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.

by the second quarter of 1937 they had reached 50 per cent of the 1923 level. Even the cas income and h outgo approach cannot rescue this explanation. As we have seen. however.(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. Gallaway's Out of Work. Irvingto-on-Hudson. In 1932 the deficit was $2. A. the gold inflow should not have been sterilised. New York.) It was Roosevelt's anti-recovery industrial codes combined with destructive union activity that finally sent the American economy into a vicious tailspin. p.6 per cent during the depression while deficits averaged 3. Why Wages Rise. 1997. New York University Press.000. the µreserve requirement theory¶ does not hold a drop of water.3 per cent. (See Richard K. productivity-adjusted wage rates exceeded the 1929 rate by 14 per cent. Sterilisation only prevented incoming gold from adding to excess reserves. The was argument that the virtual disappearance of the government¶s deficit caused the crash doesn't hold up. Unemployment averaged 18.In the beginning of 1935 issues of new securities were more than 85 per cent down on the 1923 level. The grey area in the chart below shows the difference between hourly wage rates and productivity. The nail needs to be rammed home on the so-called link between deficits and unemployment.000 while revenue equalled $8.6 per cent of GNP. 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. Though unemployment and deficits varied throughout this period. p.058. Harper.8 billion and unemployment stood at 14. Total federal expenditure for the whole of 1937 and the first four months of 1938 was $10. The gold sterilisation approach fares no better than the other two. It was union activity that destroyed this healthy job-creating trend.000.000. The argument that sterilisation cut the money supply and thus caused the economy to contract should be too silly for words.6 per cent. in 1937 it was $2. (From a gold standard-free trade point of view. Clearly. 'deficit theorists' should have realised that their proposition was not being supported by the economic facts. Vedder and Lowell E.229. The Foundation For Economic Education. 1957. 103).16 . these reserves were successfully reduced without affecting business activity. More importantly. This only leaves the deficit and gold sterilisation explanations to be dealt with.7 billion and unemployment was 23.

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

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

(Optimum conditions are rare and could only be maintained for a short period. (Australia Will Survive the Greenback's Fall.) This means that vast collecting areas are required. In plain English. 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. not to mention the colossal amounts of materials needed for construction of collectors. 9 November 2009). 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.Com Monday 1 March 2010 Greens argue that solar and wind power are genuine alternatives to centralised electricity generation. To argue that solar and wind are inefficient alternatives to coal-fired power stations because they are more costly is no argument at all. A carbon tax has basically the same effect. Critics counter that these alternative energy sources are very inefficient and would require substantial subsidies. 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. they should bear in mind that solar and wind involve no indivisibilities to speak of. 10x for a solar plant to produce the same amount of power it becomes crystal clear why solar is grossly inefficient. 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. This approach leaves me somewhat bewildered. so as to replace them with solar and wind.Carbon taxes energy production and technology: more green nonsense Gerard Jackson BrookesNews. meaning coal-fired power stations. No wonder considering that Professor Sinclair Davidson used a similar defence in defending a rise in the value of the Australian dollar. solar energy is extremely dilute (wind* is also a form of solar energy). say. But because of the extremely dilute nature of solar energy many more blocks (capital) are need to produce the same output. As it takes x number of blocks for a coal-fired power station to produce y amount of power and. unlike centralised power generation these so-called alternatives are marked by long run rising average costs of production. First and foremost. No indivisibilities mean no economies of scale. there is no reason whatsoever to assume that exporters have not already reached that limit. The maximum amount of solar energy striking the Earth under optimum conditions is just under 1Kw. 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. For those who think otherwise. What this means in economic terms is that solar and wind involve massive diseconomies of scale. We all know that a rise in the exchange rate has a similar effect as a direct tax on exports. the situation would be even worse. Our critics have remained silent in the face of this defence. a fact that even the critics have overlooked. Wall Street Journal. Actually. 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. It is this kind of elasticity of thinking that has given the greens a free ride. 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. Moreover. A determined . despite the fact that there is a strict limits to just how efficient a firm can be.

a fact that critics have so far failed to note. (Horses were so inefficiently harnessed in ancient times that they where not even used in agriculture. LTD. Williams. unless greens think they can repeal the first law of thermodynamics. S. Musson. Dover Publications. Dover Publications.D. 1958 Ordeal by Planning. A.switch to solar power would quickly deliver a double whammy to the 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. Macmillan & Co. John Jewkes. Pimlico 1993. The first effect would be to drain away masses of capital which in turn would deprive industry of investment funds. Macmillan Press LTD. 1972 . Abbott Payson Usher. E. B. So far they have failed to do both. Methuen & Co LTD. (Of course. 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. Inc. T. David Sawers. This would be swiftly followed by a devastating rise in energy costs that would savage the economy and slash the standard of living. I cannot think of a single instance of this happening. or that of any advanced economy. 1900. 1996 The Mediveval Machine: The Industrial Revolution of the Middle Ages. They must also stress the massive social and economic costs of these alternatives. Macmillan & Co. 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. 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. as the case of Spain amply demonstrates. 1948 A History of Mechanical Inventions. Jean Gimpel. 1993 The Economic Laws of Scientific Research. LTD. Saul. Terence Kealey. Derry and Trevor I. 1976 Science Technology and Economic Growth in the Eighteenth Century. 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. 1982 Technical Change: The United States and Britain in the 19th Century. 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. Richard Stillerman. The Sources of Invention. John Jewkes.) It is also clear that there is absolutely no way in this universe that the barrier of diluteness can be overcome. Saul. the situation would be different if the average standard of living was reduced to that of a medieval peasant. Methuen & Co LTD. K.

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

so long as an employee is being paid the market rate for his services . It naturally follows that should for any reason labour costs exceed this rate unemployment will emerge. (Over time inflation or a continuing increase in productivity will in any case make the same adjustments. former Treasurer. R. 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. It never even occurred to this pompous twit and his fellow incompetents in the HRNS that maternity leave involves a fundamental moral question. Peter Costello. Now economics uses marginal productivity theory to explain wage rate determination. particularly from our rightwing. 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. Maternity leave is never free. decided to slag Abbott for straying from the free market fold.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. 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). However. 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. Nicholls Society. God help us. This is why smarter politicians either try to subsidise maternity leave directly through the firm or pay for it out of taxes. 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. opportunism and absence of economic credentials. Not a bit of it. 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. As Luis de Molina (1535-1600) categorically put it. the outfit that wrecked the case for free labour markets and is therefore in no position to criticise Abbott.Tony Abbot's maternity leave fiasco Gerard Jackson BrookesNews. (Pretty rich coming from an economic illiterate). Costello is a member of discredited H. 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. Now there are basically three ways in which these schemes can be funded: Government's can legislate them. 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). 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.) Hence their shabby attempts to conceal the destructive aspects of their legislation. 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.

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

people . (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. Hence the monstrous bill that they and their media stooges have the outrageous audacity to call universial healthcare.) 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. That means. who knows what's next?) But one must be fair. 449. even to politicians as despicable as Pelosi and Reid. This is the sort of silliness that one would normally treat as an aberration. 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. according to these brilliant economic thinkers and their advisors. allowing the government to impose a "carry tax" on notes whose expiration date had passed.Com Monday 22 March 2010 The Democrats' opposition to tax cuts borders on the hysterical. the confiscation of all 401(k) funds. 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. would be to worsen the economic situation. That Obama can indeed bring "Christmas everyday".The Democrats' anti-tax lunacy Gerard Jackson BrookesNews. can receive a warm welcome in the strangest of places. . Unfortunately Greg Mankiw has given a sympathetic hearing to this lunacy (Reloading the Weapons of Monetary Policy). some years ago Marvin Goodfriend. (Now that Obama and his socialist supporters have virtually declared the Constitution obsolete. Edited by Piero Sraffa. clear evidence that he has failed to totally free himself from Keynesian thinking. The effect of this. The ludicrous idea of a carrying tax originated with monetary crank Silvio Gessel2. p. suggested that dollars should contain a magnetic strip carrying information about when the notes entered the banking system. For instance. This is because unstamped money would lose part of its purchasing power each month. Believing that savings and hoarding were destructive of prosperity he proposed a currency that would lose a proportion of its value each month. Economic fallacies. 1973. Royal Economic Society. a senior vice president at the Richmond branch of the Fed. The real reason. (The Works and Correspondence of David Ricardo. however. of course. The longer people kept their notes the more they paid the government. 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. If those who used it were genuinely sincere they would propose a 100 per cent tax on all savings. .) Nevertheless. 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. even the most absurd. Either way. is that more and heavier taxes buy more political control and hence power over the people. irrespective of the appalling cost in jobs and living standards. This would be done by having people literally pay the post office to stamp their notes.

) This section is so embarrassing ² or used to be ² to Keynesians that they chose to ignore it. thus maintaining prosperity. This has it that consumption drives an economy. including real pensions. But as genuine students (some going back to the early days of the Industrial Revolution) of the boom/bust cycle observed. Increased consumption is its obvious result. this misbegotten idea is once again being resurrected The thinking behind the scheme is based on the concept of underconsumption. 23. Martin¶s Press. Macmillan-St. I know of no instance in which a sudden rise in the demand to hold money preceded a depression. 1973. 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. So taken was he with Gessel's absurd proposal he was almost in raptures. It is this process that raises real wages and living standards. the reverse is true as the recent recession demonstrated. it has always been the reverse as people tried to protect themselves against hard times. however. 2 Gerard Jackson is Brookesnews' economics editor . unduly neglected prophet" he gave this crank's proposal a glowing recommendation (The General Theory. In fact. chap. 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. Therefore if consumption lags behind production the economy will sink into recession. But Keynes apparently did. Anything that directs spending away from investment into consumption will therefore eventually lower living standards. one of the oldest fallacies in economics.had their purchasing power reduced unless they spent their incomes within four weeks of receiving them. Now. 1 The classical economists could distinguish between cash balances and savings just as they could distinguish between real savings and forced savings. 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. In any case. 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. It is important to understand that savings fuel free economies and entrepreneurship drives them. Calling Gessel a "strange. One would imagine only an idiot would be stupid enough to swallow Gessel's economics. Gessel argued that this process would abolish savings and stimulate consumption. Moreover.

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

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

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

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

an increase of over 170 per cent in a mere 10 years. It is promised to the American people and not to any government. It is saving and not government spending that fuels an economy and it is entrepreneurship and not politicians and bureaucrats that drive it.9 per cent Medicare payroll tax on capital gains and other investments.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". This is plain ridiculous. What will happen ² in my opinion ² is that the government will default in part by raising taxes and printing money. a rise of more than 75 per cent over last year. Smith's observation was confirmed by the phenomenal rise of British power in the nineteenth century. the region in which economic decline becomes irreversible. However. Let's try and tie all of this together. Princeton University Press.(A capital gains tax is also a transaction tax and a tax on risk that strikes at entrepreneurship. It follows that any policy that raises the cost of accumulating capital will therefore lower the rate of growth. no sensible man would argue that there is no limit to national recovery. 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. He didn't mean by this that Great Britain was finished but merely that countries can endure enormous losses and humiliation and still recover. The sheer magnitude of Obama's tax and spending program is completely unprecedented. 2009). At the rate things are going debt as a proportion of GDP will exceed 90 per cent in 2020. And this is the minimum estimate. 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. All of which will be accompanied by the total repeal of the Bush tax cuts. The same goes for economic growth. it gets worse. (See their book This Time is Different: Eight Centuries of Financial Folly. And this is exactly what Obama is doing. Thanks to this economic lunacy by 2020 the aggregate US public debt will exceed a staggering $20 trillion. . 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. These promises must be either paid for or the government must default in part or in full.) As expected. leaving less for capital formation by taxing future living standards and trapping billions of dollars in current investments. 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.Will the US economy survive Obama's economic policies? Gerard Jackson BrookesNews. Defenders of this madness argue that these don't matter because the government owes the money to itself.) He then intends to top off this idiocy with a 3. with a 90 per cent debt level being especially dangerous. Making it even scarier is the fact that the debt does not include the hundreds of billions that Medicare and social security owe. Now it needs to constantly borne in mind that growth is defined as net capital accumulation which is another term for investment. (You get what you vote for and Americans voted for Obama. 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".

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

but this is what is really being said about the consequences of a falling dollar. The logical consequences of such a policy is that it could result in "competitive depreciations". would welcome a devaluation on the grounds that it would promote economic growth. This is like someone working more and more hours for the same amount of pay. or at least expansion. to have a strong dollar. But this belief is based on a mercantilist fallacy. particularly exporters and domestic producers squeezed by imports. In other words.Why a "cheap dollar" would not save the US economy Gerard Jackson BrookesNews. 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. Hutt's The Theory of Idle Resources. a devious means to eliminate your competitors' advantage. A genuine depreciation should not be a matter of policy but the result of a misguided inflationary policy. Many. Americans must export more for the same quantity of imports.S. This means that living standards will be lower than they would otherwise be because the terms of trade have now become adverse. This is not strictly true. to depreciate the currency one must first inflate it. That a depreciating dollar would tend to expand exports is perfectly true ² the rest is fantasy. (See William H. unless there is a considerable amount of idle capacity.) Some observers. not a means of gaining a trading advantage. 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. 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. A depreciation in these circumstances is a process of restoring equilibrium. This happens where a loose monetary regime results in an overvalued currency thereby reducing the flow of exports while artificially stimulating imports.Com Monday 5 April 2010 According to Nobel laureate Joseph Stiglitz: "Right now." During the Great Depression this policy of encouraging weak currencies was called "exchange dumping". In plain English. would argue that an increase in the demand for exports also raises the demand for labour and thus increases wage rates. LibertyPress 1977. 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. To satisfy other countries growing demand for US goods as the result of a depreciating dollar export industries would have to expand output. particularly Keynesians. 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. it¶s not in the interest of the U. 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. Assuming that the dollar were to fall. 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. this would reduce the cost of American tradables in terms of other currencies. (In the . We want a weak dollar and we want exports. Living standards drop not just because imports become more expensive but because capital goods (the material means of production) are scarce. labour and capital must be withdrawn from other lines of production thus curtailing their output. that land. This means.

Japan used to be touted as an excellent example of export led growth. This is why Japanese living standards rose significantly even as it developed an 'adverse' terms of trade. 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. 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. I never tire of pointing out that savings fuel an economy and entrepreneurship drives it. But this was never the case ² and it certainly isn't the case for China. 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. 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. For nearly 40 years Japan's terms of trade for its manufactures declined. meaning that it had to export more and more for the same quantity of imports. 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 . Japan had an extremely high saving rate which enormously increased its productive capacity while entrepreneurs did the rest. Where there is no unemployment real wages rates are still cut while the composition of the demand for labour changes. despite powerful government intervention ² which includes extreme Keynesian policies ² from which the country is still suffering. Do the advocates of a depreciating dollar think that by merely increasing exports the US would enjoy rise in per capita investment.1930s this was called exporting your unemployment).

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

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

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

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

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

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

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

(The same point had been made by earlier critics of Culpeper's proposal. Lock won the debate hands down. the developments that Copernicus and Galileo wrought geatly advanced science. balance of current account problems. 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.) Therefore.Obama's Yellen appointment signals very bad news for the US economy Gerard Jackson BrookesNews." Let us try to grasp the full import of this statement. The funny thing is that in 1621 Sir Thomas Culpeper was making the very same argument for the English economy. 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". Under Keynesianism we have now regressed to the same level of economic understanding of money. What is interesting about this comparison is that Keynes' work is an economic regression. On the other hand. 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. completely absorbing the Keynesian framework without question. Keynesians are a constant reminder of those Ptolemaic astronomers who continued along their merry way despite the discoveries of Copernicus and Galileo. even to the point of stating: "If it were possible to take interest rates into negative territory I would be voting for that. a state of . forcing down rates would have the effect of reducing the supply of savings and hence the level of business activity. 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. Like many others he noted Holland's prosperity and its low rates of interest. Which is precisely what America got. the "distinguished" Ms Janet Yellen ² much like her Keynesian husband ² remains entirely unfazed. In today's world it also means massive financial and capital distortions. interest and investment as Sir Thomas Culpeper and his allies. Interest ² like all prices ² is a market phenomenon. a distorted capital structure and an eventual bust followed by rising unemployment. He then assumed if Parliament legislated for lower rates England would then become as prosperous as Holland. Even though low interest rates were later legislated for market rates still stubbornly resisted state intervention. In the seventeenth century this meant a reduction in savings and investment. Not so. This is very bad news for the US economy and signals that Obama intends to pursue a purely Keynesian approach to government. She is typical of her breed. It could be argued that the current lack of resistance to the Fed's low interest rate regime is proof that Culpeper. A negative rate is one in which the depositor pays the bank interest instead of the reverse. While the views of Ptolemaic astronomers had ² fortunately ² no bearing on economic policy the exact reverse is true of Keynesianism.Com Monday 5 April 2010 Obama has nominated Janet Yellen to be vice chair of the Federal Reserve. Keynes and Yellen are right. It is a situation in which the buyer of treasuries pays the government interest for the privilege of having loaned it money. What an absolutely wonderful achievement. a return to mercantilist fallacies on spending and growth. If you force it down below its true rate you will create distortions. usually credit expansion by the banking system. leaving her utterly incapable of thinking outside the Keynesian box. Nevertheless. But monetary expansion means inflation.

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

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

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

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

that unless policies change. government and therefore Peter in a deep financial hole. it's the way the government taxes Peter that allows the government to spend so much on Paul.U. 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. a bill so big. by devaluing those obligations by printing money. that it can never be paid. notes and bonds to eager sellers.S. I concluded that unless millions of Pauls are about to be told that they are not getting what they were promised.S. government is years in the making and it's going from bad to worse. namely the inflation tax.S.S. who in no uncertain terms are the reason the U. because Peter can't afford it. government has NO money.Com Monday 12 April 2010 In Part 1 of this series. government that is quite literally out of control. on its way to bankruptcy. but.S. I introduced Peter and Paul friends.S. a vicious circle which could eventually lead to the destruction of the dollar. that it must tax Peter to spend it on Paul.S. national bankruptcy through the Federal Reserve's printing press. for when it becomes clear that the U. Armed with their hard earned savings. government. government. the Federal Reserve will be forced into action like never before. I further demonstrated that the policy of deferring the costs of all this spending largesse. that the only way out of those obligations is via inflation. And as they do. to become THE buyer of these bills. because it simply costs too much. In part 2 of this series. or that millions of U.S. But as I argued. not only the primary buyers of all these obligations and a funding source too big to be filled by U. the creditors of the U. and Tax Peter don't tell him. so that the Federal Reserve doesn't have too. will be via the wholesale use of the Tax Peter don't tell him policy of inflation. dollar. Lay the bill bare and its likely Peter throws a fit. from eager buyers of those treasury bills. government. government. it's a government that's on its way to bankruptcy.S. a government that has committed to obligations so big. part 4 Michael Pollaro BrookesNews. Starting with the simple fact that the U. this funding policy is unsustainable.S. I demonstrated that the tab being run by the U. government can not possibly make good on its mounting debt obligations by taxing Peter. Tax Peter later.S. In other words.S. will go from friends to foes. better known as borrowing. notes and bonds en masse. by Taxing Peter later via borrowing instead of Taxing Peter now.S.S. Tax Peter later and Tax Peter don't tell him ² and further posited that it is the latter two. government debt? Foreign creditors. has helped create obligations so huge. indeed because of it. I made the case for a U. And the trigger for this exit from U. I posited that in addition to the ever constant cry for more government spending in support of Paul. . notes and bonds issued by the U. the U. which have been instrumental in masking the true cost of Paul and putting the U. 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. funding the excess of spending over tax receipts. government debt holders are not getting their money back. In other words. there will come a time when the only way out for our politician friends. they buy all those treasury bills. National bankruptcy through the Federal Reserve's printing press In part 3 of this series. fearing the debasement of the dollar and therefore the value of their investments. the creditors most sensitive to the purchasing power of the U. unfortunately for the U. based creditors for long. government's creditors. to make good on their promises.S. I then introduced the 3 kinds of government tax forms ² Tax Peter now.

