public attention away from the various problems and scandals that surround the Obama administration. As he sees it, Sowell thinks that symbolic efforts such as Cruz's are a gift to liberals. Sowell would rather pick fights that he thought he could win.

The problem with this line of thinking is that much liberty can be lost while waiting for such favorable situations to develop. In a context of ever growing government, social power is constantly converted to State power, which reduces capacity for individuals to fight back or resist over time.

A common mechanism employed by the State that drives gradual decline of freedom is political compromise. When one side seeks an outcome that reduces freedom, any compromise with that side reduces freedom. The more compromises that are reached, the more freedom declines.

Here is a nice article that discusses the dangers of compromise in the context of Ted Cruz's resistance on the Senate floor. It draws from the story of Anatoly Sharansky who spent a decade as a prisoner in a Soviet gulag. Sharansky refused to obey even mundane orders from his prison-masters because "Sharansky knew that to compromise even a little would lead to compromising a lot."

If you value freedom, then you do not compromise it even a little, because over time it leads to compromising a lot.

That is what Ted Cruz's actions reflect.

Tuesday, September 24, 2013


"Dogs and cats, living together. Mass hysteria!"
--Dr Peter Venkman (Ghostbusters)

Google word counts associated with 'anarchy' have probably increased recently. Liberal talking points appear to include labeling as anarchists those people who oppose agendas for larger government.

In its most straightforward sense, anarchy means self-rule. Rather than institutionalizing a government to rule people, individuals govern themselves.

This is certainly not the picture that today's liberals want to paint when they shout anarchy. After all, self-rule was a founding principle of America. The last thing liberals want to do is to awaken visions of self-rule in the heads of a slumbering populace.

Instead, liberals want to associate anarchy with conditions of lawlessness and chaos. Yes, lawlessness and chaos can be a consequence of anarchy. But these conditions can just as readily be associated with institutionalized governments--as history has repeatedly demonstrated.

But Leftists know the power of words, and they like to engage in the classic Liberal Mind Trick. Change the definition of the word and then repeat it in hopes that citizens will internalize the propaganda.

Proponents of the State want to portray anarchy as bad. Their hoped-for outcome is captured by Joseph Sobran at the end of this nice little essay:

"The measure of the state's success is that the word 'anarchy' frightens people, while the word 'state' does not."

Still, a fair question to ask is whether freedom is best realized under conditions of anarchy or under some form of limited government. We'll circle back to this question in a future post as it is one that I've been pondering lately.

Monday, September 23, 2013

What a Fool Believes

She musters a smile
For his nostalgic tale
Never coming near what he wanted to say
Only to realize
It never really was
--Doobie Brothers

President Obama's dazzling elocution continues to betray his level of intelligence. Another example went into the books from a recent speech to the Business Roundtable when the president declared that "raising the debt ceiling, which has been done over a hundred times, does not increase our debt."

That one should raise eyebrows of even this president's staunchest minions. Gradeschoolers should have trouble swallowing this line.

His opponents have to savor, and proponents have to dread, situations where Obama decides to go off teleprompter. He clearly was trying to wing it here.

Sunday, September 22, 2013

Food Stamp Nation

Feed the babies
Who don't have enough to eat
Shoe the children
With no shoes on their feet
House the people
Livin' in the streets
Oh, oh, there's a solution
--Steve Miller Band

Informative video on the rising American dependence on food stamps. We've noted escalating SNAP enrollment before. About 50 million Americans now use food stamps.

The video also brings out the role of corporations in the process. Simply stated, food stamp programs are money makers for many retailers such as Wal-Mart (WMT) and those producers who supply them. They have a vested interest in encouraging food stamp programs and do so via lobbying and other avenues that secure political influence.

The result? Another avenue for transferring wealth and for unnaturally skewing wealth distribution. And an increasingly institutionalized mindset in the value of welfare programs despite an economic scoreboard that indicates the opposite.

