Mangled Thoughts

Mind, as the silence of the past week suggests, one has been in a deep freeze. Deeply frozen by what has transpired.

It is the is the ignorant “Right” who are responsible for this mini ice-age, from Brackistan to the Fascist Rudd Cabinet. Having taken some anti-freeze pain killers, it is time to go forth again, weilding cudgels. There are unfinished matters from last week. Beginning Monday, the right targets will be clubbed, and the above are them. First up, one cannot but comment on the financial markets crisis.

The recession that, as any recession, should not occur if it were not for keynesian snake-oil.

Keynesianism is the culprit behind the financial collapses overseas, the boom - bust syndrome. It has been liberally spooned out by central banks, politicians and their advisers. All addicted to economic smithlication through Keynesian policies. What is now in plain view is what both Mr. Gerard Jackson and Dr. Frank Shostak have analysed and commented upon over the last decade plus some more, credit expansion has been massive. Try it at home, if you wish to enjoy a decade or more luxuriating in Hotel Prison with a well appointed room decorated with iron bars and a padlock.

Has the credit expansion by US, European, and British central banks been greater than that committed by the Reserve Bank of Australia? If so, it would be a staggering fact to contemplate, but the answer is not in raw numbers, as the collapse of ‘banks’ and other corporations overseas might suggest. It is with the reduced, absolute numbers expressed as percentages that count, which both Jackson and Shostak have supplied in their columns.

Recessions commence long before crashes in financial markets. They begin with contraction in higher stages of production, delivering the paradox of consumption rises though a country is already in recession. This escapes not only the peas for brains ALP ministers, it also escapes the dunderheaded Liberals and their euphemistically named ‘free market think tanks’ (they are anything but this). Yet, the “Right” also believe in the keynesian lie, consumption drives growth. To this lot, as much as the Left, capital is just some sort of blob that central planners can ‘grow’ by massive government consumption.

It is the consumption fallacy that is driving mob fear of depression. Consequently, many are convinced that the credit crunch and the collapse of the two Fs, AIG, and other financial firms overseas, means depression. To arrest it, the central banks are engaging in another round of massive credit expansion. The RBA alone engaged in a fresh round of credit expansion in cutting rates by 1%, and it is expected it will do so again soon. Pouring petrol onto the flames is self-defeating; hospitalisation for severe body burns is the regular course of events.

The raw scale of the collapse of financial corporations overseas has turned the misapprehension into fear of depression not witnessed since the Great Depression. Hence, the keynesian policies announced by Governments -a massive increase in their consumption that they falsely call investment. Rudd adds, ‘it will also build the nation’. It won’t arrest the recession and deliver recovery. It will compound the recession, because it means diverting capital funds away from investment and pissing them up against a wall.

Capital Funds, required for the only way recovery can occur, investment in sound production and with it real accumulation in capital. Rudd’s keynesian and facist plans he announced this week will arrest recovery and deepen the recession. It is how a recession can be converted into a brutalising depression. Unfortunately, what sits opposite Rudd and Swann are also clueless and thus incapable of eviscerating Rudd over this. Turnbull, contrary to Tim Blair, is also an ignoramus and a fascist, and also sees nothing wrong at all with destroying Australians through Carbon taxation.

Fractional Banking is the mechanism by which Central Banks’ credit expanionsion is distributed.

It must be frustrating for Shostak and Jackson having to explain from solidly theory what sound money is, and what credit expansion is and does. The frustration being the dunderheaded “Right”. Fractional banking, the mechanism by which Central Banks’ credit expanionsion is distributed, is the cause of the collapse of Fanny and Mae, AIG, and ‘banks’ in Europe and Britain. A commentator on radio summed this up without realising force of what he had summed up and what is behind it, but what else is expected of the commentariat, who also dwell in the Keynesian swamp?

Given sound money, lending is driven by real savings. Credit expansion saps this by creating the illusion real savings are greater than they are with the consequence of extension of unbacked loans. Unadulterated debt. It is money ‘creation’, book entries of deposits which drove the shambles overseas. To illuminate, if there are two dollars, Treasury printing an additional unbacked two dollars does not make four dollars. What it does is sap the value of the two dollars. To, illuminate, Dr. Shostak set out in detail the case of Fannie Mae and Freddie Mac in,

Can the US Government save Fannie Mae and Freddie Mac?

“The FF makes money by charging a guarantee fee on loans that it has purchased and securitized into MBS. By buying mortgages and repackaging the loans for resale via mortgage-backed securities (MBS), or by owning mortgages outright, the FF have provided banks and other financial institutions with fresh money to make new home loans.

Due to an implied government guarantee the FF were able to raise funds relatively cheaply by selling their debt to investors. This in turn…”

There is an additional aspect to this case. They were:

“… established by Congress in order to provide support for the housing market by keeping money flowing in the mortgage market. (Fannie Mae was established in 1938 as part of Franklin Delano Roosevelt’s New Deal while Freddie Mac in 1970).”

There is a word for it, trading while insolvent, but unlike other businesses they could do so because of Central Banks creating money.

