Thursday, January 31, 2008

Letter to the Editor

Vijay writes a letter to the Seattle PI in response to its article:
There are two deeply rooted misconceptions in this ideologically tainted article that you wrote. One is that liberty is an old idea; a throw-back to some sort of barbaric age. In fact, liberty is historically a very new idea; an idea that underpins the American tradition and which has always animated the greatness of our Republic.

It is government tyranny, oppression and wars of conquest that are the truly old ideas. These are the ideas that Clinton and Obama both cling to, albeit veiled by a diaphonous sheet of idealism. Those who have been inoculated against the media spin that is endemic to our country are able to see straight through this veil of false idealism.

The second deeply rooted misconception of your article is that Ron Paul is an "isolationist". Clearly a brief trip to your dictionary is in order. Isolationism is a foreign policy that prescribes abandonment of trade and dialogue Ron advocates nothing of the sort. He speaks of non-interventionism. The idea that we do not try to impose our beliefs through the barrel of the gun. It is dialogue, friendship, free exchange of ideas, and trade that Ron encourages. The very ideas that our founders advocated:

"Peace, commerce, and honest friendship with all nations – entangling alliances with none" (Thomas Jefferson).

Would an "isolationist" advocate ending the embargo on Cuba, and allowing American citizens to visit a country that has been destroyed by our heavy-handed bullying?

I hope, for your sake, and for the future of our nation, you will recognize, and uproot the misconceptions that have led you to paint Ron's ideas in such a dishonest manner.

Vijay Boyapati (Director of Operation Live Free or Die).

Countdown Special Comment: On FISA and Telecom Immunity

This is another one of those holy shit videos. Olbermann shreds President Bush over FISA.

UPDATE: TJ wanted me to add Ron Paul's response.

Great HuffPo Article on Ron Paul

Why I Support Ron Paul

Gold as a Hedge Against Deflation

Gold and Deflation is an interesting article that makes the case that gold acts a hedge against deflation, not inflation. I recommend it.

John McCain is Dr. Strangelove

Brave New Films presents John McCain is Dr. Strangelove.

Vote early, vote often

Oh my. This video is brilliant.

Tuesday, January 29, 2008

Bank reserves go negative

Holy shit (yes two expletives in one day). This picture is worth a thousands words.

Read Mish's post for the full details.

Radio show host shreds Mitt Romney

Holy shit. I've never heard anybody shred a candidate like this guy did. And he endorses Ron Paul at the end.

I will admit there's something disingenuous about his tax argument. Americans in the lower half income percentiles don't pay 25% tax rates so they aren't going to suddenly have that money in their pockets. But he's still ultimately correct for several reasons.

First, those tax dollars will move from wasted spending on things the government wants (e.g. spending on our military empire, farm subsidies, special interests) to spending on things the people want (e.g. capital investments in our economy, hospitals, medical training). Second, the largest tax on those in the lower half is the inflation tax (roughly 10%) and that can only be fixed by stopping the Federal Reserve from lending money at below market rates and monetizing debt. Third, despite what all those Keynesians say, it's better to tax consumption than income. Income leads to savings which leads to investment. Investment leads to long-term sustainable growth. The United States has a giant negative savings rate. Our economy is only able to avoid total crisis because of our foreign creditors. That is not sustainable.

But Ron Paul's platform is even better. Just phase the income tax our completely and replace it with nothing. As I discussed in this entry, nearly the entire income tax is used to pay for our military empire.

Update: Haha, I noticed the radio station is 1040. How ironic.

Monday, January 28, 2008

The People are Sovreign, not President Bush

The Daily Dose gets it right in The Constitution in Reverse:
I think the only thing I can say to sum-up Bush’s last State of the Union address is that it shows that Bush’s philosophy of government is the inverse opposite of the Constitution. According to the Constitution, power and authority flow from the people and the State to the federal government. But Bush’s key word of the night, repeated ad nauseam, was “empower” — as in, the federal government will empower the people. But the federal government has no authority to empower the people (or the states). The power is supposed to be in the people to begin with.

To Bush, power and authority flow down from the central government, and dispensing such power, the act of “empowerment,” is a gift given by Washington, D.C. Terrible!
That's correct. According to wikipedia, in a republic, "sovereign power is founded in the people, individually, not in the collective or whole body of free citizens, as in a democratic form. Thus no majority can deprive a minority of their sovereign rights and powers."

In this country, the people are supposed to be sovereign and are "endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed." In other words, the government gets its power from us, not the other way around as President Bush likes to think.

Also, for anybody who thinks our system of government is a democracy, that is a complete fallacy perpetrated by those who'd like you to believe the minority has to submit to the majority. The word democracy is not contained in the Declaration of Independence, the United States Constitution, nor in the constitutions of any of the 50 states. Our federal and state constitutions are very clear that we have a republican form of government.

Bernanke's Choices

The famous Austrian economist, Ludwig von Mises, said
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
What this means is that the Fed has a choice: pain now or much more pain later. Currently, Bernanke is trying to keep the credit expansion going. The Fed can keep extending credit at cheaper and cheaper prices by lowering interest rates. Eventually, though, the debt level will become so high that banks will become reluctant to extend credit at any price or debtors will refuse to take on more debt. At that point, the Fed's efforts to increase the credit expansion will be like "pushing on a string." The money supply will start contracting and the Fed will be left with a choice. It can print money and drop it from helicopters. This will lead to the total destruction of the dollar. Or it can let interest rates rise to the free market level as Paul Volker did in 1979.

The problem is that in the late 70's, the United States was a creditor nation and today we are a massive debtor nation. Will the Fed have the stomach to let interest rates to double digits to save the dollar? Many doubt it. The dollar and gold are telling a story. Gold is hitting new highs and is close to an all time high of $930/oz. The dollar index is at 75.58, close to its all-time low set in November. Even if the Fed is successful in the near term at keeping the credit supply expanding without destroying the dollar, it will only result in more future pain as Mises pointed out. And as somebody pointed out, inflation makes rich people richer and poor people poorer. Deflation makes everybody poorer. The market is currently telling us that the Fed wants inflation and will get it. But markets are often wrong. These are interesting times.

Sunday, January 27, 2008

Friday, January 25, 2008

Road to Serfdom Thought Two

I am not even done with the editor's Introduction and I found another gem by Bruce Caldwell discussing the continuing relevance of The Road to Serfdom.
Another theme, evident perhaps more explicitly in this introduction than in specific passages in Hayek's own text, but nonetheless very much a part of his underlying motivation in writing the book, is Hayek's warning concerning the dangers that times of war pose for established civil societies -- for it is during such times when hard-won civil liberties are most likely to be all-too-easily given up. Even more troubling, politicians instinctively recognize the seductive power of war. Times of national emergency permit the invocation of a common cause and a common purpose. War enables leaders to ask for sacrifices. It presents an enemy against which all segments of society may unite. This is true of real war, but because of its ability to unify disparate groups, saavy politicians from all parties find it effective to invoke war metaphors in a host of contexts. The war on drugs, the war on poverty, the war on terror are but three examples from recent times. What makes these examples even more worrisome than true wars is that none has a logical endpoint; each may be invoked forever.

Hayek's message was to be wary of such martial invocations. His specific fear was that, for a war to be fought effectively, the power and size of the state must grow. No matter what rhetoric they employ, politicians and the bureaucracies over which they preside love power, and power is never easily surrendered once the danger, if there ever was one, has passed. Though eternal vigilance is sage advice, surely "wartime" (or when politicians would try to convince us that it's such a time) is when those who value the preservation of individual liberty be most on guard.

This is enormously relevant today as Caldwell points out. In another post, I enumerated several recent examples of loss of civil liberties such as The Patriot Act, the suspension of habeas corpus, the repeal of posse comitatus, and spying on Americans without warrants. This is but a few.

