minority opinion

Wednesday, January 8, 2014

Any Real Difference Between Keynesianism And Counterfeiting?

The Piranha Of Portugal: Greatest Counterfeiter Of All Time

By Bryan Taylor

The new US $100 bill is out, as you may have seen this holiday season. Our dear old Uncle Ben is a technological wonder with a dozen different anti-counterfeiting devices on it. Since there are more $100 bills circulating outside of the United States than inside, the U.S. Government has to insure that counterfeiters are unable to replicate the government’s most treasured export. This raises the question, who was the greatest counterfeiter of all time?

Government Counterfeiting

Although governments have done more to destroy their own currencies than all the counterfeiters in the history of mankind put together, the government is not the correct answer. Governments have debased their own currency for millennia. Historical examples of government-induced debasement include:

§ The Roman Empire replacing its silver Denarii with billon Antonininii;

§ The Khans of China creating the first paper inflation in the 1300s;

§ The United States making its first currency, the Continental Dollar, worthless;

§ Germany hyperinflating out of its debts by creating trillions of marks;

§ Or the US Federal Reserve blowing up its balance sheet.

In holding governments accountable, we are also not talking about one government counterfeiting the currency of another government as the

§ Barbarians did of the Roman gold Aureus

§ British did of Continental Dollars and French Assignats during the 1700s

§ Germans did of British Pounds during World War II in Operation Bernhard

§ United States did of Japan’s Occupation currency of the Philippines

§ North Koreans did of US Dollars, making them one of their principle exports.

Governments have consistently destroyed their own currency and those of other countries without ever being held accountable for their “crime” the way a counterfeiter is punished. No, we are not talking about governments; we are talking about individual counterfeiters.

It is one thing for the government to expand the money supply in order to stimulate the economy and help the unemployed. It is quite another for counterfeiters to do the same – albeit on a much smaller scale – to benefit themselves. Counterfeiters provide competition to the government, and though government officials are applauded when they inflate the economy, counterfeiters are condemned to prison when caught.

A Classy Counterfeiter

Our vote for the greatest counterfeiter of all time goes to Artur Alves dos Reis whose story was recounted by Murray Teigh Bloom in The Man Who Stole Portugal. Reis was both smart and classy, and his criminal operation reflected these qualities. To my knowledge, Reis put together the most audacious counterfeiting scheme in history. He conceived his master plan while he was in jail in Oporto for embezzling the funds of a company he had taken over. Some criminals sit in jail and try to avoid repeating their misfortunes. Others, like Reis or Tony de Angelis, think-up bigger, more foolproof schemes. While he was sitting in his cell, Reis put together his master plan that would make him the richest, and possibly the most influential man in Portugal in only one year.

Counterfeiting is a very complex operation. To be successful, (i.e. not get caught), be able to spend your money, and not receive free room and board from the government, you have to do three things successfully. First, you have to create counterfeit currency that can’t be detected. Second, you need a way of laundering the money and converting it into real assets so you can enjoy the fruits of your ill-begotten labors. Third, you must make sure that you avoid the triple curse of detection, arrest and conviction. Let’s see what Reis’s solution was to this age-old problem.

Step One: Create an Undetectable Banknote

First, create a counterfeit that can’t be detected. During the 1920s, the Banco do Portugal had the exclusive right to print currency in Portugal. The bank used foreign printing companies with superior anti-counterfeiting technology to protect their banknotes. The English company, Waterlow & Sons, printed the 500 and 1000 Escudo notes (equal to about $25 and $50 in 1923) for the Banco do Portugal. So why not get Waterlow & Sons to print the notes for Reis as well?

Reis was a natural-born forger. He forged his diploma as an engineer from Oxford as a “joke,” but this helped land him a job as a government railroad inspector in Angola at the age of twenty-two. In 1924, he forged $100,000 worth of checks and used the money to take over control of Ambaca, the Royal Trans-African railway Company of Angola. He then used the money in the company’s treasury to cover his own checks. He was arrested in July 1924 for embezzlement, but was released two months later when a court decided his was a civil and not a criminal case.

It was during the two months he was the guest of the Oporto police that he conceived his infamous counterfeiting scheme. The key was to find someone with a respected name who could help him convince Waterlow & Sons to print banknotes secretly for Reis. He found three men of questionable repute, but with connections to help Reis: Jose Bandeira, Gustav Adolf Hennies and Karel Marang.

Bandeira got his brother, the Portuguese Minister to the Netherlands, to give Marang a letter introducing him as a respected Dutch citizen who had a power-of-attorney for Alves Reis to negotiate the printing of the banknotes. Marang went to Waterlow & Sons in London, and presented his letter of introduction as the “Consul General of Persia” on forged Banco do Portugal stationary to Sir William Waterlow.

Marang spun the story Reis had instructed him to give. A private syndicate was being formed to save the colony of Angola from its current dire financial condition with a $5,000,000 investment. In return for the loan, the syndicate would be allowed to print and circulate banknotes in Angola. Waterlow & Sons would print the banknotes for the syndicate, and once the notes reached Angola, the banknotes would be supercharged with the word ANGOLA so they wouldn’t be confused with notes from the mother country. The whole affair had to be kept secret lest Angola fall into further financial difficulties due to ill-placed rumors of pending economic ruin.

Sir William knew that supercharging notes was normal practice for Portugal’s colonies, and that the Banco Ultramarino had the exclusive right to print banknotes for the Portuguese colonies. This was an opportunity for Waterlow & Sons to get this business away from Bradbury, Wilkinson & Co., the current printer of banknotes for the Banco Ultramarino in Angola.

