Tuesday, 1 September 2015

The United States of America and Islam Have Nothing Fundamental In Common

Guest post by Andy Clarkson

Five years ago, President Barack Obama delivered a speech in Cairo, Egypt, whose many errors are still widely embraced today. He declared “civilization's debt to Islam” and sought “common ground” between Islam and the United States, arguing “they overlap, and share common principles”. “Islam has a proud tradition of tolerance,” he said, and its culture and its many innovations have “given us majestic arches and soaring spires; timeless poetry and cherished music; elegant calligraphy and places of peaceful contemplation.”
Analysing the speech and its context five years later, this post
looks at some of the innovations and contributions and their ultimate source, and examines what is and what is not in common with the Arab world of 1000 years ago and the United States of America.

The post is based on Mr Clarkson’s notes written on that day.*

In A History of Knowledge (page 103), Charles van Doren writes:

It was in Alexandria that the Muslim Arabs first came into close contact with Greek culture. They immediately fell under its spell. They soon became noted mathematicians, astronomers, and physicists, and they continued the work begun even before the fall of Rome decoding and interpreting Greek scientific thought.

Note the use of Van Dorn's term "Muslim Arabs". While these Arabs were Muslims, they adopted the Greek mind - at least to the degree to which they used Aristotelian logic. They were transformed by the reason of Aristotle. But, no doubt these were men of mixed premises

In A History of Philosophy (page 316), Wilhelm Windelband noted:

(W)e must not...overestimate the independent achievements in individual Arab medicine and natural sciences. Here, too, the science of the Middle Ages is essentially learned tradition. The knowledge which the Arabs were later to deliver to the West had its origin, in the main, in the books of the Greeks.
    Nor did even experimental knowledge experience an essential extension through the Arabs' own work; only in some fields, as, for example chemistry and mineralogy and in some parts of medicine, e.g. physiology, do they appear more independent. In their method, however, in their principles by which they apprehend the universe, and in their entire system of philosophical conceptions, they stand, so far as our information on the subject reaches, entirely under the combined influence of Aristotelianism and Neo-Platonism...
The Arabs of that time do deserve praise for their translation of Aristotle's works. As a result of their support for the ideas of Aristotle, the Arab world flourished. The eventual result was that the writings of Aristotle spread to Paris and throughout Europe. This European expansion led to the decline of the mysticism of the Dark Ages, and to the emergence of the reason-based Renaissance and Enlightenment. This led to the science of Galileo and Newton and to Renaissance art. The Enlightenment provided the philosophical and cultural atmosphere for the political formation of the United States of America.

Writes Dr. Leonard Peikoff in his book Objectivism: The Philosophy of Ayn Rand:

    ...(T)he United States with its unique system of government could not
    have been founded in any philosophically different period. The new
    nation would have been inconceivable in the seventeenth century, under
    the Puritans, to say nothing of the twelfth -- just as, the power of
    tradition apart, its selfish, absolutist individualism would never survive
    a vote today (which is why a second Constitutional convention would be
    a calamity). America required what the Enlightenment alone offered:
(The Duel between Plato and Aristotle, Objectivism:
    The Philosophy of Ayn Rand
, p 453).

*That* is the common ground between the Arab world of a thousand years ago and the United States of America. The common ground is the transfer of Greek thought (reason) taken from idea to action.

And for this, we must admire certain Arabs of that time period. We must especially admire Aristotelian Arab philosophers such as Averroes (Ibn Rushd). From Windelband, (p. 317):

    But the most important and independent among Arabian thinkers was
    Averroes. He treated in paraphrases and longer or shorter commentaries,
    which were printed in the older editions of Aristotle, almost all the didactic
    writings of Aristotle, who was esteemed by him as the highest teacher of truth.

So while Greek thought had a great influence upon Arab culture of the Dark Ages, it was not entirely Aristotelian. Burgess Laughlin wrote in the The Aristotle Adventure (p 112):

Aristotle's logic entered the Arabic-Islamic cultural stream beginning c. 850. Conflicts appeared quickly between theologians who disavowed all philosophy, and the theologians who wanted both revelation and reason. The struggle between them continued for centuries.

It was clearly a culture of mixed premises. And today we can see the real impact of Islam on the Arab world. Continues Laughlin (pp 117-119): "For 200 years after the introduction of ancient Greek philosophy into Arabic culture, c. 850, Islamic theologians reacted against it. Their strength grew slowly and steadily like an avalanche of mud.

At the peak of that reaction, Al-Ghazali of Khurasan...began his scholarly career by studying philosophy and logic...To attack philosophy, Al-Ghazali picked three targets. His first target was Aristotle (the master of philosophy)...Al-Ghazali's and other scholars' persistent attacks on philosophy (and on philosophy's tool, logic) weakened support for philosophy in Arabic culture in the east for the next 200 years...For Arabic culture in the east, Islam (that is, submission to God) not philosophy (with logic as its tool), was to be man's guide in this world.

Windelband provides additional evidence of the struggle between Aristotelian and Islamic thinkers. (Page 317):

Avicenna (Ibn Sina)...whose 'Canon' became the fundamental book of mediaeval medicine in the West, as well as in the East, and who also exercised a powerful influence by his extremely numerous philosophical writings, especially his Metaphysics and Logic. His doctrine comes nearer again to pure Aristotelianism, and perhaps the nearest among all the Arabians. But the extension of these philosophical views was regarded with jealous eyes by Mohammedan orthodoxy, and the scientific movement experienced so violent persecutions in the tenth century that it took refuge in the secret league of the "Pure Brothers". Avicenna himself was also persecuted.

Is this "tolerance" Mr. President? "Violent persecutions" by Mohammedan orthodoxy? This is not "peaceful contemplation" Mr. President.

Burgess Laughlin describes the conclusion of Aristotelian influence (that is of reason -- the foundation of medicine, science, mathematics, and everything good) in Arab-Islamic culture on page 124 of The Aristotle Adventure:

    After the two contemporaries, Ibn Rushd (Averroes) and
    Ibn Maimun (Maimonides), no significant Arabic
    philosophers (Aristotelian or otherwise) appeared in
    Islamic culture -- ever. In Islamic-Spain, the study of logic
    and philosophy (as parts of 'alien learning') became
    extinct, extinguished by popular and theological hostility to
    non-Islamic culture."

The result of all this is the total absence of progress in the Arab world for the past eight-hundred years!

With the extinction of Aristotelian logic and the rise of Islamic ideology and theocracy, most of the Arab world remains in a primitive state. The only progress in the Arab world since then, which has taken place in the past 50 to 100 years, is due to the Aristotelian logic of Western engineering in the oil fields made productive by American and European corporations.

Those recent achievements, just as the achievements of a thousand years ago, are the result of Greek thought. And all those achievements are possible, not because of, but in spite of Islam. Civilisation owes nothing to Islam. It owes everything to the Greek philosophy that by an accident of history was once incubated in Islamic countries.

In short,

It was Arabs qua Aristotelians and not Arabs qua Islamists who are responsible for the accomplishments of Arab Muslims.

Barack Obama denies the reality of medieval Arab culture by praising Islam itself as a tool of modern progress. To deny the fact that Islam is the consistent killer of human thought and action is a disgrace. It is a disgrace because Obama attacks not only the true instrument of human progress, but because he also attacks the philosophical and historical roots of the country in which he is president. That instrument of human progress and the philosophical root of the US are one and the same -- the faculty of reason.

There are not many larger philosophically fundamental frauds ever committed by an American president than the one committed by President Barack Obama five years ago.

