The truth of the matter is that, far from causing starvation and famines, it is the speculator who prevents them. And far from safeguarding the lives of the people, it is the dictator who must bear the prime responsibility for causing the famine in the first place. FULL ARTICLE by Walter Block
Source link: http://archive.mises.org/12923/defending-the-speculator/
Defending the Speculator
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A classic statement of truth!
i unashamedly use walter block’s ‘defending the undefendable’ to get talking points whenever i want to sound contrarian and smart!
This is timely, considering the latest round of squawking from European statists about speculators. They naturally blame speculators rather than the entire Euro system.
The impetus for this kind of misplaced blame is that speculators are politically embarrassing. A crisis will reveal economic realities that some people (especially statists) work very hard to hide. The statists can’t or won’t do anything to solve the economic problem, so they demonize the speculator for demonstrating the State’s crimes and its impotence.
The truth is, idle speculation has nothing to do with famines. All it does is tie up vast sums of capital in wagers against the markets, rather than investing in worthwhile projects that affect the conduct of business.
“Iowa Sen. Tom Harkin issued a call on Tuesday for regulation of the “over the counter” derivatives market, which has an estimated size of about $596 trillion. By contrast, the value of the world’s financial assets—including all stock, bonds, and bank deposits—was pegged at $167 trillion last year by McKinsey. How can the derivatives market be larger than the entire world’s financial wealth?”
http://www.slate.com/id/2202263/
That’s right. For every dollar invested in a listed company on any of our stock exchanges, five dollars (in notional value) are put out on the table, invested in guesses that some metric is going to be going either up or down. It’s just a casino. In a practical sense its only function is to keep money from doing any meaningful or productive work.
Credit default swaps? Add another $55 trillion in nominal, or notional, value. These sums are, of course, highly leveraged. But they still represent many trillions of actual dollars spent watching dice roll across a table. They are extraneous to the real economy, the one represented by business, real estate and personal loans.
But I suppose it’s better that way. There’s so much excess money in investors’ pockets that if it all were to be funneled into bona fide investments, the only effect would be to bid up stock prices well beyond their actual worth (according to the laws of supply and demand). A bubble would form, expand and (pop!) everyone would once again lose except the last fellow to have sold off his chips before the music stopped.
The world’s grain markets are tangentially connected to this casino, and grain farmers are among the biggest speculators as they need to hedge their final crop sale price, so as not to lose their shirts in a down market. (Recall that when there’s a good crop, prices drop… while in a bad year you have no crop, but if you did it would be worth a lot.) Farmers must speculate heavily in futures on their own crops in the ground. But all that razz matazz doesn’t add to or detract from the amount of grain to be sold by one single ton.
No, what really causes famines now is expansion in the size of the total grain market. When large amounts of our corn are dedicated to ethanol production, the corn left for food purposes goes up in price. And those on the bottom, that two to three billion people who can barely afford to eat as it is, can’t afford to buy as much food that year. Market dislocations in the price of corn can cause rice prices to double or even triple– and many people just can’t afford that added expense.
Block actually makes no case in his article that speculators can, as he avers, actually prevent a famine. But neither do they exacerbate one. They’re far away from the market floor, where grain prices are actually set.
“All it does is tie up vast sums of capital in wagers against the markets, rather than investing in worthwhile projects that affect the conduct of business.”
Would you still make this statement in an economy with gold as money and no fractional reserves?
Virtually every economist would agree that were we to switch to actual metal transfers as our representation of wealth, we would step back in time a good 400 years. Capital flows would be conducted by railroad or ship. It wouldn’t be as efficient as hawal banking, or banking by gentleman’s agreement, which has been in use for the past 1400 years or so in the Islamic world.
Instead, a much better argument can be made for retaining all our current forms, including money creation and retirement by a Federal Reserve, by using a gold PEG.
In fact I’m almost convinced. The peg is just a binding resolution to keep the price of gold, denominated in dollars, within a certain range. Whenever gold gets too expensive (that is, whenever dollars lose value) you ‘burn’ a sufficient amount of dollars to pull the price of gold back into range.
You’ve never heard of it? A pretty good argument can be made. Certainly better than the argument that we should go back to using coinage and ingots.
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You’ve never heard of it? A pretty good argument can be made. Certainly better than the argument that we should go back to using coinage and ingots.”
Strawman much?
You’ve avoided comment on the gold peg. Any thoughts? Or do you still like lumps of metal?
I think you misunderstand what the economists on this site mean by the gold standard… perhaps you should give Mises a read then comment as much as you do.
I’ve just taken your good advice,and read Rothbard’s Case for a Genuine Gold Dollar– which I assume is ‘pure gold’ in your book.
http://mises.org/rothbard/genuine.asp
To me, he first fails to make the case that we have a problem. The relationship of nominal dollars (or any other paper currency) to commodity price is a flexible one, and hobbling the currency by linking it to gold will not change that. Prices will still rise and fall. It’s called supply and demand.
When demand for gold rises, you get more dollars for it. When it falls, you get less. To chain the two together, like two escaping convicts in the swamp, I think impedes flexibility and progress. And it encourages work that’s both useless and destructive. Countries short of gold will plow up their fields to gather, at great expense in labor and damage to the environment, tiny bits of it in the soil just so they can melt them together in bars. This is doing productive work? I don’t think so.
Plus which, the market for gold would very quickly become saturated. The price would drop.
Our economy is normally expanding. Therefore the supply of money will ultimately be forced expand in tandem. When it does, the economy overheats. And the wise course then is to raise the price of money (via interest rates), bringing things back into line.
The system works pretty well right now. And if it were properly managed, and kept away from vote-seeking politicians, it would work like a charm. It does, however, need constant tinkering. And I believe we figured that our thirty years ago, after one disturbing bout with double-digit inflation.
Look at the price inflation stats since. If zero inflation equals recession, and 7-8% inflation represents dangerous territory, I think you’ll be forced to agree we’ve been keeping well within the sweet spot, 3-4% annually.
The Austrians are seeking to cure a disease no one’s really suffering from.
Because I do not care. BTW
“Our economy is normally expanding. Therefore the supply of money will ultimately be forced expand in tandem. When it does, the economy overheats. And the wise course then is to raise the price of money (via interest rates), bringing things back into line.”
Prove it.
“Look at the price inflation stats since. If zero inflation equals recession, and 7-8% inflation represents dangerous territory, I think you’ll be forced to agree we’ve been keeping well within the sweet spot, 3-4% annually.”
I’ll be forced to agree to nothing because a) I don’t care much for “price inflation”, whatever the hell that is and b) there is no such thing as a “sweet spot”. Read more until you understand the Austrian theory and how it’s premised and cease your reliance on empty gov’t produced statistics which are aggregated to the point that they have no bearing on the real economy… It’s a theory of malinvestments. It does not matter if the CPI inflation rate is 2% or 200%, if it is in excess of what the market would ordinarily produce there is a) inflation induced price increases and b) misdirection of productive resources. Not hard to understand.
“When demand for gold rises, you get more dollars for it. When it falls, you get less. To chain the two together, like two escaping convicts in the swamp, I think impedes flexibility and progress. And it encourages work that’s both useless and destructive. Countries short of gold will plow up their fields to gather, at great expense in labor and damage to the environment, tiny bits of it in the soil just so they can melt them together in bars. This is doing productive work? I don’t think so.”
It is considered economically valuable, hence yes, it is “productive”. Stop hinging yourself on the “labour” theory of value or whatever crap you believe in. Secondly, you’ve no understanding of how our proposed gold standard would work. There would be gold mined up, yes, which would then be represented by notes (market competition dictating the extent to which the note is backed by reserves, 100% being very likely with no bailouts, FDIC etc. to cover bank runs) and of course being used with credit cards etc. The mining industry already exists and functions without the sort of toil you fictionally refer to, and most gold needed is already above the ground, with silver and copper existing for smaller denomination coins and platinum for larger ones. So… get a clue.
“Plus which, the market for gold would very quickly become saturated. The price would drop.”
Nope, most gold needed is already aboveground. The impact of new gold mined up is marginal.
“I don’t care much for “price inflation”, whatever the hell that is…”
It’s critical. If the money supply is expanding, yet prices are not increasing, you’ve yet to demonstrate that there’s any problem. It’s a ‘so what’ situation.
And the only area in which we’re seeing cost increases right now is in health care– an area of the economy that’s obviously highly distorted. Most other purchases are currently in the two percent range. Try getting your head out of the clouds and going to the store for a change. You’ll see for yourself.
That’s a prerequisite for convincing anyone that we have a problem. Show your audience that we have some sort of problem that affects people. Absent that, all the gloom and doom we read about here is of the Chicken Little variety. Because for people out here in the outside world, it’s not sufficient that a theoretical problem be expounded. There has to be some concrete effect.
Virtually every economist has as the basis of their “expertise” illegitimate theory.
Vanmind: Truer words were never said.Theories are just that, until they’ve been tested in the real world and the results adjusted for extraneous factors. Testing should be rigorous, and designed to disprove a theory if at all possible. Tests designed to produce the desired results are worth little.
Only those theories that resist disproving should be granted some validity. Which leads me to ask, has the Austrian solution, to your knowledge, ever been applied in a real-world monetary crisis?
Other, that is, than in IMF and World Bank structural adjustment programs. There the theory has been dictated to indebted countries many times– always with disastrous results in every area other than the simple retirement of debt and curbing of runaway inflation. What they do there is to cure an illusory prosperity by inducing a very real depression.
