Tuesday, April 27, 2010

C Corporations and Moral Hazard

C Corporations and Moral Hazard
By Alex Merced

When confronting todays economics problems one thing we can agree across philosophies, theories, and economic frameworks is that Moral Hazard is rampant in the current system. The question then becomes how do you eliminate the moral hazard to return more realistic expectations in economic calculation.

The mainstream view on the left and right is that this moral hazard is created by "irrational" behavior cause by "too much" capitalism, so regulation must be enacted to reform this behavior and bring transparency to the market. As far as to handle the regulation issue, I've discussed how free market regulation can exist.

Now to Austrian Economics aficionados like myself usually take a different approach and believe that this moral hazard took generations of distorting economic calculation to create. This has been done via institutions like the federal reserve, IRS, and FDIC. Although I take it a step farther and say that the modern legal corporate structure is fundamentally flawed to a free market working, cause it separates or moves liability from two major players in enterprise, the executives running the enterprise and the Shareholders.

So let's see the effects...

Shareholders: Since Shareholders in a C Corporations have no direct legal liability or tax liability by virtue of ownership of these shares it makes disposing of these securities a decision made with very little cost except the opportunity cost of future gains that weren't realized if they continued to hold the shares. This makes the shareholder willing to sell the shares at a moment notice when the price goes up, and makes the value of company in itself in the long term a very slight consideration. Unlike this, Limited Partnership shares still separate legal liability as a Limited Partner but you retain the tax liability and you can't just dump the shares at a moments notice, this incentive creates a culture where investors do their due diligence and are concerned about the long term outlook of the company in case it takes time to find a buyer of the share.

Executives of Company: The executives and the Board of Directors are beholden to the shareholders... yet the make up of the shareholders is constantly changing due to shareholders having such a short time horizon as explained above. If the shareholders are not pleased with the short term returns from their investment, they can pressure the removal and change of these executives. Although if the company is built on unsustainable policies for short term growth, the executive doesn't own the capital in the enterprise so the concern of losing their position is a greater incentive to not change these policies to something sustainable. In a limited partnership the General Partner runs the company and must have a 1% interest in the company itself creating a dual incentive since their own capital is tied up in the venture and they have unlimited liability. While they are still beholden to the limited partner, the limited partners do have an interest in sustainable corporate governance because of the liquidity of their investment.

So essentially the C Corporation has opened a greater array of investors to the capital markets, but at the cost of moral hazard and short term thinking that results from the "Liquidity" of these investments. What I conclude is that if we're going to have a more SUSTAINABLE foundation and capital structure we need more active people running these enterprises, meaning they need more active investors which will never happen with the current C Corporation structure of liability. While some advocate creating artificial liability in the C Corp, why bother when you already have a business structure proven to create more sustainable businesses in the Limited Partnership.

Bottom Line, abolish the C Corporation.

US Economic History from 1913 to Today in 10 Minutes

Sunday, April 25, 2010

Does Wall Street Contribute to the Economy?

Does Wall Street Contribute to the Economy?
by Alex Merced

 One of the complaints I keep hearing about is that Wall Street doesn't contribute anything to the economy. Well, Wall Street, which is just a moniker for the "Finance" industry has done a great job of facilitating it's function in the economy. The function of the finance industry to facilitate financing (lending and investment), and the only way it does this is not only by creating and selling securities as the detractors would like to believe. Derrivatives, Prorietary Trading, and all the other fun politically unpopular stuff that Wall Street does helps create liquidity and demand. If these securities arn't liquid (which really just means has lots of demand), then it makes it hard to sell new securities for new companies cause the amount of investors becomes less. So yes these trading markets where firms and investors make money for themselves do serve this financing function, but does that mean everything is working as it should... no.

Risk and Reward help dictate how investors align their capital over time, and we have seen that investors, company executives, and everyone has seen their time horizons shrink demanding profits and returns on their investments quicker than ever before. When peoples time horizons shrink, more risk must be taken to achieve their goals in this time horizon, so one must study how culturally time horizons have shrank. Here are many factors I would consider:

1) The advent of C Corporations seperated those with Capital at Risk from those making the business decisions. Even in a Limited Partnership the General Partner who ran the business had to at least have %1 stake in the venture but now in a C Corporation the CEO is beholden to shareholders who are looking for short term gains since their securities can easily be sold at a moments notice. In a limited partnership, Limited Partners with Limited Liability can't just sell their shares on the fly so they have a stake in long term stability of the company and invest based on long term outlook instead of short term price fluctuations. C Corporations truly separated the liabilities of failure and liquidity from investors and executives and allowed them to operate in a short term gain framework.

