Monday, June 15, 2009

Cool, the Lakers Won -- Let's Riot!

As it became clear during Sunday night's game that the Lakers would win the NBA Championship, I knew there would be a riot outside Staples Center. I just knew it. Even though Staples Center has stopped showing big games on their outside screens due to the riots in 2000, that didn't stop L.A.'s best and brightest from showing up there and getting their vandalism on.

To be sure, this year's riot was far smaller than the 2000 riot, but the fact that it happened at all is a shame and an embarrassment to the people of L.A. It wasn't spontaneous this year. The people who caused trouble outside Staples Center made a special trip over there to light fires, mess up cars, and smash store windows. This is what people in L.A. do when they're happy. This is what people in L.A. do when they're angry. This is... just what people in L.A. do.

Let's hear it for all the Angelino thugs out there! Give yourselves a pat on the back. Your pride in the city of L.A. is admirable. If anyone deserves to trash their city in a victory riot, it is certainly you.

This is why I own guns and know how to use them.

Sunday, June 14, 2009

Gov't Seizes Control of Tobacco Industry

The U.S. federal government massively increased its power yet again last week: The Senate passed a bill on June 11 that put the tobacco industry under the regulation of the Food and Drug Administration. The House passed a similar bill in April.

As Ron Paul points out in this video clip, this bill that has effectively given the FDA control over the tobacco industry will eventually result in prohibition and thus the emergence of a black market in tobacco.

This is yet another dark day for capitalism and freedom in America. What leaves me flabbergasted is the fact that the nationalization (either direct or indirect) of so many industries and facets of our lives by our federal government is becoming a normal daily occurrence that no longer seems to alarm people or put them in a defensive mode. It's just... normal now.

What the hell has happened to this country and the people who inhabit it? The body remains, but the spirit has left it.

Tuesday, June 9, 2009

The New Three Rs: Reading, Writing, and Relief

This morning on the way to work I was listening to a radio news segment covering the impact of California's budget woes on the Los Angeles Unified School District (LAUSD), L.A. County's beloved public school system. (A brief introduction: LAUSD serves 694,000 students: 73% Hispanic, 11% African-American, 9% non-Hispanic white, 6% Asian and Filipino. It is the second-largest employer in Los Angeles County after the county government.)

The reporter on the radio show was basically delivering a sob story about all the badly needed services, programs, and facilities that would be endangered by a severe budget cut for LAUSD -- pretty typical. But then the report shifted gears a bit and took a disturbing angle I hadn't anticipated at all. The reporter said the budget cuts might drastically scale back the following two services for LAUSD students:

  1. Free lunches
  2. Free after-school and summer programs

She proceeded to explain why that would be very, very bad. Scaling back free lunches would be disastrous because countless single parents who send their children to LAUSD schools are very close to the poverty line and factor those free lunches into their daily food budget. And scaling back after-school and summer programs would be unthinkable because it would put the children (whose parent or parents work all day) back on the streets without any adult supervision, thus likely increasing the amount of gang violence.

What that report conveyed to me was that evidently we're not actually talking about education cuts here -- we're talking about welfare cuts. Free lunches funded by LAUSD are glorified food stamps, and free after-school and summer programs funded by LAUSD are glorified babysitting.

I'll venture a few guesses here as to the main reasons why LAUSD is in a world of hurt right now, and none of them have anything to do with the economic meltdown:

  • Single parent homes, especially fatherless homes
  • Parents having children when they are not in a financial position to take care of them
  • Parents having children when one parent or relative cannot stay at home to raise them and instill values in them
Isn't it clear how the above three factors contribute directly to the problems of poverty and gang violence? When a family defers having children until its finances are in order, free lunches funded by LAUSD are not necessary. And when a family has two parents, it is more likely that at least one of the parents will make sure that a boy grows into a man rather than a baggy-jeaned thug, and that a girl grows into an honorable woman rather than a pregnant teen.

Come on, LAUSD. Reading, writing, and relief isn't the answer. Placing emphasis on values for once -- nuclear families, financial prudence, hard work, excellence, achievement, independence -- there's your guaranteed winning strategy for the long term if you have the courage to commit to it.

Thursday, June 4, 2009

"At Least California's Government is Productive..."

I was having a discussion with one of my friends this past weekend regarding the economy and the results of California's recent special election. We were discussing the fact that all five of the propositions on the ballot that would have raised taxes were rejected by the voters. Which means the California state government is still suffocating under a bloated $21 billion budget deficit. It failed in its attempt to increase taxes as a way of reducing the deficit, and unlike the federal government, it lacks the politically expedient ability to create money out of nothing. So it would appear that California's two remaining options are to (a) reduce spending or (b) beg for a federal bailout.

I joked that Obama would be California's sugar daddy soon, fully expecting my friend (who has been a staunch conservative for years) to join me in my disgust at the idea of a federal bailout of our state government. But he didn't. To my extreme surprise, he actually said a bailout of California would be a good thing. To paraphrase what he said, "I wish this string of bailouts had never gotten started in the first place, but if the federal government is going to bail somebody out, it should be California, not GM and Chrysler. Those car companies have allowed themselves to be strangled by the unions, and they no longer make cars that people want to buy. They're not productive. At least California's government is productive."

Come again? The state government is running a $21 billion deficit, yet it's still productive? I think I hear the Mad Hatter's voice echoing in the distance...

In rough terms, being "productive" in the economic sense means producing (or enabling the production of) more goods and/or services than one consumes. If GM and Chrysler are considered unproductive because they are going into debt rather than turning a profit, then for the same reason mustn't we also consider California's government unproductive since they are going into debt rather than generating a surplus? Or is that a little too logical to be true?

Shortly after my "conservative" friend made his unexpected comment supporting the idea of a California bailout, it suddenly made sense to me. I remembered -- he is employed by the local government. A famous quote by Upton Sinclair popped into my head (yes, Sinclair was a bit of a socialist, but even socialists can occasionally stumble upon nuggets of wisdom):

It is difficult to get a man to understand something, when his salary depends upon his not understanding it.

I can almost guarantee you that if my buddy were employed in the private sector, he would be singing a different tune regarding the so-called "productivity" of California's government.

As California goes, so goes the nation. If the federal government bails out California, more states will follow, and soon the entire nation will be centrally organized and operated. The relentless destruction of this once-great United States will accelerate at an even greater pace.

Friday, May 29, 2009

Mike Judge is the Man!

Mike Judge, the creator of the animated TV series King of the Hill, has now created another animated show called The Goode Family. It premiered two days ago on ABC. Instead of being an over-the-top caricature of rednecks, it's an over-the-top caricature of sanctimonious, politically correct liberals -- especially environmentalists. It's about time somebody had the balls to create a show like this.

Cracking jokes about rednecks and red state culture is not controversial; it's practically required in blue Hollywood. But poking fun at environmentalists, especially from within Hollywood's own ranks... now that's controversial.

I find it interesting that the introduction of The Goode Family has coincided with the economic reality of the recession taking its toll on pricey businesses such as Starbucks Coffee and Whole Foods Market, which cater to the elitist, pretentious liberal crowd. (And witness the correspondingly sharp explosion in popularity of low-brow McCafe. I stopped by a McDonald's the other day, and everyone in line ahead of me was ordering a McCafe drink.) It seems as though the expansion of the pricey businesses in previous years was partly a biproduct of bubble-illusion, much like the real estate bubble in which it was embedded, and now that the economic house of cards is crashing down, people are beginning to recognize the reality that not everyone can afford the liberal brand of moral superiority.

If you haven't seen The Goode Family yet, go watch it on Hulu. The first episode is hilarious. Let's hear it for Mike Judge for having the courage to create a network TV show with its cross-hairs fixed on Blue State America for a change!

Tuesday, May 26, 2009

Is There Such a Thing as "Too Much" Liberty?

My friend Jason made an interesting comment regarding my previous post: "Too much of either liberty or justice will invariably squelch the other." I'd like to explore that comment.

Admittedly, I have read little if any political theory on the philosophy of justice. But that may not be a drawback for the purposes of this blog post. Often, one's perspective on an issue is shaped by other people's ideas before one ever sits down alone to really think through the issue de novo. The standard academic approach is first to learn what other people have said or written about an idea, and then to think -- hopefully critically -- more deeply about it. Less common in academia is the approach of thinking deeply and systematically about something before preconceptions are fed into one's mind. But doesn't the latter approach potentially yield better intellectual fruit? With either approach, one ends up learning "the greats." But in the latter case, one has the additional opportunity to take an unbiased, and therefore maximally open-minded, stab at an issue before being shown the well-trodden road of orthodoxy. It is in this fresh, unbiased spirit that I approach the idea of justice, about which I am admittedly uneducated.

Back to the statement under consideration: "Too much of either liberty or justice will invariably squelch the other." Too much liberty? Too much justice? Something tells me one's exact definitions of the terms "liberty" and "justice" will have a significant bearing on the truth of that statement.

The statement seems to assume that "liberty" means freedom in the positive sense: "freedom to." I fully agree that if people have unlimited positive freedom -- freedom to do anything and everything -- chaos, and therefore injustice, is the inevitable result. So I would say that is a bad definition of liberty. Now, how about we define "liberty" in the negative sense: "freedom from." In particular, freedom from violent aggression against one's physical person or property. If we define violent aggression against a person's body or property as "crime," then liberty in the negative sense is freedom from crime. That is the libertarian definition of liberty.

