FT203: “People vacationing in warmer climes know global warming is better than global cooling.” —Old Pithy

Posted by PITHOCRATES - January 3rd, 2014

Fundamental Truth

It is very rare for People to Vacation somewhere where they have to wear more Clothes

People love a white Christmas.  Looking out your front window as a gentle snow falls.  Christmas lights and reindeer on the lawn poking out from the fields of snow.  Coming in from the cold and shaking the snow off.  Then warming up with a cup of cocoa in front of the fireplace.  Feeling the warmth radiate out while listening to the pops of the burning wood.  The warm memories of Christmases past.  Then comes New Year’s Day.  And then you just hate that foul white stuff as you shovel it for the umpteenth time.

As you shovel and your back aches and you feel what may have been a hernia you now understand why people retire to someplace warm.  To get away from this.  Before they have a heart attack shoveling it.  Because you’re sick and tired of shoveling snow.  Cleaning the snow off your car.  Fearing for your life when cars ahead of you spinout.  Wondering how many times can you slip and fall before you start breaking something.  But most of all you just hate being cold.  All you can think about is the joy of last summer sitting in the shade with a cold beer.  Doing nothing.  And loving it.

Even young and healthy college kids hate the cold.  Which is why when they go on spring break they head south.  And between the boozing and the sex they spend time lying on the beach doing nothing.  And loving it.  With the ladies practically naked in tiny bikinis sunning themselves.  And the men looking at the practically naked ladies.  For it is very rare for any vacationer (other than those on a ski getaway) to vacation somewhere where they have to wear more clothes.  Because people just don’t like being cold.

The Fall Harvest feeds most People most of the Year

But we complain when it’s too hot, too.  During the dog days of summer.  When it’s the humidity, not the heat, that makes it so insufferable.  Until we step inside our air conditioned home.  Or sit in an air conditioned movie.  While enjoying a cool beverage.  And some delicious popcorn.  Or spend time in the pool.  Or at the beach.  Where the ladies are practically naked.  Or going out to eat.  Enjoying cool adult beverages and a nice meal at an outdoor cafe while wearing shorts.  Or dining inside an air conditioned restaurant.

You may sweat and stink when you get home.  But you won’t be tracking snow and salt into the house.  Soaking the rugs and carpets.  Or leaving puddles of water on the tiled floor.  No.  During the summer there’s no mess.  There are no wet socks in your shoes.  No frost bite.  No hypothermia. If you car breaks down in the summer you don’t have to worry about freezing to death before someone rescues you.  Whereas if you slip off the road and down the embankment on an expressway during a blizzard frostbite and hypothermia are real possibilities.  As is freezing to death.  Because being cold is dangerous.  And being cold when you’re stranded a long way from home or help can be lethal.

Another bad thing about cold is that things don’t grow in the cold.  Which is why farming is seasonal.  A problem throughout history.  As people’s need to eat is not seasonal.  So not only did farmers have to grow food to eat during the summer they had to grow enough during the summer to feed everyone throughout the winter.  With the fall harvest feeding most people most of the year.  Making a long growing season essential for survival.  Because if you ran out of food before the next harvest you went hungry.  Or died.

If we have another Little Ice Age we may suffer Recurring Famines once More

There were recurring famines during the Little Ice Age.  Which ran from approximately 1350 to about 1850.  The climate cooled enough to shorten the growing season.  Which were cooler and wetter than they are today.  And because of that they didn’t grow enough food to feed everyone.  With the occasional famine wiping out about 10% or more of a country’s population.  As masses of people starved to death because of global cooling during the Little Ice Age.

The United States suffered some droughts the past few growing seasons.  And food prices went up because of these droughts.  But there were no famines in the United States.  Or in the countries the United States exports food to.  No, today the only countries having recurring famines are hard-line communist or other such closed and oppressive states.  Such as North Korea.  Al Gore has been warning us about the perils of global warming since the Nineties.  We did nothing.  And a few decades later there are still no famines.  Because even in regions suffering from the worst drought farmers can still irrigate their land.  And grow food.  Food may be more costly but there will be food.  But no famine.

People who worry about global warming fret about these droughts.  And the lack of fresh water.  But about 70% of the earth is nothing but ocean.  And we can desalinize seawater.  It’ll make water more costly.  But there will always be water.  Even during the worst of droughts.  So even if global warming does its worst to us we will be all right.  No.  The real fear is global cooling.  Because global cooling will shorten our growing seasons.  Which will reduce our food supply.  And if you ever looked at an aerial view of our vast farmland you will understand the problem that is.  It’s just too big to bring indoors.  If we have another Little Ice Age we may suffer recurring famines once more.  And not just in North Korea.  But throughout the world.  Those people vacationing in warmer climes know it.  Global warming is better than global cooling.  For our personal comfort and safety.  And our food supply.

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Tax Cuts, Roaring Twenties, Farm Prices, Smoot-Hawley Tariff, Stock Market Crash, New Deal, Great Depression and the Great Recession

Posted by PITHOCRATES - November 6th, 2012

History 101

(Originally published March 20, 2012)

Tax Cuts and the Small Government Policies of Harding and Coolidge gave us the Roaring Twenties

Keynesians blame the long duration of the Great Depression (1929-1939) on the government clinging to the gold standard.  Even renowned monetarist economist Milton Friedman agrees.  Though that’s about the only agreement between Keynesians and Friedman.   Their arguments are that the US could have reduced the length and severity of the Great Depression if they had only abandoned the gold standard.  And adopted Keynesian policies.  Deficit spending.  Just like they did in the Seventies.  The decade where we had both high unemployment and high inflation.  Stagflation.  Something that’s not supposed to happen under Keynesian economics.  So when it did they blamed the oil shocks of the Seventies.  Not their orgy of spending.  Or their high taxes.  And they feel the same way about the Great Depression.

Funny.  How one price shock (oil) can devastate all businesses in the US economy.  So much so that it stalled job creation.  And caused high unemployment.  Despite the government printing and spending money to create jobs.  And to provide government benefits so recipients could use those benefits to stimulate economic activity.  All of that government spending failed to pull the country out of one bad recession.  Because of that one price shock on the cost of doing business.  Yet no one talks about the all out assault on business starting in the Hoover administration that continued and expanded through the Roosevelt administration.

Herbert Hoover may have been a Republican.  But he was no conservative.  He was a big government progressive.  And believed that the federal government should interfere into the free market.  To make things better.  Unlike Warren Harding.  And Calvin Coolidge.  Who believed in a small government, hands-off policy when it came to the economy.  They passed tax cuts.  Following the advice of their treasury secretary.  Andrew Mellon.  Which gave business confidence of what the future would hold.  So they invested.  Expanded production.  And created jobs.  It was these small government policies that gave us the Roaring Twenties.  An economic boom that electrified and modernized the world.  With real economic growth.

If an Oil Shock can prevent Businesses from Responding to Keynesian Policies then so can FDR’s all out War on Business

The Roaring Twenties was a great time to live if you wanted a job.  And wanted to live in the modern era.  Electric power was spreading across the country.  People had electric appliances in their homes.  Radios.  They went to the movies.  Drove cars.  Flew in airplanes.  The Roaring Twenties was a giant leap forward in the standard of living.  Factories with electric power driving electric motors increased productivity.  And reduced air pollution as they replaced coal-fired steam boilers that up to then powered the Industrial Revolution.  This modernization even made it to the farm.  Farmers borrowed heavily to mechanize their farms.  Allowing them to grow more food than ever.  Bumper crops caused farm prices to fall.  Good for consumers.  But not those farmers who borrowed heavily.

Enter Herbert Hoover.  Who wanted to use the power of government to help the farmers.  By forcing Americans to pay higher food prices.  Meanwhile, the Federal Reserve raised interest rates.  Thinking that a boom in the stock market was from speculation and not the real economic growth of the Twenties.  So they contracted the money supply.  Cooling that real economic growth.  And making it very hard to borrow money.  Causing farmers to default on their loans.  Small rural banks that loaned to these farmers failed.  These bank failures spread to other banks.  Weakening the banking system.  Then came the Smoot-Hawley Tariff.  Passed in 1930.  But it was causing business uncertainty as early as 1928.  As the Smoot-Hawley Tariff was going to increase tariffs on just about everything by 30%.  Basically adding a 30% tax on the cost of doing business.  That the businesses would, of course, pass on to consumers.  By raising prices.  Because consumers weren’t getting a corresponding 30% pay hike they, of course, could not buy as much after the Smoot-Hawley Tariff.  Putting a big cramp in sales revenue.  Perhaps even starting an international trade war.  Further cramping sales.  Something investors no doubt took notice of.  Seeing that real economic growth would soon come to a screeching halt.  And when the bill moved through committees in the autumn of 1929 the die was cast.  Investors began the massive selloff on Wall Street.  The Stock Market Crash of 1929.  The so-called starting point of the Great Depression.  Then the Smoot-Hawley Tariff became law.  And the trade war began.  As anticipated.

