Byzantine Empire, Bosporus, Silk Road, Dutch East India Company, English East India Company, Tea Act and Opium Wars

Posted by PITHOCRATES - March 11th, 2014

History 101

(Originally published May 15th, 2012)

To encourage Risk Takers to Travel Halfway around the World Mercantile States granted Monopoly Charters

The modern world began because Europeans had a penchant for silk and spices.  Something they enjoyed during Roman times.  When the Romans ruled the world.  And the Mediterranean Sea was nothing more than a Roman lake.  But when the empire stopped conquering new lands and sending the spoils of war home they had to turn to other means to pay for the cost of empire.  Taxes.  To pay for the Roman government and their public spending.  And the Roman legions.  This excessive government spending led to the fall of the western half of the empire.  But the eastern half lived on for another 1,000 years or so.  Why?  Because the capital of the Byzantine Empire was Constantinople.  On the Bosporus.  Trade crossroads of the world.

This city was so rich everybody wanted to conquer it.  So they could have all those riches.  For everything that came along the Silk Road from China crossed into Europe at the Bosporus.  Soon Muslims fought Christians in the Holy lands.  Then more Christians came.  The Crusaders.  Those who didn’t die went back to Europe with some of those Chinese luxuries.  Spices.  Silk.  Porcelain.  Etc.  Sparking a renewed interest in these finer things in Europe.  Especially the spices.  For European cooking was horribly bland at the time.  The Ottoman Turks eventually took Constantinople.  Renamed it Istanbul.  And controlled that lucrative trade.  Making those much sought after Asian goods rather expensive in Europe.  Which they had no choice but to pay.  Because if you wanted those luxuries you had to go through Istanbul.  Until the Portuguese sailed around Africa and found a direct route to those cherished goods, that is.

It was the Commercial Revolution.  A new age of international trade.  A trade even more profitable than what the Ottoman Turks controlled.  Because big ocean-going vessels can carry more cargo than anything coming over land on the Silk Road.  And these new European maritime powers wanted that wealth.  And the power it would provide.  To encourage risk takers to get into those wooden ships and travel halfway around the world they granted monopoly charters.  The Dutch East India Company (VOC) was one of the largest.  And one of the wealthiest.  But this was not your typical company.  The VOC established overseas colonies.  It waged war.  Established treaties.  Even coined its own money.  Because of this thousands of VOC ships stuffed full of valuable cargoes sailed to Antwerp and Amsterdam, making the Dutch very wealthy.  And powerful.

The Tea Act allowed the Company to Ship their Tea Directly to America and exempted them from any Duties

Of course the Dutch weren’t the only ones doing this.  They had competition.  Portugal.  Spain.  France.  And England.  Who would bump into each other numerous times fighting for control of this trade.  And those colonies.  The English and the Dutch would fight 4 wars.  Which is how Dutch-founded Manhattan became part of the British Empire and, subsequently, one of America’s greatest cities.  The English East India Company gave the VOC a run for its money.  Parliament even passed legislation to give the English a monopoly on all trade with their American colonies.  The Navigation Acts.  Which stated that all trade to and from America had to be on English ships.  And all trade had to go through an English port.  Where the ships were unloaded and the cargoes inspected.  And taxed.  Then they could reload their cargoes and continue on their journey.  All tenets of mercantilism.  This kept the lower-priced Dutch goods out of America.  And prevented the Americans from selling to the Dutch directly for higher prices.  So it shut down the Dutch from all American trade (except for a prosperous black market). And brought in some lucrative tax revenue for England.  While extending shipping times and increasing prices for the Americans.  Which they were not happy about in the least.

The English East India Company (the Company) was similar in structure to the VOC.  And soon made the Indian subcontinent a wholly owned subsidiary of the Company.  But it wasn’t cheap.  Waging war was costly.  As was managing those conquered territories (something the Romans had also learned).  Then a famine in Bengal in 1770 claimed about one-third of the local population.  Making laborers more scarce.  And more expensive.  All at a time when the sales of their imported goods were falling in Europe.  There were warehouses full of unsold Chinese tea that they couldn’t sell.  Making for a bad time for the Company.

Higher costs and lower sales spelled trouble.  And that’s what the Company had a lot of.  Trouble.  So the Company turned to Parliament for help.  And Parliament helped.  By allowing the Company to ship their tea directly to America without having to unload it in a British port.  Or pay a duty on that tea.  Which would greatly reduce their costs.  And allow them to sell it in America cheaper than they did before.  So Parliament passed the Tea Act in 1773.  Making life better for all involved.  But the Tea Act left in place another tax in the previous Townshend Acts.  Which was a bigger problem than getting cheaper tea (which they could get on the black market from the Dutch).  These taxes on the British subjects in America were unconstitutional.  Because there were no Americans sitting in Parliament.  This was taxation without representation.  A much bigger issue than cheap tea.  So they threw that first ‘cheap’ tea into Boston Harbor.  The Boston Tea Party being a major step towards war with the mother country.  And American independence.

Britain became the Lone Superpower after Abandoning their Protectionist Mercantile Policies and Adopting Free Trade

The American Revolutionary War was not the only headache the British got from their mercantile policies.  Part of those policies required maintaining a positive balance of trade.  So there was always a net inflow of bullion into the mother country.  That’s why raw materials shipped into Britain from America.  And finished goods shipped out to America.  Finished goods are more valuable than raw materials.  So the Americans had to make up for this balance of trade in bullion.  Resulting in a net inflow of bullion into the mother country.  Very simple.  As long as you can manufacture higher valued goods that other people want to buy.

And this is the problem they ran into with the Chinese.  For though the British wanted those Chinese spices, silk and porcelain the Chinese didn’t want anything the British manufactured.  Which meant Britain had to pay for those luxuries with bullion.  Including all that Chinese tea they craved.  Which resulted in a net outflow of bullion to the Chinese.  The British fixed this problem by finding the one thing that the Chinese people wanted.  Indian opium.  Grown in Bengal.  Of course, this turned a lot of Chinese into opium addicts.  The addiction problem was so bad that the Chinese banned opium.  But the British were able to smuggle it in.  They sold so much of it that they used the proceeds to buy their tea.  Thus reversing the bullion flow.

Not the finest hour in the British Empire.  The Chinese and the British would go on to fight a couple of wars over this opium trade.  The Opium Wars.  Which the British did all right in.  Even gaining Hong Kong in the bargain.  They didn’t build any long-lasting love with the Chinese people.  But Hong Kong turned out pretty nice under the British.  Especially after they abandoned their protectionist mercantile policies and adopted free trade.  Which made the British the lone superpower for about a century as they modernized the world by leading the way in the Industrial Revolution.  And the Chinese in Hong Kong were very happy indeed to be there when the communists took over the mainland.  And caused a famine or two.  For they lived comfortably.  In a state founded on mercantilism.  That achieved its greatest prosperity during the free trade of capitalism that followed Britain’s mercantile ways.