Marang asked Waterlow to print the 500 Escudo note with Vasco da Gama on it. The deal was signed on January 6, 1925, and for the printing cost of $7,200, Reis and his conspirators would receive $5,000,000 in banknotes, a 70,000 percent return on their investment. Bandeira picked up the first group of notes from Waterlow & Sons on February 10, and by March 20, they had 100 million Escudos ($5,000,000) in Portuguese banknotes. Bandeira used his orange diplomatic card to transport the bills in luggage marked the “Legation of Portugal” across the borders without detection. After the first step had been successfully completed, they placed an order for an additional 190 million Escudos in banknotes ($9,500,000). Of course, the banknotes never made it to Angola.

The greatest risk in the scheme was having banknotes with duplicate numbers discovered, but this was the lesser of two evils. If Reis and Marang had requested banknotes outside the numerical range of the 500 Escudo notes, the spurious notes would have been quickly discovered. The lower risk lay in duplicating the existing serial numbers, and hoping the counterfeiters were able to successfully release all the banknotes before the law of large numbers caught up with them.

Step Two: Laundering Money with Your Own Bank

Step One of the plan was complete, now for Step Two: laundering the money. A small-scale counterfeiter can pass bills through petty criminals, but the notes Reis and friends had were equal to almost 1% of Portugal’s GDP. This was the equivalent of over $150 billion if the same amount had been released in the United States today. Even if Reis hired every petty criminal in Lisbon and Oporto, he wouldn’t be able to unload a fraction of the banknotes.

Reis was going first class with his counterfeiting scheme, and he decided the only way to launder the money was to have his own bank. Reis used his newly printed banknotes to encourage corrupt Portuguese officials and politicians to grant him his bank charter, and on June 15, 1925, the Banco Angola e Metropole’s application was approved by the government. Of course, the bank would have multiple branches in Lisbon and Oporto to speed up the distribution of their treasure.

Want to exchange foreign currency? The Banco Angola e Metropole provides the best rates. Want to borrow money for a business or mortgage? The Banco Angola e Metropole will be happy to extend you the loan in cash. Want high interest rates on your deposits? Go to the Banco Angola e Metropole? In the meantime, Reis, his wife, and their compatriots spent their money freely, buying jewelry, cars, real estate, and sending money abroad.

Reis flooded Portugal with his freshly minted banknotes, and the economy of Portugal was booming. And as Reis would rationalize, how was this any different from what a real government did? Was there really any difference between Keynesianism and counterfeiting?

Step Three: Avoid Detection (For a While)

Step Three and the most important of all was how to avoid detection, arrest and imprisonment. For this, Reis had a brilliant solution. Since they were counterfeiting Banco do Portugal banknotes, only the Bank could initiate proceedings to prosecute them. But what if – just what if – Reis controlled the shares in the Banco do Portugal? The bank had already exceeded its statutory banknote limit many times over and the directors of the Banco do Portugal had never been prosecuted, so why should they prosecute Reis? Or as Reis put it, “How can they arrest us when they’re us and we’re them?”

Like most European countries, Portugal had suffered inflation after World War I. Prices had increased 48% per annum between 1919 and 1924, and the Escudo had depreciated by 87% against the Pound Sterling. Although the Banco do Portugal was only supposed to issue banknotes thrice its capital, it had, in fact, issued banknotes a hundred times its capital. Reis’s monetary manipulations were minor by comparison. The chart below shows the depreciation of the Portuguese Escudo against the U.S. Dollar after World War I.

Read more at:

http://www.testosteronepit.com/home/2014/1/8/the-piranha-of-portugal-greatest-counterfeiter-of-all-time-o.html

"Bubbles Always Pop"

An Austrian Wolf In Keynesian Sheep's Clothing

by Guy Haselmann

The world has been kept on life support mostly by government spending of trillions of dollars and central bank printing of trillions more. Both have boosted asset prices and given the allure of economic progress. Over-zealous regulators, market rule changes, and aggressive policy stimulus have temporarily stabilized markets. Market vigilantes have been hibernating, because unclear investment rules and uncertainties around the ultimate magnitude of stimulus have prevented them from attacking bad policies or distorting asset price valuations.

It is difficult to know the extent that markets and the global economy have benefited from official policy stimulus; however, five years after the crash, economic growth and the labor recovery remain subpar. Strong growth should have been ignited by now.

Most economists still believe in the ‘official position’ that growth is edging sustainably higher and that interest rates will slowly rise to reflect it. They could be correct, but should it fail to unfold as expected, confidence in the efficacy of official policy will diminish and the social contract will break down further. Since markets require confidence, they will also react accordingly.

Some argue that economic benefits to stimulus have run its course, while the costs from looming unintended consequences have not yet been unleashed. Many believe (and I am one) that the risks and costs of current Fed policy outweigh the benefits.

* * *

The Fed’s asset purchase program (QE) and Zero Interest Rate Policy (ZIRP) are the foremost factors that have widened wealth inequalities. The richest few have benefited the most, simply because the 10% richest Americans own 80% of US stocks. The FOMC believe that its asset-price-inflation-trickle-down-policy leads to spending which ultimately leads to job creation, especially for the poor.

However, several FOMC members themselves have questioned Fed policies, citing that they have not worked as well as had been hoped, and pointing out that aggregate demand has been weak throughout the recovery. To his credit Fed Governor Jeremy Stein broached the subject of unintended consequences of Fed policies when he mentioned in his February paper, “A prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risk, or to employ additional financial leverage in an effort to ‘reach for yield’”.