Now let's up the ante. Let's define "liberty" and "justice" in terms of each other. Let's define "injustice" as a crime (violent aggression against one's body or property) for which the victim(s) are not eventually recompensed. We can now say that liberty is defined as the freedom from injustice, and justice is defined as the recompense of victims whose liberty has been violated. Liberty and justice require each other. Moreover, total liberty and total justice require each other. Under these definitions, the idea that there must not be "too much" of either liberty or justice is absurd.

I realize that my definitions above are not completely precise. The definitions themselves contain words (e.g., "recompense") that need to be defined just like liberty and justice do. But I think I succeeded in clarifying the definitions at least enough to illustrate the critical dependence of the "liberty vs. justice" issue one one's precise definitions of those two terms.

Remember: It's freedom from, not freedom to!

Sunday, May 17, 2009

Meet H. L. Mencken

In my previous post I asked, "Are we adults, or are we children?" One of the most famous writers and journalists in America in the early 20th Century, H. L. Mencken, had an interesting answer to that question. He said the vast majority of people never progress mentally beyond adolescence, and that the disastrous but infinitely entertaining spectacle of democracy proves it.

I first heard of Mencken in a LewRockwell.com podcast interview from June 8, 2008, entitled "The Old Right." When Murray Rothbard, one of the most influential and well-known Austro-Libertarian theorists after Ludwig von Mises, was once asked how to learn to write well, he responded, "Read H. L. Mencken." So I read Mencken's 1926 book, Notes on Democracy.

Wow. The Mises Institute's warning that Notes on Democracy is not for the faint of heart is accurate. If you think Rothbard doesn't sugar-coat his writing, wait till you read Mencken. The man is incredibly blunt. Basically, Notes is a comedic roast of democracy that is as far from political correctness as east is from west.

As I mentioned above, Mencken held a dim view of the common man, Homo vulgaris. In fact, he is openly elitist in Notes. He contends that the concept of democracy was a step backward, not forward, for mankind since it gave inferior men a means by which to elevate themselves to the level of truly superior men. He explains that the bulk of men, who are inferior, do not want freedom; they want safety and security. More than that, they are genetically incapable even of understanding such abstract concepts as freedom, honor, and courage. Civilization advances in spite of, not because of, the bulk of these inferior men. It is in fact the small minority of truly superior men, history's towering geniuses, who alone have shaped and guided humanity's progress in all areas. Although he does not use these exact words, what Mencken implies is that Homo vulgaris serves simply to provide fertilizer from which the flower of true superiority, Nietzsche's übermensch, can grow.

Now, I can't say I completely agree with Mencken's thoroughly dim view of the common man, but I find it difficult to argue with much of what he says in Notes. Specifically, I cannot disagree with him that some men are intrinsically superior to others in various ways, sometimes as a result of genetics. This is one of the most controversial ideas today, and merely suggesting it will typically get one skewered by the press or crucified by the academic orthodoxy. Most people have a vehement, deep-seated, but completely unexamined (and therefore inherently religious) belief that all men are created with equal ability and potential in every way. But if all men are created equal in all ways, why do they not all look alike? Why do they not all sound alike? Why do they not all think and act alike? Why can some men master a dozen languages, while others never get a firm grip on even one? Why can some men compose majestic symphonies, while others cannot even memorize the melody to "Yankee Doodle"? Why are some men geniuses in five different areas, while most others are not geniuses in even one? Anyone who does not have a reasonable answer to those questions, yet maintains with fiery conviction that all men are equal in every way, is simply clinging to a religious belief that contradicts the plain facts.

Mencken's point is that democracy is a Utopian theory, but in practice it amounts to mob rule -- and the mob is not very bright. The Founding Fathers agreed with this idea, which is why they put various checks in place to hold back the mob and its fickle passions. Unfortunately, their checks did not work very well. The system we have today may not officially be a direct democracy, but history indicates that it has nevertheless devolved by the political pressures of mob rule.

Perhaps Mencken's most surprising claim is that one of democracy's most profound failures is that it eliminates the aristocracy (heredity/superiority-based class distinction) and replaces it with a plutocracy (wealth-based class distinction). Mencken is actually in favor of aristocracy since it is insulated from the degrading and corrupting pressures of the mob. For it is only in isolation from the mob that geniuses can develop and protect virtues like honor, courage, and freedom that ultimately direct the evolution, rather than devolution, of humanity.

After immersing myself in Austro-Libertarian ideas for months, reading Mencken forced me to confront an aspect of liberty I had not yet fully considered: Does the "invisible hand" work because of, or in spite of, freedom for the ignorant masses? Is the history of economic progress a history of collective prosperity emerging from the ignorant masses who had increasing levels of freedom, or is it actually the history of a relatively small number of industrial and financial geniuses who were able to harness the mob's unfocused energy for the purpose of their focused and enlightened goals?

Far from being a spontaneous uprising of the masses, the American Revolution was directed from beginning to end by a small minority of highly intelligent and educated men. As some of the Founding Fathers pointed out in their writings, freedom cannot long survive in the hands of those who lack the knowledge and will to defend it. That means most people. If Mencken is correct that the masses are truly ignorant and have never mentally progressed beyond adolescence, then maybe the waxing and waning of freedom throughout history has had far more to do with the struggles and conflicts of geniuses than with the superstitions and myopic passions of Homo vulgaris.

Tuesday, April 28, 2009

The War on Drugs

Some of the most fundamental arguments for and against the War on Drugs can be concisely stated thus:

Anti-drug position: The government should outlaw certain drugs, because people often behave irresponsibly or even dangerously when they consume them, and some of those drugs can also be dangerous to one's health. Legalized drugs would impose a burden on society, the safety of our roads, the health care system, etc.

Pro-freedom position: It is a violation of a person's natural rights for the government to imprison or harm him merely for possessing, selling, or consuming a drug. A person owns his own body, and therefore any decision that only affects his body and nobody else's is purely his own. If he has violated someone's natural rights (life, liberty, or private property), whether influenced by drugs or not, then of course a crime has been committed and should be dealt with accordingly. But buying, selling, possessing, or consuming a drug in the absence of a violation of anyone's natural rights is not a crime.

A couple of obvious questions present themselves: If, say, marijuana is illegal ostensibly because it alters a person's judgment, why is alcohol legal? Alcohol certainly alters a person's judgment. Furthermore, whereas people under the influence of alcohol tend to become more aggressive and often even belligerent, people under the influence of marijuana tend to become less aggressive and more relaxed. Similarly, if some drugs are illegal ostensibly because of their negative health effects, why is tobacco legal? Tobacco, whether smoked or chewed, is strongly correlated with cancer.

I assert that existing drug laws are logically inconsistent. Logical consistency ultimately requires one of two alternatives: (a) prohibit all drugs, or (b) legalize all drugs.

Prohibiting all drugs is not possible due to the inherently arbitrary definition of the word "drug." If one defines a drug as a substance that has an effect on one's body and/or mind, then every atom, molecule, compound, or mixture in existence would have to be defined as a drug: If one were to ingest, smoke, or handle enough of anything, it would have a noticeable effect on one's body and/or mind. Some substances just happen to have more of an effect than others. The only non-arbitrary, logically consistent alternative is to legalize all drugs.

A lot of people would probably be surprised to learn that one of the most profound discoveries in the biological sciences in the history of the human race was made by a man while he was tripping on acid. Graham Hancock explains in his 2007 book Supernatural:

In late July 2004, the Nobel Prize-winning biologist Francis Crick, co-discoverer of the structure of DNA, died at the age of 88, and soon afterwards a little-known fact of his life hit the tabloid press. This was that when he was working at the Cavendish Laboratory in Cambridge in the early 1950s, he frequently used LSD (which remained legal until the mid-1960s) as a "thinking tool" to boost his mental powers. According to a report published in London on August 8, 2004 in The Mail on Sunday, Crick had privately admitted to colleagues that he was under the influence of LSD in 1953 at the moment when he "perceived the double helix shape" and unraveled the structure of DNA.

You can read the cited article here.

The fact that Crick discovered the famous double helix shape of DNA while under the influence of LSD doesn't necessarily mean that he would never have discovered it without LSD. Even if he hadn't, perhaps somebody else would have made the discovery without LSD. Independent, near-simultaneous discoveries are common throughout the history of science. Nevertheless, Crick's acid-trip discovery should at least make us pause and consider the possibility that maybe -- just maybe -- some drugs that are currently illegal can, are, and have been, used responsibly as tools for various purposes.

For ages, shamans in countless hunter-gatherer societies throughout the world have used the substances found in various psychoactive plants as the foundation of their religions. These people have claimed, and still claim, that the psychedelic substances -- ayahuasca, psilocybin mushrooms, ibogaine, mescaline, etc. -- open a gate to the "spirit world" that allows them to enter and explore. Maybe it's true, and maybe it's not. I suppose one actually must take a given drug and experience the result firsthand before one knows for sure.

Have government officials experienced each and every psychedelic substance that they have banned virtually worldwide? Of course not. Even if they had, what right does a government have to tell people which inner experiences they are and are not allowed to have?

For those who would argue that prohibiting drugs isn't primarily about banning certain inner experiences, but rather preventing people from harming themselves or others, I ask this: If that is the case, then why should people be allowed to drink alcohol? Or own knives and guns? Or drive cars?

