PONZI REVISITED

I am committed to the goal of raising your awareness. I will post articles and pieces that are informative, thorough, and relevant to all of us, the American people. I hope you take the time to read the post.

Ferris Geithner's Day Off

by Gary North
by Gary North
Recently by Gary North: Why Should Your Children Pay for My Retirement?

In my previous report, "Why Should Your Children Pay for My Retirement?" I went through the logic and economics of Social Security and Medicare. I made the point that, at some point, the bill-payers are going to resist the payments that previous generations have legislated. What one generation can legislate, a subsequent generation can repeal.

The main political question is this: In which form will this repeal manifest itself?

The statistical facts of Social Security and Medicare make it clear that the funding of both programs has hit a brick wall. They are no longer funding 100% of the recipients' benefits. The money is coming out of the general fund, which is $1.5 trillion in the hole this year. So, the benefits are being paid by lenders. There is no way that they will get their money back. In the long term, they will get stiffed. They refuse to consider the statistical evidence. They believe they can get out of this obvious Ponzi scheme before it collapses. They stay in the program.

In the short run, U.S. Treasury debt is no-risk, or close to it. It sets the standard for financial economists on what constitutes zero risk. In the long run, it is a guaranteed loss.

Everyone knows this debt will not be paid off. Everyone knows that it will grow. Everyone knows that the only reason for buying U.S. Treasury debt today is to park money where it is safe. The debt is liquid. The long-term future is irrelevant for present decision-making, they believe.

The rate of return is close to zero. On T-bills, it is as close to zero as it has ever been. During the Great Depression, rates got to a tenth of a percent, but prices were falling. A tenth of a percent was, in some years, a tax-free rate of return of close to 10% in terms of rising purchasing power (falling consumer prices). Today, the rate of return may be negative, depending on whether the CPI is the standard, which has been rising, or the Median CPI, which has been flat for months.

The enormous size of the debt's monthly expansion indicates that there are not good opportunities for capital growth. No one would lend money to the Treasury for a tenth of a percent if he thought he could get a safe 4% in private markets. Bankers would not turn their depositors' money over to the Federal Reserve for 0.15% per annum if they thought they were not facing horrendous losses over the next year: commercial real estate losses, defaults by businesses, and a possible secondary recession.

Let us face reality: the Treasury is getting free money because Federal Reserve policies have produced an economic crisis that refuses to go away. The Treasury is the lender of last resort to the banking system through a $500 billion line of credit to the FDIC. It is the lender of last resort to home owners who are underwater in their mortgages. But it is the lender of last resort only because it is the borrower of last resort. To write checks, it must borrow an additional $1.5 trillion in fiscal 2010.

What do I mean, "borrower of last resort"? I mean that the Treasury is there to take lenders' money whenever they cannot think of anything else worth lending to. Because of the Federal Reserve, the economy is in such bad shape that lenders depend on the Treasury to park their money for them.

GEITHNER AS A VALET

Think of Timothy Geithner as a valet in some downtown parking lot. You drive your car to the little booth. You hand him the keys to your car. He says he will park it for you. He says you can get it back at any time. He holds the keys to your car, and you trust him. He hands you a ticket. It is an IOU to your car.

When I think of Tim Geithner, I think of the valet in Ferris Bueller's Day Off. It's joy ride time! He climbs into the car, and his buddy leaps in beside him. Off they go! The buddy, of course, is Ben Bernanke. Think about this situation. The lenders of the world are lending trillions of dollars to an agency that has a AAA rating, yet this agency is the most indebted organization on earth. It is on the hook off-budget for at least $75 trillion that it does not have for Social Security and Medicare. It is on the hook on its on-budget budget for $12.6 trillion. This will be $14 trillion before we know it.

Our government is not alone. All Western governments are on the hook for similar percentages. It is just that the United States is larger than the other governments. They, too, are lenders of last resort only because they are borrowers of last resort.

Asian governments are not on the hook to this extent. They have not set up retirement programs. They have not indebted future generations of workers in the name of retirees. Yes, they face debts. They will have to do something with their families' oldsters at some point. China will face this in about 15 years. But this is not a new problem in the history of families. It has been inherent from the beginning. What is different is the West's policy, begun in Germany in the 1880's by Bismarck, of politicizing this family obligation. This experiment in government debt is about to end in the greatest default in man's history: a domino effect of broken promises that will undermine the West's capital structure.

When the promises are finally broken to long-term lenders (oldsters), they will also be broken to short-term lenders.

Think of that parking lot again. A long line of car owners has formed. Each of the people in line has a valid parking ticket.

The lot is empty. The cars are missing. But everyone has an official parking ticket.

The valet is nowhere to be found. It's Ferris Geithner's day off.

Of course, it's more complex than this. It is a gigantic system of parking tickets, with tickets against tickets. Ultimately, it's the derivative system. There are IOU's by the hundreds of trillions of dollars' worth. Maybe it's a quadrillion dollars' worth. The system is more complex than anything in man's history.

Occasionally, it blows up. It blew up in 1998: Long-Term Capital Management. That took about three billion dollars of additional bank loans to fix. Then came 2008, just a decade later. That took over $3 trillion to clear up, just in the United States. This was a thousand-fold increase in lending. It was ticket-shuffling on an unprecedented scale.

	If you like this site, please help keep it going and growing.

There will be another crisis, but much bigger. There is nothing to stop it. Geithner and Bernanke want us to believe that this cannot happen again, that the government and the central bank have fixed the problem. Why should we believe them?

We were told by the previous valet, Henry Paulson, that the problem in October 2008 was toxic assets on bank balance sheets. They are still there, except for the assets that the Federal Reserve swapped for T-bills at face value. This and other bailouts saved Citigroup, J. P. Morgan, and Bank of America. They did not save Wachovia.