Zero interest rates have incentivized corporations to issue debt in order to capitalize on the historically low interest rates; however, corporations have primarily used the money to pay greater dividends, buyback shares, or modernize plant and equipment. There is a strong case to be made that holding interest rates at zero for a prolonged period is actually counter-productive to the Fed’s efforts to achieve either of its dual mandates. This is because increasing productivity through modernization typically exposes redundancies: it allows firms to lay-off workers, while the improvement in competitiveness allows firms to drop prices.

Furthermore, and as I referenced in my 2013 paper, “Should the marginal propensity to consume of creditors exceed that of debtors, the net effect of redistribution could be to lower household spending rather than raise it. There are some conservative savers who have a predetermined goal in mind for the minimum amount of savings they wish to accumulate over time. Those investors may refuse to move out the risk curve in search of higher yields (likely widening the wealth divide). To them, lower interest rates simply mean a slower rate of accumulation, which likely will jeopardize their minimum goal. The only recourse for this investor is to save more, which is the exact opposite intention of the Fed’s policy. For example, if interest rates fall from 4% to
3%, an investor would have to increase savings by more than 20% each year to reach the same goal over 30 years.”

Another negative result of ZIRP is that banks and other lenders are discouraged from lending due to puny return levels; and, therefore, the Fed’s desire to expand lending is compromised. Are lower (or negative) interest rates supposed to increase the incentive to lend money? To assume such is absurd. Although somewhat counter-intuitive, if interest rates rose, then the supply of money willing to be lent would increase due to wider interest margins.

Policies are so unprecedented and unproven that it is possible that the Fed itself has now become a source of financial instability. This could be the case either through the potential fueling of asset bubbles, through its compromised ability to conduct future monetary policy (due to it unwieldy $4 trillion balance sheet), or due to “unknown unknowns.”

* * *

In a low to zero interest rate policy (ZIRP) environment, investors desperately search for yield. This frequently chases investors into assets to which they are ill-suited and to which they will miscalculate liquidity and downside potential. Under ZIRP paradigms, riskier assets become the best-performing. Credit spreads collapse and equities soar.

Massive monetary ‘printing’ by global central banks has not just emboldened investors, but these actions have collectively changed their behavior and psychology. There is evidence that policies have led to mis-allocation of resources. Investors are emboldened to take what many critics believe is inappropriate or reckless levels of risk. The motto, “Don’t fight the Fed” has taken on added meaning. Moral hazard and a deep-seated bullish psychology have become rampant.

Extended Fed promises of lower rates and a continuation of asset purchases even as the economy heals, are conspiring to propel prices ever-upward. Investing today has become mostly about seeking relative yield, rather than assessing value or determining if the investment’s return is sufficient compensation for the risk.

Simply stated, investors and speculators receive ever-lower returns for ever-higher levels of risks. Over time, the ability of an investor to assess an asset’s fundamental value becomes ever-increasingly impaired. It should a warning sign to portfolio manager’s fiduciary responsibility to maximize return per unit of risk (see market liquidity section).

There have been persistent cycles of asset booms (bubbles) that eventually turned to ‘busts’. Very low or negative real rates (seen recently) always create economic distortions and the mispricing of risk, thereby creating asset bubbles. Each ‘boom’ had some differences, but the common factor has always been easy money which the Fed was too slow to withdraw. Providing liquidity is always easier than taking it away, which is one reason why the Fed has hit the “Zero Lower Bound” in the first place.

Eventually (un-manipulated) asset prices always return to their fundamental value, which is why bubbles always pop. The FOMC has backed itself into a corner. Current changes in policy are being designed around efforts to manage the unwind process seamlessly. Central bank (and government official’s) micro-management appears based on a belief that they can exert an all-encompassing central control over markets and peoples’ lives. Those in power have come to believe that policies have a precise effect that can be defined and managed. This is highly unlikely.

In ‘normal’ times there is a more discernable connection between cause and effect. However, the usual relationships particularly break down during periods of over-indebtedness, unprecedented regulatory changes, and official rates reaching the zero lower bound. Today, the world is far from ‘normal’. It is not difficult to imagine the looming fallout from policies that have promoted asset price inflation, and which have materially compromised market liquidity.

Pimping the Empire, Conservative-Style

"Conservatives" and "Progressives" alike are pimping for the Empire when they support the Central State's essentially unlimited powers

By CHARLES HUGH SMITH

(I say "so-called" because the "Progressives" are not actually progressive, and the "Conservatives" are not actually conservative. Those labels are Orwellian double-speak, designed to mask the disastrous consequences of each ideology's actual policies.)

Let's begin by stipulating that ideology, any ideology, is an intellectual and emotional shortcut that offers believers ready-made explanations, goals, narratives and enemies without any difficult, time-consuming analysis, study or skeptical inquiry. This is the ultimate appeal of ideology: accepting the ideology relieves the believer of the burdens of analysis, skeptical inquiry, uncertainty/doubt and responsibility: all the answers, goals and narratives are prepackaged and mashed together for easy consumption.

This is one of the core messages of Erich Fromm's classic exploration of ideology and authoritarianism, Escape from Freedom.

And what is the essential foundation of authoritarianism? A central state. This is not coincidental.

What few grasp is the teleology of the centralized state: by its very nature (i.e. as a consequence of its essentially unlimited powers), the central state is genetically programmed to become an authoritarian state devoted to self-preservation and the extension of its reach and power.

