Anarchy is Emergent

Excellent point about the grassroots, bottom-up, market-based nature of human society and the artificiality of state governance.

I'd recommend you subscribe to confederalsocialist's channel. He's WisdomOfTheAcorn whom I endorsed in a previous post. Smart guy!

How to treat a recession II

Some more water's been going down the Mississippi since my last post. I decided it was time to get into the business again. Starting with a few minor design changes, I intend to contribute content more regularly now and offer some additional features to complement my random thoughts on supposedly important topics. Let's get back to work!

Now that a new high-priest in chief has been sworn into office, I figured it'd be a kind gesture to provide some more advice concerning the treatment of a recession. We'll examine public works programs today.

There is a widespread belief that one of the purposes of "the economy" is to provide jobs. This is false. The purpose of economic transacation is to satisfy needs and wants. The reason why the first cavemen engaged in trade with each other was precisely the effectiveness of the division of labor when it comes to satisfying diverse needs and wants. One caveman would hunt deer whereas the other one would collect berries. The two could then engage in voluntary exchange, improve their diet and increase their survivability - or just have more pleasure eating. In any case, they'd be better off than their non-trading caveman friends.

Of course, in the process of satisfying wants and needs, work opportunities are created. A few years down the road, the berry-trading cavemen may have been able to hire other neanderthals to collect more berries for him and get paid in, say, deer meat. The example isn't all too significant since it lacks a common currency and the job is not really an advance from scratch for the one performing it, but still. We now have employment. Meaningful employment. If our neanderthal would carve beautiful wooden dolls, that'd be great, but useless in the absence of demand for beautiful wooden dolls. There's no point in forcing the berry entrepreneur to give deer meat to the doll carver in order for the carver to continue his business, but that's exactly what public works programs are all about.

Instead of pursuing meaningful and profitable employment on the market, people are incentivized by the state to engage in random activity subsidized by tax money. The activity may not appear to be random since it benefits someone, but it remains a subsidy at best, for if the job was profitable, there'd be no need for the state to provide it. Thus, public works programs not only extract labor from the market to use it in unproductive endeavors, but force productive workers to finance this madness. That way, the real function of markets - the satisfaction of needs and wants - is impaired from two sides at the same time.

Public works programs do not support, but hinder economic recovery. The idea should've been discarded long ago.

Money storm ahead

I'd like to point out to my readers some quite disturbing developments concerning the monetary system of the United States:

This is the estimated amount of Federal Reserve notes (or "US dollars") circulating within the economy or being held in commercial bank deposits. As anyone should be able to grasp, the current strategy of recklessly pumping money into the economy could very likely lead to massive inflation.

The reason why we still experience deflationary tendencies could be a notable drop in bank loans and credit, a so-called "credit crunch". Robert Higgs has shown this view to be false. Little to no money has been destroyed in the credit sector, in fact, credit is at an all-time high.

An alternative explanation could be provided by this particular measurement of bank excess reserves. This is money that banks are currently holding, but have not put to use, i.e. loaned out, yet. Let's compare some numbers here:

1978-12-01 0.232
1988-12-01 1.061
1998-12-01 1.512
2008-01-01 1.640
2008-02-01 1.724
2008-03-01 2.978
2008-04-01 1.844
2008-05-01 2.011
2008-06-01 2.272
2008-07-01 1.977
2008-08-01 1.988
2008-09-01 60.051
2008-10-01 267.905
2008-11-01 559.051
2008-12-01 767.422

Such an accumulation of excess reserves is unprecedented, at least in the records of the St. Louis Fed, and combined with a stable credit market, raises the possibility of a hyperinflationary depression considerably. Basically, what it means is that as soon as banks start lending aggressively again, they have about 700 times their usual amount of Federal Reserve notes available so that 700 times more loans can be given out. You calculate what that'll do to your savings account.

It has been repeated over and over again by countless friends of liberty, but among the best investments these days are in fact stable foods, common caliber firearms/ammo and physical gold in your own hands. Don't expect government to provide for you or defend your family once prices are going through the roof and a substantial part of the population find their savings vanishing and the store shelves empty.

What's wrong with Germany?

Marco of the Opponent blog has drafted a little insight into the everyday tyranny of contemporary Germany. Pravda television, universal gun bans and state-financed ideological purgings, anyone?

Definitely worth reading, especially for those praising the progressive European social democracy.

Fred Thompson on the economy

Thanks to Gary North for pointing me to this great video by former Republican Senator Fred Thompson in which he's making fun of the breathtakingly ignorant 'remedies' we're being sold in order to 'cure' the recession. Thompson also participated in last year's presidential race on the Republican party ticket, so he shouldn't be a stranger to anyone who is following current events.

While some of his views are not quite the libertarian choice, he's spot-on with that one. Enjoy.

How to treat a recession I

In my last article I argued that recessions are actually a good and desirable development and should be greeted whenever they occur. However, I admitted that recessions are connected with temporary hardships that ought to be overcome as quickly as possible.

