Information Age Politics: The Rise of the Pirate Party

As I have been saying, the information age will usher in radical and dramatic changes in the way we do things. And corollary to these, we should see the snowballing forces of decentralization percolate into the field of politics as digital activists congregate to defend against government’s repeated attempts to control the internet through coercive means (mostly via censorship) by bringing the confrontation into the political arena.

Internet activism has turned what used to be a defensive evasion strategy into offense—via voters.

I am gradually being validated by developing events abroad as digital activists appears to have emerged as a potent third party political force, first in Sweden and now in Germany.

From the Wall Street Journal, (bold emphasis added)

The Pirate Party, a loosely organized group of digital activists, is dropping anchor in state legislatures here, shaking up Germany's staid political establishment.

The Pirates believe in file-sharing, online privacy and digital democracy, but their platform lacks policies on major issues of the day, such as the euro-zone debt crisis. That isn't holding them back.

Around 10% of German voters support them, according to opinion polls. They are expected to win seats in two important state legislatures in early May, including in Germany's most populous state, North Rhine-Westphalia. A strong result in those regional elections could set the course for the Pirates' real breakthrough: seats in the German federal parliament in next year's national elections.

"The tremors will be felt all the way to Berlin" if the Pirates enter the North Rhine-Westphalia legislature, says Joachim Paul, the party's lead candidate in the region.

The rise of the upstart movement is complicating life for Germany's established parties, which could struggle to form their usual ruling majority coalitions at state and national level if the Pirates' popularity proves durable.

The Pirates represent "a new style" in German politics, Mr. Niedermayer says. Their professed aim is to bring the digital revolution to politics, making government more transparent and accessible. They have caught the imagination of the Facebook generation, as well as of less tech-savvy voters disenchanted with bland politicians in Germany's mainstream parties.

"What we all have in common is the desire to be active in grass-roots democracy," says Kai Hemsteeg, a 30-year-old police detective. He used to be a local official for Chancellor Angela Merkel's conservative Christian Democratic Union, but says he likes the Pirates' greater openness to participation.

The Pirates were founded in late 2006 in an underground Berlin nightspot called C-Base, a hangout of the local digerati. They are part of an international movement that began in Sweden, whose main aim is the free sharing of information online, including through looser copyright laws. Of the roughly 50 Pirate parties around the world, none has had the electoral impact of the German wing.

As the information age deepens, compounded by the crisis of the welfare states (which should implode sometime soon), global political trends will increasingly shift in favor of digital or internet activism and of the entrepreneurs (China’s media suppressed political upheaval have indicated signs of the latter’s development). In the US, the rise of Ron Paul as a serious political contender against establishment politics seem as further evidence of such a formative trend shift. This should accelerate overtime.

Chart of the Day: Capital Accumulation is Key to Economic Prosperity

Professor Steve Landsburg posted on his blog a graph from a textbook of his colleague exhibiting the tight correlations between the increase in capital and economic prosperity.

Professor Landsburg writes,

But the overall picture is clear: More capital per worker means more output per worker, and more output per worker means more income per worker. This relationship — in fact, the nearly linear relationship that you see on the graph — is just what standard economic theory predicts. It’s nice to see that prediction so powerfully confirmed.

Capital here refers to physical capital — the machinery, factory space and office equipment that allows workers to be more productive. A garment worker with a sewing machine produces more blouses per hour than a garment worker with a needle and thread; therefore the garment worker with a sewing machine earns higher wages. (A good rule of thumb is that workers are paid about 2/3 the value of what they produce.) If you want rich garment workers, you need a lot of high-quality sewing machines. If you want rich farm workers, you need a lot of high-quality tractors…

As a caveat, it isn’t just the capital that is important, instead it is the political economic environment which allows the citizenry to accumulate capital that matters most.

Professor Landsburg explains further, (bold emphasis mine)

Do not, however, jump to the conclusion that if, say, Nigerians had access to Japanese levels of capital, then Nigerian wages would rise to Japanese levels. Part of the reason Nigerians have so little capital is that capital is used less efficiently in Nigeria, so people choose to accumulate less of it. To move up this ladder, you need to do more than just accumulate capital — you’ve got to be the sort of country where capital is worth accumulating. What that entails will be a topic for a future post.

As the great Ludwig von Mises wrote in 1955, (bold emphasis mine)

It is the insufficient supply of capital that prevents the rest of the world from adjusting its industries to the most efficient ways of production. Technological "know how" and the "passion for productivity" are useless if the capital required for the acquisition of new equipment and the inauguration of new methods is lacking.

What made modern capitalism possible and enabled the nations, first of Western Europe and later of central Europe and North America, to eclipse the rest of mankind in productivity was the fact that they created the political, legal, and institutional conditions that made capital accumulation safe. What prevents India, for example, from replacing its host of inefficient cobblers with shoe factories is only the lack of capital. As the Indian government virtually expropriates foreign capitalists and obstructs capital formation by natives, there is no way to remedy this situation. The result is that millions are barefoot in India while the average American buys several pairs of shoes every year.

America's present economic supremacy is due to the plentiful supply of capital. The allegedly "progressive" policies that slow down saving and capital accumulation, or even bring about dissaving and capital decumulation, came later to the United States than to most European countries. While Europe was being impoverished by excessive armaments, colonial adventures, anticapitalistic policies, and finally by wars and revolutions, the United States was committed to a free enterprise policy. At that time Europeans used to stigmatize American economic policies as socially backward. But it was precisely this alleged social backwardness that accounted for an amount of capital accumulation that surpassed by far the amount of capital available in other countries. When later the New Deal began to imitate the anticapitalistic policies of Europe, America had already acquired an advantage that it still retains today.

