How Inflationism Brings About Quality or Value Deflation

Retired professor Michael S. Rozeff at the Lew Rockwell blog explains how monetary inflationism results to the deterioration or deflation in the quality of food products.

Here is Professor Rozeff:

Ever since inflation took off in the 1960s, the food has gone downhill. That's not the only cause of it, but it's one cause. The food companies have tried to hold prices down by cheapening the food and cutting down the quantities. They've eliminated many good ingredients and substituted drek. There are foods today that I wouldn't feed to a dog.

Many bacon makers have watered the bacon. Water is a cheap ingredient! When you fry it, the water comes out and so does some white guck. I made bacon from the age of 10, and I can tell you for sure that this stuff isn't cutting it. The meat itself? Forget it! They've bred the fat out of pork, beef, and now lamb and with it went the flavor, the juiciness, and the tenderness. If you watch the food shows on TV, the cooks are constantly adding everything under the sun to the meats in an effort to create something that tastes halfway decent.

A can that says chunk tuna fish actually contains flakes that used to be what cat food was. Many common soups are salt baskets.

If a package says ORIGINAL INGREDIENTS, you simply cannot believe it! It will usually have partially hydrogenated oil and corn syrup and high fructose corn syrup, stuff that didn't exist when many of these brands first began or else wasn't used. They used to use sugar. A Sara Lee cake when first introduced was almost as good as homemade because it had the butter and makings that people used in their kitchens. It still has some butter down there after soybean oil, although maybe not since it says the butter is (cream, salt) . It has "Sugar, enriched bleached flour (wheat flour, niacin, iron, thiamin mononitrate, riboflavin, folic acid), water, eggs, soybean oil, butter (cream, salt), skim milk, corn syrup." That's before the 2% or less of the chemicals: "glycerin, leavening (sodium aluminum phosphate, baking soda, monocalcium phosphate), corn starch, natural and artificial flavors, salt, mono- and diglycerides, potassium sorbate (preservative), gums (xanthan, gellan), colored with (turmeric and annatto extract), wheat starch, soy lecithin, soy flour." Sara Lee is one of the better cases. Your typical product is usually even worse.

I find this anecdote highly relevant here in the Philippines. 

When I recently interviewed my neighborhood carinderias or eateries (small scale informal food retail businesses) on how they usually respond to rising commodity prices, their reply has mostly been to reduce the content or quantity or quality of their servings, first, because of the fear that raising prices would diminish the capacity of their consumers to spend or would lead to "poor sales".

Simon Black of the Sovereign Man labels such value deflation as shadow inflation,

Value deflation is not taught at university economics courses; you’ll never hear any of these Nobel economists or central bankers mention it. Stiglitz, Krugman, and Bernanke all happily tow the line that ‘there is no inflation’ because the price of iPads keeps going down.

These are the people who have the power to influence policy and conjure trillions of dollars out of thin air… and it’s amazing how easily they can hide the truth from people through this shadow inflation.

Curiously, this is what passes as a free society today. It is a truly, truly bizarre system.’

It’s unfortunate to see how these small scale entrepreneurs, fighting for survival, gets the kernel of the blame from supposed unethical practices, which has been used to justify more regulatory interventions (promoted by mainstream media), when they have merely been responding to the incentives brought about by immoral policies.

This shows how policies of inflationism-interventionism destroys the moral fabric of a society.

Quote of the Day: Better Regulation Means Regulation by Markets Forces

No stock market commentary for this week

We do need better regulation. But what does that mean? Once we understand the nature of markets and bureaucracies, there’s only one reasonable conclusion: Better regulation means regulation by market forces. Free markets are not unregulated markets. Instead, they are severely regulated by competition and the threat of losses and bankruptcy. Anything government does to weaken those forces simultaneously weakens the otherwise unforgiving discipline imposed on business firms (and their counterparties)—to the detriment of workers and consumers. Public well-being suffers.

Admittedly, this is a hard sell. Explaining how markets work when they are free of the government’s easy money, favoritism, implicit guarantees, and other perverse incentives takes time and the listener’s concentration. Denouncing markets, railing against greed (which of course never taints politicians), and calling for more government power makes for good sound bites. In the Internet and remote-controlled-cable-TV era, patience is a scarce commodity. So advocates of liberty have barriers to overcome.

Of course government interference with free exchange (misleadingly called “regulation”) is portrayed as necessary for the public good. A key to understanding why it is not is grasping the inability of bureaucrats to know what they would  need to know to do the job they promise to do. Markets–particularly financial markets–are too complex for government officials (or anyone else) to manage. No matter how much power they are given, they will not be able to see the future, spot “excessive risk,” or anticipate how things might go wrong.  But they can be counted on unwittingly to interfere with innovation that would yield public benefits. Any move toward central direction courts disaster. Decentralization and the discipline of competition are our only hope for economic security.

 This is from Sheldon Richman at the Freeman on how political regulation leads to the “money power” (cronyism)

Lessons from Bernanke’s Thank You Notes

From the Politico (hat tip Bob Wenzel)

If you have the Federal Reserve’s back, there’s a good chance Ben Bernanke will notice.