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

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

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

I'll buy your shorter-dated U. For sure.S. and then some. 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. this Federal Reserve call to action. taken as whole. have a look at the recent trend in money supply growth.S. this should come as no surprise when America can not possibly finance the U.S. the U. the picture is not pretty. this through December 2009: . Well. Indeed. And the Federal Reserve is buying both to fill the void. government debt. And as we saw in Part 3.S. no? Foreign creditors may still be buying U. But until you. So. Indeed. is this the start of some nasty inflation to come. don't expect too much of the former and expect a lot more of the latter. savings. year in and year out. one last metric for your consideration. Perhaps what foreign creditors are saying is this: Sure. shorten up on maturities and make sure you know the location of the exit door. if you buy my longer-dated GSE debt. none of these money printing activities by the Federal Reserve is inflation if it isn't translating into growth in the money supply. 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. government debt. government and GSE purchases.S.Interesting.S. government's borrowing needs when these needs are a growing multiple of U. the Federal Reserve against foreign creditors: Foreign creditors are pulling back on their combined purchases of government and GSE debt. 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 combined U.

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

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

borrowing and spending. caused more productive techniques to be developed. that is until Obama was elected. Part III Gerard Jackson is Brookesnews' economics editor . more regulations. those who deal with only one stage of a product tend not to see how complex the complete chain of production is. But Böhm-Bawerk pointed out that White's criticism rested on the implicit assumption that the capital saving invention was progressively capital-saving. I believe. The fundamental point is that rising productivity comes from investment. This dynamism (denied by some) has. This would conceal for a time that had these inventions been used in lengthier processes the yield would have been even greater*. If the process was not halted or reversed then real wages would inevitably decline. Eventually productivity and the growth in real wages would start to slow. 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. Technology can come to the rescue for a time by rendering some shorter processes more productive than the older but lengthier ones. putting it rather crudely.000 and the need for savings will have disappeared was truly the stuff of fairy tales. 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. they are not capital saving and they are not substitutes for labour. no matter where they come from. That US investment is still more productive than Japanese and European investment is due entirely to it having freer markets. White failed to see the flaw in his argument because he could not take it beyond one stage. This is the basic reason it produces more for less.claimed. As Hayek explained sometime ago. a proposed attack on energy 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. While entrepreneurship drives an economy only savings can fuel it. Hence those who argue.) In addition. continual injections of money with the intention of encouraging consumption have the effect of directing more resources to the lower stages of production. massive rises in taxes. A massive expansion of the monetary base. *The Positive Theory of Capital and Its Critics. Not all the destructive effects of inflation are well known ² and Keynesian doctrine is inflationary to the core. It is now 2010 and American savings appear to be facing extinction. The conclusion of some that America was becoming the land of super-abundance where the average annual real income would be $200. No country can continue to prosper in the absence of savings. (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. Nevertheless. despite their rather loud assertions to the contrary. it takes a lot of investment in manufacturing. This should help make it clear why more advanced products always require lengthier production processes and not shorter ones. which in turn tend to be more labour intensive. And this brings us to the present. In short. Obama's policies amount to nothing less than a sustained statist assault on economic growth. 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. The result is that manufacturing as a proportion of GDP starts contracting while services undergo an excessive expansion.

All we can really do is plot them after the event. Of course. 191). . F. There are always time lags between changes in the money supply and changes in production. The following chart shows the change in AMS (Austrian money supply*) and industrial production from September 2008 to last March.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.Is the US economy really recovering from recession? Gerard Jackson BrookesNews. 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. 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. McManus and R. Not so fast. 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. T. and. (Ibid. incidentally. Because there are no one-to-one relationships in economics we can never know how long these time lags will be. Macmillan and Company 1937. This means any downturn is eventually reversed and that this is now the case. 56) A stable general level of prices in itself means little. 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. particularly the policy disasters that the Hoover/Roosevelt administrations inflicted on the country. A. 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. p. It also means that these people have learnt nothing from economic history. (C. 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. This also explains why the P/E ratio has been inflated. if they were right then there would have been no Great depression. p. W. Nelson. Phillips.

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. In January industrial production flattened. What needs to be stressed is that both measures should be rising together. whether consisting of Bank Notes or specie. It was this monetary surge that was driving the economy. If it's the latter then America is heading into an extremely inflationary period with all that that entails. Navy Bills. I understand always ready money. Since last June money supply has entered a downward trend. *There are some differences among Austrians as to what ought to be included in a definition of the money supply. Exchequer Bills.000 from February to March on a seasonally adjusted basis". there was a net loss of jobs. which is the process of capital formation. Even if the 123.9 per cent in March. There is also the fact that commercial and industrial loans continue to shrink. Critics could argue ² and probably will ² that the employment figures for last month clearly indicate a rising demand for labour. Yet these figures are somewhat dubious to say the least. as I have always understood that term. meaning that business is not borrowing. which is not the case. which form no part of the circulating medium. (One should not of course base any predictions on a single month's figures. In short. seven months after the monetary decline began. This expansion worked out at an annualised rate of 56 per cent. We can infer from this that the reports from the banking sector that business demand for loans has been very weak are indeed accurate. We have a curious situation in which there is a recovery sans an increase in the demand for commercial loans. averaging an annual rate of 33 per cent. The ADP reported that "nonfarm private employment decreased 23. and 'Currency'. Whether this extraordinary growth is merely a spike in a downward trend or an indication of accelerating monetary growth remains to be seen. the former are merely . or any other negotiable paper. Moreover. including the share market. In addition.From September 2008 to the following June money supply zoomed by about 25 per cent. The latter is the Circulator. 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'. 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. So private payrolls show an increase while the ADP report shows a loss. we apparently find the same phenomenon with respect to labour. in contradistinction to Bills of Exchange. the chart reveals a rapid monetary expansion started in February and continued throughout March.000 gain in jobs is accurate it would be a very meagre result given the rate at which the workforce is increasing. which are used almost as synonymous terms in this letter. At the moment there is no capital formation and hence no real growth is taking place. On the other hand. 'Circulating Medium'. Then we have the situation of a contracting money supply which in itself strongly suggests an aborted recovery could be on the horizon. Note: It is a serious error to confuse an increase in GDP with economic growth.) Nevertheless. Right now the country has some very dodgy employment figures that even if accurate still do not paint an optimistic picture. the BLS's U6 measure of unemployment (includes the underemployed and long-term unemployed) reached 16. it should be noted that the contraction means that the quantity of bank deposits have also been falling. 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.

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

7 per cent in 1983. meaning there was no real growth. 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 . onerous policies and costly regulations. 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).3 per cent in 1985 after which it never fell below 5.1 per cent and 14. In a very important way it is not even playing out like the Great Depression. giving the second quarter a drop of 43. Unemployment had peaked at 10. Unemployment also began to fall during these years.57 per cent with the remainder basically consisting of government spending and private consumption. (If this happened under a Republican the Democrats' lapdog media would still be crucifying him. the one Democrats blame on Reagan. Fixed investment was insignificant. After diving to 4 per cent in 1982 from 12. It should be cause for particular worry for the Democrats that the demand for labour is not responding to the current changes in GDP. This is not as great as it may seem.Is it the Democrats' neo-fascist economics that is holding back recovery? Gerard Jackson BrookesNews. In other words.7 per cent.7 percent: for 1935 and 1936 the respective GDP figures were 8. It then started a rather slow but steady decline.9 per cent. Inventories amounted to 1.Com Monday 3 May 2010 The first quarter GDP figure of 3. growing by 7. 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.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. In 1934 GDP turned positive. 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. Furthermore.) 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. 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. in 1983 21 weeks was the mean average for unemployment: it is now 31 weeks. When this process gets underway unemployment should begin to decline. rising to 11. 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 3.2 per cent 1984 before declining to 7. there was no genuine increase in net capital accumulation. In both cases it is evident that the unemployment rate responded quickly to the improvement in GDP.8 per cent in November 1982. This has not been the case under Obama. What is worrying most analysts is that this recession is not playing out like any other post-war recession. In this respect the latest figure is truly dismal. Frequent readers know that I define growth not in terms of GDP but as a process of capital formation.1 per cent. 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. Then there was the 1981-1982 recession.1 per cent in the previous year GDP then leapt to 8. 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. Let's take a historical perspective.6 per cent.8 per cent for the rest of the decade1.

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

Whether Mill was junior was merely exercising filial piety in basically making the same proposal is neither here nor there. 6. 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. p. something that mining executives and CEOs clearly do not realise. Westminster Reviews. Not so. successfully demolishing it. Hence land that commands a higher price than marginal land does so because it is more fertile. determined by supply and demand. p. In other words. But as his critics pointed out. (Thomas Perronet Thompson.000 and the other $100. Routledge & Kegan Paul. what any potential buyer is prepared to offer is determined by the productivity of the land. Therefore rent is a differential.000. the fact remains that he fully understood that the logic of . 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. And this is exactly what James Stuart Mill proposed. 1965. (Principles of Political Economy.) Now the mining industry has swallowed the line that there exists a theoretical level above which a resource rent tax would apply. 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.000 then the second mine should be taxed $99. 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. To an informed observer this makes as much sense as saying that I like the idea of taking strychnine rather than arsenic. Moreover. The theory emphatically states that the level is always set by the marginal operation. Yet some 180 years later we have the head of the Australian Treasury promoting this financial monstrosity and a leading mining CEO embracing it. 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". 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. University of Toronto Press. The company wisely ignored his suggestion. 1826. Both taxes are toxic but without a doubt the rent resource tax is the most lethal of the two.)2 What this means in practise is that if the country had only two mines.000. To understand why this tax is so toxic one must first understand it. like any other product. the return in excess of the marginal activity. with one earning $1000. The existence of marginal land is irrelevant.) 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. and would not have existed without them. 419.Com Monday 3 May 2010 The mining industry has got to be its own worst enemy. The TrueTheory of Rent. the higher returns are determined by the differential. (This is clearly the germ of a productivity theory.000.Ken Henry's fallacious resource rent tax and the mining industry's failed response Gerard Jackson BrookesNews.

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.the concept of economic rent leads directly to a 100 percent tax on the alleged surplus. A full-blooded resource rent tax would have destroyed these industries. when the mining boom ends Australians will be facing increased taxes and increased government borrowing in order to maintain government spending. the facts do not support Ken Henry's contention that the tax is costless. 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. 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. Then again. one has to be incredibly naive to think that Henry's tax would not lead to even greater government profligacy. No matter what some of our 'rightwing' economists say the theory of economic rent is pure fiction and there is nothing "problematic" about it. milk bars. Gerard Jackson is Brookesnews' economics editor . Moreover. In the case of Henry's tax the premise is utterly false. 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. A final note: It is argued that Henry's tax will reduce taxes elsewhere. This is what Andrew Forrest. This means that even if other taxes are cut. These people are overlooking the obvious fact that the real problem is government spending. chief executive of West Australian iron ore miner Fortescue Metals Group. A sufficiently large partial resource tax would have the exact same effect. for example. 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'. factories. was getting at when he said that a rent resource tax would reduce investment in Australia while boosting it in countries like Brazil.) 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. (If Henry thinks otherwise. perhaps he would care to explain why). (The Mills are excellent examples of a certain type of personality that can be blinded by its own intelligence. 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. maybe Henry thinks Brazil doesn't have any iron ore. By raising the tax burden these greedy politicians raised the company's cost curve thereby restricting output by locking up valuable resources. according to the logic of this theory the existence. After all. The result was the locking up of resources. In addition. And why stop there? Why not do the same to supermarkets.

Why economic policies inspired by the Great Depression fail Gerry Jackson BrookesNews.) Any conundrum here is a direct result of fallacious economic reasoning. 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. They did this by conjuring up the phantom of pent up consumer spending. I change my mind. 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. State of the Union.) Now Keynesians tend to treat surpluses as contractionary and yet the US budget went into surplus in 1947 where it remained until 1950. (The man was notorious for continually changing positions). it is estimated that consumer spending only rose by about $14 billion while we know that government spending dropped by $59 billion. (Incidentally. something they would never do under a Republican administration. This prevented the return of mass unemployment and the emergence of large-scale idle capacity.Com Monday 3 May 2010 The latest quarterly survey by the National Association for Business Economics reports that the stimulus did not promote recovery.) Keynes was once challenged for changing his mind on monetary policy. 6 January1947. (Harry Truman. . the country's phony media are frantically pushing the idea that happy days are on the way. Despite the fears and objections of these economists post-war spending was indeed drastically slashed. including savings accounts. 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. According to this explanation war-time spending by the government greatly restricted personal consumption which resulted in people accumulating large amounts of financial assets. 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. 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". He tartly replied: "When the facts change. 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. 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.) To the utter surprise of these Keynesians. an astounding 62 per cent reduction. (In case you didn't know. To begin with. students won't find any of these facts in any economics textbook. Paul Samuelson for one expected an unemployment rate of 8 million. Their solution was what became the fashionable Keynesian nostrum of maintaining government spending. (During the same period defence spending fell by about 76 per cent. Very plausible but utterly false. The fiscal years 1944 to 1947 saw spending dive from $95 billion to $36 billion ² a $59 billion cut. Very few people realise America actually experienced this phenomenon. 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. What do you do.

Therefore the real pent up demand could only be on the production side.7 15. C. (James Stuart Mill. 1808. For the classical and other pre-Keynesians demand can come only from production. 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.1 5. (Inflation not only raises nominal GDP it also reduces unemployment by lowering the cost of labour relative to the value of its marginal product2.6 19.4 -9.1 7.5 7. This is precisely what marginal productivity theory predicts. Irrespective of what Keynesians assert real wages did exceed productivity during this period. This would be obvious in a barter economy.0 17. 79).9 23. 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.2 8.7 13. p. 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.) The idea that pent up consumer demand was responsible for the post-war recovery does not hold. 1979).1 11.9 14.1 rate GNP 1 9. to demand something one must first offer something up.5 14.0 -4. as it is impossible to consume what is not produced. In other words. John Stuart Mill succinctly presented this view when he declared that "demand constitutes supplies".2 PARW Jobless rate 2 Canadian jobless 3.1 16. The Keynesian Episode: A Reassessment. This leads to the conclusion that the problem in the 1930s was not demand deficiency but withheld capacity. Consumption in the necessary order of things is the effect of production. H. (W. (In fact. not production the effect of consumption.3 19. 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.9 Productivity real wage.) Year 1 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 100 113 125 128 130 125 117 114 122 132 134 3.4 -8. And an increase in the quantity of capital goods can come only from an increase in the quantity of savings. One should also note that GNP started to rise when the real adjusted wage began to fall. LibertyPress.4 adjusted 8. The following table clearly shows that the PARW1 (the inflation adjusted real wage divided by productivity) tracks the unemployment rate. This is where the increased demand came from. Hutt. .2 12.Therefore aggregate spending must have contracted by $45 billion. Commerce Defended.1 14.9 21. not postponed consumer demand as asserted by Keynesians.7 20.1 11.6 24. Mill's father explained that consumption is posterior to production.5 -2. Hoover and Roosevelt implemented policies that ensured that production and hence demand would be severely curbed.4 11. For Keynesians supply creates demand.3 14. and R. Baldwin.8 9.6 17.

In Hutt's terminology withheld capacity had been released and it was this discharge of productive power that drove the post-war economic boom. When hostilities ceased industry found costs and relative prices were finally being allowed to adjust to real economic conditions. May 1941. 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.5 per cent (Federal Reserve Bulletin.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. 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. The lesson for today should be crystal clear. 2 From 1933 to 1937 the wholesale price level rose by 21. 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. 453). However. (This process even repealed for a time Roosevelt's minimum wage rate). For the same period the consumer price index rose by about 11 per cent (Historical Statistics of the United States). 1 These figures were constructed by me. 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 .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. p.

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

thanks to Reagan's anti-Soviet policy. Oddly enough. I have warned that focusing on deficits provides big spenders with an excuse to raise taxes. the stimulus and bailouts: It's also a fact that as a Senator Obama voted for all the big spending programs. 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. Moreover. As I have written elsewhere. I do have the tax figures for 2008. What makes Obama's deficits almost mesmeric is their sheer size. It was a Republican majority in both houses that checked him. Of course I didn't. It will be 25 per cent for 2010. 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". This is where someone tries to excuse his own bigotry or bad behaviour by accusing critics of doing the same thing. The Bush cuts were very modest by historical standards. Not once did he raise a single objection. It seems that to Democrats only Republican tax cuts are bad for you. "You didn't attack the Republicans for running deficits". war expenditure is temporary while Obama is making his expenditure increases permanent.000 or more dropped you in the top 1 per cent bracket while $108. Is it someone earning $100.18 per cent ² but in 2009 it rocketed to 9. the Soviet Union collapsed.14 per cent) in 2007. It is also argued that Bush's "colossal tax cuts for the rich threw the economy out of balance". It's equally true that the 2009 deficit was driven by falling revenues.000 or what? Furthermore. Then we have the marvellous President Clinton and his budget surplus. His 'blame-Bush' supporters also ignore the fact that he raised spending in 2009 by about 18 per cent over the 2008 level.91 per cent and the estimate for 2010 puts it in excess of 10 per cent. Pure rot. what matters is not deficits but spending. 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. The tax structure is obviously very skewed. What is overlooked ² and deliberately so ² is that he started with a big spending program. An income of $388. and for the same reason I haven't attacked Obama on the subject. something like 47 per cent of US households do not pay federal income taxes. He is now busy trying to raise spending by a further $200 billion. What I find interesting is that those who scream about the 'rich' never make an attempt to define rich.000. Clinton was able to use the resulting 'peace dividend' (cuts in military expenditure) to balance the books. In addition. these massive Kennedy cuts didn't sink the US economy.904 put you into the top 10 per cent. 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. 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. This was from a 2008 study by the Organization for Economic Cooperation and Development. Although I consider $388. it is never explained why these people need to be punished for being successful. Nowhere will you find an article by me attacking Obama's deficits. There is no logical way by which his supporters can blame the Bush tax cuts for this fiscal vandalism. If the critics . a peace-time record. $300. In fact. $250. the one the Democrats bitterly opposed. And let us not forget that the very same Clinton now supports Obama's utterly reckless spending program.1 per cent. The idea that Clinton was a brilliant economic manager is pure hogwash. As for Iraq and Afghanistan. As it happens. despite the wars in Iraq and Afghanistan. Furthermore.000 a rather handsome income I certainly would not say it made the recipient rich. Then there is the Tu quoque (you too) fallacy.000. No attack on the Bush tax cuts is complete without an attack on the 'rich'.term elections) the deficit only stood at $160 billion (1.

I do not envy the rich their good fortune. If a genuine deflation set in the dollar would rise. old story*. On the contrary. It would certainly keep the riff raff in their place. not drop. Buffett has some 40 billion or so dollars in assets.) Nevertheless. But since when has any president been responsible for how American citizens spend their incomes or how much they borrow? In any case. for some reason many of these critics are fixated on deflation. (And you thought the Democrats were looking out for the little guy. A currency can still collapse while the remaining currencies remain perfectly stable against each other. Now ain't that odd. The Fed is responsible for the money supply. On Liberty. And of course it was Bush's fault. Steve Jobs. Oxford University. The super rich ² who tend to support Democrats ² hold their wealth in the form of all manner of assets. 1984. What is unfair about the present pattern of earnings and wealth? 2.believe these incomes are somehow "unfair" they should be made to answer the following questions: 1. Another point is that Democrats like Obama and Kerry do not call for wealth taxes. What is a fair distribution of incomes? 3. 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. This is an old. 1802). p. Larry Page and those Hollywood celebrity airheads. Moreover. 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. You see in order for the dollar to tank there must be other currencies that do well". 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. the existence of other currencies does not determine whether a currency falls or rises. He in turn was followed by David Ricardo. this credit is created by fractional reserve banking. 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. fractional banking destabilises the economy and brings capitalism into disrepute. 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. In other words. (The High Price of Bullion 1811). This makes the boom-bust phenomenon a monetary problem. particularly those who made their own money. In turn. The same goes for Bill Gates. I just deeply resent any effort by self-righteous wealthy activists to put barriers in the way of others. One argued that the deflation would be worse than the 1930s. I don't). Of course. And yet. This line of thinking became known as the currency school. Finally. For example. 96). 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. of which credit is the greatest component. as I have said so many times before: The market always gets the blame. It starts speculative manias and fuels takeover booms. As John Stuart Mill said of envy: "that most anti-social and odious of all passions". . Sergey Brin. George Soros. Sanka heiress Agnes Gund. none of this will persuade those ideologues who think it's all due to "selfishness and greed". This is complete rubbish. the boom-bust cycle is the product of fractional reserve banking and not capitalism. He then said: "That doesn¶t mean the dollar gets trashed. "Out of control consumer spending" was attacked as one cause of the crisis.

