tag:blogger.com,1999:blog-91130724489185210002024-03-08T17:01:35.767-08:00Free Market LibertyRobert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.comBlogger26125tag:blogger.com,1999:blog-9113072448918521000.post-60014832285289586442014-06-18T16:50:00.000-07:002014-06-18T16:50:18.147-07:00Economics is Superstition<div class="OutlineElement Ltr SCX119721764" style="margin-left: 0px;">
<div class="Paragraph SCX119721764" style="background-color: transparent; color: windowtext; font-family: 'Segoe UI',Tahoma,Verdana,'Sans-Serif'; font-size: 6pt; font-style: normal; font-weight: normal; text-align: left; vertical-align: baseline;">
<span class="TextRun SCX119721764" style="background-color: transparent; color: windowtext; font-family: Calibri,Sans-Serif; font-size: 11pt; font-style: normal; font-weight: normal; line-height: 18px; text-decoration: none;"><span class="NormalTextRun SCX119721764" style="background-color: inherit;">Mainstream
economics is a primitive pseudo-science based upon false premises and
invalid assumptions. In effect. It is little more that a superstition
whose practitioners, with all of their models and algorithms, are simply
modern day shamans, pretending that their tools of magic can produce
real truths.</span></span><span class="EOP SCX119721764" style="font-family: Calibri,Sans-Serif; font-size: 11pt; line-height: 18px;"> </span></div>
</div>
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<br /></div>
</div>
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<div class="Paragraph SCX119721764" style="background-color: transparent; color: windowtext; font-family: 'Segoe UI',Tahoma,Verdana,'Sans-Serif'; font-size: 6pt; font-style: normal; font-weight: normal; text-align: left; vertical-align: baseline;">
<span class="TextRun SCX119721764" style="background-color: transparent; color: windowtext; font-family: Calibri,Sans-Serif; font-size: 11pt; font-style: normal; font-weight: normal; line-height: 18px; text-decoration: none;"><span class="NormalTextRun SCX119721764" style="background-color: inherit;">It
wasn't always that way. The classical economists began to provide light
in a world drenched in the medieval darkness of mercantilism.
Mercantilism, is the belief that money is wealth and that the hoarding
of money denies others useful wealth. Adam Smith, the </span><span class="SpellingError SCX119721764" style="background-color: inherit;">P</span></span><span class="TextRun SCX119721764" style="background-color: transparent; color: windowtext; font-family: Calibri,Sans-Serif; font-size: 11pt; font-style: normal; font-weight: normal; line-height: 18px; text-decoration: none;"><span class="SpellingError SCX119721764" style="background-color: inherit;">hysiocrats</span></span><span class="TextRun SCX119721764" style="background-color: transparent; color: windowtext; font-family: Calibri,Sans-Serif; font-size: 11pt; font-style: normal; font-weight: normal; line-height: 18px; text-decoration: none;"><span class="NormalTextRun SCX119721764" style="background-color: inherit;">, and other classical economists applied common sense to expose the rules of mercantilism as a set of fallacies.</span></span><span class="EOP SCX119721764" style="font-family: Calibri,Sans-Serif; font-size: 11pt; line-height: 18px;"> </span></div>
</div>
<div class="OutlineElement Ltr SCX119721764" style="margin-left: 0px;">
<div class="Paragraph SCX119721764" style="background-color: transparent; color: windowtext; font-family: 'Segoe UI',Tahoma,Verdana,'Sans-Serif'; font-size: 6pt; font-style: normal; font-weight: normal; text-align: left; vertical-align: baseline;">
<br /></div>
</div>
<div class="OutlineElement Ltr SCX119721764" style="margin-left: 0px;">
<div class="Paragraph SCX119721764" style="background-color: transparent; color: windowtext; font-family: 'Segoe UI',Tahoma,Verdana,'Sans-Serif'; font-size: 6pt; font-style: normal; font-weight: normal; text-align: left; vertical-align: baseline;">
<span class="TextRun SCX119721764" style="background-color: transparent; color: windowtext; font-family: Calibri,Sans-Serif; font-size: 11pt; font-style: normal; font-weight: normal; line-height: 18px; text-decoration: none;"><span class="NormalTextRun SCX119721764" style="background-color: inherit;">Unfortunately,
the enlightenment of the classical economists was eclipsed by a return
of mercantilism disguised by the seductive "new" ideas of John Maynard
Keynes. The foolishness of Keynes has somehow lived on in the
influential teachings of Paul Samuelson, Paul Krugman, and even Milton
Friedman and his so-called Chicago School. Only the Austrian School of
Economics has carried the torch of classical economics through the
modern era of monetary obsession.</span></span><span class="EOP SCX119721764" style="font-family: Calibri,Sans-Serif; font-size: 11pt; line-height: 18px;"> </span></div>
</div>
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<div class="Paragraph SCX119721764" style="background-color: transparent; color: windowtext; font-family: 'Segoe UI',Tahoma,Verdana,'Sans-Serif'; font-size: 6pt; font-style: normal; font-weight: normal; text-align: left; vertical-align: baseline;">
<br /></div>
</div>
<div class="OutlineElement Ltr SCX119721764" style="margin-left: 0px;">
<div class="Paragraph SCX119721764" style="background-color: transparent; color: windowtext; font-family: 'Segoe UI',Tahoma,Verdana,'Sans-Serif'; font-size: 6pt; font-style: normal; font-weight: normal; text-align: left; vertical-align: baseline;">
<span class="TextRun SCX119721764" style="color: windowtext; font-family: Calibri,Sans-Serif; font-size: 11pt; line-height: 18px;"><span class="NormalTextRun SCX119721764" style="background-color: inherit;">Keynesianism
(neo-mercantilism) can be exposed as a silly superstition by using a
simple example. Consider a man who hoards his savings in his mattress,
reducing, according to Keynes, the "aggregate demand" within the
economy. The key to exposing this fallacy is to look at the real purpose
of money. Money itself, is not wealth. Money represents our ability to
obtain something of value (wealth) and it reflects the value or wealth
that we have traded in order to obtain the money. Money is the medium we
use between giving and obtaining wealth, but it has no intrinsic value
of its own and is therefore not wealth.</span></span><span class="EOP SCX119721764" style="font-family: Calibri,Sans-Serif; font-size: 11pt; line-height: 18px;"> </span></div>
</div>
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<div class="Paragraph SCX119721764" style="background-color: transparent; color: windowtext; font-family: 'Segoe UI',Tahoma,Verdana,'Sans-Serif'; font-size: 6pt; font-style: normal; font-weight: normal; text-align: left; vertical-align: baseline;">
<br /></div>
</div>
<div class="OutlineElement Ltr SCX119721764" style="margin-left: 0px;">
<div class="Paragraph SCX119721764" style="background-color: transparent; color: windowtext; font-family: 'Segoe UI',Tahoma,Verdana,'Sans-Serif'; font-size: 6pt; font-style: normal; font-weight: normal; text-align: left; vertical-align: baseline;">
<span class="TextRun SCX119721764" style="color: windowtext; font-family: Calibri,Sans-Serif; font-size: 11pt; line-height: 18px;"><span class="NormalTextRun SCX119721764" style="background-color: inherit;">To
make the example more clear, let us say that the hoarding man has
obtained his money by selling a factory that he has built with his
labor. The factory allows laborers to become more productive and the
output of their productivity benefits all of society. His factory is
wealth and it remains wealth after he has sold and put his money under
his mattress. The factory does not go into hiding and remains a benefit
of society. In fact, the wealth of the society remains the same
regardless of whether the man uses his money or hoards it.</span></span><span class="EOP SCX119721764" style="font-family: Calibri,Sans-Serif; font-size: 11pt; line-height: 18px;"> </span></div>
</div>
<div class="OutlineElement Ltr SCX119721764" style="margin-left: 0px;">
<div class="Paragraph SCX119721764" style="background-color: transparent; color: windowtext; font-family: 'Segoe UI',Tahoma,Verdana,'Sans-Serif'; font-size: 6pt; font-style: normal; font-weight: normal; text-align: left; vertical-align: baseline;">
<br /></div>
</div>
<div class="OutlineElement Ltr SCX119721764" style="margin-left: 0px;">
<div class="Paragraph SCX119721764" style="background-color: transparent; color: windowtext; font-family: 'Segoe UI',Tahoma,Verdana,'Sans-Serif'; font-size: 6pt; font-style: normal; font-weight: normal; text-align: left; vertical-align: baseline;">
<span class="TextRun SCX119721764" style="color: windowtext; font-family: Calibri,Sans-Serif; font-size: 11pt; line-height: 18px;"><span class="NormalTextRun SCX119721764" style="background-color: inherit;">The
single influence that the man's hoarding has on society is that he has
lowered the money supply, or, at least, that part of it that is in
circulation. The man has, in effect, deflated the economy. The total
wealth of society remains the same, but the amount of money used to
trade that wealth has changed, and, thereby, the man has caused the
all-important pricing mechanism to become inaccurate. He has done some
damage to the economy, but it is only an informational injury that has
occurred. Some things are now overpriced because there is less money and
will therefore not sell as easy. This does have a recessionary effect
on the economy but it only lasts until the prices are corrected. This is
the same thing that happens when the Federal Reserve increases the
money supply and therefore has an inflationary influence that makes the
pricing system inaccurate and leads (less directly) to the same
recessionary problem. </span></span><span class="EOP SCX119721764" style="font-family: Calibri,Sans-Serif; font-size: 11pt; line-height: 18px;"> </span></div>
</div>
<div class="OutlineElement Ltr SCX119721764" style="margin-left: 0px;">
<div class="Paragraph SCX119721764" style="background-color: transparent; color: windowtext; font-family: 'Segoe UI',Tahoma,Verdana,'Sans-Serif'; font-size: 6pt; font-style: normal; font-weight: normal; text-align: left; vertical-align: baseline;">
<br /></div>
</div>
<div class="OutlineElement Ltr SCX119721764" style="margin-left: 0px;">
<div class="Paragraph SCX119721764" style="background-color: transparent; color: windowtext; font-family: 'Segoe UI',Tahoma,Verdana,'Sans-Serif'; font-size: 6pt; font-style: normal; font-weight: normal; text-align: left; vertical-align: baseline;">
<span class="TextRun SCX119721764" style="color: windowtext; font-family: Calibri,Sans-Serif; font-size: 11pt; line-height: 18px;"><span class="NormalTextRun SCX119721764" style="background-color: inherit;">Furthermore,
the man's hoarding does not change the total demand in the economy.