2) Growing Government with low interest rate policies have put inflationary pressures on the returns needed by investors, plus the taxation that comes later on from these policies. So just to preserve the purchasing power they currently had investors had to make more gains faster, and of course Broker/Dealers are going to facilitate finding a way to do so.

So we need to return to free market values with realistic time horizons, but as long as we seperate liability from capital via legal institutions like the C Coporation (SIPC, FDIC, and the Federal Reserve don't help either), and tolerate growing government in distorting economic calculation to finance it's operations the Finance Industry won't have the capacity to return functioning in a sustainable manner, and no amount of regulation can make up for natural risk and reward.

Free Market Regulation Explained

Free Market Regulation Explained
by Alex Merced

Everyone always assumes that  as free marketers that we advocate there be no regulations at all, but the truth is we think there should be no government monopolies of regulation or violence used in enforcing it. Then the response always is, if the government can do it then people won't. Although there are plenty of ways regulation can be done for profit in a way were the regulators have consumer interest more in mind than they do now. You've probably already read plenty of articles of the effects of government regulation as far as eating up resources and raising the barrier to entry reducing competition for the very firms your trying to control so let's take a different approach.

The intended or perceived intention of regulation is consumer protection, and we've seen that this is not always the result for one key reason, any entity is beholden to the people who fund it's operations in this case government. People think of the government as a intermediary of the people but while they are publically elected they are politically motivated. Since they truly hold the DIRECT power to fund these regulators, the regulators are beholden to them and their political goals (Bush, Dodd, Cuomo, Frank w/ lending regs) instead of pure consumer protection. So as politics distorts the mission or purpose of a regulator, consumer protection falls by the way side.

This is also an issue with private sector SRO's since they are usally funded directly by the firms in the industry they are regulating so they are beholden to those firms. If these's SRO's such as FINRA etc. enforced the rules closely on their biggest constitutents (Goldman Sachs) it'd greatly effect the inflow of cash for their operations so once again consumer protection falls by the way side.

The bottom line, a regulator will always be beholden to those that pay their bills, so if you want them to protect the consumer they must be paid by the consumer directly. Even then, a regulator isn't infallible so allowing a market of regulators that consumers can volunteer to pay into and firms can volunteer to deal with to get to those consumers will allow the correct incentives and pressures for the regulatory firm to advocate on their customers behalf (such as for-profit lawyers, you hire them to protect you. Also this structure is similar to AARP or other groups you pay memberships for).

This market of regulators shouldn't have any type special power handed over the government, since we've seen that ever mixing private/public institutions ends in disatrous results (Fannie, Freddie, FINRA, Sallie Mae, etc.). Industry firms will try to strike deals with as many of these regulatory firms as possible to have access to the consumers who hired them as their intermediary, and the industry firms that strike these deal will voluntarily be monitored by these regulatory firms who will then promote and recommend these firms monitored by them to consumers who pay for the regulatory firms services. Everyone who participates in this protection is doing so voluntarily but cause of the pressure created directly by consumers.

Another way to regulate in the free market is through review publications as we see in entertainment magazines that review the music and movies we enjoy. Musicians and Entertainers operate with the pressure of getting good reviews or have their success effected by it, although if one reviewer were to write good reviews for bad movies his audience would shrink and more over to another reviewer putting pressure to remain honest. Also, if one reviewer opinion is drastically different than other, this would also call into question the quality of his review. Although these review magazines are paid for directly by consumers, so they are beholden consumers.

Although in the case of securities rating agencys, giving them psuedo government power by keying legal regulation into their ratings created a perverse incentive to cater to their clients (the buy side) into rating things highly so they can legally leverage them. If there wasn't these coerced limits by government regulation, these rating agencies wouldn't of had the same pressures to rate the Mortgage Backed Securities AAA.

Even without the free market of regultors and review publications there is the ultimate free market regulator, consequence. If consumers and providers feel there are consequences to their risks, and there is nothing mitigating this consequence (FDIC, SIPC, Federal Reserve) then the risk will typically prevent them from taking "Irrational" risks, and those that do will suffer the consequence and serve as  a warning to others.

At the end of the day, protection of the individual is the responsibility of the individual. If the individual does not take the time and isn't willing to directly be involved in their own protection the protection they do get will never truly be on their side and the world around them will stagnate from the results. To fix the world you need more aware and active individuals, willing to pay for their own protection, willing to get involved in protecting themselves and truly understanding every individual decision they make.