SNAP is one of many factors driving our addiction--our ever increasing dependence on spending and debt.

no positions

Saturday, September 21, 2013

Path of Addiction

You see the signs
But you can't read
You're running at
A different speed
--Robert Palmer

We have employed the addiction analogy many times on these pages to describe our unbreakable habits of borrowing and spending. The theme surfaced again this week as onlookers described the Fed's inability to cut back ('taper') its stimulative bond buying known as quantitative easing (QE).

Stan Druckenmiller laments the Fed's 'no taper' decision, observing that the central bank could have initiated the process to get us "off the dope." Others, of course, believe that the Fed could not cut back if it wanted to and has effectively trapped itself in a corner.

Parenthetically, Druckenmiller also observes that the Fed's decision not to taper is "fantastic for every rich person" and thinks that this monetary stimulus program amounts to "the biggest redistribution of wealth from the middle class and poor to the rich ever." This is a point these pages have made many times as well.

David Stockman thinks that "we're stumbling into the endgame" as Ben Bernanke hands the baton to (presumably) current Fed vice chair Janet Yellen. Yellen "has no clue how to wean Wall Street from its pathetic addiction to easy money."

The addiction is not just Wall Street's, of course.

There are only two paths for the addict: pull back and kick the habit, or escalate and crash.

Which path is ours?

Friday, September 20, 2013

Monetary Roach Motel

Relax, said the nightman
We are programmed to receive
You can check out any time you like
But you can never leave

Peter Schiff discusses why the Fed's 'no taper' decision was really no surprise. The Fed has checked into the ultimate monetary Roach Motel from which it cannot leave.

Way back when the Fed initiated what is now known as QE1 (the QEx numbering system prolly tells you all you need to know about the Fed's ability to end it), Ben Bernanke discussed the Fed's 'exit strategy.' Discussions of exit strategy subsequently vanished with QE2, Operation Twist, and now QEternity.

Bernanke used to say that the Fed's bond buying program was not 'monetizing debt,' i.e., printing money out of thin air to buy debt, because the Fed intended to sell those bonds back into the market once the economy 'stabilized,' thereby removing the 'temporary' printed money from the system. (The many flaws in that line of thought are topics for different days...)

Since then, the Fed has predictably shifted gears, suggesting that instead of unloading the $4 trillion in bonds building on its balance sheet, it will simply hold them to maturity.

Schiff astutely observes that this does the Fed no good either. If the Fed holds the bonds to maturity, then debtors will need to pay principal to the Fed. That won't help things, because the debtors will have to sell $trillions in assets to raise cash to pay the Fed its principal. Helloooo, selling cascade!

The Fed didn't taper because it knows that any reduction in stimulus takes the economy off life support and subjects it to immediate breakdown. The Fed wants to maintain the image that it wants to taper in order to keep the bond ghouls from assuming control of the bond market due to inflation concerns. It also can't afford to lose the stock market that QE has subsidized, as stock prices provide an illusion of economic health. Meanwhile, the Fed hopes that the economy miraculously roars back to health.

Hope, of course, is a fool's strategy. And unfortunately for the Fed, the bond ghouls may already be at work.

If rates continue to rise in the face of 'no taper,' then the game is up. Ten year T-note yield ($TNX) may therefore constitute the most watch-worthy measure on the planet.

POSTSCRIPT: A fresh article from Minyanville makes a similar argument.

no positions

Absolutely Disgusted

"I know exactly how you feel."
--Col Robert Gould Shaw (Glory)

My friend Todd Harrison captures exactly how I feel about the recent turn of events. I too am absolutely disgusted by policies that will impair lives in future generations. I also have little doubt that the ramifications of these polices will be more profound than any financial crisis that we have witnessed.

Capitalism has long since been discarded, and replaced with a socialistic, government-guided system that has been enacting short-sighted policies poised to destroy standards of living for our children.

As Toddo adds here, the motives, actions, and outcomes of this foolish experiment will be studied, debated, and ridiculed for years to come.

Right now, we surely are dancing on the head of a pin.