Since all of the members of the economy are always willing to make an
exchange that improves their lot, they will always demand things if the
price is right. What appears to the members of the cult of Keynes as
insufficient demand is really just the adjusting of economic agents to a
new pricing level based upon the change in the money supply, and the
only cure for a recession is to let this adjustment occur.</span></span><span class="EOP SCX119721764" style="font-family: Calibri,Sans-Serif; font-size: 11pt; line-height: 18px;"> </span></div>
</div>
<div class="OutlineElement Ltr SCX119721764" style="margin-left: 0px;">
<div class="Paragraph SCX119721764" style="background-color: transparent; color: windowtext; font-family: 'Segoe UI',Tahoma,Verdana,'Sans-Serif'; font-size: 6pt; font-style: normal; font-weight: normal; text-align: left; vertical-align: baseline;">
<br /></div>
</div>
<span class="TextRun SCX119721764" style="color: windowtext; font-family: Calibri,Sans-Serif; font-size: 11pt; line-height: 18px;"><span class="NormalTextRun SCX119721764" style="background-color: inherit;">Money, in itself, is without value -- just like the ideas of people like Keynes and Krugman.</span></span>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-37686881009674153722014-04-26T19:39:00.000-07:002014-04-26T19:51:59.751-07:00Why the Fed Always Fails<div class="MsoNormal">
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;">We are now into our sixth
year of a recession that the Federal Reserve had promised to deliver us from
five years ago. Japan, with its own version of a central bank, is now well into
its second decade of what was once call its “lost decade.” Before the second
world war broke out, America was in its tenth year of a depression that the
Federal Reserve bank could not deliver us from. Why does the Federal Reserve
always fail to save us from the economic catastrophes that it promises to have
solutions to?<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">The answer is simply that
recessions are caused by inflation (which generally precedes the actual
recession) and the Federal Reserve attempts to cure them with more inflation
(what Ben Bernanke calls “Quantitative Easing“). The additional inflation
precedes the next phases of the continuing recession. The remedial inflation
only postpones the correction that is needed to cure the recession.</span></div>
<div class="MsoNormal">
<span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">To understand why inflation
causes (and prolongs) economic mayhem we need to use a simple thought
experiment. Imagine a small economy where the people only consume bread and
wine. The bread takes only a year to produce from planted wheat seeds, while
the wine, properly aged, takes five years to produce. The important point being
that the wine is more time extensive than the bread. The cost of the additional
time to produce the wine is expressed economically by our term “interest.” The
higher the rate of interest, the more expensive the wine is to produce compared
to the bread. Interest is the charge that a member of the economy demands for
the sacrifice of postponing consumption for four additional years to have wine.</span></div>
<div class="MsoNormal">
<span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Left to the market, the rate
of interest is determined by the negotiations that occur between those people
who save (that is, postpone consumption) and those people who must borrow to
produce the wine. This market rate of interest determines exactly the amount of
capital that is needed to produced the wine that the people of the economy are
really willing to wait for.</span></div>
<div class="MsoNormal">
<span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">However, when borrowers have
an outside source of money, such as Bernanke’s inflation, the rate of interest
becomes cheaper by the simple rule of surplus supply. This has the effect of
making the wine cheaper than the people of the economy are willing to postpone
their consumption for. Wine production is more profitable, causing farmers to
convert wheat (bread) land into vinyards. Wine becomes cheaper, but at the cost
of bread becoming shorter in supply and therefore more expensive. The immediate
effect is that more postponing of consumption occurs and the people’s standard
of living is reduced. This, however, is not yet a recession because all the
land is used and there is still full employment. The land and laborers are just
not being used optimally, making the people poorer.</span></div>
<div class="MsoNormal">
<span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">The recession occurs,
however, when the injection of Bernanke’s inflation is over, The supply and
demand for borrowed money returns to the market rate, the rate that is higher
than the artificially low rate caused by the surplus of Bernanke’s money. Now,
wine becomes more expensive to produce and there is more of it because good
wheat land was converted to wine production. Vinyards will lose money and go
out of business; they will dismiss workers; and the land and human resources of
the economy will go unused. There will be a recession as land and people go
through a correction process and return to bread production.</span></div>
<div class="MsoNormal">
<span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Left to itself, the use of
the economy’s resources will correct and the recession will be over and the
people will regain their standard of living. However, the recession will never
end if Bernanke prevents the return to bread by announcing another round of
inflation. Another round of “quantitative easing” will inject new money into
the economy, keep the interest rate low, and keep the people poor by producing
more wine and less bread than they really want.</span></div>
<div class="MsoNormal">
<span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Bernanke’s subsidization of
wine causes even more land to be moved from wheat production to wine making,
meaning that when this next dose of inflation is used up, the correcting
recession will be even deeper and more catastrophic. The rate of interest will
go back up to its market rate and wine will become even more expensive to
produce. A greater dislocation of resources towards wine means a greater
correction is needed when the inflation ends.</span></div>
<div class="MsoNormal">
<span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">That is when Bernanke will
announce yet another round of “quantitative easing,” so we can have even more
of what we don’t want.</span></div>
Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-45737975733550583012012-06-22T12:11:00.001-07:002012-06-22T12:11:52.327-07:00Is Economic Value Subjective?<br />
<div style="margin-bottom: 0in;">
<span style="font-family: Verdana, sans-serif;">Objects
have no value without a valuer. It is a valuer's desire for an object
that allows us to impute that object with a value.</span></div>
<div style="margin-bottom: 0in;">
<br />
</div>
<div style="margin-bottom: 0in;">
<span style="font-family: Verdana, sans-serif;">We
have the economists of the Austrian School of Economics to primarily
thank for this “subjective theory of value.” Their insight
explains how the market enriches those who trade. Each time a trade
occurs in the market, each party to the transaction values what he
receives more than what he gives.</span></div>
<div style="margin-bottom: 0in;">
<br />
</div>
<div style="margin-bottom: 0in;">
<span style="font-family: Verdana, sans-serif;">Subjective
valuation serves as a basis of modern economics because it is so
right as a first approximation of what is happening, but to go
further with the brilliance of the Austrian School's economics, we
need to reexamine some objective contributions to economic value. </span>
</div>
<div style="margin-bottom: 0in;">
<br />
</div>
<div style="margin-bottom: 0in;">
<span style="font-family: Verdana, sans-serif;">Value
is relational – as important as its subjective character is, it is
ultimately about a relationship that exists between the valuer (the
subject) and the valued (the object). Sometimes it has the very
subjective nature of a simple desire of the valuer, but sometimes it
also reveals the specific relationship between the valuer and the
object.</span></div>
<div style="margin-bottom: 0in;">
<br />
</div>
<div style="margin-bottom: 0in;">
<span style="font-family: Verdana, sans-serif;">For
example, the Austrians explain interest as the difference between
having a good in the present and having that same good sometime in
the future. They call this difference “time preference.” The
amount of time preference is a result of the subject's mind, but the
fact that it exists and must exist is a result of the object's
location in time.</span></div>
<div style="margin-bottom: 0in;">
<br />
</div>
<div style="margin-bottom: 0in;">
<span style="font-family: Verdana, sans-serif;">Like
time preference, it can be said that there is also a space
preference. A subject naturally prefers a pizza from a certain chain
restaurant near his home in Denver to the same pizza from the same
chain restaurant in New York. Because of the objective condition of
space, the one in New York is virtually valueless to him.</span></div>
<div style="margin-bottom: 0in;">
<br />
</div>
<div style="margin-bottom: 0in;">
<span style="font-family: Verdana, sans-serif;">Murray
Rothbard would say that the pizzas are actually different and their
different values can be attributed solely to their being different
objects. He argued that ice in winter is a different object than it
is in summer, explaining why it is valueless in winter and
refreshingly valuable in summer. If it has a different value it must
be a different object. But, preserved in a freezer, it is, in fact,
exactly the same object. In this case, Rothard, genius though he was,
was stretching subjectivity in vain to explain all value differences.
The ice's value has changed because it is the relationship between
the subject and object, between a man and the ice positioned in time,
that has changed and it is the relationship itself that creates the
value.</span></div>
<div style="margin-bottom: 0in;">
<br />
</div>
<div style="margin-bottom: 0in;">
<span style="font-family: Verdana, sans-serif;">Time
preference is a preference for the SAME object located at a more
proximate point in time. The object is not a different object because
the subject has to wait for it.</span></div>
<div style="margin-bottom: 0in;">
<br />
</div>
<div style="margin-bottom: 0in;">
<span style="font-family: Verdana, sans-serif;">Economic
value comes from a relationship – a relationship that could not
exist without the subjective intent of the valuer but must also
involve the object's existence in time and space.</span></div>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-74236533806799915472011-11-18T12:48:00.000-08:002011-11-18T12:50:23.341-08:00Money is Debt<p class="MsoNormal">Modern money is created by debt and therefore the supply of our money fluctuates with the amount of debt that exists in our economy. An economy expands into a boom period when people are sinking deeper into debt and it contracts into a recession when people are acting responsibly and paying down their debt. The irony of our modern monetary policy is that recessions are the result of people climbing their way out of the hole of debt that they have dug themselves into and economic booms are really just artificial bubbles that are the result of people borrowing money that they will eventually need to repay.</p> <p class="MsoNormal">Whereas at one time money was a made out of something that had an intrinsic value, such as gold, most of today’s money is just a claim to a debt between a bank and one of its borrowers. When the amount of debt goes up, the claims to those debts increases and thereby increases our money supply; when the amount of debt decreases, the money supply decreases.</p> <p class="MsoNormal">How does debt turn into our money supply? A small portion of our money is real; it is printed currency and does not represent someone’s debt. However, this currency represents only a small fraction of our money supply, serving as only a seed to vast amounts of money that is produced by our private banks. Our real money supply, known as M1, includes this currency, regardless of whether it is in your pocket or your checking account. However, when that currency is deposited in your checking account it no longer exists as currency. The bank has loaned most of this currency to a borrower who now has it in his pocket. That money that counted as part of M1 when you deposited in your bank still counts as part of M1 but it again counts as part of M1 when it is in the borrower’s pocket. </p> <p class="MsoNormal">The currency cannot exist in two places, but the bank fraudulently represents that it exists in both the borrower’s pocket and in your deposited account. The bank, using its ability to produce account balances on paper, has effectively duplicated the money that originally existed as currency. The original amount of currency still exists, but there is twice the amount of money on paper. On paper, the original currency has been duplicated.</p> <p class="MsoNormal">The money that has been duplicated gets duplicated again when the borrower deposits the money in his account and it gets loaned out again. This process continues until eighty percent of the money in the economy has come into existence only through the making of loans by the private banks. The money that we believe we are spending is largely just a debt that can evaporate when the borrower chooses to “Neither a borrower nor a lender be.”</p>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-73663013520801661242011-06-08T12:03:00.000-07:002011-06-08T12:13:40.256-07:00How Local Banks Cause Inflation<p class="MsoNormal">What is money and how is it created? The answer to that question is that most of our money is created by our local banks. This counterfeiting behavior of our local banks is the reason why our economy inflates and has recessions.</p> <p class="MsoNormal">For example, suppose you have a nice, crisp $1,000 bill and you wish to deposit in a bank for safe-keeping. The bill’s claim to reality is that it has its own unique serial number; the serial number gives it its own identity as a member of the money supply (what is referred to as the M1 money supply). After it is deposited in the bank, it is mixed in with other members of the M1 money supply and your checking account is credited $1,000. The conversion of your money from a bill to a balance in a checking account does not affect the money supply because the balance in your checking account is also included in the M1 money supply (economists correctly assume that the money is still in existence although it has changed locations).</p> <p class="MsoNormal">However, the money that you believe is in your checking account does not really exist there. The bank is allowed to use that money for its own purposes – it is allowed to use it in a loan that provides income for the bank. This is where the M1 money supply gets perverted by the misleading behavior of our banks. The money that you believe is in your checking account is loaned out to someone else who invariably puts in into his own checking account. When this happens the M1 money supply is increased, because, as we have stated earlier, the money in a checking account, including this borrower’s checking account, is treated as real existing money just as the original $1000 bill was. In other words, the original $1000 dollars that was a part of the M1 money supply has become $2000 in the money supply by the simple action of the bank’s making a loan (actually, the amount loaned out is usually a little less than the full $1000 because of the bank’s requirement to keep a small fraction of the deposit in reserve).</p> <p class="MsoNormal">Each time that a local bank loans money from a checking account, it adds to the money supply, inflating the economy and cheating every person wise and lucky enough to have savings; and each time it forecloses on a mortgage or otherwise closes a loan, it subtracts from the money supply, making payrolls harder to meet and endangering the jobs of hard-working citizens. As the money supply expands and contracts through the machinations of our bankers, our savings and our jobs increase and decrease in value, leaving us the victims of bubbles and busts that are underwritten by the politicians who protect the bankers that finance their elections.</p>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-88299628142742795202011-04-15T14:20:00.000-07:002011-04-15T14:27:37.673-07:00Recessions and Our Fraudulent Banking System<p class="MsoNormal">Recessions are caused by an unstable money supply. Recessions, like the one that we have been in for the last three years, are not the result of a lack of consumer confidence and they are not cured by deficit government spending. Regardless of what the primitive Keynesian economists tell us, the unemployment that characterizes a recession is simply the result of a money supply that makes employees a bargain during a period of monetary expansion (inflation) and an intolerable burden during a period of monetary contraction (deflation). One of the goals of the following posts to this blog will be to demonstrate the necessary connection between recessions and an unstable money supply.