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Review of Intellectual Capitalism: Practical and Philosophical Aspects of Capitalism

This is the latest review of my book Intellectual Capitalism.

 

Author Dale Halling is an American patent lawyer interested in the practical and philosophical aspects of capitalism, specifically regarding the way in which human wealth is created.

The first part of this book covers Intellectual Capitalism. Halling reviews the most popular theories on economics (neoclassical, Keynesian, Austrian) and highlights the flaws and irrationality that he sees in each. Then he expands on his thesis that humans are different than other living creatures because humans can invent ways to survive by changing their environment while other living creatures must adapt to the given environment through evolution. The book covers fiat money, legal tender laws, fractional reserve banking, and central banking with a goal o identifying the source of real per capita increase in wealth.

The second part of this book is Halling’s 2014 book “The Source of Economic Growth.” I reviewed that book separately.

The third part of this book is a collection of essays comparing and critiquing the ideas of Menger, Mises, Hayek, Rand, Locke, Schumpeter, Hume, Aristotle, Friedman, Smith, and others, making distinctions between ideas based on science versus pseudo-science.

I highly recommend this book to people interested in the subject matter, but be aware the book is technical and not for mainstream readers. The author’s thinking is clear and well explained in a direct and to-the-point style. Some of the ideas are outside of what people might read in mainstream economics textbooks and therefore of interest to economists.

March 20, 2017 Posted by | reviews | | Leave a comment

The Law: Foundations

Laws are the implementation of political philosophy and political philosophy is a subset of ethics.  If a country’s political philosophy is a monarchy then the law will be whatever the king (queen) says it is.  If a country’s political philosophy is a theocracy then the law will try to implement the ideas embodied in the Bible or Koran or other holy book.  If the political philosophy is democracy, then the law will be whatever the majority votes into law.

The underlying political philosophy of this post is Natural Rights (individual rights) as explained by Rand and Locke.  This does not automatically lead to a constitutional republic or a parliamentary monarchy, however it says that the law is based on reason and can be found using reason.  When people base law on reason it is called natural law.  A subset of natural law is natural rights theory as articulated by John Locke and Ayn Rand.  Locke’s ideas on natural rights were highly influential on the Founding Fathers and the common law generally.  Locke’s influence on the common law was through William Blackstone’s Commentaries on the Laws of England, where he mentions Locke a number of times.

 In the United States today and most common law countries there are two or three major competing political philosophies.  The United States was founded on Natural Rights political philosophy, however the dominate political philosophy today is socialism or democracy.  As a result, the law is a confused set of overlapping and contradictory rules.  Socialist political philosophy is not based on reason and individual rights, but on the “rights” of groups, equality of outcome, and most importantly the idea that the state is king (or god).  Conservative political philosophy is not based in reason or Natural Rights either, however conservatives may support some Natural Right’s positions based on historical reasons.

When people hold different political philosophies they will interpret the same laws in different ways as we see with the United States Supreme Court.  The U.S. Constitution was written with the assumption of Natural Rights and when socialists (confusingly caused liberals in the U.S.) interpret the Constitution they come to absurd conclusions.  For instance, in 381 U.S. 479 Griswold v. Connecticut (No. 496), Justice Stewart and Justice Black stated in a dissent that the ninth amendment was a truism.

The Ninth Amendment, like its companion, the Tenth, which this Court held “states but a truism that all is retained which has not been surrendered,” United States v. Darby, 312 U.S. 100, 124

If the ninth amendment is a truism then why was it written down in the Bill of Rights?  Only a socialist could come to this conclusion.

The ninth amendment states:

The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.

Under the proper natural rights interpretation of the Constitution, the ninth amendment means that all natural rights are protected under the Constitution.  For instance, the right to self defense (immediate) is not mentioned in the Constitution, but would be included in the ninth amendment.  The right to work would be another right under the ninth amendment.  However this would not mean that someone has to give you a job, it would mean the government cannot require licenses, fees, or other impediments to peoples’ effort to do work.

Conservative justices are no better.  A standard cry of the conservatives is something along the line of where is “such and such” a right stated in the constitution.  Think abortion or privacy or healthcare.

In the law the word “right” has many meanings and therefore can be confusing.  A proper right is something that logically follows (directly) from the idea that you own yourself and is a moral and legal claim that a person can undertake certain actions.  For instance, since you own yourself you own those things that you create, which is the basis of property rights.

Many people are uncomfortable with the idea of self-ownership or self-sovereignty, however both Rand’s and Locke’s (and the Founding Fathers) political philosophy incorporates this concept.  Both provide differing arguments for this and I think Rand’s is superior but both are better than the arguments against them.  Note that while Locke invokes god, he also bases his argument in reason.  Thus he does not rely on god.

 

1) Self-ownership is the concept of having moral and legal exclusive control over your own body and life.

2) Rand and Objectivism argue that each person has exclusive control over their body and life.

3) Therefore Objectivism is a philosophy of Self-Ownership.[1]

 

This is a simple syllogism and does not lead to the idea of slavery.  The right of self-ownership is inalienable and logically you cannot create a valid contract to sell yourself.  A contract is a legally binding agreement between two parties.  Since a slave cannot enforce a contract against their owner the contract would be invalid.

The opposite of self-ownership is that someone else has the legal and moral right to control your body and life, in other words, slavery.

Why do we need the law?  Many anarchists argue we do not need laws, although they almost always fall back on contracts, which is law.  Rand and Locke advance the same reason for the law.  In a civil society with a proper government, the law is there to protect our individual rights and in return we give up the right to delayed retaliatory justice.  “A government is the means of placing the retaliatory use of physical force under objective control—i.e., under objectively defined laws.”[2]

All law starts with property rights law.[3]  Your property rights exist before and separate from governments.  You cannot have contract law unless you have property rights in something to trade and property rights in yourself, so you have the authority to enter into a contract.  You cannot have tort law without first having property rights in yourself or what would be the basis for complaining you or your objects you have property rights in have been harmed.  The same is true of criminal law, estates, and all areas of law.  Property rights law is foundational and the most important area of law in protecting all your rights.  It is much more important than Constitutional law and the Founders recognized this.

