Universal Health Care: A Near Death Experience for Innovation

August 8th, 2009

If economies of scale and a government system to compete with the private system are effective price reducing mechanisms, shouldn’t we have a government restaurant system to drive the cost of a McDonald’s hamburger to twenty cents?  Surely we could squeeze a few billion out of these fat restaurant middle men who stand between us and our food– even from advertising budgets alone.  And if that’ll work, why not have two national restaurant plans, and force Mickey D’s to give us burgers for free?

The national health care government plan conceit isn’t much less silly than this.  It rests on a misapplied enterprise concept of economies of scale, given muddy transference to industries and nations where it has no realistic application (unless the application is the creation of a giant systemic trap).

In itself, additional health insurance doesn’t create any health care.  The added insurance plans will be chasing after the same pool of health goods and services, overwhelming any possible pressure on insurance margins to put upward pressure on health care prices– the opposite of what politicians claim.  Government is disguising a burden as a relief, and can’t possibly have any subsequent choice but to layer mandate after mandate on all parties to try and patch the leaks on the pressure cooker they’re creating.

Which is what economies of scale really are at a government level– they’re really “economies” of force and central planning.  In a single snap shot these may appear effective, but they amount to a one stage cupboard stripping, and the true price will eventually be paid.

The first time that a king may have undertaken a castle improvement project by conscripting five thousand peasants and commanding that carpenters and masons cough up half their stock of wood and stone, he must have felt clever and efficient.  Upon further royal edicts, every peasant who could limp fast and far enough would go into hiding, while tradesmen would retire to subsistence potato farming, or change their business to cut to order (and also hide).

Disguised conscription of health care resources in the deluded pursuit of economies of scale will create shortages and higher prices just on its own non-merits (a la king, so to speak), but even worse is the blocked and severed interaction of the macro mechanisms that actually are critical at that scale– substitution and innovation.

There is some substitution on the demand side in the current system, as for example when someone uses WebMD, or does nothing for a minor or undiagnosed issue because of their value judgements about the cost or convenience.  However, suppliers are forbidden to respond to this the way they would in a normal market.

 A nurse or technician can’t run a checkup kiosk in a high traffic area to substitute convenience for the state of the art.  Nor can an unconventional and driven physician supervise a staff of a hundred technicians and try to bring us a mega-department store model of delivery to offer more or cheaper or both.  (And in case you think that’s the opposite of the direction health care should go, rest easy, since the opposite opposite is also forbidden: recently a physician practice was cut down for using a payment by subscription method to offer more personal service oriented care.)

Since alternatives aren’t allowed (to “compete with nothing”, as Clayton Christensen might put it) the normal market interplay among and between substitutions and innovations is shut down, and health care forced into one single massive channel.  This is the real cause of the rising prices thus far.  Not because the “economies of scale” are missing, but because those methods that are proposed to rescue us have already been here, and already done some of their dirty work.

It would be as if we mandate that no jewelry could be sold unless it contains at least one large top quality precious stone, and at least an ounce of gold, and that it can be manufactured only by a craftsperson with twelve years of top level training in Italy, and distributed only through a licensed and regulated employer paid jewelry policy.  And then we became disquieted when prices went up and many Americans started to go without jewelry.  (One can picture the progression.  After a few years there’d be heart wrenching stories on T.V. about young couples forced to marry without access to wedding rings. Subsequently a universal national jewelry plan would be proposed, to set right the “failure of the private sector”.)

It’s not just about offering cheap low quality stuff.  A free market constantly rips goods and services apart and bundles them back up again from a practical infinity of angles, shapes and sizes, to add quality to the cheap stuff and volume to the expensive stuff (to make it cheap).  Economically, that’s what innovation is– without it, innovation is essentially gone.

This innovation freeze from a single option market means that tomorrow’s improvements will never happen.  Even if we contend (absurdly counter to any reasonable observation) that we’re going to freeze health care at the highest available level, once again we’d be stabbing the future in the back.  We got to have better health care than our grandparents, but are willing to cut off our grandchildren from a near certain repeat of that deal to take pressure off ourselves for a few years– pressure caused in the first place by previous misguided attempts to give our present selves more.

All the evidence from centuries of real economics out in the street is that when goods and services can break into new channels and methods, it soon benefits the consumers of those goods and services. The benefits for those (public and private) who deliver the goods and services are much more uneven.  These people will tend to “talk their books” with a bias to believe that “the issues are too important to leave to chance.”

The issues are important.  But it isn’t leaving it to chance, it’s leaving it to individual decision making.  A little corny sounding, perhaps, but we might even say that it’s leaving it to freedom.

I work in the insurance industry.  The opinions in this column are my own.
 
 
 

 

By Les Lafave
Monetary and Banking Reform – themaestrosrep.org
Originally Published at Strike The Root

Waste and Corruption Out of Thin Air

August 7th, 2009

If government proposed a “stimulus” program to give each American 50 million dollars, we’d immediately think of inflation.  At that scale, the proposal would meet its deserved ridicule.

However, I’d like to look at how it would work ex-inflation, so let’s pretend there is no inflation problem.  The Federal Reserve’s magic omnipotence determines that there’s “slack” in the economy so that government can create and give everyone 50 million dollars (and Goldman Sachs its commission), with no significant inflation.  We’ll make no assumption about ever repaying the 50 million per capita, which is a realistic expectation in the current real world of money and credit expansion anyway.

So with no inflation, should The Fed get really excited (they must have been at least starting to doubt the magic) and do it again?

No.  Even without inflation, the artificial abundance of credit money will cause plenty of other distortions to economic behavior.

For starters, some people will simply retire to become consumers only.  With their production removed earlier than it otherwise would have been while their consumption is still there (and may increase in early stage “stimulus” euphoria), over all wealth measured in production (rather than money out of thin air) has gone down.

In our decades long credit roller coaster this retirement miscalculation has certainly occurred, with credit expansion giving people false signals that they can retire or semi-retire when actually they still needed the economy and the economy still needed them (provided they could somehow have been directed to real production and not to bubbleland).

The scope of this gift from The Fed and the banking system to our seniors and near seniors is still unknown.  Some people soon to be forced into unretirement now that the credit veil has slipped will have skills they can market at the level they’re used to in the face of impaired economy headwinds, and some won’t.  Since that’s about all we can know for now, we’ll have to leave these folks high and dry where the helpful stewards of the economy have put them, and move on to other expansionary credit “life blood” effects.

