By Eldon Mast, on October 30th, 2009
Thursday we got another indication that the U.S. economy is returning to strong growth. The government’s first estimate for the third quarter came in at a 3.5 percent annual pace.
Again most economists were wrong. The consensus was for only a 3.2% jump. In fact several analysts had actually lowered their estimates yesterday in advance of the report.
The quarter was the first to experience the positive effects of emergency government stimulus programs put in place earlier in the year.
Growth in consumer spending and confidence, which accounts for about 70 percent of the economy, contributed significantly to the rebound.
Purchases of durable goods, which include autos, jumped 22 percent, the biggest increase since 2001. The governments $3B Clunkermania program obviously contributed significantly to that huge durable goods jump. But what was perhaps more encouraging was the data that showed that even excluding sales, production and inventories of automobiles, the economy grew 1.9 percent in the quarter. The stimulus programs are acting as a catalyst and not just the only source of growth.
Many economists now agree that the recession ended earlier in the year. As we have said for quite sometime, when the National Bureau of Economic Research officially marks the recession’s end, they will likely point to June 2009. And that prediction was made by professor Mark Hirschey back in November of 2008.
In the 3rd quarter, residential construction also jumped at a 23 percent annual rate. It was the first quarterly gain in almost four years and the largest jump since 1986.
The home-building market — which as be ailing for several years — surged as sales climbed, propelled in part by an $8,000 tax credit for first-time buyers. The credit (also part of the emergency stimulus past by the US government earlier this year) will likely be extended with the support of the majority of the Senate.
And Q3 earnings continue to be strong — pointing to not only moderate growth in Q3 — but extremely strong growth in Q4 and into 2010.
Amazon in particular has used the past year of recession to continue to decimate it’s brick and mortar competition. Amazon, which is reorganizing the retail market value chain continues to produce strong results. “You should see more expansion in the categories we’re in, as well as more geographical expansion over time,” said Amazon’s Chief Financial Officer Thomas Szkutak last Thursday.
In the overall manufacturing sector, total inventories in Q3 continue to drop precipitously. The only conclusion: factory production will need to keep pace with significant upward momentum.
As stockpiles decrease and demand continues to grow more factories will need to come back online quickly. The gains required to produce such output will now lead to a quick rebound in hiring.
In September, the unemployment rate likely reached it’s peak and with growth now ramping significantly in the 4th quarter, overall job growth is just around the corner.
You’ll remember that we warned back in August to not be surprised by robust Q3 growth. Don’t be caught off guard again with Q4 growth that will prove to be even stronger.
By Trace Mayer, on October 30th, 2009
The first message to ever travel between two computers connected via the ARPANET, the computer network that would become the Internet, happened on 29 October 1969. The Internet just turned 40. And 40 is the new 20. It is incredible that Al Gore, born 31 March 1948, was able to invent such an amazing series of tubes at the age of 21. Technology is rapidly changing humans, life and relationships. In fact, the homo sapien is about to become obsolete. Perhaps 300 will become the new 20.
Forewarned is forearmed and this article is both objective and persuasive. But while the baton, taser, assault rifle or stealth bomber may be used in lieu of conversation words will always retain their power.
As Ludwig von Mises wrote in Socialism on page 460, ‘Only ideas can overcome ideas.’ and in Omnipotent Government on page 210, ‘Both force and money are impotent against ideas.’
Words proffer the instruments to meaning. Equity, freedom, justice, peace and prosperity. These are not mere words; they are vantage points.
OPEN SOURCE SOFTWARE
One major trend with the Internet is the open source environment. Open source software is where the original source code is made freely available and may be redistributed with or without modification. There are many examples such as Linux, SourceForge or Wordpress. The speed and adaptability of the open source environment cannot be ignored.
For example, in a memo from deputy CIO David Wennergren to top military officials he wrote,
To effectively achieve its missions, the Department of Defense must develop and update its software-based capabilities faster than ever, to anticipate new threats and respond to continuously changing requirements … The use of open source software can provide advantages in this regard.
