There's an excellent piece in today's Mises Daily by Chris Brown which highlights a lot of what I've been saying over the past several months: fiscal 'stimulus' is nothing more than a colossal waste of resources. Here's an excerpt:

"It turns out that Australia's Prime Minister Kevin Rudd is going around town breaking windows by, well, demanding they be built. There are over 35,000 construction and maintenance projects planned across Australia over the next 12 months. This includes AU$49 (US$39.4) billion dedicated to "nation building infrastructure," or crudely AU$2,200 in taxes for every man, woman, and child residing in Australia."

As long as people continue to believe that jobs are all that matter, we're doomed to repeat the mistakes of the past over and over again. Even if the 'stimulus' increased GDP in monetary terms and allowed us to stave off a technical recession, it will not create any additional real wealth or production in the economy; at best it will merely divert it.

Elsewhere, the RBA released their latest financial aggregates. Nothing too surprising in there, with monetary growth (M1, M3, broad money, money base, currency etc) all remaining about 15% YoY. Two noticeable changes were the increase in term and other non-government deposits by almost 30% YoY indicating that people are increasing their savings which is a good thing. A more worrying sign is that lending to the government by all financial intermediaries (AFI's) was up 273% YoY, a perfect example of the government squeezing the lending industry. At some stage the banks are going to have to increase the interest rates on their loans at which point the RBA will need to decide whether they a) sit back and watch (possibly raise rates too); or b) start printing money to keep rates down, thereby causing inflation.

Interesting times indeed...

Never in a thousand years would I have guessed that two industries with massive government involvement, namely Australia Post and Compulsory Superannuation schemes, are receiving flak for under performance. Hah!

AUSTRALIA'S superannuation funds recorded the second worst investment performance among the 30 OECD countries in 2008.

Forced superannuation tends to result in a misallocation of scarce resources to uses that are not optimal for many people. It's the classic "one size fits all" mentality that plagues all socialist policies; regulatory solutions that consequently stifle the free market's innovation and creativity and in the process restrict competition by raising entry costs. Friedrich Hayek referred to this as the "pretense of knowledge" syndrome infecting central planners. If the government really cared about its people it would stop meddling; order and fairness come out of the spontaneous interaction of thousands of voluntary free market transactions, not from latest political scheme concocted to win votes.

Our superannuation industry is heavily regulated by the government and hence utterly inefficient and wasteful. It's no surprise that they performed so poorly when the only people who gain are those who sit on the massive cash piles - and once you remove or make very difficult not to let them sit on the massive cash pile, the incentives to do well are virtually gone. On the contrary, you'll probably get calls from both the people on the pile and their governmental allies for increases in forced Super contributions!

The OECD Pensions at a Glance 2009 report also notes Australian seniors had the fourth highest rate of old-age poverty in the OECD in 2006, more than double the average.

"Public pension spending is only 3.5 per cent of national income in Australia compared with an average of over 7 per cent of GDP in OECD countries.''

This is a classic Argumentum ad populum, where "...if many believe so, it is so." Just because the rest of the OECD -- the ones who appear to have an old-age 'problem' that makes ours pale by comparison -- force their people to subsidise old age doesn't make it the right solution for us. In fact, the correct solution would be to abolish all future public pension spending and end this mess before it gets out of control (people currently on pensions should continue to receive it - this is a delicate issue and needs to be phased in slowly as the government promise of a pension has caused many people to alter their intertemporal preferences and hence over consume).

At the end of the day, the state's involvement in retirement security creates calculational confusion, resource misallocation, mismanagement and free riding. The real cost of the current mess will be borne by future taxpayers, who are paying for the pensions of the present retirees but can expect to receive little in return. As I've mentioned before (here and here), retirement and government pensions are a state-created concept full of economic inefficiencies, promoting waste and irresponsibility. We need to let people decide for themselves, to let individuals and families make rational and responsible decisions that enable them to provide for their old-age needs. Phasing out old-age benefits and returning to sound money so that people can actually save for the future would be a good start.

For the second part of this post, Australia Post is raking in the complaint letters! Consumers have no alternative as the government forbids competition so their only recourse is to complain; in a free market they would simply vote with their wallets and Australia Post would be out of business if they didn't clean up their act,

Australia Post received 65,000 complaints in 2007 about failures to redirect mail.

"Australia Post and its staff need to be a little more responsive to the problems that people can encounter," he said.

"[It needs to recognise] that this is a real problem for Australia Post and can cause real disadvantage and inconvenience to people is part of the solution."

Mr McMillan says the organisation's response to complaints also needs to be addressed.

This has been covered to death, but with no profit motive, I'm not optimistic that they'll address their "issues"...there's no incentive to!

As usual, with all of these problems, the simplest solution is often the best: get the government out of the way and let the free market work.

You can't make make this up: the government has decided to introduce new credit laws to punish "dodgy lenders". Not only does every lender now have to be licenced which in itself adds operating costs and red tape, but they're also subjected to laws requiring them to let borrowers "...request a variation to their credit contract if they suffered financial hardship." It's good to see that a voluntary contract between two parties is now worthless in this country. What's next, laws against usury?

It's always the same with the government: if the existing regulation doesn't work then just add yet another layer that strips even more liberties, adds more red tape, increases the costs for private enterprise and ultimately hurts the consumer, the very people they're trying to "protect". As interest rates rise thanks to cumbersome regulation and the inflation of the money supply, watch the government get even more heavy-handed in the loan industry. They will probably condemn lenders for charging "too much", like they can possibly determine what is "too much" or "fair" without the market's price mechanism. Then they'll force down rates, banks will stop lending (they'll probably simply invest themselves) and the politicians will "fight" the huge underground consumer loan industry they created that doesn't take your house, it takes your fingers.

The banks don’t prey on the poor. They offer them a service; no one is forcing them to agree to it. The price is right for them at the time they take the money, that’s perfectly legal. The right to buy or not to buy is vital to economic well-being and, of course, to personal liberty. Individuals need to be responsible for themselves and try to avoid the losses that result from mistakes. If people are constantly bailed out, the loss comes out of the public purse (or the lenders) and they are relieved of personal responsibility. They can then waste and lose just as much as their inherent laziness may dictate!

