Why the US economy could suffer another contraction

Gerard Jackson BrookesNews.Com
Monday 1 March 2010

Last December I pointed out that AMS (Austrian definition of the money supply*) had peaked in June 2009, even as the monetary base accelerated, and that this must mean that bank deposits are not expanding. The result would be "an inadvertent 'monetary tightening' that will have a detrimental impact on economic activity" which the fall in capital orders appeared to indicate. This now seems to be the case with the latest survey showing the demand for capital goods (plant and machinery) still falling. Ambrose Evans-Pritchard of the London Telegraph noted that since the beginning of the year bank lending has dropped by $100 billion, an annual decline of nearly 16 per cent. This is of major importance because the banking system is the principal source of credit. (US bank lending falls at fastest rate in history). He also noted that the broad money measure M3 had been contracting at the rate of 5.6 per cent during the previous three months, signalling, according to some market observers, an impending deflation. M3, however, is not a true monetary measure because it includes credit instruments. Money is first and foremost a medium of exchange. Therefore anything that has to be sold to obtain money cannot by definition be money, including certificates of deposits. It was not the contraction in M3, beginning about last November, that indicated a fall in bank lending but the contraction in AMS that started in the preceding June. This sequence was to be expected once we realise that a persistent fall in bank deposits must eventually lead to a drop in the demand for credit instruments. It must now follow that rather than being a cause of an economic contraction the reduction in M3 in fact a symptom of a contraction in bank deposits. The US economy is now in a situation that is unique in its monetary history: a massive and totally unprecedented expansion in its monetary base followed by a contraction in bank deposits. I must admit that in my humble opinion only an utterly incompetent Democratic administration could pull off a stunt like this. Defenders will immediately blame the banks, arguing that they are not lending. But they are not lending because firms are not demanding loans. While Democrats shed crocodile tears about people who claim they are forced wear their dead relatives dentures they are nevertheless are unable to find scores of businesses unjustly denied bank funding. The truth is that banks will always lend if they are assured of a return. In fact, if there is a boom it appears they will even lend when no return is assured. That Commercial and industrial loans are currently dropping at an annual rate of about 16 to 17 per suggests to some in the commentariat that the money supply needs to be loosened up further if a depression is to be avoided. It has yet to occur to them that the drop might have something to do with firms paying off debt and shelving plans for expansion rather than the banks refusing to lend. Firms operate on a little thing called a profit margin. When this margin disappears so do jobs, investments and the demand for loans. Now expectations play a crucial role in making investment decisions. However, expectations are also partly shaped by uncertainty. Therefore the greater the degree of uncertainty of success regarding a business decision the higher will be the return that potential investors demand. Sometimes the uncertainty is so great no amount of promises will separate investors from their money. However, the role that political uncertainty plays in frustrating investments and job creation are generally overlooked. It is bad enough that Americans have to deal with the consequences of the Fed's monetary mismanagement that generated a boom-and-bust situation that still afflicts them they must now deal with awful political uncertainty that the Democrats have created.

In a sense, America is indeed having a rerun of the 1930s but not in the way most critics believe.

*There are some differences among Austrians as to what ought to be included in a definition of the money supply. I try adhere to Walter Boyd's view who in his open letter to Prime Minister Pitt in 1801 defined money in the following terms: By the words 'Means of Circulation', 'Circulating Medium', and 'Currency', which are used almost as synonymous terms in this letter, I understand always ready money, whether consisting of Bank Notes or specie, in contradistinction to Bills of Exchange, Navy Bills, Exchequer Bills, or any other negotiable paper, which form no part of the circulating medium, as I have always understood that term. The latter is the Circulator; the former are merely objects of circulation. (Walter Boyd, A Letter to the Right Honourable William Pitt on the Influence of the Stoppage of Issues in Specie at the Bank of England, on the Prices of Provisions, and other Commodities, 2nd edition, T. Gillet, London, 1801, p. 2). In simple terms, money is the medium of exchange. Nevertheless, difficulties do arise. Are savings deposits money? This presents the problem of double-counting. If I take $10,000 in cash and deposit it in my savings account it cannot be seriously I argued that I have now expanded the money supply by $10,000. It therefore follows that if the bank lends out that $10,000 the money supply still remains unchanged. We now deduce that credit transactions do not alter the money supply. Whether we include savings deposits in our definition depends on whether or not it involves double-counting. Gerard Jackson is Brookesnews' economics editor

The US recession and the myth of 1937
Gerard Jackson BrookesNews.Com
Monday 1 March 2010

The current situation has many people referring back to the Great Depression, particularly the 1937 downturn. As usual they are drawing the wrong conclusions. The lesson that so many have failed to grasp is that the Great Depression is a tragic testimony as to what can happen to a country when governments defy economic laws. Let us begin with Roosevelt's 1935 Wagner Act. This had been passed in reaction to the Supreme Court's decision to declare the economically destructive National Recovery Act unconstitutional. However, constitutional lawyers advised business that the Wagner Act was also unconstitutional. In view of this advice most big businesses ignored the Act and used free market prices to increase output and employment. As a result unemployment fell from 9.1 million in 1935 to 6.4 million in 1937, iron and steel production rose to more than 100 per cent the 1933-34 level and car production more than doubled the 1933 level. Production trends were similar for other products. Even so, it was still a weak recovery and aggregate wages as a per centage of national income exceeded 70 per cent while profits were only about 15 per cent. This meant an overall 10 per cent increase in labour costs would be enough to slash profits by about 50 per cent. Clearly, any wage-push would quickly derail the recovery. In 1937 tragedy struck. The Supreme Court in a series of 5 to 4 decisions reversed its reasoning in the NRA case and upheld the Wagner Act as constitutional. The Act meant that business was now forced by law to 'negotiate' with politically privileged unions. Market wage rates would no longer be tolerated. The court's decision was immediately followed by an immense outbreak in union activity (some of it quite violent) resulting in a rapid rise in labour costs. The result was as predictable as it was tragic ² unemployment leapt from 6.4 million in 1937 to 9.8 million in 1938. (This is a fact that lefty historians and economists like Christine Romer, Krugman and Stiglitz ignore.) Naturally, alternative explanations for the tragedy were sought. The most popular one ² and it still is ² was based on reserve requirements. Between 1936 and 1937 the Fed reduced reserves from $3 billion to about $927 million. This, it was argued, cut the supply of funds to business and precipitated the crash. However, this view overlooks the fact that the Fed was eliminating excess reserves. In short, idle reserves. If they were otherwise, their elimination would have affected interest rates to the extent that business would have been restricted (probably severely) in its use of cash and credit. The monetary figures support this argument. In 1929 money supply stood at $46.42 billion. By 1933 it had dropped to $32.2 after which it continued to increase, reaching $45.68 billion in 1937. A marginal decrease brought it down to $45.51 billion in 1938, it then rapidly expanded rising to $55.2 billion in 19402. Instead of a monetary we do find is that: ‡ interest rates remained absurdly low, e.g., the rate on commercial paper did not rise above 1 per cent; ‡ there was a dramatic rise in commercial loans from $2 billion to $6.966 billion ² and that was just the federal reserve system; ‡ the reduction of excess reserves was accompanied by a great and welcome increase in the issue of new securities.

Harper.000. 1957.In the beginning of 1935 issues of new securities were more than 85 per cent down on the 1923 level. p. the µreserve requirement theory¶ does not hold a drop of water. 'deficit theorists' should have realised that their proposition was not being supported by the economic facts. More importantly.7 billion and unemployment was 23. p. by the second quarter of 1937 they had reached 50 per cent of the 1923 level. The nail needs to be rammed home on the so-called link between deficits and unemployment. The gold sterilisation approach fares no better than the other two. New York University Press. Clearly. Though unemployment and deficits varied throughout this period. in 1937 it was $2. This only leaves the deficit and gold sterilisation explanations to be dealt with.6 per cent during the depression while deficits averaged 3. A. Vedder and Lowell E. Irvingto-on-Hudson. The argument that sterilisation cut the money supply and thus caused the economy to contract should be too silly for words. New York.16 .6 per cent.3 per cent. The was argument that the virtual disappearance of the government¶s deficit caused the crash doesn't hold up.000. While leftists write of unions fighting to maintain wages they omit the salient fact that in 1938 real wages were 29 per cent higher than the 1929 rate.058. As we have seen. It was union activity that destroyed this healthy job-creating trend.) It was Roosevelt's anti-recovery industrial codes combined with destructive union activity that finally sent the American economy into a vicious tailspin.8 billion and unemployment stood at 14.229. 1997. 103). (From a gold standard-free trade point of view.000 while revenue equalled $8. The grey area in the chart below shows the difference between hourly wage rates and productivity. Sterilisation only prevented incoming gold from adding to excess reserves.6 per cent of GNP. however. The Foundation For Economic Education. In 1932 the deficit was $2. Gallaway's Out of Work. Even the cas income and h outgo approach cannot rescue this explanation. (See Richard K. productivity-adjusted wage rates exceeded the 1929 rate by 14 per cent.(Also see Minimum wages and capital accumulation: lefty economists fail again) Changes in Productivity United States and Wage Rates Percent of average (ratio scale) F. Unemployment averaged 18. these reserves were successfully reduced without affecting business activity. the gold inflow should not have been sterilised.000. Why Wages Rise. Total federal expenditure for the whole of 1937 and the first four months of 1938 was $10.

(Benjamin M. What it would have done is reduce the intensity of demand for labour in the long term by reducing the 'rate' of capital accumulation. Prices in Recession and Recovery. is a story for another day. a considerable rise in man hours worked and a notable increase in hourly rates of pay. It was an anti-revival measure. The current monetary disorder is a graphic example of what can happen to firms when they have insufficient funds to withstand a financial crisis. 325). LibertyPress. America was not alone in its economic folly. It needs to be made clear that if wage rates had been allowed to clear the tax would not have prevented the hiring of labour. Anderson. What it actually did was dissipate capital. in 1935 it was 65 per cent. That. Frederick C. p. The National Bureau of Economic Research. Mills wrote: During the ten months that followed the end of [Roosevelt's] code operations employment rose 7 per cent. (Frederick C.. had appro ximately two years of growing business activity. Under the 'Blum New Deal' France also followed the same route with the same tragic consequences. He and his advisors believed that this tax would have the effect of stimulating demand. We passed the July 1933 peak in the autumn of 1935. before the NRA came in. Unfortunately Roosevelt finally got his way and in doing so aborted the recovery.400 million (after which they fell) against $4. pp. it must be borne in mind that Roosevelt's anti-recovery taxes and regulations had set in motion a severe process of capital consumption. Surpluses in 1928 were $2. Anderson was scathing about the destructive consequences of the National Recovery Act: [The] NRA was not a revival measure. . Following disappearance of NRA. with rapidly growing volume of production and with decreasing unemployment. . .Benjamin M. by 1930 the figure had risen to 48 per cent. Having accepted the fallacy of excess savings Roosevelt implemented in 1936 a undistributed profits tax. It was these surpluses that allowed a great many firms to weather the financial crisis of 1920-213. however. rising to 70 per cent in 1940. Over the entire period of recovery we have a pronounced advance in total wages paid. This is not as straightforward as it seems and leads us to the fallacy of 'excess savings'. However.908 million for 1916. Economics and the Public Welfare: A Financial and Economic History of the United States 1914-1946. and average hourly earnings remained constant. I know some readers will be wondering about the role taxation played in prolonging the recession. Only the advent of WW II reversed the process. Inc. His ignorance and constant meddling gave the US its longest and deepest depression in its history. 1979. It was argued that the depression was caused by a unprecedented level of corporate surpluses. Mills. and then. Unfortunately Obama and his advisors have so far given every indication of being equally as ignorant as Roosevelt and every bit as inclined to meddle with the economy. (This subject requires a separate article in itself). In 1925 44 per cent of metal working machinery was more than 10 years old. . there cam the first real recovery. 1936. Through the whole of the NRA period industrial production did not rise as high as it had been in July 1933. 333-34). However. after the Supreme Court decision in May 1935. New York. The myth that Roosevelt in anyway promoted economic recovery is just that ² a myth. .

S. No doubt he would also argue that medieval booms and busts were also caused by tax cuts. a man thoroughly unschooled in the fields economic history and the history of economic thought. Larry Beinhart is one such economic illiterate. Beinhart is an economic ignoramus. Richard G. How's this for a correlation: every boom in American was preceded by rapid monetary expansion. for example. Some Tables of Historical U. (See How the Laffer curve really works 2. Louis. former head of the Australian Treasury stated that "Keynes was right for the 1930s. His ridiculous treatment of taxation and economic growth serves only to further underline his economic idiocy. Unless. April 2003. Beinhart thinks the boom that preceded the 1819 depression was caused by tax cuts. Then of course there were the booms and busts that plagued the British economy in the first half of the nineteenth century. John Stone. Gerard Jackson is Brookesnews' economics editor . Anderson. Currency and Monetary Aggregates Data. On the basis of a clumsy correlation he made the absurd claim that tax cuts cause the boom-bust cycle." that "savings exceeded investment" and that Japan's present problem is that it is saving too much. research paper. Unfortunately this fallacy is still alive and well. In short.1. I guess the same goes for 1830s boom that was followed by the 1837 crash which was then followed by a brief boom that ended in the 1839 crash. Federal Reserve Bank of St. 3.

despite the fact that there is a strict limits to just how efficient a firm can be. A determined . In plain English. Let us now do what the critics have failed to do and that is examine the nature of the inefficiencies that would make alternative energy sources a complete economic disaster. Actually. Critics counter that these alternative energy sources are very inefficient and would require substantial subsidies. a fact that even the critics have overlooked. Having done this the politicians now decides that it would be an absolutely spiffing idea to upset the whole capital structure by imposing a carbon tax with the intention of totally destroying certain factor combinations. they should bear in mind that solar and wind involve no indivisibilities to speak of.Carbon taxes energy production and technology: more green nonsense Gerard Jackson BrookesNews. As it takes x number of blocks for a coal-fired power station to produce y amount of power and. It is this kind of elasticity of thinking that has given the greens a free ride. This approach leaves me somewhat bewildered. (Australia Will Survive the Greenback's Fall. We all know that a rise in the exchange rate has a similar effect as a direct tax on exports. To argue that solar and wind are inefficient alternatives to coal-fired power stations because they are more costly is no argument at all. The greens' response is to state that a carbon tax would have the effect of inducing great efficiency while encouraging the development of new technologies. The maximum amount of solar energy striking the Earth under optimum conditions is just under 1Kw. Wall Street Journal. so as to replace them with solar and wind. unlike centralised power generation these so-called alternatives are marked by long run rising average costs of production. say. For those who think otherwise.) This means that vast collecting areas are required. What this means in economic terms is that solar and wind involve massive diseconomies of scale. No indivisibilities mean no economies of scale. A carbon tax has basically the same effect. meaning coal-fired power stations. Moreover. solar energy is extremely dilute (wind* is also a form of solar energy). First and foremost. not to mention the colossal amounts of materials needed for construction of collectors. Our critics have remained silent in the face of this defence. Therefore the long term effect of a carbon tax would be to substitute the latter for the former with little or no loss in production. 10x for a solar plant to produce the same amount of power it becomes crystal clear why solar is grossly inefficient. there is no reason whatsoever to assume that exporters have not already reached that limit. Firms ² including power companies ² will combine a number of blocks (capital) with labour and land in such away as to try and minimise their average costs of production. the situation would be even worse. (Optimum conditions are rare and could only be maintained for a short period. 9 November 2009).Com Monday 1 March 2010 Greens argue that solar and wind power are genuine alternatives to centralised electricity generation. Hence Davidson's efficiency argument against alternative energy is undermined by his own advice to Australian manufacturers to overcome the effect of a rising exchange rate by simply becoming more efficient. But because of the extremely dilute nature of solar energy many more blocks (capital) are need to produce the same output. If we make the simple assumption (as do mainstream economists) of treating basically treating capital (the material means of production) as uniform wooden blocks that can be easily fitted together the situation will become much clearer. No wonder considering that Professor Sinclair Davidson used a similar defence in defending a rise in the value of the Australian dollar.

LTD. 1972 . John Jewkes. the situation would be different if the average standard of living was reduced to that of a medieval peasant. Abbott Payson Usher. or that of any advanced economy.) And if taxes are all that is needed to bring about technological progress why haven't heavy petrol taxes in Europe led to new transport technologies? Note: Rather than make several brief comments on the nature of technological progress allow me to refer the reader to the following highly informative works: A Short History of Technology: From the Earliest Times to A. The first effect would be to drain away masses of capital which in turn would deprive industry of investment funds. Williams. 1996 The Mediveval Machine: The Industrial Revolution of the Middle Ages. 1900. E. Pimlico 1993. Taken to its logical conclusion we can argue that the Romans would have developed the steam engine ² if not the car ² if only the emperors had have had the foresight to put a heavy tax on horses and bullocks. Saul. Methuen & Co LTD. 1948 A History of Mechanical Inventions. Jean Gimpel. a fact that critics have so far failed to note. K. 1993 The Economic Laws of Scientific Research. The Sources of Invention. LTD. Technology and taxes The idea that raising the cost of energy will induce the emergence of new technologies could only be proposed by people completely ignorant of economic history and the history of technology. If critics of the carbon tax want to make a greater impact they must do all within their power to inform the public of the insuperable problems that afflict so-called alternative energy sources. David Sawers. (Horses were so inefficiently harnessed in ancient times that they where not even used in agriculture. This would be swiftly followed by a devastating rise in energy costs that would savage the economy and slash the standard of living. Dover Publications. Musson. (Of course. Derry and Trevor I.D. 1958 Ordeal by Planning. A. John Jewkes.switch to solar power would quickly deliver a double whammy to the economy. Inc. as the case of Spain amply demonstrates. Macmillan & Co. 1982 Technical Change: The United States and Britain in the 19th Century. I cannot think of a single instance of this happening. They must also stress the massive social and economic costs of these alternatives. Dover Publications. Saul. We can therefore conclude that given the insurmountable natural limitation that solar power diluteness presents it is a physical impossibility for solar to satisfy Australia's electricity needs.) It is also clear that there is absolutely no way in this universe that the barrier of diluteness can be overcome. Richard Stillerman. 1976 Science Technology and Economic Growth in the Eighteenth Century. unless greens think they can repeal the first law of thermodynamics. B. Macmillan Press LTD. Terence Kealey. T. Actually it would not reach this state of affairs because the damaging effects of the attempted switch would quickly make themselves felt long before the process could be completed. S. So far they have failed to do both. Methuen & Co LTD. Macmillan & Co.

This is called the Betz limit. Why a carbon tax would hit living standards Gerard Jackson is Brookesnews' economics editor . (All three volumes published by Phoenix Press. a former Marxist.3 per cent. The Wheels of Commerce: Civilization and Capitalism 15th-18th Century. Jeffrey Young.Forbes: Greatest Technology Stories. Inc. was not a very good economist. Volume 3. wind power is severely restricted by the third power. 1998 Then there is Fernand Braudel's monumental three volume work: The Structures of Everyday Life: Civilization and Capitalism. Volume 1. Nevertheless. 1988. *Wind has a maximum efficiency of 59. Volume 2. John Wiley & Sons. these works are of considerable intellectual value). The Perspective of the World: and Capitalism 15th-18th Century. meaning that small changes in wind velocity result in large disproportionate changes in output. Unfortunately. Braudel. In addition.

Costello is a member of discredited H. R. Now economics uses marginal productivity theory to explain wage rate determination. opportunism and absence of economic credentials. Now for some curious reason the notoriously arrogant Mr Costello has got it into his skull that he is the free market's white knight. Therefore our reasoning leads to the ineluctable conclusion that forcing firms to pay maternity leave would have a similar effect on the demand for female labour as do effective minimum wage rates on the demand for youngsters.Tony Abbot's maternity leave fiasco Gerard Jackson BrookesNews. It naturally follows that should for any reason labour costs exceed this rate unemployment will emerge. According to this theory there exists a tendency in a free market for every worker to earn the full value of his marginal product which in turn will equal the wage rate (the gross wage including all oncosts). Nicholls Society. particularly from our rightwing. As Luis de Molina (1535-1600) categorically put it. decided to slag Abbott for straying from the free market fold. Not a bit of it. It ought to now be clear that firms that run their own maternity schemes will only do so if they can factor the cost into a lower net pay thereby ensuring that individual labour costs do not exceed market rates. Those with some knowledge of economics will immediately realise that in a truly free labour market unemployment would not emerge because government imposed labour costs would be factored back into lower net pay while leaving the actual wage rate (gross wage untouched). politicians like to give the impression that there really is such a thing as a free lunch so they have no intention of allowing net wages to be adjusted downwards in response to any 'social justice' legislation. (Pretty rich coming from an economic illiterate). One should have thought that Abbott's scheme would have at least generated some comment about the nature and even the need for maternity leave schemes. However. (Over time inflation or a continuing increase in productivity will in any case make the same adjustments. Peter Costello.Com Monday 22 March 2010 Tony Abbot's proposal to impose a maternity levy on those businesses that have the audacity to generate a taxable income in excess of $5 million is another example of the Liberal Party's incompetence. former Treasurer. so long as an employee is being paid the market rate for his services .) Hence their shabby attempts to conceal the destructive aspects of their legislation. God help us. One doesn't need to be a trained economist to see that these financial manoeuvres are an attempt to avoid the unemployment consequences of maternity leave policies. pay for them out of taxes or firms can voluntarily undertake to implement their own. the outfit that wrecked the case for free labour markets and is therefore in no position to criticise Abbott. Now there are basically three ways in which these schemes can be funded: Government's can legislate them. Why should an employer be held in anyway responsible for the welfare of his employee's family? The Spanish Scholastics were abundantly clear on this issue and far more perceptive than any member of our so -called rightwing. This is why smarter politicians either try to subsidise maternity leave directly through the firm or pay for it out of taxes. It never even occurred to this pompous twit and his fellow incompetents in the HRNS that maternity leave involves a fundamental moral question. Maternity leave is never free. The problem for those politicians who want to buy votes by forcing companies to pay maternity leave is that economic laws do exist and violating them can have very unpleasant consequences.

Mr Henry's genius is boundless. Chafuen's Christians for Freedom: Late-Scholastic Economics. 1986. Green and Co. It's because of the likes of Henry and the HRNS that economics is getting a bad name among the public. or if he does not receive it secretly appropriate the goods of his master for his service. Gerard Jackson is Brookesnews' economics editor .. Ignatius Press. This is the same bloody mob that couldn't foresee the US and Australian recessions and yet they claim to have the ability to make personal decisions for hundreds of thousands of mothers. p. (Cited in Alejandro A. 189). 1948. it wouldn't occur to that bunch of conceited clowns at the HRNS either. The Development of Economic Doctrine: An Introductory Survey. 125. He might as well because his economics is bloody useless.he cannot demand something more. as if raising children is not hard enough? Because the Treasury has developed a "wellbeing index". According to this fanatical Keynesian mothers should be in the workforce serving the economy rather than be at home raising their children. Longmans. p.. not what is sufficient for his sustenance and much less for the maintenance of his children and family. Alexander Gray ² economist and free marketeer ² truly had the number of men like Henry when scathingly condemned The repellent doctrine that man exists for the production of wealth. So I'll ask another question: do people exist to serve the economy? Believe it or not Treasury head Ken Henry seems to think they do. (Alexander Gray. here finds its classical utterance. which probably explains its astonishing degree of ineptitude... rather than that wealth exists for the use of man. It would never occur to this clapped out Keynesian that the mercantilist policies that he promotes has contributed mightily to this welfare mess. How does he know that it is much better for mothers to be press ganged into the labour force. Come to think of it.) Asking the right questions seems to be an impossible task for the HRNS. Yikes! The next thing we'll hear is that Henry is running a coven and practising sorcery.the owner is only obliged to pay him the just wage [market rate] for his services considering all the attendant circumstances.

Com Monday 22 March 2010 The Democrats' opposition to tax cuts borders on the hysterical. is that more and heavier taxes buy more political control and hence power over the people. Royal Economic Society. Either way. . can receive a warm welcome in the strangest of places. 1973. This is because unstamped money would lose part of its purchasing power each month. the corrupt shenanigans of the power-hungry Democrats should not deter us from examining the savings argument against tax cuts: As David Ricardo pointed out about 200 years ago "to save is to spend"1.) Nevertheless. Edited by Piero Sraffa. according to these brilliant economic thinkers and their advisors. 449. p. even to politicians as despicable as Pelosi and Reid. (Now that Obama and his socialist supporters have virtually declared the Constitution obsolete. of course. For instance. who knows what's next?) But one must be fair. That Obama can indeed bring "Christmas everyday". If those who used it were genuinely sincere they would propose a 100 per cent tax on all savings. however. would be to worsen the economic situation. Unfortunately Greg Mankiw has given a sympathetic hearing to this lunacy (Reloading the Weapons of Monetary Policy). some years ago Marvin Goodfriend.The Democrats' anti-tax lunacy Gerard Jackson BrookesNews. This would be done by having people literally pay the post office to stamp their notes. the confiscation of all 401(k) funds. one of which is that the rich ² meaning merely the better off and not their super rich pals ² will save the additional income rather than spend it. Economic fallacies. That means. even the most absurd. This is the sort of silliness that one would normally treat as an aberration. suggested that dollars should contain a magnetic strip carrying information about when the notes entered the banking system. Believing that savings and hoarding were destructive of prosperity he proposed a currency that would lose a proportion of its value each month. . Apart from their insincerity (the only kinds of tax increases they support are those their fabulously rich supporters can easily avoid) there is the utter bankruptcy of their so-called economic arguments. a senior vice president at the Richmond branch of the Fed. allowing the government to impose a "carry tax" on notes whose expiration date had passed. The ludicrous idea of a carrying tax originated with monetary crank Silvio Gessel2. (It's a sad reflection on the general level of thinking in the US among a sufficently section of the population ² thanks to the success of the leftwing-controlled teachers' unions ² that millions of Americans now think that a corrupt mob of greedy politicians can really provide them with all the healthcare they need whenever it will be needed. The real reason. The effect of this.) Apart from devastating insights of the classical economists (Malthus later dropped his forceful approach to the boom-bust cycle) there is also the absurd logic of this anti-tax argument. Irrespective of what he believes using a negative interest rate to try and restore full employment is extremely dangerous and reveals a gross misunderstanding of the nature of recessions. (The Works and Correspondence of David Ricardo. The longer people kept their notes the more they paid the government. clear evidence that he has failed to totally free himself from Keynesian thinking. irrespective of the appalling cost in jobs and living standards. Hence the monstrous bill that they and their media stooges have the outrageous audacity to call universial healthcare. people .

Gessel argued that this process would abolish savings and stimulate consumption. In fact. Moreover. But Keynes apparently did. thus maintaining prosperity. This has it that consumption drives an economy. it has always been the reverse as people tried to protect themselves against hard times. chap. Other monetary cranks had similar ideas but Gessel's seems to have been the most detailed and popular. Savings are transformed into investment which then raise the marginal value of labour's product. Martin¶s Press. the reverse is true as the recent recession demonstrated. One would imagine only an idiot would be stupid enough to swallow Gessel's economics. I know of no instance in which a sudden rise in the demand to hold money preceded a depression. Now. Macmillan-St. including real pensions. 1 The classical economists could distinguish between cash balances and savings just as they could distinguish between real savings and forced savings. 2 Gerard Jackson is Brookesnews' economics editor . So it appears that the proponents of Gessel's policy of taxing purchasing power in order to accelerate velocity and destroy savings have got it into their heads that Americans may have decide to hoard dollars and hence retard recovery. 23. one of the oldest fallacies in economics. So taken was he with Gessel's absurd proposal he was almost in raptures.) This section is so embarrassing ² or used to be ² to Keynesians that they chose to ignore it. Though a significant increase in the demand to hold money (hoarding) would set off a tendency to lower prices it would still not be deflationary as that requires an absolute monetary contraction. if the underconsumptionists were right then the consumption goods industrie s would be hit first and hardest with falling demand working its way up the production structure. But as genuine students (some going back to the early days of the Industrial Revolution) of the boom/bust cycle observed. however. Increased consumption is its obvious result. Therefore if consumption lags behind production the economy will sink into recession. It is this process that raises real wages and living standards. In any case. Calling Gessel a "strange. 1973. Anything that directs spending away from investment into consumption will therefore eventually lower living standards. this misbegotten idea is once again being resurrected The thinking behind the scheme is based on the concept of underconsumption. unduly neglected prophet" he gave this crank's proposal a glowing recommendation (The General Theory.had their purchasing power reduced unless they spent their incomes within four weeks of receiving them. It is important to understand that savings fuel free economies and entrepreneurship drives them.

government debt. Peter doesn't know the half of it Let's start with some facts about U. someone has to pick up the bill.S.S. and then trying to stick someone else with the bill.S. U. how will the U. it's instructive to note that this is 2.S. For the fiscal year ending September 2009. But it's coming. part 1 Michael Pollaro BrookesNews. whether you like it or not.S. and in so doing.S.S. If you are an American taxpayer.S. It takes money from Peter to spend it on Paul. these obligations. that's the highest share of government spending relative to GDP on record. that unless policies change.U. And the simple fact is government spending . government spending. For all the talk about the government not doing enough during this economic crisis.S. It's called a tax.S. was about $3. government spending got so big. because of these policies. are so big. that's going to cost you. unless policies change. the tab the U. government has NO money.Com Monday 22 March 2010 The U. whether Peter likes it or not. thinks nothing of spending what it does not have. are set to put this spending machine into overdrive.S. government should be policing the world.S. that's going to cost you too. So then. Quite simply. money for your kid's education or medical care to everyone. the U. If you believe the U. government should be providing unemployment insurance to the jobless. on its way to bankruptcy. In fact. and fast. And if you believe the U. Part 1. of committing to obligations that it can not possibly keep. I'm not talking about a government which shows an almost total disregard for the U. The U. government had no other choice then to bail out AIG. Over the next few posts. for the government to foot that bill. No. Not tomorrow.S. government spending. And when the government spends money. what I'm talking about is a government whose fiscal finances are a mess. This is your bill. government is spending itself silly. government is quite literally out of control. At 26 percent of GDP. whether Peter receives something of value from the exchange or not. years in the making. the Obama administration and this Congress. representing budget. excluding the World War II years 1942-1945. Constitution. who think it's their job to take care of you from cradle to grave. Fannie Mae or General Motors.3 times the peak rate reached during the Great Depression and 3. Not today.S.3 times the average rate seen for the whole of the 1930s. a holder of U. I'm not talking about elitist politicians in Congress who think they know what's best for you. dollars take heed. It takes money from Peter. But someone still has to pay the tab. government.S. to supposedly save the economy. that's fine. off budget and supplemental appropriations.7 trillion dollars. I'm talking about a government that. government pay for all this spending? Can the government foot the bill? To answer these questions. with their endless spending plans. social security to the elderly. and it's as sure as death and taxes. or simply a holder of U. it will be helpful to first understand how U. set the stage for understanding why it will be impossible. The fact is if you believe the U. And by the looks of it. I'm not even talking about an administration whose policies sometimes appear to have more in common with the command and control societies of Benito Mussolini or Karl Marx than they do with the freedom loving societies of Thomas Jefferson and James Madison. I will attempt to lay bare the facts of a government that is going to have a lot of trouble meeting its obligations. One of the basic tenets of Austrian Economics is that actions have consequences. government is running will be so big that national bankruptcy is a certainty.

right along with Paul. clothing. The government doesn't have a name for these taxes. These are the kind of taxes that are taken right out of Peter's pocket. Tax Peter don't tell him. and as a result. yes and no. more willing to support the government's desire to spend money on Paul. Peter knows better. the prices of these goods and services rise to the full extent of the newly printed money. however. Why. I mean borrowing. without having to produce anything. Paul gets all this without having to do a thing in return. shall we say. This is the Federal Reserve entering the capital markets and buying those treasury bills. you ask. this newly printed money makes it way into the hands of Peter. This. through a check the Federal Reserve writes on itself. This is treasury bills. a tax venue the politicians really like.S.S. The effect of this competitive bidding is to drive the prices of all these goods and services up ² the prices of food. They call them receipts. As the first recipient of this newly printed money. This is the hardest tax venue for Peter to figure out.ALWAYS means government taxes. So maybe. you say. until they're out of office. This is the U. The government has a soft sounding name for these taxes too. is only part one of the story. They know that if they abuse this tax venue it will likely get them thrown out of office. And finally. notes and bonds. government can in turn take that money and spend it on Paul. or at least they hope he won't notice. social security and medicare taxes ² the ones on his IRS forms. Well.S. . They call it borrowing. the politicians think. We Austrians. Peter is now in a position to bid for these goods and services. but as the newly printed money makes its way into the hands of more and more Peters. every politician's favorite tax. notes and bonds with money printed out of thin air. He gets all this solely because he's on the receiving end of the Federal Reserve's printing press. for here's where it gets a bit tricky. And that's exactly what our politician friends are hoping you think. Peter's kids will have to pay these taxes. to fund the government's spending. treasury entering the capital markets and borrowing from the savers of the world. because of Paul's spending. And the best part about it ² it appears he's getting all this without a dime from Peter. Besides the ever constant cry for more government spending in support of Paul. taxes with interest. we call these taxes the inflation tax. Lay the bill bare and its likely Peter throws a fit. medical care and college educations. so that the U. And so do politicians. it appears that Paul is getting something for nothing. Tax Peter later. government taxes Peter in 3 different ways: ‡ Tax Peter now ‡ Tax Peter later ‡ Tax Peter don't tell him Tax Peter now. But mask Paul's true cost and maybe Peter will be. and a subset of Tax Peter later. right in front of his eyes ² taxes like income and capital gains taxes. Problem is this is nothing more than taxes deferred. This is the easy one for Peter to figure out. because they don't want to talk about them. Peter won't notice. it's the way in which the government taxes Peter that allows the government to spend so much on Paul. subsidized medical care for his wife and free college educations for his kids. The rise in the prices of these goods and services is slow at first. Armed with this new purchasing power. This one is a bit harder for Peter to figure out. and to add insult to injury. The U. He gets unemployment benefits to buy food and clothes. is printing money a tax on Peter? How is this taking money from Peter to spend it on Paul? Here's why and how. The government has a more soothing name for these taxes. Before long. Tell me something I don't know.

a government cannot print money. gets nothing but higher prices. if they care about the value of the U. And if this money printing policy is pushed to the extreme. No wonder why the U. via Capital Markets Peter later) Federal Reserve Peter don't tell him) (Tax $1.1 trillion $1. the hard earned savings of anyone holding that money.6 trillion. but when pursued without limit. dollar. as they watch prices continue to rise and the value of that money continue to fall.S. government's fiscal 2009 financials: Spending Reciepts (Tax Peter now) Fiscal Surplus/Deficit Borrowing $1. the U. with the inevitable result being its complete destruction. You see. Let's now bring these concepts to life with a look at the U. Unfortunately. And it occurs without Peter even knowing it. and expect people to want to hold that money forever. Thus. without question. something that our politician friends obviously can't depend on forever. As the money printing policy proceeds. year after year. Paul gets to steal purchasing power from Peter. They will exit that money en masse. not to mention Peter. for as long as it takes for the newly printed money to make its way into the hands of Peter. about 45 percent of fiscal 2009's spending was financed this way. this kind of stuff has been going on in Washington for years. even this contrarian wouldn't be too alarmed. everyone gets the same goods and services at the higher prices. We Austrians can't think of a more sinister tax.6 trillion. government can spend so much money on Paul. as a matter of policy. and even Paul's hard earned savings. Paul. as well as Paul that the candy is free. all the while telling Peter.6 trillion Exactly as we would have surmised. they will come to want no part of that money.For sure. but it's being financed by a lot of those hard to figure out taxes too. seeing prices rise and the value of that money fall.3 trillion $3. in the end. At $1.S. Because the government has been able to mask the cost of all this spending. But as the first recipient of the newly printed money. it will eventually reduce the value of that money to zero. The increased supply of money now combines with a decline in the demand for it causing the value of that money to fall further and for prices to rise even higher. gets to buy these goods and services at the lower prices. This inflation tax is very nasty stuff. government has taken on obligations that it likely can not keep. in exchange for nothing.3 trillion (Tax $0.S. That's why politicians love the inflation tax. and with it. on the other hand. when people come to realize that it is a deliberate policy with no end in sight. No wonder why spending was 26 percent of GDP in 2009 and both the Obama administration and Congress are still talking about more. Not only does printing money steal purchasing power from Peter for the benefit of Paul and produce higher prices. Now. Peter literally doesn't know the half of it. with a dose of those nasty inflation taxes to boot.7 trillion $2. that is. Not only do we have a boat load of spending. they will want to hold less of it. They get to hand out candy to Paul. deferring and hiding these costs through its borrowing and inflation tax venues. if all this was just a one year event. .S. Peter.

How big are these obligations? The U.S. government has gross debt outstanding, meaning years of Tax Peter later, of $12 trillion. And depending on the source and calculation methodology, the U.S. government is on the hook for an additional $50 to $100 trillion more in unfunded liabilities. Using $75 trillion as the proxy for unfunded liabilities, that's debt plus unfunded liabilities of 6 times GDP and an eye-popping 41 times 2009 receipts. And the trends are going from bad to worse. How is the U.S. government going to honor these obligations? Can it even do it? Is Peter able, willing and ready to pay higher taxes? Will Paul be willing to do with less? Or will the answer be the Federal Reserve's printing press, and quite possibly the destruction of the U.S. dollar?

Michael Pollaro writes a column called The Contrarian Take, its mission to present thoughts and ideas on important financial market and economic trends from the perspective of a freemarket, Austrian economist. He is also is a retired Investment Banking professional, most recently Chief Operating Officer for the Bank's Cash Equity Trading Division. He is a passionate free market economist in the Austrian School tradition, a great admirer of the US founding fathers Thomas Jefferson and James Madison and a private investor.

Is the Chinese economy running out of steam?
Gerard Jackson BrookesNews.Com
Monday 22 March 2010

There are signs that China's economy could be sliding into recession. The reason these signs are being largely ignored is because virtually all of the economic commentariat believe the fallacy that consumer spending is what drives an economy when in fact it is entrepreneurship that drives it and savings that fuel it. This fallacy has led some commentators to assert that China is entering a mature phase in its economic development which will result in Chinese savers buying more Chinese goods which in turn could raise real wages. This is appalling nonsense. Any classical economist would have quickly pointed out that it is the demand for investment goods and not consumer goods that intensifies the demand for labour and hence raises real wages. Moreover, such an economist would have been just as quick to stress that loose monetary policies are not only inflationary they also "derange" production. The second observation is of critical importance. These economists noted how manufacturing not only went into recession first but that heavy industry also suffered the greatest contraction in output relative to the consumer goods industries. Therefore, to the older economists manufacturing was something of an economic bellwether, particularly the capital goods industries. (Economic commentary is so bad in Australia that one cannot even get this basic fact publicly discussed, not even by our so-called think tanks.) There is no doubt that Chinese manufacturing is slowing (obviously a slowdown always precedes a contraction) which is described as a rate of reduction in expansion. However, excess capacity ("derangement") "in some industries" is making itself felt. This is not surprising given that the country probably has the largest steel producing capacity in the world, producing about 50 per cent of global output in 2009. Yet no one is asking whether this capacity is necessary. Commentators are putting the emergence of excess capacity down to an attempt by the People's Bank of China to cool the economy by reducing the rate of inflation. (In China the central bank proposes and the government disposes.) What is not being asked is why the phenomenon of excess capacity is not uniform throughout the economy. The answer is to be found in the fact that money is not neutral. If it were then inflation-created malinvestments would not be possible because price changes would be uniform. Therefore the appearance of excess capacity is signalling the emergence of malinvestments that must at some point be liquidated. Now these malinvestments are the creation of a reckless monetary policy which some are assuring us that Beijing is trying to reverse. When it comes to monetary policy ² which includes monetary theory ² Beijing is every bit as clueless as Washington and London. According to official PBC figures M1 jumped by 25 per cent from January 2009 to December 2009. It's reported that in an effort to maintain economic growth and prevent "overheating" at the same time the government has curbed bank lending while also ordering the banks to increase their reserves. This is dangerous nonsense. Genuine economic growth cannot cause "overheating" which is another term for inflation. Those who argue otherwise are spouting rubbish. (One should have thought that some of these people would have noticed by now that this fallacy only appeared after Keynesian policies left us in a permanent state of inflation.) If the present trend continues manufacturing will start to contract and the recession will then rapidly spread down China's production structure. Of course, the government can once again

push down on the monetary accelerator. But in a sense this is where monetary and capital theory combine to produce an unstable and highly explosive mixture. There is absolutely no way these malinvestments can be 'reversed'. Liquidation is the only solution for the great majority of them. Even trying to hold him them in check would require greater and greater quantities of monetary injections. Hence any relief would be only temporary until the point is reached where inflationary pressure is considered so great that the government is left with no alternative but to slam on the monetary brakes. Gerard Jackson is Brookesnews' economics editor

(You get what you vote for and Americans voted for Obama. leaving less for capital formation by taxing future living standards and trapping billions of dollars in current investments. The sheer magnitude of Obama's tax and spending program is completely unprecedented. At the rate things are going debt as a proportion of GDP will exceed 90 per cent in 2020. Making it even scarier is the fact that the debt does not include the hundreds of billions that Medicare and social security owe. . The same goes for economic growth. It's fiscal weight is such that if allowed to go unchecked it will do to the American economy what similar policies did to Argentina. This is plain ridiculous.) As expected. Smith's observation was confirmed by the phenomenal rise of British power in the nineteenth century. a rise of more than 75 per cent over last year. Thanks to this economic lunacy by 2020 the aggregate US public debt will exceed a staggering $20 trillion. So what is the brilliant Obama and his fellow patriotic Democrats going to do? They going to dramatically reduce the supply of savings by raising the capital gains tax from 15 per cent to 24 per cent. an increase of over 170 per cent in a mere 10 years. Princeton University Press. It is saving and not government spending that fuels an economy and it is entrepreneurship and not politicians and bureaucrats that drive it. All of which will be accompanied by the total repeal of the Bush tax cuts. Let's try and tie all of this together. These promises must be either paid for or the government must default in part or in full. Defenders of this madness argue that these don't matter because the government owes the money to itself.(A capital gains tax is also a transaction tax and a tax on risk that strikes at entrepreneurship. However. And this is the minimum estimate. It is promised to the American people and not to any government. Now it needs to constantly borne in mind that growth is defined as net capital accumulation which is another term for investment.Will the US economy survive Obama's economic policies? Gerard Jackson BrookesNews. Every reasonably intelligent person knows that the one sure-fire way of reducing the supply of any good is to raise the cost of producing it. it gets worse. It follows that any policy that raises the cost of accumulating capital will therefore lower the rate of growth.9 per cent Medicare payroll tax on capital gains and other investments. He didn't mean by this that Great Britain was finished but merely that countries can endure enormous losses and humiliation and still recover.) He then intends to top off this idiocy with a 3. 2009). (See their book This Time is Different: Eight Centuries of Financial Folly. What will happen ² in my opinion ² is that the government will default in part by raising taxes and printing money. with a 90 per cent debt level being especially dangerous.Com Monday 22 March 2010 With reference to the loss of the American colonies Adam Smith remarked "that there is a great deal of ruin in a nation". A study by economists Carmen Reinhart and Kenneth Rogoff for the National Bureau of Economic Research found that very high levels of debt can have a severe detrimental effect on economic growth. no sensible man would argue that there is no limit to national recovery. the region in which economic decline becomes irreversible. Investment always comes from savings. This raises the vitally important question of whether Obama's economic policies are rapidly driving the US economy beyond the Adam Smith's "ruin". And this is exactly what Obama is doing.

no matter how many people these programs employ. because spending on these programs is a form of personal consumption. entrepreneurs cannot invest that which politicians and bureaucrats command and then consume. This is why growth is sometimes called "forgone consumption". Rogoff and Reinhart have basically done no more than show that when the government drains away sufficient resources from private use economic growth will slow. Economic growth is the choice between consumption and investment: spending on present goods versus spending on future goods. Gerard Jackson is Brookesnews' economics editor . It is called opportunity cost. But there is an economic law that underpins their work. What is spent on A cannot be spent on B. In a free market medical improvements and necessities are paid for out of growth. Or as Maynard Keynes said: "Bygones are bygones". sometimes dramatically.Against Rogoff and Reinhart it has been argued that there is no economic law that says a certain level of debt will produce the results they record. In short. Given the enormity of the Democrats' financial depredations I cannot see how economic growth can continue unless Obama is forced to retreat. Massive amounts directed to government programs like Medicare come at the expense of growth. True. Under Obama they will be paid for at the expense of growth and that means a lower standard of living. It is also why classical economists argued that spending on consumption does nothing to raise real wage rates.

it¶s not in the interest of the U. Now whenever there is a rise in the US dollar some commentators and producers lament the effect that this will have on exports and the balance of payments. this would reduce the cost of American tradables in terms of other currencies." During the Great Depression this policy of encouraging weak currencies was called "exchange dumping". The logical consequences of such a policy is that it could result in "competitive depreciations". It's truly outrageous that an economist of the standing of Stiglitz could possibly suggest that debasing the currency is the way to improve Americans' economic wellbeing. Many. Hutt's The Theory of Idle Resources. This means. We want a weak dollar and we want exports. What is not generally understood is that depreciation is the obverse of inflation. A quick look at their psychedelic economics immediately reveals no real understanding of the nature of economic growth. but this is what is really being said about the consequences of a falling dollar. or at least expansion.S. A genuine depreciation should not be a matter of policy but the result of a misguided inflationary policy. A depreciation in these circumstances is a process of restoring equilibrium. This is like someone working more and more hours for the same amount of pay. unless there is a considerable amount of idle capacity. To satisfy other countries growing demand for US goods as the result of a depreciating dollar export industries would have to expand output.Com Monday 5 April 2010 According to Nobel laureate Joseph Stiglitz: "Right now. to depreciate the currency one must first inflate it. to have a strong dollar. But this belief is based on a mercantilist fallacy. Their logic is very straightforward: Since a falling dollar is alleged to stimulate growth by increasing the demand for exports a rising dollar must therefore choke it off. That a depreciating dollar would tend to expand exports is perfectly true ² the rest is fantasy. (In the . Assuming that the dollar were to fall. In other words. If depreciation is the road to economic prosperity then it follows that printing money is what really raises the standard of living: a thoroughly ridiculous proposition.) Some observers. This is not strictly true. particularly Keynesians.Why a "cheap dollar" would not save the US economy Gerard Jackson BrookesNews. particularly exporters and domestic producers squeezed by imports. would argue that an increase in the demand for exports also raises the demand for labour and thus increases wage rates. not a means of gaining a trading advantage. This means that living standards will be lower than they would otherwise be because the terms of trade have now become adverse. that land. (See William H. Americans must export more for the same quantity of imports. This happens where a loose monetary regime results in an overvalued currency thereby reducing the flow of exports while artificially stimulating imports. In plain English. No one in his right mind would claim that this labourer's living standard is rising simply because he is working longer hours just to maintain the same income. would welcome a devaluation on the grounds that it would promote economic growth. Living standards drop not just because imports become more expensive but because capital goods (the material means of production) are scarce. Where there is unemployment any increase in the demand for labour in these circumstances is entirely due to the depreciating currency cutting real wage rates. LibertyPress 1977. labour and capital must be withdrawn from other lines of production thus curtailing their output. a devious means to eliminate your competitors' advantage.

