Friday, December 25, 2009

Christ's Special Message

It's Christmas morning and Santa has dropped off lots of trains for the boys. Time for eating candy and desserts for breakfast, listening to carols, and having an entire day to enjoy each other's company and relax.

I'll also take some time to reflect on Christ's message and think about how I may better live up to it. The message is simple, subversive, and radical: instead of hitting each other with sticks, let's love each other.

Even if we are of different families. Even if we are of different countries. Even if you do things I disapprove of. And even if you've done something bad to me.

Let's live in peace.

Thursday, December 24, 2009

Joyeux Noel

Joyeux Noel is a wonderful movie about a Christmas truce that occurred on the front-lines in World War I. One would think any movie about WWI would be too dark and depressing for family Christmas viewing, but I think this will be one we rewatch many years. There is not much fighting in the movie (but plenty of suspense, especially on a first watching), and the movie delivers one of the best Christmas messages of any movie ever produced.

Read here for an article about the movie and how it is based on true events.

The soldiers were taught to hate their enemies, but once they made a truce in honor of Christmas and saw each other as actual human beings, they could no longer deal with each other without love. They could no longer kill each other and instead preferred to be subjected to their government's punishments for treason than murder men they shared gifts and companionship with.

Here we see the beauty and righteousness of Christ's commandment to love one's enemies.

Tuesday, December 22, 2009

Stormwatch Continued

I'd like to continue some thoughts from a previous doom and gloom post. I'll present these in question and answer format.

That graph looks scary, but we haven't seen much price inflation since the spike. Is this really such a big deal?

Perhaps not. This spike is clearly unprecedented and so has been cause of much concern, speculation, and debate among economists. But since the money has not made its way into the larger economy (as banks have just held it as reserves), it really has not had much effect on prices. Robert Wenzel makes a good case here that this spike in M1 is not a big deal and to instead just pay attention to M2 (a broader description of money supply). He goes so far as to suggest that the Fed may actually safely withdraw these reserves, which would make the M1 chart "return" to normal.

However, whether or not the M1 spike is contained, it represents a massive bailout of the banking system, which otherwise would have likely collapsed in 2008. Furthermore, this bailout must have its own negative, unintended consequences. Perhaps it will not play out exactly as Murray Rothbard suggested with a hyperinflationary death spiral immediately following the bailout, but these negative consequences are nevertheless likely to be large.

Isn't this talk of hyperinflation silly to begin with? Aren't recessions deflationary by nature?

A "healthy" recession should be deflationary by nature, as the malinvestments of the previous (artificial) boom are exposed, defaults and bankruptcies spread, and credit disappears. However, if these defaults are not allowed to occur, money and credit are not destroyed. Chris Martenson argues here that this is the situation we have now; we "should" be seeing deflation but are not because losses are not being recognized.

In fact, whether inflation or deflation occurs depends on how the Fed and government choose to respond to the crisis. Do they let failures occur and market forces work to liquidate and reallocate capital? Or do they "pretend and extend", bailing out the system and attempt to reinflate the collapsed bubble?

I suspect the answer, in the short-term at least, is "both". That is, the politically connected and "too big to fail" firms (think Goldman Sachs) get bailouts and special benefits. The rest of us get to pay for it and fail if need be. Overall, we might still see some period where prices generally decline, but I believe this period will not last for more than a year or two.

Why are you so sure we will get hyperinflation?

So far I have only discussed the situation in context of the current crisis that is a "bust" from the previous "boom" led by the housing bubble. The bailouts and efforts to stimulate the economy will have great inflationary potential. But this is only part of the problem. The other part, which in my opinion cinches the deal that hyperinflation (or at least mass inflation) will occur is the enormous debt owed by the federal government.

Read Gary North here to get a picture of how the government has promised much more money than it can deliver. That is, there will be two options: default on obligations, or inflate.

For a more in-depth analysis of why there is likely to be hyperinflation, read John Williams report here.

Surely the government understands this and won't let the system collapse?

There is always danger in trying to identify black swan events that could trigger the collapse of the current system. Critics of the government and Fed tend to under-estimate their creativity in responding to crises and extending the system. We often fail to appreciate how they can change their own rules as they see fit (for example, an insolvent FDIC can seize failed banks and gift them to politically favored banks instead of bailing them out). On the other hand, the government cannot "pretend and extend" forever. If there are true systemic imbalances and plans made based on fantasy instead of reality (Social Security), at some point the check comes due. Bad debts will eventually be recognized, and debts that cannot be paid either need to be defaulted upon or inflated away.

