Tuesday, May 17, 2011

J. S. Kim - The Role of Central Banks

  This is such a timeless classic from Orrin explaining our country's economic scam, I had to post it for all to revisit!
Capt. Bill 

Here is an informative article from J. S. Kim, one of the best minds on economics and government policy in the marketplace. Mr. Kim has consistently beat the market and, like Peter Schiff, studies the underlying principles behind government policies to predict accurately. We need less rhetoric from our government and more principle based leadership. I encourage everyone to start educating yourself on Austrian Economics, because it is the only economic training that has consistently predicted the effects of government intervention.

Mr. Kim explains his investment strategy. The underlying principles reveal that the relationships with Government and Central Banks are more important than serving the customer. This is another example of the end of free enterprise and to corporatocracy worldwide. The totalitarians lost the cold war, but are winning the economic war. This is not a good trend for freedom loving citizens of the world. Mr. Kim states that the Central Banks are more powerful than any government in the world! Throughout history, debtors are in bondage to their creditors. We cannot afford to remain ignorant of this slide into government ownership and control. God Bless, Orrin Woodward

All global economic problems today are rooted in the existence of Central Banks and their commitment to an application of destructive Keynesian economic theories to our global monetary system that simply has not worked for the better part of this century. Within the realm of academics, monetary policy, politics and media, there is a persistent refusal to acknowledge the primary role Central Banks undertake in artificially creating boom-bust cycles that would not occur in such severe fashion were Central Banks simply willing to step out of the way and allow free market forces to operate.

If you ask anyone who graduated from Wharton, Harvard or Oxford, or any number of other Western universities, with a degree in business or economics, who Alan Greenspan is, I guarantee you that he or she knows (I myself graduated from the University of Pennsylvania). However, ask them who Friedrich A. Hayek is, and I doubt if anyone knows. Yet those of us that adhere to Austrian economic theories have used our understanding of sound monetary principles to accurately predict all steps of this crisis since 2006.

So how did I learn about Austrian economic theories despite never having heard of Friedrich A. Hayek during my entire 18 years of schooling? For the last 15 years, I taught myself what the institutionalized formal educational system refused to teach me. Despite the successful accuracy of our past predictions, even today, we are summarily dismissed as crazy “gloom and doomers," while those that steadfastly adhere to Keynesian economics principles (all Western Central Banks as well as the governments and politicians they control), upon reflection, are the ones guilty of the predominant body of wildly inaccurate, unsound, and failed predictions over the past 3 years. Need a sample? How about the US housing markets being fine and properly valued? How about the US being on a path to full employment? How about strong future economic growth and a boom in US exports? Though in hindsight, these predictions sound more like the ramblings of a madman, these predictions were all made by our current Federal Reserve Chairman, Ben Bernanke, in 2005 and 2006.

In reality, if we strip away the divisive jargon of politics, gloom and doomers are not the perpetual pessimists we have been inaccurately and unfairly portrayed as by the media (for even I told my clients just five months ago that a 1,000 point rise in the DJIA was entirely plausible though the Dow’s climb has admittedly been twice my expectation since). In reality, we are merely strong proponents of the Austrian School of Economics. In the Western sphere of academia, the principles advocated by the Austrian School of Economics have been so silenced that most of us who graduated from Western institutions of education with MBAs, graduated never having heard of Friedrich A. Hayek, one of the pioneers of the Austrian School of Economics. This, despite the fact that his economic principles are so important that he is the most quoted economist in the acceptance speeches of Nobel Prize winners in economics.

In fact, by cleansing banking history and monetary policy in all textbooks of any honest discourse about the Austrian School of Economics, Central Banks have even shut out nearly all Western educated young men and women from possibly understanding the true roots of this crisis. The reason for this is simple: If people understood Austrian economic principles, there would be instantaneous revolt in the Western hemisphere against the loony monetary principles enforced upon us by Central Banks. Ignorance is the great pacifier. Those who are ignorant of Austrian economic principles and most hurt by the financial oligarchs that inflict Keynesian economic policies often the economy often serve as their staunchest defenders and apologists. For example, the retail investor who defends current stock market rallies in China, Europe and the US as “fundamentally sound” and “sustainable” will be the first person to be wiped out when these rallies ultimately and necessarily crash.