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Panic of 1907, Federal Reserve Act and Depression of 1920

Posted by PITHOCRATES - December 17th, 2013

History 101

In 1907 the Heinze Brothers thought Investors were Shorting the Stock of their United Copper Company

Buying and selling stocks is one way to get rich.  Typically by buying low and selling high.  But you can also get rich if the stock price falls.  How you ask?  By short-selling the stock.  You borrow shares of a stock that you think will fall in price.  You sell them at the current price.  Then when the stock price falls you buy the same number of shares you borrowed at the lower price.  And use these to return the shares you borrowed.  You subtract the price you pay to buy the cheaper shares from the proceeds of selling the costlier shares for your profit.  And if the price difference/number of shares is great enough you can get rich.

In 1907 the Heinze brothers thought investors were shorting the stock of their United Copper Company.  So they tried to turn the tables on them and get rich.  They already owned a lot of the stock.  They then went on a buying spree with the intention of raising the price of the stock.  If they successfully cornered the market on United Copper Company stock then the investors shorting the stock would have no choice but to buy from them to repay their borrowed shares.  Causing the short sellers to incur a great loss.  While reaping a huge profit for themselves.

Well, that was the plan.  But it didn’t quite go as planned.  For they did not control as much of the stock as they thought they did.  So when the short-sellers had to buy new shares to replace their borrowed shares they could buy them elsewhere.  And did.  When other investors saw they weren’t going to get rich on the cornering scheme the price of the stock plummeted.  For the stock was only worth that inflated price if the short-sellers had to buy it at the price the Heinze brothers dictated.  When the cornering scheme failed the stock they paid so much to corner was worth nowhere near what they paid for it.  And they took a huge financial loss.  But it got worse.

The Panic of 1907 led to the Federal Reserve Act of 1913

After getting rich in the copper business in Montana they moved east to New York City.  And entered the world of high finance.  And owned part of 6 national banks, 10 state banks, 5 trusts (kind of like a bank) and 4 insurance companies.  When the cornering scheme failed the Heinze brothers lost a lot of money.  Which spooked people with money in their banks and trusts.  As these helped finance their scheme.  So the people rushed to their banks and pulled their money out.  Causing a panic.  First their banks.  Then their trusts.  Including the Knickerbocker Trust Company.  Which collapsed.  As the contagion spread to other banks the banking system was in risk of collapsing.  Causing a stock market crash.  Resulting in the Panic of 1907.

Thankfully, a rich guy, J.P. Morgan, stepped in and saved the banking system.  By using his own money.  And getting other rich guys to use theirs.  To restore liquidity in the banking system.  To avoid another liquidity crisis like this Congress passed the Federal Reserve Act (1913).  Giving America a central bank.  And the progressives the tool to take over the American economy.  Monetary policy.  By tinkering with interest rates.  And breaking away from the classical economic policies of the past that made America the number one economic power in the world.  Built on a foundation of thrift, savings, investment, free trade, the gold standard, etc.  Where people saved for the future.  The greater their savings the more investment capital there was.  And the lower interest rates were.

The Federal Reserve (the Fed) changed all of that.  By printing money to keep interest rates artificially low.  Giving us boom and bust cycles as people over invest and over build because of cheap credit.  Leading to bubbles (the boom) in asset prices that painful recessions (the bust) correct.  Instead of the genuine growth that we got when our savings determined interest rates.  Where there is no over-investing or over-building.  Because the limited investment capital did not permit it.  Guaranteeing the efficient flows of capital to generate real economic activity.

Warren Harding’s Tax Cuts ignited Economic Activity and gave us the Modern World

Thanks to the Fed there was a great monetary expansion to fund World War I.  The Fed cut the reserve requirements in half for banks.  Meaning they could loan more of their deposits.  And they did.  Thanks to fractional reserve banking these banks then furthered the monetary expansion.  And the Fed kept the discount rate low to let banks borrow even more money to lend.  The credit expansion was vast.  Creating a huge bubble in asset prices.  Creating a lot of bad investments.  Or malinvestments.  Economist Ludwig von Mises had a nice analogy to explain this.  Imagine a builder constructing a house only he doesn’t realize he doesn’t have enough materials to finish the job.  The longer it takes for the builder to realize this the more time and resources he will waste.  For it will be less costly to abandon the project before he starts than waiting until he’s built as much as he can only to discover he will be unable to sell the house.  And without selling the house the builder will be unable to recover any of his expenses.  Giving him a loss on his investment.

The bigger those bubbles get the farther those artificially high prices have to fall.  And they will fall sooner or later.  And fall they did in 1920.  Giving us the Depression of 1920.  And it was bad.  Unemployment rose to 12%.  And GDP fell by 17%.  Interestingly, though, this depression was not a great depression.  Why?  Because the progressives were out of power.  Instead of the usual Keynesian solution to a recession Warren Harding (and then Calvin Coolidge after Harding died in office) did the opposite.  There was no stimulus deficit-spending.  There was no playing with interest rates.  Instead, Harding cut government spending.  Nearly in half.  And he cut tax rates.  These actions led to a reduction of the national debt (that’s DEBT—not deficit) by one third.  And ignited economic activity.  Ushering in the modern world (automobiles, electric power, radio, telephone, aviation, motion pictures, etc.).  Building the modern world generated real economic activity.  Not a credit-driven bubble.  Giving us one of the greatest economic expansions of all time.  The Roaring Twenties.  Ending the Depression of 1920 in only 18 months.  Without any Fed action or Keynesian stimulus spending.

By contrast FDR used almost every Keynesian tool available to him to end the Great Depression.  But his massive New Deal spending simply failed to end it.  After a decade or so of trying.  Proving that government spending cannot spend an economy out of recession.  But cuts in government spending and cuts in tax rates can.  Which is why the Great Recession lingers on still.  Some 6 years after the collapse of one of the greatest housing bubbles ever.  Created by one of the greatest credit expansions ever.  For President Obama is a Keynesian.  And Keynesian policies only lead to boom-bust cycles.  Not real economic growth.  The kind we got from classical economic policies.  Built on a foundation of thrift, savings, investment, free trade, the gold standard, etc.  The economic policies that made America the number economic power in the world.

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Free Trade, the Corn Laws and The Economist

Posted by PITHOCRATES - September 8th, 2013

Week in Review

Today the political left attacks capitalism as being unfair.  And mean.  Whereas they laud government intervention into the free market.  To level the playing field.  And to redistribute income.  To help those who can’t be as successful as others.  They support unions.  And oppose free trade.  Because free trade lowers prices for consumers.  By breaking up monopolies.  And giving them choice.  Free trade is an essential element of capitalism.  But the fight to make people’s lives better with free trade wasn’t easy.  As people who got rich with government-protected high prices opposed free trade (see Why did The Economist favour free trade? by C.R. posted 9/6/2013 on The Economist).