What they have are prejudices. not consumption. And without a doubt. politicians did that. politicians did that. bank reserves will not be allowed to shrink. 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. causing a severe drop in prices. These critics of the market don't have a theory. Even if there were. 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. This was brought about by mass bank withdrawals. Capitalism didn't impose burdensome tax regimes. In other words. From 1930 to the middle of 1933 the money supply shrank by about one-third. politicians do. These jobs are paid for out of taxes. What we face today is not a failure of capitalism but of statism. that is why I get nothing from them except leftwing drivel. There is no sign whatsoever of such an event occurring today. politicians did that. Gerard Jackson is Brookesnews' economics editor . They do not and cannot add to total demand. *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. politicians did that. Capitalism didn't run up massive government debts. "Helicopter Ben" made it clear he is prepared to flood the system with as many dollars as it takes to prevent a contraction. Capitalism didn't impose destructive spending programs on their countries. Capitalists do not set economic policy. The same fellow asserted that government jobs prop up the economy. Capitalism didn't implement unsustainable welfare schemes. This is why one needs a theory to interpret them. And capitalists are certainly not in charge of the money supply ² central banks are. Statistics tell us what happened but they don't tell us why it happened. 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.A deflation occurs when the money supply contracts.

I didn't buy it. But genuine growth comes from capital accumulation. 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. And it didn't. I complain about spending. And this is exactly what has happened today. This came in at 0. not consumption. But I don¶t complain about deficits. This period experienced GDP growth rates of 7 per cent to 9 per cent for about fifteen months with unemployment dropping from 10. This is because no one really knew how easy he would go on the monetary spigot. This was down from 127.01. producing a dismal annual figure of 0.Com Monday 24 May 2010 The economy has got a lot of Democrats spooked. The revised 3 per cent GDP figure for the first quarter tends to confirm my pessimistic prognosis. No matter which way the phony media try to spin it this is not good news. Fingers are pointing at the 2. warning that his "economic policy is one of incredible stupidity". Far from being automatic the recovery process can be frustrated by interventionist economic policies. if inflation took off and money wages were allowed to lag behind prices then a rapid rise in nominal GDP would cut unemployment. I have lost count of the number of times I argued that increased government spending would not bring about a recovery.8 to 7.2 per cent many people immediately assumed that the upswing had finally arrived. What accounts for these rapid 'growth' rates is that as the economy recovers idle capacity and formerly unemployed labour is quickly utilised. taxes. It just ain't going to happen. I stopped getting this nonsense a couple of months ago.2 percent in 18 months. In my view the contrary factors at work were too powerful to resist. a New York-based independent forecasting group. But this inflation-induced reduction in the unemployment rate would quickly result in another bust. Obama's brilliant response to the situation is to continue jacking up spending. which brings us to fixed investment. As the economy reaches 'full' capacity the growth in GDP naturally decelerates. regulations and monetary policy. According to the emails I used to get by "June 2010 the economy will be growing by 8% and unemployment will be falling. Now in January 2008 I said that the manufacturing figures for the previous December indicated that the US was in recession. In 2004 I warned that the US economy was going to be facing "another recession in or around 2008".6 in the week ended May 21. the lowest level since 21 August last year. an easy monetary policy should have seen GDP accelerating after a time lag. I also said that the presence of Bernanke at the Fed created a complication. (Of course. When GDP for the last quarter of 2009 came in at 5.42 per centage points figure for consumption as evidence that there is still some real growth in the economy. The recovery after the severe recession of the early eighties is an example of this process.) The Economic Cycle Research Institute. Moreover. But the boom-bust cycle is not a cyclical phenomenon and it doesn't come and go like the seasons. it is estimated that it would require an expansion rate of about 9 per cent to put a significant hole in the unemployment level. as if that justifies Obama's fiscal sabotage. Now it's accusations of how I "complain about deficits but never complained about Bush's spending".Is the US economy facing stagnation? Gerard Jackson BrookesNews.2 the previous week.04 per cent. reported that its Weekly Leading Index fell to 125. It's been more than two years since the economy slid into recession. When Obama emerged as a serious presidential candidate I raised the red flag in numerous articles. To tell the . And that means we'll wipe the Republicans out in November". As a rule.

and the rest of Obama's Keynesian advisors (these people are Democrats first and economists last) to take note.8 per cent. Clearly Americans can expect more and more of the same statist snake oil.9 per cent. Don't expect Christina Romer. head of the White House Council of Economic Advisers.9 of personal income while income from government programs rose to 17. Now these figures were no sooner released than Obama revealed that he was planning an additional $200 billion on welfare payment. 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. From an Austrian point of view this can be explained in terms of capital theory and the structure of relative prices. I don't know how much credence to put in this index. In the first quarter of 2010 the per centage of wages paid by the private sector fell to 41. However. Wages are also telling an unhappy tale. 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". I did warn last December that the monetary tightening* that started in June "will have a detrimental impact on economic activity".6 per cent pa has caused consternation. This process also helps explain what is happening to the US economy. and God knows how much more on top of that he has got lying around. and government wages rose to 9.truth. up from 14.2 per cent. But as I have already pointed out the money supply started to tighten in June of last year. This is what the index could be signalling. *Reports that in the three months to April the contraction in M3 amounted to 9. (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). Gerard Jackson is Brookesnews' economics editor .

Bernard Salt The Australian. are applauding this Keynesian quackery. In other words. The consumption fallacy leads to the belief that government spending can expand the demand for labour. miners dig in for the battle. 79). 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. Complete hogwash. 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. 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. (James Stuart Mill. etc. p. as it is impossible to consume what is not produced. 1808. C. That money is used to effect the exchange is irrelevant to this fundamental fact. 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. Naturally.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. 21 May 2008. The more people have to spend the better off they will be. political editor for the Nine Network. As James Mill rightfully put it: « consumption is posterior to production. But a government can only spend what it takes from others in the form of taxes. Consumption in the necessary order of things is the effect of production.) In other words. Yet this is exactly the conclusion that KPMG arrived at with respect t o the Government's fallacious resource rent tax. Baldwin. How one is supposed to consumer what has yet to be produced is a question that Keynesians never raise. What in fact we have here. Real demand springs from production and not consumption. not production the effect of consumption. Change based on the role of women was always going to transform our society over the course of a generation. In English so plain that even Mr Salt can understand it: the farmer's wheat is his demand for other goods. . (Rudd. Laurie Oakes. 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. except if you work at KPGM. is a change in the pattern of demand and not an expansion.KPMG's Keynesian quackery is hazardous to your wealth Gerard Jackson BrookesNews. profound thinkers like Laurie Oakes. and R. fees. a partner in KPMG and "a leading commentator and advisor to corporate Australia". Herald Sun 29 May 2010) . Commerce Defended. In this the sense classical economists were right to speak of money as a veil. consumer spending drives the economy. In doing so I can do no better than to draw attention to Bernard Salt. If it were not for money removing the need for barter the fallacy that consumption drives the economy would not emerge.

the richer they grow: that the man who steals money out of a shop. (This makes one wonder why the "games" did not save the Roman Empire from economic decline). This is the company whose economic model predicted that the Commonwealth Games would raise Victoria's GSP by $1. is a public benefactor to the tradesman whom he robs. More investment means more stages of production embodying improved techniques and technological progress. . 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. 1997). (Pop Internationalism. investment raises productivity. Taxes are not now esteemed to be like the dews of heaven. pp. labour's marginal product continues to rise. 1967. (Essays on Economics and Society. something the ancient pharaohs understood. How is this done? By continuously extending a country's capital structure. provided that he expends it all again at the same shop. It follows from his logic that real wages cannot rise if spending is diverted from investment to consumption.Even if the government printed the money it still cannot change the fact that the real source of prosperity is increased investment. In other words.600 jobs. Routledge & Kegan Paul. they were spot on when it came to the nature of demand. As the capital structure expands relative to the labour supply. 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. 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 real trick is to produce a continuous stream of jobs that at ever higher real wage rates. and that the same operation. repeated sufficiently often. Although the classical economists didn't get everything right. which return in prolific showers. The MIT Press.6 billion over 20 years and create more than 13. The logic of this argument is that sporting events are a substitute for capital accumulation. 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. Creating jobs is no big deal. 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. would make the tradesman a fortune. The following chart is just one of many that show wages moving in tandem with productivity. 262-263) Mill was making clear that the pattern of spending is of extreme importance. It is no longer supposed that you benefit the producer by taking his money. Yet KPMG ² the same geniuses who defend the resource rent tax ² deny this fundamental economic truth.

and this would inevitable bring about a shortening in the process of production [italics added]. or keep it lower than it would otherwise be. But a proper understanding of the nature of capital would warn that directing spending from investment to consumption would lower the standard of living. Sheed Andrews and McMeel Inc. Augustus M.) Secondly. Moreover. 1978. 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 . 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. p. 255-265). Augustus M.. Two important economic facts: Firstly. There is also Hayek's The Pure Theory of Capital. 1967. 1975. to celebrate workplace diversity and especially ethnic and religious diversity".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. Kelly. The plane fact of the matter is that GSP and GDP figures are not measures of economic growth. Lachman's Capital and Its Structure. GSP and GDP are not true measures of economic activity. 134. Finally. Both exclude spending between the stages of production on the absurd grounds that it would be double-counting. There is also Hayek's Profits. (Friedrich von Hayek. with respect to consumer spending this approach leads to the conclusion: the more the better. The result is that consumer spending is grossly exaggerated as a proportion of total spending. pp. 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. he is not solely concerned with the immediate effects or even long term effects on one group alone. and would thus raise the prices of goods of the lower order in relation to those of the higher order. Interest and Investment. he carefully follows a chain of reasoning which not only reveals secondary consequences but also long term effects. Kelly. 1975. (To get a better understanding of the nature of capital see Ludwig M. KPMG could argue ² and probably would ² that their GSP figure refutes this argument. though real growth consists of capital accumulation we cannot measure it because capital is heterogeneous. Prices and Production. 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. I am perfectly prepared to admit that I am at a complete lost as to what the devil he is talking about. University of Chicago Press. it appears that Mr Salt has adopted the politically correct view that we need "a shift to acceptance. It is to be deeply regretted that KPMG's economic fallacies are soundly embedded in what passes for economic debate in Australia. 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.

To top it off. irrespective of the cost to the country. Adding to the economy's woes we find that of the 431. The Democrats have no understanding of free markets nor do they care to obtain any. Their ultimate aim is not sustained economic growth ² without which there is no prosperity ² but sustained economic power for themselves. 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. If you are one of the unemployed or underemployed things are indeed gloomy. The same can be said of the US economy. This is not a good time to be a small American businessman. This is why so many Americans can favour more controls on business while still favouring free enterprise. Although the great majority instinctively lean to free enterprise it cannot be denied that leftist thinking has greatly influenced public opinion. So much for the wonders of big-spending government and its regulatory chains. 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.Com Monday 14 June 2010 If you read Reuters. Making matters worse is Obama's impending blizzard of regulations and the accompanying paperwork that will swamp small and medium size businesses. The Wall Street Journal reports that in the first quarter not one venture-backed company went public. 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. Unfortunately much of what he has to say can be found in the standard textbook. And no wonder. there will always be an ample supply of what Adam Smith aptly called "that insidious and crafty animal. 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. less than 10 per cent. He stated on his blog that: .000 was in the private sector. manufacturing also started to slow. One of these nostrums is that government spending is the true road to recovery.000 non-farm jobs created last month a mere 41. 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. vulgarly called a statesman or politician" to encourage this misguided line of thinking. Pushed too far government spending can actually destroy an economy. This hasn't happened since 1980. 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. 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. 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. And this is what we are really facing: misguided thinking. 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 that's the economic anvil the coming tax increases will be the hammer.Is the US economy heading for the rocks? Gerard Jackson BrookesNews. Needless to say. The massive spending programs and their contempt for the electorate is ample evidence of that fact.

). as the older economists put it. Nelson. T. All that is necessary in order that equilibrium be maintained is that consumers' incomes equal the cost of producing consumers' goods. They can't any longer treat their homes as ATMs. etc. production was deranged.Why are we having such a hard time getting free of the Great Recession? Because consumers. 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. 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. but is made between producers and producers. Phillips. However. But it goes without saying that Reich's opinion is not only plausible but self-evident. Even on the surface this is a ridiculous view. During the Great Depression it was noted: The larger number of payments is not from consumers to producers. (C. don't have the dough. F. the total of producers' payments necessarily exceeds that of consumers' incomes. 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." [Italics added]. Macmillan and Company 1937. What is cost for one producer is in part income for some other producer. 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. as they used to say in the nineteenth century. 71). "In fact. indicating that business spending is what really drives the economy. meaning that the means to produce always supplies the means to buy. Supplies constitute demands. who constitute 70 percent of the economy. demand springs from production. and was considered a monetary phenomenon. But once we do include it consumer spending drops to about one-third of total spending. W. Is it not a fact that consumer spending makes up about 70 per cent of GDP? Yes it is. Banking and the Business Cycle. p. and tends to cancel out in any computation of net incomer of net product value. . 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. There was a time when this fact was never a matter of contention. raw materials. A. This was followed in the 1930s by the even worse Keynesian theory. And now look where we are. supplies. income produced or net product is roughly only about one-third of gross income. one of which is that encouraging consumer spending can retard recovery and weaken production. McManus and R. No one denies that production takes place in stages and through time. 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. 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. as they did before the Great Recession. 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. In English so plain that even Mr Reich can understand it: consumer incomes are always exceeded by total expenditure on production. This was the result of investment expanding disproportionately to consumption. and so on. In other words.

Gerard Jackson is Brookesnews' economics editor . though in his later years he paid far less attention to the problem of depressions. See Say's Letters to Malthus as well as Ricardo's defence of Say's law.*Malthus can be considered the exception. 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.

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. The Journal of Commerce commodity price index (JCOM) fell by 8.9 per cent. Contrary to popular thinking deflation is not about a general decline in prices as such but about a decline in the money supply. Also the growth momentum of these indexes has plunged in May. .Is the US economy facing deflation? Dr Frank Shostak BrookesNews. The yearly rate of growth of the JCOM index fell to 47.5 per cent in May from April while the commodity price index CRB fell by 8.7 per cent from 24.2 per cent during that period. 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.Com Monday 14 June 2010 According to some analysts a sharp decline in major commodity price indexes has raised the spectre of deflation.9 per cent from 77 per cent in April while the yearly rate of growth of the CRB index plunged to 0.

Note though that during October to December last year we actually had deflation.7 per cent in May against 1 per cent in January.5 per cent in May last year. The yearly rate of growth of AMS stood at minus 6 per cent in October.4 billion in January 2008 while lending remains in free fall. Currently however.05 trillion in early June from $1. (Note however that the growth momentum of the inflationary credit proxy shows at present a visible bounce (see chart)). The level of excess reserves held by commercial banks has climbed to $1. By means of monetary pumping the central bank injects money into the banking system. To establish then whether we are in deflation we need to find out what the money supply is doing.e. . minus 10 per cent in November and minus 7.1 per cent in December. This money in turn is amplified by commercial banks lending through so called fractional reserve banking. The yearly rate of growth of our inflationary credit proxy stood at minus 5. The yearly rate of growth of lending fell to minus 11. lending that was generated through fractional reserve banking. Normally the main driving force in the expansion of money supply is the central bank¶s loose monetary policy.6 per cent in May against plus 3 per cent in May last year.4 per cent in May from minus 0. The latest data for our monetary measure AMS shows that the yearly rate of growth stood at 4. 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. What matters for money supply however.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. A positive figure for the rate of growth in money supply implies that at the moment inflation is still in force. is not lending as such but inflationary lending i. there seems to be a breakdown between the Fed¶s pumping and commercial banks¶ lending activity.

(Again the Fed could offset this fall by an aggressive buying of assets from non-banks). 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. 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. we have to consider the fact that the Fed doesn¶t pay much attention to the money supply data. results in a decline in the money stock and hence in deflation. Remember that whenever the Fed buys assets from non-banks it boosts the demand deposits of the sellers of assets to the central bank. . An increase in demand deposits implies an increase in money supply. 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.1 per cent in July last year the yearly rate of growth of the CPI climbed to plus 2.2 per cent in April. As we have seen so far the money stock is still rising.Now a fall in inflationary credit. So it seems that irrespective of the decline in inflationary credit the Fed can always offset this fall through monetary pumping. if not offset by the Fed¶s pumping. After falling to minus 2. Now. For Fed policy makers inflation or deflation is associated with movements in the consumer price index (CPI).

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. (Observe that what we have here is a general increase in prices and a fall in economic activity. Conclusion A sharp fall in commodity prices has raised the spectre of deflation in the US. 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. This in turn could significantly slow down the rate of increase in the Fed¶s balance sheet. 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). 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. is all about). given the fall in inflationary credit this will lead to a fall in the money supply). Such a scenario is likely to be supportive to the price of gold. We suggest that what matters for deflation is the state of the money supply. There is however another factor to consider. The lagged effect from this fall is likely to produce a pronounced decline in economic activity i.e. which is what stagflation. given the decline in banks inflationary lending this will result in a decline in money supply and hence deflation. As long as the money supply rate of growth remains positive figure there cannot be deflation. Hence. In response to this strengthening the Fed is likely to respond by tightening its monetary stance. the offsetting monetary pumping by the Fed has kept the money supply rate of growth in positive territory. a weakening in the pool of real savings. There is however. 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 suspect that a sharp fall in economic activity could cause the Fed to ignore the increase in prices and embark on aggressive pumping. will severely undermine various bubble activities.e. coupled with a fall in inflationary . This. a general increase in prices. Despite a decline in commercial banks¶ inflationary credit. (Even if the Fed were to decide to do nothing.e. always the possibility that the Fed could tighten its stance in response to a strengthening in the growth momentum of the CPI.

Global. . Frank Shostak is a former professor of economics who now works as an economist for M. could result in a fall in money supply and thus the emergence of deflation.credit. As a result the Fed may embark on strong monetary pumping. 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. We suggest this could lead to severe stagflation. F. However.

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. I suspect that like the rest of the mining industry's leaders Gina Rinehart has something of a rolodex mentality. including Rinehart. to argue that so-called "super profits" are the result of quasi-rents (another fallacy) is grossly misleading. it was incumbent upon them to discredit Rudd's resource rent tax by publicly refuting the theory upon which it is based. Housing Prices and Productivity and Marginal Costs and Prices in the Electricity Industry. The first is termed quasi-rents. be too hard on these people. One should not. Moran seems to have a very sketchy notion of what quasi-rents really are. 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". Alan Moran. a fact that he made clear in Land Regulations. 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. Moreover. He stated that Australia's proposed taxation arrangements confuse super profits with high profits based on normal business activities. What they did not do is actually challenge the concept. No wonder the IPA has failed to provide anything approaching an adequate critique of Rudd's tax. they responded to the proposal with sneers and statements ² albeit correct ² about the damaging consequences of the tax. all profits are abnormal. Now the IPA publicly condemns the tax. Some mining businesses do earn high profits as a result of two factors. clearly supports the doctrine. 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. First and foremost. (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". This is said to occur when the net returns to man-made factors exceed prime costs while still falling behind average costs. indicated even a passing acquaintance with the true nature of the tax.) 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. Even worse. The striking thing about this event is that no one who addressed the crowd. This is where our rightwing (the self-appointed defenders of the free market) have once again let the country badly down. Instead. If they had done so perhaps they would have realised that the reasoning upon which the tax is based is totally fallacious. 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. I suppose. . 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. After all. A company can earn quasi-rents while still making a loss. It seems to have completely eluded them that if a resource rent tax is economically harmful then the theory itself must be false. meaning that when faced with an economic problem her solution is to always ring "the usual suspects". However.Rudd's disastrous resource rent tax: how the right let the country down again Gerard Jackson BrookesNews. 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.