Saturday, April 24, 2010

Individualism, Creativity, and Innovation

Individualism, Creativity, and Innovation
by Alex Merced

Premise 1: That creativity comes from tapping into your inner child

 Kids say the darndest things don't they? It's this innocent nature that we admire in kids, when they are young before society begins socializing, limits, values, artificial barriers in their minds. Even then, during their adolescents they typically rebel against many of these constructs until one day the fight becomes to much and "they grow up". It's when one loses the ability to think beyond the barriers given to you that creativity dissapears and only your ability to see what is seeable is there, and you lose the ability to see what is not there.

Think of all the people you consider creative, arn't they generally playful and childlike and then think of all the frumpy people you consider an "adult" and put their creativity into perspective. So in economics the idea of seeing the unseen is called "opportunity cost", the unseen costs of every action you take. To be able to appreciate opportunity cost you must have this childlike nature to see beyond the barriers given by society, you must be creative.

This is why I feel I see such a stark difference from when I see Austrian economist who are generally very light-hearted and humorous versus Keynesians who are usually more cynical and serious. Yet, it's the Austrians who are more equipped to see the unseen opportunity costs, and realize what could have been to look to the future to see what could be. Keyensians, on the other hand focus on only known results to draw conclusions, and only draw self-destructing solutions based on actions that have "visible" results even if the results don't accomplish anything.
(For example, deficit spending has the visible result of increasing GDP but it doesn't fundamentally fix the real, unseen problem of diverting capital).

Another place I noticed this was on a recent interview with Ron Paul on Hardball where the serious and cynical Chris Matthew interviews the optimistic and light-hearted Ron Paul and discusses how Paul remind Matthews of his childhood hero, Barry Goldwater, but then he grew up. This was a sad and depressing statement that shows that at some point he gave in to the barriers that society imposes and became an "adult", while Ron Paul was able to this day in his 70's retain that childlike innocense that allows children to see things for what they are not how society wants them to be.

Do an experiment, give the facts to a child on a issue, and ask for their response.

Premise # 2: Collectivism kills Creativity, while Individualism births it

Creativity must come from an individual with little barriers of the mind as possible, although to think in groups and collectives as done in a collectivist framework would mean imposing more barriers in order define yourself into this "Collective". To see why this would be the case watch this video on the difference between Individualism and Collectivism:

Premise # 3: Innovation comes from Creativity

Innovation results from finding news way to do the same things, which will results in needing less time and resources to survive and spend more time on leisure and personal interests which is a true increase in the standard of life which can be numerically measured. Although innovation requires two things:

1) Investment: These Innovations require capital to develop and distribute, without investment there is no way to develop the most useful innovations.

2) Creativity: You can have all the capital for investment but if there is no ideas to invest in, it's useless, so you need creative people to see the unknown whcih can be developed.

So creativity is pivotal in the process of Innovation, so creating a individualist framework for inviduals to grow up with actually would increase the rate of Innovation and increase the quality of life of these individuals who use these innovations.

Premise # 4: Government Destroys Innovation

Government with it's coercive monopoly on violence accomplishes two things that destroy innovation:

1) They destroy investment through taxation and borrowing which puts incredible constraints on the available investment capital.

2) They destroy creativity by imposing values of the ruling class on society, and creating standards that only impose even more barriers of the mind.

Without creativity and invesment, innovation can occur and this only hurts individuals in their pursuit to impove their individual lives.

Thursday, April 22, 2010

How the Government destorys real democracy

When we think of democracy or a democratic process we really think of several individuals acting on their preferences and values, and when this happens large commonalities would steer society. So while any value or preference held by a large number of values and individuals would steer the ship, this only works if everyone else is free and able to voice and act on their opinion, and more important able to form one.

The democratic process occurs in several places, not just government. Eveytime you participate in market transactions and purchase a good or service you are expressing your value or preference for that good or item. When a large group of people purchase the same product, be sure that it will effect whether more or less of that product will be produced. Although our money isn't the only resource we have demonstrates our values and preferences. An individual ca also donate their time to join different groups such as religious groups, activist organization, militias, or any volunteer association.

So you can DIRECTLY effect the the dialogue of values and preferences in society through how you allocate your money and time. Although the less money and time you have then the less your able to DIRECTLY participate in this true democratic process.

- As resources are used for the Government Agenda, taxation occurs and resources are taken from individuals meaning they have less money to DIRECTLY participate

- As the money have shrinks cause of taxation they may have to work more time to make up it allowing them less time to volunteer and DIRECTLY participate

Several laws create other ways in which your money and time is taken from you, which reduces you ability participate democraticly such as the issue with sugar tariffs and corn subsisidies which create for an unhealthy culture and higher healthcare costs. Since the cost of health is higher, once again more time must be worked to make up the rising costs of healthcare meaning less time to participate in the democratic dialogue outside of government. Other rising costs in healthcare, energy, food, and more also put more pressure on your time and money.