IN NINETEENTH century Europe and America, debates over whether tariffs or free trade produced the most economic growth dominated the political scene. Up until the early 1840s, protection appeared to be winning the argument. In Britain, high tariffs were imposed on agricultural imports in 1819, by legislation known as the Corn Laws. The ideas of Friedrich List, a German economist who argued that tariffs boosted industrial development through the protection of infant industries, were gaining ground, particularly in the United States. One Pennsylvanian legislator even joked in 1833 that the dictionary definition of man should be changed to “an animal that makes tariff speeches” so frequently were they heard.

Against this atmosphere, James Wilson founded The Economist in 1843 to campaign for free trade. His first target was to repeal the Corns Laws in Britain. He argued:

They are, in fact, laws passed by the seller to compel the buyer to give him more for his article than it is worth. They are laws enacted by the noble shopkeepers who rule us, to compel the nation to deal at their shop alone.”

The UAW got very generous contracts with the Big Three during the Fifties and the Sixties.  Raising the price of cars.  Which wasn’t a problem when they were the only ones making cars.  But then came the imports.  Which told the people how much more they were paying than these articles were worth.  And started buying the imports.  As they did those generous pay and benefit packages became more difficult to pay.  So the Big Three lobbied for tariffs on those less costly imports.  And got them.  Raising the price of the imports.  Forcing Americans to deal with the Big Three alone.  And buy their more costly cars.

More people bought cars than made them, though.  And the people who made the cars were better paid than most Americans.  So these tariffs forced poorer people to spend more on a car leaving them less for their families.  So richer people could have more.  This is what tariffs do.  They allow fewer people to have more.  While more people have to do with less.  So fewer buy more.  While more buy less.  Because there are more people who buy cars than make them these tariffs, then, reduce economic activity.  And because the Big Three didn’t have to figure out how to give more for less to their customers they didn’t.  Giving their customers ‘rust buckets’ in the Seventies.  Something else that tariffs do.  Lead to inferior goods.  Because if the government forces people to buy from you then the quality of what you sell doesn’t matter.

Wilson believed that protectionism caused “war among the material interests of the world”, in other words, war between nations and classes. A high tariff regime was no longer economically “productive”; Britain was stuck in an economic depression in the early 1840s. In contrast, free trade produced “abundance and employment”. It was appropriate for Britain’s economy where “a large proportion of the population and property depended on commerce and industry alone”. On the other hand, List’s ideas about protection were dismissed as unnecessary “swaddling clothes” for a mature economy, such as Britain’s.

The Economist’s early views on free trade were strongly influenced by the classical economists Adam Smith and David Ricardo, as Ruth Dudley Edwards, a historian, has pointed out. Wilson, like Smith, realised that trade was a two way exchange. Countries needed to “increase imports to increase exports” to boost economic growth. Consumers, Smith argued in the Wealth of Nations, should buy products from where they were cheapest. All protection did was create monopolies, which were “a great enemy to good management”. Ricardo took Smith’s ideas further, arguing that all countries benefit from free trade by producing what they were best at relative to other countries.

That’s what the Big Three wanted.  A monopoly on cars sold in America.  And there is only one way to get one.  The government has to create them.  Hence the Big Three’s request for tariff protection.

David Ricardo’s comparative advantage said nations should make what they can make best and trade for those things they can’t.  For example, if two countries can both make one thing but one can do so at lower costs they can make more of them for the same costs.  Giving them a larger surplus to trade for other things.  While the other nation will consume more resources to build the same quantity leaving less to make the other things they need.  While having fewer things available for export.  So if you try to make things you can’t make efficiently you end up consuming more resources to have less.  Whereas the nation that makes only what it can make best ends up consuming fewer resources that are then available to make other things.  And they have more things to trade.  Leading to a higher standard of living.  And if their trading partners do likewise they, too, experience a higher standard of living.

Free trade leads to greater economic activity.  Which made Britain wealthy.  Allowing them to extend their empire for another 70 years or so.  Despite the warnings of the rich landowners who said repealing the Corn Laws would cause harm.  Instead, repealing the Corn Laws led to greater economic activity.  And less costly food. Allowing people to feed their families more easily.  The only harm suffered was to the profits of the big landowners.  Who lost their monopoly.  And could no longer charge more than their food was worth.

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Currencies, Exchange Rates and the Gold Standard

Posted by PITHOCRATES - June 17th, 2013

Economics 101

Money is a Temporary Storage of Value that has no Intrinsic Value

Giant container ships ply the world’s oceans bringing us a lot of neat stuff.  Big televisions.  Smartphones.  Laptop computers.  Tablet computers.  The hardware for our cable and satellite TVs.  Toasters.  Toaster ovens.  Mixers and blenders.  And everything else we have in our homes and in our lives.  Things that make our lives better.  And make it more enjoyable.  These things have value.  We give them value.  Some have more value to one than another.  But these are things that have value to us.  And because they have value to us they have value to the people that made them.  Who used their human capital to create things that other people wanted.  And would trade for them.

When we first started trading we bartered with others.  Trading things for other things.  But as the economy grew more complex it took a lot of time to find someone who had what you wanted AND you had what they wanted.  So we developed money.  A temporary storage of value.  So we could trade the valuable things we created for money.  That money held the value of what we created temporarily while we looked for something that we wanted.  Then we exchanged the money we got earlier for something someone had.  It was just like trading our thing for someone else’s thing.  Only instead of spending weeks, months even years meeting hundreds of thousands of people trying to find that perfect match we only needed to meet two people.  One that exchanges money for the thing we have that they want.  And another who has what we want that they will exchange for our money.  Then that person would do the same with the money they got from us.  As did everyone else who brought things to market.  And those who came to market with money to buy what others brought.

Money is a temporary storage of value.  Money itself doesn’t have any intrinsic value.  Consider that container ship full of those wonderful items.  Now, which would you rather have as permanent fixtures in your house?  Those wonderful things?  Or boxes of money that just sit in your house?  You’d want the wonderful things.  And if you had a box of money you would exchange it (i.e., go out shopping) for those wonderful things.  Because boxes of money aren’t any fun.  It’s what you can exchange that money for that can be a lot of fun.

Devaluing your Currency boosts Exports by making those Goods less Expensive to the Outside World

So there is a lot of value on one of those container ships.  Let’s take all of that value out of the ship and place it on a balancing scale.  Figuratively, of course.  Now the owner of that stuff wants to trade it for other stuff.  But how much value does this stuff really have?  Well, let’s assume the owner is willing to exchange it all for one metric ton of gold.  Because gold is pretty valuable, too.  People will trade other things for gold.  So if we put 1 metric ton of gold on the other side of the balancing scale (figuratively, of course) the scale will balance.  Because to the owner all of that stuff and one metric ton has the same value.  Of course moving a metric ton of gold is not easy.  And it’s very risky.  So, instead of gold what else can we put on that scale?  Well, we can move dollars electronically via computer networks.  That would be a lot easier than moving gold.  So let’s put dollars on the other side of that scale.  Figuratively, of course.  How many will we need?  Well, today gold is worth approximately $1,380/troy ounce.  So after some dimensional analysis we can convert that metric ton into 32,150 troy ounces.  And at $1,380/troy ounce that metric ton of gold comes to approximately $44.4 million.  So that container ship full of wonderful stuff will balance on a scale with $44.4 million on the other side.  Or 1 metric ton of gold.  In the eyes of the owner they all have the same value.

