Tuesday, November 30, 2010

Banking Experiment

I've written before about the insolvency of banks. As such, it makes little sense to leave all of one's money in the bank; certainly one should have at least enough cash on hand to provide for basic necessities should we face a bank holiday--which would be the predictable reaction by the government to defend their banking buddies in the event of a run on the banks.

As such, I've started extracting some of my money from one of the banks. It will be interesting to see how many days of consecutive withdrawals from the ATM before I am contacted by one of the banking heads. Updates to follow.

Saturday, November 27, 2010

Weekly Column - 11/27/2010

Here's this week's column:

"The will of man is not shattered, but softened, bent, and guided; men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which the government is the shepherd." – Alexis de Tocqueville, Democracy in America

Perhaps nowhere was the Frenchman so prescient as in his chapter titled "What Sort Of Despotism Democratic Nations Have To Fear." He did not expect a single tyrannical overlord, whose reach was violent but limited. Rather, he envisaged an overarching bureaucracy which would instill docility into the people by severely restricting the range of acceptable actions.

The sterling example of the soft despotism facing Americans is the policy of the TSA. With the advent of the new porno-scanners, documentation of abuse by government thugs began to trickle out over the Internet. At first, it was just libertarian sites; my inclination to write about the matter was suppressed out of a belief that the procedures would be tolerated, albeit begrudgingly, by a formerly free people. But when the stories began to appear on the Drudge Report, it became clear that I was wrong: this story had legs. The TSA had over-reached and now faced the prospect of revolt.

Tuesday, November 23, 2010

Weekly Column - 11/23/2010

Here's this week's column:

"The expectation of a general progressive upward movement of all prices does not bring about intensified production and improvement in well-being. It results in the "flight to real values," in the crack-up boom and the complete breakdown of the monetary system." – Ludwig von Mises, Human Action

As a principled non-voter, I watched with amusement as liberals writhed in agony while conservatives rejoiced during another "historic" election. The following day, Ben Bernanke revealed to all how little Congress—and, by extension, if only in theory, the people—has to do with the goings on in Washington. Helicopter Ben felt that inflation was too low; we thus risked deflation, which he believes is the worst thing that could ever happen to an economy. He was insisting on another round of quantitative easing, which is not something one does after consuming too much Taco Bell, but is a fancy of way of saying that he was going to print some money. Since the two trillion he quantitatively eased two years ago was so effective at leaving the country mired in recession, he figured another six hundred billion should do the trick.

The Federal Reserve operates in near total secrecy—ostensibly to prevent the politicization of monetary policy—but we know that in the latest round, William C. Dudley, president of the Federal Reserve Bank of New York, bought treasury bonds from Goldman Sachs, which charges a higher rate than the Fed would receive if it bought the treasury bonds from the treasury. The confusion is cleared up when one realizes that Dudley worked for Goldman Sachs from 1986 to 2007. Just think of Dudley as the banking equivalent of Dick Cheney, granting fat contracts to his pals at Haliburton.

Sunday, November 14, 2010

Weekly Column - 11/13/2010

This week's column:

"Now civilizations, I believe, come to birth and proceed to grow by successfully responding to successive challenges. They break down and go to pieces if and when a challenge confronts them which they fail to meet." – Arnold J. Toynbee, Civilization on Trial

Thus speaks the master historian. The challenge which now faces the west is neither political nor economic: it is spiritual. This is not to say that there are no political or economic problems. But these are secondary; they are also inexorably tied to the west’s existential crisis. To put the matter bluntly, the West has lost faith in itself. Like the noble pagans Dante meets in limbo, "without hope we live on in desire."

Historians like Toynbee have read widely, seeking to find, if not laws, at least general principles by which civilization must abide if it wishes to preserve itself. But we need not be historians to realize that the bare minimum a people must do in order to survive is to birth another generation of children and raise them to adulthood. Whether or not these in turn will prove capable of whatever challenges that civilization faces is a matter of speculation. We need only concern ourselves with the fact that another generation is brought into existence. In this most essential mission, the nations of the west are failing spectacularly, as each nation in Europe, as well as Canada and the United States, has a birth rate below replacement level. The west is dying.

