Wednesday, 24 January 2018

Bastiat & the 'balanced trade' bugaboo

With the announcement after all of a TPP deal that includes New Zealand, it's worth reminding ourselves, as this guest post by Marco den Ouden does, that trade exists because the parties to every trade see an advantage to doing so, not because it is "good for the country."


"Trade protection accumulates upon a single point the good which it effects,
while the evil inflicted is infused throughout the mass. The one strikes the eye at
a first glance, while the other becomes perceptible only to close investigation."
~ Frederic Bastiat
Protectionists of all stripes often rail about trade deficits. An unfavourable balance of trade. One of the catch phrases of these people, because at some level they realise the value of trade, is that they want "fair trade." Yet that's just protectionism under the guise of being pro-free trade.

One of Donald Trump's bugaboos is trade with China. On the Trump website it says "for free trade to bring prosperity to America, it must also be fair trade. Our goal is not protectionism but accountability."

And Hillary Clinton, in her nomination speech at the DNC, said “we should say ‘no’ to unfair trade deals... we should stand up to China.”

Those dastardly Chinese just don't play fair!

Alleged currency manipulation is part of his objection to the Chinese. The Chinese renminbi was pegged to the dollar until 2005. There was considerable hue and cry in the States that the Chinese currency was overvalued. It was alleged that this created a trade imbalance.

The Trump website goes further. "In a system of truly free trade and floating exchange rates like a Trump administration would support, America's massive trade deficit with China would not persist."

Balance of trade! That old bugaboo.

What specifically does Trump propose with respect to trade? During the primary debates he argued for a 45% tariff on imported goods and scuttling NAFTA. Those dastardly Mexicans are as unfair as the Chinese with their cheap car production.

Ironically, proponents of free trade often make the same mistaken argument. They support free trade because they believe that their country will be a winner. They will win the "trade wars" and have a favourable balance of trade. The country's exports will exceed its imports which will be good for everyone.

But the idea that trade has to be balanced, that the amount of imports and the amount of exports should match is, on the face of it, a load of malarkey.

Frederic Bastiat vs. the Protectionists

Nobody has explained this fallacy better than Frederic Bastiat, the brilliant 19th century French economist and polemicist. Bastiat's forte is the reductio ad absurdum. He takes the position of the protectionists and draws it out to its logical conclusion. His petition of the "Manufacturers of Candles, Tapers, Lanterns, Candlesticks, Street lams, Snuffers and Extinguishers, and the Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting" against the competition of the sun is a classic. His proposal of a "negative railroad" skewers his opponents mercilessly.

His attack on the notion of a balance of trade is equally devastating and equally hilarious. It made me laugh out loud when I read it. Speaking of one of the protectionists, a Monsieur Lestiboudois, he says, "he believes and loudly proclaims that if France gives ten in order to receive fifteen, it loses five." In other words, if France exports say, ten million francs of goods and imports fifteen million, France is out five million francs.

He quotes this trade critic at length with the conclusion that when trade is not balanced, the deficit is money that is given away. "Every year we give away 200 million francs to foreigners.

The Trade Balance and the Businessman

The theories of the free traders are attacked  by the protectionists as valid only in theory, but, asks Bastiat, "do you think the account books of businessmen are valid in practice?"

If there's anyone who understands profit and loss, surely it is the businessman. So, says Bastiat, consider the case of one of his businessman friends who he refers to by his initials, M.T.. Let's compare M.T.'s accounting to that of the customhouse.

"M.T. despatched a ship from Le Havre to the United States with a cargo of French goods, chiefly those known as specialties of French fashion, totalling 200,000 francs. This was the amount declared at the custom house."

Now after arriving at New Orleans, paying the shipping charge and an American tariff, M.T. still manages to sell the French fashions for a profit of twenty per cent or 40,000 francs. The return of his original investment, the shipping costs, the tariff and his profit nets him 320,000 francs which he uses to buy cotton.

In addition, M.T. had to pay for shipping the cotton back to France, commissions, insurance and so forth bringing the cost of the cotton to 352,000 francs. And that is what the customhouse entered into its books as the value of the imported cotton.

M.T. sells the cotton and nets another 70,400 francs in profit. M.T. is up 40,000 francs on the sale of French fashions to the Americans and 70,400 francs on the sale of American cotton to domestic French consumers. He has profited to the tune of 110,400 francs! Not a bad business trip!

But in the accounts of the French customhouse, France has exported 200,000 francs and imported 352,000 francs. Oh my god! It's a trade deficit! France just got snookered out of 152,000 francs! Or as Bastiat puts it, the esteemed trade critic must conclude that France "has consumed and dissipated the proceeds of previous savings, that it has impoverished and is on the way to ruining itself, that it has given away 152,000 francs of its capital to foreigners!" (italics in the original).