Are we adults, or are we children? The War on Drugs is a war on natural rights. It is a war on freedom and personal responsibility.

Sunday, April 26, 2009

Brown is the New Green

My apartment manager recently left a note hanging on my doorknob informing me of an upcoming "Going Green Project." The note pointed out that Southern California is facing a water crisis, so the management company is going to be proactive rather than reactive by "providing efficiency before it is mandated by the state." It is going to be "part of the solution rather than part of the problem" by installing new "energy efficient" toilets at no charge to the tenants.

It's official: Shit has just gone green.

First, I'll just point out the note's interesting usage of the term "energy efficient" in reference to the new toilets. Until now, the toilets I've used have been plumbing fixtures hooked up only to water and sewage pipes, not electrical outlets. If these new toilets use AC power, I can't wait to try one out!

All sarcasm aside, this "going green" fad has gone way too far. It has officially joined the politically correct lexicon of overused euphemisms. Secretaries are now "administrative assistants." Trash men are now "sanitation engineers." And now, businesses no longer cut costs -- they "conserve resources" or "increase energy efficiency."

But isn't conservation of resources (energy, water, labor, materials, etc.) relative to produced output the most basic way in which a business increases its profits? Haven't businesses been pursuing increased profits -- and therefore increased efficiency -- since capitalism first came on the scene? Am I missing something here? When has waste ever been rewarded in a free market? The only institution that rewards waste is government.

Regarding water and energy, the only reason we have shortages and "crises" in the first place is because water and energy are not ruled by purely free market forces. They are heavily regulated, or completely controlled, by government, which does not allow market prices for those resources to prevail. Government keeps the prices of water and energy artificially low, and the inevitable result is that shortages occur due to overuse (i.e., waste). Market prices are part of a self-rationing mechanism. A high price for a resource sends a signal to consumers and businesses to use less of that resource, and a low price sends a signal to consumers and businesses that they can use more of it. As a resource becomes more scarce, its market price will naturally rise -- unless, of course, government intervenes in the name of "fairness" or "protection against price gouging" and thereby prevents the market price from performing its rationing function.

If we really want people and businesses to conserve energy and water, we shouldn't sanctimoniously heap guilt on them about all things "non-green" while simultaneously allowing our government to keep the resource prices artificially low. We should simply get the government out of the water and energy businesses altogether -- flush them down the toilet -- so that market prices can prevail and thereby allow people to self-ration their use of those crucial resources.

Wednesday, April 15, 2009

Happy 94th, Income Tax!

Today, April 15th, marks the 94th year that Americans have had to pay an income tax to the federal government.

I cringe whenever I think about the utterly primitive and barbaric conditions that prevailed in the United States prior to 1916, that first year of the federal income tax. No roads, no commerce, no laws, no technology, no language, no civilization of any sort. Just the law of the jungle: widespread pillage, plunder, rape, pedophilia, necrophilia... even cannibalism.

Thank God the federal government saved the day with its brilliant solution of stealing a portion of every person's income. Out of that daring, resolute action on the part of government in 1916, American civilization was born. Prior to that year, there was no America. The land was merely inhabited by godless, lawless ape-men who spent their days wallowing in the mud like pigs.

But the theft of a portion of their income changed everything. It immediately transformed the disgusting animals into decent social beings striving for virtue and the eternal glories of the State.

Happy 94th, Income Tax! We Americans obviously owe our lives -- nay, our very civilization -- to you.

Tuesday, April 14, 2009

Duck Tales Teaches Inflation

You gotta love Duck Tales.

Friday, April 10, 2009

Political vs. Economic Votes

In a democracy or any other government that utilizes aspects of democracy (such as the constitutional republic of the U.S.), there are two main types of voting: (1) political voting, and (2) economic voting.

We're all familiar with the basic idea of political voting, but what is economic voting?

Economic voting is what one might call "voting with one's money and one's feet." Whenever you choose to spend or not spend money at a particular business, you are casting a vote. Whenever you choose to patronize or not patronize a particular business, you are casting a vote. Whenever you choose to live in City A instead of City B, Neighborhood C instead of Neighborhood D, and Home E instead of Home F, you are casting a vote. Whenever you choose between net spending or net saving during a particular time period, you are casting a vote. When you choose a college and a career, which car to drive, which supermarket to shop at, where to go on vacation, which charity to donate to, what to buy or sell on eBay... you are casting a vote. Whew -- that's a lot of votes! Economic votes are the stuff of life.

So which type of voting -- political or economic -- does the State and its allies train us from birth to worship and revere in raptured awe? Political voting, of course. There is a reason for that. It is political voting, not economic voting, that strengthens the idea that initiating force against innocent people is legitimate and morally acceptable.

Allow me to offer an analogy for your consideration. It occurred to me today that political voting is to economic voting as paper money is to gold, and as words or intentions are to actions. That actions trump words or intentions is clearly observable in business, romantic relationships, and reality in general. Paper money is an IOU, merely the intention to repay a debt with real money. Gold is real money that represents action. There is no intention to make a payment in gold. One either hands over the shiny, tangible metal or one doesn't. Similarly, political voting is a type of IOU -- a lottery ticket disguised as a virtual claim to something -- that the government offers to us: it is the intention of the government to force us to do only those things that we would have freely chosen to do anyways, i.e., to "represent" us equally and fully. But that can only happen if everyone votes unanimously on every single action the government takes. Since that obviously will not happen (if it did, what would be the point of having a government?), the government cannot make good on its intention to "represent" each of us equally and fully. It must always force some people to do certain things they do not want to do. Everyone goes into the political lottery (election) thinking, Come on, baby needs a new pair of shoes!, but not everyone is holding a winning ticket.

At the end of the day, it's freedom that everyone wants. Freedom is the gold. As long as "your" elected politician is making choices that benefit you or at least don't harm you, rather than forcing you to do things you don't want to do, you are happy because you feel free. You might even feel better than free if the government is giving you freebies. By contrast, the people who didn't vote for "your" politician are probably upset because they don't feel as free as you do -- their options are more limited. So the bizarre situation seems to be that everyone ultimately wants to be free, yet rather than simply organize themselves along purely free-market lines, they would rather form a coercive government apparatus and play with political lottery tickets (i.e., cast votes) in the hope that they'll get to keep most of their freedom or hit the jackpot by taking away everyone else's.

You are given one political vote -- and that one vote is a paper IOU, a mere lottery ticket dressed up in a cheap tuxedo.

You get to choose from an infinitude of economic votes.

Even if you have little or no money, there are ways you can freely interact with people that can make a huge difference in your community. So you can always cast an economic vote with your actions, no matter what your net worth is. It is a universally recognized "currency" in human interaction. That makes the freedom to exercise human action the gold standard in the political realm. So why do we even need political votes? Insofar as "democratic" tends to connote distributed rather than centralized control, what could be more "democratic" than the gold standard of freedom?

Tuesday, April 7, 2009

TSA Detains C4L Staffer for Having Cash

Shortly after the Campaign for Liberty (C4L) regional conference in St. Louis, a C4L staffer named Steve Bierfeldt was detained and questioned for 30 minutes by airport police and Transportation Security Administration (TSA) officials. Evidently, the only reason they detained him was because he had $4,700 in checks and cash and had a variety of promotional material such as C4L and Ron Paul bumper stickers. The TSA even threatened to turn Steve over to the DEA and FBI for refusing to tell them why he had the $4,700. They eventually released him when another officer intervened.

Interestingly, Steve was able to record most of the interrogation using the cell phone in his pocket. He appeared later on "Freedom Watch," where Judge Napolitano played the recording and interviewed Steve about his experience.

Watch the "Freedom Watch" video clip here.

Some might argue that we can't see or hear anything that happened before the recording started in the interrogation room, so for all we know, Steve instigated the entire incident for publicity by being obnoxious to the TSA officers at the security checkpoint. That is a possibility, but I consider it unlikely given that none of the officers in the recording make any mention of such behavior -- only the "suspicious" nature of a preppy-looking white guy holding $4,700.

Could this incident have had anything to do with the recent MIAC "Modern Militia Movement" controversy? With such heightened publicity for Ron Paul surrounding that incident, perhaps a few officers in Missouri were simply a little annoyed when they saw Steve's stockpile of Ron Paul-related material.

Or maybe the moral of the story is this: When you carry a large amount of "anonymous" money such as cash or gold rather than keeping all of your money in Establishment bank accounts, the Establishment immediately views you as a suspicious Outsider.

Monday, April 6, 2009

Start Saving Now

I am going to be a wet blanket in this post, but I am writing this because I do not want to see anyone I know caught unprepared when the economic turd hits the fan. We may be well prepared, but if our friends and family are not, our preparation will be largely for naught. Think of how many people you know and love, and then think of how hard it is going to be just to keep yourself afloat during the coming economic turmoil. Without any preparation, those people will all be coming to you for help. Feel a fire smoldering under your rear end yet?

If Peter Schiff, other bearish investors, and most of the Austrian School economists are right, the U.S. dollar is eventually (probably sooner rather than later) going to decline severely or even hyperinflate at the same time that the U.S. economy is suffering a severe recession. Many of them think this process could begin within the next few years. Now, I will admit that every age has its false prophets and hucksters, but that does not mean we should refuse to listen to every person who is concerned about impending disaster. Written history is full of disasters; they're not exactly rare. Schiff's and others' predictions are based on sound financial and economic reasoning. The U.S. is a nation based on debt and spending, devoid of a manufacturing base -- it cannot continue with its present standard of living. It will eventually decline to a living standard in line with its level of production, which is much lower than our current standard of living implies. On the individual level, we recognize that a person cannot long enjoy a lifestyle that exceeds his income. Just extrapolate that common sense to an entire country of people.

