deflation

Urban Magnets for Disaster

Filed in BP, deflation, economy, Ford, Gold, inflation, o, silver, ubs, US Dollar by on February 18, 2011 0 Comments

When it comes to bad stuff the sky’s the limit. It’s gonna happen, eventually…one way or another. And it could be real bad. And when bad stuff happens, you’re better off being somewhere else. Where? Generally, bad stuff seems to happen most often in cities. Why is that? Cities are where most people live. It is where governments are. And it is where the labor force is most specialized. There are no subsistence farmers living in cities. Nor do urban populations “live off the land.” Instead, they depend on complex networks of commerce. The typical city dweller produces neither food nor energy. He sits all day in an office — completely dependent on others to provide power and food. Then, he goes home — still completely dependent on the division of labor for his most important needs. Progress can be described as the elaboration of the division of labor. In man’s most primitive state, specialization is extremely limited. From what we’ve been told, the early man was the hunter. Early woman gathered…that’s about the extent of it. As the tribe grows larger, specialization increases. One person might tend the fire. Another might be in charge of making clothes or arrows. The advent of sedentary agriculture and towns caused a big leap forward in human progress and, not coincidentally, the division of labor. Some townspeople went out to tend the fields. Others began to focus on woodworking…or iron mongering…or making weapons…or clothes. Some played cards and hung around at bars. There was soon a homebuilding industry…and, not long after, merchants, prostitutes and bankers…and even shyster lawyers and tax collectors. As the division of labor expanded, the average person became richer…and more dependent on others. In order to eat, someone else had to plant…and till…and harvest…and hunt…and gather. And then, when agriculture became mechanized, he depended on faraway people who produced oil and gasoline…and people who built …

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Gold, Silver, Copper, Nickel and the Slow Death of Money

Gold, Silver, Copper, Nickel and the Slow Death of Money

A huge opportunity to hedge against both inflation and deflation is lying out there in the open. There are no transaction costs and right now there’s even a built-in discount. But most people will never realize any of this. In 1933 President Franklin Delano Roosevelt signed Executive Order 6102, which made it illegal for U.S. citizens to hold gold bullion. Prior to that, the $20 bill was essentially a warehouse receipt for a one-ounce gold coin. Prior to the Federal Reserve Act of 1914, the $20 bill actually told you this. After Executive Order 6102, $20 notes weren’t allowed to be exchanged for gold anymore. Americans couldn’t legally own or trade gold as money and savings, only as jewelry or collectible coins. A year after making monetary gold ownership illegal, FDR revalued gold from $20.67 per ounce to $35 an ounce with the Gold Reserve Act. The Act also required all gold and gold certificates to be turned over to the Treasury. The dollar was debased. A chunk of the gold it used to be good for was legally removed. Instead of  “containing” 1/20 an ounce of gold, each dollar now only contained (or represented) 1/35 an ounce. And of course you couldn’t actually own the gold itself. In 1971 Nixon severed the last official ties between gold and the dollar. The dollar quickly sunk to its real value, which had been debased by years of money supply inflation. By 1975 Americans were allowed to own bullion gold again, but during the roughly 40 years bullion gold ownership had been illegal, the dollar had been drastically debased. At its former lowest point in the summer of 1980, the dollar …

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How Savings and Investment Increase an Economy’s Output

Filed in BP, Debt, deflation, economy, interest-rates, Lear, o, silver, Spot Gold, target, US Dollar by on February 14, 2011 0 Comments

Everyone who has held a job and a bank account understands the potential benefit of postponing consumption today in order to enjoy greater consumption in the future. However, many people — if pressed — would explain this increase in saver’s income by an offsetting reduction in the income of a borrower in the economy. This is certainly a possibility. For example, if Bill (the borrower) forgets his lunch money on Monday, he might ask his coworker Sally (the saver), “Can you lend me $10 and I’ll pay you back $11 tomorrow?”  If Sally agrees, then it is clear that her $1 in interest on the personal loan was paid out of Bill’s reduced income for that month. In other words, if Bill’s take-home pay that month were $5,000, then he would actually only have $4,999 to work with, because of his $1 expenditure in “buying a loan” from Sally. At the same time, if Sally’s normal paycheck were also $5,000, then this particular month she would actually have $5,001 to work with, after earning $1 in providing “lending services” to Bill. In the scenario above, what basically happened is that Bill financed his consumption with an “advance” made by Sally. On the Monday morning is question, …