Moving money electronically is the easiest and quickest manner of exchanging money for ships full of goods.  These ships go to many countries.  And not all of them use American dollars.  But we can calculate what amounts of foreign currency will balance the value of that ship.  Or one metric ton of gold.  By using foreign exchange rates.  Which tell us the value of one currency in another currency.  Something that comes in pretty handy.  For when, say, an American manufacturer sells their goods they want American dollars.  Not British pounds.  Danish kroner.  Or Russian rubles.  For American manufacturers are in the United States of America.  They buy their materials in American dollars.  They pay their employees in American dollars.  Who pay their bills in American dollars.  Go shopping with American dollars.  Etc.  For everyday American transactions the British pound, for example, would be un-useable.  What these American manufacturers want, then, are American dollars.  So before a foreigner can buy these American exports they must first exchange their foreign currencies for American dollars.  We can get an idea of this by considering that container ship full of valuable stuff.  By showing what it would cost other nations.  The following table shows a sampling of foreign exchange rates and the exchanged foreign currency for that $44.4 million.

foreign currencies and exchange rates

If we take the US dollars and the Exchanged Currency for each row and place them on either side of a balancing scale the scale will balance.  Figuratively, of course.  Meaning these currencies have the same value.  And we can exchange either side of that scale for that container ship full of valuable stuff.  Or for that metric ton of gold.  Why are there such large differences in some of these exchange rates?  Primarily because of a nation’s monetary policy.  Many nations manipulate their currency for various reasons.  Some nations give their people a lot of government benefits they pay for by printing money.  Which devalues their currency.  Some nations purposely devalue their currency to boost their export sector.  As the more currency you get in exchange for your currency the more of these exports you can buy.  Most of China’s great economic growth came from their export sector.  Which they helped along by devaluing their currency.  This boosted exports by making those goods less expensive to the outside world.  But the weakened yuan made domestic goods more expensive.  Because it took more of them to buy the same things they once did.  Raising the cost of living for the ordinary Chinese.

The Gold Standard made Free Trade Fair Trade

Some economists, Keynesians, approve of printing a lot of money to lower interest rates.  And for the government to spend.  They think this will increase economic activity.  Well, keeping interest rates artificially low will encourage more people to buy homes.  But because they are devaluing the currency to keep those interest rates artificially low housing prices rise.  Because when you devalue your currency you cause price inflation.  But it’s just not house prices that rise.  Prices throughout the economy rise.  The greater the inflation rate (i.e., the rate at which you increase the money supply) the higher prices rise.  And the less your money will buy.  While the currencies at the top of this table will have exchange rates that don’t vary much those at the bottom of the table may.  Especially countries that like to print money.  Like Argentina.  Where the inflation is so bad at times that Argentineans try to exchange their currency for foreign currencies that hold their value longer.  Or try to spend their Argentine pesos as quickly as possible.  Buying things that will hold their value longer than the Argentine peso.

Because printing fiat money is easy a lot of nations print it.  A lot of it.  People living in these countries are stuck with a rapidly depreciating currency.  But international traders aren’t.  If a country prints so much money that their exchange rate changes every few minutes international traders aren’t going to want their currency.  Because a country can’t do much with a foreign currency other than buy exports with it from that country.  A sum of highly depreciated foreign currency won’t buy as much this hour as it did last hour.  Which forces an international trader to quickly spend this money before it loses too much of its value.  (Some nations will basically barter.  They will exchange their exports for another country’s exports based on the current exchange rate.  So that they don’t hold onto the devalued foreign currency at all.)  But if the currency is just too volatile they may demand another currency instead.  Like the British pound, the euro or the American dollar.  Because these stronger currencies will hold their value longer.  So they’ll buy this hour what they bought last hour.  Or yesterday.  Or last week.  There is less risk holding on to these stronger currencies because Britain, the European Central Bank and the United States aren’t printing as much of their money as these nations with highly devalued currencies are printing of theirs.

This is the advantage of gold.  Countries can’t print gold.  It takes an enormous expense to bring new gold to the world’s gold supply.  It’s not easy.  So the value of the gold is very stable.  While some nations may devalue their currencies they can’t devalue gold.  A nation printing too much money may suffer from hyperinflation.  Reducing their exchange rate close to zero.  And when you divide by a number approaching zero the resulting amount of currency required for the exchange approaches infinity.  Weimar Germany suffered hyperinflation.  It was so bad that it took so much money to buy firewood that it was easier and less expensive to burn the currency instead.  This is the danger of a government having the ability to print money at will.  But if that same country can come up with a metric ton of gold that person with the container ship full of wonderful stuff would gladly trade it for that gold.  Even though that person will not trade it for that country’s currency.  This was the basis of the gold standard in international trade.  When nations backed their currencies with gold.  And kept them exchangeable for gold.  Forcing nations to maintain stable currencies.  By maintaining an official exchange rate between their currency and gold.  If that nation devalued its currency the market exchange rate will start to move away from the official exchange rate.  For example, say the official rate was $40/troy ounce.  But because they printed so much of their currency they devalued it to where it took $80 to buy a troy ounce on the open market.  So a nation could take $80 dollars of that devalued currency and exchange it for 2 troy ounces of gold from that nation.  The official exchange rate forcing the nation to give away 2 troy ounces of gold for $80 when the real market exchange rate would only have given them 1 troy ounce.  So devaluing your currency would cause gold to flow out of your country.  And the only way to stop it would be to decrease the size of your money supply.  Undoing the previous inflation.  To bring the market exchange rate back to the official exchange rate.  Which is why the gold standard worked so well for international trade.  Nations could not manipulate their currency to get a trade advantage over another nation.  Making free trade fair trade.  Something few say today.  Thanks to currency manipulators like China.

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Famine, Crop Yields, Food Surpluses, Irrigation, Plow, Crop Rotation, Cultivars, Fertilizers, Pesticides, Tractor, Railroad and Ships

Posted by PITHOCRATES - June 5th, 2013

Technology 101

(Originally published May 23rd, 2012)

Because of Advances in Farming Fewer People could Grow more Food

Cold weather kills people.  A lot of people throughout history have died during winters as they exhausted their food supplies.  That’s why preparing for the winter was serious business.  You had to store enough food to carry you through the winter.  And if the fall harvests were poor it spelled big trouble.  And famine.  It’s hard to imagine what this was like.  A long winter ahead of you with an insufficient food supply.  It was scary.  For it meant some people would die before the spring came.  Hard to fathom this in a day where you can actually drive your car through a blizzard to your favorite greasy diner or fast food restaurant for a delicious hot meal to take off the chill of the coldest winter day.  It wasn’t always like this.

