Monthly Archives: September 2014

Watching the Cops

With the recent death of Eric Garner at the hands of the NYPD, a bit more attention has been placed on the police in America lately.  The incident in Ferguson, Missouri has also helped people realize that the police are not always the great heroes they are made out to be.  Actually, it is the reaction of the police to the protests in Ferguson that has been even more glaring.
Like anything in life, there are good cops and bad cops.  The problem is that they hold a legal monopoly on the use of force.  And this often leads to a lack of accountability.  How many times do we see wrongdoing of cops, only for them to go on administrative leave (usually paid), while their own buddies supposedly investigate?
It usually takes a really serious incident with absolute proof before the other police will finally turn on their own.  It is only at that point that the person might be fired.  It is rare that there are criminal charges.
Personally, I think the police should be held criminally liable for their actions, even when on duty.  Some say this will restrain them from doing their job.  But that is the point.
If Eric Garner had been in a shopping mall or some other event with a private security firm, do you think it would have ended the same way?  Private security guards tend to want to de-escalate situations.
CopWatch
In 2011, Jose LaSalle witnessed the abusiveness of some cops in Harlem.  His stepson, who was only 16 at the time, was stopped by NYPD officers and had the sense to record the incident.  The police officers threatened the boy with physical harm, and even used racial slurs.
Frustrated with the incident and others like it, along with the lack of accountability, LaSalle later took matters in to his own hands.  He fought back with video cameras and volunteers.
He formed a group called CopWatch, which involves a small group of people going out on the streets to film the police, particularly when they are doing their stop-and-frisk activities.
LaSalle’s organization does not directly file complaints on behalf of victims of police abuse.  However, the work of him and his group has a strong deterrence effect.  It is amazing the difference in behavior of some cops who know that they have a camera recording their words and actions.
Technology and Civil Liberties
Many people today believe that our world of advanced technology is a detriment to our liberty.  Just look at the NSA and the revelations by Edward Snowden.  The federal government is collecting most of our electronic data.  We really don’t have any privacy from the government when it comes to email, phone calls, and any other computer-based communications.
However, I believe that technology, while playing both a positive and negative role towards liberty, is a net positive overall.  This story about CopWatch is a perfect example of where technology is on our side.
The majority of people in the U.S. now have a cell phone.  Most of the new cell phones have video cameras.  So most people walking around are walking around with a video camera available in their pocket.  They can usually turn it on in less than 10 seconds.
Politicians like to say that if you have nothing to hide, then you shouldn’t be afraid.  This usually applies to each new invasion of our privacy and civil liberties.  While it is a completely false and absurd statement, it is more accurate when it comes to the police.
If the police have nothing to hide, then they shouldn’t mind having cameras on them.  The good police officers have nothing to worry about as long as they keep doing their job and acting in a professional and non-abusive manner.  It is the bad cops who should be afraid of the camera.
Ironically, the NYPD recently announced its own plans to have some officers where video cameras while on duty.  This may just be to quell opposition.  But this should really be a goal of liberty activists and those concerned with police abusing their power.
Let’s have all police where cameras, or at least audio recorders, at all times while working.  Technology is cheap enough now that it is feasible.
Aside from privatizing the police, I can’t think of a better way to significantly reduce the abuse of power and to hold the police more accountable.  We can fight back with technology on our side.

