Since school has begun, I've not been able to spend a single second in the gym. The main reason for this is Math Camp. Every night from 4:30 to 6:00 PM, I've been sitting in a room trying to remember matrix algebra and basic calculus. It's not difficult, but if it weren't for this class, I'd be home around 3:00 every day and could be spending that time in the gym. Once it's over, I will continue my plan to reach 235 lbs. body weight by Sept. 9. I'm not so confident about this particular goal right now, but I'll get there sooner or later.
On the schedule for Kansas, the Nov. meet is still tentative for the 21st. If I hit my body weight goal soon, I should be able to start training. If I don't end up going to that meet, I may simply do a strength test at the rec around that day. No individual event or total goals set for that meet yet, but I hope to work on that next month, once I hit my weight goal.
One friend was recently talking about his supplements for the winter. He's more of a body-builder type, but it got me thinking about trying a protein shake. If I go for it, I'll definitely have to watch my weight, but it might pay dividends in the meet.
That's all for now.
Mens sana in corpore sano.
8/28/09
8/27/09
The Party is Over
(I wrote this article in February, 2009. It appears on my Facebook)
We hear a lot of politicians and talking heads telling us what they are going to do to fix the problems we are having right now or giving us their view on how it all has happened. Many say it is the failure of the free market, that we have to regulate now more than ever to fix our problems. We are told that banks have been far too greedy and that now the government has to fix it. Indeed, the banks have made a lot of bad loans. However, the conditions in which this crisis has come about are a direct result of the interference of the government. After speaking with a couple of professors and reviewing some class material, I feel as though I can put my thoughts on this on paper.
Over the past eight years or so, loans were made that clearly should not have been made. The banks were loaning a lot of money to many people who should not have received a loan. Some banks made very risky loans to people who could not make their payments.
What happened here? Why did so many banks make these loans? Was it pure greed? In a way, yes, that is partly to blame. However, normal incentives for banks to turn a profit had been perverted. How is this?
Firstly, the Federal Funds rate (and discount rate as well) had been held too low for too long a time after the bursting of the NASDAQ bubble (sometimes called the “tech” bubble) in '00. These rates were held low to stimulate growth in the economy and to prevent a recession. ( http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=FF&s[1][range]=10yrs ) The result of these low rates was the creation of a lot of false credit. I say false because the savings rate was so low that this credit could not have been real ( http://www.bea.gov/briefrm/saving.htm ). Credit comes from savings; this is a fundamental characteristic of our economy. However, the credit had come from abroad and from our money printing press. It had come from countries like Japan and Saudi Arabia. These people sold us their goods and lent us the money to buy them. This is evidenced by the national debt being sky high ( http://www.treasurydirect.gov/NP/NPGateway ). The Fed lowered the rates in order to create more money in the hopes that demand would increase, causing an increase in productivity.
The FDIC also contributed to this problem. The insurance provided to banks as guarantees of deposit is effectively a guarantee of capital to banks. This makes the banks more able to lend money to risky borrowers. A few other sources of perverse incentives are Fannie Mae, Freddie Mac (both government sponsored entities), and FHA (another government entity) which enabled banks to make loans to people who could not afford the loans. The loans were made on the assumption that housing values would always appreciate. People were given loans that were as much or more than the price of the home that they were used to purchase. As one can imagine, this ease of obtaining credit spurred a lot of home building. This was an increase in demand, but it was artificial. Once people began to default on the ARMS and other loans made to them (which, clearly, should not have been made), this false demand was shattered. The over-filled housing market began to lose value rapidly. What people should have been doing was to rent apartments and duplexes. However, no one wanted to rent because, they thought, buying a house was the only way to go! To them, housing values would always increase, so there was no risk in obtaining a loan that was above it's current value. All of this is what was called the “Mortgage Crisis”.
As a result of housing values (and the asset-backed securities that were written on them) falling, banks which had made these loans suffered massive write-downs on their balance sheets and many failed. The banks which survived tightened up their lending standards on the fear that their capital would be further written down and they would fall deeper into insolvency (insolvency meaning that they were unable to pay their debts). As this credit tightened, the American economy, which was so used to near-unlimited amounts of credit, began to fall apart. The demand that was created by this credit, not only in housing, but in consumer goods and other things we had consumed, shifted negatively. This meant that prices would fall and we would be in a deflationary stage of the economic cycle. However, the government felt the need to step in again. Thus, we have the 750 billion dollar bailout. This bailout was created to influence banks to begin their lending again and to stabilize prices. We see here that the M1 Multiplier (a measure of the ability of banks to create money through lending) has plummeted. ( http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=MULT&s[1][range]=10yrs ) This means that the ability of the banking system to create money is restricted. In spite of this, the amount of money in the economy has skyrocketed. M1 and M2 are measures of the amount of money in the economy. M1 is, basically, cash, coin, and checking accounts. M2 is all of M1 plus certificates of deposit, savings accounts, and non-institutional money market funds. ( http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=M1&s[1][range]=10yrs ) ( http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=M2&s[1][range]=10yrs ) The creation of all this money has, effectively, kept prices up. Both the Consumer Price Index and Producer Price Index have remained fairly stable, considering the magnitude of the shift in aggregate demand. ( http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=CPIAUCNS&s[1][range]=10yrs ) ( http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=PPIFGS&s[1][range]=10yrs ) These are measures of the prices paid on goods by both consumers and companies who produce the goods we consume.
One of two things is always happening in a managed economy which uses monetary policy to effect the money supply and interest rates. Either the currency is deflating, causing an increase in purchasing power and an incentive to save, or the currency is inflating, causing a decrease in purchasing power and an incentive to borrow. Currently, our government is attempting to fix prices. This is inherently inflationary because the prices should fall. The demand was false and should be corrected. However, the government is not letting this happen. They seem to think that inflating the currency and keeping the prices high will make this whole problem pass.