As Schiff says, "the federal government is the biggest subprime borrower of all, and it has committed the American taxpayer to the mother of all adjustable rate mortgages."

When the decline comes and the economy readjusts itself to reality, we will most likely have to face two unpleasant situations: (1) high unemployment and lower wages, and (2) sharply rising costs for the things we pay for.

Now for the real wet blanket part: Preparing for this requires (among other things) getting out of consumer debt and saving money. And not just saving a few cents here and there. Financial planners usually say the conservative approach is to have an emergency fund of at least three to six months' living expenses. ("Emergency," of course, meaning to be set aside and not spent on cars, TVs, vacations, or any other discretionary purchases.) After you've accumulated your emergency fund, you may want to consider putting any additional savings into non-dollar denominated assets like gold, silver, stable foreign currencies, and/or non-perishable goods. Staying away from dollars will provide some protection from the rising prices that are sure to result from the Fed's massive monetary inflation over the past several months. As prices rise, so will your non-dollar savings.

I didn't come up with the preceding advice myself -- it comes from Schiff and many other Austrian School economists. If you follow these "doom-and-gloomers'" advice and they turn out to be wrong, the worst that will happen is that you will have a lot of money in savings and be better off because of it. But if they turn out to be right, your savings will provide a crucial cushion when you need it most. The earlier you start saving, the better chance you will have to accumulate your non-dollar assets before their prices really start to climb. If that is what you plan to do, spread the word to the people who matter the most to you -- one by one. This is not about distributing a chain letter, writing your congressman, or protesting in a political rally. This is simply about protecting yourself and the people you care about from the financial hardship that is coming.

Again, sorry for the wet blanket post...

Sunday, April 5, 2009

A Penny Spent Is a Penny Earned?

In this article, Peter Schiff points out that at the recent G20 summit in London, President Obama told Americans that their fears regarding the economy should not interfere with their spending. According to Schiff, here was the sage advice offered by Obama:

We must spend now as an investment for the future.

Those of you who are familiar with the Austrian School of economics know that spending on consumption is the exact opposite of an investment for the future. This destructive Keynesian fallacy that long-term economic prosperity rests on a foundation of consumption rather than saving has got to be put to rest once and for all.

We truly do exist in an Orwellian world when the most powerful and highly respected people stand before us and boldly claim that black is white, up is down, and two plus two equals five.

Friday, April 3, 2009

Service with a Smile

One of the things I admire most about free markets is that the businesses that operate within them are totally focused on making their customers happy. Service with a smile, as the saying goes.

Despite what some people seem to think, customer service is not inherently demeaning. Provided the customers are not just playing games or intentionally trying to make one's life unnecessarily difficult, listening to their concerns and doing one's best to alleviate their discomfort serves a genuinely noble end -- serving one's fellow man.

This afternoon I visited a local coffee shop/deli and was waiting in line behind a woman ordering at the counter. I couldn't help but overhear the conversation:

"Let's see... I'll have a roast beef sandwich, and--"

"--I'm sorry, ma'am, we're all out of roast beef."

"You're kidding me."

"No, I'm sorry, we're out."

"This is the second time I've come here for the sole purpose of ordering a roast beef sandwich, only to find that you're all out!"

"I totally understand; our roast beef sandwiches are really good. May I recommend our turkey sandwich instead? I think you'll like it -- it's another popular one."

"[Huffing and puffing] Unghhh... okay, fine. I'll have one of those. But I plan to come here again next Wednesday, and if you guys are all out of roast beef a third time, I'm not going to be a happy camper."

"I understand. What time do you plan on coming next Wednesday?"

"Around 7:00 PM."

"Okay, I'll personally make sure we have enough roast beef the next time you visit."

"[Still huffing and puffing, but less than before] Thanks."

Equally as important as what the girl at the cash register was saying to the disgruntled customer was how she was saying it. This girl was a pro. She said everything with a sweet, understanding smile on her face -- it didn't look fake at all -- and her voice was calm, soothing, and confident. I'm sure that underneath that professional exterior she was thinking to herself, What a bitch!, but the point is that she did not say it or act it. The customer couldn't have cared less what the cashier thought. All she cared about was that the cashier treated her like a queen. Actions trump intentions.

By no means are all private-sector employees that friendly and professional. But a lot of them are. Most of them are at least cooperative in the face of complaints and rude manners. They have to be. One way or another, in the long run their paychecks depend on it. In a free market, where you have countless people cooperating with each other with smiles on their faces out of mutual self-interest, what you have is a society based on people serving each other. By contrast, in a government-managed economy, you see far fewer smiles and far less enthusiasm since what you have is a society based on people serving abstract Authority. Apologists for State power claim that government benevolently serves man, but the crux of the matter is this: How can something be called serving man if it simultaneously steals from him by force?

Can you imagine how the exchange I witnessed today would have taken place in a government bureaucracy (think DMV)? Let's give it an Orwellian name like the "Ministry of Food":

"Let's see... I'll have a roast beef sandwich and--"

"--We're out of that. Order something else."

"You're kidding me."

"Lady, you're holding up the line. Order or I'll order for you."

"This is the second time I've come here for--"

"--Here's a turkey sandwich. Next!"

"But I didn't want a turkey sandwich! My tax dollars pay your salary, you know."

"Security! Take this anti-social troublemaker to the interrogation room. And put her on the terrorist watch list due to her suspicious behavior."

Is that fictional exchange hyperbole, or is it disturbingly accurate based on our personal experience with government "services?"

The essence of true service between individuals is free choice. Only when two people exchange voluntarily, without the use of force, can it be said with certainty that the exchange truly serves both of them. This is the philosophical beauty, the truth and ultimate triumph, of the free market.

The next time you serve a customer or any other fellow human being, try doing it with a pleasant smile and cheerful voice. If your smile is rooted in the philosophical foundation of the free market rather than merely some superficial muscle movements in your face, it will look far more genuine. It might even be genuine.

Thursday, April 2, 2009

The "Austrian" Approach to Investing

A few years ago, I started to dabble in the theory and practice of finance and basic investing. I read many books on the subject, and although it was fascinating reading, there were always some nagging doubts in the back of my mind regarding some of the key assumptions and philosophical approaches adopted by the authors of those books. Their ideas -- based heavily on the theories of mainstream academics -- seemed a little too neat and Platonic, isolated from the messy and uncertain world of human events.

Soon after being introduced to the Austrian School of economics, I began to wonder what this science of human action -- praxeology -- had to say about investing (besides the obvious and incessant two-word investment advice: "Buy gold!"). What I wanted to know was not whether there are particular Austrian tricks or tactics for investing, but whether there is an overall Austrian approach to investing. There were a couple of articles on the Mises Institute's web site that hinted at such a thing, but they weren't quite what I had in mind.

Then, about a week ago, I noticed a podcast in the Mises Institute's media section entitled "The Development of an Austrian View of Investment." Bingo! In that 30-minute podcast, Richard Grimm summarizes Ludwig von Mises's theory of investing as described in his 1957 treatise Theory and History and adds his own observations from his experience in the financial industry.

Grimm begins by pointing out the three main approaches to investing that one finds today: (1) technical analysis, (2) quantitative analysis, and (3) fundamental analysis. I will summarize what he said regarding each of these three approaches, injecting a few of my own comments along the way.

Technical Analysis

Technical analysis consists of looking at price charts to find patterns that supposedly determine the future direction of the market. Different patterns mean different things: the "dead cat bounce," the "Elliot wave principle," the "Hikkake Pattern," "oscillators," and so on. As human beings, we all tend to look for patterns, but Grimm points out that the problem with technical analysis is that it uses black-box methods that have no theory behind them. It's the modern-day financial equivalent of reading fortunes from tea leaves or oracle bones. It's numerology for investors. Those who use technical analysis often succumb to the "problem of randomness": if they are temporarily successful, they may think their approach is correct when in fact they are probably just lucky.

Mises pointed out that human action is not deterministic, but teleological -- determined by freely chosen goals and actions based on those goals. Technical analysis fits into a deterministic, not teleological, framework. Nevertheless, some Austrian economists embrace technical analysis for reasons Grimm cannot figure out. (Maybe it's just a guilty pleasure, like a world-class body builder singing Bette Midler songs in the shower.)

Quantitative Analysis

Quantitative analysis uses mathematical modeling and econometric applications to find investment opportunities. There are countless ways of quantitatively analyzing markets, but they ultimately amount to programming a mathematical model into a computer and then letting the computer make the investment decisions.

