Gold Continues to Increase in Price and Dallas Fed Expects Increase in Demand

Zerohedge is full of great stuff today.  Gold went up 6% in February.  Obama added the Chairman of the board of directors of Citigroup to his advisory council on jobs, showing his continued hate for the big banks.  And now the Dallas Fed expects in increase in demand:

The latest diffusion index, which came at 17.5, on expectations of 13.0, confirmed two very much expected things: i) economic "growth" continues to be predicated on inventory stockpiling, as has been the case for the past two years, which is nothing but a highly speculative bet that demand will eventually pick up (and we pray the Dallas Fed respondents use FIFO not LIFO accounting), and ii) margins are getting crushed.

Zerohedge is seriously a great site.  To see its origins, check out this New York Magazine article.

...when a former Goldman Sachs computer programmer was arrested for allegedly stealing software codes used for the firm’s electronic trading arm, and a federal prosecutor was quoted saying the codes could be used to “manipulate markets in unfair ways,” the once-obscure blog ignited a chain reaction. While on a golf outing, an editor at the New York Times learned from a friend who worked on Wall Street that the Zero Hedge allegation was the talk of the industry, and an assignment ensued. On July 24, the Times published a front-page article on so-called high-frequency trading and its potential abuses, which in turn prompted Chuck Schumer, a member of the Senate Finance Committee, to draft a letter to the SEC that same day. Twelve days later, the SEC signaled that it was considering a ban on the very computerized trading that Zero Hedge had attacked.

Suddenly, the shadowy figure behind Zero Hedge was a full-blown cult hero—a blogger with a bullet. His readership of angry traders and anti-government malcontents celebrated his newfound power. “Welcome to the party pal!!!” declared one of his fans in the comments section.

In a sign of just how radically the order has shifted in the political and media world, neither the Times nor Schumer had a clue about the identity of the pseudonymous author behind Zero Hedge. As it happens, the founder is a 30-year-old Bulgarian immigrant banned from working in the brokerage business for insider trading. A former hedge-fund analyst, he’s also a zealous believer in a sweeping conspiracy that casts the alumni of Goldman Sachs as a powerful cabal at the helm of U.S. policy, with the Treasury and the Federal Reserve colluding to preserve the status quo. His antidote? A purifying market crash that leads to the elimination of the big banks altogether and the reinstatement of genuine free-market capitalism.

Never mind Dow 10,000. Dan Ivandjiiski is all about Dow Zero.

While conspiracy theories are fun to read, its tough to put a lot of weight in them.  Still, the people at Zerohedge are providing a great public good with their constant data watching.

To end with Did You Know.

Did You Know that the Fed socializes risk when it purchases Treasury securities?  Caroline Baum explains in her Bloomberg article that asks five potential questions that Bernanke should face when testifying before Congress:

There’s been some suggestion that the $600 billion was derived from a decision to remove a certain amount of duration, or price risk, from the market. Is that true? And if so, why does the central bank want to socialize the risk, transferring it from investors, who choose or are able to take it, to taxpayers? (Background for lawmakers: Because the Fed turns its profits after operating expenses over to the Treasury, any reduction in profits means a bigger deficit and higher taxes for the rest of us.)

Maybe the theories at Zerohedge aren't so crazy.

Get Your Hank Paulson Medals!!! (I Am Seriously Not Joking)

Fresh from Zerohedge, you can buy a 3" bronze medal with Mr. TARP himself Henry Paulson on it.

After giving billions in taxpayer money to banks that ran themselves into a fiscal hole, you would think that every American would get the medal for free instead of having to pay $42.00.  It's almost like Paulson worked for a big bank before being Secretary of the Treasury.....

This just in from Zerohedge as well, Marc Faber thinks we are all doomed:

I think we are all doomed.  I think what will happen is that we are in the midst of a kind of a crack-up boom that is not sustainable, that eventually the economy will deteriorate, that there will be more money-printing, and then you have inflation, and a poor economy, an extreme form of stagflation, and, eventually, in that situation, countries go to war, and, as a whole, derivatives, the market, and everything will collapse, and like a computer when it crashes, you will have to reboot it.

Please heed his warning.

Gary North Strikes Again With Rising Food Prices.

While taking complex subjects and simplifying them to easily understandable statements is usually a tricky task, Gary North has mastered the technique.  While many are placing the blame for rising food prices squarely on the Federal Reserve and Ben Bernanke, North points out why this conclusion is short-sighted:

Why are food prices rising? Simple: because urban people in formerly Third World nations are getting richer. India and China are the obvious examples. As these economies are freed from the regulations that once burdened them, the growing urban middle class bids up the price of food. People with money in their pockets like to eat more and better food. In the bidding war between rural people with little capital and therefore low incomes vs. urban residents with more capital and higher incomes, rural people lose.

There is an ancient error, stretching back to Adam Smith, which says that retail prices rise because of cost-plus inflation. Prices for raw materials rise, forcing up retail prices. This was refuted by Carl Menger, the original Austrian School economist, in 1871. He showed that production costs rise in response to bids by entrepreneurs, who in turn expect rising demand for the output of their enterprises. The prices of economic inputs rise in response to expectations.

When, in the second half of 2008, entrepreneurs and speculators finally recognized the extent of the recession, they stopped bidding for as many raw materials. So, the prices of these production goods fell.

It is true that monetary policy affects the business cycle. It is true that QE2 is inflationary. But let us not mistake cause and effect. The increase in commodity prices all over the world ever since early 2009 is the result of simultaneous central bank policies. The Federal Reserve System and other large central banks began inflating in late 2008 to reverse the banking panic by large depositors, not small depositors, who were covered by FDIC rules.

That commodity prices could continue to rise in expectation of a QE2-generated recovery later this year is quite possible. It depends on what entrepreneurs expect commercial bankers to do. Will bankers lend? If so, the M1 supply will rise, and so will the M1 multiplier. That will force up prices. But QE2 may fail to persuade commercial bankers to lend. Then the FED will be pushing on a string.
My point is this: you should pay no attention to anyone who tells you that the rise in food prices has been the result of recent Federal Reserve policies. Commodity prices rose in 2010 despite a policy of monetary deflation by the FED. This is rarely discussed by financial commentators.

 Much of what the Federal Reserve does when implementing such measures of QEII is to influence the market with a kind-of false sense of prosperity.  Hence the stock market rise when QEII was announced and before it was actually implemented.  Entrepreneurs and investors are expecting higher profits on consumer goods due to what they see as coming inflation and increased demand.  In North's words, they begin to bid-up their final price when they make their initial investment in capital goods.  Consumers as a whole will eventually get their hands on the bank's enormous amount of excess reserves and will begin to spend it.  This happens at different levels because money reaches people at different times.  The banks that receive the newly-printed dollars (in modern day terms it is just an electronic adjustment to their balance sheet) are the first to profit while those who don't have easy access to credit and get the money last are given a raw deal because inflation has already happened.  Henry Hazlitt explained this cycle over 50 years ago in Economics in One Lesson.