Truly, if prices are allowed to fall, things will be hard. The Federal Funds Rate will be raised and people will have a new incentive to save their money. Prices will plummet and many companies which are poorly managed will fail. However, as the asset prices drop to their fair value, people will be able to afford them and we can return to a real economy where some save and others borrow. Businesses will be bought up by those who can effectively operate them (take, for instance, the auto makers who are afraid of smaller auto companies cropping up) and the increased supply will further drive down prices until consumers are able to afford them. Then, as demand rises, the quantity of goods will increase and all will be better off.
Our government, in spite of this, is bent on working its “magic”. The fixing of prices may, in the short run, keep us from harsh pain, but it will only make it worse in the long run. Eventually, the dollar will become so worthless from inflation, that it will not be able to buy anything. The dollar will be so worthless that we will not be able to pay our debts. Even if this does not happen, the inflation will only create yet another bubble and the government will have to, yet again, bail out our economy.
Inflation begets inflation, government intervention begets government intervention. I liken it to a story of cookies and milk. If I (the government) make a big batch of sugar cookies and pour a tall glass of milk for little Jimmy and Suzy (the private sector and consumers), they will probably eat it. If they get stomach aches, it is certainly their fault for eating all the cookies, but if I had not baked the cookies, they would not be in such pain! As I keep baking cookies and Jimmy and Suzy keep eating them, they eventually develop diabetes. To whom will they turn for medication for their ills? Why, to the one who gave them the cookies in the first place, of course!
This managed economy has only made it harder for the poor and the middle class. As prices of the goods we consume increase, it is harder and harder for those on fixed or low incomes to afford to live. Also, the poverty line is effectively raised and those who were considered middle class become poor. The government creates artificial conditions that make the poor get poorer and the rich get richer.
Now, I'm not saying the government is all bad; we do need regulations. The effective enforcement of transparency laws and loan limits would probably go a long way to help curb this problem. However, the government, in its quest to make everyone happy, has created perverse incentives and artificial demand. The right regulations need to be in place. I do fear, though, that only the wrong regulations and policies will be used (as we are seeing now with all of this reckless spending) and we will have this same problem yet again, if we are lucky enough that our currency lives. The only solution is to raise the Fed rates and allow people to save so that we can have real domestic credit. The government is dedicated to not allowing this to happen and will continue to destabilize our fragile economy.
In my opinion, this whole mess makes a very good case for smallness. It is, in my mind, the mammoth size of the government's power and of the companies that cause these problems. A larger company requires more regulation, in my mind, because the process is dehumanized. There are alternatives to bigness. Take, for example, credit unions. These are “banks” of a sort, but they are owned by those who make their deposits there. They are local entities that enjoy freedom from many government regulations and taxes. As a result of this, they typically can make loans at much lower rates. This, quite obviously, helps the local economy by providing a source of cheaper funding for business ventures that provide products and create jobs. I believe that these credit unions do not need the regulation of larger banks because those who borrow are putting at risk the very livelihoods of their neighbors and friends, not some rich fat cat in a suit in New York. These local credit unions could ideally be regulated by the local governments, which have a much better grasp on the specific issues at hand in their community.
Perhaps a bit more far-fetched is the idea of bank-produced currencies. The government has no incentive to keep from inflating the currency. Politicians have a very short time horizon; they don't care much for the economy past their term in office. They can finance any war and give money to any lobbyist they wish if they have the power to print money. If banks are allowed to print their own currency (denominated in dollars), they have an incentive to keep from inflating. We can, even now, move from dollars to euros to rubles to yen at the click of a mouse. It is not so unreasonable that we could move from Bank A's dollars to Bank B's dollars. This ease of movement tells the banks that they had better not inflate their currency by printing too much money, or the people will trade the inflating bank's currency for another bank who is not artificially inflating their currency. All in all, though, the ideal currency is that which is based on a commodity, as it has real value and its value cannot be manipulated by the government.
So, what's the point? The point is that our current system is flawed. We have created perverse incentives and have allowed our own greed to create a “spend, spend, spend” mentality. My suggestion would be to reject the idea that houses always appreciate, that your dollar is always a store of value, that you can live on credit and not have to pay for it. We must understand that if we live outside our means, we will eventually live beneath our means. The party, it seems, is over.
We hear a lot of politicians and talking heads telling us what they are going to do to fix the problems we are having right now or giving us their view on how it all has happened. Many say it is the failure of the free market, that we have to regulate now more than ever to fix our problems. We are told that banks have been far too greedy and that now the government has to fix it. Indeed, the banks have made a lot of bad loans. However, the conditions in which this crisis has come about are a direct result of the interference of the government. After speaking with a couple of professors and reviewing some class material, I feel as though I can put my thoughts on this on paper.
Over the past eight years or so, loans were made that clearly should not have been made. The banks were loaning a lot of money to many people who should not have received a loan. Some banks made very risky loans to people who could not make their payments.
What happened here? Why did so many banks make these loans? Was it pure greed? In a way, yes, that is partly to blame. However, normal incentives for banks to turn a profit had been perverted. How is this?
Firstly, the Federal Funds rate (and discount rate as well) had been held too low for too long a time after the bursting of the NASDAQ bubble (sometimes called the “tech” bubble) in '00. These rates were held low to stimulate growth in the economy and to prevent a recession. ( http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=FF&s[1][range]=10yrs ) The result of these low rates was the creation of a lot of false credit. I say false because the savings rate was so low that this credit could not have been real ( http://www.bea.gov/briefrm/saving.htm ). Credit comes from savings; this is a fundamental characteristic of our economy. However, the credit had come from abroad and from our money printing press. It had come from countries like Japan and Saudi Arabia. These people sold us their goods and lent us the money to buy them. This is evidenced by the national debt being sky high ( http://www.treasurydirect.gov/NP/NPGateway ). The Fed lowered the rates in order to create more money in the hopes that demand would increase, causing an increase in productivity.