 

“No other rights are safe where property is not safe.” – Daniel Webster

“No power on earth has a right to take our property from us without our consent.” – John Jay

Government is instituted to protect property of every sort; as well that which lies in the various rights of individuals, as that which the term particularly expresses. This being the end of government, that alone is a just government which impartially secures to every man whatever is his own. – James Madison, Essay on Property, 1792

 

Ayn Rand also considered property rights law as being the most important in securing man’s rights.

 

Without property rights, no other rights are possible.

“Man’s Rights,” The Virtue of Selfishness, 94, http://aynrandlexicon.com/lexicon/property_rights.html

 

There is only one fundamental right (all the others are its consequences or corollaries): a man’s right to his own life. … —and the right to property is their only implementation.

“Man’s Rights,” The Virtue of Selfishness, 93 http://aynrandlexicon.com/lexicon/individual_rights.html

 

The law is the implementation of political philosophy.  Natural law and specifically Natural Rights is based on reason.  Thus a reason based approach to law will be based in Natural Rights.  Under Natural Rights all rights are derived from the idea of self-ownership – that is property rights in one’s self.  As a result, all law and rights theory starts with property rights law

 

 

 

____________________________

[1] Money rests on the axiom that every man is the owner of his mind and his effort. (For the New Intellectual, p. 89.

 

“What greater wealth is there than to own your life and spend it on growing?”–Ellis Wyatt, Atlas Shrugged, Pt. 3 of book.

 

“For centuries, the battle of morality was fought between those who claimed that your life belongs to God and those who claimed that it belongs to your neighbors — between those who preached that the good is self-sacrifice for the sake of ghosts in heaven and those who preached that the good is self-sacrifice for the sake of incompetents on earth. And no one came to say that your life belongs to you and that the good is to live it.”–John Galt, Atlas Shrugged, http://aynrandlexicon.com/lexicon/good,_the.html

 

“There is only one fundamental right (all the others are its consequences or corollaries): a man’s right to his own life.”  Ayn Rand Lexicon, Man’s Rights, The Virtue of Selfishness, 93

 

Without property rights, no other rights are possible.            Ayn Rand Lexicon, Man’s Rights, The Virtue of Selfishness, 94

 

[2] Ayn Rand Lexicon, The Nature of Government,” The Virtue of Selfishness, 109.

[3] There is no such thing as property.  You have property rights in things.  When we say something is property we are using short hand.  For instance, you have property rights in land, but land is not property.  As a result, I call it “property rights law” not “property law”.

March 18, 2017 Posted by | Legal Philosophy | 4 Comments

Intellectual Capitalism – My New Book on Economics

Intellectual Capitalism: An Objective Scientific Approach to Economics

This book is about the science of economics that occurs by asking the question:

What is the Source of Real per Capita Increases in Wealth?

and following the scientific evidence to its logical conclusion.  The book is divided into three parts.  The first part explains the economic science that results from answering the question above.  The second part is a copy of my book the Source of Economic Growth, which answers the questions of book-coverwhat causes real per capita increases in wealth and what caused the Industrial Revolution.  The third part is a series of essays on various topics in economics.

 

This book challenges many of the assumptions of free market economists that argue that economics is a social science.  It is first school of economics that is consistent with Objectivism and the founding principles of the United States of America

March 2, 2017 Posted by | News | , , , , | 2 Comments

The Greenhouse Effect does Not Exist: The Scientific Fallacy Underlying the Whole Anthropomorphic Global Warming Story

Anthropomorphic Global Warming (AGW) is based on the greenhouse effect.  Here is how the greenhouse effect is explained.  The Earth is modeled as a blackbody.  A blackbody is an object that absorbs all the radiation that impinges on it and does not reflect any light.  Such a body in thermal equilibrium will emit what is called blackbody radiation.  The Stefan–Boltzmann law can be used to determine the temperature of a blackbody.  Specifically it states that the power emitted per unit area of the surface of a black body is directly proportional to the fourth power of its absolute temperature.

I = σT4 or rearranged  T = (I/σ)1/4

I is in watts per meter squared

T is the temperature in Kelvin

σ is the Stefan-Boltzmann constant (5.670367(13)×10−8 W⋅m−2⋅K−4)

here is website that will do the calculation for you http://byjus.com/stefan-boltzmann-law-calculator/

 

The greenhouse effect then assumes that Earth is in thermal equilibrium with the Sun and therefore the total radiative (electromagnetic) energy received from the Sun less what is reflected must equal the blackbody radiation from the Earth.  The greenhouse effect hypothesis recognizes that the Earth only receives solar energy over half its surface, however it radiates over its whole surface area.  Because of this the greenhouse effect hypothesis spreads the solar radiation over the whole surface of the Earth.

I = Is x πR2/(4πR2) = 343 W/m2

                                Is – is the solar radiation hitting the Earth and is 1370 W/m2

                                R is the radius of the Earth in meters

 

Since clouds, the atmosphere, and the ground reflect some of the light, which is called albedo, this Intensity level is further reduced by 30% or 240 W/m2.  This intensity is put into the Stefan-Boltzman equation and returns a temperature of 255°K, which is negative -18°C or about 0° Fahrenheit.  Based on this analysis it is clear that something else must be happening, because the Earth’s average temperature[1] is around 16°C (60° F).  This makes a very convincing argument for some sort of greenhouse effect.  After all we have all walked into a greenhouse on a cold day and noticed how much warmer it is than the outside temperature.

According to the greenhouse effect the reason Earth is at 16°C instead of -18°C is because of the heat absorbing components of our atmosphere.  These greenhouse gases reflect the infrared light emitted from the Earth, thus trapping this extra energy.

greenhouseeffect

 

Or here is a more technical diagram.

 

ghemath

If you want to see the math associated with this model, you can find it in Chapter 7.3 of Introduction to Atmospheric Chemistry, by Daniel J. Jacob, Princeton University Press, 1999.

Without this greenhouse effect the Earth would be very cold according to its advocates.  I have to admit that I found these arguments convincing.

