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The curious case of Syria.

Posted by Arkady K. On 9/03/2013

Much has been said about the soon-to-be inevitable strike against Syria, but I do want to add a few rambling thoughts.   Clearly the situation has been bothersome enough for me to emerge from a long slumber, hopefully some readership still exists!

While the fusion of two parties into one giant monolithic warfare-welfare state is now a foregone conclusion, several interesting arguments have come up that I would love to scribble about.  

Argument #1:  Obama does not need to seek Congressional authorization, but now that he has, he is a great president. 

First of all, just because there is precedent does not make the precedent noble.  Bush got authorization for Iraq and look what happened.  An open-ended conflict that dragged on longer than world war 2, the result of which is unclear at best.  Just last weekend, explosions rocked Baghdad as a result of sectarian violence.   Whether we bomb them, invade them or import our brand of democracy - the cultural differences of an area as diverse as that of the Middle East is too difficult for us to overcome. 

Second of all, Obama was more than ready to act solo, even as our steadfast ally across the pond bailed.  In fact, Obama changed his mind in the very last minute.  My hunch is that the change of heart came about due to popular opposition, with polls showing overwhelming and lopsided support to seek authorization.  

Third of all, Obama is a giant hypocrite:
The President does not have power under the Constitution to unilaterally authorize a military attack in a situation that does not involve stopping an actual or imminent threat to the nation. -- Candidate Obama, 2007
Of course, he was smart enough to realize that the anti-war sheep that got him elected will support him no matter what - I kind of doubt that his base is rushing out to their cars to peel off their coexist stickers. 

Argument #2:  America must act to stop a humanitarian disaster, the use of chemical weapons is abhorrent and cannot be condoned.

Indeed the use of chemical weapons is awful, disgusting and heart wrenching.  Unfortunately the claim that we must act because 1,400 innocents perished is ridiculous on its face.  For starters, the death toll for the Syrian civil war allegedly stands at over 100,000 dead.  Hundreds of thousands displaced, ripped from their homes and forced to survive in refugee camps.  Entire cities have been demolished, turned into husks with no life other than roaming resistance fighters and military personnel.   One would think, that if America was going to act on the behalf of the civilian, then the time to do so would have been months if not years ago?

However, far more interesting of a question that I have seen seldom asked - why *this* particular chemical attack!?  Obama, Kerry and others like to cite to the public this notion that Syria violated the international agreement regarding the usage of chemical weapons.  Interesting.

However, when Saddam Hussein violated the very same international standard and gassed four times as many people as did Assad in the Kurdish town of Halabja (over 10,000 dead/injured/mutilated) - nothing happened.   In fact, the Halabja gassing is now considered to be a genocide, and nothing happened!   Yet Assad, who may or may not have deployed chemical weapons is going to be on the receiving end of cruise missiles?  

Or is it far more likely, that at the time when Saddam gassed the Kurds, he was too much of a strategic ally against Iran and therefore no response was required?  Whereas now, Assad being an important ally of the current Iranian regime seems like a perfect target.  

Indeed, comparing the two incidents alone, one can easily conclude that attacking a dictator has precious little to do with humanitarian reasons, and everything to do with protecting the infamous and impossible to define "American interests".

More simply put, over the course of  5 decades there have been numerous civil wars and atrocities across the world - such is human nature - for us to intervene when a magical humanitarian line is crossed would be ruinous and the end of our country.  Nothing is more expensive than war. 

Argument #3:  These anti-war and isolationist arguments are selfish, imagine if people like you were around in World War II, what would have happened to the Jews!?

Love this one!  

Let us be super clear.  America has every right to defend itself and indeed, like candidate Obama eloquently stated, Congress can even be bypassed in order to prevent an imminent attack.  Pray tell, how or why is America in danger due to Assad's use of chemical weapons?  This is without even mentioning the fact that this is not the first time the Syrians have been accused of using chemical warfare,  it just happens to be the biggest use of it so far.

As far as the Holocaust.  Well, this can easily balloon into a separate post, but America did NOT invade Europe to save the Jews.  Anyone who thinks that is sipping way too much kool-aid.  FDR could care less about the Jews, his refusal to bomb Auschwitz is evidence of that alone.  In fact, one could make a very simple argument that stopping a raging Nazi lunatic is indeed in the best interest of the country, although my personal opinion is that Normandy was invaded to stop Stalin, not Hitler.   More on that, perhaps at another time.

Argument #4:  This is a very limited engagement, with no boots on the ground and will be an effective mechanism to teach Assad a lesson.

That is called wishful thinking.  Once the authority has been granted, this will turn into an open-ended conflict regardless of what kind of language Congress uses.  Just today, our illustrious and brilliant former MA senator had the following to say

But, “In the event Syria imploded for instance or in the event there was a threat of a chemical weapons cache falling into the hands of al-Nusra or someone else and it was clearly in the interest of our allies — all of us, the British, the French, and others,” Kerry said, “I don’t want to take off the table an option that might or might not be available to the president of the United States to secure our country.”
There are exactly two reasons for Kerry saying that:

1) He realizes that if our engagement is limited to just air strikes, then Assad simply waits it out and continues on his merry way.  We have no leverage and look limp and ineffective.
2) He is just scaring the Syrians into thinking we would actually be dumb enough to put boots on the ground, but in reality there is no plan for any such action - and the administration hopes that 50 tomahawk missiles will inspire Assad to behave rationally.

Either way, there is no real reason why our involvement would change one damn thing!   If, Syria implodes, and we get sucked into another ground war then god help us.  Other than Krugman's Keynesian wet dream coming true, only further suffering awaits us.








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Ever heard of Dr. Benjamin Carson?  If not, you will, although the calls for this man to run for political office are a bit premature.   The big buzz behind this man is a speech he gave at the National Prayer Breakfast and what makes this particular speech so "controversial" is that he is appearing to lecture President Obama who is sitting right next to him.  Supposedly the content of the speech was too political for the venue.

The Left is absolutely frazzled by this and called the speech shocking.   
The Right believes they found their next presidential candidate.

As always, both are wrong.  

Firstly, there is nothing shocking about anything this man said.  Supposedly it is offensive to the President, but Carson does not once call out any particular or specific policy.  He simply talked about the deficit, education, tax policy and health care.  He provided some suggestions and genuinely hoped that the two political sides in America can come together and solve the country's biggest problems. 

Unfortunately, another deeply religious man who is recycling old Republican concepts of HSAs and flat taxation is nothing unusual.  In fact other than his skin color, he is no different than Huckabee.  

However the speech was funny, moving - as he talked about his impoverished childhood and full of well laid out logical points.  If he gets involved in politics, we will be better for it, but the emotional reaction that is coming from the Right is silly and premature.   If he does not, then he is already an extremely accomplished individual.  Not only does he already have a movie based on his accomplishments, but his work with scholarships and promotion of education in America are aready massive accomplishments in their own right.

Below is the speech in its entirety.  Enjoy. 

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After we watched in amusement Governor Cuomo shove a hasty gun restriction bill down the throats of NY citizens many wondered, is he doing this for political gain or is this a part of a broader coalition of gun legislation?   Looks like we have our answer, Massachusetts did not hesitate to follow suit and proposed extremely similar restrictions:


  • It reduces access to high-powered rounds of ammunition.
  • It better tracks weapon sales by (1) requiring dealers at organized gun shows to connect to the Massachusetts Instant Record Check System (MIRCS) when conducting a sale of a firearm; and (2) requiring private sales of firearms to occur at the business of a licensed dealer so that the sale can be tracked electronically.
  • It limits gun buyers to one firearm purchase per month and prevents the furnishing of a machine gun to any person under 21 years of age. 
  • Finally, this bill would allow a rebuttable presumption that an individual charged with a felony involving firearms and physical force is dangerous for purposes of pretrial detention.