The Treasury can sell its 90-day debt for a small fraction of a percent per annum. It pays a little more for bonds. The buyers line up. They have nothing better to do with their money. This tells us that the recovery is a mirage. When the Treasury sells $221.9 billion in debt in one month, as it did in February, this sends a message to anyone who is not living in la-la land: there is no sustainable recovery. When investors think that a tenth of a percent per annum is the best available investment opportunity, they are in disbelief mode.

Who will finance the capital outlays that are necessary to produce sustainable recovery? If the smart money – bank money – is in excess reserves at the FED at 0.15% per annum, and not in the private markets, financing small businesses that provide most of the job growth, why should anyone believe that the job market is ready to add 150,000 jobs a month, which is what the United States needs to provide jobs for young adults entering the job market for the first time? Where will another 8 million jobs come from to put back to work those who have lost their jobs from early 2008 to the present?

THE CONFIDENCE GAME

In September 2001, Americans' confidence in the U.S. government's ability to protect them was shattered by the coordinated attacks. The government was exposed as utterly helpless. So completely implausible were the details of that attack that the public has never come to any agreement as to how or why it took place.

The media dismiss anyone who points to the impossible aspects of the government's vague account of what happened. Such people are called "truthers," due to their call for the truth about 9-11. There are millions of Americans who do not believe the government, and never will. The Web will keep doubts alive. The media want the Web to go away, but it is not going away. What is going away is the audience share for the networks and subscribers to day-old news printed on paper.

In September 2008, the quasi-private mortgage market collapsed in the United States. The government nationalized it. There is no suggestion in Washington that it can be, or should be, returned to the free market. Yet we are assured that the housing market is the largest and most important sector of the American economy.

The public thinks that the government can restore the pre-2008 world. The public is wrong. That world is gone for good. The mortgage market still functions only because investors do not know what else to do with their money. They have not thought through how the Treasury will be able to serve as borrower of last resort at today's low interest rates. They have not thought through the inevitable rise of interest rates and the effects that this will have on the market value of 30-year IOU's at under 5%. They are desperate to do something with their money, and mortgages look good to them.

The confidence that Americans had in the capital markets has been undermined by September and October of 2008. This is why they are willing to put money in banks for 1% per annum. This is why they lend money to home-buyers at under 5% in an age of inflation.

They have not thought through their futures. A recent report by the Employment Benefit Research Institute revealed that a majority of Americans still have confidence that their retirement plans are on track. Yet 46% of them have never sat down to estimate what it will take for them to retire comfortably. The percentage of those who are less confident than they were in 2007 has risen. But most of them think that they are on track to build up enough capital to retire, along with Social Security income.

In 2009, the same organization, EBRI, published a report on the American households' median retirement portfolio. The figure in mid-June was $29,000.

Confidence continues, but it is confidence based on a stunning disconnect between hope and reality.

I think it is confidence by default. For someone to lose confidence in what appears to be the central institution of society, the national government, he must then search for a plausible alternative. Not to begin such a search is to abandon hope.

The central institution of the United States has always been the free market. But this is not an organized market. There is no visible chain of command. It has been under constant assault by intellectuals and the media ever since the Great Depression. The typical American does not perceive the extent to which the free market, not civil government, provides him with whatever protection he enjoys.

So, as he steadily loses faith in the Federal government, there is no replacement institution. He therefore clings to whatever remnants of the confidence he once possessed.

I grew up in a world in which most people had enormous confidence in the Federal government. The Kennedy assassination was a shock to that confidence. Then came the Vietnam war. The economy began to unravel in the 1970's: rising unemployment and rising prices. Reagan's rhetoric restored some faith in the system. The collapse of the Soviet Union in 1991 seemed to be the dawn of a new era. A few intellectuals announced this. It sounded good. But 9-11 overturned this optimism as the new century began, and the crash ended the decade in waves of bankruptcies and default.

Confidence is cumulative. It adds up over long periods of time. To reverse it takes bad news for many years. People do not want to abandon hope in what they regard as the central institution. Yet it is clear to most people that the government is no longer functioning coherently. There was great hope in Obama, which is indicative of widespread foolishness regarding the power of Presidents, a foolishness that extends back to the New Deal.

The government is becoming irrational, as top-down, tax-subsidized operations always do. The government suffers few negative sanctions for its blunders. It bails itself out, just as it bails out its support institutions, the banks. The public has no systematic explanation for this irrationality, but the fact can no longer be concealed. The price of skepticism is falling. The Web has undermined the ability of the intellectuals to contain skepticism. The economists' rule is correct: "As prices fall, more is demanded." The price of skepticism is falling. The representative case was Matt Drudge's exposure of the decision of Newsweek to spike the Monica Lewinsky story in 1998. The digital floodgates opened.

PONZI ECONOMICS

The central fact of every Ponzi scheme is that the targeted victims keep rolling over their on-paper earnings. If they would cash in these earnings, the scheme would collapse long before it rose to front-page status. The scheme would not spread far. But people say "let it ride." They look at their above-market earnings and let the promoter keep the money owed to them.

The Ponzi operator has only one profitable way out: to move to a country with no extradition treaty with the United States. Other than this, the Ponzi scheme's designer will get caught. The scheme will fail. Yet promoters keep designing new ones.

Because the Federal government's various Ponzi schemes are compulsory, the victims cannot withdraw their money. Also, new participants are compelled by law to buy into the scheme. So, the original players did do well. Ida Fuller paid $24.75 into Social Security, retired in 1940, and pulled almost $23,000 out of it before she died in 1975. It was a sweet deal for her. It was a sweet deal for politicians who spent Social Security excess revenues. They bought the votes that kept them in power. But those days are drawing to a close.