Before I explain the errors in the above analysis, here is something that should cast a little doubt that the above analysis makes sense.  The moon is about the same distance from the Sun as Earth and its temperature varies from 106°C during the day to -173°C during the night.  Note that there appears to be some variation of opinion on the temperatures of the moon, but 106°C appears to be on the low side.  Since the moon is essentially the same distance from the Sun the solar irradiance (energy) is about the same as the Earth receives.  The moon has essentially no atmosphere, its atmospheric pressure is around 3×10−15 atm, which means it has an atmospheric pressure that is around a 1000 trillion times less than Earth.  Since the moon has almost no atmosphere there is nothing on the moon to trap the blackbody radiation from the surface of the moon and therefor the moon’s temperature ought to be close to the -18°C that is calculated by the greenhouse effect for Earth with a small variation for having a different albedo.  If we assumed that the moon was perfect black body, using the greenhouse effect method of calculating the surface temperature, the moon’s surface temperature would be about 5°C.  Way off from the observed 106°C or higher.

The empirically data from the moon shows that something is awry with the greenhouse explanation for the temperature of Earth.  The first mistake in the greenhouse explanation is spreading the solar radiation over the whole surface of the Earth.

I = Is x πR2/(4πR2)

The Earth does radiate out over its whole surface and the total energy of electromagnetic emissions from the Earth has to equal the total energy of the electromagnetic emissions absorbed by the Earth or its temperature would be increasing (decreasing).  None of this justifies setting the emissions equal to each other over the whole Earth.  On the sunny side of the Earth it absorbs net energy and on the dark side of the Earth it emits net energy.  This is why the night time temperatures are lower than the day time temperatures.  The greenhouse model assumes that the temperature of the Earth is uniform (same during the day and night).  This mistake also occurs because the greenhouse hypothesis assumes Earth is in thermal equilibrium with the Sun which is a condition for the blackbody radiation calculations.  Again this would require the Earth surface to have a uniform temperature (day, night, poles, equator), which is clearly nonsense.

The second big mistake of the greenhouse effect analysis is misunderstanding heat transfer.  “The direction of heat transfer is from a region of high temperature to another region of lower temperature.”[2]  “The three fundamental modes of heat transfer are conduction, convection and radiation. Heat transfer, the flow of energy in the form of heat, is a process by which a system’s internal energy is changed.”[3]  According to the greenhouse effect analysis, somehow the cold atmosphere is warming up the hotter surface of the Earth, which violates the second law of thermodynamics.  The atmosphere near the Earth gets colder with altitude.  It does not exceed the Earth’s temperature until the troposphere at about 75,000 feet altitude.  Any radiative heating from the troposphere would have to get through the denser atmosphere that according to the greenhouse effect are good at absorbing the long wavelength light that is supposed to be heating up the Earth’s surface.  The advocates of the greenhouse effect never really explain the fine details of how this could occur.

There are three main mechanisms of heat transfer: conduction, convection and radiation.  Radiation is mainly important only “for very hot objects, or for objects with a large temperature difference.”[4]  Neither of these is true for the atmosphere and the Earth’s surface.  In addition, the atmosphere is gas, which allows for easy convention and therefore convention is likely the dominate heat transfer mechanism between the Earth’s surface and the atmosphere.  This is what causes high pressure and low pressure systems and most of our weather.  Another point just glossed over by the greenhouse effect analysis.

So how does the atmosphere effect Earth’s surface temperature?

Compared to the moon, which has a mean daytime temperature of 123C and mean nighttime temperature of -233C [a diurnal range of 356C!], the presence of Earth’s atmosphere serves to greatly cool during the day and retain warmth during the night to reduce the diurnal temperature range to only ~11C.[5]

The atmosphere acts to slow the warming during the day and slow the cooling during the day.  The atmosphere acts like an imperfect heat reservoir or heat bath, absorbing excess heat from the Earth’s surface during the day and releasing excess heat in the atmosphere during the night.[6]

Without the greenhouse effect the whole Anthropomorphic Global Warming hypothesis falls apart.  Since a cold object cannot transfer heat to a hotter object, there can be no net radiative energy from the atmosphere that heats up the Earth’s surface.  Thus it is irrelevant whether the gases in the atmosphere are good at absorbing infrared wavelengths of light.

The effect of increasing CO2 levels in the atmosphere on temperature is so trivial as to be immeasurable.  CO2 makes up about 0.04% or 400 parts per million (PPM), which is trivial and does not add to the heat reservoir of the atmosphere.

 

     * There is no greenhouse effect

      * Without the greenhouse effect Anthropomorphic Global Warming cannot Exist.

 

[1] Actually, the term “Earth’s average Temperature” makes no sense.  Do you just add up the temperature readings around the world and divide by the number of readings?  Most temperature readings are in the Northern Hemisphere and almost none are at the poles.  Perhaps with Satellite readings you can make more sense of this term, but you still have the correctly weighting the temperature by the area or volume that it applies to.

[2] https://en.wikipedia.org/wiki/Heat_transfer, accessed January 24, 2017.

[3] https://en.wikipedia.org/wiki/Heat_transfer, accessed January 24, 2017.

[4] https://en.wikipedia.org/wiki/Heat_transfer, accessed January 24, 2017.

[5] Why can’t radiation from a cold body make a hot body hotter?, http://hockeyschtick.blogspot.mx/2014/11/why-cant-radiation-from-cold-body-make.html, accessed January 24, 2017.

[6] https://en.wikipedia.org/wiki/Thermal_reservoir, accessed January 27, 2017.

February 5, 2017 Posted by | physics | , , , , | 2 Comments

How Central Banks Create Inflation (Intellectual Capitalism Part 4)

This article continues from where my article Money and Banking ended.

Central Banks like the Federal Reserve in the United States are different than commercial fractional reserve banks.   As explained in the article A Brief History of Central Banks on the Federal Reserve Bank of Cleveland’s website,

A central bank is the term used to describe the authority responsible for policies that affect a country’s supply of money and credit. More specifically, a central bank uses its tools of monetary policy—open market operations, discount window lending, changes in reserve requirements—to affect short-term interest rates and the monetary base (currency held by the public plus bank reserves) and to achieve important policy goals.[1]

Unfortunately, this definition misses that fact that central banks are monopolies and therefore not part of capitalism (free market).

