Friday, January 31, 2014


You're begging me to go
You're making me stay
Why do you hurt me so bad?
--Pat Benatar

Last week we proposed SPX 1780ish as near term support for the index.

This week's action clearly delineated this level as a major battleground, with the bulls reclaiming the flag after multiple assaults by the bears.

Bulls will argue that their successful defense bodes well for the tape. Bears will counter that classic technical analysis says support weakens with each pass (as layers of prospective demand are 'spent').

Next week should be interesting...

position in SPX 

Leverage and Instability

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

It doesn't take much of a decline in domestic stock markets these days to grab people's attention and make them nervous. Of course, it has been a while since there has been a meaningful correction. Because the last couple of years have been largely a straight up move, price declines are more noticeable and newsworthy.

Small market declines also attract attention because systemic leverage is at all time highs. As leverage goes up, there is less general tolerance to downside price movement. Debt is high compared to equity. That equity can be wiped out with small declines in price.

As such, people are prone to react to small declines in price when they are levered. When prices go down, they must quickly unwind risky projects lest they will be rendered insolvent.

Policymakers have been expanding credit and borrowing more under the auspices of stabilizing financial systems. This is completely misguided.

Credit and debt de-stabilize. Small declines in price can send leveraged systems into chaos.

position in SPX

Thursday, January 30, 2014


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

The Treasury purchase plan proposed by the president during his State of the Union speech carries a label that only bureaucrats would be willing to stand behind: 'myRa.'

An additional point to those made previously. As China, Japan, and other foreign buyers curtail their Treasury buying, the federal government is looking for alternative sources of demand beyond the Fed-induced ponzi. Who better than uninformed 'savers' who ignorantly place their trust in the State?

To the extent that those at the bottom of the social pyramid actually participate, this scheme will separate these people from their money, thereby further distorting income and wealth distribution.

Wednesday, January 29, 2014

Income Envy

I've never seen a diamond in the flesh
I cut my teeth on wedding rings in the movies
And I'm not pround of my address
In the torn up town
No post code envy

Jacob Hornberger reinforces many of the observations made on these pages about income inequality, including the difference between income inequality that occurs naturally and income inequality that occurs by force. Currently, force is distorting income and wealth distribution.

At the end of his piece, JH poses the following hypothetical. Which would you prefer?

a) A society in which the rich earn hundreds of $millions, the middle class earn $200,000, and the bottom ten percent earn $40,000.

b) A society in which everyone receives the same amount, $10,000 per year, by virtue of government tax-and-spend equalization decree.

Those who value liberty will overwhelmingly prefer a) if the distribution of income is driven by natural (i.e., free market forces).

JH proposes leftists will lean toward b) because this group's obsessive concern with income inequality is likely grounded in envy and covetousness. They have trouble coping with the reality that some have more than others.

Indeed, many years ago Mises suggested that a pathology of resentment was central to socialism.

Tuesday, January 28, 2014

Tax Deferred Treasury Plan

You swore that you never would leave me, baby
Whatever happened to you
--Led Zeppelin

Of the many laughable proposals forecast to be floated by the president in his State of the Union speech tonite, none earned a greater guffaw from me than the proposal for a 'savings' plan that would allow people to buy Treasuries tax-deferred for retirement.


Sorry...hard for me to laugh uncontrollably and type at the same time.

Point one. Lending money to someone else (which is what you effectively do when you buy a bond) is not 'saving.' Saving is putting resources aside for the future. Lending is loaning resources (from savings) to someone else with expectations that you will get them + additional resources (interest) back in the future. When you buy bonds, you are not a saver; you are a creditor. Your savings go down and your risk profile goes up.

Point two. Lending your savings to the US government at this point in time virtually guarantees that you will lose at least part of the savings years from now that you put at risk today. This will occur thru some combintation of a) decline in the value of loan (bond price goes down), b) outright default (bond price goes to zero), c) covert default (inflation enables the govt to pay you back in devalued dollars).

Calling a T-bond purchase program a 'savings plan' is one of the better oxymorons that I have heard in some time.

Don't be the moron in this oxymoron.

Correlated Currencies

"Sometimes it's very difficult to keep momentum when it's you that you are following."
--Eva Peron (Evita)

Emerging market currencies are one of many places where we are seeing correlated stress.

Rates of forex decline against the dollar have picked up as Fed 'tapering' has become reality. Tapering tilts the dominos. One of the dominos reads that tapering reduces money printing by the Fed, which strengthens the dollar (less supply) vs other currencies.

Nice example of policy contagion.

Monday, January 27, 2014

Secession, Slavery, and Civil War

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

These pages have considered various topics related to secession, including its use as a means for coping with oppressive government and the various secession proposals by states, including Northern ones, prior to the Civil War.

This article, however, raises several interesting points about secession and slavery in mid 1800s America that have not been well considered on these pages.

One point is that the abolitionist movement included a strong disunionist thread. Per fugitive slave laws that were reinforced by the Dred Scott decision in the late 1850s, federal marshals were empowered to hunt down escaped slaves that had made their way to Northern states. That federal agents could enter a state that did not permit slavery, and capture and return escaped slaves to states that permitted slavery led to several nullification and secession proposals by Northern states.

Another point is that both Southern state decisions to secede and Northern decisions not to secede were costly miscalculations w.r.t. the slavery institution. The South's decision to secede was a miscalculation because the legal system of the US favored slavery at the time. Although many Southern states were concerned about future additions of more 'free soil' states that would have tilted balance of power away from Southern states, this was not a near-term proposition.

Constitutionally, an amendment was required to emancipate slaves in Southern states. To obtain 3/4 states approval, 26 additional states would have to be admitted and vote in unison with the 19 non-slave states to amend the Constitution to prohibit slavery. Because this was unlikely in the near term, Southern states were foolish to secede if their intent was to maintain the institution of slavery. Of course, slavery was not the only motive behind the South's secession.

