Theft of Inflation - Part 1

I have been studying Austrian economics for about the past year. I accomplish this in the 3 hours per day I spend in my car commuting back and forth to work. I listen to books and lectures from some brilliant economists and libertarians. The reason I decided to write this post is because through this period of learning I have come across what I now know to be one of leading root cause of our economic problems in America, if not the root cause. That is the serious damage the Fed is doing to the citizens.

Ben Bernanke, the current Fed Chairman is known in the political world as a leading economist. I feel it important to discuss Bernanke because like his predecessor Alan Greenspan, he has a serious misunderstanding of market economy and its cause and effects. Bernanke has grown his reputation from being a head economic professor at Princeton and his doctoral thesis that was written on the great depression. He spent considerable time studying the great depression and is considered one of the foremost experts on the economics of that era. The problem with this is that Bernanke just has it all wrong. Sounds easy to say I know. I am right and he’s wrong. What I have learned is that when it comes to studying economics, you must ask the epistemological question of economics itself. This is something that the Main stream economists like Ben do not address and hence why they can deem themselves experts and really know little to nothing of the truth of economics. Before you decide who you will learn economics from and what it can teach you, you must ask the epistemological question of how do we know what we know about economics.

This is something that Keynes (Keynes general theory is what most main stream economics is based on) never addresses. Since economics is a social science, this is extremely important. This is what brought me to study the Austrian prospective. The father of Austrian economics, Ludwig Von Mises answers these questions in his book “The epistemological problems of economics”. He stated that economics can not be studied in the same way that natural sciences can. Since you can not perform verification or falsification in economics as you can in natural sciences, economics must deductive. It is A Priori Science. Meaning we must come up with its truths through contemplation and cannot through empirical evidence. Intention, purpose, means, ends, satisfaction and dissatisfaction are key terms when studying economics, yet how do you put precise measurement on them? How does one empirically prove ones satisfaction?. This is the main reason why Main stream and Keynesian economists refute it. Yet they never deal with the epistemological questions of how applying math and equations to economics actually works. Austrians do not believe in using equations (for the most part) in economics for this reason. What equation would you use to help define what “Purpose” a man or group has? Or would you suppose that understanding a mans “purpose” is not important when studying economics? I am here to tell you that purpose is extremely important if you want to study economics.

Ludwig Von Mises used Praxeology. That is the study of “Human Action”. It is not psychology, and it is important to understand the difference. Psychology is the study of mental processes and how it affects behavior. Praxeology is the study of human action outright.

Mr. Bernanke doesn’t even know the term praxeology let alone believe you must understand human action to understand economics. Mises states that economics is one part of Praxeology. Before you accept Bernanke as an authority over economics, just listen to him speak and ask yourself if your listening to someone using scientific method when it comes to economics. Here are some goodies from his public performances:

"House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals."

"Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise."

"The Federal Reserve is not currently forecasting a recession."

"The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities."

(Two months before Fannie Mae and Freddie Mac collapsed and were nationalized) "They will make it through the storm."

"We’ve been very, very clear that we will not allow inflation to rise above 2 percent."

(June 10, 2008) "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."

"Not all information is beneficial."

(October 4, 2006) "If current trends continue, the typical U.S. worker will be considerably more productive several decades from now. Thus, one might argue that letting future generations bear the burden of population aging is appropriate, as they will likely be richer than we are even taking that burden into account."

This last quote is about as dumb as it comes. Lets all make our kids pay for us because after all,….they will be richer than us. In short, Mainstream economist have no frigging idea. When things are good, they always predict that things will stay good. If you look at the all recessions, the mainstreamers were saying it was the end of economic worry forever right up until it hits. Yet in 1928, one year before the great depression, Mises was warning about inflation and the boom and bust cycle coming to the end of its boom.

So back to my point. I apologize for the long preface to explain this point, but it is important. The number one reason for our economic down turn and most of them for the past 100 years is the Fed printing money. When the Fed prints money, they are literally stealing your money. Bernanke, Greespan and all the other chairman of the Fed have the power to do only one thing. That is print more money. That printed money does not come for free. It is directly proportional to the value being removed from circulation. (circulation means the physical money you and everyone else owns). So if there is a total of $100 in circulation and the Fed prints 10 new dollars, they have devalued your money by 10%. This is because they have printed money without any actual production of goods to back it. Printing money can and does have an effect of stimulation to the economy. One of the problems with stimulating the economy artificially this way is that it creates bubbles in particular industries which are almost impossible to predict. Many people blame the housing bubble on different things. Some blame the actual free market itself (which is beyond silly). Some blame the Community reinvestment Act of 1977 which was reinforced in the 1990’s. Some blame the Frank/Dodd and Dems from blocking regulation back in 2003 to regulate Fannie and Freddie. Quote from Frank in 2003

"The more people exaggerate a threat of safety and soundness [at Freddie Mac and Fannie Mae], the more people conjure up the possibility of serious financial losses to the Treasury which I do not see. I think we see entities that are fundamentally sound financially."