He may even send you a thank you note.

In July, the Fed chairman sent letters of gratitude to five Democratic members of Congress after they delivered speeches on the House floor urging fellow lawmakers to reject the “Audit the Fed” bill authored by retiring Texas Republican Ron Paul, the central bank’s chief antagonist.

Their efforts failed to defeat the bill, but they were not in vain, at least in Bernanke’s eyes.

“While the outcome of the vote was not in doubt, your willingness to stand up for the independence of the Federal Reserve is greatly appreciated,” Bernanke wrote in the letters, which were obtained by POLITICO through a Freedom of Information Act request.

He continued, “Independence in monetary policy operations is now the norm for central banks around the world — and it would be a grave mistake were Congress to reverse the protection it provided to the Federal Reserve more than 30 years ago.”

The letters were sent to Reps. Barney Frank, Elijah Cummings, Melvin Watt, Carolyn Maloney and Steny Hoyer.

“It's not unusual for the chairman to write thank you notes to members of Congress,” said Fed spokesman David Skidmore.

Dated July 26, the notes were written the day after the House voted 327-98 to pass Paul’s bill, which would authorize the Government Accountability Office to audit how the central bank implements monetary policy.

While the Fed defends Mr. Bernanke’s thank you notes as having been “not usual”, meaning that such action may have been a tradition, bureaucratic traditionalism does not translate into moralistic actions.

The above simply exhibits how political agents operate behind the scenes to attain self-interested goals. In this case,  Bernanke tries to influence the outcome of votes of the US congress (which he failed). This also implies that such relationship works the other way around for other political du jour issues.

One can construe “conflict of interests” and “agency problems” rather than supposed “independence” from such interactions, as well as, reciprocity and horse trading as part of concession seeking approach employed by political agents from different branches of government.

This also further demystifies the highly glamorized “virtuosity” of governments (myth of good government) as the above account puts into perspective similar human frailties of those in command of the use guns and badge institutions over the populace…except of course the difference is that they can wield political power over society to feed on their caprices.

Remembering Ludwig von Mises on his 131st Birthday

My regular followers know how much my perspectives have largely been influenced by the school of economic, political and philosophical ideas and principles inspired by the great Professor Ludwig Heinrich Edler von Mises and his colleagues and disciples at the Ludwig von Mises Institute where the former is the acknowledged leader.

Although largely unappreciated by the politically brainwashed mainstream. much of Professor von Mises’s views, theories, predictions and warnings are being validated today. Aided by the information age, more and more people are getting to recognize this. 

From Google Trend

Today marks Professor von Mises’ 131st birthday (September 29, 1881- October 10, 1973). 

Professor von Mises set as a personal mission to educate the public from the evils of Socialism.

His life long motto was tu ne cede malis, sed contra audentior ito which comes from Virgil's Aeneid, Book VI; the motto means "do not give in to evil but proceed ever more boldly against it."

Here is the great Mises on the struggle against Socialism

Society lives and acts only in individuals; it is nothing more than a certain attitude on their part. Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way out for himself if society is sweeping towards destruction. Therefore everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hang on the result. Whether he chooses or not, every man is drawn into the great historical struggle, the decisive battle into which our epoch has plunged us.

How Argentina’s Class Warfare Policies Promotes Poverty

Argentina’s politics serves as an example of how the minority (political class) exploits the majority (voting poor) to perpetuate themselves into power.

In the attempt to redistribute wealth, Argentina’s government has engaged in the tightening of currency controls that has only exacerbated capital flight.

First the unintended consequences

From the Telegraph, (bold emphasis mine)

The new regulations required anyone wanting to change Argentine pesos into another currency to submit an online request for permission to AFIP, the Argentine equivalent of HM Revenue & Customs. To submit the request, however, you first needed to get a PIN number from AFIP, either online or in person. Having finally obtained your number, submitted your online request and printed out your permission slip, you could then present it at the bank or official cambio and buy your dollars. Well, that was the theory.

In practice, the result was chaos. The online system quickly folded under the onslaught of applications, while a personal visit to an AFIP district office meant bringing a camp bed and picnic hamper.

The reason for this tidal wave of requests, and indeed for the introduction of the restrictions in the first place, was the ferocious rate of capital flight from the Argentine economy that had started in 2010, when many could already see the writing on the wall. Which brings us to that thumping electoral victory in October.

Argentina’s politicians implemented class warfare policies to gain hold of political power.

Again from the same article,

When Mrs Kirchner first came to power in 2007 she inherited the social reform programme of her predecessor (also her husband), Nestor Kirchner. Hefty tax demands on the country’s wealth base were liberally redistributed to the disadvantaged, but with little investment in longer-term projects that would deal with the causes of poverty.

From the point of view of the middle-classes, the Kirchners were using taxpayers’ money to buy themselves a constituency of dependents that would keep them in power, a tactic vindicated by that 54 per cent majority last October. Anyone with moveable assets started shifting them out of her reach by transferring them abroad or converting them into dollars.

The nasty economic effects from despotic redistributive policies and a culture of dependency: capital flight, inflation and economic stagnation as investors scamper for safety elsewhere.