And it wasn’t only long winters that killed people.  Sometimes the long summers did.  Where there were insufficient rains.  And drought.  That destroyed crops and drastically reduced fall harvests.  You don’t hear much about famine these days in the U.S, Canada, Britain, France, Germany or other advanced nations.  But underdeveloped and impoverished nations suffer famine to this day.  Why?  Two primary reasons.  Improved crop yields.  And improved transportation.  The advanced nations have them.  The impoverished nations don’t.

Improved crop yields create food surpluses.  Key to civilization itself.  Food surpluses allowed a middle class to arise because everyone did not have to grow food.  Because of advances in farming fewer people could grow more food. Those who didn’t have to grow food could think about other things.  Including ways to further improve crop yields.  By creating better tools.  Better techniques.  Better food storage.  And when you do all of these things you not only have enough food for yourself and for your surplus you have enough to export.  To those who do not have enough food.  Even allowing people to live in areas that cannot produce food.  For they can trade for food.  Thanks to these surpluses available for export.

Food is so Plentiful and Inexpensive Today that the Problem in America is not Famine but Obesity

Early farms relied on the fertile soil of river banks.  The spring flooding of the rivers raised river levels.  When the water retreated it left behind fertile soil.  Eventually we learned how to take control of our water resources.  And used it to make fertile land away from river banks.  Using irrigation.  Bringing the water to the land.  Probably the next great development was the plow.  Which let us take control of the land.  We tilled the soil to aerate it.  To control weeds.  To mix in organic material.  Such as manure.  To prepare it for planting.  And we used irrigation to bring those crops to harvest.

We then developed crop rotation to replenish nitrogen in the soil.  And to control pests.  Certain pests attack certain crops.  By rotating crops pest infestation couldn’t spread and return year after year.  Families of crops need certain nutrients.  Rotation prevents the depletion of any single nutrient.  Then we took control of the plants we grew.  By creating new plants.  Cultivars.  Using selective breeding to increase grain size, the number of grains per plant, improve disease resistance, etc.

Then we turned to chemistry.  Creating fertilizers.  And pesticides.  These two advancements alone exploded crop yields.  Never before did so few grow so much with so little.  We maximized the agricultural potential of land year after year.  And then we mechanized the farm.  Introducing the tractor.  Allowing the same number of farmers to cultivate more land.  So not only did their existing lands yield more they added more high-yield lands to explode yields.  Creating huge food surpluses available for export.  And slashing the price of food across the board.  From the bread we make from wheat.  To corn-fed beef.  Food is so plentiful and inexpensive today that the problem in America is not famine but obesity.  Obesity is bad but it takes a lot longer to die from obesity than it does from famine.  And we enjoy all of those delicious things that are making us so fat.  While there’s nothing to enjoy when starving to death.

We were able to Raise Crop Yields to such High Levels we have Food Available for Everyone in this World

As crop yields increased more food entered the market.  Good for people.  But bad for farmers.  Because they depressed crop prices.  Large farms that cultivated more land could still make a profit.  But the small farmer who didn’t cultivate more land just saw his revenue fall.  Until his revenue fell below his costs.  Leaving him unable to service the debt he incurred to mechanize his farm.  Causing bankruptcy.  Which happened a lot in the Thirties.  Causing all those bank runs during the Great Depression.

To fight this free fall in crop prices countries enacted tariffs and import restrictions.  The British Corn Laws kept out the less expensive foreign food so the landowning aristocracy could maximize their profits.  And when the British repealed the Corn Laws and adopted free trade everything the landowning aristocracy feared happen.  Food became inexpensive and plentiful.  In large part because of the United States.  Who was maximizing their crop yields.  And then using the railroad to ship their surpluses to the great rivers.  The Ohio.  The Missouri.  The Mississippi.  Where they loaded these surpluses onto steamships.  Where it traveled down the Mississippi to the Port of New Orleans.  Where they transferred it to ocean-going sail ships and steamers.  Bound for Europe.  And Britain.  Where this food fed hungry people.  And cut into the profits of the wealthy landowners.

But it wasn’t only in the United States.  Soon other great agricultural countries produced food surpluses that they shipped all over the world.  Winters still happen.  Droughts still happen.  But they don’t happen everywhere at the same time.  And because we were able to raise crop yields to such high levels we have food available for everyone in the world.  And truck, rail and ships can move that food anywhere it is needed.  Which is why we can drive to our favorite greasy diner or fast food restaurant during a blizzard on the coldest day of winter and enjoy a fresh glass of orange juice, coffee, eggs, hash browns and sausage.  No matter where you live.  As long as you live in a country that supports free trade.

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President Obama is OK with Food Assistance for Illegal Immigrants but wanted to charge Legal Border Crossers a Toll

Posted by PITHOCRATES - May 12th, 2013

Week in Review

Does the Obama administration have a spending problem?  Or a revenue problem?  Well, according to an article in the Examiner, since Obama has been president the food stamp program (SNAP) has “increased at 10 times the rate of job creation, the annual spending on SNAP has doubled, and one in seven Americans now participates in SNAP.”   The USDA even sent a Spanish-language flyer to the Mexican Embassy “advising Mexicans in the U.S. that they do not need to declare their immigration status in order to receive financial assistance.”

The Obama administration is giving away so much food assistance that the treasury will soon be unable to borrow money fast enough to pay for it.  Showing a real spending problem.  And a love for illegal immigrants living in the country.  Or who would like to live in the country.  Basically throwing open our southern border.  While at the same time President Obama wants to make Mexicans and Canadians crossing the border legally pay a toll (see U.S. Senate nixes planned U.S.-Canada border tolls by Paul Koring posted 5/10/2013 on The Globe and Mail).

Obama administration plans to impose a toll on land travellers crossing the U.S. borders with Canada and Mexico were scrapped Thursday.

The proposed toll, which sparked angry responses on both sides of the borders, was blocked in a rare show of bipartisan unanimity by Democrats and Republicans in the U.S. Senate…

It effectively killed a Homeland Security suggestion contained in Mr. Obama’s proposed budget that tolls on pedestrian and vehicular traffic crossing the Canada-U.S. and Mexico-U.S. borders be considered as a means of raising revenues for the cash-strapped federal government.

When the president wants to make people pay for the privilege of crossing our border to spend their money in our economy it’s time to admit you have a spending problem.

It is interesting that the Department of Homeland Security wants more money to secure the border when they continue to refuse to secure the border.  Which seems to be more of a policy decision than a cost factor.  Especially when the USDA is telling illegal immigrants that they can get food assistance without being able to speak English or prove that they are a legal citizen.

Bridges and tunnels need maintenance.  Which is why we charge tolls at river-crossings.  But we don’t charge tolls at land-crossings.  To do so would add a tariff to cross-border trade.  Violating the North American Free Trade Agreement.  As well as defeating the purpose of a free trade agreement.  To encourage cross-border trade.

The problem is with America’s southern border.  Making Canadians pay for the problems at our southern border would be unfair to say the least.

