Thursday, December 24, 2009

Achieving Energy Self-Sufficiency Would Be a Pyrrhic Victory

Everyone seems to agree that it would be a beneficial thing for America to become energy self-sufficient. Many reasons are advanced. The most common are national security and financial reasons. Sometimes these are one and the same; for example, that our oil dollars are financing global terrorism amongst people who at one time embargoed their product against us.

Nevertheless, this is not so. Once one digs into the issue for only a short while, he will realize the heavy costs associated with energy self-sufficiency—costs that negate and exceed the purely emotional benefit—making it, like King Pyrrhus’ victories over the Romans, so costly as to lose the war.

Why Do We Trade?

All the goods and services of modern life are the result of the division of labor carried to immense proportions. Self-sufficiency in anything, whether it be energy or toilet paper, means that we should restrict the division of labor to some extent. Think of our economic world as a bulls-eye. The small dot in the middle would be the goods and services represented by a subsistence economy, such as that of the North American Indian tribes. Small bands of people provided everything they consumed themselves. As capital and the division of labor expand, we move further out on the rings and the size of the economy grows exponentially larger. Instead of hunting our own food and weaving our own clothes, we rely upon the specialized skills of others, who perform only small pieces of the entire process but who perform their process unbelievably efficiently and productively. The division of labor expands to such a degree that we no longer understand how most goods that we consume are produced. We take all this for granted, yet it is a miracle of the free market. The more people engaged in the division of labor, the greater will be the total amount of goods and services available. Of course, the largest possible extension of the division of labor, until we trade with alien worlds, is the entire population of planet earth. (You can be assured that shortly after encountering our first alien civilization, entrepreneurs will be looking for trading opportunities!)

It is clear from this explanation that reverting backward from a more extensive division of labor society to a less extensive one means that society must accept a lower standard of living. There are two main causes for such an unfortunate occurrence—war and misguided economic policy. History is replete with examples of trade restrictions used as weapons of war. This makes perfect sense, too. If an enemy nation is denied trade, its total national product diminishes and its war-making capacity becomes a much larger burden upon the people. This burden may be so great that the war cannot be continued, lest the people starve. Therefore, it is ironic that societies often make war upon themselves! When they restrict the importation of some good, they force their society to revert to a less extensive division of labor, which results in a lower standard of living. Yet almost every country in the world restricts trade to some extent, almost always in order to protect the jobs and capital of some local industry which can no longer compete internationally. Government and special interest propaganda blind the people to the reality of the situation.

Energy Self-Sufficiency Would be a Pyrrhic Victory

The claim that our national security is enhanced by government restrictions on foreign energy imports and increased subsidies to domestic production fails to take into account that society at large is weakened by such action. Government intervenes to force business out of the production of goods more desired by the market and into domestic energy production. Few politicians and/or citizens recognize that an artificial requirement favoring some industry must come at the expense of another. We may get more domestic oil production, but we must have less of something else—the same capital and labor cannot be engaged in two production processes at the same time. If this process is carried far enough, an economy can collapse into backwardness. The Soviet Union is the prime example of our age. Its domestic production of goods to sustain life was so small that the people simply gave up. All production was geared to the military with no regard to the economy as a whole. Those who traveled there at the so-called height of Soviet power, like myself, were shocked at the state of the economy. There was nothing for the people—not housing, food, decent clothing, personal transportation, or even hot water! The Soviet Union had magnificent military hardware but little else. Its military might, achieved by ignoring the needs of the people, was a Pyrrhic victory. Society simply collapsed.

No one knows what sacrifices in lifestyle alone, not to mention capital investment in all other goods required by a modern country, would be required for America to become energy self-sufficient. Undoubtedly, our total energy consumption would be much less than it is today in addition to our loss of other goods. This means that our military budget would have to be cut unless we were prepared to go the way of the Soviet Union and simply ignore the needs of the people. We would be trying to support the same military preparedness on the back of a smaller economy.