</p> <p class="MsoNormal">So, the question has to be asked, if a recession can be avoided by a stable money supply, why can’t a government simply keep the money supply constant and make its citizens happy and employed. The answer to such a question is simply that governments do not have control of the supplies of their own money because they support and protect banking systems that are inherently corrupt, fraudulent, and economically destructive – banking systems that allow banks to produce their own form of counterfeit money – what is called fractional reserve banking. It is another goal of the following posts to this blog to educate the readers, in plain language, how banks inflate the economy by creating their own money from nothing and then deflate the economy by destroying that same money and returning it to nothing. Employees are a bargain during inflationary periods and are a problem when money again becomes relatively scarce (deflation).</p> <p class="MsoNormal">Fractional reserve banking cannot be justified legally on any grounds, nor can it endure the moral scrutiny of an informed people. It is simply fraudulent in that it is founded upon false pretenses and has the effect of taking people’s wealth without their knowledge or consent. Fractional reserve banking is simply the result of greedy bankers and dishonest or ignorant politicians and judges. A third goal of the following posts here will be to show how fractional reserve banking is inherently criminal in nature and in its effects upon innocent people.</p> <p class="MsoNormal">There is a wonderful book on the damaging effects and underlying illegality of our federal reserve banking system. <i style="mso-bidi-font-style:normal">Money, Bank Credit, and Economic Cycles</i>, by Jesus Huerta de Soto. It is a scholarly (yet readable) work that is perhaps worthy of a Nobel Prize for its author. This wonderful work describes in accurate detail the criminal nature of fractional reserve banking, how it necessarily leads to recessions, and how governments are powerless to protect us from its effects. Unfortunately, it is a tome of nearly 900 pages and will therefore not be read by the people who need its information the greatest – the average voter. Its basic premises, however, are relatively simple and can be published in blogs such as this one.</p> <p class="MsoNormal">It is the intent of this blog, therefore, to show clearly and in plain language the following three truths that can not only prevent further recessions, but can help protect hardworking people from having their savings diluted and destroyed by greedy and irresponsible bankers:</p> <p class="MsoListParagraphCxSpFirst" style="text-indent:-.25in;mso-list:l0 level1 lfo1"></p><ol><li>Recessions and high unemployment are the result of a money supply made unstable by fractional reserve banking;</li><li>Banks create money from nothing by fractional reserve banking, rendering the government unable to stabilize its own currency; and</li><li>Fractional reserve banking is inherently deceitful, destructive, and criminal in nature.</li></ol><!--[if !supportLists]--><p></p>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-83610261262550348822009-06-19T17:49:00.000-07:002009-06-19T17:51:43.619-07:00Depressions and Their Solution<!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:trackmoves/> <w:trackformatting/> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:donotpromoteqf/> <w:lidthemeother>EN-US</w:LidThemeOther> <w:lidthemeasian>X-NONE</w:LidThemeAsian> <w:lidthemecomplexscript>X-NONE</w:LidThemeComplexScript> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> <w:splitpgbreakandparamark/> <w:dontvertaligncellwithsp/> <w:dontbreakconstrainedforcedtables/> <w:dontvertalignintxbx/> 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mso-generic-font-family:swiss; mso-font-pitch:variable; mso-font-signature:-1610611985 1073750139 0 0 159 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-priority:1; mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:""; margin-top:0in; margin-right:0in; margin-bottom:10.0pt; margin-left:0in; mso-pagination:widow-orphan; font-size:11.0pt; mso-bidi-font-size:10.0pt; font-family:"Calibri","sans-serif"; mso-fareast-font-family:"Times New Roman"; mso-bidi-font-family:"Times New Roman";} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; font-size:10.0pt; mso-ansi-font-size:10.0pt; mso-bidi-font-size:10.0pt; mso-ascii-font-family:Calibri; mso-hansi-font-family:Calibri;} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.0in 1.0in 1.0in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-qformat:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"Times New Roman"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi;} </style> <![endif]--> <p class="MsoNormal">This is a simple outline of what depressions are and how they are solved.<span style=""> </span>The problem and its solution are simple and should be understood by every voter. It may take a little effort, but the answers are available to us all.</p> <p class="MsoNormal">(1) The market, if left free of government intervention and other forms of fraud and misappropriation, is immune to serious economic downturns (Say’s Law). There will always be individual business failures, but the misfortune of one person in the free market is another person’s opportunity. The same amount of material wealth in the economy remains the same; there is just a change of ownership. Because of this balancing of fortunes and the fact that the total wealth of the economy remains the same, there should never be epidemics of business failures. </p> <p class="MsoNormal">(2) Business failures reach epidemic proportions because there is a change in the money supply. A reduction in the money supply, referred to as deflation, means that there are insufficient funds to maintain the demand for goods and services at existing prices. This change in demand reduces trading and creates employment. This is the essence of a depression. There is the same amount of wealth in terms of real goods and services but there is not enough money to purchase them.</p> <p class="MsoNormal">(3) All that needs to be done to prevent depressions is provide a money supply that cannot be reduced. If the money supply were stable, there will still be goods on the market that are overpriced, causing business failures, but the money of the economy would be directed to cheaper alternatives. These cheaper alternatives would provide new business opportunities to offset the losses, preventing business failures from reaching the epidemic proportions that are characteristic of depressions.</p> <p class="MsoNormal">(4) Durable commodities, such as gold, do not disappear and therefore can serve as a money supply that would prevent depressions from happening. In turn, government issued money can be made stable and can also serve an economy that is depression-free. Even if a government caused inflation through deficit spending, it would not necessarily lead to a depression, since the government’s money would still not disappear and thereby lead to the reduction of money that would cause a depression. This inflation would cause a misallocation of the economy’s resources and reduce its overall productivity but it would not lead to the unemployment that is caused by a reduction in the money supply.</p> <p class="MsoNormal">(5) However, the US government, along with the other governments of the industrial world, cannot provide us with a money supply that is invulnerable to depression-causing deflation. Why? Because governments have no control over the creation of most of the money in their own economies – banks do. To see how this is done, please read the previous post to this blog “Our Money is Not Real” below. Through fractional-reserve banking, banks are allowed to multiply the government issued money up to six times through issuing credit on money that they do not really possess. This money exists on paper only and can disappear with the application of more paperwork. When our banks contract their credit (reduce the loans outstanding), the money supply of the nation is reduced and a depression results.</p> <p class="MsoNormal">(6) The fractional-reserve banking is solely responsible for our recessions and depressions and it is nothing more than a form of fraud that our governments allow bankers to perform upon the rest of the economy. It is supported legally through transparent legal fictions that actually contradict each other and make no sense. The primary fiction is that bank deposits are not really deposits, but rather, are loans. But if this is the case, then the depositor commits fraud every time he writes a check on money that he has already loaned to his banker. An accessory to the depositor’s fraud is the banker who honors the check even though he has already borrowed the money and loaned it to another customer.</p> <p class="MsoNormal">(7) Depressions can be brought to an end if the lawyers and judges of our country consistently apply the laws of fraud to the bankers who duplicate and triplicate our money during boom times and then reduce that money to vapor when they contract that credit.</p>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-62259877093542651282009-06-16T14:21:00.000-07:002009-06-18T16:37:39.186-07:00Indeflation<p class="MsoNormal"><span style="font-size:100%;">Indeflation is the phenomenon that turns a curative recession into a disastrous depression. It is what happens when a government attempts to stimulate its country’s economy with inflationary spending but, paradoxically, causes that economy to further deflate and sink deeper into a state of high unemployment and falling prices. It happened in the Great Depression; it has happened again in Japan’s ongoing depression; and it is happening now in America under the misguided leaderships of George W. Bush and Barack Obama.</span></p><p class="MsoNormal"><span style="font-size:100%;">The term “indeflation” is not being coined for the first time here; it lives on the internet, where a working definition can be found at </span><a href="http://mileslater.wordpress.com/2008/05/05/indeflation/"><span style="font-size:100%;">http://mileslater.wordpress.com/2008/05/05/indeflation/</span></a><span style="font-size:100%;">. According to that site, “INDEFLATION is the production of traditionally inflationary observations and reactions causing deflationary results.” The seeming paradox of inflationary reactions actually causing deflation, along with all of the unemployment that comes with deflation, can be explained very simply. It might seem like a paradox, but it is actually the natural consequence of a government attempting to prevent an economic correction that cannot be denied.<?xml:namespace prefix = o /><o:p></o:p></span></p><p class="MsoNormal"><span style="font-size:100%;">To understand how indeflation happens we must begin by recognizing that a recession is a curative process whereby market prices go down to correct their overpriced state during a preceding bubble. If left to run it s course, a recession results in a lower volume of money but approximately the same amount of goods. Because of the lower volume of money, the same goods sell for a smaller price. The inflation caused by the preceding bubble is corrected by the recession’s deflation.<o:p></o:p></span></p><p class="MsoNormal"><span style="font-size:100%;">However, governments tell us that they can prevent the corrective process of a recession and keep us in the bubble of poor investments that we have made for ourselves, and this is how the healthy process of a recession gets turned into the unhealthy state of a depression. The government, regardless of its leadership under either party, attempts to prevent a recession by “stimulating” the economy with deficit spending. Hoover did it, FDR did it, Bush did it, and Obama is now doing it – governments, unfortunately, do it. This stimulating deficit spending is intended to inflate the economy and undo the corrective work of the recession’s deflation, however, the needed correction cannot be denied and these attempts at inflating the economy will have the effect of actually further deflating the economy, causing more unemployment and increasing the misery of the adjustment process.<o:p></o:p></span></p><p class="MsoNormal"><span style="font-size:100%;">The government’s attempt to create inflation actually causes deflation because that government is only one of many producers of money. Banks, by issuing credit, actually produce money, just as they destroy money be withdrawing credit (to understand the simple mechanism of credit expansion and contraction, see the previous post on this blog). The one large inflater, the government, has the effect of activating thousands of small deflaters, the banks attempting to remain solvent. The cumulative effect of the many deflaters far exceeds that of the government – the deflationary credit contraction of banks exceeds Obama’s inflationary spending.<o:p></o:p></span></p><p class="MsoNormal"><span style="font-size:100%;">As a model of this indeflation phenomenon, let us take a hypothetical miniature economy where the government has issued and distributed $1,000. According to monetary theory, when the initial $1,000 gets deposited in a bank, the bank “multiplies” that money by loaning it to borrowers at the same time it makes it available to the depositors – deposited money gets duplicated and then duplicated again. Economists even have a formula that determines how much that initial money supply gets multiplied by the bankers. It is simply expressed as “1/R” where R represents the amount of reserve the bankers must keep of their deposit money. Since R is a fraction, usually around 1/6, the result of dividing it into one simply results in an inversion of the fraction: a 1/6 fractional-reserve requirement means that the banks can expand the money 6 times and a 1/8 fractional-reserve would mean that the banks can expand the initial money supply 8 times.<o:p></o:p></span></p><p class="MsoNormal"><span style="font-size:100%;">So, to elaborate on our simple model economy, let us say that the fractional-reserve is 1/5, meaning that the banks must keep 1/5 or 20% of its deposits on hand as a reserve, allowing themselves to loan out the other 80% of the deposited money. This means that the original $1,000 issued by the government will be expanded 5 times by the banks to produce a total money supply in the economy of $5,000.<o:p></o:p></span></p><p class="MsoNormal"><span style="font-size:100%;">Now, the government, in an attempt to stimulate the economy, decides to issue an additional $100, bringing its total issue into the economy to $1,100. The government plans to have its additional $100 expanded by the banks by a factor of 5, increasing the money supply by $500, for a total money supply of $5,500 – this is inflation.<o:p></o:p></span></p><p class="MsoNormal"><span style="font-size:100%;">However, the banks are wise to their government’s inflationary intentions and, just like the rest of us, begin to put their money into inflationary hedges, things that will not become less valuable if the government succeeds in making the dollar less valuable. Why have their money tied up in loans that are basically cash that cannot be touched for the term of the loan? By the time that the loan is repaid, the money is diluted by the government’s stimulation. The banks, as a way of not losing their shirts in the impending inflation, put their money into gold or otherwise act as we would all do to avoid being victims of inflation. The result of the banks’ adaptations to the government’s inflationary intentions is to reduce the volume of their credit. Although the law may only require them to reserve 1/5 of the money deposited in their safes, their financial strategies cause them to keep what Murray Rothbard referred to as “excess reserves.” <o:p></o:p></span></p><p class="MsoNormal"><style> <!-- /* Font Definitions */ @font-face {font-family:"Cambria Math"; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:1; mso-generic-font-family:roman; mso-font-format:other; mso-font-pitch:variable; mso-font-signature:0 0 0 0 0 0;} @font-face {font-family:Calibri; panose-1:2 15 5 2 2 2 4 3 2 4; mso-font-charset:0; mso-generic-font-family:swiss; mso-font-pitch:variable; mso-font-signature:-1610611985 1073750139 0 0 159 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-priority:1; mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:""; margin-top:0in; margin-right:0in; margin-bottom:10.0pt; margin-left:0in; mso-pagination:widow-orphan; font-size:11.0pt; mso-bidi-font-size:10.