Wednesday, December 30, 2015

What Do Falling Oil Prices Tell Us about the Dollar?

I recently blogged about my bearish positions on the oil and gold markets.  Today, the Wall Street Journal observes that oil prices are falling on the Saudi oil minister's statement that despite falling prices Saudi Arabia won't change its output.  Despite prices that are below most US producers' break even points, the US producers are covering their variable costs.  The journal writes:  "U.S. oil stockpiles remain near levels not seen for this time of the year in around 80 years."  Stockpiles' rising to record levels will further pressure ]oil prices.  In the short run the situation is bearish, but in the long run it is bullish.

What does this tell us about the dollar?  America's Keynesian and monetarist economists, Democrats and Republicans, have created a monetary system whereby the dollar serves as a reserve currency; governments, central banks, and citizens around the world hold dollars; and the dollar is backed by the full faith and credit of the government that fought the Iraqi War in order to eliminate weapons of mass destruction. The rationale for this system is that the sovereign dollar holders will act rationally.

Nevertheless, the sovereign producers of oil are also the sovereign holders of dollars.  As producers of oil, many are now producing at a loss.  If there can be a glut in the oil market, how can these sovereign producers assume the mantle of rationality when it comes to holding dollars?

The famous game theory model of the prisoner's dilemma predicts that when two parties do not share information the solution to the problem of choosing whether or not to collude tends to be suboptimal.  Of course, central banks speak to one another--much as European governments spoke to one another before a millennium of wars. 

Sunday, December 27, 2015

Trump versus Sanders

The Wall Street Journal blog reports that Bernie Sanders aims to win Donald Trump's supporters' votes, for they are anxious about the economy, whose decline Sanders blames on greed.  Greed, of course, has always existed, and there is no evidence that there is more greed now than there was in the free market period of American history, when real wages grew at 0.5% to 2.5% per year.

Mr. Sanders is right: There is little difference between Mr. Trump and him. Both are big government advocates. Mr. Sanders sees government redistribution as the cure to greed, an absurd, impossible plan, and Mr. Trump sees government immigration restrictions as the cure to job loss, an equally absurd non-sequitur.

While Hitler, like Trump, was a racist, he was also, like Sanders, a national socialist. The twenty-five-point Nazi plan of 1920 contains much overlap with Mr. Sanders's views, albeit Sanders's Brooklyn Jewish background may not have been to Hitler's taste.

Point six of the Nazi twenty-five-point plan, for instance, was nearly identical to Sanders's position on immigration: "Non-citizens may live in Germany, but there will be special laws for foreigners living in Germany."

The Nazis also agreed with Mr. Sanders's redistributionist schemes, as in points ten and eleven: "Every citizen should have a job. Their work should not be selfish, but help everyone. Therefore we say...No one should live off money from rents or other income unless they have worked for that money."

Like Sanders, the Nazis hoped to repeal greed.  Since greed is a natural impulse like sexual desire or hunger, aiming to repeal greed opens the door to repression and ultimately murder, as has been the case with a long list of large-scale socialist states over the past century.

The Nazis' immigration policies, redistributionist schemes, and opposition to selfishness parallel  Bernie Sanders's platform. The American left is a reincarnation of the Nazi movement, with the racist (but not anti-Semitic) element excised.

Friday, December 25, 2015

Commodity Prices to Remain Soft

The Wall Street Journal reports that oil companies are writing down assets and that the SEC is pressuring the companies to reveal how the falling prices will affect their asset values.  News like this may come a little before a bottom, although the Journal also wrote a piece on December 11 suggesting that a bottom is in.  A contrarian attitude toward newspaper reports is often right. It's when the newspapers say that there is no bottom in sight that the bottom is in. Hence, I'm not convinced that a bottom is in.

I pulled out of my MLPs and oil-related holdings in October 2014. My doing so resulted in some issues with my stock broker, so I moved my entire portfolio to TIAA-CREF.  I lost a bit on my investments in MLPs and oil stocks, but I made some back shorting oil at a few points. 

Recently, I attended an alumni meeting of the UCLA business school in New York, and several of the MBA students were interested in oil. In the course of our conversation, one asked me how I knew to pull out of oil at the beginning of the decline. I'm not a technical analyst, but I do subscribe to a technical trading letter, Sunshine Profits, that helps me. My chief interest is in their gold reports by Przemysław Radomski, CFA, but I also get a monthly oil report by Nadia Simmons.  