The Ponzi schemes are now a major source of employment. Think of the health care industry. The schemes are keeping the unemployment rate from climbing. They are still vaguely trusted, not because the optimists have looked at the figures, but because they haven't. They do not intend to. To examine the numbers would point out that they have been conned. This would make them look foolish in their own eyes. People will do whatever is required to avoid such self-inventorying. The main thing that is required is to suspend disbelief. The media and the government systematically exploit this widespread moral weakness.

But reality eventually intrudes. The people eventually come back to the parking lot, tickets in hand, demanding their cars. Maybe Geithner will be in another line of work, just as Paulson is. But his replacement will have to face the ticket-holders. What will he tell them? How will he explain that their cars were sold to China?

China's central bank holds more marketable tickets than anyone else does. Chinese officials still act as though they believe the Ponzi game has years to go. One of them recently announced that China trusts the dollar and has no use for gold. That means that China is preparing to unload the dollar to buy gold. The question is this: timing.

The Chinese central bank cannot get out of its pile of IOU's. It can get out of some of them. It is operating its own Ponzi scheme, namely, telling urban workers that there will be plenty of employment because of Western purchases of goods. The average Chinese worker does not ask this: "What would China's standard of living be if Chinese, rather than Americans, were spending the newly created yuan?" Economics is not widely understood. The average worker sees only the assembly line and his monthly paycheck. He associates the two. He wants the assembly line's belt to keep moving. He doesn't care who buys his output, just so long as someone with money does. The central bank then creates the new money.

CONCLUSION

Think of Timothy Geithner as Ferris Bueller's valet. Ferris was not driving his own car. He was driving his buddy's father's car. The valet was not driving his own car. All it took for the valet to have a swell afternoon was to hand Ferris a ticket.

The movie was a delightful male fantasy. We knew it was fantasy, from start to finish. Yet the key fact of the entire script was an objective fact: the mileage on the car's speedometer. That was objective reality. It could not be escaped. They tried to reverse reality by putting the car on a stand and putting the transmission in reverse. When the stand tipped over, the car went out the back of the garage and smashed into the yard below.

Ferris had a great day. His buddy had to face his father alone. We are never told what his father did or said. The movie implies that the father deserved everything he got – or had taken away.

The car was forever ruined.

There was a price to pay for Ferris Bueller's day off. The script writers did what they could to keep this fact from occurring to anyone.

So does Timothy Geithner.

March 20, 2010

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2010 Gary North

The Best of Gary North

Keynesian Theory; Debunked

End of Keynesian Blood Sucking Parasitic Economic System

Economics / Economic Theory Mar 13, 2010 - 06:04 AM

By: Gary_North

On March 11, I spoke at the annual Austrian Scholars Conference, sponsored by the Ludwig von Mises Institute. It was gratifying to see so many attendees that they could not fit into one room.

The Mises Institute is a high-tech outfit. They set up a video camera, and the speech appeared on monitors in other rooms. It will also go on-line within a few days. This will be free. Anyone in the world with Web access can see it from now on. This is a great model for communication and education.

My topic was "Keynes and His Influence." My goal is to recruit half a dozen bright young scholars to begin a joint project in refuting Keynes' General Theory of Employment, Interest, and Money (1936) line by line. I have set up a department on my Website to this end.

I tried to make four main points in my speech.

1. Keynes' influence has been indirect (mediated).
2. His legacy will soon be uniquely vulnerable.
3. Only the Austrians called the 2008 recession.
4. It is time for a comprehensive refutation of Keynes

THE MOST INFLUENTIAL MODERN ECONOMIST

There is no question that John Maynard Keynes was the most influential economist in the 20th century. Yet his influence has been different from what economists and the intelligentsia have believed.

In a filmed interview of Keynes' main rival in 1935, but not in 1965, F. A. Hayek, an Austrian School economist, made an important point. Keynes was influential in 1946, the year of his death, but his influence was not yet overwhelming. That came later. Hayek did not say how much later. It came within five years. You can see the video here.

The key to Keynes' influence was the 1948 textbook written by Paul Samuelson, Economics. It became the most widely assigned college textbook in economics. It had no major competition for at least three decades, and its competitors were also Keynesian in outlook.

Samuelson promoted Keynes' ideas, but he used a very different format. He did not quote Keynes at length. He presented what has since been called the neo-Keynesian synthesis. He applied Keynes' fundamental principle of deficit spending in the Great Depression to the overall economy in a post-depression world. He really did try to make general the General Theory, which the book had not been.

The General Theory was highly specific. It was a program designed to counteract falling spending and a falling money supply in an era in which there was no government insurance for failed banks or their depositors. It was a program to offset widespread hoarding of currency. From the day that the FDIC was created in 1934, American banks stopped failing, and the money supply started to rise. Keynes wrote his book after this transition in the United States. The book was a theoretical defense of policies that had already been adopted in the United States and Western Europe, and which World War II would escalate: deficit spending, mass inflation, and a vast expansion of the government's share of the economy. This is not how the Keynesians have told the story. It is how the story ought to be told. I am trying to recruit economists and historians who will commit several years of research to telling it.

Keynes' "General Theory" has long been an unread book that sits on the shelves of economics graduate students and professors. No one actually has read it except specialists in the history of economic thought. The book is close to unreadable. Compared to his earlier books and essays, it is uniquely unreadable. We do not see its formulas quoted as proof of contemporary policies or recommended policies. The literature cited in economists' footnotes is what we can legitimately call Keynesian, but this literature is an extension of Keynes' work, not Keynes' actual work.