Quite a number of people put their trust in government to accelerate the process. So I figured I better start a new series: a handbook for the aspiring central banker and bureaucrat to find out how to ruin an economy in transition, in other words, what NOT to do.

Today we shall start with a popular magic trick out of Mr. Keynes' cylinder: deficit spending.

The reasoning behind running up debt to become wealthy is the idea that recessions are not caused by far-reaching shifts in customer preference patterns, but by "uncertainty" and "confusion". If people can be manipulated to spend money faster than they would under true market conditions, this is seen as a success and the correction of a "market failure". Keynes doesn't want to wait until markets have adapted in the long run to what customers actually desire because "we're all dead in the long run".

Debts can be repaid in boom periods, Keynes assumes. That way, we get the best of both worlds: a stable economy and zero public debt.

However, Keynes doesn't answer the question of how to determine which public works program that we need to go into debt for will yield a sufficient profit so we can repay our obligations. Obviously, government doesn't follow the price mechanism - it would be unnecessary otherwise. That leaves political/ideological projects and socialized industries as areas to invest.

An example for an ideological project would be renewable energies. You can pump a lot of money into it without clearly defining your aim. Do you want long-lasting home generators for survivalist-minded folks in the outback, or high-performance cells with a relatively low shelf life for emergency use in factories and offices? Or do you intend to replace every non-renewable energy source in the country with wind parks and solar panels? You need to calculate your budget accordingly, and need a good reason why your specific purpose is more worthwhile than any other use (e.g., researching waterproof solar panels for diving purposes). It's a subsidy in any case, however, and yields no expected positive return. Otherwise, the market would do it.

Socialized industries include, but are not limited to, streets and police. One might wonder how building more streets or hiring more cops is going to boost profitable trade and commerce. As I explained above, there's just no way to determine and thus, no way to promise that debt incurred during a period of economic adjustment will ever be paid back.

And that's exactly what's been going on ever since. A lot more debt during recessions and a little less more debt during a boom. Interest needs to be paid for this debt in the future, this will drag down economic development since taxes need to be levied or money needs to be printed which will lead to inflation, a hidden tax, in order to repay it. Deficit spending is a vicious cycle.

In addition, government needs to borrow somewhere to finance its deficit spending. Even though credit markets have been extended ridiculously through fractional reserve banking and the Fed itself, there is still no unlimited amount of credit available. If government buys up all the credit, this drives up interest rates for private sector businesses in need. They may not get the loan they need and go bust. This is called "crowding out".

Anything more to say about it? Government deficit spending ignores your personal subjective value choices, sacrifices long-term, but stable business plans for short-term, debt-based ones and levies taxes on your children's future. In other words: hands off !

All hail the recession !

First, I'd like to apologize to my dear readers for being unproductive over such a long time span. Lack of inspiration, business in out-of-blog life and general tiredness kept me from writing.

Today, however, I feel like commenting on the craze of the day: claims that someone finally "get us out" of the coming recession.

It is a generally accepted view that recessions are bad. 'Something' ought to be done about them, we are told by all the concerned-looking pundits, otherwise we might face the full impact of the bust. And that is, supposedly, "bad" for "the economy".

That may be true in Bizarro World. On Earth, a recession indicates a reallocation of resources away from seemingly unproductive enterprises to those which actually satisfy customer demands. Various shifts in preference patterns may occur: market participants may either change their preferences for certain goods and services while remaining in the same time preference pattern, e.g. change their fondness for chewing gum to a liking for white bread, or alter their time preference altogether, e.g. stop buying video games and instead save for a house. As long as this happens in small doses, the impact of the reallocation is hardly recognizable. If, however, for some reason a large amount of market participants decide to switch from popular industry A to unpopular product B, markets need to restructure on a grand scale.

This, in turn, leads to temporary inconveniences such as unemployment, wage reductions, short-time work (or overtime) or business failures.

Think about it again: politicians, economists and pundits generally support fighting this process. How does that make any sense? It is not some bad voodoo that tends to haunt our world for an unknown reason from time to time, but simply markets reacting to future trends and expected modifications in supply and demand. So why would they want to stop it?

Of course, the argument "it's bad for the economy" holds some truth: it is bad for those entrerprises that are expected to undergo enormous changes or go bust due to production of goods or services that are not in demand (anymore). Nobody wants to leave a front row seat in the ride of life, but we have to decide at some point: Do we want an economy that produces goods and services according to market demand, or a museum economy which reflects demands and speculations of the past, but is unwilling and unable to adapt to our changing wishes and needs?

If you don't want to live in a museum, you'll be just as glad as me to see the recession unfold. Gas prices dropping, house prices dropping, commodity prices dropping in general, laggard companies like GM that have been more busy meddling with Michigan politics than producing neat cars for decades threatened to be finally gone for good, Ponzi schemers like Bernie Madoff going broke as well and, maybe of paramount importance, politicians that are too busy "fixing the economy" to think about going to war another time. I might be wrong with that one, but at least it's a reasonable hope.

Thus, as the headline said: all hail the recession !