The United States of America is at war, not only on the battlefield, but also in the realm of ideas. We are in an on-going cultural war between reason and faith. This US president sided with the enemy.


Andy Clarkson is the convenor of the Facebook Group The Impact of Aristotle Upon Christian, Islamic & Jewish Cultures, where this post first appeared, and which you should join.


* Andy Clarkson would like to thank Boaz Arad-Erder for reclaiming these notes. “The original English version disappeared off the websites where they were published -- nothing sinister, but not worth repeating here. Fortunately, Boaz on that day in 2009 translated them into Hebrew and published on various sites in Israel. This summer he provided me the Hebrew version and using Google Translate, I was able to get most of it back. And then with some tweaking, they are very close to their original version. I hope you enjoy.”

Talking refugee “quotas”

I think western countries … will make a big mistake in not accepting large numbers of these people.
They have proven their mettle by what they have gone through to get out of (e.g.) Syria. And they will
be among the most loyal advocates of “western civilisation” and toleration.

- Mario Rizzo, spotted by Cafe Hayek

Helen Clark says New Zealand can accept more refugees, and the NZ government should therefore raise NZ's refugee quota.

Former Prime Minister Helen Clark last night drew parallels between New Zealander settlers from humble beginnings in Britain and the thousands of boat people from Africa landing in Europe." …
    Where migration is properly organised and legal that will be of benefit to the country receiving people and of benefit to the country which is sending them. But we see so much pressure now for migration which is propelled by war and conflict and just by plain poverty.
    "And let's face it, a lot of our forebears left the United Kingdom because it was very difficult to get ahead so they saw an opportunity to go and start afresh somewhere else. That's pretty much the motivation that propels people ... to try the desperate journey across the Mediterranean."
    One of the ways the situation could be ameliorated was with more legal migration, she said…
    Lifting the refugee quota beyond 750 in New Zealand would help the extra 250 or so people who would come, she said.

I have to say, agree with her.

I agree at least with her main argument, if not her actual numerical conclusion.

There are 60 million refugees in the world today, many of them emanating from conflicts in which the NZ military played at least a small part. UN planners setting “quotas” for how many of these human beings will be carted around the planet (and to which parts) just further dehumanises people already brutalised by years of conflict.

My basic position is not that we should necessarily be encouraging these refugees to come here, or writing “quotas” for refugees that need to be either filled or closed off, but we should at least recognise that we have no moral reason to exclude these people should they elect to make their way here peacefully.

The basic fact is that many of the world’s new refugees come from war zones in which we bear some responsibility. We should then, along with others, take some responsibility for the people displaced.

A further basic fact is that, since you and I and every other New Zealander don’t own all of New Zealand—we, each of us, only own what we own—peaceful  people have every right to enter these islands freely, the only justifiable controls at the island’s boundaries being to exclude those who are provably not peaceful.

Those are the basic moral facts: that peaceful people should be able to bass borders freely, especially those in whom we have played some part in forcing that move.

The basic economic fact, on which so many get mired, is that migrants—refugees and otherwise—are far and away not a burden to their new country but a boon. Immigrants do not threaten our jobs — on the contrary, they create new possibilities and demand in our economy. Refugees and other migrants are not primarily consumers, but producers. They are not just mouths to feed, but human beings with brains, brawn and ability. Most refugees start with fewer skills on paper and lower incomes than so-called economic migrants, yet as US figures show within a short time “those refugees were making 20 percent more income and improved their language skills more than economic migrants.” After all, they have a far  greater dedication to their new home: unlike economic migrants, then can very rarely ever go back home.

Many recent refugees too come from the Syrian civil war. You may be interested to know that one measure of the integration of Syrians in the US economy is that “there are over 150,000 Americans of Syrian descent, with a median household income of over $65,000, compared to about $53,000 for native-born Americans.” That fact is near-universal. People with the get-up-and-go to get the hell out of a war zone will generally have more gumption and more producing power both than the native-born.

But, I hear you say, they’ll all come here to claim our welfare. True, many do. But even the way our settlement system thrusts welfare upon them, very quickly most suck off the bonds of state and trike out on their own. Reduce the state welfare at their arrival and encourage more private sponsorship instead ---and with greater average incomes their own compatriots here would be in a great position to act as sponsor—and you not only reduce the time these new NZers spend on the welfare teat, but encourage their more rapid assimilation into their new country. Because…

The humanitarian relief that refugees need isn’t food stamps once they arrive [here] – it’s an escape from violence and oppression.  Refugees aren’t fleeing Syria because their Syrian equivalent of Temporary Assistance for Needy Families benefits expired; they are fleeing because they are being murdered.  

Remember that too when you’re talking about refugee quotas.


‘Big Garden,’ by Mark Wooller


Few artists choose to celebrate suburban values, suburban gardens. With his new collection of paintings (opening tonight in Newmarket), North-of-Auckland artist Mark Wooller is one.

The once traditional quarter acre Auckland section is now almost a distant memory. In my new series of work I have expanded the lush gardens to cover the whole section – totally surrounding or “safeguarding” the houses… “The once traditional quarter acre Auckland section is now almost a distant memory. In my new series of work I have expanded the lush gardens to cover the whole section – totally surrounding or “safeguarding” the houses… classic houses [highlighted here] with stylish Victorian Villas, Californian Bungalows, and Art Deco houses featuring prominently in many of the paintings.

In age of centralised intensification, his new paintings celebrate some of the pleasures of decentralisation.


Monday, 31 August 2015

Learning from Europe: Intro

It almost sounds like a fairy tale now, doesn’t it:

There was a time, not long ago, when some [political and economic] commentators believed Europe was a model for the rest of the world.


Oliver Hartwich begins a series explaining why that much beloved fairy tale is having an unhappy ending. “Europe’s decay,” he says in this introductory piece, “is mostly due to the way Europe has been conducting itself.”

Europe … is not at the crossroads but is facing a dead-end. Or a cliff. A very steep cliff.

Since so much of the world has been eager to copy “that way,” it might be worth recognising what particular ways have led it to this vertiginous position. In particular,

We in Australasia could do well to learn from the pitfalls of elitist decision-making and an unsustainable, expanding welfare state…

But will we?

This looks like the start of a series worth keeping in touch with. [Or just leap to the whole piece here.]

Farewell Oliver Sacks

Oliver Sacks, author of The Man How Mistook His Wife For a Hat and Awakenings and very much else has died.

Oliver Sacks

J.K Rowling posted this morning:

The great, humane and inspirational Oliver Sacks has died. He wrote this recently. That's a life well-lived.

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[Pic by Guardian]

We could do without a capital gains tax-- and without the morons who support it

Australia has a housing bubble and a capital-gains tax. New Zealand has a housing bubble and no capital-gains tax.

No connection there, you would have thought.

Numb-nut morons Certified geniuses however suggest that the New Zealand government should embrace a tax on capital gains, in order to avoid the housing bubble we already have.

The logic of the argument escapes me, just as the art of logic has clearly escaped long ago from these self-proclaimed genii proclaiming it.

Writing in The Australian this morning, Henry Ergas observes

there is an iron law of Australian public policy, it is that you can’t keep a bad idea down. And never was that clearer than in the [latest] ­discussion of capital gains tax.