When it comes to rising food prices, the Fed is not directly responsible but rather it is the China Central Bank and its money-printing induced boom.  Like North said, people are moving out of poverty in China at an extraordinary rate and speculators are bidding up the price of food as more Chinese are able to afford higher quantities of it.  At the same time, China's easy-credit policies are leading to a huge bust, especially in real estate, if the Central Bank does not start clamping down on it.  It has already started to do so by increasing banking reserve requirements a few times in the past month or so, but time will tell if China's government and Central Bank are really in control of it's booming economy.  The official inflation rate in the country was 5% last year, but "official" in terms of what the Chinese government lets on is usually a red flag.  Other reports have said it was at least 10%.  Inflation of 10% sounds likes one of Krugman's wet dreams to me.

Cool Chart and Interactive Map of Housing Price Drops

Courtesy of Mish:

Powered by Tableau

Krugman Gets It Right and the Importance of Speeches

Krugman today on the Gov. Walker's proposition:

And then there’s this: “Notwithstanding ss. 13.48 (14) (am) and 16.705 (1), the department may sell any state-owned heating, cooling, and power plant or may contract with a private entity for the operation of any such plant, with or without solicitation of bids, for any amount that the department determines to be in the best interest of the state. Notwithstanding ss. 196.49 and 196.80, no approval or certification of the public service commission is necessary for a public utility to purchase, or contract for the operation of, such a plant, and any such purchase is considered to be in the public interest and to comply with the criteria for certification of a project under s. 196.49 (3) (b).”

We can all guess who will get the no-bid contract.

While most political speeches are as entertaining as watching wet paint dry (probably less so), some can have a real impact.  Peggy Noonan explains:

Look what happened a year ago to a Wisconsin businessman named Ron Johnson. He was thinking of running for the Senate against an incumbent, Democratic heavy-hitter Russ Feingold. He started making speeches talking about his conception of freedom. They were serious, sober, and not sound-bitey at all. A conservative radio host named Charlie Sykes got hold of a speech Mr. Johnson gave at a Lincoln Day dinner in Oshkosh. He liked it and read it aloud on his show for 20 minutes. A speech! The audience listened and loved it. A man called in and said, “Yes, yes, yes!” Another said, “I have to agree with everything that guy said.” Mr. Johnson decided to run because of that reaction, and in November he won. This week he said, “The reason I’m a U.S. senator is because Charlie Sykes did that.” But the reason Mr. Sykes did it is that Mr. Johnson made a serious speech.

Did You know that China no longer is the major owner of U.S. debt? Let's take a look at the Fed balance sheet:

Instead of owing the majority of government debt to a foreign country we now owe it to......ourselves?  Oh well, it's not like the Fed monetizes our debt or anything...
Just wait till the Fed starts pushing the banks to buy municipal bonds to mask it monetizing their debt as well.

New Slate and Press and Journal Article

Making Political Sense: Harrisburg Mayor Needs an Economist

By: James Miller

Published 02/22/2011

Within the past year, Harrisburg Mayor Linda Thompson’s administration has been plagued with a number of resignations.

These resignations, including recent Communications Director Chuck Ardo and City Solicitor Phil Harper, have occurred due to the perceived incompetence of Thompson in dealing with the city’s financial problems.

Behind the scenes derogatory remarks plus an investigation by the Security and Exchange Commission are not helping her image either.

Though Harrisburg’s fiscal situation is dire, there are many solutions which the mayor could choose from. Declaring bankruptcy or an outright default would be a start.

Sure, default would be disastrous but it would only result in short-term pain and would set the stage for Harrisburg to renegotiate its labor contracts and get the city back on a more sustainable track.

Unfortunately, Thompson has dismissed this option, but she may not have a choice if things do not start turning around soon.

It is no secret that Harrisburg’s $1 billion debt crisis is a national laughingstock. While states and cities across the country are facing massive deficits, Harrisburg is often listed as one of the worst.

With some Harrisburg businesses struggling to stay open due to a decrease in sales, a tax on those who work within the city should seem like a short-sighted idea.

So it should come as no surprise that a call for a commuter tax is precisely the kind of thing Thompson would ask for.

The current tax on those who work in Harrisburg is $52. Some, such as “The Patriot News,” have called to increase it by as much as $8.

What Thompson and others do not seem to realize is that increasing a tax by $8 dollars a year, though seemingly small at first glance, is a tax on businesses within Harrisburg that could potentially receive the taxed away income.

Taking away $8 from one Harrisburg worker takes it away from such businesses as Neato Burrito or Molly Brandigans. Even if the money is not spent in Harrisburg, it is often spent on other companies somewhere in the state.

It can also be used to supplement the savings accounts of Pennsylvanians which could in turn be lent out by banks to aspiring entrepreneurs or others wishing to purchase a car or home.

Either way, a tax on Harrisburg workers ends up being a tax on Pennsylvania as a whole.

Therefore, Thompson must hire a competent economic advisor that can inform her of such unintended consequences that are a result of raising taxes.

If Thompson was serious about rejuvenating the economic activity of Harrisburg, she would embrace pro-competitive and growth initiatives such as ending the parking monopoly the Harrisburg Parking Authority has on the city.

As of right now, if someone who owns a parking lot in Harrisburg, they are barred from using it as a commercial parking lot.

Getting rid of restrictions to entry in the parking business would promote competition and cheaper prices, as an increase in land owners are able to use their property to provide in-demand parking to an already congested city.

This would have to correlate with a selling off of the city-run parking garages of course.

The initial sell-off would mean a fall in revenue initially, but could be made up by more and more commuters coming to the city who are able to spend the money saved on businesses within Harrisburg.

The implementation of a commuter tax is the act of choosing a short-term gain on the back of long-term prosperity.

After a number of high profile resignations, the Thompson administration desperately needs to hire someone who can restore fiscal sanity to Harrisburg fast.

Cleaning up her language and an investigation from the same agency that missed the likes of Bernie Madoff, Enron and the 2008 financial crisis are just mild nuisances compared to running the capital of Pennsylvania.

Financial solvency cannot be solved through tax raises themselves. They are a trade off of removing money that could be spent within the city for the sake of continuing an already unsustainable public sector.

The sooner Thompson and other like-minded politicians realize this, the better the city, the state and the country as a whole will be.