Wealth does not consist, as Marx said, in a collection of commodities, but in a collection of capital goods. Such a collection is the result of previous saving. The anti-saving doctrines of what is, paradoxically enough, called New Economics, first developed by Messrs. Foster and Catchings and then reshaped by Lord Keynes, are untenable.

If one wants to improve economic conditions, to raise the productivity of labor, wage rates and the peoples' standard of living, one must accumulate more capital goods in order to invest more and more. There is no other way to increase the amount of capital available than to expand saving by doing away with all ideological and institutional factors that hinder saving or even directly make for dissaving and capital decumulation. This is what the "underdeveloped nations" need to learn.

Bottom line, economic prosperity can only be attained through a market economy (economic freedom or laissez faire capitalism). Interventionism or politicization of the allocation of scarce resources can only result to the opposite—capital consumption.

Quote of the Day: The Road to Serfdom

Rome had its socialist interlude under Diocletian. Faced with increasing poverty and restlessness among the masses, and with the imminent danger of barbarian invasion, he issued in A.D. 301 an edictum de pretiis, which denounced monopolists for keeping goods from the market to raise prices, and set maximum prices and wages for all important articles and services. Extensive public works were undertaken to put the unemployed to work, and food was distributed gratis, or at reduced prices, to the poor. The government – which already owned most mines, quarries, and salt deposits – brought nearly all major industries and guilds under detailed control. ‘In every large town,’ we are told, ‘the state became a powerful employer, standing head and shoulders above the private industrialists, who were in any case crushed by taxation.’ When businessmen predicted ruin, Diocletian explained that the barbarians were at the gate, and that individual liberty had to be shelved until collective liberty could be made secure. The socialism of Diocletian was a war economy, made possible by fear of foreign attack. Other factors equal, internal liberty varies inversely with external danger.

The task of controlling men in economic detail proved too much for Diocletian's expanding, expensive, and corrupt bureaucracy. To support this officialdom – the army, the courts, public works, and the dole – taxation rose to such heights that people lost the incentive to work or earn, and an erosive contest began between lawyers finding devices to evade taxes and lawyers formulating laws to prevent evasion. Thousands of Romans, to escape the tax gatherer, fled over the frontiers to seek refuge among the barbarians. Seeking to check this elusive mobility and to facilitate regulation and taxation, the government issued decrees binding the peasant to his field and the worker to his shop until all their debts and taxes had been paid. In this and other ways medieval serfdom began.

(bold emphasis added)

That's from Will and Ariel Durant from the The Lessons of History, quoted in an article by fund manager David Kotok of the Cumberland Advisors.

Same lessons apply today.

The Impending Collapse of the Immoral Welfare State

The welfare state has been sold to the public as a moral political system. In reality, it is a gigantic fraud, not only built upon unsustainable economics or the Santa Claus principle but on immoral grounds of thievery.

Professor Gary North explains, (bold emphasis added)

The welfare state is defended ethically as a system of safety nets. These safety nets are defended as ethically necessary for a good society, meaning ethically good. Intellectuals see business profits as legitimate mainly because profits provide a tax base for funding the welfare state.

These safety nets require constant and ever-increasing funding. They are going to lose this funding. Why? Because of national government bankruptcies.

There is no question that the deficits will produce a series of fiscal crises. These crises will initially be covered up by central bank inflation, but the end result of that policy will either be hyperinflation, which is a form of concealed default, or stable money, which will be followed by open default. There will be a default. The political fall-out of this default will change the nature of Western politics.

The welfare state is going to self-destruct. It is highly unlikely that we will see the complete destruction of the welfare state in any nation, but it will contract on a scale not seen since the fall of the Roman Empire. That is because we have not seen a welfare state as comprehensive as Rome's until modern times.

The bigger they are, the harder they fall.

I know of no studies of the effects of the fall of Rome on the masses of welfare recipients. It took centuries for the system to decline. We know that the central state in 400 A.D. could no longer support the welfare clients that it supported with bread and circuses in the days of Nero. Manorialism steadily replaced the central government in the Western Empire. But for centuries, welfare clients lived and died as clients.

Then the welfare state died. It did not revive until the twentieth century.

THE GREAT DEFAULT

What will make the coming Great Default different from Rome's will be the speed of its arrival and the magnitude of the contraction.

Birth rates have fallen everywhere outside the United States. The number of aged retirees in every Western nation, including Japan, is increasing relentlessly. The number of children born is falling. The end is clear. So is the politics of kick the can.

Unlike Rome, the West's intellectuals have defended the spread of the welfare state by means of a system of ethics. It rests on a variation of the Mosaic commandment against theft: "Thou shalt not steal, except by majority vote." So widespread has this revised commandment been that the electorates in every Western nation will not tolerate its rejection. Yet the economics of the deficits points to the operational failure of the welfare system.

The defenders of the welfare state will then have to explain this widespread collapse of the programs. How did such an ethically superior system fail? How did it lead millions of welfare clients to trust a self-destructive state? How did it mislead so many addicts to government handouts? How did it lead them into a ditch, devoid of skills to compete in the post-default world?

Answer: because the welfare state was ethically corrupt before it was fiscally corrupt. It is based on theft by majority vote.

We have seen what happens to the false messiahs of the messianic state. Western Marxists had a solid though small market for their fat books until the Soviet Union went bankrupt in the late 1980s and shut down in December 1991. Overnight, Marxism lost its academic defenders. They became as invisible as Baghdad Bob did on the day American troops marched in.

