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Subject(s): Pirates! The real kind and the one’s administering TARP. And we’ll also discuss the Rasmussen poll about capitalism and socialism.
In this podcast, Bruce, Michael and Dale talk about the AIG bonus Fiasco, limiting executive pay, and the public’s tolerance for President Obama.
The direct link to the podcast can be found here.
The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download here.
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My first reaction to Pres. Obama’s speech last night was depression. Here were the Democrats giving the president standing O’s for completely converting the Republic into a social democracy. I mentioned that on Facebook, and one of my readers said it reminded him of Amidala’s line from Star Wars Episode III: “So this is how liberty ends…with thunderous applause.”
But on more careful review, I find that I am not, in fact, depressed over the long-term. Indeed, last night’s speech seems to me not to herald the beginning of a new era for big government and socialism, but rather the last gasp of a dying ideology.
We are, I think, at the cusp of a new era, but it isn’t the one that Pres. Obama and his acolytes in the Congress are thinking it is. Neither the Democrats nor the Republicans, it is clear, have any idea about what is happening. Very few people do. I am going to try and explain something very complicated, and do so very simply, and as briefly as I can. So, with the realization that all simplifications are inevitably wrong in some particular, let me explain.
“Ed’s dead, baby. Ed’s dead.”*
We stand now, I think, in a very historically similar position to the one described by Barbara Tuchman, in the beginning chapter of her monumental work on the outbreak of Word War I, The Guns of August:
So gorgeous was the spectacle on the May morning of 1910 when 9 kings rode in the funeral of Edward VII of England that the crowd, waiting in hushed and black-clad awe, could not keep back gasps of admiration. In scarlet and blue and green and purple, 3 by 3 the sovereigns rode though the palace gates, with plumed helmets, gold braid, crimson sashes, and jeweled orders flashing in the sun. After them came 5 heirs apparent, 40 more imperial or royal highnesses, 7 queens, and a scattering of special ambassadors from uncrowned countries. Together they represented 70 nations in the greatest assemblage of royalty and rank ever gathered in one place and, of its kind, the last. The muffled tongue of Big Ben tolled 9 by the clock as the cortege left the palace, but on history’s clock it was sunset, and the sun of the old world was setting in a dying blaze of splendor never to be seen again.
Four years later, the world order of 1815-1914 was drowned in fire and blood. The Age of Royalty was over, and the Age of Democracy had begun. I believe that Pres. Obama’s speech of last night may very well be the historical equivalent to Edward VII’s funeral.
Ever since it began in late 2007, a blog called Fabius Maximus has been arguing that we are watching the decline and fall–indeed, collapse–of our current economic and financial system. A précis of the argument can be found here, and a more comprehensive archive can be found here. Just as the black-clad crowds lining the streets of the capitol of the British Empire on the morning of May 20, 1910 might have found it inconceivable that their generation would witness the collapse of both the European geopolitical regime, and, ultimately, the British Empire itself, so it may be inconceivable to us that we are witnessing the collapse of the Post-WWII economic and political regime. But I believe it is nevertheless true.
“MONEY! Doesn’t it make you feel good just to say that, Jerry?”
Let me start by explaining what money is. Money is a medium of exchange, that is, it is an object of some kind that I can exchange for goods and service, rather than trying to barter with people to obtain what I need. It may consist of elaborately carved cowry shells, tiny beads painstakingly stitched to strips of leather, round pieces of metal with the image of guys named Julius or Claudius hammered into them, or little pieces of high-quality paper that say “Federal Reserve Note” on them.
But whatever it is, money has certain minimal characteristics. It must be convertible, i.e., if I do a job for you, I have to be willing to accept it as payment, and whoever I buy bread or clothes from has to be willing to accept it in exchange, too. It also has to be difficult to replicate, so that when I accept it, I am reasonably assured that it is the genuine article.
For nearly all of recorded history “money” has been synonymous with gold or silver. And right up till the late 18th century, it was more or les the perfect money. It was intrinsically valuable, in that raw silver or gold was as easily convertible as hammered or minted coins. It was also practically impossible to counterfeit, the best efforts of alchemist to convert dross into gold notwithstanding. It was also relatively rare, and it difficult to obtain new supplies of it without intensive–and extremely expensive–mining operations.