“A bubble would form, expand and (pop!) everyone would once again lose except the last fellow to have sold off his chips before the music stopped.”
A bubble did form. Guess why.
“But all that razz matazz doesn’t add to or detract from the amount of grain to be sold by one single ton.”
Prove it.
Given that speculators ease adjustments to future expected changes in supply (and demand) and thus direct where the industry is headed, which you may call “betting” (don’t care what you prefer to label it), it’s interesting you should draw such conclusions…
“First, the speculator lessens the effects of famine by storing food in times of plenty, through a motive of personal profit. He buys and stores food against the day when it might be scarce, enabling him to sell at a higher price. The consequences of his activity are far-reaching. They act as a signal to other people in the society, who are encouraged by the speculator’s activity to do likewise. Consumers are encouraged to eat less and save more, importers to import more, farmers to improve their crop yields, builders to erect more storage facilities, and merchants to store more food. Thus, fulfilling the doctrine of the “invisible hand,” the speculator, by his profit-seeking activity, causes more food to be stored during years of plenty than otherwise would have been the case, thereby lessening the effects of the lean years to come.”
Helps to read the article btw…
First, I don’t disagree with your point.
However, if the speculators are allowed to gamble with money that isn’t theirs (leverage, FRB loans, etc.) and then losses are socialized (banks failing, FDIC, etc.), then the speculator exists in an environment rife with moral hazard. I also wonder about the commodity exchanges – are they “sound” businesses, or do they only persist in their current form through the power of the state. I believe that it isn’t the speculator that really deserves the bad press, it is the system within which they operate. I hate the game, not the player.
One of the functions of the commodity exchange, in my perfect world, would be to ensure that the parties of futures must make good on their speculation. Thus, if you made bad bets, you paid. If you couldn’t pay, then you went bankrupt and lost everything. Then there would be a substantial reduction in the moral hazard that exists in today’s exchange system.
I also believe that there are powerful interests that seek to manipulate the exchange values of various commodities, gold in example, that make the futures price deviate from the price for immediate physical delivery. Basically, that a lot of shorts would be busted if they were forced to cover their shorts. I believe that a reckoning is coming.
If anyone is interested in other works about grain speculation, you might find “Satan’s Bushel” by Garet Garrett interesting. One of the central themes is the trading of wheat on the commodity future’s exchange, and how it bears little relation to the actual growing and selling of physical wheat that happens in reality. It also emphasizes how the powers that be will change the rules to protect themselves and screw everyone else. And that you play in “their” game to your own peril.
I can’t recall an instance where speculators filled that role, holding excess grain off the market during a good year and profiting in a lean one. World grain markets are very, very tight. There’s virtually no margin. Just about every ton grown lately gets eaten that year.
It’s another argument for birth control. Pretty soon we’ll be needing to grow hydroponic gardens in space. And if you thought tomatos were expensive NOW…
“Consumers are encouraged to eat less and save more, importers to import more, farmers to improve their crop yields, builders to erect more storage facilities, and merchants to store more food.”
Strange, that sounds an awful lot like the Broken Window Fallacy. Imagine an arsonist helping to improve agricultural technology by destroying crops and making farmers improve their crop yields and so forth. A speculator is a glorified gambler. Some days he win, some days he loses. Most speculators probably lose far more money than they make. A speculator should really be defended by saying he’s doing nothing illegal not because he’s doing anything particularly productive.
This entire paragraph, by Block, bears no relation to the actual process of grain production:
“First, the speculator lessens the effects of famine by storing food in times of plenty, through a motive of personal profit. He buys and stores food against the day when it might be scarce, enabling him to sell at a higher price. The consequences of his activity are far-reaching. They act as a signal to other people in the society, who are encouraged by the speculator’s activity to do likewise. Consumers are encouraged to eat less and save more, importers to import more, farmers to improve their crop yields, builders to erect more storage facilities, and merchants to store more food. Thus, fulfilling the doctrine of the “invisible hand,” the speculator, by his profit-seeking activity, causes more food to be stored during years of plenty than otherwise would have been the case, thereby lessening the effects of the lean years to come.”
Grain “speculators” store no food. Storage is expensive. If Block is talking about speculators in the commodities futures exchange, which I assume he is, he should be aware that the LAST thing these people like to do is to actually take possession of the crop. They all live in fear of that nightmare scenario when a line of trucks stops outside one’s office and asks “Where do you want us to put this?” The idea is to buy low and sell off at some point when the price rises.
The other thing is that stores don’t last long in this current economy. Talk of holding food off the market pending some future time when it’s in short supply is largely out of date. Google the data on the world’s grain reserves. You’ll find that the world barely grows enough to satisfy current demand– and the gap has been steadily narrowing in recent years. World grain reserves are currently down to 57 days of grain consumption.
So the speculator doesn’t “lessen the effects of famine by storing food in times of plenty”. Nor does he “buy and store food against the day when it might be scarce”. Because that day is now. Food gets gobbled up as soon as it reaches the retail market. And with current enthusiasm for corn-based ethanol the situation’s only going to get more dire.
Now I ask you: how are “consumers encouraged to eat less and save more”? Don’t they always eat when they’re hungry, and abstain when they’re not? And what incentive is there for “importers to import more”? Don’t they always import whatever they can sell, and no more? And where is the incentive for farmers to improve their crop yields? Isn’t it a given that farmers maximize crop yields whenever they think they can sell at a reasonable price? And plant something else when they think prices might be too low?
I can see no noble place in the scheme of things for the speculator. The futures market only has one obvious virtue: it offers a venue for farmers to hedge against low prices. Gambling with their own crops is a nuisance, but nowadays something of a necessity.
I would like to hear a response from a genuine farmer, with experience in this area.
I’d like for you to prove anything you say.
If your first comment is an objection, I share it. In our current economic condition speculative bubbles form and burst continually. In no way do I endorse the way capitalism is conducted in the USA.
In your second objection, arbitrage on the part of farmers does not affect the total amount of grain they grow. Arbitrage is necessary to protect them from the vagaries of the market, and they must hedge against their own good luck to shield themselves from low prices in a bounteous year. BUT… they never try to grow less. That would be like trying to protect oneself from having to pay high taxes by earning less money!
Instead, farmers will vary the crop so they’re growing, ideally, something everyone else isn’t. When all your neighbors are growing wheat it’s probably a good year to sow flax; when they’re growing corn you should plant soy; and so forth.
And your third objection: “Given that speculators ease adjustments to future expected changes in supply (and demand) and thus direct where the industry is headed, which you may call “betting” (don’t care what you prefer to label it), it’s interesting you should draw such conclusions…”
Try as I may, I can’t make sense of this one. It doesn’t sound like a complete sentence. Or a completed thought.
Bets in the casino may influence future trends in the markets– but they shouldn’t. This is a problem just because people in the financial world talk to each other, and share opinions as to what’s ‘hot’ at any given time. But they move the markets in bad ways. They encourage exactly the kind of thinking we saw toward the end of the nineties, when everyone overvalued the tech sector– and all took a bath financially from basking in the collected wisdom.
There’s only one thing that should influence the direction of an industry: sales volume. Anything else is just gambling (hopefully only with money you can afford to lose).
Am I to believe you’ve no objection to it when you constantly promulgate the fact that the US has the world’s most trusted currency (supposedly) and that it’s been successfully managing its currency (by whatever arbitrary standard)…?
“Bets in the casino may influence future trends in the markets– but they shouldn’t. ”
To conflate them with a “casino” is purely a matter of your own opinion as is the “they shouldn’t.”
“This is a problem just because people in the financial world talk to each other, and share opinions as to what’s ‘hot’ at any given time. But they move the markets in bad ways. They encourage exactly the kind of thinking we saw toward the end of the nineties, when everyone overvalued the tech sector– and all took a bath financially from basking in the collected wisdom.”
Yeah, read the article again… I am unsure how you could make all this commentary on it and yet have evaded the parts discussing just this…
“There’s only one thing that should influence the direction of an industry: sales volume. Anything else is just gambling (hopefully only with money you can afford to lose).”
Um, whence this “should”? Firms always try and predict where demand is heading &c., even if imperfectly.
Micheal says:
“The truth is, idle speculation has nothing to do with famines. All it does is tie up vast sums of capital in wagers against the markets, rather than investing in worthwhile projects that affect the conduct of business.”
Speculators provide liquidity in the markets that might not be there without them. Others would not invest if they didn’t believe they could sell quickly.
They also act like insurance. They smooth out risks in the futures markets. Thus when they buy low when everyone else is consuming before a famine, they need to STORE the commodities so they can sell later when prices rise – i.e. during the famine.
This is the service they perform and they risk there own capital. If they borrow money to do it, so be it, it’s between them and their creditors.
AIG fills exactly the function you describe. They provide a hedge against imprudent guesses as to where the markets may end up in any given period. Thus they seem important, and integral to the process.
The only thing is, they don’t have to keep any capital on hand to pay off those bets, if everyone happens to bet black and the ball lands on red. So they throw up their hands in mock anguish, and tell everyone to “Go fish.”
At which point we have a choice. Market purists can vote against a bailout, and the companies relying on such a hedge saving them can all go belly up. If the bad investments are systemic (of COURSE they are!) the shock can go around the world, crashing every bank from Germany to Hong Kong. The result will be worldwide depression, for years– or until someone can figure out where to start next.
