Saturday, 20 January 2018

QotD: 'The chief menace of dictatorship...'


"In the democratic creed the State exists for the benefit of the individual. In the Fascist creed the individual exists for the benefit of the State....
...."A fascist leader must find some outlet for the renunciation of individuality to which he has condemned his people... The chief menace of dictatorship (other than to the unfortunate victims of it) lies, as I should have realised, in this: that if a dictator makes a false step, his pride must be saved at any cost to the country; whereas if a Government makes a false step, public opinion can demand a new Government, which will be only too delighted to repudiate the actions of the old one."~ A.A. Milne, from the 1935 introduction to his book 'Peace with Honour'
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Friday, 19 January 2018

Bonus Quote of the Day: She's having a baby...


"And as much as I sincerely mean congratulations to the PM, I dread, dread, the coming M.S.M. gushing, it's going to be puke-inspiring, and if there is one, ONE, picture of ruddy Winston holding the baby for a photo op, I am going to puke."
~ Mark Hubbard 

"The good governance of this country should not depend on the constant availability of any one person. If a system breaks down over the temporary absence of a single individual, then that system is not fit for purpose. The prime ministership is not, and should never be, be a single point of failure for the country as a whole."

~ Liam Hehir.

David Hume on universities


"In Hume's view ... the best endowed universities often served as 'sanctuaries in which exploded systems and obsolete prejudices found shelter and protection, after they had been hunted out of every other corner of the world.'”~ from Dennis Rasmussen's book The Infidel & the Professor
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Thursday, 18 January 2018

David Hume on 'the English'


"If there is a central, guiding theme of the work ['History of England'] as a whole it is the blessings of civilisation. As in his 'Political Discourses,' Hume takes a stand firmly in favour of the superiority of the modern world and against the idea of a fall from ancient glory.    "For Hume, most of English history—indeed, most of human history—had been a story of disorder, oppression, poverty, and dependence. He thus finds the tendency to romanticise the days of yore and 'exalt past times above the present' to be utterly preposterous.    “'My Notion is,' he writes, 'that the uncultivated Nations are not only inferior to civiliz’d in Government, civil, military, and ecclesiastical; but also in Morals; and that their whole manner of Life is disagreeable and uneligible to the last Degree.'    "He insists that 'the English, till near the beginning of the last Century, are very much to be regarded as an uncultivated Nation.'”~ from Dennis Rasmussen's book The Infidel & the Professor
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Wednesday, 17 January 2018

QotD: On Inequality


"Inequality is not so much a cause of economic, political, and social processes as a consequence."
~ Nobel-Prize winning economic historian Angus Deaton, from the article at the Human Progress site: 'Why We Shouldn’t Obsess Over Economic Inequality'
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Saturday, 13 January 2018

Q: What is a house?


“The house is a machine for living.”~ a banality from the very banal Le Corbusier

“Oh yes, young man; consider that a house is a machine in which to live, but by the same token the heart is a suction pump. Sentient man begins where that concept of the heart ends.    “Consider that a house is a machine in which to live, but architecture begins where that concept of the house ends. All life is machinery in a rudimentary Sense, and yet machinery is the life of nothing. Machinery is machinery only because of life.”~ Frank Lloyd Wright, from his lecture ‘To the Young Man in Architecture'

“A house is not a machine to live in. It is the shell of man — his extension, his release, his spiritual emanation. Not only its visual harmony but its organisation as a whole, the whole work combined together, make it human in the most profound sense…  The poverty of modern architecture stems from the atrophy of sensuality.”~ architect Eileen Gray, designer of the house that Le Corbusier could never have designed, but nonetheless fell in love with

Friday, 12 January 2018

Happy New Year


Welcome back, everyone!

I hope you had (or are still having) a great break, and are ready (or almost ready) to dive into a new year.

Here then, through the words of author Neil Gaiman, are my best wishes for your new year:


"May your coming year be filled with magic and dreams and good madness. I hope you read some fine books and kiss someone who thinks you're wonderful, and don't forget to make some art. And I hope, somewhere in the next year, your surprise yourself."
~ Neil Gaiman

Wednesday, 20 December 2017

Happy Christmas -- from Frank Lloyd Wright and us!




Architect Frank Lloyd Wright used to send out his poetic Christmas message every year. So I do too. 
He called it “Man the Enlightened Being.”  “The herd disappears and reappears," says Wright's message, "but the sovereignty of the individual persists." What better time of year to take time out to reflect on that.* 
_Quote Literature tells about man. Architecture presents him. The Architecture that our man of Democracy needs and prophecies is bound to be different from that of the common or conditioned man of any other socialized system of belief. As never before, this new Free-Man’s Architecture will present him by being true to his own nature in all such expressions. . .
    With renewed vision, the modern man will use the new tools Science lavishes upon him (even before he is ready for them) to enlarge his field of action by reducing his fetters to exterior controls, especially those of organized Authority, publicity, or political expediency. He will use his new tools to develop his own Art and Religion as the means to keep him free, as himself. Therefore this democratic man’s environment, like his mind, will never be style-ized. When and wherever he builds he will not consent to be boxed. He will himself have his style.
    The Democratic man demands conscientious liberty for himself no more nor less than he demands liberty for his neighbor. . .
    Whenever organic justice is denied him he will not believe he can get it by murder but must obtain it by continuing fair dealing and enlightenment at whatever cost. He will never force upon others his own beliefs nor his own ways. He will display his social methods to others as best advantage as critic or missionary only when sought by them.
    His neighbor will be to him (as he is to himself) free to choose his own way according to his own light, their common cause being the vision of the uncommon-man wherein every man is free to grow to the stature his freedom in America under the Constitution of these United States grants him.
    Exterior compulsion absent in him, no man need be inimical to him. Conscience, thus indispensable to his own freedom, becomes normal to every man. . .
    Remember the men who gave us our [American] Nation. We have ‘the Declaration’ and our Constitution because they were individualist. Great Art is still living for us only because of Individualists like Beethoven. We have creative men on earth today only as they are free to continually arise as individuals from obscurity to demonstrate their dignity and worth above the confusion raised by the herding of the common-man by aid of the scribes and Pharisees of his time—quantity ignoring or overwhelming quality. The herd disappears and reappears but the sovereignty of the individual persists. . .
Read on here for Frank Lloyd Wright's full message: “Man, the Enlightened Being,” and have a great individualistic holiday season.
And remember this useful advice about responsible holiday drinking: Don’t underestimate when you’re at the bottle store. When there’s serious celebrating to be done, it would be irresponsible to run out.