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. 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. is one of those dummies. Economic rent is a surplus. so are the textbooks. This leaves the Centre for Independent Studies whose recent paper in support of a carbon tax was an absolute disgrace. successfully demanding that it publicly admit its error. someone heavily involved in mining. erroneously stated: Economic rent has its origin in the labour theory of value. We now find that the IPA refuses to hold itself to the same lofty standard that it rightly applies to the Australian Treasury. Equally bizarre is their refusal to acknowledge that the theory of economic rent has been effectively debunked. told me that an industry executive had used Davidson's article to attack the resource rent tax and that others had done the same. It has absolutely nothing whatsoever to do with the labour theory of value. even though they are stridently attacking the tax. 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. Professor John Fairbairn.) Although I share his opinion of those who admit to being leftists while calling themselves economists.) If this error had quickly disappeared it probably would not have mattered that much. If he actually said this then he is being absolutely true to the theory. Peter Smith launched what can only be described as a sneering. This is a truly unforgivable error for any economist to make. This is the same outfit that is crowing about having exposed the Treasury's dodgy figures on government spending and GDP. the fact remains that his article was vacuous. To top it off. James Stuart Mill certainly thought so. 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. 27 May 2010. Professor Sinclair Davidson. adamantly refusing to make the necessary correction. The "dumb" twenty. insulting and very aggressive attack on 20 leftist economists who came out in public to support the resource rent tax. And this is why they will never publish an article challenging the economic rent doctrine. . They never did so in the past and they are not about to start now. Peter Smith. including land that is being mined. one of my readers. If they are wrong. 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. When it comes to double-standards the CIS is even worse than the IPA. who holds the Ritchie chair in economics at the University of Melbourne. an IPA fellow. Yet the IPA still insists on standing behind Davidson's article. Not bloody one. (Quadrant. (See chapters II and III of Principles of Political Economy and Taxation. These economists are simply applying the theory of economic rent as laid out in every standard textbook. a differential created by the emergence of marginal land. However. The IPA is not the only guilty party. Don't hold your breath waiting for this lot to explain their double-standards. 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. Classical economists couldn't understand why natural resources had value when human labour hadn't yet added 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.

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 .

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

1979. 2006.2 per cent (W. pp. p. To ensure that the facts would be correctly reported by history Hoover recorded the incident in his memoirs: A statement of Rexford G. had lunch with me. LibertyPress. (Robert Higgs. James Rand. W. ten days before the inauguration. 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". 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. and Cold War. . as I wanted it in the record: My dear Mr. Anderson estimated that in 1939 there was more than 50 per cent slack in the economy. Economics and the Public Welfare: A Financial and Economic History of the United States 1914-1946." When I consider this statement of Professor Tugwell's in connection with the recommendations we have made to the incoming administration. Rand: I beg to acknowledge your telephone message received through Mr Joslin as follows: "Professor Tugwell. If that were to happen America would indeed ² to the undying satisfaction of the left ² cease to be America. Benjamin M. adviser to Franklin D. a responsible industrialist. Economic Survey 1919-1939. [they] would project millions of people into hideous losses for a Roman holiday. (Benjamin M. and oil prices to soar. Tugwell (one of Roosevelt's close advisers) is worth repeating.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. Professor Higgs calculated that from 1930 to 1940 net private investment was minus $3. had telephoned me this statement of Tugwell's as a warning. 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. Roosevelt refused. Roosevelt. Arthur Lewis. Depression. as he admitted. . his . Unwin University Books. In any event. 47948). HERBERT HOOVER Some years afterwards. p. The Independent Institute. I confirmed his telephone message in the following letter. . 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. which place the responsibility of the collapse in the lap President Hoover.1 billion. 205). 7). He said they were fully aware of the bank situation and that it would undoubtedly collapse in a few days. Arthur Lewis calculated that from 1929 to 38 net capital formation plunged by minus 15. . . Anderson. War. Yours faithfully. 1970. I can say emphatically that . What appear to others to be mistakes turn out to be necessary steps on the road to an ideological victory. I asked Ray Moley why Roosevelt refused to cooperate with me in the banking crisis.

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

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

It is absolutely absurd to suggest that this process raises total spending.9 per cent. This does not mean that government spending is harmless. So how does this fit in with Rudd's alleged spending blunder. If.8 in April to 56. But there is no suggestion of where this pressure might be originating. one takes note of the monetary situation then a different very gloomy picture emerges. Of course. Despite the somewhat optimist tone of the report these figures suggest that a contraction may have started. In fact. Therefore one would expect that this is where the first effects of a monetary slowdown would make themselves felt. So long as the surplus consisted of 'idle' reserves then it is true that its expenditure raises total spending. irrespective of what his media pals think. The more a government spends ² irrespective if whether it borrows or taxes ² the more resources it will direct away from other activities. production fell by 2. Unfortunately. But the effect is no different from the government directly spending newly printed dollars. the link between money and changes in output and the pattern of production are never given any consideration in Australia.3. If this spending had indeed saved the economy manufacturing would be accelerating.6 per cent and new orders by 4. Regrettably. They admit that a downward pressure on selling prices is squeezing profit margins even though input prices for May remained unchanged. it had no beneficial effect on manufacturing. especially investment. We find that the PMI for May fell from 59. If the government borrows or taxes then this clearly involves a straightforward transfer of purchasing power. It is the origin of the source of the funds that determines whether an increase in government spending will expand 'aggregate demand'. This is particularly damaging where the government believes that consumption and not business spending drives the economy. not the spending itself. Movements like these are bound to be perplexing so long as real monetary effects are ignored. It's clearly a question of how one interprets the statistics. they did nothing to raise real wages and the standard of living.Manufacturing is a leading economic indicator because of its time sensitive nature. the one that saved the economy? One thing is for certain. not slowing What needs to be understood is that Keynesianism only works its magic through monetary expansion. it seems that the very thought of discussing the matter is an anathema. however. Gerard Jackson is Brookesnews' economics editor . The projects that the Rudd government funded amounted to state-sponsored consumption and added nothing to Australia's capital structure. No doubt Price Cooper Waterhouse is right if one focuses solely on the trend. In other words. This is why correlations that focus on spending while ignoring the money supply cannot be legitimately used to refute the government spending fallacy. the situation is different if Government spending comes out of a surplus. Yet this is exactly what is being said. Now the Price Cooper Waterhouse PMI report for June states that despite a recent slowdown "manufacturing activity grew solidly in May". even Rudd's critics have failed to succinctly nail the spending fallacy.

In . 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. KPMG asserts that the tax "has an excess burden of zero". in this case mineral reserves. James Stuart Mill being a notable exception. 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. at least that's how it sounded. Therefore the argument that the tax is justified because of the "immobile nature of the natural resources" collapses. whether it be a house or a car.KPMG and the stupidity of Rudd's resource rent tax Gerard Jackson BrookesNews. Not only did the economic rent doctrine preceded Ricardo it was soundly rejected by his contemporaries. In plain English. In orthodox economics. It is not mobility that matters but accessibility. All profits are abnormal. This is plain silly. Once that is done no amount of fancy statistical techniques can salvage it. As such it can be safely taxed away for the 'benefit' of the community without harming investment. To understand what is wrong with KPMG's conclusions we must first determine why the theory upon which they are based is absolutely false. what is grossly misnamed "economic rent" is in fact nothing but a profit. Having people like this expound on economic matters is like getting a plumber to remove an appendix. however. 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. What it actually proved is that media commentators like Laurie Oakes should be kept away from sharp instruments. This outcome rests on the modelling assumption that the RSPT only taxes the economic rents earned from immobile factors. For him rents are correctly perceived as time payments for the hire of a service. output or unemployment. 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. When economists speak of rent they do not do so in the sense that the layman does. This is an interesting point because KPMG admits that it used a general equilibrium model to obtain its results. rent is an unnecessary surplus. 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. 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. a differential created by the appearance of marginal land. What it didn't say is that these models have been embarrassing failures.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. Neither is true. Naturally Rudd's media mates thought KPMG had thoroughly skewered the tax opponents. 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. 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. There is no such thing as normal profits. That KPMG cannot grasp this was made clear by its statement that the tax would not have a detrimental effect normal profits. Since there is no change in the supply of mineral resources«.

For sheer economic stupidity this takes some beating.addition. including capital goods. It's exactly the same when a business makes an investment decision. University of Toronto Press. 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. through the general prosperity produced by the labour and outlay of other people. which naturally required a great deal of supervision and entrepreneurship. Even if Mill had been right at the time he wrote. 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. 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. 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". 1988. Talk about Keynesianism running amok. rather than invest this so-called 'surplus' the mining industry has apparently been burying it. Let's return to Mill for.) Mill made the above statement in a speech to the Land Tenure Reform Association in May 1871. Public and Parliamentary Speeches. the so-call economic rents that emerged during the Napoleonic Wars resulted in an enormous increase in agricultural techniques and investment. An acre of land that cost $100 in 1870 could be bought for $10 in 1930. KPMG asserts that the tax has a "zero economic cost". p. A ridiculous opinion that Treasury head Ken Henry ² like the majority of economists ² seems to have completely swallowed. did so for about 70 years. 422. that the The incomes of landowners are rising while they are sleeping. (John Stuart Mill. In economics there is the concept of opportunity costs. This is what has to be given up in order to obtain a good or service. My God. 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. For example. 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. 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. they are utterly worthless. If cutting corporate taxes increases . It's truly depressing to see people swallow these phony statistics. Unfortunately for Mill prices for agricultural land had already passed their peak and were heading down ² and. 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. 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. how can this possibly justify the Rudd Government's tax on the mining industry? As for KPMG's figures. apart from WW I. Yet according to Mill landowners simply accumulated wealth in their sleep without the slightest effort. 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. The present world-wide economic situation should have finally destroyed what faith anyone had in economic models. 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". believing as did Mill. In other words.

leading to higher and more complex finance arrangements than Treasury has forecast.investment it follows that raising taxes on the mining industry will have the opposite effect. 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. 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. 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. The fact is that Rudd used taxpayers' money to get the result he wanted. 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 now seems to be the case for outside economic reports.

And so fair. deciding to use the war against terrorism as a means of embarrassing Republicans and putting a Democrat in the White House. Although. 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. 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. a committee member. I immediately thought: "Ah. he informed us. too. Silly me. In fact. if not last. completely distorted the Republicans' argument. he chose the former.) But to his disgust that's what some politicians tried to do. 17 September 2001." a thought. 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. 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. As expected. helpful to Democrats and terrorists. particularly capital gains taxes. that he then treated as uncharitable (New York Times and the Melbourne Age. deeply bigoted. he's sickened by Kennedy and Co using the atrocity as a cover to try and push through their very partisan pro-homosexual bill". a natural position for two-faced pompous Democrats. However. I sincerely doubt that he has a patriotic bone in his entire body. to try and stimulate the economy. started to use it as a fundraising tool. as Lenin once put it. The ever helpful New York Times. cheerfully provided him with. if they'd been paying attention to his New York Times propaganda pieces they would have found all the evidence they needed. No sooner was the subcommittee on terrorism and homeland defence formed in response the World Trade Center than Harman. being a fanatical Democrat. What a sweet guy.Paul Krugman's dishonesty and contemptible behaviour Gerard Jackson BrookesNews. Having condemned Republicans as distasteful political "opportunists" Krugman then took the high-moral ground. 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. Like all truly committed Democrats Krugman's first loyalty is to the party and not his country. 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. Krugman. integrity is the one thing you will not find at the Times. . that is. Fortunately for Krugman. I should have called him a lying Democratic Party hack. a "transmission belt" from which to savage the Republican forces of darkness. and self-righteously announced that the Bush administration should become more bipartisan and drop its tax proposals. But notice how Kennedy's callous behaviour caused Krugman no distress whatever while Republican tax proposals clearly evoked a deepseated loathing. they're right to demand evidence. outrageously dishonest and thoroughly hateful excuse for a human being. What disgusted Krugman was the call by some Republicans to cut taxes. They're right: I was far too generous.

7 per cent. without a hint of humour: "The vast right-wing conspiracy isn't a theory. 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. Nevertheless. not Republicans.6 per cent. On a final note. The divergence was caused by the payroll approach which excludes the self-employed.1 per cent and the official unemployment rate stands at 9. It was the sanctimonious Krugman. the unemployment level depends on which method is used to measure." Revolting humbug from a revolting man. I've no idea what it is about President Bush that drove Krugman nuts. As Krugman well knows. There is absolutely no excuse for this attempted deception. While being interviewed by Tony Jones from the Australian Broadcasting Corporation (Lateline. 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. Today the U-6 per cent rate is 17. 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. 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. none of which appeared to bother Krugman.3 per cent peak to 5.7 per cent. 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. it's quite clearly visible to anyone who takes a little care to do his home work". 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. the Household Survey indicated that 1. I'm beginning to assume that if it were not for advances in psychopharmacology he would have been hospitalised years ago. which was the same rate as when Clinton ran for a second term in 1996. Gerard Jackson is Brookesnews' economics editor . For example. After 9/11 Krugman quickly deteriorated to the point of paranoia: he then began to accuse the GOP of managing a "vast rightwing conspiracy".As usual. 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. The divergence between the two methods raised interesting questions. while the U-6 rate stood at 9. 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.9 million jobs had been created from November 2001 while payrolls showed a weak demand for labour. That the Democrats when in power intentionally fail to practice what Krugman demanded of Republicans is not something he ever bothers to mention.

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

Things were looking grim in 1982 with GDP at 0. third and fourth quarters saw it rise at a sizzling 9. 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.Obamanomics hits a reef Gerard Jackson BrookesNews. They then made the additional mistake of assuming that the recovery phase is a natural outcome that emerges irrespective of government policies. which we shall now do. 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.) And this is precisely what happened.2 per cent to 2. and then produce the monetary evidence in support of their case. For that one would have to go back to the 1930s. Happy days were here again and the Republicans were doomed. Nevertheless. (I wasn't the only one to stress this fact. (They tried to do that anyway.5 per cent respectively. 8. an event from which the Democrats learnt nothing of value.3 per cent. .7 per cent. "Supply side economics" had nothing to do with it. I added the bit about corrupt and incapable. It are not.1 per cent.7 per cent. Any reasonably informed person would know that the Hoover/Roosevelt experience had long since put that idea to bed. The second.3 per cent for the fourth quarter. (I clearly recall how the media just loved that. Their first mistake was to assume that booms and busts are in fact a cyclical phenomenon. Now we find that the first quarter GDP for this year is down to 2. the point must be eventually reached where even these ideological hacks cannot continue to deny that the Obama economy sucks. Another club with which to beat the imbecilic Reagan. If this had happened under a Republican president America's corrupt media would be screaming blue murder.) Nearly 30 years later the same contemptible media is making excuses for Obama's dismal performance. The following chart shows that M1 flattened out in the middle of 1981 and then began to accelerate again. Compare this situation with what happened under Reagan. The media were ecstatic.7 per cent. (To be truthful. a mere difference of 48 per cent.) I politely pointed out that Obama's economic policies were guaranteed to retard recovery if not actually abort it. 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. The better informed could argue that Reagan's recovery was in fact a Keynesian success story. If Reagan had done what Obama has done there would have been no recovery with the result that the media would have crucified him. In the fourth quarter of 2009 GDP came in at 5.) Then the first quarter of 1983 saw GDP jumping by 5.Com Monday 28 June 2010 Growth for the fourth quarter has been revised down ² again ² from the original 5.1 per cent and 8.

If these critics were right about Reagan's policy the economy should now be whizzing along. What makes this situation even more curious is that in 1994 Greenspan gave the OK for the banks to introduce sweeps. The effect was to underestimate the actual growth in M1. And this has happened even though Bernanke doubled the monetary base. I doubt if America has ever experienced anything like this before.7 per cent. The money supply rapidly rose from September 2008 to June 2009.Let us now turn to the monetary situation under Obama. a process that reclassified bank deposits as savings accounts. If we use the Austrian definition of the money supply* the situation begins to appear positively bizarre. . It then started to fall until last February. 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. And what was the latest result? A miserable GDP rate of 2. This was followed by a swift acceleration that now appears to be slowing.

There is no Keynesian multiplier and there never was. These people are so stupid they cannot see the obvious: borrowing and taxation amount to a transfer of purchasing power. or any other negotiable paper. in contradistinction to Bills of Exchange.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. 1801. 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. The notion pushed by the likes of Summers that $1 of government spending generates $1. let alone blustering buffoons like Pelosi. could direct an economy is something so stupid that it could only be found in a leftwing university faculty or a newsroom. If I take $10. the former are merely objects of circulation. and other Commodities. In this they had the support of so-called economists like Larry Summers and Christine Romer. as I have always understood that term. Whether we include savings deposits in our definition depends on whether or not it involves double-counting. These are the same clowns that told Americans that massive borrowing and spending was the only way to save the economy. which are used almost as synonymous terms in this letter. Frank and Dodd. Gillet. I understand always ready money. We measure aggregate spending in terms of dollars.50 in additional income is pure Keynesian claptrap.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. money is the medium of exchange. the pattern of spending. Aggregate spending must remain unchanged. 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'. difficulties do arise. Navy Bills. T. We now deduce that credit transactions do not alter the money supply. *There are some differences among Austrians as to what ought to be included in a definition of the money supply. A Letter to the Right Honourable William Pitt on the Influence of the Stoppage of Issues in Specie at the Bank of England. The very idea that anyone at all.) 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. which form no part of the circulating medium. Gerard Jackson is Brookesnews' economics editor . 'Circulating Medium'. London. and 'Currency'. p. Reagan was always friendly towards business. Nevertheless. This raises another problem: Why did business borrow and spend under Reagan but won't under Obama? The answer is obvious. 2). (Walter Boyd. The latter is the Circulator. In simple terms. whether consisting of Bank Notes or specie. meaning he was never hostile to investment. (People like these are Democrats first and economists last. 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.000. It therefore follows that if the bank lends out that $10. 2nd edition. on the Prices of Provisions.000 the money supply still remains unchanged. Exchequer Bills. Are savings deposits money? This presents the problem of double-counting.

Com Monday 28 June 2010 There seems to be a degree of schizophrenia when it comes to manufacturing and services. The Economy: The Neglected US Depression. I fear that in Australia Mr Friedman would be dismissed as "unbelievably stupid" and not "professional". particularly consumption. One should note that this view is basically an opinion presented as an economic fact. However. 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. It's not enough to point out that investing abroad in manufacturing is far from novel.. 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. in economic terms. 12 Augusts 2001].Did outsourcing hollow out the US economy? Gerard Jackson BrookesNews. as supporters of this argument do. and that in the 1950s and 1960s French intellectuals of all political stripes issued dire warnings against American investment dominating Europe. 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. 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. that as people become richer they want fewer material goods and more services is to say very little. [Los Angeles Times. but perhaps even unsustainable with respect to living standards. To say. It is also poor economics to assume an overvalued currency cannot emerge under a regime of floating rates. that in the nineteenth century Britain invested massively in the US and South America. This is a dismissive and arrogant approach that should be considered unworthy of anyone who calls himself an economist. 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. As Joseph Schumpeter observed: . which is the same as arguing that floating exchange rates are always determined by purchasing power parity. (David Friedman is one of the few economists to question the profession's complacent views on the manufacturing shift. Ordinarily an inflationary monetary policy will eventually drive down the exchange rate. 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. etc.) Notwithstanding previous criticisms of orthodox economics. 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. The "hollowing out" charges should have at least alerted most economists to the possibility that such rapid economic shifts are not only sudden. 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. It is still being argued that any shift from manufacturing into services is a natural process brought about by increased living standards.

I think two lessons need to be learnt: 1. The effect of an overvalued currency is to make imports cheap relative to domestic goods and services. without neglecting other cases. giving rise to increased investment embodying new technologies. the inflating country will find its standard of living is still rising. A little economic reasoning indicates that a loose monetary policy could have the same effect by artificially stimulating the demand for foreign consumption goods. including investments in production processes. The world is a dynamic place and all things are never equal. These very facts themselves provide ammunition for those who oppose parity changes. reasoned primarily in terms of an unfettered international gold standard.In the first place. the 'classical' writers. p. i. was astute enough to spot this and wrote an excellent description of the situation: If an imbalance is allowed to persist too long. Money matters ² a lot ² and that ignorance of what inflationary policies can do to investment and manufacturing can have the most terrible . even as manufacturing is declining. (Joseph Schumpeter. One could also argue that such a process has been offset in America by foreigners using their dollars to acquire US assets. 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. regardless of the source. (One can also call this the consequences of a monetary inspired shift in the terms of trade.. and the eventual adjustments are all the more sudden and severe when at last they come. The History of Economic Analysis. There were several reasons for this but one of them merits our attention in particular. 732). and the demand for other consumption goods can still be satisfied by increasing imports. There is nothing novel about this view. In 1970 Samuel Brittan. Because the overvaluation has distorted the price structure. This makes adjustment needlessly painful and difficult when it does come. Oxford University Press. 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.e. a deficit country acquires an excessively homebased industrial and commercial structure while the surplus country becomes excessively export-oriented. Now there is absolutely nothing new or particularly Austrian in what I have just written. and there is the risk of high transitional unemployment while resources are being transferred. Houses can get bigger as expenditure is directed towards more consumption. even momentarily. 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. 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... 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. But then one could argue that in the absence of a loose monetary policy productivity and living standards would rise even faster. In a world of fiat moneys the absence of specie points must sever the link between price levels and interest rates. The longer the longer the currency remains overvalued the greater will be the distortions. In the meantime. which will eventually be reversed). 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. This is where an apparent hollowing out process could possibly make its appearance. 1994. a well-known economist with the Financial Times and a Keynesian by training.