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"Times New Roman"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; mso-bidi-font-size:10.0pt; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"Times New Roman"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi;} .MsoPapDefault {mso-style-type:export-only; margin-bottom:10.0pt;} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.0in 1.0in 1.0in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><span style="font-size:100%;"><span style="font-family:'Calibri','sans-serif';">Returning to our model, let us say that the average bank in our little economy, in reaction to its government inflationary behavior, decides to keep 1/4 of its deposits in reserve, even though it is required to keep only 1/5. </span>This would mean that the “multiplier” that determines the total money supply from the government issuances would be 4 rather than 5 (where R = 1/4, 1/R = 4). Since the government has issued a total of $1,100 into the economy, the total money supply after the banks have performed their credit expansion, would be only 4 times the original $1,100 or $4,400. In other words, an economy that had a money supply of $5,000 now has a money supply of $4,400 – it has been deflated by $600, resulting in further unemployment and a level of misery that would not have been necessary if the recession could have been allowed to run its natural course.<o:p></o:p></span></p><p class="MsoNormal"><span style="font-size:100%;">Recessions are the result of banks being able to expand and contract the money supply through fractional-reserve banking and the government cannot do anything to prevent this from happening. As long as we have fractional-reserve banking, there will be cycles of booms and busts and unfortunately, government intervention will only prolong and deepen the misery of the busts. <o:p></o:p></span></p>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-75702099856789288082009-05-21T16:18:00.000-07:002009-06-18T16:50:08.098-07:00Our Money is Not Real<p class="MsoNormal">Economic depressions are all the result of one single phenomenon – government sponsored fraud. If we eliminate the monetary fraud that empowers our politicians, we will have a stable economy that provides growth and full employment without the need for manipulative political institutions like the Federal Reserve. How the government, through its enabling of monetary fraud, causes economic downturns can be explained simply in the following few short paragraphs.</p><p class="MsoNormal">The marketplace, when it is not disturbed by government intervention, is an adaptive system that is self-correcting, eliminating the possibility of long-term downturns. Supply always changes to meet demand as producers change their prices and offerings to meet consumer needs. Massive unemployment is avoided because workers, like other producers, must occasionally change their services and their rates to meet the true sovereign of the market – the consumer.</p><p class="MsoNormal">Large adjustments in consumer demands that are pervasive across the economy are the result of an unstable monetary policy that causes surpluses and shortages of money. These monetary surpluses (known as inflation) and their corresponding shortages (known as deflation) cannot occur if the economy’s money is real. If money is real, its existence remains relatively constant through time without inflation or deflation. On the other hand, if it grows with our “irrational exuberance” and shrinks as our consumer confidence shrinks, it is not real and its volatility is caused by its fraudulent foundation.</p><p class="MsoNormal">How has our government enabled a form of money that is essentially fraudulent, causing depressions and credit meltdowns? To answer this question, we need to first recognize the vaporous quality of our money. The vast majority of our money has no physical existence at all. It is not backed by gold, green paper, or anything else. We can claim to have a thousand dollars in the bank simply because the bank says we can. Our money, known among economists as “fiat” money, is just a recorded number that our bank is required to keep accurate track of. Fiat money exists for no other reason than the right authorities say it does and this nebulous nature of our money is, as we will see, the reason why it can mysteriously come and go from our economy.</p><p class="MsoNormal">To understand fiat money we have to understand that fiat money is produced by our banks; not by the treasury department, the mint, or some other government organization. It is produced as if it was counterfeit currency, by private companies that actually increase their profits by making more of it through a practice that is essentially fraudulent. Banks become profitable businesses by producing as much fiat money as they can. To see how this is done, let us take three simple examples of a bank issuing credit: </p><p class="MsoNormal">1. The owner of the bank loans out $1,000 of his own money. In this case, the borrower has $1,000 more to spend, but the banker has $1,000 less, so the total effect of the transaction does not inflate or deflate the economy. This was the original form of credit but it is now almost nonexistent.<br /></p><p class="MsoNormal">2.The owner of the bank loans out $1,000 that he has borrowed from his customers. He has given the loaning customer a $1,000 CD and he has given the borrower $1,000 as a loan. The total effect on the economy is again innocent. The borrower has $1,000 more to spend for the period of the loan, let us say two years, but the CD holder, who cannot claim his money for the two year period of his CD, has $1,000 less to spend. Again, there is no inflation or deflation. This form of credit, however, is minor and not important for the subject of this post.<br /></p><p class="MsoNormal">3. The owner of the bank accepts $1,000 from a depositor into a checking account. He promises, with the government’s help, to keep the money safe, however, in truth, he actually loans the $1,000 out to a borrower (the government actually requires him to keep a small token of the checking out in a "fractional reserve," but the amount is insignificant and is ignored here for simplicity sake). There are now two people who are walking around claiming to have the original $1,000, the depositor, with his check book, and the borrower. The original $1,000 has turned into $2,000 in the economy’s money supply. This is called inflation.</p><p class="MsoNormal">The vaporous quality of our money is caused by the loaning out of our deposited money. Loaning out money that the depositor has a right to immediately demand is the source of the fiat currency that represents most of the money in our economy. When there are lots of borrowers with “irrational exuberance,” our economy inflates and when there are foreclosures and fewer borrowers we have deflation and rising unemployment as employers run out of the cash needed to make payrolls. Our government’s endorsement of the duplicating of depositors’ money through “fractional reserve” banking is the source of all monetary instability.</p><p class="MsoNormal">But fractional reserve banking is not only the source of our vaporous and unstable money supply, it is essentially fraudulent. If the banker is promising to keep the depositor’s money in safekeeping while loaning it to borrowers, his promise is made under false pretenses. On the other hand, if the depositor is making the claim that he actually has the money in a safe place while it has gone to a borrower, he is, perhaps unwittingly, making a false claim – his claimed money is really unavailable to him.</p><p class="MsoNormal">Once the government begins to enable this fraudulent money juggling, it either has to have the courage and integrity to fix the problem or it has to hide the problem through a series of techniques that protect the local banks from getting caught appropriating their depositors’ money. This is precisely the reason why politicians created the Federal Reserve System in 1913. Through a central bank, any local bank that ran short of money could be protected by the central bank. This plan, of course, failed in the Great Depression when the number of local banks with shortfalls became too great. Now the government had to take another step to cover its mistake, creating the FDIC which insured depositors even in periods of massive shortfalls. The FDIC, of course, only works because now the bank failures are covered directly by the taxpayer (the ultimate but involuntary insurers). Once the government begins to correct its distortions of the marketplace it needs to cover its ineptitude with even greater market distortions.</p><p class="MsoNormal">The only regulation that is needed to protect bank deposits is the enforcement of the law against fraud. If a bank promises to keep your money in a safe place and then is caught using it for another purpose, the officers of the bank are guilty of fraud and should go to jail. Enforcing this simple regulation would eliminate the need for the Federal Reserve System and the FDIC and would allow our economy to be based upon money that is real.</p>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com2tag:blogger.com,1999:blog-9113072448918521000.post-25134980544414054882009-05-08T17:46:00.000-07:002009-05-08T17:49:26.970-07:00Jefferson’s Economic RecoveryThomas Jefferson solved the problem of economic downturns, and, if we had followed his lead, there would have been no Great Depression and we would not be mired in another one today. Jefferson was a good friend of J. B. Say, the French economist who solved the problem of rising unemployment. Jefferson tried to recruit Say to his beloved University of Virginia and he commissioned the English translation of Say’s<em><strong> A Treatise on Political Economy</strong></em>, which became America’s standard textbook on the subject for the next fifty years. Had we continued its use we would be without the Federal Reserve Bank, Keynesian monetary manipulation, and the costly recessions that they have caused.<br /><br />At the center of Say’s economics is the insight that money, while serving as a medium of exchange that makes our markets work, also serves as a veil that obscures our vision of how those markets work. Piercing money’s veil of obfuscation, the market appears in its full reality as a magical place where men and women can magnify the value of their labor a hundred-fold by trading what they produce using their comparative advantage for the products of other people with their own specialized advantages.<br /><br />Man, incapable of lifting himself out of a stone-age existence using his own self-reliance, can trade a few minutes of his own specialized labor for woven cloth, liquid fuel from rocks, and the written record of the greatest thoughts of his species. Trading, the activity of the marketplace, provides food, housing, and intellectual nurture to an individual barely capable of surviving on his own in the harshness that is nature.<br /><br />But trading is both facilitated and obscured by money. As a commodity valued by men of different appetites, money allows a dairy farmer to trade his wares for the bread of a lactose intolerant baker. However, as it becomes a measure of the value of everything else in an economy, money disguises the fact that the dairy farmer and the baker are essentially both bartering what they produce for the product of another. Looking beyond the efficient medium of money, there is no distinction between consumers and producers, every transaction in the marketplace represents the culmination of an act of production and the initiation of an act of consumption.<br /><br />Say knew, as did his friend Thomas Jefferson, that only governments can create unemployment and only traders in the marketplace can resolve their own unemployment. We are all traders and we must therefore be willing to trade our specialized services for the specialized services of others. We must offer the wealth that is our own comparative advantage for the magnifying wealth of the marketplace. We must trade for real wealth rather than the unstable veil given to us by a government that once deserved our trust.Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-88626493898170393972009-03-26T18:01:00.000-07:002009-03-26T18:08:31.681-07:00Our Dangerous Banking SystemAlthough I enjoyed using the Seinfeld sitcom as a literary device in the previous post to illustrate the internal workings of American banking system, I think a little history is needed to fully reveal how dangerous that banking system is to our general welfare.<br /><br />According to Murray Rothbard, in <em>The Mystery of Banking, 2nd Edition</em>, banks originated as trusted places where people, for a small fee, kept there valuables in a safe place (this practice continues to this day in the form of safety deposit boxes). This practice of protecting people’s deposited valuables turned to fraud over one-thousand years ago in China when banking merchants first used their deposits to inflate the economy. Customers were given receipts for their deposits of gold and these receipts were treated as substitutes for the gold itself and could therefore be used in commercial exchange. The banks eventually were caught issuing more receipts than they actually held as gold. This attempt to inflate the economy with counterfeit receipts of gold was then considered to be a crime, although it is now hailed as our modern “fractional reserve” banking system.<br /><br />Venice, the home of Marco Polo, adopted many things from its Chinese trading partners, among which were noodles, silk, and the bad practice of using bank deposits to inflate the economy. In Venice as well as China, however, the issuing of more gold receipts than gold was considered a form of fraud, rather that the heart of a banking system that made national heroes of its leading perpetrators. The wizards of our current Federal Reserve would have been ringleaders in those more innocent times.<br /><br />The Middle Ages in Europe witnessed the growth of another form of banking which we are also today very familiar with – the loaning of money for interest. But, in the Middle Ages, the banking families that grew rich financing the wars of kings, loaned only their own money – not the money of other people who had intrusted their wealth to them. This type of issuing of credit has a far different effect on the general economy than the modern practice of loaning out other people deposits. When a Rothchild loans $1,000 of his own money to a customer, there is no inflationary effect on the economy. The customer has $1,000 more to take to the market to bid on fabrics and spices, but Rothchild has $1,000 less to make competing bids in that market. The result of loaning your own money out is that the money supply remains the same; there is no inflation, and the costs of the fabrics and spices remain essentially unchanged.<br /><br />The practice of bankers loaning only their own money ended in England and America in the nineteenth century when courts held consistently that depositors’ deposits were not deposits at all, but rather, were loans from the depositor to the bank, to be used by the bank for its own purpose of making loans to customers. On the surface, this does not seem to be such a bad practice; the additional money that banks are able loan is available for expanding businesses. However, let us take a look at the inflationary effect of banks making loans from its depositors’ accounts.<br /><br />When customer Richman deposits his $1,000 in the local bank, he receives a deposit slip that proves his checks are worth that sum. He is able to go to the market and write checks just as if he had the $1,000 in his pocket. However, the bank takes his deposit and loans $800 to Poorman (the $200 is held by the bank to satisfy the government’s requirement of a 20% “fractional reserve”). Now, Richman and Poorman each go to the market with what they believe is a pocketful of money, Richman with $1,000 and Poorman with $800. But doing a little addition, we can see that the market has a total money supply from our friends of $1,800 from what began as Richman’s original $1,000. The marketplace has suffered an inflation of an addition $800.<br /><br />Poorman, however, does not carry around his $800 in cash. He took his loan and immediately deposited in the bank. Now it is safe and all he has to do is carry his checkbook and a deposit slip that proves that he has $800 deposited in the bank. It is as good as carrying around cash. However, now the bank has a total amount on deposit of $1,800, Richman’s $1,000 and Poorman’s $800. Since it can loan out 80% of its total deposits, it is able to loan out an additional $640 (80% of the Poorman’s $800 deposit) to Realpoorman. Realpoorman, in turn, deposits his $640 in the bank and the bank has even more deposits and the inflationary growth of the money supply continues.