The FDIC also contributed to this problem. The insurance provided to banks as guarantees of deposit is effectively a guarantee of capital to banks. This makes the banks more able to lend money to risky borrowers. A few other sources of perverse incentives are Fannie Mae, Freddie Mac (both government sponsored entities), and FHA (another government entity) which enabled banks to make loans to people who could not afford the loans. The loans were made on the assumption that housing values would always appreciate. People were given loans that were as much or more than the price of the home that they were used to purchase. As one can imagine, this ease of obtaining credit spurred a lot of home building. This was an increase in demand, but it was artificial. Once people began to default on the ARMS and other loans made to them (which, clearly, should not have been made), this false demand was shattered. The over-filled housing market began to lose value rapidly. What people should have been doing was to rent apartments and duplexes. However, no one wanted to rent because, they thought, buying a house was the only way to go! To them, housing values would always increase, so there was no risk in obtaining a loan that was above it's current value. All of this is what was called the “Mortgage Crisis”.
As a result of housing values (and the asset-backed securities that were written on them) falling, banks which had made these loans suffered massive write-downs on their balance sheets and many failed. The banks which survived tightened up their lending standards on the fear that their capital would be further written down and they would fall deeper into insolvency (insolvency meaning that they were unable to pay their debts). As this credit tightened, the American economy, which was so used to near-unlimited amounts of credit, began to fall apart. The demand that was created by this credit, not only in housing, but in consumer goods and other things we had consumed, shifted negatively. This meant that prices would fall and we would be in a deflationary stage of the economic cycle. However, the government felt the need to step in again. Thus, we have the 750 billion dollar bailout. This bailout was created to influence banks to begin their lending again and to stabilize prices. We see here that the M1 Multiplier (a measure of the ability of banks to create money through lending) has plummeted. ( http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=MULT&s[1][range]=10yrs ) This means that the ability of the banking system to create money is restricted. In spite of this, the amount of money in the economy has skyrocketed. M1 and M2 are measures of the amount of money in the economy. M1 is, basically, cash, coin, and checking accounts. M2 is all of M1 plus certificates of deposit, savings accounts, and non-institutional money market funds. ( http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=M1&s[1][range]=10yrs ) ( http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=M2&s[1][range]=10yrs ) The creation of all this money has, effectively, kept prices up. Both the Consumer Price Index and Producer Price Index have remained fairly stable, considering the magnitude of the shift in aggregate demand. ( http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=CPIAUCNS&s[1][range]=10yrs ) ( http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=PPIFGS&s[1][range]=10yrs ) These are measures of the prices paid on goods by both consumers and companies who produce the goods we consume.
One of two things is always happening in a managed economy which uses monetary policy to effect the money supply and interest rates. Either the currency is deflating, causing an increase in purchasing power and an incentive to save, or the currency is inflating, causing a decrease in purchasing power and an incentive to borrow. Currently, our government is attempting to fix prices. This is inherently inflationary because the prices should fall. The demand was false and should be corrected. However, the government is not letting this happen. They seem to think that inflating the currency and keeping the prices high will make this whole problem pass.
Truly, if prices are allowed to fall, things will be hard. The Federal Funds Rate will be raised and people will have a new incentive to save their money. Prices will plummet and many companies which are poorly managed will fail. However, as the asset prices drop to their fair value, people will be able to afford them and we can return to a real economy where some save and others borrow. Businesses will be bought up by those who can effectively operate them (take, for instance, the auto makers who are afraid of smaller auto companies cropping up) and the increased supply will further drive down prices until consumers are able to afford them. Then, as demand rises, the quantity of goods will increase and all will be better off.
Our government, in spite of this, is bent on working its “magic”. The fixing of prices may, in the short run, keep us from harsh pain, but it will only make it worse in the long run. Eventually, the dollar will become so worthless from inflation, that it will not be able to buy anything. The dollar will be so worthless that we will not be able to pay our debts. Even if this does not happen, the inflation will only create yet another bubble and the government will have to, yet again, bail out our economy.
Inflation begets inflation, government intervention begets government intervention. I liken it to a story of cookies and milk. If I (the government) make a big batch of sugar cookies and pour a tall glass of milk for little Jimmy and Suzy (the private sector and consumers), they will probably eat it. If they get stomach aches, it is certainly their fault for eating all the cookies, but if I had not baked the cookies, they would not be in such pain! As I keep baking cookies and Jimmy and Suzy keep eating them, they eventually develop diabetes. To whom will they turn for medication for their ills? Why, to the one who gave them the cookies in the first place, of course!
This managed economy has only made it harder for the poor and the middle class. As prices of the goods we consume increase, it is harder and harder for those on fixed or low incomes to afford to live. Also, the poverty line is effectively raised and those who were considered middle class become poor. The government creates artificial conditions that make the poor get poorer and the rich get richer.
Now, I'm not saying the government is all bad; we do need regulations. The effective enforcement of transparency laws and loan limits would probably go a long way to help curb this problem. However, the government, in its quest to make everyone happy, has created perverse incentives and artificial demand. The right regulations need to be in place. I do fear, though, that only the wrong regulations and policies will be used (as we are seeing now with all of this reckless spending) and we will have this same problem yet again, if we are lucky enough that our currency lives. The only solution is to raise the Fed rates and allow people to save so that we can have real domestic credit. The government is dedicated to not allowing this to happen and will continue to destabilize our fragile economy.
In my opinion, this whole mess makes a very good case for smallness. It is, in my mind, the mammoth size of the government's power and of the companies that cause these problems. A larger company requires more regulation, in my mind, because the process is dehumanized. There are alternatives to bigness. Take, for example, credit unions. These are “banks” of a sort, but they are owned by those who make their deposits there. They are local entities that enjoy freedom from many government regulations and taxes. As a result of this, they typically can make loans at much lower rates. This, quite obviously, helps the local economy by providing a source of cheaper funding for business ventures that provide products and create jobs. I believe that these credit unions do not need the regulation of larger banks because those who borrow are putting at risk the very livelihoods of their neighbors and friends, not some rich fat cat in a suit in New York. These local credit unions could ideally be regulated by the local governments, which have a much better grasp on the specific issues at hand in their community.