With my 50 million, I’ll probably stop everything else to pursue a writing career.  Any other productive possibilities from me will be permanently (or at least until everything blows up even more) lost to society.

In the 50 million for everybody story, plenty of other part-time writers will join me in pursuit of the full-time dream.  Also, actors, film makers, dancers, models, painters, sculptors, chefs, fashion designers, musicians, and of course, singers.  American Idol will need at least a few extra rotations– maybe even its own network.

Something like this happens in real life credit expansion.  It’s not just directly bohemian pursuits, but other apparently more practical endeavors that become over indulged because of false expansionary signals: we get more retailers, restaurateurs, boutiquerateurs, financial and real estate tycoons in training, “internet marketing gurus”, advertisers, public speakers, and miscellaneous experts– every type and stripe of consultant who once did something successfully for a decade (or at least didn’t fail too publicly), and have now risen above doing the expert activity to advise others.

Pursuing the dream, or advising others on dream pursuit, isn’t bad as such (too late, I’ve insulted everyone– no one is reading anymore).  And it’s certainly not that many people in professions this piece may appear to denigrate aren’t exactly in their productive niche and awesome there.  However, regardless of whether we make those judgements that money and credit creation make the economy too fluffy, it clearly does make it too frothy– entrepreneurs get hasty in pulling the trigger, and then hang on waiting for the next boom that credit expansion signals have promised them.  This paper promise must eventually be broken since no amount of paper, nor any book keeping entry of whatever size, is ever going to eat a single restaurant meal, or otherwise consume anything except for a dwindling supply of economic clarity and perspective.

(It isn’t entirely a vacuumful of wishful thinking on the production side of course.  The psychological extremes of overreaching are naturally late stage, while consumers will all along have been helpfully translating their expansionary false signal receptions into “real” but ultimately regretted demand for dreamy non-essentials– the new era feedback loop that the Fed thinks it wants, and doesn’t really even seem to much doubt after it collapses.)

In the 50 million dollar story, Fed magic is still on the job, and there’s no collapse yet.  There are no laborers– everyone is retired, an artist, or an entrepreneur– but we still haven’t got to the true elephant in the central bank.

The “slack” has come out of the economy– at 50 mil per head, probably with a pop.  The artificial boom has ratcheted up the optimism of the players.  Those entrepreneurs with apparently successful businesses will be getting signals to expand them.  The Fed, not wanting to “choke off” the apparently vibrant economy, and getting plenty of cheerful feedback from the banking system that new credit can be “absorbed”, will feed the frenzy, as they were born and structured to do.

Now the future looks so huge that the entrepreneurs believe they can take on bigger and more distant expansionary projects.  Indeed, the situation seems to demand it.  The closer borrowed money gets to being free– a favorite central bank ploy– the more dangerous it seems to decline expansion.  Your competitor may be using the free money to grow to infinity and then smother you.

Because the credit is artificially created, it can signal temporary enthusiasm, but it can’t signal an actual match up to future available resources.  The flashing, screaming pedal to the metal promise of future resources to complete every entrepreneur’s project is a screaming pedal to the metal lie that no actual arriving future can possibly fulfill.  (For one thing there aren’t any laborers, somebody’s bound to notice that eventually.)

This is where the true “confidence” issue shows up.  It doesn’t matter if players are confident that government “will provide liquidity”.  Speeches, guarantees, backstops and loans of last resort don’t help– in fact make it worse, because these are rational doubts about what is and is not being produced from finite resources, how much of the future is being crammed into the present, and when exactly this denuded future will make it’s appearance (or from where we are at the moment, its curtain call).

No Bernanke or Geithner speech can address this, because all they can produce is debt and more speeches, and all that brings is economic and political miscalculation, waste, instability, and possibly on top of that, inflation.

By Les Lafave
Monetary and Banking Reform – themaestrosrep.org
Originally Published at Strike The Root

We Can Put a Man on the Moon (And That’s About It)

June 20th, 2009

Barack Obama, Hillary Clinton, John McCain– all of these mainstream presidential candidates used the “put a man on the moon” comparison.  The logic is that we put a man on the moon, therefore we can solve X, where X = something that inspires (and/or annoys) voters.

However, the campaigns didn’t fully explore the fun side of the comparison.  Since there are no limits to the limits that our man on the moon achievement can’t remove from the public purse, we could:

  • Give Hugo Chavez, as a return gift, a bottle of cologne that seems normal before he puts it on, but then permanently smells like Satan.
  • Prove a 12th dimension to string theory and teach everyone to understand it with a psychedelic Muppet movie, also in 12 D.
  • Develop safe nuclear human shrinking technology to take the Guinness record for world’s shortest man away from China, so we’ll still have bragging rights about something if they get their own moon walk (and own most of the earth) by 2024.

One of the first things we might notice if analyzing men on the moon today, is that there aren’t any.  If our intention is to achieve “universal health care” or “energy independence” at great expense for a week, and then stop indefinitely, then yes, we should strongly consider the Apollo program as our model.  But making Hugo Chavez smell like Satan has a practical element that most popular man-moon comparisons lack– it’s a technical closed-ended project.

No program with a time horizon of forever can possibly be simple.  Permanent universal health care is more complicated than putting a man on the moon.  The probable outcome for a man on the moon project model if used for an open-ended concept is to freeze out the future.

Realistically, no one either hopes for or expects the future.  The vision instead is of a slightly tweaked version of the past, with a little more or less of the seer’s favorite things depending on their level of optimism. We try to get rid of what we see as a thoughtless free for all and since the future on some level must be thoughtless, the best solution will be thrown away (maybe not today, maybe not tomorrow, but soon, and for the rest of our lives).

Someday blood-borne nano robot “doctors” may be mass produced for pennies to diagnose and treat us constantly throughout our lives– affordable universal health care, case closed.  But the constituencies that grow and feed from today’s top-down “solution” will do what they can to stop that, or anything else that might threaten to leave them behind.

Cost control is another piece that gets thrown out in man on the moon top-down thinking.  Government planners believe that their job is to stretch our capability and resources beyond where they can otherwise go.  In a sense that top-down conceit succeeded for awhile, in that with the help of our system of maximum credit expansion we stretched our capacity to its consumerist limit for decades, but then we inevitably found those limits with a credit collapse.