The open source environment is the opposite of a classified environment. The source code may be viewed by all. Every single revision may be viewed by all. Transparency is fundamental to the process much to the consternation of some parties.
For example, a researcher built at monitoring tool called Wikipedia Scanner for the online open source encyclopedia Wikipedia.
The BBC reports two examples:
An online tool that claims to reveal the identity of organisations that edit Wikipedia pages has revealed that the CIA was involved in editing entries.
Wikipedia Scanner allegedly shows that workers on the agency’s computers made edits to the page of Iran’s president. …
“The changes brand Mr Limbaugh as “idiotic,” a “racist”, and a “bigot”. An entry about his audience now reads: “Most of them are legally retarded.” The IP address is registered in the name of the Democratic National Headquarters.
Once the taste of such freedom has been experienced it is difficult to extinguish the desire for more. Additionally, the fundamental thinking process spreads over into other aspects of life.
OPEN SOURCE VOTING
The Wall Street Journal reported 9 September 2009 that Diebold (DBD) Election Services which provides proprietary non-publicly viewable voting software is selling their unit to Election Systems and Software. Senator Schumer is concerned about the sale because it gives about 75% of the market share to a single company.
But Diebold Election Services, which has since changed their name to Premier Election Services, has been caught tinkering around with Wikipedia. John Borland at Wired reports,
On November 17th, 2005, an anonymous Wikipedia user deleted 15 paragraphs from an article on e-voting machine-vendor Diebold, excising an entire section critical of the company’s machines. While anonymous, such changes typically leave behind digital fingerprints offering hints about the contributor, such as the location of the computer used to make the edits.
In this case, the changes came from an IP address reserved for the corporate offices of Diebold itself.
What could possibly be at issue? Well, in 2003, Walden O’Dell, CEO and chairman of Diebold, was a top fundraiser for George W. Bush’s Presidential campaign. As Hacking Democracy’s documentary revealed a letter sent by O’Dell to Ohio Republicans stating that he is “committed to helping Ohio deliver its electoral votes to the president next year.“
Of course, this situation would be too funny, if not so sad, for The Onion to leave it alone.
With the available technology and open source software why is voting not completely transparent and accountable? Why is proprietary software, owned by private companies and not available for public review, used?
GOLD AND FIAT CURRENCIES
Fiat currencies are like the common stock of nations. All fiat currencies are in long-term bear markets when compared against gold. This portends civil unrest which has already broken out in Iceland, Greece, China, Iran, the United States and others.
Governments may have had a role and been able to function earlier. When the economy was not very complex a thug could tell someone how much they could charge for a cow. But in our current extremely complex society that is riddled with chaotic fingers of instability the distortions that come from government are extremely disrupted to a civil society. At all times and in all circumstances gold remains money. Thus, during this age of turbulence you will know that unlike Bear Stears, Fannie Mae or Washington Mutual stock or Zimbabwe Dollars; gold can never become worthless.
Remember, governments only consume wealth. They are parasitic and produce nothing. The only way they gain and maintain market share is through the threat or use of violence against innocent individuals. For matters of morality is a robber’s costume material? But governments, particularly the large Welfare States, are archaic and barbarous institutions that are no longer needed with our more advanced and civil society. Statism is an ineffectual excuse for immoral behavior. Statism is merely a human livestock management practice.
GOVERNMENTS LOSING THEIR WHUFFIE
Whuffie is the ephemeral reputation-based currency of Cory Doctorow’s science fiction novel Down and Out in the Magic Kingdom and current application to the Internet is explained in the fascinating The Whuffie Factor.
The primary goods and services that governments sell are theft, corruption, famine, pestilence and war. Sure, the costumed criminal gangs strut around lying about how they are protecting markets through regulation but who can seriously believe them? The smart kids in school go off and start business while the dumb kids become the regulators because it is the path of least resistance for the immoral. Seriously, the dumb kids are going to regulate the smart kids? After all, the dumb kids think they know how the series of tubes works.
