Power & Market

Big MacCoins vs. the US Dollar

08/02/2018Tho Bishop

McDonalds has announced that they will be releasing MacCoins in celebration of the 50th anniversary of the Big Mac. While crypto-related gimmicks have proven to be profitable, there is no blockchain involved, instead customers will receive a physical coin whenever they purchase a Big Mac. CNN Money reports that McDonalds has 6.2 million MacCoins ready for distribution.

On social media, I've seen conversations about whether MacCoins, at 1:1 part with a Big Mac, would be a more effective store of value than a traditional Federal Reserve dollar. If the chain was willing to honor MacCoins indefinitely in the future, the answer would appear to be yes. Looking at the Big Mac Price index, a measure The Economist uses to track Purchasing Power Parity between foreign currencies, the price of a Big Mac has risen over 300% in the past 32 years. In fact, as D. H. Taylor has noted, the Big Mac is an American staple that has seen its price rise dramatically more than official CPI numbers. 
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Unfortunately Ronald McNixon will close the Big Mac window at the end of the year, rendering the MacCoins to simply nominal value. Of course, if we had a system of competing currencies — as Ron Paul has long championed — it would be fun to see what sort of experiments would emerge in money. Senator Rand Paul openly discussed currency backed by private stocks during his presidential campaign, while the rise of cryptomania has even smalltime pizza companies looking at ways to provide additional value to workers. 

Eliminate taxes on alternative currencies and ending legal tender laws would not only open the doors to monetary innovation but help empower Americans to new ways to protect their savings. Because at the end of the day, I would much rather trust the Hamburglar​ than those currently in charge with the Fed.

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Block in NY Times: Trump's Tariffs a "Fake Fix"

07/26/2018Ryan McMaken

In today's New York Times, Walter Block employs some excellently Rothbardian logic in exposing just how absurd is the argument that protectionism increases wealth. In this case, Block notes that if protectionism helps to increase the living standards of people in American states who import from other states, then New York would surely benefit from slapping tariffs on imports from Iowa:

As an illustration, assume Mr. Trump is the governor of New York. He is devoted to making the Empire State “great again.” Right now, both New Yorkers and Iowans raise pigs — but Iowa produces far more than New York. So Governor Trump sets up a protective tariff against the importation of Iowa-raised pork. Will this make New York great again?

Hardly. There is a very good reason the Empire State does not produce a huge amount of this product: economic efficiency, the true path toward economic greatness. Of course, pork product jobs will increase in New York thanks to the Trump tariffs. But this is the way to ruin the state’s economy.

Surely, New Yorkers would be far better off continuing to produce goods and services in which they have a comparative advantage (Broadway shows, dairy products, financial services, jewelry, maybe even newspapers) and trading them for pork, rather than trying to grow more of it locally. Ditto for the Iowans. They, too, would be well advised to stick to what they do best and trade for what they want.

There are good reasons the United States is such a prosperous country, one of which is this: The country is a gigantic free-trade zone among the states. Yes, every once in a while a state legislature will get in the way. Wisconsin may try to reduce the importation of wine from California. But this only interferes with the specialization and the division of labor that maximizes output. Happily, the Supreme Court has typically given the back of its collective hand to all such attempted interferences with interstate economic freedom. ... Maybe we should be happy that the president hasn’t yet kicked Hawaii out of the union and imposed a tariff on pineapples to strengthen the weak pineapple industry in other states. Absurd, yes, but hardly less bizarre than thinking tariffs on foreign goods will make the American economy great again.

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Brazil's Libertarian Renaissance: Why It Matters

Any Brazilian libertarian gets the same questions: What the heck is happening there? How come you have people with “Menos Marx, Mais Mises” signs down the streets? Aren’t you some kind of left-libs? Isn’t Lula, now jailed for corruption, ‘Obama’s man’?

The curiosity about Brazil and what is happening here is so widespread that people have discussed that in the US (see here and here), in the UK, and even in Italy.

Every time people ask me about it, I tend to respond in a somewhat different manner, and I tend to forget stuff. So here I want to tell you what I think about the whole thing.