The Marxist system had been seen by Western intellectuals as intellectually viable, one of several legitimate perspectives. Then, overnight, it was regarded as a total failure, and – even worse for intellectuals – a fool's quest, a bad joke. Marxism was rejected in theory because of its visible loss of power. The ethics of Western Marxism – in contrast to Marx's rejection of ethics – had always been an illusion. Marxism had always been what Marx had said it was: a matter of power. Defenders who steadfastly had defended Marxism in theory if not in actual practice were no longer willing to do in public. They did not want to be identified with historical losers – losers of power.

If Marxism had been ethically based, it would not have faded overnight just because its power base collapsed. The true believers would have stayed the course. But Marxism was never about ethics. It was always about power.

So is the welfare state.

The defenders of the welfare state have come in the name of a higher ethics. When the system goes belly-up fiscally, these defenders will face the same sort of existential crisis that the Marxists faced in 1992.

They ought to be able to see that the welfare state is a fraud, a delusion, and an ethical monstrosity: charity with guns. They ought to be able to see that theft is theft, with or without majority votes. But they don't.

Read the rest here

The coming global debt default binge will most likely highlight the collapse of welfare state. And this would most possibly suck into the vortex the paper money system. That's because the central bank fractional reserve monetary system has enabled and facilitated the existence of the welfare state. The proverbial chickens will come home to roost.

China’s Road to Capitalism Lacks the Knowledge Revolution

A narrative of China’s path to progress according to Nobel laureate Professor Ronald Coase and Professor Ning Wang at the Wall Street Journal,

China's road to capitalism was forged by two movements. One was orchestrated by Beijing; its self-proclaimed goal being to turn China into a "modern, powerful socialist country." The other, more important, one was the gross product of what we like to call "marginal revolutions." It involved a concatenation of grass-roots movements and local initiatives.

While the state-led reform focused on enhancing the incentives of state-owned enterprises, the marginal revolutions brought private entrepreneurship and market forces back to China. Private farming, for example, was secretly engaged in by starving peasants when it was still banned by Beijing. Rural industrialization was spearheaded by township and village enterprises that operated outside state control. Private sectors emerged in cities when self-employment was allowed to cope with rising unemployment. Foreign direct investment and labor markets were first confined to Special Economic Zones.

Well, China’s road to capitalism has been half baked as it requires a very important factor that has been amiss: allowing ideas to have sex as Matt Ridley would call it.

Professors Coase and Wang adds,

In the years to come, China will continue to forge its own path, but it needs to address its lack of a marketplace for ideas if it hopes to continue to prosper. An unrestricted flow of ideas is a precondition for the growth of knowledge, the most critical factor in any innovative and sustainable economy. "Made in China" is now found everywhere in the world. But few Western consumers remember any Chinese brand names. The British Industrial Revolution two centuries ago introduced many new products and created new industries. China's industrial revolution is far less innovative.

The active exchange of thoughts and information also offers an indispensable foundation for social harmony. It is not a panacea; nothing can free us once and for all from ignorance and falsehood. But the free flow of ideas engenders repeated criticism and continuous improvement. It also cultivates respect and tolerance, which are effective antidotes to the bigotry and false doctrines that can threaten the foundation of any society.

When China started reforming itself more than three decades ago, Deng rightly stressed the "emancipation of the mind" as a prerequisite. But that has yet to happen. It's time for China to embrace not just the market, but the marketplace of ideas. This will help not just China reach its full potential, but the world as well.

China’s fundamental problems emanates from the still top-down command and control political system which has been running a head on collision course with the snowballing forces of ‘marginal revolutions’ or grassroots economic movement via entrepreneurs.

A knowledge revolution would be incompatible with the incumbent centralized structure of governance, which has underpinned the continued restrictive policies on “free flow of ideas”.

A communist society depends on the conformity of behavior, ideas and actions with those of the political authorities, mainly enforced through coercion and indoctrination, whereas a knowledge revolution will democratize and produce diversity of ideas, opinions and actions channeled through a market economy.

And a society founded on a knowledge revolution would, thus, undermine the privileges of those currently in power.

Yet having to unleash the forces of capitalism would mean substantial changes to China’s political system.

Yet the jury is out on how China’s politicians will deal with such monumental adjustment process, which I expect to be turbulent, along with the response of the average Chinese. And such transition will be accompanied by a national financial and economic crisis as ramification to the recent marco (top-down) economic policies, the impact of which would also diffuse into politics.

Current events have already been manifesting signs of such tempestuous adjustment process.

Interesting times indeed.

Poker Bluffing Central Bankers Means Gold Bullmarket Should Continue

Everytime gold prices goes into hibernation, devotees of the state yell “where is inflation?!”

The “No Inflation” Propaganda

As I have been repeatedly saying, the impact of monetary inflation has always been relative. Inflation affects different economic sectors at different degrees and at different times. Politically favored sectors are the primary beneficiaries followed by the sectors that commercially interact with them, thus the gradient multiplier effect to the economy as earlier explained.

In the stock market, this phenomenon is manifested through what I call as the rotational process.

Yet today’s seeming benign conditions of consumer price inflation (CPI), which account for as symptoms of monetary inflation, does not imply of the absence of CPI inflation nor has CPI inflation solely been manifested on gold prices alone.

Nonetheless anti-gold arguments based on reductio ad absurdum and the fallacy of reading history into the future represents no less than pretexts for further inflationism and government interventions: no inflation today, thus inflate more!

These people should be reminded that economic laws are always in operation and applies equally to everyone. And that the inflation disease operates through different stages which means that CPI inflation could explode at any given time.

In reality, gold has been up for the 11^th straight year despite the ephemeral bout of deflationary episode during the crisis of 2008.

Chart from Goldmoney.com

And gold’s 11 year phenomenal record rise came amidst the US Federal Reserve’s Bubble blowing policies.