In 2010 the flight of capital started gathering speed, totalling $11 billion by the end of the year. In 2011, as the election approached and signs of a probable Kirchner win emerged, this figure more than doubled to $23 billion. Hence the great slamming of the fire exits as soon as her victory was in the bag.

The months since then have seen an almost weekly tightening of restrictions to close any remaining loopholes, to the extent that it has now become almost impossible to buy foreign currency anywhere apart from the black market.

Which is, of course, exactly what the government hoped for, and in that respect at least the policy has been a success. In the first six months of this year dollar flight has been reduced to $3.5 billion. But damming the flood has come at a huge cost to the economy, especially since the currency restrictions were coupled with another set of regulations that effectively imposed a near-total ban on any imported goods. 

Apart from the minor inconveniences this has caused to shoppers, such as no longer being able to buy breakfast cereal not composed of shredded carpet, the measure has also backfired on Argentine industry itself because so many of the products manufactured in Argentina still need component parts and raw materials from elsewhere. Hence, for example, the 1,600 workers laid-off from the Renault car plant in Cordoba last June, while the parts they needed to finish the job languished in a container on a Buenos Aires quayside. But you do not need to be an economist to imagine the consequences when a G20 nation suddenly adopts North Korean-style siege-economy tactics, which does make you wonder about the quality of advice the government is getting.

Eventually there will be no one else to squeeze but the gullible and manipulated poor, and signs are becoming evident…

It’s not that significant, but set alongside the downwardly spiralling prospects and the upwardly spiralling inflation (25 per cent), the frantic hunt for hard currency and the bland ministerial assurances that there is nothing to worry about, it is just another little ripple of déjà vu permeating life in Argentina.

This reminds me of all the free stuffs given by local governments in the Philippines which most people think are without costs.

Nevertheless Argentina’s politics serves as a grim reminder of the evils of democracy.

As the great libertarian Henry Louis H.L. Mencken once warned,

The state — or, to make matters more concrete, the government — consists of a gang of men exactly like you and me. They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office. Their principal device to that end is to search out groups who pant and pine for something they can’t get, and to promise to give it to them. Nine times out of ten that promise is worth nothing. The tenth time it is made good by looting ‘A’ to satisfy ‘B’. In other words, government is a broker in pillage, and every election is a sort of advanced auction on stolen goods.

Bottom line: There is no such thing as a free lunch

US Drone Warfare Fuels Arabic and Islamic Hatred

One of the main reasons why there has been too much vile and hatred against Americans in the Muslim world has been because of the imperialist-interventionist-militant foreign policies adapted by the US government influenced by the military industrial complex and the imperial goals of the politically entrenched neoconservatives.

One such evidence is the rampant use by the US military of drones to supposedly weed out terrorists. Such actions in reality defies the 3D policies (Development, Diplomacy and Defense), framed by Secretary of State and former first lady Hilary Clinton

As Professor Bill Easterly of the NYU in a recent blog writes,

Hilary Clinton said a while ago that Defense and Development were complements.

Not so much. A new report from Stanford and NYU (see excellent summary in the Guardian) found that US drone strikes (greatly increased under this administration) in Pakistan were killing and terrorizing civilians, while very few killed their terrorist targets.

It would be hard for Development to benefit from “drones hovering 24 hours a day over communities in northwest Pakistan, striking homes, vehicles, and public spaces without warning.”

The report alleges that drones strike areas multiple times, killing rescuers of victims of the first strike.

Such gruesome violation of human rights which masquerades as the war on terror will exacerbate geopolitical tensions instead of solving them

Yet the best way to promote peace is through trade.

As Judge Andrew Napolitano recently pointed out,

Is it not more likely that when the West supported toppling Arab strongmen, the rioters in the streets saw that as a signal to express hatred toward the meddling West? Might Obama’s drones, which have fallen all over the Middle East killing innocents in schools and hospitals, at weddings and funerals, and demolishing mosques and homes, be coming back to haunt him?

The Arab Spring has become the Western Winter, brought about by two American presidents who thought they could kill without moral justification or painful consequence. We should come home from these barbaric places and leave them alone. We should trade with them, since they want to buy our iPads and washing machines and blue jeans, but let them run their own governments.

Yet another emerging problem has been the escalating anxiety over the overbearing use of drones against Americans in their homeland—another sign of America’s transition towards a police state. These are symptoms of the growing desperation of the ruling class.

War on Internet: Despite Ban, Social Media Users in China Booms; Philippine Hackers Protests

As I have been pointing out, the information age, which essentially represents the snowballing forces of decentralization, particularly globalization and rapid technological advances, will dramatically change every aspect of our lives.

And governments operating from the political economic constructs of the 20th century, particularly the centralized top-down industrial age era political institutions has been fighting tooth and nail against such revolutionary changes that undermines the privileges of the incumbent the political class and their cronies.

Today’s centralization’s debt and welfare crisis have been in fact symptoms of the decadent top-down political institutions. Inflationism has thus been one of the measures of financial repressions that has been applied to achieve such an end.