A central bank, or monetary authority, is a monopolized and often nationalized institution given privileged control over the production and distribution of money and credit. In modern economies, the central bank is responsible for the formulation of monetary policy and the regulation of member banks.[2]

According to this definition a central bank has control over “printing” the national currency, which in the modern world can be done by just a computer entry.  If you look into the Federal Reserve of the United States you will find that they have control over printing paper money, while the Treasury has control over minting coins.  However most currency today is just a computer entry and here the answers get even more obscure.  The best answer is that direct money creation is a dance between Congress, the Treasury, and the Federal Reserve.  Everything becomes convoluted when a central bank is added into the equation and so far we have only discussed direct creation of currency not open market operations, discount window lending, and changes in reserve requirements.  I think politicians and central banks, not to mention the largest banks and brokerages, like this obscurity.

In order to make this less obscure I will analyze each “tool” of a central bank separately.  In addition, we are going to analyze the direct money creation issue through the lens of Modern Monetary Theory (MMT).  One reason to look at MMT it is how most central bankers see the world, which is illuminating.  It also points out some uncomfortable truths and exposes some of the Keynesian nonsense.  Wikipedia explains MMT as:

Modern Monetary Theory (MMT or Modern Money Theory, also known as Neo-Chartalism) is a macroeconomic theory which describes and analyses modern economies in which the national currency is fiat money, established and created by the government. The key insight of MMT is that “monetarily sovereign government is the monopoly supplier of its currency and can issue currency of any denomination in physical or non-physical forms. As such the government has an unlimited capacity to pay for the things it wishes to purchase and to fulfill promised future payments, and has an unlimited ability to provide funds to the other sectors. Thus, insolvency and bankruptcy of this government is not possible. It can always pay”.[3]

This quote is very revealing, especially the idea that “the government has an unlimited capacity to pay for the things it wishes to purchase and to fulfill promised future payments, and has an unlimited ability to provide funds to the other sectors.”  At the beginning of this series I pointed out that when money enters the equation in economics, people think magic happens and logic disappears.  The MMT people think they can create wealth by manipulating money.  The MMT advocates believe money and banking allow for good magic and Austrian Economics argues that money and banking are bad magic (meaning it destroys wealth). econgrowth.small

This is why I wrote my book on The Source of Economic Growth, which shows that increases in real per capita wealth are created by applying our reason to the objective problems of life – in other words by inventing and increasing our level of technology.  Money is not wealth, as I showed earlier in this series.  Money and banking are mainly a lubricant for the economy.  Of course real inventions in money and banking do increase our per capita wealth, such as cryptocurrencies might do if the governments (central banks) of the world would get out the way.  Cryptocurrencies hold the promise of significantly reducing the cost of transferring money around the world.

Modern Monetary Theory is correct that the government cannot run out of money if has legal tender laws, but that does not mean that “the government has an unlimited capacity to pay for the things it wishes.”  The Gross Domestic Product (GDP) of the United States in 2016 was around $17 trillion.[4]  If the government decides to spend $20 trillion of wealth and continues to spend more than the total output of wealth of the United States, then the Unites States will go bankrupt.  The ability to print (create) more money will not matter.  Venezuela has a central bank, but it has not saved Venezuela or allowed its government “to pay for the things it wishes.”  The expected inflation rate in 2017 for Venezuela is 1,660% according to the IMF (International Monetary Fund) and its GDP fell 15% in 2016.  It also did not save the Weimar Republic which had a central bank, and it did not provide the government an unlimited capacity to pay for the things it wishes.  The MMT’s answer to the Weimar Republic is that they were forced to repay their war debts in gold.  According to MMT governments with a central bank and legal tender can be infinitely wealthy, which is clearly absurd.

The problem with MMT is it confuses money with wealth.  This is similar to how Keynesians reverse cause and effect, by arguing wealth is created by spending (consumption).  The ideas underlying MMT were proposed by John Law, who created the Mississippi Company in France in the early 1700s and almost bankrupt the whole country.[5]  It is a fascinating story, but beyond the scope of this article.

According to MMT the government creates money by spending.  As this article, Why a Central Bank Can Never Run Out of Money, explains:

The U.S. government spends it currency into existence. This is important, too. The government spends first and then collects taxes. (Logically, this is how it began, or else how would people get the money to pay taxes?) Taxes are what give the dollar value. As Alfred Mitchell-Innes, a diplomat and credit theorist, once put it: “A dollar of money is a dollar, not because of the material of which it is made, but because of the dollar of tax which is imposed to redeem it.”

According to this statement then increasing spending causes inflation, while increases in taxes cause deflation.  In the United States the Democrats (socialists) always want to increase spending and taxes, which cancel each other out according to MMT.  Republicans (conservatives) want to reduce spending and taxes which would also cancel each other out by this theory.  This analysis again confuses money with wealth and it ignores debt financing.

Another amazing thing about this statement is that if you or I “spent money into existence” it would be called counterfeiting and would be considered theft.  Somehow when the government does this, it is okay and according to MMT stimulates the economy (creates wealth).

The parenthetical comment “else how would people get the money to pay taxes?” is easily refuted by history.  People in the United States paid taxes, before the United States government had any legal tender.  As a result, there was no way for the government to spend before it collected taxes.  Even a cursory review of history provides numerous other examples, including early man in which there was no formal government.  In addition, my earlier article on Banking shows that banks create money when they create loans, which any MMT advocate should know.

I cannot make any sense of the final statement that the value of a dollar is created because of the tax necessary to redeem it.  This statement could only make sense to a totalitarian.  Totalitarians believe that when the government spends money it gives up some of its power and when it taxes and redeems the money it redeems this power.

This article explains the mechanism by which money is created as:

The Treasury spends dollars into existence through the central bank. The central bank credits the accounts of banks, and banks credit whoever is getting paid. Taxes reverse the process. Banks then debit accounts, and the central bank debits the banks. The government cannot run out of credits.

Note that no liability is created by the government in this direct money creation and no one is paying interest on this money, just like no one pays interest when money is printed.  There is a myth that all money in the United States (most modern countries) is created by a loan and that we have to pay the banks interest on all money created.  This is incorrect, the money created by this direct money creation process is not a loan and no one pays interest to have this money.