Additionally, there simply wasn’t much to buy. Most people grew their own food, produced their own clothes from flax or wool, and built their own houses by hand. Money was essentially a luxury, and it bought mainly luxury goods for fat cats. Kings could raise and equip armies with it. Merchants could buy nice clothes. But for the most part, money was a tool for use by the rich, and by the relatively few urban dwellers. And, as such, gold or silver was perfect for that level of economic activity.
By the 19th century, though, there were lots more things to buy, and lots more city dwellers, and that trend was increasing rapidly. Hard money became…problematic. The thing about having a hard currency based in gold or silver is that, at the end of the day, whether you run a fully convertible gold standard, or some sort of fractional reserve system, the size of the money supply is always constrained by the amount of gold or silver on hand.
If the economy takes off on a tear, it’s extremely difficult to expand the money supply to meet the demand. When the supply dries up, the economy just shudders to a quick stop, because nobody has enough spare money to fund more expansion. So the economy collapses until it reaches equilibrium with the available money supply, and the cycle starts again. Look at a chart of US economic activity in the 19th century and you see it’s a system of booms and busts, which were far steeper than any we’ve seen since the depression. So the fundamental problem with a gold standard is that it’s relatively inflexible when used by a vibrant, diverse economy. When everybody needs gold, and the demand is unpredictable, gold is very difficult to use unless you’re willing to live with severe booms and busts.
The Great Depression was the death knell for the gold-based world economic system. Those nations that jettisoned gold the fastest, recovered the most. Of course, WWII intervened in the depression, so it took a decade or so to get back to the business of commerce–as opposed to the business of building things to kill Nazis. But, by 1944, everyone–on the Allied side, at least–had recovered enough breathing room to meet at Bretton Woods, NH, and hammer out a new economic system.
What they came up with was a system of fiat currencies, all freely convertible in the FOREX market.
Now, governments could adjust their money supplies appropriately by printing more money or less of it, and taxing their populations more leniently or more severely, as needed. This is the system most of us have grown up with…and it’s dying.
It’s dying because of something innate in human nature that the gold standard was better equipped to deal with: the urge to loot the system.
It’s an urge that has always been there. Sometimes it has been the result of intentional government action to cheapen the currency. If you were, say, the king of Persia, you didn’t need to consult the priests of Ahura Mazda to know that if you changed from using 10 grams of gold per coin, to using only 9 grams per coin, you could stretch your gold supply by 10%. You could then take the extra gold, and buy yourself a nice hat. Or use the extra gold to make one. Whatever.
Of course, people would notice this pretty quickly, and items that used to cost 9 gold pieces would cost 10 pieces–inflation!–but because gold had an intrinsic value, the same weight of gold could be exchanged. It was still pernicious, of course, but because gold had an intrinsic value–and because the supply of gold was relatively inflexible–it wasn’t usually seriously pernicious.
Sometimes, the urge to loot the system has been done by private individuals, who figured out that if they shaved a bit off the edges of their gold pieces, they could accrue enough gold shavings to buy themselves a nice hat, too. This, by the way, is why when we began minting coins instead of hammering them out. They were minted with milled edges, making shaving attempts immediately obvious.
By the 19th century, the looting attempts became widespread, populist movements, like the “Free Silver” movement. At the time, gold was real money. If you took a bunch of gold to a Minting facility, the mint would return you an equal weight in gold coins–minus a nominal minting fee. After huge silver deposits were discovered at places like the Comstock Lode, populist agitation began for minting silver in the same way, at a ratio of 20 ounces of silver for 1 ounce of gold. The massive amount of silver floating around would, of course, have made this an extremely inflationary policy, and the farming and borrowing interests would have benefited by paying off bills for less than they had borrowed…enabling themselves to use the extra saving to buy a nice hat.
But during the First Age of Money, the looting was always constrained by the fact that gold had an intrinsic value, and that the supply of gold was inelastic. There were, therefore built-in constraints to the looting impulse.
When the Bretton Woods Agreement launched the Second Age of Money, it solved the problem of the inelasticity of the money supply, and enabled monetary authorities to fine-tune the money supply in response to economic activity. That was a good thing in the sense that it flattened–although did not eliminate–the business cycle fluctuations.