All during the Cold War our military budget was a much smaller percentage of our country’s GNP than that of the Soviet Union, yet it equaled if not exceeded that of the Soviet Union in all objective measures of military power. Former economic advisor to Mikhail Gorbachev, Yuri Maltzev, estimates that the U.S. economic base was at least fifteen times that of the Soviet Union. In hindsight, it was no contest. And at no point during the Cold War was the U.S. self-sufficient in energy. In conclusion, rather than enhance our national security, attempts to achieve energy self-sufficiency actually would reduce it.

Saturday, December 19, 2009

The Path to Sound Money and a Vibrant Economy

The greatest challenge facing the United States and Western Civilization—which includes all those countries engaged in international trade in order to facilitate social cooperation through the division of labor—is the destruction of money by central banks who have the power to expand their fiat money supply to unlimited proportions. Such fiat money expansion destroys the usefulness of money as a vehicle for communicating value through time and space. What will the dollar be worth in terms of apples and oranges in the future and around the world? No one knows, even when we may predict with a great deal of certainty the quantity of apples and oranges that will be produced in the future and market demand for them. It is not the quantity of apples and oranges that makes future exchange problematic; it is the quantity of money that makes it so.

Because societies have recognized that only a stable quantity of money may perform these crucial services to the economy has money always been a commodity itself with certain characteristics, chiefly among them being its scarcity in nature. For, as Ludwig von Mises has explained, any quantity of money may serve all the functions that are required of money regardless of the size or complexity of the economy. It is the crucial characteristic of scarcity—that is, its quantity—that has been undermined by central banks. Already we have seen the deleterious effects of this debasement of money in the form of repeated and ever more violent boom-bust business cycles. These cycles are the external manifestation of “sick” money; they are NOT the external manifestation of “excessive greed” or any other failing of society’s citizenry. “Sick” money has transmitted its disease to society, not the other way around. Therefore, it is imperative that the United States and other Western nations end the expansion of their money supplies and re-anchor them in some commodity of lasting value, namely gold, silver, or some combination of the two. But…how can this be done? That is the crucial question…the elephant in the living room, so to speak.

Let us first establish that the goal of any currency reform is to end at a stroke the further expansion of the money supply. The expansion of money confers no societal benefit whatsoever. More money does not bring into existence, either in the near term or in the longer term, more goods and services than would be produced without its expansion. The truth of this statement lies in its logic and also in historical experience. But these are subjects for another day. The important point is that ANY further expansion of the money supply causes harm; therefore, it is not a question of gradually reducing the expansion of money. No, we must stop any further expansion by even a very small amount.

First, End Fed and Bank Fiat Money Expansion

In our current fiat money environment, two institutions have the legal ability to expand the supply of money—the Federal Reserve Bank (the U.S. central bank) and commercial banks. Most people understand that the Fed can increase the money supply, but few understand that privately owned banks themselves also have the legal ability to increase the money supply. Although the manner in which money expands can be rather complicated (and needlessly so), I will explain the basics. The Fed can inject money into the economy by monetizing the federal debt; that is, it accepts the government’s promissory notes and credits its checking account. Then the federal government spends the money. This in itself increases the supply of money, as can be easily understood, but there is more. When the recipients of the government’s money deposit their checks, bank reserves increase when the bank of deposit sends the check to the Fed for deposit in its reserve account (a checking account at the Fed that is owned by the commercial, private bank. The Fed is the “bankers’ bank.) Now the banking system has “excess reserves” upon which to pyramid more loans and deposits by a magnitude of from ten times to over one hundred times! All the bank must do is make a loan and credit the loan customer’s checking account. It is restricted in the extent to which it may expand its loans and deposits (in equal amounts) only by the amount of its excess reserves. Remember, the Fed created excess reserves when it monetized the government’s debt. Here lies the danger—under normal conditions banks try to remain completely loaned up, utilizing every penny of their excess reserves by making loans and, in the process, creating money out of thin air. In our large economy, excess reserves normally amount to fewer than two billion dollars, an amount considered to be the frictional amount that cannot be fully utilized. Over the past year the Fed has injected massive reserves into the banking system, and now excess reserves stand at over a TRILLION dollars, or five hundred times the historically normal amount!