Throw it into the sea!

But Bastiat is not done yet! It seems M.T. despatched another ship shortly thereafter with another 200,000 francs of goods. Sadly, the ship sank and M.T. had no choice but to enter into his accounts a loss of 200,000 francs.

The good gentleman at the customhouse, however, entered the shipment as 200,000 francs in the export ledger before the ship sailed. But because it sank, there will never be anything entered in the import ledger to counter it. "It follows," says Bastiat, "that M. Lestidoubois and the Chamber will view this shipwreck as a clear net profit of 200,000 francs for France!"

But wait! Bastiat is still not done! "There is still a further conclusion to be drawn from all this, namely, that, according to the theory of the balance of trade, France has a quite simple means of doubling her capital at any moment. It suffices merely to pass its products through the customhouse, and then throw them into the sea. In that case the exports will equal the amount of her capital; imports will be non-existent and even impossible, and we shall gain all that the ocean has swallowed up."

Indeed, when someone sells something, whether to a domestic or foreign consumer, he does so to make a profit or he wouldn't make the trade. Conversely, when someone buys something, whether from a domestic or foreign consumer, he does so because he sees it as advantageous. Trade exists because the parties to the trade see an advantage to doing so, not because it is "good for the country.

Indeed, we could go further and argue that if we need a balance of trade between countries, why not between islands? Why shouldn't the North Island insist that the value of foodstuffs it imports from the Mainland be balanced out by an equal value of manufactured goods exported there? To ask the question is to see its absurdity.

Marco den Ouden writes at The Jolly Libertarian. His post has appeared previously there and at FEE. It has been lightly edited (did you notice?)

QotD: Mises on trade

"In our age of international division of labour, free trade is the prerequisite for any amicable arrangement between nations."
Omnipotent Government, p. 6
 "Imports are in fact paid for by exports and not by money."
The Theory of Money and Credit, p. 286
"It is a matter of indifference whether one produces foodstuffs and raw materials at home oneself or, if it seems more economic, obtains them from abroad in exchange for other products that one has produced."Nation, State, and Economy, p. 84 
"History is a struggle between two principles, the peaceful principle, which advances the development of trade, and the militarist-imperialist principle, which interprets human society not as a friendly division of labour but as the forcible repression of some of its members by others."
Socialism, p. 268
The nationalists stress the point that there is an irreconcilable conflict between the interests of various nations, but that, on the other hand, the rightly understood interests of all the citizens within the nation are harmonious. A nation can prosper only at the expense of other nations; the individual citizen can"fare well only if his nation flourishes. The [classical] liberals have a different opinion. They believe that the interests of various nations harmonise no less than those of the various groups, classes, and strata of individuals within a nation. They believe that peaceful international cooperation is a more appropriate means than conflict for the attainment of the end which they and the nationalists are both aiming at: their own nation’s welfare. They do not, as the nationalists charge, advocate peace and free trade in order to betray their own nation’s interests to those of foreigners. On the contrary, they consider peace and free trade the best means to make their own nation wealthy."
Human Action, p. 183
"It is inconsistent to support a policy of low trade barriers. Either trade barriers are useful, then they cannot be high enough; or they are harmful, then they have to disappear completely." ~ Money, Method, and the Market Process, pp. 135–36 


Tuesday, 23 January 2018

The shutdown scam

"[The US] government wastes so much that it has to borrow money! That $$ has to be paid back with interest via inflation and/or passed on to the next generation. The more that government spends — even for a 'good' cause — the less wealth its nation creates."

~ Mary Ruwart

Did you notice what wasn't being talked about in the just-ended US-government "shutdown"? Answer: the reason several government departments were being partially shut down - that being: because the government can't pay its bills -- that being: because it spends too damn much.