The point is, prices of gold will continue to respond to policies and that there hardly are any market trends that moves in a straight line—unless the marketplace endures an episode of extreme pressure from embedded imbalances.

As I previously wrote,

If they do, then markets must be experiencing an episode of extreme stress, symptomatic of the ventilation of acute systemic imbalances on the marketplace. They appear in the form of a blowoff phase (climax) of a bubble cycle or of hyperinflation in motion.

These extreme episodes are the black swan moments.

And the seemingly harmless CPI inflation landscape has been prompting for what seems as the crisis-political response feedback loop mechanism: where policymakers intervene in response to the market reactions and vice versa.

Political agents and their followers will naturally ‘selectively focus’ on data that supports or fits on their views, for the simple reason any admission of the CPI inflation threat will force them to reverse on their policies that would discomfit the markets and work against their interests (more below).

Until we see CPI inflation surge and or a major political backlash on central bank actions, we should expect this cycle of political interventionism/inflationism to continue.

And such actions will come under the half-truth discourse of a “no” or “little” inflation risk environment.

Gold Outperforms Obama Crony Warren Buffett’s Berkshire Hathaway

And it is also important to point out that gold has beaten the portfolio of the Obama crony and statist, Warren Buffett in spite of his repeated ranting against gold.

Whether priced in the equivalent of gold grams...

Chart from Pricedingold.com

Or based on relative performance…

Chart from the Daily Reckoning

“Unproductive” gold has clearly outperformed Mr. Buffett’s flagship Berkshire Hathaway over the past few years.

While past performance may not guarantee future outcomes, the second point is that fundamental drivers underpinning gold’s bullrun remains firmly in place.

Inflationism (expansion of monetary base in the US—see lower window—as well as in other developed economies) and the policy of negative real rates worldwide should continue to drive gold higher in spite of the current consolidation phase (chart from US Global Investors)

So, aside from highly distorted markets through various forms of market interventionism, I think this phase can be construed as a normal profit taking consolidation phase following the recent record run.

And reading price signals over the short term in an environment of heavy interventions can mislead, as acts of market interferences may have short to medium term volatile effects on the market’s price channels.

And given these highly politically influenced conditions, gold should continue to defy any statist expectations and beat the returns of Berkshire Hathaway.

Poker Bluff, Redux

It can also be observed that many of the current attributions to weak gold prices have centered on the supposed reluctance by policymakers to continue with “further stimulus”.

Such blarneys over withholding stimulus have been the dominant narrative and may have partly influenced the recent violent downside swing of September of 2011 and in March 2012 (two arrows indicated). I don’t recall of what news was ascribed to the December decline, I was on vacation.

Yet it has been a predilection, if not a habit, of the mainstream to associate current events to the market’s price actions (available bias).

We have seen this happen before through the gibberish of so called “exit strategy” in 2010. Then, I called this nonsensical propaganda as poker bluffing central bankers.

In reality in 2011, the US Federal Reserve monetized about 61% of US treasury issuance or a “whopping 8.6% of gross domestic product (GDP) on average per annum” according to Lawrence Goodman of Center for Financial Stability.

The US Federal Reserve financed most of the expenditures of the US government to compensate for the insufficiency of funding sources from private sector savings and the decline of foreign demand for US government papers. As US government expenditures continue to swell, the buyer and financier of last resort will be the US Federal Reserve.

The third point is that any constrains towards further “stimulus” would extrapolate to an outright default by the US government. Such event would ripple across the political spectrum that would adversely impact the favored banking industry and to welfare-warfare state. And US politicians and bureaucrats won’t likely resort to this option as this would put in jeopardy the survival of current political institutions or the cartelized central banking-welfare warfare state-banking system.

So policymakers will find ways and means to conduct more inflationism through overt or through stealth and possibly will come in different names.

Alternatively, this means another round of poker bluffing chatters.

Gold’s Correlation with Various Asset Classes

Lastly gold’s correlations with asset markets have been vacillating.

For most of the past years, the inflation tide has been manifested with gold’s leading the way relative to the equities as represented by the US S&P 500.

But this relationship appears on the rocks. During parts of 2011 (red ellipses), prices of gold and US equity markets parted ways. This came coincident to the end of QE 2.0 and the policy dithering by the US Federal Reserve. Then, gold prices rose as US stocks fell. This divergence was finally resolved when central bankers abroad reintroduced their versions of QE.

However, such divergence—but on an opposite path where gold has been in consolidation gold while the US S&P continues to ascend—seems to have remerged anew today.

My guess is that gold will close this anomalous divergence by heading higher.

My impression is that the gold appears to partly mirror the actions of the euro.

While the gold-Euro correlations has been loose over the past 3 years, where the upward streak of gold’s trend came amidst the sharp gyrations of the euro, recently gold seems to be moving in sympathy along with the euro’s decline.

Correlation should not be read as causation though. It would be mistake to think of gold as plainly anti-US dollar trade.

In reality, gold is the nemesis of fiat or political money, whether the US dollar, European euro, China’s yuan, Japanese yen, British pound or the Philippine Peso.

The bottom line is inflationism will continue to breath life into gold’s bullmarket, current volatility notwithstanding.

Betting against gold, says Professor Gary North, is the same as betting on governments. He who bets on governments and government money bets against 6,000 years of recorded human history.

The ‘New’ Old Idea: Central Banking Ponzi Financing Schemes

From the Wall Street Journal,

Even as the European banking crisis shows signs of easing, lenders across the Continent are engaging in a variety of maneuvers to avoid, or at least delay, coming to terms with potential problems lurking on their books.