As a result, the smart kids often just purchase the dumb kids through bribes, extortion, etc. Is this deep capture any more plain than with Goldman Sachs (GS) and JP Morgan (JPM)? There is a plethora of whistle-blowing that shows up on the open source Wikileaks.
Citizens, human livestock, are more productive for their farmers, the elite Wall Street bankers, when they believe the illusion that they are free. Thus statecraft has evolved to be ‘of, by and for the people’. But now the human livestock is realizing their true relationship to the State; they are good only for milk on April 15th and meat in Iraq, Afghanistan or H1N1. They realize that if voting made any difference it would be illegal. They begin to see governments more like an acne infection on the earth’s face that needs to be cleansed.
LIVESTOCK RUMBLINGS
And so the livestock, awaking to the reality of their being owned, are grumbling and mumbling. Millions have marched on Washington DC. The ideavirus is spreading from hive to hive. What ideavirus?
That governments are costumed criminal gangs hired by bankers that are engaged in purely immoral and unethical behavior to lie, steal, cheat, defraud and murder. That their little paper tickets issued by the unaccountable and close-source Federal Reserve are the primary way they fund these nefarious activities. That the psychopathic bankers are able to privatize the gains and socialize the losses. The best possible way to deal with these parastic vampire squids was enacted by the Founding Fathers in Section 19 of the 1792 Coinage Act that provided for ‘any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, * * * every such officer or person who shall be guilty of any * * * of the said offenses, shall be deemed guilty of felony, and shall suffer death.’
As Bloomberg reported on 15 September 2009,
James McDonald, chief executive officer of New York investment firm Rockefeller & Co., died Sunday from a single gunshot wound that was probably self- inflicted, officials in Massachusetts said.
CONCLUSION
Technology is rapidly moving forward. It has enabled ideas to spread at rapid speeds. The spread of these ideas is undermining the current power structures and revealing things are they really are. The FRN$ and all other fiat currencies are evaporating before the heat of gold and the rise of digital commodity currency.
But all of the current machinations are nearly insignificant compared to the larger picture that soon a whole new level of species is likely to develop called the Homo Evolutis. Governments have been a constant retardation for evolution and advancements as life struggles from the swamps to the stars. Try to escape from being collateral damage as life will be what it was born to be: FREE AND INDEPENDENT.
DISCLOSURES: Long physical gold and silver and no position in DBD, JPM, GS or the problematic SLV or GLD ETFs.
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By Bron Suchecki, on October 29th, 2009
Nick from www.sharelynx.com shared some quotes with me that I’d like to pass on. They are from a book written in 1939 by Graham & Whittlesey called Golden Avalanche:
“Before leaving the subject of gold supply it is interesting to relate present gold reserves to the monetary circulation of this country and the world. The gold reserves of the United States are almost two and a half times the total of all ordinary money now in circulation in this country. We could replace at its present value every piece of paper money with a gold coin and would still have enough left over to do the same for every country in Europe. There is enough gold in the monetary reserves of the world to replace all ordinary currency of the entire world 100 per cent with gold coins. Never until the present decade was such a situation as this even approached.” p.15
“It has been estimated by a number of writers, on the basis of conditions prior to 1914, that the production of gold would have to rise by about 3 per cent a year in order to preserve approximately stable price levels. The best known of these calculations are those of the Swedish economist, Professor Cassel. This estimate tends to exaggerate the rate of expansion in the demand for basic reserve money. It is based on a period when population and production, and, therefore, the money-work to be done, were increasing at an exceptional rate, and when the non-monetary demand for gold was at its highest. During these years, moreover, the need for gold rose as rapidly as it did partly because of the extension of the international gold standard system to embrace a growing list of countries.