Thursday, September 19, 2013

Taper Off

"The mother of all evils is speculation--leveraged debt."
--Gordon Gekko (Wall Street: Money Never Sleeps)

A year after announcing QEternity, the FOMC told markets that they are not about to cut back (a.k.a. 'tapering') their rate of bond purchases. The Fed's balance sheet is headed toward $4 trillion in assets. These assets are being purchased with money created out of thin air.

Markets around the world embraced risk in jubilation, with the S&P 500 (SPX) closing at an all time high. Gold shot up nearly $60 on the news.

This is what unbridled speculation and moral hazard look like. As long as the Fed pumps easy credit into the system, then speculators have fuel for buying risky assets on margin (a.k.a. the carry trade). As long as these speculators believe that the Fed has their back, then they are emboldened to make their carry trades ever larger.

This works until either the cost of carry increases or the value of the assets that they have purchased on margin decreases. When either occurs, carry traders sell their positions to close their trades before they lose their shirts. Of course, it is impossible for all of these folks to escape the carry trade unwind phase with their shirts on (see, for example, the 2008 credit collapse).

When carry traders figure this out, we get the elevator shaft once again.

position in SPX

Wednesday, September 18, 2013

Minimum Wage Laws and Discrimination

When you said goodbye
You were on the run
Tryin' to get away from the things you'd done
Now you're back again
And you're feeling strange
So much has happened, but nothing has changed
--Glenn Frye

In part 2 of a missive on the damage wrought by minimum wage laws (part 1 here), Thomas Sowell observes that minimum wage laws have historically been an instrument of racial discrimination. This is because these laws not only constitute compulsory unemployment, but they also disproportionately force low skilled workers, who often come from minority groups, to the sidelines.

Cases of using minimum wage laws to promote discriminatory agendas have been documented in other countries such as Canada, Australia, and South Africa. The United States has been no exception. For example, supporters of the first federal minimum wage law in the US, the Davis Bacon Act of 1931, included Northerners seeking to keep Southern construction companies that employed non-union black workers from heading north and under bidding unionized firms on building projects.

The irony, of course, is that many proponents of minimum wage laws also claim to oppose racial discrimination.

These people have either not thought things through or they possess ulterior motives.

Those who empathize with minorities and 'underprivileged' classes should be the last to support minimum wage laws because these laws disproportionately force minorities from labor markets and put them out on the street.

Tuesday, September 17, 2013

Three Bubble Lines

I can see clearly now the rain is gone
I can see all obstacles in my way
Gone are the dark clouds that made me blind
--Jimmy Cliff

Every now and then it helps to grab a 'big picture' view for perspective. The below chart shows monthly S&P 500 (SPX) prices since 1980. Let's note a few things.

First is that the smooth uptrend pattern that characterizes the first half of the series (let's call this the Normal Progress Line) looks nothing like the saw toothed, zig zaggy pattern that characterizes the second half of the chart.

The saw toothed pattern began in the mid 1990's when it lifted off from the Normal Progress Line and went nearly vertical. Let's call that steep sloped line a Bubble Line. Three Bubble Lines are present in the saw toothed phase of the series.

The first Bubble Line corresponds to what is often referred to as the ' bubble.' It gets this label because the marquee event during this period was the astronomical appreciation of Internet-related stocks. That bubble popped in 2000 and deflated until early 2003.

The second Bubble Line then began tracing its path higher. We commonly label this period the 'housing bubble' because the marquee event during this period was the astronomical appreciation of real estate and associated real-estate securities. That bubble popped in 2007 and deflated until early 2009.

Interestingly enough, the 2009 low corresponds to position of the Normal Progress Line if its slope is extrapolated forward.

Since early 2009 a third Bubble Line, corresponding to the 'QE bubble,' has been tracing a path higher. It can be called the QE bubble because it has been characterized by unprecedented money printing and securities buying that has fancily been labeled 'quantitative easing' by central bank sophisticates. Unlike the previous two bubbles, there is no particular asset class that has benefited from this round of easy money policy. Instead, all financial asset classes have been floating higher on an ocean of central bank induced liquidity.