Although government was the reason the bubble was in the housing market and not some other market, but that is truly all irrelevant. If it was not the housing market, it would have been some industry. Why? Its because the money was there, and it should not have been. When the fed prints money, the end point where it gets into circulation is through the banks in the form of loans. The interest rate drops below its natural rate. The natural rate is where the amount of money available and the amount of people that want to borrow money balance each other to result in some interest rate charged by banks (it is the interest rate that makes the borrowers demand = the amount of money available to lend. If more people want to borrow than the bank has to loan the interest rate rises until peoples time preferences change enough that less people want to borrow. (at 5% interest perhaps 10 people want to borrow $100, at 10% interest, maybe only 6 of those 10 people are still interested). It also goes for the money side. If a bank has $100 to loan out they charge 10% interest and there will be exactly enough people that will borrow the full $100. If they have $200 to loan out, they will have to drop the interest rate to 7% to get more people interested. It is supply and demand plain and simple. The more money a bank has to loan out, the less the interest rate. The more demand there is to borrow the higher the interest rate.

So now lets say the Fed wants to print money and get it into circulation. The banks will now have more money to lend so the interest rate falls below whatever its previous natural rate was. This changes peoples time preference. A time preference is what entrepreneurs believe is the time it will take them to make a certain percentage of money. If someone has an idea for a business, lets say they want to build and sell houses. They think they can make 11% each year on their money by buying land and building a house and selling it. If the natural interest rate is 10%, most of these entrepreneurs may think it is too risky and hold off. 1% profit just isn’t enough for the risk and work involved. If the housing market goes up and they think they can make 13% maybe they jump in and start building houses. If the housing market slows and they can only make 10.5%, more entrepreneurs stay out. But if the Fed prints money and the interest rate drops to 5%, guess what? No one sees any risk and everyone jumps in to the housing market. Banks are not only lending to the entrepreneurs but also have so much money they need to lend that they are also lending to home buyers. Many of whom are not even qualified to buy, but what risk is there? If they fail to pay back, the bank will get the house and it will be worth even more than they originally loaned for it.

You can see the vicious cycle. Abnks lending mooney to buys of homes and to builders. They all have distorted time preferences due to artificially low interest rates. All of which is sparked by the Fed printing money and artificially lowering the interest rate below the markets natural rate. The result is an artificial bubble. Eventually the market saturates (no more buyers left) and you get the boom. This is the basic explanation of Von Mises’s “Boom and bust” cycle.

Meanwhile valuable resources have been pulled from other industries. People left their manufacturing jobs to become carpenters (because the demand was higher so the pay was higher). People left other industries to become real estate agents (why manage a restaurant when you can make so much money selling homes). So other industries suffer while the boom is in housing. Then the bust hits and not only do you have a dead industry, but a dead industry with too many people work in it that were supposed to be in other industries.

The good news is that according to Austrian theory, deflation comes with the depression. Deflation is when prices fall due to lack of demand. People are out of work and have no money so all industries prices fall drastically. Since prices fall, so do wages. Sounds bad right? Prices fall, wages fall, cant be good right? The good news comes from the fact the deflation actually starts the repair process because deflation also changes the entrepreneur’s time preference. There are entrepreneurs in all other industries that during the time of inflation and high prices could not make their idea work (regardless of interest rate). Now goods are cheap and wages are cheap. What better time to start a new business! Those who do have capital love to invest during a period of deflation. It’s when they get the biggest bang for their buck. So they start investing and creating new jobs for all those people in the housing bubble.

Now here is the bad news and I must bring Mr. Bernanke back into the picture. Mr. Bernanke doesn’t understand the Austrian business cycle. He has been taught his whole career from other Keynesian and Mainstream economists that deflation is bad. He must do anything to avoid it! So whenever he sees a sign of deflation what does he do? He starts up the printing press and gets inflation going again. So now he hasn’t let deflation do its good work of repairing the economy and he is already starting the next bubble with his printing press. Mainstreamers are very afraid of deflation. Austrians embrace deflation. What it comes down to is Austrians would do nothing. Let the deflation hit. Let the Entrepreneurs get their good deals while creating jobs and recession is gone. Bernanke thinks he cant let deflation hit. He is worried it is some black hole we cant get out of. Yes we will all make lower wages. But the price of goods falls as well and that money you saved up in the bank becomes more valuable and can buy more. You might just open that business you have always wanted and create a few jobs along the way.