Even if the gold standard system were again established as it was in 1913 the need for gold could not be expected to increase as it did in the half century before the World War, simply because there would not exist the same possibility of extending the use of gold over a steadily widening area. As was noted earlier, the monetary reserves of the world are today nearly three times as great as in 1929. If commodity prices were to return to the 1929 level, if business activity were to increase at an annual rate equal to that maintained in the sixty fat years prior to 1914, and if all the countries then on the gold standard should return to it, we should still have enough gold to meet all monetary requirements for many years to come, even though not one single ounce was produced during that time. If the gold standard is not restored on such a scale, then the world is long on gold to a corresponding degree. It is absolutely fair to say that, ignoring entirely the possibility of increasing the efficiency of our monetary and banking systems and making the most liberal assumptions as to growth in the monetary and non-monetary demand for gold, there is not the remotest prospect of the world’s needing to have another ounce of gold mined for several decades.” p. 18-19
By Russ Nelson, on October 29th, 2009
The US Sentate is currently considering a bill designed to pay people to be unemployed, and to penalize any private parties that still employs people.
Well, that’s not exactly how the bill is written, but that’s how any economist will read it. They’re planning to extend unemployment benefits, which would otherwise run out. This has the effect of paying people to have the job of being unemployed. When you buy more of something, anybody who has a supply of it will step up to the plate. So rather than
take a job, any body just to get income flowing again, the US Senate is encouraging people to stay unemployed.
The other thing they’re doing which “helps” the recovery is to raise the unemployment insurance payments that employers have to pay when they employ someone. This is a tax on employment, and makes it more expensive
to keep someone employed. Anybody whose employment is on the edge will get kicked over and kicked off.
When you tax something, you get less of it. When you subsidize something, you get more of it. Thus it has always been, and thus always have politicians ignored that fact. It’s the economist’s burden to always have to tell them that their grand plans are doomed to failure.
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By Trace Mayer, on October 29th, 2009
The recent gold bull upleg is in the midst of a predictable slight correction and consolidation. When that finishes it is highly probable, based on seasonality and technicals, that the next part of the upleg will commence. The Federal Reserve and Washington are only making matters worse through their extremely damaging policies.
GOLD PARTY BARELY STARTED
Back on 9 September 2009 I wrote:
200 day relative price of gold is at 1.08x … Based on seasonal trends gold and silver will be strengthening, with the strongest months in September and November
This upleg in gold and silver will have significant strength because of the long period of consolidation just like in 2004 and 2006 which provided the foundation for the uplegs in 2005 and 2007 that took gold from $400 to $700 and $650 to $1,000, respectively. If the current upleg is similar to the previous two then the 200 day relative prices for gold and silver at the top of this upleg would be about 1.5x and 1.7x, respectively.
This puts $1,300 gold and $25 silver within range without greatly exceeding previous trading norms
Back then the price of gold was $996 and the 200dma was about $920. Today gold’s price is about $1,030 with a 200dma of about $950. While the probability for a profitable trade is not nearly as high as it would be should the price relative to the 200dma be significantly below the 200dma there is still room for the price to run as we enter winter. The October intermission is likely coming to a close.
OCTOBER INTERMISSION
Dr. Greenspan testified in 1998 that, ”Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”
One of the key reasons to keep the price of gold suppressed through central bank gold leasing is to keep interest rates low. This will be particularly helpful for the $182,000,000,000,000 of certificates of confiscation that will be sold during the week of 26-29 October 2009. Another reason is that NYMEX November options expired 27 October 2009.
PHYSICAL PREMIUMS RAISED
The physical coin dealers are fairly wise to the machinations of Wall Street. When the paper price of bullion falls precipitously then the dealers often raise the premiums.
For example, a reader asked me a few weeks ago when would be a good time to buy gold American Eagles. I suggested after the next drop and if lucky then he may be able to acquire them around $1,025 spot but the premium would likely increase. He reported his shopping to me a couple days ago after the recent drop in price and informed me the premium had been raised from $37.95 to $41.95 per coin.