Whether Keynes would approve of what is recommended in his name is moot. Hayek spoke to Keynes a few weeks before he died. According to Hayek, Keynes was not happy with developments being offered in his name.

Keynes had always been an opponent of inflation. His earlier works repeatedly warned against the threat of inflation. Yet, by 1945, inflation was a way of life in the West.

We should compare The General Theory to Charles Darwin's Origin of Species. Darwinists rarely quote Darwin to support their latest papers. They cite him as the originator of the idea of evolution through natural selection. Attacks on Darwin's actual exposition are shrugged off by his followers as irrelevant. We find an entire school of Darwinists who preach an idea that is opposed to what Darwin taught: the "punctuated evolutionism." Darwin believed in tiny changes over long periods of time. They believe in huge changes in brief periods of time. Still, they call themselves Darwinists. Why? Because they believe in his Big Idea: purposeless, random causation prior to man.

The same is true of Keynes' General Theory. It was Keynes' primary idea that dominates the thinking of economists: government budget deficits as the means of overcoming economic slumps. As to simple formulas and concepts in the book, modern economists rarely cite them in professional journals. If one or more specifics of the book are refuted, his supporters shrug it off. Keynes' influence relates to the one big idea, just as Darwin's influence does.

The specifics in the book are forgotten today, such as his statement that the government could plant bottles full of money, bury them, and let workers dig them up for a living. He also said that building the equivalent of Egypt's pyramids would help restore prosperity. He really believed this. His disciples do not refer to these passages. When pressured by critics, they dismiss them as merely rhetorical. They were rhetorical, but not merely rhetorical.

A VULNERABLE LEGACY

Today, Keynesians insist that their man was right. They take credit for the recovery since late 2009, such as it is. This assertion is widely accepted. It is so widely accepted that Wikipedia has an article on it: "Keynesian Resurgence."

Yet the reality is far different from the perception. Keynes' solution in 1936 was a program of fiscal deficits, coupled with mild monetary expansion in a time of monetary contraction. These government deficits were supposed to stimulate consumer spending.

Yet the heart of the U.S. government's program in 2008 was not the $787 billion spending program. Rather, it was the prior doubling of the Federal Reserve's monetary base, the FED's face-value swaps of its marketable Treasury debt for unmarketable toxic assets owned by the biggest banks, the AIG bailout, and the subsequent $1.25 trillion pumped into Fannie Mae and Freddie Mac, after their nationalization by Henry Paulson in September 2008. None of this was Keynesian. All of it was ad hoc monetary inflation and central bank subsidies to large banks.

Keynes recommended government spending and employment by government. He did not recommend central bank bailouts of large banks. He focused on fiscal policy, not monetary policy.

The biggest banks were saved by these interventions. Small banks continue to go under, Friday afternoon after Friday afternoon. The banking industry as a whole has contracted its loans to commercial and industrial firms. Banks have added over $1 trillion to their excess reserves at the FED, thereby sterilizing money. This is anti-Keynesian: a restriction of spending, meaning a reduction in aggregate demand compared to what would otherwise have been the case.

Keynesianism as an idea has received a shot in the arm – mainly with fiat money, not Federal deficits. Yes, the deficits have been enormous, just not by comparison to central banks' money creation. The deficits are unprecedented, all over the world. Yet the economic recovery is universally criticized as weak.

If enormous deficits are not serving as stimuli for widespread recovery, then what credit should Keynes get? Keynesians are saying that government policies kept the world economy from collapse. But this is not the same as saying that the policies have restored prosperity. They haven't.

There have been some protests by economists. Several hundred academic economists, mostly in obscure universities, publicly protested the stimulus package.

But no group of economists, other than the Austrians, said in 2008 that the FED should do nothing, that Fannie and Freddie should be allowed to go under, and that the stimulus bill should be voted down. With only this exception, the entire academic community of economists became cheerleaders for the FED's bailouts of 2008. They sold their non-Keynesian birthrights for a mess of Federal Reserve pottage.

The silence of the profession in 2008 and after has boxed them in. They are defenders of moral hazard, despite their timid warnings to the contrary.

If one person has summarized the alternative economic scenarios facing us, it is Merle Hazard. Merle is not his real name. He is a financial planner in Nashville. He began performing on YouTube in 2009. He and his partner, Bretton Wood, sang the question: "Will it be Zimbabwe or Japan?" So far, it's Japan.

The governments of the West have made one thing inescapably clear. They do not intend to enforce high bank capital ratios established by the Bank for International Settlements. The European Union and the European Central Bank have also made it clear that they will not enforce EU rules on the deficit-to-GDP ratio. There is only one rule today: "Tax and tax, spend and spend, inflate and inflate."

The looming bankruptcies of Western governments and Japan are now becoming clearer to the literate public. Observers are becoming more Austrian in their perception. Investors do not accept this scenario emotionally, but the numbers are clear. There will have to be a cutting back of Medicare, Social Security, and unemployment benefits, either sooner or later.

It is also clear that unemployment will not be significantly reduced by the present recovery. The Keynesian tools are not working. They have not worked in Europe for a generation, where life on the dole is permanent for 10% of the work force.

When the bust comes, the Keynesians will take the blame. They have demanded credit for the recovery, and they have received it. They are consuming public favor today. They will pay for it later.

"WE TOLD THEM SO!"

The Austrian School's representatives predicted the recession. The defining moment was Peter Schiff's debate with Art Laffer in 2006. Schiff said a crash was coming. Laffer ridiculed him. Because of YouTube, this story will not go away.

It never does any good to go to the losers and say, "I told you so." It does a great deal of good to go to the general public, which is always in search of leadership, and say, "We told them so." You don't convert true believers and spokesmen very often, but you can undermine their leadership.

