-----BEGIN PGP SIGNED MESSAGE----- Hash: SHA1 Not sure when I last saw an actual testament to Ludwig von Mises on the WSJ editorial page. Besides in a Ron Paul editorial, that is. :-) Mises' "calculation argument", reasoning from the same he used logic below, predicted the eventual fall of the Soviet Union, and the collapse of the Maoists, at least, in China. "Prices aren't just made up," as Walter Williams likes to say. While von Mises is right, there seems to be a huge parasitic load that a state can inflict on its markets before they fail catastrophically, causing many, if not most, people to mistake the parasite for its host. At the moment, markets are well on the way to becoming mere mitochondria in the continuing imposition of a totalizing liberty-eating superorganism. This is primarily the effect of force monopoly, of course. If competitive markets for force in the same geographical area were possible (meaning cheaper than otherwise), the problems Mises talks about would cease immediately, and finance, and everybody else, would be finally free of the nation-state its price-calculating apparatchiks, among other evils. Unfortunately, saying that reminds me more of the old Scots-Irish joke "If we had some ham, we could have some ham and eggs, if we had some eggs," than anything about its historical necessity. The Second Ammendment to the U.S. Constitution is supposed to help, but it remains to be seen whether it matters much in a world where judges and executive functionaries promulgate more "law" than an already logorrheahic legislature does. I can sympathize. I have made all kinds of claims about book-entry versus digital bearer settlement, for instance, and in the same spirit of universal liberation from the nation-state, but those claims have so far not proven to be "agreeable to experience", as Gibbon said once about predicting the end of the world, a quote I used as a signature for a decade or so, until Eudora became obsolete, and I never got around to re-instantiating it in Apple Mail. All of which brings us to Rush Limbaugh's Undeniable Truth of Life Number Six: "The world is governed by the aggressive use of force." An assertion that separates, rather sharply, those of us who are still politically conservative from other people who would normally agree with us on a whole lot of other things -- including most of von Mises' followers today. To bash Gibbon's words to fit (and paint them to hide the damage :-)), however it may deserve respect for its usefulness and antiquity, the non-aggression principle itself has not been found agreeable to experience. Like the old arguments about the nuclear first-strike option, sometimes it's better to remove a threat before it kills you, rather than after. Or at least make the other guy think you can. "Weakness is provocative", as Rumsfeld said more than once -- along with "we don't want to see a smoking gun from a weapon of mass destruction." Sometimes you really do have to dance with the girl that brung ya. Even if she is a force monopolist parasite on free people everywhere. :-/. Cheers, RAH - ------- <http://online.wsj.com/article/SB10001424052748704471504574443600711779692 . html#printMode> OPINION NOVEMBER 6, 2009, 9:58 P.M. ET The Man Who Predicted the Depression Ludwig von Mises explained how government-induced credit expansions led to imbalances in the economy. By MARK SPITZNAGEL Ludwig von Mises was snubbed by economists world-wide as he warned of a credit crisis in the 1920s. We ignore the great Austrian at our peril today. Mises's ideas on business cycles were spelled out in his 1912 tome "Theorie des Geldes und der Umlaufsmittel" ("The Theory of Money and Credit"). Not surprisingly few people noticed, as it was published only in German and wasn't exactly a beach read at that. Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen. Government-imposed expansion of bank credit distorts our "time preferences," or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption. Ordinarily, any random spikes in credit would be quickly absorbed by the systemthe pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse. The system is dramatically susceptible to errors, both on the policy side and on the entrepreneurial side. Government expansion of credit takes a system otherwise capable of adjustment and resilience and transforms it into one with tremendous cyclical volatility. "Theorie des Geldes" did not become the playbook for policy makers. The 1920s were marked by the brave new era of the Federal Reserve system promoting inflationary credit expansion and with it permanent prosperity. The nerve of this Doubting-Thomas, perma-bear, crazy Kraut! Sadly, poor Ludwig was very nearly alone in warning of the collapse to come from this credit expansion. In mid-1929, he stubbornly turned down a lucrative job offer from the Viennese bank Kreditanstalt, much to the annoyance of his fiancie, proclaiming "A great crash is coming, and I don't want my name in any way connected with it." We all know what happened next. Pretty much right out of Mises's script, overleveraged banks (including Kreditanstalt) collapsed, businesses collapsed, employment collapsed. The brittle tree snapped. Following Mises's logic, was this a failure of capitalism, or a failure of hubris? Mises's solution follows logically from his warnings. You can't fix what's broken by breaking it yet again. Stop the credit gavage. Stop inflating. Don't encourage consumption, but rather encourage saving and the repayment of debt. Let all the lame businesses failno bailouts. (You see where I'm going with this.) The distortions must be removed or else the precipice from which the system will inevitably fall will simply grow higher and higher. Mises started getting some much-deserved respect once "Theorie des Geldes" was finally published in English in 1934. It is unfortunate that it required such a disaster for people to take heed of what was the one predictive, scholarly explanation of what was happening. But then, just Mises's bad luck, along came John Maynard Keynes's tome "The General Theory of Employment, Interest and Money" in 1936. Keynes was dapper, fresh and sophisticated. He even wrote in English! And the guy had chutzpah, fearlessly fighting the battle against unemployment by running the currency printing press and draining the government's coffers. He was the anti-Mises. So what if Keynes had lost his shirt in the stock-market crash. His book was peppered with fancy math (even Greek letters) and that meant rigor, modernity. To add insult to injury, Mises wasn't even refuted by Keynes and his ilk. He was ignored. Fast forward 70-some years, during which we saw Keynesianism's repeated disappointments, the end of the gold standard, persistent inflation with intermittent inflationary recessions and banking crises, culminating in Alan Greenspan's "Great Moderation" and a subsequent catastrophic collapse in housing and banking. Where do we find ourselves? At a point of profound insight gained through economic logic, trial and error, and objective empiricism? Or right back where we started? With interest rates at zero, monetary engines humming as never before, and a self-proclaimed Keynesian government, we are back again embracing the brave new era of government-sponsored prosperity and debt. And, more than ever, the system is piling uncertainties on top of uncertainties, turning an otherwise resilient economy into a brittle one. How curious it is that the guy who wrote the script depicting our never ending story of government-induced credit expansion, inflation and collapse has remained so persistently forgotten. Must we sit through yet another performance of this tragic tale? Mr. Spitznagel is the founder and chief investment officer of the hedge fund Universa Investments LP, based in Santa Monica, Calif. -----BEGIN PGP SIGNATURE----- Version: 10.0.0.2489 wj8DBQFK9W/dw/EfyN/eiFoRAiyIAKCWemtEq+gnPpwwtcnfbi0TlF+epwCgmVCL 71EpUFGwtJB6CUKOwEWX0h8= =vP6d -----END PGP SIGNATURE-----