Do we all work for Goldman Sachs?

Here's a link to a conspiracy-type article about Goldman Sachs. Of course, I can't vouch for its accuracy, but in general I consider beyond dispute that there are corrupt "businessmen" pulling giant levers in Washington, defrauding the rest of us of enormous sums of the wealth we create, in just the kind of "crony capitalism" that statists use as an excuse for more government controls in the economy.

It is important to remember that some state oppression is direct, both politically and philosophically, i.e., taxes and regulations restrict your freedom and are meant to restrict your freedom; -- but a great deal of injustice is the indirect consequence of the non-capitalistic government's parceling out of favors to the "well-connected", i.e., to those who are willing and able to buy men of political power.

Atlas Shrugged gives timeless characterizations of both manifestations of statism.

Defenders of individual rights must communicate clearly the polar-opposite difference between those corrupt "businessmen" of today who are able to "do whatever they want" by trafficking in government favors -- versus the individuals in a system of true capitalism, who would be free to make any business arrangements, but would be unable to purchase economic favors from the government, since a capitalistic government would have none to sell.

A couple of firsts

Elias started taking violin lessons. At first, in the Suzuki method, they don't even get the violin out, but now he can play six notes, enough for part of a song:



Dahlia went to her first day of preschool! She was extremely excited about it the day before, and the first thing I heard in the morning was her yelling "Daddy I go to school today!" She was fully dressed and even had her shoes on 40 minutes before it was time to go, and had a great time. Elias was excited to have her go too.

The wonderful irony

During a time of soaring injustice, here's some overdue justice:

The Austrian business cycle in one image

[T]he only way 45% of the world's wealth could vanish in a year is if it was a mirage in the first place. - Mish Shedlock

Sacramento, California: Inflationary malinvestment in the background; deflationary bust in the foreground.

"As many as 50 people a week are turning up and the authorities estimate that the tent city is now home to more than 1,200 people." Daily Mail

A government-caused period of massive inflation of credit money has just ended. We are now sliding down the backside of that unsustainable mountain of credit and debt, in a deflationary reset, something not seen since the 1930's:

Peak credit has been reached. That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed.

It took nearly 80 years for people to get as reckless as they did in 1929. 80 years! Few are still alive that went through the great depression. No one listened to them. That is the nature of the game. The odds of a significant bout of inflation now are about the same as they were in 1929. Next to none. - Mish

Incredibly, the government's solution is to try to inflate more, through "stimulus" spending and through printing. Are these actions about to stop the bust?

Based on what house prices and equity valuation have been doing this quarter, we are likely in for a total loss of household net worth approximating $7 trillion this quarter alone, which would bring the cumulative decline in consumer wealth to $20 trillion. This wealth loss exceeds the combined expansion of the Fed’s and government balance sheet by a factor of ten. That should put the reflation-deflation debate into perspective. - David Rosenberg, North American Economist at Merrill Lynch, quoted by Mish

In other words: we have deflation right now because the shrinking of (and from) credit money matters more than the increasing of "base money" -- because most money is credit money.

If we are in deflation -- the payback for government-caused inflation -- and governmental printing and spending won't stop it (until it stops), isn't everything just going to get cheaper?

If economic recovery is to be achieved, the first thing that must be done is to stop “stimulus packages” and undo as far as possible any that are already in progress. This is because their effect is to worsen the problem of loss of capital that is the underlying cause of the economic crisis in the first place.

Unfortunately, they are not likely to be stopped. If they are implemented, especially on the scale already approved by Congress, the effect will be a decumulation of capital up to the point where scarcities of capital goods, including inventories of consumers’ goods in the possession of business firms, start to drive up prices.

Higher prices of consumers’ goods will result not only from scarcities of consumers’ goods (which, of course, are capital goods so long as they are in the hands of business firms), but also from scarcities of capital goods further back in the process of production. - George Reisman

What's the big picture here?

There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved. - Ludwig von Mises

What would Ayn Rand say? Luckily she already said it. Besides Atlas Shrugged, there's the speech "Egalitarianism and Inflation," the original speech is available here and reprinted in Philosophy: Who Needs It. She gave this speech decades ago, during a time of "stagflation," but you can judge if it is relevant today. In part:

While the government struggles to save one crumbling enterprise at the expense of the crumbling of another, it accelerates the process of juggling debts, switching losses, piling loans on loans, mortgaging the future and the future’s future. As things grow worse, the government protects itself not by contracting this process, but by expanding it. ...

