Welcome to my World, Jim Puplava

In a recent interview at Casey Research, Jim Puplava shed some light on the ongoing inflation / deflation debate.  He takes the position that in a fiat money system, there can be no deflation – deflation meaning as measured in prices.

This is one of the problems we have when talking about deflation. You will often hear, for example, that "housing prices fell by 30%" or the "stock market fell by 40%," supposedly meaning it was deflationary. But that is a specious argument at best, because if we call the crash in real estate and the stock market deflation, then what would the deflationists argue now that housing is starting to turn around? What would they call the S&P going from 666 to 1,373? It's up over 100%... is that deflation?

Let's take the popular definition of inflation – rising prices, which is really a symptom of inflation. During the financial crisis, there were only three months where the CPI was negative. Prior to 2008, the last time you saw a negative CPI was in 1954, when Eisenhower was president! So despite all the claims about deflation, all you would have to do is look at a graph of M1 and M2 and see that the money supply actually expanded during this period.

Under a strict gold standard, deflation was certainly possible, for instance during the 1920-1921 recession:

Even before that. Step back to 1920-1921… If you look at the statistics during that period of time when we were on an actual gold standard, you saw a huge contraction of GDP and in the price of goods. Here are the actual numbers: between the summer of 1920 and 1921, nominal GDP fell by 23.9%; wholesale prices as measured by the PPI dropped by 40.8%; and the CPI fell by 8.3%. It lasted for roughly two years.

He makes a key point: even under a gold standard in the 1930s, once Roosevelt confiscated and revalued the dollar to gold, inflation again was the result:

Furthermore, even in the gold standard we had during the '20s and '30s, we had inflation. President Roosevelt devalued the dollar by 60% in March of 1933, and when he repriced gold from $20 to $35, he stopped deflation dead in its tracks. By the end of the month we were experiencing inflation. We were running single-digit inflation rates the very month he did that in 1933, all the way up to 1937, when FDR and the Federal Reserve reversed course. So as a result of the devaluation we got large doses of inflation.

I have long held that as long as inflation is measured in prices – a measurement that government will always manipulate lower than reality – central banks will be free to implement policies that support monetary inflation. And it is in monetary inflation where the big theft takes place.  Prices are a sideshow meant to distract the audience from the actual theft.

One of my first posts at this site more than two years ago was on this subject:

In the era of modern central banking, there is only inflation. One cannot even credibly use Japan as a proxy. Check the numbers; they have had some minor pluses and minuses -- but nothing coming close to wholesale deflation of prices. Plus or minus two percent per year is within error -- given the manipulation and randomness of the statistics used.

Central banks want inflation. This has proven difficult to achieve lately, however do not discount for a minute the desire to get it. There are still many tools available for banks and governments to get this wish. As long as we do not have price inflation in the standard government statistics, they will feel free to keep pumping. So they will keep pumping until they get price inflation. Any shrinking in credit markets only gives room to pump further.

The FED’s balance sheet tripled during the crisis of 2008/2009. Who says they will not keep tripling it until price inflation gets in the way? There is no argument one can make for the FED to not buy junk debt from the banks at face value in order to save the banks…until we get to price inflation or mass inflation. Nothing has stopped them from buying a lot of junk so far.

As long as [the Fed’s] yardstick is inflation as measured by the CPI, they will be under no constraints to continue pumping until they get serious inflation as measured by the CPI.

Jim Puplava, welcome to my world.  The deflationists of the world have no chance with central bankers in charge. 

As long as it is commonly accepted wisdom to measure inflation / deflation in terms of a basket of consumer prices – with the measurement controlled and manipulated by the government – and the prices as measured are not increasing at significant (low double-digit perhaps?) rates, there will be no deflation: not in prices and not in money supply.

There are many issues to draw our concern in the current economy; deflation is not one of the issues.

