Classical Liberal and Libertarian Legacies: Ludwig von Mises and Murray Rothbard

The classical liberal and libertarian legacies of Ludwig von Mises and Murray N. Rothbard in the account of Professor Gary North (at the LewRockwell.com)

Ludwig von Mises

My only meeting with Mises came in the fall of 1971. I had been hired by the Foundation for Economic Education. I was invited to attend a special ceremony. F. A. Harper had edited a second collection of essays honoring Mises. The first book of essays honoring Mises had been edited by Mary Sennholz and was published in 1956. The meeting was held in a nice hotel in New York City. After the meeting, I was able to talk with Mises about a number of things, including his connection with the German sociologist, Max Weber. Weber referred to Mises's 1920 essay on Economic Calculation in the Socialist Commonwealth, in a footnote in a book that Weber did not complete. He died in 1920. Mises told me he had sent the essay to Weber.

Mises left a legacy that has steadily grown since his death in 1973. He was one of those rare men who had two phases in his career. The first phase, beginning in 1912 and ending after the publication of John Maynard Keynes's General Theory (1936), established his reputation as a major economic theorist. His 1912 book on money and banking, his 1922 book on socialism, and his many articles on specialized topics in economic theory identified him as a major theorist. But his opposition to all forms of fiat money gained him a reputation as a 19th-century Neanderthal in the world of fiat currencies, which began with the abolition of the gold standard at the outbreak of World War I in 1914. His hostility to socialism also contributed to his status as a pariah. He was clearly resisting what was regarded in academic circles as the wave of the future. Academics want to be trendy. Mises was not trendy.

The triumph of Keynesianism after 1936, coupled with the outbreak of World War II in 1939, led to an eclipse in Mises's career. When he came to the United States in 1940 as a refugee, he was virtually unknown here. He had no teaching position. He was 59 years old. He had never been known in the United States. He was dependent on occasional writing assignments, and also on donations from friends, including Henry Hazlitt.

He served as a free market voice crying in the Keynesian wilderness for the next 30 years. He presided over a graduate seminar at New York University which went on for a quarter-century. Murray Rothbard was one of the regular attendees, although as an auditor. He was not paid by the university, which relegated him to the status of visiting professor. He was supported by donors. Yet there was no one on the NYU economics faculty who is remembered today. They were nonentities, and they left no legacy.

The publication of his book, Human Action, by Yale University Press in 1949 did begin to establish his reputation in America. The book sold far better than anyone had expected. This book was the first comprehensive, integrated theory of free market economics that had ever been published. Very few people understood this in 1949, but anyone who has studied the history of economic thought finds in this book the first comprehensive application of economic theory to the entire market-based economy. The analysis is integrated in terms of the Austrian economic defense of subjective value theory and methodological individualism.

He continued to write after 1949. His books were sold by the Foundation for Economic Education, which brought him to the attention of readers who were in favor of the free market. His articles appeared in the Foundation's magazine, The Freeman. The Freeman did not circulate widely in academic circles, but it was a widely read magazine on the Right.

I bought a copy of Human Action in 1960. I was aware of Mises's importance in the history of economic thought, but at my university, I was probably the only student who knew about him. I suspect that the only professor who knew about him was Carl Uhr, who taught a course in the history of economic thought.

Mises was tenacious in his commitment to free-market principles. Probably more than any other major scholar of the 20th century, he was known to his peers as uncompromising. He was regarded as ideological by Chicago school economists. They were correct. Because of his consistency in applying the principle of nonintervention into every nook and cranny of the economy, but above all in his opposition to central banking, free-market economists regarded him as eccentric. "Eccentric" for them was a word for "rigorously consistent."

He was known to the Left as the West's most implacable opponent of economic intervention. When the Nazis marched into Austria in 1938, they confiscated his library. He had left it behind when he left the country to go to Switzerland in 1934. He feared that the Nazis would take over in Austria, and he was correct. As a free market economist and a Jew, he would not have survived in Austria.

The Soviets also recognized who he was, and they confiscated the library from the Nazis, and sent it to Moscow. It was not discovered there by any Western economist until the 1980s. That was a great irony: Western economists did not know who he was, but Soviet economists did. This became increasingly true in the 1980s, as the Soviet economy began to disintegrate, exactly as Mises had predicted it would.

Mises's great advantage over almost all of his peers was this: he wrote in English as a second language. Most economists write in English as a third or fourth language. He did not use equations. He did not use a lot of jargon. He developed paragraphs based on sentences that were developed consecutively. You could begin on page 1 of any of his books and, if you paid attention, you could get to the end without becoming confused.

This was an advantage because average people who were interested in economics could follow his logic. His reputation spread by way of "The Freeman" throughout the late 1950s and the 1960s. That magazine had a circulation as high as 40,000 in some years. There were not many economists who could reach an audience that large.

He really did stick to his knitting, and he really did stick to his guns. He stuck to his guns with such tenacity that for decades he had no influence whatsoever in the academic community. They wrote him off. But, after his death in 1973, his influence began to grow. In 1974, his disciple F. A. Hayek won the Nobel Prize in economics. Bit by bit, his reputation spread. Because of the Mises Institute, his name is now more widely known than almost any other economist of his generation, either before World War I or after World War II. The average person would be unfamiliar with the name of most economists in the first half of the 20th century, and he would be unable to read the works of almost any economist in the second half.

So, because Mises was unwilling to compromise, especially in the area of methodology, refusing to use equations, his legacy has been greater than most of his long-dead peers. His legacy is growing, and theirs is almost nonexistent.

Murray Rothbard

Much of Mises's influence is the result of Murray Rothbard's voluminous writings, in powerful, captivating, and flawless English, from the late 1950s until his death in 1995. Rothbard became the primary interpreter of the works of Mises, even though he did not share Mises's commitment to 19th-century limited government. It is possible to read Human Action, but it is a lot easier to read Man, Economy, and State. Rothbard never found full-time employment in a college or university that had an economics department until late in his career. He taught engineering students, who were not interested in economics and surely did not know who Rothbard was. If he had any legacy from his classes at Brooklyn Polytechnic, nobody has been able to discover it.

He gained his reputation as an economist mainly through the publications that appeared in a 12-month period from 1962 through early 1963. Columbia University Press published his doctoral dissertation on America's first depression: The Panic of 1819. It read like a dissertation, unlike anything else Rothbard ever wrote. It had some minor influence in the economic history, but it was a narrow topic.

Then came Man, Economy, and State in the fall of 1962. Then, the following spring, came America's Great Depression. That book was a study of the statist policies of the Hoover Administration. It applied the Austrian theory of the trade cycle to the economic and political events of the Hoover Administration. Because it was based on Austrian economic theory, academic economists rejected it. Because it was hostile to Herbert Hoover, any conservative who found out about it probably rejected it before even looking at the table of contents. It was almost a perfect book for alienating everybody. Then came the acceleration of the Vietnam War and the development of the antiwar movement. Rothbard became actively involved in the antiwar movement, and he ceased writing books on economic theory. This continued until the early 1980s, when he wrote the best upper division textbook in money and banking that has ever been written, and which has probably never been assigned in any university in the United States: The Mystery of Banking. It is totally hostile to fractional reserve banking, central banking, and all forms of fiat money. It is the primary task of all university-level courses in money and banking to establish the students' confidence in all three of these. Rothbard once again had painted himself into a corner.