Remove all of the banking and lending regulation and allow the free market and competition to work. We're on a slippery slope to a place no one wants to go (politicians excluded) and these do-gooders who think they're saving the world are leading the charge, systematically removing individual liberties and freedom as they go. As Ayn Rand said, we support the smallest minority of them all: the individual.

The fast food chains have "voluntarily" restricted what can be promoted to children under the age of 14 - I'm sure there was no pressure from the government at all. As I wrote earlier this month, where does this end? When does the heavy hand of government stop deciding what's "in our interests" and what the "right choices" are? People used to say, sarcastically, when smoking was being "disincentivised", that the government would eventually even regulate what foods we're allowed to eat, something that is now a reality!

"Forcefully imposing your will on others through the use of government is never the correct means of achieving a desired end and will only result in further destructions of liberty and freedom down the road."

Smoking Police; Food Police; I wonder what the next target will be once fast food is outlawed or simply made too expensive to exist?

There's a great analogy in Thursday's Mises Daily by Llewellyn H. Rockwell Jr demonstrating how low interest rates alone will do little to "fix" the global economic crisis.

To understand the implications, imagine if a fine restaurant advertised a five-course meal and French wine for all comers — at $1 each. Would the customers be exuberant? You bet. They would be wild with anticipation, choosing to stand in a line and hang out at the restaurant rather than do other things with their time.

The restaurant would be packed and happy, though of course it couldn't sustain this in the long run, but the fun is great while it lasts. At some point, reality kicks in. The manager notes that there are no more tables and maybe no more food. The employees are exhausted. Moreover, the balance sheets don't line up: they are losing money on every meal they serve. At some point, the manager is going to have to announce the bad news and everyone is going to have to go home.

This is roughly what happened with the current boom and bust. Policy makers, however, seem to be under the assumption that they can keep the boom going on forever simply by dropping the interest rate ever lower. This is something like a restaurant owner thinking that he can continue to have people wait in line even though he has no tables or food or servers remaining. It is a physical and economic impossibility for him to make good on his promises.

At some point in this process, people begin to drift away and go on to other things. The manager can continue to advertise $1 meals in the hope of stimulating his business but this is simply illusion. No one is buying it; even if they did, the restaurant can't make the balance sheets work out. We can venture a prediction here that this restaurant will not be stimulated. It will enter into a prolonged period of inactivity until nothing is left.

Policy makers can lower interest rates as much as they like but at the end of the day, the only way they can maintain a rate below that of the market (the rate based on the pool of real savings plus risk, time and so on) is through increases in the quantity of money. They have to produce additional quantities of money and offer it on the money market (to banks) to maintain any downward pressure on rates at all - with the consequence being price inflation. This whole process is nothing more than wealth redistribution as each unit of the money supply is diluted and the new money is not distributed evenly; it inevitably reaches certain people first - the bankers, government, etc. These people can then buy more out of an unchanged supply of real goods which in turn increases money prices - the prices the rest of the population now pays with their depreciated dollar savings.

Increasing the quantity of money does nothing to benefit the economy as a whole but does benefit some; namely governmental officials, policy makers and bankers at the expense of everyone else, especially the poor and people on fixed incomes. Not only that but it deceives firms by distorting a very important price signal, encouraging malinvestment and sowing the seeds of the next crisis. Steve Horwitz provides an excellent summary, noting that by lowering the interest rate, it gives firms "...the impression that the public is now more patient and more willing to wait for consumption goods. Had the expansion of loanable funds been financed by genuine savings, the lower interest rate would be sending an accurate signal about the public’s wishes. However, when the expansion is caused by an excess supply of money rather than a shift in the public’s time preferences, the tight relationship between market rates of interest and underlying time preferences is broken."

If these Mercantilist policies of monetary inflation are maintained the question is not if we're going to have another recession after this one, but when.

As far as our political system is concerned, I'm not a fan. Left, Right, it's all the same, all part of the same corrupt system, the only major difference being from whom they take the money and to whom they give it. Then there's the independents and minor parties - in particular Nick Xenophon and Barnaby Joyce. They often hold the senate ransom to the highest bidder - in other words they sell their vote to whomever is willing to fill their constituent with the most plundered loot. Then there are the times they come up with various schemes and impose them on the population, the most recent being a move to stop petrol outlets from reducing petrol prices. Yes, you heard me: they're arguing for higher petrol prices and using "competition" to justify it!

Independent Senator Nick Xenophon and National Party Senate Leader Barnaby Joyce are combining to stop major oil firms and supermarkets from offering reduced petrol prices, in a bid to force out smaller competitors operating in the same locality.

The two senators are jointly sponsoring a private members bill which would require oil companies and firms, such as Coles and Woolworths, to charge the same price at two or more of their outlets if they are within 35 kilometres of each other.

Senator Joyce says the move will ensure greater competition and stop the larger operators from forcing out the smaller outlets and then charging whatever they want.

"This is a great step for our nation to make that," he said.

"We are piece by piece trying to build up a platform that says in our nation you have the right to go into business and not to be forced out by guerilla-like tactics of people around you."

Yikes. More like a great step backwards, Sen. Joyce! These two have obviously fallen victim for the neoclassic theory of competition where the only thing that matters is the number of competitors. Unfortunately the real world doesn't work exactly as the neoclassical models say it does - in fact, when the oil companies in 'cohesion' with the big retailers drive down the price of petrol it's a good thing as people now spend less of their income on petrol and therefore have more to spend or invest elsewhere, increasing their wealth and wellbeing. Yes, the smaller competitors will cease to exist because they are no longer competitive, but that's not necessarily a bad thing. The only way these "larger operators" can force out their competitors and then maintain their position is by improving their products and/or narrowing their profit margin to the point that competitors cannot enter. Whether or not they're charging above marginal cost is irrelevant; if other companies still can't compete, it's because their efficiency or productivity is such that it's not possible (profitable) to compete. This is a win for consumers who don't care who or how many firms provide them with their petrol, only that it's the cheapest possible.