Modern Portfolio Theory (MPT), which includes the Capital Asset Pricing Model (CAPM) for estimating the prices of financial assets like stocks, is based on the assumption that the logarithm of price changes in the market follow normal distributions (bell curves). But various people, including famous mathematician Benoit Mandelbrot and financial writer Nassim Nicholas Taleb, have shown that price changes in the market do not follow normal distributions at all. Whereas normal distributions have "skinny tails," meaning the probability of a large deviation from the mean drops off rapidly with the size of the deviation, real-world asset price distributions have "fat tails," meaning the probability of extreme or even catastrophic deviations from the mean is disturbingly high. Moreover, those "fat-tailed" distributions are not well behaved. They often exhibit quasi-fractal behavior. Another failing of MPT noted by Austrian economists is that it totally ignores the role of the entrepreneur. Entrepreneurial action affects the cross-correlations between different assets, which means the MPT "optimizers" that use them can become unstable. For these and other reasons, all of the investment methods based on MPT are severely flawed.

A common practice in quantitative analysis is to "backtest" one's mechanical, model-based trading system on historical market data. The idea is that if the system is successful on past data, it is likely to be successful in the present and future as well. But Warren Buffett succinctly explained in a recent Berkshire Hathaway shareholder report why the backtesting approach is seriously flawed: "If merely looking up past financial data would tell you what the future holds, the Forbes 400 would consist of librarians."

Surprisingly, despite MPT's well-known fatal flaws, it has made its way into how a lot of financial assets are managed these days. For example:

  • Uniform Prudent Investor Act of 1992: If you're running a pension fund in a state that has adopted this act (44 of 50 have), you are required by law to use MPT to manage your assets.
  • Pension Protection Act of 2006: Businesses running pension plans or 401(k)s have two choices: They can either (a) use an advisor who has a Certified Financial Planner (CFP) credential and is paid by fee rather than commission, or (b) use an MPT optimizer model.

A popular outgrowth of quantitative analysis and MPT is passive investing, which emphasizes diversification above all else. The typical example is to buy an index mutual fund, which buys and holds hundreds or even thousands of securities to track a broad market index rather than pick or actively trade securities in an effort to "beat the market." While index funds do have some definite advantages over actively managed funds, such as low expenses, low portfolio turnover, and returns guaranteed not to be below (nor above!) average, their implicit assumption that more diversification is always better may be their Achilles' heel.

Pursuing extreme diversification assumes that the Efficient Market Hypothesis (EMH) is basically correct. The EMH says that markets quickly and accurately reflect known information, so to that extent, the asset's price is always "right" -- only unanticipated information causes prices to be temporarily "wrong." And because savvy professional investors will pounce on that unanticipated information such that the asset's price will be "corrected" incredibly quickly, ordinary investors don't stand a chance of consistently identifying and taking advantage of undervalued or overvalued assets. Some of your attempts may be successful, but most will not since your competition (the people you are trading with) are much more experienced and skilled than you are. So on average, trying to "beat the market" will in the long run result in below-market returns. Therefore, why not just guarantee oneself market returns by randomly selecting a large basket of diverse stocks and holding onto them (more or less what an index fund does)? That's the EMH-inspired Ode to Diversification.

Austrian economics is not compatible with the EMH. The big problem with EMH is its assumption that only unanticipated information presents investment opportunities. It denies the possibility that known information may not be "correctly" factored into the price of an asset. Austrian economics recognizes that people's actions are based partly on subjective valuations, not purely objective data. Different people process and react to information in different ways -- often in very different ways. People can have any number of goals, motivations, desires, preferences, fears, biases, weaknesses, etc. Because of this, it is possible that the current price of a particular asset may not be "right" at all. It could be, for example, that most people are motivated in some way to believe that its price is right, or maybe most people's understanding of economics is insufficient to allow a better estimate of its price. Austrian economics recognizes people as unique, subjective, goal-driven, acting beings. EMH assumes they are robots.

Fundamental Analysis

Fundamental analysis is stock picking. In Theory and History Mises defined the thought process of investing as thymology, the science or philosophy that underlies fundamental security analysis. Thymology is an offshoot of introspection, similar to the methods used in history and natural psychology. At its core is knowledge of human valuations and volitions. Picking stocks via fundamental analysis is the Austrian approach to investing.

Thymology, or security analysis, proceeds in four steps:

  1. Study historical data and events
  2. Identify key factors that influenced past events
  3. Integrate current information into the analysis
  4. Synthesize scenarios to evaluate future courses of action

This means an "Austrian" investor considering a given firm would attempt to gain an understanding of its business (financial statements, management, organizational structure, etc.) and the environment in which it operates (geography, competition, economic and political climate, currency, etc.) before making a decision to buy, hold, or sell. An Austrian perspective, especially knowledge of Austrian business cycle theory, should give an investor a distinct advantage here.

The wise old investors who have advocated a passive approach (including the legendary John Bogle, founder of The Vanguard Group) have been right about emphasizing low expenses and sticking to an investment plan despite temporary fluctuations, but could they have led us somewhat astray by overemphasizing diversification? In a world of general insanity, the Austrian approach to investing is about finding the opportunities that most people are too crazy to notice. Too risky, you say? Not if your view of reality is clearer than most. Gambling is one thing; taking a calculated risk based on solid economic understanding applied to a careful assessment of human motives and actions is quite another.

Investing in a broadly diversified U.S. index fund during a protracted (5+ years) U.S. bear market is like hunkering down and holding on for life while a tornado passes through the neighborhood. That's one way to do it, I guess. A better strategy might be to get out of the tornado's way.

Tuesday, March 31, 2009

Some Cool Graphs

If you are interested in economics and like looking at graphs, then you'll love this page at the Mises Institute web site.

The page is full of various graphs, roughly divided into the following categories: Current prices, monetary trends, interest rates, macrotrends, and federal budget.

If you feel overwhelmed by the sheer number of graphs or don't know what most of them represent, never fear. In December '08 Jeffrey Tucker interviewed Mark Thornton, senior fellow at the Mises Institute, to walk through the page and explain what each of the graphs means. Along the way, Thornton also provided commentary on how some of the graphs relate to the current financial meltdown as well as previous recessions. It's quite educational. Click on one of the links below.

Current Market Conditions - Mark Thornton Explains the Mises Institute's "Markets and Data" Web Page (12/15/2008)
Audio Stream / MP3

Sunday, March 29, 2009

Would the Big Guys Still Buy Out All the Little Guys in a Free Market?

I frequently discuss free market economics with my friends. A few of them are free market advocates like I am, but we still ask each other tough, critical questions from time to time. Sometimes we are just playing devil's advocate, but other times we honestly don't know the answer. In one recent discussion I had, one of my friends (a supporter of free markets) asked a good question to which he did not have an answer. I'll paraphrase what he said:

"I understand how government intervention is often used to concentrate wealth in the hands of the politically well-connected. But I still have lingering doubts that a totally free market would prevent wealth from becoming ever more concentrated in the hands of the wealthiest and most powerful people. For example, look what happens to most successful start-up companies. A big competitor inevitably comes along and offers to buy out their business for such an attractive sum that it would be crazy to refuse. So the big guys can just buy out all of the little guys to eliminate the competition and maintain their monopolies, can't they?"

I started to respond but stopped in mid-sentence when I realized I didn't have an answer to the question. My friend had stumped me. A small seed of doubt regarding totally free markets had been planted in the back of my mind.

A few weeks went by. I continued to read books and articles by Austrian economists and libertarian scholars, keeping an eye out for something -- anything -- that might address the hard question my friend had asked. Finally, today as I was reading Thomas Woods's new book Meltdown, a passage on page 48 jumped out at me:

In the wake of the Enron scandal and the dot-com boom and bust, Congress passed Sarbanes-Oxley, a regulatory act that well-established firms came to welcome since they knew it would give them a competitive advantage against newcomers. They had no idea how much. The most recent estimated annual cost to implement it in a public corporation is $3.5 million.

So how does this $3.5 million cost of implementing the Sarbanes-Oxley regulations apply to small businesses choosing to sell out to their much larger competitors? Woods quotes Michael S. Malone from a 2006 Wall Street Journal article:

"The closer you look at Sarbanes-Oxley," writes [Malone], "the more you realize it is almost perfectly designed to crush new business creation.... [$3.5 million is] pocket change for a Fortune 500 company, [but] the entire annual profit of a newly public firm. Is it really any wonder that smart entrepreneurs look for a corporate sugar daddy instead of an IPO?" Add to that Regulation FD ("Fair Disclosure") and the new rules on stock option valuation, and the result is that "fewer new companies are going public; economic power is being concentrated in the hands of fewer companies; competition is reduced; new wealth is less widely distributed; the rich are getting richer; fewer talented people want to join entrepreneurial ventures; and corporate boards are getting stupider and more paranoid." That could be why the biggest, most established firms typically seem to favor additional regulatory burdens. Expect to hear them joining the chorus today, solemnly informing us how sadly necessary additional regulation is.

In other words, one of the main reasons so many entrepreneurial ventures sell out to the big guys rather than "go public" and compete with them is because government regulations have made "going public" prohibitively expensive.

This is a perverse effect of the government on the economy that few people understand. The mountains of government regulations burdening our economy disproportionately harm the small businesses, not the big ones, because the costs of complying with them are typically fixed rather than proportional to a business' size. And in addition to that regulatory strangulation, small businesses must also prepare themselves to do legal battle at any time with large corporations and their teams of highly paid lawyers over "intellectual property" and other anti-competitive schemes -- not an inexpensive undertaking for a small business, to be sure.

The little guys sell out to the big guys not because our economic system is inherently rigged against them, but because our government has made it so through incessant regulation and interference.

