Modern Financial/Economic/Social Policy: The Art of Theft

“Remember, the enemy has only images and illusions, behind which he hides his true motives. Destroy the image and you will break the enemy.” – Enter the Dragon (Bruce Lee movie)

Behind fancy mathematical equations and theories promoting how to get things done, the truth is ultimately the victim in these endeavors. You can’t get something for nothing, but at the same time you can’t beat something with nothing. It is my objective to at least give you the “something” that will make you think of exactly where you stand. The “something for nothing” thinking is the essence of what is taught in many universities (including the so-called prestigious ones), in particular when it comes to developing financial, economic, or social policy. Of course, this shouldn’t be surprising since “do-gooders,” “world improvers,” and other former central planners (a.k.a. technocrats) are exceedingly busy “teaching” the new generation how to run other people’s lives. In this post, however, I simply want to devote a little bit of space to a rudiment that undergirds modern social science—specifically the disciplines of finance, economics, and social policy. This rudiment is the act of theft.

Of course, they won’t call it theft. In the name of saving the planet, taking care of the elderly, or providing “free” healthcare central planners stake a claim on property that does not belong to them. In other words, they believe the story of Robin Hood is good, despite the fact that they would not agree to this behavior if done to them.

Let me give you an illustration of what I am talking about. Say, for example, you have some money in a bank. If someone were to force you by putting a gun to your head to hand over the money, clearly this would be called theft. It wouldn’t matter if the money were used for a charity or any other thing. In fact, the thief (of the Keynesian variety) could reason that since you are not spending the money, you are hurting the economy. He is going to spend it for you. I hope we are in agreement in this crucial observation: taking something from someone by force is stealing.

I am not adding to the analysis beyond what I’ve just said. I am simply pointing out the fundamental principle that it is wrong to take something for your own use that you have not worked for.

Now, let’s extend the analysis. Say, for example, a politician comes along and claims he/she wants to achieve some goal (fill in the blank). The politician needs funds, of course, to execute the goal. Where is this money coming from? “From us, the taxpayers,” you may answer. But, what about the person who does not want to hand over the money? “It doesn’t matter,” you may say, “it is for the social good.” It goes without saying, but if you don’t pay your taxes, you go to jail. And there you have the gun. In the name of your favorite charity, an individual has been forcefully required to hand over his property. Logically, this example is no different than the previous one I illustrated.

Suddenly what the person agreed what was an act of theft at the individual level, when performed by an elected politician (in the name of doing good), that wrong becomes a right. This is fundamentally why we should never be captivated by anyone doing good deeds; they can certainly be deceiving when it is done out of order.

Make no mistake, I am not advocating that good deeds are bad; rather, doing them by way of stealing, is wrong. Or like the popular saying goes, two wrongs don't make a right!

Modern financial/economic/social policy propagates this thinking and behavior. Teachers of these disciplines promote the idea that redistributing resources by way of a central committee is always and everywhere efficient. They completely eradicate the notion of property rights within the framework of equality before the law. These promoters hide behind elaborate econometric analysis and theorems, which on the surface appear sound and legitimate, but ultimately cause more damage. In other words, the “cure” of the “problems” (created by previous policies) they seek to solve is actually “poison.”

The Short View

By John Authers
Published: February 5 2010 (Financial Times)

It is almost like old times. Yesterday's global sell-off was as ugly as anything since the worst fears of the crisis began to abate last spring. The rebound that started this week has been swiftly forgotten. What happened?

There were probably two catalysts, one generated by markets, and another by data from the real world.

First, confidence in European governments' ability to repay their debts reached something of a tipping point, ushered there by a combination of the fears over Greece, a troubled auction of Portugal's debt, and mounting fears that Spain's much bigger economy appears to be in deeper trouble than either Greece's or Portugal's.

The credit default swap market suggests that such a tipping point has come.

Merrill Lynch points out that the implied default risk on Markit's index of five-year sovereign debt is now slightly higher than for comparable corporate debt - a remarkable finding.

Then came the latest news on employment in the US. Initial claims for unemployment insurance went up, against expectations. The data are noisy, and may be affected by the bad winter that much of the north-eastern US has endured.

But there were 6 per cent more new claims last month than in December. This is a great leading indicator and it is rising again. This was not in the script.

If the labour market is viewed in the old-fashioned way as a zero-sum game between labour and capital, this might be good news for share prices. But persistent high US unemployment would not be taken that way. Rather it would suggest that last year's bounce back in asset prices has not been enough to stir a lasting recovery in the world's biggest consumer.