In a great essay called War Is the Health of the State, Randolph Bourne provides a detailed explanation of the exact phenomenon Hayek and Caldwell referred to where the state uses war as the mechanism to gain power and control. I find this enormously frightening today. In the last century, the Democrats were generally the pro-war party and the Republicans were the anti-war party. This may seem strange to some of my liberal friends, but there's a lot of history. Woodrow Wilson brought America into World War I -- he was a Democrat. World War II is probably a bad example since we were attacked, but for the sake of completeness, I'll mention that FDR was a Democrat. Harry Truman, a Democrat, entered us into the Korean War and set the precedent for doing so without a declaration of war by Congress as the Constitution requires. Instead he went to war based on a mandate from the United Nations. John Kennedy and Lyndon Johnson entered us into the Vietnam War, again without a declaration. Bill Clinton took us to war in Bosnia, also without a declaration.

On the Republican side, George H. W. Bush and George W. Bush are the only Republicans since the 19th century to take us to war. So until recently, the Republican party was the anti-war party. Now the Republican party has been taken over by the neoconservatives. According to wikipedia, this movement has left-wing origins. This isn't surprising since war is only compatible with the idea that government should be large and in control and this is a philosophy of the left.

So basically, we have two parties that run the country. The Democrats have a long history for being the party of war. The Republicans have recently been taken over by warmongers. So it doesn't really matter who wins because the tendency of both parties now is for war. If things continue, we're likely to be in a perpetual state of war. This is a huge threat to our liberties. As James Madison so astutely observed, "No nation could preserve its freedom in the midst of continual warfare. "

Road to Serfdom Thought One

I am reading The Road To Serfdom by F. A. Hayek and I thought I'd try something new. Whenever I come across something interesting, I will write about it.

I am still in the editor's introduction written by Bruce Caldwell and there's a section that I found quite interesting.
John Maynard Keynes read the book on the way to the Bretton Woods conference, and delighed Hayek when he wrote him that it was a "grand book" and that "morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement." Keynes went on to say, though that "You admit here and there that it is question of knowing where to raw the line. You agree that the line has to be drawn somewhere, and that the logical extreme is not possible. But you give us no guidance as to where to draw it
Many modern economists that have enormous influence on our government's policies worship Keynes and despise Hayek. There are many articles by Paul Krugman praising Keynes. There's Krugman's introduction to Keynes' The General Theory of Employment, Interest, and Money. Then there's another article titled Why aren't we all Keynesians yet? Reading these articles leaves no doubt that Krugman holds Keynes as an economic god. And it was just as easy to find an article by Kruman attacking Hayek. In it, he says
And it wouldn't just be a matter of demanding that historians play down the role of slavery in early America, or that economists give the macroeconomic theories of Friedrich Hayek as much respect as those of John Maynard Keynes. Soon, biology professors who don't give creationism equal time with evolution and geology professors who dismiss the view that the Earth is only 6,000 years old might face lawsuits.
He actually compared Hayek's work with the theory of creationism. Yet, his economic hero Keynes said of Hayek's pivotal work that it was a "grand book" and that "morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement." Also, did Krugman forget that Hayek won the Nobel Prize in Economics? This isn't too surprising. Economists like Krugman use Keynes as the intellectual cover to move America towards socialism, even if this wasn't what Keynes had in mind.

Moving on. Caldwell goes on in the next paragraph to say
Hayek evidently took these criticisms to heart, for in the coming years he would make two further important contributions to political philosophy that would refine and extend the arguments made in The Road to Serfdom. In The Constitution of Liberty he laid out the philosophical foundations of liberal constitutionalism, where in a private sphere of individual activity is defined, the state is granted a monopoly on coercion, and then is constitutionally limited by the rule of law in its use of those coercive powers. In the last third of the book Hayek outlined specific sorts of government policies that were consistent with such a political setup. In Law, Legislation, and Liberty, Hayek lamented how western democracies were increasingly circumventing the spirit of liberal constitutionalism by passing coercive legislation, typically under the guise of achieving social justice, but in reality serving well-organized coalitions of special interests.
That last line really resonates with me. "Hayek lamented how western democracies were increasingly circumventing the spirit of liberal constitutionalism by passing coercive legislation, typically under the guise of achieving social justice, but in reality serving well-organized coalitions of special interests." This is happening more and more and it is frightening. And in many cases, it's not even under the guise of social justice. It's simply corporate lobbyists writing legislation that is designed for the benefit of their corporations. You can see this in the Medicare Pharmaceutical plan to "help" seniors and the ending of Posse Comitatus so that the President can use the military to "help" in the case of a crisis. This is corporatism, not capitalism. I wonder if the HMO lobbyists are busy right now writing the legislation for Hillary's healthcare plan.

John McCain and Miss Teen USA South Carolina

It would be nice if the candidates running for President actually knew something about the role government currently plays in our markets.

This made me laugh

The scary thing is that the government probably will make us go on diets once taxpayers are paying for healthcare for overweight Americans.

Wednesday, January 23, 2008

Great article about military spending in Mother Jones

In How to give everyone healthcare and get rid of the income tax, I estimated that about 5% of our workforce goes to the military based on the fact that about 5% of our GDP is military spending. Well, it appears I grossly underestimated the amount of our GDP that is spent on the military.

In Why the debt crisis is now the greatest threat to the American republic, Charles Johnson does a more thorough analysis of how much the USA actually spends on the military. Although the FY08 military budget is $623 billion, the true amount of spending is almost double. These costs include off-budget items like the wars in Iraq and Afghanistan and military spending that is included in non-military department departments (e.g. nuclear weapons in the Department of Energy, foreign military aid in the Department of State, long-term care in the Department of Veteran Affairs).

He estimates that total military spending in 2008 will be $1.1 trillion. To put that in perspective, the total revenue from personal income tax is $1.24 trillion. The total amount spent by China is around $65 billion and $50 billion by Russia. We spend much more than the rest of the world combined.

So basically, the entire personal income tax goes to military spending for maintaining our empire. It makes me sad to think how much I have personally paid in taxes for this.

I agree with almost everything this article says. The one thing with which I disagree is that we need to rollback the Bush tax cuts. I believe that with a policy of non-intervention, where we stop being the policeman of the world and we start dismantling our military empire, we can get rid of the entire income tax and provide quality healthcare for all Americans with an actual free market approach.

Continuing the policies we have is not going to work. The United States is going to go bankrupt. It's going to be ugly. I believe we're headed for a financial crisis worse than the Great Depression. There's a good chance it will happen this year. Our entire policy depends on the rest of the world lending us over $1 billion each day. Most Americans don't give this a thought or think it's normal. There will be a time when we'll will look back in amazement about how we thought this was okay. It will be similar to how people today look back at slave owners and wonder how they thought it was okay.

Saturday, January 19, 2008

Capitalism versus Corporatism (Part 1)

According to Wikipedia,
Capitalism generally refers to an economic and social system in which the means of production are predominantly privately owned and operated, and in which investments, distribution, income, production and pricing of goods and services are determined through the operation of a market economy. It is usually considered to involve the right of individuals and groups of individuals acting as "legal persons" or corporations to trade capital goods, labor, land and money (see finance and credit).
Capitalism is the system that has created the prosperity we've gained in this country over the past several hundred years. In a true free market, a buyer and seller only agree to a transaction if it's to the mutual benefit of both parties. The buyer believes that the item he wants is worth more to him than the money he is willing to exchange for it. The seller believes the money is worth more to him than the item. Both parties agree to make the exchange because they both benefit from it. This free exchange automatically develops in a non-primitive economy. People specialize and they need to exchange the items or services that they are skilled at providing with other items and services they need or want.

In a modern economy, businesses develop that use capital from their investors and the the skills of their workers to create products desired by their customers. In a true free market, multiple businesses compete to provide the same services giving consumers choices. This competition results in low prices and high quality products. If consumers think they can find something cheaper and of higher quality from another company, they will take their business elsewhere. Companies understand this and must compete on cost and quality in order to retain their customers. New businesses will enter the market if they think they can provide something cheaper or of higher quality.