Bad ideas being enshrined in public policy debate are evidently not confined to Australia. If only. Happily, however, neither are good arguments against them, and Ergas’s is a beauty. For not only did Australia’s capital-gains tax do precisely zero to avert their housing bubble,

those high rates of capital-gains tax are anything but costless. To begin with, the capital-gains tax can tax investment income that has been taxed several times, compounding the tax rate on savings. And as the tax rate on savings is already high, the additional economic harm is material.
    It is true that Treasury’s “Re: Think” paper on tax reform suggests otherwise. Because taxes don’t have much impact on the level of savings, it argues, taxes on savings, such as the capital-gains tax, may do little damage to efficiency, ­assuming they are imposed ­uniformly.
    However, Treasury’s argument is confused. After all, saving is merely a way of using income today to “buy” consumption tomorrow; and just as the economic harm a tax on oranges causes does not depend on how it affects spending on oranges but on whether it materially reduces the number of oranges consumed, so the economic harm from taxes on savings depends not on what ­happens to the level of savings but to the impact on how much future consumption savers buy.

Sad to say that despite his other good works here, Mr Ergas labours under the modern misconception that consumption is more important than production—ignoring the obvious-enough fact that the latter makes the former possible—production itself being the most important economy-wide consequence of saving. And take note that the impact on saving (and thence production) of a capital-gains tax is “typically large”:

For example, at an unchanged level of savings, a tax that cuts the average inflation-adjusted annual rate of return by just 5 percentage points reduces the value of savings in 30 years by over 75 per cent.

Cut production by that much over that time period, and everybody is poorer for it.

But the distortions due to the capital-gains tax are even greater than those caused by other taxes on savings. In effect, as gains are only taxed when they are realised, the higher the capital-gains tax, the greater the incentive to postpone realisation. By thus locking in investors, high rates of capital-gains tax make asset markets less ­efficient while inducing investors to carry more risk (in the form of unrealised gains) than they otherwise would.
At the same time, because the capital-gains tax can be avoided by postponing realisation, rate increases may yield little revenue for the harm they cause.

Not that I favour government revenue-gathering, but since both the US Treasury and Congress’s bipartisan tax committee agree that revenue gained is hardly worth the harm, you’d think that our local numb-nut morons Certified Geniuses for CGT would realise that neither their goal of raising revenue nor pricking bubbles is something their tax can do.  Thank goodness then that

the New Zealand tax review … found capital gains taxes “make the tax system complex and costly”; it concluded that a capital-gains tax would not lead to a “fairer or more efficient tax system, lower avoidance or raise substantial revenue.”
New Zealand therefore benefits from not having a CGT, as do numerous other countries.

Do you hear that Bernard Hickey, Gareth Morgan, Russel Norman, Uncle Tom Cobley and all? The evidence shows New Zealand therefore benefits from not having a CGT, as do numerous other countries.

So either those folk are certified morons immune to evidence, or they have another goal. Which is probably just soaking the rich

You choose who is which.

[Hat tip Catallaxy Files]

Quote of the Day: On the minimum wage

“When you are unemployed, your wages are zero,
regardless of what the minimum-wage law specifies.”

~ Thomas Sowell, Fact-Free Liberals: Part II

Get help

[Hat tip Stephen Hicks]

Even with a wide-angled lens…

…it looks good.

Photographer Andrew Pielage describes it:

The Living Room at Frank Lloyd Wright's Taliesin East in Winsconsin.
It's incredible how Mr. Wright can design one room that is both a comfortable place for a party and an intimate room for two. I have experienced both of these in the Living Room over the past week.

Luck chap,

Friday, 28 August 2015

Friday Morning Ramble, 28.08.15

Bureaucracies aren’t good parents. Lesson learned?
Playgrounds may go due to safety bill – RADIO NZ

Bureaucracies aren’t good parents. Lesson learned? 
Kids probably no better off in state care – RADIO NZ

“Socialism is compassionate, caring, and helps children everywhere.”
Children with cancer go without chemo for weeks in Venezuela due to medicine shortage – LATINO.FOXNEWS.COM

“This latest from the Commissioner, and then Paula Rebstock's panel to "transform" CYF are just part and parcel of the ongoing drama that is chasing the tail of  inter-generational social malaise driven by paying people to have babies.”
The latest CYF instalment – LINDSAY MITCHELL

“So, the ‘system’ often fails to meet the needs of Maori children? First and foremost their parents and families failed to meet their needs… So the Maori population is double the Asian yet has 46 times more children in state care.  New Zealand, instead of overtly or covertly disapproving of Asians, should be looking at what they do that keeps their children safe and protected.”
Only 64 Asian children in state care – LINDSAY MITCHELL

“It appears we are creating a generation of New Zealanders whose sole  experience of entrepreneurship is writing a great application for government  funding.”
Jumping on the taxpayer bandwagon – Max Christofferson, STUFF

Chris Trotter labours under the illusion we are living in capitalism.
Reply to Chris Trotter: The West is Not Capitalist. – Mark Hubbard, LIFE BEHIND THE IRON DRAPE

“When it comes to decreasing housing prices, there are two solutions: decrease demand or increase supply.”
Taking Control of Rent Control – Adam Millsap, MERCATUS CENTER

“Waste” in bureaucracies. Let’s just pass a law.

“Donald Trump dropped his long-awaited immigration position paper this week. To no one’s surprise, it is a long list of restrictionist clich├ęs about immigrants taking jobs, abusing welfare, and lowering wages for Americans. Here are the five biggest inaccuracies.”
5 Charts that Show Trump's Immigration Paper Is Nonsense: Foreigners are not a threat to the US economy – David Bier, F.E.E.
Why There’s No Such Thing as “Stealing American Jobs” – Michael Hurd, DR HURD.COM

“Donald Trump and Bernie Sanders have both fallen for the oldest fallacy in economics.”
The Oldest Fallacy in Economics – Donald J. Boudreaux, F.E.E.
Trumponomics is Notonomics – Donald J. Boudreaux, CAFE HAYEK

“In economics, there is lots of room for difference of opinion, and although Donald Trump is entitled to his own opinion, he is not entitled to his own facts.”
Trump Gets His Facts Wrong On China – Charles Calomiris, FORBES

Investors watched in dismay as global markets spiraled into chaos Monday, sending the Dow plummeting 1,000 points within several minutes of the opening bell. But for some 2016 presidential candidates, the massive selloff was nothing short of a political opportunity.”
It’s the Economy, Stupid: Version 2016 – Michael Hurd, DR HURD.COM

“Do not fret, however. Beijing has called in the Red Cavalry—otherwise known as the People’s Bank of China.”
Here Comes The Red Cavalry——Goldman Says Back-Up The Trucks, Again! – David Stockman, CONTRA CORNER

“Turn those presses back on!”
Market talk suddenly turns to specter of QE4 – CNBC

How central banks make you eat your seed corn.
Who the Heck Consumes His Capital?!Keith Weiner, CAPITALISM MAGAZINE

Why ‘Grievance Feminism’ is a threat to serious feminist and humanitarian issues.
While women overseas face true oppression, Western feminists dream up petty hashtags – Dr Christina Hoff Sommers, DAILY TELEGRAPH

Eat them, skin them, save them.
Property rights can be used to protect endangered species – Lauran Huggins, LIBERTARIANISM.ORG

“I think of it as the single most important economic issue of our time, because if we don’t finally work it out that Keynes got it completely wrong, we are going to create for ourselves a permanently lower standard of living and a widening underclass of the unemployed and under-employed.”
Tom Woods on Say’s Law – Steve Kates, LAW OF MARKETS

“Economics is dead, and economists killed it.”
Economics Is Dead, and It Is Being Killed Again – Per Bylund, MISES DAILY

