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Introduction: Where We Are

It’s a fallacy to believe the US has a free market economy. The economy is run by a conglomerate of individuals and special interests, in and out of government, including the Deep State, which controls central economic planning.

Rigging the economy is required to prevent market forces from demanding a halt to the mistakes that planners continuously make. This deceptive policy can last only for a limited time. Ultimately, the market proves more powerful than government manipulation of economic events. The longer the process lasts, the greater the bubble that always bursts. The planners in charge have many tools to perpetuate confidence in an unstable system, but common sense should tell us that grave dangers lie ahead.

Their policies strive to convince the unknowing that the dollar is strong and its status as the world’s reserve currency is secure, no matter how many new dollars they create of out of thin air. It is claimed that our foreign debt is always someone else’s fault and never related to our own monetary and economic mismanagement.

Official government reports inevitably claim inflation is low and we must work harder to increase it, claiming price increases somehow mystically indicate economic growth.

The Consumer Price Index is the statistic manipulated to try to prove this point just as they use misleading GDP numbers to do the same. Many people now recognizing these reports are nothing more than propaganda. Anybody who pays the bills to maintain a household knows the truth about inflation.

Ever since the Great Depression, controlling the dollar price of gold and deciding who gets to hold gold was official policy. This advanced the Federal Reserve’s original goal of demonetizing precious metals, which was fully achieved in August 1971.

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China’s Currency Manipulation Does NOT Harm Its Trading Partners

June 19, 2018

China’s Currency Manipulation Does NOT Harm Its Trading Partners

Americans are being told that China’s currency manipulations are causing harm to its trading partners, America being the main victim. Nothing could be further from the truth. China’s currency manipulations certainly cause harm, but to China itself!

No country can cause harm to another by adopting any economic intervention. All economic interventions cause harm only to the country that adopts them. This applies to subsidies of home industries, quotas restricting import volumes, tariffs imposed on imports, and currency manipulations.

A nation typically manipulates its currency by giving more of its own currency in exchange for the currency of other countries. Thus foreign importers can buy more goods per unit of currency exchanged. In other words, if the free market exchange rate between the dollar and the yuan is six yuan per dollar, an importer would be able to buy goods costing six yuan by tendering one dollar. If the Bank of China arbitrarily decides to boost imports, it can give eight or ten yuan for each dollar presented. Chinese goods drop in price on the American market.

Protectionists such as President Trump view this as harm, but where exactly is the harm? A Chinese good that previously cost a dollar now may be purchased for sixty or eighty cents. Our American standard of living goes up at China’s expense! The extra money in Americans’ pockets may be used to consume or invest more. This is a very strange definition of harm.

The real harm occurs in China. The Bank of China sets off price inflation in its own country. It may try to mitigate this inflation by raising the interest rate on its own debt in order to withdraw the extra yuan from circulation. This is known as “sterilization”. It then appears as if China has achieved greater exports with no price inflation. However, China’s debt rises.

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How the Feds Use Transportation Funds to Spy on You

May 23, 2018

How the Feds Use Transportation Funds to Spy on You

A recent announcement by a local transit authority in Virginia sheds light on how the Department of Homeland Security (DHS) and the Transportation Security Administration (TSA) are building a massive, intrusive surveillance network built on America’s transportation system.

The Greater Richmond Transit Company (GRTC) recently announced plans to install more than 100 live surveillance cameras at stops along a rapid transit line. According to a WTVR report, GRTC plans to install approximately four cameras at 26 Pulse stops along Broad Street. The system will be live 24 hours a day and directly connected to the city’s 911 facility.

The ACLU of Virginia opposes the system. The organization’s director of strategic communications said constant monitoring changes the nature of a community.

“There’s very little evidence that this type of surveillance enhances public safety, and there is every reason to think that it inhibits people. That it causes us to behave differently than we would if we weren’t being watched,” Bill Farrar said, adding that the system will “keep tabs” on people who rely on public transit.

“GRTC has said in promoting this, in promoting the need for this particular line, we want to help people get out of the East End food desert. So we’re saying use this to get the food that you need, but we’re going to watch you while you do it.

GRTC Pulse is “a modern, high quality, high capacity rapid transit system serving a 7.6-mile route.” It was developed through a partnership between the U.S. Department of Transportation, the Virginia Department of Transportation, the City of Richmond and Henrico County.