Usually I divide my explanation into three parts:

1. Eight years of hard interventionism (2008-2016 under Lula da Silva and Roussef) pushed the country to the limits. There was no way out, either more libertarian ideas would enter in the common discussion or we would be heading to full blown real-life communism, Venezuela style;

2. Internet, social networks, and bottom up organization via ‘apolitical’ movements; and

3. A weak but vigorous intellectual environment is slowly forming for libertarian (or what Americans might call "conservative") ideas. (See, for example, Olavo de Carvalho.

#1: There are more than 30 political parties down here. Only one, the NOVO labels itself as "classical liberal/libertarian." There are more than ten communist/socialist parties. The so called ‘conservative’ candidate for the forthcoming presidential election had to strike an agreement with a lib-left party to get his way into the candidacy.

Since redemocratization in the late 1980’s/early 1990’s, Brazil has had five presidents, two of them communists. Lula da Silva and Roussef. There was one social-democrat: Cardoso. These presidents served 22 years in total. The current president, Temer, belongs to a center party that has never been anti-establishment in the last 35 years. Our system gives way too much power to the executive branch, which lead to growing interventionism. The government represents 40% of the GDP and has been growing in the last 20 years.

On the practical side, the last relevant libertarian politician in Brazil, Roberto Campos, passed away 30 years ago. There was nobody defending libertarian ideas in the political world, which was a reflection of the cultural and academic environment. Statism, empirically represented by the expenditures with the soccer stadiums for the 2014 World Cup, lead the country to the biggest economic crisis in its history. The GDP decreased by more than 3% in two consecutive years, 2015 and 2016. In 2017, there was no growth.

#2. Another new development was  the Brazilian Mises Institute (Instituto Mises Brasil - IMB), inspired by the MI. It emerged in the mid 2000’s, and was founded by Hélio Beltrão with the academic support of Prof. Ubiratã Iorio. From the beginning, the institute distributed a lot of free material online and used social media to spread the ideas, some facts on that:

There was no libertarian movement in Brazil in 2010 (I’m writing that in 2018!), people had started talking about it, but there was nothing organized. Nowadays, there are around 40 thousand visits to mises.org.br every day, in 2008 the number was 13 times lower. There are 300,000 likes on Facebook. The Institute has a podcast running for 5+ years with more than 300 episodes. 1 million books have been downloaded. Since 2013, "Mises" has more Google searches than "Keynes."

Well, here is where the story gets complicated and this is where we get to #3.

In my view there are two complementary responsible for the intellectual change: Olavo de Carvalho and Instituto Mises Brasil.

Olavo is a Brazilian philosopher, he became known in the late 1990’s, but gained traction in the mid 2000’s with a weekly web-radio show where he presented his conservative positions and waged cultural war on widespread communist ideology in Brazilian culture, universities, and the media. With his attack on the centralization of power, he always mentioned the calculation debate and has used methodological individualism in his political analysis.

Meanwhile, the IMB provided materials and events on economics and political science and spread the ideas to a wider and more libertarian, less conservative, audience.

So, what is ahead?

In October there will be national elections in Brazil, including races for congress and the senate, new governors and houses in the states, and a new national president.

There is likely to be be somewhere between 20-25 libertarian representatives, a huge jump from the zero of the last 30 years. Maybe some senators and numerous state representatives. 

But, we have got to keep fighting the ideological war.

The Brazilian experience can be an inspiration to other movements elsewhere in the globe, and those lessons could be a starting point to those that want to do something about it.

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Big Corporate Mergers Often Come with Big Risks

07/17/2018Doug French

The June 29th edition of Grant’s Interest Rate Observer led with, “Time Warner, Inc. was put on this earth not to produce Game of Thrones but to punctuate the cycles of investment enthusiasm.” Grant’s reminds the forgetful that a few bubbles ago Time Warner and AOL merged and that “announcement in 2000 rang down the curtain on the dot-com era.”