“The boundaries between industries are starting to blur, as disruptive innovators like APPLE, GOOGLE & AMAZON deal death blows to industry after industry.”
Commerce Commission understands neither creative destruction nor the scourge of lower prices on WordPress. – Jim Rose, UTOPIA – YOU ARE STANDING IN IT

“Markets will bend around the constraints until they die. It's almost as if it had been obvious. Oh wait - it was.”
How Minimum Wages Discourage Entrepreneurship – Donald J. Boudreaux, F.E.E.
As Minimum Wages Rise, Restaurants Say No to Tips, Yes to Higher Prices – N.Y. TIMES

“In the wake of a stronger than expected U.S. GDP report (see Second Quarter GDP Revised Up, as Expected, Led by Autos, Housing), some are questioning the stated growth.”
GDP by Other Measures; Will the "Real" GDP Please Stand Up? – MISH’S GLOBALE CONOMIC TREND ANALYSIS

Even Pablo Picasso is not immune to a downturn.
Art Collectors Pawn Masterpieces To Meet Market Rout Margin Calls – ZERO HEDGE

“The Keynesian response to the current stock market crisis in China, and the overall downturn in the economy, would be to open the floodgates and print money Bernanke style.
”This, of course, has major long term negative consequences and there are some indications China's central bank, the People's Bank of China, is not going to respond in Keynesian fashion.”
Is China in the Process of Ditching Keynesian Economics? – ECONOMIC POLICY JOURNAL

“The fallacy of mixed economy at centre of China's troubles.”
We all win if Beijing bows to market forces – Jonathan Fenby, THE AGE

“Among a people generally corrupt,
liberty cannot long exist.”

- Edmund Burke

“The energy industry is the industry that powers every other to improve human life. The more affordable, plentiful, and reliable energy we can produce, the more (and better) food, clothing, shelter, transportation, medical care, sanitation, clean water, technology, and everything else we can have.
    “Unfortunately, because of backwards energy and environmental policies that are anti-development, not anti-pollution, we are squandering the opportunity of a generation, through blind opposition to our three most potent sources of power: hydrocarbon energy (coal, oil, and gas), nuclear energy, and hydroelectric energy.
    “It’s time to replace today’s energy deprivation policies with energy liberation policies.”
The Energy Liberation Plan – Alex Epstein, FORBES

“Big-government advocates will say that as society grows more complex, laws must multiply to keep up. The opposite is true. It is precisely because society is unfathomably complex that laws must be kept simple.”
Complex Societies Need Simple Laws – John Stossel, CAPITALISM MAGAZINE

“The former head of the Australian Productivity Commission laments that we have run out of the ability to use monetary and fiscal policy to generate higher levels of economic activity … It is so depressing to read such stuff.”
Five years too late – Steve Kates, CATALLAXY FILES

“People try to live within their income so they can afford to
pay taxes to a government that can't live within its income.”

- Robert Half

“Central bankers built a Brave New World where central bank money printing would boost stock prices and the wealth created would trickle down to workers and cause a booming economy. If you doubted that, you are now seeing proof that maybe this world was a little bit of Lewis Carroll’s Alice in Wonderland along with the Aldous Huxley.”
If You Doubted The Central Bankers’ Brave New World, You Were Right – Lee Adler

“But most important in terms of the depression was the new statism that the Republicans, following on the Wilson administration, brought to the vital but arcane field of money and banking. How many Americans know or care anything about banking? Yet it was in this neglected but crucial area that the seeds of 1929 were sown and cultivated by the American government.”
1929 And Its Aftermath——A Contra-Keynesian View Of What Really Happened – Murray Rothbard, MISES.ORG

“Government is the great fiction, through which everybody
endeavours to live at the expense of everybody else.”

- Frederic Bastiat

“The patent system is not a tool for entrenched interests to stifle competition as ivory-tower academics would have us believe. Patents allow independent inventors and small companies to compete against better funded rivals, who would otherwise simply take away their inventions.”
Looking Down on the Patent System from the Ivory Tower – Joseph Allen, I.P. WATCHDOG

“Patents are commercial assets, not litigation tools. Unfortunately, far too much time and writing is spent talking about litigation and not studying how patents function in the creation and distribution of new values in the marketplace.”
The Top 10 Reasons Why Your Startup Needs Patents – David Pridham & Brad Sheafe, FORBES

"The creative community has been buzzing this past week in response to the NY Times Sunday Magazine piece by Stephen Johnson, 'The Creative Apocalypse That Wasn’t.' Not surprisingly, feedback in the Times comments section was decidedly negative. As the week’s progressed we’ve also seen a number of thoughtful responses in commentaries published across the web.
    “No, actually everything’s not hunky-dory in the creative universe.”
Counterpoints to Steven Johnson’s NY Times Magazine piece — “The Creative Apocalypse That Wasn’t” – Ellen Seidler, VOX INDIE

“In what can only be characterized as a bizarre, rambling, and intellectually dishonest article, The Economist has inexplicably taken the position that patents are not necessary for innovation. This anti-patent hit piece is full of inaccuracies and outright falsehoods, masquerading as thoughtful commentary on an issue where the authors are quite clearly ignorant.”
What ‘The Economist’ Doesn’t Get About Patents – Gene Quinn, I.P. WATCHDOG
The Economist bites the hand that feeds it: patents - Gene Quinn & Steve Brachmann, I.P. WATCHDOG

“…no empirical support for the theory that ‘patent hold up’ is a problem in the high-tech industries that rely on patented tech standards (such as WiFi).”
An Empirical Examination of Patent Holdup – OXFORD JOURNALS

Inalienable Rights: What's Up With That?
Ayn Rand’s Theory of Rights: The Moral Foundation of a Free Society – OBJECTIVE STANDARD
Getting property rights right: Mixing my labour? – NOT PC

“As fall semesters in the U.S. gear up across the country, freshman and returning students enter a university culture filled increasingly with social justice warriors and party-obsessed drifters.”
On Cloud Nine or Crying Their Eyes Out: How Emotionalism is Destroying Student Culture – Thomas Duke, THEUNDERCURRENT
The contagious madness of the new PC – Mary Wakefield, SPECTATOR

“Ladies, gentlemen, people of indeterminate gender…”
Political correctness is killing freedom of speech – BRENDAN O’NEILL.CO.UK

Science experiments are supposed to be reproducible. If they can’t be reproduced, their results are not science. “Psychologists have completed a major review of the findings of 100 psychology studies. Less than half could be reproduced.”
Massive study reports challenges in reproducing published psychology findings – SCIENCE DAILY
Yes, many psychology findings may be “too good to be true” – now what? – RETRACTION WATCH

“What recent research says about fraud, errors, and other dismaying academic problems.”
A Scientific Look at Bad Science – THE ATLANTIC

Now this is how to do a death notice.  (From the NZ Herald, this morning.)

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[Hat tips Suzuki Samurai, Adam Mossoff, Center for the Protection of Intellectual Property, Geek Press, Michael Field, Mikayla Novak, Ezra Klein, Jane, spiked, Manhattan Institute, Rothbardian, Mark Hubbard, Louise Lamontagne, Stuart Hayashi, Daniel Stratton, Laissez Faire Capitalism, Michael Brown, Jim Matzger, The Centre for Independent Studies, Jim Rose]

Thanks for reading.
Have a great weekend!

Thursday, 27 August 2015

“Good Riddance, Bryce Williams”

No, I haven’t and won’t watch the murder video from Virginia that is disgustingly being passed around, and undoubtedly shown on high rotation on news channels.

There’s only one things to say about it really: Good riddance to the murderer.

Mercy to the guilty is injustice to the innocent.

The acoustics inside the tunnel are great!