The Austrian theory of the business cycle was the tool that enabled Schiff and others, such as me, to predict in 2006 that a recession would hit in 2007. It did – in December 2007. We told them so. This establishes our credentials, but more to the point, it establishes Ludwig von Mises' credentials. He thought that economic logic alone was necessary to defend a position. But in political debate, having the numbers demonstrate that you were right is also necessary.

When the USSR went bust economically in 1988, then lost the Afghan war in 1989, and finally committed suicide in 1991, Marxism died. All the footnotes in the Marxist books no longer mattered in academia. All the post-1991 wailing by Marxists that the Soviet Union really had never been truly Marxist has been ignored. Why? Because the Marxists took credit for the USSR for 74 years. They praised the Soviet Union's central planning. So, in 1991, they could not get off the sinking Soviet ship in time to justify the Marxist system.

By 1991, China's economy was booming because of Deng's abandonment of Marxist economics in 1978. That left only Albania, Cuba, and North Korea. The Marxists had nowhere to turn to that offered evidence of economic success. Overnight, they became a laughing stock on campus.

This will be the fate of Keynesians when the governments of the West finally go bust or else abandon the deficits and the fiat money.

Who will still be standing to pick up the intellectual pieces? The Chicago School economists did not predict 2008. They did not defiantly protest the FED's bailouts of September and October. Neither did public choice economists, rational expectations economists, or behavioral economists. They all climbed aboard the Good Ship Keynes, which was in fact the Good Ship Bernanke. The Austrians did not.

The Austrians, few in number, are the last men standing to challenge the Keynesians. This is their great opportunity. They have waited a long time.

GOING ON THE OFFENSIVE OFFENSIVELY

As W. C. Fields said so long ago, "Never give a sucker an even break." This also applies to bloodsuckers. The Keynesians are apologists for the bloodsucking class: tax collectors, deficit-expanders, and boondogglers of all shapes and sizes.

I have set up www.KeynesProject.com to help mobilize the guerrilla troops in a comprehensive assault on Fort Keynes. This is a supplement to the vast collection of free books and materials found on www.Mises.org, especially the books in the Literature section of the home page.

There has to be a full-scale assault on the General Theory that shows how it is illogical, line by line. This has been done sporadically in the past, but not systematically. To oppose Keynes' overall system was to commit academic suicide.

When the decks are cleared, then there must be a systematic critique of the post-Keynes literature. But this is too large a job for a handful of scholars. It will take at least a decade to produce the basic critique of Keynes. My hope is that this project will be complete in time for the crisis produced by today's policies.

To persuade the next generation of economists and talking heads that Keynes was wrong, and therefore his apologists are wrong and have been wrong, we need two things: (1) a body of material in all the media that shows that The General Theory was a con job from day one; (2) an economy universally suffering from the effects of the policies that have been justified in the name of Keynes. Since we are going to get the second, why not work on the first?

CONCLUSION

We have lived in the shadow of Keynes since 1936. That shadow has darkened academia for over 70 years. Keynes justified what politicians and salaried academic bureaucrats always wanted: more power for politicians and tenured bureaucrats.

Keynes justified this system of parasitic bloodsucking. The bills are now coming due. The voters are going to join a tax revolt against these bills. They will seek justification. Austrian School economics is best positioned today to offer that justification. To become even better positioned, a younger generation of Austrian School economists must publicly gut The General Theory.

Gary North [send him mail ] is the author of Mises on Money . Visit http://www.garynorth.com . He is also the author of a free 20-volume series, An Economic

I thought it would serve us well to continue to add historical content to the blog, so that readers can gain a better understanding of our history, our Founders beliefs, and how we have 'progressed" as a nation.
This piece discusses Thomas Jefferson's viewpoints on the sedition Acts of 1798, 10th amendment concerns and what he believed were fundamental truths concerning state's rights over the federal apparatus. so much of what he wrote about affects the people of our nation, even today. I hope you find this historical narrative to be helpful in gaining a better understanding of politics and how it directly affects your own life.

Jefferson and Nullification

by Clyde Wilson
by Clyde Wilson
Recently by Clyde Wilson: Q&A on Nullification and Interposition

"Resolved, That the several States composing the United States of America, are not united on the principle of unlimited submission to their General Government . . . . and that whensoever the General Government assumes undelegated powers, its acts are unauthoritative, void, and of no force. . . . that the government created by this compact [the Constitution for the United States] was not made the exclusive or final judge of the extent of the powers delegated to itself; since that would have made its discretion, and not the Constitution, the measure of its powers; . . . . that this would be to surrender the form of government we have chosen, and live under one deriving its powers from its own will, and not from our authority; . . . and that the co-States, recurring to their natural right in cases not made federal, will concur in declaring these acts void, and of no force, and will each take measures of its own for providing that neither these acts, nor any others of the General Government not plainly and intentionally authorised by the Constitution, shall be exercised within their respective territories."

So wrote Thomas Jefferson, Vice President of the United States, in a document drafted at the request of members of the Kentucky legislature in 1798. Kentucky passed Jefferson’s paper and broadcast it to the world as the definitive opinion and stand of the sovereign people of the State. The language drafted by James Madison for similar documents adopted by the Virginia legislature in 1799 and 1800 was similarly unequivocal in its constitutional position and forceful in expression.

The people, acting through their natural polities, the States, had created and given authority to the Constitution of the United States. The Constitution conferred powers on a general government to handle certain specified matters that were common to the "general welfare" of all the States. That government was an agent. It could not be the judge of its own powers. To allow it to be so would mean nothing less than a government of unlimited power, a tyranny. The partners to the Constitution, the sovereign peoples of the States, were the final judges of what they had intended the Constitution to mean. When the general government exceeded its power it was the right and duty of the State to interpose its authority and defend its people from federal acts of tyranny – yes, to render a federal law inoperative in the State's jurisdiction...

