Monthly Archives: September 2011

Milton Friedman vs the Austrian Perspective

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So you are a good free market Chicago School guy.  You have rejected Keynesian economics in favor of the free market Chicago school.  You have read Milton Friedman’s “Right to Choose” and you are convinced that the free market is the way to go.

Well, maybe he is not such a free market guy.  He is, in fact, in favor of compulsory taxation, monopoly, price controls, and the welfare state.  Milton Friedman proposed the tyrannical payroll deduction in the United Sates during WW2 and it has stuck with us like a curse ever since.  He is against cartels in most areas except for money.  Though Chicago School has done many positive things in promoting liberty, its faults are glaring and can no longer be ignored after September 2008. The Chicago School was fundamental in popularizing the idea that almost all government regulations are actually lobbied for and constructed by the industries that are to be regulated to push out competition and raise costs for new competitors entering the sector.  This allows large firms to absorb regulatory costs while pushing out small businesses and new upstart companies.  The term popularized by many from the Chicago school is “Cui Bono” or who benefits?.  The Chicago School realized that in almost all cases, the big players in the industries being regulated are almost always the same beneficiaries of such regulations and are also the biggest pushers of regulation (just like today’s health care legislation and insurance companies.)  Chicago School has written hundreds of books on almost every industry when making their case but have somehow missed the elephant in the room, the Federal Reserve. So the largest monopoly of all escapes all scrutiny from the Chicago School.  Chicago School refuses to use this same method of “Cui Bono?” on the banking cartels that exist around the world in the form of Central Banks.  This seems absurd when considering that all the shareholders of central banks are private and have enormous leverage in setting the price for money (the interest rate).  So the Chicago School and Milton are completely inconsistent in their theories when it comes to money.  They are for free competition in all fields except for banking, where the Chicago school supports government sponsered monopoly.

When it comes to methodology, the Chicago School is as bad if not worse than the Keynesians.  The Chicago School and every other school of economic thought besides the Austrian School since the 1930s have viewed human beings as mathematical aggregates.  That is to say, human beings are simply numbers to be put in mathematical formulas.  The Austrian School completely rejects this because human beings are conscious actors that change their behaviors based on conditions. For example if you raise the income tax, some people will likely find other ways to generate income through investment or some other method.  Therefore, human behavior and concious actors will change how much revenue will be brought in.  All other schools of thought pretend that human behavior is for the most part unchanging and can be constructed as part of a mathematical formula. For example, if government action A is taken than B will be the result.  Ludwig Von Mises established in “Human Action” that human behavior cannot be predicted and observed in the same way that hard sciences make predictions. All particles in the universe act in the same predictable way when a force is applied to them. This is not true with human behavior.  When a new variable is applied to human interaction, humans will react in multiple different ways, each to achieve their own desired goals. Since economists can’t possibly know the goals and motives of every single person, it makes human beings almost impossible to predict the same way that chemists or other scientists make predictions with their respective studies.  This puts economics closer to the field of sociology rather than a hard science, i.e. physics, that mainstream economists’ fantasize about making economics into.  Human beings are conscious actors but the Chicago School’s methodology leads to many conclusions that are not logical because they often do not take this into account. Murray Rothbard gives the example of Milton Friedman’s negative income tax or guaranteed annual income.  Rothbard argues that it is precisely because the welfare bureaucracy is so inefficient that the United Sates is not more bankrupt than it is.  Friedman’s plan to make it more efficient by automatically sending out checks to anyone making below a certain income creates a hugely distorted incentive structure that is logically obvious but which Chicago School’s methodology seems unable to grasp.

Lastly if you still think that the Chicago School is free market consider this; Ben Bernanke is a student of the Chicago School, specifically Milton Friedman’s book on the Great Depression. Everything that Ben Bernanke has done has been lock step with what Milton Friedman had suggested should have been done during the Great Depression. Not one major economist from the Chicago School publicly protested against TARP or the mind boggling expansion of the money supply.  The Chicago School has completely capitulated to the Keynesian world view and have shown their true colors. The only school of thought that has not been toppled in the wake of September 2008 has been the Austrian School.

Here Gary North goes into some of the intellectual history of economics. Additionally, Gary North makes the argument that the intervention of 2008 was so massive that it was arguably taken even further than anything that Milton Friedman would have suggested thirty years ago.

Here is another lecture comparing Milton Friedman to the Keynesian paradigm.

Here is an article about how mainstream conservatives and supply siders are Keynesian.