I have more to say, but Austrian theory has a lot more to it than one post can hold.

Are You Helping Obama Rob the Armored Vehicle?

Prior to my going to lunch today, I heard a bit of Rush's radio program in which he played a clip of Obama playing the class warfare card against the rich. Of course this is nothing new. Obama regularly displays his hatred of Capitalism and free markets. Here is the transcript of the clip Rush played:

OBAMA: If we choose to keep those tax breaks for millionaires and billionaires -- if we choose to keep a corporate tax break for corporate jet owners, if we choose to keep tax breaks for oil companies that are makin' hundreds of billions of dollars -- then that means we've gotta to cut some kids off from getting a college scholarship. That means we've gotta stop ... funding ... certain grants for medical research. I think it's only fair to ask an oil company or a corporate jet owner that has done so well to give up that tax break that no other business enjoys.

First, I love how Obama states it. We just need to "ask" these evil corporations. Sounds comparatively nice to the reality of "if you don't cough up more money, we'll be coming after you with the IRS" doesn't it? Also, this isn't about raising revenue. As Libertarian economists have demonstrated, income stays about the same no matter what the rate it. You may either rape a few for all they are worth, or tax everyone at a lower rate. Since we know this is true, this proves Obama couldn't care less about revenue. It has everything to do with power.

So I went about my business of fine dining at my dinner table with my wife and kids. After I was done I sat down at the TV to see if there might be any interesting movies to record. For about five minutes I watched Armored. Here's the movies description.

A newbie guard for an armored truck company is coerced by his veteran coworkers to steal a truck containing $42 million. But a wrinkle in their supposedly foolproof plan divides the group, leading to a potentially deadly resolution.

Terribly wrong is where sin always takes you. But coerced is not exactly how Matt Dillon's character, Mike Cochrane, started on Columbus Short's character, Ty Hackett, (I think) in order to recruit him to help rob the money. Mike started with a conversation that was clearly designed to tempt and create hatred within Ty. Mike clearly wants to get rich quick, and in order to get others to go along with him, he has to create the idea that Ty has been dealt a bad hand in this life. Since I didn't record the movie I'll have to go by memory on what was stated.

"Your parents were good people, who worked hard all their lives, who worked two jobs, who slaved away for nothing. In the end they died and left you nothing but debt. There is no way to get ahead in this life because someone is going to rip you off."

Now though this was said subtly, it was clear he had alternative intentions. Mike is the Devil's representative or as in literature class, the Antagonist.

Now after I was driving back to work something clicked in my mind. So I now have to ask. What is the difference between Obama's speech attacking the rich and Matt Dillon's character? One convinces a couple of other guys to rob an armored vehicle, the other seeks votes to rob evil corporations, businesses, etc via taxes, lawsuits etc. by convincing the voter to hate the rich.

Have you been "coerced" to follow Obama to rob the armored vehicle?

Bernanke Is So Brilliant, He Doesn't Know Why

I am told over and over again how Ben Bernanke is the most brilliant economist ever. In fact, he is so brilliant, he can't figure out why things are the way they are. Yet this past week, as reported on ABCNEWS, Fed Chairman Ben Bernanke admits he's clueless.

"We don't have a precise read on why this slower pace of growth is persisting," Bernanke said. He said the weak housing market and problems in the banking system might be "more persistent than we thought."

It amazes me at how worldviews and presuppositions can blind the brightest of people. The answer is so simple that the old saying everyone is missing the pink elephant in the room doesn't do justice to his blindness. But such is life within the view of Keynesian economics. Of course, this assumes that Bernanke isn't doing what he is doing on purpose, but assigning motive like that assumes the worst in a person.

Now if you are one of those non-economist kind of people like myself and just want a simple answer as to why unemployment is probably close to 20%, I would suggest a couple of short interesting lectures offered by the Mises Institute. So if you have an MP3 player, go and download these couple of links and learn the truth about the current Mob's ability to print money.


Austrian Economics Versus Mainstream Economics

Interest Rate and Unemmployment

Government Motors CEO & Crony Capitalism

Here is yet another example of Central Planning expressed in phony baloney crony capitalism in this story at money CNN. Now we all know that Americans don't want electric cars. We all know that the Left wants to force Americans to change their lives. Well, now we have the CEO of Government Motors...I mean GM desiring a tax hike on gas.