On the other hand, for any abolitionist who could do the constitutional math, then the best prospects for near term change in the slavery status quo was Northern secession. Secession would have removed Northern state obligations to permit fugitive slave hunts by federal agents. Such states would have become more attractive destinations for people wishing to escape slavery--thereby increasing rate of escape of Southern slaves to the North. As rate of escape increased, viability of the slavery institution decreased.

Furthermore, secession by Northern states would have voided the Constitution in those states. Anti-slavery states could have written a new constitution where equal treatment under the law would not be compromised for personal gain.

An interesting question to ponder is why, once Southern states actually seceded, didn't Northern states immediately move to amend the Constitution to eliminate the 3/5 and fugitive slave clauses and get their houses in order? Border states would become even greater magnets for slaves escaping from the South which would have put added stress on the slavery institution in the South.

People in the North could have followed that up with a voluntary (not forced) trade embargo with the South. Southern states, being heavily dependent on Northern industrial goods, could hardly have lasted long on their own. Chances were good that many Southern states would have sought to resume a voluntary union with the Northern states for economic reasons. Those returning states would have faced a legal system that had been constitutionally revised to uphold the rights of all.

Secession by either the North or South opened a door for peaceful resolution to the slavery issue.

Sunday, January 26, 2014

Policy Contagion

Shake my fist
Knock on wood
I've got it bad
And I've got it good
--Robert Palmer

Cracks are forming. From the US perspective, these cracks are primarily appearing offshore--in foreign markets and economies. China, Japan, Argentina, Greece. Various instruments reflect the stress. Currencies, bonds, derivatives, equities.

Whether these are THE cracks that precede a correlated event remains to be seen.

Prof John Taylor suggests that correlated disturbances that do occur from here should be viewed as contagions of policy--and primarily of central bank policy initiated by the Federal Reserve. Easy money policies here encouraged easy money policies elsewhere.

Now, unwinding such policies here, even on a miniscule scale such as the $10 billion monthly taper enacted by the Fed, encourage reactionary unwinds elsewhere that, because of their correlated nature, amplify effects on world markets.

A cold in the US infects a plague on the globe.

Saturday, January 25, 2014

Social Gospel

Matthew Harrison Brady: But your client is wrong. He is deluded. He has lost his way.
Henry Drummond: It's a shame we don't all possess your positive knowledge of what is right and what is wrong, Mr Brady.
--Inherit the Wind

The Social Gospel movement is grounded in the belief that Christian ethics can be applied to solve social problems such as poverty, crime, alcoholism, and racism. The movement is consistent with postmillenial belief that the second coming of Christ would not occur until earthly wrongs were righted.

One way to advance the Social Gospel is through voluntary, charitable acts. However, the movement gained political traction in the late 1800s when Social Gospellers of primarily Protestant origin proposed that government could be used to cure social ills--Prohibition being one example. The Republican Party was first on board, but it did not take the Democratic Party long to follow suit.

As such, the Social Gospel became the religious arm of sorts for the Progressive movement that was revving up at the same time.

Although the 'official' Social Gospel movement is generally said to have withered in the first half of the 20th century, it is obvious that the central idea has not. In particular, the idea that government can be employed as an agent for social change persists in various religious and secular forms.

Friday, January 24, 2014

Cuts Like a Knife

Driving home this evening
Could have sworn we had it all worked out
You had this boy believing
Way beyond a shadow of a doubt
--Bryan Adams

Domestic equity markets down ~2% today. Unlike recent history that has seen dip buyers emerge late in the day to ramp 'em, indexes drained today to close on the lows.

Haven't seen a -2% day since last June. SPX knifed thru the 50 day moving avg with authority but as the chart indicates, previous excursions below the 50 day have been quite temporary.

Hard to read much into the recent action given all the head fakes lower over the past year or so. It does feel like the bulls were caught offsides to start 2014.

Sentiment remains optimistic. Even the bears are looking for a rally--one that they hope that will be of the 'failing' variety. Most bears are pessimistic in words only, however. Few are actually short in any significant size. They are hoping for that failing rally to provide a nice entry point.

Technical levels of lore below include SPX 1780ish (near term support), 1740ish (multi-month uptrend, and 1700ish (200 day moving avg).

The SPX last touched its 200 day 14 months ago while marking 'Thanksgiving lows' in November, 2012.

position in SPX

Bear Market Attrition

Were you ever fooled by laughter's lure
Only to find that they laughed in spite?
--The Who

It has been said that by the end of bear markets, no one is left standing--not even the bears. One reason for this is the false promise of bear market rallies. The allure of higher prices gradually lures bears out of their caves as they perceive the worst is over.

Then the Next Time Down decapitates them.

Give this process enough time and it is easy to see why few make it to the other side in one piece.

position in SPX

Thursday, January 23, 2014


Winston Zeddemore: Hey Ray, do you remember something in the bible about the last day when the dead would rise from the grave?
Ray Stantz: I remember Revelations 6:12. "And I looked, and he opened the sixth seal, and, behold, there was a great earthquake. And the sun became as black as sackcloth, and the moon became as blood."
Winston Zeddemore: "And the seas boiled, and the skies fell."
Ray Stantz: Judgment Day.
Winston Zeddemore: Judgment Day.

Millenialism is the belief that there will be a period of time where Christ will return to Earth and reign before Judgment Day. In Revelations 20: 1-10, this period is proposed to be "a thousand years."

Various theories propose how this will materialize.

Amillenialism is the belief that the millenial reign of Christ is not physical; it is spiritual and symbolic. It is also currently active beginning with Pentecost, when the New Testament era's new church began. During the millenium, the spiritual kingdom of God will grow. However, political kingdoms of man will exert their power as well. This has led some amillenialists to posit that darks days of 'tribulation' await the Church until Judgment Day arrives.