50 Years of Fighting Poverty

As the Census Bureau releases its annual report on poverty, we can look back on 50 years of fighting poverty.  That’s right.  This year is the 50th anniversary of Lyndon Johnson’s war on poverty.
It is estimated that $22 trillion (in 2012 dollars) has been spent fighting poverty since Johnson announced this new war.  This includes a plethora of government programs that were designed for those with a low income.
This figure doesn’t include certain “entitlement” programs such as Social Security and Medicare.  It doesn’t include unemployment insurance.  It definitely does not include government education, which serves all levels of income.
There are currently over 100 million people in the U.S. that receive some kind of welfare specifically for low-income people.  That is about one-third of the entire population of the U.S.  I guess you could say that Lyndon Johnson’s war on poverty has been a huge success in getting a massive segment of the population dependent on the federal government.
Of course, all of the money that funds these programs has to come from somewhere.  It is either through taxes, or through debt and inflation. Middle and upper income earners pay the large majority.  But poor people pay both also, so they are technically just getting some of their own money back, with major administrative costs being taken off the top.
While most low-income people don’t pay income taxes, they do pay payroll taxes if they are working.  They also pay many other taxes including gas taxes, sales taxes, phone taxes, cable taxes, and the list goes on.
And low-income people certainly take a hit with debt and inflation.  Wages tend to lag behind in increasing with consumer prices.  If a gallon of milk goes up in price by a dollar, who do you think it hurts the most?  A high-income earner or someone with a high net worth won’t feel it nearly as much as the guy barely getting by.
A War on Everything
It seems that the government knows how to make a mess of anything it declares war on.  (Ironically, there hasn’t been an official declaration of war, militarily speaking, since World War 2.)
When the government declares a war on drugs, then this leads to more violence and more drug use.  When the government declares a war on terror, this leads to more terrorists.  When the government declares a war on poverty, it leads to more poverty and more dependence on government.
Since Johnson declared the war on poverty, the poverty rate is no better today than it was 50 years ago.  You could argue that poor people are a little better off economically speaking.  Some have cell phones and cable television.  But this is really more of a reflection of the advancement in technology.  If it had been up to the government, people would be much poorer today than 50 years ago.
It is actually the things that the left hates that have managed to give some help to poor people.  Think about Walmart.  I don’t love shopping at Walmart because of the chaos there at times, but it has undoubtedly helped millions of people.  They can buy food and other consumer products at cheaper prices.
The free market, despite the massive government interference, is what has enabled some people to lift themselves out of poverty and to prosper.  And it is the free market that has given us an almost exponential growth in the electronics industry.  It has enabled poor people to afford cell phones, televisions, and computers.
Meanwhile, the government just hampers this process.  As both Frederic Bastiat and Henry Hazlitt taught, a good economist will look at the unseen effects of government policy.  In other words, if the government hadn’t spent $22 trillion over the last 50 years in the name of fighting poverty, imagine how much more we would have today.  Imagine the inventions and advances that we haven’t seen because the government deprived the market of this capital investment.
There would be far less poverty today if the government had never started a war on poverty.  And we also wouldn’t have a hundred million people dependent on the government.  It is going to be that much more painful when the government faces major fiscal problems and has to break some of its promises.  Meanwhile, let’s hope the government doesn’t declare any more wars.

FOMC Statement – September 17, 2014

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The FOMC released its latest policy statement on September 17, 2014.  The Fed will continue its “taper” by reducing its purchases to “just” $15 billion per month.

For reference, in most of 2013, the Fed was purchasing assets (creating money) by the tune of $85 billion per month, which is an annual rate of about $1 trillion.  So $15 billion per month, which would have been considered a lot 6 years ago, is a huge reduction compared to what the Fed had been doing last year.

If nothing drastic happens over the next 6 weeks, then the Fed is expected to end its so-called quantitative easing program at the end of October.

If you study Austrian school economics, and in in particular the Austrian Business Cycle Theory, you will know that loose money and artificially low interest rates cause resources to be misallocated and unsustainable bubble activity.  At some point, this has to stop.  Just by reducing the rate of monetary inflation, this can be enough to pop the bubble activity.  But we have to realize that there is a time lag.

In other words, if the Fed doesn’t ramp up the digital printing presses again, then we are going to see a recession in the somewhat near term.  The only exception to this might be if there is some kind of a major event or if commercial banks start lending out some of their excess reserves.

Price inflation, according to the government’s CPI numbers, had started to pick up a few months ago.  But the report for August showed it has slowed down again.  If the CPI stays down, this is a sign that Americans are holding back their spending and borrowing.  It is also a sign that a recession may not be far away.

