More news from the War on Drugs™

"When President Nixon declared drug addiction Public Enemy Number One in 1971, it was with his 1969 declaration to Congress that the full forces of government must be marshalled “to cope with this growing menace to the general welfare of the United States.” Again, the nation was told, we would reduce crime and poverty, lower the scope and costs of incarceration, and stamp out a danger to the American family.
    "It is a vast understatement to say that these assurances were wrong ...
    "As of 2015, the rate of prisoners as a function of the population has grown from 100 per 100,000 in the period before Nixonian drug policy to over 500 per 100,000. As a result, the United States has become the world’s largest jailer, both in absolute terms and in rate. ...
    "Between 1973 and 2013, over $1 trillion was spent on drug enforcement in the U.S. alone. Yet, in 2016, Americans spent $150 billion on heroin, methamphetamines, cocaine, and marijuana, which doesn’t even factor in other classes of illicit drugs. Perhaps the most troubling aspect of these sunk opportunity costs is that despite a regime of increasing funding for supply-side enforcement, drug prices have continued to decline over the last four decades. This isn’t to say that they exist in cost parity with legal substances; their prices are still higher. What it does say is that current policy does little to abate demand.
    "Moreover, instead of reducing crime, prohibition simply creates more criminals. Everyone involved in the drug market, from supplier to distributor to consumer, is automatically a criminal. Absent the property rights protections and dispute resolution apparatus available via normal legal channels, interested parties must resolve their own conflicts, often leading to violent means. ...
    "Just as it was with alcohol during Prohibition, quality control is an issue with illegal drugs. As we discussed earlier, prohibitory laws create incentives to minimise the costs of production and transport while maximising profit, which in turn trends towards potency as the major concern. Because the product is manufactured by local entrepreneurs, however organised, there are no industry-wide safety standards. Hence, the current issue of heroin laced with fentanyl, for example. This leads to an increase in drug-related overdoses, and other related problems.
    "These are just a few of the more obvious social costs related to the War on Drugs™."

~ Tarnell Brown from his post 'Nothing New Thing Under the Sun: Prohibition, Drugs and the Iron Law'

 

So Trump wants to be like Nixon huh? This is not good.

Trump: Nixon? Surely Not

Guest post by Jeffrey Tucker

If you have followed the Republican trajectory over the last year, perhaps this will not surprise you. And maybe you discerned this last week when “Law and Order” became another official Republican campaign slogan, alongside “Make America Great Again.”

As it turns out, the model that the Donald Trump campaign is using for its public image, messaging, and policies was the one pioneered by Richard Nixon in 1968. Trump’s campaign manager Paul Manafort confirmed it.

Then the candidate himself agreed.

I think what Nixon understood is that when the world is falling apart, people want a strong leader whose highest priority is protecting America first [said the Trumpanzee]. The ’60s were bad, really bad. And it’s really bad now. Americans feel like it’s chaos again.

Nixon Was the Turning Point

Nixon was a remarkable case. His public credibility was built by his big role in the 1948 congressional hearings that pitted State Department Official Alger Hiss against Whittaker Chambers. Nixon was then a congressman from California and a key player on the House UnAmerican Activities Committee (HUAC). He publicly demonstrated Hiss’s Communist Party connections, and thereby became a hero to the anti-communists of that time.

The event became the cornerstone of Nixon’s entire career, establishing him as the leader of the anti-leftist faction of the party. Based on this reputation, he went from the House to the Senate in 1950, to the Vice Presidency in 1950, and finally the Presidency in 1968. Upon his election, hopes were high among the libertarians of the time that he would perhaps work to dismantle the welfarism and warfarism of the Lyndon Johnson era.

I recall my father telling me about his own feelings at the time. “I never trusted Nixon,” he told me years later. “But we shared the same enemies. At the time, that was enough for me.”

[Ayn Rand herself, politically was not primarily anti-communist but pro-freedom. Writing of that 1968 election she called herself an “Anti-Nixonite for Nixon.”

As to the state of the country at large, as we approach the Presidential election of 1968: it is obvious that there is an enormous swing to the right—if by "right" we mean the trend toward freedom and capitalism. But, tragically, it is a blind swing, without conscious knowledge, programme or direction. The people are rightfully, indignantly against the welfare state, against the blatantly cynical injustices of pressure-group warfare, against the deceptions and contradictions of pragmatic "anti-ideology." But they do not know the root nor the solution of these evils. They do not know whether they are for capitalism—they should be, but probably would not be, at present. It is the task of a country's intellectuals to provide the people with political knowledge—with an intelligible political philosophy. The philosophy of a mixed economy, of the Welfare State in all its variants, is bankrupt: it has had its day and has brought us to our present state. There is only one alternative now: the philosophy of capitalism—if a collapse into dictatorship is to be averted.
    Without the proper intellectual leadership, the people's blind rebellion will not save this country and will come to nothing, as have all the blind rebellions of the past. But the people's groping need and desperate eagerness for enlightenment are there, waiting for the men of courage and integrity to speak. Let us hope that a Nixon Administration will make it easier for such men to appear and to be heard.

Like many others, she was to be profoundly disappointed.]

Even in those days, the Republican Party was a coalition of disparate groups: foreign policy hawks, law-and-order conservatives, and the libertarian-minded merchant class that was sick of government spending, inflation, taxation, and regulation. The political priorities of the groups were in tension, often in contradiction. Which would prevail?

As it turned out, Nixon would devastate the anti-communist crowd by opening up diplomatic relations with China. But that was nothing compared to his complete betrayal of the libertarian wing who had reluctantly supported him. He began the drug war that was specifically structured to harm blacks and hippies. He ordered IRS audits of his enemies.

Nixon closed the gold window and officially put the monetary system on a paper standard – thus realising the dreams of decades of Keynesians and backers of big government. He pushed the Fed for more inflation. He founded the Environmental Protection Agency, which has harassed private property owners ever since.

Most egregiously and shockingly, on August 15, 1971, Nixon announced to the nation a policy that hadn’t been experienced since World War II. It was like a scene from Atlas Shrugged. “I am today ordering a freeze on all prices and wages throughout the United States,” he said. After the freeze, all price increases—every single one – were to be approved by a pay board and a price commission. [The Moratorium on Brains, Rand called it.]

Galvanising the Libertarians

This was the event that led the libertarians to gain a heightened consciousness of the task before them. What had previously been a loose association of intellectuals and a few other writers became a mass movement of students, donors, organisations, publications, and activists. The Libertarian Party was founded. Reason Magazine, founded as a mimeographed pamphlet in 1968, became a real magazine with an actual publication schedule. Ron Paul, under the intellectual influence of the Foundation for Economic Education, decided to enter public life.

Murray Rothbard captured the spirit of outrage that gave birth to the libertarian movement. He wrote the following in the New York Times on September 4, 1971:

On Aug. 15, 1971, fascism came to America. And everyone cheered, hailing the fact that a “strong President” was once again at the helm. The word fascism is scarcely an exaggeration to describe the New Economic Policy. The trend had been there for years, in the encroachment of Big Government over all aspects of the economy and society, in growing taxes, subsidies, and controls, and in the shift of economic decision-making from the free market to the Federal Government. The most recent ominous development was the bailout of Lockheed, which established the principle that no major corporation, no matter how inefficient, can be allowed to go under.
    But the wage-price freeze, imposed in sudden hysteria on Aug. 15, spells the end of the free price system and therefore of the entire system of free enterprise and free markets that have been the heart of the American economy. The main horror of the wage-price freeze is that this is totalitarianism and nobody seems to care…
    The worst part of our leap into fascism is that no one and no group, left, right, or center, Democrat or Republican, businessman, journalist or economic, has attacked the principle of the move itself. [Well, Rand did, as we’ve noted above.] The unions and the Democrats are only concerned that the policy wasn’t total enough, that it didn’t cover interest and profits. The ranks of business seem to have completely forgotten all their old rhetoric about free enterprise and the free price system; indeed, The ‘Washington Post’ reported that the mood of business and banks is “almost euphoric.”…
    The conservatives, too, seem to have forgotten their free enterprise rhetoric and are willing to join in the patriotic hoopla. The New Left and the practitioners of the New Politics seem to have forgotten all their rhetoric about the evils of central control...