Today's US payroll report, expected to show a small fall in joblessness, might change momentum again. But in this environment, a bad number could lead to grievous falls.

The Decade in the Markets

Several months ago, the Financial Times published an excellent graphic demonstrating the behavior of several important worldwide markets--namely global stock market indices, ten-year bond yields, central bank policy interest rates, and commodities--during the first decade of the 21st century. Far from the cry of stability that central planners aim to achieve, it is anything but that.

You will find the information in the link below.

http://www.ft.com/cms/s/0/fee44b50-ee52-11de-944c-00144feab49a.html

Zero Unemployment Is Possible

Contrary to the folklore articulated in many economic textbooks these days, it is possible to have zero unemployment in any economy. Without resorting to fancy mathematical equations or economic axioms, simply look at the world around us: how many things that need to get done. I don't have to go into details what they are, simply having an observant eye will do. In fact, as Lew Rockwell says, "read any account of economic history from the late Middle Ages through to the 19th century and try to find any evidence of the existence of unemployment. You won't find it. Why is that? Because long-term unemployment is a fixture of the modern world, created by the interventionist state. "We" try to cure it and "we" ended up doing the opposite."

Moreover, it was this unemployment anomaly which became visible during the 19th century that caused Karl Marx to write its vitriolic missive against capitalism, believing--like many do today--that it is the root of all evil. Far be that from the truth, that view is a complete misrepresentation and misunderstanding of how the free-market economy works.

Having said that, i present you an excellent article written by Mr. Lew Rockwell, who wonderfully explains the plausibility for employment to persist in any economic system.

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How to Fix the Jobs Problem
by Llewellyn H. Rockwell Jr. (January 29, 2010)

All this talk of unemployment is preposterous. Think of it. We live in a world with lots of imperfections, things that need to be done. It has always been so and always will be so. That means that there is always work to be done, and therefore, always jobs. The problem of unemployment is a problem of disconnect between those who would work and those who would hire.

What is the disconnect? It comes down to affordability. Businesses right now can't afford to hire new workers. They keep letting them go. Therefore, unemployment is high, in the double digits, approaching 17% or more. Among black men, it is 25%. Among youth, it is 30% or higher. And the problem will continue to spread so long as there are barriers to deal making between hirers and workers.

Again, it is not a lack of work to be done. It is too expensive to pay for the work to be done. So ask yourself, what are those things that prevent deals from being made?

Let me list a few barriers:

1. The high minimum wage that knocks out the first several rungs from the bottom of the ladder.
2. The high payroll tax that robs employees and employers of resources.
3. The laws that threaten firms with lawsuits should the employee be fired.
4. The laws that established myriad conditions for hiring beyond the market-based condition that matters: can he or she get the job done?
5. The unemployment subsidy in the form of phony insurance that pays people not to work .
6. The high cost of business start-ups in the form of taxes and mandates.
7. The mandated benefits that employers are forced to cough up for every new employee under certain conditions.
8. The withholding tax that prevents employers and employees from making their own deals.
9. The age restrictions that treat everyone under the age of 16 as useless.
10. The social-security and income taxes that together devour nearly half of contract income.
11. The labor-union laws that permit thugs to loot a firm and keep out workers who would love a chance to offer their wares for less.

Now, that's just a few of the interventions. But if they were eliminated today, and it would only take one act of Congress to do so, the unemployment rate would collapse very quickly. Everyone who wanted a job would get one.

Depending on the credibility of the new approach, businesses would begin hiring immediately. It would be a spectacular thing to behold. However, the new approach would have to be certain and not something to be reversed in a couple of months. No one wants to invest in employees only to have them taken away. So there could be no expiration date on the new laissez-faire approach.

What is the objection to this approach? I seriously doubt that many people would dispute that it would work to end unemployment. But many people say, oh, this won't do at all. It is not just jobs we want. It is good-paying jobs!

If that's the case, you have to understand what is being claimed here. People are saying that it is better that people be unemployed rather than exploited at low wages. If so, it all comes down to your definition of exploitation. If $10 per hour is exploitation, we should be creating even more unemployment by raising the minimum wage. We could dis-employ all but a few by raising the minimum wage to $1,000 per hour.