The scholars of the rising leftist Establishment who took over American history writing beginning in the 1930s invented a self-flattering fable to render the Kentucky and Virginia documents themselves null and void. Jefferson and Madison, they said, really did not care about States’ rights. They were merely anticipating the great tradition of the American Civil Liberties Union in opposing the Alien and Sedition Acts. Their concern was to defend the freedom of speech of the non-conformist radicals of their time.

This established interpretation is a lie and requires a good deal of either ignorance, self-deception, or deliberate falsehood to peddle. It is true that the Virginia and Kentucky acts were not followed up by active resistance to the feds. They did not have to be, because Jefferson and his friends won the following elections, got rid of the bad laws, and compensated those who had been harmed by them. There is evidence that Virginia and North Carolina were quite willing and able to call out the militia if necessary and that grand juries were standing by to indict any offending feds.

Not interested in State rights? Jefferson reiterated the centrality of State rights to the preservation of liberty and self-government in his inaugural address (and in hundreds of letters for the rest of his life). His party and the succeeding Democratic party proclaimed "The Principles of 1798" repeatedly as their foundational philosophy, right up to the War to Prevent Southern Independence. It could not be clearer: in the American government system State rights and liberty could not be separated. They were the same thing. They had the same defenders and the same enemies. The Sedition Act was not just an invasion of individual rights, it was an illegal invasion of a sphere that the people had left to their States.

Further, the Sedition Act, punishing criticism of federal officials with jail sentences and fines, had been passed in stark defiance of the recently adopted First and Tenth Amendments which absolutely forbade Congress to pass any law abridging the freedom of speech and press and reserved to the States all powers not specifically conferred on the government. How then could Congress pass such a law as the Sedition Act? Because the Federalists, Hamilton and Adams and their supporters, justified their legislation by invoking the Common Law’s provisions about the punishment of "sedition." The Common Law existed in each State to the extent that State had found it worthwhile to adopt it, but it had no place in a written document of delegated powers such as the Constitution for the United States. If the feds could ignore specified power limitations by grafting Common Law jurisdiction into the Constitution, then literally everything under the sun could be brought under their power. Not only that, but everything under the sun could be ultimately disposed of by the federal courts, which would become the new sovereign. This had to be stopped.

Interposition by Virginia and Kentucky was intended to halt the Northeastern elite's relentless agenda to become the economic and moral overseers of all Americans through the federal machine. This has always been the engine for the unconstitutional usurpation of federal power – then, since, and now. When State interposition next came into serious play in the United States, the occasion was the tariff laws, by which the Northeastern elite had perverted a constitutional power to raise a revenue into a means of excluding foreign competition and creating a captive market for their profit.

After their service as presidents, Jefferson and Madison lived by their republican ethics – they were private citizens with no special right to interfere in public affairs. But they expressed opinions on issues of the day privately to those who asked and who they trusted. When, less than a generation after the "Principles of 1798" had been proclaimed, the possible nullification of the tariff laws by South Carolina drew attention, Jefferson was gone from the scene. Madison, in contradiction of his own plain language and the circumstances of 1798–1800, claimed that state interposition was not what they had had in mind at that time. Historians who want to trash States' rights and the South Carolina resistance to the tariff during 1828–1833 lean heavily on Madison's somewhat vague statements. Self-evidently, Madison contradicted himself, as he did quite often throughout his career. Unlike Jefferson, he was a superficial and inconsistent thinker who often swung from one side to the other. (That is why his pretentious speculations in The Federalist, which, by his own admission, have absolutely no constitutional authority whatsoever, are the favourite text of third string "constitutional lawyers" and would-be "political philosophers.")

We do not have to wonder what Jefferson in his post-presidential years thought about State interposition. It is not in the least a mystery, although it is something of a secret since "scholars" have assiduously avoided exposure of the relevant documents, which are not easy to find. In 1825, the day after his last Christmas in this earthly realm, Jefferson wrote to William Branch Giles, former Senator from Virginia and stalwart Jeffersonian. He shared Giles's concerns about the state of federal affairs. "I see, as you do, and with the deepest affliction, the rapid strides with which the federal branch of the government is advancing towards the usurpation of all the rights reserved to the States, and the consolidation in itself of all powers, foreign and domestic; and that, too, by constructions which, if legitimate, leave no limits to their powers."

The minority President John Quincy Adams was pushing a large program of federal expenditures and expanded powers. Adams and his Congressional allies, Jefferson said, for an example, had construed the delegated power to establish post roads into a power to cut down mountains and dig canals. The old, evil program of the Northeastern "monarchists" to enrich themselves off the earnings of the agriculturalists was once again in the saddle. Reason and argument were no good in such a situation. "You might as well reason and argue with the marble columns" in the Capitol.

The South might well be forced into a choice between "the dissolution of the Union with them, or submission to a government without limitation of powers. Between these two evils, when we must make a choice, there can be no hesitation." However, not yet. "But in the meanwhile, the States should be watchful to note every material usurpation on their rights; to denounce them as they occur in the most peremptory terms, to protest them as wrongs to which our present submission shall be considered, not as acknowledgments . . . ."

Jefferson mentioned that he had written a letter to Giles on Christmas about important matters, of which Giles "will be free to make use what you please." I have not found this letter, but it may have something to do with a document Jefferson wrote out on December 24, which he titled "The Solemn Declaration and Protest of the Citizens of Virginia on the Principles of the Constitution of the United States of America and the Violation of Them." It seems to have been intended for the use of Jefferson's neighbours in the grand jury of Albemarle County to begin a program for Virginia once more to interpose, against Congress's usurpation in its "internal improvements" expenditures.