Perhaps a bit more far-fetched is the idea of bank-produced currencies. The government has no incentive to keep from inflating the currency. Politicians have a very short time horizon; they don't care much for the economy past their term in office. They can finance any war and give money to any lobbyist they wish if they have the power to print money. If banks are allowed to print their own currency (denominated in dollars), they have an incentive to keep from inflating. We can, even now, move from dollars to euros to rubles to yen at the click of a mouse. It is not so unreasonable that we could move from Bank A's dollars to Bank B's dollars. This ease of movement tells the banks that they had better not inflate their currency by printing too much money, or the people will trade the inflating bank's currency for another bank who is not artificially inflating their currency. All in all, though, the ideal currency is that which is based on a commodity, as it has real value and its value cannot be manipulated by the government.
So, what's the point? The point is that our current system is flawed. We have created perverse incentives and have allowed our own greed to create a “spend, spend, spend” mentality. My suggestion would be to reject the idea that houses always appreciate, that your dollar is always a store of value, that you can live on credit and not have to pay for it. We must understand that if we live outside our means, we will eventually live beneath our means. The party, it seems, is over.
Mo' Money, Mo' Problems
(I wrote this article in December of 2008. It was originally posted on my facebook)
Around the beginning of November this year, I read an article by John C. Medaille regarding a recent article by Pat Buchanan. This quote piqued my interest: “In truth, the federal budget is mainly about transferring wealth. However, it is largely a transfer of wealth from the bottom and the middle to the top.” I read his examples, but I also considered that there may be more to this idea.
Fast forward to last week. I was trawling YouTube and came across a video of Ron Paul on the news. He was talking about the Federal Reserve and gold-backed money. I was struck by his speeches and considered what he said in light of things I have learned in classes I've had recently. I remember especially a class on the monetary system we have. What follows is a synthesis of my basic learnings and thoughts on the topic. Feel free to comment, but please be respectful, I'm not a Ph.D.
The value and amount of our money in circulation is controlled by an institution called the Federal Reserve. It regulates the banking industry and influences its activity by buying and selling securities and by reducing or increasing the amount of money that banks are required to hold on reserve. (1) These changes alter the interest rate at which banks can borrow from the Federal Reserve (called the discount rate) and the rate at which banks borrow reserves from each other (called the Federal Funds rate). There are basically two ways this can go. Either the rate is lowered via a buying of the securities or the rate is increased via a selling of the securities. Lately, the rate has been low. In 2001, after the terrorist attacks, the rate was lowered extremely and kept low, creating a lot of money. More recently, the rate has been lowered again to about the same level (it came up in between those times). One of the effects of this low rate is inflation. Inflation is, “the rate at which the general level for prices of goods and services is rising, and, subsequently, purchasing power is falling.” (2)
So, what's the problem with inflation? We hear about it all the time on the news, but what does it mean to you and I?
Firstly, inflation erodes wealth. As the definition given above states, purchasing power falls. The dollar you have today will be worth less tomorrow. Two things are to be noted here. When the dollar is inflated, things get more expensive. A loaf of bread now costs more than a loaf of bread 10 years ago because the value of the thing that you exchange for it has dropped. Also, the value of your savings drops. Any money you have invested in a retirement account is basically taken from you in increments because its value is decreasing. When you put that money away in your 30s, it was worth X amount of bread or milk. Later, in your 70s when you draw that money out, it buys X minus some factor of inflation amount of bread or milk. As the currency inflates, people become poorer. This increases the number of people who are poor, as their wage doesn't really change in proportion to this inflation, especially when the inflation is as rampant as it has been. These people are forced to spend greater amounts of their money on sustenance and less on saving and other things. Meanwhile, the government benefits from this increased amount of money. By simply printing money the government can carry out its programs that increase people's dependence on the government and can finance wars and whatever special interest it may have. In this way, Federal Reserve-created inflation acts as a secret tax on the people. Sure, you may not actually file an IRS return to the Federal Reserve, but the government certainly is taking your money. Large businesses are also favorably impacted because they benefit from the low interest rates. They use credit to grow and increase the wealth of their shareholders. While this happens, the so-called “middle class” is eroded as the money moves from their pockets to the pockets of government officials and the wealthy. The middle class becomes poor.
Secondly, inflation creates business cycles. The banking system as it is now is based on fractional reserves. This system dictates that “only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal.” (3) This creates a reverse pyramid of credit. One bank who gets the newly-printed money from their friendly Fed bank makes loans with that money. Not only do they make loans equal to that money, but they may only be required to hold 10 or 20 percent of it in reserve. Now, that money moves on to the next bank where it is deposited and the same thing happens again. This creates an effect known as the multiplier effect. (4) How does this create business cycles? Businesses that rely on credit to operate (a great many of them, in my experience) depend on this multiplication of money. They borrow the money to grow the company and create wealth for the shareholders or owners. This creates a boom. Now, two things, in my mind, contribute to the subsequent recession. One, the inflation created by this newly-printed money increases the prices of the companies' inputs. This causes the businesses to cut production to save money and results in a contraction of the economy (also called a recession, in some instances). Two, the Federal Reserve may decrease the amount of money in the economy (which increases the rates) and the credit that the companies rely on becomes more expensive. In the same way as before, the companies' costs increase and they are forced to cut production to cut costs in order to survive. This also causes a contraction in the economy.
So, what does the Federal Reserve do about all this? They attempt to manipulate the inflation using their power to alter reserve requirements and the money supply. However, the attempt to flatten these booms and recessions simply doesn't work. One notable example is the Great Depression. FDR could have fixed the problem by returning to sound money (money backed by gold or silver), but instead resorted to fiscal policy (i.e. spending his way to prosperity) to “fix” the problem. Sure, people had jobs, but the real specter was the inflationary system that underlies the economy. These people were destined to be poorer because of the vicious circle that had come about. The government needed money to spend on the programs and the inflation that resulted was destined to steal from the workers.