It is an absolute lie when the media and financial executives stated last year that no economist foresaw the blowback of decades of loose monetary principles that created the perilous situation the world suffered in 2007 and 2008. And when they tell us that this crisis has bottomed, this is a lie too. It is true that no Keynesian economist forecast this crisis; however, there were plenty of Austrian economists who forecast nearly every step of this crisis months and even years before this crisis unfolded. I, myself, back in September of 2006 started writing about a “Peak Investment Crisis” and I was hardly the only one who foresaw the depth of this crisis more than 3 years ago.

Furthermore, one could review the very public predictions of self-proclaimed adherents to Austrian economic principles such as Jim Rogers, Max Keiser, Ron Paul, Peter Schiff and many others for the past 3 years as well. I am very confident that you will find that strong proponents of Austrian economics were well accurate in the majority of their predictions while all of our banking and political leaders were atrociously inaccurate in their predictions as a group. Given the huge chasm in the accuracy of predictions between proponents of Austrian and Keynesian economics, were it not for a realization that the media are shills for the financial oligarchs, it would indeed by perplexing to try to understand why they continue to marginalize the accurate predictors as “gloom and doomers” and continue to heap praise upon the atrociously poor predictors. I, for one, refuse to give power or credibility to the term “gloom and doomers” as it surely is a favored discrediting tactic of the financial oligarchs that rule the US Federal Reserve and the world’s other Central Banks.

The US Federal Reserve has always been eager to re-inflate collapsed asset bubbles with cheap credit and ultra-loose monetary policy (just reference the actions of the US Central Bank, post-crash, after the 2000 dotcom stock market crash, and the more recent US housing crash). In the face of a runaway asset bubble, however, Central Banks have always been reluctant to rein in the flood of malinvestment created by their loose (and damaging and foolish) monetary policies by raising interest rates. In fact, the only time that I can recall the US Federal Reserve proactively, instead of reactively, attempting to curb inflationary bubbles was in the late 70’s and early 80’s, when they raised the Fed Funds interest rate to 20.00% in order to serve a larger private agenda and prevent the US dollar from collapsing.

But today, eager to reinflate the stock market after the US housing market plunge, they have successfully re-inflated the US S&P 500 to a P/E valuation that, for the last four months, has been 7.5 times higher than its historical average of 17.79. And as usual, the US Central Bank stated yesterday that they have no interest in stopping this runaway malinvestment bubble either as they stated they will leave interest rates near zero for the foreseeable future.

Central Bank policies, as usual, only serve to postpone and exacerbate the problems that their loose monetary problems create by engineering illusory recoveries that are entirely borne out manipulating the monetary system that they control, but that have zero basis in fundamentally sound economic principles. What do I mean by this? It is quite simple. When economies struggle, Central Banks never seek to solve the root of the problem, but instead, choose to artificially cut interest rates due to Keynesian economic theories, even when free market dynamics call for no such actions. Consequently, a flood of cheap credit leads to spikes in investment borrowing solely due to cheap credit and not because of the existence of appealing investment opportunities that offer good growth prospects.

The flood of easy money that Central Banks create now needs a home, as investors don’t borrow money to earn less than 1% annual interest in a bank savings account. The home, outside of entrepreneurs who may reinvest this money into their own businesses, is either the real estate market or the stock market. In the case of the stock market, since the stock market was not demanding more new money but has been force-fed new money, it continues to absorb the excess liquidity artificially created by Central Banks even when stocks are already fairly valued and even overvalued. This is Central Bank force-fed malinvestment, not economic recovery, and outside of the manipulation of Wall Street high frequency computer trading programs, this is precisely how we ended up with an S&P 500 with a P/E over a 133 for the last four months.

In reality, if free markets were free of Central Bank meddling, and allowed to function and set interest rates, proper interest rates would be set, and the appropriate amount of borrowing and investment or disinvestment would occur in US stock markets to achieve a healthy valuation of stocks. Instead, when Central Banks' artificially create excess money that free markets do not demand, excess money chases poor investments, distort asset prices, and create an extended period of malinvestment. So while periods of malinvestment can last for exceptionally long periods of time as long as Central Banks keep shoving cheap credit down the throat of the economy, the “economic recoveries” they produce are unsustainable and therefore nothing more than prolonged periods of ill-advised malinvestment. Under these conditions, every higher rise is, in reality, nothing but a greater distortion and move away from fair market values that plant the seeds for a future disastrous and inevitable crash that cannot be prevented.