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

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 . completely oblivious to the fact that it is capitalism that raises real wages. as it had always been. The likes of Ellis need to be taken seriously because they are parroting leftist thinking. Harvard University Press. Communism killed more than 100.) No wonder there was a revolution. which had accelerated to 4 per cent by 1800.5 hours in 1850. 3 January 2006). Yet Ellis rages about wage slavery under capitalism. make capitalism far more dangerous then Islamo-fascist terrorism. newsrooms and political structure.3 per cent. America is an equally illuminating case when it comes to wages and working hours. From 1870 to 1930 average annual manufacturing output expanded by 4. Alas.5 hours by 1920. The situation in England was very different. the average working day in manufacturing was 11. (Paul Johnson. Combine this with population growth and you end up with appalling poverty. Terror. But I figure he is literally too dumb to work that out.8 hours in 1900 and 8. the world before what we call capitalism was one of abject poverty for the great masses. Repression.000. (This includes fixed capital). Regardless of what ignorant leftwing bigots like Ellis would have their readers believe. Capitalism's achievement of raising the living standards of the masses to unimagined levels while accommodating a colossal increase in population was. By the 1780s her economy was growing at an unprecedented annual rate of 2 per cent. the opposite case rules. and is.000 children a day" and of creating "intercontinental slavery" (Byron Shire Echo. This returns us to Ellis.000 people in the last century (The Black Book of Communism: Crimes. Bank Credit Analyst. These crimes. one of whom is Bob Ellis. For example. September 1978 Issue. according to this leftwing genius. On one occasion Ellis accused capitalism of murdering "24. 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. If ours was an economically literate society then his bigoted leftwing rants would be treated with the intellectual contempt they so thoroughly deserve. the same toxic thinking that has been insinuated into our universities. And that includes the hypocrisy and moral bankruptcy of those who preach this venomous creed. 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. unprecedented. When it comes to contempt for the facts and moral grandstanding this wilful leftwing ignoramus takes some beating.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. The only way of dealing with it is to expose its dishonesty whenever and wherever it is preached. 9.A leftwing intellectual spews anti-market nonsense Gerard Jackson BrookesNews. And this bitter and ignorant dipstick has the gall to accuse capitalism of mass murder. 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.1999). 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.

the Office of Thrift Supervision. The Principles of Economics with Application to Practical Problems. 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. An evil society. What he doesn't understand is that as countries become more capital intensive real wages rise. (The Age. you guessed it.. not least and . other people do that ² and those other people are unioncrats. 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 Federal Deposit Insurance Corporation. queues are a dirty rotten capitalist trick. This is the same moral cretin who blamed Prime Minister Howard for the Bali massacre. (Mountifort Longfield Lectures in Political Economy. 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. 26 October 1999). 1905. perhaps [even though it doesn't murder its citizens.in the thirty years between 1860 and 1891" even though only 10 per cent of the labour force was unionised. the bullet in the back of the head. Ellis related how in cheap Asian resorts "waiters and porters swarm all around you. it was always wrong. the Federal Reserve. 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. But Society never puts people out of work. the Federal Housing Finance Agency. 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. 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. 180-199!) It is not the fault of profits when a large permanent pool of unemployed labour emerges. But don't expect facts or economic reasoning to faze a bigot like Bob Ellis. A society in decay. p. Mr Ellis. According to Ellis: "A society with queues [tolerates unemployment] is a bad society. 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. What the devil does he think the Securities and Exchange Commission. New York. the torture chambers. Profit motive should be back of the queue. The disappearance of lift attendants is a simple example of how capital accumulation effects the demand for labour in certain occupations. queues mean that profits are being inflated by not putting enough people to work. it's the fault of Bob Ellis' union mates and their political enablers who have made it unprofitable to hire people. Fetter. 1834. even for little things. (Professor Francis A. Richard Milliken and Son. That's right. pp. which. according to this profound economic theorist. The Century Co. asserting that Australians were "paying in blood for John Howard's arse-licking. and it's now disabled America". and. Here the rising cost of labour forced firms to employ labour economising techniques by automating the lifts. he blames on the free market. Mr Ellis?]". It was the secret police. not bread queues. In his ABC commentary he informs us that "deregulation is wrong." unlike Australia. the mass graves and the calculated murder of millions of men women and children that condemned the regime as evil. folks. 26 October 1999). the gulag. 130). Why? Because. This is why Swiss waiters get paid a lot more than Asian waiters and porters. But this is one aspect of the regime that comrade Ellis neglected to mention. What deregulation? The US banking system is more enmeshed in regulations to day then it was 30 years ago. 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.

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

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

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

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

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

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.

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

the entertainment industry's pseudo intellectuals. The demand curve for labour is always downward sloping. 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. As more people enter the market the supply of labour slides down the demand curve. 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).Com Monday 5 July 2010 It can be far easier to tell a lie than it is to refute one. Any attempt to prevent .Illegal immigrants are Obama's sixth column Gerard Jackson BrookesNews. A similar phenomenon occurred in fourteenth century Europe. the country's so-called 'progressive' media. This is a fact that leftists ruthlessly exploit. (In my opinion. 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. many of whom ² like the loathsome Sandlers and Soros ² deeply hate the United States. an immigration policy intended to render the constitution ineffective and install what would in effect by a dictatorship amounts to nothing less than treason. 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. This is what the following article does. Obama lied about illegal immigration and he lied about protecting the border and those who near it.) We can do no better than start with Comedy Central's (known to patriotic Americans as Cowardly Central) smart-aleck Stephen Colbert. In other words. This brings us to our poor downtrodden illegal immigrants. In this he has the treasonous support of the leftwing unionocracy.) The point at which the supply of labour meets the demand for labour determines the wage rate. To fully refute the lies that are told about the need for illegals one needs to use both history and economics. Americans have seen this with respect to their southern border. (Economists call this the value of the marginal product. As expected. This is because at each point down the curve the value of the worker's output gets lower. 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. 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. hold on to that thinking cap. lying is a moral imperatives. As I said earlier. 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. 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. It is written for those who want to counter leftist arguments in favour of illegals. once the population began to recover there emerged an inexorable downward pressure on wages. For them. 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. and numerous billionaires.

Woytinsky and Associates (New York: The Twentieth Century Fund. (This explains why the wages of peasants fell once the population recovered from the effects of the plague).this movement will raise the level of unemployment. The chart was simplified to emphasise the effect that immigration can have on real wage rates. This 57 per cent drop was caused by "the great Ellis Island influx in the first two decades of the 20th century"*. 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.27 per cent rate that prevailed from 18551895 was slashed to 0. that raised real wages for everyone. It was this factor.50: by 1922 it had jumped in real terms to about $18. The following chart shows that the annual growth in real wages of 1. England was no different. 1953) . But since the industrial revolution it was the process of capital accumulation that continued to raise real wages. There was a massive increase in industrial investment which raised real wages for everyone. 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. 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. He correctly noted . Industrial development is never 'even' in that everyone is affected the same way. Employment and Wages in the United States by W.55 per cent for the period 1896-1916. 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. this time from England. On the eve of WWI the average wage of these girls was about $3. combined with severe immigration restrictions. S. But the vital factor was ² as always ² capital accumulation. This process will continue so long as population growth does not exceed the rate of capital accumulation. Let us take a look at another example. Source: The Tucker series converted to hourly rates and adjusted to the cost of living. Few Americans know that this once happened to the US. 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.

a deeply anti-growth policy. Taken to its logical conclusion this policy would push American wage rates down to the Mexican level if not lower. English Agriculture in 1850-51. It is. apart from also being a lefty bigot. at least for agriculture. It means that the standard of living is rising. This is why barbers get paid vastly more today than they did 150 years ago. (Sir James Caird. But in these circumstances this is to say no more than the prices of their products will not cover the market wage. 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. wash their cars. This in turn brings us back to smarty-pants Colbert. Imagine the situation if the flow was to rapidly expand. Once a country starts accumulating capital at a far faster rate than the growth in population it eventually becomes capital intensive. in fact. do their laundry. Those who cannot successfully compete for labour must abandon their enterprises.) So what Sir James found is that where population increased but industrial development remained absent real wages stagnated. Brown. To try and solve this 'labour shortage' by flooding the labour market with immigrants is to promote a policy of lowering real wages. London: Longman. that parts of agriculture cannot pay enough to attract the labour it needs then it will complain of a labour shortages. babysit the kids and mindlessly vote for corrupt Democrats? And this is where Obama's sixth column appears.that the higher-wages of the Northern counties is altogether due to the proximity of manufacturing and mining enterprise. This is where the phony labour shortage comes in. 1852. where else can these caring and compassionate liberals get cheap labour to cut their grass. a strategy for using imported labour to offset the beneficial effects of capital accumulation.(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. Ultimately jobs are a function of price. If Colbert and his lefty mates get their way it will certainly be the latter case. 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 . illegal immigrants and all those lovely jobs that good-for-nothing rednecks refuse to do. Once again we are back to capital accumulation as the key to raising the standard of living. which is exactly what Colbert is.) Think about it. change their beds. Green and Longmans. 511-12. not falling. which means that as the competition for labour raises wages more labour intensive industries have to raise their wages or otherwise lose labour. for example. If it is found. This would release resources in America for more valuable activities while at the same time creating more job opportunities in Mexico. 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. dust their antiques. It is. One could argue ² and many do ² that illegals could be turned into guest workers. This situation is not to be lamented but celebrated. pp. that is. in effect.) Economic logic tells us that by bringing in more and more labour jobs that had once disappeared can reappear. And why would Colbert and Hollywood's celluloid intellectuals (Jimmy Smits for one) support a policy that cuts real wages? (The wages of others. 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. This would be the response of an economic illiterate.

*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. Obama has basically said that while he remains president the border will to all intents and purposes cease to exist. This is no different in principle from them bringing in an invading army to keep themselves in power.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. Why would Obama do this to his country? Because he is a dedicat d leftist who hates e America and despises its people. No wonder he found a home in the Democratic Party. Gerard Jackson is Brookesnews' economics editor . There is a word for this kind of behaviour.

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. He believes that with housing trading at 6 to 7. with the first chart. the key is the ability to command goods. Another counter argument is that Australia's rapidly expanding population is helping to drive prices up. This puts a floor under prices*. the structural explanation ² which is what this is ² for rising prices tacitly assumes that nominal incomes must be rising. The following charts shows just this. produced by Steve Keen. Today. So what is the situation? Well a bubble economy can be described as one in which price rises are unsustainable. This is not to say that there cannot be dramatic price falls in specific goods.Com Monday 5 July 2010 Jeremy Grantham. even if it had to throw money out of helicopters. But my desire for a roomier house does not provide me with the means to buy one.) Now I am very fortunate in the house that we own.5 times the family income instead of the usual 3. The alternative view is that Australia has an undersupply of housing which is driving prices up. The question is whether this is the case for housing. . defined as M1 (currency plus bank deposits). The second chart shows the rise in the money supply for the same period while the third chart shows monetary growth for 1986-1996. has been driving house prices then we would expect to see a strong correlation between the two. Sometimes these prices falls could be very severe. I would like a much bigger one (the wife is not so sure) because I love plenty of room. Unless a growing population has the necessary income there will be overcrowding and a fall in the quality of the housing stock. 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. (Classical economists tended to use the term "effectual demand" to distinguish between the two. To raise this point is to invite the rejoinder that "housing is a basic need" that has to be met. If the money supply. This is just another way of saying that it is an inflationary boom. 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. meaning there was a monetary contraction. 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. This is to make the mistake of confusing the desire for a product with the means of commanding. co-founder of the international investment firm GMO. 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. Housing is not immune to this phenomenon. Nevertheless.5 means that prices are about double of what they should be. even if it increases. If it were otherwise house prices would not be rising.Will the Australian housing market crash or will interest rates fall instead? Gerard Jackson BrookesNews. showing the rise in prices from 1985. As this possibility is never considered we must presume that the population argument assumes incomes are rising. In addition. There was a time that when a bubble burst prices fell. Once again.


But does this mean Grantham is right? Not necessarily. Gerard Jackson Brookesnews' economics editor .Correlation does not mean cause and effect. it is much more likely to lower them. Grantham is certain that interest rate rises are on the way. for the months April and May M1 contracted by 1. on the other hand. The money supply has been comparatively flat for a while. unfortunately. However. in my opinion. There is no economic law that states that this spending pattern cannot change. given the circumstance there is. that another trend cannot begin. merely that these adjustment need not herald a collapse in prices. 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. A significant increase in rates could undoubtedly cripple many borrowers and sink the housing market.5 points from May to June while production is down by 7. In addition. 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. Although the laws of supply and demand are the same everywhere and at any time the conditions of supply and demand are not.22 per cent. In fact. no other way of explaining the housing boom other than in terms of the Reserve Bank's criminally loose monetary policy. the Australian Industry Group reports that its manufacturing index is down 3. I. On the contrary.9 points. giving us an annual average of 7. think that in the not too distant future we might see interest rates drop. Therefore I think it is more than likely that if a severe crash had been in the pipeline we would have already experienced it. The real question here is whether incomes are sufficiently high enough to maintain the new ratio. for example. This is not to say that the housing market is not ripe for some adjustments. This where interest rates come in. Conditions in the American housing market. It seems to me that given monetary conditions the sort of crash Grantham is predicting is somewhat farfetched. The middle chart shows bank deposits and hence M1 are falling. There are no mathematical relationships in economics. are not the same as those in Australia.3 per cent. 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.

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.


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

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.

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

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. And talking of 14-year-old kids brings to mind Mr. lab elled a murderer and butcher by conservatives. 27 February 1860). The truth is perhaps somewhere in the middle. Why should they when they themselves share her corrupt beliefs. He's as reviled as he is worshipped. 25 May 2005). 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. 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. In father's footsteps.The media leftist bigotry aids treason Gerard Jackson BrookesNews. San Martin who was a reluctant guest in early days of Castro's Gulag. Not only is Guy's position morally untenable it is an assertion that directly contradicts the truth. New York City. Showing vastly more courage than most journalists are capable of. a freedom fighter by socialists. Once again let us turn to Lincoln for illumination. About two-thirds through this piece of agitprop Guy told readers: Che Guevara's legacy is much disputed. Dimly aware of Guevara's moral turpitude and completely unwilling to confront it she sank effortlessly into moral ambivalence. 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. 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. . He bellowed at the boy to kneel in front of him. Unfortunately journalists like Guy seem unable to master the plain-speaking style or moral clarity of a nineteenth century woodsman turned lawyer.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. 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. So the truth is somewhere in the middle. 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. I'm a black-and-white sort of guy. and the accidental truth of the assertion does not justify or excuse him.

The last thing this slimy leftwing Hollywood icon wanted to do was tarnish Guevara's noble image). When he was cornered by Bolivian troops this swaggering sadist blubbered and begged for his life. And this is the sadistic butcher that Robert Redford worships. Needless to say. Carlos Barberia related to the New Jersey Record how one day Guevara invited him to watch his goons gun down four "counter-revolutionaries". . President of the 30th of November Democratic Party. in Guevara's own words. 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.Compare this boy's courage with Guevara's last few seconds on this earth. he had their relatives dragged in front of the mangled corpses just to make sure they got the right revolutionary message. 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). no wonder Michael Moore loves him). (We get an idea of the scale of Guevara's crimes from Daniel James' Che Guevara: A Biography. 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. While the killings proceeded the gallant Guevara sat back and chewed on his steak dinner. James wrote that Guevara admitted to ordering thousands of executions. On becoming dictator one of Castro's first acts was to put the psychotic Che Guevara in charge of Havana's La Cabana fortress. Well. is imprisoned. This is a revolution! And a revolutionary must become a cold killing machine motivated by pure hate. that's Hollywood for you. 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. I believe the first camp was Guanahacabibes to which. Not satisfied with simply murdering these people. No one really knows how many were murdered in La Cabana. There is also the infamous women's prison popularly known as Manto Negro [Black Cloak] in which Maritza Lugo Fernandez. He immediately set about his grisly work of mass murder by setting up a production-line for the extermination of the regime's opponents. When its revolutionary thugs couldn't find him they arrested his father and then shot him. This incident planted in Barberia an undying hatred of Guevara. These procedures are an archaic bourgeois detail. (Gee. his captors did humanity an enormous favour and gave this child-killing thug a well-deserved lead injection. 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. This article barely scrapes the surface of Guevara's murderous record. judicial proof is unnecessary. "people who have committed crimes against revolutionary morals" were imprisoned ² and worse. Demonstrating that there really is such a thing as justice. 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". 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. A short time later the regime went after Barberia.

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. Gerard Jackson is Brookes¶ economics editor .

They will hit families and small businesses in three great waves on January 1. Itemized deductions and personal exemptions will again phase out. Second Wave: Obamacare There are over twenty new or higher taxes in Obamacare. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones. The "Special Needs Kids Tax" This provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2500 (Currently. The lowest rate will rise from 10 to 15 percent. For those dying on or after January 1 2011.6 percent in 2011. This year. 2011: First Wave: Expiration of 2001 and 2003 Tax Relief. or health reimbursement (HRA) pre-tax dollars to purchase non-prescription.C. D. There are thousands of families with special needs children in the United States. Higher tax rates on savers and investors. The standard deduction will no longer be doubled for married couples relative to the single level. there is no death tax. All the rates in between will also rise. and families.Com Monday 12 July 2010 In just six months. there is no federal government limit). The dependent care and adoption tax credits will be cut.6 percent (this is also the rate at which two-thirds of small business profits are taxed). 2011. In 2001 and 2003. The child tax credit will be cut in half from $1000 to $500 per child. Several will first go into effect on January 1. There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children. They include: The "Medicine Cabinet Tax" Thanks to Obamacare. over-the-counter medicines (except insulin). The "marriage penalty" (narrower tax brackets for married couples) will return from the first dollar of income. small business owners. the largest tax hikes in the history of America will take effect. 2011: Personal income tax rates will rise. These rates will rise another 3.8 percent in 2013.6 percent Higher taxes on marriage and family. The dividends tax will rise from 15 percent this year to 39. The top income tax rate will rise from 35 to 39. 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. (National . which has the same mathematical effect as higher marginal tax rates. The return of the Death Tax. there is a 55 percent top death tax rate on estates over $1 million. These will all expire on January 1. and many of them use FSAs to pay for special needs education. Tuition rates at one leading school that teaches special needs children in Washington. Americans will no longer be able to use health savings account (HSA). The capital gains tax will rise from 15 percent this year to 20 percent in 2011.Six months to go until the largest tax hikes in United States history Ryan Ellis BrookesNews. flexible spending account (FSA). the GOP Congres enacted s several tax cuts for investors.