The setup and “payoff” of the credit collapse make a good example of fogging up (so to speak) economic and cost/benefit calculation, but at least the fog is sometimes perceived as fog.  The man on the moon comparison has an insidious apparent clarity– the fog itself is hidden.

The Apollo program can be looked at as the cherry on top of a rather wretched sundae, with the space program as the cream skimmed from WWII cauldrons.

Scientifically butcher 70 million people while also wasting several generations worth of non-human resources in a couple years of pyrotechnics, gather up the best and brightest survivors from that unprecedented education (including many from the enemy side), and voila, a successful “public-private partnership”, ready and able as a guiding beacon to lure the next dozen generations into a confused public-private rathole that never quite measures up because, thankfully, we never match that level of unmeasured precursor costs.

Probably there’s a sub-set of economic activities that a military command model (and a military industrial complex full of “public-private partnerships”) can do well, but one would hope to get some acknowledgement that this model isn’t appropriate for the general permanent organization of society.  (The expression here might run something like, “We put a man on the moon, you can’t tell me that we can’t destroy our future as a free society with an entrepreneurial culture to attempt energy independence and universal health insurance coverage, until our enslavement and bloatation makes it all fall apart.”)

In a scientific closed-ended project, enable or kill are pretty much the congressional choices, and the project’s actors only have to defend it to the end.  Compare that to a politically footballish, open-ended project, poked with partisan pointed sticks to see if it might bleed pork fat or stir up a crucial constituency, from now until the end of political time.  If the program might start out making partial sense, give it a decade or two– it will be staggering around the beltway like a wounded brontosaurus.

If your project is a moon walk– a highly technical, voyage of discovery type closed-ended project, politicians for the most part have to pick some project leads and let go.  Opportunities to meddle might not be zero, but the risk is always around that a committee chair ends up face to face with one of the world’s pre-eminent scientists in the field, saying, “Hi there, you don’t know crap.”  This compared to the usually mousey performances of CEO’s in front of congressional committees in finance, health care, or even oil– areas that have gradually been politicized into subjectivity and submission.  (If it’s science, we can defend ourselves, but if it’s politics, politicians win, and the chips can be cashed in for more power.)

The uncontested acceptance of the man in the moon comparison shows that the mainstream parties are biased towards a leadership model of social organization, and away from models of self-organization.  The bias was fertile ground for a credit collapse.  Underlying the inflation, debt, and burning down the house “solutions” is a pretense that good leadership makes anything possible.

It doesn’t.

In pretending otherwise, we neglect an opportunity for another (if less sexy) voyage of discovery: How are good decisions made, who can make them, at what level, and over what time frames?  It would be nice to stop boondoggling for long enough to explore this, but most of economic fashion is not only poor for such study, it’s pretty much designed to avoid the topic and pretend that everything is just a matter of stretching capacity so more men can be put on more moons.

Since at least as far back as the first moon walk debt has been treated as a solution, not a problem.  The result if not the time frame was predictable– debt is crashing on our heads. A war (and a half) didn’t help– mortgage securitization didn’t help– but in the context of the economic collapse these are just types of debt.  We know that these are secondary causes because all experience shows that regardless of any disasters– whether skirted or firmly stepped in– we would have continued exploring the limits of the debt envelope until we found them with a pop.

George Bush and Barack Obama, Angelo Mozilo and Bernie Madoff– they all could have never been born and sooner or later we’d have been right about where we are, because it was a pattern of beliefs and behaviors and not one particular action that got us here.  No president, no congress, and very few Americans have had any respect for the risks and consequences of debt for as long as any of us have lived.

In our current struggles the fading interest in checks and balances is disturbing.  Hope that we might be able to walk and chew gum– that society could be psychically capable of yearning for “the leader” while refusing compromise on the price seems like a confirmed pipe dream.  This isn’t specifically a comment on President Obama. Politicians are reflexively reaching for this trade if it might buy any partisan trinket, and we’re letting them.

Even if the general view of government always tracks toward the delusive, we could at least make a greater effort to study where government has its best odds at success—where its most muted mediocrity might lie.  Cost containment may never be a strength.  We may sometimes wish that warfare was rather less of a core competency.  A starting point might be to look only at programs that are technical, closed-ended or involve a complete hand off, and are largely non-partisan under normal, non-crisis circumstances.

Not easy, but if we could even just start to examine our systemic flaws, that would be a much prouder achievement than walking on the moon.

By Les Lafave
Monetary and Banking Reform – themaestrosrep.org
Originally Published at Strike The Root
 
 

 

 

 

Carbon in the Monetary Unit: Alternatives to Fiat Currency

April 5th, 2009

In an earlier piece, An Energy and Carbon Monetary Unit, I wondered if there might be a happy medium (so to speak) between the bubbly excesses of fiat currency and a perhaps distant but disturbing problem of interest payments under a gold standard.

Energy money can be considered on its own, but I’d like to introduce a “carbon” credit sub-plot, on the theory that an analysis of energy should be undertaken with all of its output, and tied to its negative externality so that true costs percolate into the light.  A related piece of theory is that over a long enough time frame we benefit if all stakeholders at every scale get to give their “answer” to our economic questions.

My fantasy is that if we could throw the issue into the monetary unit and force a cost judgement on everything, from mini wind turbines hand-knitted of hemp fiber at vegan communes, to whale blubber charcoal cured in spent reactor fuel baths by North Korean child labor, then we could all shut up for just five minutes (except for me; I’d spend ten of my five minutes on a request for exemption).

As an example of energy-pollution monetary interaction, if we determined that wind energy was as friendly as anything could be, then a wind energy unit would require the lowest additive pollution credit to bring it up to one monetary unit– one “energy-carbon dollar”.

Say you’re a farmer (you don’t have to say it out loud if you’re near someone who’ll think it’s weird). You’ve built a wind turbine.

Perhaps (since you’re a farmer), the government will let you use your wind energy on your farm without buying a carbon credit; perhaps (since they’re the government), not.  But if you want to convert your wind energy into money, then you’ll send it through the grid to your bank where they store it in their accumulators and you get, say $.90 for each $1.03 of energy– $.03 in the bank’s pocket, and it’s matched up with $.10 of pollution credit hypothetically required for clean wind, to create an energy-carbon dollar.

