We have learnt a great deal about the world over the last few chapters. Unfortunately we have discovered that we are living in a world that is distorted by constant propaganda until we begin to believe things that are not true and have no means of distinguishing truth from fiction since the science has been taken from the study of economics and replaced with beliefs and ill-founded mathematical models.
The Socialists have conned us into believing in the Welfare State and the concept of the "free lunch". The Bankers have conned us into believing in paper money and in conjunction with an uncritical economic profession have conned us into believing that, just like the Wizard of Oz, they can control everything by juggling the interest rate of money. Our politicians have also approved of this transition of reality to La-la Land as it gives them great power to win elections by promising what is unsupportable in reality and then printing the money to pay for it.
All this is supported by the entrepreneurs and business people in our society who manage to survive and keep alive the Golden Geese which produce the Golden Eggs which are the REAL Wealth of society.
But eventually the fairy story starts to crack under the pressure of keeping up the unsustainable payments of the modern welfare state. We are a bit lucky here in New Zealand as we had our reality check back in 1987 when the share market crashed and the huge welfare state of that time had to be dismantled and sold off to the highest bidder to raise enough cash to pay for the "groceries". Just like the apocryphal rich family fallen on hard times and selling off the family silver to survive.
But unfortunately Helen Clark and Michael Cullen spent nine years back in power building up the welfare state and the huge public service needed to run it. We cannot escape the fact that we are broke again and if we try to maintain the welfare state we can only do so with borrowed money or freshly printed paper money. As the world is now discovering this concept is a mirage. There is no "Free Lunch". What is consumed must have been worked for by someone or else it is just another debt to hand on to our children and grandchildren.
What a feckless lot we have become.
However, thanks to the internet, we can see the mirage for what it is and begin the fight back to REALITY. Sound money, economic theory based on facts and scientific assessment and a very small government with the absolute smallest of staff who do not interfere in any way with the business of entrepreneurs and the ways of commerce but leave the market place to discover the best solution by the selective process of consumer discovery.
The longer that the governments of the world fight the natural economy and try to maintain the paper money dream world the longer we will be in this limbo world of stagnation. Japan entered limbo in 1990 and has not emerged yet. We have a long way to go.
This is not meant to be doom and gloom. We just need to understand that life cannot be just one long dream party. Someone has to do the work and that person is all of us. And if the government stops taking and wasting so much of our wealth we will all be that much better off.
We are dependent on a majority of people understanding the truth and voting in politicians who are capable of understanding the truth and doing what has to be done. Until we can do that we are lost in a slowly decaying limbo.
Nov 15, 2010, 10:21
Understanding "Austrian" Economics
By now I am sure that you have twigged that I am not the inventor of some new brilliant Theory of Economics called REAL Economics but merely a truth searcher who has found economic truth in the writings of the "Austrian" economists.
I call it REAL Economics because what the Austrians write about always reflects reality and can be observed directly in action or can be deduced logically from observations about which intelligent and unbiased people can agree. In other words a scientific approach.
You will notice that I am very careful to point out that the use of mathematics in describing Economic Action is fraught with misconceptions. The mathematical fallacies of Keynes and Samuelson have subjected generations of prospective economists to total misunderstanding of economic reality.
We do not need to think about economics in the Micro as opposed to the Macro sense. Econometrics is Economic Tricks about some unreal world I call La-la Land. There are very good reasons why so many are being deluded by the few and we will discuss this later.
Economics is about humans acting to enhance their well-being. Whether I do so by buying an ice-cream at the local dairy or purchase health cures over the internet from remote towns around the world, it is still all the same. If I wish to keep account of the financial incomings and outgoings of a Nation State then that is my choice. Whether it is economics or merely accounting is perhaps worth some discussion - but not here.
Perhaps if the world traded using gold and silver then the Nation State would "blur" at the boundaries because we would not need any money exchanges. Everyone is using the same money - the REAL stuff. This is already happening at Goldmoney.com. People store their gold in Gold Money vaults in England or Switzerland and when they trade they make electronic payment (bank transfers) and the gold or silver ownership is simply transferred by the Gold Money accounting system.