Only at the very end of his life did he begin to do a detailed academic study in economics. He wrote two volumes on the history of economic thought. He died before the third volume was completed. There has never been any history of economic thought to rival it in terms of a mixture of minute details of the lives of economists, coupled with careful analyses of their economic doctrines.

His legacy stems from the power of his economic analysis and the cogency of his writing style.

He left another legacy in the area of early American history: his study of colonial America up to, but not including, the American Revolution. Sadly, he took his notes on a piece of audio recording technology that disappeared, so he was never able to finish the fifth volume.

Then there is his legacy as the most literate defender of economic and political anarchism in the history of anarchist thought.

He stuck to his knitting. He never stopped writing. He did not compromise in his hostility to economic intervention by the state. He did short articles, midsized articles, fat books, heavily footnoted books, pamphlets, newsletter articles, movie reviews, political analysis, and whatever else interested him, which was everything except possibly nuclear physics. The huge volume of his writings, the clarity of his writings, the ideological consistency of his writings, and the fact that he got Lew Rockwell on his side, established a legacy which has been leveraged by the power of the World Wide Web. He is reaching a larger audience today than he could have imagined. He died in 1995, the year that the Netscape browser was introduced. He could not have foreseen the impact of this event.

His skills were ideally suited to this new technology. His skills in written communication are exactly what people doing Web searches are looking for. He was a print-media person, and while the Web is equally geared to video, for those who are looking for cogent writing, Rothbard's body of material is vast.

Brain Drain Politics: Ecuador’s Gambit

Ecuador’s foolish gambit

From AP

Galo Guarderas is starting off on five years of study in Spain to make himself an expert in photovoltaics, a vital field for a world tapping into solar energy.

The price tag for the studies is more than $150,000. But the 47-year-old professor of electrical engineering won't owe a cent for his doctorate.

His country, Ecuador, is footing the bill.

Guarderas is a pioneering participant in a new program that aspires to convert this small South American nation into a global competitor. In exchange for each state-paid year of school, the professionals guarantee to work at least two years back at home.

President Rafael Correa isn't just bent on staunching brain drain, in which talented people flee developing countries for lack of local opportunity. He's determined to reverse it, create a brain gain.

"Without human talent Ecuador won't advance," Correa said in a speech last month. "We lack the minimum critical mass of top-flight professionals needed to spur the country's development."

Ecuador's deputy minister of science and innovation, Hector Rodriguez, said the goal is "a radical transformation" from a country whose exports are 77 percent raw materials, chiefly oil, to one that exports technology.

This is represents another example where when you are the hammer everything looks like a nail.

Lavishly spending money for “foreign education” to supposedly solve the nonsensical brain drain issue does not deal with root of the problem particularly “talented people flee developing countries for lack of local opportunity.”

Yes the problem, to repeat, is THE LACK OF ECONOMIC opportunities because of Ecuador’s socialist government (new age or 21st century socialism). Economic opportunities are not driven by education alone but by investments or through a political environment which encourages businesses or enterprises (economic freedom).

In the US, contrary to political wisdom, science or math graduates have not been guaranteed employment.

Feel good policies (to get elected or to remain power) like always will eventually just blow up. In politics, insanity or doing the same thing over and over again and expecting different results represents the norm.

Japan’s Capital Flows to ASEAN Accelerates

I have been saying that the current international monetary environment will prompt for a deluge of (direct and portfolio) investments (euphemism for capital flight) towards ASEAN, mainly from Japan, as well as from Western Countries.

As I previously noted

Japan’s investments in ASEAN do not seem to be country specific, but more of a regional dynamic. Or that the Japanese probably hedge their ASEAN exposure by spreading their investments throughout the region…

We are getting some signs of confirmation.

Japan has reported intensifying direct investment flows to:

Indonesia. As per the account of Kenichi Amaki of Matthews Asia,

The Japanese are pursuing opportunities beyond just the auto industry in Indonesia. A local operator for a major convenience store chain talked to us about the intense quality control training they receive from their Japanese partner. This operator plans to significantly accelerate store openings over the next several years.

The investment push into Indonesia makes sense from a return perspective. According to Japan's Balance of Payments statistics, return on direct investment into Indonesia has averaged 10.7% in the decade up to 2010. In contrast, investment returns from North America and China have averaged only 5.4% and 8.1%, respectively, during the same period. As growth in China moderates, Southeast Asian nations such as Indonesia are emerging as a new source of growth for Japan Inc.

Economic growth seems to be a secondary factor or a rationalization to the real cause: Japan’s domestic financial repression mainly through inflationism as political recourse to her ballooning debt woes.

Malaysia. From the Malaysian Trade Industry

There has been no let-up in interest among Japanese investors in Malaysia's main industrial pillar - the electrical and electronics (E&E) sector, said International Trade and Industry Minister Datuk Seri Mustapa Mohamed.

"There continues to be interest either by way of reinvestments or interest by those companies (from within and out of Japan) to relocate their businesses here," the minister said at a media briefing after the 2012 Panasonic Scholarship Award ceremony at the ministry yesterday.

He said there was no slowdown in the trend of Japanese interest in the E&E sector which last year accounted for 34 per cent of the total employment in the manufacturing sector.

For the first seven months of this year, Japanese investors poured in some US$824 million (RM2.6 billion) into 48 projects, almost double the US$400 million (RM1.2 billion) invested in 26 projects in 2010.

Malaysia saw a 76 per cent jump in foreign direct investments (FDIs) in the first half of the year with RM21.3 billion versus RM12.1 billion in the same period last year. Some 52 per cent of these FDIs valued at RM15 billion were in the manufacturing sector.

Japan led the foreign investment pack, in the first seven months of the year, with RM3.4 billion worth of investments followed by the US (RM2.3 billion) and Singapore (RM1.4 billion).

Thailand. As reported by the Organization of Asia Pacific News Agencies

Thai Industry Minister M.R. Pongsvas Svasti has acknowledged that foreign direct investment (FDI) in Thailand has kept steadily growing, with FDI from Japan alone doubling in the first five months of this year, compared with the corresponding period of last year.

Let me repeat what I wrote

But since (inward) capital flows into ASEAN will reflect on global central bank activities, this dynamic would not be limited to Japan but would likely include western economies as well.

And under the political climate that induces yield chasing dynamics, YES we should expect these flows to translate to a vastly higher Phisix and ASEAN bourses overtime, largely depending on the degree of inflows. This will be further augmented by the response of local investors to such dynamic as well as to local policies.

Although NO the Philippines will not decouple from events abroad and the pace of FDIs and investment flows will largely be grounded on the general liquidity environment.

Japan’s deepening capital flows will likely be a medium to long term trend and has been conditioned or will be significantly influenced by evolving global dynamics.

Yet all these seems as an eerie reminiscent of the Asian Crisis of 1997.

America’s Growing Informal Economy?