If you want, your energy-carbon dollar thus created could sit and wait for you in the bank as a demand deposit.  As is normal for a non-fiat, non-fractional reserve currency, you wouldn’t get interest (and don’t forget the 3% you just got charged for the bank’s administration, risk and loss).  Your money, by law (at last rational), would not be loaned out by the bank, since it’s waiting there for you to demand it.

If you prefer you could ask the bank to loan out your energy money as a term loan.  Then you would get paid interest, with a portion to the bank as intermediary, but you’d no longer have access to your money until the end of the term.  Only one person, the borrower, would be using the saved money until it’s returned to you, upon which only one person, you, would then have access.  (No credit money has been created “from thin air”, and no credit bubble can occur– Austrian School money and credit theory with energy and pollution credits jammed into that mold.)

There is money being created in the example, however the energy piece is created on the productive side of the economy, not the made up financial engineering side, and this energy piece is created from real savings, with a real practical use in future growth, or in a future crisis.

The pollution credit piece is not real savings, and is indeed forged from the fires of Mordor (as some readers may have long ago stopped screaming to their computer screens about out of exhaustion and stress laryngitis).  However, I’d like to invite you to please take a sip of water and look on the bright side. The government created pollution credit part is not real savings, but is “real taxation” for real use of resources, not credit from who knows what, when or who.  Also this money creation can’t occur unless it’s directly and objectively demanded by the market side of the equation.

There would be no Federal Reserve jamming as much credit into the pipe as they can based on a formula of: (Politics) – (What We Think We Can’t Possibly Get Away With) = (Money Supply).

Back to Mordor for a moment.

I’ve seen suggestions that government should issue currency with a deliberate predetermined decay (over and above inflationary decay), so that people can’t “hoard” savings.  In the U.S. this seems like a solution to the world’s biggest non-problem, at least up until now.  How this glib manipulation can be viewed as anything other than disgusting– folks who’ve gamed their way into a nice pension determined that the peasants should never find a way to get any rest of their own– that’s hard to fathom.

However, a practical reason for decay that economic actors can attempt to mitigate seems both qualitatively and quantitatively different– the wear to a gold coin, for example, or in this case, costs and imperfections to storage.  A key question is how cheap and how good energy storage can become, but that seems like a question worth working on anyway.

Would pollution credit, as essentially a tax embedded in money, make industry uncompetitive and drive out capital? That depends.  As a replacement for income tax, it could be the opposite.  (Also as a replacement for creating credit fueled financial whirlwinds and calling them GDP growth. )

Can we get there from here?

Well.  (And this may have a familiar upside-down ring to it, if you read Part I of this piece.)  I tend to be a pessimist.  I believe that if you always listen to the yeasayers, you end up doing stunningly stupid stuff, like building your society’s economy on the premise that credit can create wealth, as long as the credit is created faster than analysis can catch up (sort of a perpetual optimism machine).

The positive part of the pessimist’s credo is that at rock bottom, there may be some upside.  There wasn’t any reason to expect that a king would accept the Magna Carta, but with friendly assistance from societal breakdown, a desperate king did.

Monetary reform doesn’t get much traction– it takes power away from people who’d prefer not to give it up.  The energy in the monetary unit would tend to take some power; the carbon piece might give some back.  I think that what’s given back wouldn’t be as much as the “political class” might think.  Maybe a concept like carbon money could jump in to roll some political logs on the way to hard (or at least harder) money.

By Les Lafave

 Monetary and Banking Reform – themaestrosrep.org

 Originally Published at Strike The Root, March 30, 2009
 
 
 

An Energy and Carbon Monetary Unit: A Realistic Money to Replace Fiat Currency “Optimism”

March 8th, 2009

Money is “a medium of exchange, a unit of account, and a store of value.”

However, absent from the view of Monetarists and Keynesians (and the “money” Wikipedia page), is an additional role for money, a role that’s given an important place by Austrian Business Cycle Theory. Money should be a measure of the aggregate of society’s savings– its future capacity for growth.  Unless someone tries to force it to tell lies, money, in its interaction with other goods, gives both the society as a whole and individual entrepreneurs a measure of the society’s ability to take on new projects (or not).

There’s a good reason why Monetarists/Keynesians won’t consider this.  A money that measures wouldn’t support their fantasies of what “monetary policy” is expected to accomplish.  To them, money needs to be a vehicle that government can manipulate to “stimulate” economic activity and create “optimism”.

Repeat that last sentence out loud once, and for most of us that’s enough to appreciate the fundamental dishonesty of the concept.  Still we could throw that out, stipulate to the erroneous “greater good”, and simply look at the effects after decades of manipulated money, credit and financial opinion– the “greater good” is itself in ruins.

The criminality (the Madoffs et al) is a red herring– only a fraction of the waste from a process that was natural and inevitable under artificial credit creation.  The Federal Reserve and the government got exactly what they asked for— if more and more credit is created, with more and more “stimulus” and “optimism” to get us all moving and spending, could there be any doubt that the average modern society will have no shortage of people willing to get “creative” in order to soak this up?  The exact path of the creativity is difficult to know in advance, but nothing will stop a party like that, other than the eventual clear vision by a critical mass of economic actors of the scary, unsustainable wasting of our limited resources.

Since it’s the normal and predictable side effects of fiat money credit creation, not spontaneous greed, random mistakes, or insufficient “stimulus”, that is the primary cause of these bubbly, wasteful financial disasters, what form of money could stop the cycle?

A gold standard ranks well on measurability– just flop it onto a scale and there it is– a measure.

And Monetarists generally don’t like gold, which you’d think would be a perfect recommendation.  However, while many Monetarists have used a need for monetary expansion as an excuse to be profligate morons, there’s a little kernel of real world worry at the twisted heart of the issue.  A gold monetary standard has an eventual problem– once the standard is generally established, the modern trend wouldn’t take more than a century or two before there’s a strain to find new sources of money, a strain that would continue ratcheting up until loans at interest become impossible. Someday, there would be “peak gold”.

It’s a distant flea of a problem compared to the immediate brontosaurus that Monetarists saddle us with daily.  However, a few centuries can pass surprisingly quickly (especially for the unborn, who have very little concept of time).

So we’re looking for a money that is non-static, but nevertheless a real measure of a society’s ability to create new goals and move forward, or conversely, would appropriately stall us out when we’re not ready.  We need a limitless limitation.

A few thousand years ago, a food backed currency– stored food, if absent the problem of spoilage– would have taken a good rough reckoning of a society’s future capacity.

