Nothing About This Economy Is Surprising

"Insanity: doing the same thing over and over again and expecting different results." -- Albert Einstein

The Einstein platitude above is so overused that I'm almost disgusted with myself for planting it at the beginning of this article. Almost. But then I think about how utterly applicable it is to this piteous disaster we're still calling an economy, and I really have no choice.

For nearly two decades, I have been writing about free markets and how important they are to progress – to the growth of knowledge, as the philosopher Sir Karl Popper would call it. I am by no means alone; minds far more advanced than mine -- along with groups like Cato and the Mises Institute, to name a couple -- have been defending market liberalism since long before I took my first breath. Yet, for all the effort, the arguments have met with phenomenal resistance – often ferocious and virulent. Politicians and academics have been blaming markets for our collective problems for ages, and yet I fail to see their reasoning.

Wall Street, for instance, is the favorite whipping boy for the housing crisis that has descended upon us like a poisonous fog, and yet it was created not by banks, but by government programs that all but demanded these banks loan money to anyone with a pulse. And do you know why the government did this? Because people with poor or no credit can still vote, and if you get them into houses – regardless of their ability to make payments each month – they're going to see you as a hero, and they're going to put you in office.

Now what do the banks have to do with that, except for acting as facilitators for the transactions? Let me put it another way: if you were a banker, and the government told you it was okay to lend money to people who shouldn't qualify, and told you that you would be paid handsomely for the transaction, would you say no? At best, you might say to yourself, "Is this smart?" But then you would, as everyone did, justify it by reminding yourself that if Uncle Sam says it's all right, well then it must be all right! Hey, we've all got to put food on the table!

In any case, the point of this piece is not to defend investment banks, per se, but it is rather to point out that large, centralized governments are irresponsible, inefficient monsters that destroy innovation and productivity; they are the source of all our economic woes at this moment in time (or, really, at any moment in time), and yet I firmly believe we could have done things differently -- much differently. Below are some major points that free market economists have been making for decades (or longer), and I believe that, if the world had taken them to heart, we could not only have averted this crisis, but we would be existing in an era of unprecedented prosperity.

1. F.A. Hayek – the Austrian economist, author of The Road to Serfdom, and 1974 Nobel winner in economics – observed that centralized bureaucracies lack the resources and meticulous insight to manage an economy's trillions of components. This tenet inspired the following analogy in an piece I wrote several years ago: imagine your brain trying to manage the decisions made by every cell in your body. How long do you think you would survive? Well that's what Washington has tried to do with the U.S. economy for almost a century, and we are now paying the price, yet again. Only this time, it's going to be far worse than ever before – and, indeed, may be insurmountable (see any number of my previous articles if you want to learn more about the death of the dollar and the U.S. economy).
2. In his milestone work Socialism, another Austrian, Ludwig von Mises – after whom the above-mentioned institute was named – proposed what I consider to be the most powerful economic axiom ever posited. It is called the Economic Calculation Argument, and it essentially states that any manipulation of price structures distorts the ability to perceive scarcity. In other words, scarcity is the product of every individual actor in an economy casting his or her vote, through transactions, for the relative value of any good or service. The value the collective places on goods and services is the result of these miniature "votes." When the government tinkers with the money supply, it necessarily distorts price structures and creates inefficiency. But more than that, it destroys any possibility of understanding true scarcity, and when that happens, our ability to discern who needs what, and where, becomes impaired.

   The Soviet Union -- which is inarguably the biggest joke of a planned economy ever -- perpetually failed to ascertain scarcity, and its people had to stand in lines, ad infinitum, just to get toilet paper. For my part, I thank the stars every day for the Soviet Union, because it established, irrefutably, the veracity of Mises' theory (although I do feel sorry for the people who couldn't get toilet paper).

   Unfortunately, other folks – like, oh, say, most academics, along with every single politician in Washington (except Ron Paul) – do not see the irrefutability of Mises' Argument. No, they have kept doing the same things, over and over, for a century, because what feels good gets votes. Who cares about the eventual consequences? And so it goes -- as the rest of us suffer day after day through this economic version of the Black Death.