------------------------------------------------------------------------------------------------

O, brave new world of the Web

by James Miller

“Congress shall make no law‚ abridging the freedom of speech.”

As everyone should know, this is the direct language from the first, and arguably most important, amendment of the U.S. Constitution.

What contains just 10 simple words lays the foundation that is absolutely necessary for a prosperous and content society.

Without the ability to dissent one’s own government without fear of retaliation, social and economic progress becomes stifled. Once the brakes are put on economic progress, so too are the brakes put on improving our lives.

Nowhere is that more evident than Egypt. What began with a man in Tunisia setting himself on fire in protest of the police seizing his vegetable cart literally snowballed into a movement to topple a 30-year tyrant propped up by our own foreign policy and tax dollars.

Faced with losing the powerful position he occupied for the past three decades, Honsi Mubarak did what any tyrant does when they are desperate to maintain their control: He shut down the people’s means of communication. In this case, it was the Internet and social media giants Facebook and Twitter.

By being able to communicate and organize instantaneously at little cost, the mass mobilization of people is just a mouse click away. Fifteen years ago, this would be inconceivable. From the brain of a socially awkward Harvard student came a new tool in fighting oppression. And from the idea of providing a service for anyone to communicate instantly to a small group rose a network that can relay messages to the almost 7 billion people of the world.

 Any government that strives for ultimate control of information must now deal with these two juggernauts.
Mubarak tried, and though he was successful initially, he ultimately failed due to a number of groups outside Egypt who provided Internet access outside the government’s control. Mubarak may have thought he had some control inside Egypt, but outside the country is another story.

With the whole world watching how the Internet revolution can bring a long established tyrant to his knees, how does a country founded on a limited role of government react? By introducing legislation to allow the president to essentially “kill” the Internet in a time of emergency, of course!

There is a bill before Congress that was introduced by senators Joe Lieberman and Susan Collins that grants the executive branch the power to shut down the Internet in a time of emergency or cyber attack.

Senators Jay Rockefeller and Olympia Snow have also introduced bills that would have the same effect.

While President Obama condemned Mubarak for shutting down the Internet, those in Congress are attempting to give him the same power. So much for showing support for the oppressed.

With the rise of the Internet has come a standard of living that no one would ever dream of giving up. The rapid flow of news has brought what was once considered a rather large world even closer together.

With more information comes a more educated population. Relatives can now speak to each other halfway across the globe. And a 23-year-old can now organize with people to protest what he or she sees as an illegitimate government.

With that being said, it should not be surprising that those in control fear the freedom of information and expression.
It begets the rise of decentralization to a structure built on accumulating power.

Lord Acton famously proclaimed, “Power tends to corrupt, and absolute power corrupts absolutely.” The people of Egypt realized this and forced change. Let us hope that the American people continue to realize this and put a stop to our federal government’s never-ending appetite for control.

James Miller is a public administration major at Shippensburg University and a 2006 graduate of Middletown Area High School.

Shostak invokes Hazlitt

Frank Shostack invokes Henry Hazlitt in his Mises Daily today:

Increases in the money supply set in motion an exchange of nothing for something. They divert real funding away from wealth generators toward the holders of the newly created money. This, not price rises as such, is what sets in motion the misallocation of resources. Moreover, the beneficiaries of the newly created money — i.e., money created "out of thin air" — are always the first recipients of money, who can divert a greater portion of wealth to themselves. Obviously, those who either don't receive any of the newly created money or get it last will find that what is left for them is a diminished portion of the real pool of funding.

Furthermore, real incomes fall, not because of general rises in prices, but because of increases in money supply; in other words, inflation depletes the real pool of funding, thereby undermining the production of real wealth — i.e., lowering real incomes. General increases in prices, which follow increases in money supply, only point to the erosion of money's purchasing power — although general rises in prices by themselves do not undermine the formation of real wealth as such.

When money is injected into the economy, it never affects the prices of goods instantly. Because money moves from one market to another market there is a time lag. We have estimated that in the United States it takes about 36 months before changes in money supply generate a visible effect on the prices of goods in general. It must be emphasized that the lags are variable, i.e., in some periods the time lag could be less than 36 months, in some other times it could be more than 36 months.

Hazlitt made the same argument in Economics in One Lesson, but it is good of Shostack to bring it up when the prospect of inflation is just over the horizon.

Did You Know that the military has been using psy-ops on influential senators?

Rolling Stone reports:

The orders came from the command of Lt. Gen. William Caldwell, a three-star general in charge of training Afghan troops – the linchpin of U.S. strategy in the war. Over a four-month period last year, a military cell devoted to what is known as "information operations" at Camp Eggers in Kabul was repeatedly pressured to target visiting senators and other VIPs who met with Caldwell. When the unit resisted the order, arguing that it violated U.S. laws prohibiting the use of propaganda against American citizens, it was subjected to a campaign of retaliation.

Those singled out in the campaign, according to RS, included senators John McCain, Joe Lieberman, Jack Reed, Al Franken and Carl Levin; Rep. Steve Israel of the House Appropriations Committee; Adm. Mike Mullen of the Joint Chiefs of Staff; the Czech ambassador to Afghanistan; the German interior minister, and a host of influential think-tank analysts.

And the military industrial complex continues....

If you thought that was bad check this out from Zerohedge:

Socialism Gone Apeshit: Obama Wants To Use Proceeds From $20 Billion Fraudclosure Settlement To Reduce Underwater Mortgages

According to the WSJ: "The Obama administration is trying to push through a settlement over mortgage-servicing breakdowns that could force America's largest banks to pay for reductions in loan principal worth billions of dollars…

Under the administration's proposed settlement, banks would have to bear the cost of all writedowns rather than passing them on to other investors.

And the worst case: the 10 million or whatever underwater mortgages will get an average reduction of $2000 each.

Nothing like buying votes on the backs of the big banks that funded his election to begin with.  And Obama said he was above politics.

I will end on a more humorous note.  From the always hilarious James Altucher:

I was standing right next to Steve Jobs in 1989 and it was the closest thing I ever felt to being gay. The guy was incredibly wealthy, good looking enough to get any girl, a nerd super-rockstar who had just convinced my school to buy a bunch of NeXT machines (which, btw, were in fact the best machines to program on at the time) and I just wanted to be him.

Limited Liabitily in Laissez-Faire Capitalism?

