On Capitalism

     

 

 

Operation 'Perfect Hedge' – the Criminalization of 'Greed'

As most of our readers are probably aware, the ongoing FBI investigations into insider trading at prominent hedge and mutual funds has just yielded another  batch of arrests and indictments. This seems to be still the same investigation  that ensnared the founder of Galleon, Raj Rajaratnam, a little while ago. Apparently the investigation has been going on for four years running.

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Revisiting the Squid

Back when we wrote a brief critique of Matt Taibbi's latest populist jeremiad against 'God's workers', a.k.a. Goldman Sachs, we were of course aware that the topic would be controversial. Quite a few people seem to have misread that piece as an apologia for Goldman Sachs (judging from some comments on the Seeking Alpha reproduction of the post and e-mails we received), so perhaps we didn't express our point clearly enough. Yesterday, another writer dared to speak up in Goldman's defense, specifically with regards to the questions surrounding its trades and Taibbi's allegation that GS executives are guilty of perjury. Just as we suspected, the case is not as clear-cut as Taibbi makes it out to be – not by a long shot.

 

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A recent poll suggests that public support for the free market has markedly declined all over the world. The question is though, what do people consider the \'free market\' to be? Most associate the modern-day state-capitalistic system with the term free market, but obviously that is not what it is. Meanwhile, the political establishment and the mainstream media have pawned off the crisis as an alleged \'market failure\' - even a superficial examination of this claim should reveal it as nonsense, but many people apparently believe it to be true. Ironically, Germany is the country where support for the free market is currently deemed the highest. Color us suitable baffled by this revelation. In France, disdain for the market is by now a well-worn tradition. Alas, no French refugees from evil capitalism have as of yet shown up at the border of Stalinist North Korea, so maybe they\'re not really serious about it. However, the French government - nominally \'conservative\' - attempted to introduce price controls for agricultural commodities earlier this year. It had to be lectured by Brazil and Argentina on the merits of such interventions, which inter alia brought down the Roman Empire\'s economy. We would term the French plan the \'Road to Famine\'. Oil market manipulators get \'caught\' - really? Apparently two oil futures traders managed to do what OPEC - a cartel controllig 40% of global oil output - has failed to achieve in many decades - namely manipulate the biggest commoditiy market in the world. The accused traders are rather perplexed by the suit. They bought and sold oil, which is what everybody in the oil market does. So what? According to the CFTC, the bureaucrats have detected that their actions were \'economically irrational\'. It would be laugh-out-loud funny if it didn\'t represnt a serious assault on economic freedom. Contrary to the story the witch-hunting political class is trying to sell, countless studies confirm what we already know from economic theory: the activities of speculators are beneficial. Without them, there would not be a market economy. Read the rest of this entry »
     

 

 

An Empire In Disarray – Russia Prior To The Bolshevik Revolution

Just as the Marxian theory and ideology must be understood as a product of its time – it was conceived in a time of upheaval that marked the beginning of the end of the monarchies of old Europe, and made use of the statist philosophy of one of these monarchies to establish its scientific credentials – so must the actual Bolshevik revolution be seen in the context of its time and place.


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Marx and Engels and the Theory of Dialectic Materialism


„A socialist advocates socialism because he is fully convinced that the supreme dictator of the socialist commonwealth will be reasonable from his–the individual socialist's–point of view, that he will aim at those ends of which he–the individual socialist–fully approves, and that he will try to attain these ends by choosing means which he–the individual socialist–would also choose. Every socialist calls only that system a genuinely socialist system in which these conditions are completely fulfilled; all other brands claiming the name of socialism are counterfeit systems entirely different from true socialism. Every socialist is a disguised dictator. Woe to all dissenters! They have forfeited their right to live and must be "liquidated."

