Friday, December 25, 2009

Ok, I am reading Eric Staib's article here for the second time: http://mises.org/daily/3855 and I realize what is going on with Obama and his healthcare initiative.  He is organizing all of the employed people in America into one giant union!  Once the healthcare bill is passed, we will all be in a union run by our beloved government.  Why was Andy Stern of union SEIU the visitor extrordinair this year at the White House?  Because he was helping Obama organize the world's biggest union.  Think about it.  What do unions do?  They organize labor to fight for worker's benefits.  Andy Stern is very smart; he has bypassed the whole Card Check initiative and organized the American labor force without even a required worker vote!  He realized it would be much for effective to use force, convice 535 congressmen/senators to act as surrogate voters for the masses.  Now that Andy has force on his side, there is no limit to what he can do.

Why do I care about healthcare?  I already get health insurance coverage through my employer.  Why is my insurance tied to my employer?  That is something that came out of the wage controls during WWII.  The government froze wages to control government induced inflation which lead to worker shortages.  Employers were desperate for workers.  So they asked government for permission to pay for workers health care costs as a way to subvert the wage constraints.  Later the practice was solidified by granting tax cuts to employers that offered health insurance coverage.

What should it be like?  Health insurance should be a good like any other.  You should be free to choose to buy it.  You should also have to suffer the consequences of not buying it.  What we have today is ERISA laws mandating that a hospital treat any person that presents themselves to an emergency room, regardless of ability to pay.  This is an unfunded mandate, shifting the cost of service to the hospital.  You might think that the hospital can just shift it to paying customers.  But that increases the cost of service and any increase in costs leads to a reduction in demand.  So ERISA leads to a reduction in usage of health care services.

We must push back and demand that this new law is unconstitutional.  We must demand that all laws be consistent with our Constitution!  We are a nation of laws, not of men.

Monday, December 07, 2009

Banks:

Banks make loans up to the maximum allowed based on the reserve ratio. The reserve is demand deposits, vault cash, and Federal Reserve deposit balance.  Liabilites include demand deposits, savings balances, stock shares, any money borrowed. Bank assets include buildings, bonds, savings account balances, and other securities purchased. Their assets and liabilites must always balance.  Anytime they have more liabilites than assets, they become insolvent.

Vault cash is held in reserve for clients that may wish to convert part of their demand deposit to currency. This action is contractionary to reserves. Fractional reserve banks only maintain a small amount of vault cash compared to demand deposits. So a bank run is a very bad thing and will lead quickly to insolvency if the bank can't quickly convert assets into currency. Even if they are able to convert assets to curency and remain open, they still have to contract the loans outstanding since reserves are deminishing. If they do not, then they will violate their reserve requirements and have to borrow short to cover.


Banks balance time preference for their customers. They do this be matching borrowers and lenders.  To be as profitable as possible, they like to keep loaned up to the maximum allowed based on minimum reserve requirements set by the Federal Reserve System.  The establishment of FDIC has led to a depletion even further of what would be considered safe reserve levels to meet bank business needs.  If for whatever reason their reserves are depleted, then they must contract their loan portfolio.  Since they create money by way of credit expansion, for every 1 dollar lost of reserves, they must contract loans by 10 dollars.


The Mortgage Backed Securities that the banks purchased were assets.  When these assets became less valuable, that threatened the banks solvency.  The original TARP plan was to buy these assets in a reverse auction.  The Fed would buy the MBS at the lowest bidders price.  But someone with a brain stepped in and let it be known that once a price was set for AAA rated MBS, then all securities of same type would be so valued.  This would drive the banks right into insolvency.  The Fed decided to buy these assets at face value to liquidate the bank's position.  The Fed will now be the risk bearer of the MBS. As home owners make payments, the Fed will destroy the money. Once the mortgages are paid up, the MBS can be destroyed. Crazy huh? The Fed is funny that way.


The substituition of MBS for Fed Notes when the Fed bought them from the banks was not per se inflationary. But now that amount has changed from the asset account to the reserve account on the bank's balance sheet. They can now create more money through credit expansion as George Reisman puts it so well: http://mises.org/media/4240

The reserve account for all commercial banks was about 45 billion before the bailout. Now it is 1.1 trillion. So we have huge credit expansion to look forward to at the reciprocal of the reserve ratio.  That ratio is currently 1/10.

Real savings is current production held aside for future use. It is an expression of time preference. Money pumping is a way to send false signals to business that real savings are available for investment. The best way to think about it is to take money out of the picture, think about real production. If you don't hold enough aside, then new investment will not be able to get to the finish line and will be forced to liquidate.