Do you think a spending orgy of this kind could be paid for out of current production? No, the situation is much worse than that. The government is consuming this country’s stock seed—the stock seed of industrial production: investment capital, i.e., the savings needed to keep production going. These savings were not paper, but actual goods. Under all the complexities of private credit, the economy was kept going by the fact that, in one form or another, in one place or another, somewhere within it, actual material goods existed to back its financial transactions. It kept going long after that protection was breached. Today, the goods are almost gone. ...

The value of the total tangible assets of the United States at present, was estimated—in terms of 1968 dollars—at 3.1 trillion dollars. If government spending continues, that incredible wealth will not save you. You may be left with all the magnificent skyscrapers, the giant factories, the rich farmlands—but without fuel, without electricity, without transportation, without steel, without paper, without seeds to plant the next harvest.

If that time comes, the government will declare explicitly the premise on which it has been acting implicitly: that its only “capital asset” is you. Since you will not be able to work any longer, the government will take over and will make you work—on a slope descending to sub-industrial production. The only substitute for technological energy is the muscular labor of slaves. This is the way an economic collapse leads to dictatorship—as it did in Germany and in Russia. ...

A dictatorship would find it impossible to rule this country in the foreseeable future. What is possible is the blind chaos of a civil war. ...

Is there any hope for the future of this country? Yes, there is. This country has one asset left: the matchless productive ability of its people. If, and to the extent that, this ability is liberated, we might still have a chance to avoid a collapse. We cannot expect to reach the ideal overnight, but we must at least reveal its name. We must reveal to this country the secret which all those posturing intellectuals of any political denomination, who clamor for openness and truth, are trying so hard to cover up: that the name of that miraculous productive system is Capitalism.

The bottom line is that wealth is something real in the world: it is not paper, it cannot be printed, and it cannot be increased by being redistributed. When government economic manipulations caused a boom of soaring paper-dollar asset prices, people the whole world over were lured into disastrously wasting their actual savings. Deflation is the economic process in which we are forced to accept this reality. Further governmental printing and spending now will only make things worse, by destroying even more real wealth. Instead we must demand that the government cease all bailouts, stimulus spending, and money printing.

Mish versus Schiff

This is my take on Mish's post explaining that Peter Schiff was wrong (Schiff is a highly visible analyst who predicted the housing bust and recession):

Schiff ruined his own credibility. Even if he's pro-laissez faire, he's not a philosopher: foremost he's supposedly an expert on this economy, but he was dead wrong on the most fundamental economic trend last year which followed the housing bust: global deflation. He will get called out on this because he can be. It is far better the calling out be done by someone who deserves an audience for being right (Mish), than by the "MSM" defenders of statism. (Statism is what nurtures the mass corruption we suffer from among both politicians and their corporate clients, by the way. And if you don't mind a foul-mouthed, emotionalist tirade, this video -- not to be played at work or around children or nuns -- expresses something of the proper attitude towards the powers that be.)

I see nothing personal in the Schiff piece, I judge it to be objective and just. Mish laid out the facts which make the case that he's the real thing, he's what Schiff was supposed to be, both as investment advisor and as outspoken expert on our economic-political reality. Good for him, I hope he gets a lot more readers and customers. I think the post and the attention it gets can only be good for the cause of laissez faire.

This about sums it up

But I think either one of these would have been a more appropriate picture:


Life in Hooverville


Death in Vietnam

Economics and the absurd

Mish Shedlock is the only applied economist or market analyst I listen too. I wish I'd found his blog years ago when he was predicting this recession. Mish is always fact-based and level-headed, he seems to be extremely careful to differentiate between what he knows is probable and what he doesn't know. No crazy predictions, just a few very good ones, based on both fundamentals and technicals. He works 14 hours every day.

He is an analyst at Sitka Pacific, with two hedge funds which make money even today:



Mish may be at his best when concisely showing that the Keynesians and Monetarists -- Krugman, Paulson, Bernanke, Greenspan, Friedman, etc., etc. -- are flat out fools, that 8th graders could know better just by using common sense. Mish is a fan of the Austrian school. He likes to quote von Mises:

There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.

Here's the best place to start with Mish. If one spends an hour reading this and following some of the links to his other posts, it can be very educational.