These large firms are not able to "charge whatever they want", contrary to what Sen. Joyce believes. I think a real life example of how "predatory pricing" is nothing more than a myth that politicians use to justify additional regulation is called for here. I'll quote from Leeman in "The Limitations of Local Price-Cutting as a Barrier to Entry (1956)", who points out that Rockefeller himself failed to successfully utilise "predatory pricing":

"According to a widely accepted view, he softened up small competitors in the oil business by a period of intensive price competition, bought them out for a song, and then raised prices to consumers to make up his losses. Actually, the softening-up process did not work...for Rockefeller usually ended up paying...so handsomely that the sellers, often in violation of promises made, proceeded to build another plant for its nuisance value, hoping again to collect a reward from their benefactor...Rockefeller after a time got tired of paying..."blackmail" and...decided that the best way to hold the dominant position he wanted was to keep profit margins small all the time."

The reason large rather than small firms dominate so many markets isn't a result of "predatory pricing" but rather the result of taking advantage of economies of scale. They are then forced to maintain low prices for fear of potential as well as actual rivals. As long as competition is free, the only thing that can prevent this from happening is governmental interference.

Unfortunately Sen. Joyce and Xenophon missed this lesson. Thanks to their guerrilla-like tactics and the strong-arm of the government behind them, we are now forced to accept higher petrol prices than would exist in an unhampered market. A great step for our nation indeed!

An excellent question. though most would say ‘who cares’?  Let us examine the end result of each scenario:

INFLATION       The value of your money progressively decreases as central banks print enough money to prevent deflation (a contraction in the money and credit supply).  Anyone who has a debt will have no problems paying off the nominal value of the debt, as the nominal value of your wage increases over the nominal value of your debt.  Example: this year the price of bread is $1… next year the price of bread is $3.  I have covered this phenomena in some detail in previous posts, I encourage you to ask me questions if you still want some help understanding the concept of inflation.

DEFLATION      The value of your money progressively increases as central banks are unable to print enough money to prevent the contraction in the money and credit supply.  If you have a debt, it is almost impossible to pay off the debt as it’s real value increases (nominal value is unchanged) while the nominal value of your wage decreases.  Example: the price of bread decreases from $1 to 50 cents in one year.  The collapse of lending, increased number of loan defaults, all contribute to a contraction of the supply of money, which makes the individual value of money greater (think the polar opposite of inflation).

In short… INFLATION = good for people with debts.  DEFLATION = bad for people with debts.

Now “deflationists” will not contend with the assumption that INFLATION can occur, even hyperinflation like Zimbabwe, but they see it as highly unlikely as the level of money printing would be astronomically high.  Furthermore, any attempts to neutralize the effects of deflation with money print would hopelessly collapse as seen with the central bank of Japan in the Asian Financial Crisis.  Also, any money that is printed goes directly to creditors and doesn’t touch the local economy to raise the price of everything.  Post-Keynesian economists like Steven Keen, a man whom I deeply respect, also contend that there is evidence to suggests that the money print by the central bank precedes the increase in the money supply (M2 to be exact)…. which means that the central banks are printing money in response to bank insolvency.  Thus, the increase of $1-2 trillion in the Federal Reserve’s balance sheet was in response to the ‘bank runs’ which took place at the end of last year, rather than an effort to create new money to pump into the local economy.

Inflationists on the other hand say that the government is perfectly willing to go as far as to print our way to hyperinflation.  More importantly, that the government is currently pursuing a course that will inevitable lead to hyperinflation.  They contend that the government has a course of trading private debt with public debt, these are also known as bailouts and they continue to this day as the government is pursuing a relentless nationalization agenda.  This isn’t perceived to be so much of a problem as the price of the debt (i.e. the interest rate) is quite low, thanks to the majority of the debt financed by short terms T-bills (1-3 years bonds).  When these bonds are required to be paid off, the government rolls the debt over into new bonds… or simply put, it borrows money to pay off borrowed money.  This is somewhat manageable when the economy is in a boom phase, where there is predictable growth that can theoretically outpace the increase in debt.  The failure of neoclassical economics for both monetarists and Keynesians was that their models assumed the the economy would be in perpetual growth, which was found to be the case as gravity exists in the economics in the form of finite resources.  As the government increasingly swaps more private debt with public debt and simply rolls over the debt repayments, exponential functions take over and the debt servicing on the debt starts to become impossible.

Pretty soon, people who buy the debt (like China and Japan) start to realize that the US is not going to pay back that money with any real value and stop purchasing this debt (they already have btw).  This forces the US to start doing something called ‘quantitative easing’, which means that the central bank prints money and buys it’s own bonds.  As the money print continues, the government starts to pay creditors the freshly printed money.  These creditors want to dispose of this currency either through exchange into their own currency (as most of the creditors are foreigners) or they will spend it on raw materials or even US financial assets.  As more US money abounds, the value of this money begins to decrease, even outside the local US economy.  As the value of the dollar decreases, the US central bank will be in a trap: the only way to defend the value of the dollar is to raise interest rates, but this will increase the amount of debt the government as to go into to service the existing debt.  And, if the interest rates rise, all of a sudden the credit based economy grinds to a halt as no one can pay back their debts.  If the central bank chooses to ignore that the value of the money is decreasing and the prices of everything are increasing, entering into hyperinflation will occur more rapidly than anyone predicts as they will eventual ‘turn the corner’ on the exponential curve of the depreciation of the US dollar.

The Japanese example isn’t applicable, the inflationists say, as the nature and origin of Japan’s productive capacity and creditors are completely different to the US.  Also there is the tiny little fact that Japan is the largest creditor nation in the world, while the US is the largest debtor nation.  This is a striking point between the two schools… the PKs say that the scale of the debt black hole is too enormous for pure money printing to overcome.  The Austrians are saying that the money printing is being used to swap the private debt with the public debt, and if this process continues then the value of the currency will collapse.

So… which one is right?  The answer is, no one really knows.  Some people will say ‘I’m 100% sure this way or that way’, but in reality, we’re all just economic geeks watching the carnage unfold.  This is exciting to watch, but painful in reality to the people at the bottom of this gigantic pyramid scheme that we call money and banking.

Personally I’m not interested in the little esoteric arguments between the economic schools… and there are many.  I think there’s value in the analysis of the financial system from both schools and both possible scenarios make sense and are plausible.  We’ll just have to see what happens.  In any case, my advice is to horde faith in God and put your money in assets that will protect you from either scenario, which are precious metals (i.e. gold, silver, platinum).