Today we need to be able to do a lot more than eat in order to accomplish our work.  But I’d suggest that energy would be a good measure for today’s economies, since we need it in pretty much anything we do.  If we have sufficient energy stored to take on a project— it’s as safe as it can estimably be to take it on.  If not, then we know we’d get stuck with a half finished project and the waste and risk associated with that— we would have to wait.  (The way we needed to wait on “improving housing affordability”.)

We can also theorize that the payment of interest will never be a problem with an energy monetary unit.  Until we’re capable of building a “Dyson Sphere” enclosing the solar system, we won’t run out of energy potential (and who knows, even that might be a pit stop on the way to the stars?)

Is it a little odd to propose that we literally have money to burn?

Comparatively, no, it’s not.  How much stranger that for money we’ve chosen an unmeasurable paper standard. We measure anything and everything.  People have even tried to figure out if a human soul has weight, but for money, of all things, we’d rather pretend?  The one thing that we think we don’t need to measure is our savings versus our consumption– our stored capacity to use resources– our future on earth?  (If I didn’t know how inherently trustworthy government is, I’d suspect we were being manipulated or something.)

A currency that can be spent literally, or saved literally, is a chance to stop pretending that savings, or lack thereof, has nothing to do with our future.  A chance to uninduce the self-induced march of the bubbles.

Let’s go back to optimism for a moment.  As you can perhaps tell already, I’m not entirely a fan.

President Obama has “The Audacity of Hope”, but the implied rarity of hope in the political sphere is a little disingenuous.  The value of “optimism” is unquestioned in politics, especially if it’s yours.  You can pretty much imagine any president saying when criticized something like: “Look, any plan will be criticized, but I believe in optimism– you can’t always listen to the naysayers.”  (Maybe there’s a reason there’s always naysayers– maybe all the plans have sucked?  We are, after all, where we are, and didn’t get here overnight.  Every presidential plan is a central plan, with a clear theoretical basis for sucking.)

Optimism isn’t just the universal political habit of mind, but the most common in general.  Perhaps optimism deserves some of its boosterous reputation, but in the end as a mass state of mind, it can turn very quickly into an excuse for lazy thinking.  Money and economics in particular have been heuristically much too glib, and not to be too dramatic, it’s conceivable we could pay for it with our lives.

It isn’t only that we’ve managed to stupidly fool ourselves into underestimating the savings we need for our own not much more than day to day living, and then, what’s needed to have a future equal to or better than the past.  It’s not just that we’ve decided, out of nothing, that doing nothing is not an option, while spending trillions of dollars is a must.  (Mandatory trillions spent on something somewhere– we “know” it must be spent, but how, where, what– that we don’t know.)

To me there’s still much more, as long as we’re throwing our fiat currency habitual non-measurement of resources into the mix.  We also appear to be underestimating by many orders of magnitude the level of saving that we need to give us a near certainty of sustaining a human civilization indefinitely.

We’ve added a lot of dependencies in our modern system that haven’t even been tested by an historical sized natural disaster— a San Francisco earthquake, or a Krakatoa.  What about something many orders of magnitude bigger, which might have a very high probability over a period of a thousand years or so– the natural disasters that we know have happened in early or pre-history?  (If a thousand years seems like a long time, consider that that still gets a double digit percent chance that it would occur in the lifetime of yourself, your child, or your grandchild.)

These, along with potential manmade disasters (where perhaps rightly, many people would place even more emphasis), put us on the footing of “it’s a matter of when, not if”, a place that I’d contend we wouldn’t be if we had a hundred or so times our current savings.

(Say for example that most countries had started work on an energy currency system 50 years ago, had because of this perhaps developed more advanced energy accumulators, and now had the above type magnitude of real savings in energy.  Say further that tomorrow someone is able to prove that pollution caused global warming is real, with a best model estimate 90% certainty of ending modern civilization.  With that evidence, and those usable savings, then these countries would have potential to mothball most industry for a decade or more, working instead entirely on changing the outcome, rather than just waiting for a civilization ending catastrophe.)

A long, long time ago (in the title), I mentioned “carbon” in the monetary unit.

Now, I’ll carefully disappoint half the readers who were waiting for the good stuff, while providing (temporary) relief to the other half, who had probably been saying, “Carbon? Is this idiot one of those “cap and traders”?

To be continued in Part II…

By Les Lafave

Monetary and Banking Reform – themaestrosrep.org

Bernanke Moves the Sun-Dried Fish (Fun With Austrian-Style Crusoe Economics)

February 22nd, 2009

In this adventure of Robinson Crusoe, the writer is so bitter that he takes it out on innocent characters in his own imagination, meanly depriving Crusoe of tools, supplies and opportunity.

Seven hundredths of a second after Crusoe thinks, “I wonder if I could rescue some supplies from the ship?” it sinks almost instantaneously with a perverse Champagne cork popping sound, into a trench a thousand fathoms deep.

Fish leap and play daily in Crusoe’s sight, but too far off for hand fishing.  The giant dwarf coconuts are five hundred feet tall, but with mini-nuts that take ten minutes each to crack and yield one calorie.  The island’s unique tortoises can outrun him.

Scrounging for enough food to starve over years instead of days is an exhausting grind.  Crusoe can only dream of capital projects.  There appear to be sources for tool making, but always a little too far from food sources to consider risking.

The problem that Crusoe has, as delineated by many Austrian School economists, is that he must have savings in order to produce tools (higher order capital goods).  Without savings of food he has to continue as he is, hand gathering for subsistence.  Crusoe plans, estimates and saves a few scraps.

Then Friday shows up.  The two divide the subsistence chores and start to do a little better.

They work out a detailed plan– by the standards of the island, it’s a massive capital project.  It involves building tools, and tools for building tools, in assembly line fashion.  The savings needed for them to complete their capital project according to their estimate– a thirty day supply of food.

Crusoe has been maintaining a rather ambitious food storage cave. He shows this to Friday.  It contains some pathetic food scraps of surplus over subsistence– the space carefully organized for the bounty that never comes.

Friday, now with considerable excitement about the thirty day plan, examines the potential of the space.  After all this waiting Crusoe is also catching emerging economy fever, and so as difficult as communication is for them anyway, they’re both hasty, and tragically fail to understand each other.