   What is insanity again?

3. I don't care how fancy Ben Bernanke's helicopter is; a government cannot print money to solve economic problems. Printing money creates economic problems. It's called inflation, and it sucks. If you don't believe me, would you believe the Romans? How about the Spanish? The Portuguese? The British? What about those aforementioned "geniuses" in the Soviet Union?

   Do you really think the U.S. is somehow different than all those empires of yesteryear, who so recklessly manufactured their own currencies -- ultimately whittling themselves to a mere fraction of their former, majestic selves? No. The U.S. is subject to the same economic principles that every other foolish empire has had to face, and printing $12.8 trillion isn't going to do anything but ensure that our children better learn to speak Chinese. And they better learn to speak it real good, because that big groaning sound you hear in the sky – yeah that one – that's the sound of the center of economic power heading east.

So here we are – wallowing in the filthy muck created by generations of politicians and central bankers. You would think global governmental establishments would finally see the light, right? Surely it's time to stop this cycle! Isn't this the hour to listen? Hail Mises! Hail Hayek! Take us back to sound money and true liberty!

Well, apparently listening isn't part of the equation, because governments everywhere are printing unprecedented sums of money. They are creating still more easy credit. They are doing all the same things – on the largest scale ever -- that got us here in the first place. Above everything else, though, they are fulfilling Einstein's famous dictum.

For the entire world is now truly and incontrovertibly insane.

Disclosures: Paco is long TBT, UGL, and DXO. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.

Comments

[Carlos Lam:]

On Apr 30 10:12 AM Mutual Fund Wealth wrote:

> Waaaay too much history here folks. Get with the program and learn
> how to invest wisely no matter how the global markets are performing
> at any given time. There are always sectors of the market place

Looking at history IS a way to learn how to invest wisely. That's what Peter Schiff & Paco Ahlgren are doing when looking at the Dow/gold ratio. That's what Jim Rogers is doing when looking at the savings flows moving from London to NYC to Asia. History isn't THE key, but it is A key.

Apr 30 10:29 AM

[Whippet:]

SW Richmond:
Great stuff re: "Economic Calculation in the Socialist Commonwealth". Here is a link to download the free monograph so we can give it to anyone with the will to read:

mises.org/econcalc.asp

Thanks again, Paco! I think it's almost time to build Galt's Gulch and take our skin, and minds, out of the game. When GDP is down 6.9% and consumer spending is up 2%, and the markets read this as positive news, I only have two words: CAPITAL DESTRUCTION. The axe is being sharpened, and the golden goose's neck is on the chopping block.

Apr 30 10:41 AM

[Atakan:]

Well written piece Paco but I can't say I agree with some of your statements. For one, I think the case for China leading the world economy in the near to mid-term is a hasty one. We are seeing the immense challenges the Chinese government is facing with drying exports and trade. They do have lots of dollars but those dollars have no place to go except back to U.S. Treasury. So the "hostage" situation continues. In addition you are contradicting yourself by singing China's praises whilst dissing central government meddling with the private economy.
I buy the argument that incentive structures when distorted can cause big headaches and system wide tremors but we can have a hybrid system with effective check and balances that are actually guess what "ENFORCED". The revolving door of Wall Street to DC has caused lax regulation by the likes of SEC that to me has been the weakest link in this monstrous mess. If you haven't yet read the book "The Demons of our Own Making". It does a nice job explaining the system wide dependencies and how most effective regulations can be those that are based on rough but simple and enforceable rules. Bring back the rules of
- 1:12 leverage and no more
- requirements to report holdings after a certain size is reached
- put in place a CDS clearing house where counter party risk can be manages
and you'll have much more perhaps even "black swan" proof system. What will be the missing? $50M dollar bonuses to the likes of Mr. Cassano of AIG. I think the society would be able cope with that much!