So why wouldn’t you?

Some frightening alcohol statistics

In the debate that ended in passing David Seymour’s bill allowing you to watch rugby in a bar (yes, people, that’s the kind of place we live in; where a law must be passed so you can watch sport with a drink in your hand), National’s Chris Bishop presented some frightening statistics about New Zealand drinking.

New Zealand ranks only 96th in the world for our rate of alcohol consumption.

Our binge drinking rate is only half that of Australia’s, and only one-sixth that of Britain’s.

That is appalling.

What is even worse is is that young people are drinking much less.

There are one-quarter fewer young drinkers now than five years ago, and one-third fewer than the turn of the century-and regular young drinkers – the best of that bunch – are dropping like flies, only half the number it was just fifteen years ago.

What’s more, the number of young drinkers who said they went binge drinking in the last month has dropped by18 percent since 2007!

Something is not right.

Clearly, we are raising a nation of wowsers.

Worse, an MP is raising these figures in parliament as a kind of apology for drinking, as a sop to the wowsers who might object to people having some fun with a drink in their hand.

Bugger them. We need to defend the right to enjoy ourselves, and not apologise for it.

Good on David Seymour and those MPs who did vote for his bill for moving a tiny bit in that direction.

Today’s random medical scare-story …

[Hat tip Shaun Holt]

Quote of the Day: On NZ’s modern-day entrepreneurship

“It appears we are creating a generation of New Zealanders whose sole experience
of entrepreneurship is writing a great application for government  funding.”
~ Max Christofferson, ‘Jumping on the taxpayer bandwagon

Wednesday, 26 August 2015

Quote of the Afternoon: There’s no ‘I’ in team?

“He understands that there is no ‘I’ in ‘team.’
Like Wendell Sailor however, he is also keenly
aware that there are five in ‘individual brilliance’.”

~ Peter Flynn on the brilliance of Geelong’s Stevie J.

Quotes of the Morning: Before & after the 1929 crash

One of Colin Seymour’s hobbies is collecting nonsense.

There are few more nonsensical prognostications than folk either side of the event that’s on everyone’s mind this week: the Great Wall St Crash that began in earnest on October 24, 1929.  Here’s what some numb-nuts had to say, with the times they said them indicated on Colin’s chart above. They offer a great example of hubris when humility would be far more appropriate.  Because these people had much to be humble about …

1. "We will not have any more crashes in our time."
    - John Maynard Keynes, leading British economist, in 1927

2. "I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future."
    - E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928

  "There will be no interruption of our permanent prosperity."
    - Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

3. "No Congress of the United States ever assembled, on surveying the state of the Union, has met with a
    more pleasing prospect than that which appears at the present time. In the domestic field there is tranquillity
    and contentment...and the highest record of years of prosperity. In the foreign field there is peace, the goodwill  
    which comes from mutual understanding."
    - US President Calvin Coolidge December 4, 1928

4, "There may be a recession in stock prices, but not anything in the nature of a crash."
    - Irving Fisher, leading U.S. economist, New York Times, Sept. 5, 1929

5. "Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a
    50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a
    good deal higher within a few months."
    - Irving Fisher, Ph.D. in economics, Oct. 17, 1929

    "This crash is not going to have much effect on business."
    - Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929

    "There will be no repetition of the break of yesterday... I have no fear of another comparable decline."
    - Arthur W. Loasby (President of the Equitable Trust Company), quoted in The New York Times, Friday, October 25, 1929

    "We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright,
    good stocks are cheap at these prices."
    - Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929

Those last few comments were just the day or so after the first big crash – in other words, about the same stage in the exact same stage in the cycle as we are now.

And as you’ll probably be aware, those two “leading economists” are still leading us—Keynes and his remedies being well known; Fisher’s doctrine of price stability having helped to cause both this crash and that one. (Fisher lost his shirt in that crash, but unfortunately not his reputation.)

Keynes’s “remedies that weren’t” didn’t take hold until later in the thirties. But it was Fisher who had claimed during the 20s that his “scientific” approach to so-called price stability” had established a “New era of prosperity during the 1920s.” (Ludwig Von Mises published a book in 1928 that critiqued Fisher's approach and predicted that it would lead to an economic crisis and collapse. Mises passed the "market test" while Fisher lost his personal fortune during an economic crisis that his economics help create.)

But the post-crash crystal ball gazing as the numb-nuts followed it all down was no better—some trying to convince themselves, some trying to convince themselves—starting with words that are already sounding very familiar.

6. "This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan... that any man
    who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a
    bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in
    many years."
    - R. W. McNeal, market analyst, as quoted in the New York Herald Tribune, October 30, 1929

    "Buying of sound, seasoned issues now will not be regretted"
    - E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929

    "Some pretty intelligent people are now buying stocks... Unless we are to have a panic -- which no one
    seriously believes, stocks have hit bottom."
    - R. W. McNeal, financial analyst in October 1929

7. "The decline is in paper values, not in tangible goods and services...America is now in the eighth year of
    prosperity as commercially defined. The former great periods of prosperity in America averaged eleven years.
    On this basis we now have three more years to go before the tailspin."
   - Stuart Chase (American economist and author), NY Herald Tribune, November 1, 1929

    "Hysteria has now disappeared from Wall Street."
    - The Times of London, November 2, 1929

    "The Wall Street crash doesn't mean that there will be any general or serious business depression... For six
    years American business has been diverting a substantial part of its attention, its energies and its resources
    on the speculative game... Now that irrelevant, alien and hazardous adventure is over. Business has come
    home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before."
    - Business Week, November 2, 1929

    "...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not
    the precursor of a business depression such as would entail prolonged further liquidation..."
    - Harvard Economic Society (HES), November 2, 1929

8. "... a serious depression seems improbable; [we expect] recovery of business next spring, with further
    improvement in the fall."
   - Harvard Economic Society, November 10, 1929

    "The end of the decline of the Stock Market will probably not be long, only a few more days at most."
    - Irving Fisher, Professor of Economics at Yale University, November 14, 1929

    "In most of the cities and towns of this country, this Wall Street panic will have no effect."
    - Paul Block (President of the Block newspaper chain), editorial, November 15, 1929

    "Financial storm definitely passed."
    - Bernard Baruch, cablegram to British Chancellor Winston Churchill, November 15, 1929

9. "I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence
    that there will be a revival of activity in the spring, and that during this coming year the country will make
    steady progress."
    - Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929

    "I am convinced that through these measures [public spending, minimum-wage laws] we have
    re-established confidence."
   - U.S. President Herbert Hoover, December 1929

    "[1930 will be] a splendid employment year."
   - U.S. Dept. of Labor, New Year's Forecast, December 1929

10. "For the immediate future, at least, the outlook (stocks) is bright."
    - Irving Fisher, leading economist, in early 1930

11. "...there are indications that the severest phase of the recession is over..."
    - Harvard Economic Society (HES) Jan 18, 1930

12. "There is nothing in the situation to be disturbed about."
    - Secretary of the Treasury Andrew Mellon, Feb 1930

13. "The spring of 1930 marks the end of a period of grave concern...American business is steadily coming back
    to a normal level of prosperity."
    - Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930

14. "... the outlook continues favourable..."
    - Harvard Economic Society, Mar 29, 1930

    "... the outlook is favourable..."
    - Harvard Economic Society, Apr 19, 1930

15. "While the crash only took place six months ago, I am convinced we have now passed through the worst --
    and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. 
    That danger, too, is safely behind us."
    - Herbert Hoover, President of the United States, May 1, 1930

    "...by May or June the spring recovery forecast in our letters of last December and November should clearly
    be apparent..."
    - Harvard Economic Society, May 17, 1930

    "Gentleman, you have come sixty days too late. The depression is over."
    - Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery,
      June 1930

16. "... irregular and conflicting movements of business should soon give way to a sustained recovery..."
     - Harvard Economic Society, June 28, 1930

17. "... the present depression has about spent its force..."
   - Harvard Economic Society, Aug 30, 1930

18. "We are now near the end of the declining phase of the depression."
    - Harvard Economic Society, Nov 15, 1930

19. "Stabilization at [present] levels is clearly possible."
    - Harvard Economic Society, Oct 31, 1931

20. "All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in
    the presence of an agent of the I.R.S."
    - President F.D. Roosevelt, confiscating gold in 1933

A version of this post appeared at the Gold-Eagle.