<br /><br />This modern banking practice works if you don’t think of the damage done to Richman when he goes to the market and finds that the goods he once purchased for $10 are now costing him $20 because he must now bid for those goods against other people with money – the additional money that the bank has created by issuing credit on his original $1,000 deposit. Richman is a victim of an inflation that diluted the value of his $1,000.<br /><br />But there is a greater danger to this “fractional reserve” banking system. Just as they can create inflation by issuing credit, banks can also create deflation by reducing the total amount of credit issued. Banks have the power of credit expansion that inflates the economy and they likewise have the power of credit contraction which deflates the economy. When an economy inflates, the good that once sold for $10 has the inflated price of $20; and when an economy deflates, the good that once sold for $20 has a sales price of $10. Merchants who don’t reduce their prices fast enough get caught holding unsold goods. Other merchants who do reduce their prices make sales that are less than their costs. Businesses lose money in what is called a recession.<br /><br />And merchants aren’t the only victims of the banks’ credit contraction; employees who sell their labor must also reduce their prices (wages) to adapt to the deflating economy, and their failure to do such leads to their inevitable unemployment.<br /><br />The real problem with “fractional reserve” banking is that the whole economy is dependent upon the psychology of the bankers. When bankers are optimistic, the economy booms, but when they lose confidence in their borrowers, they recall their loans and cause the economy to deflate through credit contraction, causing a spiral of deepening financial depression.Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com1tag:blogger.com,1999:blog-9113072448918521000.post-43565356466898242412009-03-20T17:38:00.000-07:002009-03-21T06:03:35.074-07:00Seinfeld, Kramer, and the Federal ReserveEvery American taxpayer should know how his country’s banking system works. While how it operates may appear obscure and even intimidating, it is really so simple that all you have to do is watch one particular episode of the Seinfeld sitcom reruns to master its dark secrets.<br /><br />In the episode entitled “The Wigmaster,” the mechanics of our Federal Reserve banking system are perfectly modeled through the mischief of an unscrupulous parking lot manager. Think of the parking lot as your local bank, watch the show carefully, and walk away with the equivalent of a graduate degree in money and banking.<br /><br />Two Seinfeld buddies, George and Kramer, have decided to “deposit” their cars in Jiffy Park’s long-term parking lot (Kramer actually gets a free t-shirt for making his initial deposit). The manager of Jiffy Park, like your local bank president, agrees to take care of the deposited property, including providing the necessary storage and protection.<br /><br />Our two heroes walk away satisfied that their properties are safe, apparently unaware of the deceptive use that will be made of their vehicles. The manager of Jiffy Park, like the president of our local bank, is not really in the business of storing and safekeeping people’s property – instead of depositing the deposits, he loans the deposits out to others for his own gain. In the case of Jiffy Park, the cars are borrowed by prostitutes to perform “tricks,” while in the case of our local bank, the deposits are borrowed by business people, homeowners, and other people performing transactions of a more legal nature.<br /><br />That our bank deposits are loaned to borrowers is not really a secret to most of us, but the more sinister aspects of the banking system become apparent when we realize that, if our deposits have been loaned out to borrowers, they should not be available to be returned to us upon our demand. This, like the case of Jiffy Park, reveals the dark side of loaning out for profit what really belongs to other people.<br /><br />Kramer chooses to withdraw his deposit (his car), when it is currently being used by a prostitute plying her trade. This is invariably what will happen when people make withdrawals from their bank accounts. In Kramer’s case, Jiffy Park tells him that his property is currently unavailable, but he can have a Mary Kay Cadillac instead. In the case of our bank withdrawals, our money might be on loan, but we can have someone else’s deposited money instead.<br /><br />Like Kramer, we can go about our business using someone else’s deposits. In Kramer’s case, the excitement of a pink Cadillac is enough to make him forget that his own deposit is unsafe. In the case of our bank deposits, the money of another bank customer is just as good as our own. Everything is fine until Kramer and the owner of the Mary Kay Cadillac want there vehicles at the same time or until there are a large number of simultaneous withdrawals from our bank.<br /><br />For Jiffy Park, there are other vehicles to tantalize the gullible customer but in the case of our local bank, fooling the customers requires the help of the Federal Reserve. As the “lender of last resort” the Federal Reserve is in the business of providing an endless supply of Mary Kay Cadillac’s to our local bank. If too many customers want there deposits back when they are on loan to others, the Federal Reserve will always produce more deposits that look just like our deposits, keeping the bank from the embarrassment of having to admit that your deposits are not really deposited – they are being used by the bank to make its own profit.<br /><br />So, as long as the Federal Reserve keeps coming up with pink Cadillacs, what is the harm? The harm is called inflation by credit expansion. Jiffy Park has taken, for example, ten cars and made them look like twenty. Ten drivers deposited ten cars and think they are the sole possessors of the ten cars, but ten prostitutes also think they are the rightful possessors of ten cars. Twenty people think that they have exclusive use of a vehicle, but there really was only ten cars deposited in the lot. Jiffy Park has counterfeited ten additional cars.<br /><br />In the case of our bank, the amount of money originally deposited is believed to be owned by the depositors, but the borrowers actually believe that they own the money also (there is a “fractional reserve” of the deposited money that the bank cannot loan out but that amount is small and disregarded here for simplicity’s sake). Due to the bank’s ability to loan out deposits, the economy has far more money in it while having the same number of goods to buy with the money – the bank is the source of inflation. In the same way that Jiffy Park inflated the number of cars possessed through its deceptive practices, the banks are allowed, legally, to inflate the economy by loaning out money that they are pretending to keep “on deposit.” Your local bank counterfeits “legal tender.” In boom periods, banks inflate the economy; in periods of pessimism, they reduce the loans and thereby deflate the already inflated economy, causing unemployment.<br /><br />The Seinfeld episode ends with an innocent Kramer in a police lineup after he and a prostitute made simultaneous claims to a Mary Kay Cadillac. This is where the analogy to our bank ends; unlike Jiffy Park, there can never be a shortage of Mary Kay Cadillacs for our banks, the Federal Reserve can produce an endless number of them. The Ponzi scheme of banks counterfeiting money by undepositing deposits can continue until the American taxpayers learn about their banking system and find out that they are the ones buying all the Mary Kay Cadillacs.Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-70156754591378636192009-03-18T18:19:00.000-07:002009-03-18T18:30:15.841-07:00Econ 101. The Auction<blockquote><strong><em>The following few short paragraphs provide the reader with one of the essential foundations of economic thought. It will be simple and easy to understand because it will be free from the complications and self-contradicting delusions of so-called experts who are blinded by their psychosexual need to be “stimulating.”<br /></em></strong></blockquote><p>The economy can be accurately modeled as a simple auction, an activity that easily demonstrates the convergence of supply and demand but in terms that can be related more easily to our common experiences. In an auction, a seller offers to supply a good to the highest bidder. Prospective buyers bid against each other until there is only one buyer remaining, who, by making his final bid, sets the price of the good.<br /><br />The bidding usually begins at a very low price and there are a number of persons bidding against each other for the good. The initial large number of bidders represents the large demand for the good at its initial low price. As the bids become increasing larger, the number of bidders drops, reflecting how the demand for the product goes down as the price of its supply goes up.<br /><br />If there is more than one seller of the same type of good, the resulting prices will be correspondingly lower, reflecting how the increase supply of the good causes the demand to go down. In the same way that the buyers competed with each other to drive the price up, the sellers must compete with each other and drive the price down. Because the buyers have a large number of alternative sources, they can purchase the good at the price set when there was a large number of bidders in the original auction.<br /><br />In the end, each seller will be forced to sell at nearly the same price, the so-called “market price” for the good. Economists graph this market price at the convergence of two lines on a “supply and demand” graph, one line representing the supply of the good and the other line, sloping in an opposite direction, representing its demand. Without the art work, it is really just an auction.<br /><br />Every seller will be able to dispose of his good as long as he is willing to accept the highest bid. This is known as Say’s Law. Alternatively, the seller may exercise his option to not sell the product at the market price. The seller’s choice to not sell can be interpreted in two different ways:<br /><br /><strong>1.</strong> <strong><em>Reasonably.</em></strong> The seller has just decided that, in his judgment, the good is more valuable than the money offered for it. Perhaps, it will bring a better price tomorrow.<br /><strong>2.</strong> <strong><em>Hysterically.</em></strong> The failure of the good to “clear the market” is a sign of economic stagnation, a recession, or even a depression.<br /><br />The reasonable interpretation leaves the seller (perhaps a labor seeking employment) with the freedom to sell his product at the price and time of his choosing, eventually finding a better price or lowering his expectations and accepting the current bid.<br /><br />The hysterical interpretation believes that the seller is a victim of bidders who need stimulation. Invoking the delusional teachings of John Maynard Keynes, a man who didn’t have a real understanding of auctions or other economies, the followers of the hysterical interpretation allow themselves to be the pawns of power-hungry politicians who promise to stimulate the bidders. According to these “Keynesians,” by giving everyone more money, the value of money will go down and the bidders will be willing to bid higher for the unsold good – they will be “stimulated.” Of course, this all depends upon the seller being too stupid to get as stimulated as the bidders and demand more of the devalued money for his good. The economy’s wealth remains the same; there is just more green paper.<br /><br />Economics is the easiest social science to intellectually comprehend; however, it remains an obscurity because the government needs to make people believe that they can produce wealth by stimulating consumers and fooling producers.</p>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-12812716865678064012009-02-19T15:29:00.000-08:002009-02-19T15:35:11.892-08:00The True Economic Recovery Plan<!--[if gte mso 9]><xml> <o:officedocumentsettings> <o:relyonvml/> <o:allowpng/> </o:OfficeDocumentSettings> </xml><![endif]--><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:trackmoves/> <w:trackformatting/> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> 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mso-style-qformat:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin-top:0in; mso-para-margin-right:0in; mso-para-margin-bottom:10.0pt; mso-para-margin-left:0in; line-height:115%; mso-pagination:widow-orphan; font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;} </style> <![endif]--> <p class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.2in; line-height: normal;"><i style="">…the only means to shorten the period of bad business is to avoid any attempts to delay or to check the fall in prices and wage rates.<o:p></o:p></i></p> <p class="MsoNormal" style="margin: 0in 0in 6pt 0.4in; line-height: normal;">Ludwig von Mises, <i style="">Human Action</i> (1963, p. 570)</p> <p class="MsoNormal" style="line-height: normal;"><span style="">This post borrows liberally from the thoughts of famous economist, Ludwig von Mises. Mises had extensively studied the cycles of business booms and crashes and had an acute understanding of their causes and cures. His voice from the past can give us great comfort in our current time of financial crisis. It can also help us avoid the mistake of government “stimulation.” Mises foresaw the economic collapse of the Soviet Union seventy years before it occurred, having based his insight, not on political and military history, but on an acute understanding of the effects of government intervention in the economy. In relation to our current crisis, he begins by providing us with a very reassuring definition of what a depression is.<o:p></o:p></span></p> <p class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.2in; line-height: normal;"><i style="">...depression is in fact the process of readjustment, of putting production activities anew in agreement with the given state of the market data:<o:p></o:p></i></p> <p class="MsoNormal" style="margin: 0in 0in 6pt 0.4in; line-height: normal;">Ludwig von Mises, <i style="">Human Action</i> (1963, p. 572)</p> <p class="MsoNormal" style="line-height: normal;"><span style="">In other words, a depression or recession, such as the one that we are in now, should be looked at as a useful time when, if government intervention can be avoided, the economy can cure itself of its ills and recover to be stronger and more efficient than ever. The free market is a dynamic system that is always repairing itself and moving towards full employment and maximum productivity. The monetary contraction that occurs during a recession is really just a means for wisdom and caution to correct the mistakes that were caused by the excesses of the economy’s preceding boom period. The overly optimistic outlook of an expanding economy led to overinvestment in capital (particularly housing in the current period) and this overinvestment led to bidding wars that brought prices too high. Now, those prices must be brought down to where they belong, even if the government attempts to prevent it. <o:p></o:p></span></p> <p class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.2in; line-height: normal;"><i style="">The recovery and the return to “normalcy” can only begin when prices and wage rates are so low that a sufficient number of people assume that they will not drop still more.<o:p></o:p></i></p> <p class="MsoNormal" style="margin: 0in 0in 6pt 0.4in; line-height: normal;">Ludwig von Mises, <i style="">Human Action</i> (1963, p. 569)</p> <p class="MsoNormal" style="line-height: normal;"><span style="">Can we have excessive boom periods and, perhaps with the government’s help, avoid the succeeding recessions? Mises is correct in answering in the negative. Mankind will, in any type of economy, always work to his own advantage and this productive feature of the human character means that people will correct their mistakes of judgment and cure their own excesses. The economy must cool itself down as a way of improving itself, regardless of the government’s attempts to prevent this improvement.<o:p></o:p></span></p> <p class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.2in; line-height: normal;"><i style="">There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.<o:p></o:p></i></p> <p class="MsoNormal" style="margin: 0in 0in 6pt 0.4in; line-height: normal;">Ludwig von Mises, <i style="">Human Action</i> (1963, p. 572)</p> <p class="MsoNormal" style="line-height: normal;"><span style="">Each stimulation package from the Bush and Obama administrations has brought us one step closer to what Mises calls a total catastrophe. Each month that the recession is prolonged will reduce the confidence that the people have in the economy and its monetary system and this lack of confidence will make the inevitable lowering of wages and prices more drastic and severe. <o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">We can take the advice of Ludwig von Mises and allow the recession to run its course and cure itself quickly or we can do what we did in the 1930’s (and what Japan did in the 1990’s) and <span style=""> </span>demand that the government try to prevent the inevitable and, in so doing, allow a short-term recession to turn into a decade-long depression. <o:p></o:p></span></p> <p class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.2in; line-height: normal;"><i style=""><span style="">There is no use in interfering by means of a new credit expansion with the process of readjustment. This would at best only interrupt, disturb, and prolong the curative process of depression</span>.