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A Self-Employed Carpenter’s Continued Thoughts on the Future

Filed in BP, Debt, deflation, economy, Gold, inflation, Lear, o, silver, US Dollar by on February 11, 2011 0 Comments

My first article on this topic concerned the sharp contraction of the residential construction industry in the U.S. I am a self-employed carpenter. The main thrust of that article was that the housing market is not going to recover to anything approaching its zenith. Bloomberg Business reported in January that housing starts fell again in December to a 529,000 annual rate. The annual rate in a good economy is considered to be a million new homes per year. The recent peak in 2005 was 2 million homes. Nationally, production for the residential construction industry has dropped about 75% off its peak. Inflation, lack of wealth, and rising energy costs preclude any great gains in housing output in the near future. The majority of the skilled construction workers will be doing something other than residential construction in the near future. What is it that we’ll be doing? First off, we are craftsman. “Craftsman” is a mind-set, a personality type. Throughout history, craftsmen have exchanged their labor, skills, and ideas for the expendable wealth of those who have it. That is the ball upon which we need to keep our eye. Many of us will likely still be craftsman in the next economy. The best-run construction companies will be able to get lean enough to live through the hard times and carve out a niche in the new residential construction industry. Most companies and individuals will not make it back. The current overextended financial situation in the U.S. will cause our world to “shrink.” Inflation and sharply rising fuel prices will force a lot of economic activity back down to the community level. Many things that we currently take for granted will become more difficult to obtain. Acquiring food, fuel, heat, and shelter will take on a greater importance in the day-to-day life of the middle class. I’m not talking about the Apocalypse. I’m just saying that things will not be as comfortable as they once were. You and your fellow middle classers will be conducting more business within your neighborhoods and communities. What do we craftsman do in the transition? First of all, keep your hand in the old construction game as long as you can. Do not create new debt for yourself. Do not bid jobs so close to the bone that you have no wiggle room. If something goes awry, and it usually does, you will have either new debt or legal problems. Speaking of new debt, get out of your old debt. The leaner you emerge from this transition period, the better your choices will be. If you have any liquid assets, consider owning some physical silver. Cash will be eaten …

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A Self-Employed Carpenter’s Thoughts on the Future

The world is changing. Currently, as a nation, we have a large and well-trained section of our work force dedicated to residential construction. Unemployment within the construction industry now exceeds 20%. That number takes into account only workers getting unemployment compensation. There are also many self-employed individuals, ineligible for unemployment compensation, who have simply run out of customers and work. That is the bad news. Now the worse news: Not only are those jobs not coming back, but the construction industry will continue to diminish for the foreseeable future. The real estate glut is not on hold; it is over. Waiting for its return is similar to waiting for next the big surge in typewriters, 35mm cameras, and home phones. Why are the construction jobs not coming back? There are three main reasons, the first of which is inflation. Decades of credit expansion and the recent printing of money (quantitative easing) have increased the overall volume of our fiat currency: dollars. Therefore, the value of each dollar unit has been reduced, causing prices to rise. This results in increased costs in construction of new homes. Higher new construction costs make staying in and repairing older structures, or renting, more attractive. The second reason is fuel costs. Living rurally and working in urban areas is becoming very expensive. Reasons one and two will keep an increasing number of younger workers and couples living and renting closer to work. Why take the financial and mobility risks associated with homeownership? The third reason is we are broke. Who are “we”? Western civilization, comprised mainly of the U.S. and Europe. Consider this…there are gold and silver coins and bullion: actual wealth storage vehicles. There are paper dollars: temporary wealth storage vehicles. And there are also trillions of “dollars” represented as pixels on screens in accounting software programs. When I say that we are broke it is because I don’t believe those pixel dollars represent anything. All of the wealth supposedly held in those pixels does not exist. It is a classic Ponzi scheme. If you go today and convert your pixels to actual dollars, everything is just fine. But if 10% of us go today and try to convert our pixels into dollars, the banks will shut down…Why? Because the money doesn’t exist. There is no actual wealth stored in any of those pixels. Spain and Portugal may require financial bailouts in 2011. Part of the fallout from the Greek financial crisis last year was the creation of a eurozone bailout fund of $1.01 trillion. That fund could be used to assist Spain and Portugal if necessary. Where did that $1.01 trillion come from? Was it removed from another sector of Europe’s economy? Supplied in gold bullion to EU headquarters in The Hague? Removed from the savings accounts of earnest Europeans? No, none of those could supply …

