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“NO QUESTIONS, SIR!” by Gary North, at http://garynorth.com Date 9/10/2009
I will now make an assertion:
Am I wrong? Then call my bluff. Send me a question. I’ll answer it. If you are asking a career decision question, I will need the following information:
Then ask your question. Send you question (25 words or fewer) to this address: Put the word “QUESTION” in the subject box. I will answer all of them in future issues of this newsletter. Back in 2005, I offered this service. For a year, I answered questions every other issue. This helped me find out what topics my readers were interested in. Well, a few of my readers, anyway. One-tenth of one percent of my mailing list sent a question. Yes, one out of 1,000. Nobody else had any questions. People do not ask questions. There are three main reasons for this.
A SHAKY TRESTLE Our problem is procrastination. Most of our lives are routine. We do not get too far away from a comfortable routine. Most of the time this routine works. Some people call this being in a rut. Others call it staying on track. Sometimes the trestle is wobbling. I have no objection to routines. My routine keeps me on track in my rut. But part of my routine is to look down the tracks to see if there is anything out of the ordinary. Today, the economy is out of the ordinary. The trestle almost collapsed a year ago. The question is: Will it collapse next time? Also, when might this next time be? There are signs that the trestle is missing pillars. Every Friday afternoon, after the stock market closes, the FDIC closes five more banks. Investors shrug it off. “No problem.” Then, the next Friday, five more banks get closed. How long can this go on? Not much longer. The number of closings will increase. A man whose firm buys busted banks says that he expects 1,000 banks to close. (http://www.cnbc.com/id/32581463) “No problem.” Then there is unemployment. Every month, the number of jobs declines by 200,000 or more. The rate of unemployment jumps. Investors immediately buy more shares. Why? Because they see unemployment as a cost-cutting tactic. Therefore, “corporate earnings will go up soon.” They don’t think that an S&P price-earnings ratio of 129 (August 31) is a danger signal. It has never been this high before. It has never reached 50 before. “No problem.” They think that profits will rise to bring the P/E back to something like 15, which would be a buy-and- hold signal. Then there is the Federal deficit. It will end up on September 30 in the range of $1.6 trillion. The administration has offered an estimate of $9 trillion between now and 2019, meaning $900 billion a year. Social Security is officially expected to go into the red in 2017. One Congressman thinks this could happen before the next Presidential election. He is on the House Committee for Financial Services. http://GaryNorth.com/snip/886.htm When this happens, the Social Security Trust Fund will have to cash in some of its Treasury bonds in order to get money to send to people on the rolls. The Treasury will have to sell enough debt to the public (including the Federal Reserve System) to cover these transactions. In 2008, Medicare’s Hospital Trust Fund went negative. It received less money from Medicare taxes than it spent. Thus, it had to sell its nonmarketable Treasury bonds back to the Treasury. Its press release admitted that the program was negative, but it spoke of the Trust Fund as solvent. It is solvent legally. It has government-issued IOU’s in it. But not for long.
That’s a nice, precise figure: $342 billion. The key words are these: “will need to be transferred from the Federal treasury.” From the empty Federal Treasury.