The Time Warner — American Online (AOL) merger was a colossal $111 billion deal. A blink in time later, May 2009, the CEO of Time Warner, Jeff Bewkes, announced the two companies were separating, the merger was but a brief hookup instead of a marriage.

Now Time-Warner is making merger with AT&T, and Grant’s wonders if the deal “may epitomize the post-2008 corporate-credit boom.”

“The new AT&T is a kind of triptych,” writes Grant’s, “one-third wireless, one-third wireline and one-third entertainment.”

Of course, anything can work on paper if the guys and gals in the corner office want it to. In a 2011 piece for mises.org , I wrote,

A former director of Coopers & Lybrand told author Mark Sirower, "Lotus is the culprit in failed acquisitions. It is too easy to assume anything you want in perpetuity without any understanding of the economics of an industry, and package it in a beautiful report."

In his book The Synergy Trap , Sirower says valuation models turn on three things: free-cash-flow forecasts, residual value, and a discount rate.

The cost of capital is integral to making these assumptions. The lower the assumed interest rate or cost of capital, the higher the price for the acquisition that the models will justify.

And if anyone is assuming today's Fed-induced microscopic interests rates will last forever, well, now would be the time to be selling instead of buying. Once interest rates go up, these valuation models will be blown up along with the government-employee pension-plan assumptions.

It's hard to make something work out economically if you overpay in the first place. And that is most often what happens. Companies overpay for the firms they acquire.

It’s the rare business combination that works out. I mentioned,

according to Max Landsberg and Dr. Thomas Kell at the consulting firm Heidrick & Struggles, 74 percent of mergers fail. "Two-thirds of the newly formed companies perform well below the industry average," according to the Harvard Management Update. Although "up to 70 percent [of mergers] failed to create value, it seems clear that the end is not yet in sight," claims Financial Executive. And the Journal of Property Management says "60 percent to 80 percent of all business combinations undergo a slow, painful demise."

In the AT&T/Time Warner merger there is the additional problem of the debt load. “If pro forma AT&T were a country,” Craig Moffett tells Grant’s, “it would place 32nd on the list of highest total debt burdens, between Indonesia (at $335 billion) and the UAB ($220 billion). Pro forma leverage, on an adjusted basis, will now be 3.9 times EBITDA,”

“M&A is now — arguably, always has been — a leap in the dark,” Grant’s writes. The primary problem is size itself. Ludwig von Mises explained that socialism doesn’t work because there was no market to determine prices and thus calculate how resources should be used. Behemoth companies are no more immune than government bureaucracies.

Murray Rothbard explained,

Economic calculation becomes ever more important as the market economy develops and progresses, as the stages and the complexities of type and variety of capital goods increase. Ever more important for the maintenance of an advanced economy, then, is the preservation of markets for all the capital and other producers' goods.

Professor Peter Klein furthers the point in his book The Capitalist and the Entrepreneur,

as soon as the firm expands to the point where at least one external market has disappeared, however, the calculation problem exists. The difficulties become worse and worse as more and more external markets disappear, as [quoting Rothbard] "islands of non calculable chaos swell to the proportions of masses and continents. As the area of incalculability increases, the degrees of irrationality, misallocation, loss, impoverishment, etc, become greater.

Grant’s closed the AT&T analysis with, “There is nothing certain about the new Time Warner corporate marriage, only the time-honored tendencies of governments to inflate, investment bankers to promote, corporate CEOs to deal — and ground-hugging interest rates to addle the brain.”

In the end, this latest corporate knot-tying will crumble and destroy capital.

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Back from Texas: On the Coastal Mindset

05/12/2018Ilana Mercer

I recently traveled to Texas to speak about South Africa, at the Free Speech Forum of  the Texas A & M University.

To travel from the Pacific Northwest all the way to College Station, Texas, without experiencing more of the "Lone Star State" was not an option.

So, after driving from Austin eastward to College Station (where I was hosted by two exceptional young, Southern gentlemen), I headed south-west to San Antonio. There I lingered long enough to conclude:

The Republic of Texas is a civilization apart.