Or, you can vote for a government bailout. In which case the giant insurors learn the lesson that they don’t need to keep cash reserves, and that Uncle Sam will save them from the bottom of the barrel every time.
Or, you can vote for regulation, in which case a heavy handed State requires each insuror to k=retain a prudent amount of cash reserves.
Take your choice. Speculators don’t like to operate without a net, so you need to choose one method that will allow hedges to function effectively and reliably.
Or, you could, let them bear the brunt of their bad decisions and let that regulate their behaviour rather than concocting bullshit “consequences” that only ensue because of the FRB system to begin with…
“Or, you could, let them bear the brunt of their bad decisions and let that regulate their behaviour..”
That would be the first choice I suggested: letting everyone with a hand in the losses take the hit to the full degree of their exposure. Most people in government took the position that that would bring on a worldwide depression, and that every major bank on the globe would freeze up.
Is that okay with you? Do you see such a move as being necessary to clear the air? Or do you think that would not happen?
Yep, fine with me to have the rot cleared out rather than pretending the problem does not exist and then trying to “regulate” it away as if regulation was not in place before this recession and as if it’s not a problem related to government measures to begin with (fiat FRB mostly.)
“…that would bring on a worldwide depression, and that every major bank on the globe would freeze up.”
Sounds like you and the government are speculating, but without any logic or evidence.
Matt– There’s lots of evidence to support that theory. Whenever a country gets itself hopelessly in debt through deficit spending, and reaches the point where it can no longer service the debt, it throws itself on the mercy of those lenders of last resort, the IMF and World Bank. And every time, the specified cure is to undertake a structural adjustment program.
Which is nothing more than the Austrian Cure. Stop government spending! Dismantle all social programs! Subordinate every other economic goal to the retirement of debt! And in every instance this has been undertaken (and there have been many) the practical effect has been to induce a strong and sudden depression.
Is there any reason to suppose we could try the same cure again, without the same result?
let the banks crash, ending moral hazard.
Re: Michael,
“Worthwhile project” in your opinion, of course. The speculator may NOT think his investment is not worthwhile, otherwise he would not have made it.
Maybe you could answer me this. A person buys a million dollars’ worth of collateralized debt obligations. What has he added to the economy at large?
There’s a difference between placing a bet you think you can win and creating a job, an opportunity, a market, a demand or a new idea. All you’re doing is playing with your money.
Does he think he’s benefitted? Does the seller? Then yes, they both have.
Re: Michael,
You don’t “add” to the economy, Michael; that’s a Fabian fallacy. You have not learned anything. Whatever HE bought, made HIM feel better off.
Maybe. At least it would be MY money and NOT ANY OF YOUR BUSINESS. You’re making a value judgment based entirely on your misunderstanding of how people act and your own disdain for people that have money.
Your answer indicates one critical difference between ivory tower people, arguing in a purely intellectual realm, and people concerned with the allocation and distribution of necessities to the world’s seven billion actual, living people.
A million dollars changing hands in the casino may form the basis of both parties, buyer and seller, thinking they’ve made a satisfactory exchange. But their pleasure is not the end-all of economic activity.
A million dollars invested in bringing scrubbing equipment to the Gulf of Mexico would make a very big difference in the real world. And it could be done at a profit, if you’re the sort that has to see the profit in it. But these projects hold little appeal for people who sit at their keyboards and move numbers around all day. If you can make more money most of the time in idle wagering, that’s their preference.
Which is one reason we’re in the condition we’re now in. Not enough investment is being mad in things that really matter.
Now’s your cue to tell me that’s just something I think matters, and that value is all just a subjective preference. But there are things that matter very much to real people, and others that matter no more than the outcome of some game of chance or skill.
“But their pleasure is not the end-all of economic activity.”
Yes it is. Economics is the science of human action concerning the employment of means for the satiation of given wants under the constraint of scarcity…
It mattering to “many people” is irrelevant, of course, except insofar as they are economic agents either bringing about the investments or consuming their products. Also, the existing distortions by the gov’t in the money supply (which you think should expand and “be managed”) are partially why production is so warped right now. Go figure…
Re: Michael,
Indeed! Which is which, however, Michael? Considering the price system as the best and efficient allocator of resources, I would be squarely in the second camp. You as a person that thinks “Phooey, speculator!”, reside squarely in the first. The speculator stabilizes prices by looking for and taking advantage of disallocations – he is the Devil in Maxwell’s machine.
Again, your opinion. For the two parties, it was THEIR agreement, THEIR money. How would you feel if a person you do not know at all thinks you cut YOUR hedges too high? You’re just like that person when it comes to the so-called “speculators”.
So what are you waiting for?
“Also, the existing distortions by the gov’t in the money supply (which you think should expand and “be managed”) are partially why production is so warped right now. Go figure…”
Conceded. Monetary policy does affect production. So from this point forward, June, 2010, what prescription would you offer?
Would you advise the Fed to begin selling off their assets?
Would you advise them to raise interest rates?
Either or both of these steps would certainly retire money from circulation. But at the same time they would strangle what little we can see of our current recovery.
In fact strict disinvestment policies would precipitate a very serious crash. Do you think such a thing would be a price worth paying, just to bring the economy back to your idea of a distortion-free condition?
Mexican– The price system may be a very efficient system for allocating resources. But it is far from the best– if your object is to distribute the necessities of life to the maximum number of people. It would in that case be about the worst: the richest would have a surfeit of goods, far more than they might ever need, while the world’s poor starve in silence. In other words, the world we have today.
“The speculator stabilizes prices by looking for and taking advantage of disallocations – he is the Devil in Maxwell’s machine.”
Some times he destabilizes prices. The July issue of Harpers (not yet on the web) has an article on the radical destabilization of world grain markets by a very curious mechanism, designed to force grain prices upward. You should look for it in a few weeks. It’s called The Food Bubble, by Frederick Kaufman.
These tricks enrich the few at the expense of the many. And if we were all just playing some elaborate board game here, we could stand up and applaud the inventor of this ingenious trading pattern, saying Bravo! Well played!
But we’re not. For a majority of residents on this earth, it’s a matter of life and death.
You can move blithely along in this magical dream world, floating high above the crowd, thinking how marvelously all our goods are being allocated, for just as long as it takes for the rubes to wise up. Then there exists the possibility that we might see a market adjustment in favor of greater equality. Which, if it comes down to that, probably won’t be pretty.
But how likely is that?
2. “So what are you waiting for?”
Well, for one thing I don’t have a million dollars. Nor does my health permit that I go down there with my little shovel, to clean up someone else’s mess. It’s pathetic, how hard those people on the beaches and in the bays are trying to fix things just a little bit, when the spill is being measured in so many millions of gallons, thousands of barrels each day, and it takes so much effort to even fill one pail with sludge.
That Tony fellow we see so much of on TV now would look good in a hazmat suit, getting his fingernails gunky with a bit of the sludge he created and left for us to clean up. But he’s not the sort to ever do a thing like that.
Micheal,
i really recommend to read books that you can find on this site. Then you would realise that your posts are full of fallacies. Without the use of force (e.g. government), the only way to obtain what you want from others is to provide them with something in exchange. So, the rich must become rich by producing and offering better and cheaper goods than the competition. On a free market, you cannot become rich by decreasing the productivity or withholding goods or payment. If you do, the competition will squash you.
As a consumer, are you worried about price fluctuations due to speculation? Just buy call options. The same instrument that you condemn can be used to protect yourself. And if there are sudden fluctuations, the only one that loses money are the speculators. Why should someone else pay for solving your problems?
I’ll also address some of the other topics that you discuss elsewhere.
Minimum wage. As a businessman, surely you must be familiar with the concepts of opportunity costs and contribution margin? Nothing else is necessary to understand the effect of minimum wage. If you set a minimum wage, those employees whose contribution margin is lower than the minimum wage will lose their job in the short term. In the long term, the minimum wage influences the costs of investment projects, favouring those with lower amount of labour, which also leads to increased unemployment.
Pumping money into the economy. You note that pumping money into the economy makes people spend more. However, you don’t see “the invisible”. The increased amount of money units does not change the amount of available scarce goods. So if more is consumed, less is saved. Less saved means less invested, and that means productivity stagnates. At least in the long term. In short term a bubble will form.
“Without the use of force (e.g. government), the only way to obtain what you want from others is to provide them with something in exchange.”
So force only exists in the hands of government, eh?
Are you familiar with the term “e.g.”? It means “for example”. The government might be somewhat unique in this respect, because most people consider it a legitimate perpetrator of violence. But that does not change the economic laws.
Peter– Thanks for some pertinent comments. You say “i really recommend to read books that you can find on this site. Then you would realise that your posts are full of fallacies.”
Would I be commenting here if I hadn’t looked through some of the basic information? What I’ve found there is a remarkably elegant theory backed by little in the way of testing. Which is, of course, highly unscientific.
Economics purports to be a science. Yet I’m not finding that. I’m finding True Believers spellbound by an elegantly constructed system. Which is a phenomenon I’ve noted once before in economic history.That would be the theory Marx put into place.
Similar symptoms include my being attacked on purely theoretical ground, and my real-life observations entirely ignored. Is it your position that it doesn’t really matter what the practical effect of applying Austrian theories is, so long as they are adhered to? That would be like something the Marxists would say.
So yes, my posts are full of “fallacies”. Because they don’t follow your dicta.