God bless,

Dr Washo

PS   And if you’re a US citizen, support bills like H.R. 1207 ‘The Federal Reserve Transparency Act’ aka ‘Audit the Fed’

It must be the most revered word ever uttered by a politician: "fair". All the people want is a "fair go"; a "fair wage"; "fair prices"; their "fair share"; a "fair deal"; ad infinitum. They use it every day to justify anything they please to cheers from the people. One policy where it is used without fail, which (almost) no one questions, is the progressive tax system.

Somehow a free society, one where individual property rights are vehemently protected, people are free to keep what they labour for, what they save, what they buy (i.e. their own property), is "unfair". Unsurprisingly, Professor Peter Whiteford from the University of New South Wales in last Friday's Australian Financial Review (AFR) reported that we now have the most progressive tax system in the whole of the OECD:

“Australia had the most progressive tax system in the Organisation of Economic Co-operation and Development, redistributing more tax from rich to poor than any other country.”

It's a good time to be poor in Australia, as the ..."poorest 25 percent receive 12 times the benefits of the richest 25 percent" while they contribute considerably less in tax (ibid). Of course, very few people are voluntarily in the bottom 25 percent. It’s the policies of government that encourages them to stay down there with generous welfare payments; minimum wage legislation; and an annual debasement of the currency of approximately 10-20%, creating a moving target that they're unlikely to ever reach. The government has effectively created a class that is solely dependant on the state for its very existence.

Here's a great quote from Lysander Spooner's No Treason No. 6: The Constitution of No Authority (1870):

"The highwayman takes solely upon himself the responsibility, danger, and crime of his own act. He does not pretend that he has any rightful claim to your money, or that he intends to use it for your own benefit. He does not pretend to be anything but a robber. He has not acquired impudence enough to profess to be merely a “protector,” and that he takes men’s money against their will, merely to enable him to “protect” those infatuated travellers, who feel perfectly able to protect themselves, or do not appreciate his peculiar system of protection. He is too sensible a man to make such professions as these. Furthermore, having taken your money, he leaves you, as you wish him to do. He does not persist in following you on the road, against your will; assuming to be your rightful “sovereign,” on account of the “protection” he affords you. He does not keep “protecting” you, by commanding you to bow down and serve him; by requiring you to do this, and forbidding you to do that; by robbing you of more money as often as he finds it for his interest or pleasure to do so; and by branding you as a rebel, a traitor, and an enemy to your country, and shooting you down without mercy, if you dispute his authority, or resist his demands. He is too much of a gentleman to be guilty of such impostures, and insults, and villainies as these. In short, he does not, in addition to robbing you, attempt to make you either his dupe or his slave.”

The only people who would lose in a truly "fair" system where people are entitled to reap the fruits of their labour are the politicians, their academic allies and the thousands of interest groups that exist solely to lobby the government for "favours". The progressive tax system along with other policies that target "fairness" or "equality" punish everyone from every income bracket, decimating productive activity by discouraging hard work and rewarding sloth and waste. If it is morally correct to forcefully take from some and give to others or to favour one party at the expense of another, where does it end? Would it not be better to just take everything anyone earns and redistribute it accordingly? The progressive economy we have is ever increasingly leading us down the road towards a command system. The whole moral compass or "fair go" justification for a progressive tax system is one big reductio ad absurdum, unless of course socialism IS the goal. One wonders if Julia Gillard ever gets elected whether or not she will take these logical steps and lead us into poverty, sorry, “equality”.

What is wrong with a system where the people who have earned money are entitled to keep it in its entirety? Surely individuals who have proven that they can best satisfy the wants and needs of consumers, who continually seek to make cheaper and better products than their competitors, can be trusted to provide benefits for "society" more than politicians who earn their stripes by conciliating pressure groups and supporting projects that will win them votes. Surely the entrepreneur who time after time risks his own money to finance products and drive down prices for everyone is better placed than a politician who never risks his own money and is always subject to bribes and corruption. Surely a system where savings and wages aren’t continually eroded is better than the constant debasement of the currency under the guise of maintaining a “steady price level” where inflation and unemployment often run rampant.

Abolish the income tax and return to sound money by taking the ability to inflate away from the Reserve Bank and the state. That is the key to achieving growth, wealth and a “fair go” for everyone, not more regulation and big government aimed at saving people from themselves.

The prevailing opinion on the streets is that capitalism has failed and the government is a necessary evil required to "fix it". This opinion is so well ingrained it's almost impossible to sway with logic and reasoning; indeed, people seem to be passionate in their hatred towards the "greedy banks" and support of "job creation". This all follows the media storm around the banks raising interest rates despite the RBA keeping rates on hold, with a follow-up RBA study indicating that, contrary to what the Commonwealth bank was claiming, funding costs have not increased.

The issue of the whole central banking system aside[1], why is everyone so worried about the banks charging an interest rate (which is the price of borrowing capital) higher than it costs them to acquire? That's like saying because it only costs a bookstore owner $5 to produce a book, they shouldn't be allowed to sell it for above $6, as that's a "fair price" and anything above that would be "exploitative" (as determined by some all-knowledgeable bureaucrat). Let's not lose sight of the fact that every exchange is voluntary and no one was or is coerced into borrowing money (government "incentives" to take on debt aside!). The real issue, of course, is the government intervention that prevents competitors from entering the banking business. As long as the government doesn't restrict competition, no one is able to either exploit labour or remain in a "monopolistic" or "cartel" position for long.

In other news, I also noticed that today's Financial Review (Australian Edition) contained an article showing that of the OECD nations, Australia has the most progressive tax system - we outstrip even the quasi-socialist European countries as far as wealth redistribution and welfare 'nanny' state goes[2].

Finally, I've updated the Recommended Reading section with some great books and essays which anyone is free to read or download. One in particular is "The Myth of the Failure of Capitalism" by Ludwig von Mises, a short essay addressing the fallacious views that the market and not the government is to blame for this crisis. Here's an excerpt:

The crisis under which the world is presently suffering is the crisis of interventionism and of state and municipal socialism, in short the crisis of anticapitalist policies. Capitalist society is guided by the play of the market mechanism. On that issue there is no difference of opinion. The market prices bring supply and demand into congruence and determine the direction and extent of production. It is from the market that the capitalist economy receives its sense. If the function of the market as regulator of production is always thwarted by economic policies in so far as the latter try to determine prices, wages, and interest rates instead of letting the market determine them, then a crisis will surely develop.