The US government’s deepening embrace of statism particularly economic and political fascism and the fast expanding unsustainable welfare state, financial repression and the burgeoning police state will likely not only fuel a diaspora for the wealthy but likewise drive the average Americans to operate on the informal or shadow economy.

Professor Gary North explains why, (bold emphasis added, hat tip Bob Wenzel)

Americans are learning how to beat the system, cheat the system, and outfox the system. As the bureaucrats tighten their many nooses, Americans are finding ways to slip the noose.

An article in Forbes offers examples. They are everywhere. Businesses are just ignoring the rules. They hire lawyers to help them avoid the law. They are fed up with the federal squid. They are not cooperating.

This is significant for the future. The heart of every legal system is legitimacy. If the government — family, church, or civil — is viewed as legitimate, people who are under its jurisdiction cooperate. They add self-government to external systems of sanctions. If they refuse to do this, the government’s enforcement system cannot force them to obey consistently. The system does not have enough resources to enforce compliance.

At some point, the government loses its ability to gain its goals. Collecting more taxes in Greece is not possible. The Greek government can promise austerity, but it can gain this only by reducing spending, not by collective more taxes. The same is true of Spain. The same is true of Italy.

If the people who live under the regime think the regime is corrupt, they cheat. They feel no guilt. If they think a law is immoral or stupid, they refuse to cooperate. The government can do little to change this outlook, other than shrink. No government does this voluntarily.

The federal government is now at the limit of enforcement. The bureaucrats write 83,000 pages of new rules every year, yet the country changes only slowly. The bureaucrats think they are in charge. They are not.

In reality, the informal sector is a manifestation of government failure. The more the arbitrary laws the lesser chances of enforcement, the susceptibility to corruption and of the gaming of the system by the politically connected all at the expense of society.

Yet if this dynamic should become a reality then this would signify as the Philippinization of the US.

Interesting signs of times.

Warren Buffett Sees Rising Municipal Bankruptcies

Obama crony Warren Buffett predicts that municipal bankruptcies will increase

From Bloomberg,

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. (BRK/A), said municipal bankruptcies are set to rise as there’s less stigma attached after three California cities opted to seek protection just weeks apart.

The City Council of San Bernardino, California, a community of about 210,000 east of Los Angeles, decided July 10 to seek court protection from its creditors. The move came just weeks after Stockton, a community of 292,000 east of San Francisco, became the biggest U.S. city to enter bankruptcy. Mammoth Lakes, California, also sought the shelter this month.

“The stigma has probably been reduced when you get very sizeable cities like Stockton or San Bernardino to do it,” Buffett, 81, said in an interview today on “In the Loop with Betty Liu” on Bloomberg Television. “The very fact they do it makes it more likely.”

Cities and towns across the U.S. have been strained by rising costs for labor, including pensions and retiree health benefits, while the longest recession since the 1930s crimped sales- and property-tax revenue.

I don’t think “stigma” has anything to do with the real issue of the unsustainable financial and economic conditions of the excessively (welfare and bureaucracy) bloated public sector, driven by Keynesian policies. As per Herb Stein’s Law, if something cannot go on forever, it will stop.

So goes with Munis.

Bernanke Doctrine: New York Fed Boasts of Pushing Up the US Stock Markets

Remember the following statement which I have quoted numerous times on this blog?

History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

Those came from Ben Bernanke when he was yet in the academe.

Nevertheless such priorities seems to have served as the guiding policy creed by the Bernanke led US Federal Reserve ever since he took on the helm.

Proof?

The New York Fed even brags about their supposed accomplishments: providing lift to the US stock markets.

From CNBC

A report from the Federal Reserve Bank of New York suggests that the bulk of equity returns for more than a decade are due to actions by the US central bank.

Theoretically, the S&P 500 would be more than 50 percent lower—at the 600 level—if the bullish price action preceding Fed announcements was excluded, the study showed.

Posted on the New York Fed’s web site Wednesday, the study sought out to explain why equities receive such a high premium over less risky assets such as bonds.

What they found was that the Federal Reserve has had an outsized impact on equities relative to other asset classes.

For example, the market has a tendency to rise in the 24-hour period before the release of the Fed’s statement on interest rates and the economy, presumably on expectations Chairman Ben Bernanke and his predecessor, Alan Greenspan, would discuss or implement a stimulus measure to lift asset prices.

The FOMC has released eight announcements a year at 2:15 ET since 1994. The study took the gains in the S&P 500 from 2 pm the day before the announcement to 2 pm the day of the statement and subtracted that market move from the S&P 500’s total return over that time span.

Without the gains in anticipation of a positive Fed action, the S&P 500 would stand at just 600 today, rather than above 1300. (bold emphasis mine)

So there you have it: the ultimate insider trading and manipulators of stock market.

This also implies that the FED’s priority has been to advance the interests of the financial markets (Wall Street, bankers and the financial industry) at the expense of the real economy (entrepreneurs).

Yet many carp about US trade deficits (mostly mercantilists), when it seems clear that policy directives of the US government has long been in the direction of the financialization of the US economy.

Bottom line: Each time the US stock markets will come under selling duress, expect Bernanke’s FED to throw in taxpayers money in support of equity shareholders.

China’s Economic Growth Slows Anew, Economic Data Questioned

China reported slower economic growth for the sixth consecutive quarter

From Businessweek/Bloomberg.

China’s growth slowed for a sixth quarter to the weakest pace since the global financial crisis, putting pressure on Premier Wen Jiabao to boost stimulus to secure a second-half economic rebound.

Gross domestic product expanded 7.6 percent last quarter from a year earlier, the National Bureau of Statistics said today in Beijing. The pace, a three-year low, compares with an 8.1 percent gain in the previous period and the 7.7 percent median forecast of economists. Industrial production increased at a slower pace in June while retail sales growth decelerated.

Today’s data painted a mixed picture from a pickup in fixed-asset investment that could signal the economy is stabilizing to the warning sign that electricity output failed to increase in June from a year earlier.

Yet the accuracy of China’s declared economic figures are being questioned.

From another Bloomberg article

The figures that go into China’s gross domestic product are “man-made” and “for reference only,” Li Keqiang, then a regional Communist Party head, said in 2007.

The comments by Li, now a vice premier who’s expected to become premier next spring, were revealed in a diplomatic cable published by WikiLeaks in late 2010. Li’s remarks are especially relevant as China announced today that the economy expanded 7.6 percent last quarter from a year earlier, the slowest pace in three years.

Investors, bankers and economists face a host of difficulties in interpreting the numbers from China’s statistics bureau, Bloomberg Businessweek reports in its July 16 issue. Combining all officially reported provincial GDP numbers for last year produces a total exceeding national GDP by about 10 percent, Ma Jiantang, head of the National Bureau of Statistics, said in February. Ma said that is due partly to double counting of items including factory production and that his bureau was trying to correct the issue…

One new effort to gauge the economy is the China Beige Book, a quarterly survey of about 2,000 bankers and company executives, modeled on the U.S. Federal Reserve’s Beige Book. It measures growth in eight key industries across China’s major regions, said Leland Miller, president of New York-based CBB International LLC, which publishes the report.