Friday thinks that Crusuoe is showing a food storage cave prepared for Friday to store Friday’s surplus.  Crusoe had only intended to convey that Friday should prepare a similar larder.

The two men dive into the tasks of hand gathering food, sometimes working together, sometimes apart, in accordance with the master plan.  When they work together, Crusue makes sure to leave half the production outside the food storage cave for Friday to move to his own larder.  Friday is a little puzzled by the extra work that Crusoe keeps leaving for him, but doesn’t wish to confront his friend, and so simply moves the food into the same cave later.

When Crusoe’s tally indicates that he has thirty days supply, he asks Friday what help he needs with finishing his supply, and is amazed at Friday’s indication that everything’s finished.  Both men are so elated that the savings plan went better than they’d dared to imagine, that they even expand the tool building plan.  They dive in with a near delirium of hope and ambition.

They’re so excited and work so hard over the following days, that their savings are almost depleted before they realize the error.

The more they look at it, the more sobering the disaster begins to appear.

Without adequate saving to deal with all of the plan’s dependencies, it has turned into a trap.  None of the tools on their assembly line are more than half completed.

A lot of the early production went to make fresh vine lashings.  These lashings need to be in place on the constructed item within a few weeks at most, or they become useless.

A half completed fish weir will wash away without ever endangering a fish.  They become despondent as they look at the same picture everywhere– it looks like some aggressively inattentive kids have been playing– half dug pits, trampled brush, scattered rocks, chopped trees.

How could they have been so foolish?

As a matter of fact it’s pretty easy.  Crusoe and Friday have just engaged in an accidental experiment with fractional reserve banking, absent the banks.  Perhaps (since most central bankers have magic powers), Ben Bernanke was even there, sneaking in to rearrange the supply cave to make it look like the savings were abundant for a little longer so as to protect the illusion of growth.  Regardless, Crusoe and Friday both perceived that the same savings were available for their particular use.  The illusion lasted until they realized their mistake, and then their economy crashed.

As Crusoe and Friday try to re-capture their subsistence methods, there’ll be further depressing damage assessment as they see how much of the low hanging fruit, in some cases literally, they’ve stripped away.  The assumption had been that the completed capital projects would more than make up for any lack of care and husbandry during early stages (something we duplicate in real life bubble economies).  For Crusoe and Friday, it may be a more serious issue than just wasteful projects– the upcoming time of malnourishment may kill them before they can regain their footing.  (From that perspective we can also see that the quicker the crash came to their economic boom, the better off they would have been.)

Of course they note a radical difference in work energy from the period of boundless hope, to that of seemingly bottomless despair.  But noticing it won’t entirely cure it. (Rather similar to the way it’s useless for some idiot financial analyst on TV to decry that consumers are turning their pessimism into a self-fulfilling prophecy by failing to spend and/or borrow.)

Both “Crusoe Economics” and identification of the bubble inducing problem of credit expansion are traditions of Austrian Business Cycle Theory.  I’ve borrowed particularly from economist Jesús Huerta de Soto for the above Crusoe and credit adventure.

But since I’ve personally found a sarcasm engendered catharsis to roll back the bitter tide for perhaps even as much as a full day, it’s at this point, while Crusoe and Friday have their heads in their hands, that a disoriented whale beaches next to them, and before they can recover from their astonishment, a lightening bolt knocks over and flames a dead palm, creating an impromptu barbecue pit.  (In the roots of the flaming palm, the two discover more than their collective weights in plump, wild sweet potatoes, with a scattering of wild herbs.)

Great rejoicing.

A barbecued whale for our sliding economy, however, absent an intervention from an advanced alien culture, would seem to have a problem of scale.  Too many credit bubbles have been layered on top of each other.  There’s nothing Fed Chairman Bernanke can do, with money or fish, to hide the waste anymore.  Credit expansion from fractional reserves– credit money out of “thin air”– must always leave us high and dry (and whaleless) at some point, but as perverse as it may seem, the sooner the better.

By Les Lafave

Abolish The Federal Reserve – themaestrosrep.org

Stimulus: Still Stupid the Second Time Around

February 14th, 2009

No one would ever wish for a crisis, but the one good thing about it is that everyone starts to pull together.  Unless of course, you’re not asleep and dreaming about another country in another era.

Pulling together would interfere with self-indulgent, short-sighted, partisan ignorance.  The only positive to me, is that I now know that I won’t have to worry about my immediate personal safety if I’m ever in a crowded life boat– I can relax and wait while the children are thrown overboard, maybe even before the lifeboat becomes crowded.  (Sure, they said it was just a drill, but why take chances?  Maybe they were afraid we’d panic– maybe it’s a fractional reserve lifeboat.)

What about the consumer– if the consumer isn’t confident, surely that’s an excellent excuse to live in the present? Doesn’t the future depend on living well now?

It’s very convenient to believe that an economy depends on consumption– it’s what you’d expect the self-centered and intellectually lazy to believe in.

“You mean, my idle whims and self-indulgence are good for the economy?  The world is my smorgasbord?  I don’t have to think about anything, or prioritize, or save for a rainy day?”

Sir or madam, you are correct– economics tells us so.  Logically, even your bodily functions are good for America, so drink a keg, eat a pizza, take a laxative– economics and Uncle Sam will love you the more– because by a curious coincidence, the exact economic theory that one would expect that a lazy, selfish moron would wish to be true is the exact, prevailing economic orthodoxy in America.  What extraordinary luck!

Confidence can have an impact in any endeavor, but it seems like another non-coincidence that economics shares the same obsession as pop psychology.  What matters more than confidence is reality.  You might be able to hypnotize somebody stranded in the 100 degree desert– no food, water, shelter– into believing it’s all an air-conditioned Swedish embassy party, but that “confidence” won’t accomplish much for his or her “economy”.

Stimulus is a trap.  It can only work when the confidence is already there, waiting to come out– stimulus “works” as long as you don’t need it.  If you’re in the desert and need to reassess, stimulus is a disaster– it prevents the reassessment from taking place.  That’s really all the self-styled confidence building actions of government economists come down to in the end.  Since our method to inspire confidence is to prevent analysis, that ultimately must inspire no confidence at all.

By Les Lafave

Repeal the Federal Reserve Act – themaestrosrep.org

Where Does Speculation Come From?