Yet desperate attempts to preserve the status quo in favor of the current beneficiaries through more social controls has only transformed the internet into a major battlefront

Today’s war on the internet through serial attempts at censorship has apparently seen a backlash from civil society, whom has been waging a broad front online guerilla warfare.

Proof?

In China, banned social media websites continue to blossom.

From Bloomberg,

Facebook Inc. (FB) and Twitter Inc. have millions of users in China despite bans on the social networking services in the world’s largest Internet market, according to the results of a survey released today.

Facebook grew to 63.5 million users in China in the second quarter of this year, up from 7.9 million two years earlier, London-based researcher GlobalWebIndex said in a blog post today. Twitter users tripled to 35.5 million from 2009.

Sites blocked in China can be accessed via so-called proxy services, which connect users to servers outside the country so they can visit sites that are filtered. The workarounds have helped Facebook and Twitter compete with local sites including microblogging service Sina Weibo, said Tom Smith, founder of GlobalWebIndex.

“It only takes a little bit of desk research to discover that what is called the Great Firewall is actually much more porous than the Chinese government would like to admit,” Smith said in the blog post.

Despite their rapid growth, the two social networks are smaller than Qzone, a website operated by Tencent Holdings Ltd. (700), with 286.3 million users. Local rival Sina Weibo had 264.1 million users. Google+, the social network created by Google Inc. (GOOG) last year, had 106.9 million users. China has 513 million Internet users, according to the government-backed China Internet Network Information Center.

GlobalWebIndex asked 2,000 Chinese Internet users earlier this year which social sites they have created an account for, and which ones they used in the past month.

The quest for free market connectivity and the Hayekian knowledge revolution has been no different in the Philippines where attempts to censor social media has led to a concerted hacker attack on Philippine government offices

From another Bloomberg article, 

Hackers attacked websites of the Philippine central bank and at least two other government agencies last night to protest a law against cyber crime set to take effect next week.

The Cybercrime Prevention Act of 2012 “effectively ends the freedom of expression in the Philippines,” according to a statement posted on the central bank website by a group that called itself Anonymous Philippines. Websites of Metropolitan Waterworks & Sewerage System, the Pilipinas Anti-Piracy Team and the American Chamber of Commerce were also defaced, the Philippine Daily Inquirer reported today.

President Benigno Aquino signed the law on Sept. 12, which identifies, prevents and punishes Internet-based crimes such as hacking, identity theft and spamming. Provisions on online libel and the authority of the Department of Justice to block websites without a court order have been opposed in several petitions filed with the Supreme Court.

The law will “infringe on the Constitutional-guaranteed freedom of speech and expression,” Senator Teofisto Guingona, a member of Aquino’s party, said in a statement today. Guingona asked the Supreme Court to declare unconstitutional several provisions of the law to take effect Oct. 3.

As I previously wrote, 

The internet essentially provides the platform for the unceasing struggle to attain civil and economic liberties, through the effective neutralization of political manipulations of the people’s minds.

The chief proponent and inspiration of nonviolent resistance and civil disobedience, the great philosopher anarchist Étienne de La Boétie once wrote,

“Obviously there is no need of fighting to overcome this single tyrant, for he is automatically defeated if the country refuses consent to its own enslavement: it is not necessary to deprive him of anything, but simply to give him nothing; there is no need that the country make an effort to do anything for itself provided it does nothing against itself. It is therefore the inhabitants themselves who permit, or, rather, bring about, their own subjection, since by ceasing to submit they would put an end to their servitude. A people enslaves itself,  cuts its own throat, when, having a choice between being vassals and being free men, it deserts its liberties and takes on the yoke, gives consent to its own misery, or, rather, apparently welcomes it. If it cost the people anything to recover its freedom

Thus enslavement and freedom is a matter of people’s choice. And the state of knowledge or ignorance by every individual in a society determines that choice.

The more the diffusion of knowledge in a society, the balance of power shifts towards individual sovereignty at the expense of political entities.

And that’s why welfare warfare based governments have been averse to the internet, and that’s why political authorities will continue to wage an all out war of control of the internet.

It seems that my predictions are on a volatile path to realization.

How Statistics ‘Discovered’ Wealth in Australia

For the mainstream, wealth is what government statisticians say it is…

From Reuters,

Australians are suddenly a whole lot better off after the government statistician "found" A$325 billion ($338 billion) in share assets previously unrecognized.

The Australian Bureau of Statistics on Thursday released its latest report on household assets which included massive upward revisions to estimates for equity holdings. Total financial assets were now put at A$3.1 trillion at the end of March, compared to the originally reported A$2.77 trillion.

The revision is worth roughly A$14,380 for every one of the country's 22.6 million people.

"This issue incorporates new estimates for households holding of unlisted shares and other equity in other private non financial corporations," the statistician drily noted.

The value of such equity is now put at A$383 billion at the end of March, compared to the original A$91 billion.

"The Bureau of Statistics has effectively 'found' A$325 billion in household wealth," said Craig James, chief economist at CommSec.

Total financial assets also rose further in the second quarter to stand at A$3.11 trillion by the end of June, up A$76 billion on the same period last year.

