Stone Glasgow

Large medical studies are not a good idea.

2012-03-01T17:53:00.002-06:00

In response to NoahSD's excellent blog-post, where Noah first makes clear that the human body is wondrously complex, and we understand relatively little about its intricate, convoluted inner-workings, and explains that large, randomized, double-blind studies are our best hope in separating effective medical treatments from placebo-inducing quackery. Notably, he compares self-experimentation and anecdotal evidence to a poker player that wins after a short session (statistically meaningless sample) and concludes that his playing style is profitable. I have some objections to these lines of reasoning:

I have a few criticisms. Large, randomized, double-blind studies would be a good idea only if all human beings were sufficiently identical. Large studies are best suited to identical machines, but they are poorly suited to test machines (or animals) with a large variability. (This is one reason that in animal studies, rats with identical genes are tested.)

In examining exactly why large trials are not a good fit for human research, it is important to keep the stated goal of the AMA in the forefront of our awareness. They control what is taught at medical schools, and their goal is to increase the wages of medical doctors. Objectively speaking, what is the best way to increase the wages of doctors? As I see it, there are a few ways, but the subject is so tainted with propaganda and morality that it is almost impossible to consider them in any even remotely objective manner. To make this more palatable, let us consider an analogy; imagine that patients are in fact automobiles, and doctors are auto-mechanics:

1. Is it a good idea to accept only the treatments that work for all cars, in general? Or is it best to tailor repairs (treatments) to each individual type of car? A study that finds 5W-30 motor-oil as most effective for preventing engine wear would not apply to engines designed to accept a different grade, even if large studies show that the oil is effective for 75% of engines. We make a fundamental error in assuming that all human bodies are the same machine. They could easily be as different (and similar) as the myriad makes and models of modern cars. Because we are all “human” does not, per se, make us the same, any more than all “cars” require the same replacement parts.

2. If mechanics were somehow able to garner a monopoly on the education of auto-mechanics, with their only goal being to (regardless of morality) increase their wages, do you imagine that they would train mechanics to teach their customers to avoid riding their brakes? Would they train them to change their oil regularly? Would they train mechanics to instruct their customers to fuel their cars with high-quality gasoline of the correct octane level? I think not–I think, were their goal to make money, they would focus only on repairs necessary, and ignore any and all preventative measures.

New mechanics would come to see their jobs as repair specialists, only, with no obligation to inquire as to why some customers’ brake-pads wore out prematurely. Instead they would blame it on genetics, or manufacturing defects (make and model).

Additionally, if consumers began experimenting on their own, and anecdotally discovered that using 10W-40 as the engine became older helped to prevent engine-death, would mechanics listen, or would they tell customers that such evidence is not valid unless millions of old cars are tested? And would there be any encouragement or support from professional mechanics to test this theory? Why would there be? Keeping engines alive longer with a simple solution lowers the income of auto mechanics–they won’t be repairing and replacing as many engines. The error here is three-fold:

1. There is an assumption that all people are (mostly) identical. The truth may well be that we are widely divergent (just like cars) and huge studies do indeed identify workable cures, but do not find the best cure. They only find cures that work for all makes and models, ignoring repairs specific to individuals.

2. There is an assumption that the AMA’s stated goal (increasing wages for doctors) is not a reality; assuming that morality comes first in setting the course for future doctors.

3. There is an assumption that any attention will be paid to cheap solutions, or preventative measures.

Additionally, the analogy to poker is not appropriate, because the edge enjoyed by a drug in changing the outcome of the experiment is many magnitudes greater than a professional poker player.

A good poker player may enjoy a 3% edge in affecting the outcome of a single hand; a good drug (or treatment) may enjoy a 90% chance in successfully affecting the health or mood of a random human body.
In this way, we can see that even a single person, experimenting with a huge edge can arrive at statistically significant results. And the confounding variable involved in self-experimentation can be mitigated to a very large degree. Generally, when one thinks about natural remedies and self-medication with herbs or supplements, we imagine that the experimenter expects the remedies to work. That is not necessarily the case.

Most often, I think, we don’t really expect herbs and supplements to work, and are surprised when they do. (This has been my experience; most don’t work). In this way we can see that the placebo effect should not be expected to confound results at all; if anything we should see a nocebo effect, where the efficacy of treatments is negatively impacted, because natural cures are generally expected to be ineffective.

"Large sample size, double blind, placebo controlled, randomized. If something is proven by a study that has all of those characteristics, it’s probably true."

If you took a random sample of one million cars that all suffered from the same problem; perhaps they all have wheels that have fallen off unexpectedly, and tried to cure the problem with a new drug, a certain type of improved lug nut, what do you imagine we would be able to determine from this study?

Even if the mechanics installing the new lug nuts don’t know which are the new type and which are standard, control lug nuts, and if the cars are sufficiently randomized into two statistically identical groups, we should expect to find that the treatment is effective for some percentage of cars–they no longer experience the original problem (wheels falling off).

But for the remainder of cars, they will be no better off than before. Perhaps their wheels will fall off even more often, because the new lugs fit normal cars but not Ferraris and BMWs.

We could end up finding a treatment that improves the problem for say, 60% of cars (patients), but will have failed to understand the problem. And this is what we see, today, with many treatments used in modern medicine. If one antibiotic doesn’t work, try another, and another, and another, until the infection goes away. If it doesn’t go away, we can’t help you. Same for antidepressant drugs, which are foisted upon patients in a very similar manner.

This is a bit like throwing lug nuts at automobiles with loose wheels. It may eventually work, but it is much less effective than examining the wheels, determining which size they require, and installing the proper hardware.

Large scale studies are doing us a disservice in this way, by moving away from personalized solutions, moving away from truly understanding the problem, and moving away from innovative solutions that are custom tailored to individuals. The situation is further complicated if the best lug nuts for are standard issue and available ubiquitously, and the improved lugs are titanium or rare earth metals that are patented and cost much more. In the later case, the financially rewarding path for drug companies (lug manufacturers) would be to promote the expensive, patented solution and to ignore the cheap, ubiquitous solution. I think this is what happens all too often today; there are simple solutions to many medical problems that are largely ignored by the medical community, most often because there exist no large, randomized trials that support them. Large trials are not necessary in generating innovative solutions to medical problems, and in my opinion, can easy be counter-productive.

If doctors are prone to throwing random lug-nuts at broken cars visiting their shops, why do we consider it ignorant for common people to begin throwing random treatments at their own bodies, especially when they are harmless, most don't work, solutions are often discovered, and statistically valid results can often be obtained, with limited confounding variables?

Find a need and fill it.

2012-02-27T20:06:00.001-06:00

Getty Museum

Today, a lot of people tend to think that setting grand-goals and working to fulfill them is the path to wealth and success. This line of reasoning is exactly backwards. As John Paul Getty offered as advice for those seeking wealth: “Find a need and fill it.”

Generally, today, we tend to think only about our own needs, and how to fill them. To become wealthy, we need to think about the needs of others, and how satisfy them (at a reasonable cost).

If it can't be done at a reasonable cost, can we innovate? Can we figure out a way to solve other people's problems at a lower cost? Can we find ways to make life better for other people? If we can find some way to improve the lives of others (an improvement for which they voluntarily pay), we have created wealth. Creating wealth is the honest path to success.

Alternatively, we can become wealthy via violence or fraud -- by stealing from others, or by forcing them to transfer wealth to us at the point of a gun (or government's gun), and this is the method a lot of people on which many (economically illiterate) individuals tend to focus... but there are two paths to success.

Making the world better for your neighbors is ignored far too often in modern assessments of economic growth, and the desire for material gain. If done honestly, material gains are only acquired when someone makes the world better; profits are impossible for an honest businessman unless he has helped another human being.

How to keep an avocado fresh

2012-02-26T23:00:00.007-06:00

With acetylcysteine, a form of the amino acid cysteine. If you don't have any acetylcysteine lying around the house, you can alternatively cut a few fresh onion slices and add them to the bag; when the onion is cut, its cells generate a form of sulfur gas with a very short lifespan. Cut the onion and toss it in the bag quickly to capture the gas, which is created when newly damaged onion (or garlic) cells are come into contact with the air.

By the way, acetylcysteine can also:

1. Prevent hangovers by cleaning up the byproducts of alcohol metabolism.
2. Preserve fruit (not just avocados) by preventing oxidation (it's an antioxidant).
3. Cure a Tylenol overdose by supporting the body's glutathione production.
4. Disinfecting replacement artificial lenses before surgery (it breaks bacterial biofilms).
5. Chelate and remove heavy metals from the body.
6. Prevent death if taken soon after fatal doses of various poisons are ingested or injected in lab rats.

It does a lot of other cool stuff, too (probably). For example it's being tested on mentally ill patients:

"Acetylcysteine has been shown to reduce the symptoms of both schizophrenia and bipolar disorder in two placebo controlled trials conducted at Melbourne."

24 Hours later and still like-new.

How to keep celery crisp

2012-02-26T22:49:00.001-06:00

The container is designed to hold lasagna pasta noodles. Cold tap-water. Refrigerate. This will keep it like-new crispy for two weeks, easily.

Value is hard to measure

2012-02-25T17:39:00.004-06:00

The value of an object is not static; it cannot be objective, and it can only be measured at a single distinct moment in time, for two individuals. If an apple trades for a dollar between Fred and Bob, we can only now say that we know the value of an apple (and a dollar) for Fred and Bob, at 1:02PM, Feb 25th, 2012. It would be inappropriate to now claim that we know anything more about the value of apples. Assets don’t have fixed market values; they vary relative to what each man holds.

To see why, let's imagine that a man with two cows and three horses values them in order from most to least valuable. He may order them as follows:

1. cow
2. horse
3. horse
4. horse
5. cow

If this man has to choose to trade away one animal he will chose the cow, but if he is asked to trade away four of his animals he will keep a cow. In one trade he appears to value horses more than cows, but in the second trade he appears to value cows over horses.

Thus we can see that value can only be determined relative to specific trades. The value of the horse cannot be said to be more than the value of the cow. We can only say that he values a cow most if he must keep only one animal, and values it least if he must give up only one animal. It has no value independent of his other assets. Everyone values their things based on their own specific needs. He values the milk that the cow provides, but is willing to give up some milk in order to keep his transportation. He is not willing to give up all of his milk in order to keep his transportation, and so he values the cows differently depending on which other assets he holds. The order in which he places them is more important than the value of a specific trade.

Viewed another way, if both barns are on fire and he can only save his cows or his horses, he will choose his cows. On the other hand, if a predator threatens a horse and a cow and the same time and he can only save one animal, he will choose to save the horse. The result is the paradoxical valuation of a horse above a cow in one instance, but the valuation of two cows above three horses in another. If assets have fixed, independent values, this could never be the case. Value is always relative to our other holdings, and we can never say “a cow is worth more than a horse,” just as we cannot determine if light is a particle or a wave. When we look closely at a specific measurement of light to determine its nature, we get only a reading of it in that instant, with that instrument, in that specific situation. In the same way, we cannot determine the value of a horse by looking at one specific trade and extrapolate that to all valuations, its value is relative to what is held and what is offered in exchange.   Value can only be spoken of relative to specific acts of appraisal, just as light can only be spoken of regarding specific tests of its nature. To further complicate matters, people rearrange their scales of value depending on what is available in the market. Imagine a man with this scale of values: 1, wine; 2, cow; 3, cheese. If he sees that cheese is trading in the market for wine at an even exchange, he will reorder his scale of values to place the cheese above the cow, even if his personal opinion of the cheese’s value is less than the cow.

The myth of the eight-hour sleep

2012-02-25T16:42:00.003-06:00

It seems reasonable that our ancestor's did not sleep in eight hour sessions. It appears, according to historical documents, recent studies, and modern hunter-gathering tribes, that our natural inclination is the sleep in two four-hour shifts, with a couple of waking-hours between them.

Many of us today find ourselves awake in the middle of the night and assume there is something wrong. Perhaps that is not the case. Perhaps we are naturally inclined to wake at night, and perhaps it kept our ancestors alive more often than people who passed out for eight hours in a row.

From the BBC:

In 2001, historian Roger Ekirch of Virginia Tech published a seminal paper, drawn from 16 years of research, revealing a wealth of historical evidence that humans used to sleep in two distinct chunks.
His book At Day's Close: Night in Times Past, published four years later, unearths more than 500 references to a segmented sleeping pattern - in diaries, court records, medical books and literature, from Homer's Odyssey to an anthropological account of modern tribes in Nigeria.

Much like the experience of Wehr's subjects, these references describe a first sleep which began about two hours after dusk, followed by waking period of one or two hours and then a second sleep.
"It's not just the number of references - it is the way they refer to it, as if it was common knowledge," Ekirch says.

L-Arginine reverses liver injury in heavily alcoholic rats

2012-02-24T16:21:00.000-06:00

A recent study has indicated that supplementation with L-Arginine (sold over the counter as a nutritional supplement in the United States) at 100mg per kilogram of body weight (five grams per day for an average human), stops and reverses liver-damage in rats, even if the rats continue to consume massive amounts of alcohol.

The amount of ethanol consumed by the rats was staggering in this experiment, beginning at 10g/kg and moving to 16g/kg as the rats developed a tolerance. Their blood alcohol levels were kept between BAC 0.15 and 0.35 for six weeks, 24 hours per day, via a tube implanted in their stomachs. The legal driving limit in the United States is BAC 0.08, so the rats were always between double the legal driven limit and death, which occurs around 0.40 in most humans.

Researchers found that rats that were fed ethanol for six weeks developed fatty liver, necrosis, and inflammation. They found that within two weeks of adding L-Arginine to the diet of fish oil ethanol (in continued massive amounts), liver function began to reverse itself--"Collagen deposition and pericellular fibrosis are markedly decreased."

If these findings were to translate reasonably to human beings, it would indicate that liver disease is not a function of alcohol consumption, per se, but is instead mediated by a failure to ingest adequate amounts of protein (L-Arginine is the most common protein in the American diet). We already suspect that the malnourishment and disease found in chronic alcoholics is in part caused by their tendency to replace nutritious foods with calories from alcohol, and this study leads us one step closer to that conclusion.

CLIFF NOTES: Eating a lot of protein, or supplementing with L-Arginine, will probably prevent or reverse alcohol-induced liver damage.

Intellectual Property Laws are Harmful

2012-02-15T22:28:00.000-06:00

Intellectual property is not the same as other forms of wealth, and should be considered in a different light. It's a whole new animal, as it were, because "theft" traditionally means that an asset moves out of the possession of its original owner, and into the hands of a thief. It harms the previous owner.

With IP, assets can be transferred to an infringer at no cost to the victim of the theft. The loss of his ability to market his asset can be more reasonably controlled via the private markets. It isn't reasonable to socialize (make all citizens pay) the cost of protecting the value of an invention. That cost is, in my opinion, something with which an inventor should be burdened.

IP laws are today used as weapons, and stifle innovation. When the steam engine was invented in the late 19th century, its inventor used his patent to block innovation from other inventors, who had improved upon his design. And ironically, he was unable to improve his own design, because the most efficient flywheel design was patented by another firm. The patents blocked the creation of the most efficient engine until they expired.

Similar things are happening with software patents today. IP companies are buying thousands of them and literally extorting "protection" fees from software developers. Apple recently purchased a few thousand patents it didn't intend to use, for $6 billion, in order to threaten these companies with an arsenal of patents of its own. If they sue Apple, Apple can sue all of the companies under the "protection" of IP collection companies. IP laws are in practice backfiring.

They prevent innovation even as they claim to promote it. They are very similar to minimum wage laws in this way, promulgating the idea that they are helping the poor, and in reality creating more unemployment and suffering for low-skill workers.

Inventors can still profit from innovation absent IP and copyright laws. If you invent a light bulb, simply create a private contract with a manufacturing firm to secretly create 10 million bulbs. When they hit the market, others will rush to copy them, but you will be first to market by months or years. You become wealthy, and others are not prevented from improving on your original design.

This is how Apple operates, and is primarily why they are so successful. They innovate secretly, flooding the market with a products that take competitors years to copy.

If you invent a bow and arrow in your cave, is it moral for the village-chief to tell me that I cannot build compound bows, a vast improvement on your design? IP laws seem to promote innovation, but they also block improvements on designs. The trade-off is between original innovation and incremental improvements. Without the laws, original innovation is still there, as is incremental innovation. With the laws, only original innovation continues.

Gambling Monkeys and Irrational Decisions (Prospect theory)

2011-12-24T19:31:00.002-06:00

An average human offered the choice to accept either $500 or a coin flip for $1,000 will choose the safe bet -- $500 guaranteed. This is a rational choice, and avoids taking risk without a premium (reward.)

An average human will make the opposite choice if offered the opposite decision. Would you rather have $500 confiscated from you, or flip a coin? Heads you lose $1,000 and tails you lose nothing. Most people choose to flip the coin.

Turns out that the average monkey will do the same thing if offered similar choices with tokens and food, as shown in the video above, where Laurie Santos rambles at length about how irrational human beings tend to be when it comes to financial risk-taking, and endlessly implies that some sort of oversight is needed to correct genetic defects in our mental design. Dan Ariely wrote an entire book about it, and also appears at the TED conference on a regular basis to talk about why regulation is needed to force us to make rational decisions. Myriad progressive thinkers have used examples like this to prove that we don't know what is best for our own lives.

A better question, I think, is why? Why do we make this seemingly irrational decision to avoid risk if offered additional food, and to take more risk if threatened with loss? I think I have the answer. For most of our evolution, we have existed at the fringe of starvation, disease, and death. Life has historically been a constant and never-ending struggle for survival. Losing what we already own would be potentially fatal. If viewed in this context, our intuition regarding risk-taking proves to be correct.

Imagine you have worked tirelessly all summer to harvest and preserve enough meat and root veggies to barely last you through the winter, and you are offered a choice. Take enough additional food to guarantee your survival, or gamble to win more than you need to make it through the cold months. The choice is the same as above -- you would choose the safe bet and guarantee your passage through the winter.

And if offered the opposite choice -- to flip a coin and risk losing all of your food or none of your food -- or to choose losing half of your food -- the choice is also easy. Because you cannot afford to lose any food without starving to death, you don't care how much food you lose. Either way you're going to die, so your only choice is to gamble and hope that the coin comes up in your favor, allowing you to keep all of your food.

This type of decision making isn't irrational at all if the gambler cannot afford to lose, and doesn't stand to change his life very much by gambling for more.

Life, Liberty, Property, and Happiness

2011-11-29T20:35:00.000-06:00

Why does a parent have the moral right to forcefully control his children, but government does not have the right to forcefully control its citizens? Why is is permissible to enslave animals, but not human beings? What is the fundamental difference between animals and man, or children and adults?

What is the definition of a child, and how do we arrive at that definition? Why is it moral to be biased against animals that have a desire for life, freedom and happiness? Why do we insist that all men have a natural right to these things, a self-evident right, but animals do not? Do we imagine that if we found a method for honest communication, animals would not insist that they too deserve these rights?

What happens when machines become so complex that they too demand the same rights?

This is a continuation of this discussion, which went to some length at the Cafe Hayek blog.

How does the Fed create inflation?

2011-10-27T22:08:00.001-05:00

A bank brokers a deal between a wine-maker and a consumer, Bob. It buys ten bottles of wine for $10 with new dollars, and sells them to Bob on credit, charging 10% interest per year. Bob agrees to repay the debt in one year, and will pay $11 as a balloon payment in twelve months. Currently, dollars are worth about $1 per bottle of wine. Assuming the bank brokers no more deals, the value of Bob's dollars will rise as the months go by, because he will eventually owe $1 that does not exist -- the bank only created $10 and he owes $11, so Bob's desire for more dollars goes up as the due date draws closer.

To solve this problem, the bank (or the Fed) buys something from anyone in Bob's neighborhood for $1, or directly from Bob. If it buys something near the payment date, it will be able to garner more material goods from Bob (or anyone who knows Bob is desperate) than it would if it purchased something at the beginning of the year, when Bob isn't so desperate to acquire another dollar.

So deflation occurs even absent a rise in the wine's value. Let's imagine that dollars, wine, coconuts, and cheese are the only assets available in the marketplace, and that there are only three men alive, the banker, Bob, and the wine-maker. All three men trade wine, coconuts, and cheese at a one-to-one exchange, and after dollars are issued, all three value wine, coconuts, and cheese at $1.00 as well.

If half the wine suddenly spoils, its value will rise; there are only 5 bottles left. Its supply has dropped relative to cheese, coconuts, and dollars, but this does not affect the value of the dollar relative to all other assets -- coconuts, cheese, and dollars continue to trade as equals. The change in the value of wine is more accurately described as "wine deflation." We can say that dollars have lost value compared to a total sampling of all assets available in the marketplace, but this confounds the true nature of the changes. Dollars didn't really drop in value relative to all other assets -- the value of wine went up; all assets dropped in tandem compared to the value of wine. So a change in the value of assets purchased by banks would appear to have no real ability to affect the value of the dollar, per se. If we look at a sampling of everything it creates the illusion of inflation, but at a distance, viewed properly, the value of dollars were only affected as much as all other goods in the marketplace, and only lost value against the original asset -- the asset we already defined as having lost value vs the dollar in the first place. A fall in the value of bank purchases would have a similar and opposite effect, but would not directly affect the value of dollars when compared to the total market.

If Bob defaults on the loan, the remaining dollars would fall to zero value rather quickly, absent anyone who wanted them to pay off a loan, so defaults do create inflation.

If the banker brokers a second deal between two other men, but is tricked into brokering a purchase at $2.00 per bottle, when the market at that moment in time values them at $1.00, the result would still seem to avoid inflation, because the man who owes $20 after the trade clears will eventually provide double the demand for dollars when compared the man who agreed to pay $10. Because the value of dollars depends on the desire of each man to pay off his debts, the specific act of paying too much for a market asset cannot affect the long-term value of dollars, if those assets are at the same time sold for too much. Dollars brokered into existence can never be inflationary, as long as defaults do not occur. If the man who bought wine for ten dollars has the same credit rating as the man who paid twenty, there can be no inflation created as a direct result of the brokering activity.

So it appears, by the above simplified logic, that the only way to create inflation is to broker deals for poor credit-risk borrowers. Sub-prime lending, in all its forms, creates inflation, but apparently it is the only thing banks control capable of lowering the value of dollars relative to other goods available in the market.

Explosive billiard balls

2011-10-24T23:33:00.000-05:00

"Because of its explosive nature, not all applications of nitrocellulose were successful. In 1869, with elephants having been poached to near extinction, the billiards industry offered a $10,000 prize to whoever came up with the best replacement for ivory billiard balls. John Wesley Hyatt created the winning replacement which he coated with a new material he discovered called camphored nitrocellulose—the first thermoplastic, better known as celluloid. The invention enjoyed a brief popularity, but the Hyatt balls were extremely flammable, and sometimes portions of the outer shell would explode upon impact. An owner of a billiard saloon in Colorado wrote to Hyatt about the explosive tendencies, saying that he did not mind very much personally but for the fact that every man in his saloon immediately pulled a gun at the sound." Wiki

Austrians don't understand money

2011-10-16T20:10:00.002-05:00

Jörg Guido Hülsmann (audio only) explains that "Gresham's Law -- It's not a general law of the market, it is a law of interventionism."

This is simply wrong. "Bad coins" are used as money, and good coins hoarded even absent legal tender laws. In WW2 prison camps, the worst cigarettes were traded and the best were hoarded. In early America, tobacco was used and the same thing happened; the poorest quality plants were traded as money.

He is very wrong to assume that legal tender laws are the cause of this process, and he's missing the bigger point, known to anyone who studies those ancient hoards of metal coins. They were tokens, and the metals were used because they did not rust; they were durable. They had no way to create durable paper, as we do today, so they used metal.

Ancient coins were created without any concern for their weight (except in rare cases, designed to fight counterfeiting), and their weight varied so much that the metals in them could not possibly have been the basis for their value. Some of them were as much as 90% pure, and others contained almost no precious metal, even though they circulated at the same time. Most were not stamped with a face value, only the name of the king or bank that created them. Their value was not based on the metals in the coins.