Romney Tries to Distinguish Afghan Policy

Associated Press: WASHINGTON – Republican presidential candidate Mitt Romney is trying to distinguish his Afghan policy from that of President Barack Obama.

I want to say something witty and sarcastic.  I cannot.  There is nothing to differentiate – on Afghanistan, Iraq, North Africa, Israel, Iran, the Middle East, China, Russia, Europe, or outer space.

There is nothing to differentiate on the Federal Reserve, the deficit, the economy, taxes, spending, or foreign trade.

There is nothing to differentiate on civil liberties, police state, torture, or killing Americans without a trial.

There is nothing to differentiate on welfare, farm subsidies, medical policies, banking subsidies, military spending, education, or housing.

Please go out and vote….

Anthony Wile Disses Ron Paul

At The Daily Bell today, Anthony Wile wrote an editorial entitled “Auditing the Fed Is a Sideshow: Who Audits the Auditors?”

An audit of the Federal Reserve would be nice but really it wouldn't change anything. In fact, it would likely prove a kind of sideshow from reality, which is that monopoly central banking should simply be abolished.

Now this is true enough.  The central bank will not be abolished solely due to an audit.

And that probably won't happen until people get so sick and tired of being driven into bankruptcy and despair that they begin to kick the doors down and arrest the criminals cowering inside.

This is also true enough.

I have read through the column a few times.  Other than attributing the bill to Dr. Paul, I find not one mention of the work Ron Paul has done to bring the country and Congress to this point.  If Anthony views this as a sideshow why doesn’t he state plainly that Ron Paul’s efforts have been a waste of time –in fact, a distraction? 

Conversely, while it can be concluded that an audit would be a sideshow, if not a sham, is it not worthwhile to recognize the efforts of Ron Paul in being the single most important educator of the public on this general subject – that being the corruption of the current central banking system?

Anthony does neither – instead, ignoring the both the presence of Ron Paul and the successes he has had in education and exposure throughout this entire narrative.

Given the respect Anthony has shown Dr. Paul in the past, it is confusing why he has chosen this path.  It could have been possible to make the point that the audit is a distraction, or perhaps a very minor step towards the ultimate objective, while appreciating the almost single-handed efforts of Dr. Paul in bringing the Federal Reserve into the public dialogue.

It's not as if people don't already know the depths of the depravity that is the modern money system.

But most people DON’T know the depths of the depravity that is the modern money system.  This is a very ignorant statement on Anthony’s part.  Didn’t he see the targets of the 99%?  Were they after the Fed?  Were they after the true one-tenth of one percent?  How does Anthony believe the people will ever become knowledgeable enough “to kick the doors down and arrest the criminals cowering inside” without some education beforehand?

The reason to audit the Fed is to find out what "they" are up to. But we already know that.

Anthony already knows this.  More and more people already know this. But most people don’t know this. There is one primary reason more people know this today than did five years ago – Ron Paul. 

I have commented several times regarding my admiration for the work Anthony has done with The Daily Bell, despite some significant disagreements I have had with certain issues at the site.  However, this is a very disturbing editorial.  I have seen directly The Daily Bell handle with kid gloves individuals with positions 180 degrees counter to everything The Daily Bell writes about – letting personal and business relationships stand in the way of editorial content.  Yet here, Anthony writes an editorial throwing Ron Paul under the bus – a man who has done more toward educating for freedom and liberty than any one individual has in 200 years.

Ron Paul has earned enough goodwill to last a dozen lifetimes.  Anthony Wile, not so much. 

Creating Enemies and Maintaining Control

I have written fairly extensively regarding US policy up to and during World War II.  These writings include reviews of books regarding Pearl Harbor, the decision to use the atomic bomb, and most thoroughly several posts regarding Herbert Hoover’s book, Freedom Betrayed.