Tuesday, 25 August 2015

How the Stock Market and Economy Really Work

A timely guest post by Kel Kelly

[An MP3 audio file of this article, narrated by Keith Hocker, is available for download.]

"A growing economy consists of prices falling, not rising."

The stock market does not work the way most people think. A commonly-held belief — on Main Street as well as on Wall Street — is that a stock-market boom is the reflection of a progressing economy: as the economy improves, companies make more money, and their stock value rises in accordance with the increase in their intrinsic value. A major assumption underlying this belief is that consumer confidence and consequent consumer spending are drivers of economic growth.

A stock-market bust, on the other hand, is held to result from a drop in consumer and business confidence and spending — due to either inflation, rising oil prices, or high interest rates, etc., or for no real reason at all — that leads to declining business profits and rising unemployment. Whatever the supposed cause, in the common view a weakening economy results in falling company revenues and lower-than-expected future earnings, resulting in falling intrinsic values and falling stock prices.

This understanding of bull and bear markets, while held by academics, investment professionals, and individual investors alike, is technically correct if viewed superficially but because it is based on faulty finance and economic theory, it is substantially misconceived .

imageIn fact, the only real force that ultimately makes the stock market or any market rise (and, to a large extent, fall) over the longer term is simply changes in the quantity of money and the volume of spending in the economy. Stocks rise when there is inflation of the money supply (i.e., more money in the economy and in the markets). This truth has many consequences that should be considered.

Since stock markets can fall — and fall often — to various degrees for numerous reasons (including a decline in the quantity of money and spending), our focus here will be only on why they are able to rise in a sustained fashion over the longer term.

The Fundamental Source of All Rising Prices

For perspective, let's put stock prices aside for a moment and make sure first to understand how aggregate consumer prices rise. In short, overall prices can rise only if the quantity of money in the economy increases faster than the quantity of goods and services. (In economically retrogressing countries, prices can rise when the supply of goods diminishes while the supply of money remains the same, or even rises.)

When the supply of goods and services rises faster than the supply of money — as happened during most of the 1800s — the unit price of each good or service falls, since a given supply of money has to buy, or "cover," an increasing supply of goods or services.

Fig 1: NZ & British Price Level, 1860-1910

George Reisman derives the critical formula for the formation of economy-wide prices:1 In this formula, price (P) is determined by monetary demand (D) divided by supply of goods and services (S):


The formula shows us that it is mathematically impossible for aggregate prices to rise by any means other than (1) increasing demand, or (2) decreasing supply; i.e., by either more money being spent to buy goods, or fewer goods being sold in the economy.

In our developed economy, the supply of goods is not decreasing, or at least not at enough of a pace to raise prices at the usual rate of 3–4 percent per year; instead prices are rising due to more money entering the marketplace.

The same price formula noted above can equally be applied to asset prices — stocks, bonds, commodities, houses, oil, fine art, etc. It also pertains to corporate revenues and profits, for as Fritz Machlup states:

It is impossible for the profits of all or of the majority of enterprises to rise without an increase in the effective monetary circulation (through the creation of new credit or dishoarding).2

To return to our focus on the stock market in particular, it should be seen now that the market cannot continually rise on a sustained basis without an increase in money — specifically bank credit — flowing into it.

imageThere are other ways the market could go higher, but their effects are temporary.

For example, an increase in net savings involving less money spent on consumer goods and more invested in the stock market (resulting in lower prices of consumer goods) could send stock prices higher, but only by the specific extent of the new savings, assuming all of it is redirected to the stock market.

The same applies to reduced tax rates. These would be temporary effects resulting in a finite and terminal increase in stock prices. Money coming off the "sidelines" could also lift the market, but once all sideline money was inserted into the market, there would be no more funds with which to bid prices higher. The only source of ongoing fuel that could propel the market — any asset market — higher is new and additional bank credit. As Machlup writes,

If it were not for the elasticity of bank credit … [then] a boom in security values could not last for any length of time. In the absence of inflationary credit, the funds available for lending to the public for security purchases would soon be exhausted, since even a large supply is ultimately limited. The supply of funds derived solely from current new savings and current amortisation allowances is fairly inelastic.… Only if the credit organisation of the banks (by means of inflationary credit), or large-scale dishoarding by the public make the supply of loanable funds highly elastic, can a lasting boom develop.… A rise on the securities market cannot last any length of time unless the public is both willing and able to make increased purchases.3 (Emphasis added.)

The last line in the quote helps to reveal that neither population growth nor consumer sentiment alone can drive stock prices higher. Whatever the population, it is using a finite quantity of money; whatever the sentiment, it must be accompanied by the public's ability to add additional funds to the market in order to drive it higher.4

Understanding that the flow of recently created money is the driving force of rising asset markets has numerous implications. The rest of this article addresses some of these implications.

The Link between the Economy and the Stock Market

The primary link between the stock market and the economy — in the aggregate — is that an increase in money and credit pushes up both GDP and the stock market simultaneously.

A progressing economy is one in which more goods are being produced over time. It is real "stuff," not money per se, which represents real wealth. The more cars, refrigerators, food, clothes, medicines, and hammocks we have, the better off our lives. We saw above that if more goods are produced at a faster rate than money then prices will fall. With a constant supply of money, wages would remain the same in money terms while prices fell, because the supply of goods would increase while the supply of workers would not—meaning higher real wages. But even when prices rise due to money being created faster than goods, prices still fall in real terms, because wages rise faster than prices. In either scenario,

This is what rising prosperity looks like.

Obviously, then, a growing economy consists of prices falling, not rising. No matter how many goods are produced, if the quantity of money remains constant then the only money that can be spent in an economy is the particular amount of money existing in it (and velocity, or the number of times each dollar is spent, could not change very much if the money supply remained unchanged).

imageThis alone reveals that GDP does not necessarily tell us much about the number of actual goods and services being produced; it only tells us that if (even real) GDP is rising, the money supply must be increasing, since a rise in GDP is mathematically possible only if the money price of individual goods produced is increasing to some degree.5 Otherwise, with a constant supply of money and spending, the total amount of money companies earn — the total selling prices of all goods produced — and thus GDP itself would all necessarily remain constant year after year.

"Consider that if our rate of inflation were high enough, used cars would rise in price just like new cars, only at a slower rate."

The same concept would apply to the stock market: if there were a constant amount of money in the economy, the sum total of all shares of all stocks taken together (or a stock index) could not increase. Plus, if company profits, in the aggregate, were not increasing, there would be no aggregate increase in earnings per share to be imputed into stock prices.

imageIn an economy where the quantity of money was static, the levels of stock indexes, year by year, would stay approximately even, or even drift slightly lower6 — depending on the rate of increase in the number of new shares issued. And, overall, businesses (in the aggregate) would be selling a greater volume of goods at lower prices, and total revenues would remain the same. In the same way, businesses, overall, would purchase more goods at lower prices each year, keeping the spread between costs and revenues about the same, which would keep aggregate profits about the same.