Chinese policy makers are trying to address the government’s statistical shortcomings. More data are now directly reported to Beijing, as opposed to being first filtered through local party offices. The statistics bureau has moved to standardize data collection by China’s many ministries and industrial associations.

The bureau has also worked with the United Nations, the International Monetary Fund and the Organization for Economic Cooperation and Development to improve its tracking of the economy.

China still tends to treat its data gathering as a national secret, said Anne Stevenson-Yang, co-founder of Beijing-based J Capital Research, which analyzes equities. She cited the government’s refusal to release the weighting of goods tracked to compile its consumer price inflation index.

Statistics can be manipulated to suit political goals.

Nevertheless, market price indicators—such as struggling commodity prices, falling yuan and faltering Chinese equity markets (Shanghai Index)—does not seem to be consistent with the above report.

Unreliable and contested figures only reveals of the extent of political impasse and adds to the uncertainty of current conditions.

Quote of the Day: The Salad Days of the Keynesian public sector economy are over

The salad days of the Keynesian public sector economy are over, so argues author Patrick Buchanan at the Lewrockwell.com

In the Reagan-Clinton prosperity, officials earned popularity by making commitments that could be met only if the good times lasted forever. They added new beneficiaries to old programs and launched new ones. They hired more bureaucrats, aides, teachers, firemen, cops.

Government's share of the labor force soared to 22.5 million. This is almost three times the number in the public sector when JFK took the oath of office. These employees were guaranteed job security and high salaries, given subsidized health care, and promised early retirement and pensions that the private sector could not match.

The balance between the private and public sectors shifted. As a share of the U.S. population, the number of taxpayers fell, as tax consumers – the beneficiaries of government programs and government employees who run those programs – rose.

The top 1 percent now pays 40 percent of the income tax. The top 10 percent pays 70 percent. The bottom half, scores of millions of workers, pay nothing. They ride free.

This could not go on forever. And when something cannot go on forever it will, by Stein's Law, stop. The Great Recession brought it to a stop. We have come to the end of the line.

U.S. cities depend on property and sales taxes. But property tax revenue has fallen with the collapse of the housing market. Sales tax revenue has fallen as a result of the recession that has kept the consumers out of the malls.

Revenues down, cities and counties face a choice. Raise taxes, or cut payrolls and services. But if taxes rise or workers are laid off and services decline, Americans in our mobile society move across city and state lines, as they are moving from California to Colorado, Nevada and Arizona.

This does not end the crisis, it exacerbates it.

Bankruptcy not only offers cities relief from paying interest to bondholders, it enables mayors to break contracts with public service unions. Since the recession began, 650,000 government workers, almost all city, county or state employees, have lost their jobs. Millions have seen pay and benefits cut.

The salad days of the public sector are over. From San Joaquin Valley to Spain, its numbers have begun to shrink and its benefits to be cut.

A declaration of bankruptcy by a few cities, however, has an impact upon all – for it usually involves a default on debts. This terrifies investors, who then demand a higher rate of interest for the increased risk they take when they buy the new municipal bonds that fund the educational and infrastructure projects of the solvent cities.

Cities and counties have no way out of the vicious cycle. Rising deficits and debts force new tax hikes and new cuts in schools, cops and firemen. Residents see the town going down, and pack and leave.

This further reduces the tax base and further enlarges the deficit.

Then the process begins anew.

This is what is happening in Spain and Greece, which have reached the early 1930s stage of rioting and the rise of radical parties.

Since the New Deal, Keynesianism has been our answer to recession. As the private sector shrinks, the pubic sector expands to fill the void until the private sector returns to health. Only Keynesianism is not working.

Contagion Risk: Singapore Economy Contracts

Well I have repeatedly been warning about the growing contagion risks from different dynamics: economic slowdown on multiple fronts (Eurozone, BRICs), political deadlocks (China, Eurozone), deceleration of money supply growth in the US and the continued dithering by central bankers of major economies.

And it seems that one big casualty from these has been Singapore.

From Bloomberg,

Singapore’s economy unexpectedly contracted last quarter as manufacturing fell, adding to signs of a deepening slowdown in Asian expansion as Europe’s debt crisis curbs demand for the region’s goods.

Gross domestic product fell an annualized 1.1 percent in the three months through June from the previous quarter, when it climbed a revised 9.4 percent, the Trade Ministry said in an e- mailed statement today. The median of 14 estimates in a Bloomberg News survey was for a 0.6 percent gain. The economy expanded 1.9 percent from a year earlier.

The Asian Development Bank cut its growth forecast for the region yesterday and South Korea unexpectedly reduced interest rates as it joined countries from Brazil to China in cutting borrowing costs in July. Singapore’s exports declined in May from the previous month, and a shrinking economy could put pressure on the central bank to ease monetary policy, according to Bank of America Corp.

It is important to point out that Singapore is an open economy where the % share of merchandise trade represents more than 300% of GDP

chart from Tradingeconomics.com

The implication is that the unexpected contraction in Singapore’s economy has been a manifestation of a deepening slowdown of economic activities around the world or at least in major economies influenced by the above forces.

Reality has been reasserting dominance against fading hope.

Reality versus Expectations: A Divided US Federal Reserve

A divided US Federal Reserve has been eroding expectations and hopes for the Bernanke PUT.

From the Bloomberg,

A few Federal Reserve policy makers said the central bank will probably need to take more action to boost the labor market and meet its inflation target, according to minutes of their June meeting.

“A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee’s goal,” according to the record of the Federal Open Market Committee’s June 19-20 gathering released today in Washington.

Deferment or reluctance to further inflate translates to a bursting of the asset bubbles—the RISK OFF environment.

The S&P 500 on a downdraft.

Yet once markets have fallen significantly enough they will likely reverse course and pursue aggressive inflationism.

Bank of Japan Adds Asset Purchases, Cuts Credit Facility

I have repeatedly been saying that expectations over central bank policies or their anticipated actions has recently driven the price movements of global stock markets.

Today, the Bank of Japan (BoJ) decided to take supposedly a ‘neutral’ stance: they will buy more assets but cut credit facilities by the same amount

From the Bloomberg,

The Bank of Japan refrained from adding monetary stimulus, bolstering its asset-purchase fund while cutting a credit-loan facility by the same amount.

The bank expanded its asset-purchase program to 45 trillion yen ($564 billion) from 40 trillion yen, according to a policy statement released in Tokyo today. Seven of 17 economists surveyed by Bloomberg News predicted monetary easing. The loan facility was cut to 25 trillion yen from 30 trillion yen.

Stocks fell after the decision, which came after South Korea’s central bank unexpectedly lowered borrowing costs amid signs of slower global growth. Japanese Finance Minister Jun Azumi this morning called for more support from the central bank for growth and inflation to meet a 1 percent price goal…

The BOJ pledged to increase its purchases of short-term public debt, according to today’s statement. Previous enhancements to the program had been mostly for long-term government bonds.

Japan’s central bank kept its benchmark interest rates between zero and 0.1 percent and monthly bond purchases at 1.8 trillion yen, the bank said in the statement today.