This process of money creation is only possible because the government has legal tender laws.  In my earlier article on Banking, I pointed out that legal tender laws were necessary for the government counterfeit money.  Since a central bank is tasked with controlling the money supply they require legal tender laws.  One of the fastest ways to undermine (eliminate) the Federal Reserve is to eliminate legal tender laws.

In theory Congress has to first authorize spending first.  However, in the United States we are not allowed to audit the Federal Reserve.  Thus it is possible even likely that the Federal Reserve creates money (direct money creation as opposed to a loan) and no one knows about it.  For instance, the Federal Reserve admitted that it could not account for $9 trillion of off-balance sheet transactions.[6]  While these may have been loans (we don’t know because we cannot audit the Federal Reserve), it shows how easy it would be for the Federal Reserve (or Treasury) to just credit someone’s bank account without anyone knowing.  Of course, I have no evidence of this, because we cannot audit the Fed, but human history would be on my side.

 

“Simple Inflation” under a Central Bank

In my earlier article on Banking and Inflation I defined simple inflation as that which occurs because of printing money or debasing the currency.  This direct creation of money function the same as these processes.  The amount of direct money created is equal to the total amount of money spent by the government, less the amount of taxes received, and less the amount of money borrowed by the government.  When a government resorts to direct money creation to pay for a large part of their operations, it results in rapidly increasing inflation rates.  Venezuela is the most blatant example today.

 

What we have learned:

  *Central banks do not arise in a free market (capitalism) they are a distortion of the free market.

            *Central banks require legal tender laws in order to fulfill their mission of controlling the money supply.

            *The amount the government spends less the amount it taxes and borrows is the amount of money created by the government (government counterfeiting), which results in simple inflation.

            *Modern Monetary Theory confuses money with wealth.

            *The fastest way to undermine (eliminate) the Federal Reserve is to eliminate legal tender laws.

 

Discount Window Lending

When most people think about the Federal Reserve (the central bank in United States) they immediately think about interest rates.  The Federal Reserve mainly affects interest rates in the United States by it setting of the Federal Funds Rate and by the Discount Rate.  The Federal Funds Rate is set by the Federal Reserve and is the interest rate at which banks lend reserve balances to each other.  The Discount Rate is the interest rate that the Federal Reserve charges banks to borrow from the Federal Reserve.  Both of these are related to the Federal Reserve’s function as a lender of last resort and are intended to prevent a “run on a bank.”

A run on bank is when a bank does not have enough cash (species) on hand to meet its customers demand.  This can occur to a sound bank and just represents a cash flow issue or it can be the result of a legitimate lack of solvency and confidence in the bank.  One of the main justifications for creating the Federal Reserve was to reduce the frequency of this occurring.  The empirical evidence is a mixed on this issue.  The Federal Reserve was created before the Great Depression and there were huge numbers of bank failures then.  However, the number of runs on banks and the number of bank failures where depositors lost money have probably decreased in frequency since the Great Depression.

When the Federal Reserve changes the Federal Funds Rate or the Discount Rate, which they usually change at the same time, it affects the interest rates that banks charge.  If the Federal Reserve increases either or both of these interest rates it usually causes banks to increase the interest rates they charge customers.  Generally the goal of raising interest rates is to reduce the number of loans banks are making and thereby decrease the money supply or slow its growth.  The opposite is true when the Federal Reserve lowers interest rates.  Thus it is normally considered inflationary when interest rates are lowered and deflationary when interest rates are raised.  Unfortunately, the empirical evidence is a bit murky on this issue.  For instance, interest rates were very low during the Great Depression in the United States and the money supply was shrinking.[7]  Milton Friedman and Anna Jacobson Schwartz argued that the Federal Reserve failed to fulfill their responsibility of lender of last resort.[8]

Since there appears to be some contradiction between the empirical data and the theory let’s examine this issue more closely.  When the Federal Reserve increases interest rates above the free market rate the result is that some projects that would have made economic sense to fund with a loan no longer are.  As a result fewer loans will be imitated by banks than would have been the case if interest rates were at the free market rate (the free market rate is the interest rate that banks would charge if there was no central bank).  This will reduce the money supply.  However this is a transient effect.  Once the economy has adjusted to the new interest rates loans will be created at this new lower rate.  At this point it is likely the money supply will grow (shrink) roughly at the same rate as the economy, as I explained in my earlier article on Banking.  If the Federal Reserve raises interest rates too far above the free market rate it can cause a nationwide liquidity crises, which will destroy some wealth that was or would have been created.  The government can destroy wealth, but it cannot create wealth only redistribute it.

If the Federal Reserve sets the interest rate lower than the free market rate but not too low, then more projects that would have not made economic sense to fund with a loan now are.  This results in a one-time increase the money supply and after that it the money supply should grow at about the same rate as the economy.  As a result, lowering the interest rate below the free market rate, but not too low, will result in a one-time increase in the money supply.

If a central bank lowers the interest rates too low, banks will refuse to initiate loans.  How low?  Well if the interest rate that banks can charge to commercial customers is the same as they can get on Treasuries, then the banks are not compensated for the risk and expense of initiating a commercial loan.  Banks need to be able to charge interest rates to their commercial customers that compensates for the extra risk and expense involve over supposedly safe investments like Treasuries (government bonds).  As a result, when interest rates are set too low by the central bank it results in a contraction of the money supply.

This shows that low interest rates (lower than free market rates) are not the cause of long term inflation and if the interest rate is too low it can be deflationary.  This is likely what has been happening in Japan since the 1990s and happened in United States during the Great Depression.  Other government policies can also effect how the economy behaves, which makes it hard to nail down the exact effect of the central banks policies.  For instance, Friedman and Schwartz seemed to blame the Federal Reserve for everything that happened in the Great Depression, however it is clear that other anti-free market policies by Roosevelt and Hoover before him also contributed significantly to the Great Depression.

Central banks can also change the number of loans that are initiated by changing the reserve ratio requirement.