This is why the Founding Fathers were so intent on limiting the powers of the Central State. They understood the teleology of the centralized state: by its very nature (i.e. as a consequence of its essentially unlimited powers), the central state is genetically programmed to become an authoritarian state devoted to self-preservation and the extension of its reach and power.

You can't cede unlimited, highly concentrated powers to the central state and then expect the state not to fulfill its teleological imperative to protect and extend its powers. The state with unlimited powers will be ontologically predisposed to view any citizen that seeks to limit its expansion of power as an enemy to be suppressed, imprisoned or marginalized.

The state with unlimited powers will be ontologically predisposed to protecting its powers by cloaking all the important inner workings of the state behind a veil of secrecy, and pursuing and punishing any whistleblowers who reveal the corrupt, self-serving workings of the state.

The state with unlimited powers will be ontologically predisposed to view any other nation or alliance as a potential threat, and thus the state will pursue any and all means to disrupt or counter those potential threats.

The state with unlimited powers will be ontologically predisposed to create and distribute propaganda to mask its self-serving nature and its perpetual agenda of extending its powers, lest some threat arise that limits those powers.

Democracy and a central state with unlimited powers are teleologically incompatible.

Though they piously claim to desire a limited State, conservatives cede it essentially unlimited powers because they want that state to be powerful enough to impose their agenda on others and reward their constituencies.

Conservatives are masters at projecting a preachy devotion to a limited state, democracy, liberty and free enterprise while their support of the Central State undermines every one of these values. Conservatives are like the preacher who issues stern sermons on righteousness every Sunday while skimming big money from pimping sordid, destructive policies Monday through Saturday.

Conservatives claim to want to limit the Central State, but their slavish support of Medicare, Social Security, the Pentagon, the National Security State, the Federal Reserve (and thus interest on the national debt), farm subsidies to Big Ag, law enforcement and the War on Drugs Gulag means they support virtually 100% of the Central State's unlimited powers. Their proposed "cuts" are farcically tiny slices designed for propaganda purposes--out of $4 trillion Federal budget, conservatives preach "austerity" while leaving the Empire and their crony-capitalist cartels entirely intact.

Conservatives claim devotion to national defense while actually having no interest in actual defense. Their sole interest is supporting their favored cartels and projecting a politically useful facade of being pro-national defense. In the real world, they support the revolving door between the Pentagon and defense contractors and profitable but ineffective weapons systems. Conservatives happily shove weapons systems down the nation's throat the Pentagon doesn't even want, all the while masking their crony-capitalist agenda behind pious claims of supporting the military.

That is particularly Orwellian: ignore the military's true needs in favor of funneling profits to your crony-capitalist pals. The same Orwellian agenda powers conservative support of the banking sector (conservatives never met a banking subsidy they didn't love), Big Ag, Big Pharma, Big Everything--conservatives will support any Big Business at the expense of the taxpayers and the national commons.

The one essential tool conservatives need to force their crony-capitalism on the citizenry is an powerful Central State--and so they support the essentially unlimited powers of the Central State with gusto, even as they bleat piously about the Founding Fathers.

The Founding Fathers had two primary concerns: foreign entanglements and the dangers of an unlimited Central State. So-called Conservatives are blind to the gap between the reality of their support of a Global Empire and an all-powerful Central State and the fantasy that they even understand the Founding Fathers' concerns, much less actively pursue them.

Conservatives are against Big Government except when Big Government benefits their constituencies. Boost the Pentagon budget by 10% a year, rain or shine, to counter every possible threat to the Empire, boost the National Security State (Homeland Security, NSA, etc.) every year, boost the War on Drugs Gulag annually, leave Medicare, Social Security and interest on the national debt as sacrosanct, and guess what--you've created a self-liquidating monster State.

Behind their preachy facade, conservatives have turned democracy into an auction of political favors. As they belly up to the limitless trough of central State revenues and power, conservatives have embraced the auction as the true mechanism of governance: banking statutes are written by banking lobbyists and then signed into law.

What is the difference between a so-called Progressive who tells us Congress has to pass a crony-capitalist healthcare law to find out what's in it and a so-called Conservative who pushes a banking law penned by lobbyists? There is none: both are pimps.

Read more at:

http://charleshughsmith.blogspot.gr/2014/01/pimping-empire-conservative-style.html

Pimping the Empire, Progressive-Style

Supporting the central state to protect your favored cartels is simply pimping for the Empire

By Charles Hugh Smith

The central illusion of both Left (so-called Progressives) and Right (so-called conservatives) is that the Central State's essentially unlimited powers can be narrowly directed to further their agenda.

This is one of the core messages of Erich Fromm's classic exploration of ideology and authoritarianism, Escape from Freedom.

And what is the essential foundation of authoritarianism? A central state. This is not coincidental.

The central illusion of Progressives is that an all-powerful central state will not become a self-serving expansive empire, but will be content to wield its vast powers to protect its favored cartels/monopolies and distribute money skimmed from the citizenry to Progressive constituencies such as public unions, healthcare and education.

This is an absurd fantasy. Once you give a central state essentially unlimited power to stripmine income and wealth from its citizens, create and/or borrow essentially unlimited sums of money, protect private (and politically powerful) cartels from competition and project military, financial and diplomatic power around the globe, the state will pursue Authoritarianism and Empire as a consequence of possessing those powers.

You can't cede unlimited, highly concentrated powers to the central state and then expect the state not to fulfill its teleogical imperative to protect and extend its powers. The state with unlimited powers will be ontologically predisposed to view any citizen that seeks to limit its expansion of power as an enemy to be suppressed, imprisoned or marginalized.