http://GaryNorth.com/snip/887.htm I love this phrase: “Congress should also act immediately.” Congress did nothing except run up the general deficit by another $750 billion (minimum) in October. Then it did it again this spring. The Medicare hospital insurance program is bankrupt, but nobody in government except Ron Paul uses this word to describe government programs. CALM IN THE EYE OF THE HURRICANE Most people know little or none of this. They go through their daily routines. They are oblivious. The government has deliberately disguised these matters. The average citizen thinks that someone at the top has a solution. He cannot conceive of the possibility that experts who run the system are making things up as they go along. Most of the time the system lumbers along. But then, once in a while — such as a year ago — the system grinds to a halt. Then the response is the same: create money and increase the Federal deficit. The average guy thinks this will solve the problem at no cost to him. It feels like no cost, but the debt level rises. This year, the Federal deficit has added another $17,000 per household. No one seemed to care. Few even noticed. http://GaryNorth.com/snip/888.htm As we watch these things going on around us, and when we perceive that those around us perceive none of this, we remain calm. The calm serenity of those around us calms us, as well. We see the trestle ahead. We see the engine disappear from sight. We suspect what is going to happen to us if we don’t get off the train. But no one around us is moving toward the exit. No one even seems to notice. The problem is, the trestle has wobbled before. It has looked as though the engine has disappeared, but it always reappears on the far side of the trestle. So, we assume that this time it will not go over the edge into the blackness below. But there are lots of trestles between here and our final destination. We are calmed by the calm of those around us. They seem to know what they are doing. Yet they didn’t know a year ago. Henry Paulson was frantic. He nationalized the mortgage market on his own authority exactly one year ago. The markets remained calm. Within weeks, the bailouts of the big banks began. Goldman Sach’s rival, Lehman Brothers Holdings, went bust over a weekend. Merrill Lynch was swallowed by Bank of America. The underlying causes of the problem, namely, toxic assets, have not gone away. There are lots more of them ahead of us: Alt-A mortgages (liars’ loans), option ARMs (folks too poor even to lie loans), and commercial real estate. The re-sets will hit families that will not be able to qualify for loans. There are no more liar loans available. Lending standards have tightened over the last year and a half. The loans that were easy to get in 2007 and earlier are now ancient history. The re-sets will mean busted loans. They will end. Some of them will not be replaced. No one knows how many. The lending agencies will not be able to hide these re-set loans. They die on schedule. They must be replaced. They will not be replaced. The lenders will have expired loans on their books. The lenders have been playing “let’s pretend” with bad loans. They have not reported these loans as being in default. They have pretended that there is hope to get the owners paying again. A re-set mortgage does not offer wiggle room. Unless the regulators change the rules, these loans will have to be written down as soon as the re-set date arrives. Example: my son-on-law bought a new home in a nice neighborhood. He bought a bank-foreclosed house in a bank- foreclosed development. It was $100,000 less expensive than a few months before. The houses sold fast because the bank priced the houses to sell. Recently, his next-door neighbor lost his job. He moved back to northern Illinois to get a seasonal job. His wife and family stayed behind. Now she has been laid off. This is not a poor neighborhood. It is middle class. Unemployment climbs relentlessly. This is having fall-out effects on housing. The summer season for selling houses ended in late August. The reports on home sales will turn negative as the percentage of foreclosure sales increases in relation to total sales. Yet people in the know are calm. The average Joe is calm until the guy across the street loses his job. THE IMPLICATIONS Have you sat down with a pencil and paper to outline your situation? If you were in the market for a new mortgage, what could you present to the lender to prove that you are a low-risk debtor? If you were in the market for a new job, how much wiggle room would your finances allow you? Where are you vulnerable? Your job? Where is your employer vulnerable? People assume that corporate management knows what it is doing. Then they are amazed when they are told that their services are no longer needed. Managers don’t warn people whose jobs are at risk. They hold out hope that a turnaround is imminent. They want to believe that it really is imminent. They don’t want to lose anyone because of a premature warning to him that his job is coming to an end. So, they don’t tell a targeted employee until there is just no wiggle room remaining. Are you seeing this at your firm? Is there a drip- drip-drip phenomenon going on, the way it is with insolvent banks? If there is, what have you done to see to it that your job is safe? Anything new? If not, you should assume that your job is not safe. What about your company’s market? Is it stabilizing? Talk to someone in sales. That’s where the first signs of recovery will occur. Here is a strategy you can quietly use to assess your firm’s line of credit. Which bank is its main lender? You need to know. Once you know, check what the bank is paying on time deposits. If it’s 2% or higher, the bank is probably in trouble. It is offering rates way above the federal funds rate of 0.15% that the Federal Reserve is paying on excess reserves. It is buying time at a loss. That bank is a candidate for an FDIC take-over. The problem then will be this: a new set of managers will be in charge of rolling over old loans. They will examine every business loan on the dead banks’ books. Your firm may be at risk along with the bank that supplies the credit. The looming decline of commercial real estate threatens local banks. A recent “Wall Street Journal” article shows why.