Click here if you would like to read the full essay.

---

[1] I personally think we need a return to sound money and free banking to avoid political manipulation of the money supply -- which, by the way, has been increasing by almost 20% YoY for the past decade. I'll provide a nice chart showing this growth within the next week.

[2] As with the above, I plan to write about this sometime in the next two weeks.

One of the arguments I've noticed flying around the blogosphere lately by uninformed (I say uninformed because I do believe they've been legitimately misled by politicians and their court economists - this isn't entirely their fault) individuals is that the stimulus payments will help us fly out of the global financial crisis ahead of the rest of the world and put us in a great position to pay off the debt 'down the road'. These individuals have debated with themselves two perceived alternatives: one, to plunge along with the rest of the world into the depths of the global financial crisis; or two, take on (public) debt and 'stimulate' our way to prosperity, only to worry about the debt during the next 'boom' when it will be far easier to repay.

The first misconception, or fear, that we'll plunge further into the doldrums of the crisis if no 'stimulus' is undertaken by the government is only partially true. If the government sat on its hands but continued to take tax and other revenue from the people (while 'doing nothing'), less resources would be available for the people to spend, save and invest and therefore the economy would be worse off. The appropriate action for the government to take is an immediate reduction in taxes aligned with a cut in spending. This would provide the private sector with additional capital that they can then use in line with consumer preferences and 'stimulate' the economy (unlike government spending which is more often than not wasteful and not in line with preferences). The cash handouts issued by the government were nothing more than wealth redistribution disguised as good policy as the majority of tax revenue is collected from the top echelon of Australians, the very people who saw none of the stimulus.

While the fear of inaction is partially justified, the response of the incumbent government was not and is nothing more than political opportunism of the lowest form. At the end of the day, regardless of how many flawed economic models or cherry-picked statistics the government produces to justify itself, every dollar 'injected' into the economy must first be taxed or borrowed out of the economy. Thus, as mentioned earlier, it's nothing more than income redistribution. It does nothing to increase productivity or employment and therefore nothing to create additional income - and that's the best case scenario! More likely, government expenditure will weaken the private sector by directing resources toward less productive uses (e.g. more consumption and less productive investment) and thus impede economic growth.

Before moving on to the issue of deficit spending, I would just like to address one obvious argument that always seems to arise: that government spending takes from 'savers' and gives to 'spenders' which produces multiplier effects (more spending, growth), ad nauseum. To answer this justification of government spending, lets look at two types of savings (obviously there are more - real estate, shares, and so on, but that's irrelevant here): one, people simply hoard cash in their mattress; and two, people 'save' it in a banking deposit account. In the first case, the only way someone could believe that this would be bad for the economy (result in a 'deficiency' of aggregate demand) is if there exists confusion between 'money' and 'wealth'. If people accumulate money for the sake of accumulating wealth (e.g. stuffing it in their mattress never to be seen again), the price of commodities will continue to fall relative to money, therefore 'deficiencies' in aggregate demand will never result. If there is less money chasing the same number of goods, everyone else holding money will benefit through an increase in their purchasing power. The second case on the other hand is more straightforward, with any money deposited in banks being subsequently lent to others to spend. So regardless of what people do with their money it will be used!

To move on to the second claim that a deficit is not an issue because it will be easy to pay off in the future, let’s take a look at the area where there is an apparent "consensus" amongst economists: deficit infrastructure 'investment'. It's true, our highways are probably collapsing; our schools are dilapidated and badly in need of upgrades; and our public transport systems are third world. But the solution is not more tax dollars funnelled into this bottomless pit of bureaucratic waste. These services should be privatised: yes, roads, rail, buses, all of the so called 'social' infrastructure should be placed in the hands of the market, the only system that is capable, reliable and efficient enough to own and operate them. The fact that most people can't even consider private roads (beyond the token quasi-private toll roads) shows how effective the government run education system has been at manipulating and misleading people with false economics, filling the minds of entire generations with an inert fear of the market and into believing the fallacy of "public goods". Privatised infrastructure and the market price system - aligning investment with the preferences of the people rather than bureaucratic whims - is the only way to avoid further infrastructure waste.

That issue aside, lets examine the claim that infrastructure is one of the best ways to 'stimulate' the economy. The first claim is that it creates thousands of jobs, but one need not look far to show the stupidity of this idea. Yes, infrastructure will create jobs, but only because it is displacing them from where they are more urgently needed (it's impossible to tell if they are actually needed in infrastructure because that sector of the economy is socialised and is therefore guesswork at best - the price system is the only efficient method of allocating labour and capital). The only way the government can create these jobs is by taking money from the private sector, thereby replacing efficient jobs (that may well never be created) with inefficient and unsustainable jobs with the overall gain to the economy quite possibly negative! Only by chance can the government stumble onto a productive investment that increases future growth and productivity, but the amount of capital that is certain to be wasted in other projects will more than offset the potential gains.

The idea that these projects are justified because they're funded with borrowed dollars instead of tax dollars is equally ludicrous. The money from deficit spending has to come from somewhere and as the government produces no wealth of its own, we either have to print the difference, raise future taxes or do a bit of both - all of which hurts the economy. By borrowing, the government raises interest rates for the private sector, restricting the available capital for business. If they decide the debt is too hard to service with future tax dollars alone, they will start printing, resulting in inflation that takes real value away from the private sector and anyone who holds dollars. Whatever the government does to finance the deficit they will crowd out private investment and waste resources through countless pet projects, pork barrelling and other bureaucratic waste.

Finally, there is often a claim that there are "idle resources", in other words unemployment in the economy and that government deficit spending helps to re-employ them. The problem with this, as Henry Hazlitt clearly outlined, is that "...unless there were some serious lack of coordination among prices, costs, and wages, mass unemployment would not exist in the first place. When it does exist, the only appropriate cure is individual adjustment of prices, costs, and wages to each other - the return of coordination. But this can be brought about automatically only if the competitive forces of the market are given free play." Allowing these forces to work by removing their causes - government intervention - is the road to recovery, not the foolish notion that more wasteful debt and spending by government will somehow fix our economy.