Democracy and a central state with unlimited powers are teleologically incompatible.

Progressives worship the central state and cede it essentially unlimited powers because they want that state to be powerful enough to impose their agenda on others and reward their constituencies.

But it doesn't work that way. Once you cede unlimited, highly concentrated power to the central state, you get an authoritarian empire that is driven to protect itself from any threat at all costs--including democracy, though the state may maintain a facade of carefully managed "democracy" as part of its propaganda machinery.

Whither Chile?

The malaise of success can be a much worse enemy of the free society than its ideological foes

By Alvaro Vargas Llosa

With just under 47 percent of the vote, former President Michelle Bachelet obtained a resounding victory in the first round in November’s elections in Chile, inflicting a heavy blow to the right and opening the door to a new left-wing government that, unlike the last time she was in office, will be based on a coalition that includes members of the Communist Party. She also went on to win the second round in mid-December and is now the president-elect.

This is the culmination of a process that has left observers dumbfounded. Chile’s outgoing center-right government under President Piñera has been among the most successful in the country’s history, if we judge it by the statistics that serve to measure these things. And yet the center-right has been going through a traumatic identity crisis. Its candidate, Evelyn Matthei, who obtained 25 percent of the vote, was the third figure to lead that ideological family after two previous candidates had to drop out. Several outsiders also ran in this election. One of them, Franco Parisi, a populist economist who comes from the right, took many votes from Matthei, who represented the well-established parties National Renovation and the Independent Democratic Union.

A quick look at some of the achievements of President Piñera is enough to place him among the best performers in Latin America. The economy grew at an average rate of more than 5 percent in his first three years and is growing more than 4 percent this year—against a 3.3 average rate under Bachelet’s previous government. Poverty has been reduced to 14 percent of the population and almost one million jobs have been created. Under Piñera’s predecessor, unemployment had grown substantially. Behind this success is an investment rate that nears 25 percent of GDP, four points higher than in the days of Bachelet. Foreign investors poured US$ 30 billion into the country last year, almost half of what Brazil took in despite an economy that is nine times bigger.

So, what is happening? Mauricio Rojas, a well-known analyst, thinks this is “the best and least loved government in our history.” He points to “the malaise of success”, a material progress that multiplies expectations a lot faster than the ability to meet them. I agree. I watched a similar process in Spain, where a large middle class that was the child of the booming post-Franco economy eventually became complacent and placed on the system redistributive and egalitarian demands that were incompatible with a prosperous society. The result was, in part, Spain’s recent crisis.

Could the same happen in Chile, whose progress has made it an emblem of the emerging world? Much will depend on Bachelet, who as a candidate has given in to several demands from the radical left, including proposing major changes to the Constitution, universal free education, a tax raise and the creation of a public pension system, among others. Whether she will go ahead with this is uncertain since her majority in Congress falls short of what is required for a constitutional change. But one thing is clear: Her government will be under more pressure than any other since the return of democracy in 1990 to reverse course on many of the institutional factors that have made Chile a envied liberal democracy. A significant segment of the middle class seems to have fallen for the siren song of old-fashioned socialism.

......

Read more at:

http://www.independent.org/newsroom/article.asp?id=4838

Machiavelli for Moms

The people desire neither to be commanded nor oppressed by the great, and the great desire to command and oppress the people

By RITA KOGANZON

Niccolò Machiavelli, the 16th-century Florentine political advisor and philosopher, has been credited with founding the modern "realist" school of international relations, the modern conception of the state, and even modernity itself. What he is most famous for, however, is founding a new approach to politics that emphasizes deception and effectiveness over virtue and morality. In his best-known work, The Prince, he advises the politically ambitious to eschew genuine virtue for the mere appearance of it and to accept that the aims of a true leader justify his means, whatever they may be. "For a man who wants to make a profession of good in all regards must come to ruin among so many who are not good," he writes. "Hence it is necessary to a prince, if he wants to maintain himself, to learn to be able not to be good."

This Machiavellian willingness to be "altogether wicked" is difficult to square with some of what we in the modern world he helped create have made of Machiavelli. Perhaps most peculiar, and most telling, of all is the steady stream of self-help and advice manuals for everyday living that claim to have been inspired by him. There is What Would Machiavelli Do? The Ends Justify the Meanness, one of a number of Machiavellian guides for business success. There is also The Suit: A Machiavellian Approach to Men's Style; The Princessa: Machiavelli for Women; A Child's Machiavelli; a slew of (largely self-published) Machiavellian tracts on picking up women; and, most recently, Machiavelli for Moms.

These books find their model primarily in The Prince, a work claiming to dispense advice for princes — not office pushovers, frumpy dressers, playground wimps, and dateless sad sacks. Machiavelli does venture some advice for mothers in the Discourses on Livy, in which he applauds Caterina Sforza's parenting, though it is hard to imagine that today's self-help gurus would share his admiration for her. After conspirators trying to take the city of Forlì kill Sforza's husband and capture her and her young children, she promises to betray the fortress to the conspirators if they release her, and she leaves her children with them as collateral. Machiavelli writes, "As soon as she was inside, she reproved them from the walls for the death of her husband....And to show that she did not care for her children, she showed them her genital parts, saying that she still had the mode for making more of them." That is Machiavelli for moms, though this story is not mentioned in the recent parenting guide. How then has Machiavelli, proponent of every kind of deceit, been domesticated, becoming a modern American sartorial consultant, business guru, and family therapist?