How bad will it get?

I stand by my predictions of my first post, and I do believe that conditions will deteriorate in the upcoming years and culminate in the ultimate destruction of the dollar and massive decrease in the standard of living for most Americans.

Of course, keep in mind that I'm just a guy writing on the Internet.

Saturday, December 5, 2009

Tolstoy's John Galt Speech

I completed Resurrection, which was the last full-length novel of Leo Tolstoy and the only one written after his spiritual crisis. The book's introduction includes these summary remarks:

Resurrection is the great imaginative synthesis of Tolstoyism, gravid with the fruits of a lifetime's agony. 'It is a kind of shrapnel shell of a novel,' declared one contemporary critic. 'The novel is but the containing case. The genius of the author is the explosive force, which scatters its doctrines like the closely packed bullets among the enemy' - the enemy on this occasion being the whole fabric of society, the Law Courts, the prison system and, in particular, the Church.

One certainly gets the sense that the main character, Nekhlyudov, is largely autobiographical. Tolstoy's strength is in his characterization and description, particularly how he can portray the regeneration of spirit in a man. Resurrection is similar to Ayn Rand's Atlas Shrugged in that it is fiction chasing after its author's ideals of life. However, beyond that there is little resemblance between the two: Atlas Shrugged is built around a terrific mystery and turn-paging plot, but with one-dimensional characters making pages of speeches at each other. On the other hand, the story and pacing of Resurrection is only slightly compelling, but the characters are rich and believable. In contrast to the epic 3-hour-long speech of John Galt in Atlas Shrugged (the only part of the book I skimmed through), Tolstoy's main character summarizes the author's driving point in under 2 pages. Here it is (taken from pages 449-451):

'This is what it comes to,' thought Nekhlyudov, 'these people accept as a law something which is not a law, and they do not acknowledge the eternal, immutable, pressing law that God Himself has written in man's heart. That is why I feel so depressed in their company,' thought Nekhlyudov. 'I am quite simply afraid of them. And indeed, they are terrible people - more terrible than brigands. A brigand might, after all, feel pity, but not these men: they are insured against pity as these stones are from vegetation. That is what makes them so terrible. They say Pugachev and Razin were terrible. These men are a thousand times worse. Suppose a problem in psychology were set to find means of making people of our time - Christians, humane, simple, kindly people - commit the most horrible crimes without having any feeling of guilt, only one solution would present itself: to do precisely what is being done now, namely, to make them governors, inspectors, officers, policemen and so forth; which means, first that they must be convinced that there is a thing called government service which allows men to treat other men like inanimate objects, thereby banning all human brotherly relations with them; and secondly, that the people entering this "government service" must be so conjoined that the responsibility for the results of their treatment of people can never fall on any one of them individually. Without these conditions it would be impossible in our times to commit such atrocious deeds as those I have seen today. The whole trouble is that people think there are circumstances when one may deal with human beings without love, but no circumstances ever exist. Inanimate objects may be dealt with without love: we may fell trees, bake bricks, hammer iron without love. But human beings cannot be handled without love, any more than bees can be handled without care. That is the nature of bees. If you handle bees carelessly you will harm the bees and yourself as well. And so it is with people. And it cannot be otherwise, because mutual love is the fundamental law of human life. It is true that a man cannot force himself to love in the way he can force himself to work, but it does not follow from this that men may be treated without love, especially if something is required from them. If you feel no love - leave people alone,' thought Nekhlyudov, addressing himself. 'Occupy yourself with things, with yourself, with anything you like, only not with men. Just as one can eat without harm and profitably only when one is hungry, so one can usefully and without injury deal with men only when one loves them. But once a man allows himself to treat men unlovingly, as I have treated my brother-in-law yesterday, and there are no limits to the cruelty and brutality he may inflict on others - as I saw this morning - and no limits to the suffering he may bring on himself, as the whole of my life proves. Yes, yes, it is so,' thought Nekhlyudov. 'It is true, it is right,' he repeated to himself again and again, enjoying the two-fold delight of refreshing coolness after the torturing heat and the assurance of having arrived at the clearest possible understanding of a problem that had occupied him for a long time.