I'm sorry but I refuse to shed any tears for the Wall Street high flyers. Not in this life...

Apr 30 11:54 AM

[DONE_SONZ:]

The market action looks like the reflation play is starting to stick.Its like throwing bologna at the wall.As I said before,either way Im good.Down-more massive money printing Up-massive inflation.

Apr 30 11:54 AM

[John Lounsbury:]

I have an antithesis to Einstein's definition of insanity:

Stupidity: (blindly) doing the same thing over and over again and expecting the same results.

Too much of what goes on in the world suffers from either insanity or stupidity. To avoid both, we just have to pay attention. Attention may be the most under utilized commodity in the world.

Apr 30 12:01 PM

[gordon:]

Government intervention, the Plunge Team of Geithner, coached still by Paulson, is buying stocks, simply put. The Chinese gov't announced the same thing a yr ago, we just followed, secretly. All those TARP funds went to the investment banks trading desks and hedgefunds of the same companies. They were told to buy US stocks, plain & simple, especially the financials on any dips, during the stress tests. Banks were given Treasuries for almost any CDOs at .25% and PAID INTEREST 2.5-3% BY THE TREASURY, right? So, there's no reason to lend or pay a SAVER any interest on CDs, why risk it? Then they buy our own Treasuries to keep rates down further. The Patriot Act makes all this legal. It's considered national security. No bank, auto co, defense contractor, telcom,has to even open their books to disclose this. Certainly not the White House Working Group! The most clandestine operation in US history is in progress, imo.

Apr 30 12:59 PM

[Leftfield:]

Of course, there's Will Rogers, "If stupidity got us into this mess, why can't it get us out again."

Apr 30 01:05 PM

[Thomas J. G...:]

I find many free market advocates are getting really confused. What happened in late 2008 was not a libertarian moment. It pushed the country into electing the most socialist president in a long time. The man on the street has largely come to the wrong conclusion that Greenspan/Bush free market tendencies caused the Financial Panic of 2008.. In making your arguments you have to hit the advocates of bigger gov't squarely between the eyes as I did with my "Did the Government Break Our Leg and Offer us a Crutch" article. What is interesting is in other countries (Britain and Australia) the sitting govt's are what we would consider advocates of larger government, and Brown and Rudd are in trouble based on poor economic performance.

Apr 30 01:19 PM

[henarl:]

A large centalized government is corrupt and evil because the politicians and bureaucrats who run it are self serving humans who are more interested in increasing and perpetuating their positions of power than they are in the long term good of society.
A large financial industry, consisting of mortgage brokers, banks, securitizers, rating agencies, insurers, etc. is corrupt and evil because the people who run it are self serving humans who are more interested in making as much money as possible, as fast as possible, than they are in the good of their companies or society. Unfortunately, in a society with hundreds of millions of people, these large organizations are necessary otherwise we would have anarchy and chaos. The underlying problem is not really with the size or nature of the organizations but rather with the inherent self serving nature of individual human beings.

Apr 30 03:13 PM

[Valley Boy:]

If the folks producing the charts were not interested in history,
there wouldn't be any charts.


On Apr 30 10:12 AM Mutual Fund Wealth wrote:

> Waaaay too much history here folks. Get with the program and learn
> how to invest wisely no matter how the global markets are performing
> at any given time. There are always sectors of the market place that
> perform well no matter what type of economic conditions exist. Times
> change and investment strategies must also change accordingly.<br/>
>
> Doug T.....The mutual fund guy
> www.mutualfundwealth.com/

Apr 30 03:32 PM

[Sober Realist:]

Nice article and some references to further reading from some of the commentors that I will take them up on. Someone, I think it was User 353732, recently used the acronym PRA (People's Republic of America) to describe the U.S. and it sounds appropriate considering our current economic and political climate. Though as another reader pointed out, China is a poor example to be heralded as an economy to aspire to, free of government intervention and manipulation ---NOT.
So after reading and listening to Ron Paul and others of like-mind which I have come to agree with whole-heartedly, I still feel uncertain as to what the future holds. If governments everywhere are intervening with quantitative easing and all other forms of government intervention, then what kind of future does the entire globe face?
"We have destroyed our preception and understanding of true scarcity."
This statement makes perfect sense when you look at the energy sector experts saying that we are setting ourselves up for another price spike in oil because of the precipitous drop in price causing future projects to be halted or moth-balled all together.