The language above comes from the Governor, similar legislation was filed by Representative David Linsky:
  • Having one standard of the issuance of all gun licenses, giving local police chiefs the ability to evaluate all aspects of an application for a gun license.
  • Requires proof of liability insurance for possession of a firearm, rifle or shotgun.
  • Requires that all large capacity weapons and grandfathered assault weapons must be stored at gun clubs or target ranges.
  • Requires live shooting as part of the curriculum for a basic firearms safety course; this is not a current requirement.
  • Requires all applicants for gun licenses and FID cards to sign a waiver of mental health records for review to be destroyed after decision.
  • Imposes 25% sales tax on ammunition, firearms, shotguns, and rifles; dedicates funds towards firearms licensing, police training, mental health services, and victim’s services.·         Brings Massachusetts into compliance with the National Instant Criminal Background Check System (NICS).
  • Limits gun buyers to one firearm purchase per month. 
Even though Massachusetts is already considered to be one of the toughest States to obtain, buy and own guns the politicians have decided to crank down even further.  Connecticut incidentally is also an extremely difficult State and yet the Sandy Hook tragedy unfolded anyway.  

The idea is that by imposing the following restrictions we will have a reduction in gun violence, but lets examine the restrictions and determine whether something like Sandy Hook would have been prevented.  After all, most legislation IS reactionary, but in this case the proposals are so badly off the mark as to wonder what the ulterior motive here is. 

1)  25% excise tax on all purchases.  Due to various restrictions, rules and laws, on average all purchases in MA are extremely expensive.  Slapping an extra 25% tax on that acts as a direct punishment for gun owners under the guise of community aid.  There are 300 million registered guns in the United States, that means that 99.99% of all guns are never used in malicious manners.  Why should responsible gun owners looking to protect themselves be responsible to pay for licensing, police or mental services.  These are NOT related.  This will do nothing to stop mass shootings, it just makes it more expensive for responsible people.  One good way to restrict anything is to inflate the price artificially, politicians are doing just that. 

2) Restricting magazine capacity.  By randomly and arbitrarily reducing the magazine sizes the politicians are rendering the entire point of the gun useless.  What good is it for me people to pay money and spend time training, learning and practicing when in real life they may never have enough ammunition to protect themselves.  Why 7 rounds?  Where did this number come from?  Where does it stop?  The next proposal can be 5 or 3.  Why not?  Meanwhile, lunatics like the Sandy Hook shooter will just bring multiple guns or more magazines.  Those looking to defend themselves are compromised, those intent on evil will just work around it. 

3) Reduction to high powered ammunition:  This is vague and unclear, but presumably something like hollow points will be harder to get.  Studies upon studies show that ammunition makes a huge difference in stopping power.  If you have a 9mm and want to stop 250lb man busting in your home you can fire several standard 9mm rounds and still fail to stop the intruder.  You must be an excellent shot and have plenty of ammunition to be successful, or you can get ammunition that is designed to stop a human.  By making the purchase of this illegal or difficult the politicians are further compromising the millions of RESPONSIBLE gun owners.  The lunatics will just get it illegally anyway, much like criminals do these days anyway.  Because you can have 1,000 laws of the books or 10,000 laws, criminals could care less. 

4) Require all large capacity to be stored in a club.  This is extremely scary and unclear, but because the term "larger capacity" is a term that is defined and redefined by politicians it can currently mean that 75% or more of all current handguns CANNOT be stored at home.  Anything ranging from the standard police issue Beretta or M1911 is now suddenly illegal.  By not being able to store it at home, people are now defenseless.   Not sure how this can be viewed as anything, BUT wholesale disarmament and whether this is even legal after recent supreme court decisions.   Presumably, since the Sandy Hook shooter stole the guns from his mother that something like this would be prevented?   Again, this is a very serious punishment of responsible individuals and a massive restriction of over 75% of all handguns that are currently in people's homes.  A gun stored at a range, is of little use to anyone and defeats the purpose of having guns in the house. 

5)  Limiting gun purchases to once a month.  Why?  What does that accomplish?  Other than a massive inconvenience  more red tape and more politicians - who does this benefit?  A mass shooter will either steal the guns anyway or wait a bit longer to carry out the crime.   This is just random central planning that looks good on paper, but provides zero practical assistance. 

6) More complicated background checks.  These are all good in practice and theory and in a sense they worked in Connecticut.  After all, the lunatic tried to buy a gun from a store and was told he would have to wait for two weeks - at which point he killed his mother and used her guns.  So how do more complicated background checks solve the problem?  They do not.  The side effect is that more and more guns are purchased and/or obtained in hard to track ways.  By reducing the complicated check system more guns would be obtained in straight forward fashion and would actually be more easily tracked, but that is not the kind of logic I expect politicians to understand or embrace.

The list really goes on and on.  The take away is this. 

We had a crisis, a very serious crisis.  Our Government, in a predictable fashion responded to this crisis, by clamping down and punishing those that are not responsible.   In the case of Massachusetts, a group is being targeted and discriminated.  This discrimination imposes unfair, expensive and time consuming restrictions on gun owners.  Gun owners in this state are already akin to sexual offenders, as the only other group of people who must announce their presence upon moving into a new town.  Yes, even though 99.99% of gun owners who move into a new town/city actually bring law, order and safety - they must, like a lowlife sexual offender register with the local police action.  

Yet that is not enough, soon waivers of mental stability, extra liability insurance, crushing excise taxes and obnoxious restrictions are coming down the pipe.  

The end result will be the following:

- Black market activity:  If a 25% excise tax comes through, instead of pursuing legal avenues to purchase and obtain gun parts/ammo/etc people will seek other mechanisms.  I can't even predict how many will buy ammunition from NH.  Ammunition already costs an arm and a leg, it can take 30 minutes to go through 150-200 rounds at a range for practice.  That can cost 60-80 bucks depending on grade!  Slap a 25% extra tax on that and suddenly gun owners are paying up to 20 dollars in taxes just to practice?!?

- People will either give up guns in MA or move.  This State is already bleeding people and losing its Congressional voice, but now the State will be more disarmed.  How many more studies do we need to see to confirm, that YES, an armed population is a safer population.  Don't believe?  Looks at Kennesaw, Georgia where gun ownership is mandatory.  Just like Switzerland, more guns apparently made the place safer and is considered to be the top 10 best towns for families! 

- Mass shooting will continue.  Why would they stop?  Mass shootings are not a function of guns, or video games or Hollywood or whatever other idiotic explanation.  Mass shooters are sick and disturbed people, as long as those exists, there will be tragedies.  IN fact, America's gun ownership is #1 in the world.  Yet over the past many decades gun violence and violence in general has gone down and down and down.  America is less violent now than it was in the 70s, 80s, 90s.  According to FactCheck.org: gun ownership and production is up, but gun murders/assault and robberies are down.  Until we solve the problem of why we have seen a rash of crazy people come out and murder innocents, we will not solve the problem. 

The solution.

The solution has to be thee-fold.  

First, stop disarming responsible civilians.  The police cannot be everywhere!  There are thousands of laws on the books, it is a massive ball of red-tape that does not and cannot stop criminals.  An armed society is useful until the following is solved:

- Drug war.  How many illegal guns and murders occur because of the drug war?  Countless.  End the drug war and legalize all drugs, this action alone will eliminate a massive portion of the guns on the streets.  This will make gun ownership less necessary. 

- Mental illness:  Crazy and violent people should be either treated or locked up.  Instead of having our prisons overflowing with folks who sell marijuana, we should house individuals who pose a threat to our society.  Removing lunatics and violent people from the streets will make gun ownership less necessary. 

- Apply the same gun restrictions to the police and military as you do to civilians.  The history of the United States is quite specific.  It is the protection from tyranny.  While gang violence and would-be robbers attempting to kill and steal private property is tyrannical, so is a legally armed group of men who are capable of destroying your life.  As long as we are on equal footing, gun ownership is less necessary.   The police of course will resist, after all, they need to protect us from criminals.  But if criminals will always exist, then civilians should be armed as well.  This is a catch-22 that cannot be solved.  The truth is, most gun owners would rather NOT carry.  Most gun owners would rather NOT use their guns.  Who wants or needs that?  This is just a function of our society. 