2. “As a consumer, are you worried about price fluctuations due to speculation? Just buy call options. The same instrument that you condemn can be used to protect yourself. And if there are sudden fluctuations, the only one that loses money are the speculators. Why should someone else pay for solving your problems?”
That’s only a practical suggestion for people who already have more money than they can use. For people with limited income, where every dime goes toward meeting expenses, that’s not an option. Or rather, it’s the “let ‘em eat cake” option.
Besides, the only arena in which I’m seeing price inflation now is in medical expenses. And I believe we can all see that the causes here are not due to the Fed’s monetary policy.
3. “As a businessman, surely you must be familiar with the concepts of opportunity costs and contribution margin? Nothing else is necessary to understand the effect of minimum wage.”
As a business person I found the most productive strategy to be to hire people on at a living wage, and to tell them I expected more from them. Thus both “opportunity costs” and “contribution margins” went up. Some of them I did have to fire, if they were unable to make the cut.
4. “You note that pumping money into the economy makes people spend more. However, you don’t see “the invisible”. The increased amount of money units does not change the amount of available scarce goods.”
It absolutely does. Because most goods are neither scarce nor limited. Let’s say you make kitchen floor tiles. And there’s lots of money floating around, so lots of families are remodeling their kitchens. And the distributors are all calling you back, saying “We’re out of stock! Send more!”
What’s a business person to do? You keep the factory rolling and fabricate a bunch more tiles. Thus dollar demand has directly created more supply. Or as we like to call it, product. The factory owner is merely the means toward this end, it’s the demand that got the job done.
An economist would probably have to take a moment to ‘get’ this, if I may indulge in a bit of snippiness.
However you do frame a debate very nicely. So if you see anything else in my comments that makes you slam the keyboard in annoyance, please do me the favor of putting it into words again. Those were all reasonable ripostes.
Dear Michael,
even if you really lookd at the sources on the website, you still didn’t get two crucial points (and some minor ones). They are the core of the problems with your arguments.
The first one is that when you are analysing the consequences of an action, you need to analyse all of them, not merely a subset, just like you do. Your previous experience influences the scope of your views and skews your perspective so that you do not see the unseen. You fail to understand that the objections people here bring to your arguments do not negate your experience, merely are telling you to take a step back and look at the whole. I have education in business administration and experience in running a business, so I understand your arguments quite well, but you errorneously assume that that is all there is. There is more, and we are trying to get you to comprehend that. There are an infinite amount of factors influencing every moment and choosing an arbitrary subset them does not allow one to form a correct theory.
The second problem is the inability to graps the essence of scarce goods. You can’t have your cake and eat it too. This error is somewhat related to the previous issue, you do not see that the goods need to come from somewhere. Partially it seems that you conflate the physical supply with value thereof. Value is subjective, and can rise or sink, but the physical supply is fixed. If you are a businessman, you must have an understanding of opportunity costs and contribution margin. In order to invest into production process A consisting of machine B and human resources C, you need to forego a production process X consisting of machine Y and human resources Z. It’s either-or. If cost of C increases, then the contribution margin of A decreses, and if it goes below the contribution margin of X, business that previously used A will switch to X. Machines B and human resources C will be made redundant in favour of machines Y and human resources Z.
As an addition, I would like to point out that according to the Austrians, economics must be value free (just like any other hard science). Instead of being concerned about how things should be, it must only determine how things are and what the causal relationships are.
Now to the individual questions:
I addressed this above. Your observations are not ignored, you are merely reminded that they are incomplete.
Regarding options:
The option premiums are miniscule compared to the prices of the underlying, for commodities they appear to be in the in the area of 1%. Quite possibly these costs are lower than the costs for a regulatory body to oversee the transactions or the increased volatility that would occur in the absence of derivatives.
Take for example a look at onion derivatives. In the US, since 1958 you are forbidden to trade onion futures, but contrary to the assumptions of opponents of derivatives, the volatility of onion prices did not sink, especially during the time of sudden shocks it is actually worse than with other commodities. Funny thing is also that the ban happened because the producers were claiming speculation drives the prices down.
The actual progress of inflation is a debated topic in the Austrian circles. There does not seem to be a consensus on when the price increase will happen (as in nearer or further future), only that eventually it will happen. The factors influencing the exact progress are complex. It appears though that most of the money that was pumped into the economy is not circulating but sitting on bank’s accounts, so maybe that’s why the pressure to increase the prices is lower. Also, the markets are heavily distorted by the acts of government, there are bubbles. Maybe the medical sector is one of them?
Do you even understand what these terms mean? In order to choose option A, you need to forego option B. If option A provides a higher profit than option B, B is a bad business decision. It lowers your profit or makes it easier for competitors to undercut you (or a combination thereof).
From the perspective of one business, you would be correctly under the impression that being given additional input factors is beneficial. However, these factors do not magically appear, they must come from outside of the business, and cause opportunity cost for another entity. In the economy as a whole, all actions carry opportunity costs. You see that you have additional factors available to you, but you don’t see that the factors are unavailable to someone else, and this misleads you.
I adressed this in general above.
Kitchen tiles need to be produced. The production consumes resources, which by the act of production become unavailable for other uses. Again, you are misled by not noticing the opportunity costs that occur to someone else. Tiles require, for example, clay. The clay needs to be mined (or whatever they do with it),formed, baked, stored and transported. All this requires resources: miners, drills, trucks, heat, presses, storage buildings. And so on. If these are used for the production of tiles, they are unavailable for other uses. This is such a crucial point that I have to insist on that you comprehend before we move further.
Now that we have established that you can’t have your cake and eat it at the same time, let’s take a look at the opportunity costs. If the production of tiles does not happen without an intervention into the market, we can conclude that the production of tiles bears opportunity costs compared to the alternative uses. If the costs were negative, that would mean there is an untapped business opportunity. So, if a policy measure causes the production of tiles, that means it caused the resources to be used in a way that creates lower value. You are misled by noticing a frantic activity in one sector, but not realising that this requires the resources to be diverted from other uses. These uses might not be in the spotlight, but according to the arguments I laid down above, we know that they produce higher value. Therefore, the intervention causes a waste of resources.
Peter– I thank you for another thoughtful response. And in fact I wrote a detailed reply to it. Unfortunately, that reply has been moderated. So I think we won’t get to see it.
(BTW, it was really brilliant!
But here’s something that perhaps can get past the censor:
You comment “Kitchen tiles need to be produced. The production consumes resources, which by the act of production become unavailable for other uses. Again, you are misled by not noticing the opportunity costs that occur to someone else. Tiles require, for example, clay. The clay needs to be mined (or whatever they do with it),formed, baked, stored and transported. All this requires resources: miners, drills, trucks, heat, presses, storage buildings. And so on. If these are used for the production of tiles, they are unavailable for other uses. This is such a crucial point that I have to insist on that you comprehend before we move further.”
I can’t believe this is the way you think. You only need tow things to make tiles: labor and clay. And we have an unlimited quantity of each. No matter how big the order, it can be fulfilled. The only variable is how quickly the order can be filled.
The only true constraint on the system is how much money people have available to buy tiles. Without that, there is no demand.
Sorry for the late reply. I am not retired yet so the time I can spend writing posts is limited.
The errors you received are not censorship, it is a way of preventing spamming. If it happens next time, just wait a couple of minutes and resend the post. Deleting posts here happens rarely, only if it is some sort of spam or if they are very uncivil.
Yes, I can see that. You see, this is not about beliefs. This is about cold logic. Do the conclusions follow from the premises? Whether one believes it or not is irrelevant.
Again, you limit your observations to one part of the reality. You cannot draw correct conclusions unless you examine all that is affected.
michael writes:
“I can’t believe this is the way you think. You only need tow things to make tiles: labor and clay. And we have an unlimited quantity of each. No matter how big the order, it can be fulfilled. The only variable is how quickly the order can be filled.”
I remain deeply puzzled that so many people continue serious debate with someone who freely reveals himself to be both a lunatic and an ignoramus.
I don’t think that anyone actually answered “What has he added to the economy at large?”
Actually your speculator has added liquidity. He has chosen to fund mortgages with his own capital, and therefore take them off the books of holding institutions. Of course, within the current system this person has been proven exceedingly foolish, because of the fraudulent behavior of the bond rating agencies. But this particular speculator, even though his action does not need to have an aspect of “social responsibility” (as many of your other critics point out), has actually provided a service to the issuing agencies of the loans, and arguably the depositors of the funding institution and the people who want mortgages.
The function is actually analogous to the (old time) function provided by the person who purchased bank notes for a discount on their face value (in gold), then took the notes to the issuing bank to redeem them (in gold). This person, though reviled as a profiteer by the note issuing bank, served a critical social function in his pursuit of profit. He kept banks honest, and kept the money honest. He speculated on the arbitrage between the location of a note (Boston, for example), and its bank of issuance (perhaps Atlanta).
A grain speculator also allows the farmer to sell his product and guarantee a price prior to the production of the crop. Farmers certainly sell ahead their future production. And actually both parties in that arrangement are speculating – the farmer and the person who promises to buy his future crop at a certain price.
With my liberal anti-speculator religious friends, I like to point to the Bible story of Joseph. This was a story about a speculator that saved Egypt from famine.
And what a speculator he was…. He bought low during times of plenty and sold high 7 years later. The price to buy his grain was so high it involved slavery (voluntary slavery – really more of a long term contract).
