Ludwig von Mises Quote of the Day

Ludwig von Mises was born on this day in 1889. It is appropriate therefore, to share one of my favorite quotes from Mises. It is one that helped inspire me to pursue economics as a vocation:

Socialism cannot he realized because it is beyond human power to establish it as a social system. The choice is between capitalism and chaos. A man who chooses between drinking a glass of milk and a glass of a solution of potassium cyanide does not choose between two beverages; he chooses between life and death. A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings. To stress this point is the task of economics as it is the task of biology and chemistry to teach that potassium cyanide is not a nutriment but a deadly poison. Human Action, p. 676.

You can watch a tribute to Ludwig von Mises given by his American student Murray Rothbard here:

Stockman on Capital Account

Last Friday, I posted an appearance of David Stockman on CNBC discussing the destructive consequences of the FED's meddling in the economy. His appearance on that network was before Ben Bernanke announced QEInfinity. Since then he has appeared on Capital Account hosted by Lauren Lyster where I think he is even better and more eloquent. Stockman does an excellent job documenting the ways in which the FED, as a practical arm of the U.S. government, behaves precisely as Nassau Senior described in the quote from yesterday.

Nassau Senior Quote of the Day

Today is the birthday of classical and proto-causal-realist economist Nassau Senior. It is appropriate to treat to you a quote of the day from pg. 176 (of the Kelley Reprint Edition) of his An Outline of the Science of Political Economy originally published in 1836. It is as timely as today's headlines.

. . .[G]overnments have generally supposed it to be their duty, not merely to give security but wealth; not merely to enable their subjects to produce and enjoy in safety, but to teach them what to produce and how to enjoy; to give then instruction how to manage their own concerns, and to force them to obey that instruction.Unfortunately, too the ignorance and folly with which they have attempted to execute this office have been equal to the ignorance and folly which led them to undertake it.

The Fed Is the Heart of the Problem

That is what David Stockman told CNBC last week. Have a look:

The money quote: ". . .the fed and these lunatics who are running it, and I use that word advisedly, are basically telling the whole world untruths about the cost of money, about the cost of risk, about how you allocate capital." In such a world, he rightly wonders, how can we hope to restore free market capitalism.

How did Stocks Get So High?

That's the question asked by Business Week Magazine. The answer, I suggest, is money and by that I mean newly created money. The article notes that the S & P 500 average increased 25% over the past year. This seems surprising given the general economic stagnation during that time. In fact, over the previous 12 months ending in August, the True Money Supply, increased 8.4%. Such an increase in the money supply, made possible by credit expansion, reduces interest rates and increases asset prices including stock prices.

As Jesus Huerta de Soto explains in his Money, Bank Credit, and Economic Cycles:

In an economy which shows healthy, sustained growth, voluntary savings flow into the productive structure by two routes: either through the self-financing of companies, or through the stock market. Nevertheless the arrival of savings via the stock market is slow and gradual and does not involve stock market booms or euphoria (p. 461)..

On the other hand,when there has been monetary inflation in the form of credit expansion, it's another story:

Only when the banking sector initiates a policy of credit expansion unbacked by a prior increase in voluntary saving do stock market indexes show dramatic and sustained overall growth. In fact newly-created money in the form of bank loans reaches the stock market at once, starting a purely speculative upward trend in market prices which generally affects most securities to some extent. Prices may continue to mount as long as credit expansion is maintained at an accelerated rate. Credit expansion not only causes a sharp, artificial relative drop in interest rates, along with the upward movement in market prices which inevitably follows. It also allows securities with continuously rising prices to be used as collateral for new loan requests in a vicious circle which feeds on continual, speculative stock market booms, and which does not come to an end as long as credit expansion lasts. . . .Therefore (and this is perhaps one of the most important conclusions we can reach at this point) uninterrupted stock market growth never indicates favorable economic conditions. Quite the contrary: all such growth provides the most unmistakable sign of credit expansion unbacked by real savings, expansion which feeds an artificial boom that will invariably culminate in a severe stock market crisis (pp. 461-62).