This third and final bubble has yet to deflate. When it does, note how far down stock prices have to fall to reach the Normal Progress Line. The SPX would have to fall by 50% from here.

Given long term tendencies of markets to overshoot in both directions, and that actual prices have been above the Normal Progress Line for going on 20 years, it is easy to conjecture that popping the QE bubble will drive prices below the Normal Progress Line for an extended period of time.

position in SPX

Monday, September 16, 2013

Subsidies and Elevator Shafts

Out along the edges
Always where I burn to be
The further on the edge
The hotter the intensity
--Kenny Loggins

At 21 - 22 min in his recent interview Stan Druckenmiller discusses the role of quantitative easing (QE) in boosting stock and other asset prices. In his view, "QE has subsidized all asset prices and when you remove that subsidization the market will go down."

The interviewer responds, "That would suggest that a lot of what we see in asset prices is illusory, and if you take the Fed away, the fundamental underpinnings just aren't there."

Druckenmiller wistfully pauses and then shares that his first mentor and boss used to tell him that "it takes hundreds of millions of dollars to manipulate a stock up, but the minute you have this phony buying stop, it can go down on no volume. It can just re-price immediately."

This has him looking for signs that the Fed's 'phony buying' is going to stop. Because as soon as it does, prices are likely to fall down the elevator shaft.

So, we have millions of investors, including the 'smartest' ones, engaged in risky behavior that they know is being subsidized, and they plan to keep doing so until they get the signal that the subsidization will stop. At which time they will all exit their positions, presumably with the goal of keeping their gains.

Stan Druckenmiller obviously thinks he has an edge in being able to forecast the end of QE.

Others, whether they feel the same edge, obviously believe that they will not crash and burn either.

You don't have to be as smart as SD to recognize the danger of this situation.

position in SPX

Sunday, September 15, 2013

Generational Theft

They gave you life
And in return you gave them hell
As cold as ice
I hope we live to tell the tale
--Tears for Fears

Insightful interview with legendary former hedge fund manager Stanley Druckenmiller. This is one of those chats that I like to listen to multiple times. Druckenmiller is a sharp guy with a proven track record--particularly during periods of social and market chaos. Moreover, because he's not comfortable in the public spotlight (as you might gather from this interview), this interview is a rare opportunity to learn what's on Druckenmiller's mind.

Although he shares his thoughts on a range of interesting topics including the importance of the next Fed chair and his current views on markets and investing, I want to focus here on the topic that motivated Druckenmiller's 'coming out' into the spotlight. This interview is actually a follow-up to a  tour Druckenmiller did earlier this year focused on our entitlement problem. We are spending more than we take in and borrowing to make up the difference. This burdens future generations with the bill for the current generation's consumption.

Druckenmiller calls this 'generational theft.' Entitlements are a classic Ponzi scheme, where benefits go to those who 'invest' in the system early, leaving the latecomers holding the bag. That many officials and their minions deny the Ponzi-esque nature of entitlement programs demonstrate how far off the rails we are.

Apparently, recent squabbles related to the 'sequester' convinced Druckenmiller that there is little chance that the political process as currently practiced will correct this problem. Perhaps one of the reasons that it took him so long to figure this out is that he voted for Obama. He notes in the interview that he bought into the Hope And Change rhetoric. I was pretty surprised by this revelation as it struck me as naive coming from a guy this smart.

Perhaps more naive is his proposed solution. He is spearheading a campaign to educate people, particularly college students and seniors, on the gravity of the problem with an emphasis on how their consumption today burdens the generations that follow. He thinks that the more people understand the numbers, the more they will gain a sense of the injustice that the system does to the young. Subsequently, they will vote for reform, thinks Druckenmiller.

Hope he's right but I'm not holding my breath. People are born economizers and seek the most benefit from the least cost. When they can recruit strong armed government agents to take resources from others on their behalf, they will be tempted to do so.

Nonetheless, it is good to see Druckenmiller on the circuit. Even if his approach seems pretty idealistic, he is pursuing a noble goal.