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Why Economists Are Not Popular

Filed in BP, deflation, Ford, o, silver, US Dollar by on February 7, 2011 0 Comments

One of the many reasons why economists are unpopular is that they keep reminding people that things have costs, that there is no free lunch. People already know that — but they like to forget it when there is something they have their hearts set on. Economists don’t have to say anything when people are buying things at a shopping mall or at an automobile dealership. The price tags convey the situation in unmistakable terms. It is when people are voting for nice-sounding things which politicians have dreamed up that economists are likely to point out that the costs ignored by politicians are going to have to be paid, one way or another — and that you have to weigh those costs against whatever benefits you expect. Who wants to put on green eye shades and start adding up the numbers when someone grandly proclaims, “access to health care for all” or “clean air” or “saving the environment”? Economists are strictly party-poopers at times like these. They are often gate crashers too, since usually nobody asked them how much these things would cost or even thought about these issues in such terms. Some of the more persistent or insensitive economists may even raise questions about the goals themselves. How much health care at the taxpayers’ expense? In Britain, a 12-year-old-girl was given breast implants. That much health care? Meanwhile, Britain’s skyrocketing medical costs of taking care of things that people would never have spent their own money to take care of forced cutbacks and delays in more urgently needed medical treatments. One woman’s cancer operation was postponed so many times by the British health service that, by the time the system could take her, the disease was now too far gone for medical help — and she died. Economists could have told anyone in advance that making things “free” causes excessive use by some, leaving less for others with more urgent needs that have to remain unsatisfied. Rent control, for example, has led to more housing being occupied by some, who would not have paid the …

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Blinder Understates Cost of Carbon Tax

Filed in AMAG, BP, deflation, economy, job creation, lead, Lear, New Gold, o, Spot Gold by on February 4, 2011 0 Comments

In a recent article in the Wall Street Journal , Alan Blinder listed numerous alleged benefits of a phased-in carbon tax. Out of his entire column, he devoted a single sentence to the possible downside of his plan when he wrote, “No one likes to pay higher taxes.” A more balanced assessment shows that a carbon tax presents very real dangers, even if we rely on the same economic analysis that so enthralled Blinder. Spurring Innovation through Higher Taxes? Here’s Blinder explaining the economic benefits of a carbon tax that starts out low, but will eventually become quite steep: “Once America’s entrepreneurs and corporate executives see lucrative opportunities from carbon-saving devices and technologies, they will start investing right away — and in ways that make the most economic sense. I don’t know whether all this innovation will lead to 80% of our electricity being generated by clean energy sources in 2035, which is the president’s goal. But I can hardly wait to witness the outpouring of ideas it would unleash. The next Steve Jobs, Bill Gates and Mark Zuckerberg are waiting in the wings to make themselves rich by helping the environment.” We should also be clear that Blinder’s argument for job creation does not rely on the “negative externalities” of carbon emissions. Earlier in the piece, he made a list of the “few nice side effects” that would result from a carbon tax: “reducing our trade deficit, making our economy more efficient, ameliorating global warming …” Because he puts global warming at third in the list, we see that there is nothing peculiar to greenhouse gases behind his main argument for job creation. No, Blinder is making the simple observation that if the government imposes artificial costs on the…