David Stockman noticed -- and he knows all about these things, he being that former Reagan Budget Director who resigned over the Reagan Administration spending too damn much and, as a consequence, having to borrow too damn much. That was back when all these big deficits started ....
Since 1975 there have been 14 shutdowns and we have had the privilege of being on-hand up close and personnel on 11 of these.
....Five shutdowns occurred while [I] was a member of the US House (1977-1981) and another six during [my] stint as director of OMB. The idea back then, needless to say, was that shutdowns came about mainly when anti-spenders refused to capitulate to the incessant demands of the swamp creatures for more appropriations, pork and graft.
....During the Reagan shutdowns, in fact ... they ... had some modest success in containing the worst excesses ...
....No more. On the surface the current fight appears to be over DACA, immigration and the Wall, and therefore a purely political enterprise in which both parties are attempting to feed their respective bases with copious amounts of rhetorical red meat.
....But, in fact, that's not the half of it----or even the most of it.
What is "the most of it" is the spending. That is to say, all the over-spending and consequently excessive borrowing.
The underlying issue behind the appropriations stall ... is a spending arms race between the two parties....
.....Needless to say, however, Wall Street is looking in entirely the wrong place for clues as to the implications of the current shutdown scam. The danger does not lie in adverse impacts on current quarter GDP; it lies, instead, in the implicit confirmation that a fiscally driven bond market collision will soon monkey-hammer the casino revilers...
.....What is really happening, of course, is that the Trumpite/GOP is proving in spades that America is now saddled with two pro-government parties. This means a good shutdown is going to waste and that there is no stopping the fiscal doomsday machine that is now racing toward a national calamity, unimpeded...
....If you think the law of supply and demand has been repealed by the financial gods in order to make Bubble Finance sustainable---why then there is nothing to sweat.
....Otherwise, now would be an opportune time to get out of the casino. The GOP has vacated its historical function as the party of fiscal rectitude and has now become the second pro-government party in the land.
....Accordingly, there is nothing left to stop the nation's fiscal doomsday machine...

QotD: On haranguing dissenters [updated]

"This interview [below] between Canadian psychologist Jordan Peterson and UK Channel 4 interviewer Cathy Newman] is truly a work of art, and while one could probably write a treatise analysing it, one important [point], which I blogged about recently, is the phenomenon of the conceptual versus the anti-conceptual mind...
...."Newman demonstrates [the] anti-conceptual mentality by refusing to grasp the method that Peterson follows. Essentially, she continually ignores or evades his reasoning, mindlessly attaching herself to one word or fragment of his statement which she then tangentially relates to some PC cliche... This is a recurring theme. Peterson tries to explain the causes of an observable fact before jumping to any conclusions or evaluating the morality of those causes, while she wishes to take the fact alone as prima facie evidence of her own preconceived judgment: 'There is a pay gap, therefore men are oppressing women.' ...

...."This anti-conceptual method is endemic to the left and accounts for most of their own political positions.... Why is this? To the left, seeking causes is irrelevant because causes are preordained... These days, that means people are determined by their class, gender, and ethnicity... Consequently, the leftist mind is stunted at birth as it were, leaving its zombie disciples in a position not to have a reasoned discussion nor to debate in the pursuit of truth (causes), but only to harangue and attack dissenters."
~ from the Rational Capitalist's post: "Important 'Takeaway' from the Peterson Interview: The Anti-Conceptual Left"


History teacher Scott Powell agrees that the problem here is conceptual.
For what it's worth, and this is for all you educators and activists out there mainly: the real significance of this interview is that it shows how difficult it is for someone who operates at a higher level of abstraction to talk to someone who refuses to, and why the real battle for freedom is in education.
....The interviewer insists on reframing all issues at a lower level of abstraction (to "simplify," to reduce to soundbites--by stripping away key elements of the truth) and Peterson keeps trying to elevate the discussion to the plain on which it belongs by maintaining the full context. Because modern education has failed so utterly, he can't do it. He stays patient and benevolent throughout, and he does "overpower" her intellectually in the end, especially during that one moment where the truth breaks through.
....But in a perfectly tragic twist befitting our modern world, Peterson's own uneducated "supporters" then attacked her on-line, which fundamentally undercut the intellectual effort he undertook.
....To make the world a better place requires nothing less than increasing the level of abstraction of the culture. Nothing less.


Monday, 22 January 2018

If you go down to the woods today, you might hear a bit of te reo #PopUpGlobe

Pic by Stuff

In Shakespeare's outrageous comedy A Midsummer Night's Dream batshit crazy things happen to serious young things who have escaped the city's strictures for the unfamiliar and faintly dangerous delights of the forest, wherein they are made sport of by those who have born and grew up there: by a race of fairies invisible to the erstwhile city-dwellers whose puckish ways, however, are not.

They, and every receptive audience for the Dream (if the director is doing it right), are always in for a big surprise.