Some banks are concocting unorthodox structures designed to improve all-important capital ratios, without raising new capital or moving unwanted assets off their balance sheets. Others are engaging in complex transactions with struggling customers to help temporarily avoid loan defaults—but possibly exposing the lenders to future problems.

Banks now have greater flexibility to pursue such tactics because of the roughly €1 trillion ($1.33 trillion) of cheap three-year loans that the European Central Bank recently handed out to at least 800 lenders. The program, known as the Long-Term Refinancing Operation, or LTRO, is widely credited with averting a possible catastrophe as banks struggled to pay off their maturing debts.

But by granting the new lease on life, the ECB program also has enabled the industry to delay its cleanup process, according to some bankers, investors and other experts.

The impact of the current inflationist policies in the Eurozone has been to:

-shield bankers from adapting reforms,

-promote the moral hazard of accounting or book keeping prestidigitation,

-become heavily dependent government’s sustained rescue efforts and

-rely on continued asset inflation by the ECB in order to keep the banking sector’s balance sheets afloat. The late neo-Keynesian Hyman Minsky would have labelled this Ponzi financing.

Here is a very relevant quote from fund manager David R. Kotok (bold emphasis mine)

“The mind, once expanded to the dimensions of larger ideas, never returns to its original size.” Oliver Wendell Holmes, Sr.

Holmes, Sr. lived in the century before World War I. He preceded central banks like the Federal Reserve and European Central Bank. He didn’t know there would be an International Monetary Fund. In his time, he was a thinker, author, physician, poet. His son was the famous Supreme Court Justice.

Fast forward. The new idea is to take the government-institutional official sector coalition and empower it when there is a financial crisis. This approach is at work in the Eurozone, the UK, the US, and a growing number of other venues. The new idea is to crush the private sector and to keep the official sector in the game for a prolonged period.

This “idea shift” is a distinguishing feature of the recent crisis period that started in 2007-2008. The old idea was that the official sector would intervene, rebalance the system, and then exit. The old idea was to get the private sector back in the game quickly. The old idea was to recover the official money and then let the market resume its functions of pricing and clearing and providing capital.

The old idea is dead.

So Ponzi schemes from central banking have been the “new” idea. Well, it’s really nothing new. Simply ask the incumbent governor of the Reserve Bank of Zimbabwe Gideon Gono.

Today’s inflationism by developed nations has signified as a modified digital version of an ‘age old’ practice by political authorities.

Quote of the Day: Troubles of Mild inflation

The Wall Street Journal’s Notable & Quotable section presented the great Henry Hazlitt’s excerpt on the “troubles of even a mild inflation”.

Here is the complete quote from Hazlitt’s must read classic Economics in One Lesson (p.150-51) [bold emphasis mine]

So inflation turns out to be merely one more example of our central lesson. It may indeed bring benefits for a short time to favored groups, but only at the expense of others. And in the long run it brings disastrous consequences to the whole community. Even a relatively mild inflation distorts the structure of production. It leads to the overexpansion of some industries at the expense of others. This involves a misapplication and waste of capital. When the inflation collapses, or is brought to a halt, the misdirected capital investment—whether in the form of machines, factories, or office buildings—cannot yield an adequate return and loses the greater part of its value.

Nor is it possible to bring inflation to a smooth and gentle stop, and so avert a subsequent depression. It is not even possible to halt an inflation, once embarked upon, at some preconceived point, or when prices have achieved a previously-agreed-upon level; for both political and economic forces will have got out of hand. You cannot make an argument for a 25 percent advance in prices by inflation without someone’s contending that the argument is twice as good for an advance of 50 percent, and someone else’s adding that it is four times as good for an advance of 100 percent. The political pressure groups that have benefited from the inflation will insist upon its continuance.

It is impossible, moreover, to control the value of money under inflation. For, as we have seen, the causation is never a merely mechanical one. You cannot, for example, say in advance that a 100 percent increase in the quantity of money will mean a 50 percent fall in the value of the monetary unit. The value of money, as we have seen, depends upon the subjective valuations of the people who hold it. And those valuations do not depend solely on the quantity of it that each person holds. They depend also on the quality of the money.

This only goes to show why policies of inflationism has hardly been about economics, but mostly about advancing the interests of some politically favored groups. Such that once embarked upon, like narcotic addiction, inflationism becomes hard to stop as this would reverse the gains made from the early infusions.

Importantly, the consequent economic and financial system built around such policies becomes entirely dependent, not only on the sustenance, but on accelerated inflationism.

Mr. Hazlitt’s warning seems in full motion as central banks persistently ramps on their balance sheets.

chart from Cumber.com

And like narcotics addition, the long term outcome would not be pleasant.

Entrepreneurship: The Gap Between Theories and Practice

Kate Maxewell of the Kauffman Foundation writing at the Growthology blog observes of the chasm between entrepreneurial literatures and entrepreneurs in action (bold emphasis mine)

In my reading of the entrepreneurship literature I have been struck by the large gap between entrepreneurs and people who study entrepreneurship. The group of people who self select into entrepreneurship is almost entirely disjoint from the group of people who self select to study it. Such a gap exists in other fields to greater and lesser degrees. Sociologists, for instance, study phenomenon in which they are clearly participants whereas political scientists are rarely career politicians but are often actors in political systems.

But in the case of entrepreneurship the gap is cause for concern. My sense is that all too often those studying entrepreneurship don’t understand, even through exposure, the messy process of creating a business, nor, due to selection effects, are they naturally inclined to think like an entrepreneur might. At Kauffman, we have had multiple scholars say to us that they’ve found that talking to entrepreneurs is useful in their research.

