Unforeseen Contingencies

Off to Montana!

2008-06-26T21:56:00.004-06:00

Enough of this wet Iowa landscape. I'm taking off next for Montana, land of high prairies, snow-covered mountains, big grizzlies, and slow internet connections.

Well, we actually do have high speed connections, but I will likely have only sporadic access. And so dear readers (reader?) (Nat?) (anyone there?) my posting may be sporadic for the next month. But never doubt I'll return.

Best to all, and back soon!

(Photo: Pushups at 10,000 feet. Mats Roing & Charles Steele, Spanish Peaks, MT, July 2007. Faithful lab Dushka in foreground puzzles over this stunt.)

HOORAY!!! SCOTUS on HELLER!

2008-06-26T21:34:00.001-06:00

The best news I’ve heard in a long time!

The Supreme Court has issued its ruling in District of Columbia et al. v. Heller, and affirmed that the Second Amendment indeed protects an individual right to keep and bear arms. This is a very important result. The most fundamental individual rights are those of life, liberty and property, including the ability to protect them. This decision effectively overturns Federal bans on private ownership of firearms, and will make it much more difficult for the Federal, state, and local governments to disarm and oppress us. The majority opinion is extremely informative and well worth reading.

Self-defense is both a natural right and a responsibility. As I’ve noted before, no one is entitled to police protection by law. (I quoted Justice Stevens on this, and his point was noncontroversial. See the 5 June 2005 post on Castle Rock v. Gonzales.) The responsibility for self defense falls on the citizens, as it should. And government has no just power to prevent us from doing so.

It’s hard to understand the opposing view that holds that the Second Amendment guarantees the government the "right" to arm itself, "mad hatter logic" as the majority puts it. But this important decision comes none too soon, given that we are likely soon to have a Congress brim-full of mad hatters.

So, three cheers for the majority! And more importantly, heartfelt thank yous to Heller, Levy, Tom Palmer, and the other champions of liberty who took this case to the Supreme Court.

Economic illiterate attacks economics

2008-06-24T22:14:00.008-06:00

From the man who admitted "I know a lot less about economics than I do about military or foreign policy issues. I still need to be educated." From the man who recently called for interest rates of zero percent. Now, an inane and factually incorrect attack on economists and economics:

"You know the economists? They're the same ones that didn't predict this housing crisis we're in. They're the same ones that didn't predict the dot-com meltdown. They're the same ones that didn't predict the inflation that's staring us in the face today."

This is simply militant ignorance. Economists warned of the dot-com bubble. Economists warned of the housing bubble before subprime mortgages became the preferred vehicle for promoting the mania. And economists have been warning of inflation for some time.

The U.S., and particularly Congress, has simply ignored sound economics, and the country is now plunging headlong into a financial and monetary debacle. Economics is what is needed, not econ bashing. McCain is an economic illiterate, and utterly unfit for any public office, and particularly the Presidency.

Does he want predictions? I predict this dunce won't win. (Election fraud doesn't count.)

But as I already predicted, he's back in the race for political excellence!

Excellence in Politics!

2008-06-22T06:05:00.011-06:00

As this poor Iowa pig swims for its life* in the recent floods, our two presidential candidates are revealing hidden political genius.

Senators Obama and McCain have both managed to find ways to blame each other for the Midwest flooding. Obama managed to take a particularly cheap shot with "I know that Sen. McCain felt as strongly as I did, feeling enormous sympathy for the victims of the recent flooding. I'm sure they appreciated the sentiment, but they probably would have appreciated it even more if Sen. McCain hadn't opposed legislation to fund levees and flood control programs, which he considers pork."

The McCain campaign, in turn, pointed out that McCain had in fact sponsored an amendment to the water projects bill that would have actually allocated the funds involved to levee construction, instead of to such things as beach restoration, conservation projects in the Florida Everglades, and similar, umm, pork. Obama voted against the amendment, which was defeated.

As it happens, neither man need feel guilty about having caused the flood. The water projects bill itself was passed, over George W.’s veto, and thus the Federal government eliminated flooding in the Midwest forever.

In his little talk, Obama went on to promise increased spending on, well, just about everything; and also proposed a new federal bureaucrat to help reduce red tape. So I think it’s clear that Obama has won this round of the "Excellence in Politics" game...pork, pork, and more pork, plus more government to help reduce the problems of too much government. McCain will really have to work to top this. (I’m sure he’s up to it, he has experience!)

* Note: the piglet in the photo is actually not escaping the Iowa floods; it is a competitor in the swim race at the annual International Pig Olympics in Moscow. Правда! Had I realized Russia had a Sport-Pig Federation, I would never have left!

Julian Simon’s Virtuous Cycle: the good news and the bad news

2008-06-20T15:41:00.008-06:00

Why don’t we run out of resources? The late Julian Simon had several theoretical explanations for why finite natural resources are not, in the long run, a binding constraint on economic growth. One of the most important pieces of the explanation was his account of the "virtuous cycle." It works like this:

Suppose there is a fixed physical amount of some important material. Suppose also that per capita income grows, as does population. We would expect that this would begin to drive up the price of the material, which in turn would depress economic growth.

The result?

The higher price discourages consumption of the material, and thus slows the rate of depletion, but more importantly, the higher the price the more intense the search for substitutes, alternatives, and technical improvements that allow more services to be obtained from a given quantity of the material. As Simon pointed out, historically this search consistently generates knowledge and innovation that leaves us wealthier than if the problem had never been encountered. The end result is a virtuous cycle that drives economic growth. And furthermore, because there are increasing returns to knowledge, this process becomes stronger with higher levels of development.

This cycle makes theoretical sense, and empirically it’s a fundamental factor in historical economic growth. Now let’s apply it to oil.

Prices of crude oil have been sharply increasing throughout this decade. Economic growth, especially in Asia, is the fundamental factor. James Hamilton (Econobrowser) has some interesting figures suggesting that this has only begun. Most notably, oil demand in China grew 7.2% annually from 1990 to 2006, and in 2006, the Chinese consumed 2 barrels of oil per person. Contrast this with the average Mexican’s 6.6 barrels, or the average American’s 25, and it’s obvious that there’s enormous scope for growth in demand. We may debate peak oil and similar supply constraint theories (I’m doubtful), but the near certainty of sharply increasing world demand mean that prices will continue to rise. Even with optimistic projections for new oil sources, demand will grow faster than supply, and price will rise.

But while increasing scarcity isn’t good news, Simon’s cycle suggests it’s not a crisis, either. High prices are a central factor that will drive a rational switch to non-carbon energy sources. And over the longer haul, we ought to be better off for it.

That’s the good news.