Premillenialism is the belief that Christ will literally return to set up his kingdom--i.e., Christ will return prior to the millenium and personally administer his kingdom prior to Judgment Day. Historic, or post-tribulational, millenialists believe that the Church will experience a period of great tribulation prior to Christ's return. Dispensational, or pre-tribulational, premillenialists believe that Christ will return in secret to raise dead and living Christians into the sky (a.k.a. 'rapture') prior to the period of tribulation. After the period of tribulation, Christ will return with the raptured Christians to establish his kingdom and rule the millenium.

Postmillenialism is the belief that Christ's return will follow the millenial. It differs from amillenialism in that Christ's return to earth will be physical, and that the millenial period is associated with great evangelistic success of the Church, where billions of people will come to accept Christ as Savior. Until the world experiences a long period of Christian culture, Christ will not come again to end history and judge the world. Many postmillenialists have thus concluded that they need to 'save' and 'convert' others by any means necessary in order to hasten the millenial and Christ's second coming.

Wednesday, January 22, 2014

Original Welfare Queens

To keep her looking pretty
Buy her dresses that shine
While the rest of them dudes were making their bread
Buddy, beg your pardon, I was losing mine

Southern slaveholders were the original welfare queens of the United States. This group engaged in relentless pursuit of redistribution of wealth by force by instituting a 100% tax on the labor of slaves.

Southern artistocracy's pretentions of sophistication and refinement can be viewed as fronts for large quantities of leisure made possible because they didn't have to work--others were producing for them at the point of a gun. Slaveholders were using government force to advance their interests on the backs of others. They were using the strong arm of government to get more for less, or, in this particular case, to get something for nothing.

All welfare states require a fundamentally similar arrangement.

Tuesday, January 21, 2014

Capitalism, Population, and Falsified History

"There is no fence or hedge around time that is gone. You can go back and have what you like of it, if you can remember."
--Huw Morgan (How Green Was My Valley)

In this missive, Mises discusses the oft cited falsehood that people were better off prior to capitalism. Capitalism came into its own in the early 18th century.

Before the advent of capitalism, a person's social status was fixed from beginning to end of life. Status was inherited from ancestors and rarely changed. The poor, which comprised most of the population, had little if any upward mobility.

Primitive production processes of the time were operated primarily for the benefit of the wealthy. In Europe. more than 90% of the population worked the land and rarely interacted with city-oriented processing industries. Feudalism was the dominant social design for hundreds of years.

Of the many problems inherent to this social structure was that production was designed to meet the needs of the well-heeled few. As population grew, there were many more people born into poor conditions than into rich conditions. Thus, particularly in rural areas, there were more people than there was work for them to do (since work was designed to support the rich--a limited growth market).

Productivity, defined as output per person, declined as growth in the denominator outpaced growth in the numerator.

In time, a significant fraction of population lived as outcasts on the edge of death. No work to be done with seemingly nowhere to go to change their condition.

Facing extinction, some people among the outcasts set up shop to produce goods. Unlike the orientation of conventional production of the time, however, these entrepreneurs targeted the masses. They produced cheaper products that could be bought and used by the masses.

This was the onset of capitalism. Sagely stated by Mises, capitalism can be seen as "everyone's having the right to serve the customer better and/or more cheaply."

Mises suggests that a central measure of capitalism's effectiveness is growth in population. Population cannot grow significantly if scarcity is not alleviated via production. Population has grown by orders of magnitude since the advent of capitalism. And, in countries that have engaged in capitalistic practices, the great majority of people enjoy standards of living far greater than their pre-capitalist ancestors.

Mises also dispels the oft-repeated myth that people who went to work in early capitalist operations were worse off than they were in their previous conditions. Mothers did not leave their kitchens to work in factories. Most had no kitchens. Those that had kitchens had little food to cook in them. Children did not come from comfortable nurseries. They were starving and dying.

The 'unspeakable horrors' of capitalism is once again refuted by simple population statistics. The fact that populations exploded during capitalism's early periods demonstrates that scores of children who would have died under previous conditions survived to become men and women.

No doubt conditions could be improved--and they were subsequently improved via productivity advancement. However, it is a mistake to consider conditions of early capitalism as if they could be replaced with current conditions. Instead, one must consider the conditions and choices available to people at the time.

Those that make this mistake promote falsification of history.

Monday, January 20, 2014

Immorality of the Welfare State

This is the craziest party that could ever be
Don't turn on the lights 'cause I don't wanna see
--Three Dog Night

Jacob Hornberger sketches the immoral structure of the welfare state.

Initial proposal: The federal government sends all US adults $10,000 annually. Unfortunately, since the government does not produce economic resources on its own, it must seize those resources from people in the private sector who do produce them. It must tax each adult $11,000 ($10K for the subsidy + $1K administrative expense to the government) in order to raise the grant money.

Most people don't like this plan, since they'll be out more than they'll gain.

Revised proposal I: Rank all people by age from oldest to youngest and divide them into two groups equal in number. Suppose that the age that divides the population in half is 35. All people over 35 will receive the $10,000 annual subsidy. All people under 35 will pay annual taxes of $22,000 ($10K grant for himself + $10K grant for someone over 35 yrs old + $2K in govt admin expense).

The older half likes the proposal, naturally. But the younger half dislikes it since it will be paying out more than they are getting. Passing such a proposal via democratic vote will be difficult.

Revised proposal II: Everyone will be tax exempt except the rich. Start with the top 10% of wage earners and tax them to the degree that it will pay for all individual subsidies plus the government administration expense. If more is needed, then tax the top 20%, then the top 30%, and so forth.

Not surprisingly, everyone likes the proposal except the rich. Because far more people will get more than they put in, the proposal has an excellent chance at passing by democratic vote.

Proponents of revised proposal II tell the rich that they can try to get elected and change the rules. Or, they can leave the country. Until then, their wealth will be confiscated to subsidize others.

It is difficult to conjure a more immoral system than this.

Sunday, January 19, 2014

Declining Economic Freedom

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

We have discussed Heritage's Index of Economic Freedom before, including issues with the measurement scales that underweight violations of freedom. Because the overall measurement scale reasonably dimensionalizes the economic freedom construct, however, it does garner some validity. The index is likely, for example, to capture trends even if the magnitude of the trends is inaccurate.