The Reisman “First Step” to Neutralizing Excess Reserves

At a Mises Institute Seminar in Long Beach, CA last month, Professor George Reisman presented an intriguing plan to prevent the banks from expanding their lending against this massive amount of excess reserves. He recommended that the Fed create even more reserves! But here’s the twist—the Fed should insert enough reserves of fiat money into the banking system to equal the current level of bank checking accounts, BUT at the same time also require 100% fiat reserves against those checking accounts and prohibit the Fed from creating any more reserves thereafter. This step would do two things. Number one, and most importantly, the banks would not be able to convert those trillion dollars in excess reserves into ten to one hundred trillion dollars of new money. Secondly, it would force the federal government either to tax the people for what it spends or borrow honestly from them. Either method would create a natural limit on government spending, forcing it to prioritize and moderate its plans to those more in line with society’s means.

The Barron “Second Step”--Convert Fiat Money to Commodity Money

Governments cannot be trusted to refrain from violating their own laws. They do so, of course, by passing another law to suspend “temporarily” the previous law which put what it considers to be an undue restraint upon its actions. Therefore, we must return to commodity rather than fiat money. The government could do this by simple arithmetic; it could divide the money supply by the number of ounces of gold it holds to establish a legally binding exchange rate of dollars for gold. Currently the most widely used definition of money—M2—stands at $8.4 trillion, and the government owns 260 million ounces of gold. Therefore, it could provide 100% backing of M2 with gold by agreeing to pay out an ounce of gold for $32,308 and, conversely, to buy gold for the same amount. Presently the price of gold has fluctuated between $1,000 and $1,200 per ounce, so a decision to support the dollar at this dollar-to-gold ratio would have unknown economic consequences. Better for the government to establish the ratio at a level closer to the current market level for non-monetary gold. But how can the government do this? If it prints more money to buy gold in the open market, it would not solve its problem—it would have even more fiat dollars to back by the new quantities of gold it received. But, the government has other resources! The government is like a cash-poor but property rich relative--it owns vast expanses of valuable land. In fact the government owns roughly 30% of the landmass of the United States, mostly in sparsely populated areas west of the Mississippi and in Alaska. This is its ace-in-the-hole.

Selling Government Land for Gold Is Doubly Beneficial!

The government has no just cause for owning more land that its normal day-to-day operations require, such as enough land for its military bases and other government office buildings. Its ownership of lands in the western United States and in Alaska has prevented the development of the resources on these lands for the benefit of the U.S. citizens and the world. Like an anorexic who prefers to starve with nutritious food close at hand, the government refuses to allow the development of valuable resources from its land holdings to feed the resource starved economy of the United States. These lands are potentially the most valuable on the face of the earth. Not only do they hold much mineral and vegetable wealth, but they are located in a capitalist country of entrepreneurs, skilled workers, an honest court system, good infrastructure…in essence, all the factors necessary for successful capitalist development. So, not only would the sale of government land for gold allow for the backing of the U.S. dollar by more ounces of gold and, therefore, ease the transition to a 100% gold standard at a better dollar to gold ratio, it would unleash the productive capacity of 30% of the nation’s land resource! This is not rape of the land any more than a farmer rapes his fertile soil or a timber company rapes its well-managed forests. Selling land allows it to be capitalized and managed for productive benefit into perpetuity, the opposite of government’s so-called management, which is nothing more than locking land away as if it did not exist.

In conclusion, the U.S. can quickly take the necessary steps to return to sound money and at the same time unleash a new, real economic boom. It needs to take steps first to freeze expansion of the money supply, followed by a judicious sale over time of its valuable land holdings for gold. The gold proceeds of the sale would allow the government to back its currency 100% by gold at fewer dollars per ounce. The U.S. would once again have the world’s strongest currency and most productive economy. There is nothing preventing us from taking this action but our own foolish adherence to failed economic theory.

Friday, December 4, 2009

The Fatal Combination

Two factors are driving the United States to totalitarianism and bankruptcy—unbridled state spending and fiat money manufactured by government. Either one is enough to destroy a country, but together the fuse to destruction is much shorter, because the two complement and build upon one another.