Apr 30 04:18 PM

[fireball:]

paco
so what do we do besides invest in metals, land, bullits and staples?
i have come to the sad conclusion that the animating contest of liberty is to much for the majority and they prefer the chains of servitude for safety and security. those old voting restrictions make more sense everyday. the fearful seem to want to make me give up my inalienable rights, right along with them but i know that the iron fist is under that velvet glove. only 3% participated openly against the great british empire. only 1/3 supported them.

atakan
think of china as a pissed-off madman who wants to collect on a bad debt. we probably have them outclassed on war-tech but we have given them pretty good access to our shores in deep water ports and cargo containers. what a shocker at the wal-mart warehouses one night. that is far-fetched but just one of several possibilities. think along the lines of the russian mega-base in venezuela, and control of the panama canal. i know china and russia are our friends. i never bought that one because of gorby's speech to his comrades when they "gave up". something about the old plan of feigning friendhip to the west to get us to disarm. china can lose our entire population and only a billion are left. one last factor is a large group of young men who have no chance of having a woman in china.

whippet
already there. retired early. no more progressive marxist income tax. i refuse to fund our own destruction.sitting in my dream home on a freshwater lake at the end of a dead end road with great neighbors. we never call 911. we already know how to respond to the criminal rabble. it will be interesting watching the socialist apparatus break down under its' own bloated weight.

we live in interesting times.

Apr 30 05:36 PM

[Missing_Link:]

> [Cetin Hakimoglu]
> Stupidity...like someone who keeps shorting into an unrelenting
> bull market....

Exactly.

Because bull markets never relent.

(Until suddenly, they do).

Apr 30 07:25 PM

[Mr. Ed, Jr.:]

Actually, I was thinking stupidity was more like someone continuing to post his comments despite a -5567 (and counting) SA rating.

-5567....that is otherworldly in the thumbs down department (SA readers have actually hit the thumbs down almost 8500 times for your comments...and that is after most of them just started to ignore you.)

I suspect your comment ratings are inversely correlated to the quality of whatever you are smoking.


On Apr 30 12:07 PM Cetin Hakimoglu wrote:

> Stupidity...like someone who keeps shorting into an unrelenting bull
> market....
>
> On Apr 30 12:01 PM John Lounsbury wrote:

Apr 30 09:18 PM

[Hot Richard:]

You aren't going to change this pony show until a very small group (someone mentioned Galt's Gulch) shows the way. Then, much like wearing fabulous parachute material as pants, others will see the huge benefits and come storming the castle...er...Gulch. Once there they will make it like the place they left. At this point in human development, socialism provides the masses not with a better standard of living, but with the illusions they need. I count these illusions as charity, morality, security, patriotism, society, and incredibly enough...efficiency and freedom! They cannot handle, nor do they truly value, the truth and true freedom.

Hot Richard prefers reality.

I also wanted to put to rest the rumor that I, Hot Richard, am from the future and am visiting this time period to view one of the most interesting collapses in human history. At least part of this rumor is untrue. Technically, I am from the past.