http://GaryNorth.com/snip/889.htm When these loans go bad, this will force more of these banks out of business. It will be crunch time for local lines of credit. CONCLUSIONS Does any of this raise some questions in your mind? Have you thought through your answers? If not, why not? Questions can be asked here of Morality101 via Comment, or to Author, garynorth@garynorth.com (subject: Questions) |
Browsing Posts tagged Federal Reserve
Tuesday, September 1, 2009
Refuting “Economic Suicide”
I bring up a brief discussion on the nature of inflation in response to possibly one of the most foolish articles I have seen lately. At Seeking Alpha, Henry Bee writes that Auditing the Fed is Economic Suicide. In an incredible feat of intellectual gymnastics, Bee lays down the accusation that somehow the public knowing what is happening with the money supply will be the end of the free market:
The free market understands that auditing the fed is a very dangerous line to cross. If crossed, U.S. inflation will likely skyrocket over the next decade to unseen levels. U.S. economy tanks. Bond investors lose money as interest rates rise. Stock investors earn negative real return as equity risk premium rises and aggregate PE ratio tank. The US Dollar erodes due to higher domestic inflation relative to foreign inflation. Gold and commodity prices rise.
Perhaps we can forgive Mr. Bee for being Canadian, and therefore not understanding the history of the Federal Reserve and monetary policy in the United States. Or perhaps we can direct him to the aforementioned Milton Friedman, or maybe Murray Rothbard, or F.A. Hayek, for some simple education on monetary policy. Remember, “gold and commodity prices rise” only in terms of the value of the money itself. They are physical, tangible things. They always retain the same value, and it is the value of the money itself that changes due to inflation. After beginning with the Vault, Bee continues and moves on to the Balance Beam:
How Does Auditing the Fed Cause Inflation?
Inflation is caused by a central bank that loses control of its money supply. There are two ways that a politically compromised central bank can lose control of its money supply.
I’ll interrupt Mr. Bee while he’s still doing some of his simple posing, and before he really gets going with the tumbling. Inflation is caused by a central bank that loses control of its money supply? I think not. Remember, inflation is always and everywhere a monetary phenomenon. Inflation is caused by the introduction of more money into the supply. Who introduces more money into the supply? The central bank. The Federal Reserve is our central bank. Incidentally, Mr. Bee might be interested to know that since its inception, the Federal Reserve has practiced nothing but inflationary monetary policy and, in about 100 years, has managed thereby to devalue the dollar by approximately 97%. It would seem then, that the Federal Reserve itself has been the cause of inflation all along. But I will allow Mr. Bee to continue:
Road to Inflation #1: Repeating the Political Cycle
When the central bank is not independent, politicians have historically pumped up the money supply (for temporary economic boost) shortly before an election to buy votes with a lower unemployment rate. After the election, the effects wear off, returning the economy to its natural rate of unemployment but at a higher inflation rate than before. Because it is hard to fight off inflation quickly, by the time the next election rolls around the economy has not been squeezed back to its original inflation rate. Politicians pump up the money supply again, this time from a higher base inflation. As this cycle repeats itself, the central bank loses control of the money supply.
Bee makes a good point here in defending the separation of church bank and state. However, akin to a balance beam backflip, Bee here asserts that an audit of Federal Reserve will allow politicians direct control of the money supply. Since the discussion surrounding HR 1207 has been one of simply getting a look at the books, Bee’s arguments, while valid conceptually, are unfounded in reality. Indeed, both Barney Frank and Ron Paul have agreed with Bee’s own argument, and intend to be disciplined in making the audit one that trails real time by enough that exactly what Bee purports to be the danger will not happen.