Spending Outside the Constitution’s Enumerated Powers

Consider. Federal spending has exploded beyond all comprehension, with the Obama administration desiring to spend even more on new entitlements. He is emboldened to do so, because his party controls a majority of votes in both the House of Representatives and the Senate. It’s a done deal. When I complain about all this, some of my friends say “Well, Pat, we have a democracy and the majority has spoken.” This is suppose to end all debate. A majority wants to spend more on entitlements and that is the end of the matter. But our Founding Fathers would scoff at such a conclusion. They would bring out the masterpiece of their time of trial, our blueprint for the happy society, our glorious Constitution. They would ask my friends to point to that clause in our founding document that authorizes welfare entitlements. It is nowhere to be found. Oh, I know that supreme courts have interpreted things in big government’s favor, but pardon me if I claim that I know how to read just as ably as any of them. Our founding document was designed to be read and to be understood by the common people, not by lawyers and academics alone. Ignoring the enumerated powers listed in our Constitution was one of the most serious breaches of liberty to befall our nation, for it opened the door to corruption. I use the term “corruption” in the Jacksonian meaning of allowing people to use government to attain advantages for themselves, their friends, and their constituents that they could not attain through voluntary means. This is impossible if our government adhered to the very words of the Constitution.

Manufacturing Its Own Money

So, for all practical purposes we have scrapped our Constitution and have opened the door to raiding the productive sector of the economy via the police power of the state. And yet, this is not sufficient for a complete collapse of our nation. That mechanism was set in place in 1913 with the establishment of our third national bank, the Federal Reserve Bank. Prior to 1913, the U.S. had enjoyed what was perhaps the greatest fifty-year period of economic growth of any nation in the history of the world. And it did it without a central bank or government money. Two forces restrained government spending, which is mere consumption of the product of the wealth generating forces in society. One, our political class still held within its bosom a reverence for our Constitution. And, two, the government was required to obtain the money it wished to spend from the people themselves. Government did not have a central bank with its own printing press and, therefore, it could not spend money that it had neither taxed nor borrowed honestly from the people. It was in the position of state governments today. This placed a natural limit upon its spending. High taxes would be political suicide. Heavy borrowing would raise interest rates—the crowding out effect—and harm business. So peacetime spending operated within fairly narrow bounds that were naturally set by the reality of society’s ability to produce and to pay.

But the Federal Reserve Act of 1913 changed all that. Now the government could spend the very money that it itself manufactured. It became a counterfeiter, and not just ANY counterfeiter. It became the one and only LEGAL counterfeiter, with the power to forbid its citizens to use any money not of its own manufacture. In fewer than one hundred years, our dollar has dropped to less than on twentieth of its 1913 value.

Unlimited Government Funded by Unlimited Money

When FDR threatened to pack the Supreme Court during the Great Depression, a frightened court suddenly found that his spending programs were invisibly enumerated in the Constitution. Thereafter, there has been no institutional restraint upon government, and we have arrived at the situation today where no one in government expresses any concern over whether its spending promises can be fulfilled. Of course they can be fulfilled! The government just prints the money and spends it! Fed Chairman Ben Bernanke himself has famously stated that the Fed can expand the money supply to accommodate ANY level of government spending. Zimbabwe, here we come!


There is much agonizing and hand wringing over What, Oh, What can we do to solve our financial crisis. The answer has lain before us all along. It is to be found in a strict adherence to the very words of the Constitution that limit spending only to those areas so enumerated and lays a sacred obligation at the foot of the federal government to PROTECT (and not to manufacture) our money. Let the political process operate within those natural bounds and the U.S. can solve its problems rather quickly. The fatal combination of unlimited government funded by unlimited fiat money will be broken. Government spending will be limited to that expressly enumerated in the Constitution, and the government’s counterfeiting monopoly will be abolished. Ours will once again be a nation in which the government is our servant, limited to protecting our lives and our property, and not our master. All that is required is renewed dedication to our nation’s founding document, our supreme law of the land. I do not see how any politician can take a public stand against the Constitution, for such a stance is tantamount to a call for the repeal of the most precious gift from our Founding Fathers.