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Answering Krugman on Austrian Economic Theory

Answering Krugman on Austrian Economic Theory

I still get the sense that Krugman truly doesn’t understand the Austrian position. For example, he asks, “Why is there overwhelming evidence that when central banks decide to slow the economy, the economy does indeed slow?” But because the Austrian theory says the bust occurs when the central bank backs off and allows interest rates to rise toward their “correct” level, this is hardly a problem. In fact, if central banks couldn’t slow the economy, as an Austrian economist I would be worried about my theory. Krugman also poses questions concerning (price) inflation rates and the connection between nominal and real GDP. But I think he is conflating the Austrian theory with a purely “real” business-cycle theory. Austrians understand that monetary influences can have real effects. To repeat, that is the very essence of the Mises-Hayek theory. Although most of Krugman’s objections are due to his unfamiliarity with the actual Austrian theory, I think one source of confusion came from the particular illustration I used in my article. First let’s set the context by quoting Krugman : “So what is the essence of this Austrian story? Basically, it says that what we call an economic boom is actually something like China’s disastrous Great Leap Forward, which led to a temporary surge in consumption but only at the expense of degradation of the country’s underlying productive capacity. And the unemployment that follows is a result of that degradation: there’s simply nothing useful for the unemployed workers to do. “I like this story, and there are probably other cases besides China 1958–1961 to which it applies. But what reason do we have to think that it has anything to do with the business cycles we actually see in market economies?” First, I should say I’m glad that Krugman at least concedes that (his understanding of) the Austrian explanation both is theoretically possible and actually happens in the real world — coming from the guy who referred to it in 1998 as equivalent to the “phlogiston theory of fire,” this is progress! However, Krugman still doesn’t have quite the right understanding of the Austrian view of the “capital consumption” that occurs during the unsustainable boom. As I said above, on this particular issue the fault lies with the necessarily simplistic “sushi model” I used in the article that Krugman read . In that article, in order to make sure the reader really saw why Krugman (and Tyler Cowen) were overlooking something basic, I had the villagers boost their daily sushi intake even while they developed a new technology to help augment their fishing. So during their “boom,” it would have seemed to a dull villager that both consumption and investment were rising. In my fable, this was physically possible because the villagers neglected the regular maintenance of their boats…

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Why Paul Krugman Is Wrong on the Austrians

The Austrians on Capital In contrast to mainstream macro models, which either do not possess capital at all or at best denote it as a homogenous stock of size “K,” Austrian theory explicitly treats the capital structure of the economy as a complex assortment of different tools, equipment, machinery, inventories, and other goods in process. Much of the Austrian perspective is dependent on this rich view of the economy’s capital structure, and mainstream economists miss out on many of the Austrian insights when they make the “convenient” assumption that the economy has one good. (Krugman will be glad to know that yes, I can spell all this out in a formal model — and one that referee Paul Samuelson grudgingly signed off on.) Krugman and other Keynesians stress the primacy of demand: they keep pointing out that the owner of an electronics store, say, won’t have the incentive to hire more workers, and buy more inventory, if he doesn’t expect consumers will show up with money to spend on new TVs or laptops. But Austrians point out that demand per se is hardly the whole story: Regardless of how many green pieces of paper the customers have, or how much credit the store can get from the bank, it will be physically impossible for the electronics store to fill the shelves with new TVs and laptops unless the manufacturers of those items have already produced them. And in turn, the manufacturers can’t magically create TVs and laptops merely because the demand for their products picks up; they rely on other sectors in the economy having done the prior preparation as well, such as mining the necessary metals, assembling the proper amount of tractor trailers needed to ship the goods from the factory, and so on. These observations may strike some as trivial, not worthy of the consideration of serious economists. But that’s only because normally, a market economy “spontaneously” solves this tremendous coordination problem through prices and the corresponding signals of profit and loss. If someone had to centrally plan an entire economy from scratch, there would be all sorts of bottlenecks and waste — as actual experience has shown. Without the guidance of market prices, we wouldn’t observe a smoothly functioning economy, where natural resources move down the chain of production — from mining to processing to manufacturing to wholesale to retail — as neatly depicted in macro textbooks. Instead, we would see a chaotic muddle where the various interlocking processes didn’t dovetail. There would be too many hammers and not enough nails, too much perishable food and not enough refrigerated railroad cars to deliver it, and so on. The Austrians on Interest When it comes to explaining the coordinating function of market prices, Austrians assign a very important role to interest rates, for they steer …