That said, I would like to ask Mr. Bee a simple question. What makes you suppose, Mr. Bee, that the Federal Reserve is not already unduly influenced by politicians? As I have explained in the past, the Fed is largely a conglomeration of private banking institutions, overseen by a Board of Governors, headed by the Chairman of the Federal Reserve, currently Ben Bernanke. The Board of Governors is a seven-member panel appointed by the President of the United States. This means, Mr. Bee, that seven people who, through their appointment, answer to the President, and the President alone, control all that is our monetary policy, all that is our money supply, and therefore all that is our inflation. If Ben Bernanke and six others answer only to the President, how exactly is the Federal Reserve not influenced by politics in the manner you suggest already?
Bee goes on to discuss a second road to inflation:
Road to Inflation #2: Financing Government Spending
A central bank that lacks independence from politicians makes it tempting for the government to finance an inappropriately large portion of its spending through printing money. A central bank that promises to finance too much government spending also loses control of the money supply.
Now honestly, there is only just so much we can forgive of Mr. Bee for his being Canadian. This really represents a complete lack of attention to current events. Inside of a four month period, the Federal Reserve just financed a $700 billion bailout of the US Financial industry through TARP, an effort, mind you, that resulted in all that money going to the noble purpose of, well, nobody really knows, followed by the $800 billion stimulus package. Based on Barney Frank’s admission in the video found in this post, Ben Bernanke indicated to him when the bailouts began with AIG, that he had $800 billion to play with. Well that covered TARP. The only logical inference then is that the Fed printed the rest to finance the stimulus. Our central bank is already following this road, Mr. Bee. The only question is, how much have they inflated the money supply?
Well the answer from the Fed has been, to this point, simple. Silence.
When seven men who answer to one man control the entire money supply, and hold no accountability, they can do as they please. Adding a check to this highly centralized power by making their actions transparent to the public cannot be a bad thing.
There Will Be (Hyper)Inflation by Thorsten Polleit.
Increasing “Excess Reserves”
The demise of fiat-money regimes around the world has become unmistakable. They can only be kept alive by central banks creating ever-greater amounts of base money and governments underwriting commercial banks’ liabilities.
The US Federal Reserve, for instance, increased the stock of the monetary base – which includes banks’ demand deposits held with the Fed, plus coins and notes in circulation – from $870.9 billion in August 2008 to $1735.3 billion in January 2009.
Banks’ “excess reserves” – banks’ base-money holdings minus required reserves – rose from $1.9 billion to $798.2 billion. These excess reserves allow the banking sector, which operates under fractional reserves, to increase the credit and money supply manifold.
The monetary base expands when the central bank takes over the troubled assets of commercial banks in order to extend new credit to those banks. This process is gaining momentum: on March 18, 2009, the Federal Open Market Committee (FOMC) announced that it will increase base money by purchasing another $1,150 billion of securities. It is also considering increasing base money by extending credit to private households and small businesses.
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FBI cracks down on people using their own money
by Fred E. Foldvary, Senior Editor, June 8, 2009
The federal government continues to enforce its money monopoly under the new Obama presidency. In June 2009 the FBI arrested the chiefs of the private Liberty Dollar company. Among those arrested was an instructor at the Liberty Dollar University training sessions and the woman who manages the Liberty Dollar Fulfillment Office. The Liberty Dollar web site alert exclaimed, “The FBI strikes again!”In November 2007, during the primary presidential elections, when Liberty Dollars was about to issue copper dollar medallions depicting candidate Ron Paul, the FBI had raided the headquarters of Liberty Dollar and confiscated their materials and records. But the Liberty Dollar company continued in operation. Now the federal government has made it clear that it will enforce its money monopoly. The coming trial will test whether the use of a private barter currency is legal in the USA. There are people who consider themselves to be monetary reformers who advocate a monopoly government currency. But in effect, the USA has had a government monopoly currency since the Civil War. Since the end of the price controls of World War II, the US dollar has been continuously losing purchasing power. The Federal Reserve has continuously expanded the money supply by more than the growth of the economy. The inflation has in effect been a tax on money holdings, and has inflicted