But the bad thing was that it completely removed any physical restraint on the money supply. It depended on governments and monetary authorities to exercise self-restraint, rather than impersonal, externally imposed constraints. The result has been 65 years of continually expanding credit, more or less constant inflation to a greater or lesser degree, and unrestrained spending and borrowing.
Governments–and their democratic (small “d”) constituencies quickly learned that they could loot the system. Social insurance, medical care, military expansion…whatever the Big Idea of the minute was, we could have it. And if we didn’t want to pay the taxes to the government to pay for it–and, mostly, we didn’t–we could simply borrow it. We could obtain a whole bunch of little green pieces of paper now in exchange for a promise we’d pay back more little green pieces of paper sometime in the future. In the meantime, we could buy all the hats we wanted!
But now, we are obligated to pay back various people about fifty trillion pieces of green paper. Unfortunately, the entire household worth of everyone in the country is worth about forty trillion pieces of green paper.
How can the current economic and financial system possibly be considered solvent at this point? How will re-expanding the cycle of debt re-invigorate it?
No, we’ve had our fun. We got to loot the system for 65 years. Now, the hat bill is coming due.
I suspect we’ll pay the hat bill the same way that Germany repaid their war reparations debt after WWI. “Hey, you remember that reparations bill for 3 billion marks that we’re supposed to pay next week? Yeah. I just wanted to let you know that we’ve sent that order off to the printers, this week, and we should have that printed up for you by Tuesday.”
The result was massive hyperinflation, the collapse of credit, and 5 years of compete economic stagnation, serious economic pain, severe unemployment…and the ability to start over in the mid-20s with a clean balance sheet. Clean enough, in fact, that by 1936 Germany had more or less completely emerged from the Great Depression, while the employment rate in the United States hovered at around 18%.
What Pres. Obama is proposing may result in nothing more than additional spending that helps bring about the collapse of the Post-WWII economic regime, while at the same time providing–temporarily–a social safety net that will provide some help as we pass through a difficult transitional period.
“I was there at the dawn of the Third Age of Mankind…”
OK. Maybe it’s not that grandiose, but I think we are seeing the dawn of the Third Age of Money.
No one in the government realizes how the economic world is changing. So their proposed solutions are likely to be exposed over time as ineffective and, perhaps even counter-productive. The credibility of governments around the world is now invested in staving off an economic collapse. When their failures become evident, and their “solutions” are exposed as fantasies, that credibility will collapse. Who will want to buy government bonds, or use worthless government money? Who will trust the governments who lead us into the economic abyss?
Unfortunately, rather that realizing that we are entering a transition, and trying to discover how to shepherd us through that transition, they are invested in preserving the dying system of government-regulated money supply and credit. And even if they realized that we were in a transitional period, they would still do nothing about it because it would require voluntarily releasing their power over the economy.
Governments have always been in charge of money; determining what money is, how it will be exchanged, how new money will be created, etc. In part, this is traditional, in that only government had the resources and ability to fund and oversee mining and exploration activities, regulate what legal tender consisted of, and all of the other monetary functions. There simply were no other large organizations in existence to perform those tasks.
It wasn’t until the 17th century that organizations began to emerge that could begin performing those tasks, and not until the 18th century that it became practical. Private money of various types began to sprout up everywhere. 18th-century America was, for a time, replete every decent-sized bank issuing its own currency based on deposits.
Eventually, the Federal government cracked down on that private money, not so much from jealousy of the government’s role as the issuer of currency, but because private banks suffered from the same tendency to loot the system, issuing more and more inflated currency until it was worthless, and they ended up wiping out their depositors in the collapse as their obligations came due. There were some solid money banks of course, but the spectacular failures of so many private currency attempts led the government to tax them so heavily that private currency issuance became uneconomic. Governments may not have been perfect, but the constraints of the gold system meant that they didn’t fail as completely and spectacularly as private banks did.
What was missing in private currency of the time, and what has been missing in the current post-WWII financial system is feedback. Yes, there is some, but it takes a long time to filter into the monetary authority, and is derived indirectly from statistics on economic activity, rather than by any sort of direct observation. The Fed raises interest rates today, for instance, and it takes around eight months to observe the indirect effects of the monetary policy change. This is why the role of the Fed, has often been described as steering a car by looking through the rear-view mirror. Based on seeing where you’ve been, you make decisions about where you must go. That may be a form a feedback, but it is so separated in time from the inputs that it’s an inherently unstable system.