True, Joseph had divine entrepreneurial foresight, and probably used force of government to save up the grain, but still he saved when everyone else was consuming.
If Joseph sold at top dollar during a famine, I bet he paid out plenty of his profits to hire bodyguards.
I like the story of how the insurance industry got started.
Originally the only function of government was the defense of the realm. Then as now, if you had anything, it needed defending. But then the first large hydraulic civilizations got organized, where god-kings directed the work of thousands of laborers in watering the deserts. Crops on such a scale could sustain the first large populations.
But some years the crops failed anyway. So the kings decreed a tithe should be donated by each farmer, a tenth of his yield in every good year. These taxes went into a granary, which was the first insurance policy. And in a bad year the granary was opened, to feed the people and stave off famine.
This approach was very popular. Joseph, profiting from adversity? I don’t think I’d want to be in his shoes.
Well Joseph did alright since he had the pharaoh on his side. But then his descendants ended up in slavery, if you take the Bible as history.
The story you relate does sound like the Joseph story. Perhaps you are on to something, the real origin of the Biblical tale.
“story” being the operative phrase…do you both live in fictionland?
(Hint: Eric: there were never any Jewish slaves in Egypt…Michael: … no; words fail me)
Re: Michael,
Such a daunting task, polling every economist there is. Did you?
Despite the existence of letters of credit and insurance, I would pressume . . .
As binding a resolution as the Indian Treaties, Bretton Woods and the Constitution, or are you talking about a sort of government/big banking chimera that does not exist yet?
How much you would “burn” in an era of funny money, one can only speculate. Most money does not even exist on paper, being nothing more than accounting tricks based on the promise of payment from a few million debtors.
Coinage and ingots are impervious to computer viruses and high-power electromagnetic pulses. Just sayin’.
Hard to imagine there’s still anyone believing in the magical powers of physical gold.
Are you talking about retaining our current system of electronic transfers, paper banknotes, etc but insisting they be convertible into actual gold? That would make a bit of sense. But I guess you’re not. It’s back to the old flotilla of ships on the high seas, taking the same bullion back and forth, back and forth because someone thinks they’re doing meaningful economic work.
I look forward to a future where my debit card deducts ounces of silver from my bank account.
Why is it that every critic of commodity money inevitably assumes that what it’s advocates propose is paying for drinks by pinches of gold dust? Even that awkward solution was mandated by the state’s ban on private minting and was corrected anyways by (illegal) private mints. I don’t even ask that the gov. adopt gold as it’s currency, just remove the monopoly privileges on it’s fraudulent paper notes and the tax codes that punish all attempts to use any commodity as currency, remove the promise to bailout banks at any time with cash infusions or the suspension of specie, then let the market choose whatever form of money it will.
Jake,
Bottom line, in this country we do have to render unto Caesar his due. So far as I know we are free (per my comment below) to trade gold for produce as we wish. The only caveat is that we have to report to the IRS the estimated dollar value of the trade. Because they require a piece of the action.
Irritating, isn’t it? It’s like working in a time when the Mafia took a bite of everything you earned. And with much the same rationale, that they were keeping you safe from harm. That is, from their own enforcers.
But that’s the cost of doing business here. Tip: you’re free to move anywhere else, and do business somewhere the tax code’s more to your liking. In most of Eastern Europe I think it’s only 15% of earnings.
We are all free, at all times, to exercise our free will.
You wouldn’t have to move much gold back and forth. The ownership would typically change and not so much the location. A part of one bar of bullion could change hands 5 times in one night, but the bar never be split up and never have to be moved. So long as there is no smell of fractional reserve then this can be happening with platinum also. And other metals.
Re: Michael,
Some people believe in an even more extraordinary magic, that of the Promise to Pay: “Verily I say, your money is safe with me!” – The FED. Those people of faith are being wiped out. How many “gold bugs” are under the same condition, Michael?
You have been making too many guesses. I am not talking about retaining “our” anything – that’s for the Market to decide, but there is no reason to believe it would not be something similar, as long as people can contract and demand physical gold.
If the current system was so good, why is it illegal to buy and sell goods for gold or silver? The game is clearly rigged. You choose to ignore that.
If promises to pay weren’t kept, there would BE no economy. All economic activity is based on confidence. One doesn’t lightly damage it.
The hawala system has been going for well over a thousand years. That’s how money moves through the traditional world of Islam. It’s all done on a handshake, and IOUs circulate throughout the network, across the globe. Everyone polices the system, and everyone gets paid what they’re owed. Because if they weren’t, the system would fall apart.
Personally, I think that if you and others here would prefer to take payment in gold and put it under your bed, you should be able to. That would be as useful to the economy at large as storing it in Fort Knox, or in women’s dowries in India. It won’t reduce the amount of paper money in circulation in the slightest, though. All you’d be doing is exchanging your dollars for gold, so the guy who sold you the gold could spend them.
Ever looked at the ‘sell’ price of gold, BTW? Should the day come when you want to take your bullion out and exchange it back for dollars, I think you’ll find that conversion wasn’t a very bright idea. The best price I’m seeing is about 3/4 of the ‘buy’ price. It’s like selling your diamond ring back to the jeweler. Big disappointment.
Next, a question: Is it really illegal to engage in exchanges involving gold or silver? I don’t think it is. (“If the current system was so good, why is it illegal to buy and sell goods for gold or silver? The game is clearly rigged.”) Exchanges in any commodity are permitted under law. Your only requirement is to assess a dollar value to the exchange and to report that amount to the IRS. You can give someone gold for something he has, if he agrees to the deal.
Finally, your parting comment: “You choose to ignore that.”
Nothing annoys me more than people who bring in some new subject, then say before I have a chance to address it, that I’ve been ignoring that.
You just brought it up. I addressed it.
“If promises to pay weren’t kept, there would BE no economy. All economic activity is based on confidence”
When confidence is all there is to back it, there is a problem…
To the rest, you still do not comprehend the gold standard. Stop commenting here incessantly, take time to read Mises PROPERLY, then return with questions, rather than filling the blog with inane drivel that scarcely suffices to even erect a strawman argument…
“Ever looked at the ’sell’ price of gold, BTW? Should the day come when you want to take your bullion out and exchange it back for dollars, I think you’ll find that conversion wasn’t a very bright idea. The best price I’m seeing is about 3/4 of the ‘buy’ price. It’s like selling your diamond ring back to the jeweler. Big disappointment.”
Please stop bullshiting based on no real facts… If anything, the value of gold will go up, not down, if it were to become currency again…
“When confidence is all there is to back it, there is a problem…”
Not that I can see. The true value of a paper currency lies not in gold in a vault, but in all the things it will buy. That is, in all the people who will readily accept it as being valuable. So it is really all about confidence.
“If anything, the value of gold will go up, not down, if it were to become currency again…”
If so, that would be a weakness. I thought the virtue to using gold to back your money was that it would be stable.
If instead the money was always losing value, relative to the metal backing it, now THAT would be a problem. Wouldn’t it? What happens to countries that always have to devalue their currency?
Re: Michael,
Transactions are based on trust, of course. What I am talking about is placing value on the government’s promise to “pay”, as long as you use “their” money. How can that be more reasonable than placing one’s trust on a commodity?
I have an impression you have a distorted view of what is the “economy”, most likely espouse the circular description favored by Samuelson and other Keynesians.
Keeping gold in Fort Knox is not the same as keeping it privately – that gold in FK was forcefully taken from Americans back in the 30s, if there is any of it left in there at all.
Same when buying stocks – you buy them, the guy who sold them spends the money, maybe. And?
Yeah . . . big. Keep thinking that.
It is.
That’s not what is meant by saying “using gold or silver as currency.”
Then stop ignoring it. I can only judge actions – your posts; I cannot read minds.
“Transactions are based on trust, of course. What I am talking about is placing value on the government’s promise to “pay”, as long as you use “their” money. How can that be more reasonable than placing one’s trust on a commodity?”
Well, technically, if you already have their money they don’t have anything to “pay”. You continue using it precisely as long as you believe people will continue to take it, in exchange for goods and services.
If you buy Treasury notes with that money, though, then they promise to pay you back on maturity– with more of their money.
I can see your problem. If you don’t have any confidence in their money you have to use something else. Go back to barter, for instance. Or move somewhere with a currency you like better. Aren’t you ‘ignoring’ your other options?
Should you choose to remain here, I would judge the likelihood that the USG decides to scrap their currency and go with some other standard to be marginal to nonexistent. But good luck with that.
2. “I have an impression you have a distorted view of what is the “economy”, most likely espouse the circular description favored by Samuelson and other Keynesians.
Please tell me more. If everyone’s mistaken, maybe you can set us straight. Specify where the description is circular.
3. Your argument disparaging the observation that gold loses value between the time you buy and the time you sell seems inadequate. Please expand on it.
My view is that any decision to return to the gold standard, on the part of the USG or any other government, is unlikely. And unnecessary. Were doing very well now without gold. And its easy to extrapolate the harm such a move would cause (i.e. the inevitability of a severe depression). So the idea enjoys little popularity in those places where it would matter.
One aspect, just to think of problems at random: What peg would you set as the gold price in dollars? The current one?
If so, holders of overseas dollars would rush to the window on the first day, to buy up all America’s gold reserves. Then they could watch as the dollar devalued down to nothing. Our dollars would be worth what Hungarian pengos were back in 1947. And China and Japan would have all the money.