After these effects take place then people begin to become dependant on Government as the sole method of expressing values and preferences in society since only a few have the time and money to do it elsewhere. People begin to proclaim the acts of elected officials as "The Will of the People".

First off, the people is made of several individuals all with slightly different views, so there can't be any collective "will of the people". Accepting this, each individuals votes for their elected official for different reasons, so while an official may win an election it's impossible to tell if they had a majority vote cause of a particular view or in spite of it. More than likely they pieced together a majority vote based on several different issues and sometimes votes just to spite the opposition. So winning an election does not determine, "The will of the people".

The only way to have a true to democratic process is for people to have the time and resources to participate in the community, and this can only happen by rejecting government as the sole tool for democratic action and accepting sound economic principles (Austran Economics) for people to have the time and money to participate.

Wednesday, April 21, 2010

The Effects of Public Policy on Private Activity

The Effects of Public Policy on Private Activity
by Alex Merced

One of the problems of people who advocate for a growing role of government is that they operate in a mindset of unlimited resources, or that a growth in government has little to no effect on their current resources. The reality is that the economy has a static and generally decreasing amount of resources, so when the economy is being productive innovations will help us use less of these resources to accomplish our day to day tasks. This is the benefit of a free market or private activity, the innovations that allow the shrinking pie to be spread even further.

For these innovations one needs investment, capital, and ideas. Capital gravitates towards ideas, cause good ideas will serve as a magnet for even more capital, but again there is a limited amount of capital to gravitate towards these ideas. So essentially, to survive in a world of growing scarcity you need innovation which needs investment which is maximized by freeing up capital for investment.

So where does the government fit in on all of this?

Since there is limited resources not all of society will get fair slice of the pie, or even slice at all. Overtime though this percentage should shrink as innovations will free up these resources travel to more and more people in a variety of ways. Although people generally grow impatient for this to happen and will call for programs to watch for the welfare for those who are unable to get a piece of the pie. Although these programs themselves must take resources from this pie/economy to watch for the currently small amount of people outside of it.

The government has two ways to move resources from one place to another:

1. Government can tax the people and redistribute those resources to the outsiders, although the people are taxed this means the people have less resources to invest or consume, and since the potential consumption of a potential innovation is diminished the amount people are willing to invest in it is reduced.

2. Government can borrow the money but there is limited amount of loanable funds, so if the government borrows these funds then they can't be borrowed to invest in innovations also hampering the innovation process.  Even worse, to pay this debt with interest the government must tax later resulting in the effect previously mentioned. So borrowing has a worse effect than taxation since it reduces current lending and future consumption.

The result:

In the end, after taking these resources out of the economy, the economy has less resources to support the population that it was able to support before (it's productive capacity has been reduced) and now even more people fall outside of the economy creating a demand for growth in the social programs previously established. The growth in demand will increase the size of these programs and increase the size of resources that must be taken out of the economy creating a cycle that drives more and more resources into these "public" programs and away from private production.

So while the public sector has gotten larger and larger, the world has survived in spite of this cause the innovation that has occured has minimized the impact of this resource drain. Innovation is the key to battling scarcity and in this case you want resources free to gravitate towards ideas meaning the public sector must be dismantled.

Monday, April 19, 2010

The Illusion of a "Standard" of Life

The Illusion of a "Standard" of Life
by Alex Merced

Government constantly uses the concept of a "standard" of life in justifying it's policies in the name of improving this standard. Can there really be a standard, this is only possible if you believe in objective values and that certain things all people will value the same cause of some sort of  intrinsic worth. The reality is every experience, good, service, etc. is subjectively valued so even if you standardized the resources available (which we know an unsustainable practice) you still have varying levels of quality of the life individuals from how they value their own lives. Individuals will all subjectively value those identical resources differently and subjectively value the experiences they get from them differently as well.

There is no way to standarized how people value goods and services, and there is not accurate way to measure these valuations much less aggregate them. The quality of someones life can be vary to low or high whether someone is rich, poor, or in whatever condition they are in it's realtive to their preferences and understanding of the world around them. With all this in mind, it's impossible to construct any policy that can truly create real value other than pushing arbritary numbers higher. On top of it, these numbers (statistics) don't quite capture the resources wasted now, or the resources that'll be lacking tomrrow cause of the artificial upward pressure put on these numbers by government. (such as GDP, College Enrollments, Construction Projects)

The only way for someone to improve the quality of their life isn't to push some imaginary floor of quality but to free a persons autonomy to pursue the things they value and prefer as long as it doesn't interfere with anyone elses ability to do the same in a direct manner (indirectly, every action can arguably affect everyone). So policy shouldn't be geared to improving a standard life that can't truly be measured but to pursue the liberty for individuals to try to find happiness.