It was this article, and the events he described, that made the libertarians realise that they needed their own movement, something different from the left and right, and outside the Democrats and Republicans, each of whom represent their own kind of tyranny. Never again would they trust the promises of a “strong president.” Never again would they trust a mainstream party.

The experience with Nixon taught those who seek more freedom that there is a huge difference between merely hating the left and actually loving liberty. The lesson was burned into the hearts and minds of a whole generation: to see your enemies crawl before you is not really a victory. The only real victory would be freedom itself. And to love liberty is neither left nor right. Libertarianism is a third way, a worthy successor to the great liberal movement from the 17th-19th centuries, the movement that established free trade, worked for peace, celebrated prosperity through freedom, ended slavery, liberated women, and universalised human rights.

The realisation marked a new era in American political life.

Then there Was Watergate

If you don’t like government as we know it, you need to decide why. When Nixon was finally driven out of office following the Watergate scandal, conservatives wept. But the libertarians, having now developed a sense of their task quite apart from the rightest cultural and political agenda, cheered the end of the cult of the Presidency. By then, Nixon had become their bete noir.

Rothbard wrote:

It is Watergate that gives us the greatest single hope for the short-run victory of liberty in America. For Watergate, as politicians have been warning us ever since, destroyed the public’s “faith in government” – and it was high time, too. Watergate engendered a radical shift in the deep-seated attitudes of everyone – regardless of their explicit ideology – toward government itself. For in the first place, Watergate awakened everyone to the invasions of personal liberty and private property by government – to its bugging, drugging, wiretapping, mail covering, agents provocateurs – even assassinations. Watergate at last desanctified our previously sacrosanct FBI and CIA and caused them to be looked at clearly and coolly.
    But more important, by bringing about the impeachment of the President, Watergate permanently desanctified an office that had come to be virtually considered as sovereign by the American public. No longer will the President be considered above the law; no longer will the President be able to do no wrong. But most important of all, government itself has been largely desanctified in America. No one trusts politicians or government anymore; all government is viewed with abiding hostility, thus returning us to that state of healthy distrust of government. *

It’s almost a half century later and the Republicans have once again chosen a man who is loved mainly because of the people he hates and those who hate him back. And once again, we are being told that greatness, law, and order should be the goal. Once again, the right is defining itself as anti-left while the left is defining itself as anti-right, even while both favor centralist and nationalist agendas.

It’s a perfect time to remember what that Nixon generation learned: regardless of ideology, absolute power corrupts absolutely. Even twenty years later, libertarians were highly skeptical of Ronald Reagan for this reason. It wasn’t until he showed himself to be a very different kind of candidate than Nixon – Reagan was very clear that the real enemy of the American people was government itself – that libertarians went along.

Regardless of the personalities ascendent at the moment, the real struggle we face is between the voluntary associations that constitute the beautiful part of our lives, on the one hand, and, on the other, the legal monopoly of violence and compulsion by the institutions of the state, which lives at the expense of society.

If you don’t like government as we know it, you need to decide why. Is it because you believe in a social order that minimizes coercion and unleashes human creativity to build peace and prosperity? Or is it because you think the wrong people are running it and we need a strong leader to put them in their place? This is the major division in politics today.

---

Jeffrey Tucker is Director of Content for the Foundation for Economic Education and CLO of the startup Liberty.me. Author of five books, and many thousands of articles, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.  Follow on Twitter and Like on Facebook.
His post first appeared at FEE.

---

NOTE:

*  Ayn Rand disagreed. It was the disaster of pragmatic government that Watergate exposed, she argued immediately after the televised Watergate hearings – of short-termist unprincipled government without any serious goals beyond re-election (sounding familiar?):

It is not a matter of personalities, nor of anyone's honesty or dishonesty. The corruption is inherent in the system: it is inherent in any situation in which men have to act without any goals, principles or standards to guide them. "The good of the country" is not a goal (unless one has a clear, objective definition of what is the good). "The public interest" is not a principle. (Observe that all pressure groups claim to represent "the public interest.") Someone's wish or "aspiration" is not a standard.
    You have heard every politician in every election proclaim his allegiance to those empty generalities. You have been wise enough not to believe his public utterances. What makes you believe that he has better principles in the privacy of his own mind and that, once elected, he will act on them? He hasn't and he can't.
In a controlled (or mixed) economy, a legislator's job consists in sacrificing some men to others. No matter what choice he makes, no choice of this kind can be morally justified (and never has been). Proceeding from an immoral base, no decision of his can be honest or dishonest, just or unjust—these concepts are inapplicable. He becomes, therefore, an easy target for the promptings of any pressure group, any lobbyist, any influence-peddler, any manipulator—he has no standards by which to judge or to resist them. You do not know what hidden powers drive him or what he is doing. Neither does he.
    Now observe the results of such policies and their effect on the country. You have seen that Nixon's wage-price controls, imposed two years ago for the purpose of slowing down inflation, have accelerated it. You have seen that a shortage of soybeans, which you probably do not buy, has led to the shortage of most of the food items which you do buy and need. You have seen a demonstration of the fact that a country's economy is an integrated (and self-integrating) whole—and that the biggest computer would not be able to predict all the consequences of an edict controlling the price of milk, let alone an edict controlling the price, the costs, the sales, the amounts of wheat or beef or steel or oil or electricity. Can you hold in mind the total of a country's economy, including every detail of the interrelationships of every group, every profession, every kind of goods and services? Can you determine which controls are proper or improper, practical or impractical, beneficent or disastrous? If you cannot do it, what makes you assume that a politician can? In fact, there is no such thing as proper, practical or beneficent controls.
    Like the Nixon re-election committee, the government of a mixed economy is a setup ruled by undefined goals, undefined principles, undefined standards, undefined responsibility, undefined (and unlimited) power, unearned (and unlimited) wealth. A country  that accepts such conditions can achieve nothing but self-destruction, as the men of the re-election committee did. This is the lesson that comes loud and clear through the grimy mess of the Watergate hearings—a pictorial lesson that concretises the senselessness, the pettiness, the futility, the chaos, and the depersonalised evil of a government swollen with a power no government can or should hold. (For a discussion of the proper functions of a government, I refer you to my [essay on ‘The Nature of Government.’)
…