Saturday, September 14, 2013

Information, Education, and Government

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

Information and education. Society cannot be free if government is involved in either of these.

The reasoning is straightforward. Government is legalized force. Because it constantly seeks more power, government can use its force to manipulate information in a manner that favors political agendas and to develop channels for distributing it. 

History is replete with examples readily recognized by outsiders as propaganda and mind control. 

Yet, insiders often have trouble seeing it. Instead of evil, they see benevolent rulers acting for a 'greater good' and strengthening 'national spirit.'

The Framers understood the danger. Of the limited powers granted the federal government by the Constitution, not one provides for involvement in the design, production, or distribution of either information or education.

Yet, over time, we have permitted the federal government to operate in both domains.

Friday, September 13, 2013

Sipping Liberty

No more running down the wrong road
Dancing to a different drum
Can't you see what's going on
Deep inside your heart?
--Michael McDonald

By the day, more people are waking up. From a long slumber, they are opening their eyes and seeing that the gift of freedom is theirs by right. It is not a privilege handed down by discretionary rule.

Liberty is endowed by our Creator. It is a condition of humanity.

This worries the Establishment to no end. The few in Washington that have picked up Liberty's torch are acting boldly--in the sense that actions aimed at limiting the role of government have been so rare on Capitol Hill as to appear alien. So much so that Statists associate actions to restrain our out-of-control federal government with anarchy.

Increasingly, however, Americans aren't drinking this rhetorical kool aid. Instead, they are sipping liberty.

There is no greater threat to the State than a people awakening to freedom.

Thursday, September 12, 2013

Diversity and State Control

But I still feel the same
Lost like tears in the rain
I love the mystery of you
--Ric Ocasek

Diversity is axiomatic of human nature. Variation among people is essential to prosperity. If all people were similar in skills, capabilities and interests, then it would be difficult to realize the division of labor necessary to advance standard of living.

That people differ in their skills and interests is one of God's great gifts.

We often hear proponents of the State give lip service to the value of diversity. It is lip service because the State loses its effectiveness as diversity increases among those it seeks to govern. Diversity means difference of opinion. Diversity fosters dissent and is difficult to control.

The State seeks sameness among its subjects. It wants no dissent. Instead, it pursues uniformity and groupthink--a mindless deference to authority.

This is why centralized designs struggle. The greater the area over which an authority wishes to govern, the more difficult it is to do so. Greater distances bring more diversity. Dissenting viewpoints grow.

As geographic area grows, it becomes increasingly difficult for the State to marshal enough public support to legitimize its actions. The number of dissenters constitutes an increasingly significant threat to State control.

Government's insatiable quest for more power inevitably finds the State seeking to expand its reach. Fortunately, the increasing diversity that such power seeking encounters is likely to push back.

Diversity is the enemy of the State.

Wednesday, September 11, 2013

Open Window

"When the Lord closes a door, somewhere He opens a window."
--Maria Von Trapp (The Sound of Music)

One of God's wonders is the paradox of gain through loss. In scripture readings over the past few weeks, we have heard about the gains possible from voluntary losses. Give up your possessions and other worldly attachments, He says, and join Him in the Afterlife.

But we also experience loss in involuntary, often tragic, ways. Theft or catastrophic loss of property, severe illness, death of a loved one. In light of such events, we are often prone to question God's existence or His affection for us. After all, what kind of deity would let such bad things happen to good people?

It is likely, of course, that we will never completely understand His intent. However, it is possible to anticipate, as Maria suggests above, that God creates conditions for positive outcomes from seemingly very negative events.

For me, one of those situations unfolded twelve years ago today. September 11, 2001 was one of the worst days of my life. Like others, I still have trouble processing what unfolded that day, and I struggle to suppress rage when viewing footage or thinking back to that time.

But 9-11 was also a significant turning point for me. I began asking questions that I had never pondered before. Today, my hunger for truth has never been stronger.

Perhaps this quest would have occurred anyway given the subsequent train of events. At the very least, however, my departure would have been delayed.