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

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

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

Obama and his advisors did not give the slightest indication that they would abandon these so-called economic policies if elected. Creating jobs is the easiest thing in the world for a government to do. 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. The results are as predicted. if these so-called investments are paid for out of taxes then total spending remains the same.Com Monday This article was first published on 27 October 2008. That's why he favours deficits. According to Keynesian folklore this process sets off a magical multiplier that then raises everybody's income. I say could because if the economy has already been flattened there won't be any business demand for funds. 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. Resources are limited and bygones are bygones. it's possible the fed would oblige Obama. . 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". The federal government is spending more than it has ever done before in peace time." The ancient pharaohs had an identical policy: they called it pyramid building. This brings me to the second fundamental fact. What the US needs. Therefore interest rates might not enter the astrosphere. He knows taxes cannot cover his outrageous spending proposals. he added. It was based entirely on what the Obama campaign called an economic policy and what any competent economist would have called lunacy. Obama claims he can do this by raising taxes and spending the loot to close his imaginary "investment deficit. The more that is spent on his "investment deficit" the less can be spent on investment that raises real incomes. However. Yet Obama and his economic quacks say it is not enough. Two fundamental facts need to be understood: Firstly." This is Keynesian claptrap. (Even Keynes would argue that raising taxes in a recession is stupid. In view of these fact I thought it appropriate to republish the article. and in doing so trigger off an inflation that could make the late 1970s look like a picnic.Obama's economic nightmare Gerard Jackson BrookesNews. Faced by an inability to fund the deficit out of taxes and borrowing an Obama government would turn to the fed. But then his economic advisors Jason Furman and economist Austan Goolsbee are Keynesians. Borrowing could send interest rates rocketing. About eighteen months has passed since his inauguration and true to his word he did not change course. But the pattern of spending changes and the greater the taxation the great the changes. Attempts to close this kind of deficit with tax increases would crush the economy. the government grab for funds would make sure the economy stayed comatosed. 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. 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. Considering Bernanke's Keynesian views and an apparent desire to join the Obama cavalcade. This is the kind of nonsense that has virtually wrecked the British economy. This is a sure bet given that Paul Krugman will be an influential though unofficial economic advisor. 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. is a "dose of Keynesianism".

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. In 1978 Congress slashed capital gains taxes. The statistics do not prove the theory).4 billion and the total amount of venture capital had risen to $5. from $39 million in 1977 to a staggering $570 million at the end of 1978. They also ran deficits. fewer risks would be taken because the risk capital won't be there.1 billion in the first year and then $3. $16. (During a period of significant monetary expansion governments can enjoy a tax windfall. You have to be pretty dumb with respect to economics to think that this is a good time to impose massive taxes. This will savage the existence of venture capital. the corporations and capital gains. this resulted in an explosion in the supply of venture capital.8 billion. Result: revenue from the tax dropped sharply with realised gains from the sale of capital assets falling by 34 per cent. Not to worry. (Economic theory explains the statistics.5 billion in 1978 to $10. Combine this stupidity with the rest of his tax and spend idiocy and the effect on equities and hence pension funds would be horrific. and the stock issues of struggling companies fell from about 500 in 1969 to precisely four in 1975. In 1981 the maximum tax rate on long-term capital gains was . This is obvious proof that taxes do affect behaviour. Tax collections on long-term capital gains. Yet the Treasury had assured President Nixon that the tax increase would raise $1.5 billion in 1983 rising to $23.2 billion a year until 1975. The Democrats and their media toadies are still blaming Hoover for the resulting disaster. 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. leapt from $8. But this is only half of it. which is also a stealth attack on 401(k)s. capital gains taxes are a great way to soak the poor. By the start of 1979 a massive commitment to venture capital funds took place. He plans to hit oil companies. In 1969 President Nixon raised the capital gains tax from 28 per cent to 49 per cent. Such a huge and unfundable amount could only have the most serious economic consequences.6 billion in 1979. Obama and his advisors have conned themselves into thinking they can raise massive sums from capital gains taxes. that is ² that capital gains disappear in recessions there is the not so obvious fact that capital gains taxes are transaction taxes. and business expansion will be greatly curbed. despite the dire predictions of big-spending critics of tax cuts." (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. By 1981 venture capital outlays had soared to $1. Now this is precisely what Hoover and Roosevelt did. This is because monetary expansion can greatly inflate capital gains).There are deficits and then there are the Dems' deficit. But a transaction tax on capital gains is nothing but a resource allocation tax. If you think about it. The statistics do exists and they do support my economic reasoning. fewer innovations and inventions will be funded.7 billion in 1985. Therefore the way to avoid them is to not cash them in. High-tech companies in Silicon Valley were hit particularly hard. while this disaster would be unfolding Obama would be busy working on his imaginary federal "investment deficit. consequently there will be fewer start-ups. 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.

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

provided that you give it to him again in exchange for his goods. It cannot raise aggregate purchasing power. the richer they grow. Joe is now employed by his neighbours at his old wage rate. 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. In return for their generosity he must maintain their properties and keep the street clean. Pelosi ² and those like here ² is of the view that paying someone to engage in any activity must by definition stimulate growth. Irrespective of what she thinks economists call unemployment benefits "transfer payments". (At this point I am quite sure that readers are having no trouble seeing the fallacy in Pelosi's 'reasoning'.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". What is really frightening about this dangerous bilge is that she and the rest of those economic illiterates in the Democrat Party believe it. that the man who steals money out of a shop. University of Toronto Press 1967. not stimulus payments.Nancy Pelosi's economic idiocy and unemployment benefits Gerard Jackson BrookesNews. borrow. Assume that Joe Sixpack loses ² through no fault of his own ² his $800 a week job. Presto! The street has now returned to full employment. than the general reception so long given to a doctrine which. Obama is no better. In others words. proves that the more you take from the pockets of the people to spend on your own pleasures. This is just another way of saying that the public sector can drive the demand for labour.. let us also assume that Obama. As John Stuart Mill wrote more than 150 years ago: The utility of a large government expenditure. A hypothetical example will should serve to reveal the extent of Pelosi's economic stupidity. What has . which return in prolific showers'. 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. is a public benefactor to the tradesman whom he robs. This raises Bill's purchasing power by the same amount as it lowers Joe's. provided that he expends it all again at the same shop. repeated sufficiently often. Frank and the rest of those compassionate Democrats impose a job tax on every household in Fred's street.) The first thing to note is that though everyone is working the street's total income has not changed. Not only do these cheques turn "stone into bread" but they do it faster and more effectively than any other conceivable economic policy. 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. and that the same operation. Vol. Collected Works of John Stuart Mill. for the purpose of encouraging industry. Transfer payments are not included in the national accounts because they do not add to GDP. would make the tradesman a fortune" (John Stuart Mill. I. Unfortunately far too many of the economists who understand this fact seem incapable of carrying it further. Taxes are not now esteemed to be 'like the dews of heaven. pp. Believe it or not this is based on one of the oldest fallacies in economics and one that classical economics had thoroughly debunked. His economic policy (spend. tax and regulate) is based on his faith in the ability of the state to create growth. It is no longer supposed that you benefit the producer by taking his money. 262-63). Pelosi. if it proves anything. Essays on Economics and Society. Nevertheless. is no longer maintained.

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

regulations. chairman and CEO of General Electric and a former Obama supporter. an Obama groupie. In this they have the help of leftwing 'historians' and journalists whose political bigotry is only exceeded by their ignorance. (America-hating leftists lie to .1 million in 1935 to 6. And it was Jeffrey Immelt. the Democrats ² as is par for the course ² blame everyone and everything for the disaster except themselves. Moreover. After the Supreme Court declared the NRA unconstitutional in May 1935 business confidently expanded production.4 million while the output of iron and steel exceeded the 1933-34 level by more than 100 per cent. What is not generally understood is that the anticipated coming of Roosevelt's destructive NRA led to business accelerating output. The Fed's index of production (1923-25) rose from 60 in March 1933 to 100 in July. Being a Democrat Roosevelt. driving the industrial production index down by 25 per cent within 12 months. Starting from March 1933 the American economy started to rally as confidence began to return. 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. completely ignoring the fact that all the hate has ² as usual ² been coming from Democrats. for example. 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.8 million in 1938. The Dodd-Frank financial reform bill. giving them enhanced powers which being unions they naturally abused. So in in 1937 what was now the Roosevelt Court upheld and enforced the Wagner Act. blames mutual hatred for the pessimism.4 million in 1937 to 9. For those who think this is highly unlikely we need look no further than the Roosevelt administration. the banks reopened and orderly buying by retailers started to appear. By 1937 unemployment had fallen from 9. The court's decision allowed union action combined with government wage codes to significantly raise labour costs: unemployment was driven up from 6. 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. is interventionary bilge that will allow massive social engineering without doing a damn thing to prevent financial crises. Anatole Kaletsky*.) Not once did Anatole "The Groupie" Kaletsky refer to Obama's loathing of business.) Trade unions were legally privileged. Allowing the despicable likes of Frank and Dodd near anything financial is akin to putting the Mob in charge of the Fed. Therefore.Like every good Democrat Obama is incapable of learning his economic lessons Gerry Jackson BrookesNews. The Australian. who said that Obama "did not like business". simply refused to consider he was wrong and the recovery ² stunted as it was ² had proved it so.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. 8 July 2010. Once the act was passed production dived. Not only does business have to put up with Obama's ignorant rants it is facing a flood of taxes. Of course. (This Act was really an extension of the NorrisLa Guardia Act passed under Hoover. like Obama. Anatole Kaletsky. (A polarised and pessimistic US is the big threat. political meddling and an energy policy that could very well swamp it.

Now this contraction continued into early 2010 and it now seems that it may be making itself felt.) Obama's policies are once again teaching us that expectations matter. If this is signalling a lengthy fall then we can expect manufacturing to contract.8 per cent drop. 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 66.8 trillion in cash becomes clear.4 in June. Yep. 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. Once we take this fact into account the mystery of why 500 of the country's largest companies are sitting on about $1. 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. a 7.protect Obama's dangerous economic program refutes the standard explanation for the length and depth of the Great Depression.6 to 61. The following April I warned that the US "could be facing more of a downturn than a recovery". 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. Last December I pointed out that the US economy was looking very sick. The Democrats could then find themselves confronted by the electoral consequences of their own economic folly and the Fed's monetary mismanagement. The CEOs of these companies have come to understand that this is guaranteed to paralyse the economy. overall production to shrink and unemployment to rise again before the November elections are called. destruction and Keynesian madness. Gerard Jackson is Brookesnews' economics editor . *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. 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. there is nothing like a good dose of carpet bombing to stimulate a town's economy.

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

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

with the bread that he produced prior to this exchange. the producer of the special tool. What about a producer of an intermediate good. while transferring his bread to the shoemaker. Claim transactions versus credit transactions When individuals exchange final goods and services for money. However. If the logs of wood had been poled up ready-made on his arrival. In other words. Obviously. the baker. As long as the flow of production is maintained. and if the house were there to begin with. a baker has agreed to exchange his ten loaves of bread with a shoemaker for ten dollars. For the baker. the baker can always exchange his money for the final consumer goods he deems necessary (i.for shoes by means of the bread he produced. 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. then the savings of purchasers of these tools and equipment will be squandered. We could also say that the production of useless tools and equipment weakens the pool. Obviously. Or we can say that the buyer of the promise provides a credit to the seller of the promise. which prior to the making of these new tools weren't available at all to individuals. When the baker exchanges his money for shoes. p. According to Rothbard: Crusoe without the axe is two hundred fifty hours away from his desired house. he does offer a means to secure these goods. Nash Publishing. he would be further advanced toward his goal without the necessity of further restriction of consumption. (Murray Rothbard. John without a stick can only pick up 20 apples a day. if the tools and equipment acquired turn out to be useless. which is his saved bread. so to speak. has never relinquished his claim on final consumer goods. with the introduction of more advanced tools and machinery various new consumer goods can be produced. it is quite different when an individual exchanges money for a promise to repay money in one-year's time. Hence what we have is a credit transaction. will contribute to the production of final consumer goods some time in the future. Additionally. 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. the baker will not be able to fully exercise his claim. he has already paid for the shoes. he also offers time. However. (Both shoes and bread are part of the pool of funding as they are final goods). The baker can exercise his ten dollar claim any time he deems it to be required. Crusoe with the axe is only two hundred hours away. they are in fact engaging in a claim transaction. In other words. In this case. or a producer of any intermediate good. if for some reason the flow of production is disrupted. 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. They have agreed on the terms of the exchange because they both believe that it will promote their individual well being.) Also. while the shoemaker pays for the bread by means of the shoes he made. he would achieve his desire immediately. is lower than the value of the ten dollars. the buyer of the promise is temporarily transferring his claim on consumer goods to the issuer of a promise. For instance. doesn't directly supply final consumer goods. the value of his means. Similarly the shoemaker holds that the ten loaves of bread are much more valuable to him than his ten dollars. The baker who secures the ten dollars now holds a claim on consumer goods up to the value of ten dollars. For instance.45. .e. he can always exercise his claim on final goods and services). in turn. he would be that much closer to his objective. Man Economy and State.

These twenty apples sustain him (i. A Theory of Interest. then saving will never be undertaken. he denies himself the consumption of apples and as a result. He is. No 4 Winter 2002) In short. other things being equal. saving implies giving up some benefits at present. The Quarterly Journal of Austrian Economics vol 5. the act of saving by John is a means through which he can achieve his ultimate goal. The cost is on account of the fact that while John saves. (Ludwig von Mises Human Action. since consuming is the end of all production. however.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. which he obtained by selling his ten loaves of bread. and State p 44) It follows.In a credit transaction the two parties to an exchange also set the terms of the exchange. Why would the baker demand eleven dollars rather than ten dollars? The difference emanates from his so-called time preference. . 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. Economy. As far as John is concerned. The value of the price paid is called cost. since it means that he has been kept alive on just nineteen apples a day. Note that the act of saving is quite painful for John. that the return on savings must be in excess of the cost of savings in order for John to agree to save. 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. keep him alive). 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. which is bettering his situation. did not prefer satisfaction in the present to satisfaction in the future. After all. This means that consuming an apple at present will always carry a premium over a saved apple. however. Man. we have seen. doesn't get enough nourishment. the baker agrees to exchange his ten dollars. 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. This. Now. if savings can't better an individual's life and well being. Hence. However. (Rothbard. But ³never consuming´ is an absurdity. then. If man. To improve his life and well being. for eleven dollars in one-year time. he requires a greater amount of apples. Costs are equal to the value attached to the satisfaction which one must forego in order to attain the end aimed at. can be achieved by means of a special stick that must be made. Hence. (See an interesting discussion on means ends by Jorg Guido Hulsmann . 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. which could undermine his health and poses a threat to his life. which will be consumed some time in the future. 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.e. the savings of forty apples has allowed him to double his daily production of apples. he would never consume. On this. p. he would invest all his time and labor in increasing the production of future goods.

. 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. etc.e. However. Now the lender will not accept $1. the return on savings must be above the premium in order for John to agree to save. which is time preference. the attainment of well-being in a nearer period is. For instance. if one dollar buys one apple and the agreed interest rate is 10 per cent.21 to agree to lend since $1. 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. puts pressure on the pool of funding.1 in one year time. Thus. 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. or nonproductive consumption. the lender will also require recouping the expense of insuring the credit transaction against the risk of default by the borrower.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. John can allocate a greater percentage of apples towards savings. In short. then in one-year's time the lender of the apple would expect to get back 1.1. (The consumption is non - . As far as the shoemaker is concerned.1 apples. of course.1 apples. (Carl Menger Principles of Economics. The interaction between individuals' time preferences sets the so-called market interest. means that the required return on savings will be lower. an increase in the pool of funding sets the platform for lower interest rates. 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. the purchasing power of money and business risk are important elements in the formation of interest.1 since this sum will permit him to purchase 1.21 will secure the lender 1.1 will only buy him one apple. the time preference of the baker. the premium of having the apple now versus having it in the future is getting smaller with the increase in the stock of apples. guaranteeing the satisfaction of earlier needs must necessarily precede attention to later ones. New York University Press p 153-154). This. their importance is assessed in reference to the fundamental factor. Apart from time preferences. In other words. 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. implies that he will generate enough final goods (shoes) to allow him to repay the ten dollars and the interest of one dollar. The second apple serves to support the second most important requirements. Should a zero interest rate be imposed. Hence this act of consumption. As his pool of apples or the pool of funding expands. This. this will abort all savings and lead to the destruction of the production structure.This premium is what the phenomenon of interest is all about.1 apples. Consequently. The lender of the apple will also be happy to accept $1. Furthermore. which is established in accordance with his particular set-up. He will require $1. As a result of a fall in the purchasing power of money the price of an apple increases by 10 per cent to $1. since $1. According to Carl Menger: To the extent that the maintenance of our lives depends on the satisfaction of our needs. in turn. determines that he will exchange his ten dollars for the shoemaker's promise to repay eleven dollars in a year's time. The reason why he can now allocate a larger percentage is because with more apples at his disposal. 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. 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. as a rule. the existence of a premium) precludes the natural emergence of a zero interest rate. a prerequisite of well being in a later period««. We can thus conclude that positive time preference (i.

which in turn makes it much harder to make provisions for savings. however. This in turn makes it much harder to implement various projects as far as the maintenance and the improvement of the infrastructure is concerned. As time goes by this lowers the economy's capacity to produce final consumer goods and it hence weakens the pool of funding. As long as the pool of funding is expanding the central bank's monetary policies appear to work. An increase in monetary injections lowers interest rates below the accepted level where it pays to save. 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. 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. more funding is allocated towards the final production of consumer goods and less towards the maintenance and the improvement of the wealth producing infrastructure. the pool still manages to support not only wealth producers but also various non-wealth-generating activities. In this case. By means of loose monetary policies the central bank can only create non-wealth-generating activities. Contrast this with the case when money is secured on account of the previous production of consumer goods. This again revives various "artificial forms of life". Consequently the flow of production of various final consumer goods weakens. After a certain "cooling off" period the central bank reactivates its loose stance. However. then the economy falls into a "black hole". Monetary expansion also undermines the pool of funding as a result of the consequent decline in interest rates. all of this is just an illusion.productive because the individual consumes goods without making any contribution to the pool of funding). monetary growth cannot produce a general expansion in economic activity ² also labelled economic growth. This in turn raises consumption beyond levels that otherwise would have taken place. Subsequently. In other words. 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. On the contrary it only weakens the pool further and delays the date for a meaningful . by employing so -called counter-cyclical policies the central bank seems to be able to "navigate" the economy. All this in turn further weakens the infrastructure and so undermines the flow of production of final consumer goods. As the pace of money creation out of "thin air" intensifies it puts greater pressure on the pool of funding. by diverting real funding from wealth generating activities towards non-wealth generating activities monetary expansion only weakens economic growth. In other words. the pool becomes so depleted that it ceases to grow. 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. the consumption of the holder of money is fully backed up by his contribution to the pool of funding. and the so-called economic boom emerges again. the withdrawal of consumer goods from the pool of funding by means of money results in productive consumption. On the contrary. For instance. Once this happens the central bank can print as much money as it likes but finds that it cannot "revive" the economy. 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. If. We can thus conclude that contrary to assumed ways of thinking. or it even declines. 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.

pp 32-33. let us call it commodity x. had some features that made it more marketable than other commodities. In other words. undermine the pool of funding? The answer is no.economic recovery. (Murray N. over time. The Quarterly Journal of Austrian Economics vol 7. 1971). 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. 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. Rothbard. some are more divisible into smaller units without loss of value. commodity x is durable and it is also portable. 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. many different goods have been used as the medium of exchange. A stagnant or shrinking pool of funding therefore shatters the myth that central bank policies can grow and navigate the economy. money. On The Optimum Quantity of Money. 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. Just as in nature there is a great variety of skills and resources. N. All of these advantages make for greater marketability. (See William Barnett and Walter Block. « 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. Note that producers of perishable goods can now save their produce so to speak by means of x. 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. 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. people also discovered that this commodity. no 1 (Spring 2004). Historically. which in turn makes it even more marketable. On this Mises wrote that." (Ludwig von Mises.) . which was universally employed as a medium of exchange. in word. So as the demand for commodity x rises its purchasing power follows suit. some more durable over long periods of time. For instance. All this means that there is now much greater demand for x than before.: The Foundation for Economic Education. What Has Government Done to Our Money?) Would an increase then in the supply of x.Y. in response to an increase in the demand for x. 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. In short. In addition to offering benefits such as any other good does.) 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. What matters here is that new money which is not backed up by any real goods and services was created. The acquired x provided the producers of perishable goods with greater flexibility as far as securing various goods and services was concerned. so there is a variety in the marketability of goods. people already attached some importance to this commodity. According to Rothbard. 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. Some goods are more widely demanded than others. some more transportable over large distances. The Theory of Money and Credit (Irvington-on-Hudson.

which generates seemingly unlimited goods and services. This is. most economists are preoccupied with how the demand for goods and services can be boosted. In short. but also enhances the production structure and thereby promotes our lives and well being. however. For them funding is something that can be created out of "thin air".Now. Should this persist. doesn't alter anything we have said so far. Indeed. 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. Note that in the process of the exchange useful goods have been traded. which is fully redeemable into commodity x. 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. Once a commodity loses its appeal as the media of exchange it remains in demand for its other attributes. Paper money should be seen as a receipt or a claim on the commodity x. Now. so to speak. the pool of funding is the heart of the economy. As long as the pool of funding is still big enough to support various economic activities. Summary and conclusions Most individuals in the western world take the ample availability of goods and services for granted. Cheap monetary and fiscal policies. a producer of the good x will have the right. an increase in the production of x doesn't deplete the pool of funding but on the contrary expands the pool. not so when a bank prints a certificate which is unbacked by x. There wasn't any prior production of any useful goods including commodity x. being a final consumer good it will be part of the pool of funding. dominate the thinking of today's western economists. however. to withdraw from the pool in accordance with the value of the good x he has produced. It is the pool of funding which not only maintains. which is the pool of funding. Now the introduction of paper money. The bank then lends this unbacked certificate to an individual Arthur. In order that the production structure can continue to supply the great variety of goods that it does requires a key ingredient. Consequently. the central bank and government can give the false impression that it is their policies that made economic growth possible. however. does not have life of its own. and this of course must lead to a weakening of the pool of funding. This threat emanates from the view that there is no need These ideas. It is. 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. The whole system of interventionism . are in fact achieving the exact opposite. a growing threat to this pool and to the high living standards that we have become accustomed to. much less appreciated that the sophisticated structure of production. What we have here is a claim on money that was 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. 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. which were popularized by John Maynard Keynes. There is. 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. 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. Hence. which masquerade as policies that aim to grow the economy. however. so to speak. 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. Given the assumption that goods will always be there. the complex structure of production gives the impression that what is required is simply the existence of demand and the rest will follow suit. Once.