See you next year!!


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* [Note that by the word Democracy’ Wright did not mean “a counting of heads regardless of content”; what he meant by the word was simply: Freedom.]
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Tuesday, 19 December 2017

QotD: "The secular meaning of the Christmas holiday ... "


"The secular meaning of the Christmas holiday is wider than the tenets of any particular religion: it is good will toward men...
    “The charming aspect of Christmas is the fact that it expresses good will in a cheerful, happy, benevolent, non-sacrificial way. One says: ‘Merry Christmas’—not ‘Weep and Repent.’ And the good will is expressed in a material, earthly form—by giving presents to one’s friends, or by sending them cards in token of remembrance…
    “The best aspect of Christmas is the aspect usually decried by the mystics: the fact that Christmas has been commercialised. The gift-buying . . . stimulates an enormous outpouring of ingenuity in the creation of products devoted to a single purpose: to give men pleasure. And the street decorations put up by department stores and other institutions—the Christmas trees, the winking lights, the glittering colours—provide the city with a spectacular display, which only ‘commercial greed’ could afford to give us. One would have to be terribly depressed to resist the wonderful gaiety of that spectacle.”
~ Ayn Rand
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Monday, 18 December 2017

QotD: "They’ve always been here. But not everybody’s joining up."


"Terrorism has ... come of age with the millennial generation. The Islamic State ... is miles from the Al Qaeda it grew out of. Its supporters aren’t coming from Afghanistan, Iraq, or Pakistan anymore. They’re living in Belgium, France, Britain, and ... even the United States. They’re not refugees or illegal immigrants. They’re legal, passport-carrying, Western-born or naturalised citizens of our countries.... ISIS isn’t just a geographical entity. There are kids sitting across Western countries, right here in our cities and neighbourhoods, being inspired and groomed by the group’s wide-ranging social media expertise and slickly produced propaganda videos as we speak. These kids are not coming here from Syria. They’ve always been here. But not everybody’s joining up. The success of a campaign like #ExMuslimBecause; the burgeoning memberships of ex-Muslim groups like the Council of Ex-Muslims of Britain (CEMB), Muslimish, and Ex-Muslims of North America (EXMNA); and the steadily growing audiences of pro-secular dissidents and reform activists from Muslim backgrounds show that there’s something else brewing too—something you don’t hear about as much because it has historically been suppressed by governments, moderates, and fundamentalists alike."
~ Ali A. Rivzi, from his book The Atheist Muslim: A Journey from Religion to Reason
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Sunday, 17 December 2017

Holiday reading


It's that time of year again when I try to prune my book stack to take away. Because how many books can you fit in a small backpack.

And this year I genuinely thought the only important summer reading to do was to re-read Thomas Sowell's brilliant trilogy on race and culture and migration and conquest -- because what could be more relevant, right!

But the book stack just kept right on growing ...




So what do I prune, readers?



And what's in your book stack for the summer?

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Friday, 15 December 2017

QoTD: How behavioural economics misbehaves


"McKenzie explained behavioural economics thus 'The moral of my sequence of classroom experiments is simple: You can easily prove that people are irrational if you tightly constrain the choice environment, barring choosers from knowing what others are doing, preventing choosers from correcting errant decisions, and ensuring that 'bad' choices do not have economic (and monetary) consequences, with subsequent effects on people’s incentives to learn from and act on their own and others’ errant choices. In such environments, drawing out irrational decisions is like shooting fish in a barrel'.”
~ from Mario Rizzo's review of Richard B. McKenzie's book Predictably Rational: In Search of Defenses for Rational Behavior in Economics [hat tip Jim Rose]
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Thursday, 14 December 2017

A job Is not a thing


A business will hire anyone they believe will make them more money than they cost. It is as simple as that, but as Ryan Ferguson explains in this Guest Post, most people think about employment and jobs in a complex and abstract way.


A business will hire anyone they believe will make them more money than they cost. It is as simple as that, but most people think about employment and jobs in a complex and abstract way.

People talk and think about jobs like they are things. Like you can possess one, lose one, or like you need to go get one from someone. So they go to job boards looking for the people who are giving away jobs. They go through the societal rituals that are expected of job seekers. But they are making a fundamental mistake -- because jobs are not things, they are abstractions.

Getting lost in this abstraction causes a lot of pain and confusion. Seeing past the abstraction lets you see the countless opportunities you have available to you.

A job is an abstraction to describe a relationship between one person and another individual or group of people that agree to a certain type of ongoing trade. To get a job, you don’t need someone to create it and give it to you; you simply need to convince someone that you can make them more money than you cost.

When you see jobs for what they truly are, the world opens up to you.
Resumes, interviews, degree requirements, and references checks are tactics to help businesses measure their confidence in your ability to make them money. But at a fundamental level, all that you need to do to get a job with any business in the world is convince them that you are going to make them more money that you will cost.

What you cost is more than just your salary though. There are employment taxes, legal risks, and training costs on top of the money you are paid. Businesses need to be confident in your ability to make them money over the long-term to enter into an ongoing relationship with you. That is why references, previous work experiences, and projects you’ve completed are valuable. They show that you can actually create value.