The Stalinst Democrats used them also as slush funds for their Party. The $US 700 billions ‘rescue’ package, besides being nothing more than confiscation of real savings from American taxpayers, and their destruction, had a rider attached. Some of those $700 billions is to be directed into the coffers of the Party. This was reported during the behind the scenes wrangling over the plan to confiscate and destroy precious savings. According to a radio report, the Democrats slipped in the condition during the wrangling. It might be observed the majority of Republicans opposed the scam, against the Democrats.

The GOP suffers many of the same problems the Liberal Party does, namely a dearth of guns who can soudly advise Republican Presidents, and kick the diseased Left to death at the same time. So, we watched the gruesome spectacle of the Bush administration rescuing a Democrats’ hoax and, after the Bill had been passed, that liar, who is also Speaker of the House of Congress, Pelosi gloating and declaring how she and her fellow Democrats had saved Americans. In truth, she and her fellow diseased Leftists were overjoyed on three counts.They had their slush fund scam rescued, under a plan sponsored by the Bush administration (the political force of it needs no expansion), and succeeded again in kicking modest Americans when they are down ( Americans should tremble in fear of what an Obama Presidency, should they win, will do to them).

To put things into perspective

“The ace in the hole of our commentators and advisers is the sheer magnitude of the monetary figures. For example, the first quarter of this year experienced something like a $7 billion increase in foreclosures. This is a massive sum that was bound to boggle the public’s mind — and so it did. But when we look at it in terms of a $13 trillion plus economy a different picture emerges: we find that it is less than 0.07 per cent of GDP. Let’s look at this another way. This $7 billion is 3.5 per cent of Google’s current market value, 2.5 per cent of Microsoft’s market value and 12.5 per cent of Bill Gates’ net worth. The idea that $7 billion could sink the American economy is ridiculous.”

(American economy: The subprime market, depreciation and the exchange rate)

Consumption, expressed as GDP, is 1/3 only of total expenditure. The 2/3 is in capital, which is unsurprising since only capital makes consumption possible, and only capital accumulation delivers growth (which is also why taxing profits is criminal - profits are increases in capital).

The real conundrum is how much damage has been done to production due to credit expansion. How deep, how extensive is the damage? What is the magnitude of the recession? The ban on short selling has eliminated a major signal in markets, since short and long selling conveys expectations of the future, and for this reason prevents what is happening, wild swings delivering real damage. This is a testament to the stupidity of Australian politicians also.

The danger is, far from allowing the recession to do its work in wiping out malinvestments, Statist politicians are about to inflict great carnage through their socialist policies. Lying to the public, they are blaming free markets when it is them and Central Banks who have done the damage. So much, at that, for Peter Costello, Pulitzer Prize winning ignoramus in economics. The danger is not only more snakeoil will be poured down our throats by this lot. In blaming free markets, Rudd, as he has announced, using the recession to increase central control over Australians. However deep the recession is, Rudd will inflict far, far worse than a mere recession.

Interest rates

Interest rates are not the ‘price of money’. The price of sound money is given in its basis, a commodity such as gold. A valued good and so exchangeable for other goods, but its properties also render it effective for use as money to trade in goods. Real money is generated out of production. The price of gold yesterday is the price of money today. It has been interesting to observe those in overseas markets shifting into not only gold but also oil, as a defence against the fake money pumped out by central banks.

Interest rates, as Jackson carefully explained in, The nature of interest rates and why it’s dangerous to manipulate them, are the prices of time, given in preferences for present goods and savings (future production of goods). Böhm-Bawerk killed false explanations of interest and in doing he found the theory of interest - the time preference of theory. This theory establishes the distinction between consumption (present) goods and capital (future) goods. Jackson, in explaining the theory of interest, also nails why the snake-oil of keynesianism is ruinous in,

“Keynes just could not grasp that interest exists because people value present goods more than future goods (time preference). And so interest determines the supply of and demand for capital goods.”

The rate of interest is established by:

“… the marginal efficiency of capital [expected rate of return] is the rate of interest. This is the natural rate of interest and a price on the time market.”

The rate of interest not only equates supply of capital with demand for it. It is a process that occurs with time, capital goods are allocated over time. Keynes’ account of interest and money totally debases both, reducing them to mere “monetary phenomenon” of “supply and demand for money”.

Credit expansion, distorts the natural market rate of interest. This is the sapping of the signal informing entrepreneurs in establishing capital allocation priorities, based on the marginal productivity of capital. Every entrepreneur in planning capital allocation, while not working from economic theory, does exactly this through financial analysis. This is where the damage to the capital structure is done; interest as the price of the preference of time spells out why the issue is malinvestments that will be wiped out (recession).

Credit expansion delivers the paradox:

“…gives rise to the consumption of goods which is not preceded by production. It generates exactly the same results as the counterfeit money. For under these conditions the buyer of goods does not use them to support his own production. In fact he consumes and produces nothing. Consequently the buyer of the money/or seller of goods can never realize his money, for the means of sustenance to support these newly created money was never produced. Any attempt then, to lengthen the production structure by means of an expansion in the money stock must always fail.”

Consumption rises, though the country is in recession. This is what the housing and loans bubble and crash in the US manifested. But, then this is what the consumption fallacy twinned with money creation boils down to.