The market economy makes peaceful cooperation among people possible in spite of the fact that they disagree with regard to their value judgments. In the plans of the socialists there is no room left for dissenting views. Their principle is Gleichschaltung, perfect uniformity enforced by the police.“

Ludwig von Mises, Human Action, Ch. XXV., The Imaginary Construction Of A Socialist Society


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A Theory of Capital

Time, savings and economic progress

The economics of Keynes and the Chicago monetarist school are historical outgrowths of a school of economic thought that has remained curiously untouched by the revolution of subjectivist economics that began with the publication of ‘Grundsätze der Volkwirtschaftslehre’ (‘Priniciples of Economics‘) by Carl Menger in 1871.

 

Carl Menger: Author of ‘Principles of Economics’ and founder of the Austrian school.

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The money multiplier

The practice of creating new bank deposits from thin air has large economic effects. It is important to recognize that from a practical standpoint, deposit money in demand deposits at banks is part of the money supply. It matters not if money circulates in the form of banknotes and coins or is deposited in demand deposits – demand deposits are a perfect money substitute, which is to say, they are money. We have previously commented on measures of the money supply and provided links to the various methodologies attempting to measure it in ‘Monetary conditions in the US‘, but for this article it is enough to state, money is the medium of exchange, and every form of money or money substitute that performs this function from the viewpoint of the individual actors in the economy is ipso facto money.

  moneymultyImage via Pennsylvania Lottery

 

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Part One: Legal and Ethical Questions – the debate over fractional reserves

We recently came across an article by Robert Murphy, ‘The Fractional Reserve Banking Question‘, in which he briefly comments on a controversy within the Austrian School, between what could be termed the ‘neo-Currency’ and ‘neo-Banking’ schools, a terminology introduced by Joseph Salerno, harkening back to the ‘currency’ and ‘banking’ school debate of the early 19th century.

 

bankrun

 

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Get me a Job, Ben!

So the demand uttered in a recent article on Slate. The author Daniel Gross refers to the many things the Federal Reserve is responsible for according to its mandate. Plaintively Gross asks:

 

“Fed Chairman Bernanke does not seem to care about high unemployment. Why?”

 

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A crisis for the Establishment – the One Party State comes under attack

We have speculated for a long time that the day was probably drawing near when the US political establishment would be seriously challenged. Our pet idea has always been that this challenge  could take the shape of the eventual formation  of a viable third political party, or alternatively an independent political movement. You might of course just as well say 'a second political party'.

 

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Ruminations on the effects of monetary policy in the context of short term and secular cycles: Money supply growth, asset prices and capital over different time frames

Once the growth momentum of money supply wanes, asset prices – specifically stock prices – that have been buoyed by an excess of free liquidity tend to either come under pressure or see their rallies stall out. Normally an economy emerging from a cyclical recession experiences an increase in private sector credit demand. In the early stages of recovery, the Fed’s easy money policy tends to egg this credit demand and credit growth on. Investments in higher order production stages appears more profitable, as low interest rates suggest low time preferences and an abundance of available savings.

 

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The high priest of interventionist economics

From his perch at the New York Times, Professor Krugman has been dispensing economic and political advice for many years. Unfortunately, he is to economics somewhat similar as Ben ('you have to buy financials here') Stein is to investments, in short, he is potentially capable of causing a lot of damage. For this reason alone, his views must be challenged from time to time, even though we poor bloggers do certainly not have his reach. My fellow blogger and friend Mish has recently done so,  in a blog entitled 'Krugman still wrong after all these years'. He certainly is, and I want to take the opportunity to add a few complementary thoughts to Mish's ruminations on the topic. First of all, I would recommend this paper (pdf) by Daniel Klein and Harika Bartlett, in which Krugman's editorials have been analyzed statistically and then interpreted by the authors.