) 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. Yet despite all the monetary pumping and the aggressive lowering of interest rates the economy has continued to struggle.collapses when this fountain is drained off: The Santa Claus principle liquidates itself". Frank Shostak is a former professor of economics who now works as an economist for M. F. Global . 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. 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. (Human Action 3rd edition Contemporary Books p 858.

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

The results were startling. This resulted in the venture capital pool surging to $11. grossly misrepresented ad nauseam ² and now that I think of it.000 jobs! Professor Laffer and his supporters stood vindicated. In 1983 these outlays rose to nearly $3 billion. In 1982 the US General Accounting Office sampled 72 companies that had been launched with venture capital since the 1978 capital gains tax cut. Gerard Jackson is Brookesnews' economics editor . pilloried. No sound economist would deny this proposition. In 1981 the maximum tax rate on long-term capital gains was cut to 20 per cent. 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. to conventional economists that is. All because of Nixon's ill-considered capital gains tax. All that Professor Laffer had really said is that beyond a certain point the burden of taxation would cut investment and thus reduce. And yet Laffer was lampooned.4 billion and the total amount of venture capital had risen to $5. This was about 400 per cent more than had been out-laid during the 1970s slump.8 billion in the midst of the 1982 depression.By 1981 venture capital outlays had soared to $1. still is. unlike most of his media critics. venture capital outlays rose to $1. if not halt.5 billion. these companies had paid $350 million in federal taxes. However. economic reasoning and history refute the contention that abolishing capital gains taxes would cut national savings. But then Nixon never professed to know anything about economics. generated $900 million in export income and directly created 135.8 billion. economic growth. Starting with $209 million dollars in funds. Clearly. not that you would know this from the media. Astonishingly enough. Compare this situation to the period from 1969 to the 1970s which saw venture capital outlays collapse by about 90 per cent.

This obviously suggests a monetary expansion. What is really odd about this view as it is usually presented is that it never refers to the money supply. The chart below strongly suggests that is the case. The storyline here is that if the CPI accelerates the Reserve will have to tighten monetary policy by raising rates. 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. (Only capital theory can successfully explain the links. aka Henry Thornton ² monetary policy is much like a Cheshire Cat. What we have here. if prices are to continue to rise then money incomes must also be rising. As we can see.5. Now it's true that banks are not the sole source of funds for business but the fact . after which it started to contract.The Australian economy is slowing. however. a grin without a cat. In fact. Latest reports are that the housing market is indeed cooling. This deceleration indicates an actual contraction in output is a distinct possibility at this stage.) Moreover. The fact that banking lending to business peaked in November 2008 and then began to fall is interesting. the PMI by 11.Com Monday 19 July 2010 Apart from the potential threat of inflation things are looking pretty good for the Australian economy. meaning that the economy could be heading into a recession. To these commentators ² people like Peter Jonson. it did flatten out in the latter part of the year and then remained comparatively flat until last March when it stopped at 247.4 per cent. For the year 2009 the money supply (defined as bank deposits and currency) grew by nearly 5 per cent. 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. about which much ink is being spilt. the time sensitiveness of the housing market should result in a slowing of demand. One finds that where monetary policy has driven manufacturing output a point is reached where input prices begin to accelerate before production slows. It was constructed on figures from the AIG's monthly reports. both production and the PMI peaked in April and then quickly dropped. the near future could be holding very grim prospects indeed ² and I am not referring to the threat of inflation.8 per cent and production by 16. Note the acceleration in the prices of inputs that started in March. Given the previous monetary expansion a sudden halt should be expected to have a detrimental impact on manufacturing later down the line. However. or so most of our economic commentariat think. In other words. not accelerating Gerard Jackson BrookesNews.

4 per cent and non-dwelling construction by ±0.0) make interesting reading.7 per cent. Hence. These negative figures do not suggest to me an expanding economy. The aggregate approach cloaks what is really happening to an economy.2 per cent. The ABS national accounts for the March quarter (ABS 5206. even if it will be in private.) If things are going badly then one should find indicators in that part of the national accounts that deal with "contributions to growth". Before long I expect certain economists to be eating crow. But the really notable fact is that machinery and equipment are down by ±0. I was highly dubious then and more so now. (Back in 2000 I warned that even though unemployment was falling and GDP growing the US was actually going into recession. Last October UBS economists predicted that the Australian economy would start accelerating in the second half of 2010. GDP can be increasing even as the economy slides into recession. Gerard Jackson is Brookesnews' economics editor . revealing that the private contribution to GDP was only 0.that lending fell ² and continues to fall ² suggests basically three things: a) the demand for loans has been shrinking. b) the banks tightened credit or c) consumer borrowing squeezed out small to medium sized businesses. Whichever the case ² or combination ² it should have signalled that things were not right.

Obama. for one. and then falling until the following February. Obama did not cause this recession: the lousy monetary economics of the Fed did that. 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.) It's now July. The chart shows the money supply rapidly climbing from September 2008 until peaking in June 2009. 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. (It's a pity there was no one around to rein in the Republicans during the Bush administration. the monetary aggregates were indicating a slowdown and not a recovery. (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.Com Monday 19 July 2010 Grim is one word that surely sums up the state of the US economy.) Furthermore. 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. albeit one that Obama's tax policies would probably snuff out. (A clear case of projection. accusing me of being bigoted (pretty rich from those in a political party based on bigotry) and "twisting the economic facts and history". What else could explain his 'economic policies'? Ideologically -driven ignorance. Republicans were able to rein Clinton in before he could do too much damage. except that I couldn't even see a swallow. (Democrats can be accused of many things but never of putting the interests of the country above their lust for power. particularly if Republican-controlled houses have kept him in check. however. Without a doubt the Obama administration is the most incompetent since the lamentable Carter sat in the Oval office. after which it started to climb again and then apparently start falling again. Democrats soon hit the keyboard. is not Clinton and this is not the 1990s. For a start. one swallow and all that stuff. a recovery had emerged. Now there are some who sincerely believe that Obama has deliberately set out to destroy the economy. . there is the Fed to consider. Well. When Obama first emerged into the political sunlight I warned that this character is a committed leftwing ideologue and a profoundly ignorant man. Back in February I warned that "the economy is shaping up to be a disaster for the Democrats". the economy has turned into a disaster for the Democrats and the emails have ceased.) 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.Obama's policies are a recipe for economic stagnation Gerard Jackson BrookesNews.) Some conservatives think that once the economy picks up Obama might be able to garner enough credit to win a second term.

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

The solar plant requires 33. Our politicians are not so honest.2 billion solar fraud is just another demonstration of its leaders cowardice and wanton disregard for future living standards. 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. the resources that would be used up in building solar energy plants are immense. Even if this were not the case they would still be facing massive diseconomies of scale. President Obama did say that under his so-called energy program "electricity prices would skyrocket".000 watts.000 tons of glass.800 divided by 75 equals 50.) Fortunately.8 gigawatts equal 3.3 times the area of the gas plant to produce a miserable 0. labour and capital to produce a tiny fraction of the electricity that coal-fuelled or nuclear plants could produce with the same resources. Colorado.500 tons of copper. calculated that a solar plant with a 1000 MW output capacity would consume 35. or any economy above a medieval level of existence. Obviously it is the diluteness of the energy source that makes solar uneconomic.8 gigawatts would have to cover 25.0000. Now let us put these figures into perspective. To top it off. (The same people who scream against 'urban sprawl' swallowing up land see nothing wrong with blighting the landscape solar plants and wind farms.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. labour and capital that can be freely drawn on. This would be a grave mistake because it implicitly assumes constant returns to scale. Solar energy is so dilute that it requires masses of land.7). They are both based on outrageous distortions and outright lies. 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. 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. electricity prices would continue to rise and the standard of living fall. the insurmountable natural obstacle is energy density. (Remember: a gigawatt is 1000. 600.0197 of its output. Clearly. Kathryn A. Lawrence. In plain English.8 gigawatts would cost we merely need to multiply 50.333. It is easy to assume that to determine how much a solar plant capable of generating 3. a scientist with the National Solar Energy Research Institute in Golden.3 acres or 39. Few people realise that it is physically impossible for solar energy to meet the needs of a modern economy. so 3. For this to be the case there would have to exist an unlimited amount of idle land.000. this super leap into the future can only produce electricity one-third of the time.800.) As disastrous as those figures are. 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 tons of aluminium. to produce 3.8 gigawatts whenever needed.6 square miles as against 15 square acres. and so on. 1.The Government's 'alternative energy' policies will be a disaster for the economy Gerard Jackson BrookesNews. 2 million tons of concrete (which is 500 times the amount of concrete a 1000 MW nuclear power plant would use!). 7.000 tons of steel. (Then again. This is because solar ² including wind power ² face insurmountable natural limitations. it gets worse.Com Monday 26 July 2010 The Liberal Party's proposed $3. Yet these are conservative figures! .7 by $476 million (3. Clearly.) Therefore. 75.000 watts.

Obviously a part of the energy needed to produce a solar plant will be electrical. concrete and glass comes to about 30 trillion BTUs for a solar thermal 1. and 12 MBTU/ton of concrete. a solar plant needs about 1. This means energy costs amount to 75 million BTU per ton of aluminium.000 MW is decentralized). A conventional plant would only use about 1000th of this for the same output.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. 18 MBTU/ton of glass. So for the same power output. These figures put to rest the idea that solar is a benign and efficient alternative to coal-fired power plants. So why are Australia's think tanks and so-called conservative columnists silent on these facts? Gerard Jackson is Brookesnews' economics editor . *That this report was produced 35 years ago is irrelevant. That energy produces wastes in addition to the wastes produced by the production of the materials. 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. All of this for a solar plant which produces 1.056 times more structural metal (by weight) than a nuclear plant or a fossil burning plant. the opportunity costs of these plants would be colossal and totally unjustified. an environmental menace and a criminal waste of land. All of which will be deposited in the environment.000 MW of electricity.000 MW plant (a lot more if the 1. Obviously. irrespective of how technically efficient solar collectors become. labour and capital and a savage attack on the standard of living. 56 million BTU per ton of steel. Solar would be a blot on the landscape. The energy needed just to produce the aluminium. 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.

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. 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. 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. at least for the moment. This is what is called a deflation. But these figures do reveal how tight monetary policy has become. though it needs to be stated that the expansion was an erratic. But the link between time. even though the money supply has been 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. This is not to suggest that the mining boom is not contributing to the increase in manufacturing costs. 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. 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. 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. The Australian Industry Group's report for June shows manufacturing growth is slowing significantly while input prices are accelerating.5 per cent. Recent comments by Ric Battellino. .Will the Reserve's tight monetary policy drive the Australian economy off a cliff? Gerard Jackson BrookesNews. if Battellino had said that the boom was putting stress on manufacturing by bidding up factor prices then he would have a point.) Recent indicators strongly suggest that the Reserve's tightening is finally have an effect. 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. money and economic activity is completely missing from the Reserve's press releases and monetary announcements. Battellino warned that the mining boom put a great deal of stress on inflation. On the other hand. It is these deposits that expand the money supply and create inflation. (The Reserve's monetary aggregates are always a couple of months behind. Deputy Governor of the Reserve. Unfortunately. monetary growth stopped last January. the money supply is. actually contracting. What is not so well known is that this is a monetary induced phenomenon. Now I don't believe for a moment that the Reserve is going to allow the money supply to deflate by a significant amount.Com Monday 26 July 2010 For 2009 M1 rose by 4. Genuine borrowing occurs when person A temporally transfers purchasing power from himself to person B. But this bidding is not inflationary. For inflation to emerge the banking system needs to create additional deposits (bookkeeping fictions). However. Credit expansion is like a huge ocean-going liner: it takes time to put it into reverse. not borrowing per se. And as we know. And the faster it was going the longer it will take. This is rubbish. and Glenn Stevens Reserve Bank governor make this very clear. Stevens is just as bad as Battellino. This is why the Reserve says it needs to look at the CPI before it knows whether to raise interest rates.

Jonson fails to see that a so-called neutral interest rate policy is innately inflationary.) What they do is focus on interest rates as if the two are completely separate. Moreover. But this company is not a monopoly.) 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. resulting in an annual increase in revenues of "7-8 per cent". 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. If McCrann were right other companies would have been undercutting Woolworths by a significant margin. All prices were rising. (This is like separating a Cheshire cat from its grin. 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. (This view created for me one of those should-I-laugh-or-cry moments. There is absolutely no evidence that this was the case. Gerard Jackson is Brookesnews' economics editor .5 per cent cash rate means that "monetary policy is now neutral". While monetary policy remains this tight there will be no stopping the economy from running to a brick wall. This has Peter Jonson (aka Henry Thornton) arguing that the Reserve's 4. 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. Terry McCrann argued that competition is now preventing Woolworths from raising prices. Although our economic commentators frequently refer to monetary policy they never mention the money supply.Not only is the housing market also beginning to cool but retail prices appear to be hitting a wall. he has also failed to look at the monetary aggregates.

have fallen to 4.5 per cent in March. Also. The growth momentum of new home sales has plunged in May. The ISM manufacturing purchasing management index fell to 56.2 per cent in the month before. Year-on-year the rate of growth fell to 7. in the week ending July 9. such as professor Paul Krugman. Additionally.8 per cent in May from 38.Influential commentators urge the Fed to raise the pace of pumping Dr Frank Shostak BrookesNews.3 per cent in May from 30. The yearly rate of growth of sales fell to minus 18.2 last month from 59. demand for loans to purchase .Com Monday 26 July 2010 Some Fed officials and various commentators. the growth momentum of housing starts displays a visible decline. 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.7 in May.8 per cent in April.8 per cent in June. the yearly rate of growth of retail sales after climbing to 8. Visible weakening is also seen in the housing market. For instance.

the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. who raised interest rates in the face of financial crisis.) . The New York Times June 27. The Third Depression.homes. In 2008 and 2009.1 per cent to 163. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer. 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. (Paul Krugman. which tried to balance budgets in the face of a plunging economy.3 the lowest level since December 1996. Unlike their predecessors. fell 3. According to Krugman things were different in 2008-2009. it seemed as if we might have learned from history. today's governments allowed deficits to rise. 2010. Unlike governments of the past. as depicted by the mortgage purchase index.

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

Now. He pays the oven maker with some of the bread he is producing. As a result it will not be possible to boost the production of bread. As a result the making of the oven would have to be aborted.e. so how can an increase in government outlays revive the economy? Various individuals who are employed by the government expect compensation for their work. out of the production of ten loaves of bread if the baker consumes two loaves his real saving or real funding is eight loaves). 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. In this case the more the government spends and the more the central bank pumps the more will be taken from wealth generators. thereby weakening any prospects for a recovery. 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. (We ignore here borrowings from foreigners). all other things being equal. it cannot replace the final consumer goods). It is only used to facilitate the flow of goods. Similarly other wealth generators. (For instance. 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. 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. 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. 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. The only way it can pay these individuals is by taxing others who are still generating real wealth. When loose monetary and fiscal policies divert bread from the baker he will have less bread at his disposal. 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. as a result of the increase in government outlays and monetary pumping. Consequently the baker will not be able to secure the services of the oven maker. 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. The only way fiscal and monetary stimulus could "work" is if the flow of real savings i. 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. his production of bread will actually decline.e. In order to implement his plan the baker hires the services of the oven maker. but an adequate flow of final goods and services that maintain individuals life and well being. real funding. If for whatever reasons the flow of bread production is disrupted the baker would not be able to pay the oven maker. As one can see. This in turn will hamper the production of their goods and services and will retard and not promote overall real economic growth. (The baker will not have enough bread to pay for the services of a technician to maintain the existing oven in a good shape). (Money is just a medium of exchange. Consequently. is large enough to support i. not only does the increase in loose fiscal and monetary policies not . (Note that the overall increase in real economic activity is in this case erroneously attributed to the loose fiscal and monetary policies).production of bread. 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. Note that the introduction of money doesn't alter the essence of what funding is. fund. will have less real funding at their disposal.

Year-on-year the rate of growth of the Fed's balance sheet (monetary pumping) climbed to 152. banks make it easier for a lender to find a borrower. 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. Obviously the Fed can accelerate the pace of pumping by embarking on a very aggressive buying of assets. It is therefore futile to urge banks.5 per cent in February 2008. This pumped money however is unlikely to enter the economy as long as commercial bank lending remains depressed. The decline in the rate of expansion slows down the rate of damage to the process of real wealth formation. As a result the yearly rate of growth of our monetary measure for the US jumped to almost 33 per cent in November 2008. 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. Since most economic indicators reflect monetary expenditure obviously the stronger the monetary pumping is the stronger various economic indicators become. Lending amounts to a transfer of real savings from a lender to a borrower by means of the medium of exchange i. When a bank lends money. 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. 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.3 per cent respectively in June. Hence the slowdown in the expansion should be regarded as good news for the economy. By fulfilling the role of middleman. The existence of banks enhances the use of real savings. Needless to say that such type of credit can only make things much worse. (We ignore the case of the Fed buying assets directly from non-banks). 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. .raise overall output.e. as various commentators including Bernanke and Krugman are doing. «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. but on the contrary it leads to a weakening in the process of wealth generation in general. This of course means that the expansion of various economic indicators reflects a weakening in the process of real wealth formation. after all the essence of credit is about the lending of real savings. (Note that this expansion is labeled economic recovery). Yet most commentators including Krugman label monetary driven expansion as good thing. 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. The pace of pumping remained very high during 2009 hovering at 125 per cent during January to September. to lend more if real savings are not there. (Note that there is a variable time lag between changes in the monetary expansion and changes in various economic indicators).7 per cent and 2. The yearly rate of growth of Fed's balance sheet and AMS stood at 13. During December 2008 to September 2009 the yearly rate of growth of AMS hovered at around 22 per cent. According to Ludwig von Mises. money.8 per cent in December 2008 from 1.

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

. policy is to do nothing. 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. However. On the contrary loose policies only weaken the process of real wealth formation thereby weakening prospects for a sustained economic expansion. The key for such an environment is to stop sabotaging the process of real wealth generation by means of loose policies. The more aggressive the fiscal and monetary policies stance is the worse the economic conditions become. F. 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. 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. once this pool becomes stagnant or is declining the illusion of the effectiveness of loose monetary and fiscal policies is shattered. 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.such but the creation of an environment where individuals can earn incomes that will enable them to lift their living standards. 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. Frank Shostak is a former professor of economics who now works as an economist for M. Hence the best. Global.