Herbener on The Fed and QE3

My friend and department chair, Jeffrey Herbener is interviewed by Lee Wishing of Grove City College's Center for Vision and Values about Ben Bernanke's recent announcement that the Federal Reserve will buy $50 billions worth of bonds every month until the economy looks better. You can watch the interview by clicking here.

In this interview Herbener explains the likely economic consequences of such monetary expansion, including distortion of investment, capital malinvestment, hampering necessary economic adjustment, increasing stock market volatility, and increased price inflation.

Dr. Keith Smith on How the Market Can Cure the Health Care Problem

The medical care industry is in serious need of reform. The question that we dare not ignore is what sort of reform. Way too often policy makers and the journalists that support them merely assume that reform requires increased socialization and centralization. The trouble is that socialization always reduces quality and increases costs because of inefficiencies due to economic calculation and incentive problems.

A different avenue for reform would be to move toward a truly free market. On Monday's Capital Account Lauren Lyster interviewed an independent doctor Keith Smith who explained how a free market can more efficiently supply medical care:

Baklava and Bull Fighting Anyone? . . . .Anyone?

Where will we be if we don’t get a handle on our fiscal problem? Let’s just say I hope you like Bull Fighting and Baklava. The sovereign debt crises’ faced by Spain and Greece are indicative of where we might be headed if we continue down our present path. In July Maria Bartiromo interviewed Sean Egan, CEO of Egan-Jones, the first ratings agency to cut the U.S. debt rating last year. When asked what were the biggest problems in the Eurozone, Egan responded, “The largest problem, and it's a very difficult problem to solve, is that debt relative to GDP has continued to increase for most European countries.” When asked why are these countries in so much debt, he simply noted, “They've been spending a lot more money than they've been taking in. With the decline in the GDP, the assumptions that were made in setting the budgets have not been met, so the deficits continue to build.” Sound familiar?

How Big Is Our Government's Debt Problem?

As I discussed on Wednesday, we cannot escape the fact that we are in a fiscal mess. While our total government debt equaled $381 billion in 1970, today it is pushing $16 trillion. That’s trillion with a t. The average U.S. taxpayer owes over $140,000 in debt.

 While conventional wisdom on the right sees Democrats and President Obama as especially profligate, the sad fact is that it has not mattered much which party is in power. Both parties have contributed mightily to our fiscal woes. It turns out that 7% of the current U.S. Government Debt accrued before Ronald Reagan took office. The Reagan administration added over 13% to our current debt. The next two presidents made similar though slightly lower contributions, with George Bush I adding 10.5% and Clinton adding 9.8%. An astounding 42.7% of our debt, however, was accumulated during the administration of George W. Bush and President Obama had already accumulated 16.8% by the end of last year. The bottom line is this: Government spending and debt has increased with both Republicans and Democrats in the White House. Government spending and debt has increased with both Republicans and Democrats controlling Congress.

Things have only gotten worse following the financial meltdown of 2008. It took from 1789 to 2001 to accumulate a federal debt of $5.8 trillion. However our rulers added an identical $5.8 trillion in four short years between 2007 and 2011. The top ten monthly budget deficits have all occurred since February 2009.

During the Obama administration, the U.S. government has accumulated more new debt than it did from the time that George Washington became president to the time that Bill Clinton became president. Since Barack Obama entered the White House, the U.S. national debt has increased by an average of more than $64,000 per taxpayer. In fact, Barack Obama will become the first president to run deficits of more than a trillion dollars during each of his first four years in office.

Such developments have culminated in record-breaking fashion this March. The Government of the United States achieved a sad milestone of spending more than in any other month in our nation’s history. Federal spending topped $396.4 billion. That amounts to $1,190 for every American man, woman, and child. At the same time, it collected only $550 per citizen in taxes. That’s right. The government spent over 2 times what it brought in through taxes. Now the grand total stands at $15.9 trillion. U.S. Government Debt has grown over 2 and a half times in just 11 years. And we add well over a hundred million dollars to our debt every single day.