Of course, the Keynesians ignore this lead up to the Great Depression.  This massive government intrusion into the free market.  And the next president would build on this intrusion into the free market.  Ignoring the success of the small-government and tax cuts of Harding and Coolidge.  As well as ignoring the big-government free-market-intrusion failures of Herbert Hoover.  The New Deal programs of FDR were going to explode government spending to heights never before seen in peace time.  Causing uncertainty like never seen before in the business community.  It was an all out assault on business.  Taxes and regulation that increased the cost of business.  And massive government spending for new benefits and make-work programs.  All paid for by the people who normally create jobs.  Which there wasn’t a lot of during the great Depression.  Thanks to programs like Reconstruction Finance Corporation, Federal Emergency Relief Administration, Civilian Conservation Corps, Homeowners Loan Corporation, Tennessee Valley Authority, Agricultural Adjustment Act, National Industrial Recovery Act, Public Works Administration, Federal Deposit Insurance Corporation, Glass–Steagall Act, Securities Act of 1933, Civil Works Administration, Indian Reorganization Act, Social Security Act, Works Progress Administration, National Labor Relations Act, Federal Crop Insurance Corporation, Surplus Commodities Program, Fair Labor Standards Act, Rural Electrification Administration, Resettlement Administration and Farm Security Administration, etc.  Oil shocks of the Seventies?  If an oil shock can prevent businesses from responding to Keynesian policies then an all out war on business in the Thirties could do the same.  And worse.  Far, far worse.  Which is why the Great Depression lasted 10 years.  Because the government turned what would have been a normal recession into a world-wide calamity.  By trying to interfere with market forces.

Only Real Economic Growth creates Jobs, not Government Programs

The unemployment rate in 1929 was 3.1%.  In 1933 it was 24.9%.  It stayed above 20% until 1936.  Where it fell as low as 14.3% in 1937.  It then went to 19.0%, 17.2% and 14.6% in the next three years.  These numbers stayed horrible throughout the Thirties because the government wouldn’t stop meddling.  Or spending money.  None of the New Deal programs had a significant effect on unemployment.  The New Deal failed to fix the economy the way the New Dealers said it would.  Despite the massive price tag.  So much for super smart government bureaucrats.

What finally pulled us out of the Great Depression?  Adolf Hitler’s conquering of France in 1940.  When American industry received great orders for real economic growth.  From foreign countries.  To build the war material they needed to fight Adolf Hitler.  And the New Deal programs be damned.  There was no time for any more of that nonsense.  So during World War II businesses had a little less uncertainty.  And a backlog of orders.  All the incentive they needed to ramp up American industry.  To make it hum like it once did under Harding and Coolidge.  And they won World War II.  For there was no way Adolf Hitler could match that economic output.  Which made all the difference on the battlefield.

Still there are those who want to blame the gold standard for the Great Depression.  And still support Keynesian policies to tax and spend.  Even today.  Even after 8 years of Ronald Reagan that proved the policies of Harding and Coolidge.  We’re right back to those failed policies of the past.  Massive government spending to stimulate economic activity.  To pull us out of the Great Recession.  And utterly failing.  Where the unemployment rate struggles to get below 9%.  The U-3 unemployment rate, that is.  The rate that doesn’t count everyone who wants full time work.  The rate that counts everyone, the U-6 unemployment rate, currently stands at 14.9%.  Which is above the lowest unemployment rate during the Great Depression.  Proving once again only real economic growth creates jobs.  Not government programs.  No matter how many trillions of dollars the government spends.

So much for super smart government bureaucrats.

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The Federal Reserve, Roaring Twenties, Stock Market Crash, Banking Crises, Great Depression and John Maynard Keynes

Posted by PITHOCRATES - September 25th, 2012

History 101

The Federal Reserve increased the Money Supply to Lower Interest Rates during the Roaring Twenties

Benjamin Franklin said, “Industry, perseverance, & frugality, make fortune yield.”  He said that because he believed that.  And he proved the validity of his maxim with a personal example.  His life.  He worked hard.  He never gave up.  And he was what some would say cheap.  He saved his money and spent it sparingly.  Because of these personally held beliefs Franklin was a successful businessman.  So successful that he became wealthy enough to retire and start a second life.  Renowned scientist.  Who gave us things like the Franklin stove and the lightning rod.  Then he entered his third life.  Statesman.  And America’s greatest diplomat.  He was the only Founder who signed the Declaration of Independence, Treaty of Amity and Commerce with France (bringing the French in on the American side during the Revolutionary War), Treaty of Paris (ending the Revolutionary War very favorably to the U.S.) and the U.S. Constitution.  Making the United States not only a possibility but a reality.  Three extraordinary lives lived by one extraordinary man.

Franklin was such a great success because of industry, perseverance and frugality.  A philosophy the Founding Fathers all shared.  A philosophy that had guided the United States for about 150 years until the Great Depression.  When FDR changed America.  By building on the work of Woodrow Wilson.  Men who expanded the role of the federal government.  Prior to this change America was well on its way to becoming the world’s number one economy.   By following Franklin-like policies.  Such as the virtue of thrift.  Favoring long-term savings over short-term consumption.  Free trade.  Balanced budgets.  Laissez-faire capitalism.  And the gold standard.  Which provided sound money.  And an international system of trade.  Until the Federal Reserve came along.

The Federal Reserve (the Fed) is America’s central bank.  In response to some financial crises Congress passed the Federal Reserve Act (1913) to make financial crises a thing of the past.  The Fed would end bank panics, bank runs and bank failures.  By being the lender of last resort.  While also tweaking monetary policy to maintain full employment and stable prices.  By increasing and decreasing the money supply.  Which, in turn, lowers and raises interest rates.  But most of the time the Fed increased the money supply to lower interest rates to encourage people and businesses to borrow money.  To buy things.  And to expand businesses and hire people.  Maintaining that full employment.  Which they did during the Roaring Twenties.  For awhile.

The Roaring Twenties would have gone on if Herbert Hoover had continued the Harding/Mellon/Coolidge Policies

The Great Depression started with the Stock Market Crash of 1929.  And to this date people still argue over the causes of the Great Depression.  Some blame capitalism.  These people are, of course, wrong.  Others blamed the expansionary policies of the Fed.  They are partially correct.  For artificially low interest rates during the Twenties would eventually have to be corrected with a recession.  But the recession did not have to turn into a depression.  The Great Depression and the banking crises are all the fault of the government.  Bad monetary and fiscal policies followed by bad governmental actions threw an economy in recession into depression.

A lot of people talk about stock market speculation in the Twenties running up stock prices.  Normally something that happens with cheap credit as people borrow and invest in speculative ventures.  Like the dot-com companies in the Nineties.  Where people poured money into these companies that never produced a product or a dime of revenue.  And when that investment capital ran out these companies went belly up causing the severe recession in the early 2000s.  That’s speculation on a grand scale.  This is not what happened during the Twenties.  When the world was changing.  And electrifying.  The United States was modernizing.  Electric utilities, electric motors, electric appliances, telephones, airplanes, radio, movies, etc.  So, yes, there were inflationary monetary policies in place.  But their effects were mitigated by this real economic activity.  And something else.

President Warren Harding nominated Andrew Mellon to be his treasury secretary.  Probably the second smartest person to ever hold that post.  The first being our first.  Alexander Hamilton.  Harding and Mellon were laissez-faire capitalists.  They cut tax rates and regulations.  Their administration was a government-hands-off administration.  And the economy responded with some of the greatest economic growth ever.  This is why they called the 1920s the Roaring Twenties.  Yes, there were inflationary monetary policies.  But the economic growth was so great that when you subtracted the inflationary damage from it there was still great economic growth.  The Roaring Twenties could have gone on indefinitely if Herbert Hoover had continued the Harding and Mellon policies (continued by Calvin Coolidge after Harding’s death).  There was even a rural electrification program under FDR’s New Deal.  But Herbert Hoover was a progressive.  Having far more in common with the Democrat Woodrow Wilson than Harding or Coolidge.  Even though Harding, Coolidge and Hoover were all Republicans.

Activist Intervention into Market Forces turned a Recession into the Great Depression

One of the things that happened in the Twenties was a huge jump in farming mechanization.  The tractor allowed fewer people to farm more land.  Producing a boom in agriculture.  Good for the people.  Because it brought the price of food down.  But bad for the farmers.  Especially those heavily in debt from mechanizing their farms.  And it was the farmers that Hoover wanted to help.  With an especially bad policy of introducing parity between farm goods and industrial goods.  And introduced policies to raise the cost of farm goods.  Which didn’t help.  Many farmers were unable to service their loans with the fall in prices.  When farmers began to default en masse banks in farming communities failed.  And the contagion spread to the city banks.  Setting the stage for a nation-wide banking crisis.  And the Great Depression.