Saturday, March 28, 2009

The Cheapest Inflation Hedge

After mentioning some key points from Peter Schiff's 2007 book Crash Proof: How to Profit from the Coming Economic Collapse, I got to thinking about what the cheapest way to save in foreign currencies or physical gold would be. After discussing the matter with a friend, I decided to compare three methods: (1) buying and selling shares of the Merk Hard Currency Fund through a discount broker (many offer free mutual fund transactions), (2) buying and selling "digital gold" through GoldMoney.com, and (3) buying and selling physical gold bullion coins at the local dealer and storing them in a safe deposit box. I didn't consider gold Exchange Traded Funds (ETFs) since I've heard sketchy things about them.

I chose GoldMoney.com as a representative "digital gold" currency since it appears to be fairly legit and is growing in popularity. Basically, when you purchase gold through GoldMoney, they allocate the gold to you (earmark it) and let you choose a secure storage vault from their list. For transactions below $10,000, they sell gold at 2.5% above spot and purchase it at spot, and they charge a yearly fee of 0.2% for storage.

For physical gold bullion coins, I have seen recent buy/sell spreads of around 4%, so for a conservative representative value I assumed 5% on average. In my calculations, I treated the buy/sell spread as a purchase fee of 5% with no sale fee. For storage, I assumed a small safe deposit box at a flat cost of $20 per year.

The first step was to summarize the fees and expenses for each of the three strategies.

Table 1. Fees and expenses for dollar-hedging strategies

The next step was to calculate the total cost per year for each strategy, given various average balances and average rates of transactions. For each average balance and average rate of transactions, I calculated which of the three methods was the least costly over the course of a year (ignoring taxes). The results are presented in the following table:

Table 2. Minimum yearly costs for dollar-hedging strategies

From Table 2, we can see that there is no clear winner in all cases. For a small balance and frequent transactions, the Merk Hard Currency Fund is the winner (however, frequent buying and selling of a mutual fund often results in penalties, and Merk's prospectus warns against it, so maybe it's not really a winner). For balances greater than about $10,000 and a rate of transactions less than about $5,000 per year, physical gold coins are the way to go. For situations intermediate between those two, "digital gold" through GoldMoney.com is the least costly.

Keep in mind, however, that in these calculations I made a few assumptions that may not always be true, and I only compared one factor (yearly expenses) among the strategies. Obviously, there are other factors to consider. For example, the total cost to accumulate one's balance to begin with might be important if you don't plan to maintain the balance for more than a few years. Another example is that a lot of people are hesitant to buy "digital gold" that is stored in someone else's vault, no matter how legit the operation appears to be. The feeling of security and empowerment that comes from possessing physical gold -- at home, in a safe deposit box, buried somewhere in a treasure chest, whatever -- surely places a psychological premium over alternative dollar-hedging strategies in uncertain times. When you hold gold in your own hand, nobody can steal it from you without starting a hell of a fight. By contrast, all the Federal Reserve has to do to steal U.S. dollars from you is print more of them.

Bottom line: Saving money in a basket of "hard" foreign currencies probably isn't a bad idea, but it's likely more expensive than simply buying and selling gold. And isn't gold the hardest currency by definition, anyways? In the long run, how could gold fail to appreciate against any fiat currency?

Monday, March 23, 2009

The Morality of the Free Market

After listening to hundreds of podcasts offered by the Mises Institute and LewRockwell.com over the course of six months or more, I have finally encountered one that I can say is, without a doubt, my favorite one so far.

It is an hour-long speech given by a rabbi named Daniel Lapin at the 2009 Austrian Scholars Conference in Auburn, Alabama. In it, he discusses the morality of making money in a free market. He speaks from a Judeo-Christian perspective, emphasizing Judaism.

There is something about Rabbi Lapin's speech that grabbed hold of me and wouldn't let go. He is an excellent speaker, but that isn't it entirely. I think it's because I'm interdisciplinary at heart, and Lapin's speech is refreshingly interdisciplinary. It bridges the gap between Austro-Libertarian theory and Judeo-Christian wisdom in what I think is a beautiful and coherent way.

A common misperception among Republicans and other non-libertarian conservatives is that libertarianism is inherently hedonistic, greedy, and devoid of morals. To be sure, some libertarians are greedy or hedonistic. But as Rabbi Lapin explains, there is nothing inherently contradictory between freedom and morality in the Judeo-Christian tradition. To the contrary, morality has everything to do with freedom.

When you get a few spare moments, take the time to listen to Rabbi Lapin's excellent speech. I think you'll be glad you did:

Daniel Lapin: It's Moral to Make Money in the Market

Sunday, March 22, 2009

Crash Proof

I try to remain open minded enough to consider convincing evidence or arguments seriously, even if they contradict something I believe or think I know. Peter Schiff's 2007 book Crash Proof is a good example.

Peter Schiff is an open and enthusiastic advocate of Austrian economics and is the president of Euro Pacific Capital Inc., a brokerage firm that specializes in trading foreign securities. He is well known in the Austro-Libertarian community, and is becoming better known in the mainstream media, because he not only successfully predicted the crash of the housing bubble well before it happened, he has also earned a large fortune based on his accurate financial foresight.

In my March 6th post I wrote that rather than shy away from the U.S. stock market in response to the Dow tumbling by 50%, we should instead view the resultingly cheap stocks as a great bargain akin to the 50%-off or buy-one-get-one-free sales we've been seeing lately in the consumer goods sectors. When one wants to buy something, I argued, isn't it better for that person if the thing -- even if it's stock -- is cheap rather than expensive? Although I still think that fundamental rule is sound, and Schiff agrees with it, Crash Proof solidly argues that in a world where reality and public opinion are often painfully at odds with each other, time-tested investment strategies (of the sort found in most investment classics published by Wall Street) sometimes need to be modified in response to widespread insanity.

The particular insanity Schiff writes about in Crash Proof is the combination of the U.S. trade deficit, budget deficit, and national debt (especially when unfunded liabilities such as Social Security are included). The U.S. has rapidly gone from the world's largest creditor nation to its largest debtor nation, and in the process our manufacturing base has almost completely disappeared. Plus, U.S. citizens used to have one of the highest savings rates in the world but are now the world's biggest spenders with a near-zero savings rate.

Schiff explains that economic growth requires capital accumulation by businesses, which requires savings by consumers. The Austrian perspective is that saving is a tradeoff between present and future consumption. When people save, they consume less today in order to consume more in the future, and this sends a signal to the market that production capacity should be increased to meet the higher demand that will be created in the future as the people spend their savings. The market signal is sent in the form of lower interest rates created by the wider availability of loans to businesses as a result of increased savings. Businesses use these loans to accumulate capital, which they then use to expand and improve their operations. That ultimately results in more and cheaper consumer goods, i.e., a higher standard of living. We thus see that in a free market, the individual virtues of thrift and saving create greater prosperity for all. If a country's national savings rate is negative or close to zero, its economy is therefore not growing -- it is shrinking. Such is the case for the U.S. and its debt-ridden citizens.

As for the U.S.'s huge trade deficit, Schiff points out the Austrian observation that a country ultimately "pays" for its imports not with money, but with its exports. The reason for this is that ultimately the money Country A pays for goods from Country B comes back to it when Country B (or some other country that has purchased that money) uses it to purchase goods from Country A. If a country has zero balance of trade, it means that it exports roughly as much stuff as it imports (in terms of units of money). By contrast, a country that exports more stuff than it imports (i.e., it largely "imports" money) has a positive balance of trade, and a country that exports less stuff than it imports (i.e., it largely "exports" money) has a negative balance of trade. The U.S. has a negative balance of trade -- a big-time trade deficit -- because our manufacturing base that used to produce exportable goods has gradually disappeared. By contrast, our biggest trading partner, China, has a positive balance of trade -- a trade surplus -- due largely to their impressive manufacturing base. In effect, the U.S. is getting a "free ride" since China has not yet traded in all those dollars for actual goods. When it eventually decides to do that, all those dollars coming back to the U.S. in search of goods will bid prices up into the stratosphere. And this is in addition to all the new money reserves that U.S. banks have gotten from the Fed but haven't used as a base of an inflationary credit pyramid yet.

So why does creditor China continue to give debtor U.S. a veritable free ride? There may be a variety of reasons, but the biggest one appears to be that the U.S. dollar enjoys special status as the world's reserve currency since the U.S.'s repudiation of the Bretton Woods Agreement in 1971. As long as the dollar remains the reserve currency, China has reasons to accept them in exchange for its exports and hold onto them. However, there is no reason to think that the U.S. dollar will be the world's reserve currency forever. Given how recklessly the U.S. government has been running the printing presses since late 2008 to bail out American corporations in the wake of the financial panic, combined with our nation's sky-high trade and budget deficits and near-zero savings rate, the U.S. dollar appears to be on its way out. And given that a number of "common-sense" investment strategies (e.g., as outlined in investing-for-the-average-Joe type books) depend totally on the U.S. dollar remaining the world's reserve currency, it just might benefit us to reconsider our basic approach to investing.