On 9/11/01, the Lord opened a window for me.

Tuesday, September 10, 2013

Let Labor Markets Trade Freely

You could have a steam train
If you'd just lay down your tracks
You could have an aeroplane flying
If you bring your blue sky back
--Peter Gabriel

Patrick Barron suggests that one of the most effective things that could be done to improve urban wastelands like Detroit is to take a sledgehammer to regulations that restrict the free trade of labor. We have stated it many times on these pages. Intervention in labor markets, such as minimum wage laws, amounts to compulsory unemployment.

This has particularly negative effects on marginal, unskilled wage earners. By law, they are unable to offer their labor to employers below the legal limit. Employers hire fewer workers, and are prone to look for lower cost environments in which to operate. Perversely, as labor markets are choked off, more and more workers face the marginal situation.

Channeling Mises, Barron dispels the urban legend of 'labor gluts. Unless we face limited supplies of other factors of production, it is the supply of labor that limits economic expansion. As the pool of available labor increases, people are prone to specialize more. More specialization generally increases productivity, meaning that more goods are produced per hour of labor. This increases overall wealth and general standard of living.

Because individuals have insatiable desires to constantly improve their standard of living, there can never be too many goods. On the contrary, there is always more work to be done than there are people to do it. Therefore, in markets that trade freely, there is no unwilling unemployment.

Regulation suffocates the labor market, and forces willing workers to the sidelines.

A worthy first step in getting cities like Detroit back on their feet is to allow buyers and sellers of labor to trade with no restraint.

Monday, September 9, 2013

Russia, Syria, and Strength

"We can't fight everyone at once. Think. Less emotion. You'll live longer."
--Miroslav Lokar (Behind Enemy Lines)

Russia sides with Syria and publicly joins others in urges for US to stand down in proposed military action against Syria. Putin understands strategic thinking. He knows that he can improve his image by siding with peace--even if that is not his long term intention.

He also knows that he is turning the screws on the American president. Whichever way Obama acts from here is likely to strengthen Putin's and the Russian position at the expense of the American president. If Obama attacks, then the US engages in an unpopular war that further weakens America's political and economic position. If the US president backs down, then Obama reneges on an initiative that he has foolishly escalated and thus faces humiliation.

We should expect leaders of all countries wishing to strengthen their positions vis a vis the US to line up behind Russia.

POSTSCRIPT: Note Syria's late morning statement here.

Sunday, September 8, 2013

Destroying Social Cooperation

Help me if you can I'm feeling down
And I do appreciate your being 'round
Help me get my feet back on the ground
Won't you please, please help me
--The Beatles

Gary Galles describes how a primary consequence of State action is the destruction of social cooperation.

Social cooperation is a natural condition of a free society. To advance their interests, individuals engage in exchange with others. Cooperation with others expands over time because producers have increasing incentive to improve their output to better accommodate the needs of buyers.

When government intervenes in voluntary exchange, it erodes propensity for cooperation. If, for example, production is taxed, then producers are motivated to do spend less timing thinking about how to benefit others while spending more time thinking about how to avoid taxes.

The more government intervenes, the more people go into self-defense mode in order to protect their interests against aggression by the State.

Social cooperation declines as does standard of living in kind.

Saturday, September 7, 2013

Chaotic Blindness

"Who would have ever believed that human beings would have been stupid enough to blow themselves off the face of the earth?"
--Julian Osborne (On the Beach)

The Misesean chaos endpoint draws ever nearer. Crushing debt, massive currency debasement, stifling government intervention, escalating threat of war. All symptoms of the authoritarian mechanism of socialism.

The warning signs surround us. Yet complacency abounds. People are unable to see the cliff or sense separation from it.

History suggests that people generally come to their senses only when impact is imminent.

Friday, September 6, 2013

Ten Year Yields Break Higher

When explanations make no sense
When every answer's wrong
You're fighting with less confidence
All expectations gone
--Swing Out Sister

Ten year yields staged a picture perfect breakout yesterday following a textbook cup and handle set up.

