Examining Socialist Myths: Tax Cuts Don’t Stimulate the Economy

Aw Hell. It’s election season again. As someone posted, “It’s a great time to pare down my Facebook friends.” I’m sure a fair amount of that goes on. As an acquaintance of mine recently described it, “Political beliefs are largely an echo chamber. Election season is an invitation to everyone else to enter your personal echo chamber.”

I’ve gotten better about things. I enter fewer political discussions on Facdbook and have greatly reduced my objectives. The truth is that as a Libertarian, I disagree politically with well over 90% of the voting public. So if I responded to every invitation to enter a political argument, I’d never have any to time to myself.

And some arguments are really subjective and not worth discussing. If you think Obama’s the best President in history, good for you. If you think Mitt Romney is the voice of sanity in the political wilderness, good for you. I’m not here to debate things like that. I’m never going to win the argument, first off, because these beliefs are not subject to change. They are part of political identity that people have absorbed and they’re sure as hell it giving them up for me.

But then, sometimes, I just can’t help myself. Sometimes political beliefs are so out there that I just can’t help myself. If a NeoCon is arguing that invading the entire Middle East will usher in a new American Golden Age, I just have to wade into the fray. I can’t say I have any success in converting people, but occasionally people do tell me that they find discussing things with me enlightening.

Which brings us to today’s political Facebook discussion, “Do tax cuts stimulate the economy?” I find it strange that this is a real question, but I am going to treat it as legitimate and go forward from there. Continue reading Examining Socialist Myths: Tax Cuts Don’t Stimulate the Economy

European Leaders Speak of Return to Bretton Woods

There is a saying on Wall Street that “markets make opinions.” That means that when markets are trending higher, there is talk about how innovation and technology have made us prosperous as a people; when markets are falling, we talk of how we have lost our competitive edge. It’s similar to Vegas gamblers. When they are winning, they have a system. When they are losing, they are unlucky. 

When the inflationary boom is raging, politics love to talk about how the people deserve this newfound prosperity they are experiencing. When the deflationary contraction comes, we talk of lost virtue. The market becomes a drought in everyone’s mind and the politicians become the priests of the Rain God come to tell us we must repent. So I can’t say I’m particularly surprised to see that British Prime Minister Gordon Brown and European Central Bank President Claude Trichet have recently been calling for a return to the first Bretton Woods agreement. As those of you know who have read my book, Bretton Woods was the agreement reached after World War II whereby the United States would redeem gold at $35 an ounce and the rest of the world would use the US Dollar as their reserve currency. 

Ah, the excesses of paper money. I guess when the wheels come off the wagon, it’s suddenly cool for Trichet to say that, what the world really needs is “”discipline: macroeconomic discipline, monetary discipline, market discipline.” That’s akin to a drunk saying in the midst of his hangover that he really needs to stop drinking. Yes, the world does need monetary discipline, but it does not possess the world power to impose it on itself and the central bankers of the world are happy to oblige it along it’s merry way. Although it is possible that there is more here than just giving a nod to virtue in the aftermath of the credit orgy; it is possible that this may be the early murmuring of an actual move away from the US Dollar and towards a new financial order. As I mentioned in this blog on October 13th, a move away from the Dollar is inevitable at some point, and it’s possible that the European leaders would like to stop the death of 1000 cuts that is propping up the dollar. Perhaps they’d like to be rid of the current system sooner rather than later. 

Wouldn’t it be a coup for the Euro if it became redeemable in gold? That would assure it that it would become the next reserve currency in the world. Such a move would spell the end of the US empire, because we could no longer print the money needed to run it and traditionally the Europeans have wanted the US to be strong as a protection from Russia. But they may see the writing on the wall and figure that the US Dollar is going to collapse anyway and that Russia is not nearly as strong as it once was. Perhaps they are considering a move towards become great powers on their own merits once against rather than merely a protectorate of the United States. 

It certainly would be, as the Chinese curse says, “interesting times” indeed.

The Endgame Begins

Despite the fact that I’m an avid gamer, my Chess game is pretty horrible. There was a one point in my life where I thought I might devote some time to it, but that never came to be. I do know through my limited reading on the subject that serious students of the game divide Chess into three parts: opening, midgame, and endgame. Because the game has so much history, and because the number of opening moves are very limited, much of the opening tends to follow historical convention of various “opens.” But the open only goes for the first handful of moves. Before too long, the game has broken from the predictable opening to the midgame where the players have now gone from “following the script” to making moves as best they see fit on their own accord. The midgame is where the players are forced to begin making entirely their own decisions, but the situation is also so dependent on the opening that an experienced player can look at a game in progress and reliably predict what opens both players used.