So too, it has been reported, were many of the audience for the Auckland Pop-Up Globe's production over the weekend -- surprised to discover that the fairies, the original inhabitants of the play's strange lands, were represented in this production by two Maori warriors and a wahine speaking in te reo. According to the Herald, who have clearly been simply trawling Facebook to muster controversy where there is none:
Online reviews left about the Pop-up Globe performance said the move was 'disrespectful' and 'bastardising' Shakespeare and confusing for audiences. Other theatre goers have made their equally damning views direct to the venue's management...
One person wrote on social media the use of Te Reo in A Midsummer Night's Dream "spoilt what otherwise was a thoroughly entertaining and professional production." In a Facebook review, another disgruntled theatre goer said the decision to have the fairies speak in Maori meant only two people at his count could understand what was being said.
The reporter does not say how many in total were included in that count, but she is at pains to link "the debate about the use of Te Reo Maori" in the production at the Globe with "the debate about the use of Te Reo Maori" elsewhere which, she says, "has flared several times in recent months ... [including] former National Party leader Don Brash clashing with RNZ's Kim Hill on her Saturday morning show over the public broadcaster's use of Maori greetings on air."

Linking the two "debates" seems to be both unhelpful and disingenuous. Because as every theatre-goer knows, it is possible to destroy a play with errant direction even if you support the director's intentions.

But as everyone leaving the play on Saturday night in tears of laughter could attest, this is not a play that has been destroyed. Far from it. In this setting, and with this directorial choice, the play comes alive.

As it happens, I too was at the show on Saturday night, and I was one of those wiping my eyes of tears when I left (and my Saturday-night-best of blood, but that, dear readers, is another story). And far from being surprised by the speaking of a strange tongue for 20% of the time, I was fully prepared for it -- indeed, I was coming back for a second time having enjoyed the first performance so much. And I will be back again for more before this season ends.

Because, what the reporter fails to point out is one very salient fact: this is a damned fine show! It is truly world class. The performances are stellar, the setting is superb, and the choice to use tangata whenua to represent the forest's native fairy folk is as thematically sound as it is dramatically stunning. Who better to represent the original forest folk than our original forest folk? And that choice being made, why wouldn't you ask them to speak in that original language? If it adds an air of unreality, then that is precisely what the Dream should do!

But there is much of it we can't understand? And so what -- there is much in Shakespeare's own English that is difficult for many to parse, and we don't usually play the Bard with subtitles. And there is much more of Shakespeare's original text that is cut in every production in order to reduce the show time -- a chainsaw being taken to the text that in some cases will see it reduced by as much as half!

But, comes the response, courtesy of the Herald's Facebook trawl, "This [is] silly because the fairies revealed key plot points." And indeed they do -- and apparently the Herald's erstwhile online reviewer is unfamiliar with the art of mime, which these actors speaking te reo use superbly to tell the story. The spells they cast over the various players could not be more clear if they were telegraphed; and if the reasons for their playfulness are not always clear, let me assure you that they are far more so than in many an opera sung in an unfamiliar European tongue. There are enough signposts in this Dream to understand where we are being led, both by mime and by the familiar-enough words of te reo each of us do know that pepper the text.

And as the play's director and Pop-Up Globe founder Miles Gregory explains (the man without whom, it should be remembered, this exciting theatre concept would not even exist),
 having the fairies speak Te Reo was a long-held dream because in Shakespeare's original work the fairies were written as communicating in a language unfamiliar to the other characters. "So to me, having the fairies speak another language enhances the storytelling and provides a fresh and exciting take on a play that is extremely well known."
And so it is, and so it does. That the storytelling is done in such a setting by such consummate performers only adds to the excitement.

Puck (played as a Maori warrior you truly believe could girdle the globe) is outstanding, he steals the show (as every good Puck should); Oberon provides deft support; and if Titania is more statuesque than seductive, she/he comes into her own when seduced herself by Nick Bottom's ass. (If you don't know, then you really must come along and find out!)

For me, the bitching, and the reportage about it, are just so much colourless carping. As an amused Puck says after watching the hilarious knock-down drag-out fight that climaxes Act III,
On Saturday night, that one beautifully-timed word brought the house down.

QotD" On "privilege" and John Rawls's "new" theory of (in)justice

"The new 'theory of justice' demands that men counteract the 'injustice' of nature by instituting the most obscenely unthinkable injustice among men: deprive 'those favoured by nature' (i.e., the talented, the intelligent, the creative) of the right to the rewards they produce (i.e., the right to life)—and grant to the incompetent, the stupid, the slothful a right to the effortless enjoyment of the rewards they could not produce, could not imagine, and would not know what to do with... Why should those 'favoured by nature' be made to atone for is not an injustice and is not of their making?...."That this is regarded as a new theory, raises the question of where Mr Rawls's readers and admirers have been for the last thousand years."~ Ayn Rand, in an Untitled Letter -- "the most appropriate title ... would be 'I told you so." But since that would be in somewhat dubious taste, I shall leave it untitled."

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'

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

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

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'

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!!


* [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.]

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

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

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?


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]

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.

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.

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)

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):


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).

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.
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."

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
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).

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).
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.

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.
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:

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.
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.
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

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.