By the same token, what killed depositors in banks that issued private money was a lack of feedback. It wasn’t possible to see that bankers were looting the system in time to withdraw your money.
We call this lack of feedback asymmetrical information. We’ve never been able to even approach the ability to have full information about what a bank or government is doing that may affect the money supply, or economic activity as a whole. We’ve never been able to see all sides of the story, as it were. So, we’ve had to more or less leave it in the hands of government, simply because governments have been the only organizations with the size and scope to reduce, even partially, the problem of feedback.
So, it seems pretty hopeless, doesn’t it? The financial world we’ve grown up with is collapsing under the sheer weight of looting. If governments can’t do it, and a return to the gold standard can’t do it, then where are we? At the edge of another dark age?
I foresee the rise of private money once again, and returning in such force as to negate the government’s role in the economy. In fact, the pieces for creating the Third Age of Money are already there.
The Internet will be the platform for the new money. But it’s just the platform; the communications media. The actual objects that make up the Third Age of Money will almost be located in cyberspace.
First, there is encryption. In the not-too-distant future, you will go online with a persona, i.e., an online identity with a unique, highly encrypted digital signature. No more logging in with different user names and passwords at 100 different web sites. Your persona will be uniquely identified as you through the use of 4096-bit or 8192-bit public key encryption. Your persona will be impossible to forge or duplicate. It will be unique. Your “bank” and your “money” will be similarly encrypted.
Second, is your ATM/debit card. It won’t be exactly the same, of course. It will be far more secure, probably through the use of biological identification systems to verify authorization, such as retinal scans. It will be linked directly to your persona’s bank account.
Third, is the ability of all the major banks and credit card companies to do online transactions, and to convert one system of private money to another at a publicly known exchange rate. So, you can pay directly to your account–or withdraw from it–in Discover Dollars, or MasterBucks, or Credit Suisse Francs. Or perhaps there might even be a universally acknowledged unit of currency–the “Credit”–that all the private companies agree to use.
But, the most important element of creating a reliable private money system that is resistant to looting the system is feedback. The reduction of asymmetrical information. And that exists, too. eBay has been using it for years. Indeed, in no small way, the system implemented by eBay may be a key element of our future.
Imagine a system where, every time I do business with your persona, I rate your reliability, and it doesn’t matter of the persona is an individual or a bank…or a government. Every day, millions of people who do transactions in MasterCard can rate the reliability and value of the MasterBucks system. Private companies like Standard and Poors or Moody’s would not only rate MasterBucks, but consumers would rate the reliability of S&P or Moody’s judgments.
And not only are the bank’s persona’s being rated, but your persona is as well, by every one who does business with it.
Put them all together and you have a secure form of private money that’s convertible, impossible to forge, and is subject to constant feedback about its value and performance. Does MasterBucks have too high a debt ratio or too much exposure to non-performing loans at MasterCard? No problem. It’s instantly convertible to Credit Suisse Franks. And the conversion rate lowers MasterBucks reliability ratings even more, signaling the company to correct its course, or lose its depositors.
Think of the implications this has for taxation, especially income taxation. Keep all your money in Credit Suisse Francs, say, and the US government will never even be able to see a record of your deposits or withdrawals. How will they track your income? And who will want to pay governments that failed to prevent the collapse for…well…anything? Who will accede to the demand for money by governments that repudiated their debts, and destroyed the life savings of millions?
I can foresee huge implications for the future that are very pro-liberty. In the long term. In the short term, though, if I’m right, and the current financial system is collapsing we will be in for a very rough decade or so. Very rough indeed.
*Apologies to Quentin Tarantino.
Al Sharpton must sniff a payoff somehere. He’s protesting in front of Bernie Madoff’s place.
Bill Press pushes for a redefinition of “public interest” to include making terrestrial radio stations carry a format that fails everywhere it is tried to the detriment, naturally, of one that succeeds.
After years of pandering to them, John McCain makes the staggering discovery that Democrats are no more bi-partisan than the GOP.