 

How Inflation Destroyed the Roman Empire

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There were many reasons the Roman Empire fell but, inflation and government spending were huge parts.  Government stimulus programs and public works became common then as they are today.  People today underestimate the complexity of the Roman Empire but, their bureaucracy was almost as large as ours today.  Aqueducts were often created to give people employment just like “The Community Reinvestment Act” seeks to do today.  I find this interesting on many different levels.  For one, Rome’s policies were very similar to ours today.  They even had similar names like jobs bill and community reinvestment act.    There is a book written in the 1940s called the “New Deal in Old Rome” that compares Roman governance in the later Empire to New Deal programs.  The parallels are almost bizarre.

Then, just like today, government bureaucracy and spending were only part of the problem, the much bigger problem was inflation.  Inflation was rampant and brought the Empire to its knees.  The rates of inflation increased over time at a similar rate to that at which the United States is currently.

 

What is really staggering is that the Roman Empire’s fiscal transgressions are nothing compared to the modern United States’.  Rome had to dilute its coins by recalling them every few years and watering them down with other metals, while the U.S. can simply print bills of credit to infinity with no checks in place at all.  Nero would be envious indeed of the American State’s monetary power.  Rome also centralized everything into its capital city and attempted to regulate its provinces from afar but, again this is nothing compared to the centralization that Washington DC has been able to accomplish.  For all the corruption that infected the Roman government, it is tame compared to the corruption of the American Political Class. Here is a brief presentation on Roman Inflation.

This one is a bit longer.

 

 

Big Silver Drop, Great Time to Buy!

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Silver just took a huge drop, this is a great time to get in if you have not already.  Silver touched fifty dollars an ounce this spring and now has dropped down to thirty dollars today from around forty last week.  This is significantly lower than its high this year and many multitudes lower than its inflation adjusted high of 1980.  Many people may think that this is a bad signal for the metals market but, they are completely wrong.  The silver market naturally has huge swings because it is such a small market.  Pullbacks, even large ones, are a healthy sign for a bull market.   It is when bull markets turn into a parabolic increase that they reach bubble levels.  We are still a long ways away from silver or gold being a bubble.

Remember that silver is not just a precious metal, it is an industrial metal as well.  Even if the economy comes back strong, silver should do well in a boom just like oil or copper.  It is the greatest conductor of heat and electricity that occurs naturally in the universe.  This means we use it for everything, especially in the modern electronic age. There are literally hundreds of uses that you can find here.

We are in a totally unprecedented time in history when all the countries in the world have fiat currency.  Every single fiat currency in history has collapsed.  This has happened hundreds of times throughout the world as we look through time.  Hell, hyperinflation occurs in South America every decade or so! Even if you don’t buy everything I have been selling you about silver, you should at least protect yourself and buy a smaller amount of it just in case.  If you think that massive inflation or hyperinflation is a low probability scenario you should still have some capital invested into precious metals because it is such a high impact scenario.  Personally, I am confident this is a high probability, high impact scenario.  Consequently, I’m making a large portion of my portfolio out of silver.  Also, invest in physical metals to start out, don’t have all your gold and silver in paper stocks or shares.

Here is a movie on silver and gold investing by Michael Maloney.

 

Here is an article with more technical analysis.

 

Philosophical similarities between modern liberalism and conservatism and brutal communist regimes