The reality is that this fiat money (money that is not convertible into something that has intrinsic value) favors the government and the large businesses. It is based on a system that steals from the poor in the form of high prices and a loss of wealth and gives to the big daddy federal government and your rich neighbor. Sound money, or money that is convertible directly into something of intrinsic value (such as gold or silver), favors the people. Sound money saves us from this inflation that results from the creation of money from nothing. The inflation is stopped because the supply of money is fixed (i.e. one dollar is equal to a fixed weight of gold). Interest rates are kept low because they fall to the competition between banks instead of relying on the decisions of a handful of men in Washington D.C. In case the moral implications are not obvious enough, consider this: if a farmer dilutes his milk with water and sells it, he is put in jail. Why are these men given free license to do the same with our dollars?
Around the beginning of November this year, I read an article by John C. Medaille regarding a recent article by Pat Buchanan. This quote piqued my interest: “In truth, the federal budget is mainly about transferring wealth. However, it is largely a transfer of wealth from the bottom and the middle to the top.” I read his examples, but I also considered that there may be more to this idea.
Fast forward to last week. I was trawling YouTube and came across a video of Ron Paul on the news. He was talking about the Federal Reserve and gold-backed money. I was struck by his speeches and considered what he said in light of things I have learned in classes I've had recently. I remember especially a class on the monetary system we have. What follows is a synthesis of my basic learnings and thoughts on the topic. Feel free to comment, but please be respectful, I'm not a Ph.D.
The value and amount of our money in circulation is controlled by an institution called the Federal Reserve. It regulates the banking industry and influences its activity by buying and selling securities and by reducing or increasing the amount of money that banks are required to hold on reserve. (1) These changes alter the interest rate at which banks can borrow from the Federal Reserve (called the discount rate) and the rate at which banks borrow reserves from each other (called the Federal Funds rate). There are basically two ways this can go. Either the rate is lowered via a buying of the securities or the rate is increased via a selling of the securities. Lately, the rate has been low. In 2001, after the terrorist attacks, the rate was lowered extremely and kept low, creating a lot of money. More recently, the rate has been lowered again to about the same level (it came up in between those times). One of the effects of this low rate is inflation. Inflation is, “the rate at which the general level for prices of goods and services is rising, and, subsequently, purchasing power is falling.” (2)
So, what's the problem with inflation? We hear about it all the time on the news, but what does it mean to you and I?
Firstly, inflation erodes wealth. As the definition given above states, purchasing power falls. The dollar you have today will be worth less tomorrow. Two things are to be noted here. When the dollar is inflated, things get more expensive. A loaf of bread now costs more than a loaf of bread 10 years ago because the value of the thing that you exchange for it has dropped. Also, the value of your savings drops. Any money you have invested in a retirement account is basically taken from you in increments because its value is decreasing. When you put that money away in your 30s, it was worth X amount of bread or milk. Later, in your 70s when you draw that money out, it buys X minus some factor of inflation amount of bread or milk. As the currency inflates, people become poorer. This increases the number of people who are poor, as their wage doesn't really change in proportion to this inflation, especially when the inflation is as rampant as it has been. These people are forced to spend greater amounts of their money on sustenance and less on saving and other things. Meanwhile, the government benefits from this increased amount of money. By simply printing money the government can carry out its programs that increase people's dependence on the government and can finance wars and whatever special interest it may have. In this way, Federal Reserve-created inflation acts as a secret tax on the people. Sure, you may not actually file an IRS return to the Federal Reserve, but the government certainly is taking your money. Large businesses are also favorably impacted because they benefit from the low interest rates. They use credit to grow and increase the wealth of their shareholders. While this happens, the so-called “middle class” is eroded as the money moves from their pockets to the pockets of government officials and the wealthy. The middle class becomes poor.
Secondly, inflation creates business cycles. The banking system as it is now is based on fractional reserves. This system dictates that “only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal.” (3) This creates a reverse pyramid of credit. One bank who gets the newly-printed money from their friendly Fed bank makes loans with that money. Not only do they make loans equal to that money, but they may only be required to hold 10 or 20 percent of it in reserve. Now, that money moves on to the next bank where it is deposited and the same thing happens again. This creates an effect known as the multiplier effect. (4) How does this create business cycles? Businesses that rely on credit to operate (a great many of them, in my experience) depend on this multiplication of money. They borrow the money to grow the company and create wealth for the shareholders or owners. This creates a boom. Now, two things, in my mind, contribute to the subsequent recession. One, the inflation created by this newly-printed money increases the prices of the companies' inputs. This causes the businesses to cut production to save money and results in a contraction of the economy (also called a recession, in some instances). Two, the Federal Reserve may decrease the amount of money in the economy (which increases the rates) and the credit that the companies rely on becomes more expensive. In the same way as before, the companies' costs increase and they are forced to cut production to cut costs in order to survive. This also causes a contraction in the economy.
So, what does the Federal Reserve do about all this? They attempt to manipulate the inflation using their power to alter reserve requirements and the money supply. However, the attempt to flatten these booms and recessions simply doesn't work. One notable example is the Great Depression. FDR could have fixed the problem by returning to sound money (money backed by gold or silver), but instead resorted to fiscal policy (i.e. spending his way to prosperity) to “fix” the problem. Sure, people had jobs, but the real specter was the inflationary system that underlies the economy. These people were destined to be poorer because of the vicious circle that had come about. The government needed money to spend on the programs and the inflation that resulted was destined to steal from the workers.
The reality is that this fiat money (money that is not convertible into something that has intrinsic value) favors the government and the large businesses. It is based on a system that steals from the poor in the form of high prices and a loss of wealth and gives to the big daddy federal government and your rich neighbor. Sound money, or money that is convertible directly into something of intrinsic value (such as gold or silver), favors the people. Sound money saves us from this inflation that results from the creation of money from nothing. The inflation is stopped because the supply of money is fixed (i.e. one dollar is equal to a fixed weight of gold). Interest rates are kept low because they fall to the competition between banks instead of relying on the decisions of a handful of men in Washington D.C. In case the moral implications are not obvious enough, consider this: if a farmer dilutes his milk with water and sells it, he is put in jail. Why are these men given free license to do the same with our dollars?