I've seen poor and rich be misrable, and I've seen them both be joyous, and no government can replace the journey that is the one to fulfillment, self-discovery, and happiness.

Sunday, April 18, 2010

A Response to a Question from an Anarcho-Socialist

I follow a variety of youtube channels, podcasts, and blogs from all over the political spectrum and this video poster in particular is a anarcho-socialist. While I agree with him on some of tendencies of the interaction between man and women and socialization, we definetley disagree on the merits of a free market system. In recent video he posed the following question:

And then I posted the following Response:

The Story of Your Enslavement

Saturday, April 17, 2010

Best Explanation of the Financial Crisis Yet

This video not only nails on the head several economic concepts, but very accuratley retells the story of the financial crisis spread this video around!!!

Friday, April 16, 2010

How Laws + Taxes Divert Resources and Lowers Quality of Life

How Laws + Taxes Divert Resources and Lowers Quality of Life
by Alex Merced

Everyone thinks there needs to be more laws for this and that to basically prevent or control everything they don't like without realizing the consequences of laws, and if they need money to enforce this law they'll create a tax. The problem is that to keep this legal and tax institution manageable it needs an army of lawyers and accountants which require money, money that could of been used elsewhere to develop new consumer technology or medical innovations.

The only benefit you get from an army of lawyers and accountants is preventing being hassled by the federal government, this does not free up my day for more leisure time or make me healthier which would improve my quality of life. Actually it lowers my quality of life due to the leisure time lost having to keep track of receipts and documentation so that way the slightest mistake doesn't result in financial ruin in the courts, and I can't imagine the stress and paranoia of a more and more complex legal/tax system can result in a longer life span.

Some might respond saying that this is good, only with laws can we maintain some sort of preferred social order (which everyone has a different definition of) and we need taxes to enforce those laws. On top of creating this "ideal" social order it creates highly paid lawyer and accounting jobs.

These people assume that if the government didn't spend the taxed portion of peoples incomes they wouldn't of spent it, and I can tell your personally that is not the case. Where I would of spent that money is another sector of the economy that would of seen growth in activity and jobs if I had the money to spend there which probably would have been something that added value to my life and subjectively see it.

A concept that has left modern day is that of opportunity cost, the thought of what "could of been" if an action had not been taken. If I had not spent my extra income supposedly, then I probably would of saved it but then the bank will spend it by loaning it out to home owners and entrepreneurs who may develop a good or service I may value enough to withdraw that savings and buy later.

The bottom line is that resources are limited, and if more and more resources must be spent to keep up with a tax and legal system of growing complexity then that's less resources for something else and that is not optimal.

Thursday, April 15, 2010

How to repair a bankrupt country

How to repair a bankrupt country
By Alex Merced

Well continuing with the balance sheet analogy of my previous post, how does a bankrupt company survive bankruptcy and what is bankruptcy. In order for a company to survive it must have enough assets to pay of it's creditors which are part of it's liabilities, if it can't do this (which means there's no more equity) then the company must go into bankruptcy. In bankruptcy the company will attempt to do a few things:

1. Try to restructure the terms of it's liabilities
2. Try to exchange liabilities in exchange for Equity
3. If possible to see if people will forgive debt (wouldn't bet on this)

So basically for a country as the economy shrinks to the point where there is little to no private sector and just a public sector this is an economy in bankruptcy. So how would we use the bankruptcy approaches above to fix this problem?

1. Restructure the costs of the Public Sector by lower wages, laying off excess public workers, and lowering the amount budgeted to parts of the private sector.
2. Turn some public programs into privately run services or programs which allow entrepreneurs to find ways to provide the same service in a profitable and cost efficient way, without the moral hazard that running at a perpetual loss a public program can cause.
3. Or completely end programs and services who's costs can't be reduced and can't be privatized.

All three of these actions will result in more resources for a larger private sector means for a resilient and vibrant economy as I described in the previous post. In a country like the US that is quickly growing into this bankruptcy scenario it's time to start advocating drastic measures like this before it's too late.