President Obama has a spending problem.  And he needs to fix that problem by cutting spending.  Not by raising taxes everywhere and on everyone.  Higher taxes and a less friendly business environment destroy economic activity.  And he should know this.  As he had a front-row seat for his destructive economic policies that have created the worst recovery since that following the Great Depression.  And yet all he ever comes up with is more of the same failed policies of the past.  It’s as if he just tries them one more time they will have a different outcome.  Which is either a sign of insanity.  Or of someone that puts politics before all else.

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The US without Obamacare is in the same Financial Mess as the UK who already has the NHS

Posted by PITHOCRATES - March 17th, 2013

Week in Review

The British Empire ruled the world for a century or more.  And they did that with representative government.  Capitalism.  And free trade.  Making the empire very wealthy.  And strong.  Allowing it to rule the world.  The devastating costs of World War I pretty much put an end to that.  And after World War II they nationalized health care.  With the NHS.  And some industries.  Becoming a social democracy.  Like much of Europe.  Labor strikes and power outages were so common in the Seventies they called it the British disease.  It was difficult to see the greatness that was once the British Empire.  The great nation that modernized the world.  Farming advances.  Representative government.  The Industrial Revolution.  Capitalism.  The things that built the great nations of the world today.  Things you didn’t think about when you looked at Britain in the Seventies.  Lady Thatcher brought some of that greatness back.  Improved the economic well-being of the nation.  But it didn’t last (see Osborne must make tax open and honest by Matt Sinclair posted 3/17/2013 on The Telegraph).

The Government is still spending nearly half of our national income. No country has ever financed that except by imposing punishing taxes on families making quite ordinary incomes. The alternative of making the numbers balance by taxing the “one per cent” just isn’t grounded in reality. First, there aren’t enough of them. Second, they won’t sit around like obedient little cash cows, and placidly continue to invest in this country, as we confiscate their incomes or levy swingeing property taxes on their homes.

Then there is the longer-term problem of demographics. Everyone is worrying about economic growth in the next quarter. But as the population continues to get older, none of our leaders seems to be asking how we are going to pay for the big NHS and pensions bills that are likely over the next quarter of a century.

Public spending has already reached its limits: our levels (at 49 per cent of GDP in 2012, according to the OECD) are higher than those in Germany, and could soon eclipse those of Sweden. The extra pressure caused by an ageing population means the existing system is unaffordable.

Sounds familiar.  Currently total government spending in the U.S. at all levels of government is approximately 40%.  Government at every level is trying to raise taxes. Even on those making ordinary incomes.  The government talks about making those who can afford to pay more (the 1%) should pay more.  But there aren’t enough of them.  Even if you take everything they earn.  We have an aging population, too.  And we have a system that is unaffordable as well.  There is really only one difference between the UK and the US.  The UK has national health care.  They have the NHS.  While the US is working towards a national health care.  Starting with Obamacare.  Which means things will get far, far worse in the US.  Far worse than they are in the UK.  Especially with the US having five times the population the UK has.

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FT159: “There’s more to know than most people know.” —Old Pithy

Posted by PITHOCRATES - March 1st, 2013

Fundamental Truth

Some want to Lower the Voting Age despite our Teens’ Penchant for Making Poor Decisions

Parents can’t tell their kids anything.  Because they know everything already.  Despite doing a lot of stupid stuff.  They smoke cigarettes.  Do drugs.  Binge drink.  Drink and drive.  Have unprotected sex.  And a whole lot of other things that can have lasting consequences.  Consequences such as cancer.  A drug addiction.  An arrest for driving under the influence.  An arrest for vehicular manslaughter.  Catching a venereal disease.  Becoming a single mother while still in high school.  Or becoming a single mother with a venereal disease.  While still in high school.

Teens and young adults have a history of making poor decisions.  Why?  Is it because they are stupid?  No.  It’s because they are young.  Inexperienced.  And grow up in an environment that tells them they are far wiser than they are.  As they grew up people constantly told them that they are smart.  They are wise.  And that we need to listen to what they say.  For they are our future.  Some even wanting to bring them into the political process earlier.  By lowering the voting age.  Which is an odd thing to do.  Considering their penchant for making poor decisions.

Of course kids are all for lowering the voting age.  For if they could vote earlier there would probably be more than 2 states that have decriminalized marijuana by now.  And they could lower the drinking age, too.  For let’s face it kids are going to binge drink no matter what we say.  Just as they are going to smoke marijuana and have sex.  So we might as well help them do these things.  And lowering the voting age will be a step towards making that happen.

The Founding Fathers wanted a Government of the People not a Ruling Elite in a Faraway Place telling them what’s Best for Them

So we know what kids want.  Less parenting.  And more fun.  They want the freedom to enjoy whatever they want to enjoy.  And believe they are enlightened like our Founding Fathers were when they wanted the freedom to do what they wanted to do.  Of course, the Founding Fathers’ Enlightenment was a lot different from that of the kids’ today.  The Founding Fathers were interested in science, economics and religious freedom.  They were familiar with the history of Greece and Rome.  Magna Carta.  The Protestant Reformation.  The English Civil War.  They were proud of their membership in the British Empire.  The most enlightened and free empire, or country, in the world.  Thanks to their representative government.  But when Parliament did not let them have any representation in that house while passing laws to govern them, well, they didn’t love the British Empire as much as they once did.

The Founding Fathers weren’t fans of mercantilism.  Then the dominant economic policy of the day.  European powers fought each other for colonies.  Their colonies shipped raw materials back to the mother country.  Who then used them to manufacture finished goods.  That they then sold to the world.  And to their colonies.  Keeping the net flow of gold and silver flowing to the mother country.  While exporting more finished goods than they imported.  With the state helping a few well-connected domestic businesses.  Keeping the state coffers flush with money.  While the people paid higher prices than they normally would have paid.  Thanks to those government policies favoring the well-connected businesses.  Basically like what China is doing today.  Maintaining a strong export economy with cheap labor.  That doesn’t benefit the Chinese masses all that much.  Creating basically two Chinas.  The rich in the cities.  And the poor and impoverished everywhere else.

The Founding Fathers wanted liberty.  Political liberty.  And economic liberty.  Laissez-faire capitalism.  Where the people taking the greatest risk profited the most.  Not the state.  They wanted a limited federal government.  Just large enough to protect the nation.  To treat with other nations.  Those things best suited for the federal government.  While the vast majority of power belonged to the states.  Closer to the people.  And not in some distant land.  They wanted a government of the people.  Not a ruling elite in a faraway place telling them what’s best for them.  That’s why they fought for their independence from a distant power in the first place.  The British Empire.  And they sure didn’t want to trade one distant power oppressing them for another.  They didn’t want money corrupting the federal government.  They wanted the seat of financial power and the seat of government power separated.  For the greatest abuses of power came when wealth joined power in the Old World capitals.  London.  Paris.  Madrid.  Thomas Jefferson wanted the federal capital as far from the bankers and merchants in New York as possible.  Which is why they placed the new federal capital in a swamp on the Potomac River.