This should be obvious, but it’s not. The result is research that can lack grounding, perspective and credibility. As a researcher I understand the natural impulse to keep things neatly ordered so as to create elegant papers and clear conclusions. But the fact of entrepreneurship is that it is anything but pretty or neat. More importantly, the research product resulting from such a disconnect can present a distorted view of the entrepreneurial process that may actually hinder our understanding of it. Such ill-informed research can then go on to form the basis of a policy directed at entrepreneurs – without ever having involved or understood them.

Like investing in markets, theories and practice are often detached. Yet many cling to the barnacle of academic mirages that perceives entrepreneurship as rigorous methodological science.

And as I earlier pointed out entrepreneurial traits are not acquired from books or from the academia and don’t require ‘new attitudes’. Instead they emanate from observation, knowledge, the willingness to learn from failure, and most importantly, the desire to undertake activities that profits from risk ventures through servicing or producing for the consumers.

As the great Ludwig von Mises pointed out, (bold emphasis added)

In order to succeed in business a man does not need a degree from a school of business administration. These schools train the subalterns for routine jobs. They certainly do not train entrepreneurs. An entrepreneur cannot be trained. A man becomes an entrepreneur in seizing an opportunity and filling the gap. No special education is required for such a display of keen judgment, foresight, and energy. The most successful businessmen were often uneducated when measured by the scholastic standards of the teaching profession. But they were equal to their social function of adjusting production to the most urgent demand. Because of these merits the consumers chose them for business leadership.

In short, as part of human action entrepreneurship represents more a work of art—which attempts to satisfy the preferences and value scales of consumers—than of science.

Video: "Ideas Having Sex" A Conversation with Matt Ridley and John Tierney

(hat tip Greg Ransom)

The Unraveling Global ‘Earth Hour’ Energy Industry Bubble

Like the welfare state, the supposedly politically correct environmental position represented by green energy projects are being exposed for what they truly are—delusions of grandeur.

Political support for green ‘renewable’ energy has been diminishing in Western nations.

From the Wall Street Journal, (bold emphasis mine)

The green economy strikes again, or shall we say strikes out. Oakland-based Solar Trust of America filed for bankruptcy this week, leaving its planned multibillion-dollar plant in California on ice. The company declared itself insolvent after its parent—Germany's Solar Millennium—filed for bankruptcy in December, and Solar Trust realized it wouldn't be able to pay a $1 million rent check due April 1.

Solar Millennium, in turn, had been hoping to sell a controlling stake in Solar Trust to the German company, solarhybrid, until solarhybrid also filed for bankruptcy in March. Then there's Q-Cells, another German solar company, which also filed for bankruptcy this week, sharing that fate with Solon, the Berlin-headquartered photovoltaic firm that went bust in December.

This cascade of insolvencies comes after Germany decided last year to slash the above-market prices it forces utilities to pay for renewable energy sources and to cut the subsidies that have locked German taxpayers into €100 billion in handouts to the solar industry. Even before the subsidy cut, German solar manufacturers were struggling under price pressure from China, which has responded to Western subsidies by ramping up its own production, undercutting higher-cost European and American producers in the process.

Greens in Germany and beyond are protesting that if only governments would continue soaking taxpayers to prop up solar, wind and other low-carbon favorites, these technologies would be viable. But even that is far from clear. Q-Cells and others had responded to Chinese competition by outsourcing some of their own production to Asia to cut costs. That wasn't enough to save them.

The real story is that green manufacturing, which was supposed to be the planet's salvation and Europe's new industrial base, proved to be as vulnerable to low-cost competition as many other industries. Far from creating a sustainable comparative advantage, German subsidies sparked the very rivalry now putting its home-grown industry out of business.

The Italian government appears to have taken note of these economic realities and last weekend said it would slash "excessive" subsidies for solar and wind power. Industry Minister Corrado Passera uttered the obligatory promise that Rome remains committed to generating a carbon-free, wind- and sun-powered economy, but that "we need to do so without overreliance on taxpayer resources."

So economic reality has been prevailing over mass hysteria.

Aside from gross mismanagement, mainly due to the moral hazard of political support which has been wasting taxpayers money, competition from Asia has added to the industry’s woes.

Of course, the most important factor is that there is no such thing as a free lunch, or the Santa Claus Principle, as most political zealots believe.

And considering the tremendous financial pressures to survive the welfare state, politicians see the latter as more of a priority than sustaining the economically unviable green industry, which ironically, has been contributing to the welfare state’s financial burden.

Under fiscal pressure from the ongoing debt crisis ordeal, Spain has also cut subsidies to unfeasible political pet projects.

From Bloomberg, (bold emphasis mine)

Spain halted subsidies for renewable energy projects to help curb its budget deficit and rein in power-system borrowings backed by the state that reached 24 billion euros ($31 billion) at the end of 2011.

“What is today an energy problem could become a financial problem,” Industry Minister Jose Manuel Soria said in Madrid. The government passed a decree today stopping subsidies for new wind, solar, co-generation or waste incineration plants.

The system’s debts were racked up as revenue from state- controlled prices failed to cover the cost of delivering power. Costs have swollen in the past five years because of an increase in regulated payments for the power grid, support for Spanish coal mines and subsidies for renewable energy plants…

Spain’s decision is a “first step” to rein in debts, and officials are working on a broader package of measures, Soria said. The nation isn’t planning a levy on hydropower or nuclear plants, nor will it take on power-system liabilities, he said.

The Spanish action follows Germany’s announcement last week that it would phase out support for solar panels by 2017 and the U.K.’s legal battle to reduce its subsidies for the industry.

Spain was an early mover in developing renewables plants, and support for wind energy helped Iberdrola become the world’s biggest producer of clean power, with plants in the U.S. and Brazil. The industry sustains about 110,000 Spanish jobs, according to the Renewable Energy Producers Association.