Monday, November 08, 2010

Weekly Column - 11/08/2010

Here's this week's column:

"The Pledge [to America] puts forth a clear plan to end the current uncertainty, starting with stopping all looming tax hikes so that small businesses can get back to creating jobs. This is followed by a blueprint for fiscal sanity that begins with cutting spending to pre-"stimulus," pre-bailout levels, a move that will save taxpayers $100 billion in the first year alone." – John Boehner, Why You Should Vote For Republicans

Thus wrote the new republican majority leader on the eve of the election which propelled him and his party out of the political wilderness and back into some semblance of power. It would have been better to have written nothing at all. When it comes to fiscal responsibility, the republicans are no different from the democrats, as these statements prove. Boehner’s party is as serious about reducing government as Pelosi’s was sincere about ending the wars.

Tuesday’s election was about one man: Barack Obama. Voters were unimpressed with the first two years of his term—during which the economy tanked, deficits grew boundlessly, and billions were meted out to those with political connections, without appreciably reducing unemployment—and they sought to take it out on his party. Whether or not this is fair is beside the point. Whatever further legislative plans are up his sleeve, the president must now contend with a house dominated by republicans.

Sunday, November 07, 2010

Keynes - The General Theory - Chapter VII

Section I: Keynes defines savings for us: "So far as I know, everyone agrees in meaning by Saving the excess of income over what is spent on consumption."

Fair enough. He then explains how, although savings and investment are equal--he states that they are identical, though in not so many words, in the previous chapter--an apparent inequality may come about: "Thus the differences of usage arise either out of the definition of Investment or out of that of Income."

Section II: He then defines investment for us: "In popular usage it is common to mean by this the purchase of an asset, old or new, by an individual or a corporation. Occasionally, the term might be restricted to the purchase of an asset on the Stock Exchange. But we speak just as readily of investing, for example, in a house, or in a machine, or in a stock of finished or unfinished goods..." Disinvestment is thus the opposite, namely, the selling of an investment.

Although Keynes seems to be aware of this, the distinction between goods to be consumed and those to be resold--investments--is very blurry. I don't see that it changes his definitions.

On a graver note, it is obvious that, according to these definitions, savings does not equal investment. I have some cash in my wallet, and I have money in a checking account. Neither of those could be construed as investments, according to Keynes's definition, though both are assuredly savings.

Continuing, he writes: "Investment, thus defined, includes, therefore, the increment of capital equipment, whether it consists of fixed capital, working capital or liquid capital; and the significant differences of definition (apart from the distinction between investment and net investment) are due to the exclusion from investment of one or more of these categories."

Unless I missed something, Keynes does not include liquid capital in his definition of investment. So by his own standard, the equality fails. Or, I should say, by one of his standards, it fails. There is still much confusion in trying to understand what Keynes means by his terms.

In this section, Keynes mentions the Austrian school, with which he was probably familiar from his time spent with his friend F. A. Hayek. But if he was aware of the school's existence, he demonstrates that he did not appreciate the importance its adherents laid on the role savings plays in the accumulation of capital: "The statement, for example, that capital formation occurs when there is a lengthening of the period of production does not much advance matters."

Section III: Keynes introduces us to the term "normal profit", which I do not see defined. He claims that this accounts for the discrepancy between income and savings which he postulated in one of his previous books. But the problem is far bigger than that.

We've constantly referred to the confusing nature of Keynes's prose. Here's a prime example: "As I now think, the volume of employment (and consequently of output and real income) is fixed by the entrepreneur under the motive of seeking to maximise its present and prospective profits (the allowance for user cost being determined by his view as to the use of equipment which will maximise his return from it over its whole life); whilst the volume of employment which will maximise his profit depends on the aggregate demand function given by his expectations of the sum of the proceeds resulting from consumption and investment respectively on various hypotheses."