Schiff suggests a three-pronged strategy to minimize one's exposure to the effect of the tanking U.S. dollar:

  • Invest in foreign stocks: If the U.S. dollar crashes, all business that deal in U.S. dollars (including all U.S. businesses) will crash with it. Select only foreign stocks of companies that do most of their business in foreign currencies rather than U.S. dollars. Choose conservatively by selecting stocks that have sound fundamentals (sound management, reasonable P/E ratio, etc.) and high yields paid in foreign currencies. Especially conservative sectors are energy/oil/gas utilities, commercial real estate, commodities, and natural resources. If investing in a mutual fund, make sure it is unhedged for "currency risk" since that "risk" is the very reason we want to invest in the fund in the first place. The biggest currency risk right now is not that the foreign currency will tank, but rather that the U.S. dollar will. Forget the mainstream warnings about "political risk" whenever investing in established foreign stocks is mentioned. The biggest political risk our investments face right now is from our own government. Schiff suggests that 70-90% of one's investment portfolio should consist of conservative foreign stocks (the rest would be in gold -- see next bullet).
  • Invest in gold: Aside from the fact that gold is the soundest money there is, and that its price is bound to increase dramatically as the government and banks print U.S. dollars like mad, Schiff also points out some more interesting reasons for investing in the yellow metal. One of them is that he thinks people are going to start moving to gold standards after the U.S. dollar collapses, and this might create political pressure for governments to follow suit. If that happens, gold will command a premium above its bullion price by virtue of its being used widely as legal money. Another reason is that the Internet and debit cards make transacting with precious metals easier than it has ever been in the past. Interestingly, despite his enthusiasm for gold investing, he warns that a bubble in mining stocks similar to the dot-com bubble may occur. Schiff suggests that 10-30% of one's investment portfolio should be in gold-related investments such as physical gold and shares of gold mining stock.
  • Stay liquid: If the U.S. dollar tanks, it will be important to have savings not only to handle emergency expenses, but also to take advantage of great bargains that are likely to pop up during the turmoil. Save three to six months' living expenses in U.S. dollars in case of emergencies, but any additional savings that will not be needed immediately should go into foreign currencies to avoid the effects of the declining U.S. dollar. Schiff recommends a diversified mix of relatively sound foreign currencies ("relative" being the operative word), such as can be found in foreign money market funds like the Merck Hard Currency Fund. He also suggests possibly saving money at institutions actually located in foreign countries so that if unbearable conditions force one to leave the U.S., one will have money waiting at the new location. In conditions that bad, it is unlikely that the U.S. government would let citizens leave the country with anything more than the shirt on their back. Everything else would probably be confiscated.

Schiff's advice in Crash Proof is a bit extreme, but I cannot deny that we are living through a rather extreme situation. On the one hand, investment advisors usually point out that the saying, "This time it's different" is one of the most dangerous sentiments in finance, as well as one that is not supported by most historical evidence. I fully agree, but let's not forget that history repeats itself in more than just one way. Mainstream advisors say things like, "The U.S. dollar will not collapse, because previous financial panics have not caused it to do so. History repeats itself, so we'll be fine." To that I respond: "In previous financial panics, government was more limited and our national and personal debt was much lower. This time we have a perfect storm forming around the U.S. dollar, and yet you expect it to survive? Many other paper currencies from the past have been hyperinflated away by governments printing money in a panic, just like our government is doing right now. History repeats itself, so we will not be fine."

If the thrift, discipline, and love of freedom of the American people is simply laying dormant within us and can be reawakened, the U.S. economy will recover and return to greatness someday. But as Schiff convincingly argues, that recovery is not likely to occur as quickly as the Fed-engineered false "recovery" we saw at the end of the dot-com debacle. The reality is that the true engine of economic growth in the U.S. -- a strong manufacturing base, thrifty citizens, and limited government -- has been destroyed over several decades and will take many years to rebuild, if it is rebuilt at all.

Before the American house of cards crashes down completely, might it be worth considering Schiff's advice? It may not be a bad idea to position oneself to survive the demise of the U.S. dollar by investing in conservative foreign stocks and gold and saving cash in foreign currencies.

Thursday, March 19, 2009

A Clarification Regarding Hyperinflation

In my post yesterday, I was not implying that every single aspect of our economic situation today is comparable to that of Weimar Germany in the 1920s. I was simply using that particular historical example for its convenient ability to conjure up in people's minds the image of people pushing around wheelbarrows full of paper money. Lest one make the mistake of thinking that I chose 1920s Weimar Germany as the only example of hyperinflation in history, allow me to clarify.

Here is an alphabetical list of countries, summarized from this Wikipedia page, whose currencies have been destroyed or severely devalued by hyperinflation at least once at some point in history:

Angola (1991-95)
Argentina (1975-91)
Austria (1921-22)
Belarus (1994-2002)
Bolivia (1984-86)
Bosnia-Herzegovina (1993)
Brazil (1986-94)
Bulgaria (1996)
Chile (1971-73)
China (1948-49)
Free City of Danzig (1923)
Georgia (1994)
Germany (1923)
Greece (1944)
Hungary (1944-46)
Israel (1971-86)
Japan (1943-51)
Krajina (1993)
Madagascar (2004-05)
Mozambique (1977-2004)
Nicaragua (1987-90)
Peru (1988-90)
Phillippines (1939-1945)
Poland (1922-24, 1989-91)
Republika Srpska (1993)
Romania (1998-present)
Russia (1921-22, 1991-99)
Turkey (1995-2005)
Ukraine (1993-95)
United States (1775-83, 1861-65)
Yugoslavia (1989-94)
Zaire (1989-96)
Zimbabwe (1980-present)

That last one, Zimbabwe, is an especially good example of hyperinflation since it is still happening at this very moment. On January 16 of this year, Zimbabwe's government issued a $100 trillion paper bill:


I just have to laugh when I witness the utter ignorance of economics displayed by some people when they try to rationalize why hyperinflation must be caused by the free market rather than government. Take this example from Wikipedia describing the "major cause" of Russia's 1992 hyperinflation (Note: I am a huge fan of Wikipedia, it's just that once in a while one inevitably stumbles across questionable statements in its articles):

In 1992, the first year of post-Soviet economic reform, inflation was 2,520%, the major cause being the decontrol of most prices in January.

So decontrol of prices, i.e., free market forces, are what caused the hyperinflation? In other words, as soon as the government stopped controlling prices, those greedy capitalist business owners just started charging whatever the hell they wanted for their goods and services, thus causing prices to soar over 2,500% in a single year?

There's a bit of a problem with that explanation. That 2,500% number doesn't just refer to what business owners in Russia were charging -- by economic logic, it also refers to what consumers in Russia were spending. In order for a voluntary transaction involving money to take place, there must be both a buyer and a seller. A business owner can charge whatever the heck he wants for his stuff, even $100 trillion if he's so inclined. But in order for him to actually get that $100 trillion, he has to find a customer who is not only willing to fork over $100 trillion, but also happens to have $100 trillion. Do you see where I'm going with this? If the price of everything is shooting up by 2,500%, it's not just because businesses are charging ridiculous amounts of money for their stuff. It's also because the consumers have ridiculous amounts of money with which to buy that stuff. Where is all that money coming from? Who prints the money in every country and forces the citizens to use it instead of alternatives like gold and silver coins? I'll give you a hint: it rhymes with "smothernment."

Do you think any country that was ever on a gold standard ever saw "hyperinflation" of its currency, so that its citizens began to push around wheelbarrows full of gold bars and sweep piles of gold coins into the gutter to keep the sidewalks clear? Sounds ridiculous, right? Precisely.

Wednesday, March 18, 2009

Say Bye Bye to the U.S. Dollar

Look at this graph:


It shows what economists call the "monetary base," which in plain English just means the amount of paper money and coins in circulation, plus bank deposits at the Federal Reserve. Banks use their Federal Reserve deposits as a "base" on which to pyramid loans to businesses and consumers.

Look at the gigantic spike near the right-hand side of the graph. Kind of sticks out like a sore thumb, doesn't it? Beginning late last year, the Fed doubled the monetary base within two or three short months. From the graph we can see that the previous doubling of the monetary base took about 14 years.

Enjoy the sales and low prices while they last. At least we have debit cards now, so we won't have to push around wheelbarrows full of paper money like they did in Weimar Germany during their hyperinflation in the 1920s. It'll just be a race to see who can swipe their debit cards the fastest. When the value of the currency falls moment by moment, even seconds can make all the difference.

Sunday, March 15, 2009

Imagine a Private Legal System

My previous blog post concerned the inherent conflict of the tradition of jury "duty" with the Thirteenth Amendment, which prohibits involuntary servitude except for people who have been convicted of a crime. I mentioned the idea of a free-market jury selection process, and understandably I received a couple of questions regarding the viability of a private legal system in the broader sense. In this post I will try to address those questions.

First, I'll digress slightly to point out that libertarianism is by no means a single, undifferentiated political philosophy. Among people who refer to themselves as "libertarian," an entire spectrum exists. At one extreme are mainstream conservatives who merely want to reduce the size and power of government by a vague, but typically moderate, amount -- just reduce a tax here, reject a spending increase there. They still want a government, just one that does not interfere with the free market and our daily lives quite as much as the present one does. At the other extreme are radical conservatives who want to "minimize" government ("minarchy") or abolish it altogether to give way to the free market (anarcho-capitalism). Many minarchists say that the only legitimate functions of government are to provide national defense, police, and courts of law. (Ludwig von Mises, perhaps the most influential Austrian School economist, was a minarchist.) Anarcho-capitalism, on the other hand, holds that there are no legitimate functions of government since the very nature of government -- the initiation of coercive force or the threat thereof -- violates the Non-Aggression Axiom which is the foundation of libertarian political theory. (Murray Rothbard, another of the most influential Austrian School economists, was an anarcho-capitalist.)