<o:p></o:p></i></p> <p class="MsoNormal" style="margin: 0in 0in 6pt 0.4in; line-height: normal;">Ludwig von Mises, <i style="">Human Action</i> (1963, p. 578)</p>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-91304583040904152722009-02-17T15:07:00.000-08:002009-02-17T15:10:06.420-08:00Beware of Governments Bearing Gifts<!--[if gte mso 9]><xml> <o:officedocumentsettings> <o:relyonvml/> <o:allowpng/> </o:OfficeDocumentSettings> </xml><![endif]--><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:trackmoves/> <w:trackformatting/> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:donotpromoteqf/> 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mso-para-margin-right:0in; mso-para-margin-bottom:10.0pt; mso-para-margin-left:0in; line-height:115%; mso-pagination:widow-orphan; font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;} </style> <![endif]--> <p class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.2in; line-height: normal;"><i style="">The popularity of inflationism is in great part due to deep-rooted hatred of creditors.<o:p></o:p></i></p> <p class="MsoNormal" style="margin: 0in 0in 6pt 0.4in; line-height: normal;">Ludwig von Mises, <i style="">Human Action</i> (1963, p. 467)</p> <p class="MsoNormal" style="line-height: normal;"><span style="">In this pivotal moment in our economic history, battle lines are being drawn from the halls of academia to the chambers of our Congress. The intellectual geography upon which those ramparts of ideological combat are drawn is the issue of whether a government can create something from nothing. On one side of the battlefield are the faithful, those people who have defied all of the empirical evidence available to them and have blindly accepted that something comes from nothing. Opposing the followers of blind fiscal faith are those that rely on historical evidence and the common-sense knowledge that is the result of their own individual experiences.<o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">The faithful belong to a religion known as the Keynesianism and the god upon whose alter they sacrifice our tax money is the modern deity known as the state. Keynesians believe that their god has the power to rain down manna upon its people, providing them with bread where before there existed not even the grain to mill into flower. Their logic is simple: if people are becoming poor, the state can just produce more money and give it to them. Paying no heed to the idea that real economic wealth is measured in commodities such as food, cloths, houses, and automobiles, the Keynesians claim that if commodities are purchased with money, all the state has to do is produce more money and the commodities will just appear out of nowhere.<o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">The opponents of the faithful include the practical economists whom the Keynesians have labeled as being classical, neoclassical, Chicago school, Austrian school, or supply-siders, and libertarian and Republican politicians whom ABC’s Cokie Roberts has collectively condemned as “those who should be punished.” The single characteristic that has held these diverse opponents together is their tendency to look beyond blind faith and empty promises and try to find the source of the newfound wealth that the Keynesians have assured us comes from the simple application of green ink to paper. <o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">It is the source of the state’s blessings that the Keynesians have always kept bound in layers of promises of other blessings, each one meant to distract the seeker in his probing to their empty core. For example, to inhibit the least forceful probers they have claimed that the cost of state largesse is “built into the system” or “just a write-off.” <span style=""> </span>And with each additional level of probing there is the assurance that if the prober was only sufficiently sophisticated he would see that the state is so great that it does not need a source.<o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">Pressed by those whom Cokie Roberts truly believes are in need of punishment, the Keynesians will admit that wealth must come from someplace but that someplace is in the future. Rest assured, you will not have to pay for the state’s gifts – it is your children and grandchildren who will gladly foot the bill. You should just accept your role as a devourer of your own young and depend on later generations to pay for today’s play. In the words of their founder, John Maynard Keynes, we should not worry about the long run because “in the long run, we shall all be dead.”<o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">But the Keynesians are wrong – there is no long run that we can dump on our young. The future of the state’s devouring is not the future of your children and grandchildren; the future that pays for all exists in the present and is called “credit.” The extra money that the Keynesians produce does not create more wealth, only more paper. The additional paper reduces the value of existing paper, and more importantly, it reduces the value of money invested in American businesses as credit. The people who are really paying for the state’s gifts are the creditors, exactly those people who are needed most to help gives us jobs. The quote from Ludwig von Mises is an accurate one; government handouts are little more than thinly veiled attacks upon creditors, the very people who can turn the threats of the present into the promises of the future. <o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">Beware of governments bearing gifts – what appears to be manna from the sky is really hail. <o:p></o:p></span></p>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-83778947022952389942009-02-16T15:39:00.000-08:002009-02-17T12:43:12.699-08:00The End of Unemployment<blockquote><span style="font-style: italic;">It is not the abundance of money but the abundance of other products in general that facilitates sales... Money performs no more than the role of a conduit in this double exchange. When the exchanges have been completed, it will be found that one has paid for products with products.</span><br />James Mill</blockquote>The preceding quote by James Mill is a faithful summary of an economic principle known as Say’s Law. 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mso-bidi-theme-font:minor-bidi;} .MsoPapDefault {mso-style-type:export-only; margin-bottom:10.0pt; line-height:115%;} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.0in 1.0in 1.0in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-qformat:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin-top:0in; mso-para-margin-right:0in; mso-para-margin-bottom:10.0pt; mso-para-margin-left:0in; line-height:115%; mso-pagination:widow-orphan; font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;} </style> <![endif]--><span style="font-size:130%;"><span style="line-height: 115%;font-family:";font-size:11;" ></span></span>This has a powerful implication towards the current economic crisis – in fact, Say’s Law tells us why this “crisis” is not really a crisis at all, but merely a time when, without government interference, the economy is only honing its skills and becoming more efficient.<br /><br />To see how this is so, let us apply Say’s Law to a particular product on the market that is near and dear to most of our lives – our own labor. By offering to do work, we deliver a product to the market and, according to Say, by simply offering that product we are facilitating its sale – we are creating our own employment.<br /><br />According to Say’s Law, there is no such thing as a real surplus of employment. Every man who wants to sell his labors should, without government intervention, find a buyer (that is, an employer). In short, what Say is saying is that:<br /><blockquote style="font-weight: bold;">IN A FREE MARKET, THERE IS NO REAL UNEMPLOYMENT.</blockquote>Then, one must ask, what are the unemployment statistics that are now dominating our front pages? The unemployed represent the amount of the employment product that is stocked on the shelves at the market but, as yet, remain unsold. And, why do products sit too long on the shelves?<br /><blockquote style="font-weight: bold;">THE SELLER IS ASKING TOO MUCH.</blockquote>Employees, like retail sellers, must realize that if a product is not moving it needs to be put on sale. The sale will invariably help the product “clear the market.” The unemployed person is either asking too much for his services or he is only offering his services in a limited field of application (a third possibility is that he is prohibited by the government to seek his market value by the so-called minimum wage laws).<br /><br />The bigger question for 7.6% of America’s workers who are now unemployed is: “Is it right that I should have to take a smaller salary than what I am used to, or have to take a job outside my specialty? “ This question is actually what Keynes based his economic fallacies upon. Keynes saw that employee’s offer a product that is “sticky” in that it cannot be adjusted to work in a true marketplace. While the market forces every other commodity to go up and down, employees only want to go up. Employees accept a bull market for their services but will not accept it when it becomes bearish.<br /><br />Keynesian ideas do not refute Say, however, they merely point out how employees need a little business training – they need to be trained in how to better provide a product for sale in a marketplace.<br /><br />During period of optimism, credit expands and products such as employment are offered and sold at a price that is the result of the carelessness that comes from over confidence. In times of pessimism, credit contracts and makes corrections to the earlier carelessness. Employees must realize that they were perhaps making too much during the period of expansion and that the recession is “putting their feet back on the ground.” When the contraction is over, money will be less plentiful and they may well realize that the smaller salary that they accepted in a recession offers just as much buying power as the greater one that they held during periods of inflation.<br /><br />Say’s Law is true and has never been refuted by the snake-oil salesmen that are still trying to sell government intervention under the fallacies of John Maynard Keyes. Unemployment is not being unable to find work; it is simply the unwillingness to satisfy other peoples’ needs at a fair price.Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-66804136200871347682009-02-13T15:56:00.000-08:002009-02-13T15:59:49.245-08:00Economic Stimulus as Folly<!--[if gte mso 9]><xml> <o:officedocumentsettings> <o:relyonvml/> <o:allowpng/> </o:OfficeDocumentSettings> </xml><![endif]--><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:trackmoves/> <w:trackformatting/> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:donotpromoteqf/> <w:lidthemeother>EN-US</w:LidThemeOther> <w:lidthemeasian>X-NONE</w:LidThemeAsian> <w:lidthemecomplexscript>X-NONE</w:LidThemeComplexScript> 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font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;} </style> <![endif]--> <p class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.2in; line-height: normal;"><i style="">The only means to shorten the period of bad business [depression] is to avoid any attempts to delay or to check the fall in prices and wage rates.<o:p></o:p></i></p> <p class="MsoNormal" style="margin: 0in 0in 6pt 0.4in; line-height: normal;">Ludwig von Mises, <b style=""><i style="">Human Action</i></b> (1949, p. 570)</p> <p class="MsoNormal" style="line-height: normal;"><span style="">The trillion dollar economic stimulus package will fail to resolve the current economic crisis and here is why. </span><span style="font-family: "Times New Roman","serif";"><o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style=""><span style=""> </span>Growth in employment, and the economic good times that it brings, occurs during periods of credit expansion. When credit is expanding, banks are creating money by making loans to people who hire other people to serve them. This happens regardless of whether the credit is issued to employers or consumers. Credit expansion occurs when creditors are optimistic about getting their loan money repaid.<o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">Growth of unemployment, on the other hand, occurs during periods of credit contraction. When credit is contracting, banks are reducing the money supply by recalling loans to people who employ other people. Credit contraction occurs when creditors fear that loans will fail and should therefore not be issued.<o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">In terms of credit contraction, it is important to note that creditors not only want a return of the loaned money, but they also want the loaned money to have the same value when repaid as it had when it was loaned out. <o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">The government’s distribution of new money for no other consideration than to “stimulate” the economy tends to dilute the existing money in the economy, including the money that creditors have on loan to their clients. <o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">Most creditors are smart enough to know that if they loan out $100 that will only be worth $90 when it is repaid, they will actually lose real economic value by making the loan. Therefore, the already pessimistic creditor becomes more pessimistic and tends to contract his credit even more.<o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">The more the government threatens to dilute the value of the loaned dollar, the more creditors will keep their money in their pocket and let other people lose their jobs.<o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">So, what is the solution to an economic crisis such as the current one? As von Mises points out in the above quote, the only real solution is to let the economy heal itself. This involves letting some bad investors take their losses while allowing wiser investors to buy back at a new “ground floor” and use their wisdom to create new jobs in an economy where resources are allocated more efficiently.<o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">Left to itself, the economy would actually come out of the recession stronger than ever, but because of government intervention, credit contraction will be prolonged, unemployment levels will remain high, and an economy trying to correct itself will never fully heal. <o:p></o:p></span></p>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-23844936987404426992009-02-10T17:06:00.000-08:002009-02-12T15:24:28.109-08:00Roosevelt, Reagan, and Inflation<p class="MsoNormal" style="MARGIN: 0in 0in 0pt 0.2in; LINE-HEIGHT: normal"><i>“When you take a loan, money is created. When you pay it back, money is destroyed.”<?xml:namespace prefix = o /><o:p></o:p></i></p><p class="MsoNormal" style="MARGIN: 0in 0in 6pt 0.4in; LINE-HEIGHT: normal"><b>Advocates of Liberty</b>, <a href="http://www.iowaliberty.org/node/61">http://www.iowaliberty.org/node/61</a></p><p class="MsoNormal" style="LINE-HEIGHT: normal"><span style="font-family:lucida grande;">According to the now discredited theories of Keynesian economics, the government is suppose to be able stimulate a sluggish economy by deficit spending</span><span style="font-family:lucida grande;">. Although the economics of John Maynard Keynes has been time and again proven fallacious, it remains a tempting morsel for socialist politicians who are looking for a justification for their big-government policies. In fact, at the current time, Washington is now proposing a “stimulus” package that promises economic recovery by throwing good money after bad.