If anyone can explain what that may mean, I would be indebted to you. I am wholly unable to extract value from this section, so I move onward.

Section IV: We come to the concept of "forced savings." The general idea here is clear: something alters the purchasing power of the wage-unit, thereby increasing savings. Keynes, of course, connects it, with the help of his confusing terminology, to the coordinated efforts of entrepreneurs to maximize employment, but this need not concern us.

While it is true, in a certain sense, that if the purchasing power of the currency were to rise due to a general reduction in prices, this would be "forced savings", this is misleading. For one, there is no compulsion: the consumer may divest himself of these forced savings by purchasing items. For another, if a consumer can suddenly get the things he desires for a cheaper price, this is a glorious thing. It need not be given a negative connotation.

On the other hand, if the purchasing power of the currency is falling, due to inflationary policies of a central bank, the consumer finds his savings reduced. This is truly compulsory, and cannot be easily avoided. It's telling that Keynes doesn't focus on that which is truly forced--what Ron Paul calls the inflation tax.

Keynes is rightly critical of the concept of forced savings--which evidently stems from Bentham: "Thus “forced saving” has no meaning until we have specified some standard rate of saving." We may chuckle to ourselves, since this rejoinder occurs shortly after Keynes uses "normal profit" without defining it. For some reason, too, he thinks that "forced savings" only pertain to an economy in full employment. Since it is essentially a monetary phenomenon--at least insofar as inflation is concerned--I am not sure why this is the case.

Section V: Keynes struggles to understand the purpose of a bank: "It is supposed that a depositor and his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no saving corresponds."

This is basically true of our current system, but there is no reason a bank must loan the money depositors leave in their checking accounts. In fact, as I pointed out in a recent column, the demand deposits which comprise checking accounts must not be invested or else the bank will not be able to make good on withdrawal demands.

Keynes offers a reasonable statement, which is nonetheless false: "It follows that the aggregate saving of the first individual and of others taken together must necessarily be equal to the amount of current new investment." Since we have a fractional reserve banking system, every dollar which is deposited in a bank is lent out--ten times or more--to borrowers. This is the "money multiplier" effect. It explains why the banks are so hosed whenever a bubble bursts. It is, in fact, the cause of the bubble in first place--though an inflationary central bank is a necessary prerequisite. Even if you reject the Austrian explanation for the business cycle, it must be admitted that Keynes is wrong here.

He examines the consequences of credit expansion by the banks. "It is also true that the grant of the bank-credit will set up three tendencies (1) for output to increase, (2) for the marginal product to rise in value in terms of the wage-unit (which in conditions of decreasing return must necessarily accompany an increase of output), and (3) for the wage-unit to rise in terms of money (since this is a frequent concomitant of better employment)..."

Let us take these one at a time. The first is generally true; the expanded credit will fuel investment, especially in a particular sector. In other words, there would be a boom, say, in housing. But while output may rise in one sector, it will not necessarily rise uniformly; some sectors may even see a reduction in output.

This tendency to think only in aggregates harms Keynes's second point. During the housing bubble, the marginal product of homes was rising in terms of the wage unit; but this did not hold true of every good in the economy. Computers were falling in prices, both absolutely as well as relative to the wage-unit.

The third is not completely false, but it is mostly so. Certainly, some people saw an increase of income in real terms during the housing boom--real estate agents, for instance. However, since the creation of credit was not backed by savings, these increases were offset by decreases in other sectors. Moreover, much of this production was malinvestment; we did not need so many houses in Vegas. This impoverishes people and leads to a reduction in wages. Keynes is right to an extent, but only ephemerally, and in the short term. In the long run, bubbles pop.

Keynes asserts that "the reactions of the amount of [the individual's] consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself." We shall see if he proves this at a later point, and leave off for now.