In a market-based labor contract, there is no exploitation. People come to agree based on their own perceptions of mutual benefit. A person who believes it is better to work for $1 an hour rather than sit at home doing nothing is free to make that contract. In fact, a person who works for a negative wage — who pays for an internship, for example — is free to make that deal too.

I propose to you, then, a definition of exploitation that comes from the writings of William H. Hutt: violence or threat of violence implied in the negotiation of anything affecting the life of a worker or employer. In that sense, the present system is exploitation. Workers are robbed of wages. Employers are robbed of profits. Poor people and young people especially are robbed of opportunity.

Read any account of economic history from the late Middle Ages through to the 19th century and try to find any evidence of the existence of unemployment. You won't find it. Why is that? Because long-term unemployment is a fixture of the modern world, created by the interventionist state. "We" try to cure it and "we" ended up doing the opposite.

So it is hard for me to take seriously all the political plans for ramping up intervention in the name of curing unemployment. There is no voluntary unemployment in a free market, because there is always work to be done in this world. It is all a matter of making the deal.

All that stands between the present awful reality and 0% unemployment is a class of social managers unwilling to admit error. How much higher does the rate need to get before we admit the error of our ways?

The Precarious State of Our Union

by Peter Schiff**

[Blogger's note: Peter Schiff is president of Euro Pacific Capital. I wanted to write a brief commentary about Mr. Obama's State of the Union speech; however, after reading Mr. Schiff's article, he explains exactly my views...enjoy!]

In this week's much anticipated State of the Union address, President Obama again demonstrated his poor understanding of the fundamental problems that confront our nation. By following the advice of the same people who helped guide our economy to the precipice of total collapse, Obama now threatens to push it over the edge.

Notwithstanding his well crafted lip service regarding future spending restraint, the essence of his current program is for more government spending and larger deficits. For all his talk about job creation, his policies will further burden those who might otherwise create those jobs with higher taxes and more regulation. While he did call for tax cuts for the middle class and offered what amounts to bailouts for those struggling to repay student loans, such cuts do nothing to promote growth in the near term and will add to the deficits in the long term.

The President spoke optimistically about the future, but in reality there is little evidence to support such an upbeat outlook. He began his speech by assuring us that the worst of the storm had passed. General Custer may have said something similar when the first wave of Indian attacks ebbed at Little Big Horn.

While Obama did have some harsh words for Wall Street (not exactly a courageous political stance), he leveled no criticism at the Federal Reserve or other government agencies that had financed and guaranteed all the ridiculous real estate speculation that precipitated the crash. And while he at least conceded that the prosperity of the last decade was based on illusions, he continued to endorse the very policies that produced the mirage in the first place.

To lead us back to brighter days, he articulated a vision of a centrally planned recovery, where clean energy and a Soviet style five-year plan to double our exports would make our economy preeminent once more. He fails to understand that the only reason our economy rose to the top in the first place is that the government left it alone.

In the words of the Spanish philosopher George Santayana, "Those who cannot learn from history are doomed to repeat it." Since our President cannot even learn from the mistakes of his immediate predecessor, to say nothing of those he made himself while in the Senate or during his first year as president, we are surely doomed to repeat them, perhaps more quickly than Santayana could have imagined.

Rather than tightening the reins on the reckless monetary policy that undermined our savings, diminished our industrial output, inflated asset bubbles, and led to reckless speculation on Wall Street and excess consumption on Main Street, we are loosing them further. Rather than repealing regulations that distort markets and create moral hazards, we are adding new ones that do more of the same. Rather than cutting government spending to reduce the burden it places on our economy, we are increasing both the amount of the spending and the size of the burden. Rather than making government smaller so that the private sector can grow, we are making government bigger and forcing the private sector to shrink. Rather than paying off our debts we are taking on even more. Rather than encouraging people to save we are enticing them to spend. Rather than creating jobs, we are merely creating unemployment benefits.

As a result, instead of seeding the soil for a real recovery we are setting the stage for a prolonged depression.

The Size and Power of the State (The Economist)

The eminent scholar Jacquez Barzun, in his masterpiece, From Dawn to Decadence, stated we live in an age of absurdity; that is, an age where the attitudes and behaviors exuded by society contradict the visible activities prevalent and commonly accepted. This would be a form of cogitative dissonance on a massive scale. I like the definition of the word “absurd” given by the Merriam-Webster dictionary. It is defined as, “ridiculously unreasonable, unsound, or incongruous.” There is no way to better describe a recent leading article I read in The Economist, which commented on the enormous expansion of government over the recent years. It is filled with half-truths, inconsistencies, omissions, and distortions. To the untrained eye, these observations are non-existent or difficult to pluck. What makes articles like this stand out is that they are sprinkled with veracity, which gives them an aura of accuracy. While providing a full-length correction of the absurdities mentioned in the article would take a book in and of itself, I will make mention of several statements that stand out and then provide an explanation that The Economist fails to mention. I don’t expect to change minds sank deep in ideology, but I do hope to motivate your thinking against what is propagated by court economists and the establishment presently in power.