Hülsmann claims that "A central bank cannot go bankrupt." This is correct, but only because it doesn't need any assets, per se, to begin operations. The central stores, acting as banks in prison camps started with nothing. They issued paper from thin air to purchase goods -- with the promise to exchange them for paper in the future. This was the method used to to buy things for the store; to stock the shelves. Banks can legitimately start with nothing. They are brokers; they don't need any assets to operate in a free market.

How to beat a breathalyzer

2011-10-12T17:58:00.002-05:00

Breathalyzers work by calculating the amount of alcohol in the breath, and extrapolating the amount of alcohol in the blood by assuming that the ratio is 2100 to 1 -- that for every gram of ethanol in the breath, there are 2100 grams in the blood. In europe, breath testers assume that the ratio is 2300 to 1.There are many problems with this assumption.

1. The ratio varies from person to person, and women typically have a lower ratio, meaning that breath tests are biased against them.

2. About 1.8% of people have a ratio below 2,100, about 14% have a ratio higher than normal.

3. The ratio depends on the temperature of the breath. The ratio is only 2,100 at 37 °C, and the average temperature of the breath is 34°C. If one is running a fever, the machine will read a higher blood alcohol content, and if one is cold, it will read lower. This is further confounded by the variation in average body temperature between individuals.

4. The ratio will change if the person is still absorbing alcohol into his system. The amount of ethanol vapor will be higher during the absorption phase, which lasts from 20 to 90 minutes, depending on the types and quantities of foods and drinks consumed.

5. The human body generates about three grams of ethanol per day in its normal operation. Ethanol is a byproduct of our digestive system, and the amount generated will vary. People on low calorie, carbohydrate restricted diets will generate more, and their breath can read as high as .02 (1/4 legal limit in the US), without ingesting any external alcohol whatsoever.

6. Ethanol vapor in the lungs takes time to evaporate from lung tissue; faster than normal breathing can lower the reading by as much as 32%, and slow breathing or holding one's breath can raise the reading by the same amount.

So a breath test certainly could be accurate, but it seems about as likely as finding a broken watch showing the correct time. Even if they take you to the station and draw blood, the concentration will vary between arteries and veins, depending if the person is still absorbing alcohol previously consumed. Veins will show a higher reading after absorption is complete, and the law generally states that they are to be used for the blood sampling.

To lower a breath test reading:

1. Lower your body temperature -- remove clothing, drink a lot of cold water, etc.
2. Breathe as fast and deeply as possible before the test.
3. Eat a lot of carbs before drinking.
4. Leave the bar a long time after your last drink.
5. Make sure you don't have a fever (Tylenol and Advil are fever reducers.)

The primary cause of inflation

2011-10-12T11:44:00.000-05:00

Inflation is caused primarily by the rise of wealth in society, making labor more expensive. If you won the lottery tomorrow, how much would you charge for an hour of labor? The same applies to societies that become richer over time. Today the average unskilled worker earns about 25 times more per hour than he did in 1774, and is also about 25 times richer. The time one spends laboring today buys a lot more milk and bread than it did, for an average worker, in 1774.

Imagine two islands, one where everyone is living in a nice hut with a lot of preserved meat, cheese, wine, spices, etc, and another were everyone lives on the beach and fishes to eat each day. If men on the rich island want to hire others to work in their factory, they'll need to pay them more because both of them have more assets. Rich men can pay more, and rich men demand more for their time. On the poor island, a worker might be available for two fish per day. On the wealthy island that has a lot of preserved fish and a lot of fishing boats, food is easier to acquire and the amount offered for a day of work will have to be higher.

Further, imagine that the supply of fish and food did not rise faster than the amount of other material goods and people on the islands over time. Even if each man pulls two fish from the sea each day for life, and they use fish as money, the richer island would demand more fish per hour of labor, lowering the value of money when compared to labor and services (inflation). Because most things today require human labor to create, their price has risen vs most things that require very little human effort. Fishing nets are now made by machines and their price has fallen over time, but the price to hire a fisherman for a day has steadily gone up since 1774.

This is not to say that labor is the reason that anything is valuable, or is based on the labor that goes into it. It is only to state that as society becomes richer, each rich man demands more assets from other rich men in order to labor for them, raising the cost to produce new assets in terms of what already exists.

If tomorrow everyone suddenly had ten times more of everything they owned yesterday, what would be the only thing that would rise in value? Labor. And as we became richer, we got more of everything we previously had, including money.

Steve Jobs understood that wealth is not a zero sum game

2011-10-11T17:40:00.001-05:00

“Apple was in very serious trouble, and what was really clear was that if the game were a zero sum game, where if Apple were going to win, Microsoft has to lose, then Apple was going to lose. A lot of people’s heads were in that place at Apple, even in the customer base. There were too many people at Apple playing the game of “if Apple is going to win, Microsoft has to lose.” It was clear that we didn’t have to play that game; Apple wasn’t going to beat Microsoft... Apple didn’t have to beat Microsoft. To me, it was essential to break that paradigm.” Steve Jobs, 2007, on his return to Apple

Moving rhetoric

2011-10-11T17:21:00.000-05:00

It saddens me to see such brilliant rhetoric wasted; directed at the victims of a creeping disease, encouraging its proliferation, instead of working to create a vaccine. The irony is palpably maddening.

"What They did not want you to ever find out is that your generation, the generation born between 1980-1995, actually outnumbers the Baby Boomers. They knew that if you ever turned your eye towards political reform, you could change the world.

They tried to keep you sated on vapid television shows and vapid music. They cut off your education and fed you brain candy. They took away your music and gave you Top Ten pop stations. They cut off your art and replaced it with endless reality shows for you to plug into, hoping you would sit quietly by as They ran the world. I think They thought you were too dumb to notice.

Indeed, I thought They had won.

But I watched you occupy the capital of Wisconsin. I see you today as you occupy Wall Street. And I see a spark, a glimmer of the glorious new age that is yours. A changing of the guard, a guard that has stood for entirely too long and needs your young legs to take his place.

I watch you turn away from what is easy and stand up for what is right. I see you understand we as a society are only as strong as our weakest link. I see you wise beyond your years. And I am proud. Give ‘em hell, kids. You are beautiful." -Kate Danley

Progress reduces personal freedom

2011-10-10T20:46:00.009-05:00

Progress reduces personal freedom, but reducing personal freedom does not create progress.

Many areas of modern living are logically incompatible with personal freedom, and self-directed actions by individuals, because many industries are today so complex that many professionals are required to promise to have a client's best interest in mind; to be paid to be selfless, an impossible task.

Governments, military leaders, doctors, economic advisors, and others are today forced to make decisions on behalf of others. A patient cannot be reasonably asked which drug he would like to purchase unless he knows as much as his doctor. Doctors must act in their patient's best interest, and that requires the explicit separation of the doctor's income from his client's payment. It is impossible to have his own best interest (selling the most profitable drug) and his client's best interest (comparing costs to side effects and efficacy) in mind simultaneously.

Today, the healthcare industry is set up in such a way that doctors may as well be selling spaceships to people who know nothing about interstellar travel. They have a financial incentive to recommend the hyperdrive and plasma engine upgrade, and the would be space-traveller has no way to decide what he wants without depending on the salesman for information.

Doctors are in the business of service and guardianship. Guardians agree to act "selflessly," and are necessarily presumed to be more knowledgable, intelligent, wise, or capable than the people they serve. If not, they would not be needed; a patient would pay the hospital to use their equipment to diagnose and treat himself, and would have enough knowledge of international affairs to know when he must jump in his tank and ride off into battle. In 1775, this was possible; each man owned the most advanced weaponry available to any military (muzzle-loaded muskets). And so it was for 18th-century medicine. It was so simple that anyone could do it, and the only drugs available were basically whiskey and willow bark. There was no need to submit to guardian-doctors when the nation was formed; each man was capable of caring for himself and his family with maximum effectiveness. This was a unique time period in human history. Previously, the protection of the king's castle and his knights was required for average people, who were too poor to afford the weaponry of war, or the safety of castle walls. Affordable guns changed that, making the United States, where each man was his own king, a viable possibility.

Today the story is much different. We are again forced to explicitly trust others to care for us because of advanced technologies. None of us are able to defend ourselves effectively without the "castle walls" of an organized military with high-tech weaponry, and medicine is too complex -- drugs too dangerous and scanning equipment too expensive for anyone to enjoy modern healthcare without trusting someone else to have their best interests in mind.

To live a modern life, we must blindly trust others to make decisions for us, recognizing that we are sometimes unable to balance our needs and wants with the price of their acquisition. We don't know how much to pay for an apple if we can't judge its quality. We must trust someone else to judge it for us, and it is improper for that person to be the apple farmer.

Guardians must perform their duties independent of financial compensation. The relationship between a doctor and a patient he agrees to serve cannot be a trade, because serving others is incompatible with trade. As Alisa Rosenbaum was so eager to tell us, one cannot negotiate a trade and be altruistic at the same time. If either party is truly selfless, he would simply offer what he has as a gift, and refuse anything in return. No one can be paid to hold your interests above his own, lest he return the payment immediately because he has agreed to put your interests first. The payment must therefore be separated in some way from the act of service, and the motivations for serving generated by something other than monetary compensation.

The business of creating drugs, and medical or military equipment is still the domain of men with their own best interests in mind, who hold their own needs above all others. By this process, they accidentally serve by more and more efficiently producing what their neighbors want to buy. Manufacturers, in serving their own needs and wants, create the machines and materials needed by the service professions, which are growing in number as the world becomes increasingly complex. The future of modern society will depend upon our ability to keep those who serve from cooperating and trading with people that produce. Doctors serving patients must not be friends with the drug and equipment manufacturers. Armies protecting us must not have dinner with Lockheed executives.

It is like a pilot who agrees to fly you and your plane to a distant location. He must not only negotiate the price before the flight, he must also get into the plane. If the pilot remains on the ground and directs the plane by remote control, his motivations are no longer necessarily in line with yours. He is free to improve efficiency by taking more dangerous routes, or save fuel by slowing the trip, or save money by reducing the safety features of the plane. Doctors are today unshielded from the moral dangers inherent in flying by remote control, as are military and political leaders, who have promised to have the best interests of Americans in mind, but are prodded by manufacturers at every turn to use their products in ever larger quantities.

To correct the problems of government and healthcare, we must put the pilots back into the planes they have agreed to fly, and separate the duties of their service from the influence of the plane's manufacturer. Doctors must not be paid by drug companies, and must avoid friendship or association with drug company salesmen, just as political leaders must avoid the company of lobbyists and the friendship of the businessmen that supply the wealth government consumes. Both doctors and politicians must not earn income by shifting their loyalty away from those they have promised to serve.

Trading is an inherently adversarial process that results in a better life for both combatants. Service is an inherently cooperative process. If you have wine and I have cheese, it's easy to attempt to negotiate away as little of my cheese for as much of your wine as possible, but if I have wine and you agree to feed me, I have to trust you and cooperate with you by telling you what I like to eat, and how many calories I require, and what types of food I like. Because your side of the trade is ambiguous, especially if I have no knowledge of cheese-making or cannot properly judge its quality, I must trust you to do your best to create something that benefits me at the lowest cost, and have no control over the final product. I cannot negotiate with someone who serves me; I must accept what he produces and offer gifts of gratitude, as it were, in exchange. Those that serve agree to make the world better in the future. Those that produce have already improved the world in the past. They are two sides of the same coin, but the motivation to produce and trade is fundamentally different from the motivation to be in service to other people.

As we progress to ever increasing levels of expertise and division of labor, more and more trust will be put in others to make decisions for us; to tell us what to do because we cannot properly make the decisions ourselves. It stands to reason that all our decisions will eventually be made by other people, and when that happens, we won't really be making any decisions at all, except one -- to allow others to control our lives, and to trust them to avoid abusing us. Primitive men are slaves to themselves, waking to farm their own land, milk their own cows, and tend to their own children. Men of the future will be slaves to each other, each depending more and more heavily on the decision-making of others. In the past, the decision to remove a gangrened limb might be made by its owner. Today, the owner visits another man, and asks to be told what to do. Today if almost anything goes wrong, we ask someone else to tell us how to fix it. The trend can only continue as each of us becomes more specialized, and the machines that support our lifestyles become more complex.

It is imperative that we all understand that it is impossible for any of us to be paid to put others' interests ahead of our own, and if we are all to eventually be in the business of service, it is best to insure that the interests of servants and their masters be aligned as much as possible.

The dollar's value does not affect export levels

2011-10-09T00:55:00.006-05:00

Many conservatives and libertarians believe that when China inflates its currency, it makes the products they produce cheaper for Americans by lowering the value of its currency (and invisibly taxing its citizens).

This is like claiming that higher inflation in America will make our industries better able to produce higher quality goods at a lower cost. It is bizarre to claim that taxes and inflation cripple private industry’s attempts to innovate and improve their products (true), and also time claim that the same actions in China will have the opposite effect.

Dollars and RMB are just mediums of exchange and units of account. If one prison is using Marlborough and another is using Lucky Strike, a flood of new cigarette money, or additional confiscation and abuse by guards will not improve a prison’s efficiency in creating pruno and shanks made for export to other prisons. A shank is still a shank, the change in value is driven by changes in the relative wealth of traders, not the value of their money.

Exports become more appealing to rich nations not because the value of money has changed, but because the exporting nation has become poorer; its average quality of life reduced, relative to the richer nation. Just as a man brought from 1960 to the present era would be willing to work long hours in exchange for an average modern lifestyle, so too are men living in oppression and poverty in the third world.

The value of a nation's money is not the driver of changes in levels of imports or exports. They are correlated because government actions that affect the nation's average quality of life also affect the value of money. A government that makes life harder for its citizens makes them willing to accept less for their labor. A government that taxes so heavily that it leaves every citizen naked and starving will have a nation of laborers willing to exchange what they produce for food and shelter. A government that takes as little as possible, and encourages the growth of business within its borders, will see the price that its people demand for the products they produce rise over time.

A Libertarian argument in support of government healthcare and regulatory oversight.

2011-10-08T21:49:00.002-05:00

Obamacare, will lower per capita insurance costs by forcing everyone to be part of the system. It avoids the risk that only sick people will purchase health insurance, and allows companies to price insurance based on actual disease rates without calculating the probability that a new customer is already sick. This is one reason that group insurance for companies is cheaper per person.

Many people feel it is immoral to force people into the group system, but this is somewhat strange; they often don’t feel it is immoral to force everyone into military-protection “insurance.” We are all forced to pay for universal military protection, and the cost is lower, per capita, because we are all forced into the plan.

If each citizen were able to choose to purchase protection or not (ignoring the free-rider problem), military “insurance companies,” would have higher per person costs to defend its customers. People living in areas more susceptible to enemy attacks would be more likely to purchase protection, just as people more likely to get sick are more likely to purchase health insurance. The same “self-selection bias” problem exists in pricing insurance against international violence.

Additionally, if one is against universal health, one should also be against universal police forces, because people with larger families or more assets enjoy more benefits relative to people who don’t own anything, have no children, and live in safe neighborhoods. If each of us should pay individually for health insurance, surely we should all pay for police and courts based upon how many of our children and assets they are required to protect.

If one claims that he should be free to choose to live with the risk that he may be hospitalized, without insurance protection, should he not similarly demand that he be free to choose life without the protection of police? Should he not be free to select the level of police protection he desires, so that he is free to avoid paying for services and accept the risk that his home may be burgled? If one is in favor of a public police force, one should also favor universal healthcare for the same reasons.

My opinion is that the only legitimate function of government is the military protection of its citizens, and that army services cannot be privatized, because a company with profits as its primary goal would necessarily engage itself in conquest and slave-trading, if motivated by profit and nothing else. Military and governance must be motivated by something other than the desire for material gain; if we must trust someone with enough power to defend the nation, we must also trust them to avoid enslaving the nation.

This is why ancient civilizations separated the merchant class from the nobility; aristocrats were expressly forbidden to engage in any form of trade at all. Trading was to be shunned completely and rulers were raised from birth to be disgusted with the very thought of trading for material gain. Income of royalty was to be donated, citizens were to pay “tribute,” to their leaders who so honorably and nobly protected the kingdom from invasion, unmotivated by the desire for mutual exchange. Rulers and royalty were to be motivated only by honor and and the duty to defend.

If the physical protection of citizens is a government’s only purpose, what difference does it make if invaders are men and machines, or diseases and viruses crossing borders undetected? If it is government’s legitimate duty to protect our physical bodies against damage from bullets and bombs, should it sit idly by if the damage is caused by an infectious agent? What is the difference between an invading army of men, and an invasion by an army of viruses and bacteria? If an alien race were to invade the nation, and each extraterrestrial were no bigger than an atom, would the military be absolved of any duty to defend us?

If a horde of walking sharks suddenly emerged from the sea, killing millions and leaving a swath of bloody terror in their wake, would it be the responsibility of private citizens to have adequate insurance coverage for their own hospitalization, and enough weapons to fend off the sharks? I don’t see a fundamental difference between an invasion by man-eating sharks, hijacked planes hitting tall buildings, and an army of men with guns crossing the border. Why are citizens asked to pay for a private defense and elimination of intruders when a life-threatening invasion is of one type, but rely on government for protection from another?

To be logically consistent, if one recognizes the necessity of a military entrusted with the duty to defend its people from physical harm, one must also recognize that the size or shape of the invaders does not matter. A person who falls ill at the hands of a virus, hell bent on destroying his body, is no different than a person attacked by an enemy soldier.

Protecting other human beings with powerful weaponry, be they bullets or drugs, is a business of honor and duty, and cannot be operated as private enterprises without encouraging ruinous corruption. A guard must be trusted to refuse bribes, and a general must be trusted to never rent the services of his army, and soldiers must never sell sensitive information, no matter how high the price.

In the same way, a doctor must be trusted to offer the best advice, drugs, and procedures that are in the patient's best interest. He must be driven by a duty to protect his patient's body from disease, not a desire for profit. A doctor who knows that a $4 drug will be more effective, and have less side effects, must avoid recommending a $100 drug that will earn him a higher commission. He must be trusted to avoid unnecessary procedures and tests, even though he knows they will be profitable for him or his hospital.

The problem in both businesses (doctoring and soldiering) is that customers are powerless to negotiate in good faith. A citizen does not know how much to spend on military, does not know enough about the stability of international governments to know how dangerous or likely invasion may be. And a patient does not know enough about medicine to know the risks and benefits of various drugs and procedures. Customers are forced to trust doctors and military leaders.

We must trust soldiers to avoid abusing their power by enslaving us tomorrow at gunpoint, or entering our homes to steal our assets, or accepting bribes from those that would do us harm. Soldiers must separate their duties from the desire to profit by trading some of the power they hold for material gain. And doctors must do the same, keeping their duty to their patients separate from their desire to profit by recommending more expensive treatments.

If guarding our borders is a legitimate function of government, medicine should logically be included as a legitimate function as well. Both are jobs best left to men who are motivated not by pecuniary incentives, but instead live to uphold their honor and duty to the citizens that they protect and serve. Both military and doctors must depend upon the profit-driven manufacturing of the private sector, to create weapons and medical equipment, but perhaps a return to the old methods would be best. Perhaps doctors and generals should have no direct access to negotiations, as was done with the aristocracy of the middle-ages. All trading was done at arm’s length, with middlemen and servants engaging themselves in the "nasty, lowly and dishonorable" business of negotiation and trade, so that rulers were free to protect the kingdom from harm without any danger of corruption (trading power for money.)

Guardians and doctors are necessarily in the same business; they both protect people from harm, and both must avoid the temptation to trade power for money at the expense of their customers. This is the purpose of regulators. A patient is unable catch a doctor prescribing more expensive or less effective drugs, or performing harmful or useless surgeries. A regulator is designed to know as much as a doctor, and to audit the actions of physicians and insure that they are not taking advantage of patients for profit. They are needed only because patients are incapable of judging a doctor's quality without knowing as much as the doctor (removing the need to hire a doctor).

In any business where one party agrees to care for the other, using superior firepower or knowledge, regulation is needed. One party has agreed to act in good faith, but absent any oversight, is free to abuse the other party without risk; without oversight, the abuse would never be discovered.

A case could be made in support of a private, voluntary regulatory system, where doctors agree to be audited by private-market regulators, but the source of the regulator is not important, per se, because his job is in both cases an honorable duty, and by that I mean to say that he must be trusted with a power to protect us from harm that is unmatched by his salary. A soldier is not driven to fight, or driven to risk his life because of the money he receives. He is driven to protect because he enjoys being “selfless,” he enjoys being viewed as a good man, a hero worthy of respect and honor. He would certainly prefer to avoid a salary in the first place, and instead be showered with enough material gifts to sustain him in a lifestyle befitting a man who risks his life for the well-being of others.

The same can be said of both doctors and regulators, and even professional investment advisors, who require regulation for the same reasons -- they have superior knowledge and have the ability to agree to invest a client’s money in the best way possible, but can secretly invest in vehicles that offer the largest kickbacks and commissions. Again, a business that agrees to care for its clients by using superior knowledge or physical force is a morally dangerous situation that is ripe with opportunities for corruption.

Societies have, in the past, tried to separate trade and protection with caste systems and morality, and today we try to separate them with regulation. It is likely in our best interest to focus not on how "free" or "regulated" markets should be, or on how large government becomes, per se. We must concentrate on separating the duties of guardianship from the business of efficient production. One requires men to faithfully serve those they have sworn to protect, and the other requires an unending willingness to shift from one supplier to another and constant adaption to create the best products possible at the lowest cost. They are fundamentally incompatible processes.

Are ideas a form of property?

2011-10-06T17:29:00.000-05:00

The fundamental difference between intellectual property and physical property is that theft (and duplication) of IP is harmless to its victim. If I steal your car, you are without a car. If I copy your car, you are left unharmed.

The claim that innovators would not develop new products if they knew others could simply copy their ideas is status quo bias. The argument seems very similar to claiming that a 100% income-tax rate would stop people from working, but is fundamentally different. Innovators can protect their ideas, methods, and processes from theft; but no one is able to legally avoid having their earnings stolen by the high tax rate.

Even if we assume that innovation would not occur without IP laws, what is to stop Edison, upon the discovery of a new light bulb design, to contract with a manufacturer (or build a factory himself), to create millions of bulbs before releasing them to the market at monopoly prices? As others scramble to copy his design and materials, he would become wealthy as a direct consequence of his invention. This is a primary reason that Apple was so financially successful -- keeping its designs and products a secret until millions of them flood the market, and competitors scramble to copy them. Notice that even with IP laws, Apple still behaves as if they do not exist in order to capture the full value of innovation.

Patents on various parts of Apple products only serve to throw a wrench into the efforts of competitors, just as patents on flywheel design slowed the improvement of the steam engine.

WD40 is another good example. Its inventor chose not to patent his "recipe" of chemicals, because it would only afford a short period of protection. Instead he chose to closely guard his methods and ingredients, and to this day it has not been successfully copied. The secrets that the WD40 company now protects are almost exactly the same as the secrets of any wildly successful food, like Coca Cola... or Sabra hummus, which are exquisitely balanced and nuanced flavors that are as impossible to reproduce as WD40. Why, then, is it possible to patent an industrial lubricant, but not a soda recipe?

I have developed several commercial recipes, and I can tell you that intellectual property is every bit as relevant to the process of converting plants and animals into a meal is it was to the process of turning rocks (metals) and trees into steam engines.

Additionally, protecting intellectual property is prohibitively expensive; so much so that even a relatively wealthy person cannot reasonably afford to patent and defend what they invent. Protection is effectively afforded only to very wealthy companies or individuals. It is not logical for me to pay taxes to support the courts and judges, socializing the costs of property lawsuits that do not involve me. Claiming that I benefit indirectly by encouraging innovation is like claiming that I benefit from (and must pay taxes for) roads even if I don't use them.

