Foundation for Economic Growth - Newsletter

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Last Updated: Aug 15th, 2008 - 11:26:43

Newsletters : 2006 Newsletters : 17 November 2006
Thought for the Day

Ludwig von Mises: "The salesman thanks the customer for patronizing his shop and asks him to come again. But the socialists say: Be grateful to Hitler, render thanks to Stalin; be nice and submissive, then the great man will be kind to you later too." - Omnipotent Government


Nov 16, 2006, 16:43

 Newsletters : 2006 Newsletters : 17 November 2006
Why Intellectuals Still Support Socialism

Our Research Director likes to say that, "The man who is not a socialist at age 20 has no heart, and the man who is not a capitalist at age 40 has no brain.

I have always wondered why so many academics seem to be socialists at heart even when the evidence showing the worthlessness of socialist ideas is so overwhelming in the world around us.

Every socialist country in the world in the last century demonstrated that socialism leads to command and control economies producing low growth and eventual poverty for all. Even the Russians and the Chinese have changed their ideas and embraced capitalism.

Are academics really socialists at heart?

This article from the heart of capitalism examines this question. Click on the title to find out if academics really are socialists; or are academics driven by the logic of economic argument and the world's economic experiments and forced finally to become capitalists.


Nov 16, 2006, 10:29

 Newsletters : 2006 Newsletters : 17 November 2006
Will The Federal Reserve Create The New Socialist Man?

"Government cannot make man richer, but it can make him poorer." – Ludwig von Mises

Once upon a time we worked for gold - or silver. Money was in gold coins or silver coins. Only a century ago people were paid in gold sovereigns or silver shillings (or copper farthings, halfpennies or pennies). If you wanted money then you worked first and were rewarded later. Money kept its value as a medium of exchange so if you saved your coins you would be maintaining your wealth.

Some people were insecure about all this cash and would deposit in the local bank for safe keeping. There were two ways of doing this:

Lend the bank a sum of money for a fixed time at a fixed interest rate and the bank would on-lend this cash out to someone else at a higher rate to make a profit. As long as the bank lent prudently your cash was safe.

The other method was to deposit yuour cash for "safe-keeping" with the bank on the basis that you could demand your cash back at any time you needed it. Thieves could not steal your cash without blowing up the bank - rather more difficult than looking under your mattress! But, unfortunately banks did not tend to keep to their part of the bargain. They would secretly lend out your cash for a fixed term and interest rate so that you could not get it back when you wanted to. As long as people didn't suspect that this was going on the banks had no problem. If people became worried about their savings and all wanted their money back at the same time then the bank had to lock its doors and plead for time and good-will(!) and so on and so forth.

Things also became a bit frothy when banks started issuing paper dollars instead of giving the gold back. All was OK if people could get gold for paper dollars but being frail and sinful creatures the bankers tended to print more paper than they had in gold.

Then if there was a "run" on the bank it was really in trouble.

So banks talked to the government and said, "Why don't you help us here by issuing the paper notes and when one bank has trouble you can just send round enough paper to cover everyone's demand and stop the simple punters from worrying.

So the government thought about this and decided that this was a "good thing". They could print paper and exchange it for gold from the banks and the banks could lend out paper just as they used to lend out gold. The government ended up with the gold and all they needed to do was to support any bank in trouble by printing a bit more paper.

This system worked really well and governments liked it because they could just print a bit extra money every so often and nobody noticed very much and it was much easier than increasing the taxes on the workers.

And so the governments set up Central Banks to print their money and they passed laws so that this theft from the populace was now OK and they worked with the banks just to make sure that the banks did not get too greedy with lending out money that they didn't have. And they stopped promising to give you back your gold. All they would give you was paper. Just as well we all believe that this paper is "as good as gold"!

And we all are having a good time because a little bit of inflation never hurt anyone - yeah right.

Why are we all in New Zealand buying houses? Well at least those who can afford to are buying property.

Because we obviously don't believe in our paper any more.

In 1971 I bought a house in Wellington for $14,000. Looking this up on the WCC Rates section I see that it is now worth(?) $335,000. That is, the house has increased in value by 24 times. However we all know that the house is probably worth less now than before because it is older, and probably needs money, time and effort to make it as good as it was 35 years ago.

Now of course we all know that what has happened is that our money has been debased by the government and is worth only about one twenty-fourth of what it was in 1971.

Imagine what I would be saying now if I had put $14,000 under my mattress in 1971 to save up to buy a house in my retirement.

So I am sorry to break the bad news to you. Don't take the advice of the governor of the Reserve Bank and rent a house. Keep putting your depreciating money into appreciating assets and you may be able to keep your wealth.

This all started when I tried to measure our growth rate and realised that inflation had to be allowed for. I then tried to find out what the inflation rate was and the government told me "the CPI". Somehow I don't think the CPI has been enough over the last 35 years to turn $14,000 into $335,000. In fact the CPI would have to be 9.5% EVERY YEAR to turn $14,000 into $335,000 in 35 years.

What is going on?

We will continue working on this problem in the weeks to come. It looks like Growth Rates are not as simple as we first thought.

Here is a thought provoking look at this money question. The transfer to a "Welfare State" and easy "fiat" money of decreasing value seems to be having a serious effect on our society. Click on the Title to read what Karen and Eric have to say.


Jul 3, 2006, 17:39

Can we fix it?