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The Cult of the Golden Calf

Discussion in 'Business & Economics' started by Onion Eater, Aug 19, 2008.

  1. Onion Eater

    Onion Eater Member

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    “The consumer’s good is always the 1st order, regardless of how far back we push the analysis, even if we go back to axes carved by prehistoric men.” – Robert Murphy

    Wrong! Victor Aguilar sees the source of value in the future use of goods, not in their past costs of production.


    “Investors seek the intrinsic value of gold to protect themselves from inflation.” – Ron Paul

    Wrong! Victor Aguilar believes in the subjective theory of value; nothing has intrinsic value.


    “All political truth can be found in a coin shop.” – Jeffrey Tucker

    Wrong! Victor Aguilar believes that coin shop owners are hucksters, preying on weaklings and paranoids.


    Do you believe in Austrian Economics? He whom you dread awaits: www.axiomaticeconomics.com/golden_calf.php
     
  2. Onion Eater

    Onion Eater Member

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    Edit

    "Victor Aguilar sees the source of value in the future use or exchangability of goods, not in their past costs of production."

    I had previously omitted "or exchangability," which made this statement unclear. For instance, fiat money has no use; it is valued for its future exchangability. That it will have exchangability in the future is assumed by people when they accept it in payment because it did in the past, as described by Mises' Regression Theorem.

    In this paper, I contrast my belief in the subjective theory of value with modern Austrians' belief in the cost-of-production theory of value, as exemplified by Robert Murphy's statement. This has led them to claim that gold has "intrinsic value," a claim that has turned what was once a respected group of scholars into little more than shills for the coin shops, as demonstrated by the Jeffrey Tucker quote.
     
  3. Onion Eater

    Onion Eater Member

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    Excerpt: Is the collapse of the dollar inevitable?

    In my Critique of Mathematically Perfected Economy, www.axiomaticeconomics.com/perfected_economy.php, I write:

    “The basic flaw in the logic of modern socialists (Montagne, Cook, Zarlenga, etc.) is confusion between motivation and capability. ‘He’s privately controlled!’ the socialist sneers at the Federal Reserve chairman, the unspoken assumption being that, were the socialist put in charge, he would immediately open the floodgates of wealth and prosperity for us all. It would be a veritable socialistic paradise, if only the Benevolent One were given the authority to print money! But, the fact is, the Fed is in a box. If a socialist were put in charge, he would be in the same box.”

    In my Critique of Austrian Economics, www.axiomaticeconomics.com/critiques.php, I write:

    “Rothbard discusses an inevitable ‘distortion-reversion process’ but says little about how it actually plays out. Apparently forgetting his master’s regression theorem, he declares ‘the continuance of confidence in the banks is something of a psychological marvel’ (1970, p. 867).

    “Garrison (2001, p. 44) redefines the Production Possibilities Frontier, PPF, to be sustainable combinations of investment and consumption, but says nothing about what is so unsustainable about a credit expansion. Since he defines consumption on the PPF (which is real) to be the same as consumption on the Hayekian triangle (which is nominal), the unsustainability cannot have anything to do with a devaluation of the currency.

    “So we see that Mises, writing in 1949, was really the last Austrian to make much of an effort to explain or predict interest rate spikes. After that, their discussion of this issue, including Mises’ later writings, increasingly took on the tone of a morality play, with the greedy bankers getting their ‘inevitable’ comeuppance.”

    Clearly, the socialists and the Austrians are at opposite ends of the spectrum of views on inevitability. Socialists believe that the Federal Reserve can turn on a dime, veering away from economic collapse towards a socialistic paradise simply by giving the right person the chairmanship. And how would the Benevolent One accomplish this feat? According to the Debt Virus Theory, it is as simple as printing money and spending it directly into the economy, rather than buying Treasury Bills. On the other hand, the Austrians believe that a “distortion-reversion process” is inevitable. Credit expansion is unsustainable and this, apparently, is true no matter how benevolent the chairman of the Fed may be.

    Is hyperinflation the inevitable result of inflation? In America we have only had one bout with hyperinflation and, over 200 years later, the phrase “not worth a Continental” is still part of our language. “In conclusion,” I write in my Critique of Mathematically Perfected Economy, “to Montagne, Cook, Zarlenga and anyone else who claims that they can open the floodgates of prosperity by spending paper money directly into the economy, I say: ‘The Debt Virus Theory is not worth a Continental!’” Debt Virus Theorists’ followers are mostly laymen (for obvious reasons) and, when I wrote this, I fully expected any American with a passing interest in economics to be familiar with the expression, “not worth a Continental.”