Check out this interesting convo from CafeHayek:

• GeorgeNYC 19 hours ago

  When you guys become true libertarians and start voicing objection to the government subsidization of capital through limited liability corporations I will probably at least consider you to be intellectually consistent. However, most of what I see coming from this site is simple right wing union busting. Corporations are subsidized because they are limited in their liability to the capital that is invested. Originally that was because that would encourage investment in major capital projects. There is absolutely NOTHING in economic theory that in any way requires corporations. In fact, almost by definition, corporations create externalities because there is not incentive to act in ways that increase liability beyond the original capital investment. Such liabilities are by definition and by design not accounted for because you cannot recover those costs from any of the investors.
  
  To say that capital has the right to "incorporate" but labor does not is completely inconsistent. Neither should have that right.
  
  But I am sure supporting right wing ideology and corporate oligarchy pays the bills for you guys.

  
  
• 

  jjoxman 19 hours ago in reply to GeorgeNYC

  I'm going to give you some concepts and authors to look into, as to why limited liability is critical: entrepreneurship; R. Coase and O. Williamson; risk-sharing; capital requirements.
  
  Capital doesn't incorporate - people do. You clearly need to spend more time looking into economic theory before telling us what it does or does not say.

• Seth 17 hours ago in reply to GeorgeNYC

  'To say that capital has the right to "incorporate" but labor does not is completely inconsistent. Neither should have that right.'
  
  Who said that? I see no reason to forbid labor from incorporating. That's consistent with liberty.
  
  I don't think it's productive to let unions or corporations use government to force people to do things they don't want to do.

  
  

• vikingvista 9 hours ago in reply to GeorgeNYC

  The free market position on limited liability is complicated by the fact that liability is dominated by non-free market institutions. 

  • GeorgeNYC 19 hours ago

    Agree. That I was perhaps a bit hasty.But the point is that there are questions about corporate power as well as union power. I do not necessarily agree that either of the two economists mentioned above viewed "limited liability" as essential to their economics. Also, it is true that limited liability "encourages" entrepreneurship. But that is usually the justification for any government subsidy that it "encourages" something. The question is whether it is a requisite for the a free market? I think the answer is no because there are obviously markets that exist without limited liability corporations. In fact, I would think that the fact that there is government involvement with corporations would make them suspect.
    
    We are also not talking about economic utopias here but rather flesh and blood markets. Just because in a perfect world unions should not exist does not mean that in the imperfect word that we live in they do not serve a corrective function on the market.

    
    

  • John V 19 hours ago in reply to GeorgeNYC

    I have spent some time in the past reading the likes Roderick Long and Kevin Carson and others of the libertarian left who oppose "the corporation". Henry George and Konkin are others with interesting and thoughful things to say. I find all their points interesting from a clean slate but, in the end, I don't think it's practical...whether the idea is for mutualism, agorism or whatever "ism" of an anarchic nature. It's not going to happen. We live in the world we live in. And nobody ever said corps and LLCs are requites for a free market. They are simply state-created entities as a matter of law to shield personal assets from business assets and facilitate risk taking. I see nothing wrong with that and libertarian "purity" doesn't affect my opinion. OTOH, I'm not that wedded to the idea either. But, like I said, it's going anywhere so why argue about it? And what's altenative? All self-proprietorships where a shop owner can lose his home because some slips on his sidewalk or in the store and sues him personally?
    
    BTW, I'm not quite sure what you mean by "subsidized". If this is the argument that WalMart benefits from state-funded roads to prosper then you are getting into a murky pedantic topic that will never end....nor amount to anything. If you talking about tax-related matters such as write-offs or something else entirely, then I'd be happy to hear about it and have you explain it. But keep in mind that what amny unions are able to do with state power is far more beyond the limits of any "libertarian betrayal" of "The Corporation".

  • GeorgeNYC 18 hours ago in reply to John V

    A "subsidy" does not need to be in the form of a payment. It can also be, as you say a "shield" of "personal assets" to "facilitate" something. For example, I may have a business idea that could work to improve automobile transportation. Imagine that I can invest in a some form of factory that might make cars more efficiently but could also result, once every 20 years or so, in some form of environmental disaster that could cause billions of dollars in losses. I stress the "might" because it might also simply keep running without such a disaster. Now, if the disaster does not happen, we all make lots of money. if it does, the corporation is wiped out but not us individually. Absent the corporation we would have the added risk of putting all of our fortunes at risk. If that were the case we might consider whether the risk was actually worth it. But with the "shield" we have no such compunction. That to me is a much a subsidy as the government saying, "if there is a disaster we will pay you..." I guess you could say that there is not really a "subsidy" because the costs are spread amongst the victims rather than amongst the investors or paid for buy the state, However, would those costs, in the end represent a tax at least?

    
    

  • John V 18 hours ago in reply to GeorgeNYC

    "A "subsidy" does not need to be in the form of a payment. It can also be, as you say a "shield" of "personal assets" to "facilitate" something."

    
    That's not a "subsidy". That's simply a mechanism to separate one's personal self from one's business self. In your example that follows, you seem to have a problem with that. Why? What's the issue exactly? The person still incurs a heavy loss in the event of disaster or failure.. Your simplifying things too much. Besides, if environmental law were less socialized and more put on the backs of people through private property based law, you achieve the same deterrent.

    
    

     This is a tough one.  The arguments for LLC is that it makes forming a corporation and being successful easier, but the same case can be made for IP laws.  I suppose consolidating corporations can be consistent with liberty and would need to be upheld by contractual law by those who form it and by those who buy stock in the company.  As long as shareholders are aware that they are not entitled to the personal assets of those who formed the corporation but just the assets of the corporation itself, I see no problem with it.  I know it sounds like a cop-out but the market always finds a way to make things like this work.

Why Reserve Requirements Fail and Union Economics

Just a quick post tonight, it has been a long day.  John Tamny explains why reserve requirements fail in a global economy in his RealClearMarkets column today:

As Margaret Thatcher's Chancellor of the Exchequer Nigel Lawson noted in his autobiography, The View From No. 11, despite reserve requirements in the late ‘70s meant to hold down lending, "If mandatory reserves exceeded the amount that banks wanted to hold voluntarily", they would simply "redirect the lending via offshore subsidiaries" beyond the purview of UK regulators. Much the same, if lending limits at London banks were troublesome, those same London banks would allow their Paris branches to bid on their reserves after which bank branches in Paris would lend pounds to UK residents.

Though England is an island, the market for British pounds isn't isolated to the island, so any attempt by UK authorities to "tighten" access to pounds was made up for in non-British markets for the same currency.