The Economist recognizes that the trend of government expansion must be curtailed. This is part of the periodical’s economic standard. In particular, the periodical stands for “looking for ways to make the state smaller. That is partly for philosophical reasons: we prefer to give power to individuals, rather than government.” There is absolutely no doubt of its position, which I fully agree. Yet, for the sake of what it terms as “pragmatism”, it forsakes its moral standing on this issue by essentially promoting a system that undermines the very tenets it prescribes to hold. The articles states the following:

“A further danger consists in equating 'smaller' with 'better'. As the horrors in Haiti demonstrate, countries need a state of a certain size to work at all; and more government can be good. The Economist, for instance, is relieved that politicians stepped in to bail out the banks, since the risks of tumbling into a depression were large. This newspaper also supported Mr Obama in 2008 in part because he wanted to extend health-care coverage.”

While equating smaller with better is not necessarily true, more government is always worse. I am not advocating a system where there are no laws or enforcements of contracts. On the contrary, I advocate a government set under the premise of the U.S. Constitution and Declaration of Independence, whereby voluntary transactions cannot be violated in the name of “doing good”. There is nothing in either document that promotes in favor of the central government providing health insurance or any bank bailout for that matter. The U.S. Constitution explicitly exhorts a decentralized authoritative regime. However, over the last century, this idea has been replace by the idea of collectivism. The Economist does not see this. Many policymakers and layman do not understand this shift in thinking. But in the name of “pragmatism”, The Economist is willing to accept the enlargement of the state, which is the very thing that it opposes. Confuse? Makes no sense? Yes, surmised correctly. This is the very embodiment of absurdity.

Government cannot produce economic output; it merely redistributes resources, often done by force. In essence, they are robbing Peter to pay Paul, and in the process they take a cut (i.e. pay themselves) for providing this “service.” Interest groups vote according to which political candidate will give them more money that belongs to other interest groups. Presently, the few that recognize this as form of theft are voices crying in the wilderness: there’s hardly a chance of being heard. “Oh, wait a minute,” someone might say, “the government provides security, it builds roads, it does many good things.” Of course, anyone can do “good things” with someone else’s money. This has always been the case throughout history. And let us not forget the aphorism: “the road to hell is paved with good intentions.” The foregoing statements at its core presume that people are naturally inept and cannot look out for themselves; therefore a central government is required to exist. Indeed, the government was intended to be a provider of security: as the US Constitution claims, the government has the power to protect life, liberty, and the pursuit of happiness, nothing more, nothing less.

But what obfuscates further this situation is that The Economist gives credence to the notion of “state capitalism: more and more of the world biggest companies are state-owned, and more and more of its biggest investors are now sovereign wealth funds.” This is absolutely downright silly. How can two contradictory terms be enjoined to create a coherent idea? Claiming that there is such a thing as “state capitalism” is like saying that a professional bartender runs Alcoholic Anonymous, or like saying that a fox is the best keeper of the hen house. Property rights within the framework of the law define capitalism. The state exists to enlarge itself and subsequently restrict property rights to continue that expansion. The impulse of state intrusion is dependent upon the whims of the present age by way of manipulation and control of the masses (read Le Bon’s The Crowd: A Study of the Popular Mind).

Communism and its light version, socialism, have grown out of this process; yet, The Economist, an economic and political liberal publication at times overtly promotes this philosophy. One can go on and on elucidating the lack of coherency in much of the article. But for now, this will do.

The Bizarro Economics of Government Spending

By Bill Bonner

[Blogger's Note: It always pays to listen/read from those hand-full of individuals who saw this economic mess coming while many slept at the wheel. Mr. Bonner is one of them!].


Good news and bad news. But which is which? The situation is so confused, we can’t tell.

The good news is that housing prices are going down. That’s what The Wall Street Journal says. “Home prices declined in November.” Good. People will be able to find more affordable housing.

Wait. That’s not good news, is it? Doesn’t that mean we’re still in a depression? Besides, another report says housing is going up. What to believe?