    Indeed, the collapse of the Continental was inevitable because, having spent Continentals directly into the economy (mostly for soldiers’ wages), the Continental Congress had nothing in their portfolio with which they could buy them back. They were, in fact, benevolent men who had no desire to see their newly-won nation racked with hyperinflation, but they could no more recall the paper money that they had printed than Frankenstein could recall his monster.

    But surely the Federal Reserve is smarter than the Continental Congress! Until as recently as last year (2007), I would have responded to this question with a begrudging “yes.” As much as I dislike the United States having a central bank (I advocate free banking), I will admit that, by buying only Treasury Bills, the Federal Reserve has given themselves a portfolio with which they can buy back dollars in the event that inflation should threaten to turn into hyperinflation. Unless the Federal Government itself collapses – by losing a war, for instance – there will always be a market for T-Bills. Selling T-Bills for cash and destroying the cash is a painful, recession-inducing process, as evidenced by our experience during Reagan’s first term, but it can be done. Contra Rothbard, hyperinflation is not inevitable under a central bank.

    So what has Ben Bernanke done to make me question his intelligence, if not his benevolence? He polluted the Fed’s portfolio with AAA-rated securities, which I have mocked as being “about as marketable as the chocolate-covered cotton balls that Milo Minderbinder was trying to foist on people in Catch 22.” Everybody knows that, in spite of their impressive-sounding AAA rating, these securities are really just packages of sub-prime loans that nobody wants – what I defined in my Devil’s Dictionary of Economics, www.axiomaticeconomics.com/devils_dictionary.php, as “worthless crap.” If people wanted them, in the sense of being willing to pay cash for them, then we wouldn’t be having a credit crisis in the first place.

    Bernanke’s actions have made the question of hyperinflation a murky one. The Austrian’s depiction of hyperinflation as being the inevitable fate of central banking has always been cartoonishly simplistic, and it remains so. However, economists of all schools must now admit that hyperinflation is at least a possibility. If the dollar appears to be losing its status as the world’s reserve currency, what will the Fed do about it? Sell their AAA-rated securities for cash and destroy the cash? But what if nobody is impressed with the AAA rating and won’t buy their securities at any price? Then the Fed will be in the same position as the Continental Congress: Benevolent men who have no desire to see their beloved nation racked with hyperinflation, but who have no more ability to recall the paper money that they have printed than Frankenstein had to recall his monster.

    Of course, not all of the Fed’s portfolio is in AAA-rated securities and not everything with an AAA rating is worthless crap. They still have lots of T-Bills and there is a market for at least some of their AAA-rated securities. This is why the question of hyperinflation has become so murky. The bottom line is that nobody – not even Ben Bernanke – really knows what the Fed’s portfolio is worth these days. For this reason, I would be very leery of any economist, from any school, who speaks confidently about the future of the dollar. Is the collapse of the dollar inevitable, as the Austrians claim? Or are we at the dawn of a socialistic paradise, provided only that we install the Benevolent One in the Federal Reserve’s chair, as the Debt Virus Theorists claim? The answer is certainly somewhere between these extremes, but where exactly I cannot tell you.

    Source: www.axiomaticeconomics.com/golden_calf.php

    References

    Garrison, Roger. 2001. Time and Money: The Macroeconomics of Capital Structure. New York, NY: Routledge

    Rothbard, Murray N. [1962] 1970. Man, Economy and State. Los Angeles, CA: Nash Publishing
     
  4. Shadow

    Shadow New Member

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    Our Financial 9/11: Can They Save The System? The Bush Administration's Rescue Plan Is Not Likely to Work
    Economic Policy
    by Danny Schechter | September 23, 2008 - 10:22am


    NEW YORK: The world is holding its breath.

    Many know, and the rest of us are just finding out, that in this turbulent month of September the US is experiencing a financial 9/11, probably worse than the one in 2001, as a series of cataclysmic developments rock our economic system, which is, in turn, entangled with others worldwide. Terms like "Armageddon" are now being used in polite company.

    Imagine being a fly on the wall last Thursday night as the head of the Federal Reserve Bank, Ben Bernanke, and Treasury Secretary Henry Paulson met behind closed doors in House Speaker Nancy Pelosi's office. The meeting was called urgent; it was also unprecedented.

