Keynesian economics

What thermodynamics can teach us about economics – money is NOT wealth

rafifarber The Jewish Libertarian Blog , ,

One of the basic assumptions of Keynesian economics is that government can plop money into the system when the system is slowing down. The new money starts flowing around and things get revitalized. The new money is either borrowed from someone else, say China, or it is stolen from the population of the US itself by printing it and slicing off a piece of everyone’s wealth by diluting the dollar.

Let’s just assume for now that the money is borrowed instead of printed. OK, so the US government borrows money from someone else by selling a bond and then using that money to “jumpstart” the economy. They “jumpstart” it by sticking that money somewhere and hoping that whoever they give it to uses it to make more money. Eventually, the money that they borrowed has to be repaid.

The moral hazard here is that the government feels that it can just print the money when the bill comes due. Technically, they can. And that’s the problem.

Here’s the problem restated: Let’s say a group of people get together to invest in a start up. They risk their wealth to pour into a business that is going to produce…I don’t know…hoverboards. If they successfully produce one, then they’ll get a return on their wealth and end up with even more wealth. Because this group of investors knows very well that if they fail, they can’t just “print” the money to pay their debts. They have to succeed or they go bankrupt. They lose their wealth, and that’s it. That’s why they try really hard to succeed.

They are taking their wealth, which they worked for, and sticking it into hoverboards, and risking it. If they win, the economy grows and more wealth is added to the economy. If they don’t, that welath is lost in consumption that didn’t produce any wealth in the end.

But if the GOVERNMENT gives out a loan for hoverboards and the people they gave it to are lazy asses and they use it to buy jaguar-skinned comforters filled with platinum dust instead of figuring out how to produce hoverboards and the government doesn’t really care because if they lose the money, they can just PRINT it, then the chances that the money loaned will produce NOTHING, skyrockets.

So when the government moves to stimulate the economy with someone else’s wealth, they are ideally trying to get people to produce things with that wealth so in the end there is more wealth so they can theoretically pay back the people they borrowed money from. But if they can’t, they just print up money and steal wealth from you and ship it to China thereby taking even more wealth out of the economy and draining the whole system. Or even more ludicrously, they can print it up to pay an American citizen back, thereby stealing from him and paying him back at the same time.

So where do thermodynamics come in? The first law of thermodynamics states that the amount of matter and energy in the universe is constant. The second law of thermodynamics states that the universe tends towards chaos inexorably. The only reason things can get organized here on planet Earth is that we have a constant source of energy pouring in here, which is the sun. But we have to do work in order to organize things here. The economic equivalents of those laws, as close as I can parallel them, would be these:

Matter and energy in thermodynamics equals money in economic terms. Organization in thermodynamics equals wealth. So the economic equivalents of the first two laws of thermodynamics are

  1. The amount of money in the economy is always constant
  2. The economy always tends towards chaos, unless we use money to organize things, thereby producing “wealth”.
So, whereas the amount of money in the world is constant, the amount of wealth in the world is always changing. If money is used to produce things (organize things, create hoverboards), wealth increases. If money is used to consume things (eat, party, purchase jaguar skinned comforters stuffed with platinum dust) wealth decreases. But money always stays constant. Money is only a means with which one can either produce or consume wealth. Just as matter and energy is only a means with which one can either create or destroy.


The Keynesian approach contradicts these laws by equating money with wealth. It says that the amount of money that exists in the world varies at any given time by government decree. It also assumes that the economy tends towards wealth instead of chaos, because it doesn’t matter where the money goes as long as it’s flowing according to Keynes. For Keynes, the very act of money moving through the system means that wealth is being increased. Yeah, and I have a voodoo doll at home that works just great.

So what you’ll have in the end is a big ball of flaming economic entropy with a whole bunch of money but no wealth anywhere. Welcome to the Keynesian Debt Bubble. Welcome to the 21st century.

 

Fiat Money or a gold standard – either way it’s backed by work

rafifarber The Jewish Libertarian Blog , , ,

Thinking about paper currency lately, money backed by nothing so to speak. This is in contrast to money backed by gold. Meaning, first people passed around gold or silver, then they got tired of carrying it so they started passing around paper that could be redeemed for a certain amount of gold or silver.

It hit me today. There really isn’t such a thing as money backed by gold either. Gold only represents something. That something is called work. Gold doesn’t and cannot create prosperity in itself. All it can do is sit somewhere and look shiny. Gold only represents the prosperity achieved by people who do work.

Gold represents work better than paper because no self respecting person will give you his gold without you giving something for it in return that he wants. So when you are paid in money that is backed by gold, that gold is definitely backed by work done by somebody somewhere.