The commercial bank’s reserves normally consist of cash owned by the bank and stored physically in the bank vault (vault cash), plus the amount of the commercial bank’s balance in that bank’s account with the central bank.[9]

However, this also should have a one-time effect on the money supply.  The result is that long term inflation is not caused by a central bank’s interest rate policy.  A central bank’s failure to act as a lender of last resort may cause an extended period of deflation however.

 

Open Market Operations

Another tool of central banks is open market operations where the bank goes into the market and sells or buys securities, usually bonds.  When a central bank buys securities it increases the money supply.  This operation involves the central bank creating money (a computer entry without any associated liability) and then buying the securities, which puts money into the economy.  As those bonds (normally the central bank buys bonds) are paid off it decreases the money supply.  As a result, buying securities results in a one-time increase in inflation that is removed as the bond is paid back.  Of course the central bank can continue to buy bonds if it wants to continue to inflate.

Alternatively, the central bank can sell securities, which results in a decrease in the money supply as private parties trade cash for the security.  As the private parties receive payments from the securities (if they are bonds) the money is reintroduced into the economy.  Each purchase by the central bank is a one-time decrease in the money supply (assuming the security is a bond) that is removed over time as the bond is paid back.

Both of the scenarios above assume that the central bank is buying or selling bonds (or other securities) at their free market rate.  If the central bank over pays for a bond the amount that it overpays for the bond is a direct creation of money and is not redeemed as the bond is paid off.

When the bond is a government bond (national) and the central bank agrees to purchase the bond at a lower interest rate than the free market rate, then this results in the direct creation of money equal to the difference in the required payments in a free market verses what the government actually pays.  This is clearly inflationary and very subtle.

When a central bank starts buying a significant percentage of the government bonds when issued, the most likely reason is that private buyers are not willing to purchase the bonds at the price (interest rate) the government wants to sell them at.  This is one of the surest signs that the central bank is creating large amounts of money to finance the government.  However, it is very subtle.  It is very hard to calculate how much money has been directly created.  If the central bank buys the government bonds near their real cost and requires payments based on tax receipts, then the amount of inflation is very small or not at all.  The central bank can just quietly retire these bonds and then the inflation is huge.  Since in the United States we cannot audit the Federal Reserve we have very little idea of what is really happening.  Inflation caused by open market operations and interest rate targeting are subtle and hard to detect and I call the inflation caused by these operations “complex inflation.”  Central banks and the legal tender laws they depend are designed to obscure what the government and central bank are doing.  This allows for all sorts of mischief and inside deals.

Attempts to measure money creation, M0-M4, do not differentiate between these mechanisms and therefore are poor at predicting inflation.

How many companies did the Federal Reserve bail out in 2008?  Did these companies really pay back these loans?  We know for sure that banks were allowed to “borrow” huge sums money from the Federal Reserve at near zero interest rates and then “invest” this money in Treasuries.  This was just a complex way of hiding the fact that the Federal Reserve created (printed) money and gave it to these banks.  The procedure was obscure enough that most Americans would either not understand what was happening or would get bored when someone explained it to them.  However, the money created was paid for by (really stolen from) all those Americans (and people forced to use US dollars around the world) who hold or work for US dollars.  The bankers then paid themselves huge bonuses for their brilliant investment strategies.

 

Here is what we have learned:

          *Central banks create money directly, although in theory in the United States with the direction of Congress and the Treasury.
            *When central banks change the interest rates it causes a one-time increase in inflation (deflation).  Low interest rates do not

            *Open market operations provide numerous ways to increase inflation that are subtle and hard to detect. 

 

 

History of Central Banks in the United States

Many people label the First National Bank of the United States as a central bank.  A central bank is different from a national bank, such as the First National Bank (FNB) of the United States setup during Washington’s presidency.  The FNB was a private bank in which the federal government had a twenty percent equity interest.  It was forbidden from buying government bonds, had a mandatory rotation of directors, it could not issue notes or incur debt beyond its capitalization, and the federal government could withdraw its money from the FNB and place it with another bank.[10]  The FNB of the United States was a truly a private bank not a central bank.  It did not set the policies that “affect a county’s supply of money and credit.”  It also did not issue legal tender.

Hamilton and Washington pushed for a national bank because the national government had to be able to pay bills through-out the nation and a national bank made this easier than working with multiple different banks.  Depending on a person’s view of central banking they either vilify Hamilton or think he was a genius.  Both sides seem to confuse the national bank issue with the Hamilton’s efforts to put the newly formed United States government on sound footing.  Hamilton’ s first report on public credit did not mention a national bank, it only dealt with the state and foreign bonds left over from the revolutionary war.  The report called for:

1) Assumption of the state and foreign bonds that were trading around 20-25% of their face value.

2) Paying off these state and foreign bonds at their face value by issuing new federal bonds.

3) Tariffs and tonnage duties would back these new federal bonds.

The result of this legislation, according to Wikipedia was:

The adoption of Hamilton’s Report had the immediate effect of converting what had been virtually worthless federal and state certificates of indebtedness into $60 million of funded government securities. Fully funded, the central government regained the ability to borrow, attracting foreign investment as social unrest destabilized Europe. In addition, the newly issued bonds provided a circulating currency, stimulating business investment.[11]

Hamilton’s plan worked brilliantly and it had nothing to do with a National Bank.

            The national bank was proposed in a separate report.  Hamilton would not have been in favor of a central bank.  Hamilton believed that a bank run by the government would be tempted print too much money.[12]  The First National Bank was not a central bank, however it was a government chartered and supported enterprise sort of like Fannie Mae and not strictly a free market enterprise either.  Such enterprises are prone to inside deals.

Most people point to the Second National Bank of the United States created in the Madison administration as a central bank.  The Second National Bank was modeled after the First National Bank, except it had some regulatory authority over other banks.  This made it closer to a central bank, however it did not have the power of legal tender or a monopoly on the issuance of money.  Apparently, the Second National Bank was poorly run and became involved in politics.  Andrew Jackson refused to renew its charter so its operations ended in 1836.  The information I could find on the Second National Bank was sparse compared to the First National Bank.

The first real central bank in the United States is the Federal Reserve, which was created in 1913.  The Federal Reserve is a private entity of sorts.  It is more like Fannie Mae than a true private bank however.  It has the power to create legal tender, it is tasked with setting interest rates to achieve policy goals, and it has regulatory control over the whole banking system in the United States.