Efficiency in Government

2011-10-05T21:15:00.000-05:00

"I worked briefly as a sub-contractor for a company that won a government contract for software development in the mid 90′s. My task was to maintain and “fix” a program another developer had written before leaving that wasn’t working correctly. The program took close to 2 hours to run and spit out an erroneous report. Anyway, after figuring out that the code was complete crap, I went to the specs and re-wrote the code from scratch. Took about a day and a half. The program then ran in under two minutes and spit out the correct data. I took it to my boss, figuring he would be proud of my efficiency and initiative, but he took me outside and told me point blank that he didn’t want the program to run so quickly, nor did he want the news to get out that his department could fix things so quickly. He said I could either maintain the status quo or quit. I quit." --Comment at Cafe Hayek

Modern Banking is Like a P.O.W. Camp

2011-10-04T22:07:00.003-05:00

This is a continuation of a previous post, describing the economics of a WW2 POW camp, in response to a reader's question:

"So what benefit is it to a bank to take deposits? Seems like printing money for loans (and getting back interest) at no cost is a pretty good business to be in! They can offer loans with no risk at all, just print more money, and if someone defaults, they just seize the asset (and even if it's worthless, it is no cost since printing money is free)."

Banks take deposits because the amount of lending they are permitted to do is regulated by the Fed, based on their total customer deposits, but they are not necessary for banks to create paper currency. There are two distinct, separate steps involved -- issuing new paper, and the service of guarding paper that has already been issued.

Imagine the POW camp's store prints new money and trades it for a wool coat, and places it in the store, available in trade for the new money. This is one way to create currency, and does not require deposits of the paper currency with the store. If the store offered to keep paper money in a lock-box at the store, that would be a distinct and separate service unrelated to the process of printing new money.

The operation of modern banks is quite complex. To see how banking works in terms of POW camp paper money, the process would be as follows:

1. John knits a wool coat from yarn.

2. Bob wishes to buy the coat for 50 POW dollars, but does not have enough money.

3. The camp's store brokers the deal; it buys the coat from John with 50 dollars it prints from thin air.

4. Bob buys the coat from the store on credit, owing the store 50 POW dollars, and agreeing to repay the debt over five months, paying 11 POW dollars per month (one dollar per month as an interest fee).

Modern banking is the same, but the wool coat is a house or car and the terms of the loan are longer. Banks broker deals in exactly the same way, making it easier for a home-builder to sell to a person who lacks the capital to make the purchase.

Notice that in this system there is not enough paper money to both pay off all the loans and the added interest payments. To correct this problem, the store would need to purchase supplies and keep them off the shelves, balancing the amount of supplies and paper. This is why the Fed engages itself in "quantitative easing," purchasing assets with new money, and keeping them off the market.

Later, if the value of paper falls in value, the store would be able to place additional items on the shelves to raise the value of paper -- by making it less plentiful relative to the supplies available in the store.

Trade Deficits

2011-10-04T20:50:00.000-05:00

Don Boudreaux writes that trade deficits are irrelevant, both because of the way they are calculated, and additionally, because dollars must always eventually return to the United States, to purchase goods and services from US producers.

He correct in stating that deficits are of no concern to the well being of Americans, but is wrong in assuming that US dollars must always eventually purchase US goods or services. Dollars may be circulated indefinitely without enjoying the ownership of an American citizen ever again. Some nations use them as national currency, others use them as central-bank reserves, and foreign individuals may hold them as investments, trading them back and forth, indefinitely absent of American ownership.

Further, Mr. Boudreaux assumes that when American buys something from China using dollars, that those dollars are not immediately traded for Chinese currency on the forex.

And finally, Americans are the primary debtors to US banks, and are therefore, as a group, more negatively affected by deflationary pressure on US dollars. The supply of dollars is made lower if they are held in foreign bank accounts, because US banks no longer include them in the reserve calculations used to create new dollars. The citizenship of the dollar’s owner is always irrelevant — it is only the citizenship of the bank that matters to Americans.

The reality is likely that dollars are either quickly repatriated using currency exchanges, or that foreign companies hold accounts with US banks, and payments are accepted in dollars that never leave the United States banking system.

Much of the trouble in visualizing the impact of foreign trade is borne of a failure to regard dollars as a form of wealth, with an intrinsic value to those that must ultimately consume them. Dollars are born when banks issue new loans, and are consumed when those loans are repaid, in the same way that wine is created in when grapes are fermented and destroyed when poured at the dinner table. Wine has value for the same reason as any paper currency, and both are created and destroyed in ongoing cycles. There is no such thing as "intrinsic value," or "real value," or "use value." All are childlike concepts invented to legitimize or quantify the reasons that any object is valuable. To avoid the truth -- that any object has value only because someone values it, is a grave error.

Zero Reserve Fractional Banking

2011-10-03T17:59:00.001-05:00

Some countries, like Canada and Australia, have a fractional reserve banking system with a zero reserve requirement. The fact that inflation does not run rampant in these countries is evidence that the traditional view of FRB is flawed; the reserve requirement is not a the limiting factor stopping banks from infinitely multiplying the money supply. Collateral is the limiting factor.

When banks make new loans, they are not re-lending money that is supposed to be sitting in individual accounts, as is commonly understood. They are creating brand new money. Period. Full stop.

New money is traded for collateral. There is no theoretical reason that a bank should not have a negative reserve; a bank could begin operation with no reserves whatsoever, no deposits at all. It could print new money and exchange it for collateral without limit, and without detrimentally affecting the value of dollars. Inflation would only occur if banks issued unsecured loans.

The purpose of reserve requirements is not to throttle the money supply, per se. Its true purpose is to regulate the amount of business each bank is permitted to do -- the biggest banks, with the most depositors, will be permitted to issue the most loans. Reserve ratios are the way the banking cartel divides business amongst its members.

The Economics of a POW Camp

2011-10-03T00:44:00.000-05:00

R. A. Radford described in 1945 an account of trade in World War Two POW camps. Cigarettes, being the most liquid asset available, quickly became money; prices were listed in cigarettes and even non-smokers accepted them for their own rations of food and supplies, intending to use them as a store of value and in future trade.

Prices rose and fell depending on the influx of Red Cross supplies. When cigarette rations were reduced, prices rose. Markets were created by lists on the wall of each building, showing offers to buy or sell various goods, with prices listed in cigarettes.

The most fascinating part of the story is how closely it mirrors modern life; professional traders emerged, attempts to fix prices led to black market trading, and a fiat paper currency was created. A shop and restaurant were organized, and in order to purchase raw supplies for the store, issued paper notes that were each worth one cigarette, and were accepted in payment for anything in the store. The store became a bank, issuing paper money out of "thin air," and prisoners willingly accepted the paper because the shop agreed to trade it for goods at any time in the future. The paper money traded at par with cigarettes for a time, until the camp store began price-fixing schemes, and the camp became destabilized by bombing raids.

This method for issuing new paper money is the same system used today by modern banks. They issue new notes when they create new loans (mortgages, car loans, etc) with a few keystrokes, and insure that they are valuable by agreeing to exchange their collateral for notes in the future. The bank agrees to exchange a car title for dollars in the same way that the POW store agreed to exchange soap for new paper money.

The most interesting part of this narrative is that inflation eventually destroyed the paper money, but it was not because of excessive printing of notes. Printing too many notes would have been impossible; every purchase the central-store made with its new paper notes was kept in the store, available to be traded back to the men at the same fixed-price. If butter had been purchased for ten new paper notes, it would sit in the store, available for purchase for ten paper notes until it was sold. Even if the store went crazy, buying up all of the assets in camp with new paper money, inflation would not occur, because everything purchased would still be available for sale, priced in paper money.

Paper notes lost value for two reasons. First, they lost value when the future of the camp was in jeopardy; when prisoners feared that the store might not exist in the future. Second, they lost value because of the store's efforts to fix prices, and its policy of removing an item from the shelves if the "official price" was too low compared to the black market. If soap's official price was ten cigarettes/paper notes, and was selling for 20 outside the store, it would be removed from shelves. Eventually the store only contained items that were not very desirable, and thus paper notes could only buy a few limited items in the store. When the camp was disbanded, all paper notes were eventually exchanged as agreed in the store, but the variety of items available was limited.

It follows that inflation of a paper currency in modern economies is created by destabilization of government (war), and by the implied price-fixing that occurs when a bank agrees to exchange loan-collateral at a fixed price. If a loan is issued for a car, the bank agrees to exchange dollars for collateral-free ownership if the loan is paid off. The bank is effectively offering the home for sale in paper money at an "official,"fixed price.

If the market exchange-rate for soap goes too high, the store stops selling soap. The same thing effectively occurs in a market where home prices are rising; banks "take the soap off the shelf" by adding pre-payment penalties to mortgage contracts, which make it more expensive the pay off the mortgage; makes it more expensive to "buy the home" by paying off the loan. Banks don't remove the possibility of trading paper for the house completely, as was done with POW soap, but the inflationary effect should still be there.

A third way that inflation may occur is if the POW store began buying supplies with new paper and did not offer them for sale at all. This is what the Fed does when it engages in quantitative easing.

A fourth possible cause for inflation would involve the store accidentally buying supplies above the market price, and upon placing the asset on its shelf, finding that no one will pay 40 for soap because it trades at 20 outside the store. This effectively removes the bar of soap from the market, but leaves the new money in circulation to purchase anything else in the store, putting pressure on all other prices to rise and lowering the value of paper. This is what has effectively happened when housing prices collapsed and left many in upside-down mortgages -- the money remains in circulation but the home is priced incorrectly in the mortgage contract. The home is now effectively "off the market" just like the soap, no one will pay off a $500,000 mortgage on a house now worth $300,000. This effect is countered by mortgage defaults, which is equivalent to the POW camp store changing the price of soap to match market value. A bank prices the home correctly when it repossesses it and sells it at auction.

A final possible method for creating inflation would manifest itself if the camp's store were to begin issuing unsecured loans with new paper money. Nothing would be available in the store to match the new paper, and prices would be pressured to rise as the supply of new dollars outpaced the goods available in the store. This occurs today any time a bank issues an unsecured loan, and occurred heavily during the 1970s when banks issued massive amounts of unsecured loans to South American nations, causing massive inflation during that era and culminating in the August 1982 default of Mexico and eventually to a reduction of unsecured lending to the third world and a reduction in inflation during the 1980s.

The Yield Curve

2011-10-01T17:30:00.003-05:00

What can rental cars teach us about yield curves? What are credit default swaps? Is borrowing a car fundamentally different from borrowing a dollar?

The longer one borrows a car, the lower the daily rate, but the longer one borrows money, the higher the daily rate becomes. Why? Another way to ask this question might be: "Why do yield curves slope upward for dollars and downward for cars?" Additionally, why does the shape of the curve change? What affects the rates that lenders charge to borrow cars and cash?

At first the question seems strange; we don't normally think of cash and cars as assets that are both being leased. We tend to avoid thinking of dollars as an asset that is being rented out, just like a rental car. We even have different names for the same things when speaking about dollars. Dollars do not depreciate, they are subject to inflation. Dollars are not rented to customers, they are loaned. One can lease a new car, but one borrows money. One pays a fee to rent a car, and pays interest to lease dollars. One signs a rental contract to borrow a car from Hertz, but signs a mortgage to borrow dollars from Chase.

The situation is further complicated when considering financial investments and bonds. If a company issues a bond it is borrowing dollars from an investor; it is renting dollars from an investor. Buying a bond is the same as loaning dollars; the same as renting dollars to the company that created the bond. Buying a bond is considered an investment, but buying a bond is the same as loaning money, the same as renting out dollars for a fee. In this sense a rental-car agency is no different than an investor -- it is renting out cars for a fee. Because both cars and dollars are assets, Hertz is "investing" in rental-car contracts, just as you might "invest" in bonds. A bond is a loan contract, and a loan contract is a rental agreement.

When a rental agency rents a car to its customer, the customer issues a bond (rental contract) -- the customer agrees to pay a fee for the right to use the car. The same thing occurs when a company issues a bond -- it agrees to pay a fee (interest) for the right to use an investor's dollars. Both borrowers agree to return the borrowed asset (dollars or a car) at a certain time and place, and pay a fee for the privilege of its use. The paperwork for this agreement is the same.

Back to the original question: why does a 15 year mortgage carry lower rates than the same agreement over 30 years... but borrowing a car becomes cheaper if it is rented for a week instead of a day? At first it seems like the answer is simple -- it costs money to process the car rental (building, desk clerks) and its return (cleaning etc), and the car loses value over time, and it can't make money sitting idle on the lot, so long-term rentals are more cost effective and avoids the paperwork of the turnover. The trouble is that mortgages require all of the same things, and dollars lose value over time as well.

The are three main differences here. One is that dollars can be immediately loaned to new customers upon their return; they can always find a new investment (person willing to borrow them). Dollars sitting in an account are not idle like cars in a parking lot. The cars are losing value and failing to generate income, but the dollars in the account are generating interest.

Money is so liquid that it can be instantly rented out to myriad borrowers. Cars are illiquid, and there is always a risk that they will sit idle on the lot, which gives rental agencies an incentive to make long-term agreements to avoid idle time. Companies that rent cash (make loans) have zero risk of the money sitting idle, and therefor no incentive to offer a long-term discount on the rental fee. The yield curve flips when any asset becomes so liquid that there is no risk of the asset sitting idle. Until that point, short term rates are higher because of the idle-time risk.

Another main difference is the rate of depreciation; care lose value much faster than dollars, and because of the exponential nature of depreciation (assets lose value faster tomorrow relative to next year), depreciating assets cost more to hold now than in the theoretical future. This is obvious with cars and not so obvious with dollars, but both experience an exponential loss of value over time.

A new car will lose perhaps half its value in the first three years, but may take another six years to lose half its value again. Eventually, a very old car will be nearly stable, losing only a fraction of a percent of its original value. The same thing happens to dollars, and for this reason if inflation (depreciation of dollars) is expected to be high, short-term rental of the dollars must be more expensive -- because of the nature of exponential depreciation -- dollars are always losing more value today than they will lose tomorrow. A dollar is today worth about 5% of its value 100 years ago, and is expected to again be worth 5% of its current value 100 years in the future, relative to today.

For example, if a car is expected to lose half its value per year, I must charge more than half its value to earn a profit on one-year rentals. But I can charge less per year if you agree to rent it for two years -- at the end of two years a $20,000 car will be worth $5,000; it will have lost $7,500 per year. So I must charge over $10,000 per year on one-year rentals and over $7,500 per year on two-year rentals, and so on. The price per year will be lower if you agree to lease it for a longer term. The same pressure applies to dollars, but because they are expected to lose only 2% of their value per year, I can make a profit by renting dollars (loaning them) at anything over two cents per year, per dollar.

A third difference is that the car rental-fee is paid in an asset other than cars; it is paid in dollars. With the rental of dollars, the fee is paid in the same asset that is leased. Borrowers of dollars pay their fee in dollars, and this turns out to be a key difference, and perhaps a good reason for using different terminology. To judge its equivalent in car rental, one would need to pay for the rental with rental cars.

So why do we see upwardly sloped yield curves if dollars are expected to depreciate in the same way as cars? Shouldn't I be willing to offer discounts on the rental fee if you agree to rent my dollars for a longer term? Yes, but there is another consideration in the business of renting property: default risk.

If I rent out my car, there is virtually no default risk; I will always get my car back. It is insured against theft and destruction. If I rent dollars to you and you default, I have no insurance, and have little hope of having my dollars returned to me. For this reason, the rental of dollars becomes more risky the longer I agree to let you use them. Credit default swaps, invented in the 1990s, are a form of insurance on rented (loaned) dollars. They allow people who rent out dollars to purchase insurance that pays if the rental money is not returned in the same way that Hertz carries insurance that protects them from renters who do not return their vehicles. CDS obligations lower the cost of lending money, making borrowing money cheaper in the same way that auto-insurance lowers the cost of renting a car from Hertz.

If you screw up and crash my car, I am not affected. If you screw up and go bankrupt, I lose my dollars (unless I purchase CDS insurance). Running your life without going broke is like driving a car without running it off a cliff -- both are more likely as the time-frame grows larger. The longer you drive, the more likely you are to crash. The longer you use my dollars, the more likely you are to go broke. However, we must not make the mistake of assuming that the fee is higher because the total risk of default is higher. The risk of default each year is what matters, because the rental fee (interest fee) is paid per year. It is paid based on the amount of time a borrower holds the car or the cash.

If the borrower is a robot and his credit rating will not change from this moment until 30 years from now, the risk of default is the same for each of those 30 years, all else being equal. But he is not a robot; he is human, and I may be able to see how he drives today, but it is impossible to see how he will be driving 30 years from now. I know a loan may be a good idea for a business in its current state, but how can I know how stable it will be in the distant future? To take that gamble I must be paid a higher fee, and it is because conditions change over time. That man who borrows a car today will not be the same man in 30 years. Short-term loans are safer because it is easier to predict the near future. Tomorrow's weather is easier to predict than next week's.

However, a lender with a default swap does not fear losses in the same way that a rental-car company does not fear losing a car. The price of insurance varies from year to year, and there are myriad insurance companies available. The only risk in lending is that the insurance company will go broke at the same time that a car is stolen (which happened in 2008 with AIG's failure), so the credit rating of borrowers should not affect long and short-term rates differently.

Additionally, the final consideration is commonly known as a liquidity premium. If I am going to invest in something that is difficult to sell, I want to be paid a higher rental fee. If I invest in a rental property I want a higher return than if I invest in treasury bonds, because I can sell the bonds almost instantly, but may have to wait months or years to find a buyer for my rental property. The liquidity premium is the additional fee that is charged by people who rent their assets (invest) for longer periods of time. This consideration is mitigated by the securitization of long-term loans. Because lenders can resell their loan contracts easily, their capital is not tied up for the full term of the loan, and they don't mind issuing long-term loans any more than short-term loans.

Summary:

The shape of the yield curve (price list lenders and investors set) is determined by four distinct forces:

1. The risk that the asset may sit idle and lose value when it is not leased to a customer. This relates to the liquidity of the asset. Liquid assets carry lower risk of idle time, and liquidity is a measure of how quickly an asset can be traded, sold, or rented. Mitigated by liquid markets.

2. The risk that the asset may not be returned as agreed (default). This depends on both the credit of the borrower and the uncertainty of the future. If war is on the horizon this risk is higher for all borrowers. Mitigated by CDS.

3. The expected depreciation rate of the asset; inflation.

4. The liquidity premium (term premium). People don’t like to own assets that are difficult to sell (trade), preferring to own 100 gold coins instead of a solid block of gold weighing the same amount, because the coins are more liquid; they can be traded more easily. Mitigated by securitization of loans -- similar to selling paper shares that represent a fraction of the gold brick. Because they are smaller, they are more liquid.

5. The difference between the depreciation of the loaned-asset and the asset used as payment. With rental cars, this involves comparing the depreciation of the car with the depreciation of the dollar.

The liquidity of the asset affects the first risk -- the more liquid the asset, the lower the risk of holding an "idle asset." If it is very liquid, idle time will be near zero; cash can be immediately re-leased (invested at interest) upon its return.

A person in the business of renting out his assets must consider all of five items in setting a pricing schedule. Each lender (investor) will have a different yield curve (pricing schedule).

Implications:

Long-term leases of depreciating assets should be cheaper (per day). Long-term leases of assets expected to rise in value should be more expensive (per day), even if no change in the value of money or interest rates is expected. Renting a building for five years should paradoxically carry a higher daily fee than renting a car for same amount of time, if default-risk is removed (with insurance).

Lower liquidity of the rented (loaned) asset flattens the curve, moving it towards inversion, because of the risk that the asset may sit idle between rentals. The leasing company has an incentive to avoid idle time by charging a lower daily rate on long-term rental agreements.

Increased depreciation expectations flatten the curve for rental-car loans, making long-term rates lower relative to short-term rates, because cars exponentially decay to zero value over time. The faster the asset loses value, the cheaper long-term rentals become (relative to short-term rentals). However, if payments are made in the same asset, rates must be higher over longer periods (curve becomes steeper).

To see why, imagine that you and I both own 100 sealed bags of grain, each weighing 100 grams. Each year, mice are expected to pilfer 5% of the grain from each bag, until all of them are nearly empty. If I want to borrow all of your bags (10,000g) for a year, and wish to pay interest payments with my unopened bags, how much would you ask me to pay? Because the bags will be 5% lighter, and will weigh 95g each, you would need to be paid at least 105.26 bags (10,000/95) just to receive the same amount of grain (value) you loaned to me a year ago. The interest rate in whole bags of grain would have to be 5.26% per year, if I wished to repay exactly the amount of grain I borrowed.

Now imagine I want to borrow them for two years. What would you charge then? The bags would after two years contain 90.25g of their original grain (value), and they would have lost 9.75g of their original weight (value). To repay you I would need to give you 10,000g of grain(value), or 110.8 bags, which is 5.26% more than the 105.26 bags I owed from the first year. In the third year, the bags weigh 85.7375g each, and you would have to receive 116.64 bags.

So even if we know the exact inflation rate of our grain-bags, borrowing them for one year will cost 5.26 bags, and borrowing them for three will cost 5.55 bags per year (116.64/3). The cost to borrow for longer periods must be higher because payments are made in the same asset, depreciating at the same rate. Over time, the payments become devalued as well, which is not the case with car rentals, where dollars hold their value relative to the leased asset.

Uncertainty about the future does not make the curve steeper. Long-term rentals of cash seem like they should have higher fees because it is easy to judge the risk of a loan today, but very hard to predict risk of default in the distant future, but because of credit default swaps (insurance), the risk is mitigated. Reduced solvency of insurers affects the slope, not the solvency of borrowers.

The yield curve does not indicate where investors think interest rates will move in the future. It is a reflection of the pricing schedules of firms and individuals that rent out their dollars, and those pricing schedules are based on the five points above. The curve does not represent the expected change in inflation rates, but shows the current opinion regarding the average inflation rate in the future. It is a snapshot of lender opinions regarding how much grain the mice are expected to steal from the bags, on average.

Flat yield curves do not indicate an economic slowdown. They indicate that people don’t expect any grain to be stolen from the bags in the future; inflation expectations are zero.

Liquidity preference does not affect the yield curve of bonds, because bonds are also highly-liquid assets. Rental-car contracts are very illiquid. It would be difficult for a rental company to sell a rental contract, midway through a car loan. They must wait for the contract to reach maturity to get their car back. Bond holders don’t have to wait to get their dollars back; they can easily sell the bond in organized bond-markets.

Bonds that are not heavily traded would have a lower price, and thus a higher interest rate across all maturities, because lenders would be trading highly-liquid assets (dollars) for a less-liquid asset (bond). Similarly, a person trading a gold brick for gold coins may accept slightly less total weight in coin, because he values their liquidity; 15.9 oz of gold may trade for a one-pound brick.

High interest rates do not indicate high inflation expectations. If all rates are high and the curve is flat, inflation is expected to be zero. If all rates are high it indicates that there is a high demand for dollars. This is similar to high prices for rental cars -- it does not indicate that the cars are expected to depreciate (inflate) faster than normal, it means that people have a greater need for cars and rentals cost more. The shape of the curve indicates inflation expectations and the general level indicates how badly businesses and individuals want to borrow money.

Peace and violence

2011-10-01T05:40:00.000-05:00

Production, innovation and wealth are produced by peaceful cooperation, efficiency, innovation, thrift and honesty.

Leading an army, to defend the innocent from slavery and murder at the hands of foreign invaders, is done with top-down, statist, hierarchical organization, prowess, honor, ostentatious waste and violent deception. Soldiers blindly follow their leaders, and that is all well and good in times of war, when warriors support themselves by stealing from productive and peaceful men in order to defend those from whom they steal.

The trouble arrives when statists become friends with productive people, and are so bold and corrupt as to trade their power for material wealth. The result is a gruesome combination of treachery and corruption, leading eventually to the fall of empires throughout history.

The Source of Profits

2011-09-28T20:58:00.005-05:00

"Haeuser mit bunter Wasche" Sold for $40 million.

I think Mises is dead wrong about the source of “entrepreneurial profit.” He claims:

“A man earns profits only if he has, by superior foresight and judgment, uncovered a maladjustment—specifically an undervaluation of certain factors [of production] by the market.”

If I purchase a canvas, paint brushes, and oil paints, and labor to organize those paints on the canvas in so doing create a beautiful work of art that is auctioned at Sotheby’s for $1 million, did I earn a profit because I determined that the capital goods, the factors of production (paint, brushes, canvas) were undervalued?

No, I earned a profit by creating wealth; by organizing/changing the world around me into something more valuable. That is one source of profits earned by entrepreneurs.

The other source of profit is in trade. Each trade, if voluntary, makes both parties to the trade richer, according to his own assessment, he is better off. The item he receives is worth more than the item he trades away; and he has therefore made a profit.