great damage on the US economy. When the federal government expands the money supply, this does not just raise prices, it also distorts the structure of relative prices. It is a disturbance in the economic space-time continuum! Prices rise soonest, fastest, and highest where the money is being loaned out. During the real estate boom until 2007, much of the lending went to real estate, and land values zoomed up. The Federal Reserve money monopoly does not just inflate the currency, but causes distortions that end up in recessions such as the current one. Monetary policy along with government’s subsidy to land values created the boom that ended with the Crash of 2008. Today’s monetary expansion will again result in more inflation and distortion later. So some folks turned to a private metals-backed currency as a protest and as an example. The fact that the government is stifling the private Liberty Dollars shows that it fears that the people could abandon the US dollar as it inflates. But in the end, governmental resistance is futile, as foreign governments are starting to abandon the US dollar as an international currency. The advocates of a fiat governmental currency monopoly have not explained how they justify prohibiting private currencies. Their silence implies there is no moral or economic justification for prohibiting voluntary exchange with whatever barter or money terms the parties desire. The Ninth Amendment to the US Constitution states, in its entirety, “The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.” This recognizes that the people have rights even if not specified in the Constitution, and that these rights existed prior to the Constitution and do not come from government. These are common-law rights and natural rights. The fundamental natural right is to do anything that does not coercively harm others. There is therefore a natural and common-law right to engage in voluntary exchange, which is also a Constitutional right under the Ninth Amendment. But the US courts have ignored the Ninth Amendment, and it may also ignore it in this case. The future of the US dollar is bleak, as the trillion dollar federal deficits over the next decade will create pressure on the Federal Reserve to buy the debt by creating ever more money. As the federal debt escalates and the US dollar loses value, US treasury bonds will no longer be regarded as absolutely safe. The US government will not be able to prevent foreign government from abandoning the dollar as a currency reserve, but they can crack down on Americans who seek alternative currencies. Thus the federal government’s war on private money.
– Fred Foldvary
————————- Copyright 2008 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
Forbes.com — By Alister Bull
WASHINGTON, May 28 (Reuters) – Rising U.S. government bond yields could force the Federal Reserve to expand a massive program to buy Treasury and mortgage-related debt, and if it does, it may need to be much more aggressive to be effective.
The Fed’s second-in-command Donald Kohn gave a clear signal in a speech on Saturday that he viewed the economic impact of the asset purchase program favorably, and Fed documents show officials debated ramping up the program in April.
Since then, concerns over how the United States will fund a towering budget deficit have led to a bond market bloodbath.
The U.S. Treasury is expected to borrow about $2 trillion this year as it seeks to cover a fiscal 2009 deficit of around $1.8 trillion.
for more go to source: FED FOCUS-Rise in US Treasury yields may trigger more Fed buying – Forbes.com.
I have wasted most of this past 13 months on Digg.com, in futile jousting with immoral collectivists who do not and will not understand the morality of the personal right to life of each individual on this planet, who seek to use the Force of government to negate our right to property, and don’t give one rip about the objective of happiness. Our right to property is now diverted from sustaining our life and enhancing our happiness, and is now instead being ripped from our hands (stolen) toward furthering the immoral goals of collectivism via Force.
Much time was simply wasted, trying to avoid reading trivia completely irrelevant to the ongoing economic collapse, and even more trivia wading thru irrelevant comments often nothing more than ignorant abusive blurbs consisting of nothing more than FU, FTW. While we still hang onto the thread of freedom of speech, having to deal with such ignorance wastes everyone’s time and energy for naught.
During this period we have been clobbered by the burst housing bubble, bailouts serving only to increase the national debt, to the election of a non-citizen communist who now purports to be the president of this new USSA, to an infinitely broad “stimulus bill” which we have now seen serving only to increase the already impossible mountain of national debt. This cannot be funded because the Federal Reserve cannot find buyers for the T-bills and T-bonds, thus Government cannot pay it’s bills nor even fund the bailouts and stimulus. This is a GOOD thing, although we doubt the liberals and socialists and collectivists will not understand this just yet!