One of the leading economists of the time was John Maynard Keynes.  He even came to the White House during the Great Depression to advise FDR.  Keynes rejected the Franklin/Harding/Mellon/Coolidge policies.  And the policies favored by the Austrian school of economics (the only people, by the way, who actually predicted the Great Depression).  Which were similar to the Franklin/Harding/Mellon/Coolidge policies.  The Austrians also said to let prices and wages fall.  To undo all of that inflationary damage.  Which would help cause a return to full employment.  Keynes disagreed.  For he didn’t believe in the virtue of thrift.  He wanted to abandon the gold standard completely and replace it with fiat money.  That they could expand more freely.  And he believed in demand-side solutions.  Meaning to end the Great Depression you needed higher wages not lower wages so workers had more money to spend.  And to have higher wages you needed higher prices.  So the employers could pay their workers these higher wages.  And he also encouraged continued deficit spending.  No matter the long-term costs.

Well, the Keynesians got their way.  And it was they who gave us the Great Depression.  For they influenced government policy.  The stock market crashed in part due to the Smoot Hawley Tariff then in committee.  But investors saw the tariffs coming and knew what that would mean.  An end to the economic boom.  So they sold their stocks before it became law.  Causing the Stock Market Crash of 1929.  Then those tariffs hit (an increase of some 50%).  Then they doubled income tax rates.  And Hoover even demanded that business leaders NOT cut wages.  All of this activist intervention into market forces just sucked the wind out of the economy.  Turning a recession into the Great Depression.

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FT127: “Obamacare is a lot like the Smoot-Hawley Tariff in terms of scaring the bejesus out of businesses.” -Old Pithy

Posted by PITHOCRATES - July 20th, 2012

Fundamental Truth

The Roaring Twenties gave us Automobiles, Electric Power, Radio, Movies, Telephones and Air travel

In 1921 there were 9 million automobile registrations.  That jumped to 23 million by 1929.  An increase of 156%.  That’s a lot more cars on the roads.  In the Roaring Twenties we made cars out of steel, paint and glass.  Inside we fitted them with lumber, cotton and leather.  We put rubber tires on them.  And filled their fuel tanks with gasoline.  So this surge in car ownership created a surge in all of these industries.  Extraction of raw materials.  Factories and manufacturing plants to build the equipment to extract those raw materials.  As well as the machinery to build these automobile components.  And the moving assembly lines in assembly plants to assemble these automobiles.  The plants, warehouses and automobile dealers created a surge in the construction industry.  And all the industries that fed the construction industry.  Including the housing industry to house all these gainfully employed workers.

And this was just the auto industry.  Which wasn’t the only industry that was booming during the Roaring Twenties.  Thanks to the hands-off government policies of the administrations of Warren G. Harding and Calvin Coolidge businesses introduced us to the modern world.  Electric power came into its own.  By 1929 about 80% of all installed horsepower was electrical.  And it entered our homes.  Electric lighting and electric appliances.  Vacuum cleaners.  Washing machines.  Refrigerators.  All of this required even more raw material extraction from the ground.  More manufacturing equipment and plants.  More wholesale and retail construction.  And more housing to house all of these workers earning a healthy paycheck.

And there was more.  The Roaring Twenties gave us broadcast radio in our electric-powered homes.  Free entertainment, sports broadcasts and news.  Paid for by the new industry of advertising.  Competing with radio was another growing industry.  Motion pictures.  That by the end of the Roaring Twenties were talkies.  And speaking of talking there was a lot of that on the new telephone.  In our homes.  Interconnecting all of these industries was ship, rail and truck transportation.  Even air travel took off during the Twenties.  More raw material extraction.  More equipment.  More manufacturing.  More construction.  And jobs.  More and more jobs.  The hands-off government policies of the Harding and Coolidge administrations created the great Bull Market of the Twenties.  Explosive economic activity.  Real economic growth.  Creating low-cost consumer goods to modernize America.  Increase her productivity.  Making her the dominant economic power in the world.  The Europeans were so worried about America’s economic prowess that they met in 1927 at the International Economic Conference in Geneva to discuss the American problem.  And how they were going to compete with the American economic juggernaut.  Because the free market capitalism of the New World was leaving the Old World in the dust.

Herbert Hoover was a Republican in Name Only that FDR once Admired but Calvin Coolidge Despised

This was real economic growth.  It was not speculation.  This wasn’t artificially low interest rates creating an asset bubble.  Working Americans bought homes and cars.  And furnishings.  Businesses produced these to meet that demand.  They had growing sales.  And growing profits.  Which increased their stock prices.  Investors wanted to own their stocks because these companies were making money.  And with the world modernizing these stock prices weren’t going anywhere but up in the foreseeable future.  Unless something changed the business environment.  Well, something did.

Despite the roaring economy Calvin Coolidge did not run for a second term.  Which was a pity.  For his successor, Herbert Hoover, was a Republican in name only.  He was a big time progressive.  Who wanted to use the power of government to make the world perfect.  A devout believer in the benevolence of Big Government.  He added about 2,000 bureaucrats to the Department of Commerce.  FDR at one time admired him (before he ran against him for president).  Coolidge despised him.  Under Hoover the federal government intruded into the private sector.  His economics were Keynesian.  He, too, worshipped at the altar of demand.  He believed high wages were the key to prosperity.  For people with more money buy more.  And all that buying created demand for businesses to meet.  Even during a recession he believed wages should not fall.  Despite the fact that’s what recessions do on the back side of the business cycle.  Lower prices and wages.  And lay off people.

By the Twenties American farmers were mechanizing their farms.  Allowing them to grow more food than ever before.  Agriculture prices fell.  At first this wasn’t a problem as there were export markets for their bumper crops.  Thanks to a war-devastated Europe.  But eventually the European soldiers returned to the farm.  And the Europeans didn’t need the American food anymore.  Even places tariffs on U.S. imports to their countries to help their farmers get back on their feet.  Add in a bad winter that killed livestock.  Some bad insect infestation in the summer.  Add all this together and you had the beginning of the great farm crisis.  Debt defaults.  Bank failures.  And the contraction of the money supply.  Which the Federal Reserve (the Fed) did not step in to compensate for by expanding the money supply.  Which was sort of their purpose for being in existence.  As there was less money to borrow business could longer borrow to continue their growth.  Because of the time factor in the stages of production to expand production required borrowing money.  To make matters worse the Fed was actually pulling more money out of circulation.  Because they looked at the rising stock prices and concluded that speculators were borrowing money to invest in the stock market.  Thus inflating stock prices.  But it wasn’t speculators running up those prices.  It was an economic boom that was running up those stock prices.  Until the government put a stop to that, at least.

Bad Government Policy didn’t Create the Roaring Twenties but Bad Government Policy ended Them

The Smoot-Hawley Tariff was close to becoming law in the fall of 1929.  It was moving through committees on its way to becoming law.  This tariff would raise the tax on all imports by about 30%.  The idea was to protect domestic supplies and manufacturers.  But even in 1929 it was a global economy.  A lot of imports entered the stages of production.  Which meant costs would be increasing throughout the stages of productions.  Greatly increasing the input costs of all those businesses enjoying those high stock prices.  Which would raise their prices (to cover those higher input costs).  Reducing their sales.  And slashing their profits.  Add this to the contracting money supply and it painted a very bleak picture for business.

With demand sure to fall due to a massive new tariff that was about to become law businesses cut back.  To get rid of what was about to become excess capacity.  For they were smart.  And understood what affected their businesses.  And you know who else were smart?  Investors.  Who looked at this tariff and saw a locomotive engineer about to slam on the brakes.  And if Congress passed this into law after 1928 Coolidge wasn’t going to be there to veto the law.  So they all came to the same conclusions.  The bull market was coming to an end.  And they wanted to sell their stock to lock in their stock gains.  Which caused the great sell-off of 1929.  And the stock market crash.  Starting the Great Depression.

People still debate the cause of the Great Depression.  A popular argument is that greedy investors caused it by speculating in the stock market.  Or that greedy businesses out-produced demand.  But the economics of the Roaring Twenties don’t support this.  This wasn’t people buying big houses because interest rates were low.  This was the electrification of America.  Cars.  Telephones.  Radio.  Movies.  Air travel.  This was broad and real economic growth.  Bad government policy didn’t create it.  But bad government policy ended them.  And it was the expectations of even worse government policies that yanked the rug out from underneath the economy.  By causing a business contraction and stock market sell-off.  Much like Obamacare is doing to businesses today.  Scaring the bejesus out of them.  For they have no idea what their future costs will be under Obamacare.  So they are doing their best to prepare for it.  By not expanding their businesses.  By not hiring anyone.  And sitting on their cash.  To prepare for the worst.  Much like businesses did in 1928.  Which explains why the Great Recession lingers on.