So what was the downside? Consider that governments everywhere are working to interfere with prices, not by increasing supply or reducing demand, but by directly interfering with prices, as well as energy marketing decisions. For example, in the United States, members of Congress have suggested price ceilings, windfall profit taxes, excise tax cuts, drilling ANWR, increases in the Strategic Petroleum Reserve, decreases in the Strategic Petroleum Reserve, suing OPEC, nationalizing American oil companies, and who knows what else, all with the avowed intention of reducing prices. Some of the proposed actions might make sense in themselves, but many are utterly insane. But in all cases, the fixation on reducing prices is completely misplaced. Congress is not going to be able to restrict world demand. And let the French fishermen, British truckers, and their ilk strike all they want, neither will the French or U.K. governments, nor the E.U. for that matter. High prices for oil are a certainty. (One of the great ironies in all this is that at the same time the public and pols are clamoring for lower prices, many of the same are also calling for reduced oil consumption, for a variety of environmental, economic, and political reasons.)

The only choice we have is how we will respond to higher prices. We can either let them alone, and allow people to respond entrepreneurially, unleashing Simon’s virtuous cycle, or we can let governments take command, and attempt to eliminate scarcity by legislation and decree through political processes. This latter approach won't work, and will make the adjustment to economic realities much more difficult. Unfortunately, I can’t name a powerful politician today who doesn’t favor this latter approach.

And that’s the bad news.

(Oil barrel gif from Hisland Oil and Gas)

Economic Incompetence in High Places

2008-06-19T19:23:00.014-06:00

Oh no. The Department of Commerce just released figures for retail sales for this year. Commerce Secretary Carlos Gutierrez and others are crowing about the success of the rebate stimulus in warding off recession.

But why? Take a look at the actual release. Notice anything? How about the lack of adjustment for price changes? (Note the latest PPI figures show a substantial jump for May.) How about gasoline retailers sales leading the way? How about the .90 confidence interval being compatible with half as much increase? It isn’t clear that the permanent income hypothesis is falsified by these data.

But more importantly, suppose the preliminary results are correct and actually show an increase in consumption. Would such a jump in consumer spending be a good thing? Consumers are already overextended, with heavy debt loads and low saving rates. Add to this the likelihood that housing prices will continue to fall, further worsening the position of the average household. To the extent that the additional spending is simply consumers contending with higher prices for food and fuel, it’s difficult to understand what’s good about this. And if the additional spending is simply increased consumption, paid for by more federal borrowing, then it’s positively destructive. We’re consuming capital. Either way, there’s nothing here that warrants a sigh of relief. We are dealing with the consequences of an unsustainable credit bubble. The rebate is simply more of this - the Federal government borrows to finance increased spending. Such "stimulus" is what got us into this mess in the first place. OK, Mr. Bernanke has better access to data than I do...maybe he knows something I don’t, and he really is bringing us a nice soft landing. I don’t have any reason to believe this, but am always ready to acknowledge that the unforeseen lurks.

But scarier is the longer term outlook. For the Federal government, the current financial position is terrible. And unfortunately, it is likely to worsen, not improve. Neither presidential candidate has any sort of serious proposal for addressing the growing debt, and either one would be more likely to make it worse than better. As for Congress, the Democrats are almost certain to make further gains in the House, and probably in Senate, and it’s likely they’ll take the opportunity to increase health care entitlements and other spending, drastically, if they can. And we’ve already seen that the Republicans are worthless when it comes to controlling spending. And Bernanke and similar "experts" are utterly lost on this bigger problem.

It’s not that our problems are inherently unsolvable. It’s rather that economic competence, or just plain good sense, seems increasingly scarce in high places. "What to do about high energy prices? Why, impose a ‘windfall profits tax,’ that’ll make ‘em give us cheaper oil!" "Health care insurance too expensive? Hey, let’s put the federal government in charge! With its proven record of cost cutting, things’ll be fine in no time!" "Asset bubbles out of control? Better give the Fed even more power." "And don’t forget the important role of ethanol in saving our energy economy!" "And when in doubt, spend, spend, spend!"

It’s not a nice situation. Here’s hoping that there are lots of pleasant unforeseen contingencies I’ve missed that will obviate all this. But in the meantime, well, it’s depressing to see the incompetence at work.

Barack Obama on Father’s Day

2008-06-15T20:05:00.000-06:00

Every time I prepare to say something bad about Barack Obama, he goes and says something like this.

Unforeseen Contingencies on Father’s Day

2008-06-15T19:55:00.002-06:00

Time out for one of those rare personal posts.

My father died on 23 April of this year. It was sudden and unexpected, but not a surprise. He was quite elderly, and while in excellent shape, he had an aneurism that we all knew would eventually do him in. He’d lived with it for something like 15 years; the surgeons said they could fix it, but he such had a difficult time recovering from even minor surgery that he and my mother both guessed that he would not survive the surgery. And so they chose to do nothing - a good choice, as he lived well beyond his life expectancy. When he died, it was very fast. He suddenly collapsed, and it was over in less than an hour. As he lay dying, he and my mother reaffirmed their love for each other, and then, true to form, he began cracking jokes about the situation.

So this is the first Father’s Day I’ve experienced without being able to at least telephone my father. I’m thinking of him, of course, and this has me reflecting on what I learned from him. There are many things I could say, but one thing is always foremost on my mind. My father was an M.D., and from the very earliest, even before I was in school, I remember meeting people who would say to me "little boy, did you know your father saved my life?" It was no joke; they were serious. Dad was an otorhinolaryngologist (ear, nose, and throat specialist) was frequently called to the emergency room for a serious bleeding or breathing problem. I grew up thinking that is was normal for my father to occasionally save someone (and also knowing that he wasn’t always successful). Even at his funeral, a woman came up to me, crying, and told me her son apologized for not being able to come, and then told me a gripping story how many years before, her son had been in the ER, and his regular doctor had given up on trying to save him. My father was called, performed a tracheotomy, and, and as she put it "saved my son, and our family. We didn't realize how close it was at the time; your father came and talked with us after the operation and said everything was fine. It was only later we learned how close it had been."

What did I learn from all this? I grew up thinking it was normal to try to make things better than you find them, and that it is possible to accomplish rather remarkable things. I also had the highest appreciation for knowledge, and for ability. These things remain with me.

I cannot resist lapsing into an economics lesson: A number of us have lost our fathers. But what they’ve given us lives on. I hope for my readers that it’s good. The thing we should all do is take the good, and build on it. Anything bad, let it go by the wayside. This is the fundamental engine of economic growth, the intergenerational acquisition of capital, human and otherwise, but especially human. Never mind the mischief and damage perpetrated by our leaders. Our job is to build on the legacy we’ve received, from our parents, and their parents, and from others, and make the world better than it was when we entered it.

Happy Father’s Day.

40 Days and 40 Nights? Fun in Iowa

2008-06-12T20:17:00.006-06:00

I intend to write a post on America's bleak economic outlook; I'll do so soon.

But I am currently hunkering at a friend's place in Iowa City, Iowa. (Yes, close readers of UC will note some irony here...see the post of 3 Jan. 08 if you care about such minutiae.) Iowa is flooding, it's pouring rain, and every 5 minutes the radio has another of those Emergency Warning System broadcasts. The most interesting one so far is that a levee on the Iowa River broke, a little ways upstream from where I sit.