So what has this to do with Digg? Well, just yesterday Digg ended it’s Shout feature, which was the way we could pass good articles to our friends. Digg now suggests Facebook and Twitter be used to compensate. Now I don’t know that you feel this way, but having to play KissyFace and Tweeting is not my idea of useful productive time on the internet, so you’ll not find me there. If someone knows an equally active social website devoted to active and serious discussion of philosophical political issues and ideas, PLEASE comment and let me know.
But worse with Digg is it’s now blatant attempts to promote bleeding heart crap and to conceal or even delete anything relevant to true Liberty and the current actions of Government seeking to destroy that last vestage of Freedom. For that reason alone, I am done with Digg.com. I may submit more (of Morality101) articles to Digg, but will not be otherwise participating. I see no compelling reason that Digg will survive these fatal mistakes. Leave that to the collectivists to have a mutual admiration society and continue to scheme how to gain more powers to Force.
I hope to convert this blogger into THE major forum for the serious ongoing discussion mentioned. I wlll need your help to accomplish this, there is too much for me to learn about doing this and so I need the collaboration of others. I barely know how to “Submit” an article here via WordPress, much less to set up the tools for good interaction between us.
So, requested action(s)
- My email address is available only to my Friends who know me as Striker101 on Digg. If you are one of those, please either use your Digg handle or else email me so I know who you are. You will be authorized as Authors and thus allowed to Post and to Submit.
- To others, you will find my eaddy at the root website of http://morality101.net.
- ONLY to those who understand the foundations of Objectivist or Libertarian philosophy, REGISTER here at Morality101 so that you can participate, and then DO participate.
- We are not here to argue with collectivists, who are wholly without virtue. We are here to expand upon the likes of Ayn Rand and Ludwig von Mises. We are here to destroy collectivism before it destroys Capitalism, the free market and Liberty.
Leave your comments HERE, don’t even bother with Digg anymore.
This clip is taken from the awesome video called The Money Masters. Please view the entire video on google to understand what is going on monetarily. You can also purchase the DVD from
http://www.themoneymasters.com which I wholeheartedly recommend.
Abolishing the Fed with a plan to avoid chaos — this is making much sense! There may be a couple of holes in this plan, maybe not?!! So please if you see holes, make comment, both here and on Digg.com.
CALLER – Mr. Supinski, does my country own the Federal Reserve System?
MR. SUPINSKI – We are an agency of the government.
CALLER – That’s not my question. Is it owned by my country?
MR. SUPINSKI – It is an agency of the government created by congress.
CALLER – Is the Federal Reserve a Corporation?
MR. SUPINSKI – Yes
Striker: Long phone call with a Federal Reserve spokesman, it’s a wild ride we are on!
This webpage is copied in full from fee.org. It is a fine expression which applies to the economic collapse of today.
http://www.fee.org/in_brief/default.asp?id=2396&year=2008&month=10
October 10, 2008
by Sheldon Richman
Sheldon Richman is the editor of The Freeman and “In brief,” and a contributor to The Concise Encyclopedia of Economics. TGIF appears Fridays. Comments welcome.
What might be even more distressing than the current buildup of the corporate state in response to the supposed economic crisis is the way some self-styled advocates of the free market are willing to cast aside the economic theory they claimed to embrace.
(Aside: I say supposed crisis because the “credit freeze” that was said to require such massive government intervention seems to be a Big Lie. All indicators, from Federal Reserve statistics to anecdotal evidence based on my phone calls to local bankers and auto dealers, confirm that ample money is available to people with good credit and/or collateral. I still see Ditech TV commercials and get credit-card come-ons in the mail nearly every day. See Robert Higgs’s “The Data Don’t Justify the Financial-Market Panic.”)