Here is what I earlier said,

if central bankers FAIL to deliver in accordance to market’s expectations, then we will likely see another huge bout of downside volatility in global equity markets

The Nikkei fell 1.48% today.

This proves that Japan’s stock markets has been thriving on the inflation steroids and that looking for scapegoats such as insider trading has only served as political diversion.

This also confirms my suspicions about the BoJ’s veiled support of the banking and financial system, through more asset purchases, whom are the largest owners of the Japanese Government Bonds (JGB) and of the growing risk of Japan’s gargantuan debt quagmire.

For as long as central bankers stay on sidelines or resort to measures that fall short of market’s expectations we should expect reality to sink in. This should extrapolate to more selling pressures on the global equity markets.

Be careful out there.

Quote of the day: The Market Doesn’t Reward Greed, It Punishes It

Naked greed does not maximize corporate profits. Customers do not have full information about product quality, so they must trust their suppliers. When a corporation like GlaxoSmithKline (GSK) gets caught cheating its customers ( by suppressing information about negative side effects of one of its drugs), the gain in extra profits from cheating on this one drug is surely more than offset by the loss in profits on all drugs (from the damage to GSK’s reputation as a trustworthy supplier).

Contrary to popular wisdom, the market doesn’t reward greed, it punishes it.

This is from Professor William Easterly at the NYU Development Research Institute

China’s Oil Imports Slump, Gold Imports Soar

A slump in oil imports could also be an indicator of slowing economic growth and perhaps the end of China’s hoarding of strategic reserves.

Notes the Zero Hedge, (bold original)

Following months of ever higher Chinese imports, no doubt predicated by stockpiling and hoarding reserves, in June Chinese crude oil imports plunged from over 25 million metric tons to 21.72 MMTs, the lowest since December, or about 5.3 million barrels a day, down over 10% from the previous month's record import. While the number was still quite higher than the 19.7 million tons, the sudden drop is concerning, especially since the price of Brent slid materially in June, and if anything should have resulted in even more imports if indeed China was merely stockpiling crude for its new strategic reserve facilities. Which begs the question: was the demand actually driven by the economy, and just how bad is the economic slowdown over the past month if not even stockpiling at preferential prices can offset the drop in end demand?

From Dow Jones:

China's refineries may process less crude in the third quarter due to weaker domestic demand for diesel, which has led to persistently high stockpiles and steady exports from the country's largest refiner, China Petroleum & Chemical Corp, or Sinopec Corp.

The country's crude throughput declined in both April and May, falling 0.3% and 0.7%, respectively, compared with the corresponding months a year earlier.

Weaker demand for diesel, a primary driver of refinery output, has tracked China's economy, which has slowed for five consecutive quarters. Manufacturing activity in June grew at its slowest pace since November.

Meanwhile gold imports through Hong Kong has been soaring

Again from Zero Hedge (bold original)

There are those who say gold may go to $10,000 or to $0, or somewhere in between; in a different universe, they would be the people furiously staring at the trees. For a quick look at the forest, we suggest readers have a glance at the chart below. It shows that just in the first five months of 2012 alone, China has imported more gold, a total of 315 tons, than all the official gold holdings of the UK, at 310.3 according to the WGC/IMF (a country which infamously sold 400 tons of gold by Gordon Brown at ~$275/ounce).

From Bloomberg:

In May, imports by China from Hong Kong jumped sixfold to 75,635.7 kilograms (75.6 metric tons) from a year earlier, Hong Kong government data showed. The nation “remains the most important player on the global gold market,” Commerzbank AG said in a report. The dollar fell from a five-week high against a basket of currencies, boosting the appeal of the metal as an alternative investment.

“Higher physical demand in China is good news for the market,” Sterling Smith, a commodity analyst at Citigroup Inc.’s institutional client group in Chicago, said in a telephone interview. “The mildly weak dollar is also positive.”

The World Gold Council has forecast that China will top India this year as the world’s largest consumer because rising incomes will bolster demand.

And those looking at the trees will still intone "but, but, gold is under $1,600" - yes it is. And count your lucky stars. Because while all of the above is happening, Iran and Turkey have quietly started unwinding the petrodollar hegemony. From the FT:

According to data released by the Turkish Statistical Institute (TurkStat), Turkey’s trade with Iran in May rose a whopping 513.2 per cent to hit $1.7bn. Of this, gold exports to its eastern neighbour accounted for the bulk of the increase. Nearly $1.4bn worth of gold was exported to Iran, accounting for 84 per cent of Turkey’s trade with the country.

So what’s going on?

In a nutshell – sanctions and oil.

With Tehran struggling to repatriate the hard currency it earns from crude oil exports – its main foreign currency earner and the economic lifeblood of the country - Iran has began accepting alternative means of payments – including gold, renminbi and rupees, for oil in an attempt to skirt international sanctions and pay for its soaring food costs.

“Iran is very keen to increase the share of gold in its total reserves,” says Gokhan Aksu, vice chairman of Istanbul Gold Refinery, one of Turkey’s biggest gold firms. “You can always transfer gold into cash without losing value.”

Turkey’s gold exports to Iran are part of the picture. As TurkStat itself noted, the gold exports were for “non-monetary purpose exportation”. Translation: they were sent in place of dollars for oil.

Iran furnishes about 40 percent of Turkey’s oil, making it the largest single supplier, according to Turkey’s energy ministry. While Turkey has sharply reduced its oil imports from Iran as a result of pressure from the US and the EU, it is unlikely to cut this to zero. The country pays about $6 a barrel less for Iranian oil than Brent crude, according to a recent Goldman Sachs report.

According to Ugur Gurses, an economic and financial columnist for the Turkish daily Radikal, Turkey exported 58 tonnes of gold to Iran between March and May this year alone.

None of these looks anywhere a good news.

Gold prices, at present, may partly have been driven by the Iran sanction dynamic but I think that China may have been insuring themselves from risks of a currency crisis through the stockpiles of gold and oil.

Nonetheless I am not sure if the slump in oil imports represents an anomaly or an indication of a deepening slump in the economy and or may have redirected some of that money to the stimulus directed towards state owned enterprises.

Interactive Graphic: Beyond Bailouts, What is Cronyism?

Writes Matthews Mitchell, research fellow at the George Mason University (interactive graphics included) [hat tip Scott Lincicome]

While the bailouts of hundreds of firms in 2008 are, for many, the most prominent example of cronyism in modern American history, they are only the tip of the iceberg. Bailouts are but one example in a long list of privileges that governments give to particular businesses and industries.

Scroll over each form of cronyism to learn more, and read the full paper "The Pathology of Privilege: The Economic Consequences of Government Favoritism."

Video: How Cronyism Hurts the Economy

Another insightful video from LearnLiberty.org

Here is their summary:

It is clear big businesses wield great control over the federal government. How do we stop this so-called crony capitalism, or collusion? Professor Jason Brennan argues that while it may seem paradoxical the best solution is to limit government power. He provides two reasons for this. First, the power to "regulate the economy" is really the same thing as the power to distribute favors, which corporations will inevitably seek. Second, regulations actually benefit big businesses at the expensive of small businesses. Less government power means corporations have less power to compete for, fewer privileges to seek, fewer subsidies to enjoy, and no agencies to capture.

