SW Richmond's  Instablog

"Sec. 302. Loans. To reduce current or projected shortfalls of resources, critical technology items, or materials essential for the national defense, the head of each agency engaged in procurement for the national defense is delegated the authority of the President under section 302 of the Act, 50 U.S.C. App. 2092, to make loans thereunder. Terms and conditions of loans under this authority shall be determined in consultation with the Secretary of the Treasury and the Director of OMB."

-The White House, Office of the Press Secretary
For Immediate Release
March 16, 2012
Executive Order -- National Defense Resources Preparedness

In the early days of the credit crisis here in the United States, those of us who frequent Internet sites dedicated to discussing finance often debated the Great Depression. What brought us out of "The Depression"? Was it the war? Was it FDR's socialist programs?

Never discussed, though, is the method used by Germany, post-World War 1, to reinflate its own economy and build the military might it would use to launch its ill-fated imperialist foreign policy. The purpose of this article is to broach that subject in an enlightening way.

Before going any further, it is important to point out that the U.S. credit crisis was, and remains, the collapse of a massive credit bubble, with much of the credit having been used to spur artificial demand, in this case for housing. The bubble had been blown by the Federal Reserve Bank, by various government housing agencies, and by banks large and small, having, at the end, made half million dollar mortgage loans to anyone who could fog a mirror, and having done so through increasing leverage on an ever-diminishing base of real capital.

The modern response to the collapse of the bubble has been multifaceted. First, massive federal deficit spending (borrowing) is being used to replace the private economic activity which has collapsed. This author in particular has pointed out for several years that the federal deficit is 10% of GDP, and that claimed GDP "growth" is between 2-3 percent, which of course means that real economic activity is shrinking quite rapidly. This shrinkage renders any increase, or even sustainment, of current military spending levels problematic.

This author has also made the claim, albeit elsewhere, that the difference between economics and politics is quite simple; economics is about how things get made, and politics is about who gets to keep them. This simple fact makes it incorrect to discuss either economics or politics in isolation, and erroneous to draw any conclusions from any such discussions, yet that is how those subjects are almost always viewed. The two subjects are, rather, inarguably linked. Discussions of markets alone are irrelevant where those very "markets" are overtly manipulated by political interests for personal as well as political gain.

So it is that whenever this author sees politicians moving their mouths or issuing decrees he always considers the economic implications. The reason is simple: since politicians derive their power from occasional popular support, and since the majority of Americans now receive some kind of government benefit, and virtually ALL of them live in the economy, there always are economic implications to everything a politician does.

Few of you have heard of Hjalmar Schacht. That is a failing of your education, and it is probably not accidental. You see, Hjalmar Schacht was Adolf Hitler's bubble-blowing central banker. He is almost singularly credited with making German rearmament, on the scale required to launch WW2, possible.

Most everyone who knows anything about history knows that, after WW1, Germany was bankrupt, and this situation was made much worse by the staggering reparation payments demanded at Versaille by the victorious Allies. Somehow, from the ashes, arose a well-armed industrial powerhouse. Where did they get the money? More importantly, was it sustainably based on real economic activity, or did the Germans build their war economy on feet of sand, and was it thus doomed to fail from the outset?

Answer: they created it out of nothing. Schacht oversaw the creation of a fraudulent shell company, the "Metallurgische Forschungsgesellschaft," which existed for one purpose: to issue credit which was then used to purchase armaments. In fact, the company issued a total of twelve billion Reichsmarks of credit, in a form called "MEFO Bills," on one million Reichsmarks of actual capital. That is a leverage ratio of 12,000 to 1, enough to make even Ben Bernanke blush (well, maybe not).

An interesting central issue here is this: this author has asserted that the problem with central banking is that it appears to work for a while. A central bank-fueled credit expansion feeds itself, and the economy seems to the casual observer (the man on the street) to be growing and healthy. Government managers of the economy seem to know what they're doing. Right up until the time the economy collapses from overextension.

Schacht's policies, issuing unbacked credit bills, amounted to a massive new debasement of the German monetary system, and so the exact numbers of MEFO Bills issued were kept a strict state secret. These credit notes circulated and behaved almost like money, enabling the German government to buy whatever it needed for its burgeoning military. This was vital to the rearmament effort, as it skirted restrictions on central bank lending to the German government. Think of it as "Quantitative Easing," which it very much was, to feed Germany's military industrial complex. Without Schacht's policies, there would have been no German military buildup, and arguably, no WW2.