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

Gerard Jackson is Brookesnews' economics editor . At the end of the day. 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. if only to try and save their rancid political skins. they intend to stay that way. 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. 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.arguing that tax rises were good for the economy have done a 180 degree turn. It's this process that eventually lowers real wages and living standards. 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. there is still a limit to what any economy can endure. as Adam Smith once observed. If you think this sounds fishy. 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. Basically this means that the government should print hundreds of billions of dollars which it would then spend on goods and services. What is more. something has to give. If Obama is not forced to change course the economic consequences for millions of Americans will be increasing severe. they and their critics still don't get the problem with taxes. Despite its size and power America is no exception. As expected. The first and obvious thing is that this is a case of out and out inflation. It has been suggested that the government can break the economic impasse by becoming a buyer of the last resort. In other words. Although "there is a great deal of ruin in a nation". then you are damn right.

Right now the signs are definitely not good. 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. a committed leftwing ideologue with absolutely no understanding of how economies work and no desire to find out. 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. 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. 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. However. 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. after which it would fall. Instead. ancient errors and invalid concepts that has degenerated into a cult.) . So what we have is massive government support for an economically unsustainable pattern of production. 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.) Now it is true that under certain circumstance a monetary expansion can appear to resolve the situation. 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. Convinced of this fact (after all. after which the cycle once again resumes. He believed his Keynesian advisors when they told him that his spend-and-borrow program would halt unemployment at 8 per cent. at least for the survivors. leaving capitalism thoroughly discredited. What this means is that there are economic activities that can no longer justify their existence. Americans need to wake up to the fact that Obama is a profoundly ignorant man. much as the Japanese did with their malinvestments and with basically the same results. as I have said elsewhere. it is Obama's presidency and his neo-socialist program that are in tatters.Com Monday 16 August 2010 Sometimes it pays to keep flogging a dead horse. In this instance the horse is Obama's destructive economic policies.President Obama's nightmare economy Gerard Jackson BrookesNews. Before he was even elected I predicted that as president he would prove to a disaster. When this happens Keynesians always refer to it as a case of demand deficiency. 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. What happens is that an expanding money supply raises the monetary demand for the products of these malinvestments and so makes them profitable again. We call this inflation. The previous criminally loose monetary policy had been largely rationalised by Keynesian thinking. Even this economic illiterate and his fellow travellers know what a political albatross that would be. (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. (There is no place in their scheme of things for the concept of disproportionalities. The result was a boom followed by a bust.

this strategy cannot continue indefinitely. even when disguised as borrowing. And this is where we must look. Augustus M. Gerard Jackson is Brookesnews' economics editor . it is a case of outright fraud. And the moronic Axelrod still cannot figure out why non-farm payrolls fell 131. H. so to speak. suppliers and workforce. It is the prospect of this onslaught that is causing business to batten down the hatches. All that happens is that purchasing power is transferred from one group to another. first published 1926). Keynesians have forgotten the old the wisdom about horses and water. There is no way that taking money from Joe Sixpack to spend on a Democrat's favourite constituents can increase the demand for labour. The Fed creates the money to buy the agency bonds: the sellers then use the money to buy government bonds. Literally hundreds of billions of dollars have been created by this deceitful procedure ² and it is still continuing. (D. Right now he is busy monetising Obama's disastrous borrowing program. 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. Unfortunately the dismal expectations of business regarding Obama's policies are founded entirely on reality.) GM then uses the same dollars to pay its debts. 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.68 per cent. Monetary expansion is another matter. Banking Policy and the Price Level. leaving total purchasing power unchanged. Kelley. there may be no rate of money interest in excess of zero which will stimulate an unwilling one. 81. (From bombs to lemons. (Last Friday 10-year notes were trading at 2.000 for May and June. Robertson. 1989. But what is really striking is its total failure to stimulate recovery. despite the expectations of Bernanke and the rest of the Keynesian cult.000 last month and payrolls had to be revised down by 97. Central banks bought agency bonds which they are now selling to the Fed in order to buy treasuries. 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. No amount of borrowing can reduce the rate of unemployment. It doesn't matter how low interest rates are. The effect has been to keep bond prices higher then they would otherwise be thereby helping keep rates low. You're just going to love this. p.) Nevertheless. Innocent enough on the surface. In fact.What went wrong? Bernanke engineered the most rapid increase in the monetary base in US history and still the economy did not move. if there is too much political uncertainty about making profits then investment and spending will be severely curbed.

policies that reverse deflation should be good for the economy. This of course means that they will not postpone their buying of goods at present. 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. Louis Federal Reserve Bank President James Bullard. According to popular thinking. Why should this be classified as bad news? On the contrary. however inflation of 10 per cent could be bad news.3 per cent was associated with a fall in industrial production of 21. Indeed during 1932 the fall in the CPI of 10.e.Is deflation really bad for the economy? Dr Frank Shostak BrookesNews. It is held by mainstream thinkers that inflation of 3 per cent is not harmful to economic growth. falling prices. which is labeled deflation. Did a fall in prices cause people to postpone buying personal computers? ± not at all. this weakens the overall flow of spending and this in turn weakens the economy. at a 10 per cent rate of inflation. 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. this means that inflation could actually be an agent of economic growth. 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. since January 1998 the price of personal computers has fallen by 93 per cent. As a result of this it is held. From this way of thinking one could conclude that a general fall in prices should be associated with an economic slump. They hold that a rate of inflation of around 3 per cent could be the appropriate protective "buffer". For most experts a little bit of inflation can actually be a good thing. 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. It is held that a fall in prices generates expectations for a further decline in prices. speaking on CNBC television.e. it is likely that consumers are going to form rising inflation expectations. or deflation. For most economists and various commentators a general fall in prices. poses a problem. 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. So why then is a rate of inflation of 10 per cent or higher regarded by .6 per cent. which should boost the economic growth.700 per cent since January 1998. Consequently. 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. so it is argued. in response to a high rate of inflation consumers will speed up the expenditure on goods at present. For instance. A fall in consumer expenditure subsequently not only weakens overall economic activity but also puts further pressure on prices. But then. is a terrible thing. consumers postpone their buying of goods at present since they expect to buy these goods at a lower prices in the future. inflation. Now if deflation leads to an economic slump then following the logic of the popular thinking. Note that from this it follows that deflation sets in motion a spiraling decline in economic activity. Since reversing deflation means introducing policies that boost general increase in the prices of goods i.Com Monday 16 August 2010 On Friday July 30 the St.

could lead to a prolonged decline in the price level. is passed back to the original lender and therefore cannot disappear unless the original lender decides to physically destroy it. credit out of "thin air.experts as bad thing? Clearly this type of thinking is problematic. As long as the pool of real saving is expanding and banks are eager to expand credit various false activities continue to prosper. A fall in the price level in turn raises the debt burden and leads to a strengthening in the process of debt liquidation. consumers use a larger portion of their money to repay their debt). (Remarks by Governor Ben S. 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. Akerlof. which is fully backed up by savings. once repaid by the borrower to the bank. Hence to prevent this downward spiral aggressive monetary pumping by the central bank is recommended. Consequently.) 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. Dickens. banks curtail their loans by not renewing maturing loans and this in turn sets in motion a decline in the money stock. (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. 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. This in turn weakens the ability to grow the pool of real savings and in turn weakens economic growth. 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. The larger the outlays are the more real savings are diverted from wealth generators. Brookings June 2.e. which provides support for the creation of un-backed credit. 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. the performance of various activities starts to deteriorate and bank¶s bad loans start to rise. these activities consume and do not produce real wealth. Federal Reserve November 21. Bernanke. All this. (George A. Money. The un-backed credit in turn leads to the reshuffling of real savings from wealth generators to non-wealth generators. (Without this support banks have difficulty practicing fractional reserve lending). it is held." Once the un-backed credit is generated it creates activities that the free market would never approve. Deflation: Making sure "It" Doesn't Happen Here. It is loose monetary policy. George L.2000. 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). William T. i. In response to this. (Rather than using the money in their possession to buy goods and services. An important cause for such a fall is a decline in fractional reserve lending. 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 . Near Rational Wage and Price Setting and the Long Run Phillips Curve. Perry.e. It must be also emphasized here that another important factor that undermines the pool of real savings is government outlays. 2002.) 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.

these bad side effects are not caused by deflation but rather by the previous inflation. Hence a fall in the money supply leads to a fall in general prices ± labeled as deflation. 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. All that deflation does is shatter the illusion of prosperity created by monetary pumping. This amounts to the disappearance of money that was previously generated out "of thin air. thereby revitalising the economy. The fall in the money supply. but a shrinking pool of real savings that undermine real economic growth. but on account of a fall in the pool of real savings. 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. it is not increases in real interest rates. 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. 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. The emergence of deflation is the beginning of the process of economic healing. as suggested by many commentators. Deflation arrests the process of impoverishment inflicted by prior monetary inflation. Obviously then. strengthens the producers of wealth. requires increases in the money supply. The declining pool weakens the process of real wealth generation and in turn weakens borrowers¶ ability to serve the debt. 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. which as a rule follows by a general fall in prices. which is labeled inflation. the economy will follow the declining pool of real savings. in this situation the more money the Fed push into the es economy the worse the economic conditions become. Similarly. On the contrary. . 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. Contrary to the popular view. increases in real interest rates put things in proper perspective and arrests the wastage of scarce real savings thereby helping the real economy. Why deflation heals the economy As we have seen deflation comes in response to previous inflation. 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). However.e. which was created out of "thin air". countering deflation. Deflation of the money stock." This type of money gives rise to various non-productive activities by diverting real saving from productive real wealth generating activities. puts things in proper perspective. Note that as a rule a general increase in prices. comes not on account of falling prices. Obviously the side effects that accompany deflation are never pleasant.weakened the pool of real savings.

" This type of money gives rise to various non-productive activities by diverting real saving from productive real wealth generating activities.e. is precisely what is needed to set in motion the build-up of real wealth and a revitalising of the economy. This amounts to the disappearance of money that was previously generated out "of thin air. a fall in the money supply i. 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. by genuine wealth generators.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. money out of 'thin air'. Printing money only inflicts more damage and therefore should never be considered as a means to help the economy. Contrary to the popular view then. Frank Shostak is a former professor of economics who now works as an economist for M. Obviously then. As we have seen deflation comes in response to previous inflation. 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. Conclusion Despite the almost unanimous agreement that deflation is bad news for the economy's health. Global . so to speak. this is not the case. F.

Underlining this approach is that a falling dollar will cheapen US goods relative to foreign goods and therefore raise the demand for exports. meaning that Americans would have export more in order to import the same amount of goods. (To be fair. even though real wages are rising. Supporters can . As with so much in economics the question of the terms of trade and its connection to real wages is not entirely straightforward.) A continuing increase in productivity would cause the terms of trade to decline. In fact. it's a sneaky way of lowering real wage rates. What happens is that a falling dollar lowers the terms of trade. i. Trade takes place because of differences in prices. a country enjoying genuine economic growth is one in which productivity and real wages are rising. There is absolutely no basis at all for such an assumption. resulting in a country having to export more for the same quantity of imports.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. 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. 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. 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. I guess one needs a PhD from an accredited university to come up with this nonsense. This is the equivalent of producing more for less pay. To begin with. We have seen that an inflationary monetary policy that leads to a devaluation causes an unfavourable shift in the terms of trade.Com Monday 16 August 2010 No matter how grim the economic situation some Pollyanna will find a silver lining that indicates a mother lode. However.e.) 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. this process is usually defined as capital formation. the real objection is that the demand for exports ² no matter how intense ² cannot in itself generate growth. 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. We now see that there is a productivity induced change in the terms of trade and there is a monetary induced change. capital goods. Assuming that these Pollyannas are correct about a European recovery this does not augur the resumption of economic growth in the US. (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. plenty of these professional are very much aware of this fact and that's why in times of high unemployment they support devaluation. The current silver lining is the old fallacy of export-led growth. However. 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. In other words. the proposition that Europe is currently enjoying an economic recovery is a rather dubious one. What really happens is that resources are now redirected from production for domestic use to production for foreign use. 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. As a rule. But how does this generate growth? It doesn't.

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

drives a car. Of course. 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. 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. But they miss a vital point: these industries are at the very highest stage of the capital structure. goods must do so".Com Monday 16 August 2010 Senator Bob Brown has emerged as a destructive parasite.) 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. and certainly no newspapers to promote his lunacy. Anyone who ignores the international ramifications of the greens' proposals is not fit to be in politics." (Italics added. Not only has the media overlooked just how elitist and loony Brown's green economics really are so have our rightwing. That Beijing might consider this a form of green economic warfare has evidently not occurred to Brown. A green fanatic living at the public trough whose economic wish list would destroy the Australian standard of living. ship and plane. The same man who uses numerous electrical appliances.") 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. In a letter to The Australian (27 June 1991) he revealed his appalling economic illiteracy by defining logging and mining as "resource robbery". closing down mining means shutting down the export trade to China.The Greens' policies would destroy the Australian economy Gerard Jackson BrookesNews. . travels by train. which is exactly what it is intended to do. As Otto Maller said: "If soldiers are not to cross international boundaries. China is not going to allow anyone or any ideology to sabotage its economic development. Critics rightly point out the massive cost in terms of lost export earnings if Brown's lunatic policies were implemented. 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. 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. zinc mills and aluminium mills.

(Incidentally. 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". (The Government's 'alternative energy' policies will be a disaster for the economy) (Brown's support of solar energy also reveals his hypocrisy. 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. (By land the economists is referring to its output. (Friends of the CSI smeared me as a "technological pessimist" for pointing out the preceding facts. making the difference in costs between the two a staggering amount*. Brown's policies would virtually make the land inaccessible for development while simultaneously destroying most of the country's capital structure. 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. 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. meaning that as they expand the average cost of production rises." It has to be understood that real wages are determined by the ratio of capital-land to labour. The problem is that solar power is extremely dilute and terribly irregular. 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. The result will be a massive and unsustainable rise in energy prices. They face insurmountable economic and natural obstacles.) Therefore. 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.) So where will the electricity come from? According to Brown and his fellow fanatics solar and wind will easily fill the gap. as an economy becomes more capital intensive real wages will continue to rise. wants to destroy all of the country's coal-fired power plants. 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. He wants to tax these power stations out of existence and put a permanent ban on them. So according to this oily sanctimonious hypocrite new urban estates are bad but covering the land with solar collectors is absolutely marvellous. The higher the ratio the higher will be the standard of living.) A more savage and calculated attack on the standard of living would be difficult to conceive." Judging by other comments he has made this view must also extend to the rest of the country. 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. The Christine Milne. 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.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. .) 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. Bob Brown's fanatical playmate.

another green fanatic in the mould of Bob Brown. He needs to be exposed and exposed now. water. She demanded this be the case by 2020.) Ernest Callenbach's book Ecotopia was brutally honest about green aims to savagely lower living standards. In their utopia industry will be small-scale and labour-intensive. largely . (I bet Bob Brown could tell him.self-sufficient and the large-scale division of labour will be a thing of the past. 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? .. In his environmental paradise the standard of living will have been massively cut and energy prices kept deliberately high. And now the greens want to destroy that progress.. 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. Jeremy Rifkin. 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. Nevertheless.poor. communities will be small. a fact that he has already admitted. It is more than likely that the economy would implode before the coalfuelled power stations could even be priced out of existence. was open about the consequences of green economic policies for the standard of living. In effect. Brown's fellow fanatic. the white knight of the green movement. wind and solar power will replace central power generation. *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. proposes that a carbon tax be continually raised on these energy sources until they are forced into bankruptcy." However. 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." 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. In case anyone should think that Callenbach's views are out of keeping with what passes for mainstream thinking in green intellectual circles. confessing that "production will center on goods required to maintain life. Ralph Nader. Other greens have readily conceded that this is their real goal. In other words. Christine Milne. he did not say who would decide what these goods would be. 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 ".effect would be a severe drop in the ratio of capital-land to labour which would drive down real wage rates. she is demanding that within 10 years 80 per cent of our electricity generating capacity must be destroyed. Brown's policies are designed to turn Australia into a labour intensive economy. gave it his stamp of approval. nasty brutish and short. Living standards vastly superior to that enjoyed by any medieval monarch or eastern despot.

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 .

FAusIMM. gas is wasted in power generation. is Chairman of The Carbon Sense Coalition . BScApp. In all of these areas. fibres. World Heritage Reservations. Future Australians are in danger of becoming a nation of peasants.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. 516 National Parks. Our neighbours look on in amazement as foresters are locked out of State Forests. More recently. mining taxes are increased and there are threats to tax carbon and close our coal mines and power stations. oil shale and uranium. Most wars are about land and resources. agricultural and mining production are prohibited or increasingly restricted. aggressive Europeans swarmed into Africa. Our populous and rapidly developing northern neighbours need the primary products that Australia has in abundance ² food. They see precious agricultural and forest land being swallowed by National Parks. History has no examples where a small number of self-indulgent people have managed to squat on valuable land and idle resources forever. If we continue sterilising our resources of land. the Americas and Australia attracted by underused land. Wild Rivers Declarations. Soon the whole Coral Sea will be locked up and beaches made off limits to fishermen.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. minerals and timber. poachers and smugglers in their own land. Viv Forbes. minerals and energy. Today the refugee flotilla is unarmed. The latest proposal is a continuous conservation corridor running from Melbourne to Atherton. water courses become no-go zones for graziers and irrigation water is withdrawn from farmers and orchardists.Greens resource sterilization plans endangers national security Viv Forbes BrookesNews. Environmental Parks. minerals and energy. Indigenous reservations and bans on land clearing. Asia needs our abundant energy resources of coal. 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. Unbelievably we have nine protected Wild Rivers. gas. 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. future fleets may not submit peacefully to Australian boarding parties. 11 World Heritage properties. But they watch in disbelief as uranium mining is banned. FSIA. 2. In the colonial era. oceans. food. So they note with disbelief the way in which Australia is sterilising these valuable resources.

4-trillion deficit estimated for fiscal year 2010. Arguably.000 pork-barrel projects.3-trillion (a 25% increase). which turned the U. ‡ $700-billion TARP bill. the government doubted that cutting tax rates would spur enough growth in the short term to offset lost revenues. In early 2000. ‡ $1 trillion or more for a health care bill that the majority of Americans didn't want. The Obama administration and its congressional Democrat lackeys are on the precipice of following Argentina's disastrous economic and monetary policy decisions.5 percent of GDP in 1999.Com Monday 16 August 2010 The United States' economic decline precariously resembles Argentina's economic collapse.3-trillion deficit in fiscal year 2009. the United States government instituted economic and/or monetary policies detrimental to American's short. ‡ $500-billion bailout of Fannie Mae and Freddie Mac. the public debt stands at $13. 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. reducing interest rates and thereby spurring the economy. ‡ $1. the United States economy has been in a two-year-long recession. ‡ $410-billion Omnibus bill with 9. Among the options for reducing the deficit. ‡ Billions spent by the Federal Reserve to purchase toxic assets. government into an equity owner and granted an ownership stake to the United Auto Workers union.S.] .6-trillion dollar public debt the day Obama took the oath of office. ‡ $145-billion bailout of Greece. In nineteen months. others suspect the country will plummet into a deeper recession. ‡ $787-billion economic stimulus bill the president deemed necessary to keep unemployment under 8%. which was showing signs of recovery in late 1999. ‡ Auto industry bailout with complete disregard to the bankruptcy laws. or perhaps a depression. which was 2. The government thought reducing the budget deficit would instill confidence in government finances. cutting spending was politically difficult. According to a 2003 report issued by the Joint Economic Committee of the United States Congress. Argentinean President Fernando de la Rúa's government evaluated options to end the recession.The US is facing an Argentina-like economic crisis Scott Strzelczyk BrookesNews. ‡ $1.and long-term economic prosperity. it did not wish to abandon the convertibility system and simply print money[. In the past two years. and while some may posit that the country has started an economic recovery. What began in Argentina as a recession mushroomed into a full-fledged depression due to bad economic and monetary policy. which started in 1998 and landed Argentina in a depression by the end of 2000. ‡ $10.

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

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

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

the first requirements will be to recognize correctly our current condition. Lafayette College. in economics from Johns Hopkins University. He received his Ph. self-appointed nobility. and a fellow for the Hoover Institution and the National Science Foundation. Robert Higgs is Senior Fellow in Political Economy for The Independent Institute and Editor of the Institute¶s quarterly journal The Independent Review.D. 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. to denounce openly its injustice and idiocy. Seattle University. and the University of Economics. . Prague.read. He has been a visiting scholar at Oxford University and Stanford University. and he has taught at the University of Washington.

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