The investment in capital equipment is not arbitrage, as Mises claims. The investment is either a voluntary trade, or the beginning of a creative (organizing) process. Does anyone imagine that Steve Jobs is wealthy because he identified undervalued computer chips and aluminum ore? No, Jobs creates wealth in the same way that a painter does — by organizing the world into something more valuable than its unassembled parts.

Profits are generated when an entrepreneur changes and organizes the world into something more valuable, and losses are generated when he changes the world into something that people value less than they did before. If he buys a forest for $10 million, harvests the trees and builds homes where they used to be, but is able to sell the homes for $5 million, his loss is endured only because he reduced the value of the forest in the eyes of the world.

Profits are generated when wealth is created, and losses occur when wealth is destroyed.

The Mind of a Statist

2011-09-25T17:40:00.000-05:00

If you make decisions that are not designed to benefit other people and the “greater good” you’re a bad bad man… and rich people are immoral because they have not used their wealth to fight evil.

You’re evil unless you’re a selfless, reckless, ostentatious “superhero” who uses violent coercion… taking, stealing and destroying… to get what is “good and just.” You must judge all others and violently smite them if they do evil or disagree with your personal laws of justice.

If you are humble, peaceful, and cautious… and act to honestly provide for yourself and your family, without violence or coercion… if you trade and produce, and are tolerant of others with whom you may trade… you’re obviously an evil, evil man.

Statists think like violent comic-book vigilante heroes. The rest of us grew up a long time ago.

The morality of government and its people

2011-09-10T16:10:00.000-05:00

The people and government are always at odds with each other, and yet depend upon each other in order to make life better for everyone. A government's only income is taken from its people, and the people's only protection from war and invasion is provided by a centralized power. The only reason either can exist is by depending on the other.

Anarchists don't recognize the need for guardians (military, government), and communists don't recognize the need for merchants and private life. Socialists and libertarians fall somewhere in the middle, one desiring that centralized control be a large part of private life, and the other demanding that rulers stay as far from private life as possible. Almost everyone seems not to realize that the two will always be necessary, and somehow focus only on the faults of others' ideologies if taken to its logical extreme. Each faction is morally repulsed by the other, and I think that is because each abides by a different and opposite set of moral values. The morality of a merchant-trader is opposite the morality of a warrior, who views moral actions to include deference to authority, respect for hierarchy, honor, duty, and so on, and correctly views the use of a centralized, command and control organization as the best way to wage war.

A private citizen who engages in private production and trade holds a very different view of what is right and wrong. An honest businessman regards moral men as peaceful; he avoids violence and prefers to come to mutual agreements. He accepts outsiders and is tolerant of those different than him, he is honest in his business dealings, thrifty, efficient, creative. His morality is that of Ben Franklin, which in many ways is opposite the morality of a stereotypical warrior; a Samurai, for example. One welcomes violence, knows that deception and coercion are keys to success in battle, and defers to his superiors at all costs. The other shuns violence, knows that honesty is the foundation of success in business, and directs his own actions, considering other men his equals; none are entitled to dictate his actions.

Anarchists desire that all men live in peace by distributing power equally to all individuals, which will necessarily fail when men (peacefully) accumulate military power (perhaps also a religious following) and begin taking property by force from neighbors (who lack armies to defend themselves). A world without government control of territory is only possible if no man desires to take by force from another.

Libertarians recognize the need for rulers, but have a very specific and limited idea of their legitimate responsibilities and powers (generally military, police, courts). Libertarians regard government as a protector only of its citizens' freedom; their right to contract with each other as they see fit.

Communists believe that it is the duty of the ruler to both protect the people from violence, and also to direct the lives of individuals as if part of a military operation; something that never fails to enslave the people in the same way that a general commands and controls the actions of his troops.

I personally feel that the only necessary and legitimate role of government is in defense-based military functions. I feel that policing, laws and arbitration of disputes is easily handled by private merchants and privately-owned cities. The only thing that cannot be handled by individuals is their collective defense. Someone must be trusted with enough power to defend the nation.

I feel that rulers, in accepting the duty to defend, are trusted to avoid meddling in private affairs, to avoid abusing their great power by turning it against the people they have sworn to protect; a ruler's responsibility is only to defend against violent outsiders. Unfortunately, history has shown that the personalities of protectors and warriors are not often amenable to the idea that the most effective methods for protecting the innocent against an attacking army (with centralized control and physical force) are very different from the most effective methods for improving the lives of impoverished, sick, weak, elderly and disabled citizens.

A ruler's tendency is to use the same planning the coercion necessary for war in a futile effort to improve the lives of his people by force, forgetting that all of his weaponry and all of the comforts of life, all of the nation's medical technology and doctors' training, are provided by businessmen -- individuals engaged in private trade and production. A ruler and his army depend on the people they protect, and the merchants and producers dependent on the army just the same. It is and will be a necessary partnership until the day arrives when no man among us desires to coerce another by force. Until then we might pause to consider that the business of defense carries a different morality and methodology, and that its function is best kept separated from the morality and methodology of private life.

When the two join forces and borrow from each other we get corruption. A police officer, sworn to protect and defend innocent people, cannot be permitted to consider it moral to accept payments in exchange for the power he wields. A military leader cannot allow himself to be paid to wage war upon the request of the merchants who make the machinery of war. Similarly, private businessmen cannot permit themselves to engage in violence and coercion, cannot negotiate by force without devolving into gang-wars and mafia assassinations. Business people depend on honesty and trust; governments on violence and force. Each has its place, but trouble is always around the corner when those entrusted with power sell it to the highest bidder, or those trusted to avoid violence engage in physical coercion.

Auditing the Fed

2011-09-03T23:04:00.001-05:00

I read an article today in support of full government-audits of the Fed, as per the suggestions of various conservative and libertarian thinkers.

It's always amusing to see people who generally believe in "fighting for lower taxes, less government and freedom" make arguments in favor of more government intrusions into private business.

An audit of a private business is no more the answer to this problem than auditing the American Medical Association. The problem isn't that government isn't involved enough in the business of currency production; the problem is that they are already so involved that they gave them a monopoly in 1913.

Remove that monopoly! Don't improve it by making the Fed a true government capture. Does anyone really think it's best if the government itself runs the central bank?

Jesus.

Why Warren Buffett Supports Higher Taxes

2011-09-01T18:41:00.003-05:00

Buffett has spoken in the past about the benefits of a death tax, and has said that he thinks the death tax should be 100%. It just so happens that a 100% death tax would be one of the most profitable changes in American law for Mr. Buffett.

Berkshire Hathaway owns owns six life insurance companies. Life insurance companies make a good portion of their income by helping wealthy people shelter their income from the death tax. They can do this because insurance payouts are not considered part of an estate and are paid tax-free to heirs. So Buffett's job is to accept a wealthy man's money and agree to pay it all back to his family upon his death, for a fee.

Buffett also profits from a high death tax by purchasing family businesses at fire-sale prices upon the death of the owner. If the family must pay a 55% death tax on the estate, based on the value of the business, they become desperate to sell (the taxes must be paid within one year of death) and Buffett is right there waiting.

So far he has purchased many companies because of the death tax, including: Star Furniture, Borsheim, Ben Bridge Jewelers, U.S. Liability, NetJets, R.C. Wiley, Flight Safety and Nebraska Furniture Mart.

So the bigger the death tax, the richer Buffett becomes; benefiting from the front end (before death) and the backend for those who fail to pay his companies the appropriate protection money. Either way, a rich business owner needs Mr. Buffett's help, and the bigger the death tax becomes, the easier it becomes for the Oracle of Omaha to rape and pillage the innocent families of dead men.

Perhaps we should take comfort in knowing that he isn't alone; life insurers spend about $10 million per month lobbying in favor of the death tax.

Steven Pinker on Capitalism and Human Nature

2011-09-01T16:17:00.000-05:00

QUESTION: Do you think the economic organization we call capitalism is conducive to the human intuitions of fairness and reciprocity that you outline?

STEVEN PINKER: Probably not – these intuitions are probably tuned to face-to-face, tit-for-tat exchanges, not the complex web of highly indirect transactions that make up a market economy. People seem to have a sense, for example, that interest is inherently exploitative (since you don’t get anything tangible for the interest payments), as are markups by middlemen (since they seem to be parasites), even though economies cannot function without them. The result has been economically ruinous policies such as the prohibition of interest, and recurring episodes of discrimination, expulsion, and genocides against middleman minorities such as the overseas Chinese in Indonesia, the Indians in Africa, and the Jews in Europe. I suspect that you meant the question as an indictment of market economies, but my answer is an indictment of human intuition! I think people should all take economics courses to understand how economies really function and get over the simplistic intuitions that evolution gave us.

QUESTION: Do you think that within this economic system the tendency to dominate and exploit weaker peoples will always be a logical corollarly — “imperialism is the highest stage of capitalism” etc…

STEVEN PINKER: History shows us that the tendency to dominate and exploit is far greater with communism than with capitalism (at least the democratic capitalism of Europe and the US). The reason, I think, is that people only contribute altruistically to the good of others if they perceive them to be kin or close community. Otherwise you either have to motivate them by profit (capitalism) or by coercion (communism). As bad as the profit motive may seem, it’s much better than the Gulag, the killing fields, and the “cultural revolution.”

Read the full interview here

Three types of inflation

2011-08-24T15:01:00.006-05:00

We hear a lot about inflation, and mostly hear about the Fed or government being responsible for the dollar's decline in value over the years. This is a bit strange, and muddles a lot of conversations about the economy and the Fed. In my view there are three distinct, separate causes for inflation; good, bad, and "natural," inflation.

1. "Bad" inflation occurs when bankers "cheat" and print up new notes out of thin air. This is the only cause of inflation recognized by most conservative or libertarian economists, like Milton Friedman or Thomas Sowell. They consider inflation to be always and only a "monetary phenomenon," where the cause of inflation is always an excess supply of currency, relative to existing goods and services. In their view, the only way to inflate a currency is to use the printing press excessively, of which governments have historically been very fond.

This type of inflation is certainly possible, but is unlikely with the system that we have in the United States. New dollars, created by the Fed, are used to purchase assets that are held by the Fed. At some point in the future, they will be resold on the open market. In order for those new dollars to be permanently inflationary, the currency must be deemed worthless. A central bank that buys a brick of gold with new money harms no one if it sells the brick for the same money at a later date. It only temporarily lowers the value of existing dollars until it sells the gold. The only way to truly steal by printing money is by issuing a brand new currency, or by never selling the gold back to the market. As long as the Fed's assets are resold to the open market, no harm is done. The only effect is a temporary change in the value of currency.

Think of it this way. Imagine the Fed prints up endless amounts of money and purchases literally every asset on earth. It would hold all assets on earth, and the people would hold paper money. Now imagine it sells all of the assets back to the people, on the open market, and burns the dollars it receives. Are we not right back where we started? Has anyone been harmed? No, the only way they can hurt anyone is in buying up all the assets and then declaring the money held by citizens to be worthless.

2. "Good" inflation is a bit more complex. To understand this it is helpful to imagine that we are using a commodity as money, as was done in the past. Imagine that we are still today using pigs as our medium of exchange, store of value, and unit of account. Everyone prices goods in "pounds" of pig flesh. Further imagine that many people are holding huge amounts of preserved pig-meat in their mattresses and basements for a rainy day. What would happen if suddenly, all of the hoarded meat were offered in trade on the open market?

The value of pig-meat would fall as its supply rises (relative to other goods). This would be an inflation of the pig-meat commodity-money, but has this inflation harmed anyone? No, the inflation of pig-money only makes it easier to acquire pig-meat, which most people enjoy consuming! The world becomes wealthier as the meat flies out of basements and onto the open market. Suddenly, it is ridiculously easy to eat bacon. The only people who do not benefit from the explosion of meat-money are those who do not consume pig-flesh. To them, the only use for pig-meat is as money (exchange, storage, accounting). They are pretty pissed off when everyone begins liquidating their pig-meat on the open market, because the value of the meat in their basement falls in value.

So this type of inflation is good for everyone except those who don't consume pig-meat. In the modern world, the only people that "consume" US dollars are those who use them to pay down bank loans, denominated in US dollars. When a bank accepts dollars in payment on a bank loan, the dollars are destroyed; removed from circulation in the same way that a slab of bacon is removed by a hungry citizen. Today, when people are encouraged to spend what they have saved, everyone with a bank loan finds that it is easier to repay his loan, just as people would find it easier to eat pork. This idea won't sit well with anyone who does not consider modern money to hold real value to people who are obligated to "consume" it by repaying bank loans.

(If this is you, you may want to take a quick three-part journey, beginning with The Curious Nature of Ownership. Next, you'll want to read What is Wealth? And finally you may end with Banking: A Picture Book. I don't expect a full realization from these essays, but it may be enough for you to at least consider a new viewpoint regarding the reason modern "fiat" currencies hold value.)

The reality is that most people don't hold very much wealth as paper money. Most people hold it in some type of investment, which is a bit like loaning out slabs of bacon to your neighbor, who uses them as furniture. If suddenly, because of some act of the Fed, congress or God, you are moved to liquidate your bacon holdings (spend money), you would remove the furniture from your neighbor's house, and move it somewhere else that looked better. Perhaps you'd trade it for a new car. This act would help the man with cars and hurt the neighbor with whom you had previously invested that pig-money. The net result is likely a lot of movement and very little productive action.

This is the type of intervention that is praised by some, because it creates a lot of economic activity, and bemoaned by others, because it encourages people to move assets from productive use (neighbor's furniture) to another, perhaps questionable use as a new car. It creates what they view as "malinvestements," that will later cause bigger bubbles, and bigger crashes, than would normally occur.

3. "Natural" inflation occurs when everyone is so rich they demand more in trade to do work. It’s easier to hire a poor man to clean your bathroom; Bill Gates might want $50 million per hour to do it, if he agrees at all. When everyone in the market is becoming richer and richer, labor prices naturally rise, and assets that involve a lot of local labor rise in price. As everyone accumulates more and more wealth through productive action and trade, they become less and less willing to do boring or difficult or dangerous tasks in exchange for money. The only way to avoid the price of unskilled labor rising is to introduce new workers, either through immigration or young adults entering the workforce, but even the children entering the workforce will be less willing to work because they will have been raised by richer families, and over time immigrants will require more and more in trade as they too become wealthier.

So in this way, whatever component of an asset that requires a human being to labor to produce it will become more and more expensive over time. Today, it requires an entire bedroom full of electronic equipment to motivate a minimum-wage earning teenager to work a summer job. Fifty years ago, the same labor would have produced a lot less.

In my view it is quite silly to talk about inflation as if there is always an immediately identifiable cause, or to assume that a change in the value of dollars is always a bad thing for our quality of life. As I briefly outlined above, inflation is almost never harmful unless a new currency is issued, or unless the Fed never sells its assets back to the open market. Higher inflation might be annoying, and might make it harder to do business because the future is uncertain, but it certainly doesn't always "steal" from anyone, per se, and it certainly is not "always and only" a monetary phenomenon.

The debt of the United States is nothing to worry about

2011-08-03T22:33:00.007-05:00

The debt of the United States government is not a problem. Compare the following graphs, one of the assets of the United States, and the other of its liabilities. As you can see, both are growing in tandem, and the nation owes about half of what it owns. This is equivalent to a man with a net worth of $50,000 having a mortgage on a $25,000 house. His payments would be $120.36 per month. (Currently, Uncle Sam must pay 4.07% on his long-term debt.) Hardly an irresponsible situation.

The total assets of the Unites States currently total about $185 trillion. The US government currently "earns" about $3 trillion per year (tax receipts), and owes about $14 trillion. Imagine a wealthy man, who owns $185 million in real estate, stocks, bonds, gold and cash, who earns an additional $3 million per year from his businesses, and owes $14 million in outstanding real estate debt. Further, imagine that he has a tremendously low interest rate on that debt (4.07%) and that he is easily able to get a loan from any bank in the world because his credit rating is so high, and he has never been late on a payment in his entire life. This is the financial situation of the US government.

But even this is not the whole picture, because the government owes a large amount of the $14 trillion debt to itself, and to quasi-governmental agencies like the Federal Reserve, and the Social Security Trust Fund.

So, not only does this very wealthy man owe a small amount when compared to his assets, it turns out that he owes a good amount to himself ($6 trillion to the Fed and other government agencies). It's as if one of his companies issued bonds that were purchased by another of his own companies.

If we continue to think about the situation, we should realize that a man owing money to himself is somewhat of a non-issue. Further, around half of the money the United States government owes is to its own citizens, which is a bit like a father owing money to his own young children. The father always has the power to confiscate 100% of the income and assets "owned" by his children, which is also the case with the US government. If push comes to shove, Sam can simply take what he needs to pay his debts, but as we have seen above, there should be little doubt in anyone's mind that he'll be able to keep his promises without resorting to extreme confiscatory policy.

Ownership of U.S Treasury Securities

Additionally, there is much talk about social security "running out of money" soon, and being unable to pay its debts. If you take a look at its history, there is little reason to think this might be the case. If anything, the danger is that the trust fund will accumulate too much excess funding. It currently holds $2.6 trillion in assets that it will use to pay its debts, and has very rarely paid out more than it received over its entire history. The basis of this nonsensical fear is precisely that the US government owes money to itself, and most of those contemplating the situation fail to consider its true nature. It is as if one company owned by the wealthy man has issued bonds, and another owns them, and sells them on the open market in order to fund its liabilities. They forget that those bonds hold real value, as demonstrated by the willingness of the public to purchase them when one of the companies offers them for sale.

It is a mistake to think of the bonds held by the Social Security Administration simply as "debts of the United States." Those bonds are salable assets, and the total quantity of their issue is a known and widely published fact. When the bonds are offered for sale by the SSA, it isn't as if the market reacts to the offering as though the bonds have materialized from thin air. On the contrary, when the SSA trades the bonds for dollars, and subsequently hands those dollars to retired citizens of the United States, the market doesn't (and shouldn't) react in any way that is different than a hedge fund offering the same assets for sale. Those bonds have been issued, and are now distinct pieces of wealth. They happen to be debts of the US government, but there is little difference between the SSA holding $2.6 trillion in government bonds, $2.6 trillion in corporate bonds, or 1.6 billion ounces of pure gold. They are all assets, and all of them can be converted via the open market to cash.

Who protects the consumer?

2011-07-31T03:10:00.000-05:00

There is also a free-rider problem in the negative sense on government provision of information, because people who have no use for that information are required to pay for it. -Milton Friedman 1980

Banking: A picture book

2011-07-30T23:21:00.009-05:00

COMMODITY MONEY:

The worker pans for gold, and the banker's building is empty. The banker holds no gold and no assets other than his building:

The worker wants money, so he gives the raw gold to the banker:

Who takes the raw gold:

Turns it into gold coins:

And returns the coins to the worker:

This is the process of making "commodity money." Now the banker has an empty vault again:

What happens if the worker wants paper money? He gives the gold coins back to the banker:

Who accepts them:

And holds them in his vault:

He prints up some new paper money:

And gives the notes to the worker:

He agrees to exchange the gold for the paper at any time, and the worker uses the money instead of carrying all of those heavy coins around:

FRACTIONAL RESERVE BANKING WITH A GOLD STANDARD:

What happens if the worker owns a car, free and clear, and wants to turn it into paper money, just like raw gold? The basic process is the same, except that the car is not first converted into small pieces. The worker gives the banker his car and its title:

The banker accepts ownership of the car, just like he previously accepted raw gold. Instead of weighing gold, he judges the car's value, and prints more paper money:

Now the worker has converted his car into paper money that the bank created from "thin air." The money can always be converted to gold at the bank at a fixed rate, but the banker no longer holds enough gold to redeem all the paper money; some of his assets are no longer gold. By accepting a car in exchange for paper money, the banker is engaging in "fractional reserve banking," because only a portion (fraction) of his reserves (his assets) are gold. To redeem all of the paper money, he would have to sell the car for gold.

What happens if the worker wants to continue driving the car?

The banker loans the car to the worker. The bank now owns the car, and charges interest on the loan:

The banker also requires that the worker pay down the loan to zero over the next few years, using the paper money:

After a few years of payments, the worker has paid off the loan, and all of the notes he received in exchange for the car have been returned to the bank (plus interest):

The banker destroys the notes as they are repaid:

And returns the title to the worker:

And everything is back where it started:

Today, the process is the same, except that the paper money can no longer be exchanged for gold. It can only be exchanged for the car, by paying off the loan, but the basic process is the same as before. Today bankers convert cars and homes into paper money, instead of converting gold or silver to paper currency.

Previously, the banker agreed to redeem any note in gold or silver. Today, he'll only redeem the notes according to the bank-loan contract. Previously, anyone could redeem the notes, but today, only people with loan contracts can redeem them. If the Fed goes completely crazy tomorrow, and rampant inflation makes the notes worthless, anyone who has a car loan or a home loan can still use the worthless notes to take ownership of their home or car.

Anyone holding more outstanding bank-loan debt than they hold in cash is somewhat protected from inflation. If you have a $1 million home-loan and dollars are suddenly worthless tomorrow, you can exchange a wheelbarrow filled with worthless dollars for a $1 million home. Inflation works in your favor if you hold loan agreements denominated in dollars.

NOTE: A bank doesn't loan out notes it holds in checking accounts. Each bank loan generates new money from thin air. The bank may invest the gold or car (its assets) in very safe investments, but new loans always create new money. New dollars are exchanged for real assets. Checking accounts are not bank equity; they are not owned by the bank. The bank is providing a holding service, like a bank that accepts gold coins and agrees to guard them for a fee.

NOTE 2: Astute readers (or those who have seen the Zeitgeist movie too many times) may wonder how, absent the gold standard, workers can pay back more dollars than they originally accept. How can there be enough dollars in the world to pay the interest on the loan? The answer is that the banker prints up some "fake" notes and spends them. His goal is to print up just enough notes so that the the man can repay his loan. Today this process is known as "Quantitative Easing." The Fed literally prints money from thin air and spends it, usually purchasing government bonds with the "fake" new money. Banks are compensated for their work in this way. The interest on bank loans is an investment activity not unique to banking -- anyone can loan their assets at interest. Bankers are specifically compensated for the service of turning assets into paper money when they print and spend "fake" dollars -- dollars that are not exchanged for real assets, but are simply printed and spent.

NOTE 3: Printing "fake" dollars does not create inflation, per se, because the new money that bankers create through the loan process is worth more than the original asset. Ask yourself, would you rather be paid $10,000 in cash, or paid with a car that recently sold for $10,000? The reason you would choose the currency is because of its liquidity. It is easy to spend the money, and easy to buy bread and milk with it, and everyone will accept it. A car is much harder to exchange, even though it is "worth" the same amount. The money's liquidity makes it worth more than the car, and the banker's fake notes offset this by increasing the supply of currency.

Middle-Class Stagnation Case-Study: Housing Prices

2011-07-30T21:13:00.000-05:00

As you can see from the charts above, the price of an average home in 1978 was about the same as today, but the size of the average home has gone from 1,700 to 2,500 square feet. That means that the average middle-class home is today about 41% bigger, will last longer and require less money to maintain, and is exactly the same price as it was 30 years ago. The middle class is doing 41% better if we only consider the size. If the quality of materials (roofing rated to last 50 years, plastic siding that requires no paint, high efficiency central air) and much lower maintenance are considered, the middle class is doing very well indeed compared to 1978.

A little girl on a plane

2011-07-30T18:53:00.002-05:00

A congressman was seated in first class next to a little girl on an airplane. He turned to her and said, "Do you want to talk? Flights go quicker if you strike up a conversation with your fellow passenger."

The little girl, who had just started to read her book, replied to the total stranger, "What would you want to talk about?"

"Oh, I don't know," said the congressman. "How about global warming, universal health care or stimulus packages?" as he smiled smugly.

"OK," she said. "Those could be interesting topics but let me ask you a question first. A horse, a cow and a deer all eat the same stuff - grass. Yet a deer excretes little pellets, while a cow turns out a flat patty but a horse produces clumps. Why do you suppose that is?"

The legislator, visibly surprised by the little girl's intelligence, thinks about it and says, "Hmmm, I have no idea."

To which the little girl replies, "Do you really feel qualified to discuss global warming, universal health care or the economy when you don't know crap?"