    A "mixed" government is the only institution that grows not through its successes, but through its failures. Its advocates use every disaster to enlarge the power of the government that caused it…. The solution, of course, is to eliminate … the government's power over the economy. No, it cannot be done overnight. But if you want to fight for that ultimate solution, Watergate provides you with intellectual ammunition: its lesson is the diametric opposite of the notions now being palmed off on the country by the statist-liberal establishment.
    If you feel, as many people do, that such a battle would take too long and comes too late, there is one piece of advice I should like to give you: if you choose to resign yourself to the reign of an unchallenged evil, do so with your eyes open. Hold an image of the Watergate hearings in your mind and ask yourself what I asked you at the start of this discussion: Do you feel respect for the men on either side of the long committee table? To which of them would you care to surrender your freedom? To Senator Ervin? To Jeb Stuart Magruder? To John D. Ehrlichman? Whose judgment would you regard as superior to yours and competent to do a job which you can neither grasp  nor judge nor define nor undertake: the impossible job of controlling this country's economy? The judgment of H.R. Haldeman? Of Frederick C. LaRue? Of Senator Montoya? Which of them would you entrust with the power to dispose of your life, your work, your income, and your children's future? Senator Baker? Senator Weicker? John W. Dean 3d?
    If you hold Richard Nixon responsible for Watergate, as the absentee authority in whose name the men of the re-election committee were acting and whose favor they were scrambling to win, then—in relation to all the politicians of this country—you are the absentee authority, it is in your name that they are issuing their edicts, it is your favour that they are scrambling to win (or wheedle or extort or manipulate) at election time. No, you cannot fight them by means of your one vote. But you can make yourself heard. It is your voice that they fear, when and if it is the voice of your mind, because their entire racket rests on the hope that you will not understand.
    Do not hide behind the futile hope that the men you saw on television might be bigger in real life, that responsible government positions would raise their stature. In real life, they are smaller; today's government positions shrink them—for a reason stated by a great political thinker of the last century.
    His statement was mentioned during the Watergate hearings, but no one paid much attention to it. Yet that statement is the real answer to Senator Baker's question: it indicates what must be eliminated in order to prevent the future occurrence of events such as Watergate (or such as the Watergate hearings).
    That thinker was Lord Acton, who said: "Power tends to corrupt and absolute power corrupts absolutely."

.

Unshackling ‘The Fed’: Richard Nixon, Milton Friedman and the rise of the floating dollar

Since the end of World War II, the US Federal Reserve Bank has set the tone for all the world’s central banks.  From then until 1971, the US Dollar (under the “management” of the US Federal Reserve*) was the world’s reserve currency and the last official link between money and gold—the “gold-exchange standard” for which it was the buttress forming the “anchor” that “fixed” exchange rates between all the world’s currencies, and provided some last discipline on their spending.

In 1971, after a quarter-century of indiscipline, this “Bretton Woods” system collapsed when Richard Nixon and his advisers defaulted spectacularly on US promises. David Stockman describes the world we’ve been living in ever since.

(Excerpt from THE GREAT DEFORMATION: The Corruption of Capitalism in America by David A. Stockman. Published by PublicAffairs.)

[In 1971, after a quarter-century of Fed-driven inflation,] the stage was … set for the final “run” on the dollar and for a spectacular default by the designated “reserve currency” provider under the gold exchange standard’s second outing. And as it happened, the American people saw fit to install in the White House in January 1969 just the man to crush what remained of gold-based money and the financial discipline that it enabled.

Richard M. Nixon, as we know, possessed numerous and notable flaws. Foremost was his capacity to carry a grudge against anyone whom he believed had caused him to lose an election, especially any economist, policy maker, or bystander who could be pinned with accountability for the mild 1960 recession that he believed responsible for his loss to John F. Kennedy.

Nixon’s vendetta on the matter of the 1960 election literally knew no limits. For example, he insisted that a mid-level career bureaucrat named Jack Goldstein, who headed the Bureau of Labor Statistics (BLS), had deliberately spun the monthly unemployment report issued on the eve of the 1960 election so as to damage his campaign. Eight years later, Nixon informed the White House staff that job one was to determine if Goldstein was still at the BLS, and to get him fired if he was.

It is not surprising, therefore, that Nixon rolled into the Oval Office obsessed with replacing Federal Reserve Chairman William McChesney Martin [who he blamed for tanking the economy when then-Vice President Nixon was beginning his electioneering], and bringing the Fed to heel. To be sure, his only real interest in monetary policy consisted of ensuring that the one great threat to Republican success, a rising unemployment rate, did not happen again in the vicinity of an election.

Yet it was that very cynicism which made him prey to Milton Friedman’s alluring doctrine of floating paper money. As has been seen, Nixon wanted absolute freedom to cause the domestic economy to boom during his 1972 re-election campaign. Friedman’s disciples at Camp David served up exactly that gift, and wrapped it in the monetary doctrine of the nation’s leading conservative intellectual.

Friedman’s Rule of Fixed Money Supply Growth Was Academic Poppycock

Those adhering to traditional monetary doctrine always and properly feared the inflationary threat of state-issued fiat money. So when the Consumer Price Index reached the unheard of peacetime level of 6.3 percent by January 1969, it was a warning that the tottering structure of Bretton Woods was reaching a dangerous turning point and that the monetary foundation of the post-war world was in peril.

But not according to Professor Milton Friedman. As was typical of the Chicago school conservatives, he simply brushed off the gathering inflationary crisis as the product of dimwits at the Fed. Martin’s “mistake” in succumbing to pressure to open up the monetary spigot to fund LBJ’s deficits, Friedman insisted, could be easily fixed. Literally, with the flick of a switch.

According to Professor Friedman’s vast archive of historic data, inflation would be rapidly extinguished if money supply was harnessed to a fixed and unwavering rate of growth, such as 3 percent per annum. If that discipline was adhered to consistently, nothing more was needed to unleash capitalist prosperity—not gold convertibility, fixed exchange rates, currency swap lines, or any of the other accoutrements of central banking which had grown up around the Bretton Woods system.

Indeed, once the central bank got the money supply growth rate into a fixed and reliable groove, the free market would take care of everything else, including determination of the correct exchange rate between the dollar and every other currency on the planet. Under Friedman’s monetary deus ex machina, for example, the unseen hand would silently and efficiently mete out rewards for success and punishments for failure in the banking and securities markets. The need for clumsy and inefficient regulation of financial institutions would be eliminated.

Friedman’s “fixed rule” monetary theory was fundamentally flawed, however, for reasons Martin had long ago discovered down in the trenches of the financial markets. The killer was that the Federal Reserve couldn’t control Friedman’s single variable, which is to say, the “money supply” as measured by the sum of demand deposits and currency (M1).

During nearly two decades at the helm, Martin learned that the only thing the Fed could roughly gauge was the level of bank reserves in the system. Beyond that there simply weren’t any fixed arithmetic ratios, starting with the “money multiplier.”

The latter measured the ratio between bank reserves, which are potential money, and bank deposits, which are actual money. Commercial banks don’t create actual money (checking account deposits) directly; they make loans and then credit the proceeds to customer accounts. So the transmission process between bank reserves and money supply wends through bank lending departments and the credit creation process.

Needless to say, the Fed couldn’t control the animal spirits of either lenders or borrowers; that was the job of free market interest rates. Accordingly, banks would utilize their reserves aggressively during periods of robust loan demand until borrower exuberance was choked off by high interest rates. By contrast, bank reserves would lie fallow during times of slumping loan demand and low free market rates. The “money multiplier” therefore varied enormously, depending upon economic and financial conditions.

Furthermore, even if the resulting “money supply” could be accurately measured and controlled, which was not the case, it did not have a fixed “velocity” or relationship to economic activity or GDP, either. In fact, during  times of weak credit expansion, this “velocity” tended to fall, meaning less new GDP for each new dollar of M1. On the other hand, during more inflationary times of rapid bank credit expansion it would tend to rise, resulting in higher GDP gains per dollar of M1 growth.

So the chain of causation was long and opaque. The linkages from open market operations (adding to bank reserves) to commercial bank credit creation (adding to the money supply) to credit-fuelled additional spending (adding to GDP) resembled nothing so much as the loose steering gear on an old jalopy: turning the steering wheel did not necessarily mean the ditch would be avoided.