Explain why this would not be so.
Well, it’s not really. In most cases, usage of legal tender within transaction is not mandatory. However, there are restrictions which follow from the tax code which crowd out media of payment other than legal tender currency. For example, selling commodity money might require you to collect sales tax. Or, you need to use the currency of the legal tender in your bookkeeping and when paying taxes, and for calculating both you need to use the exchange rates prescribed by the central bank. To put this in a simple form, as long as there are taxes, they negate part of the attempts to avoid inflation of legal tender by usage of different media of exchange. Only if the inflation is too high compared to tax rates will the tendecy reverse. But of course then it is usually too late
.
Ever looked at the ’sell’ price of gold, BTW? Should the day come when you want to take your bullion out and exchange it back for dollars, I think you’ll find that conversion wasn’t a very bright idea. The best price I’m seeing is about 3/4 of the ‘buy’ price.
Liar. The spread is typically about 2-3% (for us peons; “professional” traders probably get a better deal); the worst I’ve seen is 5%. That’s hardly “3/4 of the price”.
(Unless you’re talking about 1oz minted coins/bars or something, which carry a large-ish premium; you can’t sell them back to the mint for a reasonable price, but you’ll always get a better price somewhere else. I bought some 1oz silver coins last year, paying a staggering 18% premium over spot — and hardly anyone could get physical silver at the time — but I could have turned around and sold them on-line the very same day for almost twice what I paid…in fact, I had in mind to do exactly that, but held on to them in the end…)
Well thats negative inventories speculation in action Peter. You get shortages. You get shortages just as surely as if we were having price controls. Its unnatural to the workings of a functioning market.
The free market is not supposed to have shortages. But you start bringing in a phantom supply you will get shortages. Naturally people selling hot air and bluff rather than actual gold can do so on thinner margins and drive honest competitors out.
The article.
This is only one kind of speculation.
The article.
He can also wait at the beginning of the lean years to buy foods: more sure to make profits, and faster. Thus increasing the possibility to starve more peoples ?
There is also the speculation with the “insurance mode”, the swaps, which we can call gambling.
What I want to say, is that the demonstration is incomplete, thus not convincing, not proving the point.
“He can also wait at the beginning of the lean years to buy foods: more sure to make profits, and faster. Thus increasing the possibility to starve more peoples ?”
Precisely so. We don’t see that here in the USA. But in much of Africa and Asia, when the crops fail, certain people with money go out immediately to buy up all the food in the market. Then when hungry people are beating down his door, he agrees to sell it to them at ten times its normal value.
IMO the mob should be allowed to pull such people apart, limb from limb. But then again, there are people here who would consider this to be useful economic activity, “allocating scarce food supplies to where the demand is greatest”.
People like you really ought to spend some time in a psychiatric ward, to have this mental affliction of yours cured. Why don’t you prove why and how all that came about, rather than making inane, factually void statements just to rouse emotions, hm?
He does that alot. I guess it symptom of working to long in tenure. Nice to know I work to feed his stupid ass.
“He does that alot. I guess it symptom of working to long in tenure.”
You must have had a public education. Pity they couldn’t have done a better job.
Tenure? I’ve never taught. But I’ve worked for others, I’ve directed others in their work and I’ve been self-employed. Do your comments come from a comparable breadth of experience?
Is your name really Plitmothy? It looks as though it’s spelled wrong.
“You must have had a public education. Pity they couldn’t have done a better job.”
Ahem, I do think that I deserve a little more credit. For example, I have noticed that your proclivity is one of hostility in discussions. Rational discourse with you is a highly unlikely expectation, so I might as well troll you all the way to psyche ward.
What I’m looking for here is rational refutations to those ideas I’ve been able to glean from a lifetime of experience. I’m not married to those ideas. I would be pleased to find better ones. My approach all along has been to use ideas as stepping stones to better ones.
But that’s not what I’m getting from you. So if you don’t have anything to say that makes sense, by all means flame on!
But michael is probably right inquisitor. For example if grain store owners were using fake warehouse receipts this is exactly what you would expect to happen. Its analogous to hoarding cash, on the onset of a fractional reserve banking collapse. This is what I’m saying. Not all speculation is functional to the market. Only positive inventories speculation is that way. Plus in Africa, as elsewhere, they have inflation and fractional reserve banking. They have crap currencies. Worse even then the West. So his story is really quite credible.
We cannot be ascribing virtues of the free market to situations where this description does not apply.
Nice to see that the British spirit of fair play lives on. Hurrah for the underdog, and all that.
The free market is indeed very virtuous– at times. In fact I’m not a bomb-throwing anarchist (as some seem to be around here) but a retired small business person with definite ideas based on practical experience.
And my observation has been that once you’ve wagered all the investment money you require to clear the various financial markets, and you still have a s**tpile of it left over, you just start speculating wildly with it. You get into exotic arcana found in the world of derivatives trading.
Take a look at where all that offensively unbacked, freshly created fiat money has been trending. It sure isn’t out here on the street! We could use some of it. Out here, stores are still closing up for lack of business (except, for the most obvious of reasons, those guns ‘n gold shops I don’t think you Brits have experienced yet). No fewer than four have just opened up in my own little town.
But that’s peanuts. Look up the growth in the derivatives market over the past ten years. It’s quite impressive. That’s where all the new money went, and it’s no surprise. Because when the Fed created some new funds, it loans them out to its largest customers. And it is they who control the faucet that lets this money theoretically “trickle down” upon the rest of us.
It’s a giant misallocation of resources.
A small clarification to my last comment, about fed money going from the largest investment banks out into the world to perform good works.
Let’s say you have just ‘borrowed’ a billion dollars from the Fed. The interest rate is near zero, so for you this is just ‘found money’. Tell me which is the quicker, easier thing to do with it?
1) Find ten thousand small businesses who each need a $100K loan with which to pursue expansion plans. You have to analyze everyone’s business plan. And even if they all look ‘good as gold’ you know that many of them are bound to fail anyway, due to the unforeseen. Or
2) Dump it all into one big ball of wax, offering to the public something totally opaque, but with a sexy title like ‘credit default swaps’. Something with an unknown degree of counterparty risk, but wrapped up in bright ribbon and carrying the scent of those ‘in the know’.
Your customers will gobble it up in heaps, and you will seemingly have transferred the risk onto them while personally collecting a nice little commission on each sale. And the true beauty of it all is, if by some chance everything DOES go belly up, you throw yourself on the mercy of the government… telling them you’re just a poor, nay a destitute little bank that somehow guessed wrong. They’ll forgive your debt in a twinkling, providing you’re one of the lucky ones who’ve been allowed to become Too Big To Fail.
You’ll recall the old saw about when you owe the bank a thousand dollars, you worry? Whereas if you owe them a hundred million THEY worry? Nowadays we add a little something on to that. When the big traders have squandered a trillion dollars in public offerings, they begin to operate the government as a subsidiary branch.
It would be much more profitable for the speculator to buy when food is plentiful and prices low, than wait for scarcity to strike, pay high prices, and try to sell at even higher prices. Also, if he waits, he’ll be competing with more people to make those purchases, thus making any possible profit margin even smaller.
Timing is everything. A successful speculator in food stocks tries to understand the direction the market’s taking a bit faster than everyone else.
When food’s low and is expected to remain low, he doesn’t panic and buy up everything in the market. Ditto when stocks are low and prices are high. The point is to sense change in the market, and to act before the competition (other speculators) does. This is implicit in Baron Rothschild’s deathbed advice to his sons:
“Buy low. Sell high.”
Sure, but my point is that speculators who wait too late will have too much competition to drastically raise prices, much less make much, if any, profit, while those who get in early enough are performing the valuable function mentioned in the article, of making more supply available when scarcity occurs, and thus, even if they make a huge profit, are not exploiting the poor, but helping them by minimizing any necessary price increases during scarcity.
What an excellent article.
I think we have to differentiate between what could be called the “positive inventories speculator” as depicted in “Man Economy And State” and the negative inventories speculators as running amok today in the American financial sector.
In “Man Economy And State” Rothbard describes an industry with inelastic supply. Or inelastic supply AND demand. In this case the speculators set up an alternative source of supply and demand. Which in effect reforms the industry, giving it an effectively elastic supply and demand.
In a hard money world yields tend to be high and asset prices low. Take a stock broker. If he is not merely a broker but a positive inventories speculator he is helping the market along. But if he and others engage in broker-share-pyramiding by involving himself in “naked short-selling” he is then a negative inventories speculator. This is setting up not an alternative supply. But a phantom supply. This is destabilizing the market and mispricing shares. I think it is the main reason why the last American expansion wasn’t nearly as entreprenurial as the post-Volker expansion, which was the wonder of the world and back when people like me were just astounded at the inventiveness and entrepreneurship of the Americans.
Suppose you have a negative inventories speculator dealing with airline fuels. The airline hedges by buying options to buy this ariline fuel at a cheap price. It exercises these options only if there is supply problems with this fuel, making the supply problems worse for other players.
But supposing it was positive inventories speculation. The speculators take and store fuel. They warehouse the fuel. This increases demand early on and supplies and extra supply later when fuel for some reason becomes tight. In this way the airline, by insuring itself, helps everyone else too.