A recovery under these conditions, commonly and erroneously referred to by the media as a “boom”, is not a “boom” at all, but a mass distortion of prices not set by free market forces of supply and demand, but deliberately engineered by foolish Central Bank monetary policies that successfully “bait” foolish individuals and institutions. History tells us that malinvestments always end up in busts. Not in small corrections and further sustainable growth for the next five years as Keynesian economists would want you to believe, but in spectacular busts. This is why I can be 100% sure that a spectacular bust is in the future of the US stock markets and that the only question that remains is the timing of this bust.

And when the bust that is inevitable occurs, you can be 100% sure that the financial shills that are our mass media will once again erroneously describe the “bust” as an “unforeseeable event”. Through the lens of an Austrian economist, this bust is necessary as it is part of the market’s self-healing process whereby it sheds itself of the distorted value caused by prolonged malinvestment and returns assets to their proper fair market valuations. Of course, in the process of the bust, panic often ensues which depresses assets below fair market valuations.

In fact, if one just switches the media’s descriptions for stock market rises and gold and silver market rises, then one would have a correct representation of reality. Stock market rises that are described as sustainable and healthy are more apropros descriptions for the rises in gold and silver markets, whereas the speculative bubbles they use to describe gold and silver markets is a more fitting description for the stock markets.

For the reasons described above, I am 100% certain that the reinflation of the US stock market, the Chinese stock markets and the European stock markets will all end up in disastrous busts. People don’t understand that the predictions made by the small handful of us who advocate Austrian economic principles are not driven by a genetic propensity towards pessimism. To the contrary, our predictions are driven by the logic of real world application.

For the last century, Central Banks have interfered with free market forces and imposed loose monetary policies that have led to the formation of asset bubbles that were unsustainable in nature. In every single instance, these bubbles did not undergo mild corrections and further periods of sustained growth, but all eventually experienced spectacular crashes. Thus, the continued application of the same strategies by Central Banks today are already predestined to fail in the same manner. To call Austrian economics a “doom and gloom” economic theory is a great miscarriage of justice. If its sound principles were applied by world governments, then sustainable steady growth could be achieved without the cycles of boom and bust we experience every four or five years.

If the media insists on playing the role of financial shills and calling advocates of Austrian economics “gloom and doomers”, the least they could do is reciprocate and label Central Banks and all proponents of their monetary policies as “psychopaths”. Though one may believe such a label to be unduly harsh, the clinical definition of a psychopath is one who regularly engages in antisocial behavior and exhibits a chronic disregard for ethical principles. When Central Banks continually engage in the same loose monetary schemes when they already know that the end result will be massive failure, this behavior embraces the clinical definition of a psychopath. What the people have failed to realize for the better part of this past century is that the private families that own and operate Central Banks have reaped great rewards from creating these massive failures, with the cost being the great destruction of a nation’s wealth.

Henry Ford once reportedly stated, “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, there would be revolution before tomorrow morning.” One thing we have learned today is that Central Banks have insured that the people of our nation still do not understand how our banking and monetary system works. For if they understood, they would not be following the road to destruction that is deliberately being paved for us by the US Federal Reserve, not dissimilar to the behavior of suicidal lemmings that follow one another off the edge of a cliff.

One tenet that all Austrian economic adherents would support that will never receive any acknowledgment from Keynesian economists is the following: Central Banks are a burden upon all humanity, and that until all are banished from this Earth no progress in economic or political freedoms is possible. It is an absolute myth that Central Banks are necessary for sustainable economic growth and that in their absence, anarchy would reign. There is no historic proof of this. In fact, during periods of history when Central Banks did not exist, much greater economic stability and sustainable growth persisted. If humanity were successful in shuttering all Central Banks, this would be the greatest modern day gift to humanity as true “green shoots” – free markets, economic freedom, and a realistic chance to finally end poverty – would blossom. Central Banks are masters at creating illusory economic recovery, and as we know, all illusions must eventually crumble

Sunday, May 08, 2011

Neither Social, nor Secure!

Here's a dash of common sense about a government scam, straight from the horse's mouth!
Capt. Bill!