The process has been gradual, spanning several centuries — it began, in fact, with the first great American Machiavellian, Benjamin Franklin. Machiavelli's value for European geopolitical strategy was recognized almost immediately, but it was Franklin who realized that, although Machiavelli had largely been understood as an advisor to the rulers of great states, he was in fact a philosopher for losers. He wrote books about power and the men who had succeeded or failed to seize it, but men who are busy seizing and holding power rarely have time to read books. We are most receptive to Machiavelli when we are young and lowly, or when we have been brought low by some setback, and, in both cases, Machiavelli instructs the weak. But Franklin recognized, too, that Machiavelli speaks to the ambitious among the weak, those who are not satisfied to remain low, and this made him useful to Franklin in particular and to Americans in general.

Machiavelli still has much to teach the lowly and ambitious, but some of the more recent attempts to apply his insights to American life today have missed the point. In order to benefit from the useful lessons Machiavelli can teach us about succeeding in America, we need to identify exactly what those lessons really are. To do so, we would do well to re-examine Benjamin Franklin's approach to employing Machiavellian methods to get ahead in America.

FRANKLIN'S CIVIC MACHIAVELLIANISM

The American situation as Benjamin Franklin saw it in the 18th century was particularly ripe for Machiavellian losers. The period was marked by relative social equality, an observation Tocqueville would echo a half-century later. As Franklin wrote in an advertisement to potential immigrants in 1782, "The Truth is, that though there are in that Country few People so miserable as the Poor of Europe, there are also very few that in Europe would be called rich: it is rather a general happy Mediocrity that prevails." This happy mediocrity prevailed in part because of the availability of land, but also because members of the English aristocracy were disinclined to leave their estates and move to the American colonies, leaving the new world to be populated by lower gentry, small farmers, and tradesmen. The relative absence of aristocratic hierarchy in turn meant that ambitious but poor men like Franklin might rise by their own wits. Here, however, another central feature of the American situation stood in their way: Colonial Protestants looked down on worldly ambition, deeming it sinful to grasp after wealth and position, though to actually possess either or both was a mark of God's grace.

Read more at:

http://www.nationalaffairs.com/publications/detail/machiavellian-self-help

Tuesday, January 7, 2014

Wealth Creation and the State

Money, Savings and Debt

by Pater Tenebrarum

This post can in a way be seen as an addendum to what we wrote regarding the 'gold narrative' the other day. Specifically, we want to return to the argument made in closing, namely that the present situation in terms of private and public debt relative to the economy's ability to create enough wealth to service and repay said debt is a reason to remain bullish on gold and by extension, to remain skeptical regarding the economy's future.

It is important to keep in mind that the level of outstanding debt as such actually does not prove the point. For instance, if all the credit extended were backed by real savings and if the great bulk of the extended credit were employed productively, then the size of the debt would obviously not represent a problem. After all, we would then have very good reason to expect that the investments that have been undertaken are largely sound (given the fact that they are backed by real savings) and that therefore, the economy's future output of final goods will increase sufficiently to create the profits required to service and repay the debt.

However, we know for a fact that a vast portion of the debtberg does not consist of credit that has been productively employed. Moreover, we also know for a fact that much of it is not backed up by real savings. How do we know all this?

Let us first discuss savings. What are savings? In a monetary economy, people save in the form of money. Money is a claim on real goods, it is the ultimate present good. However, in order to save, one has to refrain from consumption. Let us say that someone saves $200 per month. He certainly could spend these $200 instead of saving them, in which case he would exert a claim on the pool of final goods and consume the goods purchased. Note that by refraining from this act of consumption, not only are there now $200 in his savings account, but the goods the saver has not consumed remain with the economy's pool of real funding (the pool of real funding is the stock of produced, but unconsumed final goods).

This addition to the pool of real funding is what actually makes an increase in production possible. If ten savers put aside $200 per month, the $2,000 worth of goods thus saved could e.g. be used to maintain the life and well-being of one worker employed in production activities. When an entrepreneur applies to a bank for credit in order to expand production, he is ultimately not trying to obtain money as such, but capital. What is required to effectively fund new production activities is not money, but real resources.

To illustrate this, imagine that a few people find themselves stranded on a deserted island, and by coincidence one of the things that has been successfully recovered from the shipwreck is a printing press for banknotes and all the paraphernalia required for the printing process. Obviously they could not create any wealth for themselves by printing banknotes. It would be a pointless exercise: the banknotes could not be used to buy the necessary capital goods required to e.g. build a new boat, since these goods are simply not available on the island. This would be so glaringly obvious that they would certainly not even try – they could print billions and would not be an iota richer. If they decide to mix their labor with the natural resources available on the island so as to create primitive capital goods that bring them a few steps closer to their goal of building a boat, they would still be confronted with the problem that at the outset, their pool of real funding would be zero. They would at first have to produce whatever is necessary to keep them alive (i.e., food). If they want to spend time on producing capital goods, enough food would have to be produced that some of it could be saved to maintain their lives while they are busy with building an ax, a net, rudders, sails and so forth.

This example serves to highlight a universal truth: no wealth can be created by printing money. Money is indispensable for an economy based on the division of labor, as a medium of exchange (and all the subsidiary functions that flow from this, such as the store of wealth function) and a unit of account that enables economic calculation. It should be obvious though that adding to the supply of money does not add to the economy's wealth (in case a commodity money is used, it could be argued that the non-monetary uses of the commodity make additional supplies valuable beyond their exchange value, but as a rule the general medium of exchange derives the great bulk of its value from monetary demand).