Schacht himself described the success of the policy in a 1938 speech:

"It is possible that no bank of issue in peacetime carried on such a daring credit policy at the Reichsbank since the seizure of power by National Socialism. With the aid of this credit policy, however, Germany created an armament second to none, and this armament in turn made possible the results of our policy."

Later, at his Nuremburg trial in 1946 before the International War Crimes Tribunal, Schacht would comment:

"It goes without saying that, in normal times and under normal economic conditions, such means as mefo bills would not have been resorted to. But if there is an emergency, then it has always been customary, and it has always been a policy recommended by all experts, that the issuing bank should furnish cheap money and credits, so that the economic system can, in turn, continue to function."

Under Schacht's supervision, German government regulatory agencies also manipulated the capital markets to ensure government borrowing had priority, crowding out funds available for private investment:

By a series of controls, they reduced to the minimum consistent with their rearmament program, all private issues which might have competed with Government issues for the limited funds in the capital market. Thus, the capital market was, in effect, pre-empted for Government issues

Finally, Schacht was secretly appointed "General Plenipotentiary for War Economy by Hitler." The fact that this function has been delegated to a separate agency in today's U.S. renders it no less relevant:

Under this law, Schacht was placed in complete charge of economic planning and preparation for war in peacetime, except for the direct production of armaments which was entrusted to the Ministry of War; and upon the outbreak of war, Schacht was to be the virtual economic dictator of Germany. His task was "to put all economic forces in the service of carrying on the war and to secure the life of the German people economically". In order to facilitate his task, the Ministers of Economy, Food and Agriculture, Labor, and Forestry were subordinated to him, and he was authorized "within realm of responsibility, to issue legal regulations which may deviate from existing regulations". The necessity for absolute secrecy was stressed.

Before his resignation in late 1937, Schacht had worked out in amazing detail his plans and preparations for the German economy in the forthcoming war. Recognizing that wartime controls, to be effective, must be based on adequate information, Schacht had directed the completion of comprehensive surveys of 180,000 industrial plants in Germany…

If someone would please explain to me how the foregoing differs from the active policies of the Federal Reserve, and from the following and other sections of the Executive Order cited in this article, I would be most grateful:

Sec. 103. General Functions. Executive departments and agencies (agencies) responsible for plans and programs relating to national defense (as defined in section 801(j) of this order), or for resources and services needed to support such plans and programs, shall:

(A) identify requirements for the full spectrum of emergencies, including essential military and civilian demand;

(B) assess on an ongoing basis the capability of the domestic industrial and technological base to satisfy requirements in peacetime and times of national emergency, specifically evaluating the availability of the most critical resource and production sources, including subcontractors and suppliers, materials, skilled labor, and professional and technical personnel;

(C) be prepared, in the event of a potential threat to the security of the United States, to take actions necessary to ensure the availability of adequate resources and production capability, including services and critical technology, for national defense requirements;

Sec. 104. Implementation. The National Security Council and Homeland Security Council, in conjunction with the National Economic Council, shall serve as the integrated policymaking forum for consideration and formulation of national defense resource preparedness policy and shall make recommendations to the President on the use of authorities under the Act.

A functioning capitalist economy is not compatible with this level of central control. It will continue to break down, and an ever-increasing precentage of whatever fruits it produces will be skimmed off used to keep the command / control system in place. The prescriptions coming from Washington are for a slow and agonizing death for the middle class and what's left of the "American Way Of Life."

If you truly love free markets, you must also love free men and private property.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Many economics bloggers and posters are totally concentrated on markets and market phenomena.  This was more true in times past.  Lately, the focus of economics blogging has become political.  Why the shift?  More importantly, is it truly a shift at all?

Sometimes it’s important to state and restate the obvious.  For me at least it helps to clarify issues, bringing into focus what needs to be done.  What are we trying to do, how important is it, why does it matter?

Nearly all of the interactions most of us will have with the other inhabitants of this planet are economic in nature.  Either we are buying goods and services or selling them to others.  Even when we are engaging in leisure activities we are interacting with others economically, often engaging others in their livelihoods to help us.  The importance of this cannot be overstated: economic cooperation is the basis of human coexistence.

What, then, is the purpose of politics?  That depends entirely on several factors.  Simply put, political systems fall into two categories: systems characterized by force, and systems characterized by voluntary action.  Either:

1. The political system is a reflection of the underlying economic system.
2. The economic system is an imposition by the underlying political system.
   

In both of these cases the political system decides who gets to keep the output of economic activity.  Historically, some pretext was used to seize the output of the commoners for the maintenance of a ruling class and to pay an armed force to hold power.  This system could be maintained as long as the commoners were unable to arm themselves and resist. 