Let’s try something else… Consumer confidence rose in the latest reporting period. No argument there…

Now, that’s definitely good news, right? Nope. The better things get the more likely the feds are to clamp down on the recovery by “exiting” their stimulus efforts and reducing the deficit. That’s part of the reason stocks often decline when the news is “good” and go up when it is “bad.” Investors are afraid the feds will take away the juice. That would risk a return of the “error of ’37,”…say economists such as Paul Krugman and Richard Koo. Ignoring the calendar a bit…it would turn our president into “Herbert Hoover” Obama, as one commentator suggested.

What happened in the ’30s? Well, in the approved storyline, the feds had their stimulus foot to the floorboards…and they were happily driving right out of the depression. But fearing inflation…deficits…and a backlash against excessive spending (and believing that they were clear of the bad neighborhood) – they slowed down…they eased off their stimulus efforts in the mid-’30s. This sent the economy into another downturn and stretched the depression out for another 3 years.

It’s nonsense. What really caused the relapse of ’37 was the feds’ own meddling. But that’s not the way mainstream economists and analysts look at it. In their cockamamie view, an economy grows thanks to the good stewardship of publicly elected officials. In their view, government spending is actually BETTER than private spending. Why? Because it produces nothing of value. Really; we’re not making this up. And so what if the government doesn’t have any money? To them, money that doesn’t exist – created ‘out of thin air,’ as Keynes put it – is BETTER than real money. Because it creates consumer price inflation. Up is down. Good is bad. Better is worse. In their view, what makes a strong economy is government action. Specifically, government spending. So, anything that might incline the feds to spend less is BAD news.

According to the papers, there’s some bad news coming. ’Cause Mr. President is going to tell the nation in his State of the Union address that it’s time to put on the brakes. If we don’t, people will get the impression that government spending is out of control. We can’t have that. Because lenders might refuse to lend. Investors might refuse to invest. Voters might refuse to vote for the scalawags now in office.

On the other hand, if the Prez really does cut spending, none of the aforementioned are likely to be very happy about it. Federal spending doesn’t really make people richer; it makes them poorer. Still, appearances are what really matter. Dim economists want a president who puts into action their loopy theories. And dim voters want a president who takes action to save them from their own mistakes…especially when it means getting their hands on someone else’s money.

The stimulus offered by government spending is phony. But it appears real to the masses. Take it away and the economic consequences will appear very real too. The ‘creative destruction’ of the market will finally get to express itself. Businesses that should fail will fail. Speculators who ought to lose money will lose money. There will be blood, in other words.

Like most people, we don’t mind a little blood…as long as it’s not our own. So you can imagine how the parasites will howl when they see the knife draw near to their own arteries!

They can relax. The feds are not likely to reduce spending significantly. The deficits are structural…they’re built-in to the system…they won’t go away.

And as the depression lingers, the debt piles up…

What will happen? We don’t know. We can’t look into the future. But we can look at Japan…a country that is at least 10 years ahead of us.

Why is Japan ten years ahead? Because its stock market turned down in 1989…a decade ahead of Wall Street. And because its population is about 10 years older. And because it’s been fighting the de-leveraging process for 20 years. What can we learn? Here’s the latest from the WSJ, warning of an explosion:

“S&P lowers Japan’s outlook to negative.”

Uh oh. Not too encouraging. The rating agency told Japan that if it didn’t cut its deficits its debts would be downgraded.

Ah yes… Thanks to the Japanese, we get to see someone cross the minefield ahead of us. After 20 years, Japan hasn’t been able to get clear. But it hasn’t blown up completely, either.

But watch closely. It’s putting its feet down on some dangerous ground. Deficits have grown and grown and grown. Now, it risks an explosion with every step. This year, it will borrow $480 billion. It will receive only $405 billion in tax revenue. As far as we know, no major economy has ever run so far into the red without a blow-up.

And what can it do? They are getting the same sort of advice as Obama. They’re told they must cut the deficit to protect the currency…the economy…and the credit rating. But they’re also told that good is bad, or bad is good…that if they do the right thing – cutting the deficit – the economy will suffer. Tax revenues will fall further…widening the deficit!

The Japanese economy has become so dependent on debt-fueled government spending that, take it away and things fall apart. In the long run, that is exactly what should happen. The economy needs a shake-up…so it can rebuild on more solid foundations. But what politician wants to risk his own blood?