When I was eighteen, I had, in one day, two life changing experiences, both coming on my first day of work. One for good, the other, not so good. All of the new co-op students for AC Spark Plug, then a division of GM, gathered around a long wooden table in a conference room, to learn of their roles and responsibilities. It was at this meeting that I first met Chris Brady, my good friend and business partner. This was the good life changing event, as Chris and I have partnered in business over the last fifteen years, producing results and memories that will last a lifetime. I will save my Brady stories for another time, mainly, because I want to discuss the other life altering experience that day. I was an A section student at GMI-EMI (now Kettering), so I went to school during the summer while B section students worked in the summer, with each section rotating between work and school every twelve weeks. Because I was A section, I was only at work one day that summer for my initiation, meaning AC had to cut a check for that day before I headed to school the following Monday. You can imagine my anticipation, after leaving work, making my way to my rusty Chevette, when opening my first ever paycheck. I made a whopping sixty-four dollars minus, Federal withholding, Michigan State withholding, Flint City witholding, and FICA, leaving a grand total of around forty dollars. I couldn’t believe the taxes taken from my check, over one third of my check vanished, but still a nice amount for a broke eighteen year old. I quickly reviewed the taxes and acknowledged some legitimacy (the tax, not the amount) for the Federal, State, and City, but what is this FICA (Social Security)? No one told me about any FICA tax, exactly what is FICA Tax? I raced home to talk to my financial guru, my mom, sharing with her my concern at this extra tax. Laughing at my ignorance, she shared with me that our benevolent government withholds a certain amount of money from your paycheck, planning to take care of you when you retire. “But I don’t need the government to take care of me when I retire,” I emphatically stated, “I’m going in there and telling them to stop withholding that FICA tax.” My mother chuckled at me, like she has many times over the years, figuring I would have to learn this truth the hard way.

Imagine how strange I felt, realizing for the first time, that the State can help itself to my paycheck, not just for protection of my life, liberty, and property, but also to provide nanny services in my retirement years. I appreciate the offer Mr. State, but I will take care of myself through my own savings plan; sadly, that isn’t an option as we are forced to save our money with the State. Always the curious one, I asked around, seeking wisdom from some of my older co-workers, learning that employees and employers both pay half the bill, totalling over 12.5% of a employee's income. What I learned, that government can take our money, becoming a mandatory bank for us, didn’t sound like freedom as I understood the term. But like most eighteen year olds, my mind quickly lost focused, conveniently forgetting about my lost freedoms, reassuring myself that I could trust the Federal government to save my money; after all, if you can’t trust your own government, the one assigned to protect our life, liberty and property, who can you trust?

What’s most surprising to me, looking at our Social Security system, isn’t its upcoming bankruptcy, nor its over 12% tax on every incomes, but the curious lack of concern by the American citizens. Look at the latest statistics from the Mark Crovelli, writing for Mises Institute, on our American Social Security system.

For those people not gifted with accounting ESP like Lindorff, Social Security's unfunded liabilities are conservatively estimated to be around $17.5 trillion. Oh yeah, and that "trust fund" that Lindorff mentions as if it were really overflowing with saved money — all the money has already been spent by Congress. As you can see, the numbers are not exactly as rosy as Lindorff's ESP has led him to believe.

What is really interesting is that even while Lindorff is trying to make the case that Social Security's fiscal condition is not all that serious, he concedes that Social Security will indeed go bankrupt this year. He writes:

So with beneficiaries rising faster than anticipated, and the total national payroll in sharp decline, of course things have gone negative for Social Security earlier than originally anticipated.

One would think that an institution going "negative" (i.e., bankrupt) is a sign that there is something fundamentally flawed with it. For Lindorff, however, bankruptcy is nothing to get ourselves worked up about, especially since the bankruptcy is only caused by the demographic problem posed by the baby boomers.

Lindorff thinks the boomers are only a "demographic wave that will eventually pass." He's right — we only have around 30 more years until the "wave" passes. Thirty years of bankruptcy is nothing that need trouble us!