Make our society safer and gun violence will drop. 
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Fiscal cliff, perhaps it is best to go over?

Posted by Arkady K. On 12/28/2012

What are your thoughts on the fiscal cliff?  This has been the primary topic of conversation in the media and it focuses on whether or not the Republicans or Democrats can come together and forge a deal.

We should be wary of compromises, the end result is generally beneficial for the deal makers and disappointing for the rest of us.  As George Carlin once said: "Bipartisan usually means that a larger-than-usual deception is being carried out."

USNews has a very broad summary of what happens if our esteemed politicians fail to reach a grand compromise:
"— Some 2 million jobless Americans may lose their federal unemployment aid. Obama wants to continue the benefits extension as part of the deal; Republicans say it's too costly.
— Social Security recipients might see their checks grow more slowly. As part of a possible deal, Obama and Republican leaders want to change the way cost-of-living adjustments are calculated, which would mean smaller checks over the years for retirees who get Social Security, veterans' benefits or government pensions.
— The price of milk could double. If Congress doesn't provide a fix for expiring dairy price supports before Jan. 1, milk-drinking families could feel the pinch. One scenario is to attach a farm bill extension to the fiscal cliff legislation — if a compromise is reached in time.
— Millions of taxpayers who want to file their 2012 returns before mid-March will be held up while they wait to see if Congress comes through with a deal to stop the alternative minimum tax from hitting more people."

That is just a sampling and does not include the inevitable tax reversion as the Bush cuts and the Obama payroll cuts expire.

So lets start with the last and most painful, tax increases.  Everything from the AMT patch to the payroll cuts to the various levels of Bush cuts (depending on income) are all a Frankenstein of Congress. Don't you find it amusing how agonizing Congress finds all these complicated tax rules to be, when they themselves created it.   We have one of the most complicated tax codes in the world, except maybe for Germany, and it grows more complex each year.  Thing like AMT and its subsequent patches were just previous attempts at collecting more money from wealthy folks.  Now we have reduced our entire tax conversation over whether $250,000 makes someone rich or not.

Problem: The entire tax conversation is idiotic.  Let the taxes go up.   Lets see what happens when you take capital, which is what income is, and shift it to the Federal Government.  A tax is nothing more than a shift in private property from a decentralized source into a central source.   There are many painful aspects to this fledgling economy, but come April there will be no question as to who is not helping.  The solution for the tax problem is to flatten and simplify, not this laughable Kabuki theater that results in petty class warfare.

Proposal:  Now is a great time to do away with a whole slew of these expiring/strange/exotic/senseless tax provisions.  Switch to a 13-17% flat tax on all income that is twice the State's poverty line.  Done.  The working poor have a chance to get on their feet and the social engineering aspect of taxation melts away, along with the lobbyists, cronyism and Congressional power to hold the economy hostage every year.

Going back up to the summary, unemployment.  The idea that USNews lists 2 years of expiring unemployment as a problem is laughable.

Problem: It has nothing to do with unemployment, that is just a word game.  Unemployment insurance is paid out through employer/employee contribution, hence the term insurance.  If you lose your job, the previous sacrifices that everyone has made through lower wages acts as a backstop until you find another job.  What we have here is a mockery and a total perversion of the concept.  Any money beyond that which is covered by insurance is called welfare.  Welfare is a direct money transfer and is a subsidy.  Subsidies distorts markets and creates perversions in behavior and price points.  They ruin the market and grant power to the institution providing the subsidy, subsidies have never ever been a good idea, regardless of what emotionally appealing name they are called.

Proposal:  We need to end Federal subsidies for work related reasons.  This is a policy that began during the Great Depression under FDR, known as direct relief.  It has obviously morphed into something far bigger and more complex since then (largely thanks to LBJ), but the idea that our Federal Government should provide any incentive NOT to work is offensive to anyone who believes or supports the free market.  States should be in this business, not Washington DC.  Our Federal Government spent over 450 Billion dollars in welfare alone last year, this is not sustainable.

Social Security, which is not actually part of the fiscal cliff - if we were to go over - is being discussed because the Government is thinking of modifying payment calculation.  This is a problem that I have mentioned numerous times and it is one of the major flaws of the Social Security system,  the mechanism of depriving people of their money is too easy to implement and too alluring to let go of.

Problem:  SS payments are increasing and while not as threatening as Medicare/Medicaid will pose a significant budgetary burden in the coming decade or two.  Japan will probably melt down due to their Social Security liabilities, but they are having a population crisis unlike us.  The main issue is that SS payments are calculated based on cost of living, hence the cost of living adjustments.  However they are calculated from Gov't derived metrics, the CPI, a grossly distorted joke of a number.  Now there are talks of using chained CPI which will further lower the liability.  It works very simply, the Gov't simply asserts that prices are not going up all that much and thus fail to raise the annual SS check.  Done.  You have effectively ripped off an entire generation of people.

Proposal:  We need to stop using Gov't derived metrics to determine what to pay people, people from whom you have taken money without asking.  In some cases forcing people to sacrifice 15% of their pay (employer + employee) their entire lives only to be told later "oops, changed my mind about some of the math".   Use a combination of objective third party price calculations (shadow stats, MIT price index, etc) to create an average.  Stop stealing from senior citizens.  Next, introduce some competition back into the realm of retirement and make Social Security VOLUNTARY.  We want to live in a free society and operate in a free market, why are we being forced to participate in a retirement program?  It is absurd.  If SS is so awesome, then continue it by all means, just give me an option to opt out.  Oh, what is this you say, but SS will fail if it is not voluntary, well then my friend, it should not exist.

The price of milk will double.  This has got to be the most amusing of all fiscal cliff problems to have.  Considering we have 16 Trillion in debt and running trillion dollar deficits, the idea that milk prices is of some gran importance is rather comical.

Problem:  Again, we have subsidies at work.  The one in play is the Dairy Price Support Program, which is a stepchild of Farm Security and Rural Investment Act of 2002 and the Milk Income Loss Contract that kicked in when the 2002 statute expired.  Both of those pieces of legislation created a price minimum, in other words, the Government would pay dairy farmers some amount of money (from our tax dollars) to promote the manufacture and sale of milk.  Fundamentally, this is no different than "unemployment" welfare that has been going on for the past two years and will probably continue.  More specifically speaking, it throws a giant monkey wrench into the dairy business.  Lets assume that if this crap expires, then prices will double.  What does that mean?

It means that TRUE cost of milk is twice what it needs to be!  Will the price doubling hurt a lot of people?  Of course it will, but truth always hurts, always easier to perpetuate a lie, no?  If I told you that your actual mortgage is twice what it should be and that eventually you will have to pay it, would you rather know sooner or later?  We are so far gone in this country that instead of examining why we are subsidizing dairy farmers we bemoan how awful it would be if dairy prices go up.

Proposal:   There is nothing wrong with prices going up an down, they simply reflect production costs.  Clearly dairy production has some serious costs, we need to expose them so that consumers can properly adjust their behavior.  Yes it will impact ice cream makers, pizza makers, baby formulas, etc, and yes they will complain and make end of the world predictions.  This is what happens when you implement subsidies, this happens every time regardless of industry.  Think about that when you advocate subsidies for your pet industry (wind, solar, sugar, etc).  In the end, everything just becomes more expensive.

We need to END all farm and agriculture subsidies immediately.  Not only will that prevent billions of taxpayer money going to special industry groups, it will cut down lobby efforts significantly and will restore true prices.  Once true prices appear the consumer will drive all future demand.  Ultimately, dairy producers will have to expose to us why their manufacturing costs are so massive as to justify asking 8 bucks for a gallon of milk.  Perhaps their taxes are too high?  Perhaps cost of regulation is prohibitive?   There could be a slew of reasons, but providing subsidies is not a solution.

In conclusion, going over the fiscal cliff is like lifting the band-aid off a rotting festering wound.  It is badly infected, perhaps some sunshine can help.  

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The 2009 credit boom is coming to an end.