The virtuous cycle is driven by the owners seeking profit. If a business is not satisfying the needs of its customers, it will start to lose money. The owners will start to see their profits fall and their their capital consumed. If they don't correct this either by making the business meet the needs of its customers or by shutting the business down, they will lose all their capital. On the other hand, owners that make profit will need to continue to increase quality, lower costs, and innovate in order to maintain profits. A business may get far ahead of its competition allowing it to make very high profits, but this will attract new entrants into the market. They will see the opportunity to undercut the market leader thus attracting away his customers. This cycle continues on and on. By rewarding those who create the most value and punishing those who do not create value, the free market provides customers with the lowest cost and highest quality products. This feedback system is very important. It only works if you reward success and punish failure.

It's important to differentiate capitalism from corporatism. Corporatism is an economic and political system whereby power rests in the hands of the government and official cartels that are created or licensed by the government. These cartels correspond to various industries. For example, there might be a banking cartel, a military cartel, a healthcare cartel, and a steel cartel. In Corporatism, big government and big business make the decisions. Corporatism is also known as fascism, but that term can confuse people because they often conflate it with Nazism.

Another form of corporatism, or neo-corporatism, is where the government is heavily influenced by various businesses, labor unions, and industry trade groups. This is a softer form of corporatism that has many of the same consequences. I'm not aware of any true systems of corporatism today, but this softer form of corporatism is widespread.

Corporatism does not provide the benefits of Capitalism. In Corporatism, consumers generally do not get the highest quality products at the lowest prices. Cartels are effectively monopolies and they collude to fix prices. Fixing prices above the free market price allows them to make higher profits than they would otherwise make in the competitive market. When prices are fixed, there is less innovation and incentive to reduce costs and increase quality. Since prices are fixed, a company can not charge more for a higher quality product. Since profits are high, there is less incentive to lower costs.

In a cartel, businesses do not face the constant existential threat of a competitor coming in to take away their customers. In fact, with corporatism, companies are protected from failing as the companies that fail have large amounts of influence with the cartel and with the government. The cartel and the government will step in to prevent the failure because they don't want to disturb the system that benefits them. In this way, the system subsidizes failure. A cartel will also seek to retain the status quo and prevent one company from getting ahead of the others. This tends to punish or taking the incentive away from success. In this way, corporatism does not have the creative destruction present in capitalist systems but rather has the exact opposite characteristic of maintaining the status quo.

In corporatism, it's not just the prices of products and services that are fixed. Labor unions may have much influence and try to fix the price of labor. When the price of labor is fixed, there is little incentive for an employee to work harder because there is no way to make more money by doing a better job. Likewise, these systems also generally make it hard to fire an employee so an employee can often get away with the minimum amount of work that's just enough to avoid being fired.

Another thing that can be fixed is the cost of money. A banking cartel can set interest rates. Interest rates are the cost of money. If I borrow money, the interest is the cost to borrow. If I lend money to somebody, the interest is the price I charge. A banking cartel that also has a monopoly to create and destroy money is even more powerful. This debasement, or inflation, results in the loss of value to all existing money. Whoever gets the newly printed money receives an enormous benefit. In corporatism, the beneficiaries of this newly printed money are generally the other cartels and special interests. This is to the harm of the average person who does not get the money first but rather sees his existing money and wages lose value.

So what type of system does the United States have? I will address this in part 2. You can probably guess where I am going...

Great MLK/JFK/Ron Paul Video

Friday, January 18, 2008

Couple Interesting Articles on Healthcare

There's an interesting comment thread going on about healthcare.

I wanted to share a couple links Vijay provided.

This NY Times article discusses how an illegal private healthcare system is developing in Canada because the public healthcare system is such a failure.
Accepting money from patients for operations they would otherwise receive free of charge in a public hospital is technically prohibited in this country, even in cases where patients would wait months or even years in discomfort before receiving treatment.

But no one is about to arrest Dr. Brian Day, who is president and medical director of the center, or any of the 120 doctors who work there. Public hospitals are sending him growing numbers of patients they are too busy to treat, and his center is advertising that patients do not have to wait to replace their aching knees.

The country's publicly financed health insurance system — frequently described as the third rail of its political system and a core value of its national identity — is gradually breaking down. Private clinics are opening around the country by an estimated one a week, and private insurance companies are about to find a gold mine.

Dr. Day, for instance, is planning to open more private hospitals, first in Toronto and Ottawa, then in Montreal, Calgary and Edmonton. Ontario provincial officials are already threatening stiff fines. Dr. Day says he is eager to see them in court.

"We've taken the position that the law is illegal," Dr. Day, 59, says. "This is a country in which dogs can get a hip replacement in under a week and in which humans can wait two to three years."

I've also talked quite at length at how we don't have a free market for healthcare in this country. In fact, we have nothing of the sort. Vijay found this Economist article that discusses some examples of this.

Thursday, January 17, 2008

What Has Government Done to Our Money?

This is a great explanation of how money works in a free society and what the government has done to destroy it.

What Has Government Done to Our Money?

Thanks Ben for another great article.

Here's a small quote to wet your appetites. It succinctly sums up the inflation tax and why it's the most regressive tax of all. Unfortunately, the politicians who most claim to want to help the poor are often the ones most in favor of monetary inflation.

To gauge the economic effects of inflation, let us see what happens when a group of counterfeiters set about their work. Suppose the economy has a supply of 10,000 gold ounces, and counterfeiters, so cunning that they cannot be detected, pump in 2000 "ounces" more. What will be the consequences? First, there will be a clear gain to the counterfeiters. They take the newly-created money and use it to buy goods and services. In the words of the famous New Yorker cartoon, showing a group of counterfeiters in sober contemplation of their handiwork: "Retail spending is about to get a needed shot in the arm." Precisely. Local spending, indeed, does get a shot in the arm. The new money works its way, step by step, throughout the economic system. As the new money spreads, it bids prices up, as we have seen, new money can only dilute the effectiveness of each dollar. But this dilution takes time and is therefore uneven; in the meantime, some people gain and other people lose. In short, the counterfeiters and their local retailers have found their incomes increased before any rise in the prices of the things they buy. But, on the other hand, people in remote areas of the economy, who have not yet received the new money, find their buying prices rising before their incomes. Retailers at the other end of the country, for example, will suffer losses. The first receivers of the new money gain most, and at the expense of the latest receivers.

Inflation, then, confers no general social benefit; instead, it redistributes the wealth in favor of the first-comers and at the expense of the laggards in the race. And inflation is, in effect, a race, to see who can get the new money earliest. The latecomers, the ones stuck with the loss, are often called the "fixed income groups." Ministers, teachers, people on salaries, lag notoriously behind other groups in acquiring the new money. Particular sufferers will be those depending on fixed money contracts, contracts made in the days before the inflationary rise in prices. Life insurance beneficiaries and annuitants, retired persons living off pensions, landlords with long term leases, bondholders and other creditors, those holding cash, all will bear the brunt of the inflation. They will be the ones who are "taxed."

In our economy, the banks, the military-industrial complex, and other recipients of corporate welfare are the first-comers that benefit from the system. The middle class and the poor are the latecomers who lose out.

Great Article Explaining Gold

If you're going to read only one article about gold, this is it. It's long, but worth it.

Why the Global Financial System is About to Collapse Part 1 Part 2

Thanks to Ben for bringing this article up again. I remember reading it a couple years ago, but it really resonates now in light of recent events.

Amusing intersection of politics and work

This Gmail Chat article made my day. Wait to those liberal bloggers over at Huffington Post find out the original tech lead for Gmail Chat is a raging libertarian who supports Ron Paul.