Everyone is obsessed with interest rates right now, but I’m not sure why.  The Fed controls the federal funds rate, which is the overnight borrowing rate for banks.  This rate has mattered in the past because the Fed typically would increase it by tightening monetary policy and it would decrease the rate by loosening monetary policy.  But this rate has been near zero for almost 6 years.  It hasn’t mattered what the Fed has done in terms of monetary policy.

The Fed is not going to raise the federal funds rate by massively selling off assets.  That would crash the economy quickly.  Its main option is to pay a higher interest rate on excess reserves.  But in terms of creating money out of thin air, it doesn’t seem to matter what the Fed does in relation to the federal funds rate.

So why is everyone concerned about the interest rate?  We were concerned about this in the past because it determined the monetary policy.  But we already know what the monetary policy is.  The Fed is now purchasing assets at $15 billion per month and it is expected to stop at the end of October.  It continues to roll over its maturing debt, making sure the monetary base does not go down.

There are a lot of factors at play right now, but I am leaning towards a recession.  I would not be in the stock market except as it relates to a permanent portfolio and in terms of specific stocks and sectors.  The stock markets may hit new all-time highs for a little while longer, but I would rather be out a little early than out too late.

Scotland Independence May Disrupt the Banking System

On September 18, there will be a vote in Scotland on independence from the United Kingdom.  As suspected, most politicians and other defenders of the establishment are completely against this idea, using fear tactics and bribes in order to get the Scottish people to remain in the U.K.
It is no surprise that most of the establishment is against independence for Scotland.  They always prefer centralization.  And they don’t know the ramifications of this, particularly as it pertains to the European Union.  This could potentially cause an eventual breakup of the European Union.
Now Scotland’s two biggest banks are joining the opposition to Scottish independence.  Lloyds Banking Group and Royal Bank of Scotland Group both indicated that they would likely move their headquarters to London, or somewhere else in England, if there is a majority “yes” vote for independence.  Both banks are partially state-owned.
Part of this uncertainty is because it is unclear if the British pound would remain the currency in an independent Scotland.  And since the banks and government are so tightly connected, it just adds to the problems.
The banks rely on the support of the government, along with the central bank.  It is a similar scenario in most major advanced countries of the world.  Even the so-called private banks are under government regulation and given a backstop by the central bank as the lender of last resort.
What if a State Seceded in the U.S.?
Imagine a scenario in the United States where one particular state decided to secede.  What would happen to the banks, little or big, in that state?  My guess is that the same thing would happen.  They would probably move their headquarters.
In the U.S., banks have the FDIC.  While the FDIC is sold as a protection for consumers, it is really important for the banks in our world of fractional reserve lending.
If the FDIC didn’t exist, then the great degree of fractional reserve lending would not exist.  If there is a fear from customers that banks are lending out too much money, then this can trigger a bank run.  The FDIC has prevented most bank runs (for better or for worse) except for the really insolvent ones.
While the FDIC doesn’t really have much money, it is has the backing of the U.S. Treasury, which has the backing of the Federal Reserve.  The Fed can create money out of thin air at any time to save the banks, as we saw in 2008.
If Texas were to secede from the union, and be allowed to do so, what would happen to all of the banks headquartered in Texas?  You can use this same example for any other state.
Would the FDIC no longer apply to a bank headquartered in Texas?  If not, then the banks there would find themselves insolvent very quickly.  All it would take is for a few depositors to get scared and demand a withdrawal of their money.
In this hypothetical example, Texas could form its own version of the FDIC.  But this won’t really work unless it also forms a central bank that can fund it.  You see the problem here.  What is the point of secession if you bring back all of the bad institutions that you are trying to leave behind?
Don’t take this as an argument against secession.  I believe decentralization is usually beneficial for liberty in the long run.  But this does show the problems we face today because of fiat currencies, central banking, government guarantees, and government alliances with businesses.
These banks in Scotland will leave an independent Scotland because they want to stay solvent.  They need the government guarantees and government backing.  Otherwise, they won’t be able to compete with all of the banks that do have the government guarantees.
For those who favor independence and secession movements, I would also encourage you to support getting rid of central banking and government guarantees.  There is more of a link than many realize and it may become more evident in the coming weeks and months ahead, if Scotland becomes an independent country.