Posted by Arkady K. On 11/21/2012

The credit expansion boom of 2009 will eventually go down as yet another period of credit expansion promoted by the Fed that will have lead to another predictable bust.   Today, it will be interesting to examine how the various levels of production are behaving under years and years of artificial interest rate suppression.  It will also be helpful to look at charts and graphs examining the business cycle theory and the impact of time preference as taught by Mises.

For starters, those new to the concept - a very brief paraphrasing of the general idea.

Under a healthy functioning market people's consumer patterns impact their savings.  More consumption equals less saving and less consumption more saving.  In order to progress the society must save such that it can make investments in machinery, equipment, technology, etc if it hopes to increase the capacity of production.   Sure ,you can harvest 10 coconuts a day, consume them by night and repeat the process.  You can also defer consumption, save a coconut and once savings are sufficient build a coconut harvesting tool that will yield 20 coconuts a day while using those coconuts saved to sustain development.

In the world of money this behavior can be witnessed through interest rates or time preference.  If the consumer  begins saving, then he has suggested that the current goods are not as valuable to him now as they would be in the future.  This increases the supply of resources, the cost of borrowing these resources will invariably drop as the supply becomes more and more abundant.   Thus, once again, in a normal and healthy market the drop in consumption leads to saving thus leading to lower interest rates.

Why is this important?  Just like one would be tempted to build a coconut gathering machine when sufficient coconuts can provide for such an investment, low interest rates send a message to business (wo)men that a large amount of resources is available for consumption.  Thus, the further away the investment from the immediate consumer good the more interest rate sensitive it becomes - as the big investments require a lot of time (and thus interest payments).   So investment heavy industries like mining and raw materials are considered early stages of production, while wholesaling, services and retail are late stages of production.

Or as Mises explains ever so succinctly in required reading for every human being:
Technological conditions make it necessary to start an expansion of production by expanding first the size of the plants producing the goods of those orders which are farthest removed from the finished consumers' goods. In order to expand the production of shoes, clothes, motorcars, furniture, houses, one must begin with increasing the production of iron, steel, copper, and other such goods.
But what happens when the interest rates are incorrect?  What happens to all the business (wo)men that mistakenly considered the phenomena as an indication of resources that simply do not exist?   They will at some point literally run out of money as the amount of resources available were far lower than the manipulated rate suggested.  The false rates can come from either a central bank policy or the expansion of too much credit from large banks that have no fear of going bust (bailed out by the Fed or State like the wild cat banking days of the 1800s).

So indeed, if the entire theory that the banks and their expansion of credit cause the booms and busts , a scourge on humanity for the past hundreds of years, then I should be able to either prove or disprove the theory right here and now.

So my assertion is that the artificial credit boom from 2009 has sent the wrong signals to the economy and the amount of resources actually available is lower than meets the eye.   This means that farthest removed industries should be struggling, while the easy credit should be juicing the consumer and consequently boosting the retailers and service.  This is of course very dangerous and very wrong, because it violates the basic premise we outlined earlier.  If the interest rates are this low, it would suggest that the consumer is NOT spending and the system is awash with resources (money).

So is it?

Stages of Production

In order to visually demonstrate the various levels of production I have stacked stock indices representing the levels of production.  Highest is mining (furthest away), followed by basic materials, so on and so on finally ending at retail.   These are indices or baskets of stocks, while not a perfect measurement due to the lag effect of stocks, it should serve pretty well for our demonstration.   At the bottom of the charts is the federal fund rate, the interest rate set by the all knowing Federal Reserve.

The years are from 1999-present.


Take a moment to absorb the charts.  Now lets walk through from furthest to consumer, to closest to consumer.

  • Right off the bat, the worst performing sector is mining, virtually at multi-year lows not far from its 2009 bottom!  
  • Basic materials while doing better, has put in a top and is showing a visible downtrend.
  • Wholesalers, positioned somewhere in the middle in the production chain are still at the highs, but the trend has slowed down dramatically.  So far, all three failed to exceed the tops made in 2008. 
  • Next is consumer services, which not only is at new highs but has now exceeded the 2008 top!
  • Lastly,  very similar to consumer services enjoying the hell out of Bernanke's funny money. 
This suggests that tough times for the economy are ahead as investments and expansions into production are beginning to dry up and retract.   Recession is straight ahead as the poor investments realizing a shortage in resources begin to undo the mistakes forced upon them by artificial rates. 

One other critical point to glean from this exercise is the utter refutation of the entire Keynesian "animal spirits" philosophy.  We are told even today that booms and busts are natural, simply humans acting irrational and then suddenly curtailing their rabid spending habits causing contractions and recessions.  Except that if that was true, then 2008 would look very different.  Instead if you look at the charts again, you see the following:
  • Mining:  Decline of 65%
  • Basic materials: Decline of 64%
  • Wholesalers: Decline of 41%
  • Services: Decline of 42% 
  • Retailers: Decline of 40%
So if the animal spirit theory was true, how come the consumer related industries contracted the least and the furthest away contracted the most!?

Simple, because that theory belongs in the waste basket along with your copy of General Theory.  Instead we have an elegant, logical and impervious explanation.  The industries thought there were more resources, they were wrong, the investments were bad, the contraction must begin.  In fact the faster the contraction begins the better everyone will be!

The 2008 crisis

Now there are  two "oddities" about the chart that some of you may be noticing.

First is the observation that the 2007-2008 decline in the consumer facing sectors started earlier than the miners, materials, etc.  This is strange for two reasons:  First, the current patterns look very different and second, it seems like a contradiction in the assertion that the consumer is being driven by credit.

Second is the abrupt fall of miners/materials/etc after posting new highs.  The explanation to both is below.

First the consumer:


Consumer non-revolving credit, on a year by year basis.   As you can see, in 2005 credit began to shrink reaching one of the lowest points in the past 12 years.   

So what happened?

Scroll up again and look at the fed fund rate from 2005 to 2007 and you will see a rapid increase in interest rates from 1% to 5%.  That shut down the credit happy consumer, an unfortunate reality of America - a country's whose economic purchasing ability is just a function of its ability to go into debt.

You can see the massive spike in credit accumulated in 2010-2011.  This was achieved by zero percent interest rates that began in 2009.   For those wondering, yes, revolving also shot up - but not as much.

The economy is literally being pulled into two opposite directions at once.  Low interest rates are SUPPOSED to mean people are curbing consumption!  Welcome to the Central Bank Fun House!  Is it really a surprise that the early stage industries are declining?  We can't have it both ways.

History and logic suggest that banking and the supply of money must be severed from the State entirely. Beating a dead horse here, but centrally planned rates and supply of money is not working. 
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Today Americans woke up to the news that Hostess, the manufacturer of products like Twinkies, Wonder Bread and other "food" items is shuttering.   The explanation provided is that their unionized strikers crippled production to such a point that it triggered an automatic contract clause.  To be sure, Hostess was already on the ropes and under private equity management due to filing for bankruptcy in January of this year (their second bankruptcy in a decade), but the death knell most certainly came earlier than expected.

The closing of Hostess is actually quite tragic,  because the job losses are in the many of thousands:
The closing will result in Hostess' nearly 18,500 workers losing their jobs as the company shuts 33 bakeries and 565 distribution centers nationwide, as well as 570 outlet stores. The Bakery, Confectionery, Tobacco Workers and Grain Millers International Union represents around 5,000 Hostess employees.

"We deeply regret the necessity of today's decision, but we do not have the financial resources to weather an extended nationwide strike," said CEO Gregory Rayburn in a statement.
What exactly were the unions striking over?  Hostess attempted to extend the company's life by lowering benefits and wages:
The new contract cut salaries across the company by 8% in the first year of the five-year agreement. Salaries were then scheduled to bump up 3% in the next three years and 1% in the final year. Hostess also reduced its pension obligations and its contribution to the employees' health care plan.

In exchange, the company offered concessions, including a 25% equity stake for workers and the inclusion of two union representatives on an eight-member board of directors.
The company is citing mounting medical and pension costs for crippling their margins. I assume this is true, but there is something far more insidious going on.