I kid them though. I've seen both positive and negative articles about Ron Paul on Huffington and we both have a common enemy in neoconservatives. I wonder if the people at Daily Kos and TPM use Gmail Chat. I think they get immense pleasure out of attacking Dr. Paul.

Wednesday, January 16, 2008

How to give everyone healthcare and get rid of the income tax

There are many reasons why having an income tax and a big government is dangerous. First, the centralization of power is a threat to freedom and this centralization of power can only be acheived when the government has control of a large percentage of the country's wealth. Second, the main beneficiaries of the big government are those most connected to the government: the politicians, the recipients of corporate welfare, and other special interests seeking special privileges. Third, the money spent by the government is generally for the benefit of the government, not for the benefit of the people.

In order to stop this, we must get rid of the income tax, but when this proposal is made, progressive and liberals argue that the people proposing such a measure are selfish and greedy. So I will make a simpler proposal that isn't quite as good as getting rid of the income tax, but it's a lot better than our current income tax.

The proposal is that all the money collected by income taxes should be destroyed. After receiving the money, the government can electronically remove it from the money supply. In this scenario, we would still pay the same amount of income tax, but I believe the country would be a lot better off.

For starters, there would be no war in Iraq because we couldn't possibly afford to start aggressive wars against other countries. Instead of spending more on our military than the rest of the world combined, we'd have to spend in proportion to what a country of our size has and needs. This would wipe out hundreds of billions of dollars of spending and result in us bringing most of our 500,000 or so troops back home. We'd have a much smaller military overall.

Our military-industrial complex is responsible for about 5% of our GDP. Let's say that translates into roughly 5% of the workforce. In 2006, there were about 106M full time workers in the USA. So 5% of that would be about 5.3M workers that are part of our military-industrial complex. This sounds about right to me because there are about 1.8M full-time workers in the US Military and the rest can be accounted for by companies that make weapons and support the military. Let's say we cut that by half (I consider that pretty modest). That would mean we could remove 2.6M workers from a military that provides little benefit to Americans. How could these workers (many of them highly skilled) be useful to the economy? Well how about 1M more new healthcare workers in the form of doctors, nurses, technicians, and hospital workers. How about 500K new primary and secondary teachers? How about hundreds of thousands skilled engineers working on medical technology instead of missile and fighter jet technology? It's not just the workers but also all the resources that each of those workers represent in terms of buildings, computer equipment, energy, etc.,

When people ask why don't we have healthcare for all Americans, it's not because we don't have high enough taxes. It's because we take away resources that could be used to provide healthcare and use it for something most of us don't need, i.e. a military empire.

When I look at the healthcare proposals floated by Edwards, Obama, and Clinton, I don't see anything there about addressing the fundamental problem. Let's assume for the moment that we don't have spare capacity in our healthcare system (I don't know of many emergency rooms that don't have lines and doctors offices that don't have enough patients). Assuming then it's not simply a matter of efficiency, there are only two ways to provide healthcare to all Americans. The first way is to provide less healthcare to some Americans in order to provide some healthcare to all Americans. The second way is to increase the amount of healthcare in America. I don't like the former and I don't think any of my wealthy liberal friends are going to like increased waits for doctor appointments and fewer choices. So I think we all really want the latter to happen. For that to happen, we need millions of more healthcare workers and the facilities that go along with them. Simple supply and demand shows that in order to get more of that, the prices will have to go up in order to attract more workers into the healthcare industry. On the other hand, the prices will go down if there are millions of workers that are available to enter this industry. I am not sure where they are going to get all these skilled workers from otherwise.

In summary, the only way to get the healthcare we need is for the government to stop spending our resources on things that don't benefit Americans. I pick on the military-industrial complex because it is the biggest target. There are others as well. If we didn't have the income tax, this would automatically happen. Or if the government just destroyed that money, it wouldn't be available to spend either and it would make all the other existing money more valuable. Either way, we'd end up with a lot more of the things people actually want, like healthcare.

Tuesday, January 15, 2008

Where Free Speech is Going

The Noxious Fruits of Hate Speech laws

Here is an excerpt from the article and video:

Ezra Levant is a right-wing Canadian neoconservative who publishes Western Standard, a typical warmongering, pro-Likud journal -- a poor man's Weekly Standard for Canadian neocons. In February, 2006, he published the Danish Mohammed cartoons, which prompted an Islamic group's imam to file a complaint (.pdf) against Levant with the Alberta Human Rights and Citizenship Commission, charging Levant with "advocating hatemongering cartoons in the media," and the imam specifically accused Levant of "defaming me and my family because we follow and are related to Prophet Mohammed."

Rather than dismiss the complaint as a blatant attempt to punish free thought and free speech, the Alberta Human Rights Commission announced that it would investigate. To do so, they compelled Levant to appear before a government agent and be interrogated about the cartoons he published, his thoughts and intent in publishing them, and the other circumstances surrounding his "behavior." Under the law, the Commission has the power to impose substantial fines and other penalties on Levant.

The hearing was closed to the public -- only his lawyer and wife were allowed to attend -- but Levant insisted on recording the proceedings and was directed by the Commission not to publish the video, but he did so anyway. Here are the noxious fruits of hate speech laws: a citizen being forced to appear before the Government in order to be interrogated by an agent of the State -- a banal, clerical bureaucrat -- about what opinions he expressed and why he expressed them, upon pain of being punished under the law. This is nothing short of stomach-turning:

Monday, January 14, 2008

Director of National Intelligence Wants to Spy on all Internet Traffic

From the WSJ,

Spychief Mike McConnell is drafting a plan to protect America’s cyberspace that will raise privacy issues and make the current debate over surveillance law look like “a walk in the park,” McConnell tells The New Yorker in the issue set to hit newsstands Monday. “This is going to be a goat rope on the Hill. My prediction is that we’re going to screw around with this until something horrendous happens.”

At issue, McConnell acknowledges, is that in order to accomplish his plan, the government must have the ability to read all the information crossing the Internet in the United States in order to protect it from abuse. Congressional aides tell The Journal that they, too, are also anticipating a fight over civil liberties that will rival the battles over the Foreign Intelligence Surveillance Act.

Part of the lawmakers’ ire, they have said, is the paltry information the administration has provided. The cyberspace security initiative was first reported in September by The Baltimore Sun, and some congressional aides say that lawmakers have still learned more from the media than they did from the few Top Secret briefings they have received hours before the administration requested money in November to jump start the program.

This reminds me a quote from the Anti-Federalist Papers:
This power, exercised without limitation, will introduce itself into every corner of the city, and country -- It will wait upon the ladies at their toilette, and will not leave them in any domestic concerns; it will accompany them to the ball, the play, and the assembly; it will go with them when they visit, and will, on all occasions, sit beside them in their carriages, nor will it defect them even at church; it will enter the house of every gentleman, watch over his cellar, wait upon his cook in the kitchen, follow the servants into the parlor, preside over the table, and note down all he eats and drinks; it will attend him to his bedchamber, and watch him while he sleeps; it will take cognizance of the professional mail in his office, or his study; it will watch the merchant in the counting house, or in his store; it will follow the mechanic to the shop, and in his work, and will haunt him in his family, and his bed; it will be a constant companion of the industrious farmer in all his labor, it will be with him in the house, and in the field, observe the toil of his hands, and the sweat of his brow; it will penetrate into the most obscure cottage; and finally it will light upon the head of every person in the United States. To all those different classes of people, and in all these circumstances, in which it will attend them, the language in which it will address them, will be GIVE! GIVE!
In my post Hayek's The Road to Serfdom, I discussed how the government continues to undermine our civil liberties under the pretense that it's for our own safety. Benjamin Franklin said, "They who can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety."