Ordinary Texans—from my brief travels—tend to be sunny, kind and warmhearted. Not once did I encounter rude on my Texas junket.

On the Pacific Coast, however, kindness and congeniality don't come naturally. Washington-State statists are generally aloof, opprobrious, insular. And, frankly, dour.

Southern historian Dr. Clyde N. Wilson tells of receiving "a package containing a chamber pot labeled 'Robert E. Lee's Soup Tureen.'"

It came from … Portland, Maine.

Unkind cuts are an everyday occurrence around here, where the busybody mentality prevails.

Stand still long enough, and they'll tell you how to live. They'll even give chase to deliver that "corrective" sermon. A helmeted cyclist once chased me down along a suburban running trail.

My sin? I had fed the poor juncos in the dead of winter. (Still do).

Having caught up with me, SS Cyclist got on his soap box and in my face about my unforgivable, rule-bending. Wasn't I familiar with the laws governing his pristine environmental utopia?

Didn't I know that only the fittest deserved to survive? That’s the natural world, according to these ruthless, radical progressive puritans.

Yes, mea culpa for having an exceedingly soft spot for God's plucky little creatures.

When a Washington statist gets wind of your core beliefs—why, even if your use of the English language irks His Highness—he will take it upon himself to fix your "flaws," try to make you over in his sorry image.

For the distinct cluster of characteristics just described, Dr.  Wilson aforementioned uses the term Yankee.

The professor, whose métier is American intellectual history, was described by Eugene Genovese as "an exemplary historian who displays formidable talent." Another stellar scholar, Thomas Landess, lauded Wilson as "a mind as precise and expansive as an encyclopedia."

Duly, Dr. Wilson makes the following abundantly clear: By "Yankee," he does not mean "everybody from north of the Potomac and Ohio.”

“The firemen who died in the World Trade Center on September 11 were Americans. The politicians and TV personalities who stood around telling us what we are to think about it are Yankees."

"Yankee" as a designation belongs to "a peculiar ethnic group descended from New Englanders, who can be easily recognized by their arrogance, hypocrisy, greed, lack of congeniality, and a penchant for ordering other people around."

"A perversity of character," said Thomas Jefferson succinctly of the Yankee character.

Indeed, "Puritans long ago abandoned anything that might be good about their religion but have never given up the notion that they are the chosen saints whose mission is to make America, and the world, into the perfection of their own image."

The cover of Wilson's "The Yankee Problem: An American Dilemma" is bedecked with the quintessential Yankee mugs of Hillary Clinton, George W. Bush and John Brown, each a murderer in his or her own right. The one butchered with his bare hands. The other two killed by proxy.

The contemporary face of the fanaticism alluded to here is pundit Richard Painter, who is the spitting image of Brown. A Republican until Trump, Painter is now a member of the anti-Trump high-command at MSNBC.

In zealotry, Painter could pass for the terrifying Radical Republican Thaddeus Stevens.

A broader truth hit me in the solar plexus during the sojourn from the American Deep North to The South. On hand to better contextualize it is my friend, Clyde Wilson:

“Texas is still a Red State, despite a large number of minorities. That is because Texas, as you observed, Ilana, has a real culture. That means that there is a reality there that minorities can identify with and assimilate to. Unlike, say, Chicago or New Jersey or L.A., where they simply become aggrieved ‘victims,’ clamoring for special benefits, that being the only culture present."

"The peculiar character of the Yankee was observed by Tocqueville in the 19th century and Solzhenitsyn in the 20th. The first great American novelist, James Fenimore Cooper, wrote a whole series of books about the New England Yankees who spread into and destroyed the unique culture of his home country of Upstate New York.”

“Plenty of Northerners, like Governor Horatio Seymour of New York and Governor Joel Parker of New Jersey, blamed the War between the States on New Englanders, and not the South, which simply wanted to be let alone."

"One cannot really grasp American history unless you understand how Yankees have dominated and distorted it since the late 18th century.”