In short: Interventionism is the father of cronyism

Libertarian Legacies of Henry Hazlitt and Leonard Read…

…in the account of Professor Gary North at the lewrockwell.com

Henry Hazlitt…

Like so many people who came to an understanding of the free market in the 1950s and 1960s, Henry Hazlitt was an influential figure. He had been an influential figure for at least 30 years. He is most famous for his book, Economics in One Lesson, which he wrote in 1946. But he was a New York Times columnist at the time he wrote that book. H. L. Mencken once said that Hazlitt was the only economist who knew how to write.

Hazlitt never went to college. He wrote his first book, Thinking as a Science, when he was 20 years old. That was the same year that he went to work for the Wall Street Journal. That was in 1915. To say that Hazlitt had a long writing career does not begin to convey just how long it was. His final article was published in 1988. He died in 1993 at the age of 98.

I did not meet him until I went to work for the Foundation for Economic Education in 1971. But I had been reading his materials ever since the late 1950s. I was a latecomer in this process. It is safe to say that anyone who called himself a libertarian in 1960 had been influenced, directly or indirectly, by Hazlitt. I suspect that this is still true.

Hazlitt was one of the early American promoters of the writings of Ludwig von Mises. He was convinced in the late 1930s that Mises was right, and that the New Deal was wrong. He wrote a positive review of Mises's book, Socialism, for the New York Times Book Review in 1938. This book had been published in South Africa in 1936, although it had been available in German since 1922. I think it is safe to call him an early adopter. He understood the magnitude of what Mises had been teaching long before most American economists had read Mises's books.

Hazlitt's critique of John Maynard Keynes, published in 1959, The Failure of the 'New Economics,' is a comprehensive and thoroughly readable critique of Keynes's General Theory. It was ignored by the academic profession, possibly because it was so thorough in its criticisms, but probably because Hazlitt was noted as a financial journalist, not as a professor of economics somewhere. He did not have the right credentials, so the academic community ignored him. I don't think this bothered him in the slightest.

He was always enthusiastic. He was always extremely lively. In this sense, he reminded me of Murray Rothbard and Burt Blumert, the co-founder of the Center for Libertarian Studies. I never saw him dejected in any way.

I suppose my best recollection of him was late in his life, when he was in a retirement home. At his age, there were not many men in the home. He remarked, twinkle in his eye, that a lot of the ladies in the home made a fuss over him. Then, coming to his senses, he added, "but don't tell Frances." Frances was Mrs. Hazlitt. He was altogether a sensible man.

Again, the lesson is clear: stick to your knitting, and stick to your guns.

Leonard E. Read…

If anyone deserves the title of the founder of libertarianism, it is Read. He was a born promoter. He was the head of the Chamber of Commerce in Los Angeles in the 1930s. He had never gone to college. He was an effective speaker, and in later years, he proved to be an effective writer. He was never a back-slapper, but he was never confrontational, either.

His story of how he was converted to a free market position made an impression on me. He had gone to see the head of the Pacific Gas and Electric Company, William Mullendore. He went there, as he said, "to straighten out this fellow." By the time he had spent a couple hours being taught the principles of voluntarism, he realized that the worldview which he had held when he walked in the door was wrong.

From that day on, he was not really in alignment with the Chamber of Commerce. The chamber was always ready to promote government intervention in favor of business. From that fateful meeting onward, Leonard Read was not.

A decade later, he turned down a job heading the International Chamber of Commerce, which would have paid him $100,000 a year, which in 1946 was a fortune. Instead, he started the Foundation for Economic Education. He had contacts with rich men because of his time spent in the Chamber, but he always attempted to establish a broad-based support for the organization. FEE was not a rich men's plaything. In 1956, he launched the magazine which served as the major source of recruiting for the libertarian movement for the next 20 years: The Freeman. William F Buckley had wanted to buy it, but Read owned the name, and a year after Buckley started National Review, FEE started publishing The Freeman.

While Read was not a trained economist, he had a very clear understanding of how free markets operate. He wrote an article which I regard as the finest statement of the principle of the division of labor that has ever been written. It is called "I, Pencil." It is the story of how nobody knows how to make a pencil. A simple pencil is such a complex device that it takes coordination and cooperation beyond anyone's ability to comprehend in order to produce a simple pencil.

This insight has persuaded an untold number of people of the power and creativity of the free market. What was also creative about the article is that he wrote it as a narrative given by a pencil. He listed his own name only with these introductory words: "as told to."

He also wrote a classic little book, which is unfortunately out of print, Elements of Libertarian Leadership. He wrote many other books, and numerous collections of essays. He never stopped writing, almost until the day he died at the age of 84.

Here is the same lesson: stick to your knitting, and stick to your guns. He turned down a lot of money in 1946 to do this.

Both libertarians were not trained economists; Hazlitt even “never went to college”, yet both came out with classic economic books and articles. Bottom line: economics can be self-learned. Try the Mises Institute

Shoot the Messenger: Japan Authorities Targets Insider Trading

When markets don’t go in the way the politicians want them to, the intuitive reaction for politicians has been to shoot the messenger.

From the Bloomberg,

Japan’s crackdown on insider trading barely scratches the surface of a practice that allows traders to profit and brokerages to boost their underwriting business at the expense of shareholders and issuers.

The disclosures have undermined confidence in the world’s second-largest stock market, where the Nikkei 225 Stock Average (NKY) remains 77 percent below its 1989 peak and scandals such as the accounting fraud at Olympus Corp. and covered-up losses at AIJ Investment Advisors Co. deter investors from a waning economy.

In the five insider-trading cases uncovered since March, regulators have proposed fines for traders who short sold shares based on information leaked to them by underwriters before public offerings were announced in 2010. The revelations prompted at least two clients of Nomura Holdings Inc. (8604) to take their business elsewhere after Japan’s biggest brokerage acknowledged the breaches by its sales staff.

“Japan has been letting the animals run wild for two or three years now -- that wouldn’t happen in the U.S.,” said Takao Saga, a professor who studies the financial industry at Waseda University in Tokyo. “Insider trading is still going on in the Japan market.”

With the latest actions, the Securities and Exchange Surveillance Commission and its parent, the Financial Services Agency, are keen to show they are cracking down after it took them nine years to discover AIJ hid losses that reached $1.4 billion on pension money it managed. Olympus admitted to a $1.7 billion, 13-year coverup of losses after former President Michael Woodford blew the whistle last year on inflated fees the camera maker paid for takeovers.

Hindering Fundraising

Authorities are paying attention now because short selling by insiders is hindering corporate fundraising, not just burning investors who aren’t privy to the tips, according to consultant Robert Boxwell. The transactions involve traders selling borrowed shares, betting that the price will fall once the offerings become publicly known on concern over dilution.

“These types of insider trades cost Japan Inc. money,” said Boxwell, 54, who has lived in Japan and now studies global insider trading as director of consulting firm Opera Advisors in Kuala Lumpur. In Japan, “after years of ignoring protests from the West about cleaning up their act, they’re talking tough.”