I am currently reading further on the subject, and expect to write more on this as well.  However, two views come to mind:

1)      I have commented before, yet my feeling only grows the more I read, that the objective of the United States Government in entering the Second World War was to ensure victory for Communism and Communist Russia.  By doing so, an enemy – both militarily capable and ideologically incompatible – would be available to ensure further aggrandizement of the state over an indefinite period of time (as the communists fell, a role now played by the war on terror).

2)      It was necessary that the United States enter the wars of the first half of the 20^th century and assume this position of global power in order that the elites who sit above national politics had a continuing vehicle through which to lever control.  Great Britain in many ways historically served this purpose, but was by this time almost bled dry – and in any case could never offer the possibilities of wealth confiscation and international control that the United States could offer(how much lessor if Lincoln had lost the war).  The people of the United States had strong feelings of leaving Europe’s wars to Europe.  This feeling was eroded over time, and came crashing down on December 7. 

There is a danger that these views will cloud my further readings on this subject – that I will look only for confirmatory statements.  This is a risk – yet I am finding no other way to explain rationally the actions of both the United States and British governments. 

If it looks like a duck….

The Entrepreneur

Essentials of Economics, by Faustino Ballvé

In Chapter 3, Faustino Ballvé discusses the role of the entrepreneur:

We have seen that the market is the pivot around which the whole of economic life revolves.  We can say just as well that the market revolves around the entrepreneur.

Ballvé offers a simple definition for entrepreneur:

Strictly speaking, the entrepreneur is anyone who goes to the market to sell or anyone who goes to the market to buy, not for his own consumption, but to resell what he has bought….The entrepreneur aims at making a profit….

This buying and onward selling function can take many forms – for example: buying a good in one location with an eye toward selling the same good in a different location; buying a good and improving it before resale; buying a good and holding it until more favorable market conditions emerge.

In a statement worthy of Ayn Rand, Ballvé sees the entrepreneur as a hero:

Production, around which all economic life revolves, is, then, the great adventure of mankind: it is the struggle with tomorrow, the struggle with the unknown.  The champion, the hero, and frequently the victim in this struggle is the entrepreneur.  He undertakes some enterprise in quest of profit.  But in order to obtain it, he is obligated to satisfy the consumer…the consumer never loses.  The entrepreneur, on the other hand, can see all his hopes of profits transformed into a loss he alone must bear: the profit that the consumers (the general public) made is theirs to keep, while the entrepreneur is ruined.

A trade requires two participants – often referred to as a buyer and a seller (but in reality both are at the same time buying and selling).  In the free market, a trade results in two winners, as each participant prefers what he is buying to what he is selling.  I want the candy bar while the shopkeeper wants my dollar – after the transaction, each of us feels wealthier…else we would not have traded!

For the consumer, the trade ends in a win and his satisfaction is therefore assured: he has eaten the candy bar at a price he deemed appropriate.  However, for the shopkeeper – while the single trade was certainly beneficial – he must continually asses market conditions and make proper estimations regarding all factors of the business.  If he fails at this, he will eventually lose.  However, each and every one of the consumers of candy bars remains, as he was at the time of the trade, a winner.  Thus, Ballvé rightly points out that the profit made by the consumer is his to keep, while the entrepreneur alone bears the risk of miscalculation.

The entrepreneur must make many calculations when planning and executing his business.  What are costs today and what will be costs in the future as I produce?  What is the demand for the goods today and in the future?  How will this demand affect pricing?  Where is the competition and what actions are they taking or might they take in response to my efforts?  How much capital is necessary in the fulfillment of the business plan?  All of the calculations are calculations of probabilities – none of them can be exact because all of them regard expectations of conditions in the future.

In the meantime, countless numbers of consumers have had wants and needs satisfied.  For the entrepreneur, the calculations continue.  For him, his reward is profit if he properly calculates and loss if he does not. 