Today, T-notes rallied hard early in the day and for while it appeared that yesterday's move was a head fake. Instead, govies sold during the day and yields recovered most of the earlier session losses. This suggests that the path of least resistance remains higher.

Long bond yields have now nearly doubled from their March lows. The yield on the 10 yr note is just shy of 3%.

From a market perspective, this chart may currently be the most important one on the planet.

no positions

Bullish Gold Pattern

Yeah there's a storm on the loose
Sirens in my head
Wrapped up in silence
All circuits are dead
--Golden Earring

Gold appears to be tracing a reverse head and shoulders pattern. Can be seen as bullish multi-month basing.

It's date with destiny looks to be the gap from the April breakdown.

position in gold

Thursday, September 5, 2013

Styles of Hybrid Contracting

"I'm offering you a three-year contract at twenty thousand dollars a year, starting today."
--Potter (It's a Wonderful Life)

Once again, from Williamson (2008). For Node C transactions, there are three primary styles of mediating the contractual interface for hybrid transactions.

Muscular contracting involves a large, powerful entity that dictates contractual terms in a one-sided manner. "Here are my specifications, give me your best price or I will go elsewhere..." While workable for contracting generic goods and services, Node C involves transactions where specific investments are required. Smaller, less powerful participants understand that their investments will be at risk if things go wrong. They will therefore either ask the powerful entity for contractual safeguards, raise prices to reflect the added risk they are being asked to assume (a la Node B), or decline to contract. It should be apparent that the muscular approach to contracting is likely to be inefficient and myopic over time.

Benign contracting assumes that cooperation for dealing with unforeseen contingencies will be forthcoming. Trust supplants power as the key concept. "I trust that you'll do the right thing if the situation changes..." Because of self-interest, however, as outliers arise and stakes increase, temptation to defect from the spirit of cooperation grows. The proposition is that when 'lawful' gains to be had from insistence upon the literal terms of the contract exceed the discounted value of continuing the exchange relationship, defection from the spirit of the contract can be projected.

Credible contracting differs from benign contracting in that it does not project benign behavior when outliers appear. It also differs from muscular contracting in that it is not mean-spirited. Instead, the parties involved exercise feasible foresight out of awareness that all complex contracts are incomplete and thus pose cooperative adaptation needs. The parties look ahead, project potential hazards, work out coping mechanisms, and write them into the contractual design. Credible commitments are thus introduced to effect hazard mitigation.


Williamson, O.E. 2008. Outsourcing: Transaction cost economics and supply chain management. Journal of Supply Chain Management, 44(2): 5-16.

Wednesday, September 4, 2013

RIP Ronald Coase

"It's a giant of a human thing."
--Paul Scott (Valley of Decision)

Ronald Coase passed away on Monday at the age of 102. Coase was a giant of economic thought. His published work spanned the better part of a century and he was still active in his emeritus years.

I first 'met' Coase during my graduate studies when I read his seminal 1937 paper, "The Nature of the Firm." In it, Coase was among the first to formally consider why some transactions are done on spot markets managed by individual buyers and sellers while others are done by firms that effectively take some transactions off the market and manage them under private control by hierarchy.

Unlike his predecessors who assumed zero transaction costs during exchange, Coase argued otherwise. He observed that positive transaction costs are present in even perfectly competitive markets. For example, buyers incur costs related to searching among alternatives before making a purchasing decision. Sellers research buyer behavior prior to production and sales. If market related transaction costs are high enough, then alternative governance mechanisms (e.g., organizational hierarchies) might mediate exchanges more efficiently.

Coase's observations spawned what today is known as transaction cost economics or new institutional economics. Ironically, I happen to be boning up on theory here due to research interests.

My other primary exposure to Coase has been in nascent self-study of externalities. Coase's influential 1960 paper, "The Problem of Social Cost," was the basis for what became known as the "Coase Theorem." Roughly, the Coase Theorem posits that when property rights are respected and transaction costs are low, then parties that are in dispute over "negative externalities" such as pollution will naturally gravitate toward negotiated solutions that provide the most efficient and mutually beneficial outcomes.