May 01 12:58 PM

[guzzii:]

paco for president

May 01 03:11 PM

[guzzii:]

Paco
I am one of the smatest people I know...and I agree with everything u say...good luck

May 01 03:12 PM

[guillone:]

Finally, somebody who gets it; I'm with you Doug T. I've never heard so much whining in my life. We have a little recession and everybody starts crying. I'm making more money now than at the real estate peak in 2005. I didn't tie my assets to the real estate bubble or my income by working for some stupid company. If you did and you're broke, you're stupid; so go find where the money is and get some. If you got a big college degree and went to work for some corp and put all your eggs in one basket and now you're out of work, looks like you wasted your time buying into the myth that a big education will save you.
If you went to work for Saks as a floor clerk at the peak of the spending bubble and now you can't find a job, maybe you need to pay attention to the economy more and less time doing your nails and take responsibility for your own screw-ups. Bush/Obama ain't got nothing to do with how much money I make.
Only I can determine that. More govt, less govt is irrelevant. You decide what you do in this life, no one else. If you can't make money in the greatest capitalist system that has ever been created in recorded history, why do you think the gold standard will help you? Ron Paul is a blow-hole that talks about fantasy economics. Do you think everyone will stop gaming the system just becasue we switch to a gold standard? Don't be naive. Then you'll be complaining because the top 2% have horded all the gold and you can't get any. And they will. That's why we don't have a gold standard, dummy. Stop whining, grow up. Let's have a gold standard and I'll still make money. We can base it on collecting baseball cards, I could care less. All money is fiat. Some guys decided to game the system and they put us in a recession. Are you gonna wait until they fix it for you or take the reins and fix it for yourself? Remember the movie "Lion in Winter" when Henry the King says 'I'm a match for anything'.
Carpe Diem


On Apr 30 10:12 AM Mutual Fund Wealth wrote:

> Waaaay too much history here folks. Get with the program and learn
> how to invest wisely no matter how the global markets are performing
> at any given time. There are always sectors of the market place
> that perform well no matter what type of economic conditions exist.
> Times change and investment strategies must also change accordingly.
>
>
> Doug T.....The mutual fund guy
> www.mutualfundwealth.com/

May 06 10:36 PM

[ExZonie:]

You can download it here:

mises.org/pdf/econcalc...


On Apr 30 08:03 AM SW Richmond wrote:

> While many people report that "Atlas Shrugged" is the most influential
> book they've ever read, for me the second is "Economic Calculation
> in the Socialist Commonwealth" by vonMises. VonMises easily shows
> that directed economies aren't rational. This brief essay (a little
> more than 50 pages) was written in 1920 and is digestible even by
> devoted central banking acolytes, who will find it refutes their
> closely-held beliefs of their own intellectual superiority in managing
> the economy for us, and hopefully will make their heads explode.

May 12 01:23 PM

[punk_ash:]

Very well said. But you can judge by the number of negative votes to your comment that people do not want to take responsibility for their actions.

Banks are no different than they were 5, 10 or 20 years ago. Its the economy and the inability of people to make the payment, really the job loss is the issue here and over leveraging. If people could just keep making those payments, we could be looking at Dow 20K right now.

We must all make those changes at the micro level first.


On Apr 30 08:31 AM abetterplace wrote:

> Einstein was indeed a genius, but not in all things. Knowing that
> I am about as dumb as dirt, I do not subscribe to his quote other
> than in very broad terms. One really cannot do the exact same thing
> over again. There is one element that will certainly not allow this
> and that being time. Under a controlled. scientific environment,
> time would probably make no difference, but in the real world many
> times it would. Whether it is spending a dollar in 1900 vs 2000,
> or an ounce of gold, there would be a difference in the results.
>
> Much shorter time frames would also allow a different result.
>
> That being said, I feel that the current economic situation is not
> to be blamed to any one entity. Yes, much more to some than others,
> but there is plenty of guilt to go around.
> We as American citizens share in this. We have lived the good life
> and do not want that changed. We have become too liberal. Many want
> a Utopia. Everyone with a new house and car, a 30 hour work week
> or none at all.
>
> Well, it ain't gonna happen. No matter what the banks and politicians
> do, this country is not going to recover without
> some deep soul searching by everyone. We all cannot have what Joe
> has.Not unless we are willing to sacrifice and do what is necessary
> to obtain it through hard work and diligence. So please, quit blaming
> our lot on the banks and politicians. Take a good look in the mirror
> first.
>
>
>
>
>
>
>
>
>

May 25 07:39 PM