This is why Japanese living standards rose significantly even as it developed an 'adverse' terms of trade. Do the advocates of a depreciating dollar think that by merely increasing exports the US would enjoy rise in per capita investment. But the fundament difference between the Japanese experience and one brought about by a falling currency is that Japan's change in the terms of trade for its manufactures was entirely due to increasing productivity and not a depreciating currency. Where there is no unemployment real wages rates are still cut while the composition of the demand for labour changes. meaning that it had to export more and more for the same quantity of imports. But this was never the case ² and it certainly isn't the case for China.1930s this was called exporting your unemployment). It should now be obvious that an increase in exports due to a depreciating currency would have to take place at the expense of domestic consumption. For nearly 40 years Japan's terms of trade for its manufactures declined. despite powerful government intervention ² which includes extreme Keynesian policies ² from which the country is still suffering. Japan had an extremely high saving rate which enormously increased its productive capacity while entrepreneurs did the rest. Japan used to be touted as an excellent example of export led growth. I never tire of pointing out that savings fuel an economy and entrepreneurship drives it. especially in view of Obama's crippling fiscal policies? Have these people ever given any serious thought to the actual nature of economic growth? Gerard Jackson is Brookesnews' economics editor . It baffles me how those bright sparks who make their money by selling economic advice can describe this situation as healthy let alone one of economic growth. To argue that a boom in American exports induced by a devaluation would generate economic growth is to imply that savings and investment are unrelated.

a return of their investment. a creditor's greatest fear is inflation. I made the case for a U. funding the excess of spending over tax receipts. government debt holders are not getting their money back. by Taxing Peter later via borrowing instead of Taxing Peter now. friends that allow the U.S. will be via the wholesale use of the Tax Peter don't tell him policy of inflation.S. But mask Paul's true cost and it empowers the government to commit to obligations far beyond the ability of Peter to ever pay the bill.S. plus interest. there will come a time when the only way out for our politician friends. by devaluing those obligations by printing money. You see. I concluded that unless millions of Pauls are about to be told that they are not getting what they were promised. government's creditors. the U. and inflation of no current concern. I then introduced the 3 kinds of government tax forms ² Tax Peter now.5 percent interest on 30-year treasury bonds. namely the inflation tax. that it must tax Peter to spend it on Paul. National bankruptcy through the Federal Reserve's printing press. they part with their savings and invest. notes and bonds issued by the U. at least for now. government to fund its spending programs without resort to the wholesale use of the inflation tax. government that is quite literally out of control. has helped create obligations so huge. it's a government that's on its way to bankruptcy. I further demonstrated that the policy of deferring the costs of all this spending largesse. at a purchasing power equal to their original investment. government can not possibly make good on its mounting debt obligations by taxing Peter. So. that it can never be paid. have some friends. Armed with their hard earned savings. but we are not there. they get a real rate of return. quite yet.Com Monday 5 April 2010 In part 1 of this series. is wholesale inflation right around the corner? As I suggested in part 2. this funding policy is unsustainable. I posited that in addition to the ever constant cry for more government spending in support of Paul. The problem is. And when it becomes clear that the U. In other words. that the only way out of those obligations is via inflation. and Tax Peter don't tell him. a government that has committed to obligations so big. the U.S.S. better known as borrowing.S. because it simply costs too much. The reason.S. government is years in the making and it's going from bad to worse. that unless policies change. Tax Peter later and Tax Peter don't tell him ² and further posited that it is the latter two.5 percent interest on 10-year treasury notes and 4. they buy all those treasury bills. or that millions of U. government's creditors. Part 3 Michael Pollaro BrookesNews. Starting with the simple fact that the U.S. government. to make good on their promises. government. In Part 2 of this series.S. government has NO money. because Peter can't afford it.S. which have been instrumental in masking the true cost of Paul and putting the U. to be repaid in increasingly worthless dollars. because. a bill so big. At 3. because it sows the seed of its own demise. it's coming. I demonstrated that the tab being run by the U. government and by extension Peter and Paul. on its way to bankruptcy. fearing the debasement of the dollar and therefore . it's the way the government taxes Peter that allows the government to spend so much on Paul. Tax Peter later.U. government and therefore Peter in a deep financial hole. Lay the bill bare and its likely Peter throws a fit.S. so that the Federal Reserve doesn't have too. And those friends are the U.S.

likely a lot closer to $119 trillion. That brings us to every politician's favorite tax venue.the value of their investments. and with it. our politician friends could raise taxes. It has unfunded liabilities. To repeat. of between $52 and $107 trillion. certainly without the cover of an all out government funding crisis. Problem is. notes and bonds en masse. that is. the U. where the action has been and will continue to be. committed spending in the pipeline. In part 3 of this series.S. borrow the excess of spending over tax receipts by tapping the savings of U. government creditors. to become THE buyer of these bills. So what's next? Well. the Federal Reserve will be forced into action like never before. Next.S. indeed because of it. any funding raised in this manner is likely transient and clearly a drop in the bucket.S. national bankruptcy through the printing press. government is running with its creditors grows ever larger. government's financial state. to the extent tax rates can be hiked without eventually cratering the economy. But as we have seen. so as not to destroy the value of the dollar and scare the government's creditors. the inflation tax. time for them to pull their savings. compared to the spending load the government now faces. we will have a look at these U. With that aside. ain't going to get it done. a vicious circle which could eventually lead to the destruction of the dollar. The U. I got it. and highly unlikely. government ushers in the wholesale use of the Federal Reserve's inflation engine. but adding to its obligation footings at a rate of between $5 trillion and $8 trillion per year. the U. First. As the Obama administration has recently proclaimed. they will surmise. OK you say. For sure. That's total obligations of between $65 and $119 trillion. Part 3.S. say the politicians and Federal Reserve officials too. will go from friends to foes. Just enough to lend a bit of assistance to the government's Tax Peter later policy. government has $12 trillion in debt. As we saw in Part 2 of this series. A financial mess and clearly unsustainable. But as we saw in Part 2 of the series. we have a politician favorite. government is certainly on track to impose all kinds of new Tax Peter now venues. government creditors. I submit.S. A sprinkle here and two sprinkles there. notes and bonds to eager sellers. how deep are the pockets of . as the IOU the U.S. so that the government is not too big a burden on the economy. how much longer we can expect them to remain friends of Peter and Paul.S. but when can we expect Peter and Paul's creditor friends to turn from friends to foes? The first question to ask. And to top it all off. Political suicide. and as I suggested in Part 2. before the U. Yes. Not too much though. namely.S. Peter and Paul have some friends. The IOU will have become just too big. it will become more and more apparent to those creditors that the only way out for the government is via the Federal Reserve's inflation engine. for now Let's begin with a recap of the U. to try to pay for all this spending. must sprinkle in a bit of these stealth taxes. from eager buyers of those treasury bills. And as they do. And then D-Day. our politician friends could renege on their promises to Paul. government is not only spending almost $4 trillion per year. let's review the financing roadmap for all this government largesse. to take a bill already too big to pay and make it an even bigger bill is financial suicide. The clock is ticking. the prospects for the wholesale entrance of the Federal Reserve and the inflation tax as the politician's last resort. Tax Peter later.

S. is the U. and then into yet more government debt.S. private savings through fiscal year 2009: And the 50 year record of government debt against those same savings aggregates: Can you say parabolic? The charts speak for themselves. Now. based creditors and ask this question. as they mature into spending. based creditors to fund all this government spending. savings pool big enough to fund all this government borrowing and spending. The resulting debtto-savings ratios are breathtaking. for how long? Here's the 50 year record of government borrowing against U. For this. let's add in the impact of unfunded liabilities. we need some scenario analysis.these creditors? Let's start with U. Take a look: . and if so.S. The government is simply overwhelming the capacity of U.S.

Here's the long term trend of foreign held U.S. based creditors do not have near enough savings to buy all the government's debt. through fiscal year 2009: . you ask. Assuming 100 percent of those unfunded liabilities are turned into government debt. and I do believe that is where the U.S.S. those ratios balloon to a whopping 50 times gross and 145 times net private savings. Add in the fact that the government's obligations are currently growing at $5 to $8 trillion per year and it's impossible not to conclude that the U. buying up government debt. based creditors. printing money. Enter Peter and Paul's best friends. ratios of 28 times gross and 80 times net private savings. government is heading.S.S. we are looking at debt-to-savings ratios of 16 times gross and 47 times net private savings (net of capital consumption on fixed assets). what's keeping the government's inflation engine in the yard? Clearly U. government debt. With all this. Why is the Federal Reserve not in their hook. In fact. not all of Peter and Paul's friends are U. line and sinker.S. government's borrowing needs will be swamping the capacity of U. government debt against total government debt sold to and held by the public. of late. based creditors. They are filling the gaps left by U. not many at all.Assuming just 50 percent of the government's unfunded liabilities are turned into U. under the best case scenario. right here. and under the worst case scenario. under the worst case scenario.S. right now? And the simple answer. foreign private and central bank creditors. based creditors to fund those needs for years to come. and doing so in size.S.

to spend on Paul. One of my favorite economists. (4) It is the amount of new capital investment that is chiefly responsible for the improvement of economic conditions. lest before long there is nothing left to consume. . In the decade just passed. Nothing like shooting yourself in the foot. foreign based investors absorbed about three fourths of the government's public debt offerings. interestingly about the same time U. to say that foreign based creditors are Peter and Paul's best friends is an epic understatement. It's what Austrian economists call crowding out and it's an economic disaster. the income producing capability of the American economy is being systematically destroyed. don't you think? So. no way to pay for all this government borrowing and spending. there is no surer way for the government to usher in a basket economy then to attack the fuel which powers Peter's production. Indeed. it's just the opposite. One must produce before one can consume. and so retards economic growth. but because all this government borrowing "crowds out" private capital investment. government's publicly offered debt. 3 times what they did in the 1980s and 10 times what they did in the 1960s. the producer. Henry Hazlitt. Austrian economists teach that the government can not take from Peter. No economic growth.S.S. about twice as much as they did in the 1990s. the economy's savings pool. As discussed in Part 1 and Part 2 of this series. the consumer. (2) Government borrowing finances government deficits. with no one left to pay ANY bills. No income growth. Well. but what private industry borrows chiefly finances capital investment. Indeed. You eventually end up with a basket economy. and in contrast to mainstream Keynesian thinking. (3) What the government borrows is spent chiefly on consumption. Let's pause for some Austrian economics 101. except of course through the printing press. Foreign based creditors hold about half of the U. the charts speak for themselves. Continue down a spend-now-ask-questions-later path and you eventually run out of Peters.And the long term trend of annual foreign investment flows: Again. no income growth. government spending really took flight. worse then outright taxes. explains: The crowding-out argument can be stated in a few elementary propositions: (1) Government borrowing competes with private borrowing. not only is there not enough savings in America to fund the government's ballooning borrowing needs. and expect the economy to grow.

editor of Grant's Interest Rate Observer.S.S. treasury holdings.S. many think Bernanke's unprecedented zero interest rate policy and Obama's massive fiscal stimulus will cleanse America's financial system and restore American growth. that's growing that debt by leaps and bounds every year.S. At the .S.S.Now. let's zoom in on that topping action. some foreign creditors are beginning to think so too. dollar than he. for one could make the case that you can see this "restiveness" in the foreign investment flow numbers too. calls this concern foreign creditor "restiveness. Note the topping action in both the foreign investment flow dollars and the amount of government debt held by foreign creditors." I love the term. Especially. I know their policies will fail. First. Indeed. do you think that at least some of Peter and Paul's foreign creditor friends might agree with the Austrians? That a country with a massive debt burden. government.S. But as an Austrian economist. None of this necessarily says that foreign creditors are about to abandon the U. Have a look at the chart below. government debt. For many. Do you think they are starting to get it? James Grant. Think of him as a leading indicator. all the while gutting its ability to service that debt by consuming it away. just listen to one foreign government leader after another as they express their concern over the U. en masse. may not be such a good long term investment. showing the foreign investment flow into U. I think so. The interesting thing about the foreign creditor is that there is no investor more sensitive to the purchasing power of the U. and what that might do to the value of their U. don't you think? Foreign based creditors may still be buying U. treasuries as a percent of U. Certainly. a country with the world's largest printing press as its back-up plan. right here and now. And maybe. Now. Maybe they are beginning to think their investments may not be so safe. Quite a drop in the amount of U. government debt offerings foreign creditors have been willing to take of late. and ask yourself these questions. Are foreign based creditors getting a bit apprehensive? Are they perhaps pulling back? Note the blue line. either. their Keynesian economic training tells them so. and that "restiveness" is growing. government's ever mounting debt obligations. but at nothing like the pace experienced in recent years. have another look at the previous two foreign investment flow charts. government borrowing.S. The evidence isn't all anecdotal.

on its way to bankruptcy. what's going on in Europe. tax the crap out of Peter via the Federal Reserve's printing press. He is also is a retired Investment Banking professional. don't bet on U. based creditors to stand idly by. government. They will be right behind them. that only means that when the U.S. Spain and Ireland. Portugal. Portugal.S. In fact.S. And when they say it's time to exit. government can not make good on its obligations other then via the Federal Reserve's printing press the foreign creditor will want out. with the fiscal plights in Greece. most recently Chief Operating Officer for the Bank's Cash Equity Trading Division. with one glaring exception ²America can print money at a moments notice with which to pay its debts. it won't be long before our politician friends will have no other choice but to either come clean with Paul. but the fiscal state of these nations are not all that different from that of America. or. government's funding crisis does come to America. government. its mission to present thoughts and ideas on important financial market and economic trends from the perspective of a freemarket. He is a passionate free market economist in the Austrian School tradition. government's inflation engine in the yard? The answer. And as they do. U.S.S.S. I'll show how in the next and final part of this series. Austrian economist. what's keeping the U. . at least not yet. a great admirer of the US founding fathers Thomas Jefferson and James Madison and a private investor. You know. In my opinion. back to the original question.S. to get out before it's too late. on its way to bankruptcy. But as we have seen. part 2 Michael Pollaro writes a column called The Contrarian Take. bet on a lot. as the recent investment flows of these foreign based creditors suggest. it's a bit of a prelude to what might eventually happen to America. it could make what's happening to these countries look like child's play. not for a minute. part 1 U. the Federal Reserve's printing press is already beginning to grind its engines. and pardon the vernacular. and I mean a whole lot of the latter first. America is not Greece.first sign that the U. And when that time comes. foreign creditors. Spain or Ireland. So. expect these foreign creditors to sell their U. and cut spending. treasury holdings in increasing amounts.

This is very bad news for the US economy and signals that Obama intends to pursue a purely Keynesian approach to government. While the views of Ptolemaic astronomers had ² fortunately ² no bearing on economic policy the exact reverse is true of Keynesianism. Even though low interest rates were later legislated for market rates still stubbornly resisted state intervention. The funny thing is that in 1621 Sir Thomas Culpeper was making the very same argument for the English economy. a state of . the developments that Copernicus and Galileo wrought geatly advanced science.Obama's Yellen appointment signals very bad news for the US economy Gerard Jackson BrookesNews. Nevertheless. even to the point of stating: "If it were possible to take interest rates into negative territory I would be voting for that. It is a situation in which the buyer of treasuries pays the government interest for the privilege of having loaned it money. It could be argued that the current lack of resistance to the Fed's low interest rate regime is proof that Culpeper. In the seventeenth century this meant a reduction in savings and investment. Keynes and Yellen are right. The result is a rigid textbook mentality that is forced to rationalise economic reality in terms of what is now nothing more than an ideology. a distorted capital structure and an eventual bust followed by rising unemployment. the "distinguished" Ms Janet Yellen ² much like her Keynesian husband ² remains entirely unfazed. Interest ² like all prices ² is a market phenomenon. He then assumed if Parliament legislated for lower rates England would then become as prosperous as Holland. Keynesians are a constant reminder of those Ptolemaic astronomers who continued along their merry way despite the discoveries of Copernicus and Galileo. Lock won the debate hands down." Let us try to grasp the full import of this statement. Like many others he noted Holland's prosperity and its low rates of interest. On the other hand. interest and investment as Sir Thomas Culpeper and his allies. She is typical of her breed. Which is precisely what America got. balance of current account problems. If you force it down below its true rate you will create distortions. a return to mercantilist fallacies on spending and growth. completely absorbing the Keynesian framework without question. leaving her utterly incapable of thinking outside the Keynesian box. forcing down rates would have the effect of reducing the supply of savings and hence the level of business activity. Not so. A negative rate is one in which the depositor pays the bank interest instead of the reverse. (The same point had been made by earlier critics of Culpeper's proposal. Under Keynesianism we have now regressed to the same level of economic understanding of money. In today's world it also means massive financial and capital distortions. The issue was finally decided at the end of the century when John Lock explained that Holland enjoined low interest rates because the country had a higher rate of savings.Com Monday 5 April 2010 Obama has nominated Janet Yellen to be vice chair of the Federal Reserve. The only way that interest rates can be kept artificially low is by the use of a continual monetary expansion. According to Yellen "record-low interest rates are still needed to energize the economic recovery". usually credit expansion by the banking system. Yellen (formerly President and Chief Executive Officer of the Federal Reserve Bank of San Francisco) is an unrepentant Keynesians who remains totally blind to that doctrine's contradictions and dismal failures. But monetary expansion means inflation.) Therefore. What an absolutely wonderful achievement. What is interesting about this comparison is that Keynes' work is an economic regression.

affairs in which a person's real savings are being continuously reduced. And how is this accomplished? Through the use of inflation, which she advocates. (She has already warned of an "undesirably low" inflation rate.) Take the simple example of a 5 per cent inflation rate and a 2 per cent interest rate on deposits. This means that the principle is being taxed at 3 per cent per annum. On top of that the government, the same one that engineered the inflation, will probably be taxing your nominal returns. This is a recipe for capital consumption, not sustained economic growth. Only a Keynesian could possibly describe this dangerous nonsense as sound economics. As a good Keynesian cultist Yellen would argue ² just as Sir Thomas Culpeper did ² that a policy of artificially low interest rates boosts growth and promotes employment. Interest is the most pervasive and important price in the economy. It is the means by which the supply of capital is not only equated with the demand for capital but is also allocated through time. Meddling with this equilibrating mechanism distorts the capital structure, creates the illusion that investment exceeds savings and by doing so lays down the foundation for the boom-bust phenomenon. All of the above was well known to the early nineteenth century British economists. (See for example Thomas Malthus Edinburgh Review, February 1811, pp. 363-372 and Henry Thornton's An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, (1802), London: George Allen and Unwin, 1939, p. 239.) Thanks to Keynesianism much of the early wisdom and penetrating insights of the early economists has been marginalised with the result that dangerous mercantilist monetary fallacies now dominate the world's central banks. With Keynesians it always one fallacy on top of another. It turns out that Janet Yellen ² like Lawrence Summers ² subscribes to the fallacious Phillips-curve concept according to which there is an inverse relationship between unemployment and inflation. Now the Austrian school argued that a policy based on this fallacy would result in higher inflation and higher unemployment. They were right, as the 1970s amply demonstrated. (It is not a mere question of expectation but capital theory.) Unanticipated inflation reduces unemployment by cutting real wage rates relative to the value of the worker's product. Yet these very same people who stridently contend that a direct cut in real wage rates will lower demand and deepen a recession simultaneously argue that the same per centage cut in real wage rates brought about by inflation will have the reverse effect. (And these 'thinkers' get to be called "distinguished".) The irony here is that Keynes understood that the problem really was one of excessive wage rates and that is why he freely admitted that Whilst workers will usually resist a reduction of money-wages, it is not their practice to withdraw their labour whenever there is a rise in the price of wage-goods [consumption goods]. (The General Theory of Employment Interest and Money, Macmillan-St. Martin¶s Press, 1973, p. 9.) The major point is that Yellen is an inflationist first and foremost. She has made it abundantly clear that all of her policy suggestions will be geared to promoting an inflationary policy. Like all Keynesians she seems congenitally incapable of grasping the dangerous microeconomic consequences of inflation for investment, jobs and the standard of living. She is in fact a very dangerous woman. Gerard Jackson is Brookesnews' economics editor

Deficits, interest rates and the US economy
Gerard Jackson BrookesNews.Com
Monday 5 April 2010

Now that it appears that Obama's reckless spending and borrowing binge has dethroned US Treasuries as the world's safest investment haven market players are contemplating a future in which interest rates must continue to rise if the government's lust for spending is to be met. Strengthening this fear is the government's rising debt burden, unsustainable deficit spending and a colossal amount of unfunded liabilities that are impossible to finance. So instead of addressing these problems Obama and his merry band of irresponsible Democrats imposed a gigantic and largely unread health bill on the American people. Only a fool would think that the markets would ignore this monstrosity. However, the real question right now is when will the markets revolt? In the meantime, the argument prevails that the deficit will in itself be enough to drive up interest rates. A contrarian view is that the statistical evidence proves that inflation is the real driving force behind higher interest rates, not deficits. In fact, not only does the so-called statistical evidence prove nothing of the kind it can lead to the dangerous conclusion that it is perfectly safe for a government to continue accumulating deficits in the happy belief that they will not have a detrimental effect on investment. The conventional view assumes that if the supply of and demand for capital as expressed through the interest rate is in equilibrium then any addition to demand must raise rates. It follows that by increasing the government's demand for loans deficits will raise rates and in doing so drive out marginal investments. This is call "crowding out". However, if an increase in savings were to offset the additional demand for savings then no crowding out would occur even though private investment would still be lower than would otherwise be the case. But it needs to be borne in mind that the argument that deficits do not raise rates is not based on the assumption that the supply of savings will increase. So how do we explain the so-called statistical evidence? Simple enough. The Fed drives down interest rates and keeps them down by allowing the banks' fractional reserve system to keep expanding credit even as the government is running a deficit. What in effect is happening is that the banks are creating phony savings. This is called inflation. Eventually prices begin to rise, current account problems develop and bottlenecks appear. At some point rising prices result in a price premium emerging which causes interest rates to rise. We can now conclude that in the absence of monetary expansion deficits would certainly have exerted an upward pressure on interest rates*. Moreover, we can also see that the so-called 'cheap money' policy actually resulted in higher rates. To blame inflation for this situation in order to exonerate deficits and increased government borrowing is to reveal a total ignorance of the inflationary process and the true nature of interest. Unfortunately the errors do not stop with what we may call the deficit-interest rate fallacy. The failure to understand the nature of inflation has led some to the egregious error that a recent rise in treasury yields has been a blessing for the US economy because it now means that "King Dollar" is holding down inflation. Exchange rates can never hold down inflation, only tight monetary policy can do that. In addition, inflation disturbs exchange rates and distort the pattern of internationals trade. "King Dollar" is not a blessing but a curse. Behind this misguided opinion is the erroneous belief that a strong economy must always have a strong currency. Hence a rising currency must be evidence of a strengthening economy. Not so. Professor Ludwig von Mises recalled

how in 1919 a banker had claimed that the Polish mark should never have dropped to 5 francs because Poland is a rich country. It has a profitable agricultural economy, forests, coal, petroleum. So the rate of exchange should be considerably higher. (Ludwig von Mises, On the Manipulation of Money and Credit, Free Market Books, 1978, p. 20. The article was first published in 1923). Mises went on to say of those who preached that the state of an economy should determine its exchange rate: These observers do not understand that the valuation of a monetary unit depends not on the wealth of a country, but rather on the relationship between the quantity of, and the demand for, money. Thus, even the richest country can have a bad currency and the poorest country a good one. (Ibid. p. 21). We are living in a highly inflationary world. This means we are in a permanent state of monetary disequilibrium which is reflected in unstable exchange rates. I suggest that "King Dollar" is not only the result of inflationary forces but is also over valued. It is this overvaluation that reduces the prices of imports while penalising exports. In the meantime, the banking system is sitting on $1 trillion dollar of excess reserves just waiting to flood the economy. Now one can argue that overvaluation is impossible on a floating exchange rate because supply and demand always bring rates into equilibrium. This argument falls to the ground once it is realised that it ignores purchasing power parity. Dr Frank Shostak nailed this opinion when he noted: The so called floating exchange rate does not really belong to a free market. In a truly free market we would have a gold standard. Under the current floating exchange rate system the central banks' monetary policy continually causes exchange rates to deviate from the underlying rate as set by the relative purchasing power of money. So in this sense the rate of exchange can become either overvalued or undervalued. Given the America's horrible fiscal condition I cannot see how higher interest rates can be avoided. The demands now being made on the economy by government must result in a significant reduction if not an actual end to the rate of capital accumulation exceeding population growth. This can only mean a general fall in real wages. furthermore, I do not doubt for a moment the government ² or a government ² will be driven to use inflation to engineer a very large partial default. *Even if a depression brought about a collapse in the demand for business loans accumulating deficits could still retard recovery even if they appeared not to affect the rate of interest. Gerard Jackson is Brookesnews' economics editor

I will try to pinch-hit for him. called "praxeology.D. improbably enough." At a time when economics was becoming so fragmented and specialized that agricultural economists. Since he isn't here to correct misrepresentations of his ideas. for example. His socialist critics claimed to have surmounted this difficulty by saying that socialist regimes could copy capitalist prices ² hardly a "triumph" for the alleged superiority of socialism if it is ultimately a parasite dependent on capitalism. Mises mentored four Ph." His books are often alphabetized under "v" because of the honorific title "von. a surprisingly readable examination of methodology that includes discussions of how both economic theory and the study of history demonstrate the superiority of free-market over government-planned economic action. in my opinion. I owe him a great debt. Sad to say. Mises often is misunderstood. under Dr.") Unfortunately. poverty. All of his books were powerfully illuminating. and premature death in the wretched experiments with socialism that darkened the 20th century. (The surname is pronounced "MEE-zes" ² like "Moses" with a long "e" instead of "o. with irrefutable logic. might have difficulty understanding international trade economists. Israel Kirzner. During that period of study. Several decades later. Mises. and George Reisman. emigrated to escape Hitler. Many tens of millions of human beings could have been spared untold grief. a Jew. I have been surprised by how often Mises has been misunderstood outside the still small fraternity of Austrian economists. I read all of Mises' books. Mises's fourth masterpiece is Theory and History (1957). let's briefly review Mises' significance. Mises accomplished the intellectual equivalent of putting Humpty-Dumpty back together again by developing the economic equivalent of the unified theory in physics. Mises made. He proved. one of the most accurate representations of Mises' ideas was made. Sennholz. by liberal congressman Barney Frank. (This book is the most accessible of "the big four" to the non-economist. but four stand out as economic classics. the single greatest economic breakthrough of the 20th century. is my "intellectual grandfather. My purpose here is to correct some of these misapprehensions. rather than creates wealth. First. if only Mises's insights and warnings had been heeded. due to the impossibility of meaningful economic calculation in the absence of market-based prices.D. for the sake of readers who aren't familiar with his ideas. Mises's magnum opus is Human Action (1949).Com Monday 12 April 2010 Ludwig von Mises (1881-1973) is an iconic figure on the right. Mises integrated money into the larger body of neoclassical marginalist thought. In the postwar years. then. Louis Spadaro. I earned my Ph.s in economics at New York University: Hans Sennholz.Ludwig von Mises: Setting the Record Straight Mark W. His contributions to the advancement of economics remain unsurpassed. suffering.) In recent years. known as a great economist and a leading theoretician of free markets. showed how inflation redistributes. In Socialism: An Economic and Sociological Analysis (1922). In The Theory of Money and Credit (1912). and laid the foundation for his and Hayek's future work on how central bank monetary policy causes the widespread "cluster of errors" that characterizes the boom-bust cycle. After a decades-long career in his native Austria. This book summarizes all of his vast economic understanding and synthesizes it into a comprehensive theory of (what else?) human action. Mises. blight. why socialism is inherently unviable." Although I never met him. Hendrickson BrookesNews. .

. Mises didn't believe in conservative or liberal economics any more than one would believe in conservative or liberal arithmetic or laws of physics. without state and government. pp. Mises. recounting many of the ways in which the well-todo and powerful receive special favors from government. pp. There are people who call government an evil. although a necessary evil. for Mises steadfastly refused to compromise economic truth. He lifted the veil from the sordid. Yet in his recent history of supply-side economics. who had professed to believe in the free-market principles of Ludwig von Mises. pp. 48 [Anarchists are] shallow-minded. reporter for The New York Times. Liberalism. Ludwig von Mises ² come to be painted with an anarchist brush? Ironically. Omnipotent Government. rejected anarchism. (Cf. Barney Frank knows that Mises never would have advocated subsidies for a special interest. he was neither a moral preacher nor a moral relativist. p.. It has nothing in common with the absurd illusions of the anarchists.. One of Mises' cardinal principles was the central importance of the impartial rule of law and a concomitant rejection of privileges. the strangest misconception today involves anarchism. p. Another widespread misunderstanding involves Mises' insistence on a strict adherence to Wertfrei (German for "value-free") economic analysis. Austrian economics and anarcho-capitalism are often regarded as two sides of the same coin. what is needed in order to attain a definite end must not be called an evil . conscientiously and consistently illustrating cause/effect relationships that are not malleable to human will. denounce Mises for exactly the opposite reason.e. He was a scientist. Anarchism misunderstands the real nature of man. charging him with "moral relativism.. meanwhile. 24. 90. Bravo! Although he himself opposes free markets. pp. Government may even be called the most beneficial of all earthly institutions as without it no peaceful human cooperation. 98-9. 27-30. One of my colleagues now avoids labeling himself an Austrian economist because his interlocutors then assume that he is an anarchist.On Feb. dull." This false charge is particularly cruel. 236-239). then. often standing alone against the statist tide. from the success of the Ludwig von Mises Institute. Econoclasts. Liberalism. 2004. Liberalism is not so foolish as to aim at the abolition of the state. Lew Rockwell founded The Mises Institute in 1983. Nothing could be farther from the truth. Finally. In fact. the same cannot be said for David Cay Johnston. Economic Freedom and Interventionism. Alas. But Johnston errs egregiously by citing Mises as one of the high priests of these unscrupulous plunderers. Rep. Theory and History. 57. Some Christians. The Anti-Capitalist Mentality. Liberalism [in the European sense-the philosophy of free markets and limited government] differs radically from anarchism. [and suffer from] illusions and self-deception. (I attended its inaugural . Here is Mises on anarchism: Society cannot do without a social apparatus of coercion and compulsion. no civilization and no moral life would be possible. However. Frank took to the floor of the House and expressed amazement that many of his Republican colleagues. i. p. 36-7. The Ultimate Foundation of Economic Science. corrupt process of what we economists call "rent-seeking. were arguing for larger agricultural subsidies. historian Brian Domitrovic writes that Mises' work has climbed the "normative heights" of an absolutist ethical stance. Johnston wrote the 2007 book Free Lunch. But today. the definitive Austrian economist. did Austrian economics ² and by extension. so good. It seems that Mises can't win." So far. How.

dinner. free markets ² rather than defending his personal reputation.. Indeed. it came to be dominated by Murray Rothbard. his energies would be focused on the fight for economic rationality ² i. In retrospect.) As the Institute evolved. I am sure that if Mises were here today. it seems that there would be less confusion about Austrian/Misesian economics today if Rockwell had named his thinktank "The Rothbard Institute." I think Mises would be disappointed that the institute named after him would be known as a center of anarchist thought. Rothbard's economic thought was derived from Mises. but his anarcho-capitalist political philosophy was drawn from other sources. Mark Hendrickson teaches in the Economics Department at Grove City College First published in the American Thinker .e. I wish them continued success in their fight against economic illiberalism. The Mises Institute is doing a lot of excellent work in exposing the counterproductive nature of government intervention into economic matters. though. but what's done is done.

government. But as I argued. unfortunately for the U.S. government.S. Tax Peter later and Tax Peter don't tell him ² and further posited that it is the latter two. the Federal Reserve will be forced into action like never before. government's creditors. by devaluing those obligations by printing money. I posited that in addition to the ever constant cry for more government spending in support of Paul. a government that has committed to obligations so big. government.S. government is years in the making and it's going from bad to worse. I concluded that unless millions of Pauls are about to be told that they are not getting what they were promised. In part 2 of this series. government that is quite literally out of control.S. to become THE buyer of these bills.S. I further demonstrated that the policy of deferring the costs of all this spending largesse. the creditors of the U. because it simply costs too much. not only the primary buyers of all these obligations and a funding source too big to be filled by U. I made the case for a U. Lay the bill bare and its likely Peter throws a fit. government has NO money. who in no uncertain terms are the reason the U.S. Armed with their hard earned savings. a vicious circle which could eventually lead to the destruction of the dollar.S.S. government debt holders are not getting their money back. or that millions of U. that unless policies change. national bankruptcy through the Federal Reserve's printing press. and Tax Peter don't tell him. that it must tax Peter to spend it on Paul.S. better known as borrowing. the U. that the only way out of those obligations is via inflation. part 4 Michael Pollaro BrookesNews. In other words. fearing the debasement of the dollar and therefore the value of their investments. they buy all those treasury bills. from eager buyers of those treasury bills. notes and bonds en masse. I demonstrated that the tab being run by the U. this funding policy is unsustainable. indeed because of it. there will come a time when the only way out for our politician friends. Starting with the simple fact that the U. by Taxing Peter later via borrowing instead of Taxing Peter now.S. In other words. a bill so big.S. but. notes and bonds issued by the U. I then introduced the 3 kinds of government tax forms ² Tax Peter now. so that the Federal Reserve doesn't have too. funding the excess of spending over tax receipts. the creditors most sensitive to the purchasing power of the U.Com Monday 12 April 2010 In Part 1 of this series. But mask Paul's true cost and it empowers the government to commit to obligations far beyond the ability of Peter to ever pay the bill. And the trigger for this exit from U. will be via the wholesale use of the Tax Peter don't tell him policy of inflation. notes and bonds to eager sellers. And as they do. government has been able to fund its spending programs without resort to the wholesale use of the Tax Peter don't tell him policy of inflation. because Peter can't afford it.S. I introduced Peter and Paul friends.S. that it can never be paid. government debt? Foreign creditors. government. based creditors for long.U.S. Tax Peter later. namely the inflation tax. for when it becomes clear that the U. which have been instrumental in masking the true cost of Paul and putting the U. dollar. will go from friends to foes. government and therefore Peter in a deep financial hole. National bankruptcy through the Federal Reserve's printing press In part 3 of this series. . it's a government that's on its way to bankruptcy. to make good on their promises. on its way to bankruptcy.S. it's the way the government taxes Peter that allows the government to spend so much on Paul. government can not possibly make good on its mounting debt obligations by taxing Peter. has helped create obligations so huge.

Part 4. the inflation tax begins with the Federal Reserve entering the capital markets and buying the government's treasury bills. government's fiscal year 2009: And the record of annual Federal Reserve purchases of U. Then came the 2007-2008 credit crisis. government's finances suggest.S. so that the U. Here's the 50 year record of U. notes and bonds with money printed out of thin air.S. Peter and Paul are about to get fleeced Recall. government debt held by the Federal Reserve against total government debt sold to and held by the public. Those holdings then retraced about 45 percent of that decline topping out at about 16 percent in 2007.In fact.S.S.S. And that in turn suggests the Federal Reserve is beginning to grind its monetary engines in response. government debt. And despite Ben Bernanke's protestations to the contrary indeed it is. through a check the Federal Reserve writes on itself. when the Federal Reserve sold about 40 percent of its government holdings in favor of short term targeted loans . government debt: After peaking at 24 percent in 1974. government can in turn take that money and spend it on Paul. Federal Reserve holdings of government debt as a percent of total government debt went on an almost uninterrupted decline until bottoming in 1992 at 9 percent.S. through the U. as the protestations of a growing number of foreign creditors over the health of the U. foreign based creditors may already be pulling back from U. protestations supported by actual foreign investment flows to boot.

it's obvious that the Federal Reserve was much more important in financing U. as percents of total U.S.S. as we suggested in Part 3. because our foreign creditor friends have been doing all the heavy lifting. And finally. And the reason. to pre-crisis levels as the Federal Reserve unwinds those loan programs.S. so the Federal Reserve didn't have too. Here I suggest are the numbers to prove it. Looking at the bigger picture. government has been taking more and more of America's national savings. you can also see quite clearly that since the 1980s foreign creditors have been doing all the heavy lifting. Let's start with the 50 year record of Federal Reserve purchases of U. Let's zoom in on the recent purchasing trends of the Federal Reserve against foreign creditors: . until perhaps now. government debt sold to and held by the public: More importantly. government borrowing and spending 30 years ago then it is today. as you can see.S. That is. government debt held by the Federal Reserve and debt held by foreign creditors. at least in dollar terms. the Federal Reserve is rebuilding those positions.to bail out a failing financial sector. You can see that inverse relationship even better by trending U. government debt against foreign creditor purchases of government debt: Note the generally inverse relationship.S. so the Federal Reserve didn't have too. this despite the fact that the U.

S. In fact. On January 8th.S. to explicitly guarantee without limit the debt obligations of the government-sponsored enterprises Fannie and Freddie (GSEs). supported by all three of the government's tax venues. it is really buying the debt of the U. where I made the case that the recent action by the U. And that also means that when the Federal Reserve buys GSE debt.S.S. With this in mind. another American taxpayer nightmare. this is not what one should call the beginnings of a wholesale inflation.S. effectively makes the GSEs divisions of the U. isn't this recent surge in Federal Reserve purchases a bit deceiving? As Ben Bernanke has said. government treasury debt. it is ballooning them. government debt. let's have a look at the purchasing activities of the Federal Reserve and foreign creditors in GSE debt. government.Take note of the last few years. That means GSE debt is indistinguishable from U. government holdings to pre-crisis levels. government debt to pre-crisis levels. treasury. I penned an essay entitled Fannie and Freddie. offsetting the unwind of the Federal Reserve's credit crisis loan programs. the Federal Reserve has stepped up its purchases of U. the Federal Reserve is merely returning its holdings of U. And as such. focusing on the recent trends: . as foreign creditors have pulled back. You might say. government.S.S. the debt of the government-sponsored enterprises Fannie Mae and Freddie Mac. and as such. Plausible argument if it wasn't for the fact that the Federal Reserve is not simply returning its U. Clearly. by buying mountains of the newest form of government debt.

So.S. And as we saw in Part 3.S.S. this through December 2009: . if you buy my longer-dated GSE debt. Indeed. Well. the Federal Reserve against foreign creditors: Foreign creditors are pulling back on their combined purchases of government and GSE debt. Have a look at combined U. government debt. taken as whole. government debt. one last metric for your consideration. government and GSE purchases. government get your house in order and prove to us you will not simply resort to the printing press to pay your bills. have a look at the recent trend in money supply growth. this Federal Reserve call to action. the picture is not pretty. but over the last couple of years they have been selling GSE debt to the Federal Reserve with gusto. perhaps even the beginning of wholesale inflation? Before you answer that question.Interesting. no? Foreign creditors may still be buying U. don't expect too much of the former and expect a lot more of the latter. But until you. And the Federal Reserve is buying both to fill the void. the U.S. I'll buy your shorter-dated U. government's borrowing needs when these needs are a growing multiple of U.S. this is what any self respecting bond investor would do when they begin to feel the value of their investment is at risk ² become cautious. shorten up on maturities and make sure you know the location of the exit door. and then some. For sure. none of these money printing activities by the Federal Reserve is inflation if it isn't translating into growth in the money supply. year in and year out.S. savings. Indeed. this should come as no surprise when America can not possibly finance the U. is this the start of some nasty inflation to come. Perhaps what foreign creditors are saying is this: Sure.

it will eventually reduce the value of that money to zero.S government-Federal Reserve tag team with a bent to fill all government borrowing and spending gaps with money printed out of thin air. government.S. government. but both Peter and Paul are about to get fleeced. foreign creditor restivenessturn-fear and a U. not only are we looking at a defacto national bankruptcy. Still early in the game. on its way to bankruptcy.S. He is also is a retired Investment Banking professional. government spending largesse. As I discussed in Part 1. we Austrians can't think of a more sinister tax than the inflation tax. government. but the beginnings of wholesale inflation this may be. the hard earned savings of anyone holding that money. U. part 1 U. but when pursued without limit. part 2 U.S. is growing at double digit rates and it is approaching decade highs to boot. the Austrians formulation of the "true" money supply. and with it. most recently Chief Operating Officer for the Bank's Cash Equity Trading Division. a great admirer of the US founding fathers Thomas Jefferson and James Madison and a private investor. Looks like the start of some nasty inflation to me. part 3 Michael Pollaro writes a column called The Contrarian Take. on its way to bankruptcy.S.While I will leave a definitional discussion for a future post. He is a passionate free market economist in the Austrian School tradition. Not only does printing money steal purchasing power from Peter for the benefit of Paul. TMS. its mission to present thoughts and ideas on important financial market and economic trends from the perspective of a freemarket. Austrian economist. on its way to bankruptcy. . If these trends continue ² U.

Naturally. It was obvious to White that simply boring a hole in the ground to extract vastly more quantities of oil at ludicrously low prices was a huge capital saving innovation that greatly shortened the production process. increasing savings is what makes an expanding capital structure possible. In other words.) The other and more advanced fallacy stated that technology had resulted in less capital and labour per unit of output. The very opposite of what he . the capital economising argument was used as a criticism of Böhm-Bawerk's approach. Therefore. while all the time dramatically driving down the price of kerosene. That the layman should fall prey to them is to be expected. seeing only the immediate effects of a particular policy or investment decision. It is.US savings and investment: facts and fallacies Gerard Jackson BrookesNews.Com Monday 12 April 2010 Economics is a highly theoretical discipline with particular characteristics of its own. Before this development oil was produced by whalers which involved a very lengthy and complex production process. the main one being that economic problems tend to require long chains of complex reasoning. All of these tasks required production processes that dwarfed anything that went into whaling. One was that a new economy based on information was emerging in which "gain sharing" would replace rent. There is a great deal of concern with respect to the virtual collapse in Americans' personal savings rate ² and rightly so. White's 'capital saving' innovation was only able to yield its greater total output through investing in longer production processes. It is this inherent difficulty that gives rise to an abundance of fallacies and explains why people. This brings me to American investment and productivity. Böhm-Bawerk developed production structure analysis which showed that production takes place in stages and that has an economy progresses these stages multiply and become more complex and productive. this why America was able to grow with very little savings. The idea of capital saving investments is an old one. ship yards and docks had to built. Oil rigs became more complex as did refineries and huge oil tankers.) Let us take a look at the Clinton boom. In other words. Horace White produced the example of oil extracted from bores as an capital saving innovation. (That this is like saying that Americans don't need farming and fishing because they have supermarkets is the result of being unable to grasp even elementary economic reasoning. not only was capital a substitute for labour but capital-saving machinery had reduced the need for additional investment which had created even more advanced products. (One only had to think of what was involved in just designing and building whaling ships). tend to fall into the fallacy of composition and assume the same must hold for the economy as a whole. in my opinion. Like all economic fallacies. Now two dangerous myths ² one a crude derivation of the other ² emerged as an explanation for the 1990s economic surge. that some economists should do likewise is a disgrace. With information as a new and vital factor of production productivity and living standards would continue to rise even as manufacturing disappeared. Now this is not a piece of esoteric economic thought. Or did it? Drilling for oil resulted in huge new investments being made not to mention developments in engineering and refining. there is nothing new in this one. very important in contributing to our understanding of what happened to the Clinton and Bush booms and what needs to be done today. (Overlooked is the embarrassing fact is that Keynesianism should welcome such a collapse. wages and profits. Curiously enough.

that is until Obama was elected. While entrepreneurship drives an economy only savings can fuel it. Part III Gerard Jackson is Brookesnews' economics editor . that all America needed is the net had clearly never thought about what it really takes to supply it with cables and electricity let alone those little things called chips. Only leftist fanatics and those who think increases in GDP and utilisation are the same as increases in capital formation will fall for this leftist garbage. In short.) In addition.claimed. it takes a lot of investment in manufacturing. If the process was not halted or reversed then real wages would inevitably decline. The result is that manufacturing as a proportion of GDP starts contracting while services undergo an excessive expansion. This would conceal for a time that had these inventions been used in lengthier processes the yield would have been even greater*. Technology can come to the rescue for a time by rendering some shorter processes more productive than the older but lengthier ones. But Böhm-Bawerk pointed out that White's criticism rested on the implicit assumption that the capital saving invention was progressively capital-saving. Nevertheless. they are not capital saving and they are not substitutes for labour. It is now 2010 and American savings appear to be facing extinction. This dynamism (denied by some) has. This should help make it clear why more advanced products always require lengthier production processes and not shorter ones. Hence those who argue. White failed to see the flaw in his argument because he could not take it beyond one stage. Eventually productivity and the growth in real wages would start to slow. despite their rather loud assertions to the contrary. Obama's policies amount to nothing less than a sustained statist assault on economic growth. more regulations. caused more productive techniques to be developed. A massive expansion of the monetary base.000 and the need for savings will have disappeared was truly the stuff of fairy tales. The fundamental point is that rising productivity comes from investment. a proposed attack on energy production. (I find it rather amusing that those Australian economists who call themselves Hayekians remain totally ignorant of Hayek's contributions to capital theory and the trade cycle. The conclusion of some that America was becoming the land of super-abundance where the average annual real income would be $200. putting it rather crudely. This is the basic reason it produces more for less. massive rises in taxes. I believe. borrowing and spending. Not all the destructive effects of inflation are well known ² and Keynesian doctrine is inflationary to the core. That US investment is still more productive than Japanese and European investment is due entirely to it having freer markets. those who deal with only one stage of a product tend not to see how complex the complete chain of production is. continual injections of money with the intention of encouraging consumption have the effect of directing more resources to the lower stages of production. And what does the Obama administration and its brilliant economic advisors offer? Vastly more of the same destructive nonsense that brought America to its present sorry economic state. no matter where they come from. which in turn tend to be more labour intensive. And this brings us to the present. No country can continue to prosper in the absence of savings. As Hayek explained sometime ago. Because he could see that drilling for oil was a shorter and more productive process he failed to see that incorporating the process into lengthier production processes would yield even great output. *The Positive Theory of Capital and Its Critics.