And, according to the most recent year's worth of data, economic freedom of the US continues in decline.

The overall economic freedom index for the United States stands at 75.5 in 2014, a drop of 0.5 from 2013. The US index stands nearly 10 points lower than those economies considered 'free' by the methodology.

The overview notes that "the US is the only country to have recorded a loss of economic freedom each of the past seven years." The decline is attributed primarily to large losses in property rights, freedom from corruption, and control of government spending.

Expansion in the size and scope of government and increased cronyism are both cited as primary factors in the decline of US economic freedom.

Saturday, January 18, 2014

Savings, Credit Money, and Prosperity

Quinn Harris: We've got no landing gear, so we can't take off. Lightning fried the radio, so we can't call for help. AirSea will try a rescue mission, but without a beacon to hone in on it's like trying to find a flea on an elephant's ass. The only thing we've got is this flare gun and a single flair.
Robin Monroe: Is it too late to get it sugar coated?
Quinn Harris: That was sugar coated.
--Six Days Seven Nights

Interesting interview with Professor Hans-Hermann Hoppe on a variety of topics. Wanted to focus here on his response to an early question about why savings are vital to economic growth.

He poses a variation of the desert island situation involving two people, Crusoe and Friday. Crusoe catches fish. He can eat them now or put some aside and consume them later. In order to survive, Friday also needs to eat fish. One approach would be for each to catch fish and eat what they catch.

Another approach would be for Crusoe to save some of his catch, and then lend some fish to Friday while Friday engages in a project to build a fishing net. Because Friday could not build the net if he had to spend his time fishing, and because Friday needs fish in order to survive, Crusoe's savings are necessary in order to fund Friday's productivity improvement project. Once the net is completed, then many fish can be caught in a short period of time, thus freeing both Crusoe and Friday to engage in additional pursuits.

Suppose that instead of saving fish, Crusoe consumes all of his catch and then gives Friday a certificate that can be exchanged for fish. When Friday goes to Crusoe to exchange his certificate for fish, he learns that there are no fish. He must therefore delay his fishing net project and get busy fishing. If he does not do so, then he will starve.

Now let's take Hoppe's lesson a step further. Suppose that there are additional people on the island. A pile of fish has been set aside in previous periods. Crusoe wants to motivate lots of economic activity and productivity improvement, so he creates many paper certificates that allows the holders to claim fish. There is no limit to how many claims he can draw up. He hands out dozens to all others on the island.

Finite amount of savings. Infinite amount of claims on saved economic resources. What is likely to happen to the quantity of saved economic resources?

The lesson is that actual resources must be set aside, or saved, in order to advance productivity. Productivity cannot be advanced by issuing paper certificates (a.k.a. credit money) that serve as claims on resources. The more paper certificates issued, the greater the likelihood that savings are depleted and productivity stagnates or drops off.

Friday, January 17, 2014

Ticking Bomb

"Rule number one when you're disarming Betty: You don't step on 'em."
--Jimmy Dove (Blown Away)

It is increasingly difficult for me to gaze at this graph without wondering when the world will awake to the danger.

The picture shows a ticking bomb--a bomb that is growing parabolically in explosive strength.

And commensurately in degree of difficulty to defuse.

Corporate Leverage Higher Than 2008

--Doug Carlin (Deja Vu)

This analysis dispels the corporate deleveraging myth. Compared to 2008/09 levels, total corporate debt is 35% higher. Net debt is 15% higher.

That leverage is higher now should be obvious given the orgy that has been taking place in corporate bond issuance.

Remember that, despite appearance, the more leveraged the system, the more unstable it is.

Thursday, January 16, 2014

Federal Register Book Case

Words as weapons sharper than knives
Makes you wonder how the other half die

Nice visual from Senator Mike Lee. The book case houses one year's worth (the 2013 volume) of the Federal Register. The small stack of papers on top of the book case are actual laws passed by Congress and signed by the president.

Mike is not just pointing out the bureaucracy and red tape reflected by those 80,000 pages. He also wants to help people visualize the extent to which unelected officials--those people who work under the executive branch that hammer out the rules and regs appearing in the Register--are writing laws that govern us.

The constitutionality of this process is, to say the least, questionable. Congress is charged with writing law. The executive branch is charged with executing laws written by Congress and approved by the president.

We have discussed trends in the regulatory burden reflected by the Federal Register before and even studied trends in Federal Register page counts. Perhaps its time to update that chart...

Wednesday, January 15, 2014

Human Action

Come on baby dry your eyes
Wipe your tears
Never like to see you cry
--Human League

Central to the study of economics is the concept of human action (Rothbard, 2004). Human action is purposeful behavior. In the economic context, human action is distinguishable from purely reflexive, involuntary reactions to stimuli. Human action is intentional, governed by a purpose that the actor has in mind. The purpose of a person's action is the end, and the desire to achieve the end is the motive for action.

Human action can only be undertaken by individuals. "Societies," "groups," "governments," et al. do not act. These are only constructs or metaphors that have no independent existence aside from the actions of their individual members. Existence of institutions such as government are meaningful only through actions of individuals who are and who are not considered members.

Initiating action requires not only unachieved ends but also expectation that particular behavior will enable achievement of the ends. Such achievement is expected to result in a less imperfectly satisfied state.

Human action takes place in environments that an individual decides to change in some way to achieve his/her ends. Environments consist of general conditions that the individual believes that he/she cannot control, and means the he/she thinks can be altered to achieve the ends. To act, an individual must have some technological idea of how to use some elements of the environment as means to arrive at the ends.

Human action always takes place in time. Once an individual decides to act to achieve an end, the end can be obtained only at some point in the future.

Because time is scarce, individuals must choose among ends to be satisfied. Choosing among ends requires ranking or prioritizing them. It necessarily follows that means are also scarce. If they were not, then all ends could be satisfied at once and there would no need to prioritize. Choosing among means to satisfy ends is called economizing.