<o:p></o:p></span></p><p class="MsoNormal" style="LINE-HEIGHT: normal"><span style="font-family:lucida grande;">Keynesian politicians tell us that the government can inflate the economy, and thereby stimulate it, by simply spending more money in that economy than it takes out in taxes. The corollary of this idea is that the government can also “cool down” an overheated economy by simply reducing its expenditures below its intake from taxes. Two seminal moments in American economic history fail to bear this out:<o:p></o:p></span></p><ol><li><div class="MsoListParagraphCxSpFirst" style="TEXT-INDENT: -0.25in; LINE-HEIGHT: normal"><span style="font-family:lucida grande;"><b><u>Roosevelt’s New Deal</u></b>. In a desperate attempt to end the great depression, Roosevelt used deficit spending to try to inflate a dangerously deflated economy. Tremendous expenditures on public works and make-work projects were implemented in what was referred to as Roosevelt’s New Deal. Beginning in 1933 and continuing throughout the rest of the decade, the New Deal failed to inflate the economy and stimulate us out of the great depression. Eventually, American private enterprise began receiving large private contracts from the war-torn nations of Europe and the consequent rehiring of workers turned the economy around. <u>Deficit government spending did not inflate the economy</u>.<o:p></o:p></span></div></li><li><div class="MsoListParagraphCxSpLast" style="TEXT-INDENT: -0.25in; LINE-HEIGHT: normal"><span style="font-family:lucida grande;"><strong><u>Ronald Reagan’s Cold War Victory</u></strong>. In the 1980’s Ronald Reagan won the Cold War by overwhelming the state-run Soviet economy with the challenge of an expensive new arms race. Reagan’s plan required massive military expenditures that could only be paid for with a deficit budget. Not only did his expenditures go up but he successfully pushed congress to pass large tax cuts which, by Keynesian theory, would have had the same inflationary effect as the deficit military spending. However, rather than inflating as Keynes had promised, the economy under Reagan stopped inflating for the first time in forty years. Again,<u> deficit government spending did not inflate the economy</u>.</span></div></li></ol><o:p></o:p></span><p></p><p class="MsoNormal" style="LINE-HEIGHT: normal"><span style="font-family:lucida grande;">Why did government expenditures during these two climactic moments in American history not have the effect on the economy that Keynes would have predicted? Because money, in essence, is really just credit, and the people that create most of the credit in our economy are primarily responsible for determining the supply of money that helps people get jobs while being able to reasonably budget their households. As explained in the previous post to this blog site, banks inflate the economy when they issue credit and they deflate the economy when they reduce their credit. When bankers are confident, they issue as much credit as they can and thereby inflate the economy; when they are afraid and timid in issuing loans, they will invariably deflate the economy’s money supply and reduce the number of jobs available.<o:p></o:p></span></p><p class="MsoNormal" style="LINE-HEIGHT: normal"><span style="font-family:lucida grande;">Roosevelt failed to inflate the economy because, instead of giving bankers courage, he made them timid and afraid of his wrath. His patrician background had made him distrustful and envious of the nouveau riche money-changers who made our economy work.<o:p></o:p></span></p><p class="MsoNormal" style="LINE-HEIGHT: normal"><span style="font-family:lucida grande;">Reagan, on the other hand, gave creditors courage to inflate the economy, but that inflation was limited by the governments limit on fractional reserves. The fractional reserve can curb inflation by putting a ceiling on the bank’s creation of money; however, this ceiling does not have a corresponding “floor” that would limit the amount of deflation. Reagan’s government could limit the inflation that threatened his economy, but he would not have been able to limit the amount of deflation that is threatening ours. <o:p></o:p></span></p><p class="MsoNormal" style="LINE-HEIGHT: normal"><span style="font-family:lucida grande;">Money was the same thing under both Roosevelt and Reagan -- money was just “full faith and credit” and the bankers provided credit once they had full faith.<o:p></o:p></span></p>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-77003613732385620062009-01-28T16:34:00.000-08:002009-01-29T09:06:31.371-08:00Money, Faith, and the Credit Crisis<blockquote>“I am afraid that the ordinary citizen will not like to be told that banks can and do create money . . .”<br /><span style="font-weight: bold;">Reginald McKenna</span>, past Chairman of the Board, Midlands Bank of England</blockquote><br />Most Americans do not understand our current financial crises because they do not understand how money is created, who creates it, and how an economy can be deflated by “fear itself.”<br /><br />The simple terrifying truth is that most of our money is created by private banks and if these private banks succumb to an epidemic of fear and hysteria (perhaps provoked by an irresponsible mass media) the production of money will halt, employers will run out of cash, and employees will become unemployed.<br /><br />How do banks create money and, if so, why are they not treated as common counterfeiters? Banks create money by simply providing credit to their customers. Each time a loan is issued by a bank, the economy, to some small degree, is inflated. An isolated economy that was originally made up of $1,000 in gold coins has its money supply increased to $1,200 by the simple issue of $200 credit to a member of the economy who doesn’t have the cash now but who the creditor trusts “is good for it in the future.”<br /><blockquote>“When you take a loan, money is created. When you pay it back, money is destroyed.”<br /><span style="font-weight: bold;">Advocates of Liberty</span>, http://www.iowaliberty.org/node/61</blockquote><br />To get a clearer idea of how money is produced by banks let us take a simplified model of an isolated island economy with a total money supply of $1,000, all belonging to only one of its citizens. To keep the model simple and easy to understand, we begin by assuming that there is no trade with foreign lands, the government does not regulated the economy, and that the members of the economy do all of their trading with credit cards and therefore do not carry cash.<br /><br />The economy gets rolling when the single cash-holding member of the economy deposits his $1,000 in the island’s only bank. The bank’s books immediately reflect that it has deposits of $1,000 and the bank begins looking for a way of making a profit off that sum by loaning it out for interest. It finds a second member of the economy who has a business idea and is a good risk. Since it has deposits of $1,000, the bank believes that it has $1,000 to loan out and issues credit of $1,000 to the fledgling entrepreneur.<br /><br />Since the borrower uses his credit card for all of his everyday transactions, he has no need for carrying cash around and therefore deposits the $1,000 into his account at the bank. This new deposit leaves the bank with deposits of $2,000, the original $1,000 deposited by the original “old-money” depositor and the second $1,000 now deposited by the ”nouveau riche” borrower. The total deposits remain at $2,000 as the borrower buys equipment and hires fellow islanders because each person he does business with uses his credit card for spending and deposits his money into the island’s only bank.<br /><br />The president of the bank, who is always looking for new ways to earn interest from borrowers, realizes he now has deposits of $2,000 but only has loans outstanding of $1,000. With this in mind, he loans out the second $1,000. This loaned money is immediately deposited back into the bank, bringing the total amount of money deposited in the bank to $3,000. The bank, simply by issuing credit, has inflated the islands economy three-fold and is now looking for ways to further inflate the economy by loaning out its latest deposits. Left unchecked, this inflationary process could continue into infinity.<br /><br />In short, most money is created by the trust of creditors and the confidence they have that their credit will be repaid. While the island’s mint might affect the economy by deficit spending and speeding up the printing presses, the vast bulk of the economy’s money supply is nothing more than credit and the optimism of its bankers.<br /><br />While the money supply can be inflated infinitely on our hypothetical island, the issuing of credit money in the real world has its limits as the amount of deposited money available for loans is reduced by several factors:<br /><ol><li>Deposits are reduced by actual cash that members of economy choose to carry in their pockets or hide under their mattresses (man does not live by credit cards alone);</li><li>The government, which feels obligated to keep the economy stable, requires that banks keep a certain amount of their total deposits in reserve and unavailable for loans (a “fractional reserve”);</li><li>The bankers themselves limit their loans to those that are safe and do not involve risk. </li></ol>The first of these factors, coins and bills, is a small part of our economy and is relatively insignificant at the level of macroeconomic concerns. The second one, the government’s control of the banks’ fractional reserve is a mechanism that can be used to keep the money supply stable when there is otherwise a sense of economic well-being throughout the economy.<br /><br />It is the third factor, however, the confidence that bankers have in their borrowers, which can create inflation in times of “irrational exuberance” or deflation in times of rampant pessimism such as what we are experiencing at the current time. Regardless of the efforts of the government and the Federal Reserve, if bankers are afraid to issue loans, bank-produced money will disappear, employers will suffer cash flow problems, and employees will be handed their pink slips.<br /><blockquote>“One thing to realize about our fractional reserve banking system is that, like a child's game of musical chairs, as long as the music is playing, there are no losers.”<br /><span style="font-weight: bold;">Andrew Gause</span>, Monetary Historian</blockquote><br />Whether it is based upon gold, the promises of government backing, or the loans issued by creditors, money is essentially a product of faith. When that faith is strengthened by optimism, an economy inflates until it reaches a ceiling set by the government. When that faith is weakened by the fear and pessimism of creditors, an economy will experience a “credit crisis” that no government can control through regulation or stimulation.Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-66745054859470474992008-08-14T07:48:00.000-07:002008-08-14T07:53:09.558-07:007. Balance of Trade<p class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.2in; line-height: normal;">“Nothing can be more absurd than this whole doctrine of the balance of trade.” </p> <p class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.4in; line-height: normal;"><b style="">Adam Smith</b>, <i style="">The Wealth of Nations<o:p></o:p></i></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><o:p> </o:p></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><br /></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">The idea that a country needs a positive balance of trade is a fallacy that has been creating wars and destroying jobs for over five-hundred years.<span style=""> </span>Empires have fallen and ill-gotten fortunes have been made under the spell that it has held over the economically naïve.<span style=""> </span>Yet, under the examination of common sense, it can be quickly exposed as the absurdity that Adam Smith proclaimed it to be.<o:p></o:p><br /></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">The doctrine of balance of trade is the underlying principle behind the political theory of mercantilism, the fallacy that a country can get rich independently of its people’s productivity. To the mercantilist, gold is wealth and the country that hoards the most gold must be the wealthiest – <span style=""> </span>even if its people have no bread.<o:p></o:p><br /></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">Gold is not wealth. It cannot be digested; it is too soft to be useful in making tools; and it cannot warm the body on a cold night. Gold’s only value is as a medium of exchange, a material used as a standardized way of executing trades among people who do not want to be restricted to the practice of barter. <o:p></o:p><br /></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">While the mercantilist wants to trade for gold as an end in itself, the wise free trader only accepts gold as a means of trading for something really useful. Gold in itself may be pretty useless, but, if everyone accepts it as an intermediary unit in a complex trading system, gold can be used to obtain food, tools, and a warm shelter on a cold night. Ironically, gold is only useful when it is creating what the mercantilist refers to as a “negative trade balance,” the importing of something useful.<o:p></o:p><br /></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">By hoarding his country’s gold, the mercantilist only denies his citizens what is useful while increasing the gold used to obtain what is useful – he only causes inflation.<o:p></o:p><br /></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">How gold is used determines whether it is a practical substance or a false idol. In the hands of a trader, it can be a means of making a series of related exchanges that would be impossible by primitive barter; in the hands of a hoarder, it can be a way of slowing down the market system.<o:p></o:p><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">Gold and other forms of money can either enhance a society’s wealth by increasing the comparative advantages of its diverse members or it can be limited to serving as the object of the obsessive hoarder’s worship.<o:p></o:p></span></p>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-2419138614080308342008-07-31T11:13:00.000-07:002008-08-19T05:37:48.517-07:006. What is Right with Kansas?<p class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.2in; line-height: normal;"><i style=""><br /></i></p><p class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.2in; line-height: normal;"><i style="">“As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market.” <o:p></o:p></i></p> <p class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.4in; line-height: normal;"><b><span style="">Adam Smith, </span></b><i style=""><span style="">The Wealth of Nations</span></i><b><span style=""><o:p></o:p></span></b></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><o:p></o:p></span><span style=""><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">The state of North Dakota produces nearly half the wheat grown in the United States. Despite having a climate that provides only a limited amount of rainfall, a short growing season, and a harsh arctic winter, North Dakota is one of America’s great agricultural assets. <o:p></o:p></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><o:p></o:p><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">While North Dakota is an American garden, if it existed under a different political system</span><span style="">, it would be a remote steppe, thinly populated by nomadic shepherds and herdsmen. North Dakota is one of the world’s great breadbaskets because it is a part of that capitalistic paradise called the United States of America.<o:p></o:p></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><o:p></o:p><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">Having been born in North Dakota and raised in nearby Montana, I have nothing but respect for the hardy wheat farmers of North Dakota. Much of the state’s agricultural success must be credited to their talent, hard work, and resourcefulness. Yet, if their state (along with its harsh climate) was located in central Asia, these great bread makers of the world would be sleeping in tents and chasing sheep and goats on horseback. They are the world’s greatest wheat farmers because they live in the land of free trade.<o:p></o:p></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><o:p></o:p><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">The North Dakota success story begins with the American constitutional convention. At the end of the American Revolution, the thirteen colonies became thirteen little nations, united only for a common defense from threatening European nations. Each state (that is, each governing nation) had powerful claims of sovereignty over its territory and the unsettled territory beyond the Appalachian Mountains.<o:p></o:p></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><o:p></o:p><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">Unsatisfied by the existing arrangement, the states replaced their weak union with a constitution that would reunite them together under a federal system of government. An unheralded part of this new arrangement was a clause that prohibited any state from interfering with commerce between the states. Known as the “Interstate Commerce Clause,” this part of our constitution was effectively the first NAFTA (North American Free Trade Agreement), denying the individual states the ability to protect their local businesses by issuing tariffs against competition from other states.