SILVER BACKWARDATION
On 12 September 2009 I observed that “the London SIFO, the Silver Forward Mid Rates, have been trending towards backwardation.” It is interesting to observe the continuing trend and brief entry of silver in backwardation in the LBMA on 9 October 2009. It seems like the physical silver market is getting a little tight.
 QUANTITATIVE EASING
The big issue is whether the Federal Reserve will be able to, as Ben Bernanke said on 8 October 2009 in The Federal Reserve’s Balance Sheet: An Update, ‘tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration?’ Back in March 2009 when Bernanke started this lunacy I asserted that The Federal Reserve Will Fail With Quantitative Easing.
Bernanke asserts:
Although the Federal Reserve’s approach also entails substantial increases in bank liquidity, it is motivated less by the desire to increase the liabilities of the Federal Reserve than by the need to address dysfunction in specific credit markets through the types of programs I have discussed. For lack of a better term, I have called this approach “credit easing.
What Bernanke is trying to do is get capital to take on additional risk by moving up the liquidity pyramid. But The Great Credit Contraction has begun. While there may be differences in the velocity at which capital moves down the liquidity pyramid the overall direction has not changed. Washington and the Federal Reserve are tiny actors compared to the total size of the market.
Their policies are aimed and designed to grant special privilege to banks like JP Morgan and Goldman Sachs. Through government assistance the banks are able to move their capital down the liquidity pyramid. In effect, they have privatized the gains and socialized the losses. While there may be a case for a rise in the FRN$ in the short term the ultimate destiny is known: the fiat currency graveyard.
EXACERBATING THE GREATER DEPRESSION
As Murray Rothbard observed on page 18 of his 1963 America’s Great Depression:
It is true that credit contraction may overcompensate, and, while contraction proceeds, it may cause interest rates to be higher than free-market levels, and investment lower than in the free market. But since contraction causes no positive malinvestments, it will not lead to any painful period of depression and adjustment.
Mr. Rothbard continues the observation that government policy can hobble the adjustment process by: “(1) Prevent or delay liquidation, (2) Inflate further, (3) Keep wage rates up, (4) Keep prices up, (5) Stimulate consumption and discourage saving and (6) Subsidize unemployment.”
In the present case, mark-to-market rules, like FAS 157, are not implemented, delayed, ignored or willfully violated. The financial markets are now undergirded by fair-value lying standards. For example, Section 132 of the Emergency Economic Stabilization Act of 2008 is titled “Authority to Suspend Mark-To-Market Accounting” and restates the SEC’s authority to suspend the application of FAS 157.
The Austrian definition of inflation is an increase in the money supply. The Adjusted Monetary Base, the very lowest layer of power money, shows a tremendous increase over the past year. The effects are most likely masked by the tremendous slowing in the velocity of money.
In an effort to stimulate consumption and discourage savings that will result in keeping prices and wages high the Obama administration has unveiled a $1 trillion stimulus package. The Geithner toxic asset plan will only serve to hasten the destruction of wealth from the economy as the system evaporates.
The Federal minimum wage rose in July 2009. Unemployment will be subsidized by extending benefits for 13 weeks and delaying the income tax payments. Legacy industries, like the auto industry, are receiving bailout money to keep wage rates up and people employed doing nothing all day long because of the huge over capacity of automobiles. With Cash-For-Clunkers automobiles which have value are destroyed to reduce supply of alternative goods to new cars made by Government Motors. This is a prime example of what Washington DC is: A giant wealth destruction machine.
Therefore, like heroin to cure a hangover the quantitative easing from the Federal Reserve and the lunatic policies from Washington are not improving the situation for average people but instead exacerbating the greater depression. Now is the time to Raze The Fed and while doing the spring cleaning who needs Washington?
CONCLUSION
The current correction and consolidation of gold appears to be within trend and expected based on the seasonality. November is the strongest month and this recent correction on low volume is laying a strong foundation for a large move upwards.