Under these circumstances, ‘capital gains’ from speculation (the profiting from the buying low and selling high of assets) could be made only by stock picking — by investing in companies that are expanding market share, bringing to market new products, etc., thus truly gaining proportionately more revenues and profits at the expense of those companies that are less innovative and efficient.

The stock prices of the gaining companies would rise while others fell. Since the average stock would not actually increase in value, most of the gains made by investors from stocks would be in the form of dividend payments. By contrast, in our world today, most stocks — good and bad ones — rise during inflationary bull markets and decline during bear markets. The good companies simply rise faster than the bad.

Similarly, housing prices under static money would actually fall slowly — unless their value was significantly increased by renovations and remodelling. Older houses would sell for much less than newer houses. To put this in perspective, consider that if our rate of inflation were high enough, used cars would rise in price just like new cars, only at a slower rate — but just about everything would increase in price, as it does in countries with hyperinflation. The amount by which a home "increases in value" over 30 years really just represents the amount of purchasing power that the dollars we hold have lost: while the dollars lost purchasing power, the house — and other assets more limited in supply growth — kept its purchasing power.

Since we have seen that neither the stock market nor GDP can rise on a sustained basis without more money pushing them higher, we can now clearly understand that an improving economy neither consists of an increasing GDP nor does it cause the overall stock market to rise.

This is not to say that a link does not exist between the money that particular companies earn and their value on the stock exchange in our inflationary world today, but that the parameters of that link — valuation relationships such as earnings ratios and stock-market capitalization as a percent of GDP — are rather flexible, and as we will see below, change over time. Money sometimes flows more into stocks and at other times more into the underlying companies, changing the balance of the valuation relationships.

Forced Investing

As we have seen, the whole concept of rising asset prices and stock investments constantly increasing in value is an economic illusion. What we are really seeing is our currency being devalued by the addition of new currency issued by the central bank. The prices of stocks, houses, gold, etc., do not really rise; they merely do better at keeping their value than do paper bills and digital checking accounts, since their supply is not increasing as fast as are paper bills and digital checking accounts.

"An improving economy neither consists of an increasing GDP nor does it cause the imageoverall stock market to rise."

The fact that we have to save so much for the future is, in fact, an outrage. Were no money printed by the government and the banks, things would get cheaper through time, and we would not need much money for retirement, because it would cost much less to live each day then than it does now. But we are forced to invest in today's government-manipulated inflation-creation world in order to try to keep our purchasing power constant.

imageTo the extent that some of us even come close to succeeding, we are still pushed further behind by having our "gains" taxed.

The whole system of inflation is solely for the purpose of theft and wealth redistribution. In a world absent of government printing presses and wealth taxes, the armies of investment advisors, pension-fund administrators, estate planners, lawyers, and accountants associated with helping us plan for the future would mostly not exist. These people would instead be employed in other industries producing goods and services that would truly increase our standards of living.

The Fundamentals are Not the Fundamentals

If it is, then, primarily newly-printed money flowing into and pushing up the prices of stocks and other assets, what real importance do the so-called fundamentals — revenues, earnings, cash flow, etc. — have? In the case of the fundamentals, too, it is newly printed money from the central bank, for the most part, that impacts these variables in the aggregate: the financial fundamentals are determined to a large degree by economic changes.

For example, revenues and, particularly, profits, rise and fall with the ebb and flow of money and spending that arises from central-bank credit creation. When the government creates new money and inserts it into the economy, the new money increases sales revenues of companies before it increases their costs; when sales revenues rise faster than costs, profit margins increase.

Specifically, how this comes about is that new money, created electronically by the government and loaned out through banks, is spent by borrowing companies.7 Their expenditures show up as new and additional sales revenues for businesses. But much of the corresponding costs associated with the new revenues lags behind in time because of technical accounting procedures, such as the spreading of asset costs across the useful life of the asset (depreciation) and the postponing of recognition of inventory costs until the product is sold (cost of goods sold). These practices delay the recognition of costs on the profit-and-loss statements (i.e., income statements).

imageSince these costs are recognised on companies' income statements months or years after they are actually incurred, their monetary value is diminished by inflation by the time they are recognized. For example, if a company recognizes $1 million in costs for equipment purchased in 1999, that $1 million is worth less today than in 1999; but on the income statement the corresponding revenues recognized today are in today's purchasing power. Therefore, there is an equivalently greater amount of revenues spent today for the same items than there was ten years ago (since it takes more money to buy the same good, due to the devaluation of the currency).

"With more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing."

Another way of looking at it is that, with more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing. Thus, because of inflation, the total monetary value of business costs in a given time frame is smaller than the total monetary value of the corresponding business revenues. Were there no inflation, costs would more closely equal revenues, even if their recognition were delayed.

In summary, credit expansion increases the spreads between revenue and costs, increasing profit margins. The tremendous amount of money created in 2008 and 2009 is what is responsible for the fantastic profits companies are currently reporting (even though the amount of money loaned out was small, relative to the increase in the monetary base).

imageSince business sales revenues increase before business costs, with every round of new money printed, business profit margins stay widened; they also increase in line with an increased rate of inflation. This is one reason why countries with high rates of inflation have such high rates of profit.8 During bad economic times, when the government has quit printing money at a high rate, profits shrink, and during times of deflation, sales revenues fall faster than do costs.

imageIt is also new money flowing into industry from the central bank that is the primary cause behind positive changes in leading economic indicators such as industrial production, consumer durables spending, and retail sales. As new money is created, these variables rise based on the new monetary demand, not because of resumed real economic growth.

A final example of money affecting the fundamentals is interest rates. It is said that when interest rates fall, the common method of discounting future expected cash flows with market interest rates means that the stock market should rise, since future earnings should be valued more highly. This is true both logically and mathematically. But, in the aggregate, if there is no more money with which to bid up stock prices, it is difficult for prices to rise, unless the interest rate declined due to an increase in savings rates.

In reality, the help needed to lift the market comes from the fact that when interest rates are lowered, it is by way of the central bank creating new money that hits the loanable-funds markets. This increases the supply of loanable funds and thus lowers rates. It is this new money being inserted into the market that then helps propel it higher.

(I would personally argue that most of the discounting of future values [PV calculations] demonstrated in finance textbooks and undertaken on Wall Street are misconceived as well. In a world of a constant money supply and falling prices, the future monetary value of the income of the average company would be about the same as the present value. Future values would hardly need to be discounted for time preference [and mathematically, it would not make sense], since lower consumer prices in the future would address this. Though investment analysts believe they should discount future values, I believe that they should not. What they should instead be discounting is earnings inflation and asset inflation, each of which grows at different paces.)9

Asset Inflation versus Consumer Price Inflation

Newly-printed money can affect asset prices more than consumer prices. Most people think that the Federal Reserve and other central banks have done a good job of preventing inflation over the last twenty-plus years. The reality is that it has created a tremendous amount of money, but that the money has disproportionately flowed into financial markets instead of into the real economy, where it would have otherwise created drastically more price inflation.