 Gary North explains The Economics of Trade Unions:

1. Members assert the moral authority and legal right to use violence against any person who offers to work for less than the union is demanding. Usually, this violence is hidden: the government's threat of fines against employers who hire non-union members, but not always: violence against "scabs."
2. Members assert that if they get a majority vote in favor of this legalized violence in one company election, they should continue to exercise it forever.
3. The union decides who gets membership. It reserves the right to exclude people. This restricts the labor market, thereby raising wages for members.
4. The members assert a legal right to "their" jobs in a strike. After the strike, they must be re-hired by law. All people hired in the interim must be fired.
5. The unions claim to represent "labor," but at all times the vast majority of laborers are not members.
6. Legislation favoring union members discriminates against the vast majority of Americans, who do not belong to unions.
7. The goal of all trade unionism is to raise costs of production.
8. The economic effect of higher costs is reduced output.
9. The economic effect of reduced output is the reduction of wealth for most customers.
10. Excluded workers must seek employment with firms that were their second-choice.
11. This subsidizes firms that are not unionized: a larger supply of labor at a reduced price.

Then there is the economics of trade unionism within civil government. All of the previous applications of the law of supply and demand apply. There are some new twists, as in twisted arms.

1. Inside a geographical area, a civil government exercises a monopoly or near-monopoly.
2. Citizens cannot seek alternative sources of supply.
3. The union exercises clout at election time: a concentrated focus.
4. The government comes to voters in the name of necessity.
5. The government union works under the umbrella of this government claim of necessity.

With this as background, consider the economics of government officials when dealing with trade unions.

1. Governments for 70 years have promised higher retirement benefits rather than offering immediate pay raises.
2. Elected officials run up the bills for future elected officials.
3. Union leaders go along with this, since they can claim easy victories.
4. Union members actually believe that they will receive these enormous retirement and health insurance benefits.
5. They vote for politicians who make these promises on behalf of future politicians.
6. Politicians seek these votes.
7. The general public until 2009 has ignored these promises, believing that future taxpayers would pay them.
8. The combination of focused beneficiaries (union members) and unfocused victims (present taxpayers who will live long enough to become future taxpayers) has led to enormous state and local public debts – debts that cannot be paid and so will not be paid.

 Did You Know that Rahm Emanuel is apparently for free trade?  After his decisive victory in being elected Mayor of Chicago, Mish lays out a few quotes of Emanuel's supposed free trade stance:

His White House role in helping President Bill Clinton win passage of the North American Free Trade Agreement and comments he made about unions as President Barack Obama’s chief of staff left lingering resentment.
‘Shared Sacrifice’

In his campaign, the former Chicago congressman had called for “shared sacrifice” by public workers as the city seeks to address deficits

While NAFTA isn't exactly free trade, it is nice to see a Chicago Democrat rejecting unions constant push for protections such as tariffs.  Here is Emanuel's best quote:

A book about the Obama White House by Steven Ratner, Overhaul, even quoted Emanuel as saying, "**** the UAW," when the president was discussion the autoworker's union in a cabinet meeting.

**** the UAW indeed.

Sideshow of Hypocrisy On the Right and Left

And now for our first act, the Pulitzer Prize winning Eugene Robinson of The Washington Post.  After urging the U.S. to support the protests in Egypt for Democracy a few weeks ago, he urges the Democratic Senators opposed to Gov. Walker's union-busting in Wisoncsion that left the state to stay where they are in order stall the democratic process Wisconsins opted for at the ballot box last November.  From his column today:

Democratic state senators who fled the state to forestall Walker's coup have no choice but to remain on the lam. 

I guess Democracy is only good when it promotes what Mr. Robinson desires.

For our next act, we have Mississippi Gov. Haley Barbour who, being the goody-two shoes free-market promoting conservative he is, refused to say he would get rid of farm subsidies.
Remember, Barbour needs all the Iowa primary votes he can get come next year:

When sales volumes are good, prices are reasonable, there shouldn’t be any farm subsidies. But for natural reasons, nature, or what other countries are doing in terms of how they’re handling their markets, sometimes it is appropriate to have farm subsidies.

As far as Barbour promoting free market capitalism, I will quote the great Judge Judy, "Don't Pee On My Leg and Tell Me it's Raining."

Now for Did You Know?

Did You Know that you can track the protests and riots in the Middle East live at the Al Jazeera blog? Just go to the live blog segment. I particularly like this photo:

According to Zerohedge, Time Magazine's Intelligence columnist:

reported on Tuesday that Libyan leader Muammar Gaddafi has ordered his security forces to sabotage the country's oil facilities, citing a source close to the government. In a column posted on Time's website, Robert Baer said the sabotage would begin by blowing up pipelines to the Mediterranean. However he added that the same source had also told him two weeks ago that unrest in neighboring countries would never spread to Libya -- an assertion that has turned out to be wrong."

I will end with some passages from two Mises Daily articles today, first is one of the best Mises quotes on the study of human action he founded, praxeology:

Choosing determines all human decisions. In making his choice man chooses not only between various material things and services. All human values are offered for option. All ends and all means, both material and ideal issues, the sublime and the base, the noble and the ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another. Nothing that men aim at or want to avoid remains outside of this arrangement into a unique scale of gradation and preference. The modern theory of value widens the scientific horizon and enlarges the field of economic studies. Out of the political economy of the classical school emerges the general theory of human action, praxeology.

And Rothbard on early colonial America's currency system:

In the sparsely settled American colonies, money, as it always does, arose in the market as a useful and scarce commodity and began to serve as a general medium of exchange. Thus, beaver fur and wampum were used as money in the north for exchanges with the Indians, and fish and corn also served as money. Rice was used as money in South Carolina, and the most widespread use of commodity money was tobacco, which served as money in Virginia. The pound-of-tobacco was the currency unit in Virginia, with warehouse receipts in tobacco circulating as money backed 100 percent by the tobacco in the warehouse.

While commodity money continued to serve satisfactorily in rural areas, as the colonial economy grew, Americans imported gold and silver coins to serve as monetary media in urban centers and in foreign trade. English coins were imported, but so too were gold and silver coins from other European countries. Among the gold coins circulating in America were the French guinea, the Portuguese "joe," the Spanish doubloon, and Brazilian coins, while silver coins included French crowns and livres.

I also highly recommend Robert P. Murphy's Mises Daily which takes on Brad Delong and Steve Malanga's account on union campaign funding.  I can't wait to see Delong's response.  I have already had my run-in with Delong before, hopefully he has some more cowardly insults for Murphy.

So We Have Been Living Under a Royal Bloodline....

Geni.com is out today with a genealogy of George Washington and how every president, with the exception of Gerald Ford who's genealogy has not been added yet, since has been related to him in some sort of manner.  Apparently Barack Obama is Washington's 9th cousin 6 times removed.  Who'd a thought?