January 21st, 2009

Speculation, as we know, comes about when bridge trolls get hold of refined sugar.  The rush of the abrupt shift from their normal grumpy diet of bone marrow and gruel, causes the trolls to dance out from under their bridges in a miasma of invisible gaseous trollulose, which makes the human world go mad.  Florida real estate soon follows.

This makes as much sense as most more commonplace explanations, when explanations are considered at all, and like “greed” most trolls are invisible– all you’ll ever see is their supposed primary effects.  (Something else: it’s frustrating that Congress has made no determination to regulate this bridge troll problem– a simple matter of requiring that no sugar, sodas, or baked goods be transported within five miles of any bridges– easily accomplishable by the use of dirigibles.)

Words must be made to work properly, and work hard, on behalf of their human (or egg) masters, contended Humpty Dumpty.  (I believe that Mr. Dumpty would have no issue with the slight shock transition here, since he’s willing to end poems in the middle of a sentence.  I’m not sure that every egg would have the guts to do that.)

It’s because of my humble attempts to make Mr. Dumpty’s philosophy of language live and breathe, and to do as he says (not to criticize too harshly, but as he says, not always as the great but inconstant semanticist does), that my keyboard caps lock key remains nearly virginal.  Its use could be viewed as a kind of cheating, since it deprives words of their proper labor.  I hardly ever even use exclamation points!!

But I’m drawn to embark on a strange desperate exercise:

Locate caps lock.  Check.

Fingers limber.  Check.

Brain function engaged…

Brain function engaged…

BRAIN FUNCTION ENGAGED!!… CHECK!!

CAPS LOCK ON…

OH… ALREADY ON.  I MEAN CHECK.

SPECULATIVE BUBBLES ARE NOT CAUSED BY BRIDGE TROLLS:

SPECULATIVE BUBBLES ARE CAUSED BY MONEY AND CREDIT CREATION. THIS WAS TRUE IN THE MISSISSIPPI BUBBLE IN THE 18TH CENTURY.  IT WAS TRUE IN THE STOCK MARKET BUBBLE OF THE ROARING 20’S.  AND IT’S TRUE TODAY.

One can sort of understand– though not without some contemptuous lip curl– why our leaders skip over this simple analysis to get straight to their “solutions”.  Sub-consciously at least, they must know that close examination of speculative causes would for them be an exercise even more perilous than my latent discovery of the caps lock key will no doubt be for me.  Blame is a dish best served over-spiced, over-garnished, and over-sauced, to someone else, who really only wanted a sesame bagel.

And anyway, there’s an easy short cut for politicians to skip from their vigorous, over-sauced non-analysis to expensive, fatuous, over-garnished non-solutions.  That short cut of course, is GREED.

Why was there speculation?

Greed caused it.

Oh well then, there you go.  We need a solution for that.

Never mind that greed can cause or not cause anything, or anything’s opposite.  A greedy child could hoard all his lollipops, or give all of them away hoping to be rewarded with ice cream.  Gordon Gekko had it completely wrong, even from his own imperturbable perspective.  “Greed,” Gekko should have said, “is meaningless.  Greed, for lack of two better words, doesn’t tell us crap about crap.”

Great bubbles aren’t arithmetic sequences.  They need pyramids of money, to enrich early speculators and stimulate the fantasies of growing numbers of newbies.  Whatever any politician or central banker (or non-central banker) says, we need to keep track of this fact– it’s not possible to come by these pyramids honestly– an honest society with honest institutions would never be able to keep these pyramids marching.

In The Theory of Money and Credit Ludwig von Mises said, “It is impossible to grasp the meaning of sound money, if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments.  Ideologically it belongs in the same class with political constitutions and bills of rights.”

We could hardly be further away from such a concept.  In fact (as some have recently pointed out), it’s more like we’re living in Atlas Shrugged, with very unsound money “solutions” that cause problems which appear to need more problem causing solutions.  No where on the horizon is there any Atlas capable of shrugging.  (At this point, I think most tax payers would settle for an Atlas with any capability to restrain himself from whimpering behind an outstretched begging hand.)

AS FOR THE U.S. MONETARY SYSTEM, THAT’S A CONTRIVANCE THAT ONLY TYRANTS AND SPECULATORS COULD LOVE.

By Les Lafave

Abolish The Federal Reserve – themaestrosrep.org

Originally Published at Strike The Root – 01/20/09 

Public Works (and Won’t Works)

December 19th, 2008

The unknown cost of economic stimulus is somewhere down the unmeasured road, while stimulus’s close cousin, public works, would appear to be the next Keynesian cluster bomb to be fired at the yet defiant real world.

Illusion enablement aside, a public works infrastructure concept is a modest improvement over raw stimulus.  In public works there’s at least tangential acknowledgement that it may be a good idea to have some sort of output– contrasted with stimulus which has an even closer cousin, the broken window fallacy.

Public works has a more hopeful sound.  Stimulus could be just a giveaway to Wall Street.  Public works is stuff—concrete and steel. If Wall Street is going to get hold of public works money, at least they’ll have to work to come up with a twisted scam– it won’t be just “injected” onto their balance sheets.

But if we can’t keep that concept of output always uppermost– and the evidence so far is that we can’t– the happy, hopeful sound of public works will be another money pit.

The base assumption is already glib– that public works are just something the government does in tough times (and easy times and medium times), to create jobs, stimulate the economy, build infrastructure and give people hope.  But what are we talking about?

It’s not like we can put together teams of unemployed stock analysts and drywallers and send them off to build bridges. Subtleties like this can get lost in politics, but bridges, I’d point out, are best built by those who know how to build them. Most such people are not hanging around the donut shop waiting for Congress’s call– they’re out there now, building and repairing bridges at the rate society had previously chosen.  Stomping on a bridge building accelerator will have a lot of slippage– as for example, when a previously active engineer is lured away to teach due to an accelerated demand for new engineers.

If there’s a big ramp up, someday there will be a ramp down.  Some of the “created” jobs will be uncreated, and ripple effects will cause other loss.  (And we shouldn’t get too excited that only some of the created jobs will be lost.  We can’t know if it’s a gain over jobs that would have been created by some other plan, or by no plan.  However, the more splashy and political a job creation plan becomes, the less probable the sustainability becomes.)

A subtle ramping up in infrastructure isn’t going to be the payoff that politicians will be looking for.  They’ll want a voter attention grabbing splash.  The reaction in politics to a slower than wishful expectations infrastructure start will be to stomp on the accelerator even harder.  (Hopefully in the case of bridge building, we won’t get the splash literally.)