There were two main justifications for the Federal Reserve: 1) the United States needed a lender of last resort to avoid banking panics, and 2) the idea that the United States government almost went bankrupt a couple of times, but JP Morgan saved the day.[13]

The United States did suffer from a number of bank panics, but these were due to over-regulation, not the free market.  Oddly, finance (stocks and bonds) was not regulated at all in the United States until the Kansas’ Blue Sky Law in 1911, which was the blue print for the Securities Act of 1933.  Banks on the other hand were highly regulated, the most obvious of these regulations were unit banking laws.  Unit banking laws required that banks could have only one location and these laws existed in a number of states and was applied to federal banks.  These resulted in a lack of diversification in banks’ portfolios, which increased their risk of failure.[14]  Canada did not have these restrictions.  Canada had many nationwide banks and as a result did not have a single bank fail during the Great Depression.[15]

Private banks had already created clearing houses that acted as a lender of last resort, before the Federal Reserve.

Friedman understood . . . that before the Federal Reserve Act financial panics in the US were mitigated by the actions of private commercial bank clearinghouses. Friedman and Schwartz’s view of the 1930′s was that the Fed, having nationalized the roles of the clearinghouse associations [CHAs], particularly the lender-of-last-resort role, did less to mitigate the panic than the CHAs had done in earlier panics like 1907 and 1893. In that sense, the economy would have been better off if the Fed had not been created. This position is perfectly consistent with the position that, provided we take the Fed’s nationalization of the clearinghouse roles for granted, the Fed was guilty of not doing its job.[16]

The idea that the United States needed a central bank, is not justified by the banking failures before the Federal Reserve and the Federal Reserve failed in this function during the Great Depression.

The other justification for the creation of the Federal Reserve was the supposed bailouts of the United States federal government in 1893 and 1907 by JP Morgan.  The United States was on a gold standard and the governments gold reserves were being depleted rapidly in both cases.  In both cases Morgan guaranteed to buy bonds issued to purchase gold for the United States Treasury.  These bonds were sold on the strength and credit of the United States and Morgan profited by both of these so-called bailouts.  If the Treasury had been doing its job correctly it would have cultivated a market for these bonds long before this crisis.  In addition, the federal government could also have slashed spending.  Not surprisingly the bailout of 1907 happened under the bad economic policies of Teddy Roosevelt.  In addition, the United States had the power to issue legal tender, which it could have done to conserve its gold.  The history surrounding these events is confused and has not been fully explored.  This paper is not full exploration of this topic, however it raises serious doubts that the narrative of these panics was a legitimate justification for the creation of the Federal Reserve.

Another narrative pushed by the banking interests is that somehow banks are different than other businesses.  Banks always argue that if one bank (large politically connected bank) fails then the whole banking system will collapse.  This narrative is trotted out every time banks demand a bailout, the most recent being the bailouts in 2008.  When a bank fails it goes through bankruptcy, which acts as a circuit breaker from a cascading series of failures.  This is exactly what happens in other areas of the economy.  Another solution that I do not endorse, but is better than bailouts, was the Resolution Trust Corporation that was created to liquidate the savings and loan failures of the late 1980s.  The Resolution Trust Corporation was essentially a massive bankruptcy proceeding and importantly its existence was limited.  It had to liquidate all its assets by 1992 (five year life).

The justifications of for the Federal Reserve are weak at best and considering the damage the Federal Reserve has done to the economy and its potential for abuse it should be ended.  The origins of the Federal Reserve are based on government failure, specifically interference in a free market.

 

What we have learned:

        *Central banks do not arise naturally in a free market and are not part of a free market.

            *Central banks and legal tender laws are the source of inflation, not private fractional reserve banks.

            *Central banks provide an easy way to obscure that the central bank and the government are creating inflation.

            *Lowering interest rates causes a one-time increase in the money supply over the trend line.

            *The fastest way to undermine (eliminate) the Federal Reserve is to eliminate legal tender laws.

 

 

[1] Bordo, Michael D., A Brief History of Central Banks, Federal Reserve Bank of Cleveland,

http://www.clevelandfed.org/research/commentary/2007/12.cfm, A Brief History of Central Banks, December 1, 2007.

[2] Investopedia, Central Bank http://www.investopedia.com/terms/c/centralbank.asp#ixzz4V5iaLeW, accessed January 7, 2017.

[3] https://en.wikipedia.org/wiki/Modern_Monetary_Theory, accessed January 13, 2017.

[4] We can debate the accuracy of the actual number, however the point is the same.

[5] https://en.wikipedia.org/wiki/Mississippi_Company, accessed January 13, 2017.

[6]

[1] Lawrence Hunter, Forbes, OCT 29, 2012,  Is The Federal Reserve Using Money-Laundering Techniques To Cleanse Banks’ Balance Sheets?, http://www.forbes.com/sites/lawrencehunter/2012/10/29/are-federal-reserve-regulated-banks-laundering-dirty-money/#6da1ce8f27cb accessed February 7, 2017.

[7] Ivan Pongracic Jr., The Great Depression According to Milton Friedman, FEE, Saturday, September 01, 2007, . https://fee.org/articles/the-great-depression-according-to-milton-friedman/, accessed January 14, 2017.

[8] [8] Ivan Pongracic Jr., The Great Depression According to Milton Friedman, FEE, Saturday, September 01, 2007, . https://fee.org/articles/the-great-depression-according-to-milton-friedman/, accessed January 14, 2017.

[9] Wikipedia, https://en.wikipedia.org/wiki/Reserve_requirement , accessed January 14, 2017.

[10] The book, Hamilton’s Blessing, is a great reference for this but I do not have a copy anymore.

[11] https://en.wikipedia.org/wiki/First_Report_on_the_Public_Credit#Funding_the_national_debt , accessed January 15, 2017.

[12] Gordon, John Steele, Hamilton’s Blessing: The Extraordinary Life and Time of Our National Debt, Penguin Books, 1997, p. 34.

 

[13] http://www.investopedia.com/articles/economics/08/federal-reserve.asp, accessed January 15, 2017.