The Federal Reserve’s quantitative easing programs have not been helping the situation but instead exacerbating the greater depression. All in an effort to save the inefficient, barbarous and archaic relics of a fiat currency and fractional reserve banking system that is destined for extinction and replacement. The Crash of 2008 was just the start of The Great Credit Contraction and it will last for decades.
DISCLOSURES: Long physical gold and silver and no position the problematic SLV or GLD ETFs.
By Eldon Mast, on October 28th, 2009
Early this week a survey release by the National Association for Business Economics (NABE) provided new evidence that the U.S. recovery is solidly under way and will be sustained well into 2010. The best news of the survey is that now a majority of companies surveyed are planning to boost their payrolls this year and next.
For the first time in over a year, the percentage of businesses expecting to hire workers over the next half year exceeds the share that project more layoffs.
Additionally the majority of firms now foresee that they will spend more on new capital equipment in the next six months adding more fuel to the growing recovery in 2010.
The survey shows that companies are generally becoming more optimistic about the future. As initial claims for unemployment continue to fall, the survey results are one strong signal that a return to job growth for the US economy is just around the corner.
The NABE survey’s select group of retailers, health-care providers, hotels, restaurants, finance firms, insurance companies, and real estate employers all forecast job growth in 2010.
Much of the fuel for optimism has come from much better than expected results in Q3. Earlier in the year many economists had forecast lackluster results for Q3, but most firms have smashed those meager expectations. Since the start of the third-quarter reporting period, 80 percent of the companies in the S&Ps 500 Index have released better-than-expected results, according to Bloomberg, First Call, and Thomson earnings data. As a percentage so far, that’s the best quarterly showing in 16 years.
Not only are a majority of firms beating Q3 expectations, forecasting job creation, and upping capital expenditures, but every single company polled this month anticipates the economy will expand in 2010.
Surprise, surprise, surprise!
By Thersites, on October 28th, 2009
The policy of credit card companies charging an annual fee for those cardholders with solid credit is a good proxy for the state of the nation, and also a microcosm of both the progressive (read socialist) movement in this country and the unintended consequences of an economic policy destined to fail — or succeed if you measure success by increased impoverishment.
Those two solvent, reputable, dare I say creditworthy institutions Bank of America and Citi are reportedly
starting to charge fees to reliable customers in response to a slew of new credit card industry regulations that will limit when banks can hike interest rates. Cardholders who get a new annual fee notice in the mail will be in a no-win situation.
“They can either pay that fee or they can close the account, and if they have had the account for a while and they close it, they are potentially going to hurt their credit card score,” said Woolsey (Director of Consumer Research at CreditCards.com).
This response to government intervention provides great insight into the problems with regulations the government claims will help the consumer. By preventing banks from increasing their rates in response to a lack of creditworthy borrowers in the markets, those who have proved creditworthy customers over time will be forced to subsidize those less reliable to make up the difference, proving yet again that there is no such thing as a free lunch. We could examine the further consequences for the macroeconomy of these creditworthy people being incentivized to become less creditworthy or if nothing else losing purchasing power as a result of this policy, but the above synopsis should do.
This policy reflects what happens every time the government tries to set prices – in this case the price of credit. Some people are aided, while others lose as a consequence. Further, as with the way in which government seems to favor the debtor over the creditor today, here the less responsible is favored over the more responsible. Adding insult to injury, the more responsible cardholder must subsidize the less responsible one. In essence, this is the basis of the welfare state. Those who generate more wealth must have a significant percentage of it expropriated to help out those who do not create as much wealth. We can argue over whether wealth generators are more responsible than the indigent, but I think you understand my point.
As I have mentioned before though, this liberal system in the end devours itself. First, it is economically unsustainable. At some point, those continually forced to subsidize the reckless and feckless will either go broke or go Galt. As a consequence, so too will the whole system (go broke that is). Second, from a moral perspective, the values engendered in rewarding people for being unproductive and penalizing those who create will pervert society, leading to its malaise.