Most certainly there was no possible reason to believe that M1 could be managed to an unerring 3 percent growth rate, and that, in any event, keeping M1 growth on the straight and narrow would lead to any predictable rate of economic activity or mix of real growth and inflation. In short, Friedman’s single variable–fixed money supply growth rule was basically academic poppycock.

The monetarists, of course, had a ready answer to all of these disabilities; namely, that there were “leads and lags” in the transmission of monetary policy, and that given sufficient time the money multipliers and velocity would regress to a standard rate. Yet that “sufficient time” caveat had two insurmountable flaws: it meant that Friedman’s fixed rule could not be implemented in the real day-to-day world of fast-moving financial markets; and more importantly, it betrayed the deep, hopeless political naïveté of the monetarists and Professor Friedman especially.

The Monetarist Cone: Silly Putty on the White House Graphs

As to practicality, I had a real-time encounter with it later, during the Reagan years, when the Treasury’s monetary policy post was held by a religious disciple of Friedman: Beryl Wayne Sprinkel. Week after week at White House economic briefings he presented a graph based on the patented “monetarist cone.” The graph consisted of two upward-sloping dotted lines from a common starting date which showed where the money supply would be if it had been growing at an upper boundary of, say, 4 percent and a lower boundary of, say, 2 percent.

The implication was that if the Fed were following Professor Friedman’s rule, the path of the actual money supply would fall snugly inside the “cone” as it extended out over months and quarters, thereby indicating that all was well on the monetary front, the only thing which mattered. Except the solid line on the graph tracking the actual week-to-week growth of money supply gyrated wildly and was almost always outside the cone, sometimes on the high side and other times on the low.

In other words, the greatest central banker of modern times, Paul Volcker [the Fed chairman who ended the Nixon stagflation], was flunking the monetarists’ test week after week, causing Sprinkel to engage in alternating bouts of table pounding because the Fed was either dangerously too tight or too loose. Fortunately, Sprinkel’s graphs didn’t lead to much: President Reagan would look puzzled, Jim Baker, the chief of staff, would yawn, and domestic policy advisor Ed Meese would suggest moving on to the next topic.

More importantly, Volcker could easily explain the manifold complexities and anomalies in the short-term movement of the reported money supply numbers, and that on an “adjusted” basis he was actually inside the cone. Besides that, credit growth was slowing sharply, from a rate of 12 percent in 1979 to 7 percent in 1981 and 3 percent in 1982. That caused the economy to temporarily buckle and inflation to plunge from double digits to under 4 percent in less than twenty-four months. Volcker was getting the job done, in compliance with the monetarist cone or not.

In fact, the monetarist cone was just a Silly Putty numbers exercise, representing annualized rates of change from an arbitrary starting date that kept getting reset owing to one alleged anomaly or another. The far more relevant imperative was to slow the perilous expansion of the Fed’s balance sheet. It had doubled from $60 billion to $125 billion in the nine years before Volcker’s arrival at the Eccles Building, thereby saturating the banking system with newly minted reserves and the wherewithal for inflationary credit growth.

Volcker accomplished this true anti-inflation objective with alacrity. By curtailing the Fed’s balance sheet growth rate to less than 5 percent by 1982, Volcker convinced the markets that the Fed would not continue to passively validate inflation, as Burns and Miller had done, and that speculating on rising prices was no longer a one-way bet. Volcker thus cracked the inflation spiral through a display of central bank resolve, not through a single-variable focus on a rubbery monetary statistic called M1.

Volcker also demonstrated that the short-run growth rate of M1 was largely irrelevant and impossible to manage, but that the Fed could nevertheless contain the inflationary furies by tough-minded discipline of its own balance sheet. Yet that very success went straight to an even more fatal flaw in the monetarist fixed money growth rule: Friedman never explained how the Fed, once liberated from the external discipline of the Bretton Woods gold exchange standard, would be continuously populated with iron-willed statesmen like Volcker, and how they would even remain in office when push came to shove like it did during the monetary crunch of 1982.

In fact, Volcker’s reappointment the next year was a close call because most of the White House staff and the Senate Republican leadership wanted to take him down, owing to the considerable political inconvenience of the recessionary trauma his policies had induced. Senate leader Howard Baker, for example, angrily demanded that Volcker “get his foot off the neck of American business now.”

Volcker survived only because of Ronald Reagan’s stubborn (and correct) belief that the Fed’s long bout of profligacy had caused inflation and that only a period of painful monetary parsimony could cure it. The next several decades would prove decisively, however, that the process of American governance produces few Reagans and even fewer Volckers.

So Friedman unleashed the demon of floating-rate money based on the naïve view that the inhabitants of the Eccles Building could and would follow his monetary rules. That was a surprising posture because Friedman’s splendid scholarship on the free market, going all the way back to his pioneering critique of New York City rent controls in the late 1940s, was infused in almost every other case with an abiding skepticism of politicians and all of their mischievous works.

Yet by unshackling the Fed from the constraints of fixed exchange rates and the redemption of dollar liabilities for gold, Friedman’s monetary doctrine actually handed politicians a stupendous new prize. It rendered trivial by comparison the ills owing to garden variety insults to the free market, such as rent control or the regulation of interstate trucking.

Implicit Rule by Monetary Eunuchs

The Friedman monetary theory actually placed the nation’s stock of bank reserves, money, and credit under the unfettered sway of what amounted to a twelve-member monetary politburo. Once relieved of the gold standard’s external discipline, the central banking branch of the state thus had unlimited scope to extend its mission to plenary management of the nation’s entire GDP and for deep, persistent, and ultimately suffocating intervention in the money and capital markets.

It goes without saying, of course, that the libertarian professor was not peddling a statist scheme. So the implication was that the Fed would be run by self-abnegating monetary eunuchs who would never be tempted to deviate from the fixed money growth rule or by any other manifestation of mission creep. Needless to say, Friedman never sought a franchise to train and appoint such governors, nor did he propose any significant reforms with respect to the Fed’s selection process or of the manner in which its normal operations were conducted.

This glaring omission, however, is what made Friedman’s monetarism all the more dangerous. His monetary opus, A Monetary History of the United States, was published only four years before his disciples, led by George Shultz, filled the ranks of the Nixon White House in 1969.

Possessed with the zeal of recent converts, they soon caused a real-world experiment in Friedman’s grand theory. In so doing, they were also implicitly betting on an improbable proposition: that monetarism would work because the run-of-the-mill political appointees—bankers, economists, businessmen, and ex-politicians who then sat on the Federal Open Market Committee (FOMC), along with their successors—would be forever smitten with the logic of 3 percent annual money supply growth.

Friedman’s Great Gift to Wall Street

The very idea that the FOMC would function as faithful monetary eunuchs, keeping their eyes on the M1 gauge and deftly adjusting the dial in either direction upon any deviation from the 3 percent target, was sheer fantasy. And not only because of its political naïveté, something Nixon’s brutalization of the hapless Fed Chairman Arthur Burns aptly conveyed.

Friedman’s austere, rule-bound version of discretionary central banking also completely ignored the Fed’s susceptibility to capture by the Wall Street bond dealers and the vast network of member banks, large and small, which maintained their cash reserves on deposit there. Yet once the Fed no longer had to worry about protecting the dollar’s foreign exchange value and the US gold reserve, it had a much wider scope to pursue financial repression policies, such as low interest rates and a steep yield curve, that inherently fuel Wall Street prosperity.