Now I am currently on very high ground, way, way higher than the river (too close for the lightning for my taste), but I feel sorry for those down along the river; this includes a substantial number of businesses, homes, and university buildings. These areas have largely been evacuated already, so I'm hoping people are safe.

Meanwhile, I've been involved in a rather strange and heated debate with Mr. John Lofton, editor of The American View, on the excellent Classically Liberal blog. It's a somewhat interesting if rambling debate, covering theology, medicine, medical ethics, libertarian political thought, abortion, and Terri Schiavo's death. Mr. Lofton is perhaps the most extreme of any political religious fundamentalist I've ever debated; he appears to be a fellow traveller of the Christian Reconstructionists (the people who advocate the death penalty for violations of teir interpretations of Old testament laws). I've set myself the task of swaying his views... we'll see. CLS is rather doubtful, and of course he's likely right. (Click the "Comments" to find the discussion.)

Iowa flooding update, 13 June : We're located on one of the high points of Iowa City, on what is the only though street still open with access to I-80. Hence, it's flooded, only with traffic, backed up from the Interstate all the way downtown, I suspect. I'm babysitting two dogs, and we're more or less penned in. Oh well, not to worry...it's nothing a good tornado won't cure. (Another summer in Iowa, good grief!)

Beyond our means?

2008-06-06T14:07:00.001-06:00

Keynes argued that in the long run, we're all dead. The long run has finally arrived, and it turns out Keynes was right.

It's just an accountant in a suit and tie, but utterly terrifying, and not for the squeamish or faint-hearted.

Boycott China?

2008-05-30T15:06:00.005-06:00

A good friend of mine just sent an internet chain letter he received, and requested I comment on it. Does it make sense, and could it work? Typically I have no time for these sorts of things, but this one raised a number of interesting issues. The chain letter:

"Do you want to send a message to China?

Are we Americans as dumb as we appear or is it we just do not think? While the Chinese, knowingly and intentionally, export inferior products and dangerous toys and goods to be sold in American markets, the media wrings its hands and criticizes the Bush Administration for perceived errors. Yet 70% of Americans believe that the trading privileges afforded to the Chinese should be suspended. Well, duh..why do you need the government to suspend trading privileges? DO IT YOURSELF!

Simply look on the bottom of every product you buy, and if it says 'Made in China' or 'PRC' (and that now includes Hong Kong), simply choose another product or none at all. You will be amazed at how dependent you are on Chinese products, however you will be equally amazed at what you can do without. Who needs plastic eggs to celebrate Easter? If you must have eggs, use real ones and benefit some American farmer. Easter is just an example, the point is. do not wait for the government to act. Just go ahead and assume control on your own.

If 200 million Americans refuse to buy just $20 each of Chinese goods, that's a billion dollar trade imbalance resolved in our favor...fast!! The downside? Some American businesses will feel a temporary pinch from having foreign stockpiles of inventory.

The solution?

Let's give them fair warning and send our own message. We will not implement this UNTIL June 4, and we will only continue it until July 4. That is only one month of trading losses, but it will hit the Chinese for 1/12th of the total, or 8%, of their American exports. Then they will at least have to ask themselves if the benefits of their arrogance and lawlessness were worth it.

Remember, June 4 to July 4.

Send this to everybody you know.

Show them we are Americans and NOBODY can take us for granted. If we cannot live without cheap Chinese goods for one month out of our lives, WE DESERVE WHAT WE GET!

Pass it on America!"

Well, what do I make of this? Three sets of points seem relevant.

First of all, unlike most email schemes, if this one were actually to come to fruition and led to a boycott, it would have some sort of noticeable effect. Never mind that anonymous email chain letters are a very unlikely way of organizing a successful boycott. Never mind that the numbers quoted are all wrong (200 million X $20 ea. = $4 billion, this is much less than American monthly imports from China, and since imports aren’t evenly distributed throughout the year, exactly 1/12 of annual imports rarely if ever occur in a single month). Regardless, a successful boycott would have effects of some sort. But there’s a great deal that is fundamentally confused about this approach to dealing with America’s "China problem."

Second, blaming China for knowingly exporting bad quality stuff isn't quite right; the Chinese government has been cracking down on and even executing officials, including the head of China's FDA, for producing and selling defective goods. China's problem is corruption rather than official policy, and it kills many more Chinese than it does foreigners. The results for the Chinese themselves are often terribly tragic, as when a family’s one child is poisoned by bad medicine. The Chinese are probably more familiar and far angrier about this problem (inferior goods) than Americans are, and the national government is worried about domestic harm as well as the damage it could do to China's exports.

And frankly, most Chinese goods are perfectly serviceable. It’s an exaggeration to suggest all Chinese goods are junk; for some classes of goods, Chinese products are among the best (e.g. athletic shoes, certain medical equipment, some electronics). Perhaps consumers still might prefer rejecting Chinese goods, but it would require an intentional boycott, because most Chinese goods deliver sufficient quality for the price; that’s why people buy them.

Third, the idea of boycotting China is somewhat interesting to me, not because I think it is a good idea, but because I wonder if the average American realizes what it would mean. If we completely boycotted China, we’d also be effectively cutting the other side of the balance of payments. China is actually accelerating its acquisitions of U.S. debt and dollar-denominated assets, while much of the rest of the world seems to be slowly cutting back. This means that (1) China is propping up the value of the U.S. dollar, and (2) China is doing the lion's share of work in financing our federal deficits.

Point (1) means that without China, the U.S. the dollar would drop faster than it currently is. Among other things, since petroleum is priced in dollars, this would mean we'd see even higher oil prices than we do. Everyone wants that, right?

An implication of point (2) is that without Chinese loans, our federal government borrowing would crowd out much more private borrowing than it currently does, driving interest rates up. Since a very large percentage of Americans themselves use credit to pay for daily consumption, this would mean belt-tightening and financial difficulties for many Americans. The Fed could push interest rates back down to combat this (as Fed Chairman Bernanke is doing now) but this would further worsen inflation and the weakening of the dollar against other currencies. Or maybe we could cut government spending, or raise taxes, or both. Most Americans seem to find all of these alternatives unacceptable, so their opposition to trade with China seems a little misplaced.

In fact, it is a somewhat dangerous situation, for both the U.S. and China. China faces increasing currency risk. They (mostly People's Bank of China) hold a bit more than $1.5 trillion in dollar assets, and at current rates of acquisition it might be closer to $2.5 trillion by the end of the year. A 10% drop in the dollar means losses of $150-250 billion. These would be big losses for the U.S., never mind a third world economy. This is not in the interest of either China or the U.S. The irony is that the dollar has dropped as a result of our subprime fiasco, and since China has simultaneously accelerated its purchases of dollar assets, it's poor Chinese citizens who are ultimately helping finance things like the Bear-Stearns bailout!