Mark to Market?
(this article was written on April 12, 2009 and posted on my facebook)
Today, I read this article at the request of a friend. It describes the new policy that will ease the use of mark-to-market accounting. Under the new policy, banks will be able to "set a price that would be received by a bank in an 'orderly' transaction in the current, inactive market".
The fact is, these "toxic" assets are worthless. The banks should take write-downs because the assets are not worth the prices they were selling for. The prices were inflated.
The only observable value of any asset, good, or service, in exchange, is subjective. The price of a good is the amount of money someone is willing to pay and another is willing to take as payment for said good. In a market such as the ones in which stocks, bonds, swaps, and other securities are traded, prices are free to float about and change constantly. They are not "sticky" as are prices for other things (such as gasoline, books, or shirts).
The prices of these "toxic" assets have fallen because no one is willing to pay an inflated price for them. This new accounting policy, as well as the policy of expanding the money supply (or credit), will do nothing more than re-inflate the prices. This may seem, to the man in the street, to be no problem. Just keep the prices up and we'll be fine! No. This inflation only makes it more and more difficult for people to value the assets. The economy cannot recover if failed companies and worthless assets are not allowed to fail or their prices to fall.
The idea that we need the prices to rise is absurd. If you are going shopping, do you want bread to be expensive or cheap? Obviously, falling prices are a good thing for people who are buying them. Not only that, but they are good for the people selling them. Entrepreneurs depend on prices to tell them whether or not they are providing benefits to the people they are serving. If they are not, they will have to adapt or fail. In their place, then, can rise someone who may have a better grasp on how to better serve the preferences of the people. The failed entrepreneur, then, can find employment where he or she is better suited.
The most absurd thing that this policy assumes is that some group or another can determine what the value of these assets should be. Should we rely on the banks to determine this? Should we rely on the government to value them? How exactly do these small groups of people know any better what value people will place on these assets than the mass of people themselves?
If we say this will depend on moving averages of past prices, we tacitly assume that past preferences and valuations are proper for the current circumstances. This is patently absurd. Yesterday, company X may have been a wonderful company. Today, it may have made some egregious error and tomorrow the news of this error may come out. Is the value of that company tomorrow the same as it was yesterday? If the error is large enough, it is certain that some will value the company less. Company Y may value a credit default swap at some rate yesterday, but today may have received some other information about its debt position or its performance that may drive its managers to value another interest rate higher than the one previously swapped for. It is the same for any other security, asset, good, or service. New information provides for new valuation.
What can be said of this new policy? It seems to me that it may be the beginning of a financial dark ages. If so, we can be sure that our economy will not experience real growth for a long time.
Today, I read this article at the request of a friend. It describes the new policy that will ease the use of mark-to-market accounting. Under the new policy, banks will be able to "set a price that would be received by a bank in an 'orderly' transaction in the current, inactive market".
The fact is, these "toxic" assets are worthless. The banks should take write-downs because the assets are not worth the prices they were selling for. The prices were inflated.
The only observable value of any asset, good, or service, in exchange, is subjective. The price of a good is the amount of money someone is willing to pay and another is willing to take as payment for said good. In a market such as the ones in which stocks, bonds, swaps, and other securities are traded, prices are free to float about and change constantly. They are not "sticky" as are prices for other things (such as gasoline, books, or shirts).
The prices of these "toxic" assets have fallen because no one is willing to pay an inflated price for them. This new accounting policy, as well as the policy of expanding the money supply (or credit), will do nothing more than re-inflate the prices. This may seem, to the man in the street, to be no problem. Just keep the prices up and we'll be fine! No. This inflation only makes it more and more difficult for people to value the assets. The economy cannot recover if failed companies and worthless assets are not allowed to fail or their prices to fall.
The idea that we need the prices to rise is absurd. If you are going shopping, do you want bread to be expensive or cheap? Obviously, falling prices are a good thing for people who are buying them. Not only that, but they are good for the people selling them. Entrepreneurs depend on prices to tell them whether or not they are providing benefits to the people they are serving. If they are not, they will have to adapt or fail. In their place, then, can rise someone who may have a better grasp on how to better serve the preferences of the people. The failed entrepreneur, then, can find employment where he or she is better suited.
The most absurd thing that this policy assumes is that some group or another can determine what the value of these assets should be. Should we rely on the banks to determine this? Should we rely on the government to value them? How exactly do these small groups of people know any better what value people will place on these assets than the mass of people themselves?
If we say this will depend on moving averages of past prices, we tacitly assume that past preferences and valuations are proper for the current circumstances. This is patently absurd. Yesterday, company X may have been a wonderful company. Today, it may have made some egregious error and tomorrow the news of this error may come out. Is the value of that company tomorrow the same as it was yesterday? If the error is large enough, it is certain that some will value the company less. Company Y may value a credit default swap at some rate yesterday, but today may have received some other information about its debt position or its performance that may drive its managers to value another interest rate higher than the one previously swapped for. It is the same for any other security, asset, good, or service. New information provides for new valuation.
What can be said of this new policy? It seems to me that it may be the beginning of a financial dark ages. If so, we can be sure that our economy will not experience real growth for a long time.
Regarding "Individuals for Freethought"
(this is an article I wrote for the Kansas State University Collegian)
Regarding “Individuals for Freethought”
Recently, I saw an advertisement for a group here on campus. It read something like, “Don't believe in God? Neither do we! Individuals for Freethought”, then it went on to give the time and place of the next meeting for this particular group. According to the group's website, Freethought is, “thinking without the restraints of religious dogma, 'revelation,' authoritarianism, tradition, or prejudice.” To be a freethinker, one must reject these things. They claim that, “freethinkers use reason and science to form their own conclusions about morality and the nature of the universe.” In order to make the position clear, the website tells the reader that Freethought is different from free thought in that Freethought is “a historical tradition of thought and discourse that traces primarily back to the Enlightenment and combines free thought with doubt or disbelief regarding supernatural views, particularly traditional religions” whereas free thought is merely “critical reflection” and that “many reflective people are free thinkers in this sense, including many religious believers.”