When you see jobs for what they truly are, the world opens up to you. Like Neo learning to play with the rules in the Matrix, you can see the path forward to countless opportunities. You simply need to increase your ability to create value and your ability to convince others that you can create value.
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Ryan Ferguson hosts the World Wanderers podcast. He has been a participant in Praxis and the Carl Menger Fellow at the Foundation for Economic Education.
His post previously appeared at FEE, and at RyanFerguson.Com.
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Tuesday, 12 December 2017

Monday, 11 December 2017

QoTD: Welfare: "The bait in the poverty trap"



"After working with welfare recipients for over a decade, I began to see it as the bait in the poverty trap ... Welfare would never be enough, but when they finally realised it, they had no high school diploma, no experience, and no child care."
~ Mary Ruwart
Here's Bob Geldof from before he turned sour:



Saturday, 9 December 2017

REPRISE: How the Stock Market and Economy Really Work





As the president and his supporters tout the inflating stock market bubble as a sign of prosperity, reprising this myth-busting guest post by Kel Kelly could not be more timely.
[NB: An MP3 audio file of this article, narrated by Keith Hocker, is available for download.]


                                                                                                                                                                                                                                                                  

"A growing economy consists
of prices falling, not rising."


The stock market does not work the way most people think. A commonly-held belief — on Main Street as well as on Wall Street — [and in the White House as well as CNN] is that a stock-market boom is the reflection of a progressing economy: as the economy improves, companies make more money, and their stock value rises in accordance with the increase in their intrinsic value. A major assumption underlying this belief is that consumer confidence and consequent consumer spending are drivers of economic growth.

A stock-market bust, on the other hand, is held to result from a drop in consumer and business confidence and spending — due to either inflation, rising oil prices, or high interest rates, etc., or for no real reason at all — that leads to declining business profits and rising unemployment. Whatever the supposed cause, in the common view a weakening economy results in falling company revenues and lower-than-expected future earnings, resulting in falling intrinsic values and falling stock prices.

This understanding of bull and bear markets, while held by academics, investment professionals, and individual investors alike, is technically correct if viewed superficially but,  because it is based on faulty finance and economic theory, it is substantially misconceived .


imageIn fact, the only real force that ultimately makes the stock market or any market as a whole rise (and, to a large extent, fall) over the longer term is simply changes in the quantity of money and the volume of spending in the economy. Stocks rise when there is inflation of the money supply (i.e., more money in the economy and in the markets). This truth has many consequences that should be considered.

Since stock markets can fall — and fall often — to various degrees for numerous reasons (including a decline in the quantity of money and spending); our focus here will be only on why they are able to rise in a sustained fashion over the longer term.
The Fundamental Source of All Rising Prices
For perspective, let's put stock prices aside for a moment and make sure first to understand how aggregate consumer prices rise. In short, overall prices can rise only if the quantity of money in the economy increases faster than the quantity of goods and services. (In economically retrogressing countries, prices can rise when the supply of goods diminishes while the supply of money remains the same, or even rises.)

When the supply of goods and services rises faster than the supply of money however — as happened during most of the 1800s — the unit price of each good or service falls, since a given supply of money has to buy, or "cover," an increasing supply of goods or services. (See Fig. 1)


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Fig 1: NZ & British Price Level, 1860-1910

For those lost in the bewildered state of most presidents or modern economists, this may still seem perplexing, but could not be more straightforward mathematically -- George Reisman derives the critical formula for the formation of economy-wide prices:1 In this formula, price (P) is determined by monetary demand (D) divided by supply of goods and services (S):

P=D/S

The formula shows us that it is mathematically impossible for aggregate prices to rise by any means other than (1) increasing monetary demand, or (2) decreasing supply; i.e., by either more money being spent to buy goods, or fewer goods being sold in the economy.

In our developed economy, the supply of goods is not decreasing, or at least not at enough of a pace to raise prices at the usual rate of 3–4 percent per year; instead prices are rising due to more money entering the marketplace.

The same price formula noted above can equally be applied to asset prices — stocks, bonds, commodities, houses, oil, fine art, etc. It also pertains to corporate revenues and profits, for as Fritz Machlup states:
It is impossible for the profits of all or of the majority of enterprises to rise without an increase in the effective monetary circulation (through the creation of new credit or by dis-hoarding).
To return to our focus on the stock market in particular, it should be seen now that the market cannot continually rise on a sustained basis without an increase in money — specifically bank credit — flowing into it.

imageThere are other ways the market could go higher, but their effects are purely temporary.

For example, an increase in net savings involving less money spent on consumer goods and more invested in the stock market (resulting in lower prices of consumer goods) could send stock prices higher, but only by the specific extent of the new savings, assuming all of it is redirected to the stock market.

The same applies to reduced tax rates. These would be temporary effects resulting in a finite and terminal increase in stock prices. Money coming off the "sidelines" could also lift the market, but once all sideline money was inserted into the market, there would be no more funds with which to bid prices higher. The only source of ongoing fuel that could propel the market — any asset market — higher is new and additional bank credit. As Machlup writes,
If it were not for the elasticity of bank credit … [then] a boom in security values could not last for any length of time. In the absence of inflationary credit, the funds available for lending to the public for security purchases would soon be exhausted, since even a large supply is ultimately limited. The supply of funds derived solely from current new savings and current amortisation allowances is fairly inelastic.… Only if the credit organisation of the banks (by means of inflationary credit), or large-scale dishoarding by the public make the supply of loanable funds highly elastic, can a lasting boom develop.… A rise on the securities market cannot last any length of time unless the public is both willing and able to make increased purchases. (Emphasis added.)
The last line in the quote helps to reveal that neither population growth nor consumer sentiment alone can drive stock prices higher. Whatever the population, it is using a finite quantity of money; whatever the sentiment, it must be accompanied by the public's ability to add additional funds to the market in order to drive it higher.4

Understanding that the flow of recently-created money is the driving force of rising asset markets has numerous implications. The rest of this article addresses some of these implications.
The Link between the Economy and the Stock Market
The primary link between the stock market and the economy — in the aggregate — is that an increase in money and credit pushes up both GDP and the stock market simultaneously.