When Wayne Swan claims that his spending will still be "flowing through the economy" for ten years, he's correct: his reckless spending will alter future economic growth for the worse. Economic growth results from producing more goods and services (not from redistributing existing income), and that requires real savings and productivity. We're going to be paying for the reckless socialist policies of this government for many years to come and only when people begin to realise the fallacies behind big government, stimulus and deficit spending do we have a chance at reversing this course.

Usually when I see the name 'Simon Crean' in the press I shudder slightly and wonder what kind of BS I'm about to read but on this (rare) occasion, he's actually correct.

"I do not have a problem with a branding exercise that promotes as a marketing tool why [an] Australian product is good quality, value for money, because there's plenty of things we can promote in that regard."

"There's lots of markets we can't get into, and that's why we have to spend so much effort breaking down those markets and getting access," he said.

"We won't do it if we join the downward spiral to protectionism, and mandating the purchase within a country is protectionism; pure and simple."

Now, he's correct in that there's nothing wrong with a branding exercise - anyone should be free to start their own 'Buy Australia' marketing campaign - but the government should avoid getting involved. Unfortunately I think that, on the contrary, Crean is implying that the government will provide assistance to this campaign, which amounts to nothing more than a subsidy to local producers. These are the kind of indirect subsidies that often 'slip through the cracks' as most people are completely ignorant (due to a lack of economic understanding) towards them. Indeed, they quite often blindly support them under the guise of 'nationalism'. What I want to know is if people really care, why don't they campaign for voluntary funding? Surely that's better than forcefully taking funds from the population, many of whom will see no benefit at all from the campaign.

As far as the anti-protectionism stance, kudos to Mr. Crean (although one has to question his motives - resource revenue from China, in other words more money for his trough, and the possible backlash that could occur perhaps?). I wish the same could be said for his new apprentice, the young 'up-and-comer' and new Employment Participation Minister Mark Arbib (yikes, you can't make this stuff up), is "...listening to union demands for a 'buy Australia' policy". I used to have the misfortune of occasionally watching him talk before work (daylight savings shifted the programming!) and disagreed with almost everything he had to say - mind you, I wasn't agreeing with the Liberal representative either. I fear if he gets anywhere near policies that promote "jobs" or "local industry" or (insert union rhetoric here), he'll be quite successful at dragging our economy through the mud. I think Comrade Rudd even has him lined up as a future Labor leader - what a scary thought!

Every day we see examples of people automatically resorting to the law and the cold hard fist of government regulation at the first opportunity without even considering that perhaps, just maybe, they should simply take some personal responsibility for themselves. In this example, I’m speaking of a report released today that "...reveals that more than 50 per cent of people surveyed [survey of 800 adults] support a ban on junk food advertising that targets children". Not only that but apparently 9 out of 10 people surveyed want more government regulation associated with the "...use of toys and cartoon characters as advertising tools". What I want to know is why are people always so willing to give up more and more personal liberties to achieve their own selfish, subjective goals? Who decides where the endless regulation ends; at what point do we cease trying to control people as if they're nothing but mindless robots who can't make choices for themselves? This brings me to a statement by the Director of the Public Health Advocacy Institute, Mike Daube, who says that "...the health of children needs to come before profits",

"This survey puts the junk food industry on notice that it has to reduce the vast amount of promotion that is just swamping us," he said.

"Any survey that tells you that over 90 per cent of people want action surely has to tell the junk food industry this the time to back off."

The problem is that just because the majority of people in a survey by the Obesity Coalition (one can’t but wonder how the questions where phrased and what the demographic of the people surveyed was) want more regulation doesn’t mean it’s the correct policy. As Mises would say, that a fact is deemed true by the majority does not prove its truth. Also, wouldn’t the only logical way to protect kids completely from ‘junk food’ be to either ban the products altogether or resort to the method the Soviets used and simply ban any kind of advertising or marketing, with just generic products remaining? Those issues aside, let’s examine this a bit further.

One, advertising does not possess the coercive power that Mr. Daube thinks it does; it can’t force products on the children of the world. Advertising is not selling; it’s a mere statement of words. When on the one hand, selling a product to a child without the parent’s consent or contrary to the parent’s wishes constitutes a violation of the parent’s rights (as legal guardians), statements of words - provided they do not constitute fraud - do not violate individual rights. Therefore, the mere statement of words, including statements used in advertisements, should be free of legal restraint.

Two, it should be the parents responsibility as to what their children should and should not do and not that of the state. The parents are the ones who are responsible for their children. They raise them until they’re able to take care of themselves and in the process they are responsible for what their children eat, what they wear, what they do before and after school, what they watch on television and what they buy in stores. If parents don’t like what their children are watching on television, then it’s their responsibility to turn it off. If parents don’t like or approve of what their children are buying, it’s their responsibility to stop such behaviour, certainly not the governments.

Three, in a free market no marketer or advertiser can survive without two key values: favourable word-of-mouth communication and repeat purchasers. These are derived from providing a quality product and engaging in honest dealings and result in goodwill or a favourable reputation for the product or business. It’s the competition for this reputation that protects consumers from unscrupulous, devious and manipulative advertisers and salesmen. An excellent reputation is something every business strives to achieve – it takes years to earn, by satisfying customers repeatedly through honest dealings and quality products. Not only that, but if the state regulators didn’t intervene, I’m positive there would exist far more ‘independent regulators’, private enterprises that test foods and give them their ‘stamp of approval’, providing an indicator for customers (there are examples of this already, although for them to work properly they have to be free of political and regulatory interference – we don’t want a repeat of the debacle that was the rating agencies involved in the financial crisis!).

Finally, no one is "forcing" these kids (or rather, their parents) to buy these products. To suggest that man is nothing more than a mindless automaton that responds only to impulses and possesses no free will is absurd. People are free to choose whether to accept or reject a product by a company and don’t need some greater authority imposing their will, their own subjective values, on others.

Contrary to what Mr. Daube believes, the profit motive is the best way to improve the health of our children, not regulation, for all parents need to do is adjust their buying preferences towards healthier products and the producers, the entrepreneurs, will respond accordingly to fill this void. This is because, despite the best efforts of the government to prevent it, the capitalist mode of production excels in supplying the ever changing demands of consumers with more, better and cheaper goods in line with their preferences. If 9 out of 10 people did indeed want junk food advertisers to cease targeting their children, they should simply stop buying their products. Forcefully imposing your will on others through the use of government is never the correct means of achieving a desired end and will only result in further destructions of liberty and freedom down the road.