Of course since there are hardly any basis for the “new estimates” of “unlisted shares and other equity ownership other private non financial corporations”, this means that such "newfound wealth" have merely been arbitrarily determined by government magicians. 

Of course, forget that domestic credit provided by Australia’s banking sector has exploded since 2008

chart from tradingeconomics.com

chart from tradingeconomics.com

And also forget that money supply M2 as % of GDP has reflected on these bank driven credit boom.

A credit driven boom that is being reflected mainly on the capital intensive property markets.

This commentary from Australian Financial Review has a terse but accurate narrative of Australia’s business (bubble) cycle in progress (charts their too)

When the RBA cut the cash rate to 3 per cent in 2009, Australian house prices responded with disconcertingly robust capital gains of 13.7 per cent. Melbourne houses prices exploded in 2009, recording growth of 21 per cent.

The RBA is wary about stoking too much asset price inflation.

Although Australia’s equity benchmark (S&P/ASX 200) has not been a major recipient of the recent RBA driven credit boom.(chart from tradingeconomics.com)

Ah but the government statistics above doesn’t seem to have an inkling about this.

Well, the above instance is a neat example of of what the illustrious classical liberal French economist Jean Baptiste Say pejoratively described about government's obsession about statistics.  Quoted by the great Dean of the Austrian School of economics Murray N. Rothbard, here is JB Say…

Hence, there is not an absurd theory, or an extravagant opinion that has not been supported by an appeal to facts; and it is by facts also that public authorities have been so often misled. But a knowledge of facts, without a knowledge of their mutual relations, without being able to show why the one is a cause and the other a consequence, is really no better than the crude information of an office-clerk

Video: F.A. Hayek at BBC (Masters of Money)

Glad to see the great F. A. Hayek go mainstream

  

Somewhere in the video, Paul Krugman (Darth Vader) said that "unregulated banking and financing system is prone to financial crisis". Really? 

 

(the number of banking crisis since the Nixon Shock; chart from the World Bank) 

Jeffrey Sachs (Count Dooku) said that one of Hayek’s “badly failed” predictions is that of Hayek’s claim that “moving to a social welfare society would eat away at the health of democracy”. Really? 

To use the US as example,

chart from Heritage Foundation

from yesterday’s chart of the day

Maybe all these has nothing to do with America’s growing police state?

Or perhaps Professor Hayek had been just too early.

Senkaku Dispute: Japan-Taiwan in Water Canon Gunfighting

From the Economist, (hat tip Bob Wenzel)

A fierce shootout with water-cannon broke out between Japan’s coast guard and Taiwan’s on the morning of September 25th. The Japanese side was trying to repel an armada of almost 60 Taiwanese fishing vessels, which had sailed irritatingly near the islets, by blasting some of them with deck-mounted water cannon. Taiwan’s patrol boats retaliated by firing back with their own high-pressure hoses at the Japanese coastguard ships, all the while booming over loudspeakers that these rocks are the sovereign territory of the Republic of China (Taiwan’s official name) and that the Japanese vessels must leave Taiwan’s territory immediately. The fishing fleet managed to sail within three nautical miles (5.5km) of the disputed islands, before being turned back by the Japanese side. Meanwhile Taiwan’s navy dispatched frigates to the country’s north-eastern coast and scrambled warplanes, such as F-16s and Mirages, to monitor the civilian armada, according to a statement issued by the defence ministry on September 26th. The point, they say, was to be prepared for any eventuality. The president, Ma Ying-jeou, lent his support too, not missing a chance to add that the waters around the contested islands have been fishing grounds for Taiwan’s fishermen for more than 100 years.

This marked Taiwan’s first foray into the waters that surround the uninhabited Diaoyus since the Japanese government first nationalised a few of them, two weeks ago. The Japanese government is said to have protested to Taiwan through Japan’s de facto embassy. The incident complicates the ongoing row between Japan and the People’s Republic of China, over the archipelago’s sovereignty. Even without Taiwan’s interference, the affair has triggered huge protests on the mainland, some of them violent, and calls to boycott Japanese business.

Two things: one, this unfortunate event could be a prelude to the real thing, or two, this serves as another pantomime distraction of the public from domestic troubles or justification or cover for inflationism-interventionism.

Quote of the Day: The Mercantilist’s Pareto Strawman

The market economy has never been without its critics and enemies.  Those who feel threatened by the market; those who, however unwisely, feel they could do better without it; economists with little imagination; those, like the devotees of Pareto optima, with only too much of it; those who find most entrepreneurs disgusting characters; those attracted by the romantic charm of a feudal order in which they never had to live; social thinkers offended by the raucous tone of modern advertising; and social thinkers who know only too well how to exploit envy and greed in the service of anticapitalistic movements – all these make a formidable array of opponents.

This quote is from Ludwig Lachmann’s 1978 essay “An Austrian Stocktaking: Unsettled Questions and Tentative Answers,” Chapter 1 in Louis M. Spadaro, ed.,New Directions in Austrian Economics (1978) page 11 lifted from Professor Don Boudreaux of Café Hayek’s Quotation of the Day 

Anti-capitalists critiquing the societal benefits of voluntary exchange through the Pareto efficiency strawman have been presumptive of the possession of omniscience of the summation or aggregation of interpersonal evaluations or interpersonal utility comparisons from which to clearly establish the parameters where “no one can be made better off without making at least one individual worse off” from a “perfectly competitive equilibrium” environment.