According to Style Weekly, “this new system will bring the total number of easily accessible, city or government-owned cameras available to police and other authorities to more than 300, including roughly 200 stationary cameras Richmond police already have easy access to, and 32 cameras owned by city police.”

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7 Reasons Why European Banks Are in Trouble

May 22, 2018

7 Reasons Why European Banks Are in Trouble

While the euro crisis seems far away as all Eurozone countries ran government deficits below 3 percent of GDP, there is one problem for the euro that quietly keeps growing: the unresolved banking crisis. And this is not a small problem. The Eurosystems´and euro banks´ balance sheets totaled €30 trillion in January 2018, that is about 291 percent of GDP.

European banks are in trouble for several reasons.

First, banking regulation has become tighter after the financial crisis. As a consequence regulatory and compliance costs have rise substantially. Today banks have to fulfill demands by national authorities, the European Banking Authority, the Single Supervisory Mechanism, the European Securities and Markets Authority and the national central banks. Being at a staggering 4% of total revenue currently, compliance costs are expected to rise to 10% of total revenue until 2022.

Second, there are risks hidden in banks´ balance sheets. That there is something fishy in European banks´assets can quickly be detected when comparing banks market capitalization with their book value. Most European banks have price-to-book ratios below 1. German Commerzbank´s price-to-book ratio stands at 0.49, Deutsche Bank´s is at 0.36, Italian UniCredit´s at 0.23, Greek Piraeus Bank at 0.14, and Greek Alpha Bank at 0.34.

With a price-to-book ratio below 1, buying a bank at the current prices and liquidating its assets at book value, an investor could make profits. Why are investors not doing that? Simply, because they do not believe in the book value of the banks´assets. Assets are too optimistically valued in the eyes of market participants. Considering that the equity ratio (equity divided by balance sheet total) of the Euro banking sector is at only 8.3%, a down valuation of assets could quickly evaporate equity.

Third, low interest rates have contributed to increasing asset prices. Stocks and bond prices have increased due to the monetary policy of the ECB, thereby leading to accounting profits for banks.

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Canada’s Debt Spiral

May 21, 2018

Canada’s Debt Spiral

Living beyond our means requires us to borrow money to cover the difference between our income and our spending. Many Canadians now understand the financial consequences of this practice and regret the choices they’ve made. Unfortunately, Prime Minister Trudeau is not one of them, as evidenced by his government’s budget deficits which are further eroding the financial wellbeing of Canadians. He has broken a campaign promise, ignored basic economic principles, and seems hell-bent on setting an ignominious record. According to the Fraser Institute: “Justin Trudeau is the only prime minister in the last 120 years who has increased the federal per-person debt burden without a world war or recession to justify it.”

The Broken Promise

The Liberals had won the 2015 federal election with a pledge to run annual shortfalls of no more than $10 billion over the first three years of their mandate, and to eliminate the deficit by 2019-20.

The deficit for 2016-17, Trudeau’s first full fiscal year, was $17.8 Billion. The forecast for 2017-18 is $19.9 Billion, and for 2018-19, the forecast is $18.1 Billion.

And now, from the government’s 2018 budget, we read this:

While austerity can come from fiscal necessity, it should not turn into a rigid ideology about deficits that sees any investment as bad spending.

The government says deficits are economically beneficial, and compares deficits to loans taken out by entrepreneurs and business owners. But here’s the rub: in order to spend, the government must first raise money by taxing or borrowing (deficits). This deprives the private sector of money which would otherwise be available for businesses to borrow and invest in new production, thereby creating jobs and raising our standard of living.

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Gold Should be Viewed as Money — Not as an Investment Instrument

May 20, 2018

Gold Should be Viewed as Money — Not as an Investment Instrument

On May 4 and 5, 2018, Warren E. Buffett (born 1930) and Charles T. Munger (born 1924), both already legends during their lifetime, held the annual shareholders’ meeting of Berkshire Hathaway Inc. Approximately 42,000 visitors gathered in Omaha, Nebraska, to attend the star investors’ Q&A session.