As it happened, the Fed’s drift into these Wall Street–pleasing policies was temporarily stalled by Volcker’s epic campaign against the Great Inflation. Dousing inflation the hard way, through brutal tightening of money market conditions, Volcker had produced the singular nightmare that Wall Street and the banking system loathe; namely, a violent and unprecedented inversion of the yield curve.

With short-term interest rates at 20 percent or more and way above long-term bond yields (12–15 percent), it meant that speculators and banks could not make money on the “carry trade,” and that the value of dealer stock and bond inventories got clobbered: high and rising interest rates mean low and falling financial asset values. Accordingly, the Volcker Fed did not even dream of levitating the economy through the “wealth effects” or by coddling Wall Street speculators.

Yet once Volcker scored an initial success and was unceremoniously dumped by the Baker Treasury Department (in 1987), the anti-inflation brief passed on to a more congenial mechanism; that is, Mr. Deng’s industrial army and the “China price” deflation that rolled across the US economy in the 1990s and after. With inflation-fighting stringency no longer having such immediate urgency, it did not take long for the Greenspan Fed to adopt a prosperity promotion agenda.

First, however, it had to rid itself of any vestigial restraints owing to the Friedman fixed money-growth rule. The latter was dispatched easily by a regulatory change in the early 1990s which allowed banks to offer “sweep” accounts; that is, checking accounts by day which turned into savings accounts overnight. Accordingly, Professor Friedman’s M1 could no longer be measured accurately.

Out of sight was apparently out of mind: for the last two decades, the central bank that Friedman caused to be liberated from the alleged tyranny of Bretton Woods so that it could swear an oath of fixed money supply growth has not even bothered to review or mention money supply. Indeed, the Greenspan and Bernanke Fed have been wholly preoccupied with manipulation of the price of money, that is, interest rates, and have relegated Friedman’s entire quantity theory of money to the dustbin of history. And Bernanke claims to have been a disciple!

Constrained neither by gold nor a fixed money growth rule, the Fed in due course declared itself to be the open market committee for the management and planning of the nation’s entire GDP. In this Brobdingnagian endeavor, of course, the Wall Street bond dealers were the vital transmission belt which brought credit-fuelled short-term prosperity to Main Street, and delivered the elixir of asset price inflation to the speculative classes. Consequently, when it came to Wall Street, the Fed became solicitous at first, and craven in the end.

Apologists might claim that Milton Friedman could not have foreseen that the great experiment in discretionary central banking unleashed by his disciples in the Nixon White House would result in the abject capitulation to Wall Street which emerged during the Greenspan era and became a noxious, unyielding reality under Bernanke. But financial statesmen of an earlier era had embraced the gold standard for good reason: it was the ultimate bulwark against the pretensions and follies of central bankers.

David Stockman was director of the Office of Management and Budget under President Ronald Reagan, serving from 1981 until August 1985. He was the youngest cabinet member in the 20th century.
This post first appeared at Mises Daily, with the author’s permission.

* “Management” that saw the dollar devalued to around one-sixty-fifth of its value in just over half a century!

How Milton Friedman Corrupted Capitalism

I’m thoroughly enjoying reading David Stockman’s book The Great Deformation: The Corruption of Capitalism in America, and I can highly recommend it as a leading historical explanation of how American capitalism became anything but—from capitalism to cronyism in one century, with significant ideological way-stations on the way.
    One of the most obvious contemporary examples of America’s lack of a truly free market is its banking system: a system buttressed by government bonds, with interest rates set by an economic dictator and with regulations positively encouraging moral hazard, there is nothing free about this market in systemic cronyism. One ‘feature’ of Stockman’s book is his eagerness to pin much of the blame for this modern system of monetary (mis)management—including the blame for Ben Bernanke’s ever-abnormal printing press—on Milton Friedman and his Chicago school followers.  Ironically, “the nation’s most famous modern conservative economist became the father of Big Government, chronic deficits, and national fiscal bankruptcy.”
    A long overdue condemnation, then, as this summation by guest poster Thomas DiLorenzo highlights.

All throughout his new book, The Great Deformation: The Corruption of Capitalism in America, David A. Stockman is critical of the Chicago School, especially its intellectual leader during the last half of the twentieth century, Milton Friedman. He captures the irony of the so-called free-market Chicago School on the very first page of his introduction, where he writes of the “capture of the state, especially its central bank, the Federal Reserve, by crony capitalist forces deeply inimical to free markets and democracy.”

This is a deep irony because it was Chicago School economists such as George Stigler who wrote of the “capture theory of regulation” when it came to the trucking industry, the airline industry, and many others. That is, they produced dozens of scholarly articles demonstrating how government regulatory agencies ostensibly created to regulate industry “in the public interest” are most often “captured” by the industry itself and then used not to protect the public but to enforce cartel pricing arrangements.

This was all good, solid, applied free-market economics, but at the same time the Chicago Schoolers ignored the biggest and most important regulatory capture of all — the creation of the Fed. The Chicago School simply ignored the obvious fact that the Fed was created as a governmental cartel enforcement mechanism for the banking industry — during an era when many other kinds of regulatory institutions were being created for the same purpose (i.e., “natural monopoly” regulation).

Not only did the Chicago School ignore this glaring omission from its “capture theory” tradition of research on regulation; it also ignored the realistic, economic analysis of political decision making that was an important part of the research of the two most famous Chicago School Nobel laureates next to Friedman — George Stigler and Gary Becker. Stigler and Becker published some important articles in the field that is better known as public choice, or the economics of political decision making. Friedman himself had long been an advisor to Republican politicians, so no one could credibly argue that Chicago School economists were naïve about the realities of politics.

However, if Friedmanite monetarism was anything, it was naïve about political reality. The fatal flaw of Friedman’s famous “monetary rule” of constant growth of the money supply in the 3-4 percent range was premised on the assumption that a machine-like Fed chairman would selflessly pursue the public interest by enforcing Friedman’s monetary rule. According to Friedman, Stockman writes, “inflation would be rapidly extinguished if money supply was harnessed to a fixed and unwavering rate of growth, such as 3 percent per annum.” This was the fundamental assumption behind monetarism, and it flew in the face of everything the Chicago Schoolers purported to know about political reality.

In other words, Friedmanite monetarism was never a realistic possibility, for as Friedman himself frequently said of all other governmental institutions besides the Fed, a government institution that is not political is as likely as a cat that barks like a dog. Friedman’s monetary rule, Stockman concludes, was “basically academic poppycock.” He mocks the idea of a “monetary rule” as the “idea that the FOMC [Federal Reserve Open Market Committee] would function as faithful monetary eunuchs, keeping their eyes on the M1 gauge and deftly adjusting the dial in either direction upon any deviation from the 3 percent target.” This was “sheer fantasy,” says Stockman, and an extreme example of “political naivete.”

Stockman also takes Friedman and the Chicago School to task by writing that “Friedman thoroughly misunderstood the Great Depression and concluded erroneously that undue regard for the gold standard rules by the Fed during 1929-1933 had resulted in its failure to conduct aggressive open market purchases of government debt.” Stockman debunks the notion that the Fed failed to pump enough liquidity into the banking system by merely noting that “there was no liquidity shortage” during that period and “commercial banks were not constrained at all in their ability to make loans or generate demand deposits (M1). “Friedman thus sided with the central planners,” writes Stockman, in “contending that the ... thousands of banks that already had excess reserves should have been doused with more and still more reserves, until they started lending and creating deposits in accordance with the dictates of the monetarist gospel.” As a matter of historical fact, Stockman points out, “excess reserves in the banking system grew dramatically during the forty-five month period, implying just the opposite of monetary stringency” (i.e., Friedman’s main argument). Thus, “there is simply no case that monetary stringency caused the Great Depression.”