If I go to my neighborhood sari-sari store to buy beer/s, who is to say and under what objective technical-ethical-welfare framework will they determine if my actions (as buyer) or of the sari sari store’s (as seller) are Pareto efficient or not? The government ‘expert’ or some appointed institutional economist? Duh!

Free trade have always always a function of individual actions coursed personally or through varying forms of organization where geographical or political boundaries are irrelevant.

Yet these romantic and self-absorbed (deluded) anti-capitalists utopians fail to account that in as much as the markets, which are an expression of actions constituting individual subjective value scales and time preferences, are imperfect, governments likewise operated by a cadre of individuals also should be measured by the same Pareto efficiency effected through their policies.

The appropriate question, measured relatively, should be: Which is more Pareto efficient: decentralized voluntary exchanges or centralized government coercive redistribution?

Unfortunately for the utopians there is such a thing as the law of unintended consequences: government failures.

Bastiat on The Case for Unilateral Free Trade

The great Frédéric Bastiat makes the case for unilateral free trade. (source Mises Institute)

We have just seen that whatever increases the expense of conveying commodities from one country to another — in other words, whatever renders transport more onerous — acts in the same way as a protective duty; or if you prefer to put it in another shape, that a protective duty acts in the same way as more onerous transport.

A tariff, then, may be regarded in the same light as a marsh, a rut, an obstruction, a steep declivity — in a word, it is an obstacle, the effect of which is to augment the difference between the price the producer of a commodity receives and the price the consumer pays for it. In the same way, it is undoubtedly true that marshes and quagmires are to be regarded in the same light as protective tariffs.

There are people (few in number, it is true, but there are such people) who begin to understand that obstacles are not less obstacles because they are artificial, and that our mercantile prospects have more to gain from liberty than from protection, and exactly for the same reason that makes a canal more favorable to traffic than a steep, roundabout, and inconvenient road.

But they maintain that this liberty must be reciprocal. If we remove the barriers we have erected against the admission of Spanish goods, for example, Spain must remove the barriers she has erected against the admission of ours. They are, therefore, the advocates of commercial treaties, on the basis of exact reciprocity, concession for concession; let us make the sacrifice of buying, say they, to obtain the advantage of selling.

People who reason in this way, I am sorry to say, are, whether they know it or not, protectionists in principle; only, they are a little more inconsistent than pure protectionists, as the latter are more inconsistent than absolute prohibitionists.

The following apologue will demonstrate this.

Stulta and Puera

There were, no matter where, two towns called Stulta and Puera. They completed at great cost a highway from the one town to the other. When this was done, Stulta said to herself, "See how Puera inundates us with her products; we must see to it." In consequence, they created and paid a body of obstructives, so called because their business was to place obstacles in the way of traffic coming from Puera. Soon afterwards Puera did the same.

At the end of some centuries, knowledge having in the interim made great progress, the common sense of Puera enabled her to see that such reciprocal obstacles could only be reciprocally hurtful. She therefore sent an envoy to Stulta, who, laying aside official phraseology, spoke to this effect: "We have made a highway, and now we throw obstacles in the way of using it. This is absurd. It would have been better to have left things as they were. We should not, in that case, have had to pay for making the road in the first place, nor afterwards have incurred the expense of maintaining obstructives. In the name of Puera, I come to propose to you, not to give up opposing each other all at once — that would be to act upon a principle, and we despise principles as much as you do — but to lessen somewhat the present obstacles, taking care to estimate equitably the respective sacrifices we make for this purpose." So spoke the envoy. Stulta asked for time to consider the proposal, and proceeded to consult, in succession, her manufacturers and agriculturists. At length, after the lapse of some years, she declared that the negotiations were broken off.

On receiving this intimation, the inhabitants of Puera held a meeting. An old gentleman (they always suspected he had been secretly bought by Stulta) rose and said, "The obstacles created by Stulta injure our sales, which is a misfortune. Those we have ourselves created injure our purchases, which is another misfortune. With reference to the first, we are powerless; but the second rests with ourselves. Let us, at least, get rid of one, since we cannot rid ourselves of both evils. Let us suppress our obstructives without requiring Stulta to do the same. Some day, no doubt, she will come to know her own interests better."

A second counselor, a practical, matter-of-fact man, guiltless of any acquaintance with principles, and brought up in the ways of his forefathers, replied: "Don't listen to that Utopian dreamer, that theorist, that innovator, that economist, that Stultomaniac. We shall all be undone if the stoppages of the road are not equalized, weighed, and balanced between Stulta and Puera. There would be greater difficulty in going than in coming, in exporting than in importing. We should find ourselves in the same condition of inferiority relatively to Stulta as Havre, Nantes, Bordeaux, Lisbon, London, Hamburg, and New Orleans are with relation to the towns situated at the sources of the Seine, the Loire, the Garonne, the Tagus, the Thames, the Elbe, and the Mississippi, for it is more difficult for a ship to ascend than to descend a river. (A Voice: Towns at the mouths of rivers prosper more than towns at their source.)