Peoples’ enthusiasm is understandable: From 1965 to 2017, Buffett’s Berkshire share achieved an annual average return of 20.9 percent (after tax), while the S&P 500 returned only 9.9 percent (before taxes). Had you invested in Berkshire in 1965, today you would be pleased to see a total return of 2,404,784 percent: an investment of USD 1,000 turned into more than USD 24 million (USD 24,048,480, to be exact).

In his introductory words, Buffett pointed out how important the long-term view is to achieving investment success. For example, had you invested USD 10,000 in 1942 (the year Buffett bought his first share) in a broad basket of US equities and had patiently stood by that decision, you would now own stocks with a market value of USD 51 million.

With this example, Buffett also reminded the audience that investments in productive assets such as stocks can considerably gain in value over time; because in a market economy, companies typically generate a positive return on the capital employed. The profits go to the shareholders either as dividends or are reinvested by the company, in which case the shareholder benefits from the compound interest effect.

Buffett compared the investment performance of corporate stocks (productive assets) with that of gold (representing unproductive assets). USD 10,000 invested in gold in 1942 would have appreciated to a mere USD 400,000, Buffett said – considerably less than a stock investment. What do you make of this comparison?

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How High Is The Risk of a Currency Crisis?

April 24, 2018

How High Is The Risk of a Currency Crisis?

“The reports of my death are greatly exaggerated”, quipped Mark Twain in response to a newspaper report that said he was on his deathbed. The same could be said about many fiat currencies. Whether we are looking at the US dollar, the euro, the Japanese yen or the British Pound: In the wake of the financial and economic crisis of 2008/2009, quite a few commentators painted a rather bleak future for them: high inflation, even hyperinflation, some even forecast their collapse. That did not happen. Instead, fiat money seems to be still in great demand. In the United States of America, for instance, peoples’ fiat money balances relative to incomes are at a record high.

How come? Central banks’ market manipulations have succeeded in fending off credit defaults on a grand scale: Policymakers have cut interest rates dramatically and injected new cash into the banking system. In retrospect, it is clear why these operations have prevented the debt pyramid from crashing down: 2008/2009 was a “credit crisis.” Investors were afraid that states, banks, consumers, and companies might no longer be able to afford their debt service — meanwhile, investors did not fear that inflation could erode the purchasing power of their currencies as evidenced by dropping inflation expectations in the crisis period.

Central banks can no doubt cope with a credit default scenario: As the monopoly producer of money, central banks can provide financially ailing borrowers with any amount deemed necessary to keep them afloat. In fact, the mere assurance on the part of central banks to bail out the financial system if needed suffices to calm down financial markets and encourages banks to refinance maturing debt and even extend new credit. Cheap and easy central bank funding prompted lenders and borrowers to jump right back into the credit market. The debt binge could go on.

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Don’t Trust the “Trump Boom”

February 22, 2018

Don’t Trust the “Trump Boom”

Call me a bad conservative.

I don’t cheer this past year’s stock market gains. I don’t enthusiastically crow and pump my fist every time the Standard and Poor’s breaks a new record. I don’t breathlessly watch CNBC to see the day’s gains, listening mindlessly to commentators in custom-tailored suits with shiny gelled hair pontificating about what a rise in the futures market of Chinese copper means.

Oh, sure, the few times I check my 401k balance, I’m pleased. But when the closing bell rings and the champagne corks pop and the Financial District bursts into song and dance, I’m more or less indifferent–perhaps less. Perhaps I’m even pessimistic.

It’s because we’ve seen this movie more than a few times before. The wildcat banking of the mid-19th century, the frequent panics of the fin-de-siècle, the Roaring Twenties, Jimmy Carter’s cardigan-covered stagflation, Alan Greenspan’s handiwork in suppressing interest rates to fuel a housing bubble that popped in the fateful autumn of 2008–we live in a cinema where the feature show is never different. America, its economy and its workers, its labor and capital, are stuck in an involuntary pas de deux with some guy named Dow Jones.

The so-called “Trump boom” that’s sending stocks ever skyward was suspect from the beginning, but not for anything the President’s done. Trump’s tax-cut act, his most significant economic policy so far, has no doubt loosened some restriction on the market, freeing up money that would otherwise float down the river of Acheron into D.C.’s dead coffers. That’s certainly been a boon to traders whose job consists of playing god with other people’s dreams of retirement.