The means to satisfy ends take the form of goods. Because they are scarce, goods are the objects of economizing action. They can be classified into two categories. Consumption, or first order, goods are immediately and directly serviceable in the satisfaction of wants. A bowl of soup, for example, is a consumption good that can be used to satisfy hunger.

Producer, or higher order, goods are transformable into first order goods only at some point in the future. For example, a can of soup must be pulled from the pantry and opened. A pan is required to hold the soup while it is heated, and a source of heat such as a stove is necessary as well. Once heated, the soup is poured into a bowl, and a spoon might be employed to eat the soup bite by bite. The above factors are producer goods because they are used to produce the good to be consumed.

Many producer goods are unavailable in nature and must be produced themselves. Thus, in addition to naturally occuring factors in producing the consumer good such as labor (e.g., to open the can, select cooking temperature, stir, pour) and land (e.g., kitchen space) involved in cooking the soup, many other factors employed in the process (e.g., pan, bowl, stove, spoon) must be produced in previous time periods and positioned so that they can be used in the production of consumer goods. These are higher order producer goods.

Finally, it should be noted all human action takes place in conditions of uncertainty. Uncertainty stems both from unpredictability of human acts of choice (e.g., bounded rationality), and insufficient knowledge of the environment (both means and general conditions) that can influence outcomes.

Omnipresence of uncertainty introduces the ever-present possibility of error in human action. For example the actor might find, after completing an action, that the means were inappropriate in attaining the desired end.


Rothbard, M.N. 2004. Man, Economy, and State, 2nd ed. Auburn, AL: Ludwig von Mises Institute.

Tuesday, January 14, 2014

Minimum Wage Laws and Racism

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

Suppose you represent a group of workers that happen to be predominantly of a particular skin color. Your group earns a comfortable wage.

A new group of people that happens to be of a predominantly different skin color arrives in town. They are looking for work. They are willing to do the same work as people in your group for 30% less pay.

This is competition. People in your group don't want this competition because it would mean lower wages and likely even unemployment for some in your group who get supplanted by workers from the rival group.

People in your group turn to you to protect their wage franchise. You must do something or they will find another representative. So you get together with politicians to devise a law making it illegal to pay workers anything less than the wages earned by people in your group.

This law effectively shuts out competition from the rival group. Employers will have little incentive to hire those people of a different color. After all, workers in your group are known quantites to employers. There is little reason to believe that people in the rival group can perform work any better than people in your group. So why hire them for the same wages paid to people of your group when there will surely be transaction costs associated with the change?

Moreover, many employers may prefer workers from your group because they identify with your group's skin color. In an unhampered market, however, there will be natural pressure on employers to shed their bigotry in pursuit of economic gains to be had by hiring competent workers at lower wage rates. But the newly enacted minimum wage law impairs this process.

Discouraged, the rival group leaves your town and moves on to the next one in search of work.

Your workers thank you for supporting them. The status quo has been preserved.

And you have now followed a long line of people that have employed the strong arm of government to enforce discriminatory, racist agendas.

Monday, January 13, 2014

Government Advertising

Never had a doubt, in the beginning
Never a doubt
Trusted you true, in the beginning
I loved you right through
--Naked Eyes

Some claim that marketing and advertising make society worse off. For example, Galbraith (1958) argued that advertisers create unnecessary demand for products--thus siphoning resources away from more important needs.

Such claims are certainly contestable. In unhampered markets, advertising, like many other types of communication, can convey useful information to prospective buyers. It is also a form of voluntary persuasion. In markets for influence, people decide whether to consume that persuasion or not. Moreover, claiming that advertising diverts resources from more important needs implies that the claimant knows those 'important needs' better than those people who are freely engaging in trade. Hubris of this sort helps drive central planners.

To the extent that such claim are true in the private sector, then why would it not be equally if not more true in the public sector? After all, government seeks to influence thought and behavior. Because it is legalized force, government also has the means to turn up the volume of its voice so as to drown out opposing influence. Furthermore, government can only market by force, as it must obtain its communication resources by forcibly confiscating those resources from individuals.

Why aren't government marketing campaigns to push policies and programs at least as likely to manipulate and deceive people as do private sector marketing campaigns?


Galbraith, J.K. 1958. The affluent society. Boston: Houghton Mifflin.

Sunday, January 12, 2014

Tolluck's Paradox

"Now, Joe, I think you'd better get back into that Senate and keep those senators lined up."
--James Taylor (Mr Smith Goes to Washington)

Tullock's (1967) seminal work explained how self-interested parties incur costs in pursuit of rents (i.e., benefits gained from the efforts of someone else) beyond the traditional profit maximizing framework. His insights provided a theoretical framework for making sense of special interest group actions to obtain political favor from from policymakers. This has become part of what has become known as 'public choice economics.'

Tullock (1980) later developed what has become known as Tullock's Paradox. In regimes where the gains to be obtained from rent-seeking are high, why are the costs associated with rent-seeking behavior (e.g., lobbying, bribes, campaign donations) often so low? For example, a $10 million slice of pork might cost a special interest group only $100,000 (one percent of the 'rent') in payouts to politicians.

Why are the costs so low relative to prospective payoff?

Various explanation have been offered:

1) Voters might prefer their politicians to be immune from temptation of granting special priviledge. They might screen candidates for moral capacity prior to voting and punish in future elections those politicians who subsequently engage in the market for political favor.

2) Competition among politicians selling political favor lowers the cost to special interest groups that want to buy favor.

3) Purchasing political favor involves some uncertainty. Politicians may renege on a deal, leaving a special group out in the cold with no legal recourse. Because of the risk involved, political favor trades at a discount.


Tullock, G. 1967. The welfare costs of tariffs, monopolies and theft. Western Economic Journal, 5: 224-232.

Tullock, G. 1980. Efficient rent-seeking. In J.M. Buchanan, G. Tollison, and G. Tullock (eds.), Toward a theory of the rent-seeking society, 97-112. College Station, TX: Texas A&M University Press.