When we begin talking in trillions of dollars it can easily boggle the mind. The numbers are so large it is beyond anything we can relate to in our daily lives. Merely saying 1 trillion is a thousand billion, doesn’t really cut it. To give you some perspective on the magnitude of our current debt, understand this: If you were alive when Jesus Christ was born and you spent one million dollars every single day since that point, you still would not have spent one trillion dollars by now. It staggers the imagination but it is true.

Please Help Me I'm Falling. . . .Of the Fiscal Cliff

Increasingly we hear we are in danger of our falling off a “fiscal cliff.” As legislation currently stands the Congressional Budget Office estimates that the Federal budget deficit will fall by $607 billion due to $407 billion in tax increases and automatic spending cuts of approximately $200 billion. Most of the economic and financial intelligentsia operating within a Keynesian framework are very worried that such fiscal changes, while reducing the budget deficit, will push us off a cliff into severe recession viewed as a significant reduction in GDP.

I would suggest that, due to economic reality,  the nasty budgetary situation in which we find our nation has already pushed us off a fiscal cliff. Decades of fiscal mismanagement leave us with very few painless options. Our rulers and their intellectual supporters have rejected economic wisdom to such a degree that it amounts to a rejection of reality.

By economic reality, I mean the fundamental facts of economic life. For example, most people, with the exception of modern macroeconomists it seems, understand and accept the existential economic fact of scarcity. There are not enough goods to satisfy all of our ends. Even the Rolling Stones recognized that you can’t always get what you want.

Drawing on economic and philosophical thought developed in light of the nature of human interaction, our best economic thinkers for centuries have generally recognized that economic prosperity requires productive activity. Men like John Baptiste Say, Francis Wayland, Frederic Bastiat, Condy Raguet, Wilhelm Ropke, Ludwig von Mises, Hans Sennholz, and Murray Rothbard understood that such activity is most fostered by a free society built on private property. State intervention in the economy, therefore, was seen as generally destructive, because the government does not really produce anything. It consumes. Therefore, it is prudent for the magistrate to be strictly limited and to live within its means. 

How did we get here from there? Since the middle of the 20th Century, our rulers supported by a growing segment of the intellectual class have taken leave of their economic senses. Since the end of WWII, increases in government spending have occurred virtually unchecked. Only three times since 1946 did total government spending decline. In 1954 and ’55 it fell because of a cutback in defense spending after the Korean War and in 2010 outlays decreased ever so slightly as TARP spending was phase out of and Obama’s stimulus plan had run its course. Occasionally defense spending fell slightly, but Social Security and Medicare spending has never decreased even once.

Since the early 1970s, tax revenues generally have not kept pace with government spending. With the exception of four years during the Clinton Administration, the federal government has spent more than it has taken in according to its official budget. Of course, with off-budget spending taken into account, spending exceeded revenues through Clinton’s presidency. Since 1970 real government spending has increased a total of 295%. During that same time, government revenue has increased only 156%

It does not take a PhD from MIT to expect that, given our lack of fiscal discipline, we must have had an almost continual increase in government borrowing. Such a conclusion would be correct. In 1970 our total government debt equaled $381 billion. Yesterday it past the $16 trillion mark. That’s trillion with a t. Even if we adjust for inflation, federal government debt has increased over 8 times what it was in 1970.

The trouble, of course is that this debt must be paid back somehow. Either future generations must be taxed more heavily or the Fed merely monetizes the debt so that overall prices kiss the sky and the value of the dollar plummets. This amounts to implicit debt repudiation. The debt gets paid back, but with dollars that may be almost worthless. The only other alternative is explicit repudiation, which the political class finds impolite even to think about.

Labor Day

On Labor Day two years ago, I asked the question, "Why not Capital Day?" The question is still a good one--increasingly so given that it appears that capital accumulation has slowed significantly since 2008.

As I explain in my book, Foundations of Economics, capital accumulation is one of the chief sources of economic expansion and development. We can't fulfill the cultural mandate without it.