Then she went back to reading her book.

By JOE BURTON

What is wealth and where does it come from?

2011-07-26T19:19:00.001-05:00

Wealth is not dependent upon natural resources, is not limited, and is created from thin air. Wealth is the reorganization of our world to suit our liking, and is not the destruction or use of natural resources, it is only temporary change.

For example, in a simple island-economy, imagine a man creates wealth by harvesting salt from seawater. He pulls large amounts of water from the ocean each day, and allows it to evaporate, leaving sea salt behind. The salt is new wealth that he has created and stored. If he eats all of the salt with his food, and urinates into the ocean, eventually the salt will be in back in its original form, dispersed in the water.

In this way we see that by creating wealth (the dry salt), the man has not destroyed anything in nature. He has only changed it to suit his needs. The dry salt is more valuable to him (and other humans) than raw seawater. The salt can be used to flavor and preserve food, and will eventually return to the sea. When it sits in his hut in dry form, it is wealth -- something he values a lot more than seawater. As he uses the salt, he "spends" the wealth he has created. Nothing is destroyed.

If the man plants a tomato seed, and it grows to bear fruit, the tomatoes are new wealth. The material for the plants is generated by sunlight and air; less than 1% of the plant material came from the ground. And when the man eats the tomatoes, the waste products from his body will find their way back into the soil once again. This is the entire nature of wealth. It does not depend on the destruction of anything -- only change. Was the seawater destroyed when it was pulled from the sea, and the salt harvested from it? Was the air destroyed when the tomato plant grew? A plant grows by using the sun's energy to break the air into its component pieces. The plant breaks the bonds in the carbon dioxide molecule, harvests the carbon atom from the CO2 (leaving pure oxygen as a waste product), and uses it as the raw material for 99% of its body, shaping the carbon into leaves and fruit and flowers. A tiny fraction of the plant material comes from the ground, and it is returned to the earth after the tomato is eaten.

Wealth creation is a circle of creation and destruction. Creating wealth is organizing our surroundings to suit human needs, and destroying wealth is the destruction of that organization. Air, dirt, and a seed are worth far less than a tomato plant to human beings. We cannot eat dirt or air. A tomato sustains our bodies, and keeps us alive and healthy. Transforming air and dirt into valuable tomatoes is a process of wealth creation. Even if all minerals were removed from the topsoil, we have the ability to grow tomatoes indoors using no soil at all. We know exactly what they need, and it is mostly light and carbon dioxide.

All wealth creation happens in this way. Nothing is destroyed. If I write a book on my computer, I have not destroyed anything at all. I have only rearranged the atoms in the computer's memory. Nothing left the computer and nothing entered it except human effort. No raw materials were consumed, only changed, and millions of books are created and sold each year -- all of those new books are just arrangements of materials that we like more than the previous arrangement. A computer with a book stored in its memory is more valuable to us than one without.

If I go into a forest and build a home from the trees, I have created wealth. The organization of the trees and rocks is more valuable to a human without a home. Nothing is destroyed. When the man leaves the house it will eventually rot and crumble back into the earth, and trees will grow again where they once stood. Wealth is temporary, and none of it lasts forever. A house built from bricks and rocks will last a long time, but without constant upkeep, it will eventually return to the earth, just as any other wealth on earth. Each year, when a man paints his house, he is creating wealth.

When oil is pulled from the ground and burned, eventually the carbon dioxide entering the atmosphere is consumed by plants, which are in turn consumed by animals, and when they die they will eventually turn back into oil. It is all temporary, and it is all a circle.

It is fundamentally important to understand that wealth is based not on the consumption of resources, but upon the changing of the world around us. Wealth creation does not destroy. It changes. As we create more and more wealth, and become richer and richer, it is because we are becoming better and better at changing the world around us to maker our lives better. To make things that we enjoy more than what was there before we changed it.

Middle-Class Stagnation Case-Study: The Honda Civic

2011-07-26T16:01:00.002-05:00

Behold, the 1978 Honda Civic four-door:

This car had 60 horsepower and could go from 0-60 mph in 14.3 seconds flat! It had no air conditioning, no power anything, no CD player (or tape deck), a manual four-speed transmission, and was rated to get 23mpg in the city and 30mpg on the highway. It had no catalytic converter. It weighed 1,500 lbs and it didn't have airbags. The NHTSA gave it a one star crash test rating, and they tended to rust dangerously within the first three years. No anti-lock brakes. The average worker in 1978 earned $5.40 per hour, and the base price for this car was $4,189. It would take the average person about 776 hours, about five months of full-time work, to earn one of these bad boys. And they were selling like hotcakes because they burned the least fuel of any car on the market.

Let's fast-forward to the modern version of the Honda Civic, and see just how stagnant the American middle class has become:

Power windows, remote entry with power locks, anti-lock brakes (ABS), six airbags and a five star crash test rating. Accelerates to 60 mph in 7.3 seconds with its 140 horsepower engine. Five speed transmission. CD player. Tire pressure monitors. Weighs 2600 lbs and gets 26/34mpg. This car is much safer, burns less fuel, pollutes much less, is about twice as fast, won't rust and its major parts are guaranteed for 60,000 miles. Today the average worker can purchase this car with 670 hours of labor, and its life expectancy is probably about double that of the first generation version with less maintenance and less repairs. A car that is much better all-around take less over 100 hours less labor to earn for the average modern American worker. In terms of automobiles, it seems that the middle class is doing much better than it was in 1978.

Freedom is an Irrational Fantasy

2011-07-24T20:12:00.005-05:00

Thomas Sowell, Milton Friedman and most other libertarians argue that the cost of Military defense must be socialized; it must be paid by tax revenue and provided by government because everyone benefits equally from its protection, and some cannot be charged for service without accidentally protecting everyone else. This line of reasoning is illogical for two reasons. One is that the same argument can be made for nationalizing many currently private businesses, and the other is that government is synonymous with military. Primitive governments begin as a group of rulers and an army, and many exist in their primitive state even today. Most African nations are armies that have taken land by conquest and declared themselves to be the government, and most developed nations began in the same way. Government is to a nation what a king is to a kingdom. Each rules with lethal force, and what we now call taxes were once called "tribute."

I don't think that military defense must be socialized any more than fire insurance on your house must be socialized. It could be argued that by insuring my house and paying the fire department to stop a fire in my own house, they would also put out a fire in yours, in order to stop your fire from hurting my house. I don't see any problem with that, and I don't think that accidental benefits of any action makes it necessary to socialize that action.

The same argument could be made regarding myriad businesses. Must healthcare be socialized because when I pay for antibiotics to cure an infection, I'm accidentally protecting my neighbors from the same infection? Shouldn't vaccinations be socialized for the same reason? If enough people are immune, the rest of the society doesn't have to pay to be vaccinated, because the disease no longer poses a threat.

If I keep my house in good order and make it prettier, and accidentally raise property values in the area, shouldn't home-restoration be socialized? After all, I can't make my house more attractive without helping my neighbors raise their property values too. In the same way, one cannot provide military protection for himself without accidentally providing protection for those around him, so I don't think that the "accidental benefit" argument for the socialization of military is any more valid than arguing that government must paint our houses.

Almost everything that we do to help ourselves ends up accidentally helping other people near us. It's the entire basis of individualism, objectivism, libertarianism, and free-market thought; that one cannot become wealthy without helping other people live a better life (without stealing or using force).

Ideally, if we are to imagine the most ideal situation for mankind and its organization, we would have no military at all, and the world would live in peace. But that isn't how human beings work. A certain percentage of human beings love to build armies and try to take over the world by force, and because of that we must have weapons to defend against those men and their armies.

If we were suddenly thrown into a world without government, we would quickly return to a world with powerful governments and powerful armies. In the ideal anarchist’s world with privatized everything, religious leaders would peacefully accumulate followers and weaponry until they became strong enough, and had a large enough army to steal from and enslave their neighbors. And this is what has happened over and over again, even in the recent past, and is ongoing in most of the world.   The United States itself has within the last 200 years gone to war with multiple nations, including Mexico and Canada, and in each case was raiding a neighbor in an attempt to take over more land. The state of Texas was previously owned by Mexico. When it became a US territory in the mid-nineteenth century it was filled with native Mexicans. The United States itself is conquered land. The United States was at war with all Native American Nations and their primitive armies for hundreds of years, and the reservations we have today, scattered all across the country resemble prison camps more than anything else. The government controls every aspect of residents‘ lives, and they live in abject poverty. The Native American Nations simply lost the war, and their people were literally exterminated, with huge bounties paid by the US government for Native scalps ($5,000 per scalp or more). Millions of natives were killed in the war, and that war was no different than most other wars in the history of mankind. In each case a group of men with weapons attacks others and takes their land and anything of value they may have, and kills or enslaves them when they win.

The primitive tribes still in the world today are still doing this with spears and rocks, and even chimpanzees do it. Male raiding parties attack other groups of chimps in order to control their land. Victory means killing the men, taking the women as mates, and killing (and sometimes eating) the babies.   Christianity was used to control huge armies that took over South America, killing millions of people and taking everything of value from them. I have little doubt that in a world without government, religion would easily be used to build armies and governments all over again, and anyone who wished to avoid having his wealth confiscated by the newly formed marauding armies would need a powerful army of his own, and any army powerful enough to defend you is powerful enough to enslave you.  

I don’t see any way in which human beings can live in large groups without being enslaved to one army or another. Anyone trying to live outside the protection and enslavement of an army/government, even today, will eventually be forcefully enslaved or have his assets stolen by one of the existing powers. Libertarians have more than one occasion attempted to set up an ideal society on an island or boat, and as soon as they become rich enough are invariably invaded, taxed (enslaved), and controlled by the nearest government.   In my view, the correct reason, and the only reason that we must have a socialized military is simply because none of us are free and it’s impossible to live without armies. The world we live in today is just a bunch of very powerful nations who have reached a cease-fire with each other. We are all slaves to one government or another, and that will be the way of the world until human beings stop trying to enslave one another and steal from each other. I think that day may not ever come, and the best we can do today is realize that if we must be a slave to an army and its leaders, we can at least convince our overlords that staying out of the private business affairs of their subjects is the best way to make everyone better off.  

Imagining a society in which all men are free is an irrational fantasy. In order to avoid conquest by a neighboring army, we must have an army of our own, and again; if that army is so strong that it can defend us, it is also so strong that it owns us. We should strive not for absolute freedom, but to be enslaved by a benevolent and wise king who understands that meddling in the market is harmful to both him and his people.

Intellectual Property

2011-07-11T20:48:00.004-05:00

A friend sent me an article on intellectual property rights written by Ayn Rand. I have a few questions for her:

1. If copyrights and patents protect real property, why do those protections expire? If I buy a house, why does my ownership last forever, but my ownership of an idea does not?

2. If a machine were invented tomorrow that could replicate anything on earth, would it be best to use government force to stop people from replicating things in their homes, forcing them to pay royalties each time a golf ball or dining-room chair is replicated?

3. In practice, copyrights and patents are very expensive to obtain and very expensive to defend; too expensive for a normal person to enjoy their protections. Why should all taxpayers bear the cost of maintaining the courts of law, and pay the salaries of the judges in these courts, for a service they will never use, and which makes many of the things they purchase more expensive?

4. Why aren't we patenting recipes? If I throw tomatoes, onions, and basil together and call it "marinara," should I not receive royalty payments from all those people who wish to do so in the future? Should not all the taxpayers in the United States be forced to pay for police to inspect supermarket shelves, making sure that Newman or Kraft foods has not offered for sale a red sauce that infringes on my intellectual property?

In my opinion, intellectual property laws make things more expensive and slow innovation (patented designs can't be improved upon without permission) for the majority of people, and benefit companies that can afford to defend their patents.

If something can be copied for free, without harming anyone, I think it is silly to call that theft. If I invent a bow and arrow in my cave, should it be illegal for you to copy me? What if you have an idea for a system of pulleys that will vastly improve the design of the bow, making it ten times stronger, but I won't give you permission to improve upon my original design?

Real wealth is not primarily contained in ideas. It is primarily in making and transporting to market useful things that people want; things that improve our lives.

The cost of patents and their enforcement should not be paid by innocent citizens. The costs should be paid by the inventors themselves. If Edison invented the lightbulb without IP laws, he could simply take his design to various manufacturers, and make an agreement to manufacture 100 million of them before releasing them to the public. They would be released suddenly, and the inventor's advantage would be in moving millions of the new bulbs to market before anyone else has a chance to copy them. Inventors would still be able to make a lot of money without IP laws.

Authors, instead of releasing a book all at one time, could provide one chapter at a time by subscription, and charge people a monthly fee to receive future chapters of the book. Today, people are willing to pay a lot to have first access to HBO and Showtime programming, even though it would be free to have a friend record the show and watch it the next day. The same would be true of books.

IP laws are a great example of something that looks good on paper, but in reality benefits the wealthy at the expense of the poor. The existing laws keep music distribution companies and publishers rolling in money and we have to pay for the courts that hear their cases. The people actually writing the books or making the music get a small portion of the income generated. In a world without IP laws, most of the money would go directly to the artist, and in the internet age, there is no longer a need for stamping records or printing books. Jonathan Coulton makes music at home and sells it on the internet. You can listen for free, and it costs 99 cents to download a song. He makes $500,000 per year. If he can do that, who are we to imagine that there is any need for intellectual property laws?

Extra Large Clothing and Masturbation May Be Making You Fat

2011-06-30T18:01:00.002-05:00

Researchers tracked 474 people, all 65 to 74 years old, for nearly a decade, measuring the subjects' height, weight, waist circumference, and extra-large clothing purchases every 3.6 years. The waists of those who wore XL T-Shirts grew 70 percent more than those who avoided the extra large clothes; people who owned two or more shirts had waist-circumference increases that were five times larger than non-extra large T-Shirt owners.

The findings are in line with those of a 2005 study, also conducted by researchers at the Texas Health Science Center, in which the chance of becoming overweight or obese increased with every XL T-Shirt the person owns.

A 2008 study found that women who masturbated with their left hand and those that used their right couldn't tell the difference, but functional MRI scans showed that their brains' reward center responded to their dominant hand "more completely" than it did to their weaker hand.

"Your senses tell you there's something sweet that you're feeling as your hand rubs your genitals, but your brain tells you, 'actually, it's not as much of a reward as I expected,'" Dr. Martin P. Paulus, a professor of psychiatry at the University of California San Diego and one of the authors of the study, told the Huffington Post. So you chase that masturbation with something more satisfying, like sex with a stranger. The sweet and sticky sexual-encounter could also trigger your body to produce cortisol, a hormone associated with feelings of guilt and shame, which blocks your ability to burn fat.

And a 2008 University of Minnesota study of nearly 10,000 adults ages 45 to 64 found that buying a single extra-large clothing item per week led to a 34 percent higher risk of developing metabolic syndrome, a collection of health problems that includes high blood sugar, high cholesterol, and high levels of belly fat.

‎"Buying a reasonable amount of extra large clothing, such as an extra large shirt or a pair of Spanx, isn't likely to hurt you," writes Katherine Zeratsky, a nutritionist at the Mayo Clinic. "The extra large clothing currently sold by Walmart are safe for most people, and there's no credible evidence that these garments cause cancer."

It’s hard to make a blanket statement on whether or not you should masturbate," Brierley Wright, M.S., R.D., the sexual health editor for Fuckwell Magazine, says. "At the end of the day what I think it comes down to is how are you using masturbation—is it truly a substitute for a high-risk sex with strangers, or is it just an excuse to fuck the mailman or the kid who mows your lawn tomorrow?

But no matter how you masturbate, it is an empty and soulless activity, Wright points out. "It delivers no chance of pregnancy whatsoever and so should only be done in moderation."

Obama and Our "Structural Issues."

2011-06-24T20:36:00.001-05:00

The trouble is in thinking about the economy as if it were a house. It is not a house. It is a living and adaptive animal. The economy adapts to its own needs, and any intervention causes problems.

The economy is like a human being that moves from civilization to the wilderness and has trouble finding food. He begins to burn off fat stores and build up muscle as he runs around looking for food and building weapons and a house and so forth.

The fat cells complain about being burned alive, and Obama appears on TV and tells us that there are some structural issues with this person's body. He says that as his body is running around it is becoming healthier and stronger, and what we need to do is figure out where the calories from those displaced fat cells should be directed, and which muscles should be trained for future activities that the man might like to do.

This is all nonsense, of course. The man's body knows far better where to put those calories and will burn fat and build muscle in a much more optimal way that anyone could ever possibly imagine planning. Central planning is similar to attempting to plan the use and function of every calorie the body ever consumes. It's impossible and unnecessary.

Pig Bucks

2011-06-13T17:07:00.000-05:00

Imagine that you have ten pigs and I am a trusted rich person in the village. You come to me and say "hey, if I give you these ten pigs will you give me ten IOUs for a pig, with your signature on them? I want to go spend the pigs but I don't want to carry them to market."

I would say, "sure, give me the pigs, and I'll give you ten IOUs, each worth one pig, signed by me." But then you change your mind, and say "okay, hmm, now you have all my pigs and I have all of these IOUs... I kinda want my pigs and my IOUs, because I love those pigs and they are my friends." I would say, "Sure, but I own the pigs now. And you own the IOUs. So if you want to take possession of your pigs and keep them at your home and enjoy their company, you will need to pay me a fee for that right. After all, I own the pigs now."

You might say "okay fine, I'll pay you one pig per year for the right to keep your pigs at my home. I'll even breed them and make more pigs, and i'll use the new pigs to pay your fee."

And I say "Okay cool. And you know what? You can pay me back either in Pig-IOUs or in actual pigs. It doesn't matter, and you can pay me back at any time. As soon as you pay me back all of the IOUs, or ten pigs, (or 5 IOUs and 5 pigs) our contract is done."

Now how does the village economy look? There are now ten pigs on your farm and you hold ten IOUs, each worth one pig. All the pigs are worth one pig and all the IOUs are worth about one pig as well (depending on my health and how much people trust me to pay). How did this happen? Where did the wealth come from? Is it "real?" If it isn't real, why do people accept it as if it were a pig? Have I not just produced ten pigs with the stroke of my pen? With a promise?

Note that neither one of our net worths have changed. You started with 10 pigs. You hold 20 pigs in assets, but owe me 10 of them, so your net worth remains at 10 pigs.

For simplicity, let's pretend my net worth starts at zero. I now own 10 pigs (residing on your farm) but I also owe 10 pigs -- I owe one of my pigs to each person who presents me with an IOU.

We have created a "pig backed" currency, and there is no inflation. Each IOU came out of "thin air" and is now traded at face-value because people trust me. This is the main way in which modern currency comes into the world, except that the pigs are now houses and cars, and I am called a "bank."

The second method for bringing new pig-bucks into the world would be me printing up some fakes and spending them on the town. This would cause inflation (a reduction in the value of the pig-buck). The first method outlined above, does not cause inflation as new pig-bucks (we'll call them piggies) hit the economy.

So there are two ways the piggies come into the world. One is via lending and the other happens when I simply make new ones and spend them in the village, hoping no one will notice, which will eventually lower the value of the piggies.

Now, what happens to the piggies over time if I do not issue any additional notes? They would fluctuate in tandem with the value of a pig, and they would also be slightly less valuable than a pig, depending on how much people trust me to keep my promise on those notes. As the value of the pig goes up and down, so too does the value of my piggies.

However, even though the value of real pigs and my reputation affect their value, the piggies would probably rise in value over time, and this has happened with previously issued old-world currencies, that rose as much as 25% above their face value. After issue, currencies tend rise in value (deflation) for a few reasons:

They are easier to carry, and there is no risk that the pig may die, and the notes do not need food or shelter or protection from wolves. They are easier to transport, store, and protect from theft and destruction. Further, they hold additional value because of their liquidity, which we will examine now.

Let’s imagine that another farmer comes to me and says “I like those piggy bucks you got there, they are a lot lighter and easier to carry around than pigs, and I was wondering if you could turn my cows into piggies as well.” And so I would estimate the value of his cattle; if he holds five cows and I see that people are generally willing to trade ten pigs for five cows, I issue him another 10 piggies and take possession of his cows. He also loves his animals, and I loan them back to him as well, and he agrees to pay me one piggy per year as a fee (interest) on the loan.

Another man wants his home turned into piggies, and I estimate the value of his home based on its size, quality and location, and I judge that his home is worth about 50 piggies. Since he likes living in his house, I loan it back to him as well after trading his home for 50 piggy-bucks.

To see how liquidity plays an important roll in all of this, imagine I offer you the choice: I will buy your large boat by trading you my home, worth about 100 gold pieces, or I’ll give you the gold pieces. You would want the gold, not because you already have a house, but because it will be a lot easier to trade the gold. It is a more liquid asset. My home may sell for 100 pieces of gold, but it may take some time to find a buyer... so for this reason, liquid assets are more valuable to people than large, illiquid assets even if their last sale prices were identical. This is the other reason that piggies go up in value after being issued. They are much more liquid than the pigs, cows, and houses and so forth that generated them. It’s easier to spend one of your piggies than 1/50th of your house.

So, now that we see that the value of the piggies will be going up compared to pigs and cows and houses, is that a good thing? As it turns out, no, for several reasons. The first is that people have created contracts and loan agreements over time using piggies as a unit of account. So when a man agrees to pay another ten piggies next year, he doesn’t want to owe more next year than he thought. If it currently takes three chickens to trade for a piggy, but next year he finds that the value of the piggy has gone up and he must now trade four chickens per piggy, he has made an error last year and paid one chicken more than he thought. Deflation, is just as bad as inflation in this way.

Another reason deflation (rising piggy value) is bad is that it makes it impossible to issue loans to people at an interest rate below the deflation rate. So if the piggy is rising in value each year by 5%, and you want to loan piggies to your neighbor at 3%, that’s very difficult because you would have to pay him to take the money from you. If you wanted to charge him 3% you would have to pay him 2% per year that he holds your piggies. The lowest possible interest rate becomes the rate of deflation, unless you want to pay people to take your piggies, so this slows everything down and encourages people to stop making loans because it is more convenient to hold them and earn 5% than it would be to loan them out; the faster piggies rise in value (deflate), the less willing people will be to issue loans denominated in piggies. If piggies are rising at 20% per year, they cannot be reasonably loaned away at less than a 20% interest rate, and that rate will likely be much too high. People might be willing to make loans at less than that rate.

As deflation rates increase, the incentive to make direct loans rises. Instead of loaning you 1,000 piggies to buy a car, I would buy the car and loan it to you, and agree that you will pay me ten gallons of gasoline per year that you have it as interest payments, removing the need to deal with piggies at all. If the deflation rate is high enough, the value of piggies as a medium of exchange and a unit of account is completely destroyed.

It is certainly possible to make loans by paying people to take your money, but deflation leads to another problem; eventually one piggy will be worth as much as a house, and when an asset is worth that much it loses all of its liquidity value, and people can’t use it to buy pigs and cows and so forth anymore, so the value of the piggy as a means of exchange would eventually be lost to some cheaper, more liquid asset.

So, what is the solution to the deflation problem? Well, there are two solutions, actually. The first is for me to print up enough fake piggies and spend them in the village until they become so plentiful that their value drops back to what it originally was. This is a great way for me to make additional profits in my piggy manufacturing career, and it also helps to stabilize the value my product, the piggy. My goal in spending fake piggies would be to try to spend just enough so that deflation doesn’t happen, but not so much that inflation occurs. I want my piggies to stay the same value, relative to all other things, as much as possible.

And this isn’t an easy job. I don’t want to just peg my money to the value of a pig, because the value of the animals swings wildly up and down depending on how many farmers produce each year, new drugs, natural disasters and diseases and so forth. If the value of pigs fell a lot one year, I would have go take a bunch of assets and sell them for my piggies on the open market in order to remove some of those IOUs from circulation (in order to raise their value by lowering their supply). And the next year, when animals go up in value, I would have to print up more fakes, and all of this would just become a huge headache of fake notes and selling off my art collections from time to time.

So I decide that I will simply remove my piggies from the “pig standard.” I will no longer redeem piggies for pigs. However, I will still accept piggies for all loans on my books; in fact, I say that if you have a loan with me and you are borrowing any of my stuff, you must now pay me only in paper piggies. Real animals will not be accepted or redeemed. Some people think this is a bit strange, but there are so many people who have loans with me that they need those piggies in order to pay me, and the value of the piggies remains relatively stable because people need them to pay my interest payments, and they are used to the piggies and they trust me so no one is really that worried.