It seems to me that the main premise of this group is hopelessly illogical. The group which claims to reject dogma, in fact, has a dogma of their own. They declare that, in order to be a Freethinker, one must subscribe to the idea that dogmas are merely a “restraint” to coming to “conclusions about morality and the nature of the universe.” What good, then, is the group? They depend on a dogma to restrain their members, and then decry the restraint dogma places on people. In the FAQ section of their website, we find yet another fallacy. They claim on the main page that “tradition” is another “restraint” on those who are not members of their group. However, as quoted earlier, they tell us that Freethought itself is a “historical tradition”. Tradition and dogma are not wrong in and of themselves. If they are true, why should one not give them intellectual assent? On the issue of using reason to come to conclusions, I think it's important to note that reason alone can never be sufficient. Using reason to prove that reason can lead someone to truth is a circular argument. A person must have faith that reason can lead him or her to the truth.
I would like to outline my views so that the reader can more readily understand why I have a problem with this group's position and why I am writing this. I am a strict Catholic. I believe all dogmas held and taught by the Catholic Church. Also, I accept Darwin's evolution and the Big Bang theory (a theory put forth by a Catholic priest named Monsignor Georges-Henri Lemaitre). I harbor no hatred toward the members of other religious sects or schools of thought. I may disagree with other people, but I defend their right to disagree. However, I am no philosophical relativist. I believe that there is an objective reality, an objective Truth. I believe Catholic dogmas because they are firmly based on both faith and reason. I do not believe them because I have been told to or because I am incapable of understanding other viewpoints. My religious beliefs and my views on science are not in contradiction. I prefer to let science describe the things science intends to describe and theology/philosophy describe the things they intend to describe. Science does not intend to describe morality; therefore to ask science to do so is asking something it cannot answer. In the same way, theology and philosophy do not intend to describe the physical world and to ask this of theology or philosophy is asking something outside of their scopes.
What is the point of all this? My goal with this article is to persuade the reader to be critical of the things you read and hear. Analyze the beliefs of groups you are considering joining, analyze your own beliefs. Discuss your views with your friends, family, peers, and professors. If another person's viewpoint holds up to a rigorous logical test, consider adopting it. In your consideration, do your own research. Find things out for yourself. No one can be forced to believe anything. Exercise your ability as an individual to think freely.
Regarding “Individuals for Freethought”
Recently, I saw an advertisement for a group here on campus. It read something like, “Don't believe in God? Neither do we! Individuals for Freethought”, then it went on to give the time and place of the next meeting for this particular group. According to the group's website, Freethought is, “thinking without the restraints of religious dogma, 'revelation,' authoritarianism, tradition, or prejudice.” To be a freethinker, one must reject these things. They claim that, “freethinkers use reason and science to form their own conclusions about morality and the nature of the universe.” In order to make the position clear, the website tells the reader that Freethought is different from free thought in that Freethought is “a historical tradition of thought and discourse that traces primarily back to the Enlightenment and combines free thought with doubt or disbelief regarding supernatural views, particularly traditional religions” whereas free thought is merely “critical reflection” and that “many reflective people are free thinkers in this sense, including many religious believers.”
It seems to me that the main premise of this group is hopelessly illogical. The group which claims to reject dogma, in fact, has a dogma of their own. They declare that, in order to be a Freethinker, one must subscribe to the idea that dogmas are merely a “restraint” to coming to “conclusions about morality and the nature of the universe.” What good, then, is the group? They depend on a dogma to restrain their members, and then decry the restraint dogma places on people. In the FAQ section of their website, we find yet another fallacy. They claim on the main page that “tradition” is another “restraint” on those who are not members of their group. However, as quoted earlier, they tell us that Freethought itself is a “historical tradition”. Tradition and dogma are not wrong in and of themselves. If they are true, why should one not give them intellectual assent? On the issue of using reason to come to conclusions, I think it's important to note that reason alone can never be sufficient. Using reason to prove that reason can lead someone to truth is a circular argument. A person must have faith that reason can lead him or her to the truth.
I would like to outline my views so that the reader can more readily understand why I have a problem with this group's position and why I am writing this. I am a strict Catholic. I believe all dogmas held and taught by the Catholic Church. Also, I accept Darwin's evolution and the Big Bang theory (a theory put forth by a Catholic priest named Monsignor Georges-Henri Lemaitre). I harbor no hatred toward the members of other religious sects or schools of thought. I may disagree with other people, but I defend their right to disagree. However, I am no philosophical relativist. I believe that there is an objective reality, an objective Truth. I believe Catholic dogmas because they are firmly based on both faith and reason. I do not believe them because I have been told to or because I am incapable of understanding other viewpoints. My religious beliefs and my views on science are not in contradiction. I prefer to let science describe the things science intends to describe and theology/philosophy describe the things they intend to describe. Science does not intend to describe morality; therefore to ask science to do so is asking something it cannot answer. In the same way, theology and philosophy do not intend to describe the physical world and to ask this of theology or philosophy is asking something outside of their scopes.
What is the point of all this? My goal with this article is to persuade the reader to be critical of the things you read and hear. Analyze the beliefs of groups you are considering joining, analyze your own beliefs. Discuss your views with your friends, family, peers, and professors. If another person's viewpoint holds up to a rigorous logical test, consider adopting it. In your consideration, do your own research. Find things out for yourself. No one can be forced to believe anything. Exercise your ability as an individual to think freely.
Free-Market Healthcare
The blessed overlords in D.C. are telling us all that if we just put our faith in them, we'll all be taken care of. Besides being a moronic fantasy denying the very notion of scarcity, it's a complete denial of the principles of freedom of choice and self-ownership. Add to that a healthy dose of economic fallacy, and you've got a recipe for disaster.