Never mind if Japanese authorities have stubbornly refused or has procrastinated in adapting the necessary reforms and instead opted to prop up zombie institutions.

Such failure to reform has not only led to more than three decade slump in the Nikkei 225 (chart from yahoo), but also has put tremendous strains on Japan’s fiscal (debt) conditions.

Nevertheless, Japan’s authorities has joined their western peers to do more of the same thing, of escalating inflationism, which has led to their self perpetuating crisis. The Bank of Japan has even been supporting her stock markets, apparently, to no avail.

Japanese authorities repeatedly failed to comprehend that the root of their problem has not been insider trading but of having too much interventionism or excessive politicization of their markets and their economy

They should heed the prescient admonitions of the great Professor Ludwig von Mises,

The various measures, by which interventionism tries to direct business, cannot achieve the aims its honest advocates are seeking by their application. Interventionist measures lead to conditions which, from the standpoint of those who recommend them, are actually less desirable than those they are designed to alleviate. They create unemployment, depression, monopoly, dis­tress. They may make a few people richer, but they make all others poorer and less satisfied.

Shooting the messenger and witch hunting won’t solve the problem of productivity, competitiveness and fiscal discipline. They are symptoms of the growing desperation of political authorities

To the contrary such repressive measures would only worsen the situation.

Quote of the Day: David versus Goliath: Why Underdogs Win

Famed author Malcolm Galdwell talked about his new book “David and Goliath” and has been quoted by the Business Insider (bold original)

The crux of Gladwell's argument is that "underdogs win all the time, more than we continue to think," he told Thompson. "Traits that we consider to be disadvantages aren't disadvantages at all. ... As a society, we depend on damaged people far more than we realize. ... They're capable of things the rest of us can't do [because] they look at things in different ways."

Gladwell says that through his research he found that "'Goliath' only wins 66 percent of the time — which is first of all astonishing — so 34 percent of time someone who is one-tenth the size of his opponent wins. That blew my mind."

Underdogs who win refuse to compete by the same standards as their opponent; instead they use an entirely different strategy that exploits their stronger opponent's weaknesses. In business, this is essentially the judo strategy, or a way of disruptive innovation.

In the field of investment, I would add that underdogs are commonly known as the “contrarians” and are likely to have much greater odds of winning than the mainstream because of their ability to think independently and think 'outside the box' by going against the crowd and by challenging the conventional thinking or wisdom.

Steve Forbes on How to Bring Back America

Media mogul Steve Forbes of the Forbes magazine recently interviewed by the Hera Research Newsletter gives his prescription for the restoration of America: Gold Backed Dollar, Simplified Tax Code and the return to a free market

From Hera Research Newsletter (Hat tip Zero Hedge)

The Hera Research Newsletter is pleased to present an incredibly powerful interview with Steve Forbes, Chairman and Editor-in-Chief of Forbes Media. The company’s flagship publication, FORBES, is the leading business magazine. Combined with international and licensee editions,FORBES reaches more than 6 million readers worldwide. The Forbes.com website is a leading destination for senior business decision-makers and investors with more than 30 million unique visitors per month.

Hera Research Newsletter (HRN): Thank you for joining us today. With the U.S. economy struggling to recover from recession and financial crisis, what policies would you recommend?

Steve Forbes: The only way to recover is to stabilize our money, have a gold backed dollar, simplified tax code and return to a free market.

HRN: You advocate the gold standard?

Steve Forbes: If there’s any better system to ensure a stable value for money, it’s yet to be found. For nearly all of America’s first 200 years, the dollar was linked to gold. Since we went off the gold standard, we’ve had more and more financial, economic and banking crises. For example,if the Federal Reserve hadn’t started to print so much money ten years ago, we wouldn’t have experienced the housing bust or the commodities boom or the sovereign debt crisis in Europe. Eventually, events become a persuasive teacher.

HRN: Don’t we need a flexible money supply?

Steve Forbes: That’s like saying that changing the number of minutes in an hour would be a great tool to increase productivity in the economy. Manipulating weights and measures, whether it’s the number of ounces in a pound or minutes in an hour, is a false way to think that you can achieve prosperity. All gold does is serve as a yardstick to measure the value of your currency.

HRN: Doesn’t increasing the money supply help to stimulate the economy?

Steve Forbes: The only way to increase prosperity is through innovation and productivity. Attempts to manipulate the value of money invariably fail. We’ve had numerous devaluations, and not once has it created lasting prosperity.

HRN: Under the gold standard, would there still be a lender of last resort to backstop the banking system?

Steve Forbes: The gold standard doesn’t prevent lending during a panic. The Bank of England pioneered acting as a lender of last resort in the 1860s under the gold standard.

HRN: Wouldn’t the gold standard prevent financial innovation?

Steve Forbes: No. Financial innovation has been with us for hundreds of years in terms of new financial instruments to meet expanding needs as the global economy becomes more complex. Many of the innovations of recent years, however, have come about in response to the instability of the dollar and other currencies, which has increased volatility in currency and commodity markets. New instruments have been designed either as insurance against volatility or to take advantage of it. If you had stable money, there would be much less hedging and financial speculation.

HRN: Can governments function under the gold standard?

Steve Forbes: Certain countries feel free to spend money whether they have it or not. Fiat money, which can just be printed up, has disguised the real cost. We would never have experienced the kind of government borrowing we’ve had in recent years if we’d had stable money. The gold standard would keep the government honest.

HRN: Doesn’t government deficit spending smooth over recessions?

Steve Forbes: The bottom line for the U.S. is that a weak dollar means a weak recovery. Stability is good for the economy. The simplest thing to do is to re-link the U.S. dollar to gold.

HRN: Wouldn’t that tie the hands of the Federal Reserve?

Steve Forbes: Tie their hands to do what, further harm to the economy? I don’t think that’s such a bad thing.

HRN: Isn’t the price of gold volatile like other commodities?

Steve Forbes: The reason to return to the gold standard is that gold maintains a stable, intrinsic value over time. Stable money meets all conditions. Gold doesn’t change in value. Currencies change in value. Gold is Polaris.

HRN: How would re-linking the U.S. dollar to gold work?

Steve Forbes: You simply peg the value of the dollar to gold. Let’s say, for argument’s sake, you peg the dollar to gold at $1,600 per ounce. If gold goes above $1,600, you tighten up on money creation. If it goes below $1,600, you ease up. You keep it around $1,600 by tightening or easing up on money creation. The gold standard doesn’t preclude a booming economy having more money or a stagnant economy having less money.

HRN: Isn’t the gold standard deflationary?

Steve Forbes: No. The gold standard is neither inflationary nor deflationary. It’s like the mile: There are 5,280 feet in a mile; it’s a fixed length. That doesn’t restrict the number of miles of highway you can build. Between 1776 and 1900 the U.S. grew from a small, agricultural nation of 2.5 million people to a nation of 76.2 million people, and it became the greatest industrial power on earth. The money supply went up about 160-fold while the dollar was pegged to gold.