New projects have an unfortunate high profile over repairs and maintenance.  It seems rather muddled to consider ourselves caroholics and in need of more road infrastructure at the same time, but contradictory rationalizations are becoming an American specialty.  Thinking about interest groups now fine tuning their “infrastructure” proposals is frightening.

Congress appears to be at least as confused as anyone else.  And we can always be sure that whoever they decide to listen to, it will be based not on common sense persuasion, but on political connectedness and popularity.

Robert Poole in a Wall Street Journal piece, “Stimulus Shouldn’t Be an Excuse for Pork”, focused on U.S. Conference of Mayors requests, and concluded that, “It is clear that any infrastructure stimulus money given to the country’s mayors will lead to thousands of tennis centers to nowhere.”  Other advocates, public and private, aren’t going to have any more trouble than the mayors in seeing their porkish proposals as “infrastructure” and “job creation”.

That tradition– incorrectly considering pork spending as if it’s economically additive, has moved from the realm of the disgusting to the dangerous.  (Especially if all those tennis courts distract us from the study of safe, proper food rioting techniques.)

Consequences for off the charts government spending and borrowing are somewhere between uncertain, and certainly bad– so justifiability for public works projects on their own merit, ex any consideration of “stimulus” or “job creation”, should be a bare minimum for any infrastructure proposal.

By Les Lafave

Abolish the Federal Reserve – themaestrosrep.org

Environmental Banking

December 6th, 2008

When someone runs for office under a promise of fiscal reform, the office seeker may try to grab some press by throwing out big budget cut numbers.

Once the numbers make a big splash, the cuts may turn out to be in the category of “waste, fraud, and abuse”, whereupon everybody rolls their eyes.  We’ve heard this one before.

No doubt there’s plenty of waste, fraud and abuse, but is this genius who’s just discovered the concept of cutting it from government budgets really going to out do the hundreds of predecessor geniuses who said the same thing, and then watched it all grow again while nurturing their own pet budget items?  It’s not that easy.

As a matter of fact, it is that easy.  There’s a simple, structural way to cut waste, fraud and abuse, not just at every level of government, but in every corporation, big or small, in every industry, politically connected or otherwise, and indeed, in the budget of every individual person, rich or poor.

The magic bullet is bank reform, and the beast to be slain is artificial credit creation (artificial in that it’s created wholly from bookkeeping entries of central banks and commercial banks, not from real savings).

Take a look at a couple of modern day financial bubbles– always credit fueled– Japan real estate, the Internet bubble, the U.S. housing bubble.  We’re clearly talking about trillions of dollars of wasted resources (with plentiful enablement of fraud and abuse built in).

If this credit had never been born, we could almost picture the environmental backwards film: Strip mines filling themselves in, forests jumping back to life, smokestacks sucking back pollutants.

Think of the fuel that was used for billions of trips and commutes, the electricity, office supplies, computers, communication equipment, new constructions, building customizations, and trash haul aways, the unneeded businesses, to support other businesses that support businesses, and all, in the iconic Internet bubble example of Pets.com, amounting only to the fruitless, temporary support of a sock puppet.

To all the above, staggering as it is, we need to add another layer from decades of excessive consumer credit, and the consequent misjudgment of the level of consumerism that society can currently support– again an illusion that would not have been possible without artificially created credit.

I was struck by this vignette of excess from Satyajit Das’s “Traders, Guns, and Money”: “A colleague – Chris, the head of hedge fund sales – was recently divorced.  He began to travel frequently to Paris for business meetings.  It turned out he travelled to have his laundry done.  He did not know how to use the washing machine and liked the way the Hôtel Plaza Athénée in Paris did his shirts.”

Any society with division of labor will have parallel stories of excess, but usually limited to a handful of those directly in the ruling class, or perhaps in the actual owners of large businesses, not in the upper echelons of the “laborers”, as in this story.  (It seems telling that in contemporary America we get stories like this exactly where the credit creation rubber meets the economic road.)

And of course, there really is such a thing as trickle down.  If you’ve taken a recent look (like I have), at your personal budget and purchasing patterns in light of the seemingly unstoppable march of economic uncertainty, you may be wishing (as I do), that you could have back some of the purchasing power you took for granted in past years– money used to replace a cool item with a slightly cooler item, an extra purchase of this or that because the price seemed right, the little luxuries that you deserved, because you work hard.

A healthy society probably has no way to avoid some small percent of conspicuous consumers, and perhaps a little envy and modest emulation from many of those quite humanly wishing to join the fortunate few.  If this “waste” comes from real savings, then any harm will be less than what society would get from a habit of trying to make subjective top down judgements to force people away from their personal assessments of what is or is not an acceptable level of profligacy.

However, we’ve had very significant waste that’s risen above the level of any possible subjectivity, and with a clear first cause of artificial credit “created out of thin air”.

The efforts of policymakers, and particularly of the Federal Reserve, to give businesses and consumers a positive economic outlook and keep them borrowing and spending have, in the past, worked, but only as the confidence game that they always were– ultimately these careless policies had to get to where they were always headed, to the destruction, not the creation, of wealth.

Corporations spent their potential, not on creating real efficiencies and innovations, but on frantically buying each other up and financial engineering– neglecting core business in favor of debt enabled breadth and mass in preparation for imaginary future growth.

And at least some of us who’ve been buying a new luxury car every other year, should (in the absence of excessive credit), have been duct taping patches on the tail lights of our ten year old sub-compacts instead.

All of this may sound like just a little too much dismalness from the dismal science, but if we could decide to refrain from ramping the leverage back up again, I think that most of us would handle it with a sense of relief.

Leverage is a giant fog.  Who knows what we actually have or can actually do with this kind of borrowing? It makes it impossible for us to talk to each other about anything– certainly not subjects like entitlements or sustainability or taxes.

If we decide to get rid of central banking altogether, and replace it with a simple system of 100% bank reserving, where every loan must come from the use of someone’s real savings, then the “small footprints” that environmentalists have vainly exhorted us toward could get a second channel of support.

And who knows?  Maybe if we can clear away the fog of debt to sensibly concentrate on real business and science, we’ll find that we can sustainably afford medium size footprints after all.

By Les Lafave

Abolish the Federal Reserve – themaestrosrep.org

Originally Published at Strike The Root – 12/5/08