. (C. A. Banking and the Business Cycle. These people are making the same mistake that many conservative commentators have made in that they are assuming recessions to be indeed cyclical.Is the US economy really recovering from recession? Gerard Jackson BrookesNews. F.Com Monday 12 April 2010 Some Obama supporters are already bragging about how the 'recovery' will ensure him a second term and therefore save his statist counter-revolution. (Ibid. p. McManus and R. During that dismal period in American history it was noted by minds far more astute than those one now finds teaching economics at Harvard and MIT that our present difficulties are viewed largely as the inevitable aftermath of the world's greatest experiment with a "managed currency" within the gold standard. it is the disequilibria among particular paces induced by bank credit expansion (or contraction) that is of chief interest and importance for business cycle theory. should provide interesting material for consideration by those advocates of a managed currency which lacks the saving checks of a gold standard to bring to light excesses of zeal and errors of judgment. incidentally. The following chart shows the change in AMS (Austrian money supply*) and industrial production from September 2008 to last March. The one thing that Chicago monetarists and Austrians can agree on at this point is that the socalled 'recovery' is driven by Bernanke's criminally loose monetary policy. Because there are no one-to-one relationships in economics we can never know how long these time lags will be. p. Nelson. The actual and crucial role that money plays in the boom-bust cycle is rarely discussed in the media. even by monetarists who labour under the egregious error that so long as a "managed" money supply 'stabilizes' the price level there can be no boom and thus no bust. This means any downturn is eventually reversed and that this is now the case. if they were right then there would have been no Great depression. Macmillan and Company 1937. and. Not so fast. W. There are always time lags between changes in the money supply and changes in production. T. 56) A stable general level of prices in itself means little. Of course. All we can really do is plot them after the event. particularly the policy disasters that the Hoover/Roosevelt administrations inflicted on the country. 191). It also means that these people have learnt nothing from economic history. Phillips. This also explains why the P/E ratio has been inflated.

Critics could argue ² and probably will ² that the employment figures for last month clearly indicate a rising demand for labour. This expansion worked out at an annualised rate of 56 per cent. It was this monetary surge that was driving the economy. So private payrolls show an increase while the ADP report shows a loss. We have a curious situation in which there is a recovery sans an increase in the demand for commercial loans. there was a net loss of jobs. The latter is the Circulator. the chart reveals a rapid monetary expansion started in February and continued throughout March.9 per cent in March. At the moment there is no capital formation and hence no real growth is taking place.) Nevertheless. If it's the latter then America is heading into an extremely inflationary period with all that that entails. On the other hand. averaging an annual rate of 33 per cent. I understand always ready money. the BLS's U6 measure of unemployment (includes the underemployed and long-term unemployed) reached 16. 'Circulating Medium'. Navy Bills.From September 2008 to the following June money supply zoomed by about 25 per cent. The fact that commercial and industrial loans have dropped by about 17 per cent during the last three months would clearly indicate that the contraction is squeezing commercial borrowing. it should be noted that the contraction means that the quantity of bank deposits have also been falling. as I have always understood that term. Note: It is a serious error to confuse an increase in GDP with economic growth. Yet these figures are somewhat dubious to say the least. Then we have the situation of a contracting money supply which in itself strongly suggests an aborted recovery could be on the horizon. seven months after the monetary decline began. we apparently find the same phenomenon with respect to labour. *There are some differences among Austrians as to what ought to be included in a definition of the money supply. In addition. I try adhere to Walter Boyd's view who in his open letter to Prime Minister Pitt in 1801 defined money in the following terms: By the words 'Means of Circulation'. Or would it? If a monetary contraction was responsible for such a squeeze one should expect the demand for business loans to drive up short-term rates. Exchequer Bills. which is the process of capital formation. Whether this extraordinary growth is merely a spike in a downward trend or an indication of accelerating monetary growth remains to be seen. including the share market. Even if the 123. (One should not of course base any predictions on a single month's figures. the former are merely . What needs to be stressed is that both measures should be rising together. We can infer from this that the reports from the banking sector that business demand for loans has been very weak are indeed accurate. or any other negotiable paper. Right now the country has some very dodgy employment figures that even if accurate still do not paint an optimistic picture. which are used almost as synonymous terms in this letter. Moreover. which is not the case. whether consisting of Bank Notes or specie. A recovery that takes place without an increase in the demand for business loans and labour is a very strange beast and ² in my opinion ² a sickly one.000 from February to March on a seasonally adjusted basis". In January industrial production flattened.000 gain in jobs is accurate it would be a very meagre result given the rate at which the workforce is increasing. meaning that business is not borrowing. in contradistinction to Bills of Exchange. The ADP reported that "nonfarm private employment decreased 23. Since last June money supply has entered a downward trend. There is also the fact that commercial and industrial loans continue to shrink. In short. and 'Currency'. which form no part of the circulating medium.

000.000 in cash and deposit it in my savings account it cannot be seriously I argued that I have now expanded the money supply by $10. Nevertheless. Gillet. We now deduce that credit transactions do not alter the money supply. If I take $10. A Letter to the Right Honourable William Pitt on the Influence of the Stoppage of Issues in Specie at the Bank of England. It therefore follows that if the bank lends out that $10. money is the medium of exchange. T. Whether we include savings deposits in our definition depends on whether or not it involves double-counting. p. 2). and other Commodities. 2nd edition. Are savings deposits money? This presents the problem of double-counting. (Walter Boyd. on the Prices of Provisions. Gerard Jackson is Brookesnews' economics editor . In simple terms. difficulties do arise. London.000 the money supply still remains unchanged.objects of circulation. 1801.

Is it the Democrats' neo-fascist economics that is holding back recovery? Gerard Jackson BrookesNews.7 percent: for 1935 and 1936 the respective GDP figures were 8. It ought to beggar belief that an experienced political party finds it inconceivable that the raft of taxes it intends to unleash in January next year . (If this happened under a Republican the Democrats' lapdog media would still be crucifying him.) Whichever way the administration and its friends try to spin the latest figure there is no doubt that it is a very poor result and below expectations.7 per cent in 1983. there was no genuine increase in net capital accumulation.9 per cent.8 per cent in November 1982.8 per cent for the rest of the decade1.1 per cent and 14. the one Democrats blame on Reagan. Unemployment had peaked at 10. This is not as great as it may seem. In 1934 GDP turned positive. Then there was the 1981-1982 recession. It should be cause for particular worry for the Democrats that the demand for labour is not responding to the current changes in GDP. meaning there was no real growth. growing by 7. Let's take a historical perspective.Com Monday 3 May 2010 The first quarter GDP figure of 3.2 per cent 1984 before declining to 7. Sound economics ² meaning free market economics ² explains why government spending does not drive genuine economic growth but sound economics is something the Democrats resolutely refuse to accept. In this respect the latest figure is truly dismal. What is worrying most analysts is that this recession is not playing out like any other post-war recession.6 per cent. onerous policies and costly regulations.2 per cent should be a sobering reminder of the anaemic state of the US economy in light of the fact that the annual rate for the fourth quarter of 2009 was 5. When this process gets underway unemployment should begin to decline. In a very important way it is not even playing out like the Great Depression. in 1983 21 weeks was the mean average for unemployment: it is now 31 weeks. Fixed investment was insignificant. giving the second quarter a drop of 43. Nor did there seem to be any hiring by the private sector even though the media picked up on th news that e consumer spending jumped by 3. All of this is bound to be disappointing to those who believe ² as the Democrats apparently do ² that government is the solution and never the problem. It then started a rather slow but steady decline. rising to 11.7 per cent. In other words. Instead we find the unofficial rate of unemployment stuck at about 10 per cent and the rate of growth in GDP suffering a major reduction after experiencing a significant surge.3 per cent in 1985 after which it never fell below 5.1 per cent in the previous year GDP then leapt to 8. Inventories amounted to 1. That the economy's response to Obama's economic policies has been lacklustre to say the least can only cause them consternation and fuel their desire to seek out scapegoats rather than re-examine their statist dogma.57 per cent with the remainder basically consisting of government spending and private consumption. This has not been the case under Obama. It is sound economics that warns that one should not expect a positive response from business if it is expecting you to let loose in the near future with an avalanche of burdensome taxes. After diving to 4 per cent in 1982 from 12. Frequent readers know that I define growth not in terms of GDP but as a process of capital formation. What should happen is that as the recovery gathers steam the growth in GDP starts accelerating (the rate at which the level of idle capacity is falling speeds up).1 per cent. Unemployment also began to fall during these years. In both cases it is evident that the unemployment rate responded quickly to the improvement in GDP. Furthermore.

So at this point we can conclude that what makes the present recession drastically different from all the post-war downturns is a Democratic Party that is now so statist one is entitled to call it socialist. who once declared: "Our task is not to study economics but to change it. Adam Tooze. 1 Bureau of Economic Analysis: The GDP per centage change is based on current dollars. Overy. Clarendon Press. If the Democrats insist on clinging to their statist (neo-fascist) approach to economics I don't see much hope for the US economy. 2 The following books are essential reading for those who are interest in learning how fascist economies operated. 112. Günter Reimann. The Wages of Destruction. 1939. Penguin Books. For these people there really is no such thing as economics. J. New York: Vanguard Press. 2006 Gerard Jackson is Brookesnews' economics editor . (I would say it is socialist in a neo -fascist sense2). G. (Cited in Robert Coquest's Harvest of Sorrow.) It is a belief that any fascist would enthusiastically endorse. 2002. We are bound by no laws". 1995.would have a detrimental effect on business expectations. a Marxist economist. War and Economy in the Third Reich. Only a party consisting of dogmatic statists could possibly find this surprising. The Vampire Economy: Doing Business Under Fascism. Strumilin. Pimlico. They seem to have wholeheartedly adopted the view (along with the vicious tactics of the hateful Saul Alinsky) of S. p. R. GDP might continue to grow or even accelerate somewhat but under these conditions I cannot see a sustained process of economic growth emerging.

like any other product. 1965. Westminster Reviews. 1826. something that mining executives and CEOs clearly do not realise. p. To an informed observer this makes as much sense as saying that I like the idea of taking strychnine rather than arsenic. Both taxes are toxic but without a doubt the rent resource tax is the most lethal of the two. The TrueTheory of Rent. (Principles of Political Economy. the fact remains that he fully understood that the logic of . successfully demolishing it. Yet some 180 years later we have the head of the Australian Treasury promoting this financial monstrosity and a leading mining CEO embracing it. University of Toronto Press. Hence land that commands a higher price than marginal land does so because it is more fertile.000 then the second mine should be taxed $99.000. The company wisely ignored his suggestion.)2 What this means in practise is that if the country had only two mines. 6. To understand why this tax is so toxic one must first understand it. Not so. Therefore rent is a differential. The existence of marginal land is irrelevant. and would not have existed without them.Com Monday 3 May 2010 The mining industry has got to be its own worst enemy. Routledge & Kegan Paul. p. the price of any unit of land is. The first thing to note about the theory of economic rent is that no sooner had David Ricardo promoted it than his extremely able contemporaries went on the attack. what any potential buyer is prepared to offer is determined by the productivity of the land.000. Moreover. And this is exactly what James Stuart Mill proposed. John Stuart Mill made this point absolutely clear when he categorically and correctly stated: The rent of land consists of the excess of its return above the return to the worst land in cultivation. Whether Mill was junior was merely exercising filial piety in basically making the same proposal is neither here nor there. Never a man to shy away from the logic of his own arguments he not only called for the government to impose a 100 per cent tax on all agricultural economic rents he also suggested that the East India Company do the same in India. 419. the return in excess of the marginal activity. The theory emphatically states that the level is always set by the marginal operation.000. with one earning $1000. In other words. A few years after Ricardo's death in 1823 there was scarcely a person left in Britain who adhered to the doctrine so thorough were the assaults. Atlas Iron's CEO David Flanagan was reported to have stated: "I like the idea of a resource rent tax which takes the place of a state royalty ² but I don't want both".) Now the mining industry has swallowed the line that there exists a theoretical level above which a resource rent tax would apply.000 and the other $100. (Thomas Perronet Thompson. But as his critics pointed out.Ken Henry's fallacious resource rent tax and the mining industry's failed response Gerard Jackson BrookesNews. determined by supply and demand. the higher returns are determined by the differential.) One contemporary critic wittily observed that according to the theory that Ken Henry is thirsting to impose on the country men of six feet exist because there are men of smaller altitudes. According to Ricardo and his disciples economic rent is a surplus created by the emergence of marginal or what he would call zero-rent land. (This is clearly the germ of a productivity theory.

(The Mills are excellent examples of a certain type of personality that can be blinded by its own intelligence. according to the logic of this theory the existence. When the Queensland Government decided it needed to raid even deeper into Mount Isa Mines' profits it dropped its then-royalty scheme in favour of imposing a royalty on the mine's tonnage. A full-blooded resource rent tax would have destroyed these industries. perhaps he would care to explain why). of marginal wheat farmers determines the return (surplus) to supramarginal wheat farmers and that taxing this difference will have absolutely no effect on investment and output. In addition. These people are overlooking the obvious fact that the real problem is government spending. What CEOs like David Flanagan need to understand is that if you want to discredit a proposal you really should start by attacking the premise upon which it is based. etc? So why doesn't he? Is it because somewhere is the deep recesses of his bureaucratic mentality there is the dim realisation that the theory is indeed false and that if it were fully applied ² as its logic demands ² it would in fact destroy the mining industry? Henry has argued that a resource rent tax on the offshore oil and gas industry did not affect investment and therefore the same would go for the mining industry. the facts do not support Ken Henry's contention that the tax is costless. The result was the locking up of resources. Gerard Jackson is Brookesnews' economics editor . Moreover. By raising the tax burden these greedy politicians raised the company's cost curve thereby restricting output by locking up valuable resources. A sufficiently large partial resource tax would have the exact same effect. one has to be incredibly naive to think that Henry's tax would not lead to even greater government profligacy.) It follows that if Ken Henry really believes in the theory of economic rent he will not hesitate to not only demand that mining companies be fully taxed but that the tax be extended to agriculture. This is what Andrew Forrest. when the mining boom ends Australians will be facing increased taxes and increased government borrowing in order to maintain government spending. No matter what some of our 'rightwing' economists say the theory of economic rent is pure fiction and there is nothing "problematic" about it. for example. maybe Henry thinks Brazil doesn't have any iron ore. (If Henry thinks otherwise. was getting at when he said that a rent resource tax would reduce investment in Australia while boosting it in countries like Brazil.the concept of economic rent leads directly to a 100 percent tax on the alleged surplus. Then again. In the case of Henry's tax the premise is utterly false. This means that even if other taxes are cut. What Henry and his supporters ² none of whom appear to fully comprehend the nature of economic rent ² have obviously missed is that at the very best it was only a partial tax on 'rent'. chief executive of West Australian iron ore miner Fortescue Metals Group. A final note: It is argued that Henry's tax will reduce taxes elsewhere. And why stop there? Why not do the same to supermarkets. After all. I suggest that Mr Flanagan and similar-minded CEOs start seeking out informed opinion if they wish to protect their industry against predatory politicians and activist leftwing bureaucrats. factories. milk bars.

something they would never do under a Republican administration. Very few people realise America actually experienced this phenomenon.) Keynes was once challenged for changing his mind on monetary policy. When the war ended the use of these assets to demand consumer goods offset the reduction in government spending by maintaining the demand for Labour.) To the utter surprise of these Keynesians. instead of the economy rapidly sinking into depression with unemployment rocketing to 8 million or so it boomed and full employment was maintained at under 4 per cent. Paul Samuelson for one expected an unemployment rate of 8 million.) Now Keynesians tend to treat surpluses as contractionary and yet the US budget went into surplus in 1947 where it remained until 1950. Their solution was what became the fashionable Keynesian nostrum of maintaining government spending. the country's phony media are frantically pushing the idea that happy days are on the way. He tartly replied: "When the facts change. (In case you didn't know. The fiscal years 1944 to 1947 saw spending dive from $95 billion to $36 billion ² a $59 billion cut.) Any conundrum here is a direct result of fallacious economic reasoning. sir?" Yet when his disciples were faced by the post-war facts of an enormous drop in government spending accompanied by the restoration of full employment despite mass demobilisation their response was to rationalise them away in terms of their Keynesian paradigm.Com Monday 3 May 2010 The latest quarterly survey by the National Association for Business Economics reports that the stimulus did not promote recovery. This prevented the return of mass unemployment and the emergence of large-scale idle capacity. They did this by conjuring up the phantom of pent up consumer spending. 6 January1947. Very plausible but utterly false. (During the same period defence spending fell by about 76 per cent. (Incidentally. an astounding 62 per cent reduction. students won't find any of these facts in any economics textbook. (Harry Truman. To begin with. it is estimated that consumer spending only rose by about $14 billion while we know that government spending dropped by $59 billion. This achievement is all the more amazing when we consider that at the same time "fourteen million World War II servicemen [had] returned to civil life". It also follows that if the demand for labour keeps rising after spending is slashed then there must be something seriously wrong with the theory. According to this explanation war-time spending by the government greatly restricted personal consumption which resulted in people accumulating large amounts of financial assets. During WWII economists fretted that once peace returned and military spending severely curbed the country would return to the same levels of unemployment that prevailed in the 1930s. State of the Union. The idea that the level of output and employment is a function of aggregate spending was a very old fallacy that Keynes successfully resurrected and which is now part of orthodox economic theory even though it has been thoroughly refuted by experience. . What do you do. I change my mind. (The man was notorious for continually changing positions). Despite the fears and objections of these economists post-war spending was indeed drastically slashed.Why economic policies inspired by the Great Depression fail Gerry Jackson BrookesNews. If the spending approach is correct then it follows that a significant reduction in spending would quickly cause output to contract and unemployment to rise. including savings accounts.

7 15. and R.9 23. Consumption in the necessary order of things is the effect of production. (Inflation not only raises nominal GDP it also reduces unemployment by lowering the cost of labour relative to the value of its marginal product2. For the classical and other pre-Keynesians demand can come only from production. Maintaining real wage rates significantly in excess of productivity prevented real prices and costs from adjusting to the new monetary conditions resulting in unemployment being kept at a tragically high level. (James Stuart Mill. One should also note that GNP started to rise when the real adjusted wage began to fall. Hutt. The following table clearly shows that the PARW1 (the inflation adjusted real wage divided by productivity) tracks the unemployment rate.Therefore aggregate spending must have contracted by $45 billion.6 17.4 -8. 1979). Commerce Defended. to demand something one must first offer something up.9 21.2 PARW Jobless rate 2 Canadian jobless 3. not production the effect of consumption. 79). (In fact. In other words. LibertyPress. This is precisely what marginal productivity theory predicts. Hoover and Roosevelt implemented policies that ensured that production and hence demand would be severely curbed.4 11.7 20. John Stuart Mill succinctly presented this view when he declared that "demand constitutes supplies".4 adjusted 8. Irrespective of what Keynesians assert real wages did exceed productivity during this period. This leads to the conclusion that the problem in the 1930s was not demand deficiency but withheld capacity.5 -2.1 7.5 14.) Year 1 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 100 113 125 128 130 125 117 114 122 132 134 3.0 17. No matter how much is held in the form of financial assets by the public it cannot command an increased quantity of consumer goods unless the capital goods necessary for their production are available.1 11.2 8.9 Productivity real wage. For Keynesians supply creates demand.7 13. 1808. H.2 12. C. p. Therefore the real pent up demand could only be on the production side. The Keynesian Episode: A Reassessment. And an increase in the quantity of capital goods can come only from an increase in the quantity of savings.0 -4. This would be obvious in a barter economy.1 16. not postponed consumer demand as asserted by Keynesians.3 14.1 5.1 rate GNP 1 9. . figures show a drastic fall in GDP at the time even though there was full employment and a rapid expansion in the production of consumer goods. Once the war ended all of the productive capacity that had been devoted to producing war materiel was now directed to the production of consumer goods.5 7.6 24. Mill's father explained that consumption is posterior to production.1 11.6 19. Baldwin. (W.1 14.8 9.4 -9.) The idea that pent up consumer demand was responsible for the post-war recovery does not hold.3 19. as it is impossible to consume what is not produced.9 14. This is where the increased demand came from.

453). When hostilities ceased industry found costs and relative prices were finally being allowed to adjust to real economic conditions.9 per centage points higher Once the country was at war the Roosevelt administration did what every government at war does ² it resorted to the printing press. 1 These figures were constructed by me.2 The Canadian colum is particularly interesting in that though Canada had no New Deal her employment record during the 1930s was vastly better than the US's to the extent that on average the US unemployment rate was 3.5 per cent (Federal Reserve Bulletin. So I guess Americans will have to put up with Obama and his supporters blaming the market for the present state of the economy instead of political meddling and the Fed's appalling monetary mismanagement. The lesson for today should be crystal clear. (This process even repealed for a time Roosevelt's minimum wage rate). In Hutt's terminology withheld capacity had been released and it was this discharge of productive power that drove the post-war economic boom. p. 2 From 1933 to 1937 the wholesale price level rose by 21. For the same period the consumer price index rose by about 11 per cent (Historical Statistics of the United States). The US recession and the myth of 1937 The Great Depression: fact versus myths America-hating leftists lie to protect Obama's dangerous economic program Gerard Jackson is Brookesnews' economics editor . However. Now one of the effects of this inflationary induced war-time boom was to cut real wages by allowing them to once again correspond with productivity. May 1941. I get the feeling that the last thing the Obama administration is interested in is learning anything from economic history let alone allowing the free market to do its work.

Looking at the period 2006±2007 we find that revenue was about 18. Instead of revenue from the tax diving by $5 billion or so ² as predicted by some ² it zoomed by $133 billion (2003-2007). What I have done. We can deduce from this that reducing this tax will stimulate asset sales and hence tax revenue. capital gains taxes act as transaction taxes. (It's facts like these that leftists choose to ignore). Therefore they can be avoided through the simple process of not selling those assets that are subject to the tax.Com Monday 24 May 2010 For sometime I have been getting a stream of emails from leftists about the state of the US economy. corporate and income tax revenue rise by 40 per cent while revenue from those dreaded millionaire households increased from $132 billion to $273 billion. This is exactly what happened. Not once did I ever blame a single president for a recession that happened under his watch. Irrespective of what leftists assert. It follows that the higher the effective tax the lower the level of investment and hence output. Not one of these critics revealed the slightest acquaintance with economics or economic history. Everyone ² except leftists ² understands that if you want more of something you reduce the cost of producing it and vice versa. is argue that ² in my opinion ² Obama's economic policies. Before those cuts were implemented in 2003 business investment and spending had been contracting for just over two years. lifting a capital gains tax should spur investment and output while raising revenue. even though I have explained in numerous articles that it is lousy monetary policy that causes the so-called boom bust cycle. meaning his grotesque spending binge. (Please excuse my somewhat laborious and repetitive approach to this subject but leftists tend to be very slow learners. I also got a strong impression that much of their nonsense was par for the course in US university faculties. This trend was immediately reversed once the tax cuts passed: non-residential fixed investment started to rapidly expand and manufacturing output zoomed. In fact. So how could this happen when opponents of the cuts ² like the Soros-funded 'think tank' Center for American Progress ² predicted a fiscal disaster? Because to be truly effective cuts must operate through the production side of the economy. Therefore. the same as 1978 when the top tax rate was 70 per cent. Let us now take these leftwing assertions point by point. Now apart from the fact that deficits come from Congress. which passes budgets and sets tax policy. Given the evidence.The left get it wrong again: The market didn't cause the crisis. any argument to the contrary is perverse. his impending wave of taxes accompanied by a permanent blizzard of form-filling along with a looming barrage of other interventionist policies. So. and not any president (and the Dems of been charge of both Houses since the mid- . however. The second line of attack is to blame the Bush tax cuts for Obama's ideologically-driven spending mania. tax revenues rose above the historical average. especially when they are wearing blinkers. far from reducing tax revenue the 2003 cuts raised it. Even the most blinkered ideologue should have seen that these two criticisms are very different things.5 per cent of GDP. Capital gains are also profits which fuel investment. has greatly retarded recovery. I am frequently accused of blaming the recession on taxes and "Obama's spending and socialist policies". Revenue from the reduced capital gains tax for the period 200308 zoomed by 70 per cent and dividend taxes by 30 per cent. which is precisely what we got. demonstrating that a high tax rate is not necessarily a high revenue rate.) The period 2004-07 saw Fed revenue jump by $750 billion. bad economics and political meddlers did that Gerard Jackson BrookesNews.

It was a Republican majority in both houses that checked him. Of course I didn't.1 per cent.000 or more dropped you in the top 1 per cent bracket while $108. Clinton was able to use the resulting 'peace dividend' (cuts in military expenditure) to balance the books. He is now busy trying to raise spending by a further $200 billion. whether you use a per centage of GDP or a per centage of revenue as a measure the Kennedy cuts were about 100 per cent bigger. The idea that Clinton was a brilliant economic manager is pure hogwash. Moreover. it should be recalled that under Reagan the defence budget as a per centage of GDP was far greater than current defence spending (he was fighting the Cold War) and yet his deficits were still less than half of Obama's. the one the Democrats bitterly opposed. In addition. This was from a 2008 study by the Organization for Economic Cooperation and Development. His 'blame-Bush' supporters also ignore the fact that he raised spending in 2009 by about 18 per cent over the 2008 level. This is where someone tries to excuse his own bigotry or bad behaviour by accusing critics of doing the same thing. Nowhere will you find an article by me attacking Obama's deficits. $300. the stimulus and bailouts: It's also a fact that as a Senator Obama voted for all the big spending programs. Furthermore. despite the wars in Iraq and Afghanistan.000. It's equally true that the 2009 deficit was driven by falling revenues. I have warned that focusing on deficits provides big spenders with an excuse to raise taxes.904 put you into the top 10 per cent. What is ignored is that America "has the most progressive tax system and collects the largest share of taxes from the richest 10 percent of the population". "You didn't attack the Republicans for running deficits". There is no logical way by which his supporters can blame the Bush tax cuts for this fiscal vandalism. Oddly enough. the Soviet Union collapsed. As it happens.14 per cent) in 2007. In fact. And let us not forget that the very same Clinton now supports Obama's utterly reckless spending program. If the critics . something like 47 per cent of US households do not pay federal income taxes. As for Iraq and Afghanistan. It will be 25 per cent for 2010. $250. Not once did he raise a single objection. It is also argued that Bush's "colossal tax cuts for the rich threw the economy out of balance". it is never explained why these people need to be punished for being successful.18 per cent ² but in 2009 it rocketed to 9. these massive Kennedy cuts didn't sink the US economy. An income of $388. The top 1 per cent paid 40 per cent of all federal income taxes while the top 10 per cent paid 70 per cent and the top 50 per cent paid 97. What makes Obama's deficits almost mesmeric is their sheer size. Is it someone earning $100. thanks to Reagan's anti-Soviet policy. a peace-time record. What I find interesting is that those who scream about the 'rich' never make an attempt to define rich. It seems that to Democrats only Republican tax cuts are bad for you. what matters is not deficits but spending. The Bush cuts were very modest by historical standards.term elections) the deficit only stood at $160 billion (1. Although I consider $388. which raises the question: How come that deficit was so low if the 2003 tax cuts are responsible for the current deficit? It's true that the following year the deficit rose to 3. Pure rot. No attack on the Bush tax cuts is complete without an attack on the 'rich'. Then we have the marvellous President Clinton and his budget surplus. war expenditure is temporary while Obama is making his expenditure increases permanent. As I have written elsewhere.000 a rather handsome income I certainly would not say it made the recipient rich.000.91 per cent and the estimate for 2010 puts it in excess of 10 per cent.000 or what? Furthermore. and for the same reason I haven't attacked Obama on the subject. What is overlooked ² and deliberately so ² is that he started with a big spending program. Then there is the Tu quoque (you too) fallacy. I do have the tax figures for 2008. The tax structure is obviously very skewed.

The Fed kept rates too low (below their market levels) which expanded credit and set in motion a boom and a huge consumer spending binge. What is a fair distribution of incomes? 3. It would certainly keep the riff raff in their place. "Out of control consumer spending" was attacked as one cause of the crisis. He then said: "That doesn¶t mean the dollar gets trashed. this credit is created by fractional reserve banking. old story*. What is unfair about the present pattern of earnings and wealth? 2. I just deeply resent any effort by self-righteous wealthy activists to put barriers in the way of others. But since when has any president been responsible for how American citizens spend their incomes or how much they borrow? In any case. Whenever a member of the super-rich club calls for tax increases they are invariably the type that actually stop people from accumulating wealth (Teresa Heinz Kerry: You pay taxes. I do not envy the rich their good fortune. none of this will persuade those ideologues who think it's all due to "selfishness and greed". Another point is that Democrats like Obama and Kerry do not call for wealth taxes. In 1802 the English banker Henry Thornton warned that forcing rates below their market level would ignite a boom followed by a bust (An Enquiry into the Nature and Effects of the Paper Credit of Great Britain. the existence of other currencies does not determine whether a currency falls or rises. Steve Jobs. This line of thinking became known as the currency school. (The High Price of Bullion 1811).) Nevertheless. particularly those who made their own money. It starts speculative manias and fuels takeover booms. Finally. the boom-bust cycle is the product of fractional reserve banking and not capitalism. Larry Page and those Hollywood celebrity airheads. You see in order for the dollar to tank there must be other currencies that do well". can it ever be said that people are spending too much? Actually the answer is yes: when that additional expenditure has been created by the banking system. not drop. On the contrary. The same goes for Bill Gates. . as I have said so many times before: The market always gets the blame. George Soros. And of course it was Bush's fault. As John Stuart Mill said of envy: "that most anti-social and odious of all passions". For example. On Liberty. 1984. 1802). Sergey Brin. One argued that the deflation would be worse than the 1930s. (And you thought the Democrats were looking out for the little guy. Now ain't that odd. Sanka heiress Agnes Gund. Buffett has some 40 billion or so dollars in assets. for some reason many of these critics are fixated on deflation. Moreover. He in turn was followed by David Ricardo. This is an old. A currency can still collapse while the remaining currencies remain perfectly stable against each other. This is complete rubbish. 96). fractional banking destabilises the economy and brings capitalism into disrepute. The Fed is responsible for the money supply. In turn. The super rich ² who tend to support Democrats ² hold their wealth in the form of all manner of assets. If a genuine deflation set in the dollar would rise. Oxford University. p. And yet. This makes the boom-bust phenomenon a monetary problem. By what manner of reasoning did you reach your conclusions? I have asked these questions numerous times and have yet to receive an intelligible reply. Who needs that much wealth? Surely he needs no more than a miserable $50 million so why not tax away the rest and give it to all of those poor Americans Buffett ruthlessly exploited and then callously cast aside.believe these incomes are somehow "unfair" they should be made to answer the following questions: 1. In other words. of which credit is the greatest component. I don't). Of course.

They know nothing about economic history or the history of economic thought (most economists are no better in this respect) and they certainly do not know any basic economics. politicians did that. The decree of 1637 finally brought the bubble to an end by declaring that tulips were products that had to be paid for in cash and not with IOUs or other credit instruments. politicians did that. politicians did that. In other words. Capitalism didn't implement unsustainable welfare schemes. Capitalism didn't impose destructive spending programs on their countries. And capitalists are certainly not in charge of the money supply ² central banks are. Capitalism didn't run up massive government debts. The same fellow asserted that government jobs prop up the economy. There is no sign whatsoever of such an event occurring today. What they have are prejudices. politicians did that. not consumption. that is why I get nothing from them except leftwing drivel. These critics of the market don't have a theory. bank reserves will not be allowed to shrink. From 1930 to the middle of 1933 the money supply shrank by about one-third. This is why one needs a theory to interpret them. The more people you put on the public payroll the greater the tax burden will be on those who work in the private sector. Demand springs from production. "Helicopter Ben" made it clear he is prepared to flood the system with as many dollars as it takes to prevent a contraction. Gerard Jackson is Brookesnews' economics editor . Capitalism didn't impose burdensome tax regimes. causing a severe drop in prices. *A massive inflow of specie triggered an inflationary boom that that led to a huge amount of easy credit which produced the notorious bubble known as Tulipmania. Statistics tell us what happened but they don't tell us why it happened. They do not and cannot add to total demand. What we face today is not a failure of capitalism but of statism. Capitalists do not set economic policy. This was brought about by mass bank withdrawals. politicians do. These jobs are paid for out of taxes. And without a doubt.A deflation occurs when the money supply contracts. Even if there were.

taxes. But the boom-bust cycle is not a cyclical phenomenon and it doesn't come and go like the seasons. regulations and monetary policy. reported that its Weekly Leading Index fell to 125. Fingers are pointing at the 2. Far from being automatic the recovery process can be frustrated by interventionist economic policies. This came in at 0.6 in the week ended May 21.2 per cent many people immediately assumed that the upswing had finally arrived. warning that his "economic policy is one of incredible stupidity".Is the US economy facing stagnation? Gerard Jackson BrookesNews. As the economy reaches 'full' capacity the growth in GDP naturally decelerates. As a rule. I didn't buy it. According to the emails I used to get by "June 2010 the economy will be growing by 8% and unemployment will be falling. if inflation took off and money wages were allowed to lag behind prices then a rapid rise in nominal GDP would cut unemployment. (Of course. This period experienced GDP growth rates of 7 per cent to 9 per cent for about fifteen months with unemployment dropping from 10. Now it's accusations of how I "complain about deficits but never complained about Bush's spending". The recovery after the severe recession of the early eighties is an example of this process. which brings us to fixed investment.01. as if that justifies Obama's fiscal sabotage. But this inflation-induced reduction in the unemployment rate would quickly result in another bust.8 to 7. And this is exactly what has happened today.42 per centage points figure for consumption as evidence that there is still some real growth in the economy.Com Monday 24 May 2010 The economy has got a lot of Democrats spooked. And it didn't. What accounts for these rapid 'growth' rates is that as the economy recovers idle capacity and formerly unemployed labour is quickly utilised. I also said that the presence of Bernanke at the Fed created a complication. Obama's brilliant response to the situation is to continue jacking up spending. But genuine growth comes from capital accumulation. an easy monetary policy should have seen GDP accelerating after a time lag. This was down from 127. So when Obama supporters bragged about how 8 per cent growth rates from the middle of 2010 would keep Obama in the White House this is what they were referring to. a New York-based independent forecasting group.) The Economic Cycle Research Institute. When Obama emerged as a serious presidential candidate I raised the red flag in numerous articles. To tell the . Moreover. it is estimated that it would require an expansion rate of about 9 per cent to put a significant hole in the unemployment level. When GDP for the last quarter of 2009 came in at 5. I stopped getting this nonsense a couple of months ago. not consumption. the lowest level since 21 August last year. No matter which way the phony media try to spin it this is not good news. I have lost count of the number of times I argued that increased government spending would not bring about a recovery. producing a dismal annual figure of 0.2 percent in 18 months.04 per cent. This is because no one really knew how easy he would go on the monetary spigot. In my view the contrary factors at work were too powerful to resist. But I don¶t complain about deficits. It's been more than two years since the economy slid into recession. And that means we'll wipe the Republicans out in November". It just ain't going to happen. In 2004 I warned that the US economy was going to be facing "another recession in or around 2008". The revised 3 per cent GDP figure for the first quarter tends to confirm my pessimistic prognosis.2 the previous week. I complain about spending. Now in January 2008 I said that the manufacturing figures for the previous December indicated that the US was in recession.

6 per cent pa has caused consternation. I did warn last December that the monetary tightening* that started in June "will have a detrimental impact on economic activity".9 of personal income while income from government programs rose to 17. and God knows how much more on top of that he has got lying around. This process also helps explain what is happening to the US economy. *Reports that in the three months to April the contraction in M3 amounted to 9. In the first quarter of 2010 the per centage of wages paid by the private sector fell to 41. This study was no sooner released than this illustrious economist whined "that it would be a mistake for the US to rapidly wind down fiscal stimulus measures to bring down the deficit". But as I have already pointed out the money supply started to tighten in June of last year. From an Austrian point of view this can be explained in terms of capital theory and the structure of relative prices.2 per cent. This is what the index could be signalling. up from 14.8 per cent. Now these figures were no sooner released than Obama revealed that he was planning an additional $200 billion on welfare payment. Clearly Americans can expect more and more of the same statist snake oil. Don't expect Christina Romer. and government wages rose to 9. head of the White House Council of Economic Advisers.9 per cent. Wages are also telling an unhappy tale. and the rest of Obama's Keynesian advisors (these people are Democrats first and economists last) to take note. I don't know how much credence to put in this index.truth. (It is an absolute disgrace that government wages and employment have risen as the private sector shrank and clearly shows that this administration's economic priorities are deeply skewed in the wrong direction). However. Gerard Jackson is Brookesnews' economics editor . Ironically a recent paper by Harvard Business School and the National Bureau of Economic Research (Do Powerful Politicians Cause Corporate Downsizing?) found that when additional funds flowed to a state because its senator or representative had been appointed to the chairmanship of a powerful congressional committee it had a damaging effect on that state's economy.

21 May 2008. But a government can only spend what it takes from others in the form of taxes.) In other words. Naturally. But what's left? Who else can we commandeer into working and spending so as to keep our consumerist society ticking along? How about the long-term unemployed? How about a shift in social values to such an extent that we now see it as "good corporate karma" to embrace these previously spurned minorities? How about a shift to acceptance. That money is used to effect the exchange is irrelevant to this fundamental fact. consumer spending drives the economy. political editor for the Nine Network. 79). except if you work at KPGM. How one is supposed to consumer what has yet to be produced is a question that Keynesians never raise. In doing so I can do no better than to draw attention to Bernard Salt. fees. In other words. In this the sense classical economists were right to speak of money as a veil. Now according to Mr Salt It was a no-brainer in the 1950s: half the working age population was not engaged in the paid workforce. a partner in KPMG and "a leading commentator and advisor to corporate Australia". As I only received Oakes' article this morning (it is now Sunday) I didn't have the time to deal with the fairytale figures that the Treasury and KPMG Keynesians conjured up (I'll do this next week) so for now I'll focus entirely on KPMG's alleged economic competence. The more people have to spend the better off they will be. as it is impossible to consume what is not produced. Real demand springs from production and not consumption. Bernard Salt The Australian.Com Monday 24 May 2010 Only Keynesians could possibly come to the absurd conclusion that imposing a massive tax burden on a very successful industry would raise wages for everyone and promote economic growth. . Commerce Defended. Yet this is exactly the conclusion that KPMG arrived at with respect t o the Government's fallacious resource rent tax. 1808. miners dig in for the battle. As James Mill rightfully put it: « consumption is posterior to production. C. Change based on the role of women was always going to transform our society over the course of a generation. is a change in the pattern of demand and not an expansion. etc. and R. Laurie Oakes. Baldwin. The consumption fallacy leads to the belief that government spending can expand the demand for labour. (James Stuart Mill. Herald Sun 29 May 2010) . (Rudd. p. profound thinkers like Laurie Oakes. If it were not for money removing the need for barter the fallacy that consumption drives the economy would not emerge. to celebrate workplace diversity and especially ethnic and religious diversity? How about an era in which we stream in workers from around the globe to add to economic capacity and to our rising consumer spending base? (How to keep our consumerist society ticking: spend. are applauding this Keynesian quackery. In English so plain that even Mr Salt can understand it: the farmer's wheat is his demand for other goods. What in fact we have here. Consumption in the necessary order of things is the effect of production. not production the effect of consumption. for Salt's "previously spurned minorities" ("those with disabilities and the aged") to increase their consumption others in the community must reduce their purchasing power by the same amount.KPMG's Keynesian quackery is hazardous to your wealth Gerard Jackson BrookesNews. Complete hogwash.

Paul Krugman wrote: History offers no example of a country that experienced long -term productivity growth without a roughly equal rise in real wages. if it proves anything. 1967. something the ancient pharaohs understood. There is nothing which impresses a person of reflection with a strong sense of the shallowness of the political reasoning of the last two centuries than the general reception so long given to a doctrine which. Yet KPMG ² the same geniuses who defend the resource rent tax ² deny this fundamental economic truth. John Stuart Mill demonstrated this fact when he wrote: The utility of a large government expenditure for the purpose of encouraging industry is no longer maintained. Without capital accumulation there can be no genuine increase in "aggregate demand" and hence the standard of living. The logic of this argument is that sporting events are a substitute for capital accumulation.600 jobs. 262-263) Mill was making clear that the pattern of spending is of extreme importance. 1997). would make the tradesman a fortune. the richer they grow: that the man who steals money out of a shop. (Essays on Economics and Society. repeated sufficiently often. The real trick is to produce a continuous stream of jobs that at ever higher real wage rates. provided that he expends it all again at the same shop. As the capital structure expands relative to the labour supply. This is the company whose economic model predicted that the Commonwealth Games would raise Victoria's GSP by $1. (Pop Internationalism.Even if the government printed the money it still cannot change the fact that the real source of prosperity is increased investment. Although the classical economists didn't get everything right. . How is this done? By continuously extending a country's capital structure. Creating jobs is no big deal. The following chart is just one of many that show wages moving in tandem with productivity. Taxes are not now esteemed to be like the dews of heaven. Routledge & Kegan Paul. which return in prolific showers. The MIT Press. In other words. It is no longer supposed that you benefit the producer by taking his money. is a public benefactor to the tradesman whom he robs. pp. proves that the more you take form the pockets of the people to spend on your own pleasures. provided that you give it to him again in exchange for his goods. It follows that picking the pockets one group in order to fill the pockets of another group is not the smart way to extend a country's capital structure. investment raises productivity. and that the same operation. labour's marginal product continues to rise. More investment means more stages of production embodying improved techniques and technological progress. (This makes one wonder why the "games" did not save the Roman Empire from economic decline). It follows from his logic that real wages cannot rise if spending is diverted from investment to consumption. they were spot on when it came to the nature of demand.6 billion over 20 years and create more than 13.

Kelly. 255-265). p. he carefully follows a chain of reasoning which not only reveals secondary consequences but also long term effects. Lachman's Capital and Its Structure. Sheed Andrews and McMeel Inc. University of Chicago Press. 1975. There is also Hayek's The Pure Theory of Capital. 134.I would go further than Krugman and argue that history offers no example of a steady rise in real wages in the absence of continuing capital accumulation. Augustus M. What Mr Salt and those like him at the Treasury and in the media have not grasped is that a good economist looks beyond the immediate effects of an economic policy. 1975. (To get a better understanding of the nature of capital see Ludwig M. Interest and Investment. Kelly. I am perfectly prepared to admit that I am at a complete lost as to what the devil he is talking about. The plane fact of the matter is that GSP and GDP figures are not measures of economic growth. But a proper understanding of the nature of capital would warn that directing spending from investment to consumption would lower the standard of living. Prices and Production. or keep it lower than it would otherwise be. If Mr Salt's nonsense is the sort of thing that corporations are spending shareholders' money on then I think the shareholders should start raising questions about the competence of their CEOs. and would thus raise the prices of goods of the lower order in relation to those of the higher order. It is to be deeply regretted that KPMG's economic fallacies are soundly embedded in what passes for economic debate in Australia. There is also Hayek's Profits. GSP and GDP are not true measures of economic activity. with respect to consumer spending this approach leads to the conclusion: the more the better. Moreover.) Secondly.. Both exclude spending between the stages of production on the absurd grounds that it would be double-counting. to celebrate workplace diversity and especially ethnic and religious diversity". Two important economic facts: Firstly. though real growth consists of capital accumulation we cannot measure it because capital is heterogeneous. 1967. he is not solely concerned with the immediate effects or even long term effects on one group alone. As von Hayek explained: An increased supply of money made available directly to consumers would cause an increase in the demand for consumers' goods in relation to producers' goods. 1978. KPMG could argue ² and probably would ² that their GSP figure refutes this argument. (Friedrich von Hayek. it appears that Mr Salt has adopted the politically correct view that we need "a shift to acceptance. Augustus M. The result is that consumer spending is grossly exaggerated as a proportion of total spending. If he knew any economic history and genuine economics he would know that the rule of law and the "impersonal forces" of the free market are the greatest friends that any poor minority group can ever have. and this would inevitable bring about a shortening in the process of production [italics added]. Finally. pp. Kevin Rudd and the mining industry's super profits myth Ken Henry's fallacious resource rent tax and the mining industry's failed response Ken Henry's dangerous fallacy of taxing "imputed rent" The Treasury wants to impose the fallacious rental resource tax on mining companies Gerard Jackson is Brookesnews' economics editor .