What's the problem? The problem, to be clear, is NOT health care per se; it's health insurance and the requirements put on doctors. No, our health care system is not perfect, people die everyday. This will always happen as long as people err.
Insurance is hedging against the risk of things that are not under our control. Think of car insurance. We have insurance against things that we cannot directly control (wrecks, things falling on our cars, vandalism) and that are relatively expensive for us to fix. What is health insurance these days? Besides the part that is real insurance, it is essentially pre-payment for medical services. The government requires insurance companies to offer all manner of coverages to people. What if the people don't want this or that particular coverage? "Too bad", say the overlords, "you will take our benevolent gift". This control over the service itself has the effect of driving up prices. If companies are forced to insure all their customers against every disease under the sun, they, quite obviously, must charge more to cover the risk.
Another factor driving up prices deals with government control over supply. The most obvious example of this is arbitrary restrictions on consumer choice of insurance. We are restricted by the federal government from purchasing insurance in other states. This reduces competition since the companies in any given state have a "captive market"; a captive market created by the government. Government licenses are required to start a medical school, to open a hospital, and to practice medicine (not to mention that nurses are arbitrarily prohibited from doing many things they really could do). All of these factors have the result of increasing prices by limiting supply. If one has to jump through hoops to set up a medical school and maintain licenses, not only will there be a smaller number of these schools (which means less doctors), but he or she must charge students more to pay for all the bureaucracy that is created. After a doctor has incurred massive debt in these schools, he or she must now charge higher prices to pay off this debt and to pay for all of his or her licensing fees. Further, the doctors that do exist can charge higher prices because there are fewer doctors than there would be in a free market. Why are the politicians not talking about this? They operate on the fallacy that holding down prices will fix the problem. If the price of a good drops artificially, more people will demand it. This will create a shortage of care and we will all be poorer.
The solution? Cut the government out of it. They've done enough damage. Cut out the care requirements and the license laws. Now, some may worry that without government control, doctors will have no incentive to keep things clean and to provide good care etc. Nevertheless, the market has a solution. Have you ever heard of Underwriters Laboratories? If not, look at any one of your electrical appliances. I can almost guarantee there is a UL seal on there somewhere. This seal indicates that Underwriters Laboratories has put the product through rigorous testing and has certified its safety. How would this work in healthcare? I don't know exactly, because I'm not a doctor or a hospital administrator. The general idea goes something like this: people demand to know that their doctor is a decent person and has good training. Some person, seeing this desire of people, founds a company (somewhat like UL) that certifies the soundness of a particular doctor's practice. We trust the market to keep us safe from the hazards of potentially dangerous appliances; we trust the market to tell us if a certain higher educational institution is up to par (i.e. accreditation companies); why can we not trust the market to give us safe medical practice?
This article by Prof. Hans-Hermann Hoppe gives a concise plan to end the government control and the high prices. I have drawn insights from him and from others. I note this article as a reference to fill in some gaps I have left out of this analysis.
Tu ne cede malis, sed contra audentior ito.
What's the problem? The problem, to be clear, is NOT health care per se; it's health insurance and the requirements put on doctors. No, our health care system is not perfect, people die everyday. This will always happen as long as people err.
Insurance is hedging against the risk of things that are not under our control. Think of car insurance. We have insurance against things that we cannot directly control (wrecks, things falling on our cars, vandalism) and that are relatively expensive for us to fix. What is health insurance these days? Besides the part that is real insurance, it is essentially pre-payment for medical services. The government requires insurance companies to offer all manner of coverages to people. What if the people don't want this or that particular coverage? "Too bad", say the overlords, "you will take our benevolent gift". This control over the service itself has the effect of driving up prices. If companies are forced to insure all their customers against every disease under the sun, they, quite obviously, must charge more to cover the risk.
Another factor driving up prices deals with government control over supply. The most obvious example of this is arbitrary restrictions on consumer choice of insurance. We are restricted by the federal government from purchasing insurance in other states. This reduces competition since the companies in any given state have a "captive market"; a captive market created by the government. Government licenses are required to start a medical school, to open a hospital, and to practice medicine (not to mention that nurses are arbitrarily prohibited from doing many things they really could do). All of these factors have the result of increasing prices by limiting supply. If one has to jump through hoops to set up a medical school and maintain licenses, not only will there be a smaller number of these schools (which means less doctors), but he or she must charge students more to pay for all the bureaucracy that is created. After a doctor has incurred massive debt in these schools, he or she must now charge higher prices to pay off this debt and to pay for all of his or her licensing fees. Further, the doctors that do exist can charge higher prices because there are fewer doctors than there would be in a free market. Why are the politicians not talking about this? They operate on the fallacy that holding down prices will fix the problem. If the price of a good drops artificially, more people will demand it. This will create a shortage of care and we will all be poorer.
The solution? Cut the government out of it. They've done enough damage. Cut out the care requirements and the license laws. Now, some may worry that without government control, doctors will have no incentive to keep things clean and to provide good care etc. Nevertheless, the market has a solution. Have you ever heard of Underwriters Laboratories? If not, look at any one of your electrical appliances. I can almost guarantee there is a UL seal on there somewhere. This seal indicates that Underwriters Laboratories has put the product through rigorous testing and has certified its safety. How would this work in healthcare? I don't know exactly, because I'm not a doctor or a hospital administrator. The general idea goes something like this: people demand to know that their doctor is a decent person and has good training. Some person, seeing this desire of people, founds a company (somewhat like UL) that certifies the soundness of a particular doctor's practice. We trust the market to keep us safe from the hazards of potentially dangerous appliances; we trust the market to tell us if a certain higher educational institution is up to par (i.e. accreditation companies); why can we not trust the market to give us safe medical practice?
This article by Prof. Hans-Hermann Hoppe gives a concise plan to end the government control and the high prices. I have drawn insights from him and from others. I note this article as a reference to fill in some gaps I have left out of this analysis.
Tu ne cede malis, sed contra audentior ito.
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