While trawling the endless sea of information known as the internet you occasionally stumble upon a piece of work that 'jumps out' at you. Now, this isn't always in a good way: more and more often, especially in the midst of one of the largest global crisis's we have experienced, the socialists tend to show their true colours. You know the type, the one's who would never fully endorse free markets or capitalism, the ones who would always support additional regulation and 'favours' for interest groups no matter how ridiculous, while simultaneously claiming to be 'conservatives' or 'believers' in the free market. They see this as the perfect opportunity, the self-professed 'failure of capitalism' (when we all know that's not true), to spread the misery of socialism to us all. That's the true difference between advocates of laissez faire and big government: the former refuses to use, and fights against, the use of coercion on markets and individual liberties while the latter encourages it and actively seeks it.

The essay in question is a mammoth piece by Thomas Geoghegan, a Labour Lawyer, entitled "Infinite Debt - How unlimited interest rates destroyed the economy", published in Harper's Magazine (April 2009). The essay itself is far too long to reference or refute line-by-line here, but rest assured it's packed to the brim with a mix of fallacies, confusion, misunderstanding, emotional pleas and just plain old socialist drivel. In this article I will address just the final part of his essay, his 'five point plan' (no doubt a subtle reference to the five year plans of the communist countries?) for the United States.

"First, we have to pass a new type of law against usury that accepts the world in which we all live now. The saintly Illinois Senator Dick Durbin has proposed an amendment to the National Banking Act, to put a cap on interest at 35 percent. But that would let too many banks go on as before. Here's an alternative: let's cap interest at nine percent, then let a federal agency give exemptions to applicants - banks - that want to raise rates up to Durbin's limit (I would stop at twenty percent)."

"To get the right to this higher rate of twenty percent, however, the bank would have to demonstrate each year, to a federal agency, that it has a reputation for honesty and fairness and that it had not been found guilty of any fraudulent or bad-faith practices, such as the use of hidden fees or charges, or the unfair garnishment of someone's pension. I'm aware that this standard is vague. I suppose few licenses would be denied. But the very existence of this procedure - and the right of you and me to email our gripes to a federal agency with the power to exert extreme pressure - would have a chilling effect on banks and keep them from getting too near unconscionable conduct or charging the highest possible rates."

This first plan is particularly easy to refute, but first lets touch on the issue of usury, for the author attacks this concept throughout the entire essay. The definition of usury is interest on a loan. It’s perfectly natural and lawful and is as mutually beneficial to the borrower as it is to the lender. To assert that someone who has produced capital should then lend it out for free, without compensation (or at a rate of compensation lower than they deem fair), is preposterous.

Mutual, beneficial, voluntary exchange between two consenting individuals is perfectly fine. If they were coerced into accepting the contract then the contract is void, that’s called fraud. If not, then who is the author to decide what people should and shouldn’t be allowed to do? The owners of the capital are free to charge whatever they please: it’s their property you’re trying to borrow. If the author has a problem with it, he’s free to open up another payday stand next door and charge a lower rate of interest. This will do far more damage to the currently operating businesses than any amount of legislation, while simultaneously benefiting the customers, much more completely and efficiently than any amount of legislation. It would also be much cheaper than having the state enforce the regulations, with inspections, arrests and prosecutions. The only reason no one is opening competing loan businesses is because it's highly likely that they would lose their capital: they're not being compensated sufficiently for the risks they're taking with their property.If the government prevents someone from competing, well then there’s the problem! Legislative mandates on interest rates will simply result in the closure shops and leave customers without the service they want at a price they are willing to pay.

Back to the proposal, if this was put into law capital accumulation would fall to disastrous levels as there would be no interest in keeping it, slowing growth and progress significantly. If I have a dollar and someone wants to borrow it, I should be compensated for it. In the time you’re using that dollar, I can no longer use it. If someone forces me to loan it to you interest free, or at a rate below what I feel is fair, it represents a loss to me and a gain for you. When someone asks for a loan, they’re requesting a service. The lender has a right to refuse, or to require, as compensation, an equivalent service.

If the interest rate was forced downward by the recommended law above, the result would simply be a cap on the interest rate below its market-clearing level. What would happen? There would be an obvious and immediate shortage of credit. Not only is this inconsistent with intertemporal consumption preferences but it prevents the freedom of choice and destroys individual liberty. The banks don’t prey on the poor. They offer them a service; no one is forcing them to agree to it. The price is right for them at the time they took the money, that’s perfectly legal. By putting a cap on interest rates, they deprive the poor of this service, because no one would lend them a cent (see above). "If a man drinks wine and not water I cannot say he is acting irrationally. At most I can say that in his place I would not do so. But his pursuit of happiness is his own business, not mine." – Ludwig von Mises

"Second, we should have state-owned banks like the German banks known as the Sparkasse. Maybe each of the fifty states could charter its own bank. Each would issue credit cards at a rate much lower than what the private banks charge. Also: no fees at cash machines, no oppressive collection cases, no gratuitous destruction of people's credit ratings. The catch is that, as in Germany, the US Sparkasse would lend only to the most creditworthy people. That is, the state banks would set benchmarks not only for how the private banks should behave but how the people should behave as well."

Absolutely not. I gather he wants to appoint the boards of this “bank” and provide them with their funds by direct subsidies and by guaranteeing their investments with state bonds. This would, undoubtedly, lead to state-favoured businesses getting the majority of the “loans”. The burgeoning state control of business would swell the state bureaucracy and lead to widespread centralisation and corruption. Small businesses would fail and have their assets swallowed up by big businesses and big banks. No one would have to cater to consumers, just to bureaucrats (that’s how you would be one of the “creditworthy people”). Eventually socialism would ensue. Don’t believe me? This is almost, to the word, what the Italians did as they became enveloped in socialism before the second World War. I believe they call it Fascism.