    It was a truth-telling moment, as Michael Shedlock describes it on the Seeking Alpha Financial website. A NY Times article recapped the meeting:

    "'When you listened to him describe it you gulped,' said Senator Charles E. Schumer, Democrat of New York.

    As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program 'Good Morning America,' the congressional leaders were told 'that we're literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.'

    Mr. Schumer added, 'History was sort of hanging over it, like this was a moment.'

    When Mr. Schumer described the meeting as 'somber,' Mr. Dodd cut in. 'Somber doesn't begin to justify the words,' he said. 'We have never heard language like this.'"

    Until that moment the full extent of this disaster had been hidden from Congress and the American people with all kinds of upbeat blather and outright lies about how the "fundamentals of the economy" were sound.

    Suddenly nothing was sound. The government than announced a rescue plan. On Saturday, The Bush Administration said they want $700 billion to fund it, but that may just be the start.

    The plan includes creating a new entity like the RTC that ended the S&L crisis in the 1980's to buy up and sell-off bad mortgages and other "illiquid assets," billions to back up money market funds, and new SEC edicts to stop short sellers from undermining stock prices - a measure backed by John McCain who has made "the shorts" his boogie man over the fierce editorial objections of the Wall Street Journal editorial page and most anyone who knows anything about the way the market works.

    Barack Obama has so far supported this major intervention into saving the markets that may cost taxpayers a trillion dollars or more, although he wants to consult with other countries on what to do.

    Much of our media has ignored international fears as this crisis ripples globally. China has already called the crisis a "financial tsunami" and called for a new non-US based currency system.

    The stock markets were euphoric Friday and shot up as if the crisis had been solved. It was more "market psychology" which is not the same thing as common sense. Joe Nocera in the New York Times was less positive, likening these measures to a "hail mary pass" in football where a quarterback just flings the ball in the final minutes of the game and hopes someone catches it, noting that "most of the time they fail."

    Blogger Shedlock says, at best, these moves postponed Armageddon, but did not end the danger:

    "Government manipulation can never prevent financial Armageddon. In fact, government intervention and manipulation in the free markets eventually guarantees financial Armageddon. Armageddon was not prevented, only delayed, and at taxpayer expense."

    Nocera agrees, concluding with the kind of understatement you expect from the newspaper of record, "as much as we might hope that the government finally has the answer, it probably doesn't."

    So much for all that "problem solved" optimism you have been seeing on TV.

    Also troubling is the tendency in the media to blame the crisis on "mistakes" by irresponsible lenders and irresponsible borrowers, as if their contributions to this crisis balanced each other out and, hence, since everyone was at fault, no one is at fault.

    This "logic" compares the Jones family that took a subprime loan after being targeted by fraudulent brokers who assured them it was a great deal and that they couldn't lose, with a powerful industry that knew they couldn't afford their home but went ahead anyway securitizing the mortgage, slicing and dicing it into financial instruments and then misrepresenting its value to buyers and investors worldwide.

    Since when do you equate individuals with institutions?

    The buyer was duped; the lender and the multi-million dollar Wall Street market machine behind these unscrupulous brokers were consciously exploiting people who had no idea they were victimized by a well-calculated and criminal ponzi scheme. The FBI is investigating some of these crimes, so far indicting 400 scammers, but our media continues to leave out the criminal cabal behind this crisis. They support the bailouts, but have yet to call for a jail out as if they are unaware that Wall Street is not just a financial center but has been a crime scene.

    No wonder that a reader of the New York Times called this measure a "No Banker Left Behind Scheme."

    This crisis is hardly over.

    Listen to economist Nouriel Roubini who has been on target in most of his forecasts.

    He predicts, according to financial writer Felix Salmon, "Credit losses of $2 trillion, half the US banking system nationalized, municipal defaults, house price declines accelerating, a sudden stop in consumer spending, global contagion, stagflation, you name it."

    Roubini concludes: "At this point the perfect financial storm of the century cannot be contained. The only light at the end of the tunnel is the one of the coming financial and economic train wreck."

    If you think you can trust this Administration to solve this crisis when it has created so many others, think again. Unfortunately neither political party seems to have a clear take on what is happening or any plan to solve it.

    So strap in, we are in for volatile rollercoaster ride.
    _______
     
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