Regardless of what you think about their "food", something I find dreadful and can only refer to as food after stretching my definition of the term far and wide, the basic free market mechanics exist.  Company H, created product T because of demand from customer C.

Due to raised awareness of how harmful trans fats are (twinkies have trans fat), HCFS and other chemicals, the American consumer is most likely curbing their appetite for enriched white flour products and sugary carbohydrates.  However this decline in demand is perfectly normal and something all producers grapple with on a daily basis.  Hostess still outputs millions of products annually, so someone is buying, even if they are buying less.

Now Hostess finds itself squarely between two massive forces and both are threatening to pull the company apart.  The two forces are:  contraction of demand and inflation of higher order goods.

The first is rather simple, people are buying less product.  We can chalk this up to recessionary pressure, behavioral changes, consumer awareness, etc.  Does not really matter.

The company has exactly two choices: lower operating costs or lower final price.  

This is where the infinite liquidity pumping of our central bank and the Keynesian/Monetarist wizard known as The Bernank comes in.  Ben Bernanke has been on a kamikaze mission of pumping the American economy full of funny money for years, because we all know that adding more debt and more cheap money will provide wealth, prosperity and growth.  Oh wait, it does the opposite, who cares, Bernanke has a PhD in economics and I am just an idiot blogger.

This unpleasant experiment known as QE (Quantitative Easing) has caused a bit of damage on commodity prices.  More dollars, but same amount of goods equals rising prices.

What are the two primary ingredients of most Hostess products?  Wheat and corn (corn syrup).

Observe:


Commodity wheat prices.  Second highest in 12 years,  surpassed only by the 2007 credit induced bubble.


Commodity corn prices.

You have to ask yourself, how is it that in a global recession (or weak recovery if you prefer) that we have the highest corn prices in the past 8 years?

This increase in cost of higher order goods puts immense pressure on the Hostess bakeries.  In order for Hostess to cope with the loss of consumption, they can fix the problem by lowering final price.  However if they lower final prices while getting squeezed on raw ingredients they will lose money, back into debt they go.  So they do what is the most natural and obvious thing they can do, adjust final price in concert with rising raw ingredient prices.  This in turn discourages more consumers from buying the now more expensive product and the losses continue.

Meanwhile Time magazine slams Bernanke's mug on their cover and announce him to be the next best thing since sliced Wonder bread.

Lowering final price is out of the question, can they lower operating costs?  Most of the operating costs are labor.  Because the workers are unionized the labor costs are higher, on top of that there are numerous pension obligations and rising medical costs.  This where knowing the Great Depression helps.

In the Great Depression, prices were falling across the board however both the Hoover and FDR administrations gave political juice to big labor and legislation that propped up wages.  You would think this is utterly ass backwards since in an environment of falling prices, wages should follow suit, but they did not.  When we have state and federal minimum wage laws it creates an artificial floor for employers, if profits begin to shrink due to lowered consumption then the only way to solve the problem of labor costs is to fire people.  This is how price fixing of wages results in rising unemployment.

In the case of Hostess,  the management team proposed the only remaining alternative, lower wages and benefits.  Now, of course the unions should take a price cut, a job is better than no job, but we can be sympathetic to their plight.  This is where The Bernank comes in to play yet again. Unions are fighting the same price war that can be felt on the higher-order goods side!  Instead of grappling with rising wheat and corn costs, the average worker represented by the union is fighting rising costs everywhere; supermarkets, gas stations, clothing stores, etc.

Since the CPI is always slightly undervalued to absolve our Government of certain responsibilities, the MIT price project is more illuminating.


As can be sadly observed, priced paid are now substantially higher than they were even during the 2008 boom. So if you are a union representative and your job is to ensure that your workers are getting paid adequately, what choice do you have?  Without demanding raises, in the face of rising prices the workers are essentially getting a wage cut. The corollary of the Great Depression, is that with prices dropping the Government enforced minimum wage laws were giving workers wage increases

So while in the Great Depression case there was a gross violation of free market wage rules, in today's word we have a gross violation of pricing.  Under a healthy free market with the money supply remaining stable prices DROP. They have to drop because humans are always evolving and becoming more efficient.  So while we can blame the unions for many things, blaming the unions for trying to keep up with the Central Bank inflation is out of bounds.  

The root cause remains the expansion of cheap money and artificial interest rates. Policies of the Federal Reserve is hitting Hostess on the higher order goods side AND simultaneously forcing the union's hand on the wage side as they desperately try to compete with rising prices.  In an environment where capital formation and redirection of resources to healthy sectors is so badly needed,  our central bank is continuing to suppress rates and expand credit thus choking off recovery and prolonging the pain. 

Now that is food for thought.

P.S.  For those worried that their beloved junk is going away, rest easy, the company will be broken up and pieces of it will be sold off without the heavy weight of labor costs.   

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I present to you two examples from Europe that continue to demonstrate unequivocally that no matter how often fundamental economic principles are violated, the result is the same. A corollary lesson is that Governments will pursue these violations thinking naively that previous errors do not apply to them.

Today's subject: sin tax.

The idea of a sin tax continues to be popular on both sides of the proverbial political aisle.

Even among those that generally accept that taxation deprives the private sector by transferring capital to the less efficient public sector favor the sin tax.  They justify this error by suggesting that people should not be engaged in sinful practices like:  smoking, drinking, gambling, prostitution or the multitude of other offensive actions and raising revenue from these sinful things is acceptable.

Then there are those that are constantly harping on the "common good" and social welfare.  They justify the sin tax on the grounds that regardless of how much revenue is raised, the social benefit conferred from stamping out these activities is a worthwhile effort.  The reasoning is often convoluted and predicated on layers of presumed public spending that this same crowd foisted upon us in the first place.  For example the idea of banning smoking is perfectly reasonable because smokers inflate health care costs and since we are now in one giant health care pool the goal of snuffing out smoking is justifiable and worthwhile.

So while the sin tax is not an overt ban, it is common sense that a large enough tax can become prohibitive enough such as to stamp out usage or at the very least significantly alter social behavior.  The alternate social behavior can cause two predictable reasons:  First, it can spur and activate a robust black market where the taxed goods are now traded through unofficial exchange channels thus depriving the Government of any sales tax revenue.   Second, it can cause, depending on logistical practicalities for the buyers of these goods to seek them from more hospitable areas.  If New York for example over taxes their cigarettes, the beneficiaries may be Rhode Island or New Jersey where the tax is lower.

Both the black market and the purchasing of goods from other locations proves to be a great source of frustration to the authorities implementing the sin tax in the first place.  Not only are they deprived of revenue, but the behavior appears to fly squarely in the face of the regulators and taxers.  Don't people understand that these sin taxes are for our benefit!? If only the stupid sheeple would just do what is good for them then we would not be having this problem.

Tale of two countries.

Several days ago I came across an extremely pleasant and surprising story from Denmark.  Apparently the economic reality of human behavior caught up with Danish regulators and their "fat tax" implemented one year ago is now relegated to the ash heap of history:
The measure, introduced a little over a year ago, was believed to be the world's first so-called "fat tax".
Foods containing more than 2.3% saturated fat - including dairy produce, meat and processed foods - were subject to the surcharge.
But authorities said the tax had inflated food prices and put Danish jobs at risk.
The Danish tax ministry said it was also cancelling its plans to introduce a tax on sugar, the AFP news agency reports.
The ministry said one of the effects of the fat tax was that some Danes had begun crossing the border into Germany to stock up on food there.
According to the Danish National Health and Medicines Authority, 47% of Danes are overweight and 13% are obese.
The tax was introduced in October 2011, in an attempt to limit the population's intake of fatty foods.
The measure added 16 kroner ($2.70; £1.50) per kg (2.2lb) of saturated fats in a product, increasing the price of a 250g pack of butter by 2.20 kroner.
The decision to get rid of the tax was agreed as part of the centre-left minority government's budget negotiations.
Several supermarkets have reportedly said they will reduce their prices once the tax is abolished.
Bold emphasis is mine.  So without even mentioning that attacking saturated fat is foolish, another relic of a concept made popular by Department of Agriculture based on faulty science, the Danes learned a few painful things.