Speaking of monarchy, about a month ago the Federal Reserve announced some new accounting procedure that would supposedly make its finances more "transparent."  The use of the word transparent by the Fed should be regarded as an instant red flag.  At the time, many were reporting that this new accounting trick would make it virtually impossible for the Fed to become insolvent from an accounting point of view.

Today on Mises Daily, Robert P. Murphy lays out in simple terms exactly what the Fed can do now to avoid insolvency:

Prior to the announcement, the immediate move would be to mark up an increase on the "Assets" side with a corresponding credit to the "Capital" (or "Shareholder Equity") items on the right-hand side. But now, the Fed is saying that when its assets appreciate, it won't credit the capital accounts. Instead, it will make the right-hand side of the balance sheet go up by entering a new liability, titled (paraphrasing) "Earnings We Need to Send to the Treasury."

...the real fun happens when the Fed suffers losses on its assets. In normal accounting, when the market value of a company's assets goes down, the firm marks down its "Assets" (left-hand side of the balance sheet) and correspondingly marks down its "Capital" by the same amount (right-hand side of the balance sheet).

The danger is that if a firm loses too much, then it might wipe out all of its capital. At that point, the firm would be insolvent, because its remaining "Assets" would be smaller than its "Liabilities." Remember the basic accounting truism:

Assets = Liabilities + Capital (or Equity)

If the company suffers such large losses that its "Capital" (or "Equity") becomes negative, that is simply another way of saying that the company owes people more money (i.e., its liabilities) than it has in assets. That is the definition of insolvency, and unless the situation is rectified the firm will eventually default on its obligations and go bankrupt.

Fortunately, from the Fed's viewpoint, this tragic outcome is no longer possible for the US central bank. No matter how big the hit to its assets, the Fed will never be insolvent from an accounting standpoint. Even if the Fed's bond portfolio lost $1 trillion in an afternoon, the Fed would be fine: It would mark down its "Assets" by $1 trillion, and under its "Liabilities" it would list "negative $1 trillion owed to the Treasury." Thus the left- and right-hand sides of the balance sheet would still balance, and "Assets" would still exceed "Liabilities."

Kudos to Murphy for putting this new scheme into simple terms.  For those of us who's accounting background amounts to a 200 level college course, deciphering the Fed's ambiguous language is necessary to keep them in check.

Since I am on the subject of the Fed, James Hamilton has a decent article out today in Fortune laying out how the Fed doesn't really print money anymore, but just electronically adjusts bank's balance sheet.  This obviously isn't new, but Hamilton shows that banks earning interest on these reserves from the Fed is a phenomena that developed in 2008:

Prior to 2008, a bank could earn no interest on reserves, and could get some extra revenue by investing any excess reserves, for example, by lending the reserves overnight to another bank on the federal funds market. In that system, most banks would be actively monitoring reserve inflows and outflows in order to maximize profits. The overall level of excess reserves at the end of each day was pretty small (a tiny sliver in the above diagram), since nobody wanted to be stuck with idle reserves at the end of the day. When the Fed created new reserves in that system, the result was a series of new interbank transactions that eventually ended in the reserves being withdrawn as currency.

All that changed dramatically in the fall of 2008, because (1) the Fed started paying interest on excess reserves, and (2) banks earned practically no interest on safe overnight loans. In the current system, new reserves that the Fed creates just sit there on banks' accounts with the Fed. None of these banks have the slightest desire to make cash withdrawals from these accounts, and the Fed has no intention whatever of trying to print the dollar bills associated with these huge balances in deposits with the Fed.

So basically in late 2008, the Fed propped up insolvent banks by loading their balance sheets with excess reserves.  In order to prevent the banks from lending out these reserves and causing mass inflation, the Fed now pays interest on them in order for banks to make money by holding on to them and not loaning them out into the money supply.  Hence the trillions of dollars that banks are holding on to, much to the dismay of politicians.  If only they understood the inflationary implications of letting about $2 trillion (I constantly hear that is what it is, so it may be different) flood into the economy by massive lending.

Thomas E. Woods Jr. and a Modern Day Charles Bukowski?

Check out this interview of Thomas E. Woods by Dennis Miller.  While I am a big fan of Woods, I was hesitant to see how he would be treated by a Neo-Con like Miller.  Don't get me wrong, I think Miller is hilarious but his never-ending devotion to the military and an imperialistic foreign policy borders on pathetic.  Nonetheless, the interview goes very well and Woods does a great job and actually garners a lot of praise from Miller in the end.

After seeing many glowing reviews, I decided to purchase Woods' new book Rollback

Since I bought it from the Mises Institute, I also picked up another bumper sticker for the car:

Anyway, I think I found a kind-of modern day equivalent of Charles Bukowski.  Check out James Altucher. The dude has been an investor for the past fifteen years and appears to have lived a very interesting life.  Much of his writing has shades of Bukowski's story telling style.  Sure he isn't drinking 24/7 and having promiscuous sex with anyone who lacks genitalia, but his life is just as fascinating.

Check out: How I Screwed Yasser Arafat out of $2mm (and lost $100mm in the process)
and How to Succeed in LA Without Really Trying

Hillary Clinton Sinks to a New Low

David Henderson from EconLog lays it out:

On Tuesday, Secretary of State Hillary Clinton gave a speech at George Washington University in which she criticized foreign governments for cracking down on freedom of speech. In her audience was a retired CIA official, Ray McGovern, who quietly turned his back on her in protest of her pro-war actions. He didn't disrupt her speech. Right while Clinton was touting free speech and look at the back of the small room and could, presumably, see McGovern, goons roughed up McGovern and hauled him away. Did Hillary Clinton protest? No. She didn't even miss a beat. Nor, sadly, did anyone in her audience speak out.

Unbelievable...I guess free speech only matters when your enemies aren't practicing it.  And you wonder why others around the world consider our so-called "freedom" a joke.  I can't believe an ex-CIA guy did this though.

Update- I just saw on a re-airing of the O'Reilly Factor where Bill made a bet with John Stossel for a $1,000 that Ron Paul would not win a primary if he runs for president.  I am not sure who will win, but the fact that they are making bets about it shows that the Dr. is getting more and more mainstream media attention.  I obviously hope Stossel wins.

An Oldie But Goodie and One World Government

I figure I would put this classic video up.  If you don't get why the Federal Reserve and a centrally dictated monetary policy is so destructive for an economy, this explains everything.

And now for Did You Know?

Did you know that the Daily Show's Earth-The Book is absolutely phenomenal.

If you don't know, the book is a parody of a public school text book.  Earth is set up like a text book for visiting aliens that explains the highlights the different aspects of the human race.  After each chapter, there are  number of questions that are labeled FAQs (Future Alien Questions)

One if the better questions at the end of the chapter on Society:

Q. If ridding the Earth of war and strife was a goal, why wasn't the entire globe under a single government?
A. Good question, fascist.