As I have harped on continually here, the problem with the development of a capitalist system is that if not constantly fought for on both economic and perhaps more importantly moral grounds, it ends up sowing the seeds of its own destruction. Wealth begets wealth until it begets redistribution of wealth. Redistribution of wealth destroys the mechanisms that create it in the first place and weakens the moral fiber of a society. Much like organisms in nature that grow beautiful and strong only to decay in old age, capitalism seems to grow great only to end in grief.
Tax the rich
Feed the poor
Til’ there are no, rich no more
By Winton Bates, on October 27th, 2009
In my view, we should expect the rules of a good society to have the assent of nearly everyone but that does not mean that these rules are good for everyone. In particular, the law of liberty – preventing people from interfering with the protected domain of others – cannot be expected to be good for everyone even though it serves the good of all.
A good place for me to begin to explain the point I am trying to make is with Richard Kraut’s suggestion that under certain conditions norms, rules and laws do not serve the good of all (“What is Good and Why”, p31). The example he gives is of a situation in which our confidence that it is wrong to steal could possibly be diminished because “the property system may make it impossible for some to have the material resources they need to maintain their health …”. Kraut asks: “What objection can be make to taking what is not yours if you need it to sustain the health of your children, and the person from whom you take it has so much that it would do him no good?” The point he is making is that the rule against taking what is not yours “must be evaluated as a component of the social system in which it is embedded”.
I agree that the rule must be evaluated as a component of the social system, but I don’t think we need to be assured that the social system functions in a way that is good for all members before we can endorse laws prohibiting theft. Does Kraut’s example demonstrate that we could expect people to flourish to the same extent in a society with large wealth disparities in which there are no rules against theft as in a similar society where there are rules against theft? I don’t think so. If there were no rules against theft some resources currently devoted to mutually beneficial activities would be allocated to theft and to the protection of property against theft. Those who have a particular aptitude for stealing might benefit, but the costs to other people would clearly outweigh the benefits to thieves.
Some might argue, however, that our disapproval of theft should allow exceptions in circumstances where the thief has great needs and the victim is relatively unaffected. We might approve of such redistributions if we were to choose behind a veil of ignorance about our chances of being in a situation where we might be tempted to steal or of becoming a victim of theft. In the real world, however, how could a potential thief be sure that a potential victim would be relatively unaffected by the theft of any particular item? Even people who wear their wealth lightly can still own items that have great sentimental value.
Such considerations suggest to me that nearly everyone would agree that theft should be prohibited. I think it is likely that support for such a prohibition would be widespread even among population groups whose members have reason to be aggrieved about their treatment under the prevailing social system. In this sense disapproval of theft may be widely considered to be for the good of all, or at least widely considered to be likely to produce better outcomes than would an ambivalent attitude toward theft.
Does it change matters when the redistribution is undertaken by governments rather than by thieves? There are similarities between theft and rent seeking – the competing efforts of various individuals and interest groups to use the use the coercive powers of the state to have income redistributed to themselves at the expense of other groups in the society (for example through government budget allocations, provision of services, trade protection and other forms of industry assistance). The involvement of governments is an important difference, however, because the decision-making processes of governments may be widely viewed as having greater legitimacy than those of thieves. In addition, the information required to implement modest redistributions that might be given nearly universal assent behind a veil of ignorance – for example, provision of a welfare safety net – is available to governments responsible for implementing such redistributions.
The considerations involved seem to be similar when we come to paternalistic interventions to prevent adults from harming themselves. Norms, rules and laws protect individuals from all kinds of interference by other people, including well-meaning interference to prevent people from harming themselves. It is possible, however, to construct examples where our confidence that it is wrong to interfere is diminished. Richard Kraut gives us the example of a person who has fallen into an acute but curable despondency who proposes to kill himself even though he has many good years ahead of him (p 238). The argument that it is wrong to coerce a person for his own good because this is inconsistent with living in peace with him (see my last post) loses some force if the powers of judgement of the person concerned are obviously impaired.