A progressing economy is one in which more goods are being produced over time. What represents real wealth is not money per se [not even crypto-money], but real "stuff." The more cars, refrigerators, food, clothes, medicines, and hammocks we have, the better off our lives. We saw above that if more goods are produced at a faster rate than money then prices will fall. With a constant supply of money, wages would remain the same in money terms while prices fell, because the supply of goods would increase while the supply of workers would not—meaning higher real wages. But even when prices rise due to money being created faster than goods, prices still fall in real terms, because wages rise faster than prices. In either scenario, if productivity and output are increasing, goods get cheaper in real terms.

This is what rising prosperity looks like.

Obviously, then, a growing economy consists of prices falling, not rising. No matter how many goods are produced, if the quantity of money remains constant then the only money that can be spent in an economy is the particular amount of money existing in it (and velocity, or the number of times each dollar is spent, could not change very much if the money supply remained unchanged).


image
This alone reveals that GDP does not necessarily tell us much about the number of actual goods and services being produced; it only tells us that if (even real) GDP is rising, the money supply must be increasing, since a rise in GDP is mathematically possible only if the money price of individual goods produced is increasing to some degree.5 Otherwise, with a constant supply of money and spending, the total amount of money companies earn — the total selling prices of all goods produced — and thus GDP itself would all necessarily remain constant year after year.

"Consider that if our rate of inflation were high enough, used cars would rise in price just like new cars, only at a slower rate."

The same concept would apply to the stock market: if there were a constant amount of money in the economy, the sum total of all shares of all stocks taken together (or a stock index) could not increase. Plus, if company profits, in the aggregate, were not increasing, there would be no aggregate increase in earnings per share to be imputed into stock prices.
image
In an economy where the quantity of money was static, the levels of stock indexes, year by year, would stay approximately even, or even drift slightly lower6 — depending on the rate of increase in the number of new shares issued. And, overall, businesses (in the aggregate) would be selling a greater volume of goods at lower prices, and total revenues would remain the same. In the same way, businesses, overall, would purchase more goods at lower prices each year, keeping the spread between costs and revenues about the same, which would keep aggregate profits about the same.

Under these circumstances, ‘capital gains’ from speculation (the profiting from the buying low and selling high of assets) could be made only by stock picking — by investing in companies that are expanding market share, bringing to market new products, etc., thus truly gaining proportionately more revenues and profits at the expense of those companies that are less innovative and efficient.

The stock prices of the gaining companies would rise while others fell. Since the average stock would not actually increase in value, most of the gains made by investors from stocks would be in the form of dividend payments. By contrast, in our world today, most stocks — good and bad ones — rise during inflationary bull markets and decline during bear markets. The good companies simply rise faster than the bad.

Similarly, housing prices under static money would actually fall slowly — unless their value was significantly increased by renovations and remodelling. Older houses would sell for much less than newer houses. To put this in perspective, consider that if our rate of inflation were high enough, used cars would rise in price just like new cars, only at a slower rate — but just about everything would increase in price, as it does in countries with hyperinflation. The amount by which a home "increases in value" over 30 years really just represents the amount of purchasing power that the dollars we hold have lost: while the dollars lost purchasing power, the house — and other assets more limited in supply growth — kept its purchasing power.

Since we have seen that neither the stock market nor GDP can rise on a sustained basis without more money pushing them higher, we can now clearly understand that an improving economy neither consists of an increasing GDP nor does it cause the overall stock market to rise.

This is not to say that a link does not exist between the money that particular companies earn and their value on the stock exchange in our inflationary world today, but that the parameters of that link — valuation relationships such as earnings ratios and stock-market capitalisation as a percent of GDP — are rather flexible, and as we will see below, change over time. Money sometimes flows more into stocks and at other times more into the underlying companies, changing the balance of the valuation relationships.
Forced Investing
As we have seen, the whole concept of rising asset prices and stock investments constantly increasing in value is an economic illusion. What we are really seeing is our currency being devalued by the addition of new currency issued by the central bank. The prices of stocks, houses, gold, etc., do not really rise; they merely do better at keeping their value than do paper bills and digital checking accounts, since their supply is not increasing as fast as are paper bills and digital checking accounts.
"An improving economy neither consists of an increasing GDP nor does it cause the overall stock market to rise."

image
The fact that we have to save so much for the future is, in fact, an outrage. Were no money printed by the government and the banks, things would get cheaper through time, and we would not need much money for retirement, because it would cost much less to live each day then than it does now. But we are forced to invest in today's government-manipulated inflation-creation world in order to try to keep our purchasing power constant.

To the extent that some of us even come close to succeeding, we are still pushed further behind by having our "gains" taxed.
The whole system of inflation is solely for the purpose of theft and wealth redistribution. In a world absent of government printing presses and wealth taxes, the armies of investment advisors, pension-fund administrators, estate planners, lawyers, and accountants associated with helping us plan for the future would mostly not exist. These people would instead be employed in other industries producing goods and services that would truly increase our standards of living.
The Fundamentals are Not the Fundamentals
image
If it is, then, primarily newly-printed money flowing into and pushing up the prices of stocks and other assets, what real importance do the so-called fundamentals — revenues, earnings, cash flow, etc. — have? In the case of the fundamentals, too, it is newly printed money from the central bank, for the most part, that impacts these variables in the aggregate: the financial fundamentals are determined to a large degree by economic changes.

For example, revenues and, particularly, profits, rise and fall with the ebb and flow of money and spending that arises from central-bank credit creation. When the government creates new money and inserts it into the economy, the new money increases sales revenues of companies before it increases their costs; when sales revenues rise faster than costs, profit margins increase.