Saturday, January 11, 2014

Healthcare Insurance vs Subsidy

No visible means of support
And you have not seen nothing yet
Everything's stuck together
--Talking Heads

Nice point made at the beginning of this piece--one that cannot be overstated. The notion of insurance has become badly distorted in the context of healthcare.

Markets for insurance come about because people want to manage risk. Simply defined, risk is potential for loss. 'Potential' is an important word here because insurable losses cannot be certain. I cannot buy insurance for 'losses' (expenses) incurred when I buy food at the grocery store. Few insurers would write such a policy because there are few ways to price or pool events that occur with certainty (e.g., buying food) such that the economic costs are not simply transferred from insuree to insurer.

As such, routine costs are typically uninsurable and must be paid for out-of-pocket.

More attractive for both buyers and sellers of insurance are policies for insuring 'tail risk.' Tail risk is associated with events that occur infrequently, but incur large costs if they do occur. Events such as house fires, car crashes, and major illnesses exemplify tail risk.

Because the financial consequences can be devasting to people who experience such events, there is certainly demand for ways to insure against this risk. And because of the infrequency of such events and associated tools for managing underwriting risk, there are also suppliers willing to insure against tail events.

This is why there are generally markets for insuring against car crashes but not oil changes, and for insuring against house fires but not against replacing kitchen countertops.

If healthcare markets were unhampered, then we would observe similar structure. There would be fluid markets for insuring against catastrophic illness. Costs of insuring against catastrophic illness would rightly go up with probability of occurence, although those costs would be mitigated by competition (which is currently badly hamstrung by regulation) and by risk pooling and other tools that cope with problems like adverse selection.

Routine expenses such as doctor's visits would not be insurable in the same sense because they are by definition certain. Anyone underwriting policies for routine doctor visits would simply be transferring the cost from the policyholder to him/herself.

A critical design flaw of Obamacare is continuation of the trend to combine catastrophic healthcare risk with routine healthcare expenditures.

Healthcare risk is not being insured. Instead, healthcare consumption is being subsidized.

Friday, January 10, 2014

The Big Hurt

"Hey, rookie. You were good."
--Joe Jackson (Field of Dreams)

In spring of 1991 I vacationed with friends in Sarasota, Florida. Yes, the sparkling crescent beach of Siesta Key was a major attraction. But it was also nice to have spring training baseball in town as the White Sox were stationed in Sarasota at the time.

I remember sitting down the third base line at Ed Smith Stadium on a sunny afternoon. It had rained earlier in the day and sea gulls bathed in grassy puddles behind the left field fence. There was also a hefty wind blowing in from left field.

In the bottom of the first, a big right handed batter stepped to the plate for the Sox. He unloaded on one, crushing a towering drive to left. I'm still amazed at how high and far that ball went--into the gale, no less. It landed well beyond the fence, scattering gulls as it plopped into the puddles.

No other hitter came close to the fence that day.

That was my first exposure to Frank Thomas. The Big Hurt went on to dominate the decade. He won back-to-back MVPs in 1993-94, and finished in the top 10 in MVP voting six other years from 1991 to 2000. When he retired, Thomas had amassed 521 career homeruns alongside a .301 batting average.

On Wednesday, The Big Hurt was voted into the Baseball Hall of Fame.

Thursday, January 9, 2014

Trickle Down Mythology

Here comes the rain again
Raining in my head like a tragedy
Tearing me apart like a new emotion

Thomas Sowell challenges the political fabrication of 'trickle down economics.' Barack Obama, for example, has claimed that trickle down economics is a philosophy which "says we should give [emphasis mine] more and more to those with the most and hope that prosperity trickles down to everyone else."

These types of statements are lies because no formal theory of trickle down economics exists. It has never been developed. A mind grounded in economic reason would not propose such a theory. Not even in the most voluminous treatises on economics can trickle down theory be found.

The reason is that the idea is absurd. Why would anyone give something to A in hopes that it would trickle down to B? Any reasonable person would give directly to B and cut out the middleman.

'Give' was italicized above because the left likes to propose that some group, namely the rich, is granted some sort of special privilege (e.g., a tax 'break') via the trickle down idea. Sowell suggests that leftists are particularly prone to trot out trickle down myths when suggestions are made that taxes should be limited.

But lowering a person's taxes does not 'give' that person anything. A tax cut amounts to a person keeping property the he/she rightfully owns--property that others want to take by force through the strong arm of government.

The trickle down myth is another product of the socialist mind. Government is the gatekeeper of privilege. It must dole out this privilege smartly.

Such is the flawed thinking of the central planner.

General welfare improves not through grant of special privilege by government, but through production and trade by individuals. Social cooperation rather than state force. As productivity improves via saving, investment, and entrepreneurship, scarcity is reduced.

This is the law of capital and markets. It is not the trickle down mythology of socialists.

Wednesday, January 8, 2014

Capped Bust Half Dollar, 1807-1839

In a big country, dreams stay alive
Like a lover's voice fires the mountainside
Stay alive
--Big Country

President Thomas Jefferson had recommended Thomas Reich as assistant Mint engraver in 1801. But chief engraver Robert Scot, who had designed most early US coins including the Flowing Hair and Draped Bust halves, did not want an assistant. Within a few years, however, Scot's health began to deteriorate and a new mint director, Robert Patterson, was named in 1806. Patterson wanted to overhaul the designs of circulating US coinage and hired Reich to head the effort.

Reich's efforts included the Capped Bust half dollar, first struck in 1807. Like its predecessor, the obverse features a bust of Ms Liberty, but this time she faces left. Ms Liberty wears a Phrygian or 'freedom' cap--a symbol of the American Revolution. The headband carries a LIBERTY inscription. Her low neckline retains a draped gown, but it is now secured by a brooch at the shoulder. The obverse retains the 7 + 6 = 13 stars representing the original states. The date is below.