Just three years after Jefferson wrote this, another Vice-President of the United States, at the request of his State, drafted a "South Carolina Exposition," which described the illegality and injustice of the protective tariff and the proper remedy for it: State interposition upon "The Principles of 1798." This "Exposition" was approved and broadcast to the world by the legislature of South Carolina, along with a "Protest." The usual clamour of rent-seekers and petty political operators was raised, claiming, among other things, that Jefferson had not written the Kentucky Resolutions. In 1831 Jefferson's son-in-law produced the draft in the great man's own hand.

[There was so much demagoguery broadcast by the opponents of nullification and the shoddy historians who repeat their propaganda, that it is worth saying something about the roles of Jefferson and Calhoun as drafters of the Kentucky Resolutions and the South Carolina Exposition. Jefferson, as we have noted, did not publicly acknowledge his authorship. Calhoun's authorship of the Exposition was characterised as an evil, secretive political operation. This propaganda is designed by and for people who can think only in terms of politicians and parties instead of principles and are ignorant of the ethics of republican virtue that influenced many Americans before Lincoln. Authorship was not acknowledged because it was desired that the statements be understood as the voice of the people of the State, not mischaracterised as merely the position of a national politician.]

In a later generation, another minority president seemingly destroyed forever the constitutional role of the States by declaring the open, democratic, deliberative acts of fourteen States to be only "combinations" of criminals who refused to obey him. Lincoln made that stick by a brutal war of conquest that did not "preserve the Union" but changed the Union into a central state with no limits to its power. Those who hope to revive a constitutional role for the States as counters to the present U.S. Empire, must hope to make the States once more into self-conscious, viable polities who have the political will to enact nullification and stand by it.

March 12, 2010

Clyde Wilson [send him mail] is a recovering pr

TY ANDROS/ TEDBITS

Today, I wanted to shift back to an update on the global economy and more specifically, the USA's circumstance. Ty Andros puts out a newsletter every few months. He is very informative. His statistical analysis, along with his understanding of monetary policy and economics, makes him a great teacher for those individuals seeking guidance and understanding of the global economy and the unfolding crises ahead. This entry is part four of his series of newsletters. I recommend finding his first three(found here in this entry), and reading them in chronological order. His work is fairly easy to comprehend and the information is very helpful in understanding the complexities of our circumstance, as a nation and as individuals. I hope you take my suggestion, and read Tedbits.
Have a great Weekend!


http://www.traderview.com/tedbits/tedbits-Mar12-10.pdf

JUDGE ANDREW NAPOLITANO

Okay, so I have now had the blog up and running for almost two weeks. I hope you are enjoying it and find some or all of it to be educational and informative. I am aware that my intensity scares some of you and that it may actually negate any positive role this blog may have on you in your daily life. My intensity comes from my passion for this cause. I know I am throwing a lot at you, and some of the subjects are not casual fare.
The reason for my intensity is that I believe, we the people, have a very short time line in our future, to regain control of our country, from an out-of-control Federal Bureaucracy. The rights granted to us, as individuals, in The Constitution, are slowly being destroyed by our Federal government machine. They claim we are fighting a perpetual War on Terror, and that the patriot Act was instituted to protect us. I believe nothing could be further from the truth.
You may have heard of Judge Andrew Napolitano. He is a retired judge from New Jersey, who fights for enforcement of The Constitution. He is an expert in Constitutional law. I want to ask you to take eight minutes of your time to watch this video(till the end). He has more credibility in this department than I have.
I hope, by listening to him, that you begin now, to start defending your own rights from the intrusiveness of our federal government. Thank You.

http://www.youtube.com/watch_popup?v=7n2m-X7OIuY


Our generation is the one obligated to save our Republic from the tyranny of its own leadership. Will you fight?

REFUTING KEYNESIAN ECONOMIC POLICY

The premise of U.S. economic policy lies in the school of Keynesian Economics. This ideology, along with the presence of The Federal Reserve Bank, has led to the insurmountable debt that our Federal Government has incurred at the peoples' expense. Our nation is bankrupt, when we were just recently the most wealthy country in the world. The people have been lied to for 95 years. We have only bared witness to the "benefits" of loose monetary policy. The problems of loose monetary policy and illicit government spending are debt and legacy obligations. Our nation will soon be unable to service this debt because it is becoming a larger and larger part of the GDP. The pain will be intolerable. The financial devastation is guaranteed. Thanks Keynesians!

Sensible People See Through Keynesian Economics, But Not Economists

Economics / Elliott Wave Theory Mar 08, 2010 - 04:25 AM

By: Gary_North

Four images provide the conceptual tools to refute Keynesian economics: the gun, the wallet, the IOU, and the printing press. Recall them every time you read a Keynesian promotion of the latest government-spending plan. Let me explain.

Think of yourself as engaged in a public debate. If you want to undermine an intellectual opponent in a debate, find his system's central weak point and latch onto it like a bulldog. Never let it go. Make sure the audience leaves the debate with your refutation in their minds.

In preparing for a debate, remember this principle of effective communication: "It is easier to forget a formula than a mental image."

Academic economists love formulas. This is their great vulnerability. Unlike formulas in physics, economists' formulas conceal profound conceptual errors that simple mental images reveal as utter nonsense. The average person can readily comprehend these errors through the use of simple mental images. But academic economists are deliberately trained in graduate school to ignore these images. They are easily blinded by formulas. This puts them at a disadvantage in public debate, especially when debating members of the one school of economics that does not use formulas: Austrian School economics. I will now offer a demonstration of this principle of debate.

