Steve G.

Unintended Financial Consequences

In Personal Responsibility, War on July 17, 2008 at 1:49 pm

Earlier today I was blogging about the Securities and Exchange Commission’s latest malarkey for investors. You can no longer sell a “naked” short of the top 18 banks in the country. Why not?

Obviously selling short stock you don’t yet own, and which you would ordinarily be able to “cover” with stock you buy later is an excellent way to put more information into the market for stocks. The more informative the markets, the better for everyone. Many larger banks try to control, through corrupt relationships with brokerage houses, who has access to their actual shares in large quantities, so if you can’t naked short their stock, you may not be able to short it at all.

Now, just as obviously, there is nothing inherently wrong with naked short selling of financial institution stocks. After all, the SEC has made no move to reduce the access of investors to naked short selling of small banks or mid-sized banks. Only the largest banks. And why those banks? Could it possibly be that the very same banks are the major owners of the Federal Reserve banks, the Woodrow Wilson era scheme to distort every financial transaction by changing the meaning of “dollar” in every contract? You bet.

Don’t like it? You aren’t meant to like it. You aren’t meant to have the same opportunity that others in the economy have. You are supposed to pour your wallet into your gas tank, go to work to make the payments on your car, home, and credit cards, and, if you planned a bit, pray that the gold and silver you own becomes worth enough to keep you from going under. But the money masters and the banking gangsters and the scammers in government don’t actually care if you don’t like it.

Phil Gramm, formerly the senator from Texas, who has made plenty of money for himself by selling his soul to the corporate lobbyists while he was in the Senate and by selling his influence after, says that people complaining of hardship in the present economy are whiners. So, stop whining, and go sit in the corner. He will, he’ll give you a “time out” if you don’t pretend to enjoy life. After all, he’s got his. He screwed you and the other taxpayers to the wall over and over again with a power drill, so he got his. His fortunes are assured. Now stop whining about how much the choices he took while in government have impoverished you.

But, this essay isn’t really about you. If you want change, you know where to go. You know how to tell if a candidate is for smaller government on all the issues – they’ll be endorsed by the Boston Tea Party, pretty soon.

This essay is about the economic consequences of distorting the market by removing information. Make no mistake, the unintended financial consequences of bailing out the major banks, bailing out Fannie Mae and Freddie Mac, saving the depositors of IndyMac, providing enormous liquidity to investment banks, ramping up even M1 money supply, even turning off the lights on the liquidity measure L and the M3 money supply figure so no one can know enough about monetary inflation to make sense of economic choices is distorting the market. These distortions are nothing new, but the fact that they have been present in the market for a very long time is also nothing good.

Government subsidies, such as easy credit for investment banks, bail outs for financial institutions, pouring taxpayer wealth into the wallets of Wall Street banking gangsters, changing the rules for short selling, changing the delivery requirements for gold and silver, all these efforts are distorting the prices of everything. It is not speculators who are at fault, it is regulators. It is not those who are using their money to add information to the economy, it is those who are using taxpayers money to remove information from the economy.

These distortions prevent market clearing prices. These distortions prevent bad management choices from being punished with negative earnings and low stock prices. As long as the market clearing prices are unavailable, the distortions are going to be exacerbated by people in the market making mistaken investments and allocating their resources not according to the actual market clearing price, but according to whatever price the manipulators choose to allow.

After decades of interventionism, we are confronted with the consequences. And to understand those consequences, we have to understand the function of a market clearing price.

“The prices set on the unhampered market correspond to an equilibrium of demand and supply. Everybody who is ready to pay the market price can buy as much as he wants. Everybody who is ready to sell at the market price can sell as much as he wants to sell. If the government, without a corresponding increase in the quantity of goods available for sale, decrees that buying and selling must be done at a lower price, and thus makes it illegal either to ask or to pay the potential market price, then this equilibrium can no longer prevail. With unchanged supply there are now more potential buyers on the market, namely, those who could not afford the higher market price but are prepared to buy at the lower official rate….The price is no longer the means of segregating those potential buyers who may buy from those who may not….The visible outcome of this state of things is the sight of housewives and children standing in long lines before the groceries…(Ludwig von Mises, Omnipotent Government, 1944).”