A good question indeed.  Despite the paranoid ramblings of the New World Order type, it is practically impossible for a one world government to ensure peace or even be a sustainable body.  Just like the impossibility of a company obtaining the knowledge coordinate all market activities on a global level to become a monopoly producer of one good, a government attempting to do the same would face the same dilemma.  The world is just too large for a one world government to be in constant control and to ensure peace.  In order to do so would require the hiring of such a massive group of individuals to run the government that it would undermine the ability for private enterprise to exist.  The amount of capital sucked out of the private sector to pay for the enormous public sector would be a return to the days of Kings and serfs.  If done on a global scale, pockets of rebellion would be sure to rise and lead to the one world government's destruction.

One world government is simply unsustainable and fails for the same reason government planning of the economy is a disaster when done on a national scale.  Hayek's and Mises's information problem of bureaucracy being unable to coordinate a proper pricing system that operates under a simple supply and demand mechanism is the reason why socialism never works.  It is the same reason why one world government will not work in the long run.  The overhead costs end up overwhelming its efficiency.

Since I am on the subject of O.W.G., Earth does a great job of highlighting why the EU is such a joke in its money section:

The Euro was a transnational currency meant to test how small a nation could be and still drag an entire prosperous continent into economic collapse.

It's eerie how true that statement is unfolding in front of everyone right now.

A Refute of Libertarian's Using Government Programs

Think Libertarians are hypocrites for using government services and programs such as Medicare and Social Security?  Walter Block's article today lays out precisely why the recent revelation of Ayn Rand collecting Social Security and Medicare and subsequent criticism by those on the left has no rational basis:

The critics entirely misunderstand the Randian philosophy. Suppose Ragnar Danneskjold (my favorite character in Atlas) breaks into the illegitimate government’s coffers, liberates (it is logically impossible to steal from an illicit state) some treasure, and turns it over to Hank Rearden. Is that a just act? Of course. Indeed, it is one of the high points of Atlas, a book which, I assume, has never been read and understood by her present critics. But the act of liberation and then transfer to Rearden consists of two parts. One, seizing the money from the government, and, two, subsequently giving it to Rearden. If the entire act is to be legitimate, then each of the two constituent parts of it must be proper. Two wrongs cannot make a right. Thus, in Rand’s view, it is entirely proper to relieve the (illegitimate) government of its ill-gotten gains (the first part of this dual act). Was the U.S. a legitimate laissez faire government during the years that Ayn Rand accepted payments from Social Security and Medicare? To ask this question is to answer it: of course not. Thus, it would have been entirely proper for Ragnar to raid the Social Security and Medicare offices and make off with their stolen wealth, and, then, to give the proceeds to an innocent, such as Ayn Rand. If so, where is the hypocrisy of Ayn Rand accepting payments directly from these government bureaus? It simply does not exist. Similarly, she and all other libertarians are fully justified in mailing letters with the US post office and thus accepting the implicit subsidy therein, and, also, walking on the socialist sidewalks, driving on the socialist roads, using money issued by our central bank, eating subsidized food, etc. It is improper to give money to the illicit state, not to take from these bureaucrats. Did Ayn Rand ever contribute money to the semi-socialist-fascist government? If she did, then and only then would her critics have a case. But, of course, she never came within a million miles of doing any such thing.

I have always told people that all libertarians are essentially hypocrites, but Block's rationale is hard to refute.

Speaking of rationale, check out NJ Gov. Chris Christie taking on a group of booing fire fighters in Peggy Noonan's editorial today:

As Mr. Chrisie recounted it: “You can imagine how that was received by 7,500 firefighters. As I walked into the room and was introduced. I was booed lustily. I made my way up to the stage, they booed some more. . . . So I said, ‘Come on, you can do better than that,’ and they did!”

He crumpled up his prepared remarks and threw them on the floor. He told them, “Here’s the deal: I understand you’re angry, and I understand you’re frustrated, and I understand you feel deceived and betrayed.” And, he said, they were right: “For 20 years, governors have come into this room and lied to you, promised you benefits that they had no way of paying for, making promises they knew they couldn’t keep, and just hoping that they wouldn’t be the man or women left holding the bag. I understand why you feel angry and betrayed and deceived by those people. Here’s what I don’t understand. Why are you booing the first guy who came in here and told you the truth?”

Perhaps if someone had done this in Wisconsin, then maybe things would be different now.

Today's post is just full of rational arguments, check out Charles Krauthammer's piece on the supposed deficit reducation in Obama's budget:

But there's a catch. The administration assumes economic growth levels higher than private economists and the Congressional Budget Office predict. Without this rosy scenario - using CBO growth estimates - $1.7 trillion of revenue disappears and U.S. debt increases $9 trillion over the next decade. This is almost $1 trillion every year.

Assume you buy the rosy scenario. Of what does this $1.1 trillion in deficit reduction consist? Painful cuts? Think again. It consists of $1.6 trillion in tax hikes, plus an odd $328 billion of some mysterious bipartisan funding for a transportation trust fund (gas taxes, one supposes) - for a grand total of nearly $2 trillion in new taxes.

Classic Obama debt reduction: Add $2 trillion in new taxes, then add $1 trillion in new spending and, presto, you've got $1 trillion of debt reduction. It's the same kind of mad deficit accounting in Obamacare: It reduces debt by adding $540 billion in new spending, then adding $770 billion in new taxes. Presto: $230 billion of "debt reduction." Bialystock & Bloom accounting.

What Krauthammer lacks in foreign policy (a peaceful one that is) he more than makes up for in economics.

Now for a new part of MGD that I think will become a daily part of the posts:  Did You Know?

Did You Know that Social Security takes up 53% of Japan's government spending?
Check out Mish's post to see more.  If Bernanke keeps trying to fight deflation like Japan has done for the past twenty years, it won't take long for the U.S. to reach that point.


How about some revisionist American History?  Jeff Riggenbach explains who the first Europeans that came to the United States really were:

Two main kinds of people fled Europe to live in North America in the 16th, 17th, and 18th centuries: individualists who sought freedom from the political interference they were accustomed to dealing with in Europe; and religious zealots who sought to create and maintain a puritan theocracy on these shores without interference from the selfsame European political authorities who were interfering with the individualists. Some colonists wanted a society in which no one could impose his or her creed on anyone else; other colonists wanted a society in which they could impose their own creed on everyone else.

Since it is Friday, I have to put up the Huffington Post's drunkest countries in the world! Surprisingly, the United States ranks low on the list.  You will never guess what country comes in at number 1.