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FT120: “Give a man a fish and he can eat for a day; give him a job and he can have an obesity problem.” -Old Pithy

Posted by PITHOCRATES - June 1st, 2012

Fundamental Truth

In Warfare Starvation and Famine are the most Potent of Weapons

Starvation and famine has plagued mankind since the dawn of time.  It was the driving force in evolution.  Those who took control of their food supply lived.  Those who didn’t disappeared from the evolutionary path.  Like Neanderthal.  And those who came before him.  Our earliest civilizations massed their populations to farm.  And the masses lived in cities.  Setting down roots and saying goodbye to their hunting and gathering ways.  In the Wei River valley.  In the Indus River valley.  The valleys of the Euphrates and Tigris.  In the Nile River valley.  Where modern life took root.  Produced our first food surpluses.  And gave birth to urban life.  And the middle class.

The rise of the middle class allowed civilization to flourish.  For every person that didn’t have to produce food could do something else.  Build better tools.  Create a better government.  Create art.  In general, think about other things.  Those other things that made humans different.  By giving us a more interesting life.  And more sophisticated ways to express ourselves.

But this growth was a double-edged sword.  For large urban populations that made life more enjoyable was also a great threat to the food supply.  A cool and wet summer could destroy crops.  Poor food storage could spoil the food surplus.  A war could see an enemy purposely destroy your crops and your food surplus.  Causing famine.  Where half or your city population could easily die before the next harvest.  Or more.  Especially if the famine resulted from an act of war.   As an act of genocide.  To clear people off land that others want to use for their own food needs.  Which was Hitler’s plan in Russia.  To take the food from the Ukraine.  Kill the indigenous population.  And replace them with Nazis.  Thus creating more living space for the Third Reich.  Or Lebensraum.    Because in warfare starvation and famine are the most potent of weapons.

History has shown that the most Food-Abundant Countries are the most Capitalistic

England led the way in agricultural advances.  Increasing crop yields such that small tracts of land could support greater populations.  As well as produce such huge food surpluses that they had food to export.  As the British Empire spread across the globe so did their advanced agricultural ways.  During the 19th century starvation and famine were becoming rarer in the technologically advanced West.  The 19th century Irish Potato Famine reduced Ireland’s population by up to 25%.  A tragedy of epic proportions.  But it was an exception to the rule.  For food was growing so abundant in the advanced Western World that rarely did people go hungry.  Or feared famine.  And when mechanization and chemistry hit the farm our crop yields exploded.

During the Twentieth Century the Western World produced so much food that food prices plummeted.  Causing the Great Depression.  There was so much food available that farmers couldn’t sell their food at a high enough price to service the debt that they incurred mechanizing their farms.  But not everyone was producing bumper crops in the Twentieth Century.  Both the Soviet Union and the People’s Republic of China set records for death by famine.  As they shunned the ways of the West.  And the state took over their agricultural sectors.  States that were so inept at good farming practices and things economic that crop yields plummeted.  North Korea to this day can’t even grow enough food for her own people.  And has recurring famines.  Because they hold on to the communist ways of Stalin and Mao.  While the Russians and the Chinese have long abandoned them. 

History has shown that the most food-abundant countries are the most capitalistic.  Countries whose agricultural sectors use the latest in technology.  And/or have a rich and vibrant economy that can buy all the food they need if they can’t produce their own.  Like Hong Kong.  Basically a rock off the Chinese mainland.  It has little arable land.  Few natural resources.  But what it does have is low taxation and free trade.  And laissez-faire capitalism.  The Chinese lost Hong Kong to the British Empire (who have since given it back).  And the British used laissez-faire capitalism to make Hong Kong the gem it is today.  Where people are free and in want of little.  And in this island nation that can’t grow enough food to feed their population famine is unheard of.  Why?  Because they have the wealth to trade for all the food they desire.  In fact, while Mao gave the people in the People’s Republic of China famine Hong Kong were doing just fine.  Because they were wealthy and could trade for what they needed.  And they had the Royal Navy protecting her.

In America our Food Supplies are so Abundant and so Cheap that Poor People are becoming Obese

Poverty is the biggest killer.  Famine is prevalent in poor countries.  Like Haiti.  North Korea.  And sub-Saharan Africa.  People suffer in these countries unlike they do in the West.  Despite the amount of aid the West pours into them.  And it’s not because Western nations were blessed with natural resources.  Hong Kong doesn’t have anything other than laissez-faire capitalism.  Protected by the Rule of Law and minimal government interference into the private sector economy.  The very things that are missing from Haiti, North Korea and sub-Saharan Africa.  Where corruption rules supreme.  There is little regard for human rights.  Or property rights.  And no one can protect their people from the abuses of government.  Or from warring neighbors.  Like the Royal Navy protected Hong Kong.  And pretty much the rest of the world during the 19th century.  Just like America’s military might made the world safe for capitalism in the Twentieth Century.

Third world nations are not a victim of first world nations.  They are a victim of themselves.  Where corrupt rulers collect Western aid and live well while their people suffer.  Especially the nations that eschew capitalism.  And embrace socialism.  Like the Soviet Union did.  Like the People’s Republic of China did (the current Chinese regime is enjoying economic growth by allowing some capitalism into their still communist country).  And like North Korea still does.  These socialist utopias were a living hell for their people.  Where they live in fear of their government.  And of famine.

Meanwhile in the Western capitalist nations what do they suffer from?  Especially the poor people in America?  Obesity.  In New York they’re passing laws restricting the size of sugary beverages because they are dangerous to your health.  While they pass out free condoms and birth control as sex is far less risky behavior than a delicious carbonated beverage.  Apparently.  Yes, in America our food supplies are so abundant and so cheap that poor people are becoming obese.  Because capitalism has made those food supplies abundant and cheap.  And capitalism gave people jobs where they could afford to buy so much food that they can give themselves an obesity problem.  A problem they just don’t have in Haiti, North Korea or sub-Saharan Africa.  Because they can’t grow enough food.  Or earn enough money to buy enough food.  For they don’t have an environment conducive to creating jobs.  Which is why these nations are still impoverished and/or suffering famine despite all the aid the West gives them.  Food aid will run out.  And then they’ll just be starving once again.  If they have jobs, though, they’ll be able to buy food whenever they’re hungry.  Because it’s like that old saying.  Give a man a fish and he can eat for a day; give him a job and he can have an obesity problem.

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Tax Cuts, Roaring Twenties, Farm Prices, Smoot-Hawley Tariff, Stock Market Crash, New Deal, Great Depression and the Great Recession

Posted by PITHOCRATES - March 20th, 2012

History 101

Tax Cuts and the Small Government Policies of Harding and Coolidge gave us the Roaring Twenties

Keynesians blame the long duration of the Great Depression (1929-1939) on the government clinging to the gold standard.  Even renowned monetarist economist Milton Friedman agrees.  Though that’s about the only agreement between Keynesians and Friedman.   Their arguments are that the US could have reduced the length and severity of the Great Depression if they had only abandoned the gold standard.  And adopted Keynesian policies.  Deficit spending.  Just like they did in the Seventies.  The decade where we had both high unemployment and high inflation.  Stagflation.  Something that’s not supposed to happen under Keynesian economics.  So when it did they blamed the oil shocks of the Seventies.  Not their orgy of spending.  Or their high taxes.  And they feel the same way about the Great Depression.

Funny.  How one price shock (oil) can devastate all businesses in the US economy.  So much so that it stalled job creation.  And caused high unemployment.  Despite the government printing and spending money to create jobs.  And to provide government benefits so recipients could use those benefits to stimulate economic activity.  All of that government spending failed to pull the country out of one bad recession.  Because of that one price shock on the cost of doing business.  Yet no one talks about the all out assault on business starting in the Hoover administration that continued and expanded through the Roosevelt administration.

Herbert Hoover may have been a Republican.  But he was no conservative.  He was a big government progressive.  And believed that the federal government should interfere into the free market.  To make things better.  Unlike Warren Harding.  And Calvin Coolidge.  Who believed in a small government, hands-off policy when it came to the economy.  They passed tax cuts.  Following the advice of their treasury secretary.  Andrew Mellon.  Which gave business confidence of what the future would hold.  So they invested.  Expanded production.  And created jobs.  It was these small government policies that gave us the Roaring Twenties.  An economic boom that electrified and modernized the world.  With real economic growth. 

If an Oil Shock can prevent Businesses from Responding to Keynesian Policies then so can FDR’s all out War on Business

The Roaring Twenties was a great time to live if you wanted a job.  And wanted to live in the modern era.  Electric power was spreading across the country.  People had electric appliances in their homes.  Radios.  They went to the movies.  Drove cars.  Flew in airplanes.  The Roaring Twenties was a giant leap forward in the standard of living.  Factories with electric power driving electric motors increased productivity.  And reduced air pollution as they replaced coal-fired steam boilers that up to then powered the Industrial Revolution.  This modernization even made it to the farm.  Farmers borrowed heavily to mechanize their farms.  Allowing them to grow more food than ever.  Bumper crops caused farm prices to fall.  Good for consumers.  But not those farmers who borrowed heavily.