Ludwig von Mises goes on to note that from fixing prices and intervening in some markets, the government inexorably goes further and further “to force every entrepreneur and every worker to continue work at these prices and wages. No branch of industry can b e omitted from this all-round fixing of prices and wages and from this general order to produce those quantities which the government wants to see produced (Ibid.).”

Ultimately, the total state control of the factors of production by nationalisation or by interventionist economic policies requires that the government commit itself to war. The government cannot survive in a purely domestic economy wracked by the convulsions of its economic interventionism. As with the German government in the late 1930s, the consequences of the economic policies of hyperinflation under the Weimar Republic followed by nationalisation and interventionism under the Nazi regime was war – and no limited war, but total war spanning the globe, entering every theater of human activity. Tens of millions of people were killed both in combat and in genocide to satisfy the socialist policies of that regime, and to satisfy the world that it could not afford the costs of such oppression. In many ways, the Second World War was a war of competing socialist empires – American, Soviet, German, British, Italian, French, and Japanese. We continue to spin out the consequences of having one of the last remaining socialist empires of that list.

War is not the policy of the Bush Administration because it wants autonomy for the American economy. War is the policy of Bush and Cheney because they want total authority, and war is the only way to get it. The consequence of additional interventionism is not the rectification of the economy and the resolution of all the prior distortions, but, rather, worse distortions, more convulsions, and more people beating the drum for more and broader wars.

Economic interventionism is an addiction. The addict won’t give up his fix willingly. He doesn’t recognise that instead of facilitating his good mood and making it easier for him to get his work done, the fix makes him irrational, cranky, and unable to function. Pursuing additional interventionism is not the fix to a failed interventionist economic policy, just as buying another bottle of whiskey is not the way for the alcoholic to restore a feeling of satisfaction and control. The economic interventionist has to give up intervention and restore the market clearing price mechanism as promptly as possible.

The immediate short term consequence of market clearing prices is the collapse of major banks, the failure of major companies, and the restructuring of mis-allocated investments. Investors who have chosen poorly lose their investments. Those who have avoided the interventionist policies by sticking with the free market, or, where the only unfettered market is illegal, the black market, are rewarded by continuing to have wealth.

If, as seems very likely from the history of stock and gold prices in the 20th Century, the price of the Dow Jones industrial index has to reach about three times or less the price of one ounce of gold, and the interventionist policies artificially inflate the Dow and reduce the price of gold, the consequences may be enormous. Instead of the price of gold rising to $10,000 per ounce, as many experts suspect gold would be doing in an unfettered market, with the stock market rising to perhaps 30,000 – we see a market price of gold below $1,000 per ounce, and a stock market unable to rise consistently above 11,000.

Do you feel that $4 per gallon is too much to pay for gasoline? Before the current wars in Afghanistan and Iraq began, a typical price was closer to $1 per gallon. Ten years ago, that was a common price, today it is unheard of. Why has the price of gasoline quadrupled and more? Not because demand is four times higher, not because the world’s population is four times higher, but because the value of the dollar is about a quarter what it once was. And that is purely a function of the monetary policies, fiscal deficit policies, trade policies, and war policies of the government.

So, get ready to pay more for, or use a lot less of, gasoline. Or both. Get ready for more monetary inflation as the consequences of the bail outs and the credit terms and the distortions of stock prices convulse through the economy. Got wood? If you don’t have trees on your land and you don’t have a fireplace in your home, make friends with someone out in the country who does, because when you can’t heat your home this winter, chopping firewood will keep you warm.