Specifically, how this comes about is that new money, created electronically by the government and loaned out through banks, is spent by borrowing companies.7 Their expenditures show up as new and additional sales revenues for businesses. But much of the corresponding costs associated with the new revenues lags behind in time because of technical accounting procedures, such as the spreading of asset costs across the useful life of the asset (depreciation) and the postponing of recognition of inventory costs until the product is sold (cost of goods sold). These practices delay the recognition of costs on the profit-and-loss statements (i.e., income statements).

image
Since these costs are recognised on companies' income statements months or years after they are actually incurred, their monetary value is diminished by inflation by the time they are recognised. For example, if a company recognises $1 million in costs for equipment purchased in 1999, that $1 million is worth less today than in 1999; but on the income statement the corresponding revenues recognised today are in today's purchasing power. Therefore, there is an equivalently greater amount of revenues spent today for the same items than there was ten years ago (since it takes more money to buy the same good, due to the devaluation of the currency).

"With more money being created through time, the amount of revenues is always greater than the amount of costs, simply because most costs are incurred when there is less money existing."

Another way of looking at it is that, with more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing. Thus, because of inflation, the total monetary value of business costs in a given time frame is smaller than the total monetary value of the corresponding business revenues. Were there no inflation, costs would more closely equal revenues, even if their recognition were delayed.

In summary, credit expansion increases the spreads between revenue and costs, increasing profit margins. The tremendous amount of money created since 2008 is what is responsible for the fantastic profits companies had been reporting (even though the amount of money loaned out was small, relative to the increase in the monetary base).
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Since business sales revenues increase before business costs, with every round of new money printed, business profit margins stay widened; they also increase in line with an increased rate of inflation. This is one reason why countries with high rates of inflation have such high rates of profit.8

During bad economic times, when the government has quit printing money at a high rate, profits shrink, and during times of deflation, sales revenues fall faster than do costs.

image
It is also new money flowing into industry from the central bank that is the primary cause behind positive changes in leading economic indicators such as industrial production, consumer durables spending, and retail sales. As new money is created, these variables rise based on the new monetary demand, not because of resumed real economic growth.

A final example of new money affecting the fundamentals is interest rates. It is said that when interest rates fall, the common method of discounting future expected cash flows with market interest rates means that the stock market should rise, since future earnings should be valued more highly. This is true both logically and mathematically. But, in the aggregate, if there is no more money with which to bid up stock prices, it is difficult for prices to rise, unless the interest rate declined due to an increase in savings rates.

In reality, the help needed to lift the market comes from the fact that when interest rates are lowered, it is by way of the central bank creating new money that hits the loanable-funds markets. This increases the supply of loanable funds and thus lowers rates. It is this new money being inserted into the market that then helps propel it higher.

(I would personally argue that most of the discounting of future values [PV calculations] demonstrated in finance textbooks and undertaken on Wall Street are misconceived as well. In a world of a constant money supply and falling prices, the future monetary value of the income of the average company would be about the same as the present value. Future values would hardly need to be discounted for time preference [and mathematically, it would not make sense], since lower consumer prices in the future would address this. Though investment analysts believe they should discount future values, I believe that they should not. What they should instead be discounting is earnings inflation and asset inflation, each of which grows at different paces.)9
Asset Inflation versus Consumer Price Inflation
imageNewly-printed money can affect asset prices more than consumer prices. Most people think that the Federal Reserve and other central banks have done a good job of preventing inflation over the last twenty-plus years. The reality is that it has created a tremendous amount of money, but that the money has disproportionately flowed into financial markets instead of into the real economy, where it would have otherwise created drastically more price inflation.

There are two main reasons for this channelling of money into financial assets. The first is changes in the financial system in the mid and late 1980s, when an explosive growth of domestic credit channels outside of traditional bank lending opened up in the financial markets. The second is changes in the US trade deficit in the late 1980s, wherein it became larger, and export receipts received by foreigners were increasingly recycled by foreign central banks into US asset markets.10 As financial economist Peter Warburton states,
a diversification of the credit process has shifted the centre of gravity away from conventional bank lending. The ascendancy of financial markets and the proliferation of domestic credit channels outside the [traditional] monetary system have greatly diminished the linkages between … credit expansion and price inflation in the large western economies. The impressive reduction of inflation is a dangerous illusion; it has been obtained largely by substituting one set of serious problems for another.
And, as bond-fund guru Bill Gross said,
what now appears to be confirmed as a housing bubble, was substantially inflated by nearly $1 trillion of annual reserve flowing back into US Treasury and mortgage markets at subsidised yields.… This foreign repatriation produced artificially low yields.… There is likely near unanimity that it is now responsible for pumping nearly $800 billion of cash flow into our bond and equity markets annually.
This insight into the explanation for a lack of price inflation in recent decades should also show that the massive amount of reserves the Fed created in 2008 and 2009 — in response to the recession — might not lead to quite the wild consumer-price inflation everyone expects when it eventually leaves the banking system but instead to wild asset price inflation.
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One effect of the new money flowing disproportionately into asset prices is that the Fed cannot "grow the economy" as much as it used to, since more of the new money created in the banking system flows into asset prices rather than into GDP. Since it is commonly thought that creating money is necessary for a growing economy, and since it is believed that the Fed creates real demand (instead of only monetary demand), the Fed pumps more and more money into the economy in order to "grow it."