Enter Herbert Hoover.  Who wanted to use the power of government to help the farmers.  By forcing Americans to pay higher food prices.  Meanwhile, the Federal Reserve raised interest rates.  Thinking that a boom in the stock market was from speculation and not the real economic growth of the Twenties.  So they contracted the money supply.  Cooling that real economic growth.  And making it very hard to borrow money.  Causing farmers to default on their loans.  Small rural banks that loaned to these farmers failed.  These bank failures spread to other banks.  Weakening the banking system.  Then came the Smoot-Hawley Tariff.  Passed in 1930.  But it was causing business uncertainty as early as 1928.  As the Smoot-Hawley Tariff was going to increase tariffs on just about everything by 30%.  Basically adding a 30% tax on the cost of doing business.  That the businesses would, of course, pass on to consumers.  By raising prices.  Because consumers weren’t getting a corresponding 30% pay hike they, of course, could not buy as much after the Smoot-Hawley Tariff.  Putting a big cramp in sales revenue.  Perhaps even starting an international trade war.  Further cramping sales.  Something investors no doubt took notice of.  Seeing that real economic growth would soon come to a screeching halt.  And when the bill moved through committees in the autumn of 1929 the die was cast.  Investors began the massive selloff on Wall Street.  The Stock Market Crash of 1929.  The so-called starting point of the Great Depression.  Then the Smoot-Hawley Tariff became law.  And the trade war began.  As anticipated.

Of course, the Keynesians ignore this lead up to the Great Depression.  This massive government intrusion into the free market.  And the next president would build on this intrusion into the free market.  Ignoring the success of the small-government and tax cuts of Harding and Coolidge.  As well as ignoring the big-government free-market-intrusion failures of Herbert Hoover.  The New Deal programs of FDR were going to explode government spending to heights never before seen in peace time.  Causing uncertainty like never seen before in the business community.  It was an all out assault on business.  Taxes and regulation that increased the cost of business.  And massive government spending for new benefits and make-work programs.  All paid for by the people who normally create jobs.  Which there wasn’t a lot of during the great Depression.  Thanks to programs like Reconstruction Finance Corporation, Federal Emergency Relief Administration, Civilian Conservation Corps, Homeowners Loan Corporation, Tennessee Valley Authority, Agricultural Adjustment Act, National Industrial Recovery Act, Public Works Administration, Federal Deposit Insurance Corporation, Glass–Steagall Act, Securities Act of 1933, Civil Works Administration, Indian Reorganization Act, Social Security Act, Works Progress Administration, National Labor Relations Act, Federal Crop Insurance Corporation, Surplus Commodities Program, Fair Labor Standards Act, Rural Electrification Administration, Resettlement Administration and Farm Security Administration, etc.  Oil shocks of the Seventies?  If an oil shock can prevent businesses from responding to Keynesian policies then an all out war on business in the Thirties could do the same.  And worse.  Far, far worse.  Which is why the Great Depression lasted 10 years.  Because the government turned what would have been a normal recession into a world-wide calamity.  By trying to interfere with market forces.

Only Real Economic Growth creates Jobs, not Government Programs

The unemployment rate in 1929 was 3.1%.  In 1933 it was 24.9%.  It stayed above 20% until 1936.  Where it fell as low as 14.3% in 1937.  It then went to 19.0%, 17.2% and 14.6% in the next three years.  These numbers stayed horrible throughout the Thirties because the government wouldn’t stop meddling.  Or spending money.  None of the New Deal programs had a significant effect on unemployment.  The New Deal failed to fix the economy the way the New Dealers said it would.  Despite the massive price tag.  So much for super smart government bureaucrats.

What finally pulled us out of the Great Depression?  Adolf Hitler’s conquering of France in 1940.  When American industry received great orders for real economic growth.  From foreign countries.  To build the war material they needed to fight Adolf Hitler.  And the New Deal programs be damned.  There was no time for any more of that nonsense.  So during World War II businesses had a little less uncertainty.  And a backlog of orders.  All the incentive they needed to ramp up American industry.  To make it hum like it once did under Harding and Coolidge.  And they won World War II.  For there was no way Adolf Hitler could match that economic output.  Which made all the difference on the battlefield.

Still there are those who want to blame the gold standard for the Great Depression.  And still support Keynesian policies to tax and spend.  Even today.  Even after 8 years of Ronald Reagan that proved the policies of Harding and Coolidge.  We’re right back to those failed policies of the past.  Massive government spending to stimulate economic activity.  To pull us out of the Great Recession.  And utterly failing.  Where the unemployment rate struggles to get below 9%.  The U-3 unemployment rate, that is.  The rate that doesn’t count everyone who wants full time work.  The rate that counts everyone, the U-6 unemployment rate, currently stands at 14.9%.  Which is above the lowest unemployment rate during the Great Depression.  Proving once again only real economic growth creates jobs.  Not government programs.  No matter how many trillions of dollars the government spends. 

So much for super smart government bureaucrats.

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The Great Depression

Posted by PITHOCRATES - December 20th, 2011

History 101

The  Roaring Twenties were a Time of Unprecedented Innovation and Manufacturing

The Roaring Twenties were good times.  Kicked off by the Warren Harding administration.  Thanks to one of the few honest guys in his administration besides Harding.  Andrew Mellon.  Secretary of the treasury extraordinaire.  Some say the best secretary of the treasury since our first.  Alexander Hamilton.  High praise indeed.

So what did Mellon do?  He did some research that showed rich people paid less in taxes the higher the tax rates were.  The higher the rate the less they invested in plant and equipment in America.  Instead they invested their money out of the country.  In other countries’ plant and equipment.  So Mellon was a tax-cutter.  And that was his advice to Harding.  And that’s what Harding did.  And Calvin Coolidge continued.  Kept taxes low.  And kept government out of the business of business.

And how business responded.  The 1920s were a time of unprecedented innovation and manufacturing.  Low taxes, little government spending and limited government produced record employment.  Record upward mobility.  And record per capita income.  Gains in the decade touched 37%.  How?  I’ll tell you how.

The auto industry was booming thanks to Henry Ford’s moving assembly line.  Everyone was driving who wanted to drive.  The car companies sold one car for every 5 people.  This production created a boom in other industries to feed this industry.  And cars did something else.  They gave people mobility.  And opportunity.  People left the farms in droves and drove to better jobs.  Which didn’t hurt the farmers in the least as mechanization on the farm put more land under cultivation with fewer people.  Housing and cities grew.  Radio debuted.  And radio advertising.  Motion pictures went from silent to talkies.  Telephones became more common.  New electric utilities brought electricity to homes.  And new electric appliances filled those homes.  Including radios.  New electric motors filled our factories, increasing productivity and slashing consumer prices.  More people than ever before flew.  An increase of nearly 1000%.  It’s nowhere near today’s number of flyers but it was a reflection of the new industrial dominance of the United States.  There was nothing we couldn’t do.  And Europe was taking notice.  And not liking what they saw.  And talked about a European union to compete against the Americans.

Businesses scaled back Production in Anticipation of the Smoot Hawley Tariff Act

So the spectacular economic growth of the Roaring Twenties was solid growth.  It wasn’t a bubble.  It was the real deal.  Thanks to capitalism.  And a government willing to leave the free market alone.  It was so dominating that the Europeans wanted to stop it anyway they could.  One way was protective tariffs on farm imports.

American farm exports boomed during World War I.  Because most of Europe’s farmers were busy fighting.  With the end of the war the Europeans went back to their farms.  Which reduced the need for American farm imports.  And the tariffs compounded that problem.  To make things worse, prices were already falling thanks to the mechanization of the American farm.  Producing bumper crops.  Which, of course, dropped farm prices.  Good for consumers.  But bad for farmers.  Especially with the Europeans shutting off their markets to the Americans.  Because they paid for a lot of that land and mechanization with borrowed money.  And this debt was getting harder and harder to service.  Throw in some weather and insect problems in some regions and it was just too much.   Some farms failed.  Then a lot.  And then the banks that loaned money to these farms began to fail.

We created the Federal Reserve to increase the money supply to keep pace with the growing economy.  By making money cheap to borrow for those businesses trying to expand to meet demand.  They weren’t exactly doing a stellar job, though, in keeping pace with this economic expansion.  And when the bank failures hit the money supply contracted.  Thanks to fractional reserve banking.  All that money the banks created simply disappeared as the banks failed.  Starving manufactures of money to maintain growth to meet demand.  Things were getting bad around 1928.  The Fed did not intervene to save these banks.  Worried that investors were the only ones borrowing money for speculation in the stock market, they shrunk the money supply further.  About a third by 1932.  Manufacturers had no choice but to cut production.

While businesses were dealing with a shrinking money supply they had something else to worry about.  Congress was moving the Smoot-Hawley Tariff Act through congressional committees in 1929 on its way to becoming law in 1930.  This act would add a 30% tax on most imports.  Meaning that the cost factories paid for raw materials would increase by up to 30%.  Of course, sales prices have to include all costs of production.  So sales prices would have to increase.  Higher prices mean fewer sales.  Because people just can’t afford to buy as much at higher prices.  Businesses knew that once the tariff was passed into law it would reduce sales.  So they took preemptive steps.  And scaled back production for the expected fall in sales.