Then after most of the pieces have been taken, the endgame begins. In terms of moves, the endgame can be the longest part of the game. If played out to its conclusion, it can take quite a few moves to advance a pawn to the other end of the board, regain a queen, and checkmate the opposing king. But often good players will simply concede when they see that that is where the game is going. There are no specific markers that delineate opening from midgame from endgame. It’s more a subjective judegement that people can make when reading over the games moves, but there is, to my knowledge, no textbook definition upon which one can say “Ah, with this move, the endgame has begun.” And yet, it is something that experienced players can recognize immediately. In that way, Chess is a bit like global markets.

When compared to a game of chess, the current financial order can be said to have started back in 1944 when John Maynard Keynes led the Western Allies to agree upon a new financial system near Bretton Woods New Hampshire. As discussed in my book, the Bretton Woods agreement set about a new monetary order by which all of the currencies of the world would maintain pegs to the US Dollar which in turn would be fully redeemable in gold. In this way, all of the world’s currencies were indirectly redeemable in gold. More importantly to the United States, the US Dollar became “as good as gold” to the powers of the world. This is how the “game” of our current financial system opened, and the opening moves were indeed predictable. 

The US Dollar became the strongest currency in the world. It was readily taken everywhere and all nations worked to develop a positive trade balance with the United States so that they could begin saving this new version of paper gold in the vaults of their central banks. The currencies of the world did not vary much against each other as each was pegged to a given amount of dollars. All appeared stable and predictable. But as the game advanced, the situation developed to where their became a strain on the gold reserves of the United States. The United States had enjoyed the ability to, in essence, print paper that others took as gold upon demand. No nation can be expected to not abuse such a monumental privilege. Particularly not when there was a Cold War going on. The 1960s say a huge inflationary expansion of the US Dollar as both LBJ and Nixon expanded social spending while financing an expensive war in Southeast Asia. Various nations of the world, particularly France, began presenting their dollars to the US Treasury and asking for gold. Either the United States would have to stop all of this spending or it would have to cease redeeming in gold. In 1971, Nixon chose the later and the midgame began. 

As mentioned, in the midgame, the players have more ownership in their own decisions rather than following a pre-planned set of moves. Now the currencies of the world were free to “float” against each other. The conversion ratios between one nation and another fluctuated daily. Currency traders and not central bankers increasingly began to determine what a given currency was worth in terms of all other currencies. The US Dollar was now going to have to compete on the world marketplace, but because of how revered it had been at the start of the system, to many of the world’s central banks had too large a stake in it to allow it to collapse; remember, the opening has a huge influence on the development of the midgame. There were some scary times at the end of the 1970s where it seemed like the US Dollar was going to collapse, but ultimately it was simply too pervasive a currency and the economic and military power of the United States too strong to allow its currency to be treated like that of a banana republic- even if there was an amazing similarity between the policies of the two. 

But eventually the midgame ends. After most of the pieces have been taken, the players try to surmise who has the advantage and plan accordingly. In our little game, the pieces have been falling all in a row lately. Whether its the housing market, the stock market, or commodities, one pieces after another has been taken off of the board as a safe place to put your money. Lately even the banking system itself, the equivalent of the king in our allegory, has been in danger of getting captured. The endgame is starting. The players of the world are looking at the board and have realized that the financial order of the last six decades is about to collapse. They are starting to plan accordingly. On October 10th, Italian Prime Minister Silvio Berlusconi announced that the world leaders were considering closing the financial markets of the world so that they would have time to “rewrite the rules of international finance.” He would later say that he was just speculating about a rumor, but one does have to wonder whether he was forced to recant by the other world leaders who had wanted more secrecy maintained around their meeting. 

Whether the meeting was real, or whether it isn’t it does beg the question of when one is going to happen. I say when, because I just don’t see how the powers of the world are going to sit by and watch this deflationary collapse unfold without a fight. Confidence has become shaken in the banks of the world, and part of the reason for this is because the banks of the world have far more liabilities than they have assets when the market actions of the past year have been taken into account. A new plan whereby a large block of nations pledged a significant portion of assets to back their banking system would restore confidence in that banks structure and that nation might thereby gain an advantage in prestige over the other nations of the world. A new economic order to replace the now defunct Bretton Woods agreement must be in the works somewhere; if nothing else, it would be needed as a contingency against further collapse of confidence. 

This all spells the end of the dollar. Like a chess game, the players of the world know that its just a matter of time (a matter of moves) before the once almighty dollar is reduced to far less than the paper its printed on. We are about to once again discover the words of Ludwig von Mises who wrote that “”Government is the only institution that can take a valuable commodity like paper, and make it worthless by applying ink.”