A gradual winding down of this tangled mess would be a good idea: the U.S. needs to get its spending under control, the Chinese need to better control their finances as well. China has built an economy that is overly dependent on foreign markets, at a cost to domestic consumption. They are lending elsewhere as well, not just the U.S. This seems to have begun as a way to suppress appreciation of their currency, to help foster exports, and now, in my view, is an attempt to keep the house of cards standing. China needs to build its domestic economy, so as to reduce its dependency on foreign markets (China is quite vulnerable if there's a bad U.S. and European recession), and to increase living standards for the average Chinese.

Similarly, if Americans were to bite the bullet and say "OK, let's stop living on credit" it would be a very good thing, quite painful in the short run, but beneficial in the long run. The "boycott China" approach effectively entails this, albeit without conscious intent. Of course, Americans could return to fiscal and monetary responsibility without a China boycott. Inexpensive goods from China aren't a bad thing, and most goods aren't substandard. It's not that trade, credit, borrowing, and the like are inherently bad...obviously they aren't. It's fiscal and monetary irresponsibility that are the fundamental problems, in both countries, and that lead to unsustainable trade and credit scenarios. Sound money and fiscal responsibility would be a nice start.

To the average American, this analysis would likely seem completely unfamiliar: no discussion of outsourcing or alleged job loss, no discussion of "China outcompeting us," nor any other mercantilist nonsense. Serious analysis reveals that the U.S. and China actually have common interests, and are caught together in a financial tangle that threatens both. It would be much easier for both countries to extricate themselves with some sort of coordinated effort, but it is so much easier for demagogues in each country to scapegoat the other country, and populations in both countries love to hear that their problems are really caused by nasty foreigners. Phony patriotism trumps reason every time, unfortunately.

Boycott China? Balancing our budgets would be a much better move.

"Anarchists" for Borders?

2008-05-26T11:29:00.000-06:00

The border is a creation of the state, a limit beyond which the state tends not to extend its power. When it does so, it tends to be extraordinary circumstances (war, "extraordinary" rendition, etc.) The state, and its assumed authority, actions, and services stop at the border, the limits of its jurisdiction. Borders define the geographical limits of the state, and are created and enforced by states.

The border is something different from a property line. A property line is a boundary that defines the geographical extent of ownership. Property lines can, and often do, cross political borders. The two concepts are entirely different. I guess all that is obvious to most of us.

Hence it’s quite strange that self-professed "anarcho-capitalist" Walter Block rails against Médecins Sans Frontières (MSF, a.k.a. Doctors Without Borders), Reporters Sans Frontières (RSF, a.k.a. Reporters Without Borders), and the like. Is there something objectionable about providing emergency medical help to impoverished refugees, victims of natural disasters, and the like? Is Block doubtful about freedom of the press, or the rights of journalists to write and speak freely without being arrested or killed for doing so? Apparently so.

Block’s real beef seems to be that these groups don’t think state borders should define the limits of press freedom, or where they give medical care to the suffering, and the like. It’s simply bizarre that an alleged anarcho-capitalist libertarian should have such a high regard for the arbitrary divisions that states place on us, and speak out against those who don’t share his regard. Some "anarchist."

Block’s argument continues, and maintains that these organizations, and apparently any that affix "Without Borders" to their name, are inherently associated with "leftish political philosophy in general, and with support for world government in particular." And what is his evidence for this? He continues, "I have a confession to make. There is nary a word, heck, there is not a single solitary explicit indication linking any of these 'Without Borders' groups to the world government philosophy. Nada, not one. But, I am involved here in an exercise in verschtehen (sic), not empirical evidence mongering."

So in other words, he just made it all up. Some "researcher."

*Sigh* ...just one more example of crazy, bilious rambling from the LvMI. Mises rolls in his grave.

A Conversation Between Two "Poets"

2008-05-25T13:54:00.000-06:00

Editor's note: Unforeseen Contingencies is honored to be able to present to you a guest post by Nathalie Vogel, political scientist, libertarian, Atlanticist, and expert on contemporary Russia. We hope to post more commentary from Nathalie Vogel in the future.

For those who don't know, Eduard Limonov is the founder of Russia's facist New Bolshevik Party. And we all know who Radovan Karadzic is.

A Conversation Between Two "Poets"

By Nathalie I. VOGEL

There was a time when France greatly benefited from Russian brain-drain. Well, it certainly stopped the day a creature named Eduard Limonov received his French passport. The problem with Limonov, apart from the great amount of vulgarity that emanates from his "literature" and the nonsense he produces elsewhere, is that having been a victim of the Putin-regime, he has turned into some kind of an icon of free speech. Thanks to Putin, Limonov is now "untouchable" and a real "intellectual". In a world where Limonov is a democrat, anyone is free to worship Lenin for initiating genocides ...and anyone may even court people like Karadzic who are on the wanted list of the Hague Tribunal. Yes, in a world where Limonov is a respectable person, anything goes...

Libertarian means “libertarian”

2008-05-21T12:39:00.000-06:00

Update 25 May 2008: the photo illustrates the new face of the Libertarian Party. The LP's presidential candidate, populist-conservative Bob Barr, vows to aggressively shut down the borders. The photo shows a few of the victims of the recent ICE raid in Postville Iowa. They were arrested because their "dokyumenti" weren't in order.

The "Libertarians" will now be free to start making their case for building walls around the country, shutting down free trade, discriminating against gays, and the like. No "purism" will taint this campaign. I wonder how they'll excuse Barr's racist connections?

To hell with them.

(photo from Des Moines Register)

My original post follows...
**********************************************************************************

Note the small "l."

I’ve just emailed a letter to the twenty-five members of the Libertarian party National Committee (including, somewhat ironically, the Region 4 Representative, Bob Barr). Here’s the letter:

Dear LP friends,

In every presidential election beginning 1976 I have voted for the Libertarian Party presidential candidate. I've done so proudly, because every one of the LP candidates was a libertarian. Some of the candidates were much better than others, but every one of them was a consistent supporter of individual liberty, so I was proud to vote for them.

I believe the LP is now in danger of sacrificing its consistent support for individual liberty by nominating a conservative like Wayne Root, or even worse, Bob Barr.

Wayne Root tells us "Come to think of it, almost every social issue of our day is a States' Rights issue." http://www.rootforamerica.com/home/wherestands.php This is anti-libertarian nonsense: states do not have rights, and "social issues" are matters of individual rights, and not matters for whatever state political processes happen to choose.

Bob Barr: anti-gay, anti-immigrant, closed borders, anti-free trade... how can any libertarian even think he's vaguely a fellow traveler?

I respectfully ask you to pick a genuine libertarian for the LP candidate, and not a "states-rights" conservative. I certainly will never vote for the likes of Barr or Root. The LP is the only remaining voice in American politics that speaks for consistent *individual* liberty. Please do not betray this proud and vital role.