It was Government Meddling that Turned a Recession in the Great Depression

This brings us to the stock market crash.  The Roaring Twenties produced huge stock market gains as industry exploded in America.  Things grew at an aggressive pace.  Stock prices soared.  Because the value of these manufacturers soared.  And investors saw nothing to indicate this growth was going to stop.  Until the contraction of the money supply.  And then the Smoot-Hawley Tariff Act.  Not only would these slow the growth, they would reverse it.  Leading to the great selloff.  The Great Crash.  And the Great Depression.

As feared the Europeans responded to the Smoot-Hawley Tariff Act.  They imposed tariffs on American imports.  Making things worse for American exports.  Then President Hoover increased farm prices by law to help farmers.  Which only reduced farm sales further.  Then the banking crisis followed.  And the Fed did nothing to help the banks.  Again.  When they did start helping banks in trouble they made public which banks were receiving this help.  Which, of course, caused further bank runs as people hurried to get their money out of these troubled banks.  Tax revenue plummeted.  So Hoover passed a new sales tax to raise more revenue.  Which only made things worse.

Hoover was a Republican.  But he was a Big Government progressive.  Just like his successor.  FDR.  And all of their Big Government Keynesian solutions only prolonged the Great Depression.  It was government meddling that turned a recession into the Great Depression.  And further government meddling that prolonged the Great Depression.  Much of FDR’s New Deal programs were just extensions of the Hoover programs.  And they failed just as much as they did under Hoover.  The Great Depression only ended thanks to Adolf Hitler who plunged Europe back into war.  Providing an urgency to stop their government meddling.  And to let business do what they do best.  Business.  And they did.  Building the arsenal that defeated Hitler.

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The iPhone is Impressive but the Plough is a True Technological Wonder

Posted by PITHOCRATES - October 19th, 2011

Technology 101

The Plough allowed us to Grow more Food in Virtually any Soil giving us more Free Time to Think

The iPhone is an amazing piece of technology.  Whenever a new one comes out lines form with anxious people clamoring to get the new phone.  Steve Jobs was a brilliant entrepreneur.  He knew how to give the people what they wanted.  But he had some help along the way.

What made the iPhone possible?  Was it touch-screen LCD technology?  A little.  Was it the miniaturization of integrated circuits?  Well, that helped no doubt.  How about the transistor?  This was big.  It opened the door to the integrated circuits.  But it took something before that.  Vacuum tubes?  What the transistor replaced?  No.  Was it wireless radio transmission?  Antenna technology?  The development of electromagnetic field and wave theory?  No.  You have to go further back.  Even before the genius of Nikola Tesla (electrical engineer, inventor and father of AC power).  The telephone?  The telegraph?  The printing press?  No.  All necessary steps on the road to the iPhone.  But none of these are the prime mover that set things in motion to make the iPhone possible.  To find this prime mover you have to go way back.  To the dawn of civilization.  To the one piece of technology that changed everything.  The plough.

The first civilizations sprung up on the fertile banks of the great rivers.  The Hwang-Ho.  The Indus.  The Nile.  The Tigris.  And the Euphrates.  Where the flooding of these rivers made the soil nutrient-rich.  And easy to work.  The masses could scratch it with a stick.  Sow their seeds.  And pray to their gods for a bountiful harvest.  The plough changed that.  It let us grow food in virtually any soil.  And the work of a few could do the same of the masses in those river valleys.  This produced two things.  A food surplus.  And spare time.  Everyone in a society no longer had to farm.  They could do other things.  And think.

The Plough gave rise to Artisans, the Free Market Economy and a Middle Class

It all started here.  The plough unleashed the human mind.  It transformed us from working machines at the mercy of our environment.  To masters of our environment.  Where we transformed our environment to better serve us.

This gave rise to artisans.  Blacksmiths.  Tanners.  Cobblers.  Inventors.  Entrepreneurs.  What we call the rise of a middle class.  These people didn’t have to grow food.  Because they could trade for food.  With the things they created.  And like the farmers, they created surpluses.

We traded this surplus of food and artisan goods in markets.  The free market economy was born.  These markets became cities.  As the economy grew capital formation grew.  Banking and finance.  The joint-stock company.  The corporation.  Capitalism.  Which eventually gave us Steve Jobs.  And the iPhone.

The Plough put us in Control of our Environment, Reduced Famine and Improved the Quality of Life

None of this would have happened without the plough.  Because before the plough everyone grew food.  And lived at the mercy of their environment.  Where famine would devastate civilizations because of a bad growing season.  But the plough gave us food surpluses.  That let us live through a bad growing season.  And allowed a middle class to continue to grow.  Improving the quality of life for the first time in history.

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FUNDAMENTAL TRUTH #32: “America is great but it can’t make bad ideology good.” -Old Pithy

Posted by PITHOCRATES - September 21st, 2010

We’ve Always Done Things This Way

The Old World was set in her ways.  Change didn’t come easy.  When it came it often spanned centuries.  But not always.  As the Roman Empire incorporated new territories into the empire, she modernized those new territories.  Roads.  Fresh water.  Sanitation.  Rule of law.  Markets.  The things that made cites better.  Civilizations better.  But as a civilization grows, so does its government.  And as government grows, taxes inevitably become more onerous.

A sprawling empire required a sprawling bureaucracy to control it.  And a huge standing army to protect it from without.  And to police it from within.  When you expand and conquer new territory, the spoils of conquest can fund your empire.  When your borders are relatively static, though, you have to use alternative sources of funding.  Taxation.  As the tax burden grew, dissatisfaction grew.  Fewer citizens volunteered to serve in Rome’s legions.  So Rome relied more and more on hired armies.  This increased the cost of empire.  And it increased taxation.  The tax burden grew so great that people gave up their small farms and worked for the bigger farms.  Worked for the rich landowners.  Some tried to quit farming all together.  This caused problems in trying to feed Rome’s legions.  And her bureaucracy.  The food supply became so critical that the Romans wrote new laws forbidding people to leave their farms.  Farmers were bound to the land.  They could never leave.  If you were born on the land you would farm the land.  Forever.

During the decline of the Western Roman Empire you saw the rise of the economic system that would dominate the Middle Ages.  Feudalism.  As the Western Empire declined, the power began to shift to the rich landowners.  As did loyalties.  As the empire further disintegrated, the power of Rome could no longer protect you.  Or feed you.  And thus food and protection became the foundation of feudalism.  Land owners, the nobles (i.e., lords), would let you work their lands.  The bulk of the proceeds went to the landlord.  But you also had a portion of the manor to farm for yourself.  In exchange for the use of a lord’s land you provided military service to the lord.  When needed to protect the lord and his lands.  Property rights allowed the lord’s sons to inherit the estate upon his death.  So property ownership became hereditary.  As did the nobility.   And so it would be for centuries.

England Leads the Way

From the nobles arose one.  A dominant one.  A ruler of nobles.  A king.  A king consolidated the many nobles’ estates into a kingdom.  A country.  And the king became sovereign.  The supreme authority.  The nobles pledged their loyalty to the king.  Provided for the king.  And fought for him when necessary.  Thus the few, the many and the one.  The masses (the many) served the lords and worked on their estates.  The lords (the few) were the wealthy land owners who served the king.  The king (the one) ruled the kingdom.

Thus the European monarchy was born.  In France it was absolute.  In England, in 1215, the nobles met King John on the meadow at Runnymede.  And the king reluctantly set his seal to the Magna Carta.  In England, there would be limits to the sovereign’s power.  The king may be king, but the nobles held the wealth.  And with it a lot of power.  Sometimes they saw things differently.  And the little people, the masses, often saw things differently than did the king and lords.  These different interests were reconciled, in time, by king and Parliament, a two-house or bicameral legislature (comprised of the House of Commons and the House of Lords). 

England was the place to be.  Rule of law.  Bill of rights.  Commerce.  Banking.  Capitalism.  Liberty.  Food.  Security.  Your common everyday Englishman had a better quality of life than your common everyday [insert any other European national here].  As transoceanic trade took off, the great European powers collided with each other.  Fought for that lucrative trade.  In the Old World.  And in the New World.  These wars became very expensive.  And some lasted for years.  Like the Seven Years War.  Which the British won.  And took many French possessions throughout the world.  But at a huge cost.  She incurred a great debt.  Especially in securing one of her colonies.  British North America.

Tea Anyone?

So England taxed her British American subjects.  Only problem was, these English subjects had no representation in Parliament.  And this was very un-English.  Taxation without representation.  This caused tension.  Also, Great Britain’s mercantilist policies were also rubbing the colonists the wrong way.  America was growing.  And she wanted free trade.  But that was impossible when the home country maintained a favorable balance of trade at your expense.  And had the Royal Navy to enforce it.  As a colony, everything had to ship to/from England ports on English ships so England could accumulate bullion.  The British protected their industries.  Her colonies fed raw materials to these industries.  And that’s all they did.