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How to Replace Austerity with Freedom, Independence and Prosperity

The Economic Collapse Blog has this list of examples of how European-style “austerity” is already hitting the U.S., including cities closing schools and fire stations, and states eliminating whole state agencies and raising taxes. That includes the state of Illinois whose legislature has passed a “temporary” 66% personal income tax hike that the Democrat governor will sign. Rest assured, this income tax hike will be as “temporary” as the one in Massachusetts , still in place since 1989. Such austerity measures may lead to the same kind of social unrest Europeans have been experiencing. The Economic Collapse Blog concludes, We are entering a time of extreme financial stress in America.  The federal government is broke.  Most of our state and local governments are broke.  Record numbers of Americans are going bankrupt.  Record numbers of Americans are being kicked out of their homes.  Record numbers of Americans are now living in poverty. The debt-fueled prosperity of the last several decades came at a cost.  We literally mortgaged the future.  Now nothing will ever be the same again. To say that “nothing will ever be the same again” is just pessimistic and unnecessary. We actually can return to the prosperity of the past, by replacing debt and austerity with freedom and independence. There is no need for Americans to suffer through what European countries are suffering, because nearly all the problems we face are caused by governmental intrusions into many aspects of our personal and economic lives — intrusions by federal, state and local governments. Regardless of the good intentions that the welfare and military socialism statists have in justifying their use of compulsory government powers, what America needs is to cut the shackles of State-imposed dependence, restrictions, regulations, taxation, all those policies of moral relativism that involve violations of the Rule of Law: theft, trespass, denial of Due Process, and other acts of State-initiated criminal aggression. Freeing Americans includes repealing all forms of intrusive presumption-of-guilt regulations and restrictions that are in place having nothing to do with whether any individual is suspected of any crimes against others. Regulations are before-the-fact demands by the government that presume the individual and one’s business guilty, in which one must submit one’s private personal or financial information to the government to prove one’s innocence. Government regulations and arbitrary restrictions are literally searches and seizures by the government of information that is none of anyone else’s business, and effect in the stifling of everyday citizens’ growth and prosperity. Ending all personal income taxes , corporate taxes, estate taxes, and capital gains taxes frees people who own or share in the ownership of businesses — i.e. employers and prospective employers — to invest in their own research and development and in the expansion of their businesses, which is the genuine force behind jobs creation, in both blue collar and white collar sectors. Ending all personal income taxes frees people to explore their own ideas and inventions, and to start their own businesses that will employ more people and advance society further. Also…

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How Not to Stop a Terrorist

Filed in AMAG, BP, deflation, euro, lead, Lear, New Gold, o, silver, target by on January 26, 2011 0 Comments