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BofA: The 10Y Treasury Is No Longer A "Safe Asset", Citing Spending and Fed Policy

04/26/2018Tho Bishop

As ZeroHedges notes, a recent report from Bank of America's Barnaby Martin indicates that the banking industry seems to be waking up to the very real risk posed by the Federal government's continued fiscal recklessness.

Martin notes that recently:

Treasury performance has been akin to a risky asset. Our US rates team have highlighted numerous reasons for structural upward pressure on Treasury yields, including the Fed’s balance sheet shrinkage, higher US Libor rates and importantly…the jump in the US budget deficit.

In particular, Martin notes that the US projected deficits look even worse compared to other developed nations:

As the IMF highlight in their latest Fiscal Monitor, the US is the only Advanced Economy where debt-to-GDP is set to increase over the next 5yrs. [The chart below] shows the spectrum of debt-to-GDP changes, per country. In the US, the debt-to-GDP ratio is forecast to rise from 108% (end ’18) to 116.9% (end ’23). Contrast this to Germany, for instance, where the IMF see debt-to-GDP declining by over 17% during this period.

 

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Bring Back Interest Rates!

04/17/2018Jeff Deist

Let interest rates rise. Better yet, let interest rates function in the marketplace, wholly independent of central bank attempts at rate-setting or targeting.

How? Not through a laughably small and slow process of Fed tapering, but through a wholesale and aggressive selloff of assets still polluting the Fed's balance sheet since it began aggressively those assets from commercial bank in 2008.   

This was the critical point made by all three speakers at our event in Nashville this past weekend: interest rates need to rise before any true economic recovery can occur. The manipulation of interest rates by the Fed and other central banks causes untold distortions throughout the entire economy. Unless and until we address this problem, no fiscal or monetary policy changes will make much sense or have much salutary effect. Money and credit will continue to flow into less than optimal uses, investors will be forced to continue chasing yields in the casino equity markets, and Congress (plus other western legislatures) will continue to produce trillion dollar annual deficits without much worry about debt service. 

Perhaps worst of all, the world will continue to believe a fairy tale: that the Fed effectively recapitalized US commercial banks in the 2008 crisis and through successive rounds of QE without pain or consequences. Are we really to believe the monetary base underpinning the world's reserve currency can be quadrupled in less than a decade without causing lasting damage? That gross overspending by Congress can be wished away simply by having the Fed provide a ready market for Treasury debt at miniscule interest rates? Or that interest rates should have no connection to the savings habits of society? 

It all strains credulity, which is precisely why monetary policy relies so heavily on technocratic jargon and opaque processes: they want to confuse or bore us into not paying attention. And thus the can is kicked down the road, politically and policy-wise. That's how we became a high time preference society almost by stealth.

You can watch these engaging presentations by Dr. Robert Murphy, Carlos Lara, and myself here.

These excerpts from my talk attempt to remind the listener that none of this is normal, in fact quite the opposite. Not too long ago prosperous societies were based on the notion of capital accumulation, of producing more than they consumed, making the next generation better off in the process.

**********************************

This is the fundamental and foundational change that has to occur. We need real, positive interest rates, meaning rates above inflation rates. We have to reward saving if we intend to have a growing or sustainable economy.

It is not exaggeration to say interest rates drive civilization.

They are the most important signals in an economy. Everything flows from them, because the cost of borrowing money effects the cost of almost everything.

This is the fundamental and inescapable starting point for building not only a real economy but a real culture. Every healthy society accumulates capital, every healthy society produces and saves more than it consumes and borrows. The human desire to leave something to future generations explains why all of us sit in splendor today, in this restaurant, enjoying conditions our great grandparents could not have imagined.

To do this you need actual real interest rates, market prices for money. Savers and borrowers, supply and demand, need to meet. We have a mechanism for this, it’s called the market. Without market prices you have socialism, the opposite of markets.

So why do so many otherwise free-market economists not object to monetary central planning?