Friday, December 4, 2009

The Stormwatch

We'll wait in stone circles
'til the force comes through ---
lines joint in faint discord
and the stormwatch brews

- Jethro Tull (Dun Ringill)

Occasionally I get caught up in thinking about the ongoing Depression 2.0. Given the magnitude of how this may well play out, all else can seem trivial. Today I have the luxury of philosophizing about ethical strategies for eating meat; in a few years obtaining any food at any price might be my overwhelming concern.

I believe the primary root cause of this crisis is the Federal Reserve System of money and banking that was created in order to serve government spending and banking profits. The nature of centralized fractional reserve banking is that boom and bust cycles are an inevitability as well as massive inflation (see here for full size):

This graph shows a roughly exponential increase in the supply of money. The funny thing about exponential functions is that they all look alike as long as you adjust the scale on the horizontal axis. Also, you can zoom in on the graph a bit and things look relatively stable: just a year-over-year increase of a few percent. But zoom out a bit, and it looks like a near-vertical spike. With that in mind and given the exponential nature of this graph, you could argue that we have been in hyperinflation since the last vestiges of the metal standard were removed in 1971!

I believe we are entering the end-game of this system. The system has seen a series of crises over the years. With each crisis, the government can respond by letting the system (or part of the system) fail and letting market forces realign resources, or by bailing out the system. With each bailout, the economy becomes more centralized and the potential for a larger crisis down the road becomes increased. Murray Rothbard presciently saw one scenario for how the system could fail:

At some point in the possibly near future, perhaps in the next recession and the next spate of bad bank loans, it might dawn upon the public that 1.5 percent is not very safe either, and that no such level can guard against the irresistible holocaust of the bank run. At that point, ignoring the usual mendacious assurances and soothing-syrup of the Establishment, the commercial banks might be plunged into their ultimate crisis. The United States authorities would then be faced with two stark choices. One would be to allow the entire banking system to collapse, along with virtually all the deposits and depositors in that system. Since, given the mind-set of American politicians, and their evident philosophy of "too big to fail," it is certain that they would be forced to embrace the second alternative: massive, hyper-inflationary printing of enough cash to pay off all the bank liabilities. The redeposit of such cash in the banking system would bring about an immediate runaway inflation and a massive flight from the dollar.

Such a future scenario, once seemingly unthinkable, is now definitely on the horizon. Perhaps realization of this plight will lead to increased interest, not only in gold, but also in a 100 percent banking system grounded upon a revalued gold stock.

Here's the kicker: the scenario above occurred last year! The great housing bubble of the last decade fueled the spate of bad loans, and last Fall the entire financial system was on the brink of default and utter collapse. The bailout is the spike on the right of the graph above. That plot just shows currency in circulation. Here is the plot when you include money stock held in banks (see here for full size):

So given the above, why haven't we seen runaway hyper-inflation and the complete destruction of the dollar? What Rothbard didn't foresee was the new "tools" the Fed is using, and in particular the fact that the Federal Reserve is paying interest on this money and as a result it is not being lent out as Rothbard expected it would be.

Nevertheless, the solution to one crisis sows the seeds for the next crisis. Will the next one be "the big one" that results in the final death spiral of the dollar? Maybe, but probably not. While history will judge the fall of America as happening practically overnight, in real-time it takes years, not days. However, I do expect that the time between crises will continue to decrease while their potential for total systemic failure increases until we see the complete destruction of the dollar. I used to think this would occur "some time in my lifetime" but not until 2030 or so. I now expect this will play out within the next five to ten years.

Here's what to expect:

  • Total collapse of Social Security and government entitlement programs
  • Destruction of the dollar, including all savings held in dollars
  • The end of cheap imports, especially from China
  • Governments worldwide to either default or engage in currency destruction
  • Massive unemployment
  • Civil unrest

The America of yesterday is gone forever. What will be in its place? The optimistic scenario is the collapse of the federal government, re-emergence of commodity money, and decentralized political systems. The pessimistic scenario is a totalitarian state with a new fiat currency, diversionary wars, and bread lines.

For now, I'll store a few acorns for the coming winter and continue the stormwatch.