Since 1971, the world has been on a fiat money standard. Moreover, the banking system is fractionally reserved, which means that it can literally create additional money from thin air. There is no effort involved except a few keystrokes. This system is backstopped by central banks that 'accommodate' this creation of money from thin air by supplying bank reserves, which are likewise created at the push of a button. In this system, a lot of credit is created that is not backed by real savings. We can get an inkling regarding the size of this credit creation from thin air by looking at the amount of uncovered money substitutes in the economy, i.e., deposit money that is not backed by standard money in the form of currency or bank reserves which can be converted to currency on demand.

US money TMS-2 by economic categorization. Covered money substitutes (dark blue) consist of deposit money that is backed by either vault cash or bank reserves held at the Fed. Uncovered money substitutes (also known as 'fiduciary media') represent deposit money that has literally been created from thin air and for which no standard money backing exists – click to enlarge.

As can be seen above, although the Fed's 'quantitative easing' policy has vastly increased the portion of money substitutes that are covered by bank reserves (the often cited excess reserves), the amount of uncovered money substitutes outstanding nevertheless stands at a new record high. In theory, all of this money should be available on demand. In practice, the banks could only pay out the covered portion and would have to contract credit if they were required to pay out more than that.

The main problem with the creation of money from thin air is that by throwing additional fiduciary media on the loan market, the market interest rate is pushed below the natural interest rate dictated by society-wide time preferences. This sets the boom-bust cycle into motion. The lower interest rate makes long-term investment projects that appeared to be unprofitable at a higher rate look profitable, so investment will be drawn toward such projects. The lower market interest rate suggests that the pool of real savings has increased so as to make the funding of these long-range investment projects possible. However, this is a mirage: the additional real savings do in fact not exist. To paraphrase Mises, the entire class of entrepreneurs finds itself in a situation akin to that of a master builder who attempts to build a palace with three stories, while unbeknown to him, the building material available is only sufficient for two stories. Obviously, the later he discovers this error, the more significant the loss will be, as a lot of resources will have been wasted.

Moreover, the creation of fiduciary media makes exchanges of nothing for something possible. The early receivers of newly created money can exercise claims on the pool of real savings, although no commensurate contribution to the pool has actually been made. The earlier receivers of newly created money will benefit to the detriment of later receivers, as by the time the new money has percolated through the economy, prices will have risen to reflect the increase of the money supply. Obviously, the earlier in the process one gets to spend newly created money, the bigger one's advantage will be. Thus wealth is redistributed from late to early receivers. Moreover, by exercising their claim without an offsetting contribution to the pool of real savings having been made, these early receivers make life more difficult for genuine wealth creators, who now must contend with a diminished pool of savings. In short, printing additional money enables consumption without preceding production. Obviously this cannot possibly be sustainable – ultimately consumption is constrained by production (one cannot consume what hasn't first been produced).

In a nutshell the problem posed by the mountain of debt that has been built up over time is the following: it has misdirected investment and falsified economic calculation, which in turn has distorted the structure of production and led to the consumption of scarce capital (which is usually disguised as illusionary accounting profits) during the boom periods. Subsequently this became painfully obvious as the inevitable economic busts set in.

What's more, the duration and amplitude of the boom-bust sequences has continually grown, as after every failed boom, the amount of new credit and money thrown at the economy to 'rescue' it from the bust has been vastly increased. Ever larger additions to the amount of money and debt outstanding have resulted in ever smaller additions to economic output.

US: total credit market debt outstanding – click to enlarge.

If we consider the total amount of credit market debt outstanding depicted above, it is clear that large portions of this debt are indeed unproductive and represent a millstone hanging around the economy's neck. There are for instance (in the case of the US) more than $16 trillion in cumulative public debt. This represents the government's debt-financed consumption of the past. Even those who erroneously believe deficit spending to be economically beneficial must realize that this debt that is the residual of past deficit spending can only harm future economic development.

US: total public debt on the federal level – click to enlarge.

As Ludwig von Mises wrote regarding this point in Human Action:

“But if the government invests funds unsuccessfully and no surplus results, or if it spends the money for current expenditure, the capital borrowed shrinks or disappears entirely, and no source is opened from which interest and principal could be paid. Then taxing the people is the only method available for complying with the articles of the credit contract. In asking taxes for such payments the government makes the citizens answerable for money squandered in the past. The taxes paid are not compensated by any present service rendered by the government's apparatus. The government pays interest on capital which has been consumed and no longer exists. The treasury is burdened with the unfortunate results of past policies.”

(emphasis added)

We would note to this: one of the many Achilles heels of deficit spending that aims to provide 'economic stimulus' is precisely that the wealth creators in the economy know very well that they will eventually be taxed to pay for it. It is a good bet their reaction will reflect this knowledge. They will become cautious, take fewer risks and curtail their investment activities. This is one of the reasons why massive deficit spending schemes such as that enacted in Japan over the past two decades consistently fail to work.

Another point worth considering is that there is also still a vast amount of mortgage debt outstanding that is effectively 'underwater'. The collateral is worth less than the remaining debt, as a consequence of the housing bubble. No-one dares to write this unsound debt off, as doing so would denude the banks of capital. And so various extend and pretend schemes have been enacted (ranging from the adoption of dubious accounting methods to delaying foreclosure proceedings to various tax-payer funded interventionist schemes that aim to prevent a write-off of this debt). This is in many ways a drag on the economy, as both lenders and potential borrowers are paralyzed by this overhang of unsound debt.