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Taxation Is Robbery

February 3, 2018

Taxation Is Robbery

[This article was originally published in 1947 as a pamphlet from Human Events Associates. It was reprinted in 1962 as chapter 22 of of Out of Step: The Autobiography of an Individualist.] Mises.org

The Encyclopaedia Britannica defines taxation as “that part of the revenues of a state which is obtained by the compulsory dues and charges upon its subjects.” That is about as concise and accurate as a definition can be; it leaves no room for argument as to what taxation is.

In that statement of fact the word “compulsory” looms large, simply because of its ethical content. The quick reaction is to question the “right” of the state to this use of power. What sanction, in morals, does the state adduce for the taking of property? Is its exercise of sovereignty sufficient unto itself?

On this question of morality there are two positions, and never the twain will meet. Those who hold that political institutions stem from “the nature of man,” thus enjoying vicarious divinity, or those who pronounce the state the keystone of social integrations, can find no quarrel with taxation per se; the state’s taking of property is justified by its being or its beneficial office. On the other hand, those who hold to the primacy of the individual, whose very existence is his claim to inalienable rights, lean to the position that in the compulsory collection of dues and charges the state is merely exercising power, without regard to morals.

The present inquiry into taxation begins with the second of these positions. It is as biased as would be an inquiry starting with the similarly unprovable proposition that the state is either a natural or a socially necessary institution. Complete objectivity is precluded when an ethical postulate is the major premise of an argument and a discussion of the nature of taxation cannot exclude values.

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Why Special Interests Try to Take Control of Governments

February 2, 2018

Why Special Interests Try to Take Control of Governments

George Monbiot, popular Guardian columnist, beacon light of global environmentalism, is also the kind of progressive who insists on seeing the world as he wishes it were and not as it really is. Wearing these kind of blinders will not help us get a better environment or better world.

In his latest column, Monbiot states that: “The forces that threaten to destroy our wellbeing are… the same everywhere: primarily the lobbying power of big business and big money, which perceive the administrative state as an impediment to their immediate interests.”

This is nonsense. Big business and big money, along with other special interests, such as Big labor and Big law and Big education, and all the other “ Bigs” absolutely love the “administrative state” because they have learned how to control it and use it for their own self-interest.

This is the “ progressive paradox” that Monbiot resolutely ignores: the more the state increases its powers over the economy, the more motivated special interests become to take control of the state in order to thwart genuine market competition. The resulting corruption just gets worse and worse.

Has Monbiot ever considered what persuaded enough voters to hold their noses and choose Trump? It was not that the administrative state provided honest government under the prior administration. Nor was the prior administration making any effort to hold back the power of special interests in Washington.

Two examples will suffice. In the “fiscal cliff” bill, President Obama achieved his long sought objective of increasing taxes on the rich. But in the same bill, passed at midnight, he snuck in subsidies for his own corporate supporters.

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Misleading with Numbers: It’s Worse When the Government Does It

January 31, 2018

Misleading with Numbers: It’s Worse When the Government Does It

Major international comparisons have long concluded that Americans’ ability to effectively utilize mathematics is inadequate. Such conclusions divide students, parents, teachers and administrators into camps that share little more than blaming others for the problems. However, it is unclear whether all the finger-pointing indicates a real desire to overcome our innumeracy. In fact, we systematically misuse numbers to distort reality because we want to fool ourselves, making our ineptitude no surprise.

One of today’s most obvious misleading number games is grade inflation. Teachers have accommodated student desires for higher grades to the point that the median GPA of graduating college seniors has risen around a full grade point since it was about 2.2 in 1965. At some schools, almost everyone now gets As and Bs, and who is valedictorian has become a question of how many “perfect” students will share that title. Students have also pushed to allow A+ grades that count more.

High schools have gone even further. Many make advanced placement or community college courses worth an extra grade point. This has created a competition among students to take as many such GPA-padding courses as possible, especially ones they discover are actually easier than the corresponding high school courses. These and other policies (e.g., statewide comparisons crafted to show that, as in Lake Woebegone, all children are above average) have, however, thrown away much of the useful information such evaluations once contained.

Price inflation is another form of ego-building by manipulating comparison numbers. For most of us, if we want to brag that, say, we make more than our parents did, enough years of inflation can make it so. On the other hand, older Americans use it to “prove” how much better things used to be (e.g., “I remember when bread was a nickel” or “I only paid $22,000 for my house”).