So much for the wonders of big-spending government and its regulatory chains. Needless to say. What bothers me ² and it applies to all other economies ² is not dismal economic indicators but the dismal level of the economic knowledge of millions of Americans.000 was in the private sector.000 non-farm jobs created last month a mere 41. Their ultimate aim is not sustained economic growth ² without which there is no prosperity ² but sustained economic power for themselves. This hasn't happened since 1980. Only now are some politicians waking up to the fact that the Sarbanes-Oxley legislation might be amounting to a massive ball and chain that is holding back an entrepreneurial led recovery. To top it off. The same can be said of the US economy. They have yet to see that this amounts to saying business needs to be increasingly chained in order to make it freer and more efficient. Unfortunately much of what he has to say can be found in the standard textbook. Robert Reich is Professor of Public Policy at the University of California at Berkeley and an excellent reason why you should keep your children away from a university. Making matters worse is Obama's impending blizzard of regulations and the accompanying paperwork that will swamp small and medium size businesses. One of these nostrums is that government spending is the true road to recovery. Some Readers are demanding to know that if this is right then why is unemployment so high? Because in America the free market is being badly crippled ² and it's getting worse. The Democrats have no understanding of free markets nor do they care to obtain any. A while ago I pointed out that so long as there was sufficient capital and land to employ people there cannot be permanent widespread unemployment in a free market. Adding to the economy's woes we find that of the 431. Right across the intellectual spectrum we find ancient economic nostrums being flaunted as deep economic insights that can restore prosperity if only the state had the will to implement them. It isn't and it never was. If you are one of the unemployed or underemployed things are indeed gloomy. Pushed too far government spending can actually destroy an economy. And no wonder. Although the great majority instinctively lean to free enterprise it cannot be denied that leftist thinking has greatly influenced public opinion. Associated Press and the rest of the phony news outlets the US economy is on the mend and it's only a matter of time before happy days are here again. Given this situation is it any wonder that the American economy appears to be heading for the rocks? But as any seaman will tell you the most dangerous rocks to navigate are always those below the surface. Recessions always bring forth an abundance of economic cranks and he is no exception. irrespective of the cost to the country.Com Monday 14 June 2010 If you read Reuters. The massive spending programs and their contempt for the electorate is ample evidence of that fact. He stated on his blog that: . This is not a good time to be a small American businessman. And this is what we are really facing: misguided thinking. vulgarly called a statesman or politician" to encourage this misguided line of thinking.Is the US economy heading for the rocks? Gerard Jackson BrookesNews. The Wall Street Journal reports that in the first quarter not one venture-backed company went public. If that's the economic anvil the coming tax increases will be the hammer. This is why so many Americans can favour more controls on business while still favouring free enterprise. there will always be an ample supply of what Adam Smith aptly called "that insidious and crafty animal. less than 10 per cent. manufacturing also started to slow.

What is being overlooked by the mass of today's economists is the enormous ramifications of this fact. The only time this relationship appeared to breakdown is when. GDP is not a true measure of total economic activity because it omits intermediate spending on the spurious grounds that to include it would amount to double-counting. the total of producers' payments necessarily exceeds that of consumers' incomes. Macmillan and Company 1937. Banking and the Business Cycle. And now look where we are. as they used to say in the nineteenth century. raw materials.). Focusing on the 70 per cent statistical fiction leads to the conclusion ² though it is rarely if ever stated ² that the US is a two-stage economy: the production stage and the consumption stage. and was considered a monetary phenomenon. During the Great Depression it was noted: The larger number of payments is not from consumers to producers. and tends to cancel out in any computation of net incomer of net product value. . W. If Reich and the rest of the economic commentariat were right every economy in the world would be permanently and irredeemably depressed because there is no way that consumer incomes can ever equal or exceed total production costs. T. as they did before the Great Recession. but is made between producers and producers. A. Unfortunately in the 1840s the early wisdom was superseded by what one might call the Wilson-Mill "irrational exuberance" theory in which the monetary component dropped out of sight. and so on. supplies. demand springs from production. There was a time when this fact was never a matter of contention. This was the result of investment expanding disproportionately to consumption. No one denies that production takes place in stages and through time. who constitute 70 percent of the economy. production was deranged. Phillips. don't have the dough. 71). but part of that income the latter has to pay out in costs to other producers in another stage of the productive process (for intermediate products. In other words. (C. What is cost for one producer is in part income for some other producer. p. This was followed in the 1930s by the even worse Keynesian theory.Why are we having such a hard time getting free of the Great Recession? Because consumers. They can't any longer treat their homes as ATMs." [Italics added]. income produced or net product is roughly only about one-third of gross income. If the public had ² or at least the country's economic pundits ² a far better understanding of how the economy functioned Obama's destructive economic policies would never have got off the ground. All that is necessary in order that equilibrium be maintained is that consumers' incomes equal the cost of producing consumers' goods. "In fact. Even on the surface this is a ridiculous view. Supplies constitute demands. etc. meaning that the means to produce always supplies the means to buy. But once we do include it consumer spending drops to about one-third of total spending. However. But it goes without saying that Reich's opinion is not only plausible but self-evident. as the older economists put it. McManus and R. indicating that business spending is what really drives the economy. F. one of which is that encouraging consumer spending can retard recovery and weaken production. In English so plain that even Mr Reich can understand it: consumer incomes are always exceeded by total expenditure on production. This used to be called the underconsumption fallacy and was rightly treated with contempt by the classical economists* who understood what the great majority of contemporary economists apparently cannot: and that is that production pays for itself. Nelson. Is it not a fact that consumer spending makes up about 70 per cent of GDP? Yes it is.

See Say's Letters to Malthus as well as Ricardo's defence of Say's law. His writings on the question of universal gluts conveyed to me the impression that he failed to fully grasp what proponents of what became known as Say's law were actually saying. Gerard Jackson is Brookesnews' economics editor .*Malthus can be considered the exception. though in his later years he paid far less attention to the problem of depressions.

Also the growth momentum of these indexes has plunged in May. The Journal of Commerce commodity price index (JCOM) fell by 8.9 per cent from 77 per cent in April while the yearly rate of growth of the CRB index plunged to 0. . Contrary to popular thinking deflation is not about a general decline in prices as such but about a decline in the money supply.7 per cent from 24.5 per cent in May from April while the commodity price index CRB fell by 8.2 per cent during that period. The yearly rate of growth of the JCOM index fell to 47. Note that this is based on the same principle that inflation is not about a general increase in prices but rather about increases in money supply.Is the US economy facing deflation? Dr Frank Shostak BrookesNews.9 per cent.Com Monday 14 June 2010 According to some analysts a sharp decline in major commodity price indexes has raised the spectre of deflation. Now if some other price indexes were to come under pressure would it then imply that the economy has fallen into deflationary territory? To provide an answer to this question we need to define what deflation is all about.

Since a price of a good is the amount of money paid per unit of the good obviously within the context of all other things being equal the prices of goods in general will go up over time with increases in money supply and fall with decreases in money supply. This money in turn is amplified by commercial banks lending through so called fractional reserve banking. minus 10 per cent in November and minus 7.7 per cent in May against 1 per cent in January.1 per cent in December. What matters for money supply however.6 per cent in May against plus 3 per cent in May last year. A positive figure for the rate of growth in money supply implies that at the moment inflation is still in force. The yearly rate of growth of lending fell to minus 11. The latest data for our monetary measure AMS shows that the yearly rate of growth stood at 4.5 per cent in May last year. Despite all the massive monetary injections by the Fed commercial banks have chosen to sit on the pile of pumped cash rather than lend it out. Normally the main driving force in the expansion of money supply is the central bank¶s loose monetary policy.05 trillion in early June from $1. The yearly rate of growth of AMS stood at minus 6 per cent in October. lending that was generated through fractional reserve banking. By means of monetary pumping the central bank injects money into the banking system. is not lending as such but inflationary lending i. Note though that during October to December last year we actually had deflation. Currently however.4 per cent in May from minus 0. there seems to be a breakdown between the Fed¶s pumping and commercial banks¶ lending activity. . (Note however that the growth momentum of the inflationary credit proxy shows at present a visible bounce (see chart)).4 billion in January 2008 while lending remains in free fall. The yearly rate of growth of our inflationary credit proxy stood at minus 5. The level of excess reserves held by commercial banks has climbed to $1. To establish then whether we are in deflation we need to find out what the money supply is doing.e.

So it seems that irrespective of the decline in inflationary credit the Fed can always offset this fall through monetary pumping.Now a fall in inflationary credit. we have to consider the fact that the Fed doesn¶t pay much attention to the money supply data.1 per cent in July last year the yearly rate of growth of the CPI climbed to plus 2. results in a decline in the money stock and hence in deflation. For Fed policy makers inflation or deflation is associated with movements in the consumer price index (CPI). .2 per cent in April. So in this sense one could argue that given the Fed¶s readiness to pump money on a massive scale the likelihood of deflation is not very high. Remember that whenever the Fed buys assets from non-banks it boosts the demand deposits of the sellers of assets to the central bank. if not offset by the Fed¶s pumping. (Again the Fed could offset this fall by an aggressive buying of assets from non-banks). which we suggest means that for the time being the Fed¶s monetary pumping via buying of assets is offsetting the decline in inflationary credit. Now. An increase in demand deposits implies an increase in money supply. After falling to minus 2. Observe that currently the Fed is pumping at the yearly rate of 14 per cent against the pace of contraction in inflationary credit of around 6 per cent. As we have seen so far the money stock is still rising.

This. As long as the money supply rate of growth remains positive figure there cannot be deflation. is all about). Such a scenario is likely to be supportive to the price of gold. The lagged effect from this fall is likely to produce a pronounced decline in economic activity i. There is however. A fall in the pool of real savings in turn leads to a fall in economic activity ± the production of fewer goods can now be funded. which is what stagflation. The increase in the money supply as a result of Fed¶s money pumping is likely to result in a further weakening in the process of real wealth generation i. We suggest that what matters for deflation is the state of the money supply. Hence over time a strong money supply rate of growth and the production of fewer goods implies a general increase in money per good i.We suggest that on account of a long time lag from changes in money supply to changes in the CPI the past strong increases in money supply could lead to a further strengthening in the growth momentum of the CPI in the months to come. the offsetting monetary pumping by the Fed has kept the money supply rate of growth in positive territory. This in turn could significantly slow down the rate of increase in the Fed¶s balance sheet. a general increase in prices. which is the fall in the growth momentum of money supply during November 2008 to November 2009 (the yearly rate of growth fell from 28 per cent to minus 10 per cent).e. will severely undermine various bubble activities. There is however another factor to consider. In response to this strengthening the Fed is likely to respond by tightening its monetary stance. We suspect that a sharp fall in economic activity could cause the Fed to ignore the increase in prices and embark on aggressive pumping. a weakening in the pool of real savings. Hence. given the decline in banks inflationary lending this will result in a decline in money supply and hence deflation. Despite a decline in commercial banks¶ inflationary credit. (Even if the Fed were to decide to do nothing. coupled with a fall in inflationary .e. given the fall in inflationary credit this will lead to a fall in the money supply). (Observe that what we have here is a general increase in prices and a fall in economic activity.e. Conclusion A sharp fall in commodity prices has raised the spectre of deflation in the US. always the possibility that the Fed could tighten its stance in response to a strengthening in the growth momentum of the CPI.

Frank Shostak is a former professor of economics who now works as an economist for M. As a result the Fed may embark on strong monetary pumping. We suggest this could lead to severe stagflation. However. F. we are of the view that on account of the fall in the growth momentum of money supply between November 2008 and November 2009 US economic activity could come under pressure in a few months time. could result in a fall in money supply and thus the emergence of deflation.credit. . Global.

As they nobly took it upon themselves to defend the market against predatory politicians and the threat that economic illiteracy constantly poses to the nation's welfare. The striking thing about this event is that no one who addressed the crowd. to argue that so-called "super profits" are the result of quasi-rents (another fallacy) is grossly misleading. What they did not do is actually challenge the concept. Alan Moran. Even worse. indicated even a passing acquaintance with the true nature of the tax.Rudd's disastrous resource rent tax: how the right let the country down again Gerard Jackson BrookesNews. I suppose. I suspect that like the rest of the mining industry's leaders Gina Rinehart has something of a rolodex mentality. After all.Com Monday 14 June 2010 A short time ago Gina Rinehart ² Australia's richest woman ² helped lead a protest in Perth against Prime Minister Rudd's destructive resource rent tax. It seems to have completely eluded them that if a resource rent tax is economically harmful then the theory itself must be false. (This theory reminds me of George Well's observation that some things are so stupid only an intellectual could believe them because "no ordinary man could be such a fool". be too hard on these people. He stated that Australia's proposed taxation arrangements confuse super profits with high profits based on normal business activities. it was incumbent upon them to discredit Rudd's resource rent tax by publicly refuting the theory upon which it is based. Only someone under the influence of the fallacious pure competition model could claim that there is a fundamental difference between "super profits" and "high profits". meaning that when faced with an economic problem her solution is to always ring "the usual suspects". a fact that he made clear in Land Regulations. including Rinehart. Some mining businesses do earn high profits as a result of two factors. The first is termed quasi-rents. And so it is with doctrine of economic rent that Kevin Rudd and Ken Henry (or should I say Kev and Ken?) are striving to impose on the country. they responded to the proposal with sneers and statements ² albeit correct ² about the damaging consequences of the tax. This is where our rightwing (the self-appointed defenders of the free market) have once again let the country badly down. Now the IPA publicly condemns the tax. Moran seems to have a very sketchy notion of what quasi-rents really are. Housing Prices and Productivity and Marginal Costs and Prices in the Electricity Industry. One should not. A company can earn quasi-rents while still making a loss. This is because the theory concludes that economic rent (a surplus created by a differential) can be completely taxed away without harming investment and output. clearly supports the doctrine. and the y have come to believe that when conventional opinion has coalesced with respect to a theory it must be because the theory has been proven correct. No wonder the IPA has failed to provide anything approaching an adequate critique of Rudd's tax. However. This is said to occur when the net returns to man-made factors exceed prime costs while still falling behind average costs. all profits are abnormal.) To its detriment the mining industry has yet to realise that our rightwing has put itself in the peculiar position of damning Rudd's tax while simultaneously supporting the theory on which it is based: for proof one need look no further than the Institute of Public of Public Affairs. Moreover. First and foremost. economics is a difficult subject. . These differ from economic rent in that the high profits for successful firms are matched by losses for the unsuccessful. If they had done so perhaps they would have realised that the reasoning upon which the tax is based is totally fallacious. Instead.

a differential created by the emergence of marginal land. including land that is being mined. James Stuart Mill certainly thought so. What is truly bizarre about the present situation is not a single member of our rightwing has come out against the theoretical basis of Rudd's tax. Equally bizarre is their refusal to acknowledge that the theory of economic rent has been effectively debunked. successfully demanding that it publicly admit its error. If they are wrong.It is essential to grasp at this stage that Alfred Marshall made it clear ² as did Ricardo ² that economic rent (pure rent as it is sometimes called) applied only to land. erroneously stated: Economic rent has its origin in the labour theory of value. This is why in his Principles of Political Economy and Taxation Ricardo did not have a chaptes on rent and manufacturing but he did have one called On the Rent of Mines. Peter Smith. What Smith and the rest of the rightwing crowd won't admit ² or haven't grasped ² is that according to the economic rent doctrine a 100 per cent tax on rent is both feasible and desirable. one of my readers. Peter Smith launched what can only be described as a sneering. Don't hold your breath waiting for this lot to explain their double-standards. told me that an industry executive had used Davidson's article to attack the resource rent tax and that others had done the same. Having accepted a donation to produce a sleazy rationale for a carbon tax that would have devastated the economy Greg Lindsay is now whining about the damaging effects of a resource rent tax. adamantly refusing to make the necessary correction. The IPA is not the only guilty party. the fact remains that his article was vacuous. even though they are stridently attacking the tax. is one of those dummies.) Although I share his opinion of those who admit to being leftists while calling themselves economists. someone heavily involved in mining. This is the same outfit that is crowing about having exposed the Treasury's dodgy figures on government spending and GDP. Classical economists couldn't understand why natural resources had value when human labour hadn't yet added value. insulting and very aggressive attack on 20 leftist economists who came out in public to support the resource rent tax. an IPA fellow. Unless Peter Smith is prepared to come out and publicly attack the concept of economic rent he really has no business calling those who support a tax based on this theory as a bunch of dummies. (See chapters II and III of Principles of Political Economy and Taxation. (Quadrant. 27 May 2010. The "dumb" twenty. And this is why they will never publish an article challenging the economic rent doctrine. We now find that the IPA refuses to hold itself to the same lofty standard that it rightly applies to the Australian Treasury. To top it off. Not bloody one. Professor Sinclair Davidson. If he actually said this then he is being absolutely true to the theory. These economists are simply applying the theory of economic rent as laid out in every standard textbook. Professor John Fairbairn. Economic rent is a surplus. When it comes to double-standards the CIS is even worse than the IPA. so are the textbooks. According to a recent report Fairbairn argued that taxing away nearly all of the mining industry's so-called rent would have no adverse concequences. . This leaves the Centre for Independent Studies whose recent paper in support of a carbon tax was an absolute disgrace. This is a truly unforgivable error for any economist to make. It has absolutely nothing whatsoever to do with the labour theory of value. who holds the Ritchie chair in economics at the University of Melbourne. However. Yet the IPA still insists on standing behind Davidson's article.) If this error had quickly disappeared it probably would not have mattered that much. They never did so in the past and they are not about to start now.

Kevin Rudd and the mining industry's super profits myth Ken Henry's fallacious resource rent tax and the mining industry's failed response The Treasury wants to impose the fallacious rental resource tax on mining companies Ken Henry's dangerous fallacy of taxing "imputed rent" Gerard Jackson is Brookesnews' economics editor .

This leaves Obama doing what he does best ² blaming others. Those corrupt incompetents otherwise known as Democrats have got control of the Whitehouse and both houses and they are still blaming Republicans. He is your typical hardcore leftist: duplicitous. It was widely believed that the economic 'triumphs' of these totalitarian states would save the world from the failure of capitalism. only political success. So far nothing he has done surprised me in the least. There was no genuine economic progress and there was no real prosperity. profoundly ignorant of the real world. Their behaviour is so repulsive they ought to change their name from the Democratic Party to the Despicable Party. totally untrustworthy. The Soviet Union. Democrats being Democrats never gave Hoover a break with Roosevelt even trying to damage him by sabotaging a proposal to save the banking system2. It is not his destructive economic policies that are hurting the unemployed but those evil Republicans. contemptuous of America. blaming others for their failures. Roosevelt's economic policies (economic quackery more like it) were a disaster for the US and the world. Despite this Obama and his merry band of economic vandals remain wilfully blind to the lessons of history. . We now know that it was all an illusion. Though Roosevelt shared the Democrats' usual contempt for the niceties of the Constitution it cannot be said of him that he despised his country and his fellow Americans. While his government wasted huge amounts of resources the country consumed its capital1. It was apparently Einstein who said that the definition of insanity was repeating the same thing over and over again and expecting a different result each time. However. We find the same thing with Obama. People had lost their freedom for nothing.Com Monday 14 June 2010 Well bless my soul. however measured. The Democratic Party has now sunk so low that a man like Roosevelt would be driven out as a warmongering chauvinist. The last century was scarred by leftists of every persuasion who did exactly that: they repeated time and time again the same mistakes. Nazi Germany and Fascist Italy seem to have successfully shown that the days of the free market were over and that only the state could guarantee economic progress and full employment. Naturally. Their supporters in the media and academia make excuses for them and rationalise their policies. even if that involves lies and distortions.Obama's ideology could wreck America Gerard Jackson BrookesNews. except for the fact that he had the 1920-21 depression to guide him. there was an endless supply of Western intellectuals only too willing to accommodate them. When Obama appeared as a presidential candidate I warned that if elected he would prove to be a disaster. counts. Roosevelt's economic failures were not due to ideology but a total ignorance of economics. what do we find? Obamanomics in complete disarray. to be fair to him the same could also be said of Hoover. Why anyone should feel the need to show this administration the slightest respect leaves me completely baffled. condescending to his fellow Americans ² not that he really considers himself an American ² and lacking both class and consideration for others. Everywhere the policies they promote have been discredited by economic reality and yet they relentless pursue them. Unlike today Roosevelt's conservative critics could not point to other socialist or strongly interventionists states as a warning to the danger his economic policies posed to the nation's welfare. Year after year they kept America mired in depression and unemployment in double digit figures. Perhaps Roosevelt can be excused on the grounds that he was an economic illiterate who faced an unprecedented economic disaster. Facts do not matter. mendacious. He ought to feel right at home in Hollywood or the Harvard law faculty. economic history and the history of economic thought.

The Independent Institute. pp. Yours faithfully.1 billion. Roosevelt. . Unwin University Books. We begin to see why he wouldn't mind being a one-term president if that were the result of having succeeded in setting America on an irreversible course that would transform it into a country that reflected his statist vision. . as I wanted it in the record: My dear Mr. It then becomes apparent why Obama and his cronies would see absolutely nothing wrong with implementing an energy policy that would cause "electricity prices to rocket". In any event. Roosevelt refused. a responsible industrialist. 205). Economics and the Public Welfare: A Financial and Economic History of the United States 1914-1946. War. 2006. adviser to Franklin D. 47948). Anderson estimated that in 1939 there was more than 50 per cent slack in the economy. p. . Rand: I beg to acknowledge your telephone message received through Mr Joslin as follows: "Professor Tugwell. He wrote to me: I feel when you asked him on February 18th to cooperate in the banking situation that he either did not realize how serious the situation was or that he preferred to have conditions deteriorate and gain for himself the entire credit for the rescue operation. I asked Ray Moley why Roosevelt refused to cooperate with me in the banking crisis. Anderson. He said they were fully aware of the bank situation and that it would undoubtedly collapse in a few days. Professor Higgs calculated that from 1930 to 1940 net private investment was minus $3. as he admitted. I confirmed his telephone message in the following letter. and oil prices to soar. Depression. (Robert Higgs. HERBERT HOOVER Some years afterwards. had lunch with me. James Rand. 2 1 Before Roosevelt's inauguration Hoover pleaded with him to cooperate in dealing with the banking crisis in an effort to avert further economic suffering. Arthur Lewis calculated that from 1929 to 38 net capital formation plunged by minus 15. ten days before the inauguration. If that were to happen America would indeed ² to the undying satisfaction of the left ² cease to be America. To ensure that the facts would be correctly reported by history Hoover recorded the incident in his memoirs: A statement of Rexford G. Arthur Lewis.Now if for some perverse reason your idea of success is a massive expansion of government at the expense of economic progress ² meaning the standard of living ² then destructive economic policies make sense. and Cold War. had telephoned me this statement of Tugwell's as a warning. Economic Survey 1919-1939. (Benjamin M. Benjamin M." When I consider this statement of Professor Tugwell's in connection with the recommendations we have made to the incoming administration. . [they] would project millions of people into hideous losses for a Roman holiday. 7). 1970. LibertyPress. I can say emphatically that . his . 1979. p. Tugwell (one of Roosevelt's close advisers) is worth repeating. W. which place the responsibility of the collapse in the lap President Hoover.2 per cent (W. What appear to others to be mistakes turn out to be necessary steps on the road to an ideological victory. .

pp. (Herbert Hoover. 214-15).actions during the period from February 18th to March 3d would conform to any such motive on his part. The Memoirs of Herbert Hoover: The Great Depression 19291941. 1952. The MacMillan Company: New York. Gerard Jackson is Brookesnews' economics editor .

Considering the outrageous size of the previous monetary expansion one should expect a fairly long time lag to pass before the Reserve's monetary excesses worked their way out of the system.5 per cent. This is not surprising considering that the money supply had been basically flat since the previous October.Com Monday 14 June 2010 Kevin Rudd's BER bungle may have saved Australian economy.8 per cent. The following charts certainly indicate that the latter condition has arrived. after which it started a rather erratic decline. This is another dreadful example of the sorry state of economic commentary in Australia. even if businesses are begging for loans. Eventually those activities that were dependent on monetary growth must begin to contract. from April 2009 to June M1 jumped by 7 per cent. By last April it had contracted by 3. A look at the economic indicators point to a slowdown and not accelerating growth. However. Bank lending to business began to decline in March 2009. According to this piece of brilliant economic analysis without the $16. . For a while now I have been pointing out the very obvious fact that the money supply (M1) has been fairly flat for sometime.The Australian economy is looking shaky Gerard Jackson BrookesNews. Additionally. with the first chart showing that business lending has been falling since November 2008. so read the heading of an article by Andrew Carswell and Alison Rehn (The Australian 3 June 2010). this monetary slowdown should see a fall in business loans.2 billion that Rudd poured into the Building the Education Revolution economic growth for the March quarter would have been far below 0.

it had no beneficial effect on manufacturing. not slowing What needs to be understood is that Keynesianism only works its magic through monetary expansion. The more a government spends ² irrespective if whether it borrows or taxes ² the more resources it will direct away from other activities. No doubt Price Cooper Waterhouse is right if one focuses solely on the trend. they did nothing to raise real wages and the standard of living. This is why correlations that focus on spending while ignoring the money supply cannot be legitimately used to refute the government spending fallacy. it seems that the very thought of discussing the matter is an anathema. the link between money and changes in output and the pattern of production are never given any consideration in Australia. Movements like these are bound to be perplexing so long as real monetary effects are ignored. But the effect is no different from the government directly spending newly printed dollars. Despite the somewhat optimist tone of the report these figures suggest that a contraction may have started. however. Yet this is exactly what is being said.3.8 in April to 56. Of course. Unfortunately. the situation is different if Government spending comes out of a surplus. This is particularly damaging where the government believes that consumption and not business spending drives the economy. not the spending itself. irrespective of what his media pals think. The projects that the Rudd government funded amounted to state-sponsored consumption and added nothing to Australia's capital structure. So long as the surplus consisted of 'idle' reserves then it is true that its expenditure raises total spending. This does not mean that government spending is harmless. But there is no suggestion of where this pressure might be originating. Therefore one would expect that this is where the first effects of a monetary slowdown would make themselves felt. It is the origin of the source of the funds that determines whether an increase in government spending will expand 'aggregate demand'. the one that saved the economy? One thing is for certain. It's clearly a question of how one interprets the statistics. We find that the PMI for May fell from 59.9 per cent.6 per cent and new orders by 4. Gerard Jackson is Brookesnews' economics editor . So how does this fit in with Rudd's alleged spending blunder. even Rudd's critics have failed to succinctly nail the spending fallacy. Regrettably. It is absolutely absurd to suggest that this process raises total spending. They admit that a downward pressure on selling prices is squeezing profit margins even though input prices for May remained unchanged. If the government borrows or taxes then this clearly involves a straightforward transfer of purchasing power. one takes note of the monetary situation then a different very gloomy picture emerges.Manufacturing is a leading economic indicator because of its time sensitive nature. production fell by 2. In other words. especially investment. In fact. If this spending had indeed saved the economy manufacturing would be accelerating. If. Now the Price Cooper Waterhouse PMI report for June states that despite a recent slowdown "manufacturing activity grew solidly in May".

whether it be a house or a car. what is grossly misnamed "economic rent" is in fact nothing but a profit. As such it can be safely taxed away for the 'benefit' of the community without harming investment.KPMG and the stupidity of Rudd's resource rent tax Gerard Jackson BrookesNews. In orthodox economics. More than 180 years later we now have a government with the full support of the Treasury trying to impose on the country a tax based on this economic fallacy. There is a myth that the theory of economic rent originated with David Ricardo and that it was accepted as a sound doctrine by all of the classical economists. They pointed out the obvious fact that rent is determined by supply and demand and that the price of land is set by the value of its services and not the emergence of marginal land. There is no such thing as normal profits. To conclude from this that these effects can be quantified and the path of the economy predicted with any degree of precision is to make a grave error. however. All profits are abnormal. To understand what is wrong with KPMG's conclusions we must first determine why the theory upon which they are based is absolutely false. In plain English. in this case mineral reserves. What it didn't say is that these models have been embarrassing failures. Why? Because [t]he incidence of the RSPT is also a result of the immobile nature of the natural resources on which it is levied. This is an interesting point because KPMG admits that it used a general equilibrium model to obtain its results. Now it's true that you can use ² and should ² both the partial and general equilibrium approach in explaining the effects of a tax. What it calls a normal profit is what would prevail in a state of general equilibrium ² a condition in which profits and losses cannot exist ² and would in fact be the rate of interest. Naturally Rudd's media mates thought KPMG had thoroughly skewered the tax opponents. This is plain silly. In . Neither is true. Therefore the argument that the tax is justified because of the "immobile nature of the natural resources" collapses. output or unemployment. rent is an unnecessary surplus. at least that's how it sounded. This outcome rests on the modelling assumption that the RSPT only taxes the economic rents earned from immobile factors. If theses resources are accessible in other parts of the world ² and they are ² and capital is mobile ² and it is ² then in a sense this means that minerals are as mobile as capital. The situation is particularly bad with respect to the resource rent tax because the model is based on false assumptions about the nature of the tax and profits. Having people like this expound on economic matters is like getting a plumber to remove an appendix. Since there is no change in the supply of mineral resources«. That KPMG cannot grasp this was made clear by its statement that the tax would not have a detrimental effect normal profits. It is not mobility that matters but accessibility. For him rents are correctly perceived as time payments for the hire of a service. When economists speak of rent they do not do so in the sense that the layman does. a differential created by the appearance of marginal land. James Stuart Mill being a notable exception.Com Monday 14 June 2010 In what it evidently thought was a major strike against the opponents of its resource rent tax the Rudd Government hauled out a paper by KPMG Econtech purporting to show that not only would the tax increase real wages and spur economic growth it would also cure baldness and halitosis. What it actually proved is that media commentators like Laurie Oakes should be kept away from sharp instruments. Not only did the economic rent doctrine preceded Ricardo it was soundly rejected by his contemporaries. Once that is done no amount of fancy statistical techniques can salvage it. KPMG asserts that the tax "has an excess burden of zero".

) Mill made the above statement in a speech to the Land Tenure Reform Association in May 1871. In economics there is the concept of opportunity costs. apart from WW I. KPMG says it doesn't matter if this funding is denied to the industry because it simply involves a transfer "from these industries to the government sector". rather than invest this so-called 'surplus' the mining industry has apparently been burying it. It's truly depressing to see people swallow these phony statistics. KPMG asserts that the tax has a "zero economic cost". This is in keeping with the orthodox view (we might call it the Ricardo-Mill view) that treats "economic rent" as an unearned surplus that drains resources away from the rest of the community. For Mill ² like Ken Henry and the geniuses at KPMG ² it was blindingly obvious that a tax on economic rent was vital in order to improve the country's economic welfare. the theory properly understood does not recognize minerals as factors of production ² otherwise they would be earning what Alfred Marshall defined as 'quasi-rents' ² but as land which can be transformed into higher-valued goods. the so-call economic rents that emerged during the Napoleonic Wars resulted in an enormous increase in agricultural techniques and investment. University of Toronto Press. Public and Parliamentary Speeches. Talk about Keynesianism running amok. 1988. In other words. The present world-wide economic situation should have finally destroyed what faith anyone had in economic models. 422. For sheer economic stupidity this takes some beating. What is remarkable about his statements regarding the taxation of economic rent and the ownership of land is that they display a total ignorance of historical and economic reality. So when KPMG asserts that a resource rent tax will have a zero cost for the mining industry it is in fact declaring that the tax has no opportunity costs. (John Stuart Mill. where in heavens name do those economic sages at KPMG and the Treasury think the mining industry gets the funds to continually to buy masses of costly equipment. This is what has to be given up in order to obtain a good or service. through the general prosperity produced by the labour and outlay of other people.addition. Yet according to Mill landowners simply accumulated wealth in their sleep without the slightest effort. An acre of land that cost $100 in 1870 could be bought for $10 in 1930. For example. Even if Mill had been right at the time he wrote. they are utterly worthless. If cutting corporate taxes increases . Unfortunately for Mill prices for agricultural land had already passed their peak and were heading down ² and. My God. how can this possibly justify the Rudd Government's tax on the mining industry? As for KPMG's figures. Hence the true cost of a television set is not the mount you pay for it but the other goods and services you had to sacrifice to buy it. Let's return to Mill for. pay the highest wages for labour in the country and continue with exceedingly expensive exploration projects while at the same time attracting more capital? Incredible as it might seem. If Mill had have had KPMG's model he would have been able to claim that it had been proven with mathematical precision that a resource rent tax would be costless because ² wait for it ² the "immobile nature of the natural resources". A ridiculous opinion that Treasury head Ken Henry ² like the majority of economists ² seems to have completely swallowed. p. What KPMG is saying is that ultimately it doesn't matter whether politicians and bureaucrats spend the money or the mining industry because total spending remains the same. It's exactly the same when a business makes an investment decision. that the The incomes of landowners are rising while they are sleeping. which naturally required a great deal of supervision and entrepreneurship. did so for about 70 years. believing as did Mill. including capital goods.

Note: It used to be said that a government should never set up a Royal Commission unless it knows beforehand what the results will be.investment it follows that raising taxes on the mining industry will have the opposite effect. This now seems to be the case for outside economic reports. Rudd's disastrous resource rent tax: how the right let the country down again Kevin Rudd and the mining industry's super profits myth Ken Henry's fallacious resource rent tax and the mining industry's failed response The Treasury wants to impose the fallacious rental resource tax on mining companies Ken Henry's dangerous fallacy of taxing "imputed rent" Gerard Jackson is Brookesnews' economics editor . For those who think I am impugning KPMG's reputation. This the very same KPMG that has now announced that the RSPT cannot hurt the industry because "in theory there is no economic cost to the RSPT"! Readers can draw their own conclusions regarding KPMG's integrity or lack of. leading to higher and more complex finance arrangements than Treasury has forecast. chew on this little morsel: On Wednesday 2 June the Australian Financial Review carried a story in which it quoted KPMG as stating: The [RSPT] report backs the industry concerns that miners will find it hard to raise project funding under the government's 40 per cent guarantee. The fact is that Rudd used taxpayers' money to get the result he wanted.

I immediately thought: "Ah. After the 9/11 atrocity Krugman said that he wondered whether any politician would have the bad taste "to exploit the horror to push their partisan agenda. as Lenin once put it. No sooner was the subcommittee on terrorism and homeland defence formed in response the World Trade Center than Harman." a thought. Although. The ever helpful New York Times. he informed us. too. helpful to Democrats and terrorists. As expected. And so fair. I should have called him a lying Democratic Party hack. completely distorted the Republicans' argument. The bile he calls political and economic commentary would cause acute embarrassment to any newspaper with a shred of integrity. Before continuing I should like to answer some of his snivelling admirers who have accused me of misrepresenting him as Democratic activist. Krugman. particularly capital gains taxes. What a sweet guy. deciding to use the war against terrorism as a means of embarrassing Republicans and putting a Democrat in the White House. Krugman's distaste for those who used the terrorist attack as an excuse to push their own agenda can be gauged from his silence on the ghoulish behaviour of California Democratic congresswoman Jane Harman.Com Monday 14 June 2010 What kind of man is Paul Krugman? His New York Times articles reveal a spiteful.Paul Krugman's dishonesty and contemptible behaviour Gerard Jackson BrookesNews. and self-righteously announced that the Bush administration should become more bipartisan and drop its tax proposals. Silly me. that he then treated as uncharitable (New York Times and the Melbourne Age. Fortunately for Krugman.) But to his disgust that's what some politicians tried to do. What disgusted Krugman was the call by some Republicans to cut taxes. outrageously dishonest and thoroughly hateful excuse for a human being. integrity is the one thing you will not find at the Times. In fact. a committee member. deeply bigoted. But notice how Kennedy's callous behaviour caused Krugman no distress whatever while Republican tax proposals clearly evoked a deepseated loathing. being a fanatical Democrat. even though a thousand or more bodies were yet to be recovered from the rubble One can easily imagine Krugman's outraged response if any Republican had acted in the same fashion as the callous Harman. One only has to think of those Democrats who slimed a republican ad at the time that contained brief references to the 9/11 atrocity to realise how sickeningly hypocritical the Democrats really are. they're right to demand evidence. a "transmission belt" from which to savage the Republican forces of darkness. if they'd been paying attention to his New York Times propaganda pieces they would have found all the evidence they needed. They're right: I was far too generous. to try and stimulate the economy. he's sickened by Kennedy and Co using the atrocity as a cover to try and push through their very partisan pro-homosexual bill". Like all truly committed Democrats Krugman's first loyalty is to the party and not his country. 17 September 2001. Having condemned Republicans as distasteful political "opportunists" Krugman then took the high-moral ground. if not last. a natural position for two-faced pompous Democrats. This has been brought out ² as it has with many Democrats ² in his supine attitude toward terrorism Krugman had two courses open to him: advance the interests of the Democratic Party at the expense of his country or put his country second. cheerfully provided him with. I sincerely doubt that he has a patriotic bone in his entire body. that is. started to use it as a fundraising tool. . However. he chose the former.

On a final note. After 9/11 Krugman quickly deteriorated to the point of paranoia: he then began to accuse the GOP of managing a "vast rightwing conspiracy". Gerard Jackson is Brookesnews' economics editor . I'm beginning to assume that if it were not for advances in psychopharmacology he would have been hospitalised years ago. Krugman's statement at the time that "job creation is essentially non-existent" under President Bush was rendered complete nonsense by the fact that the unemployment rate fell from its 6. Nevertheless. not Republicans. While being interviewed by Tony Jones from the Australian Broadcasting Corporation (Lateline. without a hint of humour: "The vast right-wing conspiracy isn't a theory. the Household Survey indicated that 1. There is absolutely no excuse for this attempted deception.1 per cent and the official unemployment rate stands at 9. It was the sanctimonious Krugman.6 per cent. the unemployment level depends on which method is used to measure. but I strongly urge him to undergo a course of psychiatric treatment because he has long since passed the point where facts or reason ² or even reality ² seem to matter to him. As Krugman well knows. That the Democrats when in power intentionally fail to practice what Krugman demanded of Republicans is not something he ever bothers to mention. 11 March 2004) Krugman revealed that he had completely lost his marbles ² which he is highly unlikely to ever regain ² when he said. Now it's obvious that Krugman was giving the impression that total employment had remained unchanged under President Bush when the opposite was demonstrably true." Revolting humbug from a revolting man.7 per cent.9 million jobs had been created from November 2001 while payrolls showed a weak demand for labour. For example. it's quite clearly visible to anyone who takes a little care to do his home work". none of which appeared to bother Krugman. The divergence was caused by the payroll approach which excludes the self-employed. I've no idea what it is about President Bush that drove Krugman nuts. in case he should forget to take his meds may I suggest that in future interviewers should keep a straitjacket at hand in case the professor turns violent if any of his pathetic delusions are challenged. while the U-6 rate stood at 9.As usual. The lofty-sounding Krugman finished his article with a thinly veiled attack on Republicans whom he basically accused of pushing a "partisan agenda" and of not being "true patriots" and whom "history will not forgive. the Democrats' idea of bipartisanship ² as Obama and his band of vandals have made abundantly clear ² is to demand that Republicans abandon their proposals in favour of the Democrats' proposals. The divergence between the two methods raised interesting questions. which was the same rate as when Clinton ran for a second term in 1996. who used the terrorist atrocities "for political gain" when he turned them into a political platform to fuel his anti-tax cut jihad and recklessly assail the Republicans' integrity while simultaneously wrapping himself in Old Glory.7 per cent.3 per cent peak to 5. That there is a genuine difference between making proposals that one believes will benefit the economy and pushing an agenda or selfishly using one's position to raise party funds while the bodies of the 9/11 victims are not yet cold is something that Krugman apparently lacks the moral substance to grasp. Today the U-6 per cent rate is 17.

This view of the exploitation of workers by employers emanates from the writings of Karl Marx. all that he needs to do is to lower the price sufficiently. Thus no employer can lastingly pay a worker one dollar an hour and sell his product for five dollars an hour. Global. what the customers are prepared to pay for the product. If he fails to get a job. In a free market economy the main reason for an exchange between two individuals is that both are expecting to benefit. It follows from this theory that the employers gain must have occurred at the expense of the workers. rightly belongs to the workers. Other employers will be very happy to enter this business and offer the worker more than one dollar per hour. Frank Shostak is a former professor of economics who now works as an economist for M. It is suggested that it is the role of the government to protect the workers against possible exploitation by employers. keeping the difference for themselves. the exchange is always peaceful and without any coercion. Furthermore. he will not recover his expenditures from the customer. It is argued that a free and deregulated labour market is an impractical theory which has no place in the modern. unemployed at the wage that he insists upon. Any amount of labour services brought to the market can be sold at the wages that will clear the market. Therefore. so competition among employers tends to drive them up.Com Monday 14 June 2010 In a market for goods it is obvious to most analysts that whatever is offered as supply will be 'cleared'. whenever a man insists on a wage that is higher than the value of the product he produces. It is the values that consumers place on each particular contribution to total production that determine what businessmen can pay for that particular contribution. the fault is his and not with the free market. i. this form of unemployment is not a 'problem' but a voluntary choice on the part of the idle person. Frank Shostak BrookesNews. it is strongly rejected in the labour market. i. it is held. The conventional view which opposes a deregulated labour market also argues that the introduction of free market principles into the labour market will impoverish workers. This difference. In a free unhampered labour market. there may be a shift of a particular industry away from one region or town toward another. Consequently. sold at a price determined by the demand level of consumers.How are wage rates determined? Dr. A businessman cannot pay a worker more than the amount added by the work of the employee to the value of the product i. No businessman in a free market economy can engage in the 'exploitation' of workers as suggested by Marxian theory.e. there cannot be a problem of unemployment within the free market. While free market principles are accepted in the goods markets. A worker may decide that he wants to remain in the old town and insists on looking for a job there. For instance. . Unemployment in the free market can only emerge voluntarily. just as competition among workers has the tendency to lower wages. the employer acts as a middle man.e. According to Marx. If he pays the worker more.e. complex world of practical economics. No good need to remain unsold if the seller wants to sell it. he will remain unemployed. employers pay employees much less than the value of what they produce. Consequently. In paying wages. F.

. Happy days were here again and the Republicans were doomed. which we shall now do.3 per cent for the fourth quarter. 8. If Reagan had done what Obama has done there would have been no recovery with the result that the media would have crucified him.) And this is precisely what happened. (They tried to do that anyway. (To be truthful. Their first mistake was to assume that booms and busts are in fact a cyclical phenomenon.1 per cent and 8. In the fourth quarter of 2009 GDP came in at 5. the point must be eventually reached where even these ideological hacks cannot continue to deny that the Obama economy sucks. I've lost count of the number of emails from Democrats that bragging that the cyclical recovery would be gathering steam by the middle of 2010 and that this will keep both houses in the incapable hands of the corrupt Democrats. Any reasonably informed person would know that the Hoover/Roosevelt experience had long since put that idea to bed. Compare this situation with what happened under Reagan.2 per cent to 2. I added the bit about corrupt and incapable.) Nearly 30 years later the same contemptible media is making excuses for Obama's dismal performance. The argument here is that the Reagan deficits (that Democrats were in control of both houses is rarely if every mentioned) were fuelled by a monetary expansion and that this amounted to a successful Keynesian policy.Com Monday 28 June 2010 Growth for the fourth quarter has been revised down ² again ² from the original 5.Obamanomics hits a reef Gerard Jackson BrookesNews. Things were looking grim in 1982 with GDP at 0. (I wasn't the only one to stress this fact.5 per cent respectively. Now we find that the first quarter GDP for this year is down to 2. They then made the additional mistake of assuming that the recovery phase is a natural outcome that emerges irrespective of government policies.1 per cent. and then produce the monetary evidence in support of their case. If this had happened under a Republican president America's corrupt media would be screaming blue murder. Another club with which to beat the imbecilic Reagan. "Supply side economics" had nothing to do with it. (I clearly recall how the media just loved that. It are not. The media were ecstatic. The better informed could argue that Reagan's recovery was in fact a Keynesian success story. a mere difference of 48 per cent. Although it is true that since WW II recoveries have been fairly rapid what has been overlooked by many is that in each case the administration of the day did not interfere with the process to anything like the extent of the Obama administration.7 per cent. The second. an event from which the Democrats learnt nothing of value.7 per cent. third and fourth quarters saw it rise at a sizzling 9. For that one would have to go back to the 1930s.3 per cent. Nevertheless.) Then the first quarter of 1983 saw GDP jumping by 5.7 per cent.) I politely pointed out that Obama's economic policies were guaranteed to retard recovery if not actually abort it. The following chart shows that M1 flattened out in the middle of 1981 and then began to accelerate again.

I doubt if America has ever experienced anything like this before. And this has happened even though Bernanke doubled the monetary base. .Let us now turn to the monetary situation under Obama. If these critics were right about Reagan's policy the economy should now be whizzing along. It then started to fall until last February. If we use the Austrian definition of the money supply* the situation begins to appear positively bizarre. The money supply rapidly rose from September 2008 to June 2009. And what was the latest result? A miserable GDP rate of 2. a process that reclassified bank deposits as savings accounts. The effect was to underestimate the actual growth in M1. This was followed by a swift acceleration that now appears to be slowing. What makes this situation even more curious is that in 1994 Greenspan gave the OK for the banks to introduce sweeps. It can be seen that M1 started to flatten in late 2004 and did not begin to expand again until 2008 after which it then rocketed.7 per cent.

An astute Obama supporter could push his argument further by pointing out that monetary growth under Reagan succeeded because business borrowed and invested and this is why the banking system did not accumulate massive reserves. If I take $10. Nevertheless.) What was being said is that if Pelosi or Reid tax or borrow from Joe Sixpack and then spend the money this will promote economic growth by expanding aggregate demand. and 'Currency'. money is the medium of exchange. on the Prices of Provisions. This raises another problem: Why did business borrow and spend under Reagan but won't under Obama? The answer is obvious. London. The notion pushed by the likes of Summers that $1 of government spending generates $1. which form no part of the circulating medium. in contradistinction to Bills of Exchange. These people are so stupid they cannot see the obvious: borrowing and taxation amount to a transfer of purchasing power. There is no Keynesian multiplier and there never was. A Letter to the Right Honourable William Pitt on the Influence of the Stoppage of Issues in Specie at the Bank of England. Aggregate spending must remain unchanged. In simple terms. difficulties do arise. 'Circulating Medium'. The latter is the Circulator. could direct an economy is something so stupid that it could only be found in a leftwing university faculty or a newsroom. Are savings deposits money? This presents the problem of double-counting. (People like these are Democrats first and economists last. whether consisting of Bank Notes or specie. He understood what Obama and his fellow Chicago thugs refuse to consider and that is the way to destroy American prosperity and prestige is to paralyse business.000 the money supply still remains unchanged. Gillet. In this they had the support of so-called economists like Larry Summers and Christine Romer. 2nd edition. Reagan was always friendly towards business. and other Commodities. Gerard Jackson is Brookesnews' economics editor . It therefore follows that if the bank lends out that $10. 1801. 2). These are the same clowns that told Americans that massive borrowing and spending was the only way to save the economy. I understand always ready money. or any other negotiable paper. as I have always understood that term. the pattern of spending. Whether we include savings deposits in our definition depends on whether or not it involves double-counting. p. which are used almost as synonymous terms in this letter. Navy Bills.50 in additional income is pure Keynesian claptrap. I try adhere to Walter Boyd's view who in his open letter to Prime Minister Pitt in 1801 defined money in the following terms: By the words 'Means of Circulation'. T. We measure aggregate spending in terms of dollars. meaning he was never hostile to investment.000 in cash and deposit it in my savings account it cannot be seriously I argued that I have now expanded the money supply by $10. The very idea that anyone at all. let alone blustering buffoons like Pelosi. Frank and Dodd. We now deduce that credit transactions do not alter the money supply. How in heavens name does this process increase the quantity of dollars? What we get is not an increase in demand but a change in the composition of demand. *There are some differences among Austrians as to what ought to be included in a definition of the money supply.000. Exchequer Bills. the former are merely objects of circulation. (Walter Boyd.