People will continue to do what they want, regardless of how you try to punish them.  You would think that the prohibition of the 1920s would have put the issue to rest.   Worse yet as Danes went to Germany to buy the taxes products the local producers get hit.  This reduces profits and potentially places jobs in jeopardy as the entire production chain begins to contract as demand reduces.

So why is this a tale of two countries?  Are you expecting France to follow suit?  Unfortunately a country that is dominated by Socialists determined to centrally plan not only the economy, but all economic behavior, wilfuly ignore not just history, but examples from their European neighbors.  Introducing the Nutella tax:
PARIS — The French Senate approved Wednesday the so-called Nutella amendment that would quadruple the tax on palm oil, a key ingredient in the chocolate spread, to discourage consumption of the oil rich in saturated fat.
The amendment which would take the tax on palm oil from around 100 euros ($128) now to 400 euros was approved by a vote of 212 to 133 despite protests from major palm producing nations Malaysia and Ivory Coast.
Socialist deputy Yves Daudigny said "palm oil is the most rich in saturated fats and its harmful effect on health has been established."
The "Nutella tax" would affect any foods made with those oils and bring in about €40 million ($51 million).  Whether the French want to regulate consumption of fatty food or raise revenue is unclear, but it is extremely hard to believe that the French believe the saturated fat nonsense.  Considering the French paradox has been a wonderful example of how eating rich fatty dairy products and meats appears to carry no correlation with heart disease.

Chances are the economic ignorant French politicians are figuring that this will not affect French industry as the palm oil is primarily imported and thus they can wash their hands of it.  An additional 40 million euro in a rapidly shrinking French economy is nothing to scoff at, presumably this is viewed as a "free lunch" and they can use the health benefit to justify their actions if need be

Unfortunately what the French are doing are two things.  First, like the Danish demonstrated just a year ago, the French interested in palm oil products will just go to other countries and stock up.  The tax sounds large enough to alter social behavior and so this result is guaranteed.  Secondly, this will hurt local sellers and bakers using these products as their operating margin will shrink.  This will further reduce the tax base and could even translate into job losses and contractions.

We have a beautiful example of how two countries, geographically close enough to each other pursuing entirely opposite strategies despite the demonstrable failures.  A smart man learns his on own mistakes, a genius learns on the mistakes of others and Socialists never learn.
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It has been four years since the world economy took a dramatic nose-drive from which we are still recovering from and like many historical economic events the perceptions and interpretations vary from person to person.  Even in the midst of the 2012 elections cries about reverting to failed deregulation policies were commonplace.   What will be ultimately be taught in schools, will be very similar to how the Great Depression was historically analyzed and taught.  How the historical analysis gets laid down could potentially build a slippery slope foundation for those relying on that text.

Imagine thousands of years ago a historian with religious inclinations observing the destruction of Pompeii.  Those reading the history later would be convinced that the sinners of the city angered the gods and were punished for it and immortalized in liquid magma.  A seismologist would for instance have a very different take on the situation.

Economic calamities are no different, like the Great Depression.   Students and casual hobbyists have been "taught" for decades that speculation, greed and the collapse of the stock market somehow caused an eight year slump in America while bringing international financial markets to their knees.  It took many decades for economists to begin breaking down the true causes through the works of people like Friedman and far more accurately, Murray Rothbard, but the damage had been done.

To that end, while the wounds are still fresh, it helps to revisit this very crucial historical event despite the fact that legislation like Dodd-Frank has already been rushed out to supposedly fix what was broken.

So what is the number one cause for the 2008 Housing crisis as far as the layman is concerned?  Well of course it is deregulation.   So many have written about it, movies have been made about it and the conviction is so unshakable that even disputing it seems like lunacy.   You would think that the accusers would provide a lengthy list of legislation that proves their case, but alas, there is only one offending piece.

The notorious Gramm-Leach-Bliley Act.  That is it! So let us take a look.

The Wiki cites several criticisms:
Many believe that the Act directly helped cause the 2007 subprime mortgage financial crisis. President Barack Obama has stated that GLB led to deregulation that, among other things, allowed for the creation of giant financial supermarkets that could own investment banks, commercial banks and insurance firms, something banned since the Great Depression. Its passage, critics also say, cleared the way for companies that were too big and intertwined to fail.[22] Economists Robert Ekelund and Mark Thornton have also criticized the Act as contributing to the crisis. They state that "in a world regulated by a gold standard, 100% reserve banking, and no FDIC deposit insurance" the Financial Services Modernization Act would have made "perfect sense" as a legitimate act of deregulation, but under the present fiat monetary system it "amounts to corporate welfare for financial institutions and a moral hazard that will make taxpayers pay dearly."[23]
The critics range from the standard Leftist talking points (including economic laureate Barack Obama..oh wait) to more nuanced observations from Thornton that suggest we simply could not afford a free market because we have too many broken things in our system.  Interesting thought.  Let's work with that.

So supposedly GLB is such a reverse to free market principles that America simply was unable to cope.  Really?

Are we supposed to believe, that a bill that was signed by then president Bill Clinton and supported by 155 House Democrats (out of 206) and 38 Democrat Senators (out of 45) was a massive lurch to deregulate and bring back the free market?

So what exactly did this giant deregulation bill do?  I am going to refer to Golden State blog, an economist who reviewed the movie Inside Job:
The best they can do [Inside Job narrators]  is to cite the partial repeal of the Glass-Steagall Act in 1999, and even this argument weakens on examination. The repeal (known as Gramm-Leach-Bliley) merely eliminated a provision that prohibited commercial banks and investment banks from existing under the same corporate umbrella, a provision that exists nowhere else in the world; other elements of Glass-Steagall, including those prohibiting commercial banks from underwriting or trading in securities and those prohibiting securities firms from taking deposits, were left intact, and other laws exist to prevent investment banks from unloading toxic securities onto commercial affiliates.
So all it did, was remove that one provision and allowed the merging of the banks.  Bill Clinton stood by that provision and cited that without it, it would have been impossible in the wake of the 2008 crisis for distressed companies to be purchased by each other.   More importantly, that provision was largely being circumvented anyway.  I remember looking at this information back in 2008 and found revealing information from Cato to suggest that the point was truly moot:
Even before its passage,investment banks were already allowed to trade and hold the very financial assets at the center of the financial crisis: mortgage-backed securities, derivatives, credit-default swaps, collateralized debt obligations. The shift of investment banks into holding substantial trading portfolios resulted from their increased capital base as a result of most investment banks becoming publicly held companies, a structure allowed under Glass-Steagall.
going on to say
Second, very few financial holding companies decided to combine investment and commercial banking activities. The two investment banks whose failures have come to symbolize the financial crisis, Bear Stearns and Lehman Brothers, were not affiliated with any depository institutions. Rather, had either Bear or Lehman possessed a large source of insured deposits, they would likely have survived their short-term liquidity problems.
This is incidentally, exactly the same debate that was had in Congress in the 1930s!  The passage of Glass-Steagall as far as it separated the commercial and investment banking was never ever explained.  It was simply stated that it needed to be done and became one of the many provisions of G-S.  As I have researched the matter previously, I shall link to my own previous article, but the fact remains:
Interestingly enough, unified banks (those with investment arms) from 1927 to 1930 greatly increased their issuance of bonds, solid proof their businesses were strong and more trusted than just purely commercial or investment banks alone.   Another study quoted in Tabarrok's research suggested that unified banks simply issued higher quality securities than exclusive Investment banks.  So if there was no empirical reason for separating the commercial and investment banks, then what is the explanation behind Glass-Steagall?
I encourage you to read the history of G-S as it exposes how large private corporations can influence and write regulation, regulation that is then deemed to somehow be beneficial to the consumer, but in reality is used as a bludgeoning tool for one private entity against another.