Argentina Gets in on the Anti-Dollar Action

It is being reported that there will be a currency swap between the central banks of China and Argentina.  The swap is reported to be for a total of $11 billion, with the first payment going to Argentina in the range of just under $1 billion by the end of the year.  It will be in the form of yuan, the Chinese currency.
Argentina just recently defaulted on its debt obligations a couple of months ago.  This announced swap will help Argentina to shore up its reserves.  The yuan could also be used to buy Chinese imports.
Of course, $11 billion, while quite significant for Argentina, is a drop in the bucket for the U.S. government.  I mention this because the U.S. government, along with the Federal Reserve, is not involved in this transaction.  It is a drop in the bucket, but little drops do add up over time.
You could also say that each snowflake accumulates to eventually make an avalanche.  It takes millions of snowflakes, but they start to add up after a while.  I say all of this in reference to the U.S. dollar’s status as the world’s reserve currency.
I don’t think there is going to be an avalanche in the U.S. dollar losing its reserve status.  It will likely happen more subtly, one transaction at a time.
It is interesting that China is finding more and more countries that will deal in yuan.  Despite China’s problems, it is finding that the U.S. dollar does not command the same respect as it once did.
Chinese Reserves
This currency swap is really something of a loan to Argentina.  Argentina is plagued with debt and inflation problems.  Reserves have been draining away and it is difficult for the central bank there to get dollars because of the unreliability of its currency.
So while every international transaction that doesn’t involve the U.S. dollar is a small step away from the dollar as the reserve currency, this deal with Argentina makes Chinese officials look a bit foolish.
China holds well in excess of one trillion dollars in U.S. government debt.  Long-term, this may prove to be really foolish, as the dollar loses purchasing power due to the Fed’s massive monetary inflation.
If the answer of Chinese officials is to start loaning money to Argentina, then this is even more foolish.  The U.S. government is in a great financial condition compared to that of Argentina.  The U.S. dollar is a safe and stable currency compared to Argentina’s.
Chinese officials have been making significant changes in at least starting to get away from the U.S. dollar for transactions that don’t involve the U.S.  The most significant is Chinese and Russian officials making deals in rubles or yuan.
But Chinese central bankers keep buying up U.S. debt.  Apparently they are adding a little Argentina debt into the mix.  If they want to pile up reserves, why don’t they start buying more gold?  While they have been adding gold to their reserves, it is almost nothing compared to the holdings of U.S. Treasuries.
We should keep watching for these international deals that are being done without the use of U.S. dollars.  Hopefully, for China’s sake, they will find some better countries to do business with than Argentina.
But Chinese officials still believe in central planning and Keynesian economics.  They are mercantilists who believe that they have to subsidize their export sector by keeping a weak currency.  And until they stop buying U.S. Treasuries, I can’t take them too seriously.
If China starts trading dollars for gold in order to back their currency, then I will start to really take them seriously.  In the long run, this would actually benefit Americans because it would help put a stop to their reckless government and central bank.  And obviously it would help the Chinese people tremendously.

Free Trade or Corporate Welfare?