[15] CARPE DIEM, http://mjperry.blogspot.mx/2008/09/great-depression-not-single-canadian.html , accessed January 15, 2017.

[16] . https://fee.org/articles/the-great-depression-according-to-milton-friedman/,  The Great Depression According to Milton Friedman, Ivan Pongracic Jr., Saturday, September 01, 2007, accessed January 15, 2017.

January 16, 2017 Posted by | Intellectual Capitalism | , , , , | Leave a comment

More Proof ENVIRONMENTALISTS are EVIL

There is a general attitude among most people that environmentalism is about making the world a better place for humans.  The reality is that environmentalists want to kill off most of the human population, which means they are advocating mass murder on a scale that makes Stalin, Mao, Hitler, and Genghis Khan look like choir boys.  In addition, they are quite happy to lie about their agenda and the supposed science they are doing.  Here are some quotes by environmentalist that show that they are EVIL.
”My three goals would be to reduce human population to about 100 million worldwide, destroy the industrial infrastructure and see wilderness, with its full complement of species, returning throughout the world.”
David Foreman,
co-founder of Earth First!environmental-nazi

”A total population of 250-300 million people, a 95% decline from present levels, would be ideal.”
Ted Turner,
Founder of CNN and major UN donor

”The prospect of cheap fusion energy is the worst thing that could happen to the planet.”
Jeremy Rifkin,
Greenhouse Crisis Foundation

”Giving society cheap, abundant energy would be the equivalent of giving an idiot child a machine gun.”
Paul Ehrlich,
Professor of Population Studies,
Author: “Population Bomb”, “Ecoscience”

”The big threat to the planet is people: there are too many, doing too well economically and burning too much oil.”
Sir James Lovelock,
BBC Interview

”We need to get some broad based support, to capture the public’s imagination… So we have to offer up scary scenarios, make simplified, dramatic statements and make little mention of any doubts… Each of us has to decide what the right balance is between being effective and being honest.”
Stephen Schneider,
Stanford Professor of Climatology,
Lead author of many IPCC reports

”Unless we announce disasters no one will listen.”
Sir John Houghton,
First chairman of the IPCC

”It doesn’t matter what is true, it only matters what people believe is true.”
Paul Watson,
Co-founder of Greenpeace

”Childbearing should be a punishable crime against society, unless the parents hold a government license. All potential parents should be required to use contraceptive chemicals, the government issuing antidotes to citizens chosen for childbearing.”
David Brower,
First Executive Director of the Sierra Club

”We’ve got to ride this global warming issue. Even if the theory of global warming is wrong, we will be doing the right thing in terms of economic and environmental policy.”
Timothy Wirth,
President of the UN Foundation

”No matter if the science of global warming is all phony… climate change provides the greatest opportunity to bring about justice and equality in the world.”
Christine Stewart,
former Canadian Minister of the Environment

”The only way to get our society to truly change is to frighten people with the possibility of a catastrophe.”
Emeritus Professor Daniel Botkin

”Isn’t the only hope for the planet that the industrialized civilizations collapse? Isn’t it our responsibility to bring that about?”
Maurice Strong,
Founder of the UN Environmental Program

”A massive campaign must be launched to de-develop the United States. De-Development means bringing our economic system into line with the realities of ecology and the world resource situation.”
Paul Ehrlich,
Professor of Population Studies,
Author: “Population Bomb”, “Ecoscience”

”If I were reincarnated I would wish to return to earth as a killer virus to lower human population levels.”
Prince Phillip, Duke of Edinburgh,
husband of Queen Elizabeth II,
Patron of the Patron of the World Wildlife Foundation

”The only hope for the world is to make sure there is not another United States. We can’t let other countries have the same number of cars, the amount of industrialization we have in the US. We have to stop these third World countries right where they are.”
Michael Oppenheimer
Environmental Defense Fund

”Global Sustainability requires the deliberate quest of poverty, reduced resource consumption and set levels of mortality control.”
Professor Maurice King

”Current lifestyles and consumption patterns of the affluent middle class – involving high meat intake, use of fossil fuels, appliances, air-conditioning, and suburban housing – are not sustainable.”
Maurice Strong,
Rio Earth Summit

”Complex technology of any sort is an assault on the human dignity. It would be little short of disastrous for us to discover a source of clean, cheap, abundant energy, because of what we might do with it.”
Amory Lovins,
Rocky Mountain Institute

”I suspect that eradicating small pox was wrong. it played an important part in balancing ecosystems.”
John Davis,
Editor of Earth First! Journal

 

January 12, 2017 Posted by | philosophy | , , , , , , , | 5 Comments

Latest Review of Source of Economic Growth

This is an excellent book that cuts through the morass of theories about the source of wealth to make an identification that gave me a thrilling “Eureka!” moment, followed by an “Of course! Why didn’t I see that?” which comes with every brilliantly made, clearly expressed discovery. Thank you for clearing the cobwebs on the vital issue on the source of ongoing wealth — the dissemination of your well-supported identifications can make the difference in the quality of life in all nations for all lifetimes to come.
econgrowth.small

January 11, 2017 Posted by | Intellectual Capitalism | | Leave a comment

Slayer Live Webcast: There is no Radiative Greenhouse Effect (Jan 10, 10AM MST)

Climate of Sophistry

PDF of presentation: There is no Radiative Greenhouse Effect

Presentation start at 18:20.

In this live webcast I will be giving a slideshow presentation which demonstrates that the radiative greenhouse effect, upon which climate alarm and even the field of climate science itself is based, does not exist. On both scientific requirements of having theoretical & empirical support, the radiative greenhouse effect is proven to have neither: it is based in false physics and paradox, violates the laws of thermodynamics, and doesn’t produce the empirical observables it predicts and claims responsibility for.

It isn’t just that climate alarm isn’t as bad as the alarmists say it is, it is that the very foundation of the science – the radiative greenhouse effect – is in error, does not exist, and hence the alarmism and the policy surrounding it is completely, 100% in error.

Not merely slightly wrong, not mostly wrong…

View original post 69 more words

January 10, 2017 Posted by | Uncategorized | Leave a comment