When in 2000 it was clear ² at least to some of us ² that US manufacturing was signalling that the country was sliding into recession even as the demand for services remained strong. and that in the 1950s and 1960s French intellectuals of all political stripes issued dire warnings against American investment dominating Europe. etc. One should note that this view is basically an opinion presented as an economic fact. [Los Angeles Times.. in economic terms.) Notwithstanding previous criticisms of orthodox economics. Part of the problem here is that a great many economists are unaware that because comparative advantage was developed by the classical economists within the framework of a gold standard it has ramifications with respect to exchange rates that they have generally overlooked. (David Friedman is one of the few economists to question the profession's complacent views on the manufacturing shift. It is also poor economics to assume an overvalued currency cannot emerge under a regime of floating rates. To say. As Joseph Schumpeter observed: . that in the nineteenth century Britain invested massively in the US and South America.Com Monday 28 June 2010 There seems to be a degree of schizophrenia when it comes to manufacturing and services. It is still being argued that any shift from manufacturing into services is a natural process brought about by increased living standards. 12 Augusts 2001]. particularly consumption. The Economy: The Neglected US Depression. It's not enough to point out that investing abroad in manufacturing is far from novel. This is a dismissive and arrogant approach that should be considered unworthy of anyone who calls himself an economist. but perhaps even unsustainable with respect to living standards. Ordinarily an inflationary monetary policy will eventually drive down the exchange rate. which is the same as arguing that floating exchange rates are always determined by purchasing power parity.Did outsourcing hollow out the US economy? Gerard Jackson BrookesNews. it can still be used to explain to a considerable degree a "hollowing out" process without having to make lazy and grossly misleading references to so-called natural shifts in expenditure from the secondary sector to the tertiary sector. This argument does not faze those who insist that any such shift in manufacturing is due to changes in comparative advantage and that is that. Though the old siren calls are almost forgotten the new ones do merit consideration because conditions are very different from the days when the gold standard ruled. where this process is temporarily halted or even reversed for a sufficient length of time it results in an overvalued currency ² even when currencies are allowed to float ² which causes the structure of prices to misdirect production and investment. that as people become richer they want fewer material goods and more services is to say very little. This lackadaisical and somewhat patronising response is no real answer to the charge that the American economy has been hollowed out by manufacturers shifting production overseas to take advantage of so-called cheap labour. However. as supporters of this argument do. I fear that in Australia Mr Friedman would be dismissed as "unbelievably stupid" and not "professional". The "hollowing out" charges should have at least alerted most economists to the possibility that such rapid economic shifts are not only sudden. some commentators concluded that the US economy was experiencing a natural process of shifting investment from manufacturing to services rather than bearing witness to an impending recession.

the inflating country will find its standard of living is still rising. In 1970 Samuel Brittan. even as manufacturing is declining. Shop assistants in Britain cannot be transferred overnight to engineering establishments which do not yet exist while Volkswagen workers cannot move straight away into the German social services. regardless of the source. Now there is absolutely nothing new or particularly Austrian in what I have just written. In his Three Lectures on Commerce and one on Absenteeism (1835) Mountifort Longfield drew attention to the possibility that a change in the pattern of spending could bring about an unfavourable change in the structure of investment. and there is the risk of high transitional unemployment while resources are being transferred. In a world of fiat moneys the absence of specie points must sever the link between price levels and interest rates. I think two lessons need to be learnt: 1. The world is a dynamic place and all things are never equal. The longer the longer the currency remains overvalued the greater will be the distortions. reasoned primarily in terms of an unfettered international gold standard. i. the 'classical' writers. domestic producers are encouraged to locate abroad while foreign manufacturers are encouraged to switch production from domestic use to satisfying the demands of its expanding foreign market. 732).e. and the demand for other consumption goods can still be satisfied by increasing imports. (Joseph Schumpeter. The effect of an overvalued currency is to make imports cheap relative to domestic goods and services.. and the eventual adjustments are all the more sudden and severe when at last they come. a well-known economist with the Financial Times and a Keynesian by training. This is where an apparent hollowing out process could possibly make its appearance.In the first place. without neglecting other cases. What this means is that if the above analysis is valid then it might be possible for the "hollowing out" process to be offset by increased savings. Houses can get bigger as expenditure is directed towards more consumption. p. Oxford University Press. was astute enough to spot this and wrote an excellent description of the situation: If an imbalance is allowed to persist too long. Because the overvaluation has distorted the price structure. a deficit country acquires an excessively homebased industrial and commercial structure while the surplus country becomes excessively export-oriented. including investments in production processes. In the meantime. even momentarily. malinvestments.. An unfettered international gold standard will keep (normally) foreign exchange rates within specie points [emphasis added] and impose and 'automatic' link between national price levels and interest rates. These very facts themselves provide ammunition for those who oppose parity changes. There were several reasons for this but one of them merits our attention in particular. This makes adjustment needlessly painful and difficult when it does come. One could also argue that such a process has been offset in America by foreigners using their dollars to acquire US assets. But then one could argue that in the absence of a loose monetary policy productivity and living standards would rise even faster. 1994.. (One can also call this the consequences of a monetary inspired shift in the terms of trade. He pointed out that if absentee landlords spent their rents on buying French dresses and lace for their girl friends instead of investing in their Irish farms this could alter the factorial t erms of trade for Ireland. There is nothing novel about this view. A little economic reasoning indicates that a loose monetary policy could have the same effect by artificially stimulating the demand for foreign consumption goods. Money matters ² a lot ² and that ignorance of what inflationary policies can do to investment and manufacturing can have the most terrible . giving rise to increased investment embodying new technologies. The History of Economic Analysis. which will eventually be reversed).

Monetary policy is a lot more complicated than most economic commentators realise. 2. Gerard Jackson is Brookesnews' economics editor .consequences.

(Paul Johnson.000. Combine this with population growth and you end up with appalling poverty. America is an equally illuminating case when it comes to wages and working hours. completely oblivious to the fact that it is capitalism that raises real wages.3 per cent. The only way of dealing with it is to expose its dishonesty whenever and wherever it is preached.8 hours in 1900 and 8. Regardless of what ignorant leftwing bigots like Ellis would have their readers believe.5 hours by 1920. By the 1780s her economy was growing at an unprecedented annual rate of 2 per cent. On one occasion Ellis accused capitalism of murdering "24.) No wonder there was a revolution. newsrooms and political structure. make capitalism far more dangerous then Islamo-fascist terrorism. The situation in England was very different. From 1870 to 1930 average annual manufacturing output expanded by 4. Yet Ellis rages about wage slavery under capitalism.000 people in the last century (The Black Book of Communism: Crimes. Harvard University Press. the opposite case rules. Capitalism's achievement of raising the living standards of the masses to unimagined levels while accommodating a colossal increase in population was. Terror. 3 January 2006). He is also oblivious to the fact that his own li ne of 'thinking' leads to the conclusion that if he were right about wages the capitalist countries would have been in a permanent state of depression from day one. unprecedented. one of whom is Bob Ellis. But I figure he is literally too dumb to work that out. as it had always been. And that includes the hypocrisy and moral bankruptcy of those who preach this venomous creed. Any notion that unions were responsible for upward trend in wages that accompanied a downward trend in working hours was put to rest more than 100 years ago by Professor Fetter who gave this idea a well deserved put down with the observation that real wages in England "increased ninety per cent . Bank Credit Analyst.000 children a day" and of creating "intercontinental slavery" (Byron Shire Echo. If ours was an economically literate society then his bigoted leftwing rants would be treated with the intellectual contempt they so thoroughly deserve. The likes of Ellis need to be taken seriously because they are parroting leftist thinking. This returns us to Ellis. During the nineteenth century the British workforce increased by 400 per cent while real wages increased four fold and the production of consumer goods by about 1600 per cent. Alas. Despite this man's staggering ignorance of economics and economic history the ABC has the gall to continually publish his anti-market fulminations and libels. 9. the world before what we call capitalism was one of abject poverty for the great masses. the same toxic thinking that has been insinuated into our universities.5 hours in 1850. which had accelerated to 4 per cent by 1800. Repression.1999). according to this leftwing genius. September 1978 Issue. and is.A leftwing intellectual spews anti-market nonsense Gerard Jackson BrookesNews. Conditions were so bad in France that by 1780 80 per cent of French families were forced to spend 90 per cent of their income on bread in order to stay alive. Let's get a few historical facts straight: before the latter part of the eighteenth century it was rare for any economy to achieve even a miserable 1 per cent growth in any year. These crimes. Communism killed more than 100. For example.Com Monday 28 June 2010 The Australian Broadcasting Corporation runs a site called The Drum that publishes political and economic opinion from a select group of commentators. (This includes fixed capital). the average working day in manufacturing was 11. And this bitter and ignorant dipstick has the gall to accuse capitalism of mass murder. When it comes to contempt for the facts and moral grandstanding this wilful leftwing ignoramus takes some beating.

and it's now disabled America". not bread queues. the mass graves and the calculated murder of millions of men women and children that condemned the regime as evil. (Professor Francis A. At the same time many labour intensive occupations tend to disappear as the rising cost of labour forces firms to adopt alternatives while others are forced to pay much higher wage rates. the gulag. What he doesn't understand is that as countries become more capital intensive real wages rise. not least and . which. But don't expect facts or economic reasoning to faze a bigot like Bob Ellis. according to this profound economic theorist. He then stressed that unions could not have been responsible for this increase because in 1900 only about 10 percent of the labour force was unionised: he added." unlike Australia. and. ignorance and xenophobic bigotry" (letter to The Age 15 November 2002) and who praised the murderous thugs who abducted Douglas Wood as "honourable men [with] a well-treated captive" Thinking he was demonstrating his grasp of economic theory Ellis complained about the amount of time he has to spend queuing. But this is one aspect of the regime that comrade Ellis neglected to mention. What this twit is unable to grasp is that what was being criticised were the permanent shortages that were a fixed and unavoidable feature of the Soviet regime. it's the fault of Bob Ellis' union mates and their political enablers who have made it unprofitable to hire people. you guessed it. Fetter. This is the same intellectual clown who once said that shortages of all kinds in the gloriously defunct Soviet Empire were seen by its right-wing critics as "a sign of a political system that was evil" (The Age. The disappearance of lift attendants is a simple example of how capital accumulation effects the demand for labour in certain occupations. asserting that Australians were "paying in blood for John Howard's arse-licking. Falsely accusing free marketeers of defining the Soviet union as evil because of queuing allowed him to define the Australian economic 'system' as evil for the same reason. the Federal Deposit Insurance Corporation. the bullet in the back of the head. But Society never puts people out of work. Mr Ellis?]". Why? Because.. According to Ellis: "A society with queues [tolerates unemployment] is a bad society. This is the same moral cretin who blamed Prime Minister Howard for the Bali massacre. the Federal Reserve. other people do that ² and those other people are unioncrats. perhaps [even though it doesn't murder its citizens. queues mean that profits are being inflated by not putting enough people to work. That this is so because Asian labour markets are allowed to clear and wages tend to be low because there is an abundance of labour relative to the capital structure is something that could never occur to Ellis. folks. even for little things. Here the rising cost of labour forced firms to employ labour economising techniques by automating the lifts. What the devil does he think the Securities and Exchange Commission. (Mountifort Longfield Lectures in Political Economy. the Office of Thrift Supervision. In his ABC commentary he informs us that "deregulation is wrong. (The Age. This is why Swiss waiters get paid a lot more than Asian waiters and porters.in the thirty years between 1860 and 1891" even though only 10 per cent of the labour force was unionised. New York. It was the secret police. 180-199!) It is not the fault of profits when a large permanent pool of unemployed labour emerges. 1834. queues are a dirty rotten capitalist trick. The Century Co. it was always wrong. p. he blames on the free market. An evil society. the Federal Housing Finance Agency. the torture chambers. 130). pp. Ellis related how in cheap Asian resorts "waiters and porters swarm all around you. 26 October 1999). 1905. That's right. 26 October 1999). Richard Milliken and Son. Profit motive should be back of the queue. What deregulation? The US banking system is more enmeshed in regulations to day then it was 30 years ago. The Principles of Economics with Application to Practical Problems. Mr Ellis. Complete drivel. unless union supporters are prepared to argue "that one tenth of the labor supply fixes the value of all" they cannot claim credit for this trend. A society in decay.

a situation made worse by the Democrats financial strong-arm tactics. Marry these atavistic instincts to envy and you spawn a particularly nasty breed of intellectual. The Institute for Public Affairs then launched their own attack ² not on his book but on him. Ellis seems to believe that his socialist faith automatically qualifies him to write on economics. Since then they have treated Ellis as if he were highly radioactive. Read this book and then spread the word .God knows how many other agencies are supposed to do if not regulate.) The hostility of most Australian intellectuals to the free market and the very idea of profits is not merely a reflection of a deep rooted ignorance of market processes but a manifestation. It would be interesting to discover how much intellectual backbone he really has. to shoot the critic rather than the incompetent author. Gerard Jackson is Brookesnews' economics editor . Many of the classical economists explained that money is not neutral. Unfortunately it is the kind of garbage that can easily suck in the unwary economic illiterate*. Not so. in my opinion. of which Bob Ellis is a graphic example. This is precisely what happened. Tackling all of Ellis's lies and fallacies would take a much longer article. I doubt if there is a single central banker that has a clear understanding of sound monetary theory. In other words. those who finance our so-called right seem to agree with this passive strategy. For some strange reason our rightwing refuse to make any serious attempt to counter the vicious nonsense that the likes of Bob Ellis spew out on a daily basis. Like most of his ideological ilk. Mr Ellis explains through simple examples the misguided folly behind globalisation. Therefore artificially lowering interest rates raises the demand for bank loans which triggers a boom followed by a bust. Aggravated. Is he so ignorant that he is unaware of the fact that the savings and loan financial debacle in the 1980s resulted in a significant tightening in the regulation of the banking system? The idea that there was mass or just large-scale deregulation of the US banking system is a myth. It seems they would prefer.don't follow blindly upon the Thatcherite path of 'There is no alternative'. if Ellis thinks he is up to the task. It was pure garbage. of atavistic tribal instincts. despite his appalling ignorance of the subject. So what the devil caused the crisis? The answer is the lousy economics practised by the world's central banks of which the US Fed is the most important. The inability to conceive of spontaneous order that Smith's much maligned metaphor summed up so brilliantly. Even stranger. (The idea that the money supply is passive. The result? They narrowly avoided being sued for libel and were forced to pulp more than 4000 copies of their own book. in my opinion. is pure nonsense and is basically a product of the Banking School. meaning free market economics. (Brookesnews has published numerous articles on banking and the business cycle. they allow him to get away with murdering both history and economics. However. though they did.) Many believe that the outrageous lending shenanigans of Fannie Mae and Freddie Mac (state agencies that the Democrats plundered) caused the crisis. Some years ago Ellis wrote a book called First Abolish the Customer: 202 Arguments Against Economic Rationalism. meaning that it responds expands according to the state of demand. so to speak. For these people the Currency School never existed. *For those who doubt me on this matter the following came from Amazon: To read Bob Ellis is to have your eyes opened. he knows where to find me.

the other half two coupons. Krugman himself admits by p. His mistakes then show up in the rest of the book whenever he deals with currency issues. that he has "a private theory.Com Monday 28 June 2010 The thing that strikes one in this new. the co -ops "GBP ² gross baby-sitting product.Paul Krugman's depressing krugnorance Reuven Brenner BrookesNews. and nobody knows who owns them on a particular Friday or Saturday morning. it must be summarized. many transactions will be foregone because of the time-consuming search to make the matches. and less transactions would be foregone." People were accumulating coupons. the governing board decided to issue more coupons and. 1998). on average. If only 75 coupons were issued. rather than "spending" them. Then. Since Krugman derives his monetary philosophy from this piece. However. Issuing coupons means that a central authority. devaluation. which could be used only to barter time. not anchored even in simple. all at the same time. and keeps them floating freely. by Joan and Richard Sweeney. Judging by this book. The outcome is a baby-sitting depression. decided to issue in the 1970s coupons allowing the bearer to one-hour of baby-sitting. in fact. resembling Mandy Patinkin of Yentl days. half of the couples would be holding one. It shows the author. presto. His solutions are lasting inflation (in the 3-4 percent range). The story is this: a baby-sitting co-operative with 150 couples as members." Krugman's conclusion: "Recessions « can be fought simply by printing money ² and can sometimes (usually) be cured with surprising ease. Krugman starts his book summarizing a wonderful little article. far more illuminating ² and it contradicts Krugman's views of currency matters entirely. The rest of the booklet follows this same line of reasoning: Krugman presents his vague. Maybe he is preparing himself for another career. In all fairness. an MIT-based economist. Krugman thinks that overvalued currencies and random. if 225 coupons were issued. after a while. The book pretends to provide insights into the financial crises of the last two years." about the sudden fall of the Soviet Union. Mr. but with an insecure look. How many coupons should be issued to enable a liquid market? Assume that 75 couples wanted to go out Friday nights. he should. and who also know how to price currencies. . and suggests solutions. slim book ² The Return of Depression Economics ² is the studio picture falling out of it. Paul Krugman. short thoughts. to meet the co-op's needs. It turns out that. Krugman described the complicated details in a Slate piece (August 13. according to Krugman." This is not the lesson of this case at all. because he misunderstands the story entirely. the other 75 Saturday night. published in 1978. The lesson is more complex. measured in units of babies sat ² soared. Briefly: wise politicians and even wiser economists know. how to compensate for the masses' unpredictable mood swings. self-fulfilling panics brought about the crises. well-known facts. "few coupons were in circulation ² too few. But notice that the printing of coupons solves here a problem only because: ‡ The "central bank" made a mistake first of issuing too few coupons. based on no evidence whatsoever. tariffs and capital controls. and buying baby -sitting services in the present. 3. having monopoly powers ² the co-op in this case ² decided to issue a new currency. titled Monetary Theory and the Great Capitol Hill Baby-sitting Co-op Crisis.

the loss in foreign currency that Krugman mentions. to keep the banks solvent. they made a mistake similar to the one US regulators did with Savings and Loans Associations. The consequences were as expected: delinquent loans increased. once the printing presses were on their way. who. that central banks must manipulate demand. which would come from their after-tax income. Their analyses make absolutely no reference to deposit insurance. This example has applications for monetary policy. devaluation followed. A very inconvenient one. the number of coupons becomes almost irrelevant). Krugman's superficial understanding of this case. ‡ That the monopoly of central banks should re-examined. is just an appetizer of the ignorance he displays in the rest of this book. The Mexican government faced a dilemma. foreign speculators. since it depends on technology and regulations in financial markets (with the 150 families on Internet and with sophisticated financial contracts. the government sold 18 banks it owned. ‡ There were no financial entrepreneurs within this group to create rights to coupons. Krugman says that faced with a steady drain of foreign currency reserves. The government provided full insurance coverage for almost all depositors under FOBAPROA (Fondo Bancario de Proteccion al Ahorro). It does not imply what Mr. However. But that's not quite what happened. The government then called in the Treasury-backed IMF. contrary to his analysis. so that some could take out their money at still favorable rates ² an estimated US $20 billion. and. The story was quite different. ‡ That regulations on the financial sector may prevent finding solutions to problems.‡ The "bank" has monopoly powers. The alternative was to print the pesos. the Mexican authorities' choice was between raising interest rates to prevent the drain on foreign reserves. Let start with his analysis of the Mexican situation in 1994." Once the abundance of unwanted peso paper became noticeable. why didn't the bank sell bonds and absorb the unwanted peso liquidity? It is not the case that Mexico's Central bankers did not know what they were doing. but did not impose regulations on the quality of loans. or considered the consequences of temporarily higher interest rates. They opted for the latter. Why did the Mexican central bank do that? And once financial markets found this out. Mexican insiders pulled out the money first. Politicians faced an unpleasant choice: tell to the just-about-to-go-to-vote-public that they made a big mistake. A massive printing of pesos preceded the steady outflow and the devaluation. Unfortunately. ‡ That people preferred to forego the pleasure of going out rather than pay cash for baby sitting services. used macro-economic gobbledygook to tell the populace and the world that devaluation is the inevitable remedy. But what it implies is: ‡ That more constraints should be imposed on central banks to prevent them from making big blunders to start with. . together with Krugman. However. or devalue. and not "short-term. which he has been using for years in his books and articles. and that mainly taxpayers ² rather than the banks' well-connected shareholders and bondholders ² will pick up the tab. ‡ That finding how many coupons should be issued is hardly trivial. And just before the elections. Krugman suggests. and fulfill ² nominally ² the deposit insurance induced commitment. the government faced an unexpected US $70 billion bill. they tried to hide it for a while. Between June 1991 and July 1992. Then.

He makes no reference to the fact that between 1986 and 1990 the Bank of Japan pursued a lax monetary policy. The percentage of merged households (two adult generations living together) is 50 percent in Japan. the problem there is nothing but a "financial bubble [that] « burst.K. political calculations or even the technical alternative of selling bonds to absorb the unwanted pesos. Krugman makes no reference to any of these. they buy the currency after a plunge. How quickly trust is restored once it is lost. and only 2-3 percent in the U. the tax was 57 percent. According to him the solution is simple: Japan will be prosperous again by pursuing a 4 percent inflation. What did then suddenly bring about the crash? Compounding monetary mistakes. Krugman says that Mexican policy makers did not know what they were doing." Does Krugman provide the slightest evidence? None. Beginning in 1988 it raised taxes: a 20 percent withholding tax on savings. a 2. was then postponed to come into effect after 10.S. Japan lives with unintended consequences of this complex maze of monetary and fiscal mistakes. Does one need "bubbles" to shed light on why real-estate-backed stocks crashed? In 1990. to a greater extent than in the US. and speed of . and 9 percent in France. in 1990. preventing finding solutions. the equities were backed by the real estate. nevertheless. 9 years later. a security transfer tax. price of private housing went to exorbitant levels . but they sell Indonesia's currency when it's currency plunges. and also invested in equities ² since in Japan. His answer is that financial markets have a double standard. whereas Indonesia cannot. because of extensive public housing and company-subsidized ones. the Japanese government committed a series of fiscal miscalculations. The lax monetary policy led to inflationary expectations ± even if the official indices did not capture them. and botching the devaluation itself in a way that unnerved investors.which. a 3 percent consumption tax. the government tightened its monetary policy.5 percent surtax on corporate profits. In a country in which they have confidence. Now let's go to Krugman's perception of Japan. did not show up either in the CPI. aggravated by the fact that its financial markets have been tightly regulated. like Australia. and on top. a drastic increase in capital gains tax on real estate. The Japanese did what people during inflationary times have done everywhere: bought real-estate. Will employees just agree to a more than 20 percent drop in real wages over 5 years? No mention. expanding credit instead out tightening it when speculation against the peso began.inappropriate deregulation. It is on these two matters that financial markets depend: trust. The reason probably has been the inaccurate treatment of housing in Japanese price indices. This is called analysis? But it is toward the end of the book that Krugman's lack of understanding of basic issues becomes even more troubling. displaying further loss of confidence. that's a more complex question depending on the extent of checks and balances in a country. a capital-gains tax on equity sales. He says that it is unclear why Australia can sail through the Asian crisis. the book being rather fact free. If one sold before. a 6 percent tax on new cars. Which is not surprising." How come Mexican central bankers display such astonishing ignorance with 6 year regularity ² perfectly correlated with elections ² is a question Krugman does not notice. Now. For how long? He does not say. The latter happened because the 17 percent capital gains tax which came in effect after five years. Nonsense. and the U. Financial markets always had one standard: trust. or the wholesale price index. "allowing the currency to become overvalued. According to the book.

Last but not least." What does advocating maintaining the value of money have to do with "right wing" or with ideology? "Paper money" is the government's "non-interest paying debt. Originally published in International Economy. he never knew." It is a contract like all other. The article is integrated in Brenner's recent book. Why doesn't the principle of protecting property rights apply to this particular contract? Krugman advocates property rights in the abstract. but seems to be unaware that the principle is linked to maintaining monetary standards. instead of using the language of business." He either forgot how to do it. US $23. Arminio Fraga's appointment as Brazil's central banker.95 ² an apparently ten-years ago taken studio picture included ² may be a stiff price to pay for pompous self-indulgence passing for analyses. which goes to the heart of Krugman's total misunderstanding of monetary affairs. or. However corrupt some governments around have been ² and still are ² their currencies went down quickly." or "contagion" (Beware when economists start using the language of medicine and physics to describe facts and events of everyday living. The above version was reprinted in National Post (Canada). Straits Times (Singapore) etc. "bonds" are suppose to bond: "securities" assume a degree of security. Nowhere is this more evident than in the sequence of events this book was supposed to deal with. and then either repairing them quickly. who was once George Soros' partner. Brazil being the most recent example. Force of Finance (2002) . "economic analysis is « supposed to be a way of thinking. The crises of the last two years have to do with making grave political or technical mistakes. This speed has nothing to do with Krugman's rehashing old Keyensian solutions." "liquidity traps. Krugman says. let finish by commenting on a quote. No financial security can be created if there is not a good degree of trust. Reuven Brenner holds the Repap Chair at the Faculty of Management. which implies not just a good degree of trust. Consider for a moment the words associated with financial markets: "credit" comes from the Latin "credere" which means to trust. No. be they "depression economics. financial markets never had two standards. and came up quickly. It means that they do not have a clue what they are talking about).recovering trust if it is lost. At the very end of the book. provides such signal. but recognition of property rights and their enforcement. July/August 1999. He says that "right-wing critics of IMF" are mistaken when they say that that the IMF "should have told countries to defend their original exchange rates at all costs. as can be inferred from this book. only one. McGill University. The crises had nothing to do with technical problems. or giving strong signals that the mistakes will not be repeated.

Will oil drilling become a pipe dream?
Robert Higgs BrookesNews.Com
Monday 5 July 2010

If President Obama's Oval Office speech made one thing clear, it is that his administration and the activists who back it view the Gulf oil spill as simply an opportunity to advance their preexisting agenda ² which has nothing to do with cleaning up the Gulf, protecting the fragile coastal environment or fostering the region's economy. The Obama administration's May 27 order to stop all deep-water exploratory drilling in U.S. waters of the Gulf of Mexico for six months, pending the report of a commission investigating the causes of BP's Deepwater Horizon accident, is a case in point. Public and political reaction to the devastating oil release in the Gulf has revitalized a coalition of environmental and anti-energy lobbies that oppose not only deep-water drilling, but all offshore oil production and, in some cases, all use of fossil fuels. As usual, political opportunists have been quick to seize the moment. "You don't want to let a good crisis get away," declares Athan Manuel, director of lands protection in the Sierra Club's legislative office. The organization is urging a permanent moratorium on new offshore drilling. Kieran Suckling, executive director of the Center for Biological Diversity, disputes industry claims that shallow-water drilling is much safer than deep-water drilling. The center wants the existing six-month moratorium extended to all offshore drilling. Such lobbying already has born fruit. On June 8, the administration issued new safety standards for shallow-water drilling. According to Bloomberg Businessweek, "as many as 50 shallow-water drilling rigs that employ about 5,000 workers may need new permits in the next six weeks under the administration's new review." According to Vikki Spruill, president and chief executive of the Ocean Conservancy, Mr. Obama's moratorium is merely the beginning: "the first step needed in broader reform of a broken system." Lexi Shultz of the Union of Concerned Scientists believes that the BP accident, along with the recent deadly explosion in a West Virginia coal mine, has "shifted the [political] ground," putting opponents of oil, gas and coal production in much stronger position to obtain government restrictions on such forms of energy production. Members of Congress already have held hearings on the BP disaster in the Gulf, and many more will follow as grandstanding legislators seek the publicity and positioning such high-profile events make possible. New laws and regulations are virtually certain to result from the hasty legislative activity. No one knows what the legal and regulatory situation will be a year from now. Environmentalists and others seeking tighter restrictions on offshore drilling express no concern for the tens of thousands of people who will be put out of work directly or for the even greater number ² the retailers, restaurant employees, auto dealers, owners and employees of countless small businesses of every description ² who will be harmed indirectly. Nor do the anti-industry factions shed any tears for the billions of dollars in lost capital that millions of shareholders in a wide variety of companies will suffer. Many antienergy groups display little appreciation of the extent to which modern economies depend pervasively on the use of fossil fuels and petrochemical products. The regulatory and legislative fallout from the oil spill could be highly damaging to the economy even if it were confined to the energy sector, because that sector is joined at the hip with every other part of the economy. But a greater threat is that environmental and other anti-industry groups will parlay their windfall clout into more far-reaching political victories. They might, for example, steer the public's anger over Gulf oil pollution into the ongoing crusade to suppress carbon -dioxide

emissions. When this sort of political force presses against such a wide front, it creates "regime uncertainty" in the economy ² a prevalent fear among investors and businesspeople about the future security of their property rights and their ability to reap adequate returns on risky long-term investments. Once before, during the latter phase of Franklin D. Roosevelt's New Deal, between 1935 and 1939, the government's actions brought about substantial regime uncertainty. The effect was to discourage long-term private investment, delaying full recovery from the Great Depression. For the 11 years from 1930 through 1940, as a whole, net private investment was negative. Not until 1941 did annual net private investment exceed its 1929 amount. The oil pollution in the Gulf is already hurting residents, workers and business owners and causing heartbreaking damage to marshlands, beaches and the wildlife that inhabits the area's waters and wetlands. Let us hope the terrible situation will not be politically leveraged into measures that cause even greater damage to the national economy.

Robert Higgs is Senior Fellow in Political Economy for The Independent Institute and Editor of the Institute¶s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation.

No one's capital is safe in Obama's America
Claude Sandroff BrookesNews.Com
Monday 5 July 2010

Obama's poorly coded message to investors is to take your money out of America and keep it out. Whether through excessive taxation, suffocating over-regulation, or thuggish confiscation, the lesson to be drawn by anyone with excess capital is to look for friendlier places to put it to work. The list of friendlier places excludes North Korea, Venezuela, and Iran for the time being, but almost everywhere else qualifies. Russia's president spent several days in Silicon Valley recently looking for adventurous investors and came away with a $1B commitment from Cisco Systems. For Cisco, sitting on a cash hoard of $30B, with years of experience partnering with the burgeoning Russian venture capital industry, the decision was probably not a very tortured one. And what a perfect opportunity for Cisco's CEO John Chambers to keep his cash as far from Obama's collection agencies as possible. President Medvedev promises Cisco a capital gains tax rate of zero; President Obama promises to retire the evil George Bush capital gains rate of 15 percent and increase it to 20 percent in 2011. Cisco is merely telecasting to anyone who wants to tune in that Russia is taking advantage of Obama's lurch towards socialism (or worse). While Russia is portraying itself as a stable bastion for capitalists, America is increasingly seen as the land that mauled Chrysler and GM bondholders. While erstwhile command economies are liberalizing, America under Obama is nationalizing. The lesson is clear: Don't leave cash within the American financial system, earning minimal returns, with the fear that at any moment your assets can be confiscated or redistributed by a lawless and capricious federal government. When will Obama decide that Cisco (or Wal-Mart, or Apple, or Google, or any other successful enterprise) is not paying its "fair share"? Aren't the profit margins earned by Cisco on its routers -- sometimes approaching 70 percent ² too rich, or even obscene? Aren't these gains, in essence, nothing but windfall profits resulting in the eventual gouging of the average American internet subscriber? Cisco might not drill in the Gulf of Mexico for its profits, but man-made disasters could await it too, in the form of arbitrary, BP-like shakedowns of its hard-earned wealth. Why risk shakedowns in gangland Obama when a much more competent criminal like Putin will guarantee your investments? Cisco is not the only company sitting on a gigantic cash cushion. All told, the balance sheet cash for the non-financial segment of the S&P 500 totals around $1 trillion. Businesses sit on these huge asset cushions and accept earning virtually nothing in real terms because risks are too high to consider anything else. In 2011, one of the largest tax increases in American history goes into effect. Not only do capital gains rise, but so too does the payroll tax, the income tax, and the estate tax. And even then, businesses large and small, while in their final financial death throes, will have nothing to look forward to other than the doom of ObamaCare and the unknown costs that Obama will attempt to afflict via cap-and-trade and a European-style value-added tax. Fears are also emerging about the eventual burden imposed on all of us by dozens of states virtually bankrupt, especially if the federal government structures bailouts for those states deemed too big to fail. Unfortunately, the biggest and most likely to fail ² California, New York, and Illinois ² are Democrat and union fortresses that Obama will not let topple.

In contrast to Jefferson's goal of preserving "a model of government. existing businesses and potential founders of new ones are hunkering down. but a lack of demand for the loans to get started. Instead. having driven short-term interest to zero and purchased all the treasuries." our current administration is brutally determined to transform government into an organ that redistributes those fruits to its cronies.com First published in the American Thinker . If you launch a business today and organize as an S-Corporation. Strangling business creation translates into no new job creation. Claude can be reached at csandroff@gmail. and the federal drug dealer has little inventory left ² except for massive money-printing. by an organization constantly subject to his own will. securing to man his rights and the fruits of his labor. These fears are likely at the root of our persistently high unemployment. how can you be even reasonably sure will you take home enough in profits to justify the initial risk of the undertaking? And if you were successful enough to reach the revenue heights of $250K. But the effects of those financial stimulants are beginning to wear off. The reaction of sane. Fears of excessive taxation and unpredictable costs are muting American entrepreneurial animal spirits. hoping to wake up from this national nightmare in 2010 and 2012 with some of their wealth still intact. Inflation is almost the last strategy left for the Federal Reserve. and mortgage debt thrown its way. agency. rational Americans to these perverse incentives is not to create or hire or produce. The issue too often is not lack of loan supply to launch a new enterprise. Obama would target you as a capitalist predator and promote you to the highest tax bracket.These and many other states have already been thrown a life jacket during the last near-trillion dollar stimulus in the form of unemployment insurance and other transfer payments.

While General Mola used a secret fifth column within the city of Madrid to secure it for the Spanish Nationalists Obama is doing one better by using illegal immigrants to form a sixth column (the media form his fifth column) to turn the United States into a 'elective' one-party state by giving the Democrats a permanent majority. This is a fact that leftists ruthlessly exploit.Illegal immigrants are Obama's sixth column Gerard Jackson BrookesNews. When Adam Smith wrote the Wealth of Nations he noted that real wages in the American colonies greatly exceeded those in England whose wages in turn exceeded those found on the Continent. For them. In this he has the treasonous support of the leftwing unionocracy. once the population began to recover there emerged an inexorable downward pressure on wages. as labour services became less scarce relative to land their prices fell and the price of land and hence rents rose. The devastating death toll from the Black Death created a severe labour shortage that ² you guessed it ² drove up real wage rates. The ones that are doing America a favour by breaking its laws and hinting they'll vote Democrat as soon as the progressive Obama can get them a free pass. (In my opinion. Regardless of what that brilliant economist and economic historian Stephen Colbert might say there is absolutely no way that any form of intervention could have reversed the above process. This is because at each point down the curve the value of the worker's output gets lower. This economic genius justifies flooding the US with illegal immigrants from south of border ² meaning all way the down to Tierra del Fuego ² because Americans are too lazy to do the work that immigrants do (Immigrant farm workers' challenge: Take our jobs). Obama lied about illegal immigration and he lied about protecting the border and those who near it. the entertainment industry's pseudo intellectuals. Americans have seen this with respect to their southern border. many of whom ² like the loathsome Sandlers and Soros ² deeply hate the United States. and numerous billionaires. This is what the following article does. As I said earlier. The demand curve for labour is always downward sloping. This brings us to our poor downtrodden illegal immigrants. (Economists call this the value of the marginal product.) The point at which the supply of labour meets the demand for labour determines the wage rate. This was no mystery to Smith and his contemporaries: they knew full well that it was the scarcity of labour relative to land that drove up the colonies wage rates. A similar phenomenon occurred in fourteenth century Europe. hold on to that thinking cap. Now I want readers to hold on to their thinking caps because Colbert's lefty nonsense can only be debunked with an economic argument and a couple of historical examples.) We can do no better than start with Comedy Central's (known to patriotic Americans as Cowardly Central) smart-aleck Stephen Colbert. As more people enter the market the supply of labour slides down the demand curve. Any attempt to prevent . the country's so-called 'progressive' media. In other words. As expected. Instead of exploring at this point a policy that would ² if not halted ² lead to the eventual destruction of the United States let us examine the main arguments that are thrown up to defend what many might justly call treason.Com Monday 5 July 2010 It can be far easier to tell a lie than it is to refute one. It is written for those who want to counter leftist arguments in favour of illegals. To fully refute the lies that are told about the need for illegals one needs to use both history and economics. an immigration policy intended to render the constitution ineffective and install what would in effect by a dictatorship amounts to nothing less than treason. lying is a moral imperatives.

Woytinsky and Associates (New York: The Twentieth Century Fund. So how did this happen? The war slashed the flow of cheap labour from Ireland and Scandinavia ² where many of these girls came from ² while the increased demand from industry absorbed female labour from the South that would have normally gone into domestic service. But the vital factor was ² as always ² capital accumulation. Few Americans know that this once happened to the US. Sir James Caird estimated that even as late as 1851 the average weekly agricultural wages in 20 southern counties were 8s 5d compared with 11s 6d for 12 northern counties. Expanding the capital stock shifts the demand curve for labour to the right which raises the standard of living because having more capital to work with increases productivity and hence real wages. England was no different. this time from England. Source: The Tucker series converted to hourly rates and adjusted to the cost of living. This 57 per cent drop was caused by "the great Ellis Island influx in the first two decades of the 20th century"*. The situation of New York maidservants is a graphic example of an unorganised and uneducated group whose real wages rose significantly without the help of Democrats or the thugs like the SEIU. But since the industrial revolution it was the process of capital accumulation that continued to raise real wages.this movement will raise the level of unemployment. On the eve of WWI the average wage of these girls was about $3. Let us take a look at another example. (This explains why the wages of peasants fell once the population recovered from the effects of the plague). that raised real wages for everyone.50: by 1922 it had jumped in real terms to about $18. The chart was simplified to emphasise the effect that immigration can have on real wage rates. But should a comparatively swift and significant increase in the labour force occur then at best a slowdown in the growth of real wages would emerge: at worst real wages would fall.55 per cent for the period 1896-1916. Industrial development is never 'even' in that everyone is affected the same way. 1953) . Employment and Wages in the United States by W. He correctly noted . This process will continue so long as population growth does not exceed the rate of capital accumulation.27 per cent rate that prevailed from 18551895 was slashed to 0. In a purely agricultural society it would be clear that the limiting factor on wages and therefore the standard of living would be the quantity of fertile land. S. The following chart shows that the annual growth in real wages of 1. combined with severe immigration restrictions. It was this factor. There was a massive increase in industrial investment which raised real wages for everyone.

which is exactly what Colbert is. It is. Imagine the situation if the flow was to rapidly expand. babysit the kids and mindlessly vote for corrupt Democrats? And this is where Obama's sixth column appears. that parts of agriculture cannot pay enough to attract the labour it needs then it will complain of a labour shortages. This in turn brings us back to smarty-pants Colbert. a strategy for using imported labour to offset the beneficial effects of capital accumulation. To try and solve this 'labour shortage' by flooding the labour market with immigrants is to promote a policy of lowering real wages. English Agriculture in 1850-51. Taken to its logical conclusion this policy would push American wage rates down to the Mexican level if not lower. Brown. Why bother? It would be much better for America and Mexico if those US operations that need illegal labour because they cannot afford US labour packed up and moved south of the border. in fact. This would release resources in America for more valuable activities while at the same time creating more job opportunities in Mexico. This situation is not to be lamented but celebrated. London: Longman. But in these circumstances this is to say no more than the prices of their products will not cover the market wage. illegal immigrants and all those lovely jobs that good-for-nothing rednecks refuse to do. pp. And why would Colbert and Hollywood's celluloid intellectuals (Jimmy Smits for one) support a policy that cuts real wages? (The wages of others. which means that as the competition for labour raises wages more labour intensive industries have to raise their wages or otherwise lose labour. It is. This is where the phony labour shortage comes in. for example. Green and Longmans. wash their cars. dust their antiques. (Sir James Caird. a deeply anti-growth policy. It means that the standard of living is rising.that the higher-wages of the Northern counties is altogether due to the proximity of manufacturing and mining enterprise. If this leftist and the rest of those political gangsters called the Democratic Party thought for a moment that illegals would overwhelmingly vote for the Republicans not only would they be sending them back by the trainload they themselves would be down on their hands and knees at border laying anti personnel mines ² and Jimmy Smits and the rest of the corrupt Hollywood crowd would be .) Economic logic tells us that by bringing in more and more labour jobs that had once disappeared can reappear. If Colbert and his lefty mates get their way it will certainly be the latter case. This would be the response of an economic illiterate. Once a country starts accumulating capital at a far faster rate than the growth in population it eventually becomes capital intensive. 511-12. Once again we are back to capital accumulation as the key to raising the standard of living. where else can these caring and compassionate liberals get cheap labour to cut their grass.(For those who doubt me I refer to a study produced a few years ago by the UCLA Chicano Studies Research Center that concluded that the flow of illegals had driven down local wages by 11 per cent. not falling. One could argue ² and many do ² that illegals could be turned into guest workers. change their beds.) So what Sir James found is that where population increased but industrial development remained absent real wages stagnated. Those who cannot successfully compete for labour must abandon their enterprises. No doubt that great economic theorist and scintillating wit Stephen Colbert would point to this as evidence that the jobs were always there but Americans just wouldn't do them. in effect.) Think about it. If it is found. that is. Ultimately jobs are a function of price. This is why barbers get paid vastly more today than they did 150 years ago. This leads to the conclusion that the re-emergence and spread of low paid jobs would be evidence of either capital consumption or the population growing faster than the rate of capital accumulation. apart from also being a lefty bigot. 1852. at least for agriculture. do their laundry.

Why would Obama do this to his country? Because he is a dedicat d leftist who hates e America and despises its people. Obama has basically said that while he remains president the border will to all intents and purposes cease to exist. There is a word for this kind of behaviour. Gerard Jackson is Brookesnews' economics editor . *If a country was accumulating capital at a rate that resulted in a suboptimal use of the capital structure then importing workers could actually raise incomes. This is no different in principle from them bringing in an invading army to keep themselves in power. No wonder he found a home in the Democratic Party.down helping them while Comedy Central put on skits about Mexicans playing hopscotch in mine fields. What he is doing is inviting into America an army of illegals that he later hopes the Democrats can pardon in exchange for their votes.

So what is the situation? Well a bubble economy can be described as one in which price rises are unsustainable. With prices being what they are the Reserve must eventually raise interest rates again which in turn would puncture the bubble and send prices down. (Classical economists tended to use the term "effectual demand" to distinguish between the two. the structural explanation ² which is what this is ² for rising prices tacitly assumes that nominal incomes must be rising. co-founder of the international investment firm GMO. the idea of a sudden contraction that will send prices diving by 40 per cent or so are out of the question because there is no way any central bank would permit the money supply to shrink by that amount. The alternative view is that Australia has an undersupply of housing which is driving prices up. even if it increases. If it were otherwise house prices would not be rising. Sometimes these prices falls could be very severe. the key is the ability to command goods.5 times the family income instead of the usual 3. Another counter argument is that Australia's rapidly expanding population is helping to drive prices up. This is just another way of saying that it is an inflationary boom. This is not to say that there cannot be dramatic price falls in specific goods. meaning there was a monetary contraction. The following charts shows just this. There was a time that when a bubble burst prices fell. Unless a growing population has the necessary income there will be overcrowding and a fall in the quality of the housing stock. I would like a much bigger one (the wife is not so sure) because I love plenty of room. Once again. defined as M1 (currency plus bank deposits).) Now I am very fortunate in the house that we own. Today. has been driving house prices then we would expect to see a strong correlation between the two. The question is whether this is the case for housing. showing the rise in prices from 1985. But this view overlooks the fact that inflation has exactly this effect: monetary demand exceeds the supply of goods and services which in turn raises their prices. But my desire for a roomier house does not provide me with the means to buy one. Housing is not immune to this phenomenon. This is to make the mistake of confusing the desire for a product with the means of commanding.5 means that prices are about double of what they should be.Com Monday 5 July 2010 Jeremy Grantham. with the first chart. If the money supply. In addition. To raise this point is to invite the rejoinder that "housing is a basic need" that has to be met. As this possibility is never considered we must presume that the population argument assumes incomes are rising. So what? There are numerous countries where the expanding population is forced to live in shanties because it lacks the purchasing power to buy decent housing. The second chart shows the rise in the money supply for the same period while the third chart shows monetary growth for 1986-1996. Nevertheless. This puts a floor under prices*. is warning that Australia's housing market is going to crash and that house prices would need to dive by about 42 per cent if the long term-trend is to be restored.Will the Australian housing market crash or will interest rates fall instead? Gerard Jackson BrookesNews. He believes that with housing trading at 6 to 7. produced by Steve Keen. . even if it had to throw money out of helicopters.

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3 per cent. for the months April and May M1 contracted by 1. think that in the not too distant future we might see interest rates drop. I. The real question here is whether incomes are sufficiently high enough to maintain the new ratio. This where interest rates come in. It seems to me that given monetary conditions the sort of crash Grantham is predicting is somewhat farfetched. in my opinion. Although the laws of supply and demand are the same everywhere and at any time the conditions of supply and demand are not. The money supply has been comparatively flat for a while.9 points. This is not to say that the housing market is not ripe for some adjustments. The middle chart shows bank deposits and hence M1 are falling.22 per cent. Therefore I think it is more than likely that if a severe crash had been in the pipeline we would have already experienced it. There is no economic law that states that this spending pattern cannot change. are not the same as those in Australia. A significant increase in rates could undoubtedly cripple many borrowers and sink the housing market. for example. In addition. But does this mean Grantham is right? Not necessarily. If you look at the money supply charts it is easy to see that bank deposits are the principal component of M1 and from this we conclude that changes in M1 will mainly come from changes in bank deposits. it is much more likely to lower them. I do think that given the state of the money supply and the trend in manufacturing and production it is highly unlikely that the Reserve will hike rates. On the contrary. Conditions in the American housing market. unfortunately. merely that these adjustment need not herald a collapse in prices. Gerard Jackson Brookesnews' economics editor . The fact that for a lengthy period of time the price of a particular product was 2-3 times the average wage tells us nothing. In fact. that another trend cannot begin. no other way of explaining the housing boom other than in terms of the Reserve Bank's criminally loose monetary policy. Grantham is certain that interest rate rises are on the way. given the circumstance there is. There are no mathematical relationships in economics.5 points from May to June while production is down by 7. However.Correlation does not mean cause and effect. giving us an annual average of 7. the Australian Industry Group reports that its manufacturing index is down 3. on the other hand.