Finally Putting Up a Picture of Myself and a Fascinating Debate

Yeah, I know I need a haircut and you should all know who she is.....

Anyway, check out this interesting debate from Krugman-in-Wonderland on the Australia Depression of 1893:

Bala said...

JMFC, Just thought I'll give better shape to my question since your answer is indeed important for my understanding. I am repeating below the entire Mises Wiki on the Australian Banking Crisis of 1893. "The 1893 banking crisis occurred in Australia when several of the commercial banks of the colonies within Australia collapsed. During the 1880s there was a speculative boom in the Australian property market. Australian banks were operating in a free banking system, in addition to few legal restrictions on the operation of banks, there was no central bank and no government-provided deposit guarantees. The commercial banks lent heavily, but following the asset price collapse of 1888, companies that had borrowed money started to declare bankruptcy. The full banking crisis became apparent when the Federal Bank failed on 30 January 1893. By 17 May, 11 commercial banks had suspended trading." My main question is this - What caused the speculative boom of the 1880's? Could a massive inflow of British capital have caused it? Did it? If so, can we say that even though Australia was under free-banking, the Central Bank+FRB system of Great Britain created the speculative boom in Australia in the 1880's? I just hope you answer this because LK has been talking of the Australian Crisis of 1893 for quite some time as a refutation of ABCT. I would like to see someone of your knowledge and understanding answer this question.

Tel said...

With regards to 19th century Australian free banking, there's a number of critical points. Most significantly, Australia was a penal colony at the time and so a large percentage of the population were either prisoners or soldiers. Neither of these groups of people were exactly "free" to trade or go about their regular business -- the troops were under orders and the convicts were wearing chains. That said, convicts were allowed to own money and many of them did bring small amounts of money from England. When sentenced to transportation, their loved ones generally never expected to see them again, so they gave them what they could. The Bank of New South Wales was private, but a "private" incorporation in the 19th century had a bit of a difference meaning to what it does today. Governor Macquarie issued the charter of incorporation in the name of the British Crown (although it is arguable whether he had the authority to do so, he did have loyal troops on the ground), without assent and support of the governor there would have been no Bank of New South Wales. The BoNSW did issue paper money, which circulated successfully, but paper money was already circulating in many forms in the early colony including private promissory notes, paymaster notes issued as pay to troops and Commissariat store receipts (redeemable for goods at the central government store). In addition, new convicts who brought coins from England were strongly encouraged to deposit those coins into the BoNSW (such a deposit was in theory voluntary but was pushed by the government powers at the time, which were considerable when you were a prisoner). Beyond that, Governor Macquarie strongly disliked the trading of alcohol (rum in particular) as a local currency, and his support of the BoNSW was inspired by a morality drive and his own social engineering projects (which were not inconsiderable). When the gold rush came through, the BoNSW bought gold in exchange for paper notes, inflation was inevitable under these circumstances and of course there came a day when the gold stopped coming. Soon after the gold rush, Australia suffered strikes from workers who figured their goldrush-inflated wages should become permanent. 1893 was a bad year for banking in Australia, but 1890 had seen major maritime strike action, 1891 saw the big shearers strike and inevitably these events caused significant business losses, which cascaded into bank losses. Until there are no people, people will continue to invest in silly, unsustainable enterprises. Very true, and early Australia had a bunch of smaller private banks, many of which did go broke. However, the BoNSW was the largest and with the most support from central government, and it certainly did make a practice of issuing paper money without 100% reserve in any material commodity, right from the get-go. The BoNSW continues today under the name of Westpac and I believe it is still our biggest bank (or very close to it). I would argue that any economic system must deal with banks going broke from time to time, and support an orderly procedure for that.

Lord Keynes said...

Most significantly, Australia was a penal colony at the time and so a large percentage of the population were either prisoners or soldiers. At what time?? Certainly not in teh 1880s or 1890s. Your history of Australia is flawed: by the 1860s and 1870s 100 000s of free settlers had come to Australia, overwheling the convict population. All the states had long since ceased to be penal colonies: Transportation to the colony of New South Wales was finally officially abolished on 1 October 1850. Transportation to Tasmania ended in 1853 The last convicts to be transported to Australia arrived in Western Australia in 1868. http://en.wikipedia.org/wiki/Convicts_in_Australia When the gold rush came through, the BoNSW bought gold in exchange for paper notes, inflation was inevitable under these circumstances and of course there came a day when the gold stopped coming So asset bubbles can happen under a gold standard too? 1893 was a bad year for banking in Australia, but 1890 had seen major maritime strike action, 1891 saw the big shearers strike and inevitably these events caused significant business losses, which cascaded into bank losses. The cause of the depression of 1890s was a bursting asset bubble in property, bank runs, and debt deflation.

Bala said...

"The cause of the depression of 1890s was a bursting asset bubble in property, bank runs, and debt deflation" Incorrect. The proximate cause was a bursting asset bubble in property. That in turn caused bank runs and debt deflation. All this, however, does not answer a very fundamental question - Why did the asset bubble happen and then burst? I suspect you would say the gold rush caused it and then the cessation of the rush caused it to burst. That may be true, but that still does not answer the question completely. You still need to answer the question "What caused the gold rush?". A gold rush happens from place A to place B. It is not a "causeless" event that just happens. It is an effect of conscious human action. Gold rushes happen because of the peculiar set of conditions occurring in place A and place B. What were those peculiar conditions that occurred in Britain (the source) and Australia (the sink) at that time? Why did British capital move into Australia? This is especially important to understand if Australia did not have a Central Bank and had a relatively free-banking system (I am not yet accounting for the government intervention that Tel has spoken of). In that case, it becomes necessary to see the British and Australian economies together because it is possible that the Australian condition is an outcome of the action of British banks, Central Banks and Government. This, I suspect is part of what JMFC mentioned, not just what you replied with. That is just a small piece in the puzzle. So please explain the causes of the gold rush.

Lord Keynes never addresses what caused the initial gold rush, but it is admittedly a tough question.  I have dealt with Lord Keynes before, and though I enjoy reading opposing criticism, he (I am assuming he) does himself a disservice by only picking apart certain parts of people's arguments.  I really wish someone knew the reason behind the initial gold rush, but Bala and Tel should be praised for putting up such great arguments.  Read the whole comment thread here.  It is not just limited to the Australia Depression either, a lot of it deals with Fractional Reserve banking and how it works in a free market.  I think FRB can work in a free market as long as consumers know what they are getting into when depositing their money in a bank and agrees to let the bank do so with their funds.  This would have to be done by contractual law though.