Can paper represent prosperity? Sure it can, in theory. But just like gold, it only represents prosperity that already exists.  One dollar not redeemable for gold can theoretically represent the same amount of work that a dollar redeemable for gold can represent. But the problem is, one dollar not redeemable for anything can be printed really really easily. And when someone, say the fed, puts another dollar into circulation, that dollar still represents something.

It represents work that someone else did. There’s no other way to see it. When the Federal Reserve puts money into circulation at the push of a button, and people take that money and use it, that money is work stolen from someone else by the government.

So what is “stimulus”? What is government “spending”? Stimulus is when the government collects all the work done by the population of the United States, steals a part of that work, and uses whatever it stole to give it to a sector they like or deem important.

What is government “spending”? Well, it should be what a population gives to a government by social contract in order to protect the individuals of that population from other individuals who would try to hurt them. This should NOT cost all that much money, and therefore shouldn’t take much of the population’s work. But in the US, government spending is treated as if it creates prosperity instead of represents prosperity that already exists. So governmnet spending under Obama and Keynes is when the government decides it knows exactly where your work should be invested, and does it for you against your will by pushing the print button.

Screw that. This is insane.

The inanity of government hiring regulations, Natasha case in point

rafifarber The Jewish Libertarian Blog , ,

Before I get started with this case study, let me clarify that Israel is a socialist country founded by Marxists. So there is very little freedom here.

Now, that being said, government controls healthcare and education entirely. My wife, Natasha, works at a college that is funded by the government. It is extremely inefficient because, no matter how wasteful it gets, taxpayer funding is always guaranteed. Natasha is also very pregnant. There is also a law here that you can’t fire pregnant women. Sounds great, right?

Well, I came home today and Natasha told me that because she’s giving birth (God willing) before the semester actually officially ends, the college cannot legally NOT rehire her. So because she’s having a baby, she’s assured a placement next semester, regardless of whether the college has a class for her to teach.

Well, good news for us, right? Eh…I’d much rather not pay taxes than pay taxes and have my wife get a job because it’s illegal if she isn’t rehired.

It turned out OK for us, but what if circumstance were reversed? What if they refused to hire Natasha initially, suspecting she was pregnant, because they know that they wouldn’t be able to let her go the following semester?

The whole system is rotten. Taxpayer money flowing through a system and misdirected through legal mechanisms will only cause mal-investment, which, any Austrian will tell you, will have to be liquidated. Money earned through government force may as well be welfare. Money must represent value. Not government intrusion.

Natasha is a good teacher. She should be rehired on the basis of need and talent. If they have no need for her, they shouldn’t rehire her just because she was pregnant. If they do, we’re getting money that represents no value.

And the debt bubble expands just a little bit more.

What will we spend it on? Probably gold.

Europe and the entire Western economy is a Global Ponzi scheme

rafifarber The Jewish Libertarian Blog , , , ,

It hit me when I was reading an article about Italy “refinancing” its debt by selling bonds. Bonds are debt.

The definition of a Ponzi Scheme, as I’m sure we all know ever since Madoff ran away with $50 billion that never existed, is paying investors off with money from other investors.

In financial newspapers and other smart guy publications with articles written by people with $100,000 MBA’s that aren’t worth 50 cents, they’ll call it refinancing, or restructuring, or recombobulating, or whatever. Doesn’t make a difference. When a country like Italy sells bonds in order to pay off other maturing bonds, they are by definition engaging in a Ponzi Scheme. They are taking money from new investors – the buyers of the new bonds – to pay off old investors – the holders of the old bonds.

The reason the financial magazines and websites and newspapers call it “refinancing” is that they don’t want us to freak out and pull our money out of Europe by calling it what it is, because this would mean the reset button would have to pushed all the sooner.

It’s not just Europe. America pays off interest it owes to China and Japan with money that it borrows from somewhere else. It pays off old treasury bills by selling new ones. There’s no real genius to it.

Why can’t they pay off with real money? Because they’re busy using that to blow up rocks in Afghanistan and Iraq with billion dollar precision missiles.

The entire Western economy is nothing but selling bonds to pay off bonds. Paying off investors with other investors’ money. The clock stops when they can no longer attract new investors.

That’s when 1.5 quadrillion dollars in global derivatives gets wiped off the books in one shot.

Stay safe out there.

 

The only way Ron Paul can win

rafifarber The Jewish Libertarian Blog , , ,
As crazy as that commercial was, it's still the status quo

There’s only one way Ron Paul can win this election and become the next President of the United States. And no, he doesn’t even need to win the Republican nomination. Though it certainly would be nice if he did.