My overall thinking, though, was influenced by my friend Howard S. Katz, who died in 2011 and was an early advocate of the application of Austrian economics to gold trading. Murray Rothbard once called Howard an "absurd Robespierre" because of  internecine squabbles in the early days of the Free Libertarian Party. (I joined afterwards.)  Howard was a gold standard monomaniac who argued in his book The Paper Aristocracy, published in the late 1970s, that the paper money system was resulting in income inequality.  As a result, gold traders have a moral obligation to advocate the gold standard.  

I was an oddball at UCLA, where many of my fellow students were interested in Wall Street careers, but I was an advocate of policies that would have significantly shrunk Wall Street if not eliminated it entirely.  America would have been much better off  had it done so, but Wall Street's control of political discourse goes back at least to the 1912 presidential campaign, if not earlier. 

Actually, it was earlier, for there were six pivots in the evolution of America's bankocracy.  The first was the establishment of the First Bank of the United States by Alexander Hamilton and his colleagues, which was abolished and then reincarnated as the Second Bank in 1816.  The second pivot was the Civil War, which enabled the passage of the National Banking Act. A third was the establishment of the Fed and World War I.  A fourth was Franklin Roosevelt's first abolition of the gold standard and establishment of the New Deal.  Roosevelt was the nephew of Frederic Adrian Delano, the first vice chairman of the Fed, and the great great grandson of Isaac Roosevelt, cofounder with Alexander Hamilton of the Bank of New York.  In America the bankocracy is partly hereditary as well as economic.  A fifth pivot was Nixon's abolition of the gold standard in 1971.  A sixth was the financial bailout of 2008. 

Notice that each of the pivots was associated with a war.  The First Bank of the United States ensued from the Revolutionary War; its successor, the Second Bank of the United States, ensued from the War of 1812. The National Banking Act ensued from the Civil War.  The Fed preceded World War I by only six months.  The first abolition of the gold standard preceded World War II by four years. (The Gold Reserve Act was passed in 1935 and World War II began in 1939.) Nixon's abolition of the international gold standard occurred during the Vietnam War.  The monetary collapse of 2008 occurred during the Iraqi War. Concerning the relationship between the Fed and World War I, Federal Reserve writes:

[T]he conflict accelerated the evolution of the Federal Reserve into a true central bank by increasing its financial resources and transforming the US dollar into a major international currency. 'The war reshaped the Federal Reserve System in many ways,'  writes economist Allan Meltzer in his landmark work A History of the Federal Reserve.

"Reshaped" is an odd word because the Fed was established during Christmas week of 1913 and World War I began in July 1914, although the US did not enter the war until 1917. Both the establishment of the Fed and the entrance into World War I were under President Woodrow Wilson. JP Morgan (a) knew Wilson from Wilson's days as president of Princeton (for Morgan was a donor), (b) financed the Progressive Party, which was responsible for Wilson's election, and (c) was involved with the drafting of the original Federal Reserve Act bill in the famous Jekyll Island meeting.  In 1936 the Nye Committee in the Senate investigated  JP (Jack) Morgan Jr.'s direct involvement in the entry of the US into World War I, but it did not prove it. 

Each of the pivots was associated with a major financial disruption.  The establishment of the first bank occurred after states' issuance of paper money, hyperinflation, and collapse of the continental.  The National Banking Act was associated with inflation resulting from greenbacks. The establishment of the Fed was followed by a hyperinflation and depression in 1919 and 1920.  The first abolition of the gold standard followed a deflation and a banking collapse. The second abolition of the gold standard was associated with the stagflation of the post-Vietnam War era.  The 2008 financial collapse was associated with the takeover of banks and the tripling of bank credit. 

These disruptions resulted in secular shifts in the economy: The National Banking Act was associated with expansion of big business and the railroads.  The establishment of the Fed was followed by the stock bubble of the 1920s. The first abolition of the gold standard and its reinstatement in the 1944 Bretton Woods agreement were followed by the post-1945 stock market bubble, the boom in urban redevelopment, the expansion of the suburbs, the creation of interstate highways, the expansion of reliance on the automobile, and the expansion of automotive air pollution. 

Not all of the banking disruptions have been inflationary.  Inflation results from excessive creation of money, but roughly half of the money of the US is held overseas, and it's possible for banks to hold reserves without lending them, and that's happening now. The National Banking Act was followed by inflation as were the establishment of the Fed and Nixon's second abolition of the gold standard, but the inflation of the post-Civil War period was followed by what Milton Friedman called the crime of 1873, the establishment of a strict gold standard with no silver bimetallism, and a consequent deflation; that was also true of the results of bank failures in the 1930s. There's no guarantee that inflation will occur in the short term from printing money--in fact, just the opposite, for there are effects on commodity prices resulting from misallocation or malinvestment that result in short-term deflation. 