The most important interest rate is the Federal Funds rate, the rate at which commercial banks borrow from each other overnight if they need to meet reserve requirements for their loans. The Fed controls this rate, or “targets” it, by manipulating the amount of reserves banks have in their accounts with the Fed. Banks with high reserves don’t much need to borrow from each other, so the Fed Funds rate stays low. And since 2008 commercial banks have received interest on excess reserves parked at the Fed, which encourages high balances and keeps rates low.

All commercial interest rates — e.g., the interest you pay on your mortgage — flow from the Fed Funds Rate on a cost-plus basis.

But when the Federal Reserve effectively keeps interest rates lower than they would be naturally, it creates a terrible disconnect between lenders and borrowers. And this disconnect causes unbelievable distortions throughout the economy. As David Stockman says, because of central banks there is no honest pricing of goods anywhere — we simply don’t know, for example, what a barrel of oil or a bushel of wheat or a Honda Accord should cost. The Fed has distorted the single most important price in the entire economy — the Federal Funds rate.

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Bake The Cake and Sell The Gun

03/06/2018Tho Bishop

At first I was quick to dismiss the lawsuit by a 20-year old Oregon man against Dick's Sporting Goods as another attempt at victimization for cheap exposure, but the details are more interesting than at first glance. The suit focuses on Dick's recent move to ban gun sales to customers under the age of 21, which the plaintiff argues goes against Oregon's laws on discrimination. This is the same law that was used against a Christian Oregon baker in a court case similar to the one now under the consideration of the Supreme Court

Many libertarians have criticized the Colorado's case before the Supreme Court for relying on the argument that the law restricts the bakers' first amendment right to expression and religion. In a libertarian society, the issue would simply be one of property rights — with the right of the baker to refuse service to any client he does not want to do business with. The problem, as Ryan McMaken has noted, is that public accommodation laws have effectively neutered the property rights of business owners in the eyes of the court. As such, for practicality sake, the bakers legal strategy may be his best hope at having the court side in his favor.

Dick's, of course, would have a hard time making that case, and the wording of the Oregon law seems to make this case a clear one. The law clearly states that discrimination based on age is illegal, and Oregon law protects the right of anyone over 18 to purchase and own a gun. 

Now that we have a case that involves the opposite end of a cultural battle, perhaps this will force the state of Oregon to re-evaluate its discrimination laws. 

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Bovard: Trump's Most Dangerous Foreign Policy Folly.

02/26/2018James Bovard

Last year on the campaign trail, crowds roared when Donald Trump denounced his opponent as "trigger-happy" Hillary. But President Trump is rapidly incarnating the vice he condemned. Nowhere is this more evident than in Syria, where Trump’s recklessness risks dragging America into a major war.

U.S. policy toward Syria has been a tangle of absurdities since 2012. President Obama promised 16 times that he would never put U.S. "boots on the ground" in the four-sided Syrian civil war. He quietly abandoned that pledge and, starting in 2014, launched more more than 5,000 airstrikes that dropped more than 15,000 bombs on terrorist groups in Syria.

Four years ago, Trump warned in a tweet: "If the U.S. attacks Syria and hits the wrong targets, killing civilians, there will be worldwide hell to pay." But the Trump administration has sharply increased U.S. bombing while curtailing restrictions that sought to protect innocents. A British-based human rights monitoring group estimated Friday that U.S.-led coalition strikes had killed almost 500 civilians in the past month — more than any month since U.S. bombing began.

Read the rest at USA Today
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Building a Market for Private Education in Romania

In Liberalism (p.115), Mises argued that "the state, the government, the laws must not in any way concern themselves with schooling or education, [which] must be left entirely to parents and to private associations and institutions."

The Private Academy project, founded under the umbrella of the Romanian Mises Institute in 2015, started out to do just this: to offer an alternative to the decades of nationalized higher education from which learning needed to be reclaimed and repaired. 

The purely private endeavor started small, with seminars on Austrian economics, and is now growing to encompass philosophy, literature, politics, religion, and the arts, in an effort to recover the "lost tools of learning". You can find out more about the project here, and visit the website here

This a great undertaking, and a difficult one. But I hope to see many more like it in all the corners of the world. 

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