The government is wrestling with competing priorities as it struggles to convince investors it can meet a target to cut the budget deficit to 4.4 percent of gross domestic product this year, from 8 percent last year, while trying to create jobs in a country where 23 percent of workers are unemployed.

Oooooh that ought to hurt.

A relevant quote from Warren Buffett on bubbles,

Only when the tide goes out do you discover who's been swimming naked.

Apparently green energy has been caught swimming naked and whose bubble seems to have been pricked.

Yet those proposing to promote green energy in the Philippines through the same political route of subsidies (whether consumer or supplier based) ought to open their eyes and see what has been happening abroad.

Any industry that cannot survive on its own [because the consumers don’t want them] and which requires political fiat to thrive extrapolates to a redistribution of resources from the economy to the political privileged groups. This is rank crony capitalism.

And crony capitalism results to huge wastages, economic inefficiency, discoordination of the economy and corruption among the many other nasty side effects. And this accounts for as the reverse Robin Hood where the poor and the middle class subsidizes the rich cronies (through taxes and inflation).

Worst is that the underlying (feel good) dogma of such environmental political religion has been founded on supposed infallibility and omniscience of computer based models.

As the great H.L. Mencken wrote,

Civilization, in fact, grows more and more maudlin and hysterical; especially under democracy it tends to degenerate into a mere combat of crazes; the whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.

Unintended Consequences from the Libyan Intervention

Benjamin Friedman of the Cato Institute enumerates the unintended consequences of the foreign policy of military interventions in Libya in 2011

Writes Mr. Friedman (bold emphasis added)

Advocates of both interventions underestimate coercion’s contribution to political order. Autocratic rule in these countries is partially a consequence of state weakness—the absence of strong liberal norms, government institutions, and nationalism. By helping to remove the levers of coercion in places like Libya and Syria, we risk producing anarchy—continual civil war or long-lived violent disorder. Either outcome would likely worsen suffering through widespread murder, a collapse of sanitation and health services, and stunted economic growth conducive to well-being. And the most promising paths to new of forms of unity and order in these states are illiberal: religious rule, war, or new autocrats. The humanitarian and liberal cases for these interventions are unconvincing.

Aside from Qaddafi’s fall, U.S. leaders gave three primary rationales for military intervention Libya (I repeatedly criticized them last spring). One was to show other dictators that the international community would not tolerate the violent suppression of dissenters. That reverse domino theory has obviously failed. If Qaddafi’s fate taught neighboring leaders like Bashar al-Assad anything, it is to brutally nip opposition movements in the bud before they coalesce, attract foreign arms and air support, and kill you, or, if you’re lucky, ship you off to the Hague.

The second rationale was the establishment of liberal democracy. But Libya, like Syria, lacks the traditional building blocks of liberal democracy. And history suggests that foreign military intervention impedes democratization. Whether or not it manages to hold elections, Libya seems unlikely to become a truly liberal state any time soon. As with Syria, any path to that outcome is likely to be long and bloody.

Meanwhile, Libya’s revolution has destabilized Mali. Qaddafi’s fall pushed hundreds of Tuareg tribesmen that fought on his side back to their native Mali, where they promptly reignited an old insurgency. Malian military officers, citing their government’s insufficient vigor against the rebels, mounted a coup, overthrowing democracy that had lasted over twenty years. Thus far, the military intervention in Libya has reduced the number of democracies by one.

The most widely cited rationale for helping Libya’s rebels was to save civilians from the regime. Along with many commentators, President Obama and his aides insisted that Qaddafi promised to slaughter civilians in towns that his forces were poised to retake last March. Thus, intervention saved hundreds of thousands of lives. A minor problem with this claim is that Qaddafi’s speeches actually threatened rebel fighters, not civilians, and he explicitly exempted those rebels that put down arms. More importantly, if Qaddafi intended to massacre civilians, his forces had ample opportunity to do it. They did commit war crimes, using force indiscriminately and executing and torturing prisoners. But the sort of wholesale slaughter that the Obama administration warned of did not occur—maybe because the regime’s forces lacked the organization needed for systematic slaughter.

The limited nature of the regime’s brutality does not itself invalidate humanitarian concerns. It might be worthwhile to stop even a historically mild suppression of rebellion if the cost of doing so is low enough. The trouble with the humanitarian argument for intervention in Libya is instead that the intervention and the chaos it produced may ultimately cause more suffering than the atrocities it prevented. Libya’s rebel leaders have thus far failed to resurrect central authority. Hundreds of militias police cities and occasionally battle. There are many credible reports that militias have unlawfully detained thousands of regime supporters, executed others, driven mistrusted communities from their homes, and engaged in widespread torture.

The looting of Libya’s weapons stockpiles is also likely to contribute to Libya’s misery, in part by arming the militias that obstruct central authority. The weapons depots reportedly included thousands of man-portable air-defense systems (MANPADS), some of which may still work. It is worth noting that the widely-reported claim that Libya lost 20,000 MANPADS appears exaggerated. That figure comes from Senate testimony last spring by the head of Africa Command, who did not substantiate it (my two requests to Africa’s Command PR people for information on this claim were ignored). A State Department official recently gave the same figure before essentially admitting that we have no idea what the right figure is.

As always, the politics of interventionism has been veneered with noble “humanitarian” intentions which not only fails to meet their goals but eventually backfires.

In reality, "noble intentions" has always been used as cover to promote the interests of parties who operate 'behind the curtains' through the state.

Incredible Futuristic Eyeglasses from Google

From KurzweilAI,

In a post on Google Plus, Google X employees unveilved a prototype of the company’s “Project Glass” wrap-around augmented-reality glasses.