The Taliban release a video of them cutting off a Polish engineer’s head. The Obama administration mulls a change in strategy which would have them essentially abandon the Karzai government in Afghanistan and negotiate with the Taliban. And, unsurprisingly, some on the left just want to know why we’re still there.
Larry Sabato, director of the University of Virginia’s Center for Politics says there’s a good reason the “stimulus” bill is so big: “It’s just irresistible,” he said. “Congress says, ‘This is a freight train.’ They have to jump on because there might not be another for years.”.
The U.N. agency for Palestinian refugees suspended aid to the Gaza Strip on Friday? Why? Because representatives of the Palestinian’s government were stealing relief supplies from the UN. Well, at least, unlike ours, the Palestinian government makes no bones about what they are.
Smartphone sales were up 68% while iPhone sales topped 101% in 2008. No recession there.
Bush is gone but the left still can’t let him go. Will Ferrell demonstrates his case of BDS in a classless Broadway show. Yeah, I know, everyone’s a critic.
So how’s Obama doing so far? Well let this Brit clue you in.
In the modern world, the Left, who claim to be the romantic rebels and lovers of liberty, have become the dogmatic spokesmen of remote power. The Right, who are derided as supporters of dictatorship and closet ‘fascists’, are the real revolutionaries and romantics.
Gloom, doom and revolution are in the air:
France paralysed by a wave of strike action, the boulevards of Paris resembling a debris-strewn battleﬁeld. The Hungarian currency sinks to its lowest level ever against the euro, as the unemployment ﬁgure rises. Greek farmers block the road into Bulgaria in protest at low prices for their produce. New ﬁgures from the biggest bank in the Baltic show that the three post-Soviet states there face the biggest recessions in Europe.
It’s a snapshot of a single day – yesterday – in a Europe sinking into the bleakest of times. But while the outlook may be dark in the big wealthy democracies of western Europe, it is in the young, poor, vulnerable states of central and eastern Europe that the trauma of crash, slump and meltdown looks graver.
Exactly 20 years ago, in serial revolutionary rejoicing, they ditched communism to put their faith in a capitalism now in crisis and by which they feel betrayed. The result has been the biggest protests across the former communist bloc since the days of people power.
Europe’s time of troubles is gathering depth and scale. Governments are trembling. Revolt is in the air.
Capitalism, of course, is the reason, or at least the cause used by European socialists, to lay blame for this crisis. Forgotten, of course, is the standard of living capitalism has brought to these same people over decades despite their every effort to blunt and subvert it’s bounty through government.
Forgotten by those in the east who survived communism 20 short years ago is the marked difference they found between the east and west and how long it took them to recover from the ravages of communism.
I’ve always heard we human beings have very short memories. And I’ve also heard we always believe that the times we live in are the worst. Ever.
How else do you explain this belief that suddenly the world’s problems can be traced to evil capitalism? But it is truly under attack around the world.
In some places the attack on its foundations is blatant. Consider Bolivian President Evo Morales’ recent speech to the UN:
I think that that capitalism is the worst enemy of humanity and if we do not change the model, change the system, then our presence, our debate, our exchange, and the proposals that we make in these meetings at the United Nations will be totally in vain.
Capitalism has twins, the market and war. The market converts life into commodities, it converts land into a commodity. And when capitalists cannot sustain this economic model based on looting, on exploitation, on marginalisation, on exclusion and, above all, on the accumulation of capital, they rely on war, the arms race. If we ask ourselves how much money is spent on the arms race — we are never concerned about that.
This is why I feel that it is important to change economic models, development models, and economic systems, particularly those in the western world. And if we do not understand and thoroughly discuss the very survival of our peoples, then we certainly not will not be addressing the problem of climate change, the problem of life, the problem for humanity.
Morales, of course, attempts to blame all the ills of colonialism and its aftermath exclusively on capitalism, while ignoring any benefits accrued. He also manages to ignore the oppressive nature of that colonial period and the simple fact that it really didn’t represent capitalism as much as rule by oligarchs. The oligarchs, in many cases did “loot”, “exploit” and “marginalize”. But not under the auspices of a system called “capitalism”.