Wealth Creation in the Market Economy and the State

In spite of the foregoing, it is important to stress that the market economy, even though it is extremely hampered, continues to create wealth. We once attended a presentation by Professor Hans-Hermann Hoppe, in which he discussed the 2008 crisis and its aftermath. There was one remark he made during the Q&A that struck us as especially pertinent to this discussion. He essentially said (we are paraphrasing from memory): “We can gauge how powerful the market economy's ability to create wealth is by considering that in most modern-day regulatory democracies, perhaps 30% of the population can be said to be involved in genuine wealth creation activities. In spite of the fact that the entire amount of wealth is created by this small minority, and that this minority is subjected to the most onerous regulations and taxes, it still manages to improve the well-being and standard of living of all of society over time.”

Along similar lines, Mises stressed that although an artificial credit-induced boom leads to impoverishment, this does not mean that we should expect that we will necessarily be poorer overall at the end of a boom than at its beginning. This is so because even under the unhealthy conditions of a boom, genuine wealth creation continues. If that were not the case, the capitalist system wouldn't have been able to increase the world's stock of wealth continually ever since capitalist production processes have been adopted. However, it is also important to realize that all of this has happened in spite of the hampering of the market economy by taxation and regulations and the failed central economic planning by central banks.

Obviously though, there must be a limit to the depredations the economy can handle. Today, the State has created an environment in which most of the intellectuals who propagate political and economic ideas are essentially bought off, as the government can offer them levels of remuneration that are way beyond the value their services would command in a free market. Naturally they will tend to sotto voce engage in the vilest statist propaganda. Very few dare to bite the hand that feeds them, even if they are aware that they are promoting a harmful ideology. Presumably, quite a few of them even believe in what they are promoting.

We can see this in many obvious contradictions, such as the fact that e.g. most economists today agree that the market economy represents the by far best system for creating wealth, but at the same time support fiat money and central economic planning by the central bank, deficit spending by the state, and all sorts of state interventions in the economy. This is an inconsistent position. Either the free market is the best system, or its opposite, full-blown socialism, is. It is simply absurd to claim that what we really need is just enough socialism so as not to kill off the market economy altogether.

We are happy to report though that the intellectual handmaidens of statism are finding it ever more difficult to propagate their memes due to the internet having opened up alternative channels of communication and information that are outside of establishment control. This has made it possible for many people to learn of ideas that have previously been suppressed. On the other hand it is clear that we are still very far from the tide having decisively turned.

In fact, because the State now finds itself under increasing financial and economic pressure, it reacts in a manner that it regards as the politically palatable 'solution' to the debt problem. This solution consists primarily of inflationary policy (see the chart of TMS-2 above for evidence), and various forms of 'financial repression'. Inflation mainly robs the poorest members of society, while financial repression, depending on what forms it takes, robs everyone. The alternatives, such as writing off the unsound debt that has accumulated or cutting unsustainable government spending, are policies that are regarded as highly detrimental to winning elections. The welfare state has created so many dependents and hangers-on, not least including a vast and powerful class of bureaucrats who represent a large block of votes, that no politician dares to veer off established lines too much. Hence financial repression is chosen as the 'lesser evil' from the point of view of the ruling classes (whose main aim it is to preserve their rule and privileges).

However, there is a big problem with this. As the above-mentioned Professor Hoppe e.g. remarks in “The Economics and Ethics of Private Property” with regard to taxation:

“Thus, by coercively transferring valuable, not yet consumed assets from their producers (in the wider sense of the term including appropriators and contractors) to people who have not produced them, taxation reduces producers’ present income and their presently possible level of consumption. Moreover, it reduces the present incentive for future production of valuable assets and thereby also lowers future income and the future level of available consumption. Taxation is not just a punishment of consumption without any effect on productive efforts; it is also an assault on production as the only means of providing for and possibly increasing future income and consumption expenditure. By lowering the present value associated

with future-directed, value-productive efforts, taxation raises the effective rate of time preference, i.e., the rate of originary interest and, accordingly, leads to a shortening of the period of production and provision and so exerts an inexorable influence of pushing mankind into the direction of an existence of living from hand to mouth. Just increase taxation enough, and you will have mankind reduced to the level of barbaric animal beasts.”

Hoppe also points out that regulations (which compel or prohibit exchanges between private parties), while they are just as economically harmful as taxation, don't increase the economic resources in the hands of the government. They merely satisfy the lust for power. He concludes that this is the main reason why in wars between industrialized Western States, the less regulated ones tended to win against the more regimented ones.

However, we would point out that even the US economy, which is still widely regarded as one of the less hampered and regulated Western economies, boasts the following statistics as of 2012 (Source: the Ten Thousand Commandments):

• Total costs for Americans to comply with federal regulations reached $1.806 trillion in 2012. For the first time, this amounts to more than half of total federal spending. It is more than the GDPs of Canada or Mexico.

• This is the 20th anniversary of Ten Thousand Commandments. In the 20 years of publication, 81,883 final rules have been issued. That’s more than 3,500 per year or about nine per day.

• The Anti-Democracy Index – the ratio of regulations issued to laws passed by Congress and signed by the president – stood at 29 for 2012. That’s 127 new laws and 3,708 new rules – or a new rule every 2 ½ hours.

• Regulatory costs amount to $14,678 per family – 23 percent of the average household income of $63,685 and 30 percent of the expenditure budget of $49,705 and more than receipts from corporate and personal income taxes combined.

• Combined with $3.53 trillion in federal spending, Washington’s share of the economy now reaches 34.4 percent.

(emphasis added)

Read the rest at:

http://www.acting-man.com/?p=24479