We must consider what ability would individuals have to resist a tyrannical government should one arise in the future. The Federal government can spy on our telephone calls and Internet traffic without a warrant simply by issuing a National Security Letter. It can label any of us an "enemy combatant" thereby taking away the right of habeas corpus and trying that person in a military court. It can prevent us from boarding an airplane by adding us to a "no fly" list and it has TSA agents stationed at every airport ready to enforce any future regulation along these lines. It now wants the power to spy on all Internet traffic meaning it will be able to identify any activity it considers suspicious. In a time of crisis as determined by the President, the federal government can now use the military to police civilians and already used Blackwater paramilitary forces to confiscate the guns of lawful gun owners in New Orleans. In addition, the Iraq war has been the perfect training ground for our soldiers to learn how to police a civilian population.

The founding fathers understand the dangers of a tyrannical government and designed many levels of checks and balances into our system of government. In the Constitution, they provided a strict enumeration of the powers of the Federal Government, but we all but ignore what is granted and allow the government to assume powers unimaginable just 100 years ago. They were so worried that people over time might infer powers that weren't granted, they made the first 10 amendments to specifically limit the Federal government's power in the most sensitive areas. So freedom of speech cannot be prohibited, the government cannot search us without a warrant from an independent judiciary and without probable cause, and the government must provide due process and a trial by jury. Through the second amendment, the founding fathers intended that a government couldn't become tyrannical against a well-armed population. Through the ninth amendment, the founding fathers reiterated that if they forgot anything, the government couldn't do that either. And through the tenth amendment, they made sure that the federal government knew that the people and the states reserved all other powers.

We have lost our way and we are steadily allowing all the pieces to be put in place to allow a future tyrannical state. I am not saying that the people in power intend this, but it's just the natural course of things. As Hayek showed in his book, all forms of collectivism lead logically and inevitably to tyranny.

Credit Expansion, Economic Inequality, and Stagnant Wages

This is a great read. Credit Expansion, Economic Inequality, and Stagnant Wages

Greenspan says maybe we don't need a Federal Reserve

At the end of this interview, he implies we might be better off with a gold standard instead of a central bank. Perhaps he is posturing for what he sees coming over the horizon: the collapse of fiat currency and a return to the gold standard.

"And there are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard" (the Federal Reserve Act was passed in 1913).

Bush Speaks the Truth

Ron Paul always says he is running on the foreign policy that George W Bush ran on. Bush seems so reasonable about this back in 2000. Amazing how things change.

Gold breaks through $900

As of 5AM EST, gold broke through $900/oz and is at $911/oz. Silver is at $16.47/oz. One year ago gold was $628/oz and silver was at $12.5o/oz. These are enormous movements.

Gold and silver are telling an important story here. It's reacting to the destruction of fiat currencies due to the enormous amount of monetary inflation by central banks. While it's possible that an economic recession could trigger monetary deflation as debt money disappears, the rise in gold and silver suggest the market believes central banks will print money as fast as they can to prevent monetary deflation.

NAACP President: Ron Paul Is Not A Racist

Saturday, January 12, 2008

Thursday, January 10, 2008

Ron Paul: A New Hope

Understanding Inflation and Deflation

In order to discuss monetary issues, we have to be precise about our definitions of inflation and deflation. This is one of the most confusing issues and it took me a year to really understand this. The problem is that these terms are thrown around to mean different things depending on what school of economics one is using.

The Austrian definition of inflation is an increase in the money supply. Deflation is a decrease in the money supply. Keynesian economists changed the meanings of the terms. They defined inflation as an increase in the prices of goods and deflation as a decrease in the prices of goods.

To differentiate between the two, I will use the terms monetary inflation and monetary deflation to refer to the Austrian terms. I will use the terms price inflation and price deflation to refer to the Keynesian terms.

The Keynesian concept of price inflation is not well defined. If the price of goods rise, is it because the amount of money has increased, is it because the demand for the goods increased, or is it because the supply of the goods decreased? With price inflation, we have headline inflation and core inflation (excludes food and energy). We have the pre-Clinton era basket of goods methodology, we have the current methodology, and we have the new experimental methodology. Who gets to decide what's in the basket of goods? If the price of pork goes up because there was a pig disease that wiped out half the pigs, should the Fed raise interest rates? If the price of corn goes up because we're burning it in our cars, is this something the Federal Reserve should account for. Then we have the consumer price index and the producer price index which figure into monetary policy. This is the conflict between Austrian and Keynesian economics. It mixes monetary policy with the normal fluctuations in goods caused by changes in supply and demand in the market. The Keynesians are forever changing their models because the fundamental assumptions make no sense. In fact, in the 1970's something happened that Keynesian economics predicted was impossible: we had a recession but prices kept increasing. They had to invent a new term for this phenomena, stagflation. There is no such concept in Austrian economics because the money supply is either increasing or decreasing and the prices of goods are set by the market clearing price based on supply and demand.

Even if one believes the Federal Reserve is not a system designed for the benefit of bankers, politicians, and special interest as I believe it is, it still is fundamentally flawed. The Federal Reserve is the dog chasing its own tail. It continuously tries to adjust monetary policy to make us all wealthy, but monetary policy can't make us wealthy. The Federal Reserve controls money. That can't make us wealthy because money isn't wealth. It's simply a mechanism for moving wealth around so that we don't need to use the barter system. The Federal Reserve can print and destroy money, but this doesn't give us the things we need. When the Federal Reserve has a machine that can print food, clothing, houses, and energy, it will be able to make us all wealthy.

The Federal Reserve tries to accomplish impossible goals with monetary policy. It must create enough monetary inflation at a fast enough rate so that Congress can forever spend more money than it takes in. This lets the government pay interest with future dollars that are less valuable. Although this isn't part of the Fed's mandate, the government would literally default if the Fed didn't make this possible. It then has two statutory mandates. It has to keep price inflation low so that consumer goods don't rise in price too fast. The first two goals are at odds with each other. Since monetary inflation eventually results in price inflation, the government has to keep changing the model for calculating price inflation to show that it's low. Also, when prices go up for a reason that has nothing to do with monetary policy (e.g. a drought or an energy crisis), the Fed has to raise interest rates to counteract it. Finally, the Fed is expected to keep the economy growing (i.e. jobs). This is in conflict with the first two goals. Luckily, the Fed doesn't really care what type of jobs are being created so it's okay if desirable factory jobs are replaced with service jobs at Walmart. To accomplish all this, the Fed tries to influence the market by changing interest rates, but the market moves very quickly and interest rate changes can take a year to filter through the economy to change its course. When the Fed gets it wrong, we get bubbles and recessions.

In the Austrian model. inflation is an increase in money and deflation is a decrease. It's fairly easy to measure. Especially when you use gold as money because you just add the amount mined (very little - ~1% annually these days) and subtract the amount consumed (practically nil). So there's no problems with overestimating it or underestimating it.

So why are are there two different models for defining inflation and deflation? The reason is fairly straightforward. Before the Federal Reserve, inflation always referred to the money supply. I mentioned that the Federal Reserve had a dual mandate: low inflation and economic growth. But the Federal Reserve Act didn't define what inflation was. How convenient! You can't print money or extend too much credit if inflation is defined as money and credit. But if you redefine inflation to mean prices, you can print all the money you want as long as prices stay low. And who decides how to measure whether prices are staying low? The government of course. So the government justifies the printing of money by changing the metric to something that they can control. But does anybody really believe they managed to keep price inflation low?

In 1918, 1 oz of Hershey chocolate cost 3 cents. In 2003, it costs 52 cents. That's almost a 95% loss of purchasing power. If anything it should have gone down in price because we became more efficient at growing the ingredients and manufacturing it. So 95% is probably giving the Fed the benefit of the doubt. The funniest part is that the Fed is always "fighting inflation". They've managed to frame the topic in such a way that they are fighting something that they themselves create. It's pretty brilliant from a marketting point of view. Not so funny though if you're trying to save money for your retirement.