Sincerely,
Charles N. Steele, Ph. D.

Compromising on fundamental principles in order to make short run political advantage is a terrible thing. And it’s a stupid thing, if the "advantage" is as miniscule as a Barr or Root candidacy would provide. I hope the LP does the right thing and resoundingly rejects these "states rights" conservatives and picks a genuine libertarian to run. How about an all-woman ticket of Dr. Mary Ruart and Christine Smith?

If you’d like to send your own message, here is the LPNC contact info. For maximum persuasiveness, be sure to be direct, clear, and polite.

My Message to Bob Barr

2008-05-16T09:34:00.001-06:00

The Libertarian Party is in jeopardy of being taken over by anti-libertarian conservative bigots. I've never voted for a Presidential candidate other than the LP candidtae. Some were good, some were a bit questionable, but all were libertarians. But now the "party of principle" appears to be on the verge of abandoning its principles and nominating a supporter of big government such as Bob Barr or Wayne Allen Root.

This will do terrible damage to the cause liberty. It will contribute to the destruction of the term "libertarian," by making it equivalent to "bigot in constitutionalist clothing." The ideal of individual liberty is difficult to kill head on; far easier, as Mises and Hayek pointed out, to pervert language so that a key concept is lost.

I did go to Barr's website and sent him an email message urging him to drop out. Here's the message:

"You are not a libertarian. Core libertarian positions include open borders, equal rights for gays, an end to the criminalization of drugs. Your association with the KKK front group Council of Conservative Citizens is abominable. You're anti-libertarian. Get out of the race now!

Sincerely,
Charles N. Steele, Ph.D."

I forgot to mention his consistent anti-free-trade position. What a dreadful statist he is!

How to characterize Hillary?

2008-05-06T21:48:00.000-06:00

I’ve been away for a bit, and this will continue for another week or two, owing to various contingencies, foreseen and otherwise. With the end of the semester I’m really too busy to be writing this, but Hillary is crowing victory in Indiana (here’s hoping she’s wrong) and going on with her federal gas tax plan.

What are we to say of this plan, and what does it tell us about Hillary?

The plan: stop placing the tax on consumers, and put it on the producers (you know, those nasty people who do us the disservice of working to provide us with gasoline). This will give consumers a break, and punish the producers, for... umm, doing us the disservice of working to provide us with gasoline? Well, anyway...

This is a textbook example - literally. What happens when a per unit tax is shifted from buyer to seller, from demand curve to supply curve? Answer: nothing. These are identical in their effects on raising prices to consumers, reducing prices to sellers, and reducing quantity sold.

As I walked into my last class of the term, my students were discussing this among themselves and making fun of the plan; they mentioned it to me and asked my opinion.

"Look, anyone who has had Econ 101 knows this is nonsense. Rest assured that Hillary’s advisors are familiar with Econ 101, and I am pretty sure Hillary herself understands that this is nonsense."

"So you’re saying Hillary is evil?"

Good question.

Well, let’s look at it. The Econ 101 analysis isn’t the full story. Frankly, Hillary’s "plan" is more idiotic than it might seem from the blackboard econ perspective, because it is proposing the status quo! The federal gasoline excise tax is already levied on producers, not consumers. As the Congressional Research Service puts it, "the gasoline excise tax [i]s a ‘manufacturer's excise tax’ because the government imposes it at production (i.e., the producer, refiner, or importer)." People who are impressed with her plan are simply ignorant. The "Hillary plan" is already in effect.

In other words, Hillary is knowingly, cynically playing on voters’ ignorance. My students are right, and have Hillary pegged.

So here’s the correct characterization: Hillary = Evil.

Signing off for now,, but back soon!

Starbucks and Laissez Faire

2008-04-11T22:40:00.000-06:00

Should it really be necessary to have to defend laissez faire from the capitalists?

Classically Liberal comments on a piece from the Wall Street Journal by Cato’s David Boaz. Both are worth reading. The gist is that Starbucks might be classifying the term "laissez faire" as offensive, politically loaded, or otherwise too objectionable to be printed on its customizable customer cards...particularly bothersome to me, since socialist slogans are apparently just fine.

CLS provides a link to Starbucks customer service, so I went ahead and emailed them. I reproduce our exchange to date below. I’ll continue to pursue this, as I spend a substantial amount of money with them, and need to find out if this is a mistake.

My initial inquiry

From: Charles Steele
Sent: Apr 9 2008 7:12PM
To: Starbucks Card
Subject: Other

Hello -- I would like to know why the expression laissez faire is considered as inappropriate by Starbucks, and banned from customized Starbucks cards? (David Boaz, Wall Street Journal, 7 April '08) This is particularly puzzling, since socialist slogans appear to be acceptable. If this is your policy, I request you reverse it. I'm a professional economist and regular Starbucks customer. I'll be happy to explain to you why laissez faire is always appropriate. I won't remain a customer if you ban the term.

Customer rep Lisa M. writes back

From: Starbucks Card [cardinfo@starbucks.com]
Sent: Friday, April 11, 2008 11:56 AM
To: Charles Steele
Subject: Response from Starbucks Coffee Company - Case # XXXXXXX

Hello Charles,

Thank you for your interest in Starbucks Coffee Company and for taking the time to contact us regarding our Customized Starbucks Card personalization policy. We welcome questions and feedback from our customers at any time.

The Starbucks Customized Card program allows our customers literally thousands of ways to create a card that is unique to them. As with almost any personalization program, there are guidelines - which are published on our website - regarding what is allowed on the cards to help avoid content that could be ether offensive or illegal. This includes things such as threatening or derogatory remarks, overtly political commentary or trademarks (including the trademarked name Starbucks).

Every card is reviewed by our vendor to make sure it meets our policies, and if we unfortunately cannot approve a card, we contact the customer by email and do not charge them until they are able to complete their design.

Acting on feedback is essential to Starbucks continued success. If this does not happen, I realize that you and others may go elsewhere for your coffee needs. I assure you that Starbucks values your comments. Therefore, I shared your comments with our Starbucks Card leadership team for review.

Thanks again for your interest in Starbucks Coffee and for giving us the opportunity to address your concerns and improve our operations. If you have more specific questions not answered at the Starbucks site, please feel free to e-mail us at CardInfo@Starbucks.com or call any of our phone representatives at 800-STARBUC (782-7282).

Sincerely,
Lisa M.
Starbucks Card Services
Starbucks Coffee Company

What? Laissez faire is potentially threatening or illegal? Well, at least they realize their continued success depends on giving a good response to my feedback. I respond.

From: Charles Steele
Sent: 04/11/2008 09:04 AM
To: Starbucks Card
Cc:
Subject: RE: Response from Starbucks Coffee Company - Case # XXXXXXX

Thanks for the reply, Lisa, but you didn't answer my question.

Does Starbucks find "laissez faire" to be offensive, illegal, threatening, derogatory, or overtly political?