Those with [Fiscal Insanity Virus] are trapped in academic wonderland with no ability to see anything from a real world logical perspective. Instead they rely on formulas that imply free lunch theories and/or perpetual motion.

Mish's predictions now are for housing to tank to at least 2012, the S&P to hit 600 or possibly 450 in 2009, and unemployment likely to go over 11% (from the 7.2% reported today). Among bears, these numbers are said to be too optimistic, especially that last. He is most "famous" right now for being one of the first to figure out that deflation has arrived. (He notes that deflation is a good thing; inflation was the problem. Most economists and all governments want to inflate some more, right about now.)

Here's today's update, where he notes that unemployment is really 13.5% -- not the more presentable 7.2% that is making headlines:

There is no official definition of depression. Here is mine: When the U-6 unemployment rate rises above 12.5 in conjunction with a stock market that is down close to 50%, the CPI is negative, and nominal wages are stagnant, it's an economic depression. We are in one.
...
The Fed is desperately trying to get you to borrow. I am suggesting you cut all unnecessary spending cold turkey. We cannot spend ourselves to prosperity. It is simply impossible. Job losses are going to mount, few jobs are safe and the best thing to do is to be mentally prepared to be working fewer hours.

My response to all of this mess is: how absurd!

It is absurd that 99% of economists did not see this coming, could not explain what anyone was doing wrong to cause a recession, cannot explain it now, and are recommending exactly the worst government actions possible.

It is absurd that Greenspan, who actually understood economics once upon a time -- thanks to Ayn Rand -- was the latest and greatest cause of this mess.

It is absurd that there is such a thing as "fractional reserve banking." It is absurd that many Objectivists either don't know what it is or think it could be okay in a capitalist system. It took me two months to figure it out -- I'm very slow -- but make no mistake: FRB is fraud. When a bank cannot pay back its "on demand" deposits on demand, the deposit notes it issued are fraudulent. How hard is that to understand? It would not even matter if there existed (as there can't; ask Iceland) some magical guarantee that depositors would never demand their money at the same time, FRB is legalized counterfeiting all of the time. How much counterfeiting? Try 1000% -- since 10-1 ratios are the norm at American banks. And that is inflation, massive inflation. Inflation causes price bubbles. And bubbles pop when reality crashes the party, sending prices back in line with actual wealth.

It is absurd that popular Objectivist blogs haven't been all over this for years, that there seems to be little sense of how bad the economy is going to get still, and that it hasn't been common knowledge among Objectivists since at least 2005 that housing was going to crash. Sadly I read about Objectivists who bought a house in the last two years, apparently thinking the worst was over.

It's absurd that I haven't seen a single comment by another Objectivist (I mean a real Objectivist, not some libertarian dork) on Mish's posts.

It's absurd that Atlas Shrugged has been out for over 50 years and this is still happening.

But my first point is the most important. How can the entire profession of economics be such a colossal failure? How can the very professionals tasked with understanding the economy be its worst enemy? We can blame politicians, Wall Street, sub-prime flippers, and "bankstas" all we want, but the bottom line is that none of this would have been possible if the economists hadn't been on board, i.e., if the vast majority of professional economists weren't incompetent or corrupt or both. (Most are both: not only do they not understand that a country can't consume its way to prosperity, they are collectivist statists anyway.)

Of course the blame goes back one more step -- to the philosophers and other intellectuals who allow and make possible such irrational economics. Why is your IRA or 401K a bad dream? Because philosophy PhD's couldn't care less about reality.

And with that final insight, I realize none of this is really absurd; it is ugly but it makes sense: social collapse is the only thing that can follow -- sooner or later -- the intellectual collapse of the 19th and 20th centuries, which was fueled by the philosophical collapse that began, ironically, in the Enlightenment, by the arch-enemy of reason: Kant -- and the monster he unleashed on Germany and the world: Hegel.

I end with a quote:

Inflation is a man-made scourge, made possible by the fact that most men do not understand it. It is a crime committed on so large a scale that its size is its protection: the integrating capacity of the victims' minds breaks down before the magnitude -- and the seeming complexity -- of the crime, which permits it to be committed openly, in public. For centuries, inflation has been wrecking one country after another, yet men learn nothing, offer no resistance, and perish -- not like animals driven to a slaughter, but worse: like animals stampeding in search of a butcher.

Ayn Rand, "Egalitarianism and Inflation", 1974, in Philosophy: Who Needs It