No – the only way Ron Paul can win, regardless of whether or not he becomes the GOP nominee, is if the global economy collapses before the elections. Meaning, a full blown economic disaster the likes of which has never been seen before on this planet. If it doesn’t happen in time, Herman Cain or Mitt Romney or Barack Obama will be elected, spend more money, and expand the bubble that will eventually burst and collapse anyway. So let’s all pray it happens sooner rather than later.

I’ll explain exactly what the bubble is in numbers in a moment. First, let me answer the question, “Why does the bubble have to burst first? Can’t people just wake up and vote for Ron Paul?”

The answer is that Ron Paul is and always will be the “other” in any election. Rick Perry will go up and down because people like him one day, and then get bored of him the next day. The same can be said of Herman Cain. One day people think he’s cool, the next day he puts out an insane commercial of his campaign manager smoking a cigarette and blowing it into the camera. If Cain falls because of this, then no, Ron Paul will not suddenly rise. The votes may go to Gingrich instead, to Romney, or maybe even back to Perry, but not to Paul.

Everyone else running for president is basically the status quo. Whoever wins will be the one who people happen to think is the coolest one or the neatest one or the most intriguing or whatever. It’ll be a game of luck between all of them to see who can slip up the other, who can make the least gaffes, who can spit out the most catch phrases etc. The one who wins will be the one lucky enough to look and sound the smoothest, and that’s all.

The people voting are already settled on the status quo. They just need to agree about which status quo candidate has best hair, and then that status quo candidate will win. And then one of the status quo candidates, either Barack Obama or whatever Republican, will win.

The vast majority of voters in this primary know full well that Ron Paul is NOT the status quo. That’s why they will NEVER vote for him. He wants to take the country in a complete 180, to make actual real cuts, and then really actually truthfully shrink the government, end all wars overseas, and balance the damn budget. Everybody knows that if he is elected, he will ACTUALLY do it, which is what everyone is afraid of. It’s the unknown.

So the only way they’ll ACTUALLY vote for him, is if they realize that the status quo is already dead, the show is over, and the people are forced to actually change the direction of the country and the world.

Right now Americans are in pain, but they’re not panicking. Yet. That’s why they still want the status quo. But I read two days ago on Bloomberg the following, and here’s the bubble in actual concrete numbers:

World GDP is approximately $65 trillion annually. That means, every year, the planet produces $65 trillion worth of goods and services. The worldwide derivatives market, which is the amount of money placed in bets through various financial instruments against what they think the market will do in a given period of time, is estimated to be valued at – get this –

$1.5 QUADRILLION. That’s one-and-a-half THOUSAND TRILLION dollars. I have never in my life heard of or read about that amount of money. It is inconceivable. This number is literally, like the Tetragrammaton, unfathomable. What it means is that theoretical money, such as the value of a country’s debt, or a fund backed by a mortgage (which is somebody’s debt) or a fund that will only have value if the stock market goes up to a certain point or down to a certain point, this THEORETICAL MONEY that banks and institutions and corporations are all hiding under their corporate mattresses, is about 23 times the value of the ENTIRE PLANET.

What that really means is this: This money doesn’t actually exist. It’s fiction. And the entire planet is backed up with this paper garbage that people only pretend is money, put it on their balance sheets, and everything looks swell.

But all it will ever take for a QUADRILLION dollar crash is for something to slip. Say…like Greece.

If Greece falls, then all the fake THEORETICAL money that they stuffed in banks in the form of debt that they promised to pay back with money they don’t have, will crumble. Then the banks that hold that debt will have to admit that it isn’t worth anything, and they crumble. Then the people who invested in those banks to give them money and buy their own debt, like Italy…their investments crumble, and it starts a domino effect of people and countries and corporations having to admit that the theoretical money they stashed away doesn’t really exist.

And the bubble bursts. It’s the biggest bubble in the history of the planet. What happened in ’08 was only the bubble getting bigger and growing on the backs of sovereigns instead of banks. It just shifted one tier higher, that’s all.

I don’t know what will happen when this thing explodes, but it will be worse than anything the world has ever known economically. And when it does, nobody will want the status quo ever again. They’ll want Ron Paul, whether he’s the republican nominee or not.

There’s simply no other way he can win. And if it doesn’t happen in time, then we’ll have clueless bum in the White House who will have absolutely no idea how to handle it when it does. So let’s hope it collapses in time for the people to elect the right man.

Listen to this starting from 12:15.