A simple and rational examination of what capitalism is versus what his country experienced would help Morales understand that capitalism isn’t the cause of his people’s suffering. And while I can empathize with his concerns for the rights of indigenous people and the environment, the system which provides those rights and the wealth necessary to address both issues isn’t the populist brand of socialism to which he and Venezuelan President Hugo Chavez subscribe.
And while Chavez and Morales provide the more obvious attacks on the capitalist system, there are much more subtle ones ongoing in Europe and the United States. The article I cite above is a good example of that trend. The fact that Europe was brought so quickly to the precipice isn’t because of capitalism, but instead because so much of life is dependent on the state. And when finally the state – as we saw with Eastern Europe and the Soviet Union – can no longer carry the financial load it has burdened itself with, the whole system eventually collapses.
Funny that the less capitalistic nations of Europe where the state has assumed a more intrusive role in its citizens life seem to be facing a deeper and more immediate financial crises than are others.
But that’s not because the same sort of attempt to subvert capitalism even more isn’t at work here as well. Some time last year, I grabbed a quote from Stephen Bainbridge’s blog (forgive me, I don’t have a link) and it distills well the essence of the evolution of blatant socialism, which is rather unpopular, to a more stealth version of the ideology which we have been seeing for some time. This was written during the recent campaign:
When I think about Obama, I am reminded of Richard Epstein’s observation that in order to remain politically viable modern socialists no longer advocate direct government ownership of production. Instead, modern socialism operates on two different levels: “At a personal level, it speaks to the alienation of the individual, stressing the need for caring and sharing and the politics of meaning. At a regulatory level, it seeks to identify specific sectors in which there is a market failure and then to subject them to various forms of government regulation.” Sounds a lot like Obama’s stump speech to me.
Sounds very much like the government that has formed and is now operating. Isn’t the Obama administration forming a “Middle Class Task Force”? If that doesn’t speak to framing “alienation” I’m not sure what does. And we’re presently hip deep in the ramping up of a new regulatory regime aimed at ensuring we never suffer a new bout of failed markets no matter how many banks they eventually have to nationalize and despite the fact that government was a big part of the problem.
Consider Epstein’s main point above – In order to hide old school socialism enough to make it acceptable today, the populist message had to be tweaked. With the failure of socialism/communism in the USSR and eastern Europe, “direct ownership of the means of production” came to mean two things – gross inefficiency, the mega-state and crushing oppression.
People everywhere came to identify socialism/communism with those damning characteristics. That forever removed it from the pantheon of acceptable ideologies, although (see Chavez in Venezuela who is unapologetic about it) there are still a large cadre of true believers who are sure that the only reason socialism hasn’t worked is it hasn’t been properly done yet. And, of course, they’re the people to do it. For the most part, these people are found on the left side of the political spectrum.
Facing utter rejection, at least in the US if the “S-word” is used, it has become necessary to hide it in a populist message and, then, create a victim class and a villain. It is no longer the proletariat who suffers under the yoke of the oppressive monarchy, but instead, the “bitter and frustrated” voters of rural America. Or the middle class.
As Epstein points out, it is necessary to paint a picture of alienation of the individual from the system in order to attack the system. Establish that narrative and suddenly “hope” and “change” take on a new and easily manipulated meaning.
Once that narrative is established, then the “enemy” has to be identified. The entity or entities which are responsible for the alienation of these individuals have to be identified and called to task in order to establish the framework necessary to make the collectivist premise of bigger and more intrusive government palatable.
Wall Street. Big Oil. Big Pharma.
Ironically, the mega-state remains the answer to the dilemma which it helped create. The narrative necessarily asks how successful, without government intrusion, a small-town voter (aka “the victim”) can be in standing up against the legions of Washington DC lobbyists writing bad law or greedy “big oil” sucking your wallet dry and paying outrageous CEO salaries?
Victim class, oppressor, superhero (the government) to the rescue. Never mind that the superhero has been a much a part of the problem as any other entity involved and more so than most. This too is a classic part of the cycle. Government causes a problem, identifies the victims and the transgressors (without government being counted among that group) and it gathers the power necessary – or, more likely, has it ceded to it – to “right the wrong”. Of course, it never gives up the power it gathers.
End result – bigger government, more government power, more government intrusion.
If you can’t see that on the horizon right now, then you are indeed politically blind and will probably do well under the new state regime which is presently being built.