Sadly, those who Know the Least often determine who Wins Elections

Those who have studied history understand how the United States came to be.  And what made it the world’s number one economic power.  Laissez-faire capitalism.  Free trade.  Sound money.  In particular the gold standard.  They saw history prove Say’s Law.  Supply creates its own demand.  No one demanded personal computers or the Internet.  But when those who brought these to the market place showed how wonderful they were demand soon followed.  They saw history prove David Ricardo’s comparative advantage.  How free trade lets nations produce what they do most efficiently and trade for what they don’t.  Thus increasing the economies of all nations trading freely.

People who know history understand that the prevalent economic policy today, Keynesian economics, is a failed policy.  For Keynesian economic policies are more like mercantilism than free market capitalism.  Calling for more government intervention into the market.  Inflationary monetary policy (i.e., printing money).  As well as tax and spend fiscal policies so the government can redistribute wealth.  So the government can choose winners and losers.  Not the free market.  Policies that all go against what made America the world’s number one economic power.  The Seventies, a time when the Keynesians got everything they wanted when President Nixon decoupled the dollar from gold, saw double-digit inflation, high unemployment and a stagnant economy.  Everything the Keynesians tried failed to improve the economy.  In fact, their policies only made the economy worse.  And the only thing that pulled us out of the stagflation and misery of the Seventies was Ronald Reagan.  Who embraced the classical economic policies that made America the number one economic power in the world.  Laissez-faire capitalism.  Say’s Law.  David Ricardo’s comparative advantage.  Sound monetary policy (i.e., noninflationary).  The policies we call Reaganomics.

People who study history know this.  But teens and young adults?  Those more interested in drinking alcohol, smoking marijuana and having sex?  They haven’t a clue about economics or their history.  Yet they often determine elections.  Sad but true.  And it’s just not teens and young adults who don’t understand economics or know their history.  Thanks to the hippies of the Sixties moving into education most people coming out of our public schools don’t.  For the hippies of the Sixties changed the curriculum.  To help them in their quest to destroy capitalism.   By dumbing down the curriculum.  So it’s easier for Keynesians to keep passing the failed policies of the past.  To help them keep expanding the size of government.  To turn this nation back to what the Founding Fathers fought to get away from.  The mercantilism of the Old World.  Of present day China.  Where the few in power have all the power.  And all the wealth.  All because people think they know more than they know.  And vote as if they know everything they need to know.  But there’s more to know than most people know.  And, sadly, those who know the least often determine who wins elections.

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2012 Endorsements: Thomas Jefferson

Posted by PITHOCRATES - October 17th, 2012

2012 Election

When the Radicals attacked Parliament and the King’s Ministers Jefferson’s Summary View attacked King George

When Thomas Jefferson entered politics he was still a quiet and shy awkward young man.  He was not the public speaker Patrick Henry was.  And did not enjoy being in the spotlight.  That said he was incredibly book smart.  When he was in college he spent up to 15 hours a day reading.  And another 3 hours practicing his violin.  Which probably explained why he was quiet and shy.  And not a real lady’s man.  His first love was and always remained his books.  And it was this insatiable thirst to read and learn that made him one of the greatest writers of the Revolutionary era.  It was also where he was most comfortable.  For it was something a quiet and shy young man could do best in his solitude.

After earning a law degree he went into law.  Then he won a seat in the Virginian House of Burgesses.  And joined the opposition against the taxing efforts of British Parliament.  As well as their regulation of trade.  Going so far as to join a boycott of British imports.  Unless it was something really nice that he really, really wanted.  For he was a bit of a dandy who enjoyed the finest fashions, furnishings, wines, pretty much anything French, etc.  If it was fashionable in high society Jefferson probably had it.  But you wouldn’t believe he was a dandy by his writing.  For he wrote some powerful stuff while still in the House of Burgesses.  Especially his A Summary View of the Rights of British America (1774).  Published at a time when there was a lot of friction between the colonies and the mother country.  As furious debate raged about Parliament’s right to tax and regulate trade in the colonies.  To summarize his Summary View Jefferson stated, “The British Parliament has no right to exercise authority over us.”  Like many of the Revolutionary generation, Jefferson did not like some distant central power imposing their will on them.  But Summary View went even farther.

At the time most British Americans still wanted to be subjects of Great Britain.  They just wanted the same rights subjects living in England had.  Namely, representation in Parliament.  Denied that they attacked the dictatorial powers of Parliament.  And the king’s ministers.  But they didn’t attack King George.  Jefferson did.  When the other radicals attacked Parliament and the king’s ministers Summary View attacked King George.  While the other radicals wanted fair and equal treatment as subjects of the British Crown Jefferson was already moving beyond that.  He was ready for independence from the British Crown.  For he had no love of monarchy.

The States drafting their own Constitutions was a de facto Declaration of Independence

Much of the trouble in the colonies began with the Stamp Act of 1765.  But in Summary View Jefferson said their problems went further back.  To 1066.  To the Norman Conquest of England.  A time when, according to the Whig interpretation of history that Jefferson had read, things changed.  All land belonged to kings after 1066.  Not to the people.  But before the Norman Conquest there was the Saxony model of government.  Tracing its lineage back to Saxony Germania.  Along the North Sea.  Where once upon a time in a mystical place the good people of Saxony enjoyed representative government.  A beautiful system of government under which people lived in harmony and bliss.  Until feudalism came along.  And kings arose.  Who snuffed out these old ways.  So Jefferson hated all monarchies.  The nobility class.  And birthrights.  He didn’t believe in the divine rights of kings.  To him they were just a bunch of bullies who came along and changed the rules of the game by force for personal gain.  And King George III was no different.

When Peyton Randolph left the Continental Congress Jefferson replaced him.  At the time he was a very minor player in Virginian politics.  But his Summary View created a reputation that preceded his arrival.  And he was warmly welcomed.  Especially by the more radical elements.  The Americans had not yet declared their independence but they were already at war with Great Britain.  Blood was spilled at Lexington and Concord.  And General Washington was now in command of the Continental Army then laying siege to the British in Boston.  More importantly, some states were already drafting their own constitutions.  To form new governments to replace the royal government.  Which to many (including Jefferson) was the most pressing business.  As it was a de facto declaration of independence.  Which was even more important than the drafting of the Declaration of Independence.  Something the more senior members delegated to the junior member from Virginia.  Because they had more important things to do.

In May and June of 1776 Jefferson’s mind was back in Virginia.  And he wrote three drafts of a new constitution for Virginia.  His constitution was similar to the future U.S. Constitution.  It included a separation of powers.  A 2-house (i.e., bicameral) legislature.  An independent judiciary.  And, most importantly of all, a WEAK executive.  Leaving political power in the hands of the people via their representatives in the legislature.  There would be no royal governors or kings in the new state government.  Just pure self-government.  Just like in that mystical place where the Saxons lived in harmony and bliss.  And so it would be in Virginia.  There would be democracy.  At least for the people who owned property and paid taxes, that is.  For if you wanted to tell government what they could do you had to have skin in the game.  And pay taxes.  But after taking care of this Virginian business he got around to writing the Declaration of Independence.  And that thing that no one wanted to waste their time doing?  It became the seminal document of the United States.  Making Jefferson a superstar among the Founding Fathers.  In posterity John Adams regretted that he didn’t waste his valuable time to write it.