The money supply should grow with increased economic productivity. But the government has proven itself incapable of doing it in a smooth way. I would much prefer a world gold standard with normal increases from mining.  If gold production did not keep up with the expanding economy, then we would have a mild deflation of prices.  This would be normal and would not cause any issues.  The U.S. had an economic expansion with deflationary money in the post civil war era up to our return to the gold standard in 1879.  The computer industry has dealt with deflation in thier sector for the last 20 years and still make a profit.

Thursday, November 26, 2009

I am currently reading Milton Friedman's Free to Choose.  Milton had some great ideas.  I think his work on school vouchers is a good example.  His flaw may have been his willingness to work with government.  I know that the utiltarian position is to work within the system, but it can corrupt you too.  His idea about negative taxation I do not agree with.  But he nails socialized medicine, pointing out how it has destroyed Great Britian's heatlh system.  This is our fate if we continue down this road.  Where will our great doctors go to?  What country will provide an atmosphere of freedom?

One lucid point that Milton makes is that corporate income tax is government ownership of the means of production.  A stock holder has a claim on the assets and profits of the company.  He is also liable up to his total stock value for the loses.  When government claims 28% of corporate profits, it is the same as having 28% ownership.

The depressing take away from the book is that it was printed in 1980 and we are further down the socialized road today than we were even then.  How some of us can justify increased social safety nets with freedom is beyond me.  Social Security is just a tax on the working to support the aged.  The current collections in excess of payouts are spent now.  So the taxes I pay in today are gone.  Further taxation will be required to support me when I retire.  That is a double tax.  15% of my income diverted to government spending, all for a future promise of old age security.  No thanks, I choose to save for myself and my family, accruing interest.

Where in the world can we find liberty today?  Freedom to succeed and to fail.  Some place that honors the non-agression principle.

Tuesday, November 03, 2009

I just read Bohm-Bawerk's explanation of price theory.  It was about 10 pages having to do with horse trading, literally.  It was a very clear exposition on subjective valuation of buyers and sellers.  At the end he says this is what is meant by the words supply and demand.  The intersecting point on the supply/demand curve is the equilibrium price given the extent of the market with perfect information.  As long as it is an open market with all information known, then the price will reach an exact level that clears the market.

Bohm-Bawerk's work dovetails with Rothbard in his Man, Economy, and State.  Menger and Bohm-Bawerk, followed by von Mises, are the fathers of the Austrian school of economics.  Bohm-Bawerk explains how subjective value is the final determinant of price, but he still explains that cost of production is still a factor.  But it is a factor for the entreprenuer to consider whether to continue a certain line of production.  The market could care less what his costs are.

Sunday, November 01, 2009

I need to figure out how to use blogging and Facebook to better communicate with people I know.  I think we can come together and share ideas if we just take a few minutes out each day to link up with other like minded people.  The biggest hole in my life is a lack of idea sharing.  We are all so busy with our lifes that we fail to stop and process the information that is pouring at us.  I read books but fail to spend time learning what they are saying.  I just cross them off my list as some kind of reward.  Learning is not reading, it is integrating the ideas into my beliefs, or rejecting them as not in tune with my understanding of the world.  So much of what we hear is ex post story telling; who is right?  Do we have a confirmation bias?  Do I only accept ideas that are in line with my preconcieved understanding?  I can listen to ideas, I am open to other's views.  I would rather ask questions that dictate truth.  The talking heads on TV are all about telling us what they know; they are so unwilling to listen to others.  They just want to get there point in, get thier alotted time.  How much of the media today is just intended to influence opinion instead of report it.

Thursday, October 22, 2009

I promise to do better with my blogging.  I need to pour my thoughts out somehow.

Tuesday, July 14, 2009

Ron Paul on how Obama's stimulus plan is the taking the country in the wrong direction: http://www.youtube.com/watch?v=YBVB1Uc0nko
This guy has a good idea to eliminate fractional reserve banking: http://www.youtube.com/watch?v=nNumEm2NzQA

From my reading, I think that fractional reserve banking is the major contributor to economic instability in the world. Some event triggers a panic that leads to a deflationary cycle of credit destruction. The markets are driven down further on fears of price deflation. The only response the Fed has is to reinflate the credit. It does seem obvious that if you did not have credit expansion in the first place there would be no chance of credit deflation. A stable currency would preclude credit expansion.

Another problem is the unlimited creation of credit that our government can sell on the market. The idea that our current politicians can decide to borrow future taxes and pay a private banker the interest just seems immoral. The banker has every incentive to lobby for more borrowing. Where will this borrowing end? I used to think that monetizing the debt was bad since it would lead to inflation. But if we did as the video above states and increase reserve requrements at the same time, we could avoid the inflation and eliminate the loan interest. Then we cap future borrowing. Some say allow borrowing in time of war. I say no since that only allows our leaders to get involved in foreign wars that the people don't support. If the people want war, let them pay for it at that time through taxation.