"Third, we should have at least one or two "public guardians" as directors at the banks and other financial firms we have bailed out with $700 billion in taxes and all the money the Fed has printed. Every financial company into which we have "injected equity" should be required to have government-appointed directors, up to a third of the board. We can use these directors to nudge (if not dictate) what the banks and firms should do. For example, the directors should work to bring down credit-card rates. Through guardians, we can lower rates, bank by bank, by moral suasion and a certain built-in pressure rather than by external decree. The guardians should also demand of us good character if they bring down the rates. "Our directors" should help push capital into manufacturing. Of course, there has to be a reasonable profit, but sometimes a reasonable profit can be three percent instead of thirty percent."

I believe I covered this in the above paragraph. Welcome to communism! Enjoy your journey into poverty and the removal of human liberties! These policies will do wonders at making rich people poor, but they will do nothing towards make poor people rich. Indeed, most of these 'plans' would likely send us back several decades at least. On the issue of "public guardians", I believe Mises summed this up appropriately, "...if one rejects laissez faire on account of man’s fallibility and moral weakness, one must for the same reason also reject every kind of government action".

"Fourth, we should require the banks we bail out to cancel an appropriate amount of consumer debt - especially in instances where people would have paid back the principal by now had the interest rate been more reasonable. My retired schoolteacher, the one with the husband who is deep into Alzheimer's and who has already paid $3,000 on a $1,700 loan, should be let off the hook. The banks we have bailed out should follow the Golden Rule: just as their own debts have been written down or paid off, so they in turn should do unto others."

Here the author tugs on the heartstrings in an attempt to get someone out of a legitimate, binding, mutually voluntary and beneficial contract. People who produce goods can display them for the inspection of the buyer who is, at all times, free not to buy. The right to buy or not to buy is vital to economic well-being and, of course, to personal liberty. He is trying to turn this around, as if some authority, claiming to know what the people want, issuing orders for supply without being able to know the requirements of the buyers! This is how all the mess starts and is why no one saves – individuals need to be responsible for themselves and try to avoid the loss that results from mistakes. If people are constantly bailed out, the loss comes out of the public purse, and they are relieved of personal responsibility. They can then waste and lose just as much as their inherent laziness may dictate!

Don’t bail out the banks and don’t bail out the debtors. Bankruptcy exists for a reason. It’s the most effective way to reallocate resources in line with preferences, thereby reducing waste and hastening the recovery process.

"Finally, we should think about ways to "inject equity" directly into the accounts of working people rather than into banks. The best way to do this is to announce a plan to raise the gross replacement rate of Social Security from 44 percent to something closer to 65 percent, which is still short of the rate in many European social democracies. We can afford this as much as or more than they can."

"We could aim to reach that goal gradually, over the next twenty years, but even announcing the goal encourages future-oriented thinking. It would encourage people to believe that they could invest in real things again, instead of pinning their hopes on the false and predatory promise of a big, Vegas-style payout. The promise of a real public pension that people can live on would lead fewer of us to chase bubbles in good times, even as it gave all of us the confidence to keep spending when times were bad."

How? By printing more money? There's a huge disincentive to save in our society with the constant debasing of the dollar, debtor bailouts, heavy taxes and so on. Rather than forcing people to save (super) or providing them with a pension and other benefits (social security), a return to sound money so that savings aren't forever eroded (indeed their purchasing power would increase over time) would be a good start.

"Schumpeter feared that this kind of countercyclical thinking by people on the left would lead to a stagnating form of socialism, or even the end of capitalism, But socialism, in the state-run form he anticipated, is not inevitable, or even desirable. Social democracy, European-style, which Schumpeter did not expect, is desirable. Sure, I'd like the European governments to run up a bit of public debt to pump up demand over there - I don't think that's so immoral. What's immoral is to pump up demand, as we have, by handing out easy money at high interest and driving people into debt."

"Even in Babylon they spared people that kind of captivity. We now have to ensure our own country does the same."

This final section is full of fallacious arguments. He’s just dropped them everywhere. The problem is that to 'refute' all them (e.g. disprove socialism) requires far more time than I’m willing to give to this guy, especially as he hasn't justified any of his ideas with even an ounce of economic sense or theory, so I’m going to simply respond in kind: no, public debt is immoral; and yes, your policies WILL lead to socialism, wealth destruction and impoverishment. While it’s not inevitable, if people in positions of power are at all influenced by you, I fear for the worst. I’ll end with this: "As soon as we surrender the principle that the state should not interfere in any questions touching on the individuals’ mode of life, we end by regulating and restricting the latter down to the smallest details," – Ludwig von Mises.

Have a good weekend, and while you're out enjoying the many benefits that capitalism has enabled, be thankful that people such as Thomas don't yet have the necessary power to impose their will on others. While we have definitely moved further towards his dream of a socialist state in the past year, it's still early days and we can reverse the damage already done.

The latest GDP figures and the responses from our 'leaders' reminds me of Thomas Dolby's 1982 song, "She Blinded Me With Science," referring of course to the colloquial British concept of deliberately confusing someone (in this case, multiple people) by giving the impression of highly complex knowledge. Mr. Rudd dropped this today in response to a 0.4% growth in the GDP figure:

"Today's figures demonstrate that the Government's economic stimulus is working and it is positioning Australia as the best performing economy in the world," he said.

"Had we pursued the strategy recommended by [Opposition Leader] Mr Turnbull - not to invest and not to provide cash payments to pensioners, carers and others - Australia would be in recession today."

Even if the stimulus is the reason GDP recorded a small gain (it's quite probable), that's not necessarily a good thing. GDP is one of those figures that measures all spending, regardless of how destructive it is. In other words, the government could just as well build hundreds of battleships, have a fight to the end in the middle of the ocean until one remained, and GDP figures would record impressive gains thanks to all of that spending. The question we need to ask is this: are we wealthier for it? Are we wealthier for the billions of dollars that were squandered on plasma TVs and the like instead of being saved and invested productively? When I say productively, I mean expenditure for the purpose of increasing future consumption, an expansion in the capital base. Government expenditure -- and 'stimulus' payments, are usually (if not completely), squandered on unproductive expenditure, or destruction of the capital base. While both of these will show up in the GDP figures, only one actually improves the wealth of the nation.

So while the politicians can slap each other on the back and take "credit" for further destruction of real wealth, try to look beyond the statistics, most of which have a built in bias towards disguising the true cost of government and over-counting benefits.