Wednesday, April 14, 2010

The Economy is Like a Balance Sheet

The Economy is Like a Balance Sheet
by Alex Merced

Everyone Company and Person has a balance sheet. The balance sheet is made up of two sides:

One side has all the assets which is all the stuff the entity has ownership (control of) this can be cash, goods, intangiables, etc. More assets is better than less assets but in order to attain all those assets no one generally pays upfront, they more than likely borrowed money on the way.

The Liabilities portion of the other side represents all the borrowing I've done on the way to attain all these assets, and these assets will later on have to be used to pay these liabilities. Liabilities are not flexible, if I borrow 1000 dollars I must pay back 1000 dollars. So since liabilities are not flexible having large liabilities make the company less flexible during decreases in the amount or value of their assets.

After using my assets to pay off all these liabilities the remaining quanity is my Equity (true ownership), this quanity is flexible so more equity is desireable. A company that is almost all equity is Apple and they have proven to be a company constantly innovating in bad and good economies due to their capital structure aka balance sheet.

So more equity is desireable and less liabilities as well... so how does this relate to the economy as a whole. The Assets/ Resources in the Economy is like the assets side of the balance sheet, a bigger economy is more desireable than a smaller economy but what is the makeup of that economy can differ.

The Public Sector is like liabilities, rigid and not very flexible. Wages in the public sector only go up and never go down, instead of adjusting expenses the public sector will tax more to make up short fall. So this portion of our economy lacks the resiliency to withstand reduction of assets in the economy, so the larger this portion of the economy the more difficult the down turn.

The Private Sector is like Equity, it's flexible, entrepneurs can adjust their costs, wages, and everything in order to survive a downturn in the economy without having to waste more resources, the private sector can adjust to shifting assets/resources in the economy.


- To have a resilient economy a larger private sector is desireable which means a smaller public sector, since both sectors are competing over the same resources in the economy.

- When there is a downturn the Public Sector doesn't adjust so it must grab more resources elsewhere, which it will from the private sector which will shrink the private sector which is similar to the effect of a drop in equity when assets depreciate.

Tuesday, April 13, 2010

Obama is not the Answer

The Failure of Obama is not catalyst to people believing that the Progressive philosophy is flawed

The Success of Obama is not the key to the nation all switching to the left


a failure can always be attributed to events that occured before his presidency...

a success can always be attributed to events that occured before his presidency...

What is the truth can only be done through a deep understanding of history and economics

The bottom line is that the Obama presidency is only another in a long line of presidents who have centralized power and trampled over our liberties from the left and the right. His administrations performance is not the key to ending the divide of collectivist from individualist, in the end it's about ideas and spreading those ideas.

Ron Paul for that matter isn't the goal either, but his popularity is an indicator of our success in spreading the ideas such as Obama is an indicator of the ideas he represents.

So keep educating, keep spreading ideas, and we'll win.

Wednesday, April 7, 2010

Is Deflation Better?

I constantly speak about the dangers of inflation (increase in the money supply), and inflationary pressures of a growing government. Inflation destroys our purchasing power, causes malinvestment, and encourages risker investing. Inflation is primarily on my mind cause it's more imminent, government is naturally incentivised to inflate, so inflation and it's danger are practical concern although some take this to mean deflation (a decrease in the money supply) is the desired alternative.

 They paint this utopian image that in a world of deflation that purchasing power increases, savings will increase meaning more capital for investment and it'll breed a more prudent and moral society. In reality, deflation or any manipulation of the money supply will cause distortions in the economic calculation of market participants, just in different ways.

 With deflation artificially increasing the value of money, and what is the story whenever we artificially the price of any good? When prices are fixed above the market price less people will be willing to consume that good so you end up with a surplus. This would be the result of a deflationary environment that even though savings will be available for lending for projects, lenders will not want to pay the higher price of money and will choose not to lend it. So now you have underutilization of resources, and while I would prefer under spending than over spending this is still not ideal.

So does this mean a constant money supply is wanted, not neccessarily because of the downward price level adjustments that will constantly occur to a fixed supply. The only solution to the money supply issue is have a supply free from human influence, meaning no FIAT or paper money. In a world with a commodity backed money, the supply will fluctuate based the demand for the money for industrial use and new money mined through labor.

It's in this world, absent from taxation, regulation, and FIAT money can individuals begin to more accuratly begin economic calculation.

Tuesday, April 6, 2010

Treasuries, Investment, Interest Rates, and Risk

Treasuries, Investment, Interest Rates, and Risk
by Alex Merced

In todays world investment revolves around US Treasury debt cause it's AAA rating. Since the return yielded from treasuries is considered the "risk free" rate of return it establishes the minimum return someone should make from their investments. So since this interest plays sucha pivotal role in the investment decision and risk taking learning a little bit about how it works would be pretty important to understanding excessive risk taking by the banking system.