HRN: Wouldn’t the gold standard severely limit leverage in the financial system?

Steve Forbes: If you’re a worthy borrower, you can borrow at the market interest rate; if you’re an unworthy borrower, you have to pay a higher interest rate or you can’t get money. The gold standard would have prevented the wild lending and money creation we’ve experienced in the last few years, which has led to disaster. You can see it in the housing bubble and in the European government debt bubble. None of these things could have happened had we had stable money.

HRN: Is the Utah Legal Tender Act, which makes gold and silver legal in Utah, helpful?

Steve Forbes: I’m in favor of the states trying to get away from the Federal Reserve’s play-money approach. The key is for the next President to institute a gold-linked dollar policy.

HRN: Do competing currencies make sense?

Steve Forbes: The idea of a parallel currency is a perfectly good one. People would come to prefer a dollar based on gold rather than a dollar based on politicians.

HRN: Do you also suggest using silver as money?

Steve Forbes: The Chinese and other cultures have used silver as money, but silver doesn’t maintain its value the way gold does. Over time it takes more silver to buy an ounce of gold. About 120 years ago it took 15 ounces of silver to buy 1 ounce of gold. Today it takes more than 50 ounces. That’s why the U.S. moved away from a bi-metallic standard to the gold standard. One metal becomes more valuable than the other at different times. Silver is better than fiat money, but there’s only one gold standard.

HRN: Would the gold standard help the U.S. economy to recover?

Steve Forbes: In the 1980s, when we had very high unemployment and a stagnant economy, the way out was through a strong dollar, lower income taxes, entrepreneurship and new wealth creation. Remember, the values of assets go up when people see a future. They don’t today.

HRN: We didn’t have the gold standard in the 1980s.

Steve Forbes: Ronald Reagan killed the terrible inflation of the 1970s and sharply reduced income tax rates. Reagan wanted a return to the gold standard, but none of his advisors believed in it. Inflation was effectively killed by high interest rates. Deregulation was pushed forward, and America roared. In 1982, the Dow bottomed at 776; over the next 18 years it went up 18-fold.

HRN: You advocate cutting taxes?

Steve Forbes: Yes, and we should put in a flat tax. The advantage of the flat tax is that it enables people to focus on real things. Abraham Lincoln’s Gettysburg Address, which defines the character of the American nation, is all of 272 words. The Declaration of Independence is a little more than 1,300 words. The Constitution of the United States and all of its amendments are a little more than 7,000 words. The Bible, which took centuries to put together, is a mere 773,000 words. The U.S. federal income tax code—with all of its cross-references, descriptions of amendments and effective dates—is probably now in excess of 4,000,000 words. Nobody knows what’s in it. Last year the IRS announced that Americans spent 6.1 billion hours filling out tax forms and $300 billion on tax preparation. This is a huge waste of resources and brain power. Not to mention that it’s a corrupting influence. It’s a huge source of government power, and it brings out the worst in us. The sooner we get simplicity—and a flat tax would give us that—the more energy we can devote to productive pursuits.

HRN: How could the U.S. transition to a flat-tax system?

Steve Forbes: Since people get hung up on their deductions, we would institute a flat tax and give people the option of filing either under the new, simple system or the old, horrific system. If you’re a masochist and want to punish yourself, you can file under the old income tax system. If you want the simplified one, you can go with that. I think 99% of Americans, out of sheer convenience, would quickly switch to the new system.

HRN: You mentioned deregulation. How would that help the U.S. economy?

Steve Forbes: Take health care, for example. We don’t have a free market in health care. There’s a disconnect between patients and health care providers. If you go to a hospital and ask how much something costs they’ll look at you strangely because they think you’re either uninsured or a lunatic. How many hospitals put the prices of procedures on their websites? It’s like going into a restaurant and having no idea how much anything on the menu costs. It’s a crazy system.

HRN: How would you go about deregulating health care?

Steve Forbes: First, we should repeal the Patient Protection and Affordable Care Act—Obamacare—which is an abomination. Patients should have more choice. The insurance companies don’t compete freely for business. We should allow people to shop nationwide for health insurance. I live in New Jersey, which has a lot of senseless regulations. Why can’t I buy a health insurance policy in Pennsylvania that costs less? We should equalize the tax treatment of health care expenses. If you’re a business or are self-employed, you should be able to deduct the expense. And individuals should be free to go into the market and pay with after-tax dollars. We should make it easier for small businesses to form a collective to buy health insurance. There are a lot of simple things that could be done.

HRN: Do free markets really work?

Steve Forbes: Free markets, with sensible rules of the road, can do all the things that big government advocates say the government does but that it really can’t do. Free markets enable people to move out of poverty and break down barriers between ethnic groups and between nations. Free markets increase cooperation and foster a sense of humanity. Everything that big government says it will do, you get more from free markets than from government bureaucracies. Which one has a better future, FedEx or the U.S. Post Office? Do you want food stamps or paychecks? Big government makes a lot of promises, but it’s short sighted. Government is about meeting its own needs at the expense of the nation, and it’s immoral. Free markets have gotten a bad rap, which happens to be the subject of my new book.

HRN: The Federal Reserve recently announced that it will extend its “Operation Twist” program by $267 billion through the end of 2012. Will that help the U.S. economy?

Steve Forbes: No. The more Federal Reserve Chairman Ben Bernanke messes up, the more he’s hailed as a savior. The Federal Reserve’s programs—quantitative easing 1 and 2 and Operation Twist—are just fancy words for printing up more money. It’s a bunch of smoke and mirrors. They’ve done a lot of damage already, and they’re continuing to. What they’re doing is dangerous. Not only has the Federal Reserve created a lot of money and vastly expanded its balance sheet but, along with the U.S. Department of Treasury, it has dramatically shortened the maturity of U.S. government debt.

HRN: What do you mean when you say that the Federal Reserve has done a lot of damage?

Steve Forbes: By keeping interest rates artificially low, Chairman Ben Bernanke is cheapening the dollar, which punishes savers and harms future investment. It distorts financial markets and misdirects investments into things like creating the housing bubble. It subsidizes government borrowing at the expense of the rest of us. It’s the equivalent of a cut in pay for workers. Let’s say you’re earning $20 per hour and the government cheapens the dollar; then, in effect, you’re making $15 per hour. It violates contracts and undermines social trust.

HRN: What should Chairman Bernanke do instead?

Steve Forbes: Other than resign, Chairman Bernanke should realize that the gold standard works and that when you deviate from it, you create more and more uncertainty. He should re-link the dollar to gold. Doctors used to treat patients by bleeding them. Bernanke just keeps bleeding the economy.

HRN: Thank you for being so generous with your time.

Steve Forbes: Thank you.

Hera Research, LLC, provides deeply researched analysis to help investors profit from changing economic and market conditions. Hera Research focuses on relationships between macroeconomics, government, banking, and financial markets in order to identify and analyze investment opportunities with extraordinary upside potential. Hera Research is currently researching mining and metals including precious metals, oil and energy including green energy, agriculture, and other natural resources. The Hera Research Newsletter covers key economic data, trends and analysis including reviews of companies with extraordinary value and upside potential.