I'm particularly curious since socialist slogans are apparently considered acceptable.

I look forward to your reply.

Best regards,
Charles

Lisa responds

From: Starbucks Card [mailto:cardinfo@starbucks.com]
Sent: Friday, April 11, 2008 3:50 PM
To: Charles Steele
Subject: RE: Response from Starbucks Coffee Company - Case # XXXXXXX

Hello Charles,

Thank you for taking the time to reply to my message. Your questions and comments are valuable to us.

We apologize for any inconvenience regarding your inquiry. Please know that we do not discuss individual customer cards or the reasons they may or may not be declined. Starbucks appreciates customer feedback, and your comments have again been fowarded to our Starbucks Card leadership team.

Thank you again for your interest in Starbucks Coffee Company.

Warm regards,

Lisa M.
Starbucks Coffee Company

Not to be put off, finding Lisa rather pleasant to communicate with, and assured that Starbucks values my comments and questions, I write her back.

From: Charles Steele
Sent: 04/11/2008 03:39 PM
To: 'Starbucks Card'
Cc:
Subject: RE: Response from Starbucks Coffee Company - Case # XXXXXXX

Hello Lisa

Thank you for the response.

Again, you didn't address my question. I did not ask about any individual customer card. I asked about company policy towards the phrase "laissez faire."

I look forward to your reply.

Best regards,
Charles

But instead of Lisa, I now hear from Keith D. I guess he’s a leader in the Starbucks Card leadership team. But apparently this is too big even for him.

Hello Charles,

Thank you for contacting Starbucks.com.

I apologize for any inconvenience experienced. Due to the nature of this Starbucks Card inquiry, it is necessary to call 800-STARBUCKS (800-782-7282) as soon as convenient and speak directly with a Customer Service Specialist. When you call, please reference Case # XXXXXXX.

Starbucks call center hours:
Monday-Friday 5:00 AM to 8:00 PM Pacific Time
Saturday and Sunday 6:00 AM to 6:00 PM Pacific Time

Thanks again for your interest in Starbucks Coffee. If you have more specific questions not answered at the Starbucks site, please feel free to e-mail us at CardInfo@Starbucks.com or call any of our phone representatives at 800-STARBUC (1-800-782-7282).

Warm regards,

Keith D.
Starbucks Card Services
Starbucks Coffee Company

OK, I will call. "Laissez faire" is a fundamental principle, and it's actually this, not so much Starbucks, I'm interested in. Free people and free markets depend on laissez faire. If it’s now considered objectionable by Starbucks, I want to hear why. And I will be happy to explain to them why their continued success, and the success of civilization, depends on laissez faire.

China's Olympics

2008-04-07T07:44:00.000-06:00

Let's take a quick break from economic issues and talk about something fun: sport.

The Summer Olympics, hosted by America's number 1 creditor in terms of new loans, will be underway soon. The Chinese government had an opportunity, with the awarding of the Olympics, to take big steps away from totalitarianism. Unfortunately, they chose to go the wrong way. Politicians around the world see China as "too big to irritate," and so are falling over themselves to excuse the Chinese government. Happily, non-politicians in London, Paris, and soon -
San Francisco - differ.

This is more important than it might seem. China is a model around the world for those who like the idea of strong economic growth and tight political control. Given the behavior of the Chinese government, at this point it would be good to see China humiliated by a failed Olympics (although a shame to see athletes keeling over from air pollution, and reporters arrested for reporting on things other than what the Chinese stage-managers offer.)

There is the argument, of course, that "sport and politics should be kept separate." In other words, "when we are playing, please don’t bother us with the news that our host is systematically torturing and murdering people and that our acquiescence furthers this." Ugh.

I’m also enjoying the argument that it’s a shame to spoil the beauty of the torch run with protests, since "[t]he Olympic torch is a symbol of sport and a symbol of cooperation between nations," as Lord Coe, organizer of the 2012 Olympics, puts it. Yes, what a shame to mar this beautiful tradition.

Of course, we've not gotten away from economic issues at all. Noted advocate of freedom and democracy George W. "Cheap loans from China will cover the deficit" Bush plans to attend the Olympics, including the opening ceremonies, which many suggest boycotting as a protest. And now that New Zealand has negotiated a free trade deal with China, PM Helen Clark is speaking out boldly on the importance of separating sport from mere individual rights.

If Western governments find the Chinese government's behavior acceptable, it is all the more important that citizens around the world keep freedom and sport together, and protest the Blood Olympics.

“Too big to fail” means...

2008-04-04T22:52:00.000-06:00

...someone else is too small to matter.

Government has three ways of paying for its current expenditures. It can tax. It can borrow. It can inflate, creating money and spending it.

Taxation is theft, but it is the most honest of the three methods. It is direct, and the payers usually have a fairly good idea that they are paying, and how much.

Borrowing is paid for, ultimately by either taxation or inflation. (Default is simply a messy way to tax the lenders.)

Inflation is arguably the worst method of financing government expenditures, from the standpoint of the citizen, since it is not uniform and is correctly anticipated only in blackboard models, and hence destructive of capital and the smooth functioning of money. Inflation is economic poison, because it distorts relative prices and confuses everyone's buying and selling decisions.

The U.S. federal government depends on all three methods of financing. Since taxes do not cover our "generous" spending programs, we borrow, primarily from abroad, and we inflate, via the easy money policies of the Federal Reserve. Keep this in mind when you contemplate the Fed’s many bailout programs - purchases of loans that are basically in default - and the federal government’s "stimulus" programs.

Martin Wolf at the Financial Times has a particularly clear account of what the U.S. bailouts mean: the mistakes and losses of private lenders and borrowers are socialized, and become public property. Those of us who did not take on ARMs, either as borrowers or lenders, will pay a substantial portion of the cleanup bill.

I'm thinking now of UC reader Jeff, who me told a number of years back that his co-workers were all taking out ARMs. He was telling them they were insane, that they were signing contracts that they'd never be able to fulfill. I agreed. Stupid us. Now we get to pay. Every politician in sight now has a scheme for us (me, Jeff, and the rest of America that stayed out of unmanagable debt) to bail these idiots out. Great...more federal debt, and inflation, inflation, inflation.

But what does "bailout" mean in a country where the government itself is also in the red? And where the average citizen has negative savings, on net? Brad Setser argues, correctly, that a substantial portion of the burden falls on lenders to the U.S. government, i.e. foreign central banks... which means ultimately upon the poor citizens of emerging economies, such as the Chinese lad pictured here.

Sorry kid. If it's any consolation, they're screwing me too.

Setser's caveat, that some others argue that central bank exchange rate losses on the dollar are irrelevant so long as the external (read U.S.) purchasing power of the dollar doesn't fall, is beside the point, in my view. Inflation Ben will see to that.

There's a good deal of irony in all this. Those who were irresponsible (borrowers and lenders) and therefore are responsible for the mess, and won't be held responsible. Those who behaved responsibly and hence aren't responsible, will be held responsible.