Taking all subsidies away from banks, having 100% backing growth deflation, would get rid of most of the negative inventories speculation all on its own. After all most of the derivatives suppliers would have been wiped out in 2008, had the market been allowed to operate. But I think we must get rid of all pyramiding. Get rid of all versions of phantom supply. Or alternatively “send it to Vegas” metaphorically speaking. This means it must come under gaming regulation, not financial regulation. In some way there must be total segregation between the two types of speculation.
I do acknowledge however that if we got money right that would probably take care of most of the problem right there.
“I do acknowledge however that if we got money right that would probably take care of most of the problem right there.”
Of course the shock might kill us. The first crisis would occur the day the Fed decided to have a going out of business sale. Dumping so many bonds on the market at one time would have its effect. And the following day the rush to the exits would commence for everyone holding Treasury notes.
At the next auction there would be no buyers. So the federal government would go into default. One from which it could not emerge, having no mechanism to supply interim funding.
Interest rates would, of course, go through the roof, bringing business to a standstill. But there would still be no buyers for Treasury notes. And the number of unemployed federal workers now that the government’s out of business would be augmented by millions of furloughed employees in the private sector.
We would have no more military. Can’t pay ‘em.
I’m sure you can put some extra strokes to this scenario. It reminds me of the odd fate of Jerry Garcia, a founding member of the Grateful Dead.
Jerry had gargantuan appetites, drinking, smoking reefer, popping pills and sampling everything in the psychedelic pharmacy– not to mention all that coke and heroin. Did it for years, keeping up with a concert schedule that put him on tour 52 weeks a year. The band’s style was to play until the last fan had passed out. The man was a medical miracle, just to reach the age of fifty!
Then his doctor scared him straight. Immediately he stopped shooting heroin, drinking, smoking cigarettes… everything. His heart couldn’t take this sudden withdrawal from everything that had keeping him going. He very quickly died.
So if we ever decide to withdraw from the dollar, the wise course would be to do so gradually– and under strict medical supervision.
I don’t think that the objections to speculation are reasonable. I saw several comments elsewhere, in a discussion of Germany’s banning naked shorts on their financial markets, that to sell something in advance which you do not yet possess is “blatant fraud”. This seems to me to be nonsense. If it is fraud then every farmer is a fraud if he makes an arrangement to sell crops before they have been planted. Except for the fly-by-night operator who has no intention of being around to deliver the goods at the promised time, every farmer and other short-selling speculator has the intention of paying up. Failure to pay up results in a debt and possible bankruptcy and foreclosure of assets. That’s the way the world is supposed to work. Unless of course you’re a government, and you declare that your state-owned companies will not honor their unwise speculation on jet fuel.
As others have pointed out, it is the fraudulent fiat currency scheme which leads to what others call “excessive” speculation. The financial waters are so muddy that the vast majority of people hardly understand any more the meaning of money or its use in anything but the simplest transactions. It is easy for the public to be convinced by the German government that short sellers are committing fraud and are hurting society. In reality it is something a lot more cynical and harmful. I suspect that the krauts were hoping to dump a lot of paper into the market and they were trying to prevent any smart-alecks from staging a bear raid and tipping off the suckers (probably foreign sovereign wealth funds and pension plans) that the passel of bonds they’re trying to unload are worthless junk.
Its not the selling things in advance that you don’t possess that is the blatant fraud. Its the pyramiding, that creates a phantom supply that is the fraud. Or rather that should be considered by law to be fraud, since it is not everywhere now illegal. The phantom supply means that the shares are watered down by this phantom supply of shares that don’t exist. This is an attack on the price mechanism. Its not the action of the one person that is fraudulent. It is just like bank-cash-pyramiding. Its the building of a whole phantom supply of ponzi-shares. Just like the banks set up a ponzi-supply of cash, which we now call the money supply.
Naked short-selling isn’t about short-sellers per se. Its about share-pyramiders. The Germans can make it illegal. But since it is the actions of several parties, its not clear that making it illegal will make it less rampant. So that if they cannot be sure they can end the pyramiding, without ending the short-selling, they ought to end the short-selling until they can end the pyramiding.
The pyramiding side of it is not a difficult problem to end. Its just a matter of electronically tagging every share. Such that any one share is always in the rightful possession of any one legal entity at any one moment in time.
The insiders seem to have purposefully maintained a legacy system, wherein the time-delay between you buying shares and receiving all this paper junk certification in the mail, gives them plenty of scope for various clever rorts. Had the share-markets been running a clean shop they would have already put matters to real-time trading, where you could call a stop like in musical chairs, and the ownership of each individual share would be totally unambiguous at the moment of the freeze.
If the trading of ownership isn’t in real-time this opens the door to all sorts of scams in my view.
if the authorities actually enforced delivery obligations, naked shorting would not be the rort that it is now. this is a contractual failure, compounded by a slothful approach to enforcement.
Very true. But the banks and the government can scarcely be separated in the US at the moment. At least where I am they LOOK like separate institutions with the government having the upper hand. But looks can be deceiving. The authorities could have legally and without further legislation gone after Goldman Sachs and fined them over violating the law against naked shorting. Whereas I don’t know whether this is a big part of their act now, it surely was circa-2004. They called this racket “Prime Brokerage.” But the idea of the government going after Goldman Sachs is laughable. They are pretty much the same outfit.
Arguments to do with what ought to be done under anarcho-capitalism are not real relevant right now. The public has a pretty clear enemy in some of these outfits. The ones that have usurped public policy. Which in the general are the derivatives providers. To keep their line of dysfunctional products, and their big bonuses going, they have basically launched a takeover of some aspects of policy.
I don’t think you need to tag shares in things which are actually worth something. If the shares or the underlying bonds have real value, then value investors could easily burn the shortsellers and blow up the pyramiders. But we’re not talking about things with a lot of value underneath them. Euro bonds? Pffffftttt!!! Likewise, what are the shares worth of a large bank which has a rotten loan portfolio, and whose only chance of survival is to be fed ever-larger amounts of cash or credit by a willing government? A lot of large firms are also unprofitable, except for their sideline credit and hedging activities. What’s a mammoth company with lots of revenue and lots of debt but no profits “worth” ?
The more real wealth in the economy, i.e. wealth deriving from real capital investments selling real things to real people, the more that people would naturally tend to use the “buy and hold” investment strategy. But when you destroy the economy with paper and electronic money then only an idiot buys and holds and looks for value. The only really profitable activities are in speculation and government pork. Attacking only the symptoms of the monetary crisis – short selling, pyramiding, graft, pork, boondoggles, etc. – is missing the point. The real financial crisis is the fire hose of money emanating from central banks, not the multitude of ways in which people are running and sneaking around trying to intercept and pocket the money. Chasing around these people trying to establish rules by which they can stick their hands into the geyser of cash is a waste of time and a distraction.
I don’t think thats right. The value investors cannot burn the share-pyramiders (we are not talking about short-sellers per se) on the small companies, Since a small company can have its outstanding shares diluted many times over. And the share-pyramiders are many times the presence of any rebel value investors that want to be messing with them. Warren Buffet COULD burn these guys should he choose too. But supposing he doesn’t chose too? After all he wound up in favor of bailing these guys out and lavishing great praise on Paulson.
Supposing you are right? Why then have we not seen all these guys getting burned by the value investors? The empirical evidence isn’t there.
Why object to the stock market making sure all shares were tagged? This is what any non-crooked operation would be doing. It stands to reason that a trading house ought not be presiding over a situation where they are having peoples outstanding shares multiplied upon. I don’t get it. These sharemarkets aren’t something that have evolved faithfully in blissful independence from the government. Its not as if you are coming into an anarcho-capitalist situation and ruining precedent for everyone by trying to move them a little to where you think a competitive history would have brought them.
Mostly the reason why they don’t function around the clock, with their shares tagged and individualized, has to be simply because they are crooked. They are purposefully running a rigged game. And this is unlikely to be without official complicity.
If you look at Goodyear Tire (GT) from say January 1998 through March 2003, you will see a textbook example of what happens when a company has poor fundamentals an there is no stock available for borrowing (and thus no opportunity to sell short). The price eventually drifts down over a period of years. Indexing fund managers keep buying and accumulating the stock, even though it is doomed to go down in price. Contrast this with Lehman’s demise – short sellers allowed the price to adjust to fair market value in a matter of days. Funds that owned the stock lost money. However, they did not accumulate any more shares, as they did in the Goodyear Tire example.
We are not talking about short-selling. Share-pyramiding and short-selling are not the same thing.
Re: Michael, (Sorry, the REPLY button was not there to be pressed)
Provided, of course, that the ROI is higher than the rate of inflation. Is it? The government is pretty much defaulting on its own PROMISE by printing more money. It has done so in the past many times, no reason to believe it won’t do it again.
Who said I am ignoring them?
I didn’t say everybody, Michael – just you. Not everybody is a Keynesian.
Gold does not lose value – it is fiat money that loses value. I do not buy gold to sell it immediately after. A month’s worth of exchanges is not going to leave enough margin to surpass the exchange margin, but a couple of years does. I purchased back in 2006, when it was around $650.00 per ounce. Same with silver. Has it lost value since?
What’s with this “we” business, Kimosabe? Again, your opinion.
You say that as if there was no correction happening right now.
No peg. People that want to hold on to their dollars can later use them to stuff mattresses to keep warm at nights. A Peg would simply create yet another asset bubble.
Oh, it could happen and WILL happen – I just would not care. The correction is going to happen regardless of what you believe, whether the US goes back into a gold standard or not. You cannot keep this fiction of paper money forever – the piper will have to be paid.