Gold and Supply/Demand Fluctuations

Michael asked me whether it's a good idea to tie our currency to something whose value could fluctuate independently of economic activity. He wondered if a new industrial process might be developed that consumes gold and would cause the gold price to rise rapidly. I think this is highly unlikely for multiple reasons.

First, gold is extremely valuable (it's money). At almost $900/oz as of today, it it too expensive to be used for almost anything. It's hard to come up with a profitable process that would consume gold. The only thing I can even think of that is even close is platinum in catalytic converters and other chemical processes. But the amounts are so tiny and the value of it is so high that market pressure results in the platinum being recycled. Or consider silver which is used in photography. Silver is far more abundant than gold so there's less pressure to avoid consuming it. Still, silver is valuable enough that much of the silver used in the photography process is recycled. And it makes the process expensive which is one of the reason digital photography is far cheaper. The recycling and substitution pressures for gold would be orders of magnitude more powerful. Nobody can afford to consume something that is so valuable at any scale.

History bears this out -- almost all the gold that has ever been mined is still in existence and has an owner. Gold has very little intrinsic value. It isn't needed for any economic process. It's a good conductor of electricity and heat, but so is silver and it's much cheaper. It doesn't pay a dividend. It doesn't go bad. Gold plated plugs and contacts in electronics use so little gold that they are nearly negligible. The value of gold doesn't fluctuate according to economic activity at all. Rather, the price of fiat dollars fluctuate in terms of how much gold they are worth.

The supply side could be more of a problem. What if somebody discovered an enormous amount of gold? Geologists believe most of the gold that exists has already been mined. Gold is becoming harder and harder to find. There aren't very many unexplored parts of the planet at this point. I suppose there could be some in the ocean floor but I am not a geologist. At any rate, what I am pretty sure of is that gold is very expensive to mine. This fundamentally puts a limit on how much can be produced which is a very good thing. It guarantees a very small rate of monetary inflation. On the other hand, with a fiat currency, "printing" it is virtually free because it just is a change of a field in a database at the New York Federal Reserve Bank. Short of somebody achieving low cost alchemy, I think we're pretty safe. On the other hand, if the ice caps melt and we discover that Antarctica is a big block of gold, I agree we would need to find something else to use as money.

Gold makes a lot of sense as money. It's been considered money for most of human history. In many parts of the world such as China, India, and Arab nations, gold is viewed as the ultimate form of savings. It's rarity is nearly guaranteed. On the other hand, since the dollar peg to gold was changed by FDR in the 1930's, the dollar has lost 95% of its purchasing power.


Michael made a good point to me in email. If some guy on a blog can figure out M3, the Chinese government should have no problem figuring out what it is. This sounds right to me. So I take back my comment that this was to hide our money supply growth from our foreign bankers. But if the Fed still tracks all the components of M3, what was the point of no longer publishing it? For them, it's a formula in an Excel spreadsheet for which they already have all the inputs. I have to believe then the answer is that they don't want the public to be aware of the money supply growth. I can't think of any other reason to no longer publish it.

At any rate, how does all this money supply growth affect China which is our largest creditor? My friend Steve used to say that China doesn't care about the balance sheet. When he told me this, I didn't know enough about how the world economy worked to know what it meant. Now I know more and I think he is correct.

China has higher priorities than how much we owe them and what the value of that debt really is. China views the last several years as an investment in its economy. By providing low cost labor and financing our extravagance, we has outsourced most of our industry to China. We helped them build factories and infrastructure. We trained their workers, fixed their banking system, and assisted them with the transition from a centralized economy to one based on capitalism and entrepreneurship. The problem for us is that China will not keep financing our consumption indefinitely. Their economy is maturing and in the future they won't need us anymore to stimulate demand and provide them with technical knowhow. We already are becoming a smaller and smaller part of their economy as their domestic demand has grown and other countries import more and more of their goods.

So if the value of America's debt were to drop by half or even become worthless, I don't think China would lose too much sleep over it. They would write it off as a $500 billion or $1 trillion investment in their economy. Heck, we spent about that much on the war in Iraq. Just think about that for a moment. For $1 trillion, we bought the deaths of thousands of American soldiers, tens of thousands of causalities, hundreds of thousands of Iraqi deaths, and a destabilization of a critical region. We planted the seeds for more radical Islamic terrorism, committed ourselves to an unending war, and dramatically lowered the standing of the United States in the eyes of the world. For about the same amount, China made an enormous investment in its economy to help bring a billion people out of poverty. And, that's assuming the debt becomes worthless. China now has a sovereign wealth fund that is buying assets left and right.

Now this upsets many Democrats in Congress. They want to label China a currency manipulator. Well, if they are a currency manipulator, what's the mechanism by which they manipulate their currency? Up until a few years ago, they pegged the value of Renminbi to the value of the dollar. Was this manipulation? Dozens of countries peg their currencies to the dollar. It just effectively means they are using the dollar as their currency (with the option to decouple in the future). Up until recently, Saudi Arabia, Kuwait, and the UAE did the same thing. I never heard any talk about labeling them manipulators. Recently, China moved to using a floating peg where the currency is allowed to float within a window. This may have been due to enormous pressure from the USA to switch to a floating currency. Or it may have been because China knows that in the long term the inflation America is exporting to China is too much for their economy to handle. At any rate, this is no more manipulation than the fixed peg.

So is China to blame for allowing the US to outsource all of its industry and industrial jobs? On one hand, it's natural that this should happen. Chinese workers are willing to work for less than American workers. But this couldn't happen to such a large extent in a truly free market. What really allows this to happen is that America borrows so much money from foreigners to finance our military empire, welfare state, and consumerism.

Is this a big problem? I think it is. This situation is similar to the situation in Africa. America and Europe give Africa billions of dollars in foreign aid. Because of American and European subsidies and tariffs on agricultural products such as cotton and corn, African farmers can't compete in the world market. All the foreign aid given to Africa is used to buy food from America and Europe. So the money we give to Africa is more or less an additional corporate handout to our agriculture companies. Meanwhile, African countries become completely dependent on this foreign aid. They can't build up their own production. They need our money to buy food. American tax payers effectively buy food from American companies to feed Africans. There's an old adage about giving a man a fish versus teaching him to fish.

This is a common unintended side effect of any welfare program. The people who "benefit" from it become dependent on it and the real benefactors are the companies that sell them goods. Want to keep poor people in a state of perpetual poverty? Easy. Give them money for doing nothing. They will never develop any useful skills so they can become productive members of the economy. This is the state we've kept the Africans in. We also have done this from time to time and in different levels to people in our own country.

How does this relate to the Chinese? China "helps" us the way we "help" Africa. China provides America with foreign aid by loaning us money to buy their goods. And now we have become dependent on it. I blame America and Europe for the situation with Africa, but I don't blame the Chinese for their situation. With Africa, we are the ones creating the subsidies, tariffs, and foreign aid that cause the problem. African farmers would have no problem competing if the playing field were level. With respect to China, their workers are willing to work for less than our people are willing to. It would be immoral to blame millions of Chinese workers living in poverty that they can't have low paying jobs that provide them with just enough to feed their families so that thousands of Americans can buy LCD televisions, drive SUVs, and eat themselves into obesity. And then we make the problem much worse with all the borrowing.

Ron Paul Speech After New Hampshire Primary

Part 1

Part 2

Part 3

Part 4

Wednesday, January 9, 2008

Ron Paul is not a bigot

There was an article in the New Republic bringing up allegations that Ron Paul is a racist, bigot, and anti-semite. These are old allegations based on writings that appeared in a newsletter using Dr. Paul's name. He did not write them nor edit them. Even the author of these allegations agrees that Ron Paul has never said anything that would appear to be racist.

These newsletters were written in the years when Dr. Paul was out of Congress and busy delivering babies for people who didn't have enough money to pay themselves (he refused payments from the government). He took "moral responsibility" for not paying closer attention to these newsletters several times over the past decade. The timing of this smear attack, the night before the New Hampshire primary, was intended to attack his credibility without leaving time for him to counter it. Clearly, the New Republic did not learn of this story the day before the election. It had been known for over a decade.