1830 Capped Bust Half Dollar PCGS AU55 Large 0 CAC

The reverse design features an American Bald Eagle facing left with wings spread. The eagle clutches a bundle of arrows and an olive branch in its claws. A shield is superimposed on the eagle's breast. A scroll above the eagle is inscribed with the motto E PLURIBUS UNUM, and UNITED STATE OF AMERICA circles the rim from about 8 o'clock to 4 o'clock. The denomination appears at the bottom of the reverse as 50 C. The basic design of this reverse would become a fixture on half dollars for much of the 19th century.

The design also featured a lettered edge which read FIFTY CENTS OR HALF A DOLLAR. The 89 silver/11 copper alloy mix was similar to the previous denomination, as were other specs:

Diameter: 32.5 mm
Weight: 13.48 g
Composition: .8924 silver; .1076 copper
Edge: Lettered
Net precious metal weight: .38676 oz silver

Lettered edge Capped Bust halves were issued every year for 30 years except for 1816 when a fire destroyed the Mint's rolling mills and suspended all silver coin production. Annual mintages routinely exceeded 1 million pieces, and peaked at more than 6.5 million in 1836.

Because Capped Bust coinage during this period was produced on screw presses and each production die was individually made with lettering, date, and stars punched by hand, this series produced a huge number of varieties that have challenged collectors for generations. Overton's work remains the seminal catalogue of the myriad varieties.

In 1836 steam powered presses were introduced at the Philadelphia Mint. Steam power enabled the Mint to produce coins more efficiently and with greater uniformity. However, the technical advancements came with some aesthetic cost, including severe limitations on edge ornamentation. Engraver Christian Gobrecht was charged with modifying Reich's design to align with the new production capabilities.

1837 Capped Bust Half Dollar PCGS AU58 Reeded Edge

Gobrecht's modifications featured a coin with a smaller diameter and a reeded edge. Although the portraits of Ms Liberty on the obverse and the eagle on the reverse appeared the same, there were some subtle revisions. On the obverse, the stars were smaller and Ms Liberty was slenderized. On the reverse, the scroll with E PLURIBUS UNUM was removed, and the denomination at the bottom read 50 CENTS.

Fraction of silver in the reeded edge Capped Bust half bust was increased slightly to 90%, but the smaller diametered coin resulted in a net weight of silver slightly smaller than the previous design:

Diameter: 30.0 mm
Weight: 13.36 g
Composition: .90 silver; .10 copper
Edge: Reeded
Net precious metal weight: .38658 oz silver

Only about 1,200 reeded edge halves were struck in 1836. Strictly speaking, the 1836 coins were patterns (i.e., non-production trial coins) as the legislation authorizing the design was not passed until January, 1837. About 3.7 million coins were struck in 1837.

In 1838, Gobrecht tinkered with the design again. He used slightly heavier lettering and tweaked details in the eagle's feathers and talons. The most noticeable change is that the denomination at the bottom of the reverse was altered to HALF DOL.

1838 Capped Bust Half Dollar PCGS AU50 Reeded Edge

The reeded edge "Half Dol." Capped Bust variety was struck in 2+ million quantities in both 1838 and 1839. In 1839, the New Orleans Mint also struck some pieces, making it the first branch mint to produce half dollars.

Because no silver dollar coinage was produced during the 1807-1839 run of the series, the Capped Bust half dollar was the highest denomination coin in circulation during the period. It was the 'workhorse' coin for commerce during the early 1800s. Many pieces were held and traded by banks, so many coins were preserved with light wear. Carrying a Capped Bust Half in one's pocket during this period probably engendered a pretty good feeling as it constituted about a half day's pay for the average working American at the time.

Tuesday, January 7, 2014

IP and Big Business

"You're not in the oil business. You're in the oil shortage business."
--Barney Caine (The Formula)

This snippet from a new book proposing negative effects of intellectual property laws includes arguments made often on these pages.

Intellectual property laws are unjust because they grant monopoly privileges to people who develop ideas from on the backs of peoples' ideas and then claim the sole possession of the intangible and abundant result. This result cannot be justly be considered property because clean title cannot be proven.

Moreover, intellectual property laws are unlikely to facilitate more production and competition. In fact, they are likely to do the opposite. IP laws add barriers to entry. Larger firms can absorb these costs better than small firms. Entrepreneurs that might enter an industry see those costs and are discouraged.

The beneficiaries are the large firms. Industries get more concentrated and complacent. Innovation goes does efficiency.

As such, general standard of living does not benefit from IP laws. The beneficiaries are those who receive IP privilege and then are protected by the strong arm of the State.

More often than not, this means big business.

New Year's Asset Allocation

Under a blood red sky
A crowd has gathered in black and white

Entering 2014, my asset allocation among securitized (i.e., paper) assets is as follows:

57% cash
36% alternative assets
4% equities
2% fixed income
1% international

Alternative assets are split between commodity (primarily precious metal) ETFs (21%) and short equity ETFs (16%)

Sole equity position is Pan American Silver (PAAS). International is an emerging markets mutual fund, DFA Emerging Markets Portfolio (DFEMX).

As my view currently stands, will be looking to add to precious metals, short, and international position should the right opportunities arise.

Monday, January 6, 2014

State of War

The war machine springs to life
Opens up one eager eye
Focusing it on the sky
Ninety-nine red balloons go by

Jacob Hornberger discusses the collosal failure of three favorite state 'wars': the war on terror, the war on poverty, and the war on drugs.

More than 10 years after the war in Iraq, things are no better there and perhaps worse than before. Afghanistan...same situation. The greater the uninvited US presence in a foreign land, the greater the animosity (and pushback) of that locale toward America. Why should we expect otherwise? How would Americans react to forced presence of Chinese or Russians on US soil?

When measured on a timeline, however, the war on terror is still in its nascency compared to the war on poverty, which celebrates its 50th anniversary this year. After a half century of waging this campaign, grand proof of its failure are statist claims that poverty remains a huge problem and that governments must continue battling it.