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Most of the public think that modern conservatism and liberalism have nothing to do with the regimes of Stalin and Mao.  This is simply not true.  There may not be mass death in the United States and Europe by brutal governments but, philosophically there are many disturbing parallels.  This can most obviously be seen in the modern left by many of the modern liberals portraying communist dictators as revolutionary heroes.   This can be seen by the popularity of Ché and Hugo Chavez within the modern left.  If any of these people do things that are morally repulsive, the modern liberal gives them a pass and says that such behavior is “unfortunate but the ends justify the means and who are we to judge anyway.” No matter how many people are brutally killed by communists, the left never sees the ideology of collectivism and egalitarianism at fault.  It was simply that the wrong people were running things.  Many believe that if Trotsky took over rather than Stalin, Soviet Russia would have been some kind of paradise (this includes the founders of the neo-conservative movement and the National Review who were all former Trotskyists to include Irving Kristol, Bill Kristol’s father.)   The ideology is never questioned because it is considered a moral axiom that all people should be equal.  This idea of equality goes against the reality that each human is different. It is also against human nature.  So what does the modern leftist question?  Certainly not the moral righteousness of his cause! No, certainly not.  Egalitarianism is beyond reproach.  Reality must therefore conform to their ideas.  Thus, it is reality that must be at fault.  If you think that this is an exaggeration, ask a leftist (or a neocon) whether the universe is understandable by the human mind and concrete or whether everything is relative and we truly cannot understand anything.  They will tell you that the universe is relative and  1+1 may equal something else besides two; that we simply can’t know anything for sure.  This is obviously a contradiction because this simple statement, that the universe is relative, is concrete, implying that knowledge is possible.   So what happens at this point?  Does the modern egalitarian reject his philosophy because of the obvious flaw?  No, of course not.  His reasoning is not wrong.  Reason itself is wrong and it must be modified to fit his moral axiom.  In this way, every egalitarian at some level knows that his ideas go against reason itself.  So there is a new oppressor on the scene.  It is not just the capitalist class oppressing mankind but, reality and reason itself are oppressors as well.   To such a degree, reason and reality are rejected for a “new kind of reason” where two contradictions could now exist.   So the old ideas of the shaman and the mystic are revived in the new garb of secular Marxism.  The idea was that our reality was just a shadow for some kind of super reality that was unknowable like Plato’s famous short story about the cave.  Aristotle rejected this and said that the universe was knowable while Plato and his followers claimed that the universe was beyond the grasp of human beings.  To Plato and his followers, science was the study of appearances while to Aristotle and his followers science was the study or reality and truth.

Ever since the Greeks, all philosophies have either been Aristotelian in nature or Platonic in nature.  When looking at history, the times in which Aristotle had dominated a culture were ages of tremendous progress in all fields. Cultures that believed in an Aristotelian universe accomplished great things in physics, human rights, political science, economics and every other aspect of human knowledge. The renaissance and the enlightenment were ages when Aristotle and reason were the dominant philosophies. During all this, Plato and his ideas were always in the background waiting for their opportunity to return.  The old Platonic philosophy of self doubt and an unknowable reality began to rise again in the middle of the 19th century and eventually completely took over by the early 20th century.  Plato and his philosophy that reality does not exist except in some other reality began to dominate.  Reason was rejected.  There was no such thing as truth any more.  The Nazis believed in racial truth, the communists believed in proletariat truth as opposed to the bourgeoisie truth.  One thing was certain for all these groups, reason was to be rejected as well as any idea of singular truth.   When Platonic philosophy rules, it results in mass death and humanity’s loss of confidence in itself.

The “Black Book of Communism” describes the crimes that the communists committed in the 20th century.  The crimes were just as evil as Hitler but, it was done on a scale much larger than the Nazi sociopath could have even dreamed.   I have not read the whole book but, what I have read is sickening and disturbing to the extreme.  Americans today may think that such things can never happen here, but this is the same thing that every other culture said before they were led to the concentration camps and the ovens.   I don’t think it will happen here either. But, it’s not because I’m complacent like most people. It’s because America has enough old classical liberal traditions deeply embedded into it’s culture. These have not been uprooted by the intellectuals yet and as such, will keep these occurrences from ever happening.  If the intellectuals ever do succeed and uproot the last vestiges of the classical liberal tradition, these evils will certainly happen here.  Not because collectivism and egalitarianism sometimes accidentally result in mass genocide but, because it is fundamentally necessary to the philosophy.  Egalitarianism itself implies the dehumanization and mass death of human beings.

Here is a brief article on mises.org about the “Black Book of Communism” and its similarities to the modern liberal and conservative movements.

Austrian Business Cycle Theory

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It is critical for everyone to understand Austrian Business Cycle Theory because it affects everything. The main idea is rather simple while some of the details are a bit more hard to understand.  Austrian Business Cycle theory simply states that  booms and busts exist and that they are not unpredictable market phenomena. They are in fact very predictable because they are caused by an outside agency (central banks in most cases).  This allows the average person to avoid massive monetary losses by allowing them to identify bubbles before they pop such as the dot com bubble and the housing bubble.  This also allows the average person to make huge profits because they can identify the next bubble at the ground floor and place their money there before the public enters that particular bubble sector in mass.

Here is the famous Peter Schiff video where he predicts exactly how the crash of September 2008 happened (started in sub-prime, spread to the rest of the housing sector and then finally to the financial sector).  My favorite part is how he takes on Art Laffer (creator of the famous Laffer Curve which absurdly proposes that lower taxes bring in more tax revenue; this idea is actually believed to be true by people you may have heard of such as Sean Hannity.) Laffer is also one of the most well known of the Reagan era supply side economists that act like they are free market but, as demonstrated in this video, are actually just soft keynesians.