 

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Most read in the last 20 days:

  • America Goes Full Imbecile
      Credit has a wicked way of magnifying a person’s defects.  Even the most cautious man, with unlimited credit, can make mistakes that in retrospect seem absurd.  But an average man, with unlimited credit, is preeminently disposed to going full imbecile.   Let us not forget about this important skill...  [PT]   Several weeks ago we came across a woeful tale of Mike Meru.  Somehow, this special fellow, while of apparent sound mine and worthy intent, racked up...
  • Retail Capitulation – Precious Metals Supply and Demand
      Small Crowds, Shrinking Premiums The prices of gold and silver rose five bucks and 37 cents respectively last week. Is this the blast off to da moon for the silver rocket of halcyon days, in other words 2010-2011?   Various gold bars. Coin and bar premiums have been shrinking steadily (as have coin sales of the US Mint by the way), a sign that retail investors have lost interest in gold. There are even more signs of this actually, and this loss of interest stands in stark...
  • Credit Spreads: Polly is Twitching Again - in Europe
      Junk Bond Spread Breakout The famous dead parrot is coming back to life... in an unexpected place. With its QE operations, which included inter alia corporate bonds, the ECB has managed to suppress credit spreads in Europe to truly ludicrous levels. From there, the effect propagated through arbitrage to other developed markets. And yes, this does “support the economy” - mainly by triggering an avalanche of capital malinvestment and creating the associated boom conditions, while...
  • Gold Divergences Emerge
      Bad Hair Day Produces Positive Divergences On Friday the ongoing trade dispute between the US and China was apparently escalated by a notch to the next level, at least verbally. The Trump administration announced a list of tariffs that are supposed to come into force in three week's time and China clicked back by announcing retaliatory action. In effect, the US government said: take that China, we will now really hurt our own consumers!  - and China's mandarins replied: just you wait, we...
  • Industrial Commodities vs. Gold - Precious Metals Supply and Demand
      Oil is Different Last week, we showed a graph of rising open interest in crude oil futures. From this, we inferred — incorrectly as it turns out — that the basis must be rising. Why else, we asked, would market makers carry more and more oil?   Crude oil acts differently from gold – and so do all other industrial commodities. What makes them different is that the supply of industrial commodities held in storage as a rule suffices to satisfy industrial demand only for a...
  • Chasing the Wind
      Futility with Purpose Plebeians generally ignore the tact of their economic central planners.  They care more that their meatloaf is hot and their suds are cold, than about any plans being hatched in the capital city.  Nonetheless, the central planners know an angry mob, with torches and pitchforks, are only a few empty bellies away.  Hence, they must always stay on point.   Watch for those pitchfork bearers – they can get real nasty and then heads often roll quite literally....
  • Lift-Off Not (Yet) - Precious Metals Supply and Demand
      Wrong-Way Event Last week we said something that turned out to be prescient:   This is not an environment for a Lift Off Event.   An unfortunate technical mishap interrupted the latest moon-flight of the gold rocket. Fear not true believers, a few positive tracks were left behind. [PT]   The price of gold didn’t move much Mon-Thu last week, though the price of silver did seem to be blasting off. Then on Friday, it reversed hard. We will provide a forensic...
  • Cryptocurrency Technicals – Navigating the Bear Market
      A Purely Technical Market Long time readers may recall that we regard Bitcoin and other liquid big cap cryptocurrencies as secondary media of exchange from a monetary theory perspective for the time being. The wave of speculative demand that has propelled them to astonishing heights was triggered by market participants realizing that they have the potential to become money. The process of achieving more widespread adoption of these currencies as a means of payment and establishing...
  • The Fed's “Inflation Target” is Impoverishing American Workers
      Redefined Terms and Absurd Targets At one time, the Federal Reserve's sole mandate was to maintain stable prices and to “fight inflation.”  To the Fed, the financial press, and most everyone else “inflation” means rising prices instead of its original and true definition as an increase in the money supply.  Rising prices are a consequence – a very painful consequence – of money printing.   Fed Chair Jerome Powell apparently does not see the pernicious effects...
  • Merger Mania and the Kings of Debt
      Another Early Warning Siren Goes Off Our friend Jonathan Tepper of research house Variant Perception (check out their blog to see some of their excellent work) recently pointed out to us that the volume of mergers and acquisitions has increased rather noticeably lately. Some color on this was provided in an article published by Reuters in late May, “Global M&A hits record $2 trillion in the year to date”, which inter alia contained the following chart illustrating the...

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