<o:p></o:p></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><o:p></o:p><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">The Interstate Commerce Clause is the primary reason why America became the “land of opportunity” and the greatest commercial success the world has ever known. How the Interstate Commerce Clause worked its magic can be illustrated by the success of North Dakota wheat (as well as Kansas soybeans, hence the title of this post).<o:p></o:p></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><o:p></o:p><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">If North Dakota was a more sovereign state, not limited by the Interstate Commerce Clause, its power-seeking politicians would do what all politicians do – they would increase their personal power by performing favors for the people who keep them in power. In particular, they would pass laws that would protect their local apple growers, their steel foundries, and the state’s small but significant rutabaga producers. All of these protective measures, of course, would save inefficient local businesses, but at the cost of reducing the amount of acreage used to do what North Dakota does best – grow wheat. <o:p></o:p></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><o:p></o:p><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">Not to be outdone in their villainy, the politicians of the other states would pass measures to protect their local wheat farmers, reducing the market for North Dakota’s best product. The result of politicians in the various states being politicians is that North Dakota wheat farmers would have less income from wheat and a greater cost of living because they would have to buy their rutabagas, lettuce, and fruit from cold places like Grand Forks instead of warm places like Fresno and Bakersfield. Their farm machinery would need to be constructed from the steel foundries of Fargo and Bismarck. Politicians doing what politicians do would reduce the hard working citizens of North Dakota to a state of grinding poverty.<o:p></o:p></span></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><o:p></o:p><br /></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="">However, because we have a free trade arrangement among all of the political subdivisions within our economy of 300 million consumers, the hard working farmers of North Dakota have the advantage of an immense wheat consuming market. In addition, they also have the advantage of being able to buy farm equipment produced “back east” where farm equipment is best produced. And, most of all, they belong to a society of consumers that are free to buy their fruit from California, their cottons from Mississippi, and their engineering from MIT.<span style="font-weight: bold;"><br /></span></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><span style="font-weight: bold;"><br /></span></span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style=""><span style="font-weight: bold;">The great middle classes of North Dakota, Kansas, and the other states of America are the products of individual human ingenuity unleashed by the first great free trade agreement, the Interstate Commerce Clause.</span><o:p></o:p></span></p>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-86791968758899115732008-07-28T10:42:00.000-07:002008-07-28T11:01:36.446-07:005. Everyday MagicWhy do free market economies always outperform command (i.e. socialist) economies? The answer is a simple one; free market economies have the advantage of everyday magic. While small amounts of wealth can be produced from human labor and ingenuity alone, the high standard of living in modern economies is the product of a magic where wealth is created seemingly from nothing at all.<br /><br />Only in a market can a hungry man with a few dollars in his pocket satiate his hunger with a professionally prepared meal. The market allows a non-metallurgist to use metal tools and a non-chemist to have access to complex plastics. Markets provide us with the experience of products from around the world and allow us to have tools, homes, and vehicles that we could not possibly create with our own labor and ingenuity. It is the activity of the market, what we refer to as “trade,” that provides us with the “comparative advantage” of many other people’s labor and ingenuity.<br /><br />This comparative advantage is the magic that allows us to find wealth where it was never directly produced. Two people who have each labored for one hour can together generate four hours of wealth by concentrating their efforts where they each have a relative advantage and then trading their outputs to create a wealth that neither could have produced alone. As the number of traders increases, the magical power of trading increases exponentially. Like magic, wealth is produced by the simple act of trading as if each trade were blessed with the magic incantation “abracadabra.”<br /><br />True, command economies offer products from around the world and meals that can be purchased with a fraction of a day’s labor, but the reason why they do is because they also trade in a market. The magical wealth of trade is productive in a command economy for the same reasons that it is in a free market economy. Magic is still magic even though, in a command economy, there is far less trading magic occurring and therefore there is an exponentially smaller amount of wealth being created. Command economies have limited magic.<br /><br />So, what would be a typical man’s wealth if the magic of trading was completely forbidden rather than just inhibited as it is in command economies? He would be limited to the direct product of his own labor and ingenuity, which, assuming he is not a combination chef, metallurgist, chemist, mathematician, engineer and mechanic, would be perhaps a rough stone pounding device, a flint cutting rock, and whatever hides he could find to gird his loins. <strong>In Karl Marx’s utopian dream, man would be living in the Stone Age</strong>.<br /><br /><em>"A thriving and lucrative branch of industry promotes the creation and accumulation of new capital; whereas, under the pressure of taxation, it ceases to be lucrative; capital diminishes gradually instead of increasing; wealth and production decline in consequence, and prosperity vanishes...",</em> <strong>Murray Rothbard</strong>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-60583210333966058752008-07-24T13:11:00.000-07:002008-07-24T13:16:32.796-07:004. The New Iron Curtain<em>"From Stettin in the Baltic to Trieste in the Adriatic an iron curtain has descended across the Continent</em>."<br /><strong>Winston Churchill,</strong> <em>speech at Westminster College, in Fulton, Missouri, March 5, 1946<br /></em><br />Today, July 24, 2008, Barack Obama is scheduled to make a speech in Berlin, Germany as part of his campaign to win the American Presidency. It is most fitting that the speech is to be given in Berlin where a brick wall once stood to keep people from the socialist East from seeing the progress and material success of the western market economies.<br /><br />Obama will, of course, be well received, as American politicians from the Democratic Party usually are. Whether the Democratic candidate is Obama, Hillary Clinton, or John Kerry, he is the preference for Europeans, regardless of who the Republican candidate might be. Why do the Europeans show such a strong fondness for the Democratic Party and its platform over that of the Republicans? Why do they tell us that we need a Democratic administration to “heal our country’s lack of prestige” that occurred under a Republican administration?<br /><br />Germany, France, and the other countries of Western Europe have adopted socialist governments by evolution and now show little real difference from the societies that once existed on east side of the Berlin Wall. Like the old communist states of the East, the governments of Western Europe have adopted cradle-to-the-grave care for their citizens at the horrendous cost of their people’s liberty. And, like their eastern predecessors, the current states of Western Europe are well on their way to economical, cultural, and demographical failure.<br /><br />Regardless of geographical position, sharing productive people’s wealth with the unproductive leads to a lack of productivity, stagnation of innovation, high unemployment, and immigration of “guest workers.” Europe is dying under the weight of the same ideology that destroyed the communist states of the east; Europe is dying of a cancer where an out-of-control mass of unproductive cells feeds off the productive cells that are needed to keep it alive and healthy.<br /><br />The old communist governments that once existed on the east side of the iron curtain worked hard to hide the failures of their way of life from their own citizens. The Berlin Wall prevented the immigration of the East’s brightest and most skilled. It was also intended to prevent the people of the East from traveling to and witnessing the success of market economies. Travelers to the West from Russia, Poland, and all of the other states of the East were screened and sheltered to prevent the success of the West from being told to the people of the East. As long as the people in the East thought that everyone in the world waited in long lines for a roll of toilet paper, they would remain docile and accepting of the economic plight that was their fate.<br /><br />Now Western Europe needs to follow the lead of its eastern predecessors and prevent its people from seeing what a market economy can succeed at while their “share the poverty” plans continue to fail. As we learned with the fall of the Soviet empire, however, the state’s imprisoning of its own citizens is not a reliable means of long-term hiding the material success that is occurring elsewhere. Rather than inhibiting their people from traveling, it is a much more lasting solution to simply stamp out free market economies wherever they raise their embarrassingly successful heads.<br /><br />A Democratic administration, particularly one that promises to raise taxes and take money out of the market place, is the best way to restrain the progress and growth that has characterized America’s economy since the beginning of the Reagan administration. The Europeans love the Democratic Party because it shares their faith in “institutionalized envy” and assures them that productive people will someday have no more place to hide – not even in the “land of opportunity.”Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-46773995246834710392008-07-18T13:14:00.000-07:002008-07-22T07:04:34.931-07:003. Entrepreneurship Trumps MarxThe last thirty years of world history should be evidence enough to the open-minded that socialism necessarily leads to economic failure. Not only did the Soviet empire collapse in economic disgrace, but those countries that have continued to deny a market economy are known to be poverty-stricken wrecks.<br /><br />For those with a more scholarly aptitude, there is more evidence that the state’s ownership of the means of production only leads to failure and resource misallocation. The various agrarian-socialist experiments, such as New Harmony and Brook Farm, have all ended in absolute failure, and the first colonies in American (Jamestown and Plymouth) were economic failures until they allowed the private ownership of the means of production (farm land).<br /><br />To see why socialism must always fail economically, we need to look no further than the theory that serves as its ultimate foundation. Socialism, whether it is of the Marxist revolutionary model, the Fabian Society’s evolutionary model, or any of the other share-the-wealth schemes, rests upon the very idea that the value of any commodity is based solely upon the amount of labor that is involved in its production. This idea is known as the “labor theory of value,” first expressed by Karl Marx, but since adopted by those that insist upon “economic justice.”<br /><br />The labor theory of value is contradicted by the practical experience we have of commodity markets where prices and values go up and down while the amount of labor involved stays the same. It is also contradicted by our experience with sales in retail stores and the book values of our cars that decline even when we leave them at rest. Value, and the price that accurately measures it, is really a product of demand, the desire that potential purchasers have for it, regardless of the labor involved. The labor theory of value is simply a very naïve idea upon which the very naïve system of socialist thought is based.<br /><br />If we look deeper at the labor theory of value we can see the political history of the twentieth century unfurl before our eyes. We can see Mikhail Gorbachev surrendering in defeat to a triumphant Ronald Reagan, and we can see the massive shortages and starvations that have plagued socialist nations wherever they have existed. The labor theory of value does not measure human needs and therefore neglects the most important part of value – <strong>value is what satisfies human need</strong>.<br /><br />The labor theory of value claims that labor is the only thing that determines a commodity’s value and that the capitalist simply exploits labor to produce this value. Neglected is this theory is the value of natural resources, varying human talent, and the entrepreneurship that provides the critical function of finding human needs and the means of satisfying those needs.<br /><br />Among the things that are neglected in the labor theory of value is the ability of the astute capitalist who allocates resources in such a manner as to meet human demand. The difference between the economic disaster that occurred in Soviet Russia and the economic juggernaut of the West is primarily a result of the West’s ability to recognize true value. While the Soviets fumbled under a theory that placed no value on the entrepreneur’s ability to discover and satisfy human needs, the entrepreneurial driven market economies of the West let human needs determine value. The West succeeded because labor, natural resources, and the genius of successful decision-makers were drawn to <strong>the real source of value – human need</strong>.Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0tag:blogger.com,1999:blog-9113072448918521000.post-949350926704981792008-07-02T08:57:00.000-07:002008-07-02T09:04:57.975-07:00Trade and Tyranny<em>Stop trying to control.</em><br /><em> Let go of fixed plans and concepts,</em><br /><em> and the world will govern itself.</em><br /><em> </em><strong>Tao Te Ching, Chapter 57</strong><br /><em></em><br />Cooperation and coercion are the two methods that facilitate the combining of human effort into a single venture. Cooperation is a product of the free will of each party to the work; coercion is where some of the parties are forced to obey the will of some of the other parties. Cooperation is accomplished while preserving the liberty of all; coercion requires the enslavement of at least some to the tyranny of the others.<br /><br />Tyranny, the coercion of some men by the powers of others, is most apparent when it occurs in a dictatorship. The abusive power of one strong man who lords a military force over his subordinates is the stereotypical idea we have of a tyranny. Less obvious, but just as tyrannical, is the coercion that a majority has over a minority in a democracy. True, in a democracy, the coerced have the safeguard of being able to vote against their oppressors, but, in the case where an oppressed minority is hopelessly outmanned (such as the minority of the most productive workers in a society that believes in the redistribution of wealth), the obedience of the minority to a power that threatens violence or imprisonment can be just as real in a democracy as in a dictatorship.<br /><br />Dictatorships are coercive, monarchies and aristocracies are coercive, and democracies can be coercive. The question that we must then all ask ourselves is:<br /><br /><em>What form of government is not coercive?</em><br /><br />And the answer to this question is simple “they are all inherently coercive.” Every form of government, in order to work as a government, must coerce its citizens. Whether through the enforcement of the laws that protect its citizens from violent crimes or through the indenturing of its people to build monuments to its leaders, the government must function through coercion in order to be a government.<br /><br /><em>So, if all governments work by coercion, what form of government is best?</em><br /><br /><strong>The government that governs best is the government that governs least.</strong><br /><strong></strong><br /><em>And, what form of government fosters the greatest amount of cooperation among its citizens?</em><br /><br /><strong>Cooperation among mankind thrives best where the government coerces the least.</strong>Robert Meldahlhttp://www.blogger.com/profile/02856664427778439789noreply@blogger.com0