If on the other hand economic actors are to be “permitted” freedom to act economically within the system in nearly any manner they see fit, the political system those actors will create will be a reflection of this freedom to act, and the system’s stated purpose will be to protect the right of the actors to pursue their own economic ends.  Note that under such a system, given that most of the interactions we have with others are economic, the system elevates both self-interest AND cooperation.   For this reason the cooperation is voluntary.  The need for an internal armed force is negated by the inherently voluntary nature of the system.

This notion is uniquely American, and is the thing that is being murdered before our eyes. 

Locke’s Two Treatises of Government must have read like Atlas Shrugged to the men of the day.  Here was a total refutation of the existing system of human coexistence, primogeniture, really a system of class and privilege, imposed from above by armed men who served by working the master’s will upon everyone else under threat of death.  I can easily imagine America’s founders, many of whom are known to have been greatly influenced by Locke, realizing they were in the right place at the right moment in history to unleash human creativity.  The shining star that was once America was their monument.  America is more than what it has become.

Today America is being overtaken by a movement that promises a return to a rigid system imposed from above and that is decidedly non-voluntary in nature.  It might be difficult to hang a name on it, but it is plainly there for all to see.  The system contains elements of socialism, fascism, and certainly is oligarchic.  Its most stark features, though, are that it is characterized by force and privilege.  Internal armed enforcement has returned as a distinct feature of our system.  There is no need to name this system; it is not voluntary, and I want nothing to do with it.  We must stop it; failure means our future is in chains. 

 

Part II

 

Locke explains that, in the State of Nature, enforcement of basic notions of law is left in the hands of everyone individually:

 

"And that all men may be restrained from invading others rights, and from doing hurt to one another, and the law of nature be observed, which willeth the peace and preservation of all mankind, the execution of the law of nature is, in that state, put into every man's hands, whereby every one has a right to punish the transgressors of that law to such a degree, as may hinder its violation: for the law of nature would, as all other laws that concern men in this world 'be in vain, if there were no body that in the state of nature had a power to execute that law, and thereby preserve the innocent and restrain offenders. And if any one in the state of nature may punish another for any evil he has done, every one may do so: for in that state of perfect equality, where naturally there is no superiority or jurisdiction of one over another, what any may do in prosecution of that law, every one must needs have a right to do."

 

Locke also understands that this State of Nature is chaotic and unreliable:

 

"" To this strange doctrine, viz. That in the state of nature every one has the executive power of the law of nature, I doubt not but it will be objected, that it is unreasonable for men to be judges in their own cases, that self- love will make men partial to themselves and their friends: and on the other side, that ill nature, passion and revenge will carry them too far in punishing others; and hence nothing but confusion and disorder will follow;  I easily grant, that civil government is the proper remedy for the inconveniencies of the state of nature, which must certainly be great, where men may be judges in their own case, since it is easy to be imagined, that he who was so unjust as to do his brother an injury, will scarce be so just as to condemn himself for it"

 

Locke further explains the need for political society and the dangers inherent in nullifying it:

 

Man being born, as has been proved, with a title to perfect freedom, and an uncontrolled enjoyment of all the rights and privileges of the law of nature, equally with any other man or number of men in the world, hath by nature a power, not only to preserve his property, that is, his life, liberty and estate, against the injuries and attempts of other men; but to judge of, and punish the breaches of that law in others, as he is persuaded the offence deserves, even with death itself, in crimes where the heinousness of the fact, in his opinion, requires it. But because no political society can be, nor subsist, without having in itself the power to preserve the property, and in order thereunto, punish the offences of all those of that society; there, and there only is political society, where every one of the members hath quitted this natural power, resigned it up into the hands of the community in all cases that exclude him not from appealing for protection to the law established by it. And thus all private judgment of every particular member being excluded, the community comes to be umpire, by settled standing rules, indifferent, and the same to all parties; and by men having authority from the community, for the execution of those rules, decides all the differences that may happen between any members of that society concerning any matter of right; and punishes those offences which any member hath committed against the society, with such penalties as the law has established: whereby it is easy to discern, who are, and who are not, in political society together. Those who are united into one body, and have a common established law and judicature to appeal to, with authority to decide controversies between them, and punish offenders, are in civil society one with another: but those who have no such common appeal, I mean on earth, are still in the state of nature, each being, where there is no other, judge for himself, and executioner; which is, as I have before shewed it, the perfect state of nature.

 

 

Administering a fair and just system for the redress of grievances is the most basic function of government.  That system must be fair and just, and it must be widely perceived as such.  Seizing private property under contrived or false pretenses, then denying justice in the courts, is the surest means for reverting to the State of Nature.