imageThere are two main reasons for this channelling of money into financial assets. The first is changes in the financial system in the mid and late 1980s, when an explosive growth of domestic credit channels outside of traditional bank lending opened up in the financial markets. The second is changes in the US trade deficit in the late 1980s, wherein it became larger, and export receipts received by foreigners were increasingly recycled by foreign central banks into US asset markets.10 As financial economist Peter Warburton states,

a diversification of the credit process has shifted the centre of gravity away from conventional bank lending. The ascendancy of financial markets and the proliferation of domestic credit channels outside the [traditional] monetary system have greatly diminished the linkages between … credit expansion and price inflation in the large western economies. The impressive reduction of inflation is a dangerous illusion; it has been obtained largely by substituting one set of serious problems for another.11

And, as bond-fund guru Bill Gross said,

what now appears to be confirmed as a housing bubble, was substantially inflated by nearly $1 trillion of annual reserve flowing back into US Treasury and mortgage markets at subsidised yields.… This foreign repatriation produced artificially low yields.… There is likely near unanimity that it is now responsible for pumping nearly $800 billion of cash flow into our bond and equity markets annually.12

This insight into the explanation for a lack of price inflation in recent decades should also show that the massive amount of reserves the Fed created in 2008 and 2009 — in response to the recession — might not lead to quite the wild consumer-price inflation everyone expects when it eventually leaves the banking system but instead to wild asset price inflation.

imageOne effect of the new money flowing disproportionately into asset prices is that the Fed cannot "grow the economy" as much as it used to, since more of the new money created in the banking system flows into asset prices rather than into GDP. Since it is commonly thought that creating money is necessary for a growing economy, and since it is believed that the Fed creates real demand (instead of only monetary demand), the Fed pumps more and more money into the economy in order to "grow it."

That also means that more money — relative to the size of the economy — "leaks" out into asset prices than used to be the case. The result is not only exploding asset prices in the United States, such as the NASDAQ and housing-market bubbles but also in other countries throughout the world, as new money makes its way into asset markets of foreign countries.13

A second effect of more new money being channelled into asset prices is, as hinted above, that it results in the traditional range of stock valuations moving to a higher level. For example, the ratio of stock prices to stock earnings (P/E ratio) now averages about 20, whereas it used to average 10–15. It now bottoms out at a level of 12–16 instead of the historical 5. A similar elevated state applies to Tobin's Q, a measure of the market value of a company's stock relative to its book value. But the change in relative flow of new money to asset prices in recent years is perhaps best seen in the chart below, which shows the stunning increase in total stock-market capitalisation as a percentage of GDP (figure 1).

Figure 2: The Size of the Stock Market Relative to GDP
Source: Thechartstore.com

The changes in these valuation indicators I have shown above reveal that the fundamental links between company earnings and their stock-market valuation can be altered merely by money flows originating from the central bank.

Can Government Spending Revive the Stock Market and the Economy?

So, can government spending revive the stock market and the economy then? The answer is yes and no. Government spending does not restore any real demand, only nominal monetary demand. Monetary demand is completely unrelated to the real economy, i.e., to real production, the creation of goods and services, the rise in real wages, and the ability to consume real things — as opposed to a calculated GDP number.

Government spending harms the economy and forestalls its healing. The thought that stimulus spending, i.e., taking money from the productive sector (a de-accumulation of capital) and using it to consume existing consumer goods or using it to direct capital goods toward unprofitable uses (consuming existing capital), could in turn create new net real wealth — real goods and services — is preposterous.

imageWhat is most needed during recessions is for the economy to be allowed to get worse — for it to flush out the excesses and reset itself on firm footing. Recession is a process of recovery from earlier gross misallocations. Broken economies suffer from a misallocation of resources consequent upon prior government interventions, and can therefore be healed only by allowing the economy's natural balance to be restored. Falling prices and lack of government and consumer spending are part of this process.

Given that government spending cannot help the real economy, can it help the specific indicator called GDP? Yes it can. Since GDP is mostly a measure of inflation, if banks are willing to lend and borrowers are willing to borrow, then the newly created money that the government is spending will make its way through the economy. As banks lend the new money once they receive it, the money multiplier will kick in and the money supply will increase, which will raise GDP.

"What is most needed during recessions is for the economy to be allowed to get worse — for it to flush out the excesses and reset itself on firm footing."

As for the idea that government spending helps the stock market, the analysis is a bit more complicated. Government spending per se cannot help the stock market, since little, if any, of the money spent will find its way into financial markets. But the creation of money that occurs when the central bank (indirectly) purchases new government debt can certainly raise the stock market. If new money created by the central bank is loaned out through banks, much of it will end up in the stock market and other financial markets, pushing prices higher.


The most important economic and financial indicator in today's inflationary world is money supply. Trying to anticipate stock-market and GDP movements by analysing traditional economic and financial indicators can lead to incorrect forecasts. To rely on these "fundamentals" is to largely ignore the specific economic forces that most significantly affect those same fundamentals — most notably the changes in the money supply. Therefore, following monetary indicators would be the best insight into future stock prices and GDP growth.

Kel Kelly has spent over 15 years as a Wall Street trader, a corporate finance analyst, and a research director for a Fortune 500 management consulting firm. Results of his financial analyses have been presented on CNBC Europe and in the online editions of CNN,Forbes, BusinessWeek, and the Wall Street Journal. He is the author of The Case for Legalizing Capitalism. Kel holds a degree in economics from the University of Tennessee, an MBA from the University of Hartford, and an MS in economics from Florida State University. He lives in Atlanta.
A version of this 2010 article first appeared at the Mises Daily

1.See G. Reisman, Capitalism: A Treatise on Economics (1996), p.897, for a fuller demonstration. Most of the insights in this paper are derived from the high-level principles laid out by Reisman. For additional related insights on this topic, see Reisman, "The Stock Market, Profits, and Credit Expansion," "The Anatomy of Deflation," and "Monetary Reform."
2.F. Machlup, The Stock Market, Credit, and Capital Formation (1940), p. 90.
3.Ibid., pp. 92, 78.
4.For a holistic view in simple mathematical terms of how the price of all items in an economy may or may not rise, depending on the quantity of money, see K. Kelly, The Case for Legalizing Capitalism (2010), pp 132–133.
5.Price increases are supposedly adjusted for, but "deflators" don't fully deflate. Proof of this is the very fact that even though rising prices have allegedly been accounted for by a price deflator, prices still rise (real GDP still increases). Without an increase in the quantity of money, such a rise would be mathematically impossible.
6.To gain an understanding of earning interest (dividends in this case) while prices fall, see Thorsten Polleit's "Free Money Against 'Inflation Bias'."
7.Most funds are borrowed from banks for the purpose of business investment; only a small amount is borrowed for the purpose of consumption. Even borrowing for long-term consumer consumption, such as for housing or automobiles, is a minority of total borrowing from banks.
8.The other main reason for this, if the country is poor, is the fact that there is a lack of capital: the more capital, the lower the rate of profit will be, and vice versa (though it can never go to zero).
9.Any reader who is interested in exploring and poking holes in this theory with me should feel free to contact me to discuss.
10.This recycling is what Mises's friend, the French economist Jacques Reuff, called "a childish game in which, after each round, winners return their marbles to the losers" (as cited by Richard Duncan, The Dollar Crisis (2003), p. 23).
11.P. Warburton, Debt and Delusion: Central Bank Follies that Threaten Economic Disaster (2005), p. 35.
12.[12] William H. Gross, "100 Bottles of Beer on the Wall."
13.It's not actually American dollars (both paper bills and bank accounts) that make their way around the world, as most dollars must remain in the United States. But for most dollars received by foreign exporters, foreign central banks create additional local currency in order to maintain exchange rates. This new foreign currency — along with more whose creation stems from "coordinated" monetary policies between countries — pushes up asset prices in foreign countries in unison with domestic asset prices.