"This is impossible. (Same Voice: But it is so.) Well, if it be so, they have prospered contrary to rules." Reasoning so conclusive convinced the assembly, and the orator followed up his victory by talking largely of national independence, national honor, national dignity, national labor, inundation of products, tributes, murderous competition. In short, he carried the vote in favor of the maintenance of obstacles; and if you are at all curious on the subject, I can point out to you countries where you will see with your own eyes road makers and obstructives working together on the most friendly terms possible, under the orders of the same legislative assembly, and at the expense of the same taxpayers, the one set endeavoring to clear the road, and the other set doing their utmost to render it impassable.

The following passage resonates on the political stumbling block, mentioned by Bastiat above, for unilateral free trade:

The compelling economic case for unilateral free trade carries hardly any weight among people who really matter…

But the problem free traders face is not that their theory has dropped them into Wonderland, but that political pragmatism requires them to imagine themselves on the wrong side of the looking glass. There is no inconsistency or ambiguity in the economic case for free trade; but policy-oriented economists must deal with a world that does not understand or accept that case. Anyone who has tried to make sense of international trade negotiations eventually realizes that they can only be understood by realizing that they are a game scored according to mercantilist rules, in which an increase in exports—no matter how expensive to produce in terms of other opportunities foregone—is a victory, and an increase in imports—no matter how many resources it releases for other uses—is a defeat. The implicit mercantilist theory that underlies trade negotiations does not make sense on any level, indeed is inconsistent with simple adding-up constraints; but it nonetheless governs actual policy. The economist who wants to influence that policy, as opposed to merely jeering at its foolishness, must not forget that the economic theory underlying trade negotiations is nonsense—but he must also be willing to think as the negotiators think, accepting for the sake of argument their view of the world.

This was written by then international trade economist Paul Krugman in 1997 prior to his tergiversation of the free trade doctrine to become consumed by the forces of mercantilism whom he once condemned. (hat tip Professor Don Boudreaux) Given the temptations to power from "the economist who wants to influence that policy", Mr. Krugman reminds me of the transformation of Anakin Skywalker into Darth Vader

Quote of the Day: Overrated Sincerity, Incorruptibly Evil

Another reason when corruption seems a better option…

As far as I know, Robespierre, Lenin, Stalin, Mao, and Pol Pot were indeed unusually incorruptible, and I do hate them for this trait. 

Why?  Because when your goal is mass murder, corruption saves lives.  Corruption leads you to take the easy way out, to compromise, to go along to get along.  Corruption isn't a poison that makes everything worse.  It's a diluting agent like water.  Corruption makes good policies less good, and evil policies less evil.

I've read thousands of pages about Hitler.  I can't recall the slightest hint of "corruption" on his record.  Like Robespierre, Lenin, Stalin, Mao, and Pol Pot, Hitler was a sincerely murderous fanatic.  The same goes for many of history's leading villains - see Eric Hoffer's classic The True Believer.  Sincerity is so overrated.  If only these self-righteous monsters had been corrupt hypocrites, millions of their victims could have bargained and bribed their way out of hell.

This stirring excerpt is from George Mason University economics professor, Econolog blogger and author Bryan Caplan. [Source: Library of Economics and Liberty]

Chart of the Day: Crowding Out Effect from the Welfare State

From Bloomberg Brief (source Zero Hedge) [bold original] 

Policy choices made in the near-term will affect the economy for years to come. If not addressed, current debt and spending dynamics will probably lead to a reduced growth path, placing at risk expenditures on vital social programs and, over time, crowding out private sector borrowing that funds the gross private domestic investment necessary to boost productivity and living standards. Dollars spent on entitlements dwarf those spent on discretionary items such as education, and tower over net fixed business investment, which is partially responsible for greater productivity, business expansion and rising living standards. Periods with greater investment as a share of GDP are highly correlated with both faster economic growth and rising living standards. One risk to the U.S. economy is that rising entitlement spending will require the government to borrow from the finite amount of capital held by private savers, thus squeezing out private firms that need the capital to expand businesses and increase productivity 

Inflationism (devaluation) will NOT solve the problem wrought by parasitical relationships. The greater the entitlements/welfare state, the lesser economic growth. Such untenable relationship ultimately leads to a crisis. Thus, the only recourse to such predicament is through a substantial reduction, if not the abolishment, of the welfare state accompanied by a liberalization of the economy.

Philadelphia Fed’s Charles Plosser Warns of Risks from QE Forever

In addition to Richmond Federal Reserve’s Jeffrey Lacker, the Fed’s recent QE ‘forever’ has elicited another dissenting insider opinion.

Federal Reserve Bank Bank of Philadelphia President Charles Plosser says that the FED’s measures will not only miss attaining the targeted economic goals but would lead to hefty unforeseen risks.