What is Treasury Debt?

We believe that it's taxes that pay for military, medicare, and all the other government services and programs we may approve or dissaprove of. In Reality, tax revenues are not enough to pay for the growing role of government and the public sector so money must be borrowed via bonds known as treasuries. As any debtor would, the government wants to pay the lowest rate possible so they have an auction for the debt similar to lendingtree in which the largest banks in the world known as primary dealers (for Primary Dealers include Lehman, Bear Sterns, Merrill, etc.) bid on the debt in order for debtor to get the lowest interest rate possible.

What is with all the demand for treasuries?

Now why would banks bid treasuries to near below inflation/CPI levels when they could use that capital for other higher yielding investments? In order for this to be the case there must be some mechanism to stimulate the demand of these banks very similar to what happened in the housing crisis...

Why did lenders make so many bad mortgages, cause they didn't have to hold the loans they could just turn around and sell it to Fannie or Freddie so this created artificial demand for mortgage debt pushing lending rates low. A similar mechanism is used with treasuries since these treasuries can be used in a variety of ways in dealing with the central bank, the federal reserve.

The central banks primary role in this is to keep fueling the demand for treasuries by entering in repurchasing agreements with these primary dealers. In these agreement the central bank promises to buy back these treasuries and to do so the central bank must expand the money supply (inflation). Also, these primary dealers can use these treasuries as collateral for loans from the discount window in order to get emergency funds when these banks overlend or practice bad banking. Essentially, in exchange for facilitating the financing of government operations the banking system are given their own life support system in the form of the federal reserve bank.

So as government increases it's deficits need the demand of treasuries to increase meaning more pressure on the federal reserve to buy these treasuries from the bank with new money (aka monetizing the debt). So as the federal reserve inflates the money supply to facilitate government spending the increase reserves of these bank effectivly lowers lending rates sending a flase signal to the economy of non-existant savings causing the mal-investment charachterized in the austrian theory of the business cycle.

The effects of all this on investment and risk taking

At the same time, this inflation of the money supply will put upward pressure on price levels which increases the neccessary return from investment needed to maintain purchasing power. Also the increasing government debt puts upward pressure on taxes which means even more must be yielded from investment to make up for the tax burden. So effectively, when you combine the burden of inflation and taxes the return needed to make any profit is so high that modest medium risk investing just doesn't yield enough putting pressure on investors and investment institutions to have to take on risker investments to just walk away with anything at all.

Moral of the story:

- Inflation and Taxation only stimulates risk taking and distorts economic calculation of investors

- Inflation and Taxation are a product of growing government spending

- In order to maintain this Government Spending a strong relationship between Government and Banking must be established

- To be truly against bank bailouts and for main street you must be against the central bank and runaway spending which creates the moral hazard that strips the nation of their savings and retirement

- To believe in government entitlement programs you must be for the bank bailouts, cause without the bailout government cannot continue it's funding of programs like medicare and social security

- Money lent to the growing public sector is money not lent to the private sector, so as one grows the other must shrink along with the countries productive capacity increasing the burden over time as more and more people find themselves pushed out of an economy that can support less and less people everyday.

Monday, April 5, 2010

New York Shoots itself in the Foot

This is a Response to this New York Times Article:

If you havn't seen my video on the Fallacy of Progressive Logic then I recommend you watch it to get a better appreciation for the frustration I have over the actions against "Illegal" internships which has several problematic assumptions...

1) An Intern can't REPLACE a job - Now while I've intervied, hired, and overseen academic marketing interships for Shane&Shawn and Greico Financial Training, I can safely say an intern can't replace specialized and skill labor. A business doesn't get applicants with the same experience level and skill that someone who can demand a wage brings, and the business and it's production would suffer if it were to attempt such a replacement. This drop in productivity and returns is punishment enough for such a poor business decision.

I doubt many would make this decision unless the market is already putting downward pressure on production costs in which case that jobs wouldn't exist much longer anyways. The sooner job losses occur in an economic adjustment, the sooner the capital tied up in that unproductive job can put to more productive means creating jobs somewhere else. Why would i say the job is unproductive? If the job were productive it would produce more value than it costs meaning there would be no reason to cut it. The interships I've overseen were productive exercises that helped developed skill and experience for those who participated in them who went to greater things.

2) This hurts the Adjusting Labor Force - You have two categories of people who are going through a pain ful adjustment...