Now, let’s see if we can understand these figures. The unfunded liabilities is $17.5 trillion, that’s a boat load of money, even if your last name is Buffett or Gates, certainly enough to bankrupt the 100 wealthiest Americans with plenty of room to spare. The tax money, taken from us against our will allegedly for our own good, because it was assumed government would be more responsible than its citizens, saving it for us until we retired, is missing in action. Politicians transferred the money out of Social Security into other projects, violating our trust and their fiduciary responsibility, exhausting themselves in an orgy of spending, leaving a huge IOU to unsuspecting Americans. The problem, as I see it, is our government has proven incapable of balancing the budget with the Social Security surplus; how will they balance the budget and fund Social Security when there is no surplus? Can anyone say higher taxes or inflation? I heard recently, that Social Security is now paying out more in benefits than its receiving in taxes; simply put, this means it's time for us to reap what we the State has sown. Believing Americans, from all regions of the United States, allowed the federal government to go beyond its normal responsibilities, surrendering their money to FICA, assuming their savings is secure. Every year, for approximately the next 30 years, the numbers will get worse, accumulating more debt as baby boomers retire faster than the younger generations enter the workforce. Remember, currently, the State relies on the tax from the workers to pay the benefits of the non-workers. If the pool of workers reduces while the pool of non-workers increases, exactly the condition we find ourselves with the Baby Boomer retirements looming, the State is in trouble. The Social Security system is a classic example of a Ponzi scheme, where people get paid only if new people join fast enough to compensate existing beneficiaries. If new members do not appear, the system collapses. Population growth, not to mention the economic conditions, are not cooperating with the needed tax revenues to fund. By reviewing the State’s results, it’s clear to me, that Social Security isn’t going to be social and it certainly isn’t secure.

After hearing the dismal record of government involvement in Social Security, one can only pray for leaders to arise and address the root causes. America is suffering a courage crisis at the highest leadership levels. It’s time for government to stop trimming the leaves, calling this change; instead, start pulling out the failed government bureaucracies root and branch. Leaders in the business community, that want to serve their customers, not partner with the State, need the freedom to do so. Only production can generate real GNP and job growth, hiring more government employees only means higher taxes for the few courageous enough to still produce. Perhaps the biggest lesson learned in the Social Security mess is that government is the wrong place to look for retirement planning. We can make politicians our scapegoat, but the system rewards the wrong behaviors; changing politicians will do nothing, until we change what we ask government to do. Of course the politicians, tempted by potential votes, increased the Social Security benefits; of course the politicians, enticed by the “free money” surplus, spent it all, writing IOU’s that come due after they leave office. Social Security is in shambles, whether the government inflates its way or taxes its way out of the mess is the only question. We can complain about how poorly the Social Security system has been managed, but government wasn’t designed to manage our affairs, placing the responsibility upon citizens to clearly define and limit government’s roles. Politicians, by their nature, cannot think long term, having to stand for re-election every two, four or six years; when you consider that Americans live over seventy years on average, making life a long-term project, even retirement happening after thirty or more years, you quickly see the fallacy of our short term government involved in our long term lives. This is another example of the “Destruction of the Commons”, the politicians choosing their personal short term “good” creating the public’s long term bad. A simple way to remove the risk of "Destruction of the Commons" is to privatize, similar to what the airlines did in the early 1980's, ensuring there is no commons to destroy. Government has always been a hot bed for short term fixes, pushing the long term consequences off into the future, a future that never comes for them, since they are out of office, being replaced by others who quickly learn the rules of the political game.

The problem, even though accurately defined and easily predicted, is not simply solved. Because of the politics associated with Social Security, every electable politician is afraid to touch this with a ten foot pole, assuring the problem isn’t addressed, passing the buck into the endless future. By studying the failure of Social Security, learning the “Destruction of the Commons” principles, seeing the political take over from the economic any field government enters, one becomes certain of the proper course, keeping government out of people’s affairs. Americans, if we include colonial times, without the help from government, saving their own money and relying on family and friends, survived for 250 years without a Social Security system. Government, it seems, by offering to care for us in retirement, taxed our incomes, reduced our savings, forced us to hope in government’s solvency, a hope perpetually deferred. I have mentioned only one area of government intervention, but there are plenty of others to choose from. Each of the areas have their own particular facts, but all have the same underlying failure modes - “Destruction of the Commons.” Without looking at Public Schools, Medicaid, Federal Housing Aid and many more, don’t we already have enough knowledge to know that less government intervention is better? Is anyone truly going to argue that a $17.5 trillion deficit in one program is a success? With that said, is it really in our best interest to sacrifice our Health Care system on the State altars? You don’t have to be a prophet to see the effects of the “Destruction of the Commons” in the Health field, offering slower services, less doctors, but always the higher taxes as our reward for trusting in the State. As a leader, I learned a long time ago not to listen to what a person or organization says. Instead, I learned to watch what they did and the results they achieved. The rhetoric out of Washington may tickle the ears, but it empties the pocketbook. We can and must do better. God Bless, Orrin Woodward