The current Fed chairman, Ben Bernanke, based his academic career on the false Friedmanite theory of the Great Depression, Stockman writes. Bernanke’s “sole contribution to this truly wrong-headed proposition was a few essays consisting mainly of dense math equations. They showed the undeniable correlation between the collapse of GDP and money supply, but proved no causation whatsoever.” Thus, the old saying about “how to lie with statistics” was matched by “how to mislead with mathematical models.”

Stockman makes the case that the Austrian business cycle theory is a far more reliable source of understanding about the Great Depression. “[T]he great contraction of 1929-1933 was rooted in the bubble of debt and financial speculation that built up in the years before 1929,” he writes, and “not from mistakes made by the Fed after the bubble collapsed.” Friedman’s monetary theory, in other words, was not based on “positive economics” or historical reality, but was assumed to be “an a priori truth” merely because it was the “great” Milton Friedman who authored it. In any event, Friedman’s entire theory of the Great Depression has been “demolished” by his intellectual disciple, Ben Bernanke, who increased the excess reserves of the U.S. banking system from $40 billion to $1.7 trillion as of 2012 with little or no recognizable effect on the real economy.

Perhaps Friedman’s biggest sin, according to Stockman, was being the “brains” behind Richard Nixon’s executive order in 1971 that removed gold standard restraints on monetary printing. Friedman therefore assisted in the institutionalization of “a regime that allowed politicians to chronically spend without taxing,” he writes. Ironically, “the nation’s most famous modern conservative economist became the father of Big Government, chronic deficits, and national fiscal bankruptcy.” “For all practical purposes ... it was Friedman who shifted the foundation of the nation’s money supply from gold to T-bills.”

Stockman describes Friedman’s political naivete as mind boggling. “Friedman never even entertained the possibility that once the central bank was freed from the stern discipline of protecting its gold reserves, it would fall into the hands of monetary activists and central planners” and that the Fed would “become a fount of rationalizations for incessant tinkering and intervention in financial markets.” Printing dollars with reckless abandon, the Fed fuelled commodity booms in the 1970s, followed by busts and crashes, and then did the same with stock and real estate markets in the succeeding decades.

All disasters are documented, described  detailed in Stockman’s book—and the causal arrow is fired.

Thomas DiLorenzo is professor of economics at Loyola University Maryland and a member of the senior faculty of the Mises Institute. He is the author of several books including How Capitalism Saved America and Hamilton's Curse: How Jefferson’s Archenemy Betrayed the American Revolution — And What It Means for Americans Today.
This post first appeared at the Mises Daily.

Oliver Hartwich, the Euro, and the “dangerous naivety” of floating exchange rates

We’re famous!

I’m very happy to see that a debate on the Euro crisis hosted by our Auckland University Economics Group earlier in the month has now slipped into Australia’s wide read Business Spectator.

Oliver Hartwich from the NZ Initiative talked to our Group a few weeks back on The Never-Ending Euro Crisis - the Anatomy of an Economic Policy Disaster, in which he

covered the history and pre-history of European monetary union, Europe’s fiscal and monetary problems, the eurozone’s governance issues and their political implications.
    But in the ensuing discussion, one of the economics professors, a renowned Austrian School theorist, asked two questions that were both unbelievably simple and incredibly sharp. The first: “So what does this euro crisis really have to do with money?” And the second: “Why have you not talked much about markets in your presentation?”
    At first, I was a little startled by these two questions. After all, when you give a whole lecture on the failings of a monetary union, surely this must have something do with money, right? And secondly, didn’t the euro crisis play itself out in the markets? Isn’t that where all the drama of these past years happened? How could I not have talked about markets?
    After the initial shock, I managed to give a reasonable answer to both his questions. However, I have been thinking about them for the past few days. And the more I do, the more it seems to me that they are not only valid questions: they also provide the answers to many of Europe’s current problems.

He’s right. They do. But because he’s left himself in the intellectual straitjacket of thinking that floating exchange rates would be the only way out, he doesn’t see that answer. 

How do economies adjust?

You see, Oliver insists

without the euro currency many of the problems we now observe would have never developed… trade imbalances between European nations probably would have corrected themselves through adjustments in the exchange rate. This is how such tensions had always been overcome when Europe still had many national currencies, and it certainly would have provided temporary relief…

Temporary relief only, because as he identifies, the real crisis “is really the crisis of the countries’ respective economies” :

These are economies that are in desperate need of economic reforms. Their problems have little to do with monetary union as such; the union merely brought their problems to light. Without the escape route of flexible exchange rates, their deep-seated problems could no longer be glossed over.

Note the first and last sentence: “These are economies that are in desperate need of economic reforms… Without the escape route of flexible exchange rates, their deep-seated problems could no longer be glossed over.”

Now, remove the intellectual straitjacket, and see what happens: The problem of the single currency zone with economies in desperate need of reforms suddenly becomes the solution. If no other escape route is offered them (and herein lies the present problem) the discipline provided by the single currency encourages the reform in those economies that is so desperately needed, and gives the public a reason to demand it.

Maybe the Euro is not so bad after all

The leading Austrian theorist in Spain, Jesus Huerta De Soto makes this point in “An Austrian defence of the Euro”:

The introduction of the euro in 1999 and its culmination beginning in 2002 meant …  the different member states of the monetary union completely relinquished and lost their monetary autonomy, that is, the possibility of manipulating their local currency by placing it at the service of the political needs of the moment. In this sense, at least with respect to the countries in the eurozone, the euro began to act and continues to act very much like the gold standard did in its day.

Simply put, the “fixed exchange rates” of a Bretton Woods system, of a gold standard, or of a single Eurozone currency—in which systems, trade imbalances are corrected through adjustments in prices and interest rates—all impose monetary discipline on a government, whereas the monetary nationalism of floating exchange rates allows printing press money to let rip.

Because Hartwich still seems to contemplate the crisis through the intellectual cracked lens of floating exchange rates however, he doesn’t see this.  He still sees floating exchange rates as the only way to make the markets correct the issue.

But the big Euro problem really is a lack of market process—as our Auckland Austrian theorist above seemed to be suggesting. And the fly in the ointment here is really the central bank.  The main thing lacking in the present arrangement of the Euro currency unit—in which a central bank imposes interest rates across a whole continent—is any mechanism whereby price signals are able to work their magic.  Because if the central bank got out of the way and stopped dictating interest rates across the whole zone, there is a benevolent mechanism present in the system of (essentially) fixed exchange rates that would re-emerge: encouraging investors to withdraw marginal quantities of their money from relatively overheated areas (where prices are higher and interest rates too low), and delivering it to areas shorter of investment capital (where prices are lower, and interest rates paid to investors are higher).

And then instead of acting as a doomsday machine, the main thing that’s destroying the setup presently (the monetary transfer system) would instead become the mechanism encouraging each economy’s reform.

Fixed  versus floating exchange rates

Since this issue, of fixed versus floating exchange rates, is so little canvassed these days it’s worth making it a final postscript—in the hope, perhaps, that you too might rethink the issue.