In an interview published in Tuesday's Detroit News, Akerson floated the idea of a $1 a gallon increase in the gas tax as a way to encourage buyers to purchase smaller, more fuel efficient cars. Greg Martin, spokesman for GM's Washington office, confirmed that the quotes reflect Akerson's and GM's view.

I love the way it is phrased, "encourage". In other words, by taxing gas, we will force [the more proper word] automobile owners to buy something they don't want. But if car owners switch to electric cars, will they really save money? Of course not! Washington State has already dove into solving that tax problem you may read in this story here.

A bill in Washington state would tax electric vehicle drivers for the gas they aren't using to power their cars. As Sarah Gardner reports, it's all about finding new ways to pay for growing budget deficits.

Ta Da. If they don't get you coming, they will certainly get you going. So go ahead. Buy a stupid electric car that you won't want to leave your street with just in case you run out of power. And all of this being done in the name of a hoax of saving the environment, climate change, or Global Warming.

Now in the CNN story, it claims the Feds charge only a mere 18.4 cents per gallon tax in an attempt to make it look like government isn't charging enough gasoline taxes, but according to this document that truth is deceiving. Some states such as California and New York pay almost 70 cents per gallon.

The truth is, both Democrats and Republicans both centrally plan by being the Mobsters that businesses must go through to sell a product. They both are also the ones that businesses pay to maintain their monopolies. We have seen what destruction government has had on agriculture, housing, and now energy and every other industry it has stuck its hands into.

It is time to vote Libertarian or Constitution Party. It is time to save liberty and freedom.

The Palin Narrative

A few days ago, News sites were making fun of Sarah Palin as being a big dunce for her comments about Paul Revere. Palin stated as reported on NPR,

Ms. SARAH PALIN (Former Governor, Alaska): We saw where Paul Revere hung out as a teenager, which was something new to learn. And you know, he who warned the British that they weren't going to be taking away our arms, by ringing those bells and making sure, as he is riding his horse through town, to send those warning shots and bells, that we were going to be secure and we were going to be free.

and again,

Ms. PALIN: Part of Paul Revere's ride - and it wasn't just one ride; he was a courier, he was a messenger - part of his ride was to warn the British that we're already there, that hey, you're not going to succeed. You're not going to take American arms. You are not going to beat our own well-armed persons, individual, private militia that we have. He did warn the British.

Now I grew up in Massachusetts near Plymouth. A good portion of my historical education incorporated the Mayflower and the year 1620, the shot heard round the world in Lexington and of course, Paul Revere's ride. As I have grown older and been in different places throughout the country, I have found that people who are not from Massachusetts don't learn about Plymouth Rock, at least in the way it was stressed in my own child hood.

For instance, I have a friend from Georgia. When we have spoken about the Civil War, he did not view that war in almost any terms that I have learned. The most obvious ting that I noticed was its name. He referred to it as the War of Northern Aggression. He was the first person to explain to me that the South was not fighting over slavery among other issues. These were things I was completely unaware. Does that mean I was wrong to say the Civil War was fought over slavery? No, of course not. It is however oversimplified to say it was.

Now we could spend time on many other examples, but I think the point is clear. Sarah Palin lives in Alaska. So her perspective is going to be different. However, the Drive-by Media drove up and let loose in an attempt to reinforce the Sarah Palin is stupid narrative. However, if you take the time to listen to NPR's interview between host Melissa Block and Professor Robert Allison, you will find Melissa getting her balloon popped.

BLOCK:Sarah Palin also was saying there that Paul Revere's message to the British in his warning was: You're not going to take American arms - you know, basically a Second Amendment argument, even though the Second Amendment didn't exist then.

Prof. ALLISON: Yeah. She was making a Second Amendment case. But in fact, the British were going out to Concord to seize colonists' arms, the weapons that the Massachusetts Provincial Congress was stockpiling there.

So, yeah, she is right in that. I mean, she may be pushing it too far to say this is a Second Amendment case. Of course, neither the Second Amendment nor the Constitution was in anyone's mind at the time. But the British objective was to get the arms that were stockpiled in Concord.

BLOCK: So you think basically, on the whole, Sarah Palin got her history right.

Prof. ALLISON: Well, yeah, she did. And remember, she is a politician. She's not an historian. And God help us when historians start acting like politicians, and I suppose when politicians start writing history.

So basically, she got her story right. Perhaps oversimplified, perhaps not totally accurate, whatever the case is, it's obvious the real reason for the antagonism against her has nothing to do with her statement. It has to do with the Left's hatred of her and Statist Republicans fear of her.