Lastly, I have one last piece of evidence to present.  Presumably, if this was truly a lurch to deregulate and a move to a free market as many claim, then at the time of passage it would be logical to assume that the one Congressman who constantly beat the drum for the raw free market would support it.  However this lone Congressman opposed it and although his original letter has been lost, a copy can be found here:

CONFERENCE REPORT ON S. 900, GRAMM-LEACH-BLILEY ACT
------------
HON. RON PAUL
OF TEXAS
[Page: E2297]
Madam Speaker, today we are considering a bill aimed at modernizing the financial services industry through deregulation. It is a worthy goal which I support. However, this bill falls short of that goal. The negative aspects of this bill outweigh the benefits. Many have already argued for the need to update our financial laws. I would just add that I agree on the need for reform but oppose this approach.
...
Such a scenario would put added pressure on the financial bubble. The growth in money and credit has outpaced both savings and economic growth. These inflationary pressures have been concentrated in asset prices, not consumer price inflation--keeping monetary policy too easy. This increase in asset prices has fueled domestic borrowing and spending.
Government policy and the increase in securitization are largely responsible for this bubble. In addition to loose monetary policies by the Federal Reserve, government-sponsored enterprises Fannie Mae and Freddie Mac have contributed to the problem. The fourfold increases in their balance sheets from 1997 to 1998 boosted new home borrowings to more than $1.5 trillion in 1998, two-thirds of which were refinances which put an extra $15,000 in the pockets of consumers on average--and reduce risk for individual institutions while increasing risk for the system as a whole.
...
The better alternative is to repeal privacy busting government regulations. The same approach applies to Glass-Steagall and S. 900. Why not just repeal the offending regulation? In the banking committee, I offered an amendment to do just that. My main reasons for voting against this bill are the expansion of the taxpayer liability and the introduction of even more regulations. The entire multi-hundred page S. 900 that reregulates rather than deregulates the financial sector could be replaced with a simple one-page bill.
I have removed a few unrelated paragraphs for brevity, bolded text is mine.

There are three critical takeaways here.

First, Ron Paul in 1999, already warned that the economy is accumulating a lot of risk and that people are chasing assets - a natural consequence of easy credit expansion promulgated by our central bank and policy makers.

Second, and more importantly, is that he saw the bill as MORE regulation.  Not LESS.  He identified a moral hazard and realized that taxpayers will be on the hook in case of failure.  This is precisely what was happening with all attempts to rein in Fannie and Freddie, two agencies that were strong armed by the Government to facilitate loan processing.  However the "American dream" was not to be derailed, even if it required massive social engineering to achieve it.

Third and MOST important, he identified and spoke of an impending bubble and bust.  What did he see and what he was warning about?  Why did he believe that this bill would exacerbate the existing financial bubble. This is precisely the root of the entire problem.  This is what the economists who criticize GLB by suggesting that our markets cannot handle the legislation are trying to so poorly convey.  We have a very serious structural problem.  I would argue that band-aids like Glass-Steagall and Gramm-Leach-Bliley are nothing more than weak attempts at solving distortions created by centrally planning interest rates and forceful expansion of credit.

As Ron Paul said in his closing statement, if Congress were truly to repeal the bill, it would take one page.  Instead, GLB is huge clocking in at over 140.  Curiously enough, Glass-Steagall is 37 pages.

So, the narrative goes something like this.

Crazy free-market libertarians passed a 140+ page bill that repealed 37 pages of Glass-Steagall (insert confused face here) with the help of 155 House Democrats and 38 Senate Democrats signed by a Democrat president.  Only to be opposed at that time, by the only self-proclaimed libertarian in the House on the grounds that this was not deregulation, but simply new regulation.

Do you now see the absurdity of it all?   But of course it is easy to understand the allure of it all.

Something like 2008 and the Great Depression and all seismic collapses are difficult to fathom and understand.  Especially when you consider just how illiterate most are on Economics, combine that with the fact that even economists themselves blame GLB and you got yourself a very explosive scapegoating situation.  People always look for the easiest and simplest solution to their problems.

Sure you can point to this bill and you can point to the greed of Wall St (apparently greed never existed before 2008) and pat yourself on the back for a job well done, but it requires far more time to appreciate why the collapse occurred and what to do to prevent it from ever happening again.
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The dust is beginning to settle and everyone is coming out to survey the damage.  On the surface, one would think nothing happened.  House is controlled by the GOP and the Senate and the White House are in Democrat hands.  Numbers appear to be largely the same, was there even an election?  One would think by the cries and wails of Romney supporters that the end is near.

However upon closer inspection one sees some very interesting dynamics at play.  There were visible winners and losers yesterday.  Do not accept the explanations and excuses that are rapidly coming down the pipe from those with serious egg on their face, like Dick Morris and his assertions that the electorate changed or that no Republican could have won this election because Romney was so perfect.  Morris is blind, his blindness is punctuated by his closing statement:
We must stop Obama’s socialist agenda. That’s our job for the next four years. We cannot allow Obama to magnify his narrow victory into a mandate for larger government, bigger spending, and less freedom.
Indeed, Morris simply prefers his brand of Republicanism execute the business of larger government, bigger spending and less freedom.  Precisely what Romney represented.

George Will who days before the election predicted a Minnesota win for Romney offered similar and equally meaningless conclusions citing electorate shifts and the amusement that Americans chose to elect Obama again despite him being the most Leftist president since LBJ.   He, however cannot square the contradiction of the self-identified conservatives.
Self-identified conservatives outnumber self-identified liberals 2-to-1 in a nation that has reelected the most liberal president since Lyndon Johnson and his mentor Franklin Roosevelt. 
Ahh, but here lies the rub.  It was not Obama's Statism that won yesterday, it was Romney Statism and his backward philosophy that lost.   I have asserted that there is no difference between the Democrats and Republicans outside of specific personal issues and it is precisely the Statist similarity and the personal issue difference between Romney and Obama that gave Americans a very simple calculation.  Why would they choose Statism AND a slew of other unpleasant additions when they can do without them?  

To that end, lets quickly examine the winners and losers and see if we can make sense of what America has concluded.

Winner:  State Rights

Yes, you read that correctly.  Despite the gross overreach of our Federal Government over the past many years and decades, the fight continues. In THREE States the 10th Amendment flexed its muscle on the matter of health care.
  1. Montana, Referendum 132: Giving choice to Montana residents of whether to buy health insurance striking at the heart of the ACA's individual mandate. 
  2. Alabama, Amendment 6:  Prohibiting mandatory participation in any health care pool
  3. Wyoming, Amendment A: Amending the Wyoming Constitution to ensure that health care choices are the right of the individual.
In all three cases the margin of victory was massive.  To see States challenge Federal law is precisely how the Republic was designed to function.  Since the State laws do not violate the Bill of Rights and do not overtly harm anyone's natural rights the Federal Government is going to have to accept this - one way or another.  

That is not all.  Two States have gone boldly where none have gone before, a direct challenge to the Federal Government's ban on Marijuana.
  1. Colorado, Amendment 64:  Legalization and regulation of up to 1oz of Marijuana.
  2. Washington, Initiative 502:  Legalization and regulation of a small amount of Marijuana (size unknown).
  3. Massachusetts, Question 3:  Medicinal Marijuana.  While not bold per-se, as it joins 17 other States in ignoring the Federal laws.
In both cases, the victory was not even close.  Oregon tried to follow suit, but surprisingly failed.  Still, despite all the problem that California has been having with federal raids on their dispensaries two States decided for a full frontal attack.  Incidentally, the best and only way to stop federal raids is for as many States as possible to legalize the substance thus making enforcement impossible.   

A special mention is New Hampshire and CACR 13, where a majority of its residents voted to ban the income tax.  The measure passed 57-43, but it is unclear at the moment as to whether that is a big enough margin for the purpose of amending the NH Constitution.

What is fascinating is that despite Colorado, Washington, Massachusetts and New Hampshire all voting for Obama they also all voted for State rights and freedoms.   You can easily throw your hands up in despair and assume that Americans are stupid in voting for Obama and more taxes, yet how do you reconcile that with 57% of NH residents voting to ban all possibilities of new taxes on one hand and Obama on the other?  