That also means that more money — relative to the size of the economy — "leaks" out into asset prices than used to be the case. The result is not only exploding asset prices in the United States, such as the NASDAQ and housing-market bubbles but also in other countries throughout the world, as new money makes its way into asset markets of foreign countries.13

A second effect of more new money being channelled into asset prices is, as hinted above, that it results in the traditional range of stock valuations moving to a higher level. For example, the ratio of stock prices to stock earnings (P/E ratio) now averages about 20, whereas it used to average 10–15. It now bottoms out at a level of 12–16 instead of the historical 5. A similar elevated state applies to Tobin's Q, a measure of the market value of a company's stock relative to its book value. But the change in relative flow of new money to asset prices in recent years is perhaps best seen in the chart below, which shows the stunning increase in total stock-market capitalisation as a percentage of GDP (figure 2).

Figure 2: The Size of the Stock Market Relative to GDP Source: Thechartstore.com

The changes in these valuation indicators I have shown above reveal that the fundamental links between company earnings and their stock-market valuation can be altered merely by money flows originating from the central bank.
Can Government Spending Revive the Stock Market and the Economy?
So, can government spending revive the stock market and the economy then? The answer is: yes and no. Government spending does not restore any real demand, only nominal monetary demand. Monetary demand is completely unrelated to the real economy, i.e., to real production, the creation of goods and services, the rise in real wages, and the ability to consume real things — as opposed to a calculated GDP number.

Government spending harms the economy and forestalls its healing. The thought that stimulus spending, i.e., taking money from the productive sector (a de-accumulation of capital) and using it to consume existing consumer goods or using it to direct capital goods toward unprofitable uses (consuming existing capital), could in turn create new net real wealth — real goods and services — is preposterous.
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What is most needed during recessions is for the economy to be allowed to get worse — for it to flush out the excesses and reset itself on firm footing. Recession is a process of recovery from earlier gross misallocations. Broken economies suffer from a misallocation of resources consequent upon prior government interventions, and can therefore be healed only by allowing the economy's natural balance to be restored. Falling prices and lack of government and consumer spending are part of this process.

Given that government spending cannot help the real economy, can it help the specific indicator called GDP? Yes it can. Since GDP is mostly a measure of inflation, if banks are willing to lend and borrowers are willing to borrow, then the newly created money that the government is spending will make its way through the economy. As banks lend the new money once they receive it, the money multiplier will kick in and the money supply will increase, which will raise GDP.

"What is most needed during recessions is for the economy to be allowed to get worse — for it to flush out the excesses and reset itself on firm footing."

As for the idea that government spending helps the stock market, the analysis is a bit more complicated. Government spending per se cannot help the stock market, since little, if any, of the money spent will find its way into financial markets. But the creation of money that occurs when the central bank (indirectly) purchases new government debt can certainly raise the stock market. If new money created by the central bank is loaned out through banks, much of it will end up in the stock market and other financial markets, pushing prices higher.
Summary
The most important economic and financial indicator in today's inflationary world is money supply. Trying to anticipate stock-market and GDP movements by analysing traditional economic and financial indicators can lead to incorrect forecasts. To rely on these "fundamentals" today is to largely ignore the specific economic forces that most significantly affect those same fundamentals — most notably the changes in the money supply. Therefore, the best insight into future stock prices and GDP growth is gained by following monetary indicators.



Kel Kelly is the Head of Economic and Commodity Research at an international energy and agribusiness firm and the author of The Case for Legalizing Capitalism. Kel holds a degree in economics from the University of Tennessee, an MBA from the University of Hartford, and an MS in economics from Florida State University. He lives in Atlanta.
A version of this 2010 article first appeared at the Mises Daily


NOTES 
1.See G. Reisman, Capitalism: A Treatise on Economics (1996), p.897, for a fuller demonstration. Most of the insights in this paper are derived from the high-level principles laid out by Reisman. For additional related insights on this topic, see Reisman, "The Stock Market, Profits, and Credit Expansion," "The Anatomy of Deflation," and "Monetary Reform."
2.F. Machlup, The Stock Market, Credit, and Capital Formation (1940), p. 90. 3.Ibid., pp. 92, 78. 4.For a holistic view in simple mathematical terms of how the price of all items in an economy may or may not rise, depending on the quantity of money, see K. Kelly, The Case for Legalizing Capitalism (2010), pp 132–133. 5.Price increases are supposedly adjusted for, but "deflators" don't fully deflate. Proof of this is the very fact that even though rising prices have allegedly been accounted for by a price deflator, prices still rise (real GDP still increases). Without an increase in the quantity of money, such a rise would be mathematically impossible. 6.To gain an understanding of earning interest (dividends in this case) while prices fall, see Thorsten Polleit's "Free Money Against 'Inflation Bias'."
7.Most funds are borrowed from banks for the purpose of business investment; only a small amount is borrowed for the purpose of consumption. Even borrowing for long-term consumer consumption, such as for housing or automobiles, is a minority of total borrowing from banks. 8.The other main reason for this, if the country is poor, is the fact that there is a lack of capital: the more capital, the lower the rate of profit will be, and vice versa (though it can never go to zero). 9.Any reader who is interested in exploring and poking holes in this theory with me should feel free to contact me to discuss. 10.This recycling is what Mises's friend, the French economist Jacques Reuff, called "a childish game in which, after each round, winners return their marbles to the losers" (as cited by Richard Duncan, The Dollar Crisis (2003), p. 23). 11.P. Warburton, Debt and Delusion: Central Bank Follies that Threaten Economic Disaster (2005), p. 35. 12.[12] William H. Gross, "100 Bottles of Beer on the Wall."
13.It's not actually American dollars (both paper bills and bank accounts) that make their way around the world, as most dollars must remain in the United States. But for most dollars received by foreign exporters, foreign central banks create additional local currency in order to maintain exchange rates. This new foreign currency — along with more whose creation stems from "coordinated" monetary policies between countries — pushes up asset prices in foreign countries in unison with domestic US asset prices.

Friday, 8 December 2017

Quote of the Day: Poverty & pioneers


"Throughout history, poverty is the normal condition of man. Advances that permit this norm to be exceeded — here and there, now and then — are the work
of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority
is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.
    "This is known as 'bad luck'.”
~ Robert Heinlein
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Thursday, 7 December 2017

What's with Jerusalem?