Nice symmetry here, yes?

The linked essays are worth reading.

Austrian Business Cycle

2008-04-04T18:51:00.000-06:00

We're in the midst of a classic "Austrian" business cycle. Unfortunately, Bernanke's Fed seems hell-bent on pushing us into what Mises called the "crack-up boom."

Nobel Laureate Ed Phelps agrees.

I'll be posting more soon on this issue.

This is tight monetary policy???

2008-03-31T22:08:00.000-06:00

I'm too busy to write much of anything at the moment, but I'm aghast at the "analysis" and proposed remedies being peddled amidst the worsening credit debacle. The left has, of course, seized the day, and blames the free market. Bush has joined in with his plan to make the Fed into GosFinBank, central planner of finance overseeing the economy. I exaggerate only a little.

Unfortunately quite a number of alleged defenders of the free market have been making even less sense, and vigorously defending...um... the Fed? Good grief!

This defense of the Fed by the usually sensible David Henderson and Jeffrey Hummel is one of the less egregious examples, and it's bad. I posted a rebuttal on Tom Palmer's blog.

I just cannot understand self-described free-market advocates arguing that the provision of a crucial economic good can only be handled by government central planning, while everything else should be a market transaction. I cannot understand how they would argue the Fed has been doing a good job with its central planning, or that we've had tight monetary policy. Look at this:

This is the MZM money stock, according to the St. Louis Fed. (Left click on it if you don't have a microscope handy.) Where's the tight monetary policy? Or try this:

This is the year-to-year changes in MZM. Where's the tight monetary policy?

Don't like these, want percent changes? OK:

Tight policy? Where? When? Not when Greenspan was saying that the housing bubble was no reason for tighter policy. It's not there. There is a shrinking of the growth rate that occurs moving towards about 2006, and then when it looked like the housing bubble might pop and the Fed began rate-cutting again, growth picked up as well.

Over the seven years of the Bush presidency, MZM grew 72% by my calculation. The seven year period prior to that it was 68%, and the seven years before that it was 47%. (My calculations using Fed data.) So where's the tight policy? There isn't any!

The financial debacle was created by the Fed, and by the proclivity of the Congress & President for spending beyond our means. By itself, this deficit spending would simply have driven up interest rates and crowded out private investment. By monkeying around with interest rates and the money supply, the Fed has added misinvestment and the destruction of capital into the mix. And since a recession to clear the malinvestments is apparently unthinkable, the Fed is now embarked on a program of accelerating inflation and socializing the losses of big investors (i.e. forcing the taxpayers to take them on), the dollar and the citizen be damned.

It's horrifying, then, to hear self-proclaimed market economists talk about how the Fed has "learned to do monetary policy right," when actually the Fed is taking us to hell.

I should close on a more positive note for change. Robert Murphy (a fellow NYU Austrian Ph.D.!) does a very nice job of rebutting one of the Fed-defenders in the January Freeman, and with colleague Lee Hoskins has a nice comment on the Fed in the 16 March Forbes. Both are worth reading.

(Graphs and data from the St. Louis Federal Reserve.)

Mises' Memo to Bernanke

2008-03-16T11:39:00.000-06:00

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

Ludwig von Mises

Krugman on Bernanke: They're both wrong!

2008-03-14T08:36:00.000-06:00

and Unforeseen Contingencies can explain why!

A good friend of mine asked what I think of the comment by Paul Krugman in today’s New York Times. Krugman is commenting on the Fed’s (allegedly temporary) taking on of mortgage debt. I think Krugman is completely wrong, but wrong in a way where he'll still be able to say "see, I told you," almost no matter what happens.

The Fed isn't buying risk. It is buying losses. The serious research shows home prices are going to fall further, and the banks know it and the Fed knows it.

The "government" will absorb the losses - the citizens will, that is - and the bigger banks will get off the hook. The announcement by the Fed a few minutes ago that it will bail out Bear-Stearns only confirms this...

"privatize the profits, socialize the losses."

Krugman doesn’t mention the moral hazard effects of the bailout. Responsible financiers who were conservative and hence took less profit suffered in the boom, and the risk takers took profits. Now that the Fed bails out the risk-takers, any financial incentive to be responsible is eliminated - at least if you’re "too big to fail."

Krugman doesn't mention the effect of the Fed's continual expanding of the money supply: the dollar continues to become less valuable, i.e. domestic price inflation and further collapse on forex markets. That is, and please excuse the strong language, the dollar is being sent to hell. Ken Rogoff (former IMF chief economist) has just pointed out that inflation is growing in the U.S. and around the world precisely because central bankers, and *especially Bernanke*, have stopped making low inflation the priority.

I have been wondering why the Fed seems to have given up on fighting inflation. I can't account for Greenspan (probably some explanation involving short range political expediency), but Bernanke seems to have said in a ceremony honoring Friedman something like "Milton, you were right about the Great Depression: we've learned this, and we'll never let it happen again."

He was referring to the Friedman-Schwartz research that showed that the Fed triggered the 1929 and 1938 collapses by restricting the money supply. So he'll NEVER restrict the money supply, because every problem is a potential Great Depression? I think that's it. He's an inflationist.

He has the "core inflation" hokum on his side in pitching this nonsense. Supposedly gas and food prices have more volatility, and hence in a time when they are bouncing around for reasons unrelated to inflation it might make sense to exclude them. But this isn't the case here. For most people food and gasoline are necessities (hard to believe it's necessary to point this out, but apparently this is omitted from Bernanke's blackboard models). Inflation is worsening, and consumers are bearing the brunt.

(As I pointed out previously, in his recent testimony before Congress Bernanke pointed out that while gas & food prices are spiraling up, prices for apparel and financial services are unusually soft -- great, "let them eat Gucci... and services of the inventors of Collateralized Toxic Waste.")

Back to Krugman, he doesn't explain why increasing the money supply can "work magic." It's only in a limited circumstance in which there's substantial unemployed resources and a liquidity dearth...Bernanke's view of every situtation, I guess. Krugman seems to have stopped explaining economics and only is interested in promoting politics - unfortunate, because explaining econ is the only thing he's good at.

In sum, I think we'll see continued Fed bailouts of the banking sector, money expansion and inflation, increasing federal deficits, credit market malfunctions, recession, and... the destruction of the dollar. The current Fed policy ought to be criminal, and the Fed ought to be eliminated and replaced with a free market monetary system. But power and wealth of the beneficiaries, I don't expect to see that happen soon. Instead - more of this planned chaos. Ugh.

On that happy note, I'll close...

Israel vs. Hamas

2008-03-02T00:27:00.000-07:00

It's a great tragedy: war in Gaza again. Civilians in Gaza are trapped in what amounts to a hellish existence, with war on top of that. I took a little internet tour of photos - lots of heartrending photos - bloodied, screaming children, people crying over lost family members, and the like. Mostly Palestinians, but Israelis as well. ("Nice" shots of an Israeli kindergarten that was hit by a Kassam rocket, I believe it had been evacuated.) It's awful.