Loser:  Social issues

Social issues were on display.  

Maine, Maryland and Minnesota all voted to extend and enhance same-sex marriage rights.   This is another giant step in the right direction as it takes marriage out of the federal political discourse and plants it exactly where it belongs, the States.  While marriage should not be a government issue regardless of what level,  the best way to solve the issue of differing morals, values and religious sentiments is to localize the issue and handle it among the communities.

States extending same-sex rights while breaking down barriers of the abysmal failure known as the 'war on drugs' is a sign.  It is a sign that the electorate is shifting their stance on these issues.  Yet the Republicans are failing to get the memo.

Defeat of Todd Akin:   Todd Akin was supposed to handily defeat the very vulnerable Missouri Senator Claire McCaskill.  But he decided to let the world know what he thought about abortion and specifically abortion as a result of rape.  He turned an easy victory into a decisive loss.  No one other race showed quite as clearly how out of touch "family values/social conservatives" are.  If you are a Republican and social conservatism is important to you, then simply accept the fact that your views are not being shared by the majority.  

Defeat of Richard Mourdock:  While not clearly as obvious as the Akin defeat, Indiana's tea party choice of Richard Mourdock was comfortably leading his Democratic opponent in most polls until he commented on abortion and rape.  While his wording was not as offensive as Akin, the immediate shift in polls and his ultimate defeat followed promptly after.  Whatever he meant is not important, the idea of not allowing abortions after rape is simply too offensive for a majority of the people.  

When taken in context with the movement to legalize Marijuana, promote same-sex marriage and the defeat of two Republicans who were going to win if not for their abortion comments the picture is clear.  Things, they are a-changin'

Winner:  Limited Government and Libertarians

Gary Johnson finished with 1% of the national vote yesterday.  This is a historic finish considering he was only bested by the Clark/Koch ticket in the 1980s (by .06%) which was financed heavily by the Koch fortune.  Note: Gary Johnson was only on 48 ballots. 

While 1% is pitifully low, it is twice as much as the average Libertarian haul.  

Now it is true, Gary Johnson is not a pure libertarian by any stretch of the imagination.  His economic views are more aligned with Chicago style Friedman policies and his knowledge of Austrian economics is non-existent, but for the purpose of selling the message he did a fine job.  

Over 1 million Americans cast their vote for:  a greatly reduced Government in size and funding, flat consumption tax, end to the war on drugs, end to the war on people, end to violations of civil liberties and serious reform of entitlement, education and health care spending.  

Loser:  Big Government Republicans

Republican Senate losses combined with their inability to take the majority (something believed a month ago to be certainty) should give everyone pause.  Yet despite the GOP Senators's inability to accomplish much yesterday, the House remains intact.  This suggests, quite plainly I believe, that Americans are quite tolerant of the Republicans to continue handling the budget.  In fact more and more liberty minded candidates like Justin Amash (who won by 9 points) are joining the fray.  Republicans who want to cut military spending, oppose the Patriot Act and put social issues aside.    Those Republicans who continue to propose Romney-style spending with unpopular social issue positions will continue to lose.  

Winner:  Liberty

The loss of Romney, as I wrote yesterday paves the way for a 2016 that has the potential to offer a real distinction.  The lessons of 2012 are loud and clear.  Adapt or die.  

Whichever candidate emerges in four years will need to deliver a very simple proposal to the American public.  

A proposal of social tolerance, reduced military spending and intervention, civil rights, liberal drug policies and a true endorsement of a real free market unhampered by monopolistic money, the Fed, crony capitalism and regulations written by-and-for large corporations.    If the Republicans learn this lesson then they will be embraced, otherwise 2008 and 2012 will repeat.  

Give Americans a real choice, a choice of liberty and freedom.
Then and ONLY then, if America chooses otherwise can you begin to worry.  
For the time being, the future is bright and hopeful.   
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The election is over, it was over before it even started, but for many of you this is a very bitter pillow to swallow.  I understand that and I am not looking to tout the "I told you so" line, but instead to explain why Mitt Romney losing is the best thing that can happen for the long term.

There are three distinct camps in America right now.  The red jerseys, blue jerseys and those that are fed up with both.  Clearly the third camp is tiny and has no way of influencing change so the only way real change is going to come is due to some kind of crisis causing major jersey defections.

Given that Obama won re-election despite:
- One of the most anemic recoveries since the Great Depression
- Sticky and persistent unemployment
- A very unpopular health care legislation 
- Polarized and partisan House/Senate/Electorate
- Creeping inflation, high gas prices and stagnant wages.

This suggests that as far as the majority of Americans are concerned, things are not so bad.  Truth is, despite the occasional ISM, ADP, Consumer Confidence numbers and elevated stock prices the internal fundamentals are quite rotten.  They have been rotten for a long time, but Bernanke's zero interest rate policy and never ending liquidity has allowed the administration to kick the can down the road for quite some time.   However kicking the can has its limits and someone will need to pay the piper soon. 

So while I have been suggesting that some kind of fiscal calamity would have occurred in 2009, 2010, 2011 and 2012 - it was impossible to determine just how much creativity the central bank and DC would come up with.   After many trillions of additional debt and a THIRD round of Q.E. it is quite clear that creativity was kicked up a notch.  

However there is a limit to this madness and at some point two options will play out:  Either the liquidity will stop and another fierce recession will take over or the liquidity will continue causing inflationary misery upon the public and an eventual uptick in the bond market yields putting massive pressure on our debt servicing costs. The likelihood this will happen in the next four years is very high.  Which ever president presides over this calamity will be blamed.  Pain or malaise is what lies ahead.

The other undeniable aspect, and one that needs acknowledging is that Mitt Romney was a very poor candidate.  While Romney was representing the "opposition" his positions regarding: debt, spending, taxation, foreign policy, health care and entitlement were so poor and so similar to the existing administration that one is forced to wonder whether America is simply so far gone as to always prefer Statism over a free market or simply yearning for a real choice. 

While it is impossible to predict what would have happened if Mitt Romney had actually won in the next four years, but one thing is for certain:  For those who voted for the lesser of the two evils or wished for a different legitimate candidate you would have waited for at least another eight or twelve years!  Because a President Romney would have sought reelection in 2016 and given the high likelihood for a financial calamity would have likely lost to someone Hillary Clinton thus not having a worthy candidate for a very long time.

At this point in time, the wounds are still fresh for those wishing for change or were hopeful for something new and exciting - and you are not going to accept this explanation.  I get that.  But in four years you are guaranteed to be presented with another choice.  For those that spent time and money supporting a poor candidate like Romney this time, learn from your mistakes and choose wisely in four years. 

If a recession takes hold in the next four years then Americans would be far more partial to examining the really painful decisions that we should have been looking at now, but decided to forego.  Real entitlement reform, real examination of harmful Government policy, real considerations for legitimate spending and an adult conversation regarding debt and deficits. 

For those who are celebrating the Obama victory, be mindful that just like the lurch that happened in 2008 after eight years of disastrous Bush policies sent America reeling to one extreme, eight years of Obama could cause the same reaction in 2016.  

For the camp that was relegated to voting for a candidate we knew was going to lose, today represents a victory.  For the Republicans who are lamenting the loss, do consider the implications of choosing a candidate that represents the status quo - a status quo that must be changed.  For the Democrats who are cheering the Obama victory, keep in mind that nothing has been fixed over the past four years and when the pain comes, fairly or not Obama will be held responsible.  The next four years are going to be riddled with hardships and extremely difficult decisions. 

Hey, at least the drug war is starting to dissipate as local state issues are starting to break down Marijuana barriers.  Washington has "legalized" Marijuana, albeit in their limited and dangerous way, Massachusetts joined 17 other states in allowing medicinal Marijuana and Colorado is on the brink.   Alabama appears to have embraced the 10th Amendment and passed an initiative directly challenging the individual mandate portion of ACA.  Not a bad night after all!

Stay vigilant my friends.



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"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” - M. Rothbard