Here is why employment goals won’t be reached, from SFGate/ Bloomberg, (Bold emphasis mine)

Federal Reserve Bank of Philadelphia President Charles Plosser said new bond buying announced by the Fed this month probably won’t boost growth or hiring and may jeopardize the central bank’s credibility.

“We are unlikely to see much benefit to growth or to employment from further asset purchases,” Plosser said in a speech today at the district bank in Philadelphia. “Conveying the idea that such action will have a substantive impact on labor markets and the speed of the recovery risks the Fed’s credibility.”…

Plosser said today that central banks can’t effectively target employment levels the same way they can guide inflation rates because hiring also depends on variables unrelated to monetary policy, such as technology, education and tax rates.

“It doesn’t make sense to say that there is a particular unemployment rate that we can achieve,” Plosser told reporters after his speech. “The problem with the labor markets is there are many things that affect employment and unemployment that are beyond the control of the Fed.”

Mr. Plosser acknowledges that in a highly complex world, oversimplified centralized or political solutions can lead to unintended consequences.

Mr. Plosser fails to add that policies such as added taxes and regulations impact investments (aside from monetary policies) and thereby employment levels. The mainstream's favorite indicator, employment, represents an effect from business spending and not the cause.

Small businesses which make up the bulk of the source of US employment has been suffering from tax and regulatory policies (chart from advisor perspectives).

I would like to point out that while poor sales has also been an important concern, poor sales are symptoms of an underlying disease.

Relative economic freedom, the US has been on a decline since 2000 or when the FED began to massively inflate the system (chart from Cato Institute)

Mr. Plosser also believes that the Fed’s latest QE will lead to significant risk of consumer price inflation…

“I opposed the Committee’s actions in September because I believe that increasing monetary policy accommodation is neither appropriate nor likely to be effective in the current environment,” Plosser said. “Every monetary policy action has costs and benefits, and my assessment is that the potential costs and risks associated with these actions outweigh the potential meager benefits.”…

The Fed’s “hard-won credibility” is crucial because if the public doesn’t have confidence in policy makers, their ability to set effective monetary policy will be harmed, hurting households and businesses, Plosser said. If people believe the central bank will delay raising rates, they may “infer that the Fed is willing to tolerate considerably higher inflation,” spurring an increase in inflation expectations that would require a response from the FOMC, Plosser said.

“The Fed’s most recent actions carry with them significant risks,” Plosser said. “I am not forecasting that those risks will necessarily materialize and I hope they will not. But if they do, they could prove quite costly to the economy.”

And Mr. Plosser suggests that the Fed has been trapped, where exiting from current measures would likely be highly disruptive.

Plosser said in response to audience questions that he’s “worried that the actions we are taking to make our balance sheet bigger entail risks and those risks could be quite substantial.”

The central bank may “be forced into selling assets in the open market” when it needs to reduce stimulus, he said. Policy makers “must be aware of the consequences,” from their decisions.

In short, Mr. Plosser warns of two possible consequences from current the policy of QE forever: massive inflation or boom bust cycles, both of which would only destabilize the US and global economies.

Mr. Plosser’s warning eerily resonates with the admonitions of the great Professor Ludwig von Mises

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Quote of the Day: Manipulation of Interest Rates Sow Seeds to Crisis

Because the interest rate is the price of money, manipulation of interest rates has the same effect in the market for loanable funds as price controls have in markets for goods and services. Since demand for funds has increased, but the supply is not being increased, the only way to match the shortfall is to continue to create new credit. But this process cannot continue indefinitely. At some point the capital projects funded by the new credit are completed. Houses must be sold, mines must begin to produce ore, factories must begin to operate and produce consumer goods.

But because consumption patterns have either remained unchanged or have become more present-oriented, by the time these new capital projects are finished and begin to produce, the producers find no market for their goods. Because the coordination between savings and consumption was severed through the artificial lowering of the interest rate, both savers and borrowers have been signaled into unsustainable patterns of economic activity. Resources that would have been used in productive endeavors under a regime of market-determined interest rates are instead shuttled into endeavors that only after the fact are determined to be unprofitable.  In order to return to a functioning economy, those resources which have been malinvested need to be liquidated and shifted into sectors in which they can be put to productive use. 

Another effect of the injections of credit into the system is that prices rise.  More money chasing the same amount of goods results in a rise in prices.  Wall Street and the banking system gain the use of the new credit before prices rise.  Main Street, however, sees the prices rise before they are able to take advantage of the newly-created credit. The purchasing power of the dollar is eroded and the standard of living of the American people drops.

We live today not in a free market economic system but in a "mixed economy", marked by an uneasy mixture of corporatism; vestiges of free market capitalism; and outright central planning in some sectors.  Each infusion of credit by the Fed distorts the structure of the economy, damages the important role that interest rates play in the market, and erodes the purchasing power of the dollar.  Fed policymakers view themselves as wise gurus managing the economy, yet every action they take results in economic distortion and devastation.

Unless Congress gets serious about reining in the Federal Reserve and putting an end to its manipulation, the economic distortions the Fed has caused will not be liquidated; they will become more entrenched, keeping true economic recovery out of our grasp and sowing the seeds for future crisis.

This is from US Congressman Ron Paul