I do not believe for a moment that Dr. Paul is a bigot. I have been following him for two years after learning about his views on monetary policy when I started becoming interested in Austrian Economics. I have read dozens of his essays and speeches and not once did I ever see a hint of bigotry. Since I am Jewish, this is especially important to me.

I am disappointed that Dr. Paul would even be associated with bigots, but I can see how this could happen. I have had friends utter racist comments before and this was in New York City which is very diverse. Unfortunately, in less diverse parts of the country, this may be more common. I once visited the family of a girlfriend in a mid-western city and one of her relatives uttered an anti-semitic comment. This was disappointing but I didn't draw the conclusion that my girlfriend was anti-semitic nor that her relative was a bad person, just ignorant. It is the job for all of us to stamp our bigotry wherever it exists.

I am only writing this entry because I know people will ask me about this anyway,

The statement from the campaign:
ARLINGTON, Va.--(Business Wire)--In response to an article published by The New Republic, Ron Paul
issued the following statement:

"The quotations in The New Republic article are not mine and do
not represent what I believe or have ever believed. I have never
uttered such words and denounce such small-minded thoughts.

"In fact, I have always agreed with Martin Luther King, Jr. that
we should only be concerned with the content of a person's character,
not the color of their skin. As I stated on the floor of the U.S.
House on April 20, 1999: 'I rise in great respect for the courage and
high ideals of Rosa Parks who stood steadfastly for the rights of
individuals against unjust laws and oppressive governmental policies.'

"This story is old news and has been rehashed for over a decade.
It's once again being resurrected for obvious political reasons on the
day of the New Hampshire primary.

"When I was out of Congress and practicing medicine full-time, a
newsletter was published under my name that I did not edit. Several
writers contributed to the product. For over a decade, I have
publically taken moral responsibility for not paying closer attention
to what went out under my name."

Ron Paul 2008 Presidential Campaign Committee
Jesse Benton, 703-248-9115

UPDATE (1/10/2008) Ron Paul responds to allegations on CNN

UPDATE (1/11/2008) I am a Mexican-American, I worked for Ron Paul in the 1990’s, and I Know that Ron Paul is No Racist!

Financial Times: "Gold is the new Global Currency"

Part of Ron Paul's platform has been to change the tax laws to allow for competing currencies. He is often made fun of for saying the dollar should be backed by something real, like gold, as it was before 1971. I guess some people are starting to agree. The Financial Times has been anti-gold for years. But a recent editorial in the Financial Times titled Gold is the new Global Currency states "In today's uncertain world, the yellow metal is back in fashion....A better way to think of gold may be as central bankers used to before America dropped the gold standard: not as a commodity, but as another currency. As long as the dollar stays weak, gold's bull run will last."

The pundits said Ron Paul was crazy kook for supporting gold-backed currencies. I guess the editors of the Financial Times must be crazy kooks as well.

Vermin Supreme

One of the highlights of my trip to New Hampshire was running into Vermin Supreme. It only costs $1000 in NH to get on the ballot. This guy did it. His campaign slogan was something to the effect of Vermin Supreme for Dictator -- it's the last decision you'll ever have to make. The guy has a good sense of humor and injected some laughter into the election.

UPDATE: Diana told me that the actual slogan was "Let him run your life, because he knows what's best for you. The decision to vote for Vermin Supreme is the last decision you'll ever have to make."

Another high for gold

Gold hit another all time high at $890/oz.

Silver also hit recent highs

The important thing to remember is that the value of gold doesn't change. A gold coin today will be the same gold coin tomorrow and will be the same gold coin 10 years from now. Gold is not consumed, it doesn't have a shelf life, and nearly all the gold ever mined is still in existence today in someone's possession. Gold is valuable because it is scarce and because it has been used as money for thousands of years of human history. It's only a recent phenomenon that gold is no longer used as money (1971 when Nixon took the US off the gold standard).

When the dollar price of gold keeps rising, it doesn't indicate any change in the value of gold. It indicates a change in the value of a dollar. It isn't that gold is rising in price, but the dollars are becoming less valuable. This is happening at an alarming and accelerating rate. I don't see how this can continue much longer. If it does, we will be in the midst of a real dollar crisis. It will take serious intervention of our foreign creditors to prop the dollar back up. Otherwise, our militaristic empire and welfare state will come to an abrupt and sudden halt. Ron Paul has been repeating over and over that we need to fix our monetary system before we are forced into a painful financial crisis. We may now be witnessing it unfolding.

I recommend reading The End of Dollar Hegemony by Ron Paul.

Tuesday, January 8, 2008

Interest on Public Debt

Mish wrote an entry on federal debt interest payments which I thought was interesting. I want to add some thoughts.

Many libertarians believe it was no coincidence that the Federal Reserve Act and the 16th Amendment (Income Tax) came into existence in the same year, 1913. The belief is that the Federal Reserve system allows the government to take on massive debt while the Income Tax provides the revenues to pay the interest on the debt.

Fast forward to 2007:

The Interest on the Federal Debt in 2007 was $430 billion. The Individual Income Taxes paid by Americans in 2007 will be about $1.3 trillion. That means that 33% of our individual income taxes is used just to pay off the interest on the debt. Now, this is a bit misleading because much of that debt is held by the social security trust fund and that's just the government paying interest to itself (we'll ignore the future unfunded liability for now). According to Debt Outstanding, there is $9.2 trillion in debt. $4.1 trillion is intra-government debt (like the social security trust fund) and $5.1 trillion is debt owned by the public. This means that 55% of the interest payments are made to public debt holders and so 18.15% of the personal income tax goes directly to paying off interest to public debt holders.

This income tax is needed only to finance living beyond our means (having the government borrow money to pay for services) and to fund an incredibly expensive foreign policy. It wouldn't be difficult to get rid of most of the income tax simply by balancing the budget and having a humble foreign policy that does not include being the policeman of the world. By getting the debt down to a manageable level and reducing our military spending, we would be able to get rid of most, if not all, of the income tax.

In the past, the argument would be that we're paying the debt to ourselves so it doesn't matter. Wealthy Americans pay most of the taxes, but wealthy people also own most of the debt and receive the interest payments. Not true anymore. According to the Major Foreign Holders of Treasury Securities, foreign holders own $2.3 trillion, or 45% of the debt held by the public. That means that 8% of our personal income taxes is paid directly to foreign holders as interest payments on our debt.

Many libertarians believe that the federal debt is not just a bad idea, but it's fundamentally immoral. It's a bad idea because we're living beyond our means and that debt must be eventually paid off. If we're living beyond our means now, we must in the future live below our means. One can hope that economic growth and innovation means that in absolute terms, living below our means in the future will still be as good or better than living above our means now. But what if economic growth and innovation don't keep up with our debt? We will be forced in the future to live lesser lifestyles than the one we have grown accustomed to.

This is why it's a bad idea, but why is it immoral? It's immoral because we're committing future generations to pay for this generation to live above its means. We're effectively taking from the unborn to give to the living. Our children and our grandchildren will inherit an enormous debt that they will work very hard to pay off. With the debt burden moving from debt held by Americans to debt held by foreigners, we are effectively turning our descendants into debt slaves of our foreign bankers.

Some Humor

Great political commentary, youtube-style:

New Hampshire Primary

Tonight was a disappointment. With 95% of the precincts reporting,
  • Dr. Paul came in 5th with about 8% of the vote,
  • Hillary Clinton, who voted for the war, came in ahead of Barack Obama,
  • John McCain, that smug warmonger, won the NH Republican Primary.
Sadly, the people of New Hampshire indicated that they are in favor of, or indifferent to, preemptive war. I don't understand why people still think it's a good idea to attack nations that pose no threat to us.

