On Capitalism




The Left’s Distorted View of Charles Koch

DUBLIN – We met Charles Koch 40 years ago. In the meantime, he has gotten rich and accumulated enemies.

The leftists seem to think Koch – the CEO of Koch Industries, the second-largest privately held company in the U.S., and a big political donor – is a manipulator, pulling strings, passing out his money, and rigging the system for his own benefit.

They must not have met him. As we recall, he was a nice fellow – upright and sensible, with an earnest and well-meaning disposition.


charles kochCharles Koch: not a crony – on the contrary, a lifelong opponent of statism and its corruption.

Photo credit: Bo Rader / MCT / Landov


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Linguistic Perversions

While the whole world is waiting with bated breath whether the bureaucrats running the Federal Reserve will alter, remove or retain a single adjective in their monetary policy statement today, it occurred to us to think a bit about the use of language in the context of economics and financial markets.

Many a word has seen its true meaning altered in our Orwellian age. One example we frequently cite in these pages is the term “inflation”. It once used to mean only one thing: An increase in the supply of money. It is the only way in which the term actually makes logical sense. And yet, in modern times its meaning has been altered to designate what is in fact only one of the many possible consequences of inflation, namely rising prices of consumer goods.

As Ludwig von Mises pointed out, this means that we actually no longer have a single word to describe what the term “inflation” once used to describe. By calling rising prices “inflation”, sight is lost of the root cause of rising prices. This is of course deliberate, as the instigators of inflation are now no longer seen for what they truly are. As a result of this it has become fashionable to call central banks “inflation fighters”. This is akin to calling an armed robber a saint, or calling an arsonist a firefighter.


ecb1Police are erecting barbed wire fences around the ECB’s new headquarter in Frankfurt.

Photo credit: Kai Pfaffenbach / Reuters


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Rough Trail

We’re glad we brought out our old “Crash Alert” flag last week. It looks like we may need it.  The Dow plunged 333 points on Tuesday, or nearly 2%.  Back to that in a minute…
“Jorge,” we asked our farm manager, “when was the last time you visited Marta Sandoval at Tacana?”

“Oh… maybe two years ago. She was okay then. A little crazy, maybe.”

“Don’t you have to go every year to count the animals?”

“Not up there. It’s not worth it. She only has about five goats.”

The farm is a marvel of ambiguity. We own it. On paper. But about 100 people live on it… work it… and use it.  In fact, they control some of the best parts of it. They pay us “rent” in the form of a percentage of their animals – about 1 in 20. But since their animals aren’t worth anything, we count, but we don’t bother to collect.

And so, they pay nothing. They – and their descendants – can stay as long as they want.  How long they will want to live in such harsh and lonely conditions is a subject of much conversation and speculation. But most show no signs of wanting to come down.

“They were born there,” says Jorge. “They want to die there too.”

“Can I ride up to Tacana sometime?”

“Yes. The trail is very rough. And you’d never find it on your own. I’ll take you.”


hudbThe tattered flag is flying again … sort of.

Image: fmh


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Is This Capitalism's Achilles' Heel?

Is capitalism wrong in some fundamental way?

New Year's Day found your editor up a tree. He was pruning pear trees. The trees had gotten some sort of blight. They're half-dead… and probably should be cut down and burned. Nevertheless, we went out into the cold – pruning shears in hand – and trimmed them.

Why? What was the point? Why invest time in a tree that won't produce?Perhaps it was a just habit.

This weekend, we will undertake another curious task. We bought a house down the road. The house was built in the 1950s. It is a wreck. The smart thing to do would be to tear it down, build a cheap new house and rent it out. The return on investment would be low. But at least it should be positive.

Instead, we are fixing up the house enough to rent it out…more or less as it is. Your editor is tearing off a decrepit porch and rebuilding it…as well as spackling the cracks on the inside and repainting. What for?

If he were to calculate the value of his time, the enterprise would be unprofitable. But what the hell?

Is the house an investment? What else would it be? We're not going to live there; we're going to rent it out. Why then are we not carefully calculating our investment and demanding a return – on time and money – to make it worthwhile?

Perhaps we are not good capitalists? Or perhaps capitalism is flawed?


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Things Not Obvious to San Francisco Fed Chief

Marketwatch reports that San Francisco Fed president John Williams (a noted dove if memory serves) doesn't see the stock market as particularly overvalued at present, even though it sports a CAPE (cyclically adjusted P/E) or “Shiller P/E” of approximately 24, which is in the upper decile of all historical observations – we refer you to a recent article by Doug Short on market valuation in this context.

John Williams is correct insofar as we have not quite yet reached the crazy CAPE valuations of the 1929 peak or the tech mania peak. Of course those are not his yardsticks. With regard to valuations he says:


“With respect to stocks being near-record highs and the Fed’s hand in that, Williams said the media talks more about stock prices than the Fed does. Williams said policy makers take economic data, household wealth and money in the stock market into account, but they are not drivers of monetary policy.

“If you look at the valuation of stocks today compared to earnings and dividends and relative to historical averages, it’s not obvious that the stock market is overvalued. In fact a lot of models will tell you that it’s undervalued given how strong profits have been.”


(emphasis added)

Which 'models' might he be referring to? We hope not the so-called 'Fed model', a favorite tool of bubble spin doctors, which has been thoroughly debunked by John Hussman on several occasions (see e.g. here for an excellent overview).

When it comes to the S&P's dividend yield, one doesn't really need a 'model' to judge where we stand. A functioning pair of eyes will do just fine:



SPX dividend yieldSPX dividend yield since 1926. Note that the level of administered interest rates and t-note yields has for the better part of market history proved irrelevant for dividend yields. Thus the 'Fed model' must not only be viewed skeptically with respect to price/earnings ratios, but also with respect to dividend yields. Since the beginning of the late 90s bubble, yields have remained at paltry levels – click to enlarge.


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Theory of Interest and Prices in Paper Currency Part IV (Rising Cycle)

In Part I , we looked at the concepts of nonlinearity, dynamics, multivariate, state, and contiguity. We showed that whatever the relationship may be between prices and the money supply in irredeemable paper currency, it is not a simple matter of rising money supply à rising prices.

In Part II, we discussed the mechanics of the formation of the bid price and ask price, the concepts of stocks and flows, and the central concept of arbitrage. We showed how arbitrage is the key to the money supply in the gold standard; miners add to the aboveground stocks of gold when the cost of producing an ounce of gold is less than the value of one ounce.

In Part III, we looked at how credit comes into existencevia arbitrage with legitimate entrepreneur borrowers. We also looked at the counterfeit credit of the central banks, which is not arbitrage. We introduced the concept of speculation in markets for government promises, compared to legitimate trading of commodities. We also discussed the prerequisite concepts ofMarginal time preference and marginal productivity, and resonance.

Part III ended with a question: “What happens if the central bank pushes the rate of interest below the marginal time preference?”


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A Faible for Socialism

We have often remarked on the soft spot the New York Times has for socialism. It is after all the ideology that is most popular among the self-proclaimed intelligentsia, as can be easily ascertained by observing the unbroken support it enjoys in academe – in spite of the fact that the communist system has collapsed in what was the biggest bankruptcy in human history. Apparently they just failed to 'implement Marxism correctly'. It is easily forgotten today that Western intellectuals were cheering for the Soviet Union throughout its seven decade history, from the Lenin era until its ignominious demise.

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