College Graduates - This new crop of laborers are overwhelmed by the lack of experience and skills in an overcrowded labor market, meaning they must develop the skills and experience to demand a wage. If the amount of internships is violently reduced then less graduates can enter the labor market and climb up the wage ladder, since the surplus of skilled labor from layoffs pushes the price of unskilled/unexperience labor below the minimum wage, meaning the only other way to enter is through interships since no middle ground is allowed.

Layoffs from Shrinking Industries - This skilled and experienced labor faces a different problem, a lack of jobs that need their current skill set meaning they must develop a new one. The cost and time of education much of the time can be cost prohibitive but an unpaid internship can often be the cheapest method to develop new experience and skills to enter growing markets after overinvesting in a shriking one.

Just the threat of sanctions for "illegal internships" would severly discourage the supply of internships for these groups to have a speedier transition in this adjustment period. Again, while these groups adjust to a changing demand for labor the capital saved by businesses in certain tasks helps spur investment in growing areas meaning for new jobs to put these new skills and experience to use in.

3) Everyone is volunteering - If unpaid interns are putting long hours and handling what may be handeled by someone at some wage, then the effective market price for the labor is... 0. In that case to force an employer to pay more would be price fixing above the market price which will cause a surplus in labor (aka unemployment). Also to prevent voluntary labor at any price is just a violation of someones liberty.

Sunday, April 4, 2010

Peter Schiff - Help Him Help Us

Peter Schiff is probably one of the most articulate people when it comes to financial problems and economic mistakes of todays mainstream though. If you don't already support his run for senate, spread the word and check out http://www.schiffforsenate.com. Here's a video to see the awesomeness that is Peter Schiff.

Friday, April 2, 2010

Austrian Economics Embedabble Widget

The following widget below is a playlist to introduce anyone into austrian economics, paste it anywhere you can on the web. In your blogs, myspaces, emails etc. Spread this widget to help spread liberty.

Find more music like this on Individualist Haven

To Embed this widget click on the small ^ button on the bar above the playlist it's by the volume buttom on the widget and click on "share" and copy and paste the code.

Also Click Here to download "Economics in One Mp3"

Thursday, April 1, 2010

Teaching With Biases is not bad

The Real Immigration Issue

Being a first generation American I have an appreciation for the immigration issue and it's complexities. Although at the end of the day I feel that many of problems in immigration isn't immigration but the struggle over remaining resource in a economy that is getting weaker and weaker everyday from a growing government. So in a debate at RonPaulForums.com about immigration I had this to say:

Correlation is not causation, there are two main problems economically with
the current state of immigration.

1) The Welfare State - due to having a welfare state
citizens and non-citizens are becoming more and more a drain on taxpaying
citizens and non-citizens... you have to dismantle the welfare system. The
solution to this issue is a supply response, not a demand response. As long as
there is a supply of government services, there will be a demand for it whether
it's domestic or foreign. We must dismantle the supply of government services
which taxpayers must pay for. Volunteered from private sources are encouraged
and a not a drain on those who choose not to volunteer their limited resources.
Also as far as immigration goes, these types of programs attract probably the
wrong people. If you have no welfare system there is no incentive for anyone to
immigrate unless it's to be productive and to have the opportunity to be

2) Growing Public Sector, Shrinking Private Sector - Due
to unions and a growing state the amount of public sector jobs have increased
which have very rigid wages, they don't go down, and they always go up. This
growing sector has consumed the amount of private sector jobs who have more
elastic wages that can adjust to changes in the supply of labor and demand for
the goods produced. Shrink the public sector, the private sector will grow
enough and be vibrant enough to handle immigration. With the growth in labor
there is a growth in demand for goods to offset it in a healthy free market

In countries where open borders have had problematic effects have had large
governments and small private sectors. Prosperous countries like Switzerland
have multiple languages spoken. As far as assimilation, culture is constantly
changing on a daily basis, so to argue that there is some constant standard of
values, traditions that hasn't changed in perception or execution is an
idealistic delusion. The beauty of humanity is how it's culture changes one
generation to the next.

None of us talk with a 1920's accent or vocabulary or wear 60's attire
(without a sense of novelty). The world is constantly changing faster and
faster, you either diversify your outlook, knowledge and skills to adapt or get
lost in the changes. It's in this diversity of culture, ideas, and values where
innovation is conjured.


Founder of this blog is Alex Merced - Contact him at alexmerced@alexmerced.com

Endorsed Candidates: Rand Paul (KY - Senate), Clint Didier (WA - Senate), John Dennis (CA - Congress)

Mises Institute Daily Articles (Full-text version)


The Daily Caller - Breaking News, Opinion, Research, and Entertainment