You could read many thousands of words about the Realpolitik of the decision to recognise Jerusalem as the capital of Israel, and several thousand more about the outrage in reaction thereto.

Or you could just read this from Ali Rivzi, aka The Atheist Muslim: "The truth about why Jerusalem has been such a nexus of conflict & bloodshed for billions of Jewish, Christian & Islamic mythologists is rarely stated [so] plainly":


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Quote of the Day: Why left & right fight


"What the left and right share in common is a demand to go back, to reclaim, to seek revenge against those who resist them... Their positions are largely indistinguishable. And yet, they and their supporters loathe each other. Each considers the other an enemy to be destroyed. This is not a fight about power as such but about in whose service it will be used."
~ Jeffrey Tucker, from his book Right-Wing Collectivism: The Other Threat to Liberty
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Wednesday, 6 December 2017

Quote of the Day: School reports cut both ways


"As I said once to a Headmaster, a school report cuts both ways; it is a report on the teacher as well as on the taught. ‘Seems completely uninterested in this subject' may mean no more than that the master is completely uninteresting."
~ A.A. Milne, form his autobiography It's Too Late Now
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Tuesday, 5 December 2017

Quote of the Day: "The absolute lie in this entire conversation about tax rates is that government has a revenue problem..."



"The absolute lie in this entire conversation about tax rates is that government has a revenue problem. They don’t. They have a spending problem. And it’s the fault of both political parties."
~ J.R. Salzman
RELATED LINKS [hat tip David Stockman]:

  • The GOP Tax Cut Isn't Supply Side---It's A Fiscal Scam - Stephen Roach, PROJECT SYNDICATEThere are times when the politicization of economic arguments becomes dangerous. This is one of those times. The US simply can’t afford the current tax cuts making their way through Congress. According to the nonpartisan Congressional Budget Office, the cuts will result in a cumulative deficit of about $1.4 trillion over the next decade. The problem arises because America’s chronic saving shortfall has now moved into the danger zone, making it much more difficult to fund multi-year deficits today than was the case when cutting taxes in the past.
  • The Bull Market In Idiocy - M.N. Gordon, ECONOMIC PRISMFor now, however, several things are abundantly clear. Everyone – including you – is getting rich from Bitcoin. So, too, everyone’s getting rich from FANG – Facebook, Amazon, Netflix, and Google – stocks. Likewise, everyone’s getting rich shorting the CBOE Volatility Index (VIX). What to make of it? Without question, there’s a bull market in idiocy. And when there’s a bull market in idiocy, idiots get rich.
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Monday, 4 December 2017

Quote of the Day: "The compromise between the party of spend more, and the party of tax less..."


"The [US] Senate just passed a 500-page tax reform bill. Assuming it lives up to its promise, it will cut taxes on corporations and individuals... The root of our problem [however] is spending... The government spends more than it takes in tax revenues. A lot more. The federal debt today is over $700 billion more than it was a year ago. The reason is simple. The people may love spending, but they hate taxes. So the government makes it up by borrowing... It is the compromise between the party of spend more, and the party of tax less: the policy of borrow more.
    "A reduction in tax revenues necessarily means an increase in net borrowing. Borrowing, of course, does not generate revenues. It is merely an addition to the debt... Borrowing is not a magic perpetual motion machine. It is not a way to spend above your revenues. It is not a way to consume without first producing. It is a just a way to deceive—to consume without the taxpayer realising it."

~ economist Keith Weiner, from his post 'The Party of Spend More vs. the Party of Tax Less'
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Sunday, 3 December 2017

Quote of the Day: On tax reform and US debt


"[Senators] are worried that the tax-reform bill that just got out of the Senate Finance Committee will grow the deficit, and hence the national debt. This is a very reasonable concern... However, the solution isn’t to implement a trigger in the bill that would terminate some of the tax cuts if the projected revenue does not materialise. There is so much wrong with this proposal that it is hard to know where to start. But I will try. First, [America's] debt problem is not a revenue problem: It’s a spending problem."
~ Veronique de Rugy, 'A ‘Revenue Trigger’ Isn’t the Solution to Fiscal Irresponsibility'
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Friday, 1 December 2017

Quote of the Day: On 'net neutrality'


"Progress requires inequality. If you don't give entrepreneurs the ability to become unequal--not just get rich themselves--but they have to make their customers unequal, they've got to give their customers commercial advantage or life advantage. That's what drives progress. If you take that out of the equation, if you say all traffic has to be treated equal, all customers have to be treated equal--first of all, capital investment in the network is going to go down. We've already seen some of that. But so is innovation. Why would you want to give that up?"
~ technology entrepreneur Bill Frezza, quoted in Robert Tracinski's article 'AT&T’s Cautionary Tale for Net Neutrality'
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Thursday, 30 November 2017

Censorship made this monster


The internet is abuzz because Donald Trump is not just tweeting inanely, that is no longer news, but  retweeting from the sewers of tweetland, from a place even the odious InfoWars scolds are agin. "Yeah," says conspiracy-monger Paul Joseph Watson direct that place of pure odium, "someone might want to tell whoever is running Trump's Twitter account this morning that retweeting Britain First is not great optics."

"Optics!" And this from a man who first gained fame for posting about chemtrails, jewish bankers, a New World Order, and the lingering influence of the Illuminati. It takes sustained effort to go beyond that pale.