The theorem suggests that property rights as distributed ex ante are not as important as the ability to trade property rights during negotiations to generate mutual gain. This occurs naturally in unhampered markets because consumers will ultimately direct resources toward ends that produce the highest perceived value.

As transaction costs increase (e.g., costs of regulatory compliance, legal and court costs), then the outcomes change and become more asymmetrical in nature.

For a sampling of his thought process, here is a wonderful 1997 interview with Coase beginning bottom of page 1. In fact, I want to circle back to several insights that he shares in this conversation when I have more time.


Coase, R.H. 1937. The nature of the firm. Econometrica, 4: 386-405.

Coase, R.H. 1960. The problem of social cost. Journal of Law and Economics, 3: 1-44.

Tuesday, September 3, 2013

Simple Contracting Schema

"It's a weird subculture, Al."
--Frank Horrigan (In the Line of Fire)

Simple model of contracting from Williamson (2008):

Let k be a measure of asset specificity. For transactions that use general purpose technology, k = 0. In these cases, no specific assets are involved and the parties involved in exchange are essentially faceless. Node A corresponds to the ideal transaction in law and economics. Governance is accomplished through competition and disputes are resolved by the courts.

Transactions that use special purpose technology are those for which k > 0. Such transactions give rise to bilateral dependencies, and parties have incentives to build continuities that safeguard specific investments. Let s represent that size of such safeguards which might include penalties, information disclosure and verification procedures, specialized dispute resolution (e.g., arbitration), and, in the extreme, integration under unified ownership.

Node B corresponds to unrelieved contractual hazards in that specialized investments (k > 0) are exposed and no safeguards (s = 0) have been provided. Such hazards will be recognized by farsighted players who will price out the risks.

Added contractual supports (s > 0) are provided by Nodes C and D. At Node C, these take the form of inter-firm contractual safeguards. If costly breakdowns continue in the face of foresight to craft effective contractual safeguards, then the transaction may be taken off the market and organized under unified ownership (a.k.a. vertical integration) instead as reflected by Node D.

Because added bureaucratic costs accrue upon taking the transaction out of the market, Node D can be thought of as an organization form of last resort that becomes attractive when higher degrees of asset specificity and added uncertainty pose greater needs for integrative adaptation.


Williamson, O.E. 2008. Outsourcing: Transaction cost economics and supply chain management. Journal of Supply Chain Management, 44(2): 5-16.

Monday, September 2, 2013

Forcing Others To Make War

We'll be fighting in the streets
With our children at our feet
And the moral that they worship
Will be gone
--The Who

Suppose you do not like what is going on Syria and you think military force is in order. You have several options. You can shoulder arms and head to the Middle East, where there is a liquid market for mercenaries. You can talk to others and try to convince them to do the same.

If you do not want to be a mercenary then you can outsource this work--you can hire agents to do the work for you.

What you cannot do is force others in this country to take up arms and engage in warfare alongside you or on your behalf. You also cannot force others in this country to pay for you or others to engage in warfare that you are interested in pursuing.

If you do so then you are enslaving others to work on your behalf. In this case, you are forcing others to make war.

Sunday, September 1, 2013

Congress, War, and Impeachment

The common road
Seems just like a dream
It's a mystery to me

Jacob Hornberger once again reminds us of something that we have discussed many times on these pages. The Constitution is clear. Only Congress has the power to declare war. No exceptions are made for 'small wars' or for 'expediency' or the like.

Those who do not like this law are free to initiate the defined process to amend the Constitution to enable to the president to both declare and wage war. It is doubtful that this would occur, as those who dislike the current arrangement fear a national debate on what the president should and should not be permitted to do by law. Too many people would wake up. Indeed, many are already waking up.

If President Obama continues down this path, then JH concurs with these pages that Congress should take legal action. In his view, this means impeachment. Impeachment would give future presidents cause for pause when they consider reaching beyond their Constitutional authority.

Congress holds the cards here. Let's hope it plays them.