A simple world wide money system without trauma or unnecessary cost.
But I digress.
Henry Hazlitt, who did such a good job of demolishing Keynes' "Grand Theory" now explains some of the original basic thinking of the "Austrians".
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Nov 14, 2010, 12:38
But What is the Trouble With Paper Money Banking
The trouble with our money system is that the money is not backed by gold. We cannot get REAL money even if we want to. Our paper money is backed by a government promise that it is worth what the government says it is worth. And because of a life time of just using it we all just accept that we can exchange it for the goods we need and that price inflation is just some sort of natural phenomenon.
But all the money is backed by debt. Government debt. When the Government wants more money (over and beyond the taxes) it asks the Treasury to write out a note for, say, $100 million and they then sell that note to investors who give the government $100 million for so much interest return and the promise to pay it back at a certain time in the future.
If the government wants to borrow even more money and investors are not willing to lend it because it may be too risky and the interest is not sufficiently high to justify the risk then they send the $100 million note over to the Central Bank and they print off a new lot of money in $100 bills and sent them over to the Treasury.
Then of course the government spends the money and it enters the normal commercial fractional reserve banking system and after being lent and borrowed a few times around the country it has been expanded up to $1billion. With no work being done at all!
With the aid of computers, of course, they don't even have to go to the trouble of printing notes, they just debit and credit the appropriate accounts in the back of the computer and the money is created instantly.
Unfortunately this process enables the government and the banks to produce money very easily and this easy money is available at very low interest rates. Currently 0.25% in America (November 2010).
The reason governments would do this is to stop a "run on the banks". You see, it all starts out with people being able to borrow money easily and a boom of one sort or another starts up, often in shares or property, as people chase the escalating prices of assets. This process becomes a mania as more and more people flood in to ride the money gravy train and eventually the prices are bid up to impossible levels and something arises which triggers a rush by everyone to get their money out as the values suddenly crash.
But banks don't have enough cash to pay out all their depositors so they have to call upon the Central Bank to send over more and more cash to pay out. To stop panic in the streets as people fight to get their cash out, the government just lends the money to the banks and worries about getting paid back later. In any case it ends up with the debt coming back on the taxpayer who always pays the governments bills. We, the taxpayers, are the government's only source of REAL Money.
This is the process that the world is working through at the moment. It will result in a huge amount of debt that will not be possible to pay off - even by the children and grand-children of the people who caused this problem in the first place.
So bankers get paid large amounts of money to lend out money to people who suddenly can't repay it as the prices of the shares or houses crash and the government creates money out of thin air to keep the banks afloat. This government debt is taxpayer's debt. The bankers get their money, the investors get bankrupted and the taxpayers get the debt. Since they cannot pay it back it falls upon their children and grand-children to pay it back. Eventually this process ends when everyone realises that the government is bankrupt and has no way of getting the cash from the taxpayers and the government then just defaults on its debts and the economy goes back to a cash basis using new currency or gold and silver or it drops right back to stone age trading.
Here is a video from the BBC showing the bank run that occurred in Britain recently:
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Nov 13, 2010, 15:49
Britain's Trillion Pound Horror Story
The reality of public debt and the ability of governments to print money at will is beginning to set in.
We see Obama and Bernanke continuing to print trillions of dollars in the belief that it will solve their economic problems.
Meanwhile back in Britain in five parts this film shows us how it is all happening right now:
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Nov 12, 2010, 12:33
What Is the Current State of Economic Science?
I am not the only one who has noticed that standard economics seems to have gone astray and seems to be strangely irrelevant as a guiding force in the real world.
What we have to understand is that in the real world, workers will always work to please their bosses as that is how they can get more money and other perks. (Except of course for union workers who apply force to achieve their ends.) Economists are no exception and they all know - even if just unconsciously - that they will need to provide results which are broadly in accord with the political beliefs of the day or they discover that their views just don't get acceptance. When faced with the combined power of the world banking system and major governments economists have little choice but to go along with the mainstream - otherwise, as happened to Ludwig von Mises, they will find that jobs are exceedingly difficult to find. And when we notice that the only people providing work for economists are bankers and governments (including much of academia) this makes a non-conforming economist very much an outsider.