What a harrowed existence!  Ballvé asks if all of this can be avoided by political means.  He suggests that he will answer this more fully in subsequent chapters, however here he makes a very simple yet profound statement on the matter:

We shall concern ourselves later with the proposals that have been advanced and even tried with this object [of somehow using political means to avoid or minimize these risks] in view, whether by way of a change in the whole economic system or by way of corrective measures designed to overcome the alleged “weaknesses of free enterprise.”  But here we can already anticipate this much: What the entrepreneur cannot foresee, nobody can foresee, because, as we have said, science is impotent in the face of the unknown.

No one can know more than the entrepreneur.  No one else is risking his capital or the capital specifically entrusted to him.  No other means can be devised to bring to market the items most desired by consumers – that is to say, the general public.

There is no scientific formula for profits that is available to someone else not the entrepreneur- such a formula is not even available to the entrepreneur!  He is making a guess – hopefully a well-educated one, but a guess nonetheless; a guess based on probabilities.

Can the state make a better guess? Actors not in the market, not investing their own capital or capital voluntarily given for investment?  Regulators?

The free market is a market where consumers – the general public – rule.  It is a market where entrepreneurs take the risks.  The consumers always end up as winners in the trade; the entrepreneurs win only if they make good calculations of probabilities.

Instead of the free market, where the general public is the object to be served, much of the world is offered a political market.  In this market, it is the producer that is supported – supported by various means of regulation and restriction of competition.  Supported by subsidies designed to prevent loss or minimize the negative impact of poor calculation. 

Every one of these regulations and subsidies serves to diminish the role of the consumer.  Yet it is the consumer that ultimately is the best regulator of the market.  The consumer decides which producers are properly satisfying wants and needs.  The best form of democracy is the democracy brought on by the wallet of the consumer acting in a free market.

In less than ten pages, Ballvé makes plain the most simple and important of truths: leave the market free and the general public will find the greatest amount of its wants and needs fulfilled.

And the cornerstone and hero of this simple truth is the entrepreneur.

Value is Always and Everywhere a Subjective Phenomenon

I am reading through a delightful book written by Faustino Ballvé, entitled “Essentials of Economics: A Brief Survey of Principles and Policies.”

Following is taken from Chapter 2: The Market.  From this chapter, I will focus on the comments made by Ballvé regarding value.

Value always expresses a judgment of the estimation in which something is held, because a thing has value if and only in so far as it is wanted or desired.  For example, a millionaire can buy a diamond for a hundred thousand dollars and find himself dying of thirst in the desert and unable to obtain even a glass of water in exchange for his diamond, which there lacks all value.

I like this guy Ballvé.  He makes a great point, one that I tried to make (with less success) during one of my many conversations at the Daily Bell:

But you try an experiment. Go out in the desert for two years. You will see no other human being, and have no chance for rescue. You can take either a water truck or a London good bar of gold.

Which do you choose? Do you do so intrinsically or subjectively?

He addresses those who attempt “to find in labor a measure of the value of things.” He outlines the fallacy of this – both in terms of the so-called value to produce as well as the so-called value of labor saved by the product.  He asks “…who is to fix…” this value of labor?  Is it the government? 

He points to supply and demand in a free market as that which determines the value of any good – value as expressed in terms of another, neutral commodity: money.  It is value derived by market means – prices developed based on supply and demand, with competition between suppliers on the one hand and competition between consumers on the other – that is the key; and such competition is the means by which the consumer (meaning each and every individual) is sovereign.

And as the consumer is the public in general, without distinction of rank or fortune, the free market is the most obvious expression of the sovereignty of the people and the best guarantee of democracy. 

It is interesting that Ballvé identifies this process as the best guarantee of democracy.  Each individual gets to freely vote with his pocketbook.  What is interesting is that in today’s world a defining feature of so-called free-market democracies is the installation of a central bank – an institution designed to use government-enabled monopoly power (there is no other type of monopoly power) to centrally plan the single most important commodity to the free market: the commodity of money.

When governments intervene in the process of free-market price discovery, Ballvé writes that the individual falls from the status of being a sovereign to that of being a slave.