So that's where Britain First are--way out beyond that point where even Prison Planet et al won't go. But the US president will.  If you're British, you probably already know them. If not, Brendan O'Neill from Spiked (who slums it so you don't have to), describes "Britain First [as] the odious right-wing group that thinks Muslims are the source of Europe’s every social and moral ill." And the connection:
Trump shared a tweet by Jayda Fransen, the brash, weird woman who fronts Britain First, containing a video titled, ‘Islamist mob pushes teenage boy off roof and beats him to death!’...
The video, which he shared with his 43 million followers,
had the caption "Muslim migrant beats up Dutch boy on crutches", but it turns out the perpetrator was not a Muslim migrant, but a native Dutchman. When asked about it, White House spokeswoman Sarah Huckabee Sanders said it didn't matter whether the video was real or not. "Whether it's a real video, the threat is real, and that is what the President is talking about," she told reporters.
As O'Neill summarises:
It’s the smoking gun the ‘Trump is Hitler’ lobby has been waiting for. Here’s the actual president sharing actual hard-right propaganda about how awful Muslims are. Twitter is going to implode; they cannot believe their luck.... That is just nuts. It’s proof of his infantile streak, his lack of awareness of the historic responsibilities of his office.
We know who made the president. But Britain First, and other groups like them? Who made this small group of fruitloops a thing? You know who: all the people currently imploding on Twitter saying "how dare you." All "the virtual leftists fulminating about ‘fascism in the White House’ and ‘Islamophobia’ now getting the blessing of the actual president of the US, the British MPs insisting parliament denounce Trump, the Muslim community groups saying this proves anti-Islam hate is goose-stepping through the virtual and political worlds etc, etc." 'J'Accuse, says O'Neill:
For you made this monster. Britain First is a mess of your unwitting creation. You, and your censorship, and your cowardice, and your pathologisation of concern about Islam, and your treatment of any questioning of mass immigration as tantamount to a hate crime, created the space for these new, ‘edgy’ right-wing movements to take root and expand. In making certain things unsayable, you paved the way for these largely virtual loudmouth outfits to say: ‘We will say the unsayable.’ Britain First is a cast-iron example of how the chilling of public debate never, ever fixes problems or disappears people’s concerns or prejudices; it merely warps them, and often worsens them, and forces them to take root elsewhere...
    Here’s the thing. So shrunken has the space for honest, all-views-welcome moral and political discussion become in recent years that now even to speak of ‘British values’ is to risk being branded a racist. And they’re surprised that in a climate like that a group called Britain First is making waves? And they call Trump stupid. He is, but so are they if they don’t recognise the direct contribution their fear and chilling of rigorous discussion about faith, values and the future have made to the growth of Britain First and others. Trump’s bluster, the bluster of Britain First too, is a product of this chilling. You people losing it on Twitter today – you are the midwives of this new weirdness.
Free speech. It's a great thing.  It helps confirm that the president is infantile and even conspiracy-mongers have limits. But start banning any burying speech you don't like, and it can all come back and bite you in very unpleasant and unexpected ways.
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Quote of the Day: The issue today and every other day ...


More and more, I realise that the great man's observation below describes too many people across virtually every issue requiring their action, effort, or courage. Yet they seemingly want crops without effort ...


“Those who profess to favour freedom and yet depreciate agitation, are people who want crops without ploughing the ground; they want rain without thunder and lightning; they want the ocean without the roar of its many waters. The struggle may be a moral one, or it may be a physical one, or it may be both. But it must be a struggle. Power concedes nothing without a demand. It never did and it never will.”




Wednesday, 29 November 2017

Quote of the Day: So what are exports for again?


"A people who export more for the sake of importing more grow wealthier; a people who export more only for the sake of exporting more grow poorer."
~ Don Boudreaux, from his pithy post 'Export-led Growth?'
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Tuesday, 28 November 2017

Q: What kind of rock star economy is this?


New Zealand is still said to be a rockstar economy. If so, what kind of rockstar economy is it?

The list of top-most profitable non-financials in the US, observes Michael Reddell, features (relative) newcomers like Apple and Google "and ... almost all the companies have a strong international focus."

By contrast, of New Zealand's top 10 money-earning companies,
we have four majority state-owned companies (one a natural monopoly), a chain of petrol stations, a property-boom play, and a co-op whose profits are largely driven by swings in global commodity prices. There [isn’t] much new or very dynamic about it. In a way, the list of top 10 money-losing companies looks more interesting – in addition to Tasman Steel (No 1) and Kiwirail (No 2), it does feature Xero and Orion Health.
If that's a rockstar, then it's in some kind of dinner-music soft-rock genre.

So what about recent governments' "policy focus on increasing the outward orientation of the New Zealand economy" -- how has that gone? Answer: it's hardly rocking out. Michael Reddell again:
As a share of GDP, imports haven’t been lower since the depths of the recession in the year to March 1992. Exports haven’t been lower, as a share of GDP, since the year to March 1976 – more than 40 years ago. There was, so it was claimed, a policy focus on increasing the outward orientation of the New Zealand economy. If so, it failed.
Hmmm. so perhaps it's a rockstar in good old-fashioned savings and capital investment/accumulation then -- those good things that expand productivity and generally raise wages. Turns out that here too things are ropy:
Business investment as a share of GDP (i.e., total gross fixed capital formation less government and residential investment) ... picked up a couple of years ago from recession-era lows, but has gone sideways since, and is nowhere the rates reached in the previous expansion.
Those highs were way back in 1976, and 1986. And the recent rate of capital investment hasn't been this low since the depths of the early-nineties recession.

Overwhelmingly, capital in NZ isn't being re-invested; it's being consumed.

So what kind of rock star is this then? Answer, probably: It's one where we think we're getting wealthier because of high borrowing, historically low interest rates, and the so-called "wealth effect" of selling each other houses -- and because of all of those things, we're busy consuming what we don't even realise is capital.

Which looks less like a soft rock economy than it does some kind of death metal.


[Chart: NZ Herald]

RELATED POSTS:


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Quote of the Day: On promises and hypocrisy


“Hypocrisy can afford to be magnificent in its promises; for never intending to go beyond promises, it costs nothing.”
~ Edmund Burke
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