As Glenn Greenwald predicted, terrorists have attacked the next most logical target. A suicide bomber has caused the death of nearly three dozen people in Moscow’s Domodedovo Airport by attacking a crowded area not subject to rigorous security measures. Mr. Greenwald expected the next terrorist bombing to take place in the crowded lines just before the security checkpoint. Instead, they went for a soft target just outside of the hard target, but it wasn’t quite the soft target Mr. Greenwald expected… The suicide bomber went to the back door instead of the front. The other unguarded end of the airport was attacked: the part just beyond the security line where passengers crowd together to pick up their bags and find ground transportation or meet relatives and friends. “Medvedev Orders Bomb Probe, Threatens Sackings,” reads an Associated Press headline this morning. The article continues… “Medvedev lashed out at law enforcement and airport authorities over the attack at Domodedovo, an international hub and major gateway to Russia, which killed at least eight foreigners… “‘It is clear that there is a systemic failure to provide security for people’ at Domodedovo, said Medvedev. “He ordered the Interior Ministry to recommend transport security officials for dismissal and said authorities found culpable would be held responsible, suggesting they could face prosecution.” Exactly what were security officials supposed to do?: “Domodedovo Airport said it was not responsible for the blast. ‘We fully met all the requirements in the sphere of air transport security for which we are responsible,’ spokeswoman Yelena Galanova said in televised comments.” Domodedovo Airport is like just about every other airport in the world. That is to say, there is no protocol to stop random people from wandering into the baggage claim area. Now I suppose there may be. But I’m not sure it will help. You can “harden” one target all you want; there will still be an unprotect zone just beyond your securest point. Medvedev doesn’t want to accept that… “He urged officials to develop a system that would provide for ‘total checks’ on people and bags at airports.” I’m not sure what this is supposed to mean. Wherever these “total checks” start, there will be people congregating somewhere prior to being totally checked. These people will…

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In Praise of Anarchy

Filed in AMAG, BP, deflation, Lear, o, Spot Gold, ubs, US Dollar by on January 24, 2011 0 Comments

Left alone, good people tend to do good things. And, when unobstructed by coercion, force, violence or any other tool employed by the state in order to foster and maintain a more “responsible,” “socially conscious” citizenship, most people tend toward being good people…all on their very own. Nowhere was this sentiment better expressed during the past few weeks than in the flood-stricken state of Queensland, Australia (and, more lately, in the state of Victoria, to Queensland’s south). The rains that inundated an area the size of France and Germany (combined!) across the Sunshine State wrought havoc and destruction upon its people. Lives were lost, property damaged and industry crippled. When the worst of Mother Nature’s wrath had subsided, Queensland residents were left with a monumental clean up. To their credit, these individuals, in the face of near-immeasurable disaster, performed admirably. They did what came naturally. Contrary to the patriotic rally cries of politicians, they didn’t do what Queenslanders do; they did what good people do. And it was beautiful. The general feeling was perhaps best summed up by Wally “The King” Lewis, a retired national football hero, who spent the last week of his holidays helping his fellow Brisbane residents prepare sandbags and to bail rising flood waters out of their homes. (It is worth pointing out here that, for many Australians, there is no higher office to be attained in the land than that of venerated sporting legend.) Speaking to National Nine News from the waterlogged front yard of a neighbor – whom he had never met – Wally said, “If someone’s doing it tough, I think it’s the right thing to do to put the hand up and ask them if they want any help.” The interviewer then turned his microphone to another volunteer. “What was your reaction when Wally Lewis turned up?” Typifying the laid back disposition of the crowd, the young man casually replied, “[Laughs] Yeah, I was a little surprised but…you know…people help out. It’s all good.” The Australian people appeared to be perilously close to discovering something very important about themselves; something, perhaps, they’ve always known; an instinctual tendency toward human solidarity, the natural urge to help a neighbor in distress, to lend a hand; in short, to volunteer. Alas, barely had the first piece of debris been cleared away when the media, as it typically does, lost sight of the bigger picture. Alongside inspirational stories of non-violent, voluntary cooperation, the local papers turned their attention to the state’s role in the cleanup. Should the state and federal governments remain focused on returning “their” budgets to surplus, or should they deploy funds to assist those in need of help? In other words, how “best” should the state spend its citizens’ money…as if the only just, honest option had not already expired on point of expropriation in the first place? [The answer, in other words, is not to steal it.] While sifting through the news …

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