Control of the market by governmental authorities is the instrument of modern dictatorships, much less cruel in appearance, much less spectacular, but far more effective than the police or naked force.

Ballvé concludes with some very insightful and meaningful points:

Nothing has value in itself.  The consumer confers value on it by seeking to acquire it.  Hence the value of a thing is never objective but always subjective.

The consumer confers the value – not the producer, not the cost to produce, not the labor stored in the good.  Only the consumer.

Many seemingly otherwise in the free-market world describe gold as having intrinsic value.  It does not and cannot.  Dr. Gary North wrote a wonderful piece describing this:

Gold has intrinsic properties that make it valuable. However, it does not have intrinsic value.

I mention this, because, at some point, you will read about gold as a store of value. You will read of gold's intrinsic value. Every time you read either of these phrases, you will know that the author does not understand economic theory.

There is a widespread mistake in economic analysis within those circles that are called the hard-money camp. People are under the impression that gold is a standard of economic value. This concept is foreign to economic theory.

Yes, we speak this way. The Bible says that a virtuous woman is worth more than rubies (Proverbs 31:10). But it does not say exactly how much more valuable than rubies she is. It does not offer a formula. There is no good virtuous-woman-to-rubies ratio that is normal. The price of a virtuous woman on a free market does not fluctuate around this ratio.

We read that the price of gold has not changed. Only the price of the dollar has changed. Again, this is obvious nonsense. The price of gold went over $1,000 in March 2008, only to fall to about $750 five months later. Yet consumer prices did not change.

The lesson here ought to be that gold is not a measure of value. Then what is? Nothing is, any more than there is a measure for the value of a virtuous woman.

Individuals impute value. They think something is valuable to them at this moment. This can change, moment to moment. People are constantly changing their assessments of what items or services are worth to them.

Back to Ballvé:

It is an error to believe that he who buys a thing wishes to give for it an equivalent value or that he who pays two hundred dollars for a cow thinks that a cow has the same value as two hundred dollars, or vice versa.  In the market the buyer as well as the seller gives less than he gets….  If this were not so, no exchange would take place: each one of them would keep what he already has.

This is quite simple and yet not recognized by many.  I want a candy bar.  The store owner wants my dollar.  After the exchange, we are both richer – a win-win proposition!  It is only when one of us is forced into the trade that the net effect is a zero-sum game – a win-lose if you will.

Economic dictatorship arises when production and trade are withdrawn from the mechanism of the market by the action of the governmental authorities.

First and foremost, this dictatorship is applied through control of money – the single most important commodity in the market, virtually always one side of every trade in an advanced economy.  More so, the dictatorship is revealed through various regulations, rules, and laws that hamper the otherwise free, non-coercive exchange of goods. 

The Daily Bell always argued that every regulation and law was a price fix.  This is quite true, as every regulation and law in some way hampers the buying and selling of goods that would otherwise be demanded and produced in a free market.  With this “hampering” comes changes and distortions in prices.

Much of the world economy is blanketed by central banking and regulation, resulting in price fixing by non-market actors.  As outlined by Ballvé, these are the characteristics of an economic dictatorship.

However, to return to the main theme of this chapter: all value is subjective.  There is no good that holds a constant value.  In each good, two individuals will see different value; the same individual will see two different values on two different occasions.  What is valuable to life near a river might be worthless to life in the desert. 

Even money, the commodity most universally in demand, does not hold constant value.  This most certainly holds true for gold: the commodity that, when left free, has most often served in the function of money in a division of labor society.

All value is subjective.  Fully understanding and applying this principle allows sovereign power to each individual.  That governments have worked tirelessly to hide and ignore this principle suggests the desires for dictatorship of those in power – a dictatorship that, according to Ballvé, is “far more effective than the police or naked force.”

It is truly more effective, because it leaves most of its victims believing that they are living in freedom, while all the time they are serving their masters.