But of course scientific facts lead to scientific truths and this explains what will happen under various conditions. The economic belief system generated by not taking a scientific approach is false and leads to disaster. We see all this being played out on the world scene right now.
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Nov 5, 2010, 11:18
This is a feature film of just less than one hour showing how the Federal Reserve of America came to be and what has happened since. It explains the trouble we are all in and what we need to do to fix the problem.
End the Fed!
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Nov 4, 2010, 16:33
What You Should Know About Inflation
This book explains what inflation is. Modern economics has distorted this meaning until most cannot tell the cause from the effect. This is unhelpful.
So to ensure that we do understand exactly what inflation is and how it effects the economy we provide this book written by Henry Hazlitt in 1960.
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Nov 3, 2010, 11:47
The Concise Guide to Economics
This is a very handy guide for understanding a whole gamut of topics as understood and demonstrated by various practitioners of Austrian Economics.
This will help to clear up confusion caused by some economists as they confuse cause and effect, use terms incorrectly, assume econometrics can predict the future, and generally write to support various political points of view rather than to demonstrate the truth.
If you wish to win arguments it helps to be right!
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Nov 3, 2010, 10:03
So What Can We Do Now?
Currently our economy here in New Zealand is quietly trying to get back down to its normal size and rate of working. Exactly what that is we cannot say. And it will vary from time to time depending on differing conditions, both internal and external. The belief that Central Bankers can control the economy is now breaking down around the world. We can see straight evidence in country after country - Iceland, Greece, Ireland, Portugal, Spain, United Kingdom, America, Japan - that Central Banking and their governments are failing to solve their problems.
As Ludwig von Mises said 60 years ago, "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner...as the result of a voluntary abandonment of further credit expansion; or later...as a final and total catastrophe of the currency system involved."
What we in New Zealand can do now is abandon credit expansion and work our way through the pain of the economy moving down to a lower and more natural level.
We seem to be doing that but at a slow pace. Maybe that is for the best.
The other thing we can do now is to ask our local politicians to read about REAL Economics and then ask them what they are going to do to protect us here in New Zealand from the collapse of the world's reserve currency.
The United States of America is set steadfast on its path of self destruction. Bernanke is convinced that he can solve their problem of the Credit Boom by supplying more and more credit - Trillions upon trillions of dollars. And don't forget when that money gets out into the real economy it will be expanded 10 times by the fractional reserve banking system and then we will see inflation like we have never seen it before - unless we were in Zimbabwe in 2008.
That is the destruction of a currency that Mises was talking about above. Hyperinflation which will destroy the wealth of the middle class and bring hard times on America. Unfortunately the rest of the world will need to continue trading to maintain our standard of living and we will not have the once mighty American dollar as the common trading currency. Gold and Silver will come back into force as money as countries will no longer trust each others' paper money. This demand for gold and silver will cause the price of gold and silver to rise. We can see that happening now even at this early stage. Unfortunately this will encourage another boom in REAL Money and the gold and silver mania will start in earnest.
If we want to protect ourselves then we must buy gold and silver as and when we can. Preferably when they dip in price. Gold and silver will be the only money holding their value. Actually they will probably overshoot dramatically as the gold boom races away but if you are the owner of REAL Money you will be protected.
Although Keynes advocated the government creating work schemes and printing paper money to pay for them to get people working during the bust and must take his share of the blame as Bernanke and others print like mad he also knew of the problem this might cause, perhaps it is appropriate to give him the last word:
"Lenin was surely right. There is no subtler, no surer means of overturning the existing basis of society, than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." - John Maynard Keynes
No, no - I cannot do it.
The final word must go to George Bernard Shaw who said:
"The most important thing about money is to maintain its stability. You have to choose between trusting the natural stability of gold and the honesty and intelligence of members of the government. With due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.
Nov 1, 2010, 10:29