“Provided, of course, that the ROI is higher than the rate of inflation. Is it? The government is pretty much defaulting on its own PROMISE by printing more money. It has done so in the past many times, no reason to believe it won’t do it again.
Did the gov ever promise not to print more money? I don’t recall that they ever did. That’s one of their most basic functions. Tell me more about this ‘promise’.
The interesting thing I find is that large central banks and trading partners are still scooping up every offering, each time the Treasury holds an auction. They’re only getting like a half percent interest on these really huge loans to the Treasury. They must be convinced that this is the most utterly risk-free parking spot for money on this earth. Because obviously, the rate of return is going to be less than the anticipated rate of inflation. So they’re paying the USA to leave their savings accounts in our hands. Cool!
Also, you and I will need to clarify whether you’re talking about the Austrian definition of inflation, any increase in the money supply, or just the common usage that everyone else employs, an increase in prices and wages.
Because those definitions diverge. Under the Austrian concept, we’ve been printing money like there’s no tomorrow. But if we look at the BLS tables, we’ve seen price DEflation for eight of the past eighteen months. In fact all of 2009 was a year of deflation.
http://www.inflationdata.com/inflation/inflation_rate/historicalinflation.aspx
Next, I’ve asked you to specify where I’ve used circular reasoning– and you’ve evaded the issue. I’ll ask you again.
I’ll take all the balance of your comments as one– and address it. Obviously you’re eager to see the downfall of the dollar based world. You admit that chaos will ensue, and by your own statement, really don’t care. So let’s see who does care.
Wouldn’t that be everyone on earth other than a handful of Austrians? Wouldn’t it be Wall Street (no one values a dollar more than them). Wouldn’t it be China, India, in fact every nation on earth other than possibly Europe? And don’t they have a currency that operates in much the same manner? So then, everyone likes fiat money but you?
And how about global depression, years of zero economic activity while everyone adjusts to the new reality. Isn’t that exactly what the Communist Party once promised us? So how did their new economy work out?
And do you think anyone but you feels that that’s a reasonable price to pay? We just came through a period when our choices were (a) to let everyone fall who was overextended, erase all moral hazard and get Wall Street back to a policy of indulging only in prudent investments… at the cost of a severe depression, OR (b) bailing out the bastards with our own public funds, and coming through it with our skins intact and more debt to pay down. And which choice did America just make?
Your in the position of not liking the earth’s orbit, and commanding that it spin off its axis and dance to another rhythm. Not going to happen, bro. Learn to live with reality. People are always going to be too scared to take that fatal step into nothing… no matter how much pie there is in the sky on that glorious other side.
You want a smooth transition to sound money. But if we don’t set up the smooth transition the fact is the fiat money will collapse. This will be a humanitarian disaster. However Austrians are entitled to find some sort of perverse pleasure in it. We are human after all. It is a bit naughty taking pleasure in such a disaster. But with all the harm done to normal people, one hopes the rampant exploitation of the establishment may come to an end along with whatever else happens.
It would be better to avoid all the current pain and the coming catastrophe. But its the bigshots that don’t appear to want to avoid this catastrophe. They seem only interested in covering themselves in loot.
“You want a smooth transition to sound money. But if we don’t set up the smooth transition the fact is the fiat money will collapse.”
This is a belief– a future prediction based on speculation. There is no solid reason evident why that must be so.
The value of the dollar is predicated on user confidence. So long as that is maintained, the dollar will continue having a long and healthy life. If it is ever seriously mismanaged, of course, all that’s out the window. I mean even more seriously mismanaged than it has been!
Four or five years ago I used to think the dollar was on its way to imminent collapse. I’d look at how overextended we were and think it’ll be no time at all before our creditors will start pulling the rug out from under us. But I appear to have been wrong.
With our chronic addiction to deficit spending on every level (federal, state, personal finance) who on earth would back us? We showed zero signs of ever overcoming that addiction and we were beholden to our creditors to stave off total collapse.
THEN the Meltdown happened. Surely now the rest of the world would come to its senses and start unloading useless American dollars. Right?
Instead everything kept bumbling merrily along. Interest rates being offered by the US Treasury continued to stay as close to absolute zero as could be achieved. And people still kept gobbling up all our promises to pay some time in the future. Even though they were barely making a penny on the deal! Our dollar was still considered to be the best and the safest value on this earth.
I don’t share that opinion, personally. Emotionally I tend to be more like you. But rationally? I do note that the dollar continued to enjoy unparalleled confidence in the world business community. And that’s while it’s under current management. Imagine how popular it would become if we began doing a more competent job of balancing our books!
So I see nothing in the way of hard evidence yet that people are about to start deserting the dollar in droves. The worst has happened, two years ago– and everyone stuck with the dollar.
“This is a belief– a future prediction based on speculation. There is no solid reason evident why that must be so.”
Come off it michael. Don’t you see whats going on? You think you Americans can keep spending two trillion more than you tax every year and matters not come unstuck? Since the collapse of paper currencies has always happened in the past with 100% fidelity to this principle …… well that fact hardly qualifies as “no reason to believe”.
How does a 100% collapse rate of paper money qualify as “no evidence”. That doesn’t make a great deal of sense Michael. Explain yourself.
We are not really dealing with an economic law here. We are dealing with a politicol-economic law. The bigshots can be relied upon to wreck the currency and escape their debts after grasping most of the assets.
“How does a 100% collapse rate of paper money qualify as “no evidence”. That doesn’t make a great deal of sense Michael. Explain yourself.”
The US dollar enjoys a zero percent collapse rate, as you put it. And the entire world is invested in dollars. Every time the Treasury holds a new auction they can sell all the bonds they care to offer, at something like a half percent interest rate.
Yup. The poor old dollar’s on the ropes. It’s only being held up by the same thing the stocks markets– and the entire financial world– are being held up by. Investor confidence.
Funny how it’s able to stay aloft.
Personally I’d like to see corporate taxes go up. Those guys haven’t been paying their way. And we could save an awful lot of expense by calling off our project to rule the world by force. Those would both be prudent fiscal decisions.
Right I see you actually took into account a lot of things I was going to say. Sorry for not reading you more carefully:
“Four or five years ago I used to think the dollar was on its way to imminent collapse. I’d look at how overextended we were and think it’ll be no time at all before our creditors will start pulling the rug out from under us. But I appear to have been wrong.”
Well thats because these guys have become marvelous at kicking the can down the road. Notice that the bank-stealing ( an extraordinary event that took everyone around the world by surprise) suddenly went worldwide. At the same time Paulson, suddenly resurrected the crudest, most idiotic version of Keynesianism, ever seen. This too went worldwide.
How do we explain all this. One suspects that somewhere after World War II your Federal Reserve became some sort of asset for covert ops. Or something similar behind the scene must have taken off and metastasized. The iron law of secretive stolen money organisastions is that they reinforce their mistakes.
So something has happened here. If the conspiracy theorists were ever crackpots well they are on the money now. And it doesn’t seem to be a question of any one organisation. It appears to be intra-organisational networks, and your Federal Reserve may be at the centre of it.
So having speculated this, it does seem that a lot of measures have been taken to artificially extend the life of these currencies. But it surely must begin to come unstuck. Because you guys aren’t paying that money back, and your banking insiders aren’t going to accept a reserve asset ratio. Hence the two ways that a collapse could be avoided seem to have been cut off from the options.
Your public servants aren’t going to agree to closing down departments by the bakers dozen and voluntarily giving up their public service retirement benefits.
Its a bit of a case of the nearly irresistible force meeting the almost immovable object. Something has to give. I suppose we cannot know exactly what it will be. I assume it will be the currency. And I also assume the US will have a major constitutional conference, or you will split up into pieces.
“Well thats because these guys have become marvelous at kicking the can down the road.”
I couldn’t have put it better. You know, the normal state of the human physiognomy is DEAD. Lifeless. Yet despite that fact, if you keep it going artificially, with routine aeration and constant infusions of food and drink, it can live up to an entire century.
The economy’s like that. You have to keep it going.
And the Fed is the less than secret cabal in charge of keeping the dollar alive and well. So far they’ve been remarkably successful, and today there’s no competitor to the dollar that’s even close.
What makes it so indispensable in everyone’s eyes is that without its constant attentions to the health of the dollar, we would enter a profound and extremely protracted depression. And no one wants that. Other, of course, than the Austrians.
On the way towards anarcho-capitalism we would surely go through the intermediary steps of hyper-federalism, hyper-secession, and as well sticking a tier of voluntary-commercial-justice under the current legal system. In the course of this hyper-secession there would be the opportunity for many small territories to set up, or to allow to be set up their own unrigged bourse. Hence in the interim, while working on all these projects, its ought not be thought of as heretical to push for re-regulation of the current corrupt edifices, as long as resources and effort aren’t too much re-routed from the long-run projects. I don’t see why we cannot advocate moving to 100% fiat backing as a prelude to having the commodity monies crowd out fiat. I don’t see why we cannot push for reforming the current share-markets. Such reform does mean new legislation its true. But it also means the canceling of roomfuls of old regulations as well. As long as each individual bill proposed, cancels at least 10-times as much regulation as it introduces, we ought not be knee-jerk against it. Because there is no question that these stock-markets are hopelessly ill-managed at this time. And most particularly the American stock market.
We would want to be relevant to your average punter in the medium term. Even whilst we are trying to sell our more sweeping reforms.
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