Obama's fascist economics is failing
Gerard Jackson BrookesNews.Com
Monday 5 July 2010

It is absolutely clear, except to the most bigoted Democrat, that Obama's economic policy of borrow and spend and then borrow and spend more and more has been a total failure. A failure that will be greatly aggravated by the impending tidal wave of tax hikes that will appear later this year. Yep, folks, tax increases ² the economic equivalent of bleeding the patient ² are just the right medicine for a sick economy. There are those who think that Obama is deliberately creating mass unemployment in the belief that this will create a permanent underclass who will sell their loyalty to the Democratic Party so long as the cheques keep rolling in. One can easily understand the emergence of this line of thinking given Obama's leftism, his loathing of capitalism, his contempt for the Constitution, his disgust for America and his disdain for Jo Sixpack, his callousness plus his insistence on steering an economic course that is obviously damaging the economy. Now there was never any doubt in my mind that Obama is a leftwing revolutionary who despises his country. One only has to examine his personal history ² the one the corrupt media covered up ² to learn the truth of this statement. But I don't think promoting unemployment was ever part of his game plan. It seems to me that he believed he could successfully carry out his leftwing agenda ² the one he didn't run on ² while using Keynesian economics to solve the unemployment problem. By restoring full employment this would legitimise his agenda, rescue congressional Democrats from a November debacle thereby simultaneously securing a second term thus giving him and his fellow socialists the opportunity to firmly impose a state directed economy on the US. In other words, a fascist economy. So part of the key to getting enough Americans to accept the need for a massive expansion of government was to bring about a substantial cut in unemployment. He failed. What the vast majority of people do not understand is that the difference between a fascist economy and a socialist economy is merely one of appearance. In a fascist economy the state ² through its central planning agency1 ² decides the quantity and 'quality' of goods to be produced, how much will be invested, where each individual will work and what his role in society will be; capitalists become mere state managers and their property is theirs in name only (Immelt of General Electric is only just getting the), entrepreneurship ceases and 'profits' are only allowed to the extent that they serve the interests of the state which in turn represents the people. Hence the Nazi slogan: "The common good ranks above private profit" (Gemeinnutz geht vor Eigennutz). As Pitigliani, an Italian Fascist, stated: The function of private enterprise is assessed from the standpoint of public interest, and hence an owner or director of a business undertaking is responsible before the State for his production policy. Thus the State reserves to itself the right to intervene and to take the place of the individual, should he misuse his rights. (Contributors: Fausto Pitigliani, The Italian Corporative State , Macmillan, New York, 1934, p. x.) Obama or any member of his leftwing gang could have written this nonsense. (It needs to be recalled that Roosevelt, like General Juan Peron, was a great fan of fascist 'economics'. I mention Peron because his economics wrecked the Argentinean economy.) In the 1920s and 1930s fascism was admired as the "Third Way". However, a growing number of Americans are expressing the opinion that if Obama's big government strategy is doing nothing for unemployment and growth then what good is all this spending, borrowing and regulating? Moreover, might it not be hindering recovery?

I honestly think that Obama did not expect this would happen. Didn't Romer and the rest of his tame Keynesian economists assure him that unemployment would not exceed 8 per cent and that it would quickly fall again? So what went wrong? Fascist economics suffers from the same problem as Marxist economics in that it has nothing to do with real economics at all. S. G. Strumilin, a Marxist 'economist', made this clear when he forcefully declared: "Our task is not to study economics but to change it. We are bound by no laws". (Cited in Robert Coquest's Harvest of Sorrow, Pimlico, 2002, p. 112.) Well, we all know how that worked out. To a certain extent the same can be said of Keynesianism. In his foreword to the German edition of his General Theory (1936) Keynes cheerfully admitted: The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory. But a sound grasp of economic theory reveals that Keynes was as wrong on this point as he was on so many others. The Austrians pointed out that the Keynesian magic was nothing more than a monetary trick, one that used inflation to lower the cost of hiring labour, a fact that Keynes himself admitted: Whilst workers will usually resist a reduction of money-wages, it is not their practice to withdraw their labour whenever there is a rise in the price of wage-goods [consumption goods]. (The General Theory of Employment Interest and Money, Macmillan-St. Martin¶s Press, 1973, p. 9.) The success of the trick depends on the existence of the money illusion. However, as soon as people detect that prices are rising they adjust their behaviour accordingly. For example, unions will demand wages be adjusted for inflation. Once this happens unemployment will tend to rise again. However, in a totalitarian state the people must suffer in silence, as in Cuba and North Korea2. Therefore no state can escape the laws of economics. And that includes Nazi Germany. Austrians stress that money is not neutral. Therefore expanding the money supply will misdirect production. To maintain its existence this misdirected production will require greater and greater monetary injections to survive. Eventually the monetary brakes are applied. If the state is powerful enough it can survive the economic consequences of its policies by holding the population in fear. In a democracy they throw the bums out. Unlike the Austrians who believe that the key to avoiding economic busts is to avoid booms Keynes argued that the real problem is how to keep the boom going. As for misdirected production being a problem, he would have none of it though he did admit in the General Theory that misdirected investment does take place he brushed it aside as of no consequence3. Yet in the same work he recognised the emergence of bottlenecks which he also dismissed. But the Austrians use capital theory to demonstrate that bottlenecks are produced by misdirected production. They are in fact the product of malinvestments that will have to be eventually liquidated. Now if Keynes had been right about the nature of booms and busts then his policy of letting loose with the money supply while forcing down interest rates would have created a permanent boom after WWII. Instead, the world is now in a grave financial mess and America finds herself 'led' by a man who detests her and whose policies are at best a recipe for stagnation ² even if full employment was restored. At worst they will result in a steep decline in the standard of living, except for his billionaire pals and his Hollywood fan club.

1

In Nazi Germany planning was carried out through the Reichswirtschaftsministerium and in the Soviet Union it was done through Gosplan.
2

When Hitler became Chancellor in 1933 the official unemployment rate exceeded 25 per cent. Six years later there were acute labour shortages. During this period there was a massive increase in public spending. However, as the demand for German labour rose real wages fell significantly. Another point is that the fall in real wages meant that consumption was severely cut ² a deliberate policy of the Nazi regime ² which refutes the popular idea that a fall in personal consumption would reduce the demand for labour and deepen the recession.
3

In his Treatise on Money (Vol. I, Macmillan and Co. Limited, 1953, p. 92.) Keynes admitted that money is not neutral but did not follow through on this. Henry Thornton was a far greater monetary theorist than Keynes ever was (An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, 1802) as was Malthus (Edinburgh Review, February 1811, pp. 363372). Gerard Jackson is Brookesnews' economics editor

He's as reviled as he is worshipped. Dimly aware of Guevara's moral turpitude and completely unwilling to confront it she sank effortlessly into moral ambivalence. So the truth is somewhere in the middle. I'm a black-and-white sort of guy. If I saw a sadistic thug cheerfully put a bullet into the head of a 14-year-old kid I would have no hesitation in calling the murdering bastard an evil son of a bitch. lab elled a murderer and butcher by conservatives. Showing vastly more courage than most journalists are capable of. 27 February 1860). and the accidental truth of the assertion does not justify or excuse him. New York City. He bellowed at the boy to kneel in front of him.The media leftist bigotry aids treason Gerard Jackson BrookesNews. Not only is Guy's position morally untenable it is an assertion that directly contradicts the truth. Why should they when they themselves share her corrupt beliefs. a freedom fighter by socialists. About two-thirds through this piece of agitprop Guy told readers: Che Guevara's legacy is much disputed. In father's footsteps. Abraham Lincoln demonstrated that he fully understood the moral and intellectual bankruptcy of this devious and unprincipled approach when he warned: Let us not be diverted by more of these sophistical contrivances wherewith we are so industriously plied and belaboured ² contrivances such as groping for some middle ground between the right and the wrong (Speech at the Cooper Union. San Martin who was a reluctant guest in early days of Castro's Gulag. . The truth is perhaps somewhere in the middle. Not one of her colleagues ² particularly at the Huffington Post ² objected to her outrageous lies about the US and or questioned her leftist bigotry.Com Monday 12 July 2010 One of the interesting things about the recent arrest of 10 Russian agents by the FBI is that one of them (Vicky Pelaez) not only worked for Castro's KB-trained DGI but her cover as a leftwing journalist allowed her to blend in perfectly in the American media. Unfortunately journalists like Guy seem unable to master the plain-speaking style or moral clarity of a nineteenth century woodsman turned lawyer. This very revealing incident returns me Rosalyn Guy who wrote a simpering article promoting Aleida Guevara who had come to Australia to whitewash ² with the aid of media fellow travellers ² her father's sadistic crimes and Castro's murderous regime (The Age. 25 May 2005). And talking of 14-year-old kids brings to mind Mr. Once again let us turn to Lincoln for illumination. Recounted that on one occasion Guevara's thugs dragged a 14year-old boy out his cell and into the prison court yard where the heroic Guevara was waiting for him. the lad eye-balled Guevara and shouted in his face: "If you're going to kill me you'll have to do it while I'm standing! Men die standing!" Guevara then put his pistol to the boy's head and blew out his brains. In a letter to a Springfield newspaper he stated with the utmost moral clarity the fact that: It is an established maxim and moral that he who makes an assertion without knowing whether it is true or false is guilty of a falsehood.

judicial proof is unnecessary. is imprisoned. No one really knows how many were murdered in La Cabana. lefty feminists like Guy prefer to suck up to sickening creeps like Aleida Guevara rather than expose the plight of Cuban political prisoners like Maritza Lugo Fernandez). President of the 30th of November Democratic Party. Not satisfied with simply murdering these people. These procedures are an archaic bourgeois detail. Demonstrating that there really is such a thing as justice. While the killings proceeded the gallant Guevara sat back and chewed on his steak dinner. Needless to say. This article barely scrapes the surface of Guevara's murderous record. When he was cornered by Bolivian troops this swaggering sadist blubbered and begged for his life.Compare this boy's courage with Guevara's last few seconds on this earth. He immediately set about his grisly work of mass murder by setting up a production-line for the extermination of the regime's opponents. I believe the first camp was Guanahacabibes to which. "people who have committed crimes against revolutionary morals" were imprisoned ² and worse. . no wonder Michael Moore loves him). This is a revolution! And a revolutionary must become a cold killing machine motivated by pure hate. (We get an idea of the scale of Guevara's crimes from Daniel James' Che Guevara: A Biography. When its revolutionary thugs couldn't find him they arrested his father and then shot him. in Guevara's own words. James wrote that Guevara admitted to ordering thousands of executions. Well. A short time later the regime went after Barberia. his captors did humanity an enormous favour and gave this child-killing thug a well-deserved lead injection. While Amnesty International smears Guantanamo as part of a Gulag it turns away from Castro' Gulag which was enthusiastically set up by ² you guessed it ² that lovable rascal Che Guevara. We do know from eye-witness accounts ² the sort of accounts that journalists like Rosalyn Guy prefer to censor ² that Guevara drenched the fortress's dungeons and grounds in blood. that's Hollywood for you. There is also the infamous women's prison popularly known as Manto Negro [Black Cloak] in which Maritza Lugo Fernandez. he had their relatives dragged in front of the mangled corpses just to make sure they got the right revolutionary message. And this is the sadistic butcher that Robert Redford worships. And how did this Argentinean Beria feel about murdering people? Fortunately the snivelling coward was good enough to publicly make his feelings known: To send men to the firing squad. In the following quote from Motorcycle Diaries Guevara gave full vent to his hatred and murderous lust: Crazy with fury I will stain my rifle red while slaughtering any enemy that falls in my hands! My nostrils dilate while savouring the acrid door of gunpowder and blood. Carlos Barberia related to the New Jersey Record how one day Guevara invited him to watch his goons gun down four "counter-revolutionaries". On becoming dictator one of Castro's first acts was to put the psychotic Che Guevara in charge of Havana's La Cabana fortress. The last thing this slimy leftwing Hollywood icon wanted to do was tarnish Guevara's noble image). This incident planted in Barberia an undying hatred of Guevara. With the deaths of my enemies I prepare my being for the sacred fight and join the triumphant proletariat with a bestial howl! (Robert Redford carefully removed this quote from the film. Nevertheless the sophisticated likes of Rosalyn Guy can still seriously suggest that the truth about this truly evil character lies somewhere in middle between being a "freedom fighter" and a "butcher". (Gee.

Gerard Jackson is Brookes¶ economics editor .Why are the likes of Rosalyn Guy driven to try and defend this mass murderer? Is it because they believe his socialist ideology justified his crimes? It is the old leftist story of judging a man by his alleged intentions and not his crimes ² but only if he intends to bring about a socialist state.

there is no federal government limit). 2011: First Wave: Expiration of 2001 and 2003 Tax Relief. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones. There are thousands of families with special needs children in the United States. Americans will no longer be able to use health savings account (HSA). The full list of marginal rate hikes is below: ‡ The 10 percent bracket rises to an expanded 15 percent ‡ The 25 percent bracket rises to 28 percent ‡ The 28 percent bracket rises to 31 percent ‡ The 33 percent bracket rises to 36 percent ‡ The 35 percent bracket rises to 39. The standard deduction will no longer be doubled for married couples relative to the single level. The "marriage penalty" (narrower tax brackets for married couples) will return from the first dollar of income. and families. The return of the Death Tax. The child tax credit will be cut in half from $1000 to $500 per child. The lowest rate will rise from 10 to 15 percent. small business owners. They will hit families and small businesses in three great waves on January 1.6 percent (this is also the rate at which two-thirds of small business profits are taxed).6 percent Higher taxes on marriage and family. and many of them use FSAs to pay for special needs education. All the rates in between will also rise.Com Monday 12 July 2010 In just six months.C. The top income tax rate will rise from 35 to 39. the largest tax hikes in the history of America will take effect. The capital gains tax will rise from 15 percent this year to 20 percent in 2011.8 percent in 2013.6 percent in 2011. flexible spending account (FSA). 2011. or health reimbursement (HRA) pre-tax dollars to purchase non-prescription. For those dying on or after January 1 2011. There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children. (National . The dependent care and adoption tax credits will be cut. there is no death tax. the GOP Congres enacted s several tax cuts for investors. over-the-counter medicines (except insulin). This year. D. These will all expire on January 1. These rates will rise another 3. They include: The "Medicine Cabinet Tax" Thanks to Obamacare. Tuition rates at one leading school that teaches special needs children in Washington. which has the same mathematical effect as higher marginal tax rates. Itemized deductions and personal exemptions will again phase out. In 2001 and 2003. 2011: Personal income tax rates will rise. The dividends tax will rise from 15 percent this year to 39. Second Wave: Obamacare There are over twenty new or higher taxes in Obamacare. The "Special Needs Kids Tax" This provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2500 (Currently. there is a 55 percent top death tax rate on estates over $1 million. Several will first go into effect on January 1.Six months to go until the largest tax hikes in United States history Ryan Ellis BrookesNews. Higher tax rates on savers and investors.

Under current law. all of it will have to be "depreciated." This ability will no longer be there. or "depreciate") equipment purchases up to $250. Tax credits for education will be limited.Child Research Center) can easily exceed $14. Third Wave: The Alternative Minimum Tax and Employer Tax Hikes. Under tax rules. a retired person with an IRA can contribute up to $100. and many tax relief provisions will have expired. and pay taxes at the higher level. The HSA Withdrawal Tax Hike.000. The biggest is the loss of the "research and experimentation tax credit. This contribution also counts toward an annual "required minimum distribution. Congress' failure to index the AMT will lead to an explosion of AMT taxpaying families ²rising from 4 million last year to 28. The student loan interest deduction will be disallowed for hundreds of thousands of families. disadvantaging them relative to IRAs and other tax-advantaged accounts. Ryan Ellis is ATR Tax Policy Director and can be reached at rellis@atr. Larger businesses can expense half of their purchases of equipment.org .000 per year directly to a charity from their IRA. they'll be in for a nasty surprise ² the AMT won't be held harmless. Small businesses can normally expense (rather than slowly-deduct. up from 4 million last year. FSA dollars can be used to pay for this type of special needs education. Combining high marginal tax rates with the loss of this tax relief will cost jobs." Taxes will be raised on all types of businesses." but there are many. When Americans prepare to file their tax returns in January of 2011. These families will have to calculate their tax burdens twice. Employerprovided educational assistance is curtailed. The AMT was created in 1969 to ensnare a handful of taxpayers. many others. Small business expensing will be slashed and 50 percent expensing will disappear. which remain at 10 percent. Coverdell Education Savings Accounts will be cut. There are literally scores of tax hikes on business that will take place. The major items include: The AMT will ensnare over 28 million families. According to the left-leaning Tax Policy Center. The deduction for tuition and fees will not be available.000 per year. Teachers will no longer be able to deduct classroom expenses.000. In January of 2011. This provision of Obamacare increases the additional tax on non-medical early withdrawals from an HSA from 10 to 20 percent.5 million. Tax Benefits for Education and Teaching Reduced. This will be cut all the way down to $25. Charitable Contributions from IRAs no longer allowed.

In support of this view he quotes the . most journalists in the commercial media are not any better. not ours". This is why there is no "feedback mechanism".Com Monday 12 July 2010 I received an email from a student whose lecturer used an article by Errol Simper (Rupert Murdoch's Australian. Quite simply. for their own ideological benefit.. Of course.) According to Walsh the British oyster industry was virtually wiped out by 19th Britain's passion for laissez faire. the report also claimed that diversity of ownership could threaten editorial opinion if the owners shared similar views. By restricting broadcasting to three companies governments have created the very results that the likes of Simper sanctimoniously condemn as evidence of 'market failure. This is known as market failure. this has nothing to do with Alice in Wonderland. . When writing for The Age Max Walsh gave us the tragic tale of the British oyster.' There is no technical reason why the airwaves cannot be completely given over to the free market. . any minority would be free to broadcast just as they are free to publish. for example. the report presented a formidable case for replacing the authors with people who have a firm grasp of economic reasoning ² people who have. Unfortunately. Now what the report overlooked is that you cannot have so-called 'market failure' in the absence of a free market. According to Simper: The essence of the report's criticism was that the drive to maximise the size of their audience meant that the "three competing commercial broadcasters tend to service the most popular tastes. i. if not actually grotesque. Moreover. . It is because we do not have a free market in broadcasting that minority tastes are not catered for. producers et al. . That the leftwing Simper should support the report's findings will come as no surprise to those of us who have long suspected that he thinks Murdoch pays him for the sole purpose of defending the privileged position of the left-wing controlled ABC. it has been captured by a self-appointed ideological elite. There is no market mechanism by which viewers can provide feedback to broadcasters. That this is a case of is government failure ² or should I say government greed and ignorance ² is something the ideological likes of Simper cannot grasp. Simper had commented at length on a Bureau of Transport and Communications report that contained a segment on 'market failure' that claimed market forces are unlikely to achieve "broadcasting excellence". and that public broadcasting has escaped that fate is particularly misleading." In reality. . 'Market failure' (how socialists love that term) is said to occur when voluntary transactions have a harmful effect on a third party.) According to this brilliant academic free markets are a dire threat to the environment. The State has made it illegal to provide these services without a license. (Four years ago I received an email from another student concerning the very same article. As Max Suich said of the ABC: "It is their ABC.Market failure. free markets. But you won't hear any of this from the likes of Simper. (No. read and understood Coase and Demsetz. the ABC and the economic illiteracy of the left Gerard Jackson BrookesNews. The report's suggestion that media owners are the cause of the homogeneity of views in the media. All of which ² believe it or not ² brings me to oysters. this led Simper to state that the report "constitutes a formidable case for public broadcasting. If this were done.e. Allow me to repeat myself on this matter. August 1996) that purported to show that free markets don't work. but none of them has an incentive to service minority tastes. . The economic ignorance ² or should I say bigotry ² of some college lecturers is becoming a hazard to the public weal. The ABC is run by its journalists.

the beds were over fished by the 1850s.) It is impossible to exhaust any economic good in a free market because its price would rise to a point where it would become uneconomic to use. . laissez faire was applied to the oyster. Mr." Quite so. this is something any laissezfaire economist would have predicted). of course. It was later discovered that the outbreak had been caused by a local council allowing sewage to pollute Wallis Lake. Not only that. And where the cost of exploiting such a resource in relation to its value is low that resource could be completely exhausted. (And to think this bloke was called "one of Australia' top economic and political commentators". Under advice from Coste the oyster beds were replenished and tightly regulated." to which "it was inappropriate. Another case of local government failure. but in 1902 a number of people were afflicted with food poisoning (four died) after eating oysters polluted by human waste. But Governments would not permit this. the reporting of the likes of Walsh and Simper is still typical of what passes for informed journalism in our media. Minister for Finance. Yet Walsh blamed laisse faire for the latter. The point is that this tragic incident does not differ in principle from the 1902 tragedy. Unfortunately. This is why Britain only produces 10 million oysters a year compared with France's 2000 million.1863 Royal Commission into Sea Fisheries which recommended "unrestricted freedom of fishing be permitted hereafter". Under Jean-Baptiste Colbert (1619-83). Walsh neglected to report this case of government failure. However. The devastation of the British oyster industry was due to the oyster being treated as a free good instead of an economic good. the French oyster industry prospered under the benign guidance of the state. According to Professor Neild (from whose book Walsh obtained his information): ". certain fishermen were granted oyster concessions (licenses to fish). is treated as a free good it will be excessively used. it was local governments who polluted the oyster beds. The tragedy of the British oyster was a graphic example of the "tragedy of the commons". Predictably. All of this is something Walsh is paid more than enough to know. not laissezfaire dogmatists. enthusiastically endorsed the Professor's indictment. The result was that the oyster beds were fished out. It's a pity Walsh did not take his own advice." Walsh. the beds were virtually fished out. . . including oysters. Gerard Jackson is Brookesnews' economics editor . . glibly adding ".* On the other hand. as they still are. Even so. Furthermore. Where any resource. *In February 1997 an outbreak of hepatitis in New South Wales infected hundreds of people and killed a 77-year-old pensioner. (However. the real lesson is never to be blinded by dogma. For the oyster to be fully integrated into the market process fishermen would have had to be given property rights over the oyster beds in the same way that farmers exercise property rights over their lands and livestock. An obvious case of government failure.

Obama and his advisors did not give the slightest indication that they would abandon these so-called economic policies if elected. This brings me to the second fundamental fact. Therefore interest rates might not enter the astrosphere. I say could because if the economy has already been flattened there won't be any business demand for funds. That's why he favours deficits. The federal government is spending more than it has ever done before in peace time. Borrowing could send interest rates rocketing. Two fundamental facts need to be understood: Firstly. Resources are limited and bygones are bygones. The real trick ² and one no politician can ever master ² is to create more and more higher paying jobs so that living standards continue rise for everyone. But the pattern of spending changes and the greater the taxation the great the changes. This is simply unsustainable. So what does this make Furman and and Goolsbee?) It's a myth. He said this after the deficit had reached $455 billion and is heading for the $1 trillion mark. This is a sure bet given that Paul Krugman will be an influential though unofficial economic advisor. According to Keynesian folklore this process sets off a magical multiplier that then raises everybody's income. he added. and in doing so trigger off an inflation that could make the late 1970s look like a picnic. The more that is spent on his "investment deficit" the less can be spent on investment that raises real incomes. Roosevelt could have put every American to work had he been able to force them to endure the same horrible living standards and working conditions that Lenin and Stalin inflicted on the Russian people. it's possible the fed would oblige Obama. is a "dose of Keynesianism". Yet Obama and his economic quacks say it is not enough. However. What the US needs. . (Even Keynes would argue that raising taxes in a recession is stupid. It was based entirely on what the Obama campaign called an economic policy and what any competent economist would have called lunacy. Creating jobs is the easiest thing in the world for a government to do. even though it is highly unlikely that it could raise such huge sums in the money market ² or any other market for that matter. The results are as predicted. This is the kind of nonsense that has virtually wrecked the British economy." This is Keynesian claptrap. Considering Bernanke's Keynesian views and an apparent desire to join the Obama cavalcade. Attempts to close this kind of deficit with tax increases would crush the economy.Obama's economic nightmare Gerard Jackson BrookesNews. This is why Barney Frank ² the deficit hawk turned deficit dove² now argues that "this is a time when deficit fear has to take a second seat". But then his economic advisors Jason Furman and economist Austan Goolsbee are Keynesians. Obama claims he can do this by raising taxes and spending the loot to close his imaginary "investment deficit. In view of these fact I thought it appropriate to republish the article. He knows taxes cannot cover his outrageous spending proposals. About a week ago Obama stated with the kind of smugness that tends to emanate from conceited economic illiterates that he would create millions of new jobs by closing a federal "investment deficit. About eighteen months has passed since his inauguration and true to his word he did not change course.Com Monday This article was first published on 27 October 2008. if these so-called investments are paid for out of taxes then total spending remains the same." The ancient pharaohs had an identical policy: they called it pyramid building. Faced by an inability to fund the deficit out of taxes and borrowing an Obama government would turn to the fed. the government grab for funds would make sure the economy stayed comatosed.

The statistics do exists and they do support my economic reasoning. and the stock issues of struggling companies fell from about 500 in 1969 to precisely four in 1975. This is because monetary expansion can greatly inflate capital gains). The statistics do not prove the theory).1 billion in the first year and then $3. while this disaster would be unfolding Obama would be busy working on his imaginary federal "investment deficit. which is also a stealth attack on 401(k)s. Not to worry. Only someone utterly clueless could imagine that eliminating capital gains taxes on start-ups ² however defined ² could in anyway offset the destructive effects of the tax.4 billion and the total amount of venture capital had risen to $5. Now this is precisely what Hoover and Roosevelt did. (During a period of significant monetary expansion governments can enjoy a tax windfall.2 billion a year until 1975. the corporations and capital gains. By 1981 venture capital outlays had soared to $1. Tax collections on long-term capital gains.6 billion in 1979. from $39 million in 1977 to a staggering $570 million at the end of 1978. fewer risks would be taken because the risk capital won't be there. In 1969 President Nixon raised the capital gains tax from 28 per cent to 49 per cent. fewer innovations and inventions will be funded. High-tech companies in Silicon Valley were hit particularly hard. leapt from $8. The Democrats and their media toadies are still blaming Hoover for the resulting disaster. and business expansion will be greatly curbed. But this is only half of it. Such a huge and unfundable amount could only have the most serious economic consequences.8 billion. In 1978 Congress slashed capital gains taxes. Result: revenue from the tax dropped sharply with realised gains from the sale of capital assets falling by 34 per cent. The economic genius who says he is going to close a federal "investment deficit" aims to savage the earnings of corporations and their investment funds.5 billion in 1983 rising to $23. They also ran deficits. this resulted in an explosion in the supply of venture capital. Obama and his advisors have conned themselves into thinking they can raise massive sums from capital gains taxes. He plans to hit oil companies. This will savage the existence of venture capital. In 1981 the maximum tax rate on long-term capital gains was .7 billion in 1985. despite the dire predictions of big-spending critics of tax cuts. How much do workers think these funds will be worth when the earnings of firms they have been invested with have been devastated by Obama's destructive tax assault? The economy faces a crisis (I predicted in 2004 that it would strike in 2008) and unemployment is rising and company earnings dropping like the proverbial lead brick." (I wonder if he also has imaginary friends?) If I am wrong then statistics could easily be produced to refute me. Apart from the obvious fact ² obvious to reasonably intelligent people. Yet the Treasury had assured President Nixon that the tax increase would raise $1. But a transaction tax on capital gains is nothing but a resource allocation tax. consequently there will be fewer start-ups.There are deficits and then there are the Dems' deficit. This is obvious proof that taxes do affect behaviour. Therefore the way to avoid them is to not cash them in. Combine this stupidity with the rest of his tax and spend idiocy and the effect on equities and hence pension funds would be horrific. that is ² that capital gains disappear in recessions there is the not so obvious fact that capital gains taxes are transaction taxes. (Economic theory explains the statistics. By the start of 1979 a massive commitment to venture capital funds took place. $16.5 billion in 1978 to $10. You have to be pretty dumb with respect to economics to think that this is a good time to impose massive taxes. capital gains taxes are a great way to soak the poor. If you think about it.

000 jobs. etc. the sort of man the English speaking peoples used to mock South Americans for electing. In 1982 the US General Accounting Office sampled 72 companies that had been launched with venture capital since the 1978 capital gains tax cut. What can I say. But the oh-so clever Mr Obama and his coterie of Keynesian geniuses believe they can do what tyrants like Lenin. tried and failed to do. There is a fundamental law in economics that every socialist. If you want less of it. Stalin. That means eliminating capital gains taxes for one thing. What sensible folk call intellectual posturing. When capital-gains tax rates were raised in 1986 from 20 to 28 percent the rate of IPOs stagnated.. Things have come to a sorry pass when millions of Americans can be so easily gulled by a political joke. is how real jobs are created). All because of Nixon's ill-considered capital gains tax. In 1983 these outlays rose to nearly $3 billion. If you want more of these things you must reduce the cost of producing them. The same goes for investment and higher paying jobs. Gerard Jackson is Brookesnews' economics editor . these companies had paid $350 million in federal taxes. to conventional economists that is. Just think Peron and what he did to the once very wealthy Argentina. and at enormous cost to their victims. If you want more of a good. Compare this situation to the period from 1969 to the 1970s which saw venture capital outlays collapse by about 90 per cent. except that Obama and his crew must love economic disasters. But then Nixon never professed to know anything about economics.5 billion. Mr Obama. increase the cost of producing it.8 billion in the midst of the 1982 depression. This severe intellectual deficiency of his is concealed behind a carefully cultivated aura of sublime cerebral confidence. meddling do-gooder and arrogant political know-all thinks he can repeal: We call it supply and demand. unlike most of his media critics. He soaks up these ideas without being able to carry them to their logical conclusion. This resulted in the venture capital pool surging to $11. Astonishingly enough. Mao Tse Tung. reduce the cost of producing it. As for Obama himself. The man is an intellectual sponge. Even his appearances are nothing but studies in theatrics. Starting with $209 million dollars in funds. venture capital outlays rose to $1. The results were startling. This was about 400 per cent more than had been out-laid during the 1970s slump.cut to 20 per cent. generated $900 million in export income and directly created 135. (This.

262-63). If they did so they could easily see that the notion that politicians can overcome unemployment by putting people on the public payroll is as ridiculous as Nancy Pelosi's opinion on unemployment cheques. Pelosi ² and those like here ² is of the view that paying someone to engage in any activity must by definition stimulate growth. which return in prolific showers'. let us also assume that Obama. economists recognize that these payments cannot add to demand or create jobs because they consist of the process of merely taking money from Joe to give to Bill. This is just another way of saying that the public sector can drive the demand for labour. University of Toronto Press 1967. Not only do these cheques turn "stone into bread" but they do it faster and more effectively than any other conceivable economic policy. Joe is now employed by his neighbours at his old wage rate. Nevertheless. borrow. As John Stuart Mill wrote more than 150 years ago: The utility of a large government expenditure. if it proves anything. Collected Works of John Stuart Mill. and that the same operation. is a public benefactor to the tradesman whom he robs. Transfer payments are not included in the national accounts because they do not add to GDP. It cannot raise aggregate purchasing power. tax and regulate) is based on his faith in the ability of the state to create growth. is no longer maintained. provided that you give it to him again in exchange for his goods. His economic policy (spend. Irrespective of what she thinks economists call unemployment benefits "transfer payments". that the man who steals money out of a shop. There is nothing which impresses a person of reflection with a stronger sense of the shallowness of the political reasoning of the last two centuries. Vol. Frank and the rest of those compassionate Democrats impose a job tax on every household in Fred's street. would make the tradesman a fortune" (John Stuart Mill. In others words.Com Monday 12 July 2010 I just finished watching a video of clip of Nancy Pelosi telling us how an unemployment cheque stimulates growth because it "injects demand into the economy" which also makes these payments a "job creator". I. Unfortunately far too many of the economists who understand this fact seem incapable of carrying it further. What is really frightening about this dangerous bilge is that she and the rest of those economic illiterates in the Democrat Party believe it.. not stimulus payments.Nancy Pelosi's economic idiocy and unemployment benefits Gerard Jackson BrookesNews. than the general reception so long given to a doctrine which. What has . Presto! The street has now returned to full employment. In return for their generosity he must maintain their properties and keep the street clean. Pelosi. Essays on Economics and Society.) The first thing to note is that though everyone is working the street's total income has not changed. Assume that Joe Sixpack loses ² through no fault of his own ² his $800 a week job. proves that the more you take from the pockets of the people to spend on your own pleasures. This raises Bill's purchasing power by the same amount as it lowers Joe's. repeated sufficiently often. It is no longer supposed that you benefit the producer by taking his money. Believe it or not this is based on one of the oldest fallacies in economics and one that classical economics had thoroughly debunked. for the purpose of encouraging industry. provided that he expends it all again at the same shop. A hypothetical example will should serve to reveal the extent of Pelosi's economic stupidity. (At this point I am quite sure that readers are having no trouble seeing the fallacy in Pelosi's 'reasoning'. the richer they grow. Taxes are not now esteemed to be 'like the dews of heaven. Obama is no better. pp.

The key phrase here is demanding consumption goods directly. (John Stuart Mill. Joe's neighbours have had their total weekly income reduced by $800 in order to compensate Fred for the loss of his job. and it only by what he abstains from consuming. medicine or education.) In plain English. explaining that if we mean by demand for labour that which raises the value of labour services then demanding consumption goods directly does not perform this function. But when we demand these goods indirectly. whether they be in the form of holidays. Now I don't think Pelosi is being hypocritical here: it's just that she is literally too dumb to figure that out. as a classical economist would put it ² and hence the standard of living. But what happens when government policy prevents markets from making the necessary adjustments? Unemployment lingers. does nothing to raise real wage rates ² intensify the demand for labour. it's savings and investment that raise real wage rates and not tax-funded boondoggles. Pelosi also argues that to save part of one's income lowers total demand. When Pelosi makes the self-evidently ² at least to reasonably intelligent people ² stupid statement that taking purchasing power from A and transferring it to B raises total purchasing power she should be made to explain why tax cuts do not stimulate growth. Principles of Political Economy. And these people have the gall to assert they are smarter than Republicans. that is by increased investment in the higher stages of production. This is why Mill was able to say I conceive that a person who buys commodities and consumes them himself. that he benefits the labouring classes«(Ibid. entertainments. This is exactly what happened during the Great Depression. and expends in direct payment of labourers in exchange for labour. Gerard Jackson is Brookesnews' economics editor . etc. does no good to the labouring classes. Mill was speaking for his fellow economists when he stressed that the demand for consumer goods is not the demand for labour. The more extensive the adjustments the higher and lengthier will be the rate of unemployment unless the government changes course.) From this it follows that demanding consumption goods directly. The free market solution is to allow labour costs to adjust so that Joe can find another job that will add to aggregate demand. hightech companies. University of Toronto Press. The number of comments from rabid Democrats supporting Pelosi's economic idiocy gives ² I think ² a good idea of that party's average level of intelligence. would eventually vanish. vineyards. Under these conditions total incomes and payrolls would rise.changed is the composition of its income. One final observation. Yet to invest means to save. p. real wage rates rise. real estate. If she and her husband did not save his wide-ranging investments in resorts. 1965. 80.

After the Supreme Court declared the NRA unconstitutional in May 1935 business confidently expanded production. Moreover. is interventionary bilge that will allow massive social engineering without doing a damn thing to prevent financial crises. blames mutual hatred for the pessimism. Being a Democrat Roosevelt. Not only does business have to put up with Obama's ignorant rants it is facing a flood of taxes.4 million while the output of iron and steel exceeded the 1933-34 level by more than 100 per cent. political meddling and an energy policy that could very well swamp it. chairman and CEO of General Electric and a former Obama supporter. the banks reopened and orderly buying by retailers started to appear. completely ignoring the fact that all the hate has ² as usual ² been coming from Democrats. By 1937 unemployment had fallen from 9. Starting from March 1933 the American economy started to rally as confidence began to return. 8 July 2010. In this they have the help of leftwing 'historians' and journalists whose political bigotry is only exceeded by their ignorance. regulations.8 million in 1938.1 million in 1935 to 6. (This Act was really an extension of the NorrisLa Guardia Act passed under Hoover. Of course.4 million in 1937 to 9. And it was Jeffrey Immelt. Once the act was passed production dived. like Obama. The Australian. Therefore. by creating an atmosphere of political and economic uncertainty that the country has not experienced since the 1930s Obama has forced business to put any prospects of investment and hiring on hold. for example. Allowing the despicable likes of Frank and Dodd near anything financial is akin to putting the Mob in charge of the Fed. The Dodd-Frank financial reform bill. who said that Obama "did not like business". The Fed's index of production (1923-25) rose from 60 in March 1933 to 100 in July. giving them enhanced powers which being unions they naturally abused. simply refused to consider he was wrong and the recovery ² stunted as it was ² had proved it so. The court's decision allowed union action combined with government wage codes to significantly raise labour costs: unemployment was driven up from 6. Anatole Kaletsky*.) Not once did Anatole "The Groupie" Kaletsky refer to Obama's loathing of business. driving the industrial production index down by 25 per cent within 12 months. the Democrats ² as is par for the course ² blame everyone and everything for the disaster except themselves.Like every good Democrat Obama is incapable of learning his economic lessons Gerry Jackson BrookesNews.Com Monday 12 July 2010 America is in deep economic trouble and the great majority of economists ² having been trained within a Keynesian framework still cannot figure out why. an Obama groupie. What is not generally understood is that the anticipated coming of Roosevelt's destructive NRA led to business accelerating output. For those who think this is highly unlikely we need look no further than the Roosevelt administration. So obvious is his hostility to markets that Mort Zuckerman ² a billionaire who not only supported Obama but made heavy donations to his campaign ² recently attacked him for his anti-business policies. So in in 1937 what was now the Roosevelt Court upheld and enforced the Wagner Act.) Trade unions were legally privileged. (America-hating leftists lie to . Anatole Kaletsky. (A polarised and pessimistic US is the big threat. we need to consider the extent to which some expansion in output has been brought forward in an attempt to avoid Obama's 2011 anti business tidal wave.

Once we take this fact into account the mystery of why 500 of the country's largest companies are sitting on about $1. Although they might not fully comprehend that it is entrepreneurship that drives an economy and savings that fuel it they do know that government ² meaning politicians and bureaucrats ² can never be the engine of growth.protect Obama's dangerous economic program refutes the standard explanation for the length and depth of the Great Depression. Now this contraction continued into early 2010 and it now seems that it may be making itself felt.8 trillion in cash becomes clear. The CEOs of these companies have come to understand that this is guaranteed to paralyse the economy.) Obama's policies are once again teaching us that expectations matter.6 to 61. Using the Austrian 'definition' of the money supply I argued that a monetary contraction had clearly emerged in June 2009 and that this would affect manufacturing.8 per cent drop. If this is signalling a lengthy fall then we can expect manufacturing to contract. a 7. The rate of growth in the manufacturing production index began to gradually slow in late March and then in May the slowdown quickly accelerated falling from 66. So while business is apprehensively looking ahead to see what the brilliant Obama is going to do next it is apparently unaware that economic forces set in motion by the Fed that could send the economy into reverse are steadily and stealthily gathering speed.4 in June. there is nothing like a good dose of carpet bombing to stimulate a town's economy. overall production to shrink and unemployment to rise again before the November elections are called. *Kaletsky is the economic genius who argued that severe restrictions on CO2 emissions would stimulate economic growth and employment because they would ³have the effect on the world economy comparable to a large-scale war´ War. destruction and Keynesian madness. Yep. Last December I pointed out that the US economy was looking very sick. Gerard Jackson is Brookesnews' economics editor . The following April I warned that the US "could be facing more of a downturn than a recovery". The Democrats could then find themselves confronted by the electoral consequences of their own economic folly and the Fed's monetary mismanagement. It's because they are fearful of the consequences of Obama's policy of inserting government into every nook and cranny of the US economy.

By spending his time on making the stick he would not be able to pick up the apples that are required to keep him alive. Apples are the only good available to him that can sustain him. John's pool of funding of 40 apples is allocated towards the production of final consumer goods (i. which will see him through while he is making the special stick. whereas the 20 apples which John saved are now sustaining Rob ² the stick maker. he can only pick up some apples from an apple tree. Thus. as it were. Rob has to have 20 apples a day to keep him going.It's the savings that fuels economic growth ² not government spending Dr Frank Shostak BrookesNews. while John is maintained by the current daily production of apples. If John was to decide to make the stick he would have a problem. The 20 apples that John has secured from nature is his µpool of funding' which sustains him. In short. In other words. Observe that Rob the stick maker is sustained by John's saved 20 apples.e. Being a sophisticated individual. however. For instance. Let us say that by working 20 hours a day. he manages to secure 20 apples. a selfregenerating mechanism (i. The following simplified example will allow us to ascertain what the essence of the pool of funding is all about. after forty days he will have an adequate stock of apples that will sustain him while he is busy making the stick. which will enable him to hire the services of Rob. which keep him alive. The ingredient that makes it all possible is the pool of funding. shows that without a key ingredient. by saving an apple out of his daily production and enduring hunger. are not readily available ² they have to be extracted from nature. Note that rather than saving 40 apples John needs to save only 20 apples now. John's pool of funding will be comprised of 40 apples. take an individual John.Com Monday 19 July 2010 What typifies the modern economy is its complex structure of production that seemingly generates an endless amount and variety of goods which not only maintains our life. is that the stick is not available ² it must be made. it has life of its own). man can only secure from nature very few goods for his survival. The only way out of this predicament is for John to put aside an apple a day for the next forty days. John realises that if he had a special stick this would allow him to become more productive. producing apples). .e. man must have at his disposal an adequate amount of final goods. It seems that the production structure has. Careful examination. which is also 20 apples. also called consumer goods. Let us slightly alter the previous example and introduce an individual Rob who specializes in making sticks. To make the special stick requires two days of work. His daily production of apples could be 40 apples (i. The basics of the pool of funding concept To maintain life and well being. however. double his current production).e. stranded in a jungle. (We make the unrealistic assumption here that apples can be preserved in edible form for forty days). however. which raises the production of apples and lifts John's living standard. the entire infrastructure could not have emerged. We can see here that the saved or unconsumed 40 apples enable the making of the stick. It would appear that there is a mysterious navigator who continuously modifies the complex network of the production structure in order to cater for individuals' changing requirements. In order to stay alive. but also makes it more pleasant. Without any tools at his disposal and so by means of his bare hands. The problem. The 20 apples that John consumes sustain him and thereby enable him on the following day to engage in the picking of apples (i. after forty days.e. Because he is an expert in stick making it takes him only one day to make the special stick that John requires. These goods. apples) and towards the making of the special stick. Also.

a baker pays . of which 20 are allocated for consumption and 20 are saved. It is clear that under these conditions the 'correct' length of the roundabout method of production is determined by the size of the subsistence fund or the period of time for which this fund suffices. If he continues to consume 20 apples a day.e. can now secure meat and clothing from other individuals. What does this imply for John's pool of funding? On day one his pool of funding will be 40 apples. Payment is always done by means of various goods and services. and the greater the output will be. his pool of funding is 60 apples of which 20 is consumed and 40 are saved. On the second day his pool of funding will comprise of 20 saved apples + 40 apples from current production i. Furthermore.The Positive Theory of Capital. a subsistence fund is available to the population which will secure their nourishment and any other needs for a period of one year««. p 7) The essence of the pool of funding (or subsistence fund) which we have established with respect to our individual. and. after 21 days he will be able to use the stick. who produces apples. John. This means that the pool of funding is now comprised of a greater variety of final goods ready for human consumption. Observe that the size of the pool of funding determines the quality and the quantity of various tools that can be made. it absorbs real funding and in this sense it is a burden ² John had to make a sacrifice and save 20 apples thereby endangering his health and well being. can be widened to include many individuals that trade with each other. so to speak. Capital & Production.. or advances fund. the size of the pool of funding sets the limit on the projects that can be implemented. which will allow him to double his production of apples. let us assume of one year's duration.While the stick is being made. if production is to be carried out by a roundabout method. Macmillan and Co.The greater this fund.e. 40 apples from the daily production and 40 from savings). Now.) The pool of funding and money The introduction of money doesn't alter the essence of what the pool of funding is. from this. Money can be seen as a permit to access the pool of funding. If the pool is only sufficient to support one day of work. ( Richard von Strigl. all that we have here is an act of an exchange and not an act of payment ² money is just the medium of exchange. John. it means that he has received a claim on final goods that is worth 10 units of money. Out of this John consumes 20 apples and saves 60 apples etc. or we can also say that money is a claim on the goods in the pool of funding. Various producers who have exchanged their produce for money can now access the pool whenever they deem this to be necessary. If a baker has exchanged 10 loaves of bread for 10 units of money. and thereby raise further the production of apples. this allows John to hire the services of some other individuals that can maintain and enhance his production structure. On this. Richard von Strigl wrote: Let us assume that in some country production must be completely rebuilt. chapter 5. The only factors of production available to the population besides labourers are those factors of production provided by nature. Book 6. society draws its subsistence during the period of production customary in the community. in addition to these originary factors of production. However. then it is self-evident that production can only begin if. For instance. As the pool of funding expands. According to Bohm-Bawerk: The entire wealth of the economical community serves as a subsistence fund. (Eugen von Bohm-Bawerk. On the third day his pool of funding will be 80 apples (i. when an individual exchanges his money for goods. then it means that he can save 20 apples in one day. Mises Institute. 1891). then the making of a tool that requires two days of work cannot be undertaken. In short. the longer is the roundabout factor of production that can be undertaken.