If Jefferson were Alive Today he would likely Endorse the Republican Candidates Mitt Romney and Paul Ryan

After the Americans won their independence Jefferson accepted a diplomatic post in France where he accomplished little.  Jefferson championed open markets and free trade.  And he worked tirelessly with the French to adopt a free trade agreement.  So cheap raw materials (like Virginian tobacco) could flow to France.  And cheap manufactured goods could flow to the United States.  But the political reality in France stymied him.  The French refused to lower tariffs so they could protect their domestic markets.  Not to mention that those high custom duties allowed corrupt officials to pocket more for themselves.  His only success in France was a Dutch loan John Adams secured while Jefferson was tagging along.  Adams understood the complex world of international finance.  Jefferson did not.  Other than large sums of money tended to corrupt people.  Custom agents.  And governments.  So it was a wise thing to keep the centers of finance apart from the center of government.  Which is why the federal capital is in Washington DC and not in New York City.

Jefferson was in France during Shay’s Rebellion.  An armed protest against new taxes imposed by Boston.  Those in the fledgling government worried about suppressing this uprising (the Continental Congress had few resources other than to ask states for contributions) to prevent the collapse of the new nation.  While Jefferson said, “The spirit of resistance to government is so valuable on certain occasions, that I wish it to be always kept alive…I like a little rebellion now and then.”  And, “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.  It is its natural manure.”  Later, serving as Secretary of State in the Washington administration, he battled with Secretary of the Treasury Alexander Hamilton over the size of government and the meaning of the Constitution.  Hamilton wanted to expand the power of the federal government to help jumpstart America into becoming a mighty empire like the British Empire.  With the government partnering with the private sector.  Pooling great amounts of capital together to build incredible things.  While Jefferson wanted all Americans to be yeoman farmers physically working their own land.  With as small a federal government as possible.  And one that spent as little money as possible and remained debt-free.  In fact, when he was president he slashed spending so much that the nation could barely afford the navy to protect its shipping from the Barbary pirates.

So it is pretty clear that Thomas Jefferson hated big government.  He spent his entire political life trying to limit the power and scope of government.  To make government as impotent as possible.  To the point where he even supported a little rebellion every now and then to keep government in its place.  What would he think of the federal government today?  It would probably make him physically ill.  The spending?  The debt?  The federal register?  These would make him long for the responsible governing of King George.  And his pro-American policies.  If he were able to vote today he would vote for the lesser of two evils.  And that would be the party of limited government.  To stop the out of control growth of the federal government.  And hopefully reduce its size.  If Jefferson were alive today he would likely endorse the Republican candidates Mitt Romney and Paul Ryan for president and vice president.

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The U.S. and Japan assailed Argentina’s Mercantilist Trade Policies at the World Trade Organization

Posted by PITHOCRATES - August 26th, 2012

Week in Review

International trade can be a funny thing.  For mercantilist ways of the past are hard to give up.  Especially the misguided belief that a trade deficit is a bad thing.  Some nations are better at some things than other nations.  And have a comparative advantage.  And it would be foolish to try and produce something another nation can produce better.  It would be better for nations to do the things they are best at.  And import the things that others are better at.  Just as David Ricardo proved with his law of comparative advantage.  Still everyone still wants to export more than they import.  Still believing that their mercantilist policies are superior to the capitalistic policies that are characteristic of advanced economies.  While mercantilist policies can rarely advance beyond emerging economies.  Case in point Argentina (see Argentina says to file WTO complaint against U.S by Tom Miles and Hugh Bronstein posted 8/21/2012 on Reuters).

The United States and Japan assailed Argentina’s import rules as protectionist at the World Trade Organization on Tuesday, putting more pressure on the country to revamp policies that many trading partners say violate global norms.

The two complaints mirrored litigation brought by the European Union in May and triggered a swift reaction from Argentina’s center-left government, which vowed to challenge U.S. rules on lemon and beef imports.

Argentina is seen by many fellow Group of 20 nations as a chronic rule-breaker since it staged the world’s biggest sovereign debt default in 2002. It remains locked out of global credit markets and relies on export revenue for hard currency.

They have inflated their currency so much that it is nearly worthless.  They can get little of foreign currency in exchange for it.  So they depend on the foreign currency buying their exports for their money needs.  For they can’t destroy foreign currency with their inflationary policies.  Only the wealth and savings of those in Argentina who don’t have access to these foreign currencies.

In the old days the mercantilist empires brought gold and silver into their countries.  They had their colonies ship raw material back to the mother country.  The mother country manufactured them into a higher valued good.  Then exported it for gold and silver.   Today we don’t use gold and silver anymore.  So Argentina just substituted foreign currency into the formula.  While keeping the rest of it in place.

Argentina began requiring prior state approval for nearly all purchases abroad in February. Imports have since fallen compared with last year’s levels, boosting the prized trade surplus but causing some shortages of goods and parts and sharply reducing capital goods imports.

EU and U.S. officials say Argentina has effectively restricted all imports since the new system came into place…

On Monday, Argentina hit the EU with a separate WTO complaint, alleging discriminatory treatment by Spain against Argentine shipments of biodiesel.

“This measure, like others taken by the European Union and other developed countries for decades, effectively aims to keep our industries from rising along the value chain, limiting the role of developing countries to the provision of raw materials,” the Foreign Ministry said in a statement…

Latin America’s No. 3 economy relies heavily on a robust trade surplus, which is used to help fatten central bank foreign reserves tapped to pay government debt. The government has also moved to curb imports to protect local jobs, while imposing capital and currency controls to keep dollars in the country.

“Import growth has halted, which we should have done long before,” Foreign Trade Secretary Beatriz Paglieri was quoted as saying on the presidential website last weekend…

Argentina has also been criticized for a policy of “trade balancing,” which forces an importer to guarantee an equal value of exports. That has spawned offbeat deals whereby a car producer, for example, must ship a large amount of rice out of the country in return for a consignment of vehicle components.

Mercantilist to the core.  Which will forever trap them into being an emerging economy.  For they’ve been doing this for decades.  And they’re still an emerging economy.  Juan Peron rose to power with the same mercantilist arguments.  He was a Justicialist.  Today’s president is a Justicialist.  President Cristina Fernandez.  And little has changed since World War II.  Argentina is still an emerging economy.  Thanks to their mercantilist policies.  If they’d only give capitalism a chance their economy would explode with economic activity.  At least, based on history.  For the most advanced economies today are NOT based on the current Argentine model.  They’re based on the free trade of capitalism.  And David Ricardo’s comparative advantage.

In countries with free trade people enjoy higher standards of living.  Their governments give them this good life by doing as little for them as possible.  Letting the free market shower them with wealth and happiness.  Which brings us back to the funny part about international trade.  The countries that try to do the most for their people by restricting free trade give their people a lower standard of living.  Except, of course, for the few in power.  Or for those connected to power.

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