Again, why should we expect anything other than failure? As JH observes, the mechanism of the war on poverty creates its own cause. The process of confiscating wealth to fund poverty programs destroys the foundation for building wealth and prosperity in society. That foundation is production.

The war on drugs has been another colossal failure. The purported goal, a drug-free society, is nowhere within reach. Meanwhile, the war on drugs has spawned gang violence, corruption, robberies, murders, and overcrowded prisons. JH argues that the drug war failure is the one area where it seems Americans are waking up to the folly of statism.

Warfare and welfare statists list a bevy of excuses:

"The right people just haven't been in charge. Get our people in there and the war will be won."
"Outside factors beyond our control have postponed victory."
"Judge our programs by their good intentions rather than by their results."
"Just give us more time and we'll win the war."

The correct solution is to stop the wars. Prohibit government from waging them.

This would bring into existence economic enterprise, savings, and productive capital that alleviates scarcity. Free and voluntary trade raise general standard of living.

As statist wars decline, peace and prosperity advance.

Sunday, January 5, 2014

Democracy and Divisiveness

I'll move myself and my family aside
If we happen to be left half alive
I'll get all my papers and smile at the sky
For I know that the hypnotized never lie
--The Who

After voting on a decision where the majority vote is deemed the ruling one, you will often hear variations of the following: "Whatever differences people may have had in the past are now behind us. It is time now for the community to come together."

Of course, it is usually members of the dominant coalition that utter such proclamations.

Issues that are settled by democratic (majority) rule are naturally devisive. They encourage factions and deal making among special interests to collect a majority vote. The will of the majority is forced on the dissenting minority.

Expecting an increase in community cohesion following democratic vote is either naive or intellectually dishonest.

Saturday, January 4, 2014

Property Rights and Non-Aggression

Just like one and one don't make two
One and one make one
--The Who

It has been said that the libertarian perspective is grounded in two primary principles: property rights and non-aggression. But aren't these two principles really one in the same?

Property rights endow all individuals with inalienable authority to dispose of their property (broadly construed) as they see fit--as long as they do not invade the pursuits of other individuals. Invasion of someone else's pursuits constitutes aggression. Thus, property rights cannot exist without non-aggression.

The non-aggression principle states that aggressive, or offensive, force is unjust because it interferes with the pursuits of others--i.e., it limits the liberty of others to dispose of their property as they see fit. The only just use of force is for purposes of self-defense--i.e., force used to fend off against aggression by others. Thus, the non-aggression principle makes little sense without the notion of property rights.

Property rights and non-aggression go hand-in-hand.

Friday, January 3, 2014

How Wealth is Created

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

In economic terms, wealth measures the value of economic resources that is owned or controlled.

While it can be transferred in many different ways, economic wealth can only be created one way: production. Production combines labor with other scarce factors (materials, land, energy, etc) to generate output that enables people to live and prosper.

When it generates output that people desire, production alleviates axiomatic scarcity that constrains standard of living.

Policies that limit such production limit the creation of wealth.

Thursday, January 2, 2014

Lesson of Leverage

Time respects no person
And what you lift up must fall
They're waiting outside
To claim my crumblin' walls
--John Cougar Mellencamp

In the economic context, leverage is borrowing resources to live larger in the present than one otherwise could. Anyone carrying debt is leveraged to some degree.

Borrowed resources are employed now with the promise to pay them back later--usually with interest. Leverage thus entails risk--there is a chance that resources borrowed today cannot be paid back tomorrow. That risk may be borne by the borrower, the creditor, some combination of the two, or, as was made clear during the recent credit crisis, the public at large.

During the recent credit debacle we learned that the risk associated with leverage can be quite latent. Leverage was building in the system for years as credit was made easier. Government, organizations, individuals all levered up.

Early on, things seemed fine. In fact, higher near-term standards of living facilitated by leverage created the illusion of prosperity. "New era" claims abounded. "Housing prices can only go up..." "Policymakers have our backs..." Collective optimism increased which drove leverage to greater heights.

As we now know, there was no new era. The prosperity was a mirage--a state of borrowing from the future to fund higher living in the present.

At some point the mirage disappeared. Collective risk appetite declined. Incomes did not permit repayment of debt. Credit spigots closed. A downward spiral insued as the potential for loss associated with leverage became actual loss.

Did we learn the lesson of leverage? Not hardly. Today's systemic leverage is much higher than prior to the credit collapse. The Federal Reserve's balance sheet, for example, currently shows assets of about $4 trillion against capital of about $55 billion. That's leverage of 73:1--far higher than Fannie Mae's at the height of the real estate bubble.

Government and corporate borrowing are once again at epic levels.

Will 2014 be the year where we are presented with another opportunity to learn the lesson of leverage?

Wednesday, January 1, 2014

New Year's Shoe for Obamacare

Well, you can knock me down
Step on my face
Slander my name all over the place
Do anything that you want to do
But uh uh honey, lay off my shoes
--Elvis Presley

Obamacare, in terms of the legal mandate to be enrolled in federally compliant health insurance plans, officially went live at midnight. Zerohedge suggests that the new year sets the stage for another problem.

The federal government reports that 2+ million have signed up for Obamacare. However, signing up does not equate to being covered by insurance. A plan is not activated until the first premium is paid.

A significant fraction of Obamacare enrollees have yet to make their first premium payment. Moreover, the program's myriad technical glitches and extended enrollment deadlines make it difficult for providers to verify coverage.

This means that some people seeking to consume healthcare goods and services in the first few weeks of the year may be unable to do so because they have not yet paid for coverage. Others may get turned away because providers cannot verify their coverage. Some providers may take on risk by providing goods and services to people whose coverage cannot be verified.

Furthermore, once they receive their first premium bills or co-pay invoices, some enrollees may realize that they committed to plans that they could not afford. Zerohedge suggests that it is likely that many of those who have had the time to muddle through the glitch-prone enrollment process are people who are lacking in disposable income--and thus more prone to experience sticker shock when they get their first bills.

The first few weeks of the year will reveal whether this shoe falls on the program.