They have agreed on the terms of the exchange because they both believe that it will promote their individual well being. he can always exercise his claim on final goods and services). he also offers time. doesn't directly supply final consumer goods. Similarly the shoemaker holds that the ten loaves of bread are much more valuable to him than his ten dollars. the buyer of the promise is temporarily transferring his claim on consumer goods to the issuer of a promise. In this case. (Both shoes and bread are part of the pool of funding as they are final goods). Claim transactions versus credit transactions When individuals exchange final goods and services for money. Man Economy and State. What about a producer of an intermediate good. the baker can always exchange his money for the final consumer goods he deems necessary (i. Obviously. in turn. so to speak. If the logs of wood had been poled up ready-made on his arrival.for shoes by means of the bread he produced. We could also say that the production of useless tools and equipment weakens the pool. John without a stick can only pick up 20 apples a day. like a producer of a special tool ² what is his contribution to the pool of funding? An individual who exchanges his money for the tool will employ the tool in the production of final consumer goods or in the production of intermediate goods that. the producer of the special tool. Additionally. while transferring his bread to the shoemaker. it is quite different when an individual exchanges money for a promise to repay money in one-year's time. Or we can say that the buyer of the promise provides a credit to the seller of the promise.45. he does offer a means to secure these goods. As long as the flow of production is maintained. When the baker exchanges his money for shoes. . while the shoemaker pays for the bread by means of the shoes he made.) Also. a baker has agreed to exchange his ten loaves of bread with a shoemaker for ten dollars. p. Hence what we have is a credit transaction. has never relinquished his claim on final consumer goods. Saved final consumer goods that were transferred to the producers of tools and equipment are therefore simply consumed by them and they make no contribution to the pool of funding. Obviously. For the baker. is lower than the value of the ten dollars. With a stick his output stands at 40 apples ² implying that John can now secure 40 apples in one day instead of two days. he has already paid for the shoes. Crusoe with the axe is only two hundred hours away. Nash Publishing. which is his saved bread. will contribute to the production of final consumer goods some time in the future. the value of his means. he would be further advanced toward his goal without the necessity of further restriction of consumption. if for some reason the flow of production is disrupted. the baker. However. he would achieve his desire immediately. which prior to the making of these new tools weren't available at all to individuals. if the tools and equipment acquired turn out to be useless. (Murray Rothbard. they are in fact engaging in a claim transaction. or a producer of any intermediate good. The baker can exercise his ten dollar claim any time he deems it to be required. In other words. In other words. with the bread that he produced prior to this exchange. then the savings of purchasers of these tools and equipment will be squandered. According to Rothbard: Crusoe without the axe is two hundred fifty hours away from his desired house.e. The baker who secures the ten dollars now holds a claim on consumer goods up to the value of ten dollars. and if the house were there to begin with. For instance. However. with the introduction of more advanced tools and machinery various new consumer goods can be produced. For instance. the baker will not be able to fully exercise his claim. he would be that much closer to his objective.

for eleven dollars in one-year time. Costs are equal to the value attached to the satisfaction which one must forego in order to attain the end aimed at. The cost is on account of the fact that while John saves. since consuming is the end of all production.e. Note that the act of saving is quite painful for John. However. These twenty apples sustain him (i. The Quarterly Journal of Austrian Economics vol 5. can be achieved by means of a special stick that must be made. which he obtained by selling his ten loaves of bread. Now. It is obvious that the factor which holds every man back from investing more and more of his land and labor in capital goods is his time preference for present goods. he denies himself the consumption of apples and as a result. saving implies giving up some benefits at present. Man. (See an interesting discussion on means ends by Jorg Guido Hulsmann . which could undermine his health and poses a threat to his life. since it means that he has been kept alive on just nineteen apples a day. Economy. p. Hence. But ³never consuming´ is an absurdity. which is bettering his situation. however. ready to save and endure hunger because he believes that with the special stick he will be able to improve his life and well being. other things being equal. he would never consume. As far as John is concerned. This. the act of saving by John is a means through which he can achieve his ultimate goal. If man. This means that consuming an apple at present will always carry a premium over a saved apple. (Ludwig von Mises Human Action.97) According to Rothbard: The decision that he (Crusoe) makes in embarking on capital formation will be a result of weighing on his value scale the utility of the expected increased productivity as against the disutility of his time preference for present as compared to future satisfactions. No 4 Winter 2002) In short. . however. What does this mean? Interest rate determination and the pool of funding Consider our simplified example of John who with his bare hands can secure only twenty apples per day. he requires a greater amount of apples. (Rothbard. which will be consumed some time in the future. did not prefer satisfaction in the present to satisfaction in the future. Hence.In a credit transaction the two parties to an exchange also set the terms of the exchange. the savings of forty apples has allowed him to double his daily production of apples. he would invest all his time and labor in increasing the production of future goods. keep him alive). and State p 44) It follows. if savings can't better an individual's life and well being. the baker agrees to exchange his ten dollars. that the return on savings must be in excess of the cost of savings in order for John to agree to save. he expects that the future benefits to his life and well being that will come as a result of a greater output of apples will surpass the cost that the act of saving imposes on him at present. To improve his life and well being. then saving will never be undertaken. doesn't get enough nourishment. A Theory of Interest. On this. the cost of achieving this was that he had foregone the consumption of these forty apples and the consequent near starvation existence for forty days. Mises wrote: That which is abandoned is called the price paid for the attainment of the end sought. After all. we have seen. He is. Why would the baker demand eleven dollars rather than ten dollars? The difference emanates from his so-called time preference. The value of the price paid is called cost. then. To make this stick requires that John put aside every day an apple so that at the end of forty days he will have enough apples to sustain him during the period of the two days that he is making the special stick.

As a result of a fall in the purchasing power of money the price of an apple increases by 10 per cent to $1. New York University Press p 153-154). As far as the shoemaker is concerned.1 apples. if one dollar buys one apple and the agreed interest rate is 10 per cent.1 since this sum will permit him to purchase 1. What is the reason for this? The newly created money doesn't have any back-up behind it as far as the production of goods is concerned ² it sprang into existence out of "thin air" so to speak.1. as a rule. which is established in accordance with his particular set-up. of course. the purchasing power of money and business risk are important elements in the formation of interest.This premium is what the phenomenon of interest is all about. The holder of the newly created money can use it to withdraw final consumer goods from the pool of funding with no prior contribution to the pool. he is willing to borrow the ten dollars and repay eleven dollars because he believes that a borrowed ten dollars will allow him to generate more than eleven dollars. the attainment of well-being in a nearer period is. As his pool of apples or the pool of funding expands. implies that he will generate enough final goods (shoes) to allow him to repay the ten dollars and the interest of one dollar. In short. The lender of the apple will also be happy to accept $1.1 will only buy him one apple. guaranteeing the satisfaction of earlier needs must necessarily precede attention to later ones. puts pressure on the pool of funding. etc.e. or nonproductive consumption. He will require $1. the allocation towards savings will only cause him to give up lesser benefits as far as life and well being are concerned in relation to his previous situation. Consequently.1 apples. the time preference of the baker. And even where not our lives but merely our continuing well-being (above all our health) is dependent on command of a quantity of goods. The reason why he can now allocate a larger percentage is because with more apples at his disposal. then in one-year's time the lender of the apple would expect to get back 1. For instance. determines that he will exchange his ten dollars for the shoemaker's promise to repay eleven dollars in a year's time.1 apples.21 will secure the lender 1.21 to agree to lend since $1. the existence of a premium) precludes the natural emergence of a zero interest rate. Apart from time preferences. Should a zero interest rate be imposed. The interaction between individuals' time preferences sets the so-called market interest. John can allocate a greater percentage of apples towards savings. Thus. an increase in the pool of funding sets the platform for lower interest rates.1 in one year time.. This. However. Now the lender will not accept $1. In other words. the lender will also require recouping the expense of insuring the credit transaction against the risk of default by the borrower. a prerequisite of well being in a later period««. (Carl Menger Principles of Economics. This stems from the fact that the first apple in John's possession serves to support his most important requirements as far as life and well being are concerned. The second apple serves to support the second most important requirements.All experience teaches that a present enjoyment or one in the near future usually appears more important to men than one of equal intensity at a more remote time in the future. the premium of having the apple now versus having it in the future is getting smaller with the increase in the stock of apples. (The consumption is non - . This. We can thus conclude that positive time preference (i. in turn. this will abort all savings and lead to the destruction of the production structure. Hence this act of consumption. According to Carl Menger: To the extent that the maintenance of our lives depends on the satisfaction of our needs. since $1. the return on savings must be above the premium in order for John to agree to save. Furthermore. Monetary expansion and the pool of funding When money is created out of "thin air" it leads to a weakening of the pool of funding. their importance is assessed in reference to the fundamental factor. means that the required return on savings will be lower. which is time preference.

by diverting real funding from wealth generating activities towards non-wealth generating activities monetary expansion only weakens economic growth. As long as the pool of funding is expanding the central bank's monetary policies appear to work. As the pace of money creation out of "thin air" intensifies it puts greater pressure on the pool of funding. Contrast this with the case when money is secured on account of the previous production of consumer goods. However. more funding is allocated towards the final production of consumer goods and less towards the maintenance and the improvement of the wealth producing infrastructure. An increase in monetary injections lowers interest rates below the accepted level where it pays to save. In other words. Consequently the flow of production of various final consumer goods weakens. We can infer from this that when money is created out of "thin air" it diverts funding away from wealth producers who have contributed to the pool of funding towards the holders o the newly f created money. For a previously given pool of funding this will imply that wealth producers will discover that the purchasing power of their money has fallen since there are now less goods left in the pool ² they cannot fully exercise their claim over final goods since these goods are not there. But as various unpleasant side effects of this loose monetary policy emerge ² such as rising price inflation ² the central bank reverses its loose stance.productive because the individual consumes goods without making any contribution to the pool of funding). If. In this case. Once this happens the central bank can print as much money as it likes but finds that it cannot "revive" the economy. As time goes by this lowers the economy's capacity to produce final consumer goods and it hence weakens the pool of funding. This in turn makes it much harder to implement various projects as far as the maintenance and the improvement of the infrastructure is concerned. The reversal of the stance undermines various activities that sprang-up on the back of the previous loose monetary stance and this in turn leads to an economic bust. Subsequently. or it even declines. For instance. however. monetary growth cannot produce a general expansion in economic activity ² also labelled economic growth. We can thus conclude that contrary to assumed ways of thinking. the pool still manages to support not only wealth producers but also various non-wealth-generating activities. This again revives various "artificial forms of life". the withdrawal of consumer goods from the pool of funding by means of money results in productive consumption. the consumption of the holder of money is fully backed up by his contribution to the pool of funding. all of this is just an illusion. and the so-called economic boom emerges again. On the contrary it only weakens the pool further and delays the date for a meaningful . In other words. On the contrary. Monetary expansion also undermines the pool of funding as a result of the consequent decline in interest rates. This runs contrary to the popular way of thinking that the central bank can grow the economy by keeping interest rates as low as possible. This in turn raises consumption beyond levels that otherwise would have taken place. by employing so -called counter-cyclical policies the central bank seems to be able to "navigate" the economy. then the economy falls into a "black hole". It must be realised though that the emerging economic growth that accompanies the boom is on account of the fact that the pool of funding is still expanding. By means of loose monetary policies the central bank can only create non-wealth-generating activities. the pool becomes so depleted that it ceases to grow. which in turn makes it much harder to make provisions for savings. All this in turn further weakens the infrastructure and so undermines the flow of production of final consumer goods. After a certain "cooling off" period the central bank reactivates its loose stance.

commodity x is durable and it is also portable. In other words. So as the demand for commodity x rises its purchasing power follows suit. over time. (Murray N. Since x is a commodity it implies that individuals attach importance to it on account of the benefits it offers among them the medium of exchange services.) With the advent of money an individual could exchange his products for money and then use money to secure the goods and services he requires. According to Rothbard. Just as in nature there is a great variety of skills and resources. pp 32-33. For instance. (See William Barnett and Walter Block." (Ludwig von Mises. Rothbard. In short. let us call it commodity x. in word. 1971). Is this conclusion also valid for commodity money? The introduction of money made it possible for individuals to specialise and engage in trade on a much wider scale than the barter economy would have permitted. many different goods have been used as the medium of exchange. Various producers of perishable goods found that it is to their benefit to exchange their produce for commodity x and then use commodity x in exchange for other goods.) . Note that producers of perishable goods can now save their produce so to speak by means of x.economic recovery. so there is a variety in the marketability of goods. in response to an increase in the demand for x. The Quarterly Journal of Austrian Economics vol 7. In addition to offering benefits such as any other good does. All this means that there is now much greater demand for x than before. which was universally employed as a medium of exchange. Can commodity money lead to boom-bust cycles? Would it make any difference if the money stock was expanded due to a rising demand for money? The answer is no. What Has Government Done to Our Money?) Would an increase then in the supply of x. Historically. some are more divisible into smaller units without loss of value. some more transportable over large distances. What matters here is that new money which is not backed up by any real goods and services was created. the producers of perishable goods realised that by means of x they could make their perishable goods more marketable in the sense that more goods and services could be now secured for their products. Some goods are more widely demanded than others. The acquired x provided the producers of perishable goods with greater flexibility as far as securing various goods and services was concerned. This in turn means that regardless of the reasons an increase in money supply always leads to the impoverishment of wealth producers and to the boom-bust menace. A stagnant or shrinking pool of funding therefore shatters the myth that central bank policies can grow and navigate the economy. On this Mises wrote that. The Theory of Money and Credit (Irvington-on-Hudson. N. no 1 (Spring 2004). people also discovered that this commodity. « there would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained.Y. In the early stages of the emergence of money it was an ordinary commodity that people demanded because it contributed some tangible benefits to their life and well being. had some features that made it more marketable than other commodities. money.: The Foundation for Economic Education. All of these advantages make for greater marketability. undermine the pool of funding? The answer is no. So the fact that producers of this commodity derive a much greater benefit than otherwise is no different from a case when a particular final good for some reasons suddenly experiences much stronger demand than before. On The Optimum Quantity of Money. which in turn makes it even more marketable. people already attached some importance to this commodity. some more durable over long periods of time.

In short. a producer of the good x will have the right. Hence. much less appreciated that the sophisticated structure of production. a growing threat to this pool and to the high living standards that we have become accustomed to. Indeed. Paper money should be seen as a receipt or a claim on the commodity x. which were popularized by John Maynard Keynes. dominate the thinking of today's western economists. so to speak. Consequently. the demand for x as the medium of exchange would decline and people would seek the services of another commodity as the medium of exchange. and this of course must lead to a weakening of the pool of funding. which generates seemingly unlimited goods and services. doesn't alter anything we have said so far. not so when a bank prints a certificate which is unbacked by x. Summary and conclusions Most individuals in the western world take the ample availability of goods and services for granted. however. We can therefore conclude that in contrast to the money out of µthin air' a market chosen money can never be harmful to individuals well being. This is. if all of a sudden the supply of x were to increase sharply in excess of demand people would find that its purchasing power would fall and this in turn would diminish its marketability. Now. On this Mises wrote: An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. which is the pool of funding. For them funding is something that can be created out of "thin air". The only reason why economies are still growing is not because of central bank and government policies but in spite of these policies. however. Given the assumption that goods will always be there. There wasn't any prior production of any useful goods including commodity x. This threat emanates from the view that there is no need These ideas. Cheap monetary and fiscal policies. Now the introduction of paper money. most economists are preoccupied with how the demand for goods and services can be boosted. however. There is. the central bank and government can give the false impression that it is their policies that made economic growth possible. Note that in the process of the exchange useful goods have been traded. It is the pool of funding which not only maintains. which masquerade as policies that aim to grow the economy. Should this persist. however. The whole system of interventionism . When asked how demand is going to be funded most modern economists reply: by means of monetary pumping and low interest rate policies of the central bank. the complex structure of production gives the impression that what is required is simply the existence of demand and the rest will follow suit. the pool of funding is the heart of the economy. Once a commodity loses its appeal as the media of exchange it remains in demand for its other attributes. Once.Now. are in fact achieving the exact opposite. the pool of funding becomes stagnant or begins to shrink economic growth follows suit and the myth that government and central bank policies can grow the economy is shattered. to withdraw from the pool in accordance with the value of the good x he has produced. So whenever this certificate is exchanged for goods and services the seller of these goods acquires a claim on x while the seller of the claim acquires goods and services. being a final consumer good it will be part of the pool of funding. but also enhances the production structure and thereby promotes our lives and well being. so to speak. an increase in the production of x doesn't deplete the pool of funding but on the contrary expands the pool. does not have life of its own. In order that the production structure can continue to supply the great variety of goods that it does requires a key ingredient. which is fully redeemable into commodity x. The bank then lends this unbacked certificate to an individual Arthur. What we have here is a claim on money that was created out of thin air. As long as the pool of funding is still big enough to support various economic activities. It is.

(Human Action 3rd edition Contemporary Books p 858. F. The fact that the economy has failed to respond as in the past to aggressive loose monetary and fiscal policies should be seen as an indication that the pool of funding is in serious trouble. Frank Shostak is a former professor of economics who now works as an economist for M.collapses when this fountain is drained off: The Santa Claus principle liquidates itself". Global . Yet despite all the monetary pumping and the aggressive lowering of interest rates the economy has continued to struggle. This in turn means that all the aggression against this pool must be stopped as soon as possible in order to prevent the unpleasant economic side effects that are the inevitable results.) Since early 2001 the US pool of funding has been subjected to the most vicious attack in the form of the aggressive lowering of interest rates.

The fact that a capital gains tax is also a resource allocation tax is also neglected. It is decision-making ability that largely accounts for the existence of high-cost and low-cost firms in any industry. as does a highly progressive income tax structure. .Com Monday 19 July 2010 Obama's impending tidal wave of taxes raises the question of how capital gains taxes affect economic growth.7 billion in 1985. investors had been punitively taxed for trying to invest in railways instead of keeping their savings in canals or government bonds? Clearly. In 1969. If you think about it. (During a period of significant monetary expansion governments can enjoy a tax windfall. Could you imagine what would have happened in nineteenth century England if. high capital gains taxes are a lousy revenue raiser. from $39 million in 1977 to a staggering $570 million at the end of 1978. and the stock issues of struggling companies fell from about 500 in 1969 to precisely four in 1975. it encourages those who have accumulated wealth to simply conserve it while reducing the flow of venture capital. The more successful the entrepreneur becomes i n satisfying consumers' wants. capital gains taxes are also transaction taxes where they are levied on realised gains. is that capital gains are economic profits and not accounting profits. the greater the financial penalty he will finally pay. $16. This is obvious proof that taxes do affect behaviour. including those clamouring for tax reform. the lifeblood of entrepreneurship. In other words. entrepreneurial mobility is severely restricted and the rewards of successfully satisfying consumers' needs are heavily taxed. President Nixon raised the capital gains tax from 28 per cent to 49 per cent. for example. In fact. the most important factor that the capital gains tax penalises is the decisionmaking ability of entrepreneurs. leapt from $8. You cannot have a dynamic economy if venture capital is penalised. Result: revenue from the tax dropped sharply with realised gains from the sale of capital assets falling by 34 per cent. The incidence of the tax will largely determine the rate at which individuals will transfer their savings to more productive investments. Yet the Treasury had assured President Nixon that the tax increase would raise $1.Why capital gains taxes retard economic growth Gerard Jackson BrookesNews. High-tech companies in Silicon Valley were hit particularly hard. this resulted in an explosion in the supply of venture capital. high capital gains taxes erect a significant barrier to the movement of savings from old established companies to newer and more innovative enterprises.1 billion in the first year and then $3. It protects those (like the late tax-loving Teddy Kennedy) who can live off their family's accumulated capital against those who are trying to accumulate capital: it is not a tax on the rich but on getting rich. capital gains taxes are a great way to soak the poor. they become a tax on social mobility.6 billion in 1979. and this is where capital gains taxes do the most damage. Furthermore. Therefore the capital gains tax also becomes a tax on entrepreneurial rent. The tax actually punishes people for moving assets into more productive activities. for example. despite the dire predictions of big-spending critics of tax cuts. By the start of 1979 a massive commitment to venture capital funds took place. Tax collections on long-term capital gains.2 billion a year until 1975. What most people do not understand.5 billion in 1983 rising to $23. In 1978 Congress slashed capital gains taxes. This is guaranteed to restrict entrepreneurial mobility. This is because monetary expansion has inflated capital gains).5 billion in 1978 to $10. What is more. This has the effect of reducing the number of transactions because that is one of the ways of avoiding the tax.

The results were startling. I find it curious that those who claim to adhere to the untenable view that cuts in capital gains taxes also cut savings have never suggested that only realised capital gains spent on consumption should be taxed. Compare this situation to the period from 1969 to the 1970s which saw venture capital outlays collapse by about 90 per cent. Clearly. In 1983 these outlays rose to nearly $3 billion. still is.000 jobs! Professor Laffer and his supporters stood vindicated. to conventional economists that is. venture capital outlays rose to $1. economic reasoning and history refute the contention that abolishing capital gains taxes would cut national savings. not that you would know this from the media. This resulted in the venture capital pool surging to $11. No sound economist would deny this proposition. All that Professor Laffer had really said is that beyond a certain point the burden of taxation would cut investment and thus reduce. However.By 1981 venture capital outlays had soared to $1. Astonishingly enough. economic growth. This was about 400 per cent more than had been out-laid during the 1970s slump. unlike most of his media critics.5 billion.4 billion and the total amount of venture capital had risen to $5. But then Nixon never professed to know anything about economics. Starting with $209 million dollars in funds. Gerard Jackson is Brookesnews' economics editor . if not halt. grossly misrepresented ad nauseam ² and now that I think of it.8 billion. And yet Laffer was lampooned. All because of Nixon's ill-considered capital gains tax. generated $900 million in export income and directly created 135. these companies had paid $350 million in federal taxes. In 1981 the maximum tax rate on long-term capital gains was cut to 20 per cent. pilloried.8 billion in the midst of the 1982 depression. In 1982 the US General Accounting Office sampled 72 companies that had been launched with venture capital since the 1978 capital gains tax cut.

What we have here. the time sensitiveness of the housing market should result in a slowing of demand.5. Note the acceleration in the prices of inputs that started in March.The Australian economy is slowing. the near future could be holding very grim prospects indeed ² and I am not referring to the threat of inflation. In other words. What is really odd about this view as it is usually presented is that it never refers to the money supply. after which it started to contract. To these commentators ² people like Peter Jonson. However. For the year 2009 the money supply (defined as bank deposits and currency) grew by nearly 5 per cent. Given the previous monetary expansion a sudden halt should be expected to have a detrimental impact on manufacturing later down the line. The fact that banking lending to business peaked in November 2008 and then began to fall is interesting. a grin without a cat. meaning that the economy could be heading into a recession. if prices are to continue to rise then money incomes must also be rising. How output and prices can simply continue to rise without an increase in the money supply is for these people a non-existent conundrum that can be happily ignored. Latest reports are that the housing market is indeed cooling. both production and the PMI peaked in April and then quickly dropped. it did flatten out in the latter part of the year and then remained comparatively flat until last March when it stopped at 247. The storyline here is that if the CPI accelerates the Reserve will have to tighten monetary policy by raising rates.Com Monday 19 July 2010 Apart from the potential threat of inflation things are looking pretty good for the Australian economy. This deceleration indicates an actual contraction in output is a distinct possibility at this stage. This obviously suggests a monetary expansion. is not a straightforward case of cause and effect where rising costs have slowed output but a situation where both output and input prices are the effects of a loose monetary. however. In fact. about which much ink is being spilt.4 per cent. (Only capital theory can successfully explain the links. As we can see. or so most of our economic commentariat think. Now it's true that banks are not the sole source of funds for business but the fact . the PMI by 11. The chart below strongly suggests that is the case. not accelerating Gerard Jackson BrookesNews.) Moreover. It was constructed on figures from the AIG's monthly reports.8 per cent and production by 16. aka Henry Thornton ² monetary policy is much like a Cheshire Cat. One finds that where monetary policy has driven manufacturing output a point is reached where input prices begin to accelerate before production slows.

) If things are going badly then one should find indicators in that part of the national accounts that deal with "contributions to growth".4 per cent and non-dwelling construction by ±0. The aggregate approach cloaks what is really happening to an economy. Before long I expect certain economists to be eating crow. even if it will be in private. These negative figures do not suggest to me an expanding economy. Last October UBS economists predicted that the Australian economy would start accelerating in the second half of 2010. (Back in 2000 I warned that even though unemployment was falling and GDP growing the US was actually going into recession. GDP can be increasing even as the economy slides into recession. Gerard Jackson is Brookesnews' economics editor .7 per cent.that lending fell ² and continues to fall ² suggests basically three things: a) the demand for loans has been shrinking. Hence. I was highly dubious then and more so now. But the really notable fact is that machinery and equipment are down by ±0. The ABS national accounts for the March quarter (ABS 5206.0) make interesting reading.2 per cent. Whichever the case ² or combination ² it should have signalled that things were not right. b) the banks tightened credit or c) consumer borrowing squeezed out small to medium sized businesses. revealing that the private contribution to GDP was only 0.

) Some conservatives think that once the economy picks up Obama might be able to garner enough credit to win a second term. the economy has turned into a disaster for the Democrats and the emails have ceased. Without a doubt the Obama administration is the most incompetent since the lamentable Carter sat in the Oval office. Democrats soon hit the keyboard. for one. a recovery had emerged. (One need look no further than once-prosperous Argentina to realise what an ignorant political bigot can do to an economy in a very short time. While the commentariat were running around in a state of confusion about the economy some conservatives were solid in their opinion that manufacturing was heralding a V -shaped recovery.Obama's policies are a recipe for economic stagnation Gerard Jackson BrookesNews. (It's a pity there was no one around to rein in the Republicans during the Bush administration.) Furthermore. however.) Should the Democrats get a well deserved shellacking in November the Republicans will have to confront the consequences of Obama's criminal spending and borrowing policies while rabid Democrats and their lying mates in the media tear at their heels. one swallow and all that stuff. Back in February I warned that "the economy is shaping up to be a disaster for the Democrats". When Obama first emerged into the political sunlight I warned that this character is a committed leftwing ideologue and a profoundly ignorant man. The chart shows the money supply rapidly climbing from September 2008 until peaking in June 2009. is not Clinton and this is not the 1990s.Com Monday 19 July 2010 Grim is one word that surely sums up the state of the US economy. What else could explain his 'economic policies'? Ideologically -driven ignorance. albeit one that Obama's tax policies would probably snuff out. there is the Fed to consider. Now there are some who sincerely believe that Obama has deliberately set out to destroy the economy. after which it started to climb again and then apparently start falling again. What he did is retard the potential for recovery while feverishly working to impose a regulatory structure and debt burden on the economy that could cripple it for a generation or more. the monetary aggregates were indicating a slowdown and not a recovery. Obama.) It's now July. Obama did not cause this recession: the lousy monetary economics of the Fed did that. For a start. . Well. particularly if Republican-controlled houses have kept him in check. Republicans were able to rein Clinton in before he could do too much damage. (A clear case of projection. (Democrats can be accused of many things but never of putting the interests of the country above their lust for power. and then falling until the following February. except that I couldn't even see a swallow. accusing me of being bigoted (pretty rich from those in a political party based on bigotry) and "twisting the economic facts and history". Americans are now ² apart from the true believers who evidently live in an alternative universe ² beginning to face up to the reality of the man and the magnitude of their electoral folly. Nevertheless.

with last month experiencing sudden falls in the manufacturing indexes. Gerard Jackson is Brookesnews' economics editor . Fewer jobs means less spending which means less growth. assuming Americans would stand for it. It's true that during a recession manufacturing sometimes finds it has rundown its inventories excessively. And surging inflation is the only means by which he can do that. Once we omit increased output from utilities. When Hitler became Chancellor in 1933 the official unemployment rate exceeded 25 per cent. and a slowdown is exactly what is happening. The point remains that public spending only appears to work when the government or the central bank can successfully engineer a sufficiently large inflation rate.It was my opinion that this 8 per cent contraction would cause manufacturing to slowdown. Desperately in search of an explanation some commentators are blaming inventory restocking coming to an end. it's performance has been pretty bad overall. This situation could very well be signalling stagnation. For those Obamatrons who believe that government spending is the road to prosperity they need look no further than Nazi Germany for a refutation. a drop of nearly 75 per cent. Nevertheless. These hacks wouldn't recognise a circular argument even if you used it to string 'em up. the Democrats' anti-growth juggernaut continues to thunder along. which was mainly due to weather conditions. The fact remains that given present conditions there is no way that Obama's policies could restore full employment without cutting real wages. And there is no way that the inventory explanation can account for the New York Federal Reserve Bank's "Empire State" general business conditions index falling by 15 points to 5. and so on. promising more of the same. In fact. At this point firms obviously try to replenish their stocks. which is what they thoroughly deserve. Six years later there were acute labour shortages. This fact at least refutes the popular idea that cutting consumption reduces the demand for labour. the production index hasn't moved. Even if full employment was restored Obama's policies would suck the life out of the economy leaving the vast majority of Americans without any hope of bettering their lives. As the demand for German labour rose real wages fell and personal consumption was severely cut. Seeking out more excuses for the absence of recovery Obama's media lackeys argue that the weak labour market is holding back recovery. But manufacturing doesn't stop restocking in lockstep.1. including a wave of tax increases.

the resources that would be used up in building solar energy plants are immense. electricity prices would continue to rise and the standard of living fall.800 divided by 75 equals 50.8 gigawatts equal 3. the insurmountable natural obstacle is energy density.) As disastrous as those figures are. Yet these are conservative figures! . They are both based on outrageous distortions and outright lies.8 gigawatts would cost we merely need to multiply 50. It is easy to assume that to determine how much a solar plant capable of generating 3.333.) Therefore. (Then again. to produce 3. To top it off.3 times the area of the gas plant to produce a miserable 0. 1.3 acres or 39.The Government's 'alternative energy' policies will be a disaster for the economy Gerard Jackson BrookesNews.7). Clearly. labour and capital that can be freely drawn on. labour and capital to produce a tiny fraction of the electricity that coal-fuelled or nuclear plants could produce with the same resources.500 tons of copper. Few people realise that it is physically impossible for solar energy to meet the needs of a modern economy. Now let us put these figures into perspective. a scientist with the National Solar Energy Research Institute in Golden. so 3. (Remember: a gigawatt is 1000.500 tons of chromium and titanium a very expensive 5 tons of silver. the vast quantities of materials solar plants would consume has been accurately calculated. Lawrence. Solar energy is so dilute that it requires masses of land. Our politicians are not so honest. In plain English. 7.800. Obviously it is the diluteness of the energy source that makes solar uneconomic. 600. Colorado. Regardless of what Greg Hunt asserts there is no "real choice" between the Labour Government's destructive energy policy and the Liberal Party's green pandering.6 square miles as against 15 square acres. Literally standing next to this twenty-first scientific miracle on 15 acres is the same company's natural gas plant that generates a massive 3. and so on. Even if this were not the case they would still be facing massive diseconomies of scale.Com Monday 26 July 2010 The Liberal Party's proposed $3. This would be a grave mistake because it implicitly assumes constant returns to scale. 75.2 billion solar fraud is just another demonstration of its leaders cowardice and wanton disregard for future living standards. (The same people who scream against 'urban sprawl' swallowing up land see nothing wrong with blighting the landscape solar plants and wind farms.0197 of its output.000 tons of steel.000 tons of aluminium. The solar plant requires 33. this super leap into the future can only produce electricity one-third of the time. 2 million tons of concrete (which is 500 times the amount of concrete a 1000 MW nuclear power plant would use!).000 tons of glass. A short time ago the New York Times published an orgiastic article on the marvels of the Florida Power & Light company's 75MW solar complex occupying 500 acres.000 watts.000.7 by $476 million (3.8 gigawatts whenever needed. President Obama did say that under his so-called energy program "electricity prices would skyrocket".) Fortunately. or any economy above a medieval level of existence.0000. Kathryn A. it gets worse. For this to be the case there would have to exist an unlimited amount of idle land. Clearly. calculated that a solar plant with a 1000 MW output capacity would consume 35. This is because solar ² including wind power ² face insurmountable natural limitations. As this is not ² and never can be ² the case then these projects would face increasing costs of production as they tried to expand output.8 gigawatts would have to cover 25.000 watts.

000 MW plant (a lot more if the 1. the opportunity costs of these plants would be colossal and totally unjustified. 56 million BTU per ton of steel.The Governor of Oregon's Energy Task Force (1975)* estimated that the actual amount of resources would be three times the amount calculated by Lawrence. This means energy costs amount to 75 million BTU per ton of aluminium. 18 MBTU/ton of glass. Solar would be a blot on the landscape. and 12 MBTU/ton of concrete. irrespective of how technically efficient solar collectors become. concrete and glass comes to about 30 trillion BTUs for a solar thermal 1. Obviously. So why are Australia's think tanks and so-called conservative columnists silent on these facts? Gerard Jackson is Brookesnews' economics editor . These figures put to rest the idea that solar is a benign and efficient alternative to coal-fired power plants. As that will be coal (no nuclear in Australia) it will involve the producti on of thousands of tonnes of solid waste plus tens of thousands of tonnes of gaseous wastes. That energy produces wastes in addition to the wastes produced by the production of the materials. A conventional plant would only use about 1000th of this for the same output. All of which will be deposited in the environment.000 MW of electricity. What is relevant is that it is based on the fact that solar energy is dilute and that this is why it can never compete with centralised power stations. The energy needed just to produce the aluminium. an environmental menace and a criminal waste of land. labour and capital and a savage attack on the standard of living. So for the same power output. All of this for a solar plant which produces 1. Obviously a part of the energy needed to produce a solar plant will be electrical. *That this report was produced 35 years ago is irrelevant. a solar plant needs about 1.000 MW is decentralized).056 times more structural metal (by weight) than a nuclear plant or a fossil burning plant.

The Australian Industry Group's report for June shows manufacturing growth is slowing significantly while input prices are accelerating. And as we know. money and economic activity is completely missing from the Reserve's press releases and monetary announcements. the money supply is. How can that be? So long as the Reserve is not converting yuan into dollars then China's demand for our resources cannot generate inflation. For inflation to emerge the banking system needs to create additional deposits (bookkeeping fictions).5 per cent. Apart from the well known fact that the CPI is a deeply flawed measure that depends on old data there is the additional fact the massive expansion that has taken place since 1996 left the economy awash with credit. This is why the Reserve says it needs to look at the CPI before it knows whether to raise interest rates. fell the following month and then remained flat until March after which it contracted in April and May at an average annual rate of 7 per cent. One doesn't need to be an economist to see that there is no way this process can increase the money supply and hence raise aggregate demand. This is not to suggest that the mining boom is not contributing to the increase in manufacturing costs. monetary growth stopped last January. It is these deposits that expand the money supply and create inflation. If the mining industry is attracting capital goods and skilled labour from manufacturing then manufacturers will not only face higher input prices they will have to eventually curb their output. But the link between time.Will the Reserve's tight monetary policy drive the Australian economy off a cliff? Gerard Jackson BrookesNews. . He warns that there will be trouble in the near future if the increase in national income caused by higher prices for resources encourages households to start borrowing again. On the other hand. Unfortunately. at least for the moment. And the faster it was going the longer it will take. Now I don't believe for a moment that the Reserve is going to allow the money supply to deflate by a significant amount. and Glenn Stevens Reserve Bank governor make this very clear. This is rubbish. even though the money supply has been contracting. But these figures do reveal how tight monetary policy has become.) Recent indicators strongly suggest that the Reserve's tightening is finally have an effect. Genuine borrowing occurs when person A temporally transfers purchasing power from himself to person B. actually contracting. the Reserve Bank of Australia and the Treasury's grasp of monetary theory is ² to put it mildly ² so poor (they don't even have a usable definition of money) that they can make no connection between monetary growth and its consequences. Recent comments by Ric Battellino. Battellino warned that the mining boom put a great deal of stress on inflation. Stevens is just as bad as Battellino. However. What is not so well known is that this is a monetary induced phenomenon.Com Monday 26 July 2010 For 2009 M1 rose by 4. though it needs to be stated that the expansion was an erratic. That a point is reached in manufacturing where input prices start accelerating at a faster rate than general prices and so bring on a profit squeeze is a well known event. (The Reserve's monetary aggregates are always a couple of months behind. Credit expansion is like a huge ocean-going liner: it takes time to put it into reverse. Deputy Governor of the Reserve. not borrowing per se. But this bidding is not inflationary. This is what is called a deflation. if Battellino had said that the boom was putting stress on manufacturing by bidding up factor prices then he would have a point.

There is absolutely no evidence that this was the case.) What they do is focus on interest rates as if the two are completely separate. In his opinion the company was able to get a 4 per cent increase per annum in volumes sold despite raising prices by 4 per cent a year. (This is like separating a Cheshire cat from its grin. If McCrann were right other companies would have been undercutting Woolworths by a significant margin. This has Peter Jonson (aka Henry Thornton) arguing that the Reserve's 4.Not only is the housing market also beginning to cool but retail prices appear to be hitting a wall. While monetary policy remains this tight there will be no stopping the economy from running to a brick wall. he has also failed to look at the monetary aggregates. All prices were rising. resulting in an annual increase in revenues of "7-8 per cent". If McCrann had bothered to look at the Reserve's consumer price index (suspect as it is) he would find that from March 2005 to last March it rose by 14 per cent. Gerard Jackson is Brookesnews' economics editor . Although our economic commentators frequently refer to monetary policy they never mention the money supply. Terry McCrann argued that competition is now preventing Woolworths from raising prices. Jonson fails to see that a so-called neutral interest rate policy is innately inflationary. It's a pretty sorry state of affairs when an eminent financial journalist cannot even consider the possibility of link between changes in general prices and the money supply.) According to this line of thinking Woolworths was able to raise prices by over 20 per cent in five years and still increase its sales. Moreover. But this company is not a monopoly.5 per cent cash rate means that "monetary policy is now neutral". (This view created for me one of those should-I-laugh-or-cry moments.

the yearly rate of growth of retail sales after climbing to 8.8 per cent in June. are of the view that the US central bank should be ready to consider additional steps to boost the US economy in the wake of a visible softening in key economic data. The ISM manufacturing purchasing management index fell to 56.8 per cent in May from 38. have fallen to 4.Influential commentators urge the Fed to raise the pace of pumping Dr Frank Shostak BrookesNews. such as professor Paul Krugman. Visible weakening is also seen in the housing market. Also.8 per cent in April.2 last month from 59. The yearly rate of growth of sales fell to minus 18. Year-on-year the rate of growth fell to 7.5 per cent in March.Com Monday 26 July 2010 Some Fed officials and various commentators. in the week ending July 9.2 per cent in the month before. the growth momentum of housing starts displays a visible decline.3 per cent in May from 30. Additionally. The growth momentum of new home sales has plunged in May.7 in May. demand for loans to purchase . For instance.

as depicted by the mortgage purchase index. which tried to balance budgets in the face of a plunging economy. The New York Times June 27. The Third Depression. Unlike their predecessors. fell 3.) .1 per cent to 163.3 the lowest level since December 1996. In his articles in the New York Times on the 27 of June and 11th of July professor Paul Krugman has warned that without a dramatic fiscal and monetary stimulus the US economy is running the risk of falling into a prolonged depression. who raised interest rates in the face of financial crisis. Unlike governments of the past. 2010. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer. today's governments allowed deficits to rise. the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. it seemed as if we might have learned from history. In 2008 and 2009.homes. According to Krugman things were different in 2008-2009. (Paul Krugman.

) More Keynesian ideas can only make things much worse Following in the footsteps of John Maynard Keynes most economists.) In the face of a weakening in the rate of growth of various price indexes Krugman holds that the Fed should start act swiftly to prevent the economy falling into a deflationary black hole. and a given level of technology without causing inflation. preaching the need for belt-tightening when the real problem is inadequate spending. If for whatever reasons the demand for the produced goods is not strong enough this leads to an economic slump. hold that one cannot have complete trust in a market economy. (Ibid. the more output can be generated. all other things being equal. and in particular Krugman. (Inadequate demand for goods leads to only a partial use o existent f labour and capital goods). What drives the economy then is spending. In this framework then. many of whom will go jobless for years. a baker produces ten loaves of bread and exchanges them for a pair of shoes with a shoemaker.) Krugman maintains that the current move towards more conservative policies. argues our New York Times columnist. And the Fed should be doing all it can to stop it. Governments are obsessing about inflation when the real threat is deflation. Now. this type of thinking will lead to another economic depression and massive unemployment. it's on the verge of happening. Hence the more that is spent the better it is going to be. Successful management in the Keynesian framework is done by influencing the overall spending in an economy. this wasn't sufficient to erase still very large unemployment. Hence Krugman's view that more stimulus is required. labour. According to our professor.Despite the stimulus. What is missing in this story is the subject matter of funding. Likewise the shoemaker has funded the purchase of bread by means of shoes that maintains the bakers' life and well being. Around the world «. It is spending that generates income. Spending by one individual becomes income for another individual according to the Keynesian framework of thinking. it makes a lot of sense to boost government spending in order to strengthen demand and eliminate the economic slump. If during a recession consumers fail to spend then it is the role of the government to step in and boost overall spending in order to grow the economy.e. And who will pay the price for this triumph of orthodoxy? The answer is. tools and machinery. (Ibid. is labelled as potential output. policy makers are currently moving away from sound policies. let us say the baker has decided to build another oven in order to increase the . In the Keynesian framework of thinking the output that an economy can generate with a given pool of resources i. Note that the bread maintains the shoemakers' life and well being. For instance. which he labels as hard money and balanced-budget orthodoxy. tens of millions of unemployed workers. Unfortunately. In this example the baker funds the purchase of shoes by producing ten loaves of bread. and some of whom will never work again. Hence the greater the pool of resources. Hence there is the need for governments and central banks to manage the economy. which Krugman labels as good policy. Mr Bernanke's "it" isn't a hypothetical possibility. If left free the market economy could lead to self-destruction. has little to do with rational analysis. which is seen as inherently unstable. (ibid.

government activities and activities that sprang up on the back of loose monetary policy whilst still permitting a positive rate of growth in the activities of real wealth generators. all other things being equal. If for whatever reasons the flow of bread production is disrupted the baker would not be able to pay the oven maker. real funding. Similarly other producers must have saved final real consumer goods ² real savings ² to fund the purchase of the goods and services they require. (Money is just a medium of exchange. so how can an increase in government outlays revive the economy? Various individuals who are employed by the government expect compensation for their work. In this case the more the government spends and the more the central bank pumps the more will be taken from wealth generators. but an adequate flow of final goods and services that maintain individuals life and well being. his production of bread will actually decline. Consequently the baker will not be able to secure the services of the oven maker. If however the flow of real savings is falling then regardless of any increase in government outlays and monetary pumping overall real economic activity cannot be revived. From this simple example we can infer that what matters for economic growth is not just the existing stock of tools and machinery and the pool of labour. We have seen that by means of a final consumer good ² the bread ² the baker was able to fund the expansion of his production structure.e. It is only used to facilitate the flow of goods. (Note that the overall increase in real economic activity is in this case erroneously attributed to the loose fiscal and monetary policies). When loose monetary and fiscal policies divert bread from the baker he will have less bread at his disposal. In order to implement his plan the baker hires the services of the oven maker. As the pace of loose policies intensifies a situation could emerge whereby the baker will not have enough bread to even maintain the workability of the existing oven. Again what we have here is a set-up where the building of the oven is funded by the production of a final consumer good ² bread. it doesn't follow that the increase in government outlays and loose monetary policy will lead to an increase in the economy's actual output. will have less real funding at their disposal. even if we were to accept the Keynesian framework that the potential output is above actual output. By doing this the government weakens the wealthgenerating process and undermines prospects for economic recovery. (The baker will not have enough bread to pay for the services of a technician to maintain the existing oven in a good shape). as a result of the increase in government outlays and monetary pumping.production of bread. As a result the making of the oven would have to be aborted. (For instance. (We ignore here borrowings from foreigners). thereby weakening any prospects for a recovery. it cannot replace the final consumer goods). The only way it can pay these individuals is by taxing others who are still generating real wealth. Now.e. Similarly other wealth generators. He pays the oven maker with some of the bread he is producing. Consequently. As one can see. Note that the introduction of money doesn't alter the essence of what funding is. is large enough to support i. fund. out of the production of ten loaves of bread if the baker consumes two loaves his real saving or real funding is eight loaves). not only does the increase in loose fiscal and monetary policies not . As a result it will not be possible to boost the production of bread. This in turn will hamper the production of their goods and services and will retard and not promote overall real economic growth. The only way fiscal and monetary stimulus could "work" is if the flow of real savings i. The government as such doesn't create any real wealth. It is not possible to lift overall production without the necessary support from final goods and services or from the flow of real funding or the flow of real savings.