KEYNESIANISM'S CENTRAL FORMULA

The account of Keynesian economics on Wikipedia is a good place to begin. Here, we read of the textbook Keynesian formula:

In scientific notation, the Keynesian Formula consists of the following make-up:

C + I + G + X – M = Y(GDP)

which means:

Consumption + Investment + Government Spending + Exports – Imports = Gross Domestic Product

This is standard stuff. Start here.

Spending is the heart of Keynesian economics – aggregate spending. Consumption (C) is a series of society-wide individual allocation decisions. Investment (I) is a series of society-wide individual allocation decisions. Exports (X) are a series of society-wide individual allocation decisions. It is the same for imports.

Government spending is an allocation decision of a different kind. "See this gun? See where it is pointed? Hand over your wallet."

The student can see that total spending is based on all the letters of the formula. C, I, X, and M all begin with the original owners of resources. But G does not begin with the original owners. G begins with the new owner after multiple transactions with the gun.

G does not create. G confiscates. G cannot spend anything that it did not extract from consumers or investors.

C, I, X, and M are based on production. They are creative forces. G is based on confiscation. It is not a creative force. Everything spent by G comes at the expense of C, I, X, or M. When G spends, it does so at the expense of the others.

A bright student is smart enough to figure out what most people do when constantly threatened with robbers with guns, even if the robbers carry badges. They will not put all of their money in their wallets. They will hide some of their currency. They will not spend it. People who carry badges and guns call this currency hoarding. This is a Very Bad Thing, we are assured.

BORROWING FROM PETER TO SUBSIDIZE PAUL

Here is where Keynes came to the rescue of governments everywhere. He has the government offer to write IOU's that pay interest. "Put away the guns. Write IOU's."

Only very clever students will ask these two obvious questions:

1. Where will the government get the money to pay off the loans with interest?
2. Where will people get the money to lend to the government?

The politicians' answers to the first question is easy: (1) we will hire more men with badges and guns; (2) we will write more IOU's. But these are not answers. They are variations of kick the can.

Then Keynes added this: "print more money." He specifically taught that real wages would fall along with purchasing power in times of price inflation. Labor union members would accept these lower wages, he taught. This would lead to greater employment: lower wages mean more labor demanded. He implicitly assumed that labor union members are stupid, and so are the economists they hire to negotiate.

What about the second question? Where will lenders get the money? Keynes' answer made superficial sense back when people hoarded gold (United States) or currency (everywhere else). That was true prior to the FDIC (1934). After 1934 in the USA, the argument made no sense. Currency hoarders started to deposit their money in banks. The banks then lent this money. Henceforth, the government could write lots of IOU's and run large deficits, but the money it received as loans came from the bank accounts of lenders. The borrowers at the banks of these lenders would be shut out.

Aggregate spending would not change. Keynesian theory collapses.

Even in the first case – currency hoarding – the argument made no economic sense in 1933. When prices fall in response to hoarding – an increased demand for currency – the currency gets spent. Sellers say: "Have I got a deal for you!" Former hoarders spend. If prices are flexible downward – and in a free market, they are – then government does not need to write IOU's to get people spending again. It needs to remove legal restrictions on making good deals: tariffs, quotas, and price floors.

Once a student understands this, the teacher can move from logic to rhetoric: persuasion through imagery.

SUBSTITUTE IMAGES FOR FORMULAS

Here is the Wiki entry for government spending.

Government spending or government expenditure consists of government purchases, which can be financed by seigniorage, taxes, or government borrowing. It is considered to be one of the major components of gross domestic product.

John Maynard Keynes was one of the first economists to advocate government deficit spending as part of a fiscal policy to cure an economic contraction. In Keynesian economics, increased government spending is thought to raise aggregate demand and increase consumption.

Here, I suggest the following. Ask the question again: "How does the government get the money out of the lenders' wallets or bank accounts without reducing their spending?"

Keep mentioning the wallet. People understand wallets. They do not really understand formulas. Keep mentioning the printing press. They understand counterfeiting.

The student should always have a mental image of a gun, a wallet, an IOU, and a printing press. A formula does not convey knowledge effectively. A mental picture does. People forget formulas faster than they forget mental pictures.

The heart of Keynesian is economics is here: the attribution of autonomous economic productivity to the agency with the gun. Somehow, government can increase aggregate spending (1) without producing anything new and (2) without reducing spending somewhere else in the economy. Keynes never explained how this is possible. Neither have his disciples.

Here is the heart of the Keynesian error: "G can be increased without subtracting from C, I, X, and M." It is easy to show this from the formula. But it's still a formula. Try to turn the formula into a mental image.

Tell the student, "When you see G, think 'gun.'" This mental image undermines the authority of the formula.

A grifter is a con man who uses fake promises as a way to scam victims. If more students knew what a grifter is, you could say: "When you see G, think 'gun,' 'grifter,' and 'graft.'"

The student thinks, "This can't be all there is to Keynesian economics." But it is. He thinks, "Someone would have pointed this out in 1936 if this were all there is to it." Hardly anyone did. The few who did were not believed after 1948, the year Paul Samuelson's economics textbook was published.

How could this be the case? Because of what George Orwell observed in 1946, the same year that Keynes died. "To see what is in front of one's nose needs a constant struggle."

Be the child at the parade, crying out: "The emperor has no clothes." Start with the simplest explanation – visual – at the heart of Keynes' colossal error. Don't let go.

Start with the gun, the wallet, the IOU, and the printing press. The formula is merely window dressing for economists.

For more information, come here.

Gary North [send him mail ] is the author of Mises on Money . Visit http://www.garynorth.com . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

http://www.lewrockwell.com

© 2010 Copyright Gary North / LewRockwell.com - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2010 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.