At this point everyone has become so used to piggies that they simply put up signs stating how many piggies it will take for them to trade cows, tools, food. clothes and other things. In the old days people would negotiate using other stuff. People might say “I’ll give you two chickens for your cow” and things like that, but now they just say “I’ll give you two piggies for that cow,” or the cow farmer may even post a price in piggies. He would put up a sign stating that the “price” of his cows is “two piggies,” because everyone uses piggies, they are so easy to carry, they don’t go down in value and they are pretty predictable. They are so liquid that people have forgotten about the old days of negotiating chickens or fish for cows that all of their financial ideas and calculations are based on only one asset -- piggies, and I like that.

I love my new situation, off the pig standard, because now I don’t have to deal with the constant fluctuations of the value of an actual pig, and I become very good at keeping the value of the piggy pretty stable. And now I get a little greedy. I start to print up a few more piggies than I should, and spend them in town, and I inflate the currency very slowly, so that it is barely noticeable. People begin to have grand discussions about the “causes for inflation.”

A man named Keynes is adamant in his opinion that inflation is caused in two ways that he calls “demand-pull” and “cost-push.” As he sees it “prices” (and by this he really means “number of piggies” required), go up when the total needs and wants of the entire village goes up. This he calls “aggregate demand.” He thinks that when people generally just want more things, the “prices” for all those things goes up. But I know this is pretty silly, because I know that prices are really just a ratio regarding a very specific thing -- piggies, and I know that I am personally in control of the value of my piggies.

I’ve been messing around with my little balancing act for years, trying to keep their trade-value stable. I know that when the demand for something goes up, people are willing to trade (pay) more of anything for that item. If suddenly it becomes very fashionable to have a white horse, people are willing to trade more of anything they have for those white horses. Dark horses, cows, pigs, chickens and gold all go down in value compared to white horses, because the guys with white horses won’t trade them unless you offer him more than yesterday.

I know that my piggies are just one of those assets in a sea of items that the white horse-owners will accept for their possessions, and I know that it isn’t just piggies that are experiencing inflation relative to the white horse. All things are inflating compared to the white horse! And when it comes to his explanation for “cost push” inflation, I think its just equally silly. If the “prices” for white horses go up, the guys who sell white horse-meat are going to have a rough time. They’ll have to trade more for those horses, and ask for more in trade if they want to make a living. All of this has nothing to do with my piggies, per se. They are only one of myriad assets available.

The Truth About Calories

2011-06-13T14:38:00.002-05:00

Clint Carter of Men's Health has written recently a piece that purports to debunk a few myths about calories. I thought it might be helpful to debunk the debunker, as it were, and make my small effort to stop the promulgation of "bro science," especially when it makes to to publication by Yahoo Health and Men's Health at the same time.

Myth #1: Calories Fuel Our Bodies

Actually, they don't

A calorie is simply a unit of measurement for heat; in the early 19th century, it was used to explain the theory of heat conservation and steam engines. The term entered the food world around 1890, when the USDA appropriated it for a report on nutrition. Specifically, a calorie was defined as the unit of heat required to raise 1 gram of water 1 degree Celsius.
To apply this concept to foods like sandwiches, scientists used to set food on fire (really!) and then gauge how well the flaming sample warmed a water bath. The warmer the water, the more calories the food contained. (Today, a food's calorie count is estimated from its carbohydrate, protein, and fat content.) In the calorie's leap to nutrition, its definition evolved. The calorie we now see cited on nutrition labels is the amount of heat required to raise 1 kilogram of water by 1 degree Celsius.
Here's the problem: Your body isn't a steam engine. Instead of heat, it runs on chemical energy, fueled by the oxidation of carbohydrates, fat, and protein that occurs in your cells' mitochondria. "You could say mitochondria are like small power plants," says Maciej Buchowski, Ph.D., a research professor of medicine at Vanderbilt University medical center. "Instead of one central plant, you have several billion, so it's more efficient.

Stating that "calories don't fuel our bodies," is just laughably wrong. Calories are a measurement of stored energy. They can be applied to anything that can be burned -- including food, fire wood, and gasoline, and our body pulls energy from food to keep the body running. Calories are a direct measurement of the potential energy in each food, and to state that the calorie content of food does not matter is ridiculous. It doesn't matter if the body "chemically oxidizes" food to yield energy. That process is still a type of "burning." A campfire can be described as "oxidizing" wood.

Later, he states that the body has to spend more energy burning proteins, and has trouble accessing fuel when it is mixed with fiber, which is correct, but her numbers are exaggerated estimates. The body is tremendously efficient in sucking every last calorie from its food, unless the body is diseased or sick.

If I offer 2,000 gallons of gasoline to you, does it matter if you burn them all in one car or 100 cars? The result is the same; the cars will travel the same distance, net.

In fact, the Ph.D's statement is backwards. The more power plants we have the less efficient the power generation becomes. Each one of those cars has to warm up to peak efficiency. This is why we have central power stations -- it is more efficient. Economies of scale work for coal burning and food burning in your body.

In any event, the number of "power plants" doesn't matter. The fuel entering the body, and the body's ability to pull energy from it is all that matters. Don't forget that a car "oxidizes" gasoline to produce power for the car. Calling it oxidization doesn't mean it isn't burning the food.

Myth #2: All Calories Are Created Equal

Not exactly

Our fuel comes from three sources: protein, carbohydrates, and fat. "They're handled by the body differently," says Alan Aragon, M.S., a Men's Health nutrition advisor. So that old "calories in, calories out" formula can be misleading, he says. "Carbohydrates, protein, and fat have different effects on the equation."
Example: For every 100 carbohydrate calories you consume, your body expends 5 to 10 in digestion. With fats, you expend slightly less (although thin people seem to break down more fat than heavy people do). The calorie-burn champion is protein: For every 100 protein calories you consume, your body needs 20 to 30 for digestion, Buchowski says. Carbohydrates and fat give up their calories easily: They're built to supply quick energy. In effect, carbs and fat yield more usable energy than protein does.

Indeed, the body has more trouble generating energy from different types of food, be it protein, carbohydrates, fats or alcohol. A lot of work has been done on this topic, and the calories we see on food labels take this information into consideration. The calories listed on the label will be a good approximation of the amount of energy the body will be able to pull from the food, which will be different from the amount a fire can get fromt he same food. To imply that 100 calories of protein is going to yield less than 100 calories of energy for an average human body is absolutely incorrect.

Myth #3: A Calorie Ingested is a Calorie Digested

It's not that simple

Just because the food is swallowed doesn't mean it will be digested. It passes through your stomach and then reaches your small intestine, which slurps up all the nutrients it can through its spongy walls. But 5 to 10 percent of calories slide through unabsorbed. Fat digestion is relatively efficient—fat easily enters your intestinal walls. As for protein, animal sources are more digestible than plant sources, so a top sirloin's protein will be better absorbed than tofu's.
Different carbs are processed at different rates, too: Glucose and starch are rapidly absorbed, while fiber dawdles in the digestive tract. In fact, the insoluble fiber in some complex carbs, such as that in vegetables and whole grains, tends to block the absorption of other calories. "With a very high-fiber diet, say 60 grams a day, you might lose as much as 20 percent of the calories you consume," says Wanda Howell, Ph.D., a professor of nutritional sciences at the University of Arizona.
So a useful measure of calories is difficult. A lab technician might find that a piece of rock candy and a piece of broccoli have the same number of calories. But in action, the broccoli's fiber ensures that the vegetable contributes less energy. A study in the Journal of Nutrition found that a high-fiber diet leaves roughly twice as many calories undigested as a low-fiber diet does. And fewer calories means less flab.

We've been over this above. This information is calculated and applied to the calories listed on the label, including expected losses to urine, feces, and respiration. Fiber will slow the release of calories to the body, but will not reduce the total calories pulled from the food before digestion is complete.

Myth #4: Exercise Burns Most of Our Calories

Not even close

Even the most fanatical fitness nuts burn no more than 30 percent of their daily calories at the gym. Most of your calories burn at a constant simmer, fueling the automated processes that keep you alive—that is, your basal metabolism, says Warren Willey, D.O., author of Better Than Steroids. If you want to burn fuel, hit the gas in your everyday activities.
"Some 60 to 70 percent of our total caloric expenditure goes toward normal bodily functions," says Howell. This includes replacing old tissue, transporting oxygen, mending minor shaving wounds, and so on. For men, these processes require about 11 calories per pound of body weight a day, so a 200-pound man will incinerate 2,200 calories a day—even if he sat in front of the TV all day.
And then there are the calories you lose to N.E.A.T., or nonexercise activity thermo-genesis. N.E.A.T. consists of the countless daily motions you make outside the gym—the calories you burn while making breakfast, playing Nerf football in the office, or chasing the bus. Brandon Alderman, Ph.D., director of the exercise psychophysiology lab at Rutgers University, says emerging evidence suggests that "a conscious effort to spend more time on your feet might net a greater calorie burn than 30 minutes of daily exercise."

Correct! Congratulations, Clint, this is actually correct!

Myth #5: Low-Calories Foods Help You Lose Weight

Not alway

Processed low-calorie foods can be weak allies in the weight-loss war. Take sugar-free foods. Omitting sugar is perhaps the easiest way to cut calories. But food manufacturers generally replace those sugars with calorie-free sweeteners, such as sucralose or aspartame. And artificial sweeteners can backfire. One University of Texas study found that consuming as few as three diet sodas a week increases a person's risk of obesity by more than 40 percent. And in a 2008 Purdue study, rats that ate artificially sweetened yogurt took in more calories at subsequent meals, resulting in more flab. The theory is that the promise of sugar—without the caloric payoff—may actually lead to overeating.
"Too many people are counting calories instead of focusing on the content of food," says Alderman. "This just misses the boat."

Aspartame or diet soda *causing* obesity is ridiculous. The studies he mentions *associate* obesity with diet soda in the same way that obesity is associated with extra large clothes. We all know that wearing XL clothing won't make us fat, but wearing three XL t-shirts per week is also *associated* with increased risk of obesity! Stating that drinking three diet sodas per week is associated with obesity is the same type of statement.

How Mexican illegals replaced American field workers.

2011-06-08T21:02:00.007-05:00

This is a response to this article, which purports to show that the stereotypes about computer programmers caused the profession to become predominantly male, and that the solution to adding more women to the computer programming profession is to remove the traditional stereotypes about computer programmers. If only we could think of computer geeks as predominantly female, and remove the nocturnal and nerdy stereotypes, more women would take computer engineering courses in college, and eventually half of programmers would be women. Using exactly the same logic, I will show how the profession of picking artichokes in America came to be dominated primarily by illegal immigrants from Mexico. As you may notice, the logic itself is somewhat unconvincing.

Asked to picture a field worker, most of us describe the archetypal Mexican: a hard working illegal immigrant. We imagine him passing endless days picking strawberries and other produce in a dusty and chemical laden field. According to workplace researchers, this stereotype of the Mexican field-worker is self-perpetuating, and it keeps the field work of artichoke farming overwhelming Mexican. Not only do hiring managers tend to favor Mexican applicants, but Americans with social security numbers are less likely to pursue careers a field where feel they won’t fit in.

It may be surprising, then, to learn that the earliest field workers were white Americans, and that field work was once stereotyped as a job for white Americans.

As historian Nathan Ensmenger explained to a Stanford audience, as late as the 1860s most people perceived field work as a natural career choice for savvy young Americans. Even the trend-spotters at Cosmopolitan Magazine urged their fashionable American readership to consider careers in farm labor. In an article titled “The Field Workers,” the magazine described the field as offering better job opportunities for Americans than many other professional careers. As farm worker Bruce Hopper told a reporter, picking strawberries was “Just like hunting. You have to plan ahead and be patient as you look for wild animals or strawberries…. Americans are ‘naturals’ at farm work.” James Adams, the director of education for the Association for Farm Machinery, agreed: “I don’t know of any other field, outside of corn farming, where there’s as much opportunity for an American.”

The "Artichoke Boys"

The world described in the Cosmopolitan article seems foreign to us today. In fact, says Ensmenger, change was already in the air at the time of the article’s 1867 publication date. It’s true, however, that the very first farm workers were Americans, and that the field remained open to Americans for many years thereafter. In the early 1940s, the University of Pennsylvania hired six Americans to work on its farm, which was one of the world’s first artichoke farms. These six Americans, known by contemporaries as the “Artichoke Boys,” were charged with “setting up” the farm to grow artichokes. They are widely celebrated as the world’s first American artichoke farmers.

However, says Ensmenger, the presence of these Americans did not indicate that managers of the artichoke project had modern attitudes toward Americans in the workforce. Rather, managers hired Americans because they expected farming to be a low-skill job, akin to factory work, manual labor, or lumberjacking. Assuming that the real “work” in farming would be limited to the dirt moving side, managers reserved these tasks for Americans workers.

The idea that picking artichokes was less important than picking strawberries persisted for many years and Americans continued to work as artichoke picking field workers. Employers, says Ensmenger, were in for a surprise when they discovered a truth that we now take for granted: “Artichoke farming,” he says with a smile, “is hard.” The Americans involved in the artichoke project distinguished themselves by picking higher quality artichokes at a faster rate, and by advising their colleagues on farming improvements. For example, Bob Holbertson convinced skeptical farm owners to include water stations in order to guard against dehydration.

As the challenge of growing artichokes became apparent, employers began to train Mexicans as field workers. Rather than equating farming with hard work, employers now compared it to Mexican-stereotyped farming such as growing hot peppers or black beans. But even so, hiring managers facing a labor crunch caused by the rapid expansion of farming could not afford to be overly choosy. The quickest way to staff new field work positions was to recruit Americans and Mexicans, and employers continued to hire Americans alongside Mexicans.

The “Mexicanization” of artichoke farming.

In 1967, despite the optimistic tone of Cosmopolitan’s “Artichoke Boys” article, the field work profession was already becoming dominated by Mexican illegals. Mexican farm workers discouraged the hiring of Americans. Increasingly, farm industry ad campaigns linked Americans to human error and inefficiency in field work.

It’s not hard to imagine ads from the 1940’s, encouraging farmers to move away from American field workers and replace them with high-tech farm equipment.

At the same time, new hiring tools—including tools that were seemingly objective—had the unintended result of making the field work profession harder for Americans to enter. Eager to identify individuals to hire as field workers, employers relied on interviews and wages to make hiring decisions. With their focus on wages and hard work, they may have favored Mexicans, who were more likely to have experience with difficult farming and accept a lower wage. More critically, the interview process was widely compromised and the “correct” answers were available for study through all-Mexican networks throughout Mexico. Before they arrived, Mexican workers new what to say during the interview and how much they should ask to be paid. American workers enjoyed no such luxury.

According to Ensmenger, a second type of test, the personality profile, was even more slanted to Mexican applicants. Based on a series of preference questions, these tests sought to indentify job applicants who were the ideal artichoke picking “type.” According to test developers, successful artichoke pickers had most of the same personality traits as other farm workers. The important distinction, however, was that artichoke pickers liked “napping in the afternoon” and that they disliked “small hats without brims.” It is these personality profiles, says Ensmenger, that originated our modern stereotype of the Mexican field worker napping at three in the afternoon with a large-brimmed sombrero hat on his face.

Artichoke picking today

Today, we continue to assume that the artichoke pickers have large hats, and that napping in the afternoon is a Mexican trait. As long as these assumptions persist, says Ensmenger, the artichoke-picking workforce will continue to be Mexican-dominated. Although the stereotype of the Mexican field worker was created in the 1960s, it is now self-perpetuating. Employers seek to hire new recruits who fit the existing mold. Young people self-select into careers where they believe they will fit in—for example, Only 3% of Americans teens expect to work on a farm, down from 90% in 1885.

By uncovering the history of American field workers, Ensmenger seeks not only to remind us of American’s forgotten contributions to the artichoke-picking field. More broadly, he is interested in the process of how and why the field became predominantly Mexican. The fact that stereotypes embedded in advertisements and hiring practices had such a profound effect on “Mexicanizing” this profession, says Ensmenger, also sheds light on what can be done to reverse the trend, making field work and other farming professions more open to Americans.

2011-05-29T02:08:00.005-05:00

Why Markets Can't Cure Healthcare Auto Repair

Paul Krugman explains why markets can't solve any of the world's problems:

"Judging both from comments on this blog and from some of my mail, a significant number of Americans believe that the answer to our automotive repair problems — indeed, the only answer — is to rely on the free market. Quite a few seem to believe that this view reflects the lessons of economic theory.

Not so. One of the most influential economic papers of the postwar era was Kenneth Arrow’s Uncertainty and the welfare economics of auto repair, which demonstrated — decisively, I and many others believe — that auto repairs and auto collision services can’t be marketed like bread or TVs. Let me offer my own version of Arrow’s argument.

There are two strongly distinctive aspects of automotive service. One is that you don’t know when or whether you’ll need service — but if you do, the repair can be extremely expensive. The big bucks are in frame straightening and engine or transmission rebuilding, not routine oil changes; and very, very few people can afford to pay major automotive repair costs out of pocket.

This tells you right away that auto repairs can’t be sold like bread. It must be largely paid for by some kind of insurance. And this in turn means that someone other than the car's owner ends up making decisions about what to buy. Consumer choice is nonsense when it comes to cars. And you can’t just trust auto insurance companies like GEICO.

This problem is made worse by the fact that actually paying for your engine rebuild is a loss from an insurers’ point of view — they actually refer to it as “auto repair costs.” This means both that insurers try to deny as many claims as possible, and that they try to avoid covering cars that are actually likely to need repairs. Both of these strategies use a lot of resources, which is why private insurance has much higher administrative costs compared to communist auto repair and insurance systems. And since there’s a widespread sense that our fellow citizens should get the auto repairs we need — not everyone agrees, but most do — this means that private auto insurance basically spends a lot of money on socially destructive activities.

The second thing about auto repairs is that it’s complicated, and you can’t rely on experience or comparison shopping. (“I hear they’ve got a great deal on tie-rod ends over at the Ford dealership!”) That’s why mechanics are supposed to be honest, why we expect more from them than from bakers or grocery store owners.

You could rely on a aftermarket auto repair insurance to make the hard choices and do the cost management, and to some extent we do. But insurance companies have been highly limited in their ability to achieve cost-effectiveness because people don’t trust them — they’re profit-making institutions, and your auto repair is their cost. Between those two factors, auto repair just doesn’t work as a standard market story.

All of this doesn’t necessarily mean that socialized auto repairs, or even single-payer, is the only way to go. There are a number of successful auto repair systems, at least as measured by pretty good repairs much cheaper than here, and they are quite different from each other. There are, however, no examples of successful auto shops based on the principles of the free market, for one simple reason: in auto services, the free market just doesn’t work. And people who say that the market is the answer are flying in the face of both theory and overwhelming evidence."

Stimulus Spending and Quantitative Easing

2011-05-28T05:29:00.003-05:00

If you consider the ways that money is "printed," both by the Fed with QE and by banks making loans against houses and cars, you might notice that one is inflationary and the other is not.

And because "Stimulus" spending does not involve the creation of new money, it is probably not inflationary. It may raise the demand for money because of its temporarily higher "velocity," but should have no real inflationary effect. It simply moves assets from very productive people to others who are probably much less efficient, who will produce something that no one really wants.

Fed spending (quantitative easing) is certainly inflationary, and creates misallocation of resources, but bank lending (also a method for creating new currency) is also probably not inflationary, even at reduced interest rates, because each loan effectively trades ownership of a real asset (like a home) for new assets called dollars.

Because the process of issuing a bank loan effectively shifts ownership of the house to the new dollars, and those new dollars can always be traded for the house that the bank used as collateral (by paying off the loan with dollars), the new dollars generated by new bank loans are unlikely to be inflationary. Bank loans create new money that matches real assets. QE on the other hand, is inflationary because it does not match assets up for sale in the real world. The Fed simply spends new money and holds what it buys on its balance sheet, away from the market, which is a completely different process than taking a house as collateral and issuing new currency to match its value. The bank loan process creates money that chases existing assets in tandem. Fed spending increases the money supply relative to existing assets.

A bank loan can always be paid off with inflated dollars to acquire real assets, but the assets that the Fed holds on its balance sheet cannot be accessed by anyone. Because of this, the dollars the Fed spends are chasing assets that are no longer available for purchase, and this is inflationary.

With this understanding, low interest rates on bank loans can be regarded as a genuine discount on the process of currency creation. Banks are offering a sale, which does not create misallocation of resources. When a bank issues a bank loan with new dollars, it is effectively taking the house in exchange for its new dollars printed from thin air, and loaning the house (that it owns via the collateral agreement) back to the "homeowner," at a certain rate, which we look at in the wrong way. We see it as the bank loaning dollars at interest. More accurate would be that it is loaning the use of its asset, the house, for a fee.

"Stimulus" spending does create misallocation, because it moves wealth from productive people (successful businesses who are taxed) to other, probably less productive people (government contractors), making things that people probably don't want. But stimulus spending is not inflationary either; it creates no new dollars. It may increase the "velocity of money," which will create a temporary amount of inflation and a subsequent deflation when all the spending stops (higher amounts of trade raise demand for a medium of exchange), but no long term change will occur in the value of the currency.

One caveat is that the Fed will not print and spend new dollars unless it feels that the dollar is deflating (rising in value). The only purpose of QE is to correct a movement in the value of dollars. Similarly, if inflation slips too high, it will liquidate some of its balance sheet, selling treasuries or MBS on the open market for dollars, and destroying the dollars it receives. We hear a lot of complaining about QE, but not so much as a peep when the Fed does the opposite. This is quite strange, and seems to indicate that either people are not thinking clearly about why the Fed does anything, or they believe The Bernanke when he babbles on TV. The Fed's business is the creation of currency. It happens to hold a government enforced monopoly on the business in the United States, but it still does its job fairly well. The only difference is that it makes more money than it would with other banks competing in the same business.

The Fed still has every incentive to avoid rampant inflation or deflation, for two reasons. If it allows high inflation to happen, it ruins the profit generated by its bank loans, many of which are 30 year contracts. If people are paying back loans with worthless dollars, member banks are not making much money. Ultimately, this is not an issue, because member banks all own part of the Fed's balance sheet. But the problem is still there on the face of it. Inflation lowers the profit generated by long term loans, because the loans were signed with a set amount of expected inflation.

Second, if it allows rampant deflation, the economy grinds to a halt because people have more of an incentive to hoard dollars and are now forced to pay back dollars that are worth more than expected. So the incentive to save is raised, trade is reduced because people are less willing to part with dollars and use them as a medium of exchange, and anyone with a long term bank loan is becoming poorer by being forced to repay dollars with more value than expected. Paying off loans early (deleveraging) exacerbates the problem and removes more dollars from circulation. And deflation ultimately hurts the Fed and its member banks by reducing the amount of wealth being generated by the citizens of the United States. If people are generating less wealth, banks have less business. For these reasons they desperately try to keep the dollar stable, and have been fairly good at keeping inflation between two and five percent since it was freed from its gold-standard shackles around 1970.

The Fed realizes that a small amount of predictable inflation is best for their business. They get no deflation, constant growth, and the losses from inflation are not ultimately damaging to them. The only losers with a small and consistent amount of inflation are people with no bank loans who hold cash. (This is one way that the Fed "steals" from the poor, who mostly hold no loans and most of their wealth in cash.) There is no reason to suspect that the Fed will fail to keep inflation in its "zone of reasonableness" at this point. It has the power to keep inflation where it wants.

The gold standard is a topic for another day. Its removal was a huge plus both for the Fed and the United States, because it gave the Fed much greater freedom to control the value of the dollar without worrying about both the supply of dollars relative to assets, but also the value of gold relative to assets. The dual standard, which allowed dollars to be converted to gold and the homes or cars held as collateral, created a nightmare for the Fed. Freeing it from the government imposed obligation to redeem in gold and its collateral assets at a fixed rate created huge headaches, and huge swings in the value of the dollar. If you take a look at the stability of the dollar post 1970, there is no deflation and after a few years the dollar stabilized at 2-5% inflation for the last 20 years or so.