Trouble brewed for a while.  When Great Britain legislated what type of tea they could drink (only British East Indian tea), the American colonists had had enough.   There was a tea party in Boston, a revolution and formal independence.  And then a new nation.  With a bicameral legislation.  An executive.  And a judiciary.  It wasn’t quite Parliament, but was very similar in function.  The president was the one.  The Senate was the few.  And the House of Representatives were the many.  But there were key differences.  There was no king.  No hereditary nobility.  And there would be no mercantilism.  Despite Alexander Hamilton’s best efforts.

Let’s Just Agree to Disagree

Getting the colonies to come together to declare their independence was not easy.  It helped that there was already a shooting war going on.  Lexington and Concord.  Bunker Hill.  The coastal towns the British burnt and left in ruins.  They were already fighting a rebellion.  The declaration was almost a moot point.  But it was important.  And, after some arm twisting, they voted for independence and posted their Declaration of Independence.  But that was then.  After the Revolutionary War, there was no such unifying force.  Everyone was back to looking out for number one.  Well, most. 

Locked in a Philadelphia hall during a sweltering summer thick with horseflies, a collection of America’s finest worked to create a new government.  George Washington, Ben Franklin, Alexander Hamilton, James Madison, to name just a few, could hardly agree on anything.  The Constitution they created was not great in their eyes.  But it was probably the best that they could do.  So acknowledged, they sent it to the states for ratification.  The odds were against them.  It would take some persuading.  And persuading they did.  Hamilton and Madison (and John Jay) wrote a series of essays appearing in newspapers to make the case for ratification.  They addressed and answered all arguments against ratification.  (You can read these today in the Federalist Papers.)  And this effort was successful.  The states ratified the constitution.  There was now a nation known as the United States of America.

Our first Secretary of the Treasury was Alexander Hamilton.  A capitalist genius.  And a great admirer of the British Empire.  Being a recent transplant to the American Colonies, he had no deep-seated resentment of the former mother country.  In fact, he wanted to emulate her.  She was the greatest empire in the world.  She was obviously doing something right.  But he pushed too far.  His mercantilist plans were a bit much for some.  Especially the ‘simple’ farmers of the South.  The planter elite.  Led by Thomas Jefferson (covertly) and James Madison (overtly), they fought Hamilton tooth and nail and did everything to destroy him.  (After seeing his plans Madison switched to the opposition.)    And ultimately, did.  When Aaron Burr shot him in a duel on the field of honor at Weehawken, New Jersey, across the Hudson from New York City.  All because Hamilton tried everything within his power to keep him from becoming president of the United States and governor of New York.  Because he was on unprincipled man.  Burr took offense to that.  And, well, the scoundrel challenged him to a duel and killed him.  But I digress.

The American Ideology

The American ideology is simple.  It includes things that have been proven to work.  And excludes things that have been proven not to.  A large, diverse people make up America.  So at the heart of our ideology is that we agree to disagree. 

We don’t have kings or nobility.  We don’t have an entitled class.  No hereditary rights.  Here, it doesn’t matter who your father was.  Or what group you belong to (religious, societal, etc.).  No one person is better than another. 

We have property rights and live under the rule of law.  We honor legal contracts.  We built our nation on laissez faire capitalism.  Free markets.  With a minimum of government interference.  We do what we want and respect that others do what they want.  And we are free to do this as long as we play by the rule of law.

It was a long road getting here.  We took the best history had to offer.  And rejected the worst that history included.  Nations who did likewise went on to greatness, too (like the United Kingdom and Northern Ireland, Canada, Australia, etc.).  Those who didn’t have been repositories of great suffering and human bondage (North Korea, Cuba, The People’s Republic of China, the Soviet Union, etc.).  Of the latter nations, please note that life is getting much better in China and the former Soviet Union with the introduction of capitalism and free markets.  And it’s not in North Korea and Cuba where these governments stubbornly cling to failed policies to keep their governments in power.  Whatever the cost is to their people.

It’s the Ideology, Stupid

Good ideology makes good nations.  Bad ideology makes bad nations.  A good nation can NOT take bad ideology and make it good.  A good nation that implements bad ideology will only make that good nation bad.  All people have the capacity for greatness.  And that greatness will shine through if the government doesn’t suppress it.   To see this all we have to do is look to history.  It’s all there.  The good.  The bad.  And the ugly.

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LESSONS LEARNED #3 “Inflation is just another name for irresponsible government.” -Old Pithy

Posted by PITHOCRATES - March 4th, 2010

PEOPLE LIKE TO hate banks.  And bankers.  Because they get rich with other people’s money.  And they don’t do anything.  People give them money.  They then loan it and charge interest.  What a scam.

Banking is a little more complex than that.  And it’s not a scam.  Countries without good banking systems are often impoverished, Third World nations.  If you have a brilliant entrepreneurial idea, a lot of good that will do if you can’t get any money to bring it to market.  That’s what banks do.  They collect small deposits from a lot of depositors and make big loans to people like brilliant entrepreneurs.

Fractional reserve banking multiplies this lending ability.  Because only a fraction of a bank’s total depositors will ask for their deposits back at any one time, only a fraction of all deposits are kept at the bank.  Banks loan the rest.  Money comes in.  They keep a running total of how much you deposited.  They then loan out your money and charge interest to the borrower.  And pay you interest on what they borrowed from you so they could make those loans to others.  Banks, then, can loan out more money than they actually have in their vaults.  This ‘creates’ money.  The more they lend the more money they create.  This increases the money supply.  The less they lend the less money they create.  If they don’t lend any money they don’t add to the money supply.  When banks fail they contract the money supply.

Bankers are capital middlemen.  They funnel money from those who have it to those who need it.  And they do it efficiently.  We take car loans and mortgages for granted.  For we have such confidence in our banking system.  But banking is a delicate job.  The economy depends on it.  If they don’t lend enough money, businesses and entrepreneurs may not be able to borrow money when they need it.  If they lend too much, they may not be able to meet the demands of their depositors.  And if they do something wrong or act in any way that makes their depositors nervous, the depositors may run to the bank and withdraw their money.  We call this a ‘run on the bank’ when it happens.  It’s not pretty.  It’s usually associated with panic.  And when depositors withdraw more money than is in the bank, the bank fails.

DURING GOOD ECONOMIC times, businesses expand.  Often they have to borrow money to pay for the costs of meeting growing demand.  They borrow and expand.  They hire more people.  People make more money.  They deposit some of this additional money in the bank.  This creates more money to lend.  Businesses borrow more.  And so it goes.  This saving and lending increases the money supply.  We call it inflation.  A little inflation is good.  It means the economy is growing.  When it grows too fast and creates too much money, though, prices go up. 

Sustained inflation can also create a ‘bubble’ in the economy.  This is due to higher profits than normal because of artificially high prices due to inflation.  Higher selling prices are not the result of the normal laws of supply and demand.  Inflation increases prices.  Higher prices increase a company’s profit.  They grow.  Add more jobs.  Hire more people.  Who make more money.  Who buy more stuff and save more money.  Banks loan more, further increasing the money supply.  Everyone is making more money and buying more stuff.  They are ‘bidding up’ the prices (house prices or dot-com stock prices, for example) with an inflated currency.  This can lead to overvalued markets (i.e., a bubble).  Alan Greenspan called it ‘irrational exuberance’ when testifying to Congress in the 1990s.  Now, a bubble can be pretty, but it takes very little to pop and destroy it.

Hyperinflation is inflation at its worse.  Bankers don’t create it by lending too much.  People don’t create it by bidding up prices.  Governments create it by printing money.  Literally.  Sometimes following a devastating, catastrophic event like war (like Weimar Germany after World War II).  But sometimes it doesn’t need a devastating, catastrophic event.  Just unrestrained government spending.  Like in Argentina throughout much of the 20th century.

During bad economic times, businesses often have more goods and services than people are purchasing.  Their sales will fall.  They may cut their prices to try and boost their sales.  They’ll stop expanding.  Because they don’t need as much supply for the current demand, they will cut back on their output.  Lay people off.  Some may have financial problems.  Their current revenue may not cover their costs.  Some may default on their loans.  This makes bankers nervous.  They become more hesitant in lending money.  A business in trouble, then, may find they cannot borrow money.  This may force some into bankruptcy.  They may default on more loans.  As these defaults add up, it threatens a bank’s ability to repay their depositors.  They further reduce their lending.  And so it goes.  These loan defaults and lack of lending decreases the money supply.  We call it deflation.  We call deflationary periods recessions.  It means the economy isn’t growing.  The money supply decreases.  Prices go down.

We call this the business cycle.  People like the inflation part.  They have jobs.  They’re not too keen on the deflation part.  Many don’t have jobs.  But too much inflation is not good.  Prices go up making everything more expensive.  We then lose purchasing power.  So a recession can be a good thing.  It stops high inflation.  It corrects it.  That’s why we often call a small recession a correction.  Inflation and deflation are normal parts of the business cycle.  But some thought they could fix the business cycle.  Get rid of the deflation part.  So they created the Federal Reserve System (the Fed) in 1913.