Economic interventionism always ends up the same way. Perfectly harmonious countries, such as the Yugoslavia of the 1984 winter Olympics in Sarajevo, mask deep under currents of unrest. The subsidies from the West and from Moscow which ended in the early 1990s left the Yugoslavian economy in tatters. The government began a program of hyperinflation which ultimately reached five quadrillion percent per annum. Prices were rising at 2% per hour. Every two days and two hours, prices doubled. By the time the hyperinflation was ended by pegging the Yugoslav dinar to the German mark, everyone’s savings had been wiped out. The country split along ethnic lines, and everyone was at war.

Can’t happen here? Don’t believe it.

The USA economy has survived partial fiat monetary inflation since 1913. It has been totally unhinged from gold or silver since 1971. And while the inflation of the 1970s was ended by effectively exporting the supply of dollars to countries where the local currency inflated even faster, the countries left where that is possible today amount to, basically, Zimbabwe. And there isn’t enough of a Zimbabwe economy to make the dollar work any longer. The currency is failing.

And the consequences of the world’s reserve currency failing have not been felt since Constantinople fell in the 15th Century, ending a thousand years of economic stability with the gold solidus. The crazy economic depression of the 1930s brought on by the monetary policies of the Federal Reserve is nothing against the 60-year depression brought on by the Bank of England and Banque Royale fiat money inflation of the 1710-1722 period. And that depression is going to look like easy street compared to what is now coming, in my view.

  1. Why has the price of gasoline quadrupled and more? Not because demand is four times higher, not because the world’s population is four times higher, but because the value of the dollar is about a quarter what it once was. And that is purely a function of the monetary policies, fiscal deficit policies, trade policies, and war policies of the government.

    Citation needed.

    Oh — by the way; [ disagrees with your assessment](; mainly because the adjustments to the price of oil have occurred even compared to the spot price of gold. It’s not the dollar.

  2. Citation:
    “Given that inflation is becoming worse by the day as crude oil and other commodities climb higher and given that the Federal Reserve is not raising dollar interest rates to fight inflation and save the dollar from a collapse, it is safe to expect more of the same….”

    Chart of dollar collapsing on the dollar index:

    The price of oil is somewhat higher in terms of the spot price of gold, but not four times higher, so you get no points there. In fact, it seems that the price of oil in gold grams is only about twice what it was prior to 2000. This means that there is another 2x to account for.



    “When measured in terms of goldgrams, the price of crude oil closed this past week at a new record high, at 4.82gg per barrel. The historical average from 1946 until 2000 is 2.32gg per barrel.”

    The author, James Turk, also the author of “The Coming Collapse of the Dollar” writes, “Governments are not able to cap the oil price. Central banks don’t hold a large aboveground stock of oil with which they can use to intervene in markets. But they do hold a large aboveground stock of gold, which they actively use to keep gold from reach its underlying fundamental value. In other words, central bank price capping of gold has kept it at levels which make gold unbelievably good value.”

    I believe that, at a minimum, trade policies and war policies are increasing the gold price of oil, as well as its dollar price.

    Glad to hear that you agree with everything else I wrote. Too bad you don’t think there’s anything wrong with monetary or fiscal policies. I guess you love deficit spending and hyperinflation?

  3. Too bad you don’t think there’s anything wrong with monetary or fiscal policies. I guess you love deficit spending and hyperinflation?

    You haven’t stopped beating your wife yet, either, huh?

  4. Entirely to the contrary, I don’t have a wife any longer. She ran off with a bonds trader in Chicago. I say that she did the running advisedly, since he was a paraplegic Vietnam vet. That was in 1987. Since then, I’ve come to the conclusion that people should not seek to own one another. So, I’ve no plans to ever have a wife, either.

    Thanks also for your tacit acknowledgement that it is now proven that at least half the increase in the dollar price of gasoline since 1999 has been monetary inflation. The other half, I believe, is war.

    Or did you want to propose some other source for these price increases?

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