Back to theory. If you are a glutton for cable news-talk shows, you know it’s been little more than a parade of “experts” declaring the absolute imperative of government bailouts. Many of these experts preface their remarks by saying how much they hate the idea of government intervention to save business from its mistakes. “I’m a free-market, small-government advocate, but….” Jack Welch, formerly head of government-contractor GE, and columnist Lawrence Kudlow are among many who have said things like that. Since they spoke on television programs, I can’t quote them verbatim, but the tenor of their remarks is that the free market is great when things are going well, but this is an emergency and we don’t have the luxury of theory. Statements like this were most common during the frantic week between the House’s rejection of and reversal on the Troubled Asset Relief Program, or TARP.
Where to begin? Right off the bat we can see a problem. Any bailout plan that is believed to be potentially effective must be based on a theory. Otherwise it would merely be a shot in the dark. If you asked a TARP advocate why the intervention is necessary, he presumably would explain the problem and how the bailout would remedy it. For example, he might say that when the government borrows $700 billion in order to buy banks’ bad mortgage-backed securities, it will inject liquidity into the credit markets and improve the economy. But that is a theory. (It’s a bad theory, but it is a theory.) So the apparently bold thrusting aside of all theory in the name of pragmatic action is a mere pose. The move is as theory-bound as free-market opposition to the bailout is.
Contest of Theories
The debate, then, is a contest of theories. Free-market theory can explain the cause of the crisis – government intervention in the mortgage market through promotion of easy home-buying and implicit guarantees to lenders and underwriters, including its privileged creatures, Fannie Mae and Freddie Mac. Given that genesis of the problems and the general theory of markets, the solution is for government to back off — way off — and to let the economy adjust to real conditions and recover without subsidy, guarantee, or regulation. What is the alternative theory used by those who have jettisoned free-market theory in “this time of crisis”? Why should we believe that things will be fine only if the government has the discretionary power to transfer resources from those who haven’t screwed up to those who have?
There’s a unattractive anti-intellectualism in the scoffing at theory. The fact is, we can’t live without it. As I’ve noted before, William Graham Sumner long ago dismissed the claim that something can be true in theory but not in practice:
That a thing can be true in theory and false in practice is the most utter absurdity that human language can express. For, if a thing is true in practice (protectionism, for instance) the theory of its truth can be found, and that theory will be true. But it was admitted that free trade is true in theory. Hence two things which are contradictory would both be true at the same time about the same thing. [Protectionism: The -Ism which Teaches that Waste Makes Wealth (1885), chapter 4, section m.]
Mises and Theory
Ludwig von Mises had a thing or two to say about theory. For Mises the theories of economics (more broadly, human action) are derived by spinning out the logical corollaries of the inescapable concept action, of which we have apodictic “a priori” knowledge. (These corollaries include among others: purpose, means and ends, value and preference, cost, time preference, and profit and loss.) We do not acquire economic theories through observation. Indeed, as Roderick Long suggests, we can’t imagine observing human behavior outside a means-end framework: “[O]ur conceptual understanding plays a constitutive role in our perceptual experience.” This is the a priori nature of Mises’s “praxeology,” or logic of action. As he wrote in “Social Science and Natural Science”:
Economics therefore is not based on or derived (abstracted) from experience. It is a deductive system, starting from the insight into the principles of human reason and conduct. As a matter of fact all our experience in the field of human action is based on and conditioned by the circumstance that we have this insight in our mind. Without this a priori knowledge and the theorems derived from it we could not at all realize what is going on in human activity. Our experience of human action and social life is predicated on praxeological and economic theory.
Or as he wrote in Human Action: “History speaks only to those people who know how to interpret it on the ground of correct theories.”
If our premises are true and our reasoning is logically sound, our conclusions are true. This doesn’t mean that economics is done without reference to the world. It means only that we look at the economic world, as it were, with praxeological lenses — and are powerless to do otherwise. To be sure, we must first confirm that we are observing human action in an economic context (and not, say, a game, ritual, or reflexive motion), but once we do that, our a priori understanding of economics applies.
There is never a good time to throw aside theory and just act, for such a thing is impossible. The only question is whether our theory is good or bad.
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Following up on earlier posts America is History and - the Meltdown.
This post has also been submitted to Digg – you may comment here or there.