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This Was Mises’s Main Case for Peace

January 30, 2018

This Was Mises’s Main Case for Peace

War only destroys. Peace, on the other hand, creates.

War is absolutely devastating. There is no dancing around that fact. Not only is it responsible for the loss of countless human lives, it also leaves an immeasurable amount of physical and emotional destruction in its wake.

The market has taught us that incentives work.

Opponents of war may decry war until they are blue in the face, begging those in power to consider its human costs. But these cries almost always fall upon deaf ears, as history has tragically demonstrated.

When it comes to politicians and war, the ends always justify the means, even when those means are human lives. And while human life is sacred, this truth alone has never been enough to convince global leaders to seek an agenda of peace rather than one of destruction.

But the market has taught us that incentives work. So instead of relying on a method that has not done much to deter war over the centuries, why not try an argument that plays to the interests of those in power?

As Mises explains in Liberalism, the most impactful argument against war comes in the form of a basic economic principle from which we each benefit: the division of labor.

He writes:

How harmful war is to the development of human civilization becomes clearly apparent once one understands the advantages derived from the division of labor. The division of labor turns the self-sufficient individual into the ζῷον πολιτικόν (social animal) dependent on his fellow men, the social animal of which Aristotle spoke.”

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Central Banks Put a Safety Net Under Financial Markets

January 29, 2018

Central Banks Put a Safety Net Under Financial Markets

Most early business cycle indicators suggest that the global economy is pretty much roaring ahead. Production and employment are rising. Firms keep investing and show decent profits. International trade is expanding. Credit is easy to obtain. Stock prices keep moving up to ever higher levels. All seems to be well. Or does it? Unfortunately, the economic upswing shows the devil’s footprints: central banks have set it in motion with their extremely low, and in some countries even negative, interest rate policy and rampant monetary expansion.

Artificially depressed borrowing costs are fueling a “boom.” Consumer loans are as cheap as ever before, seducing people to spend increasingly beyond their means. Low interest rates push down companies’ cost of capital, encouraging additional, and in particular risky investments – they would not have entered into under “normal” interest rate conditions. Financially strained borrowers – in particular states and banks – can refinance their maturing debt load at extremely low interest rates and even take on new debt easily.

By no means less important is the fact that central banks have effectively spread a “safety net” under financial markets: Investors feel assured that monetary authorities will, in case things turning sour, step in and fend off any crisis. The central banks’ safety net has lowered investors’ risk concern. Investors are willing to lend even to borrowers with relatively poor financial strength. Furthermore, it has suppressed risk premia in credit yields, having lowered firms’ cost of debt, which encourages them to run up their leverage to increase return on equity.

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Can an Economy Advance Without Savings?

January 21, 2018

Can an Economy Advance Without Savings?

According to Frank Decker, Honorary Associate at the University of Sydney Law School, it certainly can. Not only that, but eschewing savings in favor of “monetisation of assets” will yield better results! I refer to his article in Economic Affairs–Volume 37, Number 3, October 2017–, a publication of the Institute of Economic Affairs, London.

Mr. Decker purports to answer the question “Central Bank or Monetary Authority? Three Views on Money and Monetary Reform.” The three views examined are commodity money, state money, and money as a derivative of property. All three views are explained very well, and a beginner to the study of the role of money will learn a lot in a short period of time.

Commodity money is the name Decker aptly gives to money backed by gold or some other widely accepted medium of indirect exchange. Commodity money’s proponents see two major advantages–that it ends inflation and the business cycle. He quotes Mises and Rothbard to good effect.

State money, or money as a state liability, is fiat money that all the world knows today. Its two most famous proponents are Keynes and Friedman. State money’s main advantages, as seen by Decker, are that the state can engage in countercyclical spending and the state can fund itself by printing all the money that it needs for current expenditures.

Decker’s third type of money–money as a derivative of property–sounds no different than fractional reserve banking, except that the fraction of reserves required to be held by the lending banks is so low that it is not a factor of lending restraint. Decker gives the example of a business that uses its assets as loan collateral. According to Decker, the money that the bank creates is NOT created out of thin air, because it is backed by private property; i.e., the loan collateral.

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