The Fed is a central bank.  It loans money to Federal Reserve regional banks who in turn lend it to banks you and I go to.  They control the money supply.  They raise and lower the rate they charge banks to borrow from them.  During inflationary times, they raise their rate to decrease lending which decreases the money supply.  This is to keep good inflation from becoming bad inflation.  During deflationary times, they lower their rate to increase lending which increases the money supply.  This keeps a correction from turning into a recession.  Or so goes the theory.

The first big test of the Fed came during the 1920s.  And it failed. 

THE TWO WORLD wars were good for the American economy.  With Europe consumed by war, their agricultural and industrial output decline.  But they still needed stuff.  And with the wars fought overseas, we fulfilled that need.  For our workers and farmers weren’t in uniform. 

The Industrial Revolution mechanized the farm.  Our farmers grew more than they ever did before.  They did well.  After the war, though, the Europeans returned to the farm.  The American farmer was still growing more than ever (due to the mechanization of the farm).  There were just a whole lot less people to sell their crops to.  Crop prices fell. 

The 1920s was a time America changed.  The Wilson administration had raised taxes due to the ‘demands of war’.  This resulted in a recession following the war.  The Harding administration cut taxes based on the recommendation of Andrew Mellon, his Secretary of the Treasury.  The economy recovered.  There was a housing boom.  Electric utilities were bringing electrical power to these houses.  Which had electrical appliances (refrigerators, washing machines, vacuum cleaners, irons, toasters, etc.) and the new radio.  People began talking on the new telephone.  Millions were driving the new automobile.  People were traveling in the new airplane.  Hollywood launched the motion picture industry and Walt Disney created Mickey Mouse.  The economy had some of the most solid growth it had ever had.  People had good jobs and were buying things.  There was ‘good’ inflation. 

This ‘good’ inflation increased prices everywhere.  Including in agriculture.  The farmers’ costs went up, then, as their incomes fell.  This stressed the farming regions.  Farmers struggled.  Some failed.  Some banks failed with them.  The money supply in these areas decreased.

Near the end of the 1920s, business tried to expand to meet rising demand.  They had trouble borrowing money, though.  The economy was booming but the money supply wasn’t growing with it.  This is where the Fed failed.  They were supposed to expand the money supply to keep pace with economic growth.  But they didn’t.  In fact, the Fed contracted the money supply during this period.  They thought investors were borrowing money to invest in the stock market.  (They were wrong).  So they raised the cost of borrowing money.  To ‘stop’ the speculators.  So the Fed took the nation from a period of ‘good’ inflation into recession.  Then came the Smoot-Hawley Tariff.

Congress passed the Smoot-Hawley Tariff in 1930.  But they were discussing it in committee in 1929.  Businesses knew about it in 1929.  And like any good business, they were looking at how it would impact them.  The bill took high tariffs higher.  That meant expensive imported things would become more expensive.  The idea is to protect your domestic industry by raising the prices of less expensive imports.  Normally, business likes surgical tariffs that raise the cost of their competitor’s imports.  But this was more of an across the board price increase that would raise the cost of every import, which was certain to increase the cost of doing business.  This made business nervous.  Add uncertainty to a tight credit market and business no doubt forecasted higher costs and lower revenues (i.e., a recession).  And to weather a recession, you need a lot of cash on hand to help pay the bills until the economy recovered.  So these businesses increased their liquidity.  They cut costs, laid off people and sold their investments (i.e., stocks) to build a huge cash cushion to weather these bad times to come.  This may have been a significant factor in the selloff in October of 1929 resulting in the stock market crash. 

HERBERT HOOVER WANTED to help the farmers.  By raising crop prices (which only made food more expensive for the unemployed).  But the Smoot-Hawley Tariff met retaliatory tariffs overseas.  Overseas agricultural and industrial markets started to close.  Sales fell.  The recession had come.  Business cut back.  Unemployment soared.  Farmers couldn’t sell their bumper crops at a profit and defaulted on their loans.  When some non-farming banks failed, panic ensued.  People rushed to get their money out of the banks before their bank, too, failed.  This caused a run on the banks.  They started to fail.  This further contracted the money supply.  Recession turned into the Great Depression. 

The Fed started the recession by not meeting its core expectation.  Maintain the money supply to meet the needs of the economy.  Then a whole series of bad government action (initiated by the Hoover administration and continued by the Roosevelt administration) drove business into the ground.  The ONLY lesson they learned from this whole period is ‘inflation good, deflation bad’.  Which was the wrong lesson to learn. 

The proper lesson to learn was that when people interfere with market forces or try to replace the market decision-making mechanisms, they often decide wrong.  It was wrong for the Fed to contract the money supply (to stop speculators that weren’t there) when there was good economic growth.  And it was wrong to increase the cost of doing business (raising interest rates, increasing regulations, raising taxes, raising tariffs, restricting imports, etc.) during a recession.  The natural market forces wouldn’t have made those wrong decisions.  The government created the recession.  Then, when they tried to ‘fix’ the recession they created, they created the Great Depression.

World War I created an economic boom that we couldn’t sustain long after the war.  The farmers because their mechanization just grew too much stuff.  Our industrial sector because of bad government policy.  World War II fixed our broken economy.  We threw away most of that bad government policy and business roared to meet the demands of war-torn Europe.  But, once again, we could not sustain our post-war economy because of bad government policy.

THE ECONOMY ROARED in the 1950s.  World War II devastated the world’s economies.  We stood all but alone to fill the void.  This changed in the 1960s.  Unions became more powerful, demanding more of the pie.  This increased the cost of doing business.  This corresponded with the reemergence of those once war-torn economies.  Export markets not only shrunk, but domestic markets had new competition.  Government spending exploded.  Kennedy poured money into NASA to beat the Soviets to the moon.  The costs of the nuclear arms race grew.  Vietnam became more and more costly with no end in sight.  And LBJ created the biggest government entitlement programs since FDR created Social Security.  The size of government swelled, adding more workers to the government payroll.  They raised taxes.  But even high taxes could not prevent huge deficits.

JFK cut taxes and the economy grew.  It was able to sustain his spending.  LBJ increased taxes and the economy contracted.  There wasn’t a chance in hell the economy would support his spending.  Unwilling to cut spending and with taxes already high, the government started to print more money to pay its bills.  Much like Weimar Germany did in the 1920s (which ultimately resulted in hyperinflation).  Inflation heated up. 

Nixon would continue the process saying “we are all Keynesians now.”  Keynesian economics believed in Big Government managing the business cycle.  It puts all faith on the demand side of the equation.  Do everything to increase the disposable money people have so they can buy stuff, thus stimulating the economy.  But most of those things (wage and price controls, government subsidies, tariffs, import restrictions, regulation, etc.) typically had the opposite effect on the supply side of the equation.  The job producing side.  Those policies increased the cost of doing business.  So businesses didn’t grow.  Higher costs and lower sales pushed them into recession.  This increased unemployment.  Which, of course, reduces tax receipts.  Falling ever shorter from meeting its costs via taxes, it printed more money.  This further stoked the fires of inflation.

When Nixon took office, the dollar was the world’s reserve currency and convertible into gold.  But our monetary policy was making the dollar weak.  As they depreciated the dollar, the cost of gold in dollars soared.  Nations were buying ‘cheap’ dollars and converting them into gold at much higher market exchange rate.  Gold was flying out of the country.  To stop the gold flight, Nixon suspended the convertibility of the dollar. 

Inflation soared.  As did interest rates.  Ford did nothing to address the core problem.  During the next presidential campaign, Carter asked the nation if they were better off than they were 4 years ago.  They weren’t.  Carter won.  By that time we had double digit inflation and interest rates.  The Carter presidency was identified by malaise and stagflation (inflation AND recession at the same time).  We measured our economic woes by the misery index (the unemployment rate plus the inflation rate).  Big Government spending was smothering the nation.  And Jimmy Carter did not address that problem.  He, too, was a Keynesian. 

During the 1980 presidential election, Reagan asked the American people if they were better off now than they were 4 years ago.  The answer was, again, ‘no’.  Reagan won the election.  He was not a Keynesian.  He cut taxes like Harding and JFK did.  He learned the proper lesson from the Great Depression.  And he didn’t repeat any of their (Hoover and FDR) mistakes.  The recession did not turn into depression.  The economy recovered.  And soared once again.

MONETARY POLICY IS crucial to a healthy and growing economy.  Businesses need to borrow to grow and create jobs.  However, monetary policy is not the be-all and end-all of economic growth.  Anti-business government policies will NOT make a business expand and add jobs no matter how cheap money is to borrow.  Three bursts of economic activity in the 20th century followed tax-cuts/deregulation (the Harding, JFK and Reagan administrations).  Tax increases/new regulation killed economic growth (the Hoover/FDR and LBJ/Nixon/Ford/Carter administrations).  Good monetary policies complimented the former.  Some of the worst monetary policies accompanied the latter.  This is historical record.  Some would do well to learn it.

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