The glasses can superimpose information on the lenses and allow the wearer to send and receive messages via voice commands, similar to Siri.

A built-in camera can record video and take pictures.

“We’re sharing this information now because we want to start a conversation and learn from your valuable input,” the Google employees wrote. “Please follow along as we share some of our ideas and stories. We’d love to hear yours, too. What would you like to see from Project Glass?”

See video below

So eyeglasses with many digital based functionalities that can be found in today's Smartphones or the tablet. (X-Ray vision next? Lol!)

The pace of technological advancement has taken on a fantastic leap. And these have been enabled and facilitated by market forces in spite of the current spate of governments interventions.

And this is why I remain cautiously or guardedly optimistic about the future as forces of decentralization gnaws away at the foundations of 20th century centralized welfare-warfare states.

Quote of the Day: Government Driven Inequality

The regulatory and tax states have made the lower classes into pariahs from the point of view of the commercial world. They are expensive to hire and hard to fire, which makes them even more expensive to hire. The minimum wage is bad enough, but that is only the beginning. A giant machinery governs how, where, when, and under what terms they can work and enjoy fulfilling lives. Business creation is harder than ever for anyone but the highly educated elite.

When they do get jobs, the whole system is allied against their social advancement. Cash business is criminalized. Everything requires a permit. The bureaucracy rules, instead of the entrepreneur. The laws, taxes, mandates, programs — and everything else the state has done — work like a giant bed of sharp rocks in the middle of a river that punishes those who tried to get to the other side.

Inflation and the Fed’s interest-rate policy have punished the accumulation of wealth and shortened the time horizon of the lower third of the population classes. The rise of the police state and the criminalization of their lifestyle have driven them into a culturally, socially, and legally marginal existence, so that they are always one step away from entanglement with police, courts, and jail.

As government grows — and the regulatory and tax states expand — and as the prohibitions on behaviors, services, and goods grow and grow, society becomes ever less economically mobile and dynamic. The class system that is part of every society becomes a caste system of entrenched position. It becomes a society of the put-upons versus the privileged.

That’s an excellent excerpt from a book review by Jeffrey Tucker at the Laissez Faire Books.

Every choice represents a tradeoff. Growth of government equates to reduced growth for the private sector. And where choices are politicized, the end result is wealth inequality prompted for by asymmetric political exposures—political inequality. So wealth becomes concentrated to the political class and their cronies at the expense of everyone else. Yet media and the academe have been blind to these developments.

Easter’s Message: There is Hope for Freedom

There is hope for Freedom. And that’s Easter’s message according to this splendid article from Judge Andrew Napolitano…

Today it seems the power of the government continues to expand and the freedom of the individual continues to shrink. The loss of freedom comes in many forms. Sometimes it is direct and profound, as when the government stops you from doing what you formerly had the freedom to do – like choose your own doctor and your own health care insurance or choose not to have health care insurance. Sometimes it is more subtle – like when the government prints money to pay its bills and, as a result, all the money you already have loses much of its value. And sometimes the government steals freedom without you knowing it – like when federal agents write their own search warrants, authorizing themselves to learn of your computer use or medical or banking records; and they never tell you what they've done.

Freedom is the ability of every person to exercise his own free will, rather than be subject to the will of someone else. Free will is the essence of humanity, and humanity is God's greatest gift. When the government affirmatively takes away freedom, the government violates the natural law; it prevents us from having and utilizing the means to the truth. Your moral ability to exercise your free will to seek the truth is your natural right, and the government may only morally interfere with the exercise of that right when you have used fraud or force to interfere with the exercise of someone else's natural rights….

Easter is the linchpin of human existence: With it, life is worth living, no matter its cost or pain. Without it, life is meaningless, no matter its fleeting joys or triumphs. Easter has a meaning that is both incomprehensible and simple. It is incomprehensible that a human being had the freedom to rise from the dead. It is simple because that human being was and is God. Easter means that there is hope for the dead. And if there's hope for the dead, there's hope for the living.

Read the rest here

Lenten Thoughts for the Day: My Salute to Holy Week Entrepreneurs

Celebrating the Lenten tradition does not eliminate human needs and wants.

So while some entrepreneurs take these as opportunities to benefit financially, in reality, the main beneficiaries are the consuming public especially when many, if not most, people elect to spend time away from work. Life becomes a lot more convenient for the most of us.

Thus I salute entrepreneurs who elect to tradeoff leisure time to open shop when most businesses are closed. This is an example of ethical self-interest which extrapolates into public good.

In the words of investing guru Doug Casey

It's in your selfish best interest to provide the maximum amount of value to the maximum number of people

And the provision of public service through trade is, in effect, loving and servicing one's neighbors, clues of which can be found in the Bible.

From Galatians 5:13-14

For you were called to freedom, brothers. Only do not use your freedom as an opportunity for the flesh, but through love serve one another. For the whole law is fulfilled in one word: “You shall love your neighbor as yourself.”

Chart of the Day: The Inflation Cycle

Today’s crisis-political response feedback loop mechanism incisively captured by this diagram from Zero Hedge.

The reason for this as resoundingly pointed out by Professor Ludwig von Mises in his magnum opus the Human Action, more than half a century ago,

The hindrance that the monetary or circulation credit theory had to overcome was not merely theoretical error but also political bias. Public opinion is prone to see in interest nothing but a merely institutional obstacle to the expansion of production. It does not realize that the discount of future goods as against present goods is a necessary and eternal category of human action and cannot be abolished by bank manipulation. In the eyes of cranks and demagogues, interest is a product of the sinister machinations of rugged exploiters. The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy.

The more things change, the more they stay the same.