Greed is Impossible

2011-05-17T15:08:00.004-05:00

This man quit his job working as a software engineer after September 11, and now spends his days cleaning a river that has been accumulating trash near an auto repair shop. I don't think there is a difference between the work he did as a software engineer and the work he does now, except that his previous work was much more beneficial to mankind.

A company used to be trading money (wealth) for this man's highly skilled labor, and now he is doing work that a person with no skills, education, or intelligence can do. If you don't include this man's personal enjoyment of the cleaning process, which job is probably better for the world? I think it is obvious, if this man's own feelings are removed, that the previous work was much more likely to make the world a better place.

And I think that the reason he is performing unskilled labor instead of using his mind, education and skills is that he does not understand that his previous work was good for mankind; he perceived it to be shameful pursuit of money; of personal greed. This an unfortunate gap in understanding among educated adults in the world. Most of us fail to realize that using our abilities to create wealth is beneficial to everyone.

When wealth comes into the world, be it a clean river or new software, it is usually very beneficial to those who create it, but even more beneficial to society. The person who creates the first computer becomes very wealthy, but the total value provided to the world is worth many times more than the inventor receives. To pay everyone on earth to destroy their computer and forget how they are built would take perhaps more wealth than exists on earth! Innovation and new wealth benefits not only the first man, but also the entire world, and its accidental influence is worth so much that all of us should be encouraged as much as possible to create wealth for ourselves. Each of us, weather we intend to or not, help the world with every moment we spend trying to help ourselves.

How much would you have to be paid to agree to never use a computer again? To never use a phone, the internet, a car, or most of the things in your home, like dishwashers and laundry machines and so forth... You would have to find machines from 60 years ago (and they would cost more to run) and use those, and your central air conditioning would not be allowed, and you would have to use cash and pay everything by check. No more movies unless you use actual film, etc. This is impossible because computers are used to process checks, currency, and send anything by mail, so we would have to imagine that we are penalized for the speed and reliability computers provide. Perhaps you could have your mail held for two extra days and be forced to randomly destroy some of it, and it would be like this for everything, and you would be forced to work for a company that does not use computers, which would be a tremendous task in and of itself. How much would that cost? How much do you personally benefit from even this single invention?

I would need to be paid many millions of dollars to avoid computers for the rest of my life, and even then I may not accept. Perhaps one billion dollars might convince me, but I can imagine an amazing future, where computers are billions of times faster and more useful than now, and that is worth a tremendous amount to me. And all of this was created by one man's greed. One man's passionate desire to create a computing machine for the home, and to become wealthy doing it. His personal desire to help himself has accidentally helped the world to be a billion times richer than before.

If computers are worth even just $1 million to each person in the united states, the total value provided to just one nation is over 300 trillion dollars, and the united states is only "worth" about 200 trillion (total estimated value of all assets owned by Americans and the US government). Intangible wealth, the stuff that is not traded but still exists among us, is unimaginably large. And it is the intangible wealth that is really, truly valued by human beings, and much of it comes into existence when people greedily pursue their own personal fortunes. We should not fault any of them, but imagine a world where everyone tries to help themselves in order to create the intangible benefits that all of us don't realize are always created when people work to create, think, and innovate, for any reason at all.

If this man is cleaning a river because he thinks pursuing money in an office building is not helping anyone but himself, that is a grand shame. His goals are admirable, but his ignorance is stopping him from living the truly purposeful life he desires.

To teach our children to be greedy is not my suggestion. We should teach our children how the world works, and encourage them to work not only for themselves, but to pursue the creation of wealth, the acquisition of money in legal and moral ways, with the full knowledge and pride that comes with knowing that every small action, every tiny piece of useful work they do, is helping future generations to live better than we can even imagine. It is impossible to be "greedy" if you know that your success is the world's succes too, many times over. It is impossible to become wealthy without helping the world more than you have helped yourself.

The Curious Nature of Wealth and Ownership

2011-05-15T23:35:00.004-05:00

How do we know that we own anything? Because we have it in our immediate possession? We know that can’t be true, because we can borrow a car, or wheel of cheese we do not own. We hold them in our hands and control them only temporarily; we do not own them. Shipping companies transport goods they do not own, we live in homes we do not own, and we even make use of digital movies that we hold for 24 hours, and “return” them to iTunes, or Netflix. So if holding and controlling an asset does not an owner make, what does? What is this thing we call ownership?

Wealth is anything valued that can be exchanged, and a wealthy man owns wealth. It is the ownership that makes him wealthy, and it is the ownership that he trades when he exchanges his wealth for another man’s wealth. We do not buy and sell wealth, we buy and sell the rights of ownership. People are only wealthy when they own, and it is the ownership that is what we exchange in markets. We do not trade the use of a tool, we trade the right to use the tool. I don't trade the cheese to you, I trade the right to eat the cheese. It is the ownership that is traded, and the ownership is the only thing that can be considered to make a man wealthy. Even if I hand you the physical cheese, it is a meaningless act until I transfer ownership. Your wealth does not increase until I transfer ownership of it to you in whatever method is defined by our legal system.

When I sell my house to you, I do not pick up the house and give you the physical asset. It is not the “real” or physical wealth that is transferred in economic transactions. It is the ownership that is traded in the marketplace, not the assets themselves. There is a strange fuzzy line between "real" and "financial" assets, but the reality is that we are always trading ownership; we are always trading financial assets weather they are written on paper or not. The ownership is all we can ever exchange, and is therefore the only tradable wealth on earth -- the rights to control items that we value.

Sometimes we are fooled into believing that when we trade physical objects we are trading wealth. That is not the case. If we go to a friend’s house and I take a book off the shelf and give it to you, and say “here, this is a gift from me, it's yours now,” you might respond by asking if I own the book. This would be an example of me giving you a physical asset without giving you its ownership, and we can see that trading the physical asset is irrelevant. In order to give you the book it does not matter its physical location. All that matters is the location of its ownership, which still rests with the homeowner. The ownership (and its method of enforcement) is all the matters.

Land deed from 1636

Without government, one enforces the ownership of their assets by personal force. With a government that does this job for us, we are able to own without being in the immediate possession of the asset. Without a system of property rights, the value of assets is always contained in their physical form, and whoever has immediate control is the owner. Previously, to exchange the ownership of wealth, we would exchange the physical wealth, but the ownership is what we were really trading -- it’s what we really value. The ownership is like the soul of the wealth, and it is the collection of souls that makes men wealthy. If a man uses wealth that he does not own, he is not wealthy. The man who flies a multimillion dollar airplane is not necessarily wealthy. It is the man who owns the plane that is wealthy.

Ownership is today determined by the state. Without the state, each man is his own government, and uses his own force in order to own; in modern economies, the state decides who owns. A man who uses wealth is not rich. Only the man that owns wealth is rich. So it is more important to look to ownership and not to the physical location of wealth in analyzing specific economic transactions.

Modern legal systems allow us to own wealth that is not in our immediate possession. The system allows us to hold “title” or “deed” or other paperwork that specifies who owns certain pieces of wealth. These are legal documents that spell out in not-so-plain english exactly who is owns the the car or home. Ownership may be divided between a few people, or one person may own the entire asset. The legal documents point to the owners.

The modern system gets us into trouble when thinking about wealth and ownership, however. We do not intuitively understand a system that is able to transfer the ownership of an asset through time and space. We are now literally able to move ownership anywhere in the world, and move ownership into the future as well, with contracts that specify that ownership will be transferred on a certain date. We can transfer ownership before we even have it, by selling short. All of this is very confusing for our primitive minds, so I have found it more reasonable to think about wealth and ownership in a way that human beings are more easily able to consider; we should think of wealth in the same way that we think of a human being, and think of ownership in the same way that we think of human souls.

With the modern legal system enforcing and regulating property rights, we are able to rip the soul from a home in California, put it in a jar, and keep in in a desk in New York. The soul of any asset is the ownership of that asset. When we move souls through time and space, and store them for later, nothing happens to the “bodies” that used to contain ownership. They continue on as if nothing has changed, but we know better. In the system of law and order that we enjoy today, if you find a house in the woods, you cannot take possession of it, because you do not know where its soul resides. Today we do not own a piece of wealth unless we control its soul, and souls are regulated by the government. We can certainly make use of a house we find in the woods. We can even destroy its zombie body, but we do not own the home in the woods. To own it, we must find its soul.

The process of creating financial (paper) assets is to delineate who will control an asset’s soul. When we create new stock in a company and sell shares to investors, we are selling pieces of the company’s soul to many people. When we create a currency we are dividing a home’s soul (its ownership) into many smaller pieces, each of which we call a dollar, kroner or yen. Those dollars entitle the holder to a piece of an asset’s soul. This entire process of moving and dividing souls is a process that creates liquidity and stability. With the ability to own assets at any point in space or time, we are able to do things that our ancestors only dreamed about, and it is a big reason that our wealth is growing so quickly. The ability to own at a distance, and move assets so easily through time and space allows the most productive among us to produce very efficiently, and to produce in vastly larger amounts than would be possible if he were forced to personally protect each of his factories and assets, or hire armies to defend them.

All of this is made possible through the careful use and threat of force. If you begin living in the house in the woods without owning it, the person that controls the home’s soul has the power to force you out of the house using police. If you refuse to leave, they’ll physically remove you, and if that isn’t possible, they’ll kill you. Similarly, if a burglar enters your home and is trying to take ownership of assets in your home, you are permitted to use force to stop him, and our laws will not punish you for defending ownership. Note that you are not defending wealth, per se, but its ownership. If he takes a car, he does not own it until he can change its serial numbers, and convince the government that he owns the car's soul. If he takes jewelry, the ownership is transferred because there is no way to prevent the soul from following the "body" of the asset. There is no way to stop the ownership from leaving the house with the thief.

If you don't have the legal right to the asset, you don't own it. The only way to own wealth in our modern society is to own its soul (legal right). Souls sometimes remain in the asset and sometimes they are legally moved in space and time, but the only thing that matters is ownership. Without legal ownership we do not control an asset, and without control we do not own. Legal ownership is all that matters in modern economies. You cannot own anything without the blessing of the legal system, and you cannot be wealthy unless the legal system says you are. The rule of law makes the physical asset irrelevant when we are trading with others. We trade papers that show the government who owns, we don't trade the assets themselves. The ownership is all that matters.

Our Tribal Minds

2011-05-14T17:29:00.002-05:00

"Economic growth" is synonymous with "increasing standard of living." To understand why, we have to understand what GDP is, and what wealth really is.

Wealth, for human beings, is anything that makes our lives better. If we are alone on an island we can still improve our life by making a shelter, storing food, farming, collecting salt and spices, making tools, finding herbal medicines and storing them, hunting and preserving meat, making and storing wine, writing songs and making musical instruments, writing poems and making books and so on and so forth. All of our actions are designed to improve our life, alone, on the island, and as we do so we are creating new wealth.

Wealth isn't fixed. It is created by people when they manipulate their environment to make their life easier and more enjoyable, and we call this manipulation "wealth." Trees are valuable to human beings because they are pretty, block out the sun, harbor animals, etc, but a house built from a few of those trees holds more value to us than the original trees, because it can keep us warm and protect us from wild animals, and protect our food stores as well. So we make a personal decision to transform the tree into something we value more -- a house.

And every person on earth is making the same personal decisions with what they own. Each person owns a little bit of something, and he decides what is the best way to improve what he owns. He may decide that a piece of paper is valuable, but that a book or poem written on the page is a beneficial transformation of a blank white page into something more valued, something worth more, something we call "wealth."

Another person who owns grapes may decide that they are tasty, but that wine is more valuable to him, and so he allows them to rot and stores them as wine. To him, that is a more valued resource than the grapes. It lasts longer, it makes him feel good, he decides it is best to make wine.

Another man may decide that his cow is best for making milk and cheese. Another may decide to breed a few cows and kill them, because he has decided that meat is better than cheese.

As we go along, it should become obvious that all of these people are making personal decisions about "wealth" that is personal, and may conflict with what their neighbors consider to be the best use for each natural resource. This conflict is solved in two ways. We can either find a god-like person or god-like council to decide what is the best use of each raw material, and analyze each person's desires and needs over the long run, and then tell everyone how to use their trees and paper and grapes and cows... or we can allow each person to make their own choices.

Allowing everyone to make their own choices is scary, because no one else is making choices that we think are correct. We think it would be more efficient if those grapes were used as food, and we think destroying a forest is a sad waste of trees, and that the man should have built a smaller house, or a house from clay or straw or stone.

I think we have an innate desire to plan and organize as a group, to meet and decide what is best for the tribe, and how everyone should operate to insure our collective survival. Unfortunately, this only works in small groups of people who all know and respect each other, and share the same beliefs about what is right and wrong. Today we have billions of people who don't know each other and share wildly different ideas about what is right and wrong. There is no way to have a group meeting and have us all agree on what is best for our group, or the forest in which we live (the earth). We must find another solution.

$1,564 for 40kg.

We must find a way to allow all of these people, some who want to make a house and others who want to live in a tent to live together in harmony with the forest. The answer that modern man has developed is private property. Because we cannot organize billions of people into a cohesive group (without force or perhaps thousands of years of homogenization), we have decided to allow each person to be their own group, and make their own decisions about the best way to manipulate their possessions, land, trees, grapes and animals. This allows everyone to do what they think is best. The trouble is that some people might feel it is best to destroy their land and their things, but there is not much we can do about that if we want to live peacefully with billions of others. Almost everyone on earth will be doing something with their life and their little piece of the world (their possessions) that we think is inefficient, wrong, useless, or wasteful. We still have a strong tendency to pull people together to operate as a cohesive whole, show them why killing animals is wrong, or show them why trees are so beautiful, and to make them stop doing what we personally think is wrong. We tend to forget that all of the ideas and opinions floating around in our own heads are only our own opinions, which are not always the "right" for everyone else.

Many of us want to pull others together so strongly that we are willing to force other people to do what we think is right. Many of us feel so strongly that others are being inefficient or immoral with their actions, that we think it is moral to point a gun at them (pass laws) telling them how they can use their trees, or if they can make wine from grapes, or if they can kill their cows or must only make cheese.

The trouble is that we have forgotten how we got here; we have forgotten why we have private property. We have forgotten that in order for a group to act as one, it must share goals and a world view, and there are now too many people with too many different ideas, even in one small town, to have them all act in unison, and have them all share ideologies.

Wealth is simply what makes life better for us. Each of us tries to create wealth by making our own lives better, but we don’t all agree on exactly what “better” really is. To solve this problem, we allow each person enough personal space to make their own decisions, as long as they don’t hurt other people (including pollution). When many people are allowed to make their own decisions about the best way to make their lives better, we get a bunch of people who are really happy about their own decisions, but we also get a lot of people who forget how we got here and want to tell other people to be just like them, and most of us feel this way because our brains evolved living in small groups of friends and family that shared common goals and a common religion and a common morality and common ideas about the best use of the resources available to the group. Our minds did not evolve with private property rights, and it seems intuitively unnatural, selfish, and unfair.

And this is where the huge push to collective governments comes from. Our intuitive sense, that we should act as if we are a small tribe living in huts, sharing everything, and working for the common good of the group. It is unfortunate that history lessons are so superficial and irrelevant today. Perhaps if people understood that what they intuit is not always “correct,” they would be more willing to respect the desires of other human beings, and allow them to be productive and create wealth in their own way (as long as they don’t hurt others or destroy/pollute their land).

A great side-effect of allowing everyone to make their own decisions about how to make stuff that improves their life is that many of us become very good at some aspect of improving human life on earth. Some may be very good at making cheese, and another becomes very good at making wine, and when they get together and trade with each other, they both enjoy the perfection of the other man’s labor -- they both have better quality food and drink than they would if they lived alone on their land. It is for this reason that “free-trade” improves life for humans on earth. It allows billions of people to perfect something and trade it for other very high quality things that they might not otherwise have.

And this is the best of both worlds. We allow each person to make personal decisions about their things, improve his own world as he thinks is best, and trade with other people for the things that they think are really good for making life better. In this way we all have an ability to live many times better than we would if we lived alone, and in this way, through private property rules and the ability to exchange with other people that we “accidentally” act as if we are one large group, with common goals and a common view about what is a good use of resources or a poor use. Because wealth is simply what we call anything with value and we value things that we think make our life better, we can say that improving life on earth is synonymous with increasing the amount of wealth on earth. Wealth is simply an improved life!

If you and I live on separate islands near each other, and I become very good at making butter and cheese, and you become very good at making strong houses and great wine, but you suck at making dairy products and I can’t figure out how to make a strong house, we have two ways to help each other live better lives (have more wealth). We can become friends and help each other out. I can make butter and cheese for you, and you can build me a house and make wine for me. This is what feels intuitively moral to most of us. Being friendly and offering to help others seems like the right thing to do.

Negotiating in crude terms, demanding payment for the wine and housing, seems wrong; greedy. A friendly exchange would work if the men are close to each other and are able to become friends. But what if the men live far apart, and what if they have such wildly different world-views and moral values that they would hate each other were they to ever meet? How can these two ever be expected to cooperate without forcing one of them to change... without forcing one to suffer or hide his beliefs and values?

We must find some way to formalize the exchange between friends in order to allow non-friends to cooperate as if they were friends. To formalize the exchange, we use prices to decide what we think the value of what we have created (wine and cheese) might be. If we think that a bottle of our wine is worth one pound of cheese, we put a price on the bottle, but we don’t use money. We don’t need it and we don’t have it yet. We put prices in barter on our wine:

Item/Price
Wine / 1 lb cheese, 2 lbs salt.
House / 1,000 lbs cheese, 100 cows, or 1,000 bottles of wine.

Both of them would create a similar “price list.” They would specify what they think the trade value of each piece of wealth they have created might be, in their opinion. If another person creates a new medicine or finds a new spice or wants to trade a horse for any of these things, they would both decide what they think a horse is worth in terms of what the other man holds. If one has a lot of wine and the other has a horse, one might decide he is willing to give up 100 bottles, and the other may decide his horse is worth 200 bottles, and if they both compromise, they might trade it for 150 bottles. If either of them decides that they don’t want to compromise, the sale does not happen. The man with the wine keeps his wealth and the man with the horse keeps his. Buying and selling (trading) does not ever happen unless both of them think that it’s a good idea. Trades won’t occur unless I think that your wine is better than mine, and you think my cheese is better than yours, and we both agree that trading them is a great idea. There can be no losers when both of them are free to make decisions about what they will or will not trade.

Today we use money, but the process is the same. Money is simply a uniform and easy-to-use form of wealth, that makes it easier to trade horses and wine. If a man has a horse that trades for 150 bottles of wine, and wants to trade some of his horse for ten bottles of wine, that is impossible without destroying the horse. In order to solve this problem, money is invented as a method for spending part of the horse’s trade value. (more on this later).

So, in order to have a modern world cooperating and making life better for themselves, and trading good wine for good cheese, and figuring out how to make better and better things that make our lives easier and more fun, we must have the ability to place trade-values (prices) on everything we make. This allows strangers, who may not ever meet, to exchange the stuff they have created, which makes both strangers live better lives, because they now both enjoy great wine and great cheese, even though they are not friends. Even strangers can improve each other’s lives with a pricing system. When we place a value on our own things, and make personal decisions about how much of our wine we are willing to giver up, and match our opinions of the value of our wine with the opinions of others, sometimes we find a common ground, and when that happens a trade occurs, and each trade makes both people better off.

So prices and trading seems crude and greedy because it doesn’t fit with our tribal brain, that wants to help everyone around us and in turn have everyone help us. It wants us to be a family and protect and love each other and each other’s possessions as if they were our own. It’s a beautiful desire, and perhaps it is sad that we cannot live that way with a billion other people, but such is the world today.

A side-effect of implementing a pricing and trading and private property system is that all of us end up accidentally working for the good of other people. All of us, by making really good wine or cheese and trading it with others are improving everyone else’s life. Imagine a man alone on an island. He makes mediocre everything but figures out how to make really tasty beer. His life might improve slowly as he creates more and more stuff that he thinks is valuable, but it won’t improve as fast as if another man arrives and does the same thing. If the second man is able to make anything better than the first man, and they trade, both of them are better off. The first man has only good beer. If the second man makes very good cheese, and they trade beer for cheese, now both of them have really good beer and cheese (but mediocre everything else).

When a third person arrives life gets even better. Perhaps he is lucky to be very good at making knives, and trades them for beer and cheese. Now all of the men have really good knives, cheese, and beer, and none of them has to work any harder than if they were alone. The ability to trade with each other makes them all better off! Now imagine that we continue this exercise until there are seven billion people on the island, and all of them are getting better and better at making wine and music and tools and tomatoes. And all of them are setting prices on their things and offering them for sale (for trade) with everyone else on earth. The growth of the population, the addition of each new person improves the lives of every other person already on the planet. Even if each person cannot do anything better than the people already there, there is some probability that each new person will become the best, or figure out some way to improve something, and if that is not the case, each new person can help others to make what is already very good, and with his help more and more excellent cheese is created, more and more wealth is brought into the world and offered in trade for all the other new wealth being manifested from nothing all over the planet.

Government Spending vs Unemployment

2011-05-12T14:13:00.000-05:00

The more government spends, the more unemployment we have.

What is Money?

2011-05-08T21:08:00.008-05:00

Is money wealth?

Yes. It is an IOU from a bank, which is wealth in the same way that an IOU from your neighbor is wealth.

Except your neighbor doesn’t pay the IOU with another IOU he can print in unlimited supply....

The government can’t print IOUs (dollars), only the federally protected bank-monopoly (Federal Reserve) can do that. Dollars are backed by real wealth because each IOU comes into existence in exchange for homes, cars, businesses, and government securities. The IOUs are "paid" in those assets when bank loans are repaid.

What is the IOU for? I brought a dollar to the Federal Reserve, and they wouldn’t give me anything in exchange!

The dollars are backed by the assets the bank takes in exchange for its IOUs. If I go to a bank and take a loan against my $10K car for 10K IOUs, the bank takes ownership of the car (holds the title), and agrees to return the ownership of the car to me in exchange for the 10,000 IOUs at any time. Dollars are backed by the cars (and houses and businesses) of which banks take ownership when they issue new loans.

Not all loans are collateralized – revolving credit card debt, for example and unsecured loans for another. So, not every loan is backed by real assets. The value of underlying collateral changes. When house values drop, the mortgage lender finds that he essentially owns an only partially collateralized loan.

Financial or “paper” assets are wealth, as per the economic definition of wealth, which is “anything valuable that can be exchanged.” Revolving debt and unsecured loans are a promise to pay, and are issued to people who have a good reputation (credit rating). Their debt can be bought and sold making their promise a form of wealth. Bank loans issued for revolving and unsecured loans are “backed” by the assets and promise of the borrower. They have pledged their assets even if it is not a formal arrangement. If the promise to repay is broken, the bank can still sue or lay claim to his assets in bankruptcy court.

If banks loan recklessly to people unlikely to repay the debt, they devalue the currency issued to make the loans. They fail to take an equivalent asset in exchange for new dollars, which inflates the currency. A responsible bank, making a loan to a credit worthy borrower, is issuing new dollars backed by the promise of a credit worthy person and the assets he owns. That person’s IOU (a form of real, exchangeable wealth) backs the new dollars.

When housing values drop, the debt of that credit-worthy borrower still backs the dollars issued. Because one of the borrower’s assets declined in value does not release him from the IOU to the bank, and does not remove his other assets from possible seizure by the bank.

When banks make responsible issues of new currency to trustworthy people, inflation is not a problem, and the dollars issued are backed by real wealth. The Fed holds a monopoly on currency creation, and its member banks are routinely reckless issuing currency and judging the credit worthiness of borrowers. If any entrepreneur were permitted to issue currency, the best bankers would rise to the top, and eventually there would be a few stable currencies with very low inflation, all backed by real assets in the same way. There is no need to “abolish the Fed,” per se. We need only return the business of creating currency to the free market.

What about when the Federal Reserve purposely purchases an asset from a failing bank at high above its “real” value? In that case, you are being given an IOU for, let’s say, $100k that is only redeemable for an asset that is worth $50k.

Issuing loans for overvalued assets, or to people who have poor credit is one cause of inflation. It devalues the dollars issued. This is why the Fed monopoly is harmful. It can get away with inflating because it has no competition.