It was Hayek who in his 1937 book Monetary Nationalism and International Stability argued

flexible exchange rates preclude an efficient allocation of resources on an international level, as they immediately hinder and distort real flows of consumption and investment. Moreover, they make it inevitable that the necessary real downward adjustments in costs take place …  in a chaotic environment of competitive devaluations, credit expansion, and inflation

Which almost exactly describes the modern world of endless currency wars, where desperate economic problems are able to be put off for tomorrow by the printing press—with all the destruction that creates.  De Soto quotes Hayek from 1975, where he summarises his argument

It is, I believe, undeniable that the demand for flexible rates of exchange originated wholly from countries such as Great Britain, some of whose economists wanted a wider margin for inflationary expansion (called "full employment policy"). They later received support, unfortunately, from other economists[4] who were not inspired by the desire for inflation, but who seem to have overlooked the strongest argument in favor of fixed rates of exchange, that they constitute the practically irreplaceable curb we need to compel the politicians, and the monetary authorities responsible to them, to maintain a stable currency. (emphasis added)

To clarify his argument yet further, Hayek adds,

The maintenance of the value of money and the avoidance of inflation constantly demand from the politician highly unpopular measures. Only by showing that government is compelled to take these measures can the politician justify them to people adversely affected. So long as the preservation of the external value of the national currency is regarded as an indisputable necessity, as it is with fixed exchange rates, politicians can resist the constant demands for cheaper credits, for avoidance of a rise in interest rates, for more expenditure on "public works," and so on. With fixed exchange rates, a fall in the foreign value of the currency, or an outflow of gold or foreign exchange reserves acts as a signal requiring prompt government action.[5] With flexible exchange rates, the effect of an increase in the quantity of money on the internal price level is much too slow to be generally apparent or to be charged to those ultimately responsible for it. Moreover, the inflation of prices is usually preceded by a welcome increase in employment; it may therefore even be welcomed because its harmful effects are not visible until later.

Hayek concludes,

I do not believe we shall regain a system of international stability without returning to a system of fixed exchange rates, which imposes on the national central banks the restraint essential for successfully resisting the pressure of the advocates of inflation in their countries — usually including ministers of finance.

In which Keynes and Friedman see eye to eye

Perhaps I could point out too, as Ludwig Von Mises did, that floating exchange rates were much loved by Keynes…

Stability of foreign exchange rates was in [big-spending governments’] eyes a mischief, not a blessing. Such is the essence of the monetary teachings of Lord Keynes. The Keynesian School passionately advocates instability of foreign exchange rates.

Much loved they were too by Milton Friedman, who in this area as in so much else shakes hands with John Maynard Keynes. 

David Stockman, who in his recent book recounting the destruction of western capitalism by its supposed defenders, gives Milton Friedman the punch in his gut he deserves for his role in fulfilling the floating Keynesian dream, nailing him and US President Richard Nixon who between them put the final nail in the gold standard and instituted the modern world of floating exchange rates.

It was Friedman who first urged the removal of the Bretton Woods gold standard restraints on central bank money printing, and then added insult to injury by giving conservative sanction to perpetual open market purchases of government debt by the Fed.  Friedman’s monetarism thereby institutionalized a regime which allowed politicians to chronically spend without taxing…
    Nixonian cynicism and Professor Milton Friedman’s alluring but dangerously naive doctrines of floating exchange rates and the quantity theory of money picked up where Franklin Roosevelt left off. Notwithstanding Friedman’s aura of intellectual respectability, Nixon's crass political manoeuvres amounted to a primitive economic nationalism that harkened back to the worst of the disaster that Franklin Roosevelt had first sown in the 1930s…
    [B]y unshackling the Fed from the constraints of fixed exchange rates and the redemption of dollar liabilities for gold, Friedman’s monetary doctrine actually handed politicians a stupendous new prize.  It rendered trivial by comparison the ills owing to garden variety insults to the free market, such as rent control or the regulation of interstate trucking…
    The very idea that the FOMC would function as faithful monetary eunuchs, keeping their eyes on the M1 guage and deftly adjusting the dial in either direction upon any deviation from the 3 percent target, was sheer fantasy…

He gave more reasons for his disgust in a 2011 speech amounting to another punch to Friedman’s solar plexus.

“That the demise of the gold standard should have been as destructive as it was of monetary probity can hardly be gainsaid.  Under the ancient regime of fixed exchange rates and currency convertibility, fiscal deficits without tears were simply not sustainable – no matter what errant economic doctrines lawmakers got into their heads. Back then, the machinery of honest money could be relied upon to trump bad policy.  Thus, if  budget deficits were monetized by the central bank, this weakened the currency and caused a damaging external drain on the monetary reserves; and if deficits were financed out of savings, interest rates were pushed up – thereby crowding out private domestic investment.”

and

“During the four decades since [Richard Nixon closed off the last monetary tie to gold], the rules of the game have been profoundly altered.  Specifically, under Professor Friedman’s contraption of floating paper money, foreigners may accumulate dollar claims or exchange them for other paper monies. But there can never be a drain on US monetary reserves because dollar claims are not convertible. This infernal regime of fiat dollars, therefore, has had numerous lamentable consequences but among the worst is that it has facilitated open-ended monetization of US government debt.”

and

“So at the end of the day, American lawmakers have been freed of the classic monetary constraints.  There is no monetary squeeze and there is no reserve asset drain.  The Fed always supplies enough reserves to the banking system to fund any and all private credit demand at policy rates that are invariably low. The notion of  fiscal ’crowding out’ thus belongs to the museum of monetary history.”

and

“In fact, the United States is clocking a 10-percent-of-GDP-deficit for the third year running because this latest budgetary fling is just another episode in the epochal collapse of US financial discipline that began 40 years ago at Camp David.”

I think Messrs Stockman and De Soto might have a point.

Don’t you?

Target your enemies

Just a week ago I talked about Richard Nixon’s Enemies List, and how New Zealand law has been moving towards making it ever easier for the well-connected to target their political adversaries.

As always, America is already far ahead of us…

Listen up

It used to be that if you wanted to talk to the government you had to send a letter.

Then you were able to send a fax.

Nowadays, if you want to say “listen up” you can send them your thoughts by email, tweet or instant message.

But as of last night’s first reading of the bill to legalise the GCSB’s inability to read the law by which the department of buggers is empowered, we can now look forward to a new way of letting the government listen up: by having them listening in directly. By having the buggers intercept our emails, tap our phones, and bug our houses.

In short, by having these flatfooted, bumble-headed buggers, who were set up to spy on non-New Zealanders, spy on us instead—and without any real legal limit.

Oh, there are limits proposed, but many fewer than the police require for a warrant to search your home.  (And those few limits have just been made many fewer.)  The limits on them are just two: first, the “responsible minister” will have to sign an authorisation (ever met a responsible minister?), which will of course remain secret; and then the robustly named “Commissioner of Security Warrants” will have to do likewise. *

Try talking to either of them if you want to complain or protest, or talk at all about “due process of law.”

In fact, try to even find out if you’re being spied on, and by whom.

There is a definite trend at work here. Put this new bill together with Simon Power’s cut-price rapid legislative guillotine removing age-hold legal provisions to protect the innocent (you know, unfashionable things like jury trials and presumption of innocence), expanded search and surveillance powers for police, expanded powers for IRD to raid whatever bank account they feel like, and provisions being prepared to share information garnered by any of them between all of them, then if any of these agencies were in any way competent there’d be serious cause for concern.

Mind you, all the provisions are there to use, aren’t they.  No point having a whip if you can’t crack it. And while you might personally think John Key is such a nice man he’d never allow anything nasty to happen (well, not unless the FBI invite a few friends to join them in Coatesville one evening for a fly-over and a little house party), maybe you should be reminded that not everyone in politics matches your illusions about Mr Key. Invoking that famous bugger Richard Nixon and reminding you of his Enemies List is probably akin to violating Godwin’s Law, but remember that the Right Honourable Robert David Muldoon had his own much-treasured list of enemies, and bucked every legal restraint then existing to harm them.