 

Here is an explanation of the Austrian Business Cycle from an academic perspective:

Here are some more brief versions:

 

 

Can Gold and Silver Keep Going Up?

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Of course they can.  People told me that silver was a bubble at 14 USD an ounce (the same people who never saw the housing bubble or the dot com bubble).  It was at 40 yesterday and dropped to 36 today.  This is a great buying opportunity. Everyone should have at least 10% of their investments in physical precious metals, not stocks.  I have much more than that because I intend to make spectacular profits in the future but, 10% should be a safety net that everyone should have just to protect themselves.

Gold and Silver peaked in 1980 and then there was a bear market for twenty years. The reason that gold and silver dropped was Paul Volcker was able to push interest rates into the stratosphere, stopping the the 1970s inflation in its tracks.  Not only has Ben Bernanke said that he will keep interest rates low for years in the future (making the bust that much worse, see Austrian Business Cycle Theory) but, even if he wanted to bring interest rates up he would send the economy into a depression much worse than the one that Volcker caused in 1981.  This is politically unpalatable, the election losses for both parties would be a blood bath.  Therefore, the Fed tries to keep the unsustainable path of the inflationary boom going through even lower interest rates; simply kicking the can down the road to future politicians.

This is the first time in history that massive inflation and low interest rates have not created an artificial boom.  Alan Greenspan was able to do it after the recession of 1991 and the dot com bust.  But, no longer is this a possibility.  This is a bad sign, it implies that monetary expansion has reached its limit and the depression that the United States has been putting off for more than a decade is coming.  However, instead of it being the small storm that it would have been ten years ago, it is now going to be a hurricane that is going to wipe out the entire middle class, retirees, and anyone trusting in government promises.

Remember that when Volcker pushed interest rates up in 1981, the United States was the largest creditor in the world.  Now it is the largest debtor.  The United States had a strong industrial base but, now it has all been shipped overseas due to the dollar’s reserve status giving it artificial buying power.  Simply put, an interest rate hike, although healthy in the long term, would rock our economy to the very core due to the 20 years of malinvestments that would have to be liquidated and the massive economic structural imbalances that would have to be corrected.

This means that gold and silver have a long way to go before this thing is all sorted out.

The Nature and the History of Money

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I have a bachelors degree in history.  But, after doing some research I realized that I was not taught anything about the history of money and, to be quite honest, I didn’t even really know what it was fundamentally. Money is literally the lifeblood of civilization.  When it is disrupted or tampered with, misery results.  Although money is so important to our daily lives, we often think little of it.  After all, it is always there and it can always buy stuff, right?  Monetary history is probably the most important history of the United States.  Nothing today has shaped our country more than money has.  It has been the topic of almost every presidential debate from George Washington until World War II. Each political party and philosophy had its own opinion on the nature of money. Thomas Jefferson, Abraham Lincoln, William Jennings Bryan all discussed money during their presidential campaigns or while they were in office. This history is almost completely lost on the American people, though it was not too long ago when it was regularly discussed by the public. Only in the last 50 years has it become taboo to talk about the nature of money itself.  But this social norm is changing.  Here are some good resources to start your study of money’s history.

 

All of Rothbard’s books are excellent at describing the nature of money.

www.mises.org/resources/6131/Case-for-a-100-Percent-Gold-Dollar-The

www.mises.org/resources/617/What-Has-Government-Done-to-Our-Money

A History of Money and Banking in the United States

 

Money Banking and the Federal Reserve (this is a good video from the Mises Institute)

 

 

 

The Coming Monetary Crisis

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There are a number of documentaries on line that will help outline the basics of what the United States will be facing in the future. The ones below have an Austrian perspective of what happened, not the usual stuff you hear about regulation. There is one player that has caused all of this, the Federal Reserve.

Overdose

 

Melt up

 

 

 

Austrian Business Cycle

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Austrian Business Cycle

Tom Woods explains the Austrian Business cycle theory to a group of students in Boulder.

I like this speech because Tom is explaining the Fed to economic students that are mostly skeptics of Austrian Business Cycle theory.   This speech is also enjoyable because it assumes that the audience has some understanding of economics above your average citizen.  Tom Wood’s assumption that the audience has intelligence allows him to skip past the more basic economic ideas and get right in to the thick of it.

http://www.youtube.com/watch?v=541bajR4k8g