However, the circumstances in we would condone people coercing others for their own good are extremely limited. We might have somewhat more confidence in intervention by government agencies than by individuals whom we have no reason to trust, but substantial moral hazards are involved whoever is permitted to intervene. Regulation might be more permissible than ad hoc interventions.
Behind a veil of ignorance just about everyone might support regulations that restrict freedom to a minor extent in order to protect vulnerable people whose judgement is obviously impaired. But in the real world it is difficult to frame such regulations to achieve the right balance. For example, the Australian Productivity Commission’s has recently published draft recommendations that the maximum bet limit on most gaming machines should be set at one dollar and the maximum amount of cash allowed to be inserted into a gaming machine at one time should be $20. While I claim no expertise in this area I think such limits could significantly inconvenience gamblers who want to minimize the time they spend playing mind-numbing machines, without doing much to protect problem gamblers. No matter how low the limits are set, they will not be low enough to prevent some vulnerable people from harming themselves.
This is true of all forms of regulation designed to protect vulnerable people from making bad choices. The rule that is good for all – the rule that nearly everyone would agree to behind a veil of ignorance about their own particular interests and vulnerabilities – will not be good for everyone. We should not expect the rules of a good society to be good for everyone.
By Claus Vistesen, on October 27th, 2009
Sorry for the hiatus, but I am preparing a large note on the ECB, whether it is conducting QE or not, what QE at the ECB is, and finally what the prospects of an exit strategy is. This has taken most of my time the last week. I will be posting this report shortly. Meanwhile, I will leave you with the following fresh report from the FT about the earnings derived from the ECB’s open market operations (emphasis is mine) which is naturally, although not directly, related to my analysis;
The European Central Bank has made up to €1bn in extra profits from crisis-related emergency lending, but its caution on unconventional policy measures has curbed potential earnings, analysts estimate. Extra liquidity pumped into the eurozone banking system since the collapse of Lehman Brothers last year has probably generated an extra €900m ($1.5bn, £780m) in profits so far, according to calculations by Goldman Sachs.
Some €300m of the total has been generated since June, when the ECB provided €442bn in one-year loans in its biggest liquidity providing operation. The extra profits are on top of the sums that the ECB normally makes on its market operations. Although the interest rate currently charged by the ECB – 1 per cent – was the lowest in its 11-year history, revenues “remain juicy because of the quantity of liquidity that banks keep hoarding”, said Natacha Valla, European economist at Goldman Sachs in Paris.
From last October the ECB has been meeting, in full, eurozone banks’ demand for liquidity. Ms Valla argued, however, that by sticking largely to using policy instruments already in its armoury the ECB had forgone potentially far higher margins.
Profits on the ECB’s programme to buy €60bn in covered bonds – low risk assets issued by banks and backed by public sector loans and mortgages – could be dwarfed by those on schemes launched by other central banks, which have involved higher risk. The Financial Times reported last month that the US Federal Reserve had made a $14bn profit on its crisis loan programmes, with its purchases of commercial paper among its most lucrative operations.
Instead, the ECB has created arbitrage opportunities for eurozone banks, which have used liquidity provided by the central bank to buy large amounts of government bonds, including from some of the smaller eurozone countries and riskier assets. These, in turn, can be used as collateral to raise fresh funds from the ECB. Eurozone banks’ holdings of euro-denominated government bonds have increased by more than €200bn since last year.
By Eldon Mast, on October 27th, 2009
This past week Warren Buffett said that is is now very clear that the low point in the US economy has already passed, with “enormous” progress being seen over the past year.
Buffett attributes much of the strong uptick to swift government action last fall and winter. The actions were paramount in keeping the economy from complete collapse.
“We made enormous progress since a year ago… What happened in September and October of 2008 will particularly be remembered for a long, long time,” Buffett said in an interview with Business Wire CEO Cathy Baron Tamraz that was released late in the day Tuesday.
Buffett continued, “And while the governmental authorities malign things sometimes, they fortunately did some very right things, very important things. They did them properly, and they kept us from going over the cliff.”
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