I overhead a man say yesterday that he liked some of Ron Paul's positions but he wanted to win the war. He left the store before I thought to ask him who does he want to win: the Sunni, the Shia, or the Kurds? I don't think people realize what kind of mess we are in there.

On the positive side, the main stream media and the political pundits are stunned that Dr. Paul could receive so many votes, raise so much money, became a major political force on the Internet, and create a movement for freedom and liberty that is just beginning. This is tapping into something big, really big. Americans may not yet be ready for Dr. Paul's message, but they are starting to wake up. I just hope they do so before this country passes the point of no return.

Monday, January 7, 2008

Photo from New Hampshire

The cool thing about being in New Hampshire is you get to meet a lot of interesting people. Here's a photo of Greg and I with George Stephanopoulos in Murphy's Taproom in Manchester.

For those who don't get the irony of this, watch the movie below at 7:30.

Apparently, they made up though and George was very gracious at the bar.

Most Creative Ron Paul Video Ever!!!

Sunday, January 6, 2008

Ron Paul Rally

Fox News excluded Ron Paul from the debate tonight because of his anti-war views. A spontaneous protest erupted.

You probably won't see this reported on the main stream media.

John McCain is a smug jerk
In the ABC New Hampshire debate, John McCain jeered at Paul, "We’re going to miss you tomorrow night, Ron". McCain was probably referring the upcoming Fox News Roundtable (read: debate) from which Congressman Ron Paul has been excluded despite that he is polling higher than many of its invitees (14% in New Hampshire). The New Hampshire GOP withdrew from the Fox event in protest, but McCain seems perfectly pleased with Fox’s decision, enough so to mock Ron Paul on national television anyway.
This raises an important question: How can John McCain be so smug and be the frontrunner in New Hampshire? McCain certainly has name recognition and he was the Granite State’s pick for the nomination in 2000. He has also been endorsed by a major New Hampshire newspaper, but I suspect there is another subtlety that pollsters and pundits are missing.

Ron Paul Town Hall Meeting in New Hampshire

I was at the town hall. The room was overflowing. I got to shake Dr. Paul's hand when he came in. He gave perfect answers as usual. I really think people should watch this to get sense of what Ron Paul is about.

Part 1:

Part 2:


Friday, January 4, 2008

Hayek's The Road to Serfdom

The Road to Serfdom by Friedrich Hayek is on my reading list. He won the Nobel Prize in Economics in 1974. From Wikipedia:

Hayek’s central thesis is that all forms of collectivism lead logically and inevitably to tyranny, and he used the Soviet Union and Nazi Germany as examples of countries which had gone down “the road to serfdom” and reached tyranny. Hayek argued that within a centrally planned economic system, the distribution and allocation of all resources and goods would devolve onto a small group, which would be incapable of processing all the information pertinent to the appropriate distribution of the resources and goods at the central planners’ disposal. Disagreement about the practical implementation of any economic plan combined with the inadequacy of the central planners’ resource management would invariably necessitate coercion in order for anything to be achieved. Hayek further argued that the failure of central planning would be perceived by the public as an absence of sufficient power by the state to implement an otherwise good idea. Such a perception would lead the public to vote more power to the state, and would assist the rise to power of a “strong man” perceived to be capable of “getting the job done”. After these developments Hayek argued that a country would be ineluctably driven into outright totalitarianism. For Hayek “the road to serfdom” inadvertently set upon by central planning, with its dismantling of the free market system, ends in the destruction of all individual economic and personal freedom.

Hayek argued that countries such as the Soviet Union and Nazi Germany had already gone down the "road to serfdom", and that various democratic nations are being led down the same road. In The Road to Serfdom he wrote: "The principle that the end justifies the means is in individualist ethics regarded as the denial of all morals. In collectivist ethics it becomes necessarily the supreme rule."

Let me submit some examples:
  • The government planted the seeds for terrorism by supporting Al Qaeda in the 1980's, maintaining military bases in hundreds of countries, supporting authoritarian regimes in the Middle East, and overthrowing democratically elected governments. When we were attacked, the answer wasn't to stop the behavior which provided a recruiting tool for radical terrorists. Instead, Congress passed the Patriot Act which allowed the government to spy on our own citizens and then gave the executive branch power to launch an aggressive war in Iraq.
  • George W. Bush didn't have enough authority to help New Orleans during Katrina. Therefore, we repealed parts of Posse Comitatus Act which now allows the President to use the U.S. Military against the American people if he declares the country is in any type of crisis.
  • The U.S. courts couldn't possibly handle processing a couple hundred suspected terrorists although our courts process tens of thousands of cases every year. Therefore, we had to suspend Habeas Corpus.
  • Our healthcare system that was created by the government is totally broken. Therefore, we need to give the government more power to control healthcare.
  • Our government provided education is terrible. Therefore, instead of adopting a free market approach to education, we need to give our central planners more control over how we educate our children.
  • Our government-run FAA and airplane security failed to prevent 9/11. Therefore, we needed to give the government more control over airplane security by creating the TSA and the Department of Homeland Security.
  • The Federal Reserve, Fannie Mae, Freddie Mac, misguided incentives in the tax structure, and the SEC-granted credit rating agency triopoly were the main causes of the housing bubble (I will post on this later). Therefore, we need to give these agencies more power in order to remedy the system.
So, yes, that pretty much sums the road we're heading down. The answer is always the same. The government caused the failures, but it's actually blamed on the free market and lack of government. Therefore, we need to give the government more power. As Hayek says, this is the road to serfdom.

Great Ron Paul Interview with Bill Moyers

Inflation and Capital Gains Tax

In The Deflation Monster, Wanniski says "Inflation can push real capital-gains tax rates above 100 percent on long-held assets, as the tax shifts from real gains to spurious inflationary increases in valuation." What does he mean by this and how is it possible to pay more than 100% on long-held assets.

Let's take a simple scenario.

Tom buys some asset for $100,000. Let's say the banks are causing inflation of 5% per year and that this asset perfectly retains its value from year to year. In other words, its real fundamental value never changes. It's worth the same to everybody today and 10 years from now. Because of inflation in the money supply, the nominal price of this asset increases every year to account for the inflation. One can make a simple series for this:

0 $100,000
1 $105,000
2 $110,250
3 $115,763
4 $121,551
5 $127,628
6 $134,010
7 $140,710
8 $147,746
9 $155,133
10 $162,889

So in year 10, the nominal price is $162,889. Tom decides to sell this asset. His real gain is zero because the asset has not appreciated in real terms. It's only appreciated in nominal terms. But taxes are on nominal gains. So Tom owes a tax on a capital gains of $62,889. At the 20% rate (and it used to be much higher), he'll pay $11,026 to the IRS. Tom just paid taxes on a real gain of zero.

Imagine that this asset was Tom's house and Tom wanted to move to a different neighborhood. He would have to buy a smaller house because of the tax on the nominal gain. Tom would need to take this tax consequence into account when making an unrelated decision. This creates an inefficiency. Now in reality, the Federal government realizes this would be unfair so it excludes the first $250,000 of profit from capital gains when it's on a house. But only when it's on a house and only the first $250,000 of profit.

If instead of a house, Tom bought a stock that paid dividends and its appreciation was due soley to nominal inflation, Tom would pay taxes on the nominal gains. He would then lose money on the stock. If after 10 years, Tom thought some other stock was a better investment, he would have to consider the tax consequence of selling the stock to buy the other stock. This makes the capital markets less efficient because the tax consequences can outweigh the gain by allocating capital to the most productive companies.

Now imagine Tom is really a wealth management fund for some wealthy investors. They have owned Exxon-Mobil for many years. They want to invest in some new solar technology because they think that's where the future is at for energy production. Unfortunately, they don't allocate their capital efficiently because of these tax consequences. So the solar company doesn't get as much capital as it could otherwise.