Incompressible

Frederic Bastiat wrote a now-famous essay titled What is Seen and What is Not Seen . In it, Bastiat discusses the principle of economics that inspired Henry Hazlitt's one lesson in economics: "From this aspect, therefore, the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." (Economics in One Lesson) These long-range consequences, or the consequences for all groups mostly consist of Bastiat's unseen. Because these consequences are unseen, it is easy to discount them in the public discourse. There has been a great deal of discussion on the problems of health care and education, among other issues of social concern in the US during this Presidential race. What I wanted to discuss in this post, in ter...

In a retrospective article on the Russian-Georgian conflict, Lewellyn Rockwell discusses Washington's attempt to resurrect WWI-era rhetoric. He quotes a 1915 book written by Francis Neilson, "How Diplomats Make War": "During a war it is no easy task to prevent your sympathy clouding your reason. The whole social system seems to be organized against any individual attempt to concentrate the attention dominantly upon the causes of the war. Governments, churches, theatres, the press, and local authorities, direct their efforts, in the main, warwards; the whole thought of society and commerce seems to be occupied with war; and all desire to question the reasons given by statesmen for participating in the war must be suppressed. It has been ruled already by certain 'leaders of thought' that it is unwise, unpatriotic, and un-English, to suspect the motives of Governments, or waver for a moment in swearing wholehearted allegiance to the authorities: you must think ...

This article has been making the rounds. The author, Paul McCulley, argues that as the banks deleverage their balance sheets they are counter-acting each other. As bad mortgages are sloughed off, the prices of homes generally fall, driving down the asset columns of all banks' balance sheets simultaneously. He has a point, but this is a symptom of the fraudulent nature of fractional-reserve banking and money multiplication, not an indictment of the sound practice of sloughing bad assets to shore up one's balance sheet. McCulley proposes a band-aid solution that only serves to perpetuate the root problem: shifting the bad assets off of the banks that took them on and forcing taxpayers to foot the bill. The moral hazard of socializing investment risk should be obvious. Frank Shostak of the Mises Institute gives a detailed response to McCulley's article here . A key difference between McCulley and Shostak is the mainstream (Keynesian) view of savings versus the Austrian view o...

What is money? Money is a human invention that solves the problem of a double coincidence of wants in a barter (primitive) economy. Man's earliest form of trade was barter: my rock for two of your bones. The problem with barter - as anyone who has been to a swap meet will understand - is that I have to want something you have and I have to have something you want. What if I don't want any bones and all you have to exchange for my rock is bones? Money emerges from barter as the good which is in greatest demand, or the most marketable good. The reason for this is simple: if you are going to accept a good which you don't want for its own sake (money) in exchange for something you have, you want to be sure that you can get rid of that good to someone else in exchange for something they have that you really want. You can only be confident that this will be the case if the good you are accepting in exchange for what you have is very marketable. There are other properties which mo...

Gold prices have been going down since mid-July. But gold prices have to go back up. The reasons are pretty simple. The Fed has been pumping money into the economy like madmen for decades (since 1971 when they cut loose from the gold standard completely... $1 in 2008 is equal to 19 cents in 1971 by official estimates which significantly understate true inflation.) That has resulted in a collapse of the market for credit, which contracts the money supply. If they do not vigorously inflate (even more), deflation will result. They were able to inflate so recklessly for so long without catastrophe because of the artificially created demand for credit. Imagine you have a machine that can create apples at zero cost. You use this machine to create billions and billions of free apples and sell them at 100% profit into the economy. At first, people will want more apples than ever because you can sell them so much more cheaply than ordinary apples. But then, you will have to start lowering your ...

At work last week, I was in a wonderful team meeting where we discussed promotion and raises. As expected, the myth of working harder quickly arose. My boss mentioned one of the Principle Engineers (PE) at the company and said (paraphrase), "Chuck works hard. You will see him filing issues in the database all hours of the night. He has to make a sacrifice of his family time to do what he does. That's why he makes more and has a high grade." This is just a bunch of pig slop. Chuck makes what he makes because if my employer paid him any less, he would get a job somewhere else. That's all there is to it. Chuck may very well work a lot of hours and that may contribute to why his economically ignorant peers believe he is entitled to his rate of pay (perhaps even he himself believes that it is because he works so much that he is entitled to his pay). This is all rooted in the myth of labor. The myth of labor is this idea that economic progress is had by working harder . Eco...

It has become a tenet of American economic faith that stock prices ought always to rise. But there is a serious problem with this. Let's say we had a gold coin economy. If prices of stocks never ceased rising (particularly in the exponential manner we have seen them rising for the last century), the gold supply would quickly be exhausted and all gold would be tied up in stocks. Clearly, something is amiss. The problem is that stocks are a kind of credit, or loan from the stock buyer to the stock issuer, the company. The price of stocks can go up over time, but in an honest economy, we would expect stock prices to go down when credit is tight and up when credit is loose. Stock prices in a gold coin economy would not increase indefinitely. Instead, companies whose growth potential is greatest would experience rising stock prices while other companies would experience concomitant stock price decreases, given a fixed "tightness" of credit. That is, for a given supply and dema...

I recently posted on the regressive effects of taxes on the poor. I have since been thinking about the nature of taxation as robbery , and it has dawned on me that taxes, which fund the parasitic class, have only one effect: taking from the many and giving to the few. The rhetoric surrounding taxation attempts, in Orwellian fashion, to reverse this fact. Taxation is justified today by arguing that it takes from the rich (the few) and gives to the poor (the many). But this is never true. Even if a particular tax measure hits a group of wealthy individuals for PR value, the rich can only ever account for a tiny fraction of total revenues taken in by the government. We can deduce that taxes never take from the few and give to the many by simple reasoning. Group dynamics always involves the public goods problem: how does a group of people come together to achieve a particular goal while minimizing the deadweight effects of freeloaders? The free-riding problem results from the fact that whe...

I have argued in the past that America is a worldwide financial empire. I could point to the 700 US facilities located in 170 of the 200 nations in the world. I could point to the global posture of our naval forces, particularly our carrier groups. I could point to the cases where US diplomats bully smaller nations into accepting WTO "free trade" agreements specifically designed to benefit our industries at their expense. But I don't have space here. It's not just that America is a rich nation. Money in itself is no threat to anyone. The most insidious aspect of our financial empire is the export of our debt and inflationary currency onto other nations. Thomas Jefferson said, "I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations ... will deprive the people of all property...

Money can be a tricky thing to reason about. I want to briefly regurgitate my understanding of the interaction between the money supply and demand for money. With a strongly conserved money supply (e.g. gold or a divine fiat money that never increases in supply), prices denominated in money will increase whenever the demand for money goes down. When the demand for money goes down, fewer goods and services must be offered in exchange for money. That is, more money must be offered for the same goods and services. Normally, however, the demand for money goes up, not down. What determines the demand for money? Population plays a role - as there are more actors demanding the use of the money, the demand for money increases and the prices of everything measured in money decreases. This is why we expect a gradual fall in prices given a rising population. Uncertainty also plays a role. When times are uncertain, the demand for longer-term stores of money for greater deferral of consumption incr...