By fulfilling the role of middleman. (We ignore the case of the Fed buying assets directly from non-banks). This of course means that the expansion of various economic indicators reflects a weakening in the process of real wealth formation. as various commentators including Bernanke and Krugman are doing. Hence the slowdown in the expansion should be regarded as good news for the economy. Money supply and economic indicators Now the so called economic recovery that Krugman and most commentators attribute to the success of loose fiscal and monetary policies during 2008-9 is just a reflection of monetary pumping by the Fed.7 per cent and 2. The pace of pumping remained very high during 2009 hovering at 125 per cent during January to September. after all the essence of credit is about the lending of real savings. According to Ludwig von Mises.raise overall output. If the banks were to be forced to expand lending whilst the pool of real savings is declining this would mean that they have started to expand credit out "thin air" or inflationary credit. «there is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens' spending and investment to the full extent of it quantity. The yearly rate of growth of Fed's balance sheet and AMS stood at 13. It is therefore futile to urge banks. The existence of banks enhances the use of real savings. The decline in the rate of expansion slows down the rate of damage to the process of real wealth formation. banks make it easier for a lender to find a borrower. Obviously the Fed can accelerate the pace of pumping by embarking on a very aggressive buying of assets. Now even if pumped money were to enter the economy it will only undermine further the process of real wealth formation and make the already bad economic environment much worse. . (Note that this expansion is labeled economic recovery). but on the contrary it leads to a weakening in the process of wealth generation in general. During December 2008 to September 2009 the yearly rate of growth of AMS hovered at around 22 per cent.8 per cent in December 2008 from 1. it in fact provides the borrower with the medium of exchange that can be employed to secure real stuff that is required to maintain people's life and well being.5 per cent in February 2008. (Note that there is a variable time lag between changes in the monetary expansion and changes in various economic indicators).e. Needless to say that such type of credit can only make things much worse. Since most economic indicators reflect monetary expenditure obviously the stronger the monetary pumping is the stronger various economic indicators become. Yet most commentators including Krugman label monetary driven expansion as good thing. The fact that at present banks are reluctant to go full ahead with the expansion of credit is indicative that the pool of real savings is in trouble. Lending amounts to a transfer of real savings from a lender to a borrower by means of the medium of exchange i. Year-on-year the rate of growth of the Fed's balance sheet (monetary pumping) climbed to 152. This pumped money however is unlikely to enter the economy as long as commercial bank lending remains depressed. From this we can infer that a decline in the pace of pumping since September last year is behind the current decline of the rate of growth in various economic indicators. money. to lend more if real savings are not there.3 per cent respectively in June. When a bank lends money. As a result the yearly rate of growth of our monetary measure for the US jumped to almost 33 per cent in November 2008.

most experts these days cling to the view that the market cannot be trusted in difficult times. Remember: government is not a wealth generator. draining resources from growth and efficiency. It will sustain waste and promote inefficiency. but will rescue activities that the economy cannot afford and that consumers do not want. To keep them alive is a threat to the survival of the company. What is required however. Once the losing activities are shut down. economic adjustment is not menacing or terrible. a company that has six profitable activities and four losing activities. If central bankers and government bureaucrats can fix things in difficult times. As time goes by the expanding pool of real savings will set a platform for the further expansion of various wealth generating activities. it is nothing more than a time when scarce resources are reallocated in accordance with consumers' priorities. Why doing nothing is the best policy to revive the economy Contrary to Krugman and other commentators we suggest that the best economic policy for the Fed and the government is to do nothing as soon as possible. from an economic point of view. The management of the company concludes that the four losing activities must go. why not in good times too? Why not have a fully controlled economy and all the problems will be fixed forever? The collapse of the Soviet Union's centralized system is the best testimony one can have that controls don't work. By doing nothing the Fed will enable wealth generators to accumulate real savings. it can only take resources from A and give them to B. In this sense. Also contrary to Krugman the unemployment rate can be lowered rather quickly if the labour market were to be freed. In fact. The management can also decide to use some of the released funding to acquire some other profitable activities. (The policy of doing nothing will force various activities that add nothing to the pool of real savings to disappear. Allowing the market to do the allocation always leads to better results. these activities rob scarce funding from profitable activities.Why economic cleansing promotes economic growth? The conventional thinking headed by Krugman presents economic adjustment ² also labeled as "economic recession" ² as something terrible. So the sooner the Fed and the government stop with the tampering the sooner an economic recovery will emerge. understood this when he introduced the market mechanism for a brief period in March 1921 to restore the supply of goods and prevent economic catastrophe. We suggest that decades of reckless monetary and fiscal policies have severely depleted the pool of real savings. Hence contrary to Krugman we can suggest that a move towards greater conservatism is the step in the right direction. is not the lowering of unemployment as . This will make the life of wealth generators much easier). Take. This is precisely what the government and central bank stimulus policies prevent from happening. Even the founder of the Soviet Union. On the contrary such policies only further delay the economic recovery. A better way to fix economic problems is to allow entrepreneurs the freedom to allocate resources in accordance with peoples priorities. Allowing the market to do the job will result in some activities disappearing all together while some other activities will in fact be expanded. even the end of the world. the best stimulus plan is to allow the market mechanism to operate freely. So again more of the loose policies cannot make the current situation better. Yet for some strange reason. Loose fiscal and monetary policies are not going to rescue the economy. for instance. the released funding can now be employed to strengthen the winning activities. Vladimir Lenin.

However. On the contrary loose policies only weaken the process of real wealth formation thereby weakening prospects for a sustained economic expansion.such but the creation of an environment where individuals can earn incomes that will enable them to lift their living standards. The key for such an environment is to stop sabotaging the process of real wealth generation by means of loose policies. If loose monetary and fiscal policies could have been instrumental for economic growth then by now all the poverty in the world would have been eradicated. Frank Shostak is a former professor of economics who now works as an economist for M. F. If the pool is in trouble Krugman's policies will only make things much worse and we could end up in a prolonged economic depression. Now if the pool of real savings is still ok then there is no need for Krugman's policies to revive the economy ² the pool will do it. The only reason why in the past loose monetary and fiscal policies appeared to have been effective is because the pool of real savings was expanding. Conclusion Contrary to Krugman and other mainstream economists neither the Fed nor the government's loose monetary and fiscal policies can cause an expansion in the pool of real savings. Global. The more aggressive the fiscal and monetary policies stance is the worse the economic conditions become. once this pool becomes stagnant or is declining the illusion of the effectiveness of loose monetary and fiscal policies is shattered. policy is to do nothing. Hence the best. .

) Mussolini could not have put it better &emdash. Despite the so-called stimulus and the half a trillion or so dollars injected into the economy (I'm ignoring the idle bank reserves) the economy is stagnating and the jobs situation is still grim. That Obama and his merry band of bitter leftists mock this fact reveals their not-so underlying contempt for 'their' country's traditions.7 thousand per month but for private employment it was only 96. history and citizens. Nevertheless.2 thousand. meaning there is no real economic growth if by that we define growth as capital accumulation. Instead GDP is growing by 3 per cent. Desperate to find an escape hatch some Democrats are now calling for Obama to extend the Bush tax cuts. G. From January to June total employment increased on average by 144. Now it is true that the Fed's criminally loose monetary policy created masses of malinvestments that needed to be liquidated. sufficient time to liquidate them and put the economy back on the road to recovery. (Cited in Robert Conquest's Harvest of Sorrow. As the Marxist economist S. this man of 'iron' refuses to budge. 2002. a dreadful phenomenon of the 1930s whose spectre appears ready to make a reappearance. But America is a generous and unique country and deserves much better than this. There are no economic laws. He knows what Americans deserve and he intends to go down in history as the one who to gave it to them ² good and proper. Compare this figure with the Brookings Institute's estimate that with a monthly job-creation figure of 208. We are bound by no laws". meaning the state.000 per month. (No wonder many Democrats are beginning to panic. It's ironic that Democrats who only a short time ago were . At this rate unemployment could start rising again.000 it would take 11 years to close the "job gap" ("the number of jobs it would take to return to employment levels from before the Great Recession".Com Monday 26 July 2010 If I were not such an admirer of the United States I should be inclined to say that in electing the rabid leftwing Obama to the presidency Americans deserve everything they are getting ² and good and hard. Even if there were it should be obvious to Bernanke that the real problem is not lack of dollars but the Obama administration. Pimlico. But economic laws do exist and defying them invites disaster.) This situation has shattered the post-war pattern of recession-and-recovery. nor does this appear likely in the near future.) To top it off. there has been. In plain English: a socialist. 112. Seasonally adjusted monthly employment data from the Bureau of Labor Statistics paints depressing picture. The first country in history to be founded directly on the principle of liberty and the "inalienable rights of Man". Expect Bernanke to try and redeem the situation by keeping rates at or close to zero. If this pattern had been maintained the rate of expansion in GDP would have been about 8 per cent by now and unemployment would be falling. (I bet that made him choke. only the Will of the Collective.The US economy is Obama's mess and Democrats are panicking Gerard Jackson BrookesNews. at least in my opinion. Strumilin declared: "Our task is not to study economics but to change it. Not the Marxist kind but the Mussolini kind. This is a doomed policy. p. One symptom of disaster is widespread persistent unemployment. To comprehend why Obama refuses to change economic course one needs to understand the fact that he is a genuine leftist. For these people economics is basically an ideology. There is no such thing as demand deficiency. and neither could Obama's supporters.) Naturally. the labour force is expanding at an average rate of 125. Obama's policies have sabotaged this process and given the country stagnation. Regardless of what Obama and fellow leftists assert America is special.

something has to give. If Obama is not forced to change course the economic consequences for millions of Americans will be increasing severe. It has been suggested that the government can break the economic impasse by becoming a buyer of the last resort. What is more. Gerard Jackson is Brookesnews' economics editor .arguing that tax rises were good for the economy have done a 180 degree turn. if only to try and save their rancid political skins. Although "there is a great deal of ruin in a nation". In other words. At the end of the day. Despite its size and power America is no exception. the country should try and inflate its way around consequences of Obama's economic malice by raising prices so that the money returns to business outweigh the costs of his administration's policies. The state of economic commentary is so bad that the effects of such a policy on the structure of relative prices and the production structure and hence manufacturing i thought to be s nonexistent or insignificant. It's this process that eventually lowers real wages and living standards. as Adam Smith once observed. then you are damn right. there is still a limit to what any economy can endure. Those leftwing economists (how is that for an oxymoron) who argue that government spending makes up for private investment are absolutely clueless about the nature of capital and true investment. Basically this means that the government should print hundreds of billions of dollars which it would then spend on goods and services. It has nothing to do with consumer spending spurring growth ² which it doesn't ² but the state commanding more and more resources which squeezes investment which in turn shortens the capital structure. As expected. The first and obvious thing is that this is a case of out and out inflation. they and their critics still don't get the problem with taxes. they intend to stay that way. It simply is not understood that even if this policy succeeded in restoring full employment it would only be temporary and at the expense of real wages and capital accumulation. If you think this sounds fishy.

) . It is this that gave him and his fellow leftists the cover and the excuse they needed to greatly expand government and let loose with a tidal wave of borrowing and spending. The result was a boom followed by a bust. Before he was even elected I predicted that as president he would prove to a disaster. Even this economic illiterate and his fellow travellers know what a political albatross that would be. Obama would not have been able to get away with any of his economic garbage if it had not been for the dominance of Keynesian thinking. Right now the signs are definitely not good. leaving capitalism thoroughly discredited. as I have said elsewhere. What happens is that an expanding money supply raises the monetary demand for the products of these malinvestments and so makes them profitable again. The previous criminally loose monetary policy had been largely rationalised by Keynesian thinking. after which the cycle once again resumes. much as the Japanese did with their malinvestments and with basically the same results. Americans need to wake up to the fact that Obama is a profoundly ignorant man. (The state of the housing market is an excellent example of how an unchecked credit expansion instigated by a central bank can create unsustainable pattern of economic activity. In December 2008 I warned that Americans would have to fasten their "seatbelts" and in July last year I alerted readers to the dangers of economic stagnation that his policies would produce. It continues until the central bank has to once again apply the monetary brakes. I do not believe it was ever Obama's intention to create a massive pool of unemployed. What Americans need to do right now is pray that he does not succeed in doing to their country what General Peron did to Argentina. Instead. However. at least for the survivors. Rather than allow the malinvestments created by the monetary expansion to be wrung out of the system the Obama administration ² with the enthusiastic support of Ben 'Helicopter' Bernanke ² has kept these malinvestments on life support. When this happens Keynesians always refer to it as a case of demand deficiency. The Obama presidency inadvertently exposed Keynesianism as a total fraud: a bundle of mercantilist fallacies dressed up in fancy new garb and decorated with meaningless equations. ancient errors and invalid concepts that has degenerated into a cult.) Now it is true that under certain circumstance a monetary expansion can appear to resolve the situation. it is Obama's presidency and his neo-socialist program that are in tatters. What this means is that there are economic activities that can no longer justify their existence. (There is no place in their scheme of things for the concept of disproportionalities.Com Monday 16 August 2010 Sometimes it pays to keep flogging a dead horse. had it not been proved mathematically?) he concluded that the American people would assume that his program of massive interventionism had indeed been successful and that free market economics had failed them. In this instance the horse is Obama's destructive economic policies. We call this inflation. after which it would fall. a committed leftwing ideologue with absolutely no understanding of how economies work and no desire to find out. Convinced of this fact (after all. He believed his Keynesian advisors when they told him that his spend-and-borrow program would halt unemployment at 8 per cent. So what we have is massive government support for an economically unsustainable pattern of production.President Obama's nightmare economy Gerard Jackson BrookesNews.

(From bombs to lemons. if there is too much political uncertainty about making profits then investment and spending will be severely curbed. Robertson. Monetary expansion is another matter. suppliers and workforce. first published 1926). In fact. Banking Policy and the Price Level. Literally hundreds of billions of dollars have been created by this deceitful procedure ² and it is still continuing. The effect has been to keep bond prices higher then they would otherwise be thereby helping keep rates low. The Fed creates the money to buy the agency bonds: the sellers then use the money to buy government bonds. Central banks bought agency bonds which they are now selling to the Fed in order to buy treasuries. Innocent enough on the surface. p. leaving total purchasing power unchanged. It doesn't matter how low interest rates are. Keynesians have forgotten the old the wisdom about horses and water.000 last month and payrolls had to be revised down by 97. it is a case of outright fraud. Right now he is busy monetising Obama's disastrous borrowing program. despite the expectations of Bernanke and the rest of the Keynesian cult. It is the prospect of this onslaught that is causing business to batten down the hatches. No amount of borrowing can reduce the rate of unemployment. (Last Friday 10-year notes were trading at 2. Unfortunately the dismal expectations of business regarding Obama's policies are founded entirely on reality. All that happens is that purchasing power is transferred from one group to another. there may be no rate of money interest in excess of zero which will stimulate an unwilling one. this strategy cannot continue indefinitely. Professor Robertson was far from being alone at the time he pointed out that while there is always some rate of money interest which will check an eager borrower. You're just going to love this.What went wrong? Bernanke engineered the most rapid increase in the monetary base in US history and still the economy did not move. There is no escaping the fact that the Democrats are about to strike the US economy with a blizzard of costly regulations and a barrage of high taxes. 81. Gerard Jackson is Brookesnews' economics editor . And the moronic Axelrod still cannot figure out why non-farm payrolls fell 131. But what is really striking is its total failure to stimulate recovery. (D.) Nevertheless. H. And this is where we must look. Kelley.68 per cent. There is no way that taking money from Joe Sixpack to spend on a Democrat's favourite constituents can increase the demand for labour. 1989. so to speak. Augustus M.) GM then uses the same dollars to pay its debts. even when disguised as borrowing. This is like Obama giving General Motors the authority to print dollars so that it can buy old bombs at outrageous prices in order that the sellers can buy GM volts.000 for May and June.

which should boost the economic growth.e. It is held that a fall in prices generates expectations for a further decline in prices.Com Monday 16 August 2010 On Friday July 30 the St.3 per cent was associated with a fall in industrial production of 21. consumers postpone their buying of goods at present since they expect to buy these goods at a lower prices in the future. is a terrible thing. if prices are trending down does it mean that people will stop buying at present? As a rule most individuals are trying to maintain their life and well being. It is held by mainstream thinkers that inflation of 3 per cent is not harmful to economic growth.e. Consequently. speaking on CNBC television. For most experts a little bit of inflation can actually be a good thing. this weakens the overall flow of spending and this in turn weakens the economy. people¶s living standard are going up ² so what is wrong with this? Does a general fall in prices cause people to postpone buying? Also.700 per cent since January 1998. From this way of thinking one could conclude that a general fall in prices should be associated with an economic slump. A fall in consumer expenditure subsequently not only weakens overall economic activity but also puts further pressure on prices. this means that inflation could actually be an agent of economic growth. falling prices. Indeed during 1932 the fall in the CPI of 10. They hold that a rate of inflation of around 3 per cent could be the appropriate protective "buffer". however inflation of 10 per cent could be bad news. Since reversing deflation means introducing policies that boost general increase in the prices of goods i. According to popular thinking.Is deflation really bad for the economy? Dr Frank Shostak BrookesNews. So why then is a rate of inflation of 10 per cent or higher regarded by . Note that from this it follows that deflation sets in motion a spiraling decline in economic activity. poses a problem. every holder of money can now command a larger quantity of goods and services i. Hence they would like the Fed to generate an inflation "buffer" to prevent the economy from falling into a deflationary black hole. which is labeled deflation. But is it true that a fall in prices should always be bad news for the economy? Take for instance a case where a general fall in prices has taken place as a result of an expansion in the production of goods and services. in response to a high rate of inflation consumers will speed up the expenditure on goods at present. or deflation. Now if deflation leads to an economic slump then following the logic of the popular thinking. For instance. since January 1998 the price of personal computers has fallen by 93 per cent. Consumer outlays on personal computers increased by over 2. said that the Fed must weigh medium-term inflation risks at the same time as it faces the worry that in the near term. But then. it is likely that consumers are going to form rising inflation expectations. so it is argued. Why should this be classified as bad news? On the contrary. As a result of this it is held. For most economists and various commentators a general fall in prices. policies that reverse deflation should be good for the economy. Did a fall in prices cause people to postpone buying personal computers? ± not at all. Louis Federal Reserve Bank President James Bullard.6 per cent. at a 10 per cent rate of inflation. This of course means that they will not postpone their buying of goods at present. inflation. On this way of thinking at an inflation rate of 3 per cent consumers will not postpone their spending on goods and hence will not set in motion an economic slump.

Federal Reserve November 21. Brookings June 2. In response to this. The larger the outlays are the more real savings are diverted from wealth generators. This in turn weakens the ability to grow the pool of real savings and in turn weakens economic growth. (Rather than using the money in their possession to buy goods and services.experts as bad thing? Clearly this type of thinking is problematic. (Remarks by Governor Ben S. is passed back to the original lender and therefore cannot disappear unless the original lender decides to physically destroy it. 2002. Whenever the extensive creation of credit out of "thin air" lifts the pace of real wealth consumption above the pace of real-wealth production this undermines the pool of real saving. Dickens. consumers use a larger portion of their money to repay their debt). An important cause for such a fall is a decline in fractional reserve lending. could lead to a prolonged decline in the price level.) On this way of thinking a continuous debt liquidation could put severe pressure on the money stock and in turn on households demand for goods and services. (George A. From this we can infer that the greater the percentage of credit out of "thin air" is in relation to overall credit the greater is the risk of a large fall in the money stock once the pool of real savings starts declining). it is held. It must be also emphasized here that another important factor that undermines the pool of real savings is government outlays. Consequently. William T. Deflation: Making sure "It" Doesn't Happen Here. It is loose monetary policy.e. which is fully backed up by savings. The existence of the central bank and fractional reserve banking permits commercial banks to generate credit which is not backed up by real saving i." Once the un-backed credit is generated it creates activities that the free market would never approve. All this. Perry. The un-backed credit in turn leads to the reshuffling of real savings from wealth generators to non-wealth generators. these activities consume and do not produce real wealth. Near Rational Wage and Price Setting and the Long Run Phillips Curve. the performance of various activities starts to deteriorate and bank¶s bad loans start to rise.e. Akerlof. credit out of "thin air. As long as the pool of real saving is expanding and banks are eager to expand credit various false activities continue to prosper. Many commentators including Bernanke are of the view that a fall in prices raises the debt burden and causes consumers to repay their debt much faster. which provides support for the creation of un-backed credit. banks curtail their loans by not renewing maturing loans and this in turn sets in motion a decline in the money stock. Hence to prevent this downward spiral aggressive monetary pumping by the central bank is recommended. Money. Again the debt liquidation and emerging price deflation are not the causes of the economic slump but the necessary outcome of the previous loose monetary policies of the Fed that have .) General fall in prices and money supply A general fall in prices can also emerge as a result of a fall in the money stock. A fall in the price level in turn raises the debt burden and leads to a strengthening in the process of debt liquidation. The point that must be emphasized here is that the fall in the money stock that precedes price deflation and an economic slump is actually triggered by the previous loose monetary policies of the central bank and not the liquidation of debt. Bernanke. (Without this support banks have difficulty practicing fractional reserve lending). i. once repaid by the borrower to the bank. (It must be realised that it is only commercial bank lending that is not backed up by proper savings (fractional reserve banking) that can disappear into "thin air" thus causing the decline in the stock of money.2000. George L.

The declining pool weakens the process of real wealth generation and in turn weakens borrowers¶ ability to serve the debt. it is not increases in real interest rates. Note that as a rule a general increase in prices. The fall in the money supply. the economy will follow the declining pool of real savings. Contrary to the popular view. The emergence of deflation is the beginning of the process of economic healing. which was created out of "thin air". The reason for this is that more money only weakens the wealth generating process by stimulating non -productive consumption (consumption that is not preceded by the production of real wealth). All that deflation does is shatter the illusion of prosperity created by monetary pumping. Hence a fall in the money supply leads to a fall in general prices ± labeled as deflation. Similarly. comes not on account of falling prices.weakened the pool of real savings. a fall in the money stock on account of the disappearance of money out "of thin air" is great news for all wealth generating activities since the disappearance of this type of money arrests their bleeding. Why deflation heals the economy As we have seen deflation comes in response to previous inflation. countering deflation. As a result of the fall in money various activities that sprang up on the back of the previously expanding money now find it hard going. Also note that it is not a fall in prices as such that raises the debt burden and intensifies price deflation but the declining pool of real savings. increases in real interest rates put things in proper perspective and arrests the wastage of scarce real savings thereby helping the real economy. strengthens the producers of wealth. Deflation arrests the process of impoverishment inflicted by prior monetary inflation.e. but a shrinking pool of real savings that undermine real economic growth. thereby revitalising the economy. but on account of a fall in the pool of real savings. But what about the fact that a general decline in prices is accompanied by a fall in general economic activity? Surely this means that deflation may be bad news for productive and nonproductive activities? The fall in economic activity as we have already shown. requires increases in the money supply. Obviously the side effects that accompany deflation are never pleasant. Obviously then. However. . these bad side effects are not caused by deflation but rather by the previous inflation. Again it is not the fall in the money supply and the consequent fall in prices that burdens borrowers but the fact that there is less real wealth. as suggested by many commentators. On the contrary. Deflation of the money stock. Now if the pool of real savings is falling then even if the Fed were to be successful in dramatically increasing the money supply and increasing the price level i. A fall in the money stock undermines various non-productive activities it slows down the decline of the pool of real savings and thereby lays the foundation for an economic revival." This type of money gives rise to various non-productive activities by diverting real saving from productive real wealth generating activities. This amounts to the disappearance of money that was previously generated out "of thin air. which is labeled inflation. in this situation the more money the Fed push into the es economy the worse the economic conditions become. which as a rule follows by a general fall in prices. puts things in proper perspective.

Global . this is not the case. Printing money only inflicts more damage and therefore should never be considered as a means to help the economy.e. This amounts to the disappearance of money that was previously generated out "of thin air. Conclusion Despite the almost unanimous agreement that deflation is bad news for the economy's health. Contrary to the popular view then. is precisely what is needed to set in motion the build-up of real wealth and a revitalising of the economy. so to speak. a fall in the money supply i. Obviously then.It is those non-wealth generating activities that end up having the most difficulties in serving their debt since these activities were never generating any real wealth and were really supported or funded. by genuine wealth generators. As we have seen deflation comes in response to previous inflation. Since a fall in the money stock undermines various nonproductive activities it slows down the decline of the pool of real savings and thereby lays the foundation for an economic revival. F. a fall in the money stock on account of the disappearance of money out "of thin air" is great news for all wealth generating activities since the disappearance of this type of money arrests their bleeding. money out of 'thin air'. Frank Shostak is a former professor of economics who now works as an economist for M." This type of money gives rise to various non-productive activities by diverting real saving from productive real wealth generating activities.

a country enjoying genuine economic growth is one in which productivity and real wages are rising. the proposition that Europe is currently enjoying an economic recovery is a rather dubious one. There is absolutely no basis at all for such an assumption. this process is usually defined as capital formation. Trade takes place because of differences in prices. Even a Harvard PhD should know that economic growth is also defined as forgone consumption: the process of sacrificing current consumption in favour of greater consumption in the future by transforming present goods into future goods. And as night surely follows day we find that said silver lining was only tinsel. However. capital goods. The former is the result of increased productivity that in turn raises real wages while the latter is the result of a monetary policy that drives down the exchange rate. We now see that there is a productivity induced change in the terms of trade and there is a monetary induced change. To begin with. As a rule.) Those who argue that expanding exports generates growth are implicitly assuming that an increase in exports means an increase in savings and hence the capital stock.Com Monday 16 August 2010 No matter how grim the economic situation some Pollyanna will find a silver lining that indicates a mother lode. What happens is that a falling dollar lowers the terms of trade. even though real wages are rising. plenty of these professional are very much aware of this fact and that's why in times of high unemployment they support devaluation. It ought to be clear to these professional economists that expanding exports by driving down the exchange rates is not the way to raise real wages and hence the standard of living. Supporters can . The current silver lining is the old fallacy of export-led growth. This means that that though a worker gets paid less per unit of output his real wage rises because he is now producing more units in the same time period. Some commentators are arguing that recovery in Europe will spur the demand for US exports which in turn will generate sufficient economic growth to restore full employment. In fact. Assuming that these Pollyannas are correct about a European recovery this does not augur the resumption of economic growth in the US. But how does this generate growth? It doesn't.Exports cannot save the Obama economy Gerard Jackson BrookesNews. The terms of trade (the ratio of export prices to import prices) has both a productivity aspect and a monetary aspect. However. in this case it is clear that the rise in wages is the result of the same process that is lowering the terms of trade. What really happens is that resources are now redirected from production for domestic use to production for foreign use.) A continuing increase in productivity would cause the terms of trade to decline. i. In other words. As with so much in economics the question of the terms of trade and its connection to real wages is not entirely straightforward. the real objection is that the demand for exports ² no matter how intense ² cannot in itself generate growth. meaning that Americans would have export more in order to import the same amount of goods. (To be fair. Underlining this approach is that a falling dollar will cheapen US goods relative to foreign goods and therefore raise the demand for exports. We have seen that an inflationary monetary policy that leads to a devaluation causes an unfavourable shift in the terms of trade.e. This is the equivalent of producing more for less pay. I guess one needs a PhD from an accredited university to come up with this nonsense. (In the absence of a stable-level policy by the central bank prices would gradually decline even as firms' price margins were maintained or even widened. resulting in a country having to export more for the same quantity of imports. it's a sneaky way of lowering real wage rates.

The real cure for the US economy is an economic policy based on a respect for free markets. Moreover. The second point is that those clamouring for a policy of encouraging exports invariably assume that the emergence of 'idle' capacity is due to demand deficiency. Gerard Jackson is Brookesnews economic editor . And this just ain't going to happen under the leftwing Obama. First.argue that exports can be increased without affecting domestic production if idle capacity is brought into use. by idle capacity (or excess capacity as it is sometimes called) it is meant 'idle' capital goods. But these clusters of 'idle' capital goods are the manifestation of entrepreneurial miscalculations created by the central bank's misguided monetary policy. This view raises two very important points. Capital goods used in one line of production can be completely useless in another line. Expanding exports are neither a panacea nor a palliative. It is true that in many cases there are varying degrees of specificity but fact this still does not solve the problem. But this only works if capital goods are substitutes for each other. once exports started to expand more and more capital goods would have to be brought into play. which means that complementary capital goods employed in competing lines of production would still have to be withdrawn for use in the production of exports.

China is not going to allow anyone or any ideology to sabotage its economic development. Of course. But they miss a vital point: these industries are at the very highest stage of the capital structure. Not only has the media overlooked just how elitist and loony Brown's green economics really are so have our rightwing." (Italics added.") Closing down these industries makes as much economic sense as arguing that we don't need agriculture chewing up the environment because we have plenty of supermarkets to provide us with food.) Bob Brown: This fanatic wants to destroy Australia's electricity generating capacity It completely escaped the attention of this genius that without pulp mills there would be no paper. Critics rightly point out the massive cost in terms of lost export earnings if Brown's lunatic policies were implemented. and certainly no newspapers to promote his lunacy.The Greens' policies would destroy the Australian economy Gerard Jackson BrookesNews. travels by train.Com Monday 16 August 2010 Senator Bob Brown has emerged as a destructive parasite. The same man who uses numerous electrical appliances. That Beijing might consider this a form of green economic warfare has evidently not occurred to Brown. drives a car. ship and plane. As Otto Maller said: "If soldiers are not to cross international boundaries. goods must do so". intermediate goods and consumer goods? (Brown's ludicrous attitude towards the primary sector reminds me of Ralph Nader's insane idea that America's petrochemical industry "might need to be abolished. This means closing them down would also close down manufacturing because their products are vital inputs for the lower stages of production that produce capital goods. . uses computers and cell phones is the same man who seriously asserts that ² what he sneeringly calls ² the "extraction industries" that supply the raw materials for these devices can be shut down without lowing wages and raising the unemployment rate. A green fanatic living at the public trough whose economic wish list would destroy the Australian standard of living. which is exactly what it is intended to do. In a letter to The Australian (27 June 1991) he revealed his appalling economic illiteracy by defining logging and mining as "resource robbery". According to th brilliant economic is theorist and economic historian Tasmania is an example of a "post-industrial" society (despite the fact that the state had never been industrialized) because the economy "is not based on dinosaur industries like pulp mills. zinc mills and aluminium mills. closing down mining means shutting down the export trade to China. Anyone who ignores the international ramifications of the greens' proposals is not fit to be in politics.

This is why even if it operated at 100 per cent efficiency it still could not compete because the material and land requirements of solar plants dwarf those of centralised power stations. The problem is that solar power is extremely dilute and terribly irregular.Nothing illustrates Brown's green fanaticism more than his mad proposal to shut down the coal-fuelled power stations that produce 80 per cent of our electricity. as an economy becomes more capital intensive real wages will continue to rise. Even if they were 100 per cent technically efficient they would still be incapable of overcoming their massive economic and technical shortcomings. And Bob Brown has the gall to assert that he wants to see "the elimination of poverty and an end to the exploitation of children and other vulnerable people. It seems that Brown goes along with Nader's asinine opinion that "the only reason why solar energy has not yet been developed is that the oil companies don't own the sun". meaning that as they expand the average cost of production rises. The higher the ratio the higher will be the standard of living. Let us recall that even though President Obama publicly admitted that moving over to solar and wind would cause "electricity prices to rocket" (explode is more like it) Brown still insists on lying through his teeth about the devastating effect his energy policy would have on electricity prices and hence the Australian economy. . The result will be a massive and unsustainable rise in energy prices." Judging by other comments he has made this view must also extend to the rest of the country. (Incidentally. (The Government's 'alternative energy' policies will be a disaster for the economy) (Brown's support of solar energy also reveals his hypocrisy. He wants to tax these power stations out of existence and put a permanent ban on them.) Therefore. making the difference in costs between the two a staggering amount*. Bob Brown's fanatical playmate. though the so-called free market Centre for Independent Studies agrees with this insanity Andrew Bolt of the HeraldSun and his fellow 'conservatives' have refused to utter a word of criticism of this piece of treachery. Brown's policies would virtually make the land inaccessible for development while simultaneously destroying most of the country's capital structure. So according to this oily sanctimonious hypocrite new urban estates are bad but covering the land with solar collectors is absolutely marvellous.) So where will the electricity come from? According to Brown and his fellow fanatics solar and wind will easily fill the gap. In reference to Tasmania he argues "that it is in the green-backed arena of « labour intensive « small businesses that Tasmania's future job creation lies.) A more savage and calculated attack on the standard of living would be difficult to conceive. But any honest assessment of his policy leads to the inexorable conclusion that the economy would be shattered and the standard of living reduced to an abject level. wants to destroy all of the country's coal-fired power plants.) It is an inescapable fact that the very nature of solar technology makes economies of scale impossible because where power stations enjoy indivisibilities that give them economies of scale (average costs fall as output increases) solar and wind complexes suffer terrible diseconomies of scale because they have no indivisibilities. Although he considers power stations to be a blot on the landscape he thinks consuming hundreds of square miles of land to generate the same amount of electricity that a power station generates on a few acres is a good environmental policy. The real reason is that these phony alternatives are horrendously inefficient. The Christine Milne. (By land the economists is referring to its output. He also believes that "urban sprawl" ² what used to be called urban development ² should be halted and the little people forced to accept crowded housing conditions." It has to be understood that real wages are determined by the ratio of capital-land to labour. They face insurmountable economic and natural obstacles. (Friends of the CSI smeared me as a "technological pessimist" for pointing out the preceding facts.

Living standards vastly superior to that enjoyed by any medieval monarch or eastern despot..effect would be a severe drop in the ratio of capital-land to labour which would drive down real wage rates. Other greens have readily conceded that this is their real goal. But our ancestors once lived in such an 'idyllic society' ² it was called the Dark Ages where poverty was wretched and life for the masses was ". It is more than likely that the economy would implode before the coalfuelled power stations could even be priced out of existence.poor. So when Bob Brown tells you that he just wants a "reduction of Australia's use of natural resources to a level that is sustainable and socially just" try to cut through the weasel language and grasp what he really means. communities will be small. another green fanatic in the mould of Bob Brown. In their utopia industry will be small-scale and labour-intensive. wind and solar power will replace central power generation. Brown's fellow fanatic. In his environmental paradise the standard of living will have been massively cut and energy prices kept deliberately high. gave it his stamp of approval.. Nevertheless.) Ernest Callenbach's book Ecotopia was brutally honest about green aims to savagely lower living standards. Siemens to use green energy hoax to rip off taxpayers The government's green Renewable Energy Target legislation is economic lunacy Why Obama's massive energy bill will wreck the US economy Why the Centre for Independent Studies should come clean on its support for the destructive carbon tax Why is the Centre for Independent Studies supporting the destructive carbon tax? . Ralph Nader. In effect. she is demanding that within 10 years 80 per cent of our electricity generating capacity must be destroyed. (I bet Bob Brown could tell him. largely . nasty brutish and short. proposes that a carbon tax be continually raised on these energy sources until they are forced into bankruptcy." However. *The effects of a carbon tax on electricity prices has been calculated by adding the carbon tax per ton to the total costs of electricity generation." It was economic growth that lifted the Western masses out of the misery and poverty of what was once their lot and gave them the highest living standards in history. Christine Milne. a fact that he has already admitted. he did not say who would decide what these goods would be. In other words. There is no doubt in my mind that Brown is a dangerous fanatic and a callous liar with a vicious ideology that would cause absolute misery if not checked. Brown's policies are designed to turn Australia into a labour intensive economy. confessing that "production will center on goods required to maintain life. He needs to be exposed and exposed now. She demanded this be the case by 2020. water. Instructive as this approach is it overlooks the vitally important point that it is impossible for so-called green energy to replace centralised power generation. was open about the consequences of green economic policies for the standard of living.self-sufficient and the large-scale division of labour will be a thing of the past. Jeremy Rifkin. And now the greens want to destroy that progress. the white knight of the green movement. In case anyone should think that Callenbach's views are out of keeping with what passes for mainstream thinking in green intellectual circles.

The humble light bulb: a victim of political stupidity and green zealotry Why a carbon tax would hit living standards Carbon taxes versus living standards The real costs of the greens' carbon tax Economic growth is the only way to raise living standards and conserve resources Gerard Jackson is Brookesnews' economics editor .

minerals and energy. 2. Indigenous reservations and bans on land clearing. Hitler invaded Eastern Europe and Russia in the search for ³living space´ and access to Black Sea oil and Japan went to war attracted by the resources of South East Asia and Australia. Our populous and rapidly developing northern neighbours need the primary products that Australia has in abundance ² food. food. But they watch in disbelief as uranium mining is banned. minerals and timber. Unbelievably we have nine protected Wild Rivers. future fleets may not submit peacefully to Australian boarding parties. World Heritage Reservations. In all of these areas. Environmental Parks. Our neighbours look on in amazement as foresters are locked out of State Forests. And our historic protectors are no longer invincible ± the Royal Navy no longer controls the Indian Ocean or the South China Sea and the US Navy is no longer unchallenged in the Pacific.Greens resource sterilization plans endangers national security Viv Forbes BrookesNews. agricultural and mining production are prohibited or increasingly restricted. mining taxes are increased and there are threats to tax carbon and close our coal mines and power stations. Future Australians are in danger of becoming a nation of peasants. They see precious agricultural and forest land being swallowed by National Parks. The latest proposal is a continuous conservation corridor running from Melbourne to Atherton. is Chairman of The Carbon Sense Coalition . the Americas and Australia attracted by underused land. FAusIMM. poachers and smugglers in their own land. BScApp. fibres. History has no examples where a small number of self-indulgent people have managed to squat on valuable land and idle resources forever. 516 National Parks. gas is wasted in power generation. Viv Forbes. So they note with disbelief the way in which Australia is sterilising these valuable resources. oceans. oil shale and uranium.Com Monday 16 August 2010 Extreme conservation policies are sterilising so much of Australia¶s resources that it is becoming a threat to our national security. In the colonial era. aggressive Europeans swarmed into Africa. water courses become no-go zones for graziers and irrigation water is withdrawn from farmers and orchardists. Soon the whole Coral Sea will be locked up and beaches made off limits to fishermen. More recently. Today the refugee flotilla is unarmed. If we continue sterilising our resources of land. minerals and energy. Asia needs our abundant energy resources of coal. gas. FSIA. Most wars are about land and resources.700 designated conservation areas and huge areas of government leasehold and aboriginal land. Australia is the odd man of Asia ² a huge land mass with a small population. 11 World Heritage properties. Wild Rivers Declarations.

S. ‡ $410-billion Omnibus bill with 9. which was 2. the de la Rúa government evaluated several options and settled on raising tax rates as the solution: The De la Rúa government was worried about the federal budget deficit.3-trillion deficit in fiscal year 2009.5 percent of GDP in 1999. which was showing signs of recovery in late 1999. The Obama administration and its congressional Democrat lackeys are on the precipice of following Argentina's disastrous economic and monetary policy decisions.The US is facing an Argentina-like economic crisis Scott Strzelczyk BrookesNews. ‡ Billions spent by the Federal Reserve to purchase toxic assets. or perhaps a depression.3-trillion (a 25% increase). cutting spending was politically difficult. which turned the U. ‡ $1 trillion or more for a health care bill that the majority of Americans didn't want. The government thought reducing the budget deficit would instill confidence in government finances. ‡ $145-billion bailout of Greece. reducing interest rates and thereby spurring the economy.] . which started in 1998 and landed Argentina in a depression by the end of 2000. ‡ $787-billion economic stimulus bill the president deemed necessary to keep unemployment under 8%. ‡ $1.Com Monday 16 August 2010 The United States' economic decline precariously resembles Argentina's economic collapse. ‡ Auto industry bailout with complete disregard to the bankruptcy laws. ‡ $1.and long-term economic prosperity. Among the options for reducing the deficit.4-trillion deficit estimated for fiscal year 2010. In early 2000. In nineteen months. Argentinean President Fernando de la Rúa's government evaluated options to end the recession. Arguably. ‡ $700-billion TARP bill. and while some may posit that the country has started an economic recovery. the United States economy has been in a two-year-long recession. the public debt stands at $13. government into an equity owner and granted an ownership stake to the United Auto Workers union. What began in Argentina as a recession mushroomed into a full-fledged depression due to bad economic and monetary policy.000 pork-barrel projects. In the past two years. the government doubted that cutting tax rates would spur enough growth in the short term to offset lost revenues. According to a 2003 report issued by the Joint Economic Committee of the United States Congress. ‡ $10. it did not wish to abandon the convertibility system and simply print money[. ‡ $500-billion bailout of Fannie Mae and Freddie Mac. others suspect the country will plummet into a deeper recession.6-trillion dollar public debt the day Obama took the oath of office. the United States government instituted economic and/or monetary policies detrimental to American's short.

the truth is that all tax brackets are impacted. when the first of three tax increases was instituted. the Argentinean government proposed cutting spending by 4. Public outrage ensued. April 2001. Moreover. a newly elected government took control. ending the Argentine peso's longstanding link to the dollar. and voiding contracts Coincidentally. succeeding governments undermined property rights by freezing bank deposits.000 to $500 per child ‡ Dependent care and adoption care credits cut ‡ Estate (death) tax returns at a rate of 55% on estates over $1 million ‡ 15% capital gains tax reverts to 20% ‡ 15% dividends tax reverts to 39. causing fear and instability. defaulting on the government's foreign debt in a thoughtless manner. and accusations that Republicans and conservatives are coldhearted people incapable of compassion or benevolence. from December 2001 to early 2002. Argentina's economy continued to shrink throughout 2000.5 billion pesos over a two-year period. and debt policies such as refinancing debt at higher interest rates exacerbated a deteriorating economy. forcibly converting dollar deposits and loans into Argentine pesos at unfavorable rates. falling wages. President de la Rúa secured approval for three big tax increases. and even the Obama lemmings will recognize they've been duped when their payroll tax deductions increase in 2011 and their take-home pay decreases. and August 2001.That left only one option: raising tax rates. effective January 2000. A summary of the Bush tax cuts expiring at the end of 2010: ‡ 10% bracket reverts to 15% ‡ 25% bracket reverts to 28% ‡ 28% bracket reverts to 31% ‡ 33% bracket reverts to 36% ‡ 35% bracket reverts to 39. In April 2001. and eventually inflation ensued.6% . Furthermore. accusations of racism. Obama and the MSM repeatedly espouse that only tax rates for those rich Americans in the top income tax bracket will increase. the United States is in a two-year-long recession. Perhaps then the lemmings will seriously consider what "hope and change" means and that elections do indeed have consequences.6% ‡ Marriage penalty is reinstituted ‡ Child tax credit cut from $1. The Obama government's actions ominously mirror the actions and the timing of the Argentinean government in early 2000. and the Joint Economic Report summarized their actions: In a series of blunders that made matters even worse. Higher unemployment.3 trillion. government monetary policies manipulated current valuations. Unfortunately. more debt. and Obama and congressional Democrats intend on letting the Bush tax cuts expire at the end of the year. The outstanding public debt stands at $13. the Obama administration and the mainstream media deceive the American people regarding the impact of the Bush tax cuts. In late 2001. and special interest groups protested. Any opposing viewpoints from Republicans or conservatives on cutting spending or addressing entitlement programs are met with media outrage.

what benefits them is generally harmful for the economy. and inflating. that inflation is the only feasible alternative. Monty Pelerin's recent American Thinker article captured the essence of the problem: The political class's survival is at stake. The government borrows money by selling government-backed securities to investors. Their survival is now driving policy. It is not concern for you or the economy that is driving policy. The only feasible alternative is to monetize the debt ² in other words. but the preservation of power of an increasingly wounded power elite. much less government-run health care. though they many not publicly admit it. The government is limited to three possible revenue sources: taxing. Obama and congressional Democrats have chartered a course leading America down an Argentinean economic path. November may be the last reasonable chance to change course. Eventually. inflate it. borrowing. Unfortunately.Many economists recognize. investors will either stop purchasing government securities or demand substantially higher interest rates due to the increased risk. Any sensible person realizes the country cannot tax its way out of a $13-trillion debt or sustain existing entitlement programs. anything that extends their rule will be tried. Eventually. First published in the American Thinker .

taxes. and incapable of living well without constant. religious. they have no intention of treating everybody equally. which is probably inevitable in view of the latter's extreme heterogeneity. and (b) all of the rest of us. much of the inequality is achieved not directly. Hence. contracts. Arrogance might as well be their middle name. and they are not shy about letting us know that they are. Nevertheless. Codevilla. backward. the ruling class views the rest of the population as composed of ignoramuses who are vicious. identity always trumps. to profit those who pay with political support for privileged jobs. professor emeritus of international relations at Boston University. has written an extraordinary essay for the July/August issue of The American Spectator. especially the traditional family. meaning themselves. And the force of his argument wanes a bit toward the end of the essay. but by the statutes' delegation of authority to countless regulatory and administrative bodies. and a great deal else. forthright discussions of America's current socio-political condition I have ever . those whose outlooks and interests derive from and focus on private affairs. its solution to any and all problems.Com Monday 16 August 2010 Angelo M. Codevilla's description of the ruling class and its modus operandi is longer and more detailed than his account of the country class. regulations. Despite the rulers' chronic complaints about people's exercising "discrimination" of one kind or another." These people know they are superior in every way. Members of the two classes do not like one another. It's called America's Ruling Class ² And the Perils of Revolution. which is one of the most intelligent. a heterogeneous agglomeration that Codevilla dubs the country class. Above all. irrational. is to increase the power of the government ² meaning of those who run it. detailed direction by our betters. unscientific. when he muses about how a country party might turn the tide against the domination and contempt it presently suffers at the hands of its officious rulers.The two Great Classes in contemporary America Robert Higgs BrookesNews. racist. as Codevilla makes plain." As the recent health-care and financial-reform statutes illustrate perfectly. on the one hand. which dominates the government at every level. religion. At its core. Codevilla cuts immediately to the core: the United States today is divided into (a) a ruling class. I heartily recommend this magnificent essay. is also the statist party: [O]ur ruling class's standard approach to any and all matters. This class divide has little to do with rich versus poor or Democrat versus Republican. but the country class encompasses perhaps two-thirds of the people. Hollywood. but it deals much more extensively with the anatomy and functioning of the class system in the United States today than with the prospect of revolution. it has to do with the division between. subsidies. the schools and universities. The ruling class holds the lion's share of the institutional power. and genuine private enterprise. violent. which will use their ample discretion to do the desired dirty work. "[L]aws and regulations nowadays are longer than ever because length is needed to specify how people will be treated unequally. etc. generally ill-behaved. and it views itself as perfectly qualified and entitled to pound us into better shape by the "generous application of laws. on the other hand. In particular. those whose attitudes are attuned to the views endorsed by the ruling class (especially "political correctness") and whose fortunes are linked directly or indirectly with government programs and. not surprisingly. The ruling class. the mainstream media. and unceasing declarations" of its dedication to bringing the country²and indeed the entire world ² out of its present darkness and into the light of the Brave New World it is busily engineering. "for our ruling class. however.

If we serfs are ever to escape the grip of our overbearing. and to deride every claim of legitimacy or entitlement our rulers have the temerity to make or presume. in economics from Johns Hopkins University. and he has taught at the University of Washington. He has been a visiting scholar at Oxford University and Stanford University. Robert Higgs is Senior Fellow in Political Economy for The Independent Institute and Editor of the Institute¶s quarterly journal The Independent Review. He received his Ph. to denounce openly its injustice and idiocy. Lafayette College. Prague. the first requirements will be to recognize correctly our current condition. Seattle University. and the University of Economics. .D.read. self-appointed nobility. and a fellow for the Hoover Institution and the National Science Foundation.

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