We live in a global world today, where there is a high division of labor and a lot of trading constantly going on across the planet.  While some people see this is a bad thing, it makes us more prosperous.
Free trade is beneficial for all parties.  It allows even poor people in other countries, with little capital, to share in at least a little prosperity.  People can specialize in one particular thing, whether it is working in a factory, or growing a certain kind of food, or anything else.
Free trade across countries is beneficial, just as it is beneficial between states, cities, and individuals in a neighborhood.  If trade is beneficial within a country, then it applies the same to trade between people in different countries.
Unfortunately, politicians exploit the mantra of free trade in order to get handouts for their buddies.  Free trade agreements are used as a cover for corporate welfare and other power plays.
These so-called free trade agreements, such as NAFTA and GATT, are not free trade agreements at all.  You don’t have to have some complex agreement to ensure free trade.
If two countries really believe in free trade, they can just make an agreement not to levy any tariffs and to not interfere with any peaceful trade.  It is really that simple.  Unfortunately, this isn’t what is happening with these agreements.
Guatemala to Subsidize U.S. Corporate Giants
There was a trade agreement signed back in 2005 call CAFTA-DR.  It is an agreement between Central American countries and the U.S.  It contains a provision that would essentially give a monopoly on certain plants or seeds to the companies that supposedly discovered them.  It is sold as a protection of intellectual property rights, as if anyone should have the right to own the rights to a particular type of seed or plant.
In order to abide by the agreement, the government in Guatemala passed the “Law for the Protection of New Plant Varieties”.  Critics of the new law have appropriately called it the “Monsanto Law”, named after the giant U.S. corporation.  I would be surprised if Monsanto lobbyists didn’t help write the agreement and the law.
The law in Guatemala would make it illegal to own certain types of seeds or possess any plants derived from them.  This would be punishable by fines, and even possible prison time.
Fortunately, because of the uproar of farmers and other groups in Guatemala, the highest court there has suspended the law.  If the country doesn’t abide by the provision in the original “free trade” agreement, then it is possible Guatemala will get dropped from the agreement.  Of course, it is always dangerous for foreign politicians to defy the U.S. government.
It is amazing that corporate lobbyists in the U.S. not only affect U.S. residents, but also those in poor foreign countries.  As if some rural farmer in Guatemala were not poor enough, let’s grant a monopoly to Monsanto and other giant U.S. companies so that the poor guy can’t grow a particular plant on his land.  And if the poor farmer doesn’t obey, then just throw him in jail.
This is what our politicians call free trade.  I’m guessing this isn’t quite what Adam Smith had in mind when he wrote The Wealth of Nations.
We must not be fooled by labels.  These so-called free trade agreements may have some good aspects, but they generally do more harm than good.  They are written by lawmakers and corporate lobbyists.
The Occupy Wall Street crowd is correct in complaining about the top 1%.  But it isn’t the top 1% of wealthy people they should be complaining about.  It is the top 1% who get their money and power from political connections and government favors.  At least the people in Guatemala seem to understand what U.S. politicians are doing.

Ecuador to Issue New Digital Currency

With the big takeoff of Bitcoin, there is more and more talk of digital currencies.  The latest talk comes from Ecuador, where the government plans to have the central bank issue a new digital currency.
Ecuador currently uses the U.S. dollar as its main form of money.  Like most South American countries, Ecuador has had currency problems, or perhaps more accurately, inflation problems.  It had to turn to the U.S. dollar in 2000 for some stability.
It is still unclear if the new digital currency will have a floating exchange rate with the dollar, or if there will be some kind of a fixed rate.
While it might sound good that Ecuador will have a currency to compete against the U.S. dollar, I fear that the government there has other ideas up its sleeve.
First, we must realize that this new currency will not be like Bitcoin.  While I have my doubts about the long-term viability of Bitcoin, at least it is a “private” currency, in the sense that it was not created by a government and it is not run by a government.  Nobody is forced to use it.
In addition, Bitcoin was purposely designed so that its supply would be limited.  You can “mine” for bitcoins, but it gets harder and harder, and the new supply gets more and more limited.  There is a finite limit to the number of bitcoins.
While we don’t really know yet how this new digital currency will work in Ecuador, we can take a pretty solid guess that it won’t be limited in its supply.  When has this ever existed with any government-issued currency that was not backed by a precious metal?
Still a Fiat Currency
Just because this will be a digital currency, it will still be issued by a central bank.  It will still be a fiat currency.  It will just be in digits.
In many ways, the U.S. dollar is almost a digital currency.  You can get actual dollar bills and coins, but actual paper money and coins makes up a small percentage of the actual money in circulation.  Most of the money exists in the form of digits in bank accounts and brokerage accounts.
When referring to the Federal Reserve’s monetary inflation, we often say that they are printing money.  But in most cases, this isn’t really true.  They are really just creating digits on a computer.  It has essentially the same effect, so I call it digital money printing.
Another concern about this new digital currency in Ecuador is that it may be used as a further step to prohibit privacy.  While a lot of Bitcoin advocates like to cite privacy as one of its advantages, I believe it can really be the opposite.  When you buy or sell something and use electronics to make or receive payment, then there is an electronic trail.  And we all know what the NSA is up to these days.  If it can track emails, then electronic payments are probably not out of reach.
The best form of privacy is using cash.  There is a reason drug dealers don’t write checks or use credit cards.  So we really have to ask ourselves if we want the government knowing all of our personal transactions.  When your kid mows the neighbor’s lawn for twenty bucks and receives his payment in digital currency, then he better be sure to pay his income taxes on that.
If any country is really serious about competing against the U.S. dollar, then it can do a couple of things.  First, it can stop inflating its own money supply.  Second, it can back up its currency with gold or silver.
Actually, there is a third option that is almost never considered.  The government can step out of the way and let the free market decide what to use for money.  Gold, silver, Bitcoin, and anything else can compete.  People can freely choose what to use.  It is likely that the top one or two choices will be widely used and accepted.
Until then, don’t trust these new government schemes.  Politicians in Ecuador want to spend money, just like everywhere else.  They are looking for a new source of funding and we can bet that they will use this new digital currency to inflate, just like we see with every other government-backed fiat currency.