You are confusing checks with dollars. If I hold Federal Reserve notes, nobody owes me anything. And no one is obligated to trade for my notes. Federal Reserve notes are not IOUs. That is why it is called “fiat money.”

The Federal Reserve Notes are an obligation to return your home to you if you return the notes to the bank. They could easily say “The Fed owes you 1/100,000th of your home” on each note. They owe you the house. You owe them 100,000 of their notes, called “dollars.”

Put another way, if you returned with 100,000 notes, the bank would be willing to offer you one note stating “The Fed owes you one house.” When you return that note to the bank in payment on the loan (not deposited to a checking or savings account), you own the house again.

This is an absurd contrivance. A debt always stipulates repayment. If a debt stipulated repayment with one million bushels of flax, that does not mean that the flax I grow and store for repayment are IOUs.

A paper silver certificate “dollar” (dollar was an imaginary term, like unicorns) was in 1792 an IOU from the mint for 24.056 grams of silver. If you held one million “dollars,” the mint owed you 24.056 million grams of silver. If you pulled more silver out of the ground and stored it, that new silver would not be an IOU any more than new bushels of flax.

The mint issued paper “dollars” if you brought raw silver to the mint for coining. It would take the silver and give you paper IOUs in return, in exactly the same way that a bank takes ownership of your assets (homes and cars) and returns paper dollars.

The silver certificate, when returned to the mint, yielded a specific amount of wealth (silver) in the same way that US dollars today yield a specific amount of wealth (a house) when returned to the bank.

There are two ways that currency comes into the world. Most of it comes into existence via bank lending, but some comes into the world because of “quantitative easing,” which is analogous to the US mint printing up “fake” silver certificate dollars and spending them. They are still IOUs (they can still be used to get silver at a fixed rate from the mint), but they are not backed by wealth and they lower the value of existing dollars. When the Fed creates new dollars “out of thin air” and buys treasuries, they are still IOUs, because they can be used to take ownership of a house at a fixed rate from the bank.

If we put you and a friend on a deserted island with just a sack of money, where would you spend it?

If I hold an IOU from my neighbor and you move me to a desert island (without the neighbor) the IOU would become worthless as well. Holding an IOU carries risk, but an IOU from a trustworthy person or company is valuable in the same way as other paper assets: loan agreements, stock certificates, bonds, etc.

The Federal Reserve is not inherently trustworthy. We are all forced to use dollars and using anything else if forbidden, thus creating an artificially high valuation of the dollars themselves, which would be worthless if they weren’t backed up by force.

They are trustworthy in as much as they have not ever defaulted on their promise to return an asset as agreed when its notes have been repaid. And it has a giant thug on its shoulder (the government), who has agreed to support it and its monopoly, which does not create an artificially high valuation of the currency, per se, but allows them to inflate dollars without worrying about losing customers. In a free market people would be free to choose from myriad currencies, judging each bank’s trustworthiness and its inflationary history.

The dollars would hold value without government force. For example, say I forget my wallet one day and walk into your store. I say “I forgot my wallet, will you accept this IOU for a bottle of whiskey?” If you accept, you now hold currency issued by me, backed and denominated in whiskey. (You could presumably trade that IOU with others who trust me.) I take ownership of your whiskey and you take ownership of my IOU in the same way that a bank issues IOUs in exchange for your house.

My whiskey IOU holds value without the use of force, and it is backed by my assets and credit worthiness. I may not even hold whiskey in my house, but because I promised to pay, that IOU continues to be worth a bottle of whiskey and would fluctuate in tandem with my wealth, credit history, and how much people in town trust me.

Later, if I come to your store with a bottle and offer to repay you, you might say “I forgot the IOU at home.” And I would say, that’s fine, keep the IOU and the bottle, but pay me a little interest until you find that IOU. If this were to happen, the exchange would be similar to a bank issuing new dollars for a home, and then allowing you to live in the home if you pay interest until you return all the dollars. They have agreed to return the home to you when you return the IOUs to them in exactly the same way that I agree to return that bottle of whiskey to you when you return the whiskey-IOU to me.

Your goal in trade is obtain wealth. Some goods are called “intermediate goods” because they do not satisfy that goal. Money is a universal intermediate good, with the possible exception of currency collectors.

The term “intermediate good” is only useful in discussing the calculation of macroeconomic numbers, like the GDP, and are useful in avoiding double counting inputs to manufacturing. The term is not useful in deciding weather or not money is a form of wealth. Dollars are not inputs to a final product. They are debt obligations that can be owned, held and traded by people who consider them valuable. Wealth is anything of value that can be owned and exchanged. Money is valuable and can be owned and exchanged. Therefore, money is wealth.

The only value anyone has for money is in its ability to trade for something else. Everything else has some value to someone other than its trade value. Money was invented to obtain those things. It has no other value to anyone.

If I borrow a pound of sugar from you and give you an IOU in exchange, what is the value of that IOU? It has three purposes for you. You can trade it with someone other than me, using it as currency, or you can turn it in and get your pound of sugar back, or you can keep it indefinitely as a low-cost method for storing wealth. There is no fundamental difference between money and goods that are useless to you and valuable to others, like raw mineral ore. You can use mineral ore for its trade value, turn it in to the mineral extraction factory, or keep it as a store of wealth, but you would not use it for any other purpose because the factory will pay a lot for it. To you, there is no difference between mineral ore and gold coins. Both are useless to you but can be used as money.

A Federal Reserve Note is an IOU promising another IOU from the Treasury.

Federal Reserve Notes are a promise from a bank that agrees to accept the notes in trade for the loans on its books. The note does not promise treasury securities. The people that hold loans against their homes, cars, and businesses can always pay back the loans using the notes. If you take a loan against a $100K home, you can always take ownership of the home for 100 thousand Federal Reserve Notes. If rampant inflation makes the notes worthless, you are still permitted to take ownership of that home with the same (now worthless) notes.

The notes are also a promise by the state to remove its gun from your head; if you earn 100,000 notes per year you can always have the gun removed by paying about half the notes in taxes. Even if the notes become worthless before April 15th, you can still remove the gun by paying with worthless notes.

If you do not owe the state any taxes, and you do not hold any outstanding loans from any US bank, you are accepting the notes in the same way that I might trade an IOU issued by my neighbor. If my neighbor borrows a case of wine from me and writes an IOU, and I offer to trade that IOU for an ounce of gold, you would accept the IOU only because you trust my neighbor to keep his promise. In the same way, you only accept Fed Notes because you trust the US government and banks to keep their promises.

USD have value because people before you accepted them in trade, and people before you accepted them for trade because they were redeemable in gold or silver. Stating that “money is debt” is quackery. Dollars are not exchangeable for wealth anymore, they are a fiat currency that only holds value because people believe in them.

The first step to creating a paper currency is creating wealth (homes, cars). The second step is trading that wealth with another person in exchange for an IOU which can now be traded as currency. Dollars hold value because they can release you from a bank loan. No matter how badly the dollar is inflated, you will still be able to take possession of your home by paying off the loan at face value.

USD today serve the same purpose as gold coins to the ancients. They are not in any way whatsoever IOUs. I ask you again, what does the Federal Reserve owe you?

The Federal Reserve does not owe; its member banks owe. When member banks issue loans, they create currency “out of thin air,” and promise to trade collateral (homes, cars) for the new dollars. When the Fed purchases treasuries it creates currency as well, but does not make any promises. Dollars spent by the Fed are alway inflationary. Dollars created by member banks are not.

The IOU arrangements that you describe are not how USD work or get their value. New USD enter circulation when the Fed prints money from thin air and buys US Treasury debt. You have it backwards; the Treasuries that the Fed holds are the IOUs. A Treasury is a paper that says: “the government owes you US dollars.”

There are two ways that USD enter the world. One way is via bank lending, which involves taking an asset in exchange for new USD, in the same way that the US mint used to take an asset (silver) and return paper US dollars. The old dollars could be returned to the mint for silver, and new dollars can be returned to the bank to take ownership of a house. When dollars are created in this way, they are backed by wealth, and they are IOUs from any bank that issued a loan.

The second way new dollars enter the world is via quantitative easing, where the Fed spends new dollars and buys Treasuries or other forms of wealth on the open market. When new dollars enter the world in this way they are not backed by wealth, but are still IOUs, because they can be returned to a bank in exchange for a house. When the Fed does this it is analogous to the old US mint printing up “fake” silver certificates and spending them. They are still IOUs that can be turned into the mint for silver, but they are inflationary.

If the old US mint, in the 19th century, purchased silver on the open market with silver certificate dollars (IOUs for silver), there would be no harm done. All the IOUs could still be honored for silver held at the mint.

Today, when the Fed purchases assets on the open market, it is analogous to the old mint purchasing silver, because modern USD are backed by myriad assets, but some trouble arrives when we realize that USD cannot be returned to the Fed in exchange for those assets, which are held by the Fed. All profits derived from them goes back to the US Treasury each year, so those assets are effectively owned by the US government and cannot be recovered by citizens holding modern US dollars. In 1792, the silver in the US mint was still owned by the US government, but all of the silver was “spoken for.” All of it could be recovered by people holding silver certificate US dollars.

The Fed will later sell its assets back to the open market in exchange for US dollars, which is done to “raise interest rates” by selling treasuries. In reality, this lowers the supply of “fake” US dollars in circulation (dollars are paid back to the Fed, removing them from the money supply) and has nothing to do with interest rate manipulation. It deflates the currency by removing some of the IOUs from circulation.

Whenever the Fed holds a large amount of assets, there are extra inflationary “fake” IOUs in circulation, and when the Fed holds little or no assets (treasuries) there are little or no “fake” IOUs in circulation that are generated by the Fed. However, there can still be effectively fake IOUs in circulation if banks are careless in estimating the value of the assets that they accept in exchange for the new dollars they create (each time they issue a loan).

If banks suddenly begin issuing million dollar loans for lumps of coal, tulip bulbs, and tremendously overvalued homes and educations, this will also cause inflation because the supply of new dollars will begin to outpace the supply of new wealth. Issuing loans to extremely poor credit risks is another inflationary activity, because new dollars are backed not only by existing wealth, like homes and cars, but the good credit of the people borrowing the new dollars. If the people can be expected to repay the loan even if their lump of coal turns out to be worthless tomorrow, there is little harm done. If the person cannot be reasonably expected to repay, the new money is not matched by appropriate wealth or credit, and is inflationary.

Wealth is not the mere possession of goods and services, it is the ability to command and control goods and services.

Wealth is anything valuable to human beings that can be owned, controlled, or exchanged. A wealthy person owns or controls a lot of things, valued by humans, that can be exchanged. There is no fundamental difference between a “paper” asset and a “physical” asset. Both are valuable, and can be owned and exchanged.

Why is money designated by a different term if it is not a different concept? If it is a distinct concept, then what is the distinction?

It doesn’t matter what we call an asset. We could call money many other things, but money is the word we choose. Because we call some foot coverings “sneakers” and others “boots,” does not mean they are fundamentally different. They are both shoes, in the same way that money and wine are both “wealth.”

Each person has his own purposes for the goods he acquires. But of all goods, money is unique in that each and every one of us has only one and the same use for money – trade.

Goods have two values: they can be traded and they can also be consumed. Currency can also be traded and consumed.

If I borrow a case of wine from you and write an IOU on a piece of paper, and hand it to you, you now hold a piece of paper that has the same two functions as any other “good.” When you return to my home next week, hand me the paper and I hand you a case of wine, what do I do with that IOU? I destroy it. The IOU has been consumed. The same thing happens to the IOUs (Federal Reserve Notes) when I return them to the bank to make a mortgage payment. The bank destroys the dollars I use to pay down the debt. The dollars I pay not longer exist, until new loans are issued by the bank.

You held an IOU denominated in wine, but I could just as easily handed you an IOU denominated in anything else. We could have agreed to write the IOU in gold, pigs, dollars, or even unicorns. It would not matter. I could have agreed to pay you one cow for your case of wine, and written you an IOU for one cow. When you turn in the IOU, I burn it and give you a cow. The IOU is a good that has been consumed.

The wine IOU has two purposes. It can be “turned in” at face-value for a case of wine, which I would argue is the note’s “purpose.” It can also be traded to someone else, in which case the note finds use as “currency.” Money is the “most liquid” asset; a financial asset like any other. It is as valuable as stocks, bonds or loan agreements, and finds use as “money” only because it is the most liquid asset available. (In early times, the Chinese expressed their notions of money by a term meaning literally “current merchandise.”p55 Hayek, Denationalization)

Even if we accept the conclusion that US dollars are only valuable because government says they are, and that USD are not IOUs, they would will be defined as “wealth,” by any reasonable interpretation of the definition. Wealth is anything valued that can be exchanged. Money, any way you look at it, fits that definition. To think of money as anything but wealth leads to confusion, and is the main reason that most are so confused regarding inflation, world trade, local economies, taxation and so forth. If money is considered to be wealth, much of the confusion falls away.

Financial assets are not “real” assets. Financial assets are fungible. Most real assets are not. Financial assets are easy to store. Real assets require physical accommodations and insurance. Financial assets are liquid. Real assets usually aren’t. Money itself is not wealth. Wealth is what money can be exchanged for – goods. Stuff.

The line between financial and “real” wealth is very blurry. Financial assets require maintenance, storage, and insurance costs in the same way that “real” assets do, but many of those costs are paid for by government when it creates rule of law, property rights, courts and police. I would have to pay to have my paper assets protected were it not for the protection of government and rule of law. The costs are socialized, but they still exist.

I would have to purchase insurance on my neighbor’s life if he made a verbal IOU large enough, and I would need to pay to have the insurance documents protected from fire and theft in the same way that I might have to pay for the protection of my wine collection or brick of gold.

Financial assets are now incredibly easy to protect from damage and theft because they are digital, but it isn’t as if there is a black and white line between “financial” and “real” assets. It is a gradual change from large illiquid assets like factories to ultra-liquid assets like currency. Wine, gold and a handshake IOU all fall somewhere in the middle. Currency is simply the most liquid asset available.

It’s true that “wealth” is an ambiguous term, but the ambiguity is shattered by the phrase “Money is not wealth.” Money is only valued for its ability to acquire other things.

Money is valued for its ability to pay bank loans tax debts denominated in dollars. Banks and the US government accept only US dollars, and it is fundamentally for this reason that they are valued.

Dollars are also valuable as a store of wealth and as a “universal” unit of wealth, useful in trade, but they remain valuable only because banks accept only dollars if you wish to pay off your mortgage, and because the government accepts only dollars for tax debts.

Mortgage Backed Securities are Like Diseased Cows

2011-05-06T23:28:00.000-05:00

Kitteh

2011-05-05T23:28:00.000-05:00

I promised to look after a friends cat for the week. My place has a glass atrium that goes through two levels, I have put the cat in there with enough food and water to last the week. I am looking forward to the end of the week. It is just sitting there glaring at me, it doesn't do anything else. I can tell it would like to kill me. If I knew I could get a perfect replacement cat, I would kill this one now and replace it Friday afternoon. As we sit here glaring at each other I have already worked out several ways to kill it.

http://www.27bslash6.com/1000characters.html

Public School Funding vs Performance

2011-05-05T12:36:00.002-05:00

Public schools are over-funded and the money spent on public schools does not correlate to the educations provided. Here is a graph showing test scores vs spending:

Spending is about $26,000 for each student signed up at a DC public school, and $28,000 for each student who actually attended. The cost of the average private school is only $6,620. So they cost a quarter of what public schools do, but still they do better.

If we imagine that supermarkets were run by the government in the same way that public schools are managed and funded today, the average monthly food cost for people choosing to shop at private supermarkets would be $550/month ($6,620/year), and public supermarkets would be spending $2,350 per month to feed its patrons, people being fed by public supermarkets would not have a choice about the foods they received, and the public markets would be providing rotten foods with little nutritional value (failing to teach people to read). Administrators of public markets would insist that the reason they cannot provide a variety of fresh and nutritious foods is that they lack funding, and about half of America would agree with them.

Penis Remote

2011-05-04T23:27:00.000-05:00

When not in use, this Panasonic concept remote is said to slumber peacefully, its limp body pulsating with light not so differently than a gently sleeping MacBook. But when touched, the remote wakes and becomes rigid...ready to be wielded and fulfilling pretty much any adolescent metaphor....

Panasonic executive #1 "We need a new product."
Panasonic executive #2 "Let's make a remote that behaves like a penis."
Panasonic executive #1 "Okay."

http://gizmodo.com/5111630/panasonic-gel-remote-concept-slippery-slimy-and-occasionally-erect

Spelling is Important

2011-05-03T23:24:00.000-05:00

Most Intimidating Police on Earth

2011-05-03T23:23:00.000-05:00

Lightning Strikes Map

2011-05-03T23:22:00.000-05:00

Lightning strikes are not evenly distributed. Some parts of the world have little or no lightning, central Africa has the most -- 200 strikes per sq km per year.

For an American, the chance of being struck by lightning is approximately 1 in 576,000 and the chance of actually being killed by lightning is approximately 1 in 2,320,000. This is misleading -- living in Florida is much more lightning risky than San Francisco.

How lightning initially forms is still a matter of debate: Scientists have studied root causes ranging from atmospheric perturbations (wind, humidity, friction, and atmospheric pressure) to the impact of solar wind and accumulation of charged solar particles.

The Empire State Building is struck by lightning on average 23 times each year.

Roy Sullivan held a Guinness World Record after surviving 7 different lightning strikes across 35 years, surviving all of them. He eventually killed himself at 71 yrs old. The seven lightning strikes:

1. 1942: Sullivan was hit for the first time when he was in a fire lookout tower. The lightning bolt struck him in the leg and he lost a nail on his big toe.
2. 1969: The second bolt hit him in his truck when he was driving on a mountain road. It knocked him unconscious and burned his eyebrows.
3. 1970: The third strike burned his left shoulder while in his front yard.
4. 1972: The next hit happened in a ranger station. The strike set his hair on fire. After that, he began to carry a pitcher of water with him.
5. August 7, 1973: A lightning bolt hit Sullivan on the head, blasted him out of his car, and again set his hair on fire.
6. June 5, 1976: Sullivan was struck by the sixth bolt in a campground, injuring his ankle. It was reported that he saw a cloud, thought that it was following him, tried to run away, but was still struck.
7. June 25, 1977: The seventh and final lightning bolt hit him when he was fishing. Sullivan was hospitalized for burns on his chest and stomach.

http://upload.wikimedia.org/wikipedia/en/c/c5/Global_lightning_strikes.png

Coke Light

2011-05-02T23:20:00.000-05:00

Diet Coke in the United States is sweetened with aspartame only. Coke light in Mexico uses aspartame and acesulfame potassium (Ace-K). For me, the Mexican sweetener combo makes Coke Light taste almost like real Coke without the nasty mouthfeel and sticky teeth side effects, and much better tasting than USA Diet Coke.

This is interesting that Coke, Pepsi, and Red Bull all choose to sweeten beverages differently in each country. Apparently Mexicans have different tastes, as every blog post or message board I have seen contains posts from Americans and UK residents searching for Diet Coke because they find Coke Light to be undrinkable.

Interestingly, Red Bull is exactly the opposite. They choose to sweeten Mexican Red Bull with sucralose and aspartame instead of using the American combo of aspartame and Ace-K, which makes Mexican Red Bull Light taste sickly sweet to me.

PS After writing this, I learned that Coke Zero in the US uses the same sweeteners as Coke Light and tastes fantastic.

Make Methyl Iodide in Your Backyard

2011-05-02T00:32:00.005-05:00

Methyl Iodide has recently been approved for use on strawberries, tomatoes, peppers and other crops. It replaces methyl bromide, which was recently banned by the EPA because of its ozone-depleting effects. Many people I know are afraid of this chemical, and I thought it might be fun to show how the stuff is made from seaweed, wood, and urine, and can be manufactured easily without a laboratory.

First we will need some sulfur, referenced in the Bible as brimstone. Elemental sulfur can be found in nearly pure form in the ground, and is an essential element for all life on earth. It's the oldest known pesticide in use. Homer described its "pest averting" qualities 3,000 years ago. It's pretty cool stuff; it can be used as an insecticide and fungicide, is responsible for the smell of skunk and garlic, is part of gunpowder, and burns with a blue flame and melts into a blood-red pool of fluid. If we can't find any pure sulfur, we can always find some fools gold (pyrite), abundant in Iowa, and allow it to rust. The rust will be sulfate, a form of sulfur.

Now we need some saltpeter (potassium nitrate), which was described by an Arab chemist in the year 1270. To make our saltpeter, we'll create a compost pile using campfire ashes and straw, which we will cover from the rain and keep moist with urine. We'll mix it up often and after a few months we'll wash the resulting chemical salts off of the straw, filter the water through more ashes, and air dry in the sun. Congratulations! You've just manufactured a wonderful fertilizer that is not permitted for use in organic farming! If you want to use bat poop or scrape the walls of a saltpeter cave in Chile, then you can use it. But if you made it like this in your backyard and fertilize your garden, your garden is no longer "organic."

Now we will make some sulfuric acid, which has been studied for over two thousand years and used to be called vitriol. To make vitriol, we need to burn our sulfur and our saltpeter, collect the smoke and combine it with steam. This was the method used in 1736 London to begin the first large-scale production of the acid. Alternatively, you could chop up a bunch of onions and collect their fumes (propanethiol S-oxide) and mix that with steam. Congratulations! You've just manufactured another chemical that is not permissible in organic farming!

Now that we have sulfuric acid, let's make some pure iodine. First, we'll collect a pile of seaweed and burn it. We'll repeat this a few times until our fire pit is coated with a residue. To remove the residue, we'll dump a bunch of our sulfuric acid on it, and watch a giant purple cloud of iodine vapor appear, and begin to crystalize on everything around us. We'll collect these crystals, which are pure iodine, discovered in the same way in 1811.

Next we'll need to make up a quick batch of methanol (wood alcohol), used by ancient Egyptians in the embalming process. Pure methanol was first produced in 1611 using the wood of the boxwood tree. To make the stuff, we need to bake some wood and collect the vapors. A clay and bamboo distillation setup should work very well. If you spray plants with methanol, it will protect them on hot days and increase yields. But be careful, methanol is poisonous. Drink a little (10 ml) and you'll go blind. Drink a bit more (30 ml) and you'll die. It is found in small amounts in fruit juices, beer and wine. It is toxic via ingestion, skin contact, or inhalation. Congratulations! You've just made a toxic poison that is allowed for organic farming! Spray away to your heart's content, just don't breathe the vapors!

Next we'll need red phosphorus, discovered in 1669. First, to make white phosphorus, we'll need to evaporate a bunch our urine and collect the residue, which will be a white, flammable, waxy substance that glows in the dark. At this point it's pretty volatile, nasty stuff. If burned and inhaled over time, it will make your jaw fall off. To stabilize it into red phosphorus, which is mostly harmless, we need to either bake the stuff at over 482 °F, or simply expose it to sunlight until it turns red. We'll choose the sunlight method. This is another element that is essential to all known forms of life; no animal or plant can live without it, and a normal person excretes about 1-3 grams of phosphorus daily. Red phosphorus is used to make matches and methamphetamine, and is not permitted in organic farming, even though it is another lovely fertilizer.

To make our final product, we need to mix three of our basic ingredients: iodine, methanol, and red phosphorus, which will produce a chemical reaction yielding methyl iodide. To extract the it from the mixture, we'll throw it back into our clay distillation apparatus and heat gently, collecting the steam and allowing it to condense into a colorless liquid. Methyl iodide is also naturally produced and emitted by rice plantations in small amounts, so if wanted to get really creative we could try to collect it from that source. Obviously, this stuff is not permitted in organic farming either. By now I hope it is becoming somewhat obvious that "organic" farming is a somewhat arbitrary term, and the "chemicals" that it bans have been around for centuries and don't seem so scary when you know how to make them.

Now when we want to grow strawberries or other fruits that are easily attacked by diseases and bugs and pests, we first mix some of our colorless fluid into the soil. It won't hurt the strawberries, but it will stop those pests from eating all the fruit and starving the village. Just don't drink the stuff, about six grams of it will kill you, but as you can see, it's a natural product that can be produced in my backyard with simple tools from rocks, trees and urine.