Back in the 60′s as a much younger man, I became a home-builder, and soon headed west to pursue that love in a more agreeable atmosphere. It grew nicely until the economy then hit a slump, which cycle repeated about every 7 years, but I didn’t understand why. The 3rd of such cycles came along, my business hit bottom again and, barely able to survive, I finally went to college and discovered a new love in economics. Of course we learned of Adam Smith, the supply demand curve, the Federal Reserve and another principle — ignoring Cause can bring only irrational treatment of Effect. Somewhere in those years, other factors of life came together for me, a foundation of consistency of philosophy which has integrated happily for this long remainder of life.
Which brings us to the latest & greatest calamity of the sub-prime mortgage, in which both the borrowers and the lenders are being blamed while at the same time being the victims! Therefore we watch the daily futile and insane attempts of our President and Congress to treat Effects with “meltdown bailout”, while studiously avoiding the Cause.
So here is what really happened — the Cause. Simply put, it was manipulation of our economy, loose money, then tight money, by The Fed with the virtually silent cooperation of Congress.
- The economy seems to be dragging, housing starts are down, soften the interest rates!
- Hmmm, needs a bit more kick in the pants, loosen loan standards!
- Ahhhhh, we got the housing market rolling really good now, arn’t we looking good!
- Oh Oh! The economy is overheating, there’s inflation signs, tighten up the money!
- Oh Oh! Interest rates are up, we gotta adjust those ARM’s!
Going back to my days in the building business, now we get the picture –It’s “The Seven Year Itch”! All caused by Congress and it’s pet playmate The Fed. But this round it has finally crossed the point of no return. The reason is not Wall Street, it is not deadbeat borrowers, it is not Golden Parachutes. The much ballyhooed “lack of confidence” is, again, Effect. Confidence without stability is impossible — cure the instability and confidence will reign. Too much borrowing, impossible national debt, for war, for socialism, for a hundred immoral efforts to deny the choice and liberty of the people. Months back, the “Bush Team” knew we were going to hit this crisis point; they drew up their horrid little plan to present when the stick got stuck too deep in the mud, so here we are. Tonight or Tomorrow the House will vote for the Senate’s latest plan and we will be screwed yet again.
Can you now understand why this long tiresome election campaign never made our economic collapse an issue? THEY caused it; they don’t know how to fix what they did, therefore let’s just ignore it and hope the problem goes away. Our MSM when right along with their game, when they should have been asking such questions. Then we have the first presidential debate, at which Jim Lehrer could so easily have asked “What caused this economic crisis, and how do you propose to fix it?”
pseudo-Libertarian Barr blew the golden opportunity to speak and make this case — 163 days before election day, but now is way too late. Ron Paul made good noises but isn’t a candidate, so now says merely “Vote 3rd Party”, when there are no candidates of ANY party, 1st, 2nd, 3rd, who can win and fix this mess after waiting too long.
I really do not believe that there is any viable solution available now, but let’s brainstorm on this. (added 3 Oct 08) Since the Fed caused this headache, why not dump it back upon the Fed to fix it? How? Just let them loan to the investment bankers whatever they need to unravel the credit crisis. The system is broken anyway, so what more harm could be done? Yes, it would be hugely inflationary, but any bailout will be inflationary anyway, so what else is new? Just maybe inflation will skyrocket enough to make the bad mortgage loans look good again? If not, hell, they caused it, now let them eat their own manure! The taxpayers didn’t do this, so why should we eat it?
The insanity of our government has mushroomed our national debt beyond hope of redemption. The effects of earlier bailouts, this bailout and inevitable future bailout attempts will serve only to further plunge our dollar toward hyperinflation and force America into collapse and a new dark age.
As individuals, we have only the option to courageously resist in all ways possible, and to attend to our survival as best we can. I initially built this morality101.net website in part to encourage you to go on tax strike, with some success, but the time for that to be highly effective has passed. We have lost the simple basic morality necessary to return. There can be no return until and unless we insist that our lives belong to no other.