Then I took a look at the Hamas Charter, just to see what this is all about. It's somewhat long, but I've distilled a few choice parts:

Art. 2: Islam is the comprehensive doctrine for every single aspect of life. (They're pretty clear - their view of Islam is that it's a totalitarian doctrine.)

Art. 7: The Islamic resistance movement extends over the entire globe, it applies everywhere, and Jews are to be killed.

Art. 11: Every last bit of Palestine is Islamic, a non-negotiable point.

Art. 13: No peace negotiations, no compromises, ever. Jihad only.

Art. 15: An individual obligation... kill, kill, kill. (Yes, stated three times.)

Art. 17, 22, 28: The Masons, Rotary Clubs, and Lions Clubs are the enemy too. (What the hell?)

There's not much to be said, other than that I hope the Israelis exterminate Hamas. How can war be anything but inevitable? The despicable Secretary General of the U.N., Ban Ki-moon, has condemned Israel for using disproportionate force. The $%#&^ of BBC keep suggesting Israeli fears are overblown, because too few Israelis have been killed. Ban, BBC, and the rest are taking a profoundly immoral position. Secretary Ban has admitted Israel is acting in self-defense. If it's self-defense, then force should be disproportionate, overwhelming.

It's not as though Hamas acts with restraint. Hamas is poorly armed (but I wonder what they brought through the wall from Egypt), and not very effective, but they give it all they've got. After all, "kill, kill, kill." It is the much better armed and more competent Israelis who hold back. There's little doubt they could annihilate Gaza, were "genocide" really their objective. Both Abbas and Hamas' Mashaal have said this is the Holocaust. It's obviously not, but richly ironic, especially coming from the leader of a genocidal sociopathic totalitarian movement that hates the Rotary clubs to boot.

But all in all, just more tragic news.

(Israeli flag courtesy of 4 International Flags). Mohammed cartoon from Jyllands-Posten.

Bernanke before Congress

2008-02-29T09:08:00.000-07:00

I’m starting to be alarmed. Fed Chairman Ben Bernanke spoke to Congress on Wednesday (27 February). I’ve read Bernanke’s testimony. I’ve heard some of the questioning and his answers. Bernanke is a highly trained economist. Yet much of what he said is nonsense, not so much because it’s factually incorrect, but because his interpretation is out of touch with economics (i.e. reality).

Consider this: "And, as a whole, the nonfinancial business sector remains in good financial condition, with strong profits, liquid balance sheets, and corporate leverage near historical lows."

Commerce Department announced earlier the same day that its measures of durable goods orders declined 5.3%. And the Conference Board announced its measure of consumer confidence fell for the second straight month, and is at a 17 year low. Did these wonderfully "liquid balance sheets" take into account that demand is collapsing? Will "strong profits" continue, when consumers (who have $1.35 in debt for every $1.00 of income, on average) find they can’t make their minimum credit card payments?

Inflation? Bernanke: "Consumer price inflation has increased since our previous report, in substantial part because of the steep run-up in the price of oil. Last year, food prices also increased significantly, and the dollar depreciated."

But don’t worry, he continues, because "core inflation in the first half of 2007 was damped by a number of transitory factors -- notably, unusually soft prices for apparel and for financial services -- which subsequently reversed. For the year as a whole, however, core PCE prices increased 2.1 percent, down slightly from 2006."

In other words, a cooked-up figure "core personal consumption expenditures" indicates inflation really isn’t a problem. Someone who doesn’t eat or use energy, and only buys new clothes and services of mortgage bankers will find unusually low prices! Great news! (Point of clarification: "core inflation" excludes food and energy prices.)

In his questioning, Bernanke’s answers seemed crazy. He seems to think higher oil prices cause inflation. He doesn’t seem to think his expansionary monetary policy does. Go figure.

His main point: "The incoming information since our January meeting continues to suggest sluggish economic activity in the near term.

The risks to this outlook remain to the downside. The risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further."

Good grief. Let’s put this all together. Bernanke’s main worry is recession. But why shouldn’t the bad investments in housing, in commercial real estate, in credit card loans, etc., be liquidated? Shouldn’t banks, lenders, and borrowers who made bad financial decisions have to face the consequences of their decisions? Bernanke’s Principles textbook says so. But Bernanke himself apparently doesn’t, and my guess is that it’s simply because the magnitude of the problem is so large. The banking system must be on the verge of a real breakdown. Nouriel Roubini is now estimating that the costs to Americans of fixing this could go as high as nearly 1/5th of U.S. GDP... that's, (gulp) $2.7 trillion. Martin Feldstein outlines a scenario in which the financial system breaks down, and Fed monetary policy is powerless to stimulate it. Nightmare stuff.

Mr. Bernanke is willing expand the money supply to help try to avoid this nightmare. It won’t work, but it will generate inflation. It will cause further collapse of the dollar against other currencies. Pump out new money all you like, the problem is that Americans don’t save, and have been living on borrowed funds from abroad and easy credit from the Fed. Artificially low interest rates, speculative demand and artificially high housing prices aren’t cured by continued expansion of the money supply. I don’t believe recession is avoidable, and more stimulus isn’t the cure for what ails us. "Stimulus" is just Keynesian AD nonsense. The problem here isn’t insufficient aggregate demand, the problem is the Austrian story: bad investments and structural imbalance caused by central bankers.

I understand why Bernanke is fixated on averting a recession, since "liquidation of bad investments" in this case involves families losing their homes, and maybe jobs. (And even worse, from the policymakers’ perspective, think of the losses to financiers!) Well, the losses are already there, and this is all simply a game of figuring out how to distribute them among hapless consumers and taxpayers so as to minimize the dislocations. Inflation is just one of the tools for doing this: "privatize the profits, socialize the losses," as they say. I don’t count on a soft landing, though. The problem is too big.

Yes, it's alarming. We have recession ahead, and this "stimulus" Bernanke is promoting will not fix it, but will wreck the dollar, making things worse.

I also understand why Bernanke doesn't want to acknowledge the extent of the mess. But back to his speech to Congress: when Greenspan spoke, he at least would pay lip service to fiscal, monetary, and financial responsibility, things which are, in fact, the only real way out of this mess. Bernanke didn’t even mention these.

Say, that has me wondering, just what is Greenspan saying these days? Uh-oh... He’s telling the Gulf States to drop their dollar pegs. It’s probably good advice. Just wait until they really take it to heart and stop using the dollar for oil contracts. Imagine: oil at 66 euros per barrel (esentially its present price), and the dollar at 0.5 euros (instead of its current 0.66).

I wonder what Bernanke will say to Congress when that happens.

(Note: Pretty bleak, huh? To cheer yourself up, click on the $10 note at the top of this post.)