Let me be clear that the idea of a private legal system falls at the radical end of the libertarian spectrum -- anarcho-capitalism -- since less radical libertarians think a government legal system is necessary. I cannot present all of the many arguments for and against a free-market legal system in one blog post, so I will attempt to summarize only a few of the major ones. Most of these ideas are taken from Murray Rothbard's libertarian manifesto, For a New Liberty.

Question #1: How can society avoid descending into conflict and chaos in the absence of standardized government courts?

This is typically the first question people ask, but it is far too general to be answered by a specific response. The various aspects of this general question will be addressed in the more specific questions that follow, but for now I'll just point out the contradiction inherent in the position that monopoly is undesirable in most, but not all, areas of life. Why is a monopoly in the farming sector, say, considered a bad thing, yet a monopoly in the legal system is considered a necessity? Is it because courts of law are so important to society? Well, what about farming -- isn't food somewhat important to society? How can we point to two different things that are both important to society, and say that one of them must not allow a monopoly but the other one must have a monopoly?

Question #2: Assuming a private legal system were to exist, how would it be financed?

One possible method of financing would be for people to subscribe voluntarily to a court service, paying a monthly premium and calling upon the court if needed. This would be similar to how insurance companies are financed. Another possible method would be for people simply to pay the private courts a fee whenever they choose to use them, and the convicted criminal or contract-breaker would eventually recompense the plaintiff for that fee. (So if the court finds the accused to be innocent, the plaintiff does not recover the fee. This provides a free-market check against the initiation of frivolous lawsuits, for people will know they are unlikely to recover the court fee unless they have a reasonable case.)

Question #3: Okay, so maybe financing for private courts wouldn't be a problem. But who in their right mind would choose a private court over the credibility and respectability of the public legal system?

Plenty of people already have. The use of private arbitration in lieu of public courts has grown for decades, especially in the insurance industry, a trend that is the exact opposite of what those who argue against private courts say should be happening. Evidently a growing number of people and organizations have found the public courts to be clogged, inefficient, and wasteful, so they are increasingly using the free-market alternative of private arbitration to settle their disputes. Private arbitration businesses have an economic incentive to be as fair and rational as possible. They seek to build a positive reputation for quality in their service just as any other business does.

I would add to Rothbard's explanation that almost every person -- especially every child -- has more than a passing familiarity with this basic libertarian concept of voluntary arbitration. Have two of your friends ever had a silly dispute about something (perhaps an arcane piece of trivia or who was "first") they cannot seem to resolve, and they recognized you as having reasonable knowledge of the topic, so they both agreed to let you arbitrate the dispute by declaring who was correct? One friend probably liked your decision more than the other one did, but if they both considered you knowledgeable on the topic, they most likely respected your decision as "final" in some sense. (One can learn a lot about basic truths of human nature just by watching how children spontaneously interact and organize in the absence of adult direction.)

Question #4: Ah, but who enforces the private arbitrators' decisions? Currently they are enforced by the public courts. Therefore, aren't public courts ultimately required after all?

No, they are not. Private arbitrators' decisions did not become legally binding until 1920, but prior to that year the use of private arbitration had grown rapidly. In fact, in medieval England, the structure of merchant law (which the government's courts handled clumsily and inefficiently) grew up completely in private merchants' courts. From the Middle Ages down to 1920, merchants enforced private arbitration decisions through ostracism and boycott. If a merchant refused to submit to arbitration or ignored a decision, the other merchants published this fact in the trade and refused to deal with the recalcitrant merchant. This typically brought him quickly to his senses. These days, with the Internet and credit ratings, ostracism and boycotting can be even more effective than they ever were in the past.

Question #5: Ostracism and boycott may work to enforce arbitrations in private disputes, but they wouldn't always be appropriate or effective in criminal cases. How would private courts enforce their decisions? Aren't libertarians opposed to the use of physical force?

No, libertarians are not opposed to the use of physical force per se. What they are opposed to is the initiation of physical force. In a criminal case, some sort of physical force has allegedly been initiated by the accused. If the accused is convicted, then enforcing his sentence is not the initiation of force but rather the serving of justice. However, justice can only be served after the accused is convicted. Prior to conviction, any physical force used by private police, judges, or marshals against an accused criminal could later be prosecuted as a crime if the accused is found innocent. In particular, no coercive "subpoena power" would exist. Accused criminals would be notified of their upcoming trial, but they would not be forced to attend (however, showing up would definitely help their case!). In contrast to statist systems, no police and judges in a libertarian society could be granted special immunity to use coercion beyond what other people in the society can use.

Question #6: Given your description of how a private court would enforce its own decisions, wouldn't private courts always tend to convict accused criminals in order to justify any use of physical force by its own marshals and judges -- regardless of whether the accused in fact committed the alleged crime?

No, because just as there is an appeals process in the public court system, a private court system would have one as well. In order to gain credibility with consumers and build a reputation for fairness, private courts would have every incentive to enter agreements with other private courts on a reasonable and fair appeals procedure. The simplest procedure would be to allow the defendant, if convicted in the plaintiff's court, to appeal his case at a court of his own choosing. If that second court also finds him guilty, no more appeals can be made -- the criminal has been convicted. However, if the second court finds him innocent, a third court (agreed upon by both courts beforehand) would act as arbitrator to reach the final decision. Effectively, this would mean that if any two private courts reach the same decision, that decision becomes binding on the guilty. With such an appeals procedure in place, any given court would have even more incentive to render fair and accurate verdicts as consistently as possible. For if the consumers started to notice that a particular private court's decisions were contradicted by arbitrating courts in an unusually large percentage of cases, they would tend to avoid using that court.

Question #7: It sounds like the courts' decisions would all be based largely on custom. But customs can differ by location. How could there be a standard, uniform legal code in a private legal system?

Rothbard explains:

The entire law merchant was developed, not by the State or in State courts, but by private merchant courts. It was only much later that government took over mercantile law from its development in merchants' courts. The same occurred with admiralty law, the entire structure of the law of the sea, shipping, salvages, etc. Here again, the State was not interested, and its jurisdiction did not apply to the high seas; so the shippers themselves took on the task of not only applying, but working out the whole structure of admiralty law in their own private courts. Again, it was only later that the government appropriated admiralty law into its own courts.

He continues:

The major body of Anglo-Saxon law, the justly celebrated common law, was developed over the centuries by competing judges applying time-honored principles rather than the shifting decrees of the State. These principles were not decided upon arbitrarily by any king or legislature; they grew up over the centuries by applying rational -- and very often libertarian -- principles to the cases before them. The idea of following precedent was developed, not as a blind service to the past, but because all the judges of the past had made their decisions in applying the generally accepted common law principles to specific cases and problems. For it was universally held that the judge did not make law (as he often does today); the judge's task, his expertise, was in finding the law in accepted common law principles, and then applying that law to specific cases or to new technological or institutional conditions. The glory of the centuries-long development of the common law is testimony to their success.

In those times, there was no arbitrarily imposed "supreme court" whose decision was binding, nor was precedent (albeit honored) considered automatically binding.

Question #8: But who will appoint the judges to let them perform the task of defining the law?

As the libertarian Italian jurist Bruno Leoni wrote: the people themselves, people who choose the judges with the best reputations and greatest expertise and wisdom:

The appointment of judges is not such a special problem as would be, for example, that of "appointing" physicists or doctors or other kinds of learned and experienced people. The emergence of good professional people in any society is only apparently due to official appointments, if any. It is, in fact, based on a widespread consent on the part of clients, colleagues, and the public at large -- a consent without which no appointment is really effective. Of course, people can be wrong about the true value chosen as being worthy, but these difficulties in their choice are inescapable in any kind of choice.

Question #9: This is all fine and good in theory, but there's no way a private, libertarian legal system would work in the real world. Is there any evidence that this theoretical libertarian nonsense actually works?

Absolutely. I already mentioned the libertarian historical development of merchant law, admiralty law, and Anglo-Saxon common law. But perhaps the most impressive historical example of a society of libertarian law and courts was neglected by historians until relatively recently. And we're not just talking about a society where only the courts and law were libertarian -- we're talking about a society that was completely without a State. It was ancient Celtic Ireland.

Ancient Ireland was libertarian for about a thousand years before it was conquered by England in the seventeenth century. It was by no means a "primitive" society; it was the most advanced, most scholarly, and most civilized society in all of Western Europe for centuries. As Joseph R. Peden, an authority on ancient Irish law, wrote in the Journal of Libertarian Studies in 1977, "There was no legislature, no bailiffs, no police, no public enforcement of justice... There was no trace of State-administered justice."

How's that for evidence that libertarianism can actually work in the real world?

Question #10: Okay, in this single blog post you've won me over to the idea that a private legal system in a libertarian society works in theory and can also work (because it has worked!) in the real world. Where can I learn more about this absolutely fascinating topic?

Outstanding! Start by reading pp. 275-290 from Murray Rothbard's For a New Liberty. It's a free download from the Mises Institute web site. He gives some references and footnotes in that section if you're hungry for further reading. While you're at it, read the whole book. It'll open your mind to a whole new universe of possibilities in political philosophy and economics. Also, I've read one other book titled Complete Liberty by a guy named Wes Bertrand that has sections discussing certain aspects of law in the absence of a State.