So woe betide you if on some future date you fall foul of some grey one out to get you, or just eager to please a superior.  Because their job is being made easier by the day.

* The rigour with which this is likely to be carried out may be observed in the fact that the Bill of Rights Act requires the Attorney General to sign a certificate whenever proposed legislation fails the Bill of Rights test—and he simply hasn’t bothered to in this case. Mind you, Finlayson does thinks his rights trump our own…

GUEST POST: Bernanke Gets Skewered by Stockman

Guest post by Byron King from Money Morning Australia 

Did you see the Sunday Times on March 31? The Sunday Review section — the part with opinion-forming editorials and columns, etc. — had a banner headline declaring ‘Sundown in America’. This was the intro to a 2,600-word article by David Stockman, former budget director for US President Ronald Reagan.

If you didn’t see the Stockman article, perhaps you saw summaries in other media. That is, we now have an economic ‘boom, bust, doom & gloom’ story with legs — and of course it drips with the holy water of top billing in the Old Grey Lady. The subject is now legitimate.

It’s respectable. Hey, I read about it in The New York Times!

Stockman Carpet Bombs the ‘State-Wrecked’ System

Basically, in his Times article (a summary of his new book, The Great Deformation: The Corruption of Capitalism in America), Stockman carpet-bombs the century-long structure of American monetary and fiscal management (mismanagement, actually), using the term state-wrecked — an obvious play on the word shipwrecked.

True to his name, Stockman enters the corral like an angry sheriff, shooting at bad guys with blazing guns.

The United States is broke — fiscally, morally, intellectually [he writes].  The Fed has incited a global currency war…that will soon overwhelm it. When the latest bubble pops, there will be nothing to stop the collapse.

No sugar and spice from Stockman. There are 50 shades of  grey musings about kinky abuse of the economy by all manner of politicians and world-improvers.

Plus, Stockman demonstrates how screwed up is the US Federal Reserve (Fed) and how they and their government have wrecked the almighty US dollar.

One of Stockman’s key targets is the modern Fed. He skewers current Fed Chairman Ben Bernanke and previous Chairman Alan Greenspan (a ‘lapsed hero’), while allowing for the good — tight money — work of former chairmen William Martin and Paul Volker. (While I’m thinking about it, Stockman missed an easy layup by failing to mention the mess aided and abetted by Arthur Burns.)

The 1998 bailout of Long-Term Capital Management by the Fed was ‘unforgiveable’, states Stockman. A decade later, the 2008 Wall Street bailout was ‘the single most shameful chapter in American financial history’.

On this last point, according to Stockman, ‘the White House, Congress and the Fed, under Mr. Bush and then President Obama, made a series of desperate, reckless manoeuvres that were not only unnecessary but ruinous.’

‘Graver Than Watergate’

Stockman plumbs the depths of history. He gets political, starting in 1933, and rips President Franklin Roosevelt for seizing the nation’s gold. It’s a sentence that ought to be a book.

Then Stockman jumps four decades, to ‘one perfidious weekend at Camp David, Md., in 1971,’ when then-President Richard Nixon ‘essentially defaulted on the nation’s debt obligations by finally ending the convertibility of gold to the dollar.’

When Nixon closed the gold window of the US Treasury, it was ‘arguably a sin graver than Watergate.’

Stop the presses! When someone indicates that something was worse than Watergate — and does so in the pages of the Times, no less — we are approaching the orbit of a forbidden planet. So what was Nixon’s even higher crime?

Per Stockman, Nixon’s move, with the country’s gold, ‘meant the end of national financial discipline and the start of a four-decade spree during which we have lived high on the hog’. In essence, lacking the discipline of a gold-backed dollar, the US has undergone ‘an internal leveraged buyout.’

Stockman’s points make eminent good sense to anyone who’s been reading outside the lamestream media for more than a few months. Still, to the liberal masses and hard-core Keynesian disciples out there—especially to execrable, formulaic, one-size-fits-all political shills like Paul Krugman [and Bernard Hickey, Ed.]—the Stockman message soars past like a stealth bomber in the night. Whoosh!

Stockman’s Gallery of Rogue Presidents

By my count, Stockman pillories FDR, as well as presidents Kennedy, Johnson, Nixon, Carter, Reagan (for whom Stockman worked), Bush I, Clinton, Bush II and Obama. On the other hand, Stockman offers a kind reference to the ‘balanced-budget policies’ of President Calvin Coolidge and more kind words about Eisenhower.

Stockman manages to avoid direct discussion of presidents Truman, Ford and Carter — although with respect to the last two chief executives, he distinctly recalls the bad days of the late 1970s. (As do I, by the way.)

The result of decades’ worth of loose money and undisciplined spending, according to Stockman, is that ‘Americans stopped saving and consumed everything they earned and all they could borrow.’

Meanwhile, observes Stockman, China and Japan have ‘accumulated huge dollar reserves, transforming their central banks into a string of monetary roach motels where sovereign debt goes in but never comes out. We’ve been living on borrowed time — and spending Asians’ borrowed dimes.’

In a sidebar that should be familiar to energy investors, Stockman slams the so-called ‘green energy’ movement. He summarizes the recent green efforts by the Obama administration as ‘mainly a nearly $1 billion giveaway to crony capitalists, like the venture capitalist John Doerr and the self-proclaimed outer-space visionary Elon Musk, to make new toys for the affluent.’

Bingo!

Where Does This Go?

Stockman paints a dire picture. He indicts the current US political system, declaring that the US ‘Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills.’

Betraying utter pessimism, Stockman offers a selection of all-but-unattainable solutions that could, possibly, surprise even the most libertarian of readers.

For example, per Stockman, the US needs

a drastic deflation of the realm of politics and the abolition of incumbency itself,’ including ‘sweeping constitutional surgery: amendments to give the president and members of Congress a single six-year term, with no re-election; providing 100% public financing for candidates; strictly limiting the duration of campaigns (say, to eight weeks); and prohibiting, for life, lobbying by anyone who has been on a legislative or executive payroll.

Of course, US governance could revert to colouring within the lines of that old Constitution, too — with those enumerated powers and such. Fat chance, right?

Will any of this happen? No way. Not when the captain, crew and most of the passengers on this ship are partying hard while the iceberg tears a hole in the bottom of the hull.

Of course, The New York Times has run many an article, over many years, about government overspending, national debt, gold and much more. The Times is a big, important newspaper for a reason. It influences people and moves markets.

But with this recent feature article in the Times, Stockman has now brought to the surface a set of formerly ‘unspeakable’ — at least amongst that crowd — monetary, fiscal and political points.

The dollar is dying, spending is out of control, debt is unmanageable and the economy is rotten through and through. (So other than the incident with the man and the gun, Mrs. Lincoln, how did you and the president enjoy the play?)

Editorialists of the world — and even the less-dense politicians — will now have to address the issues that Stockman has raised. Doubtless, they’ll move mountains to obfuscate the issues. But the door has opened to thinking about the unthinkable.

In terms of investment — certainly for our purposes here — Stockman is waving bright signal flags for a revival in the fortunes of gold, silver and other hard assets. His description of the decline of the dollar is a ringing endorsement for real stuff, like platinum, copper, oil and other things on which the world runs.

Plus, it’s fun to watch Krugman get all apoplectic as his entire worldview takes a hit.

Byron King

Byron King is the editor of Outstanding Investments and Energy & Scarcity Investor. He is also a contributor to the Daily Resource Hunter. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, Marketwatch.com, Fox Business News, and PBS Newshour. His website is: http://dailyresourcehunter.com/author/byronking/

PS: Stockman meets John Stewart:

The Daily Show with Jon Stewart
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