Former Mob Boss Doesn’t Trust Stocks

A former mob boss of the Colombo crime family in New York reported to CNBC that he doesn’t trust Wall Street, and the stock market that goes with it.  Michael Fanzese, who was in prison for 10 years, is now discussing the issue of trust.
Franzese said, “I did a lot of things at times with people on Wall Street…a lot of guys are shady and they did shady things with me and I don’t trust them.  And I don’t like other people that I don’t know really well taking care of my money.”
Perhaps we should not be surprised that a former mob boss is highly skeptical of other people.  But it also doesn’t mean that he’s wrong.
Franzese believes there is a stock market bubble that is ready to burst and recommends that investors diversify.  He even recommends investing in physical gold.  In regards to gold bullion, he said, “No matter what, it’s always going to have a value and there will always be something there.”
I never thought I would tell this to others, but they would probably be better off taking financial advice from this former mob boss than most of the pundits in the mainstream media.
Wall Street Bulls
I don’t trust the people on Wall Street, but it doesn’t mean I think they are inherently evil.  Just as you shouldn’t ask a barber if you need a haircut, or a divorce lawyer if you should get a divorce, I don’t think you should necessarily ask an investment advisor on Wall Street if you should buy stocks.
This is how Wall Street brokers make their money.  They need other investors to buy and sell.  Most people working on Wall Street are generally going to be bullish on stocks.  This isn’t always the case, but it is a general trend.
It is especially refreshing that I have actually heard some people on CNBC (besides Franzese) and others in the financial media outside of the internet who have warned about stocks.  Some just warn that there could be a pullback, but there are a few people out there who are warning there might be a big bust.
I have heard that this current run in the stock market can’t be a bubble because there are too many people warning that it is a bubble.  But there are still a lot of bulls out there, on CNBC and elsewhere.  And you can still have a bubble that is about to burst, even if some people are warning about it.
There were people warning about a tech crash in 1999 and there were people warning about a housing crash in 2005.  It was a small number of people, but they did exist.
It is not surprising that more people today are cautious about what is going on.  We are not very far removed from the last stock market bubble that burst, less than 6 years ago.
I also find that more people are becoming aware of the actions of the Federal Reserve.  They understand that the Fed has had a very loose monetary policy over the past 6 years and the record-high stock prices are a result of this.  With the Fed now “tapering” its monetary inflation, what will support stocks?  The Fed gave us the big stock market rally and now the Fed will take it away.
The one thing about a bubble is that they can often last far longer than seemingly possible.  So while I concur with the tips of Franzese, his mistake may end up being that he is too early.
There were people calling for a tech bubble to burst in 1997.  There were people calling for a housing bubble collapse in 2004.
But even if he is too early, it is better to be too early than too late.  I would take the advice of this former mob boss over the perma-bulls on CNBC any day.