Such misallocation has occurred in all current commodity markets.  From a long-term perspective, demand for oil is  greater than it would have been in a free market economy.  From today's short-term perspective, the early stages of a monetary expansion push down interest rates and expand investment in mines, resulting in falling prices. The falling prices are deflationary.  Thus, in the short run monetary expansion can cause deflation or subdue inflation, which occurred during the Greenspan years.  The later stages are usually inflationary, and commodity prices rise because the excessive competition produced by low interest rates causes bankruptcies of mining companies. More money chases fewer goods, and inflation ensues.

The commodity-price-decline cycle that began with the Volker tightening in the early 1980s culminated about twenty years later, and the gold price began to increase early in the millennium. The price peaked in 2011, but the intervening hyper-monetary-expansion of the Bernanke Fed inserted the beginning of a new cycle in 2009. The new cycle was superimposed on the preceding one, so it took a couple of years for gold to peak. We're now riding the Bernanke cycle downward. 

When will the cycle turn around?  I initially thought that the massive monetary increases would result in a brief, several year downturn, but it has extended to four years.  On the other hand, my increasing pessimism may signal a near bottom.  I am skeptical that we have hit bottom just yet, although in the coming year or two we will hit bottom. That point might coincide with economic-and-financial instability and a declining standard of living among Americans.  (That has been occurring for decades now, but the public has been susceptible to media propaganda claiming that "the economy" is improving and that borrowing large sums to buy big houses is a sign of economic health; when Americans have to cut back in basic ways, they may not be susceptible to the caricatures.) At that point, commodities will be important hedges, and prices might climb to the $3,500 level that I claimed for gold during the bull market.  

An important difference between the oil and gold markets is that the oil industry is oligopolistic; in particular, it's dominated by sovereign producers, especially Saudi Arabia.  The 19th century's fears of a private monopoly in oil were misguided.  Standard Oil had steadily reduced costs and increased efficiency throughout the 19th century. In contrast, Saudi Arabia can manipulate the price of oil, although it is sensitive to political pressure.  The political pressure for a transition to alternative energy may be spooking them. Economic theory says that a monopolist will produce to the point where marginal cost equals marginal revenue, but the Saudis' marginal revenue may still be above their marginal cost, which may be as low as $25.  If the Saudis want to dump their oil so that they are the last producer standing (in advance of a transition to green energy), then a $25 bottom is possible.

In the case of gold, the cost of production is unclear. According to Brent Cook's Exploration Insights Barrick Mining's cost of production may be $1,346.  Mining says that cash costs for 39 major miners average $649. Any number of small producers can be bankrupted, though, before we get to $649.  I had mistakenly bought GDX a couple of times over the past few years. This is the one-year GDX chart: 

How low can it go? There is a floor of demand by Chinese and other sovereign buyers. The Chinese may be interested in having the yuan replace the dollar as the reserve currency, and the Chinese like gold as an investment. As well, India demands gold for cultural reasons.  In October 2015 Bloomberg reported that gold demand in China is at an all-time high in response to the Chinese stock market. That may not, however, compensate for the excessive investment in junior exploration that responded to the low-interest-rate regime.  Notice that in both gold and oil the low-interest-rate regime saw increased production (fracking in the case of oil and gas) and subsequent price declines. 

Thus, I am relying on Przemysław Radomski to guide my gold thinking right now. There is a bottoming process, but I have no conceptual framework for when it can occur. There is going to be a bottom; we may or may not be at the bottom.  My bet is that we have further to go downward.  If oil hits $25, I will buy the leveraged ETF; meanwhile, I'm relying for technical guidance on the price of gold.  If it does not bottom around now or at $900, it can go to $400.

Monday, December 21, 2015

Walter Block Speaks to My Classes at Brooklyn College

Professor Walter Block, famed libertarian economist and Brooklyn College alum, spoke to my classes on November 3, 2015.  Block spoke about his impressions of Bernie Sanders when they were classmates together at Brooklyn. (Sanders later transferred to the University of Chicago.) Block talked about the minimum wage and victimless crimes. 

Sunday, December 20, 2015

Twin Peaks to Run on Showtime

In 2008 I opined that HBO should reprise Twin Peaks. Even better, Showtime has started to run ads saying that the show will run soon, presumably in 2017.   The idea wasn't mine--I got it from Laura Palmer, whose Black Lodge spirit promised to Special Agent Dale Cooper that she'd see him again in 25 years. That was back in 1991, so she was off by but a year.  Unfortunately, the show will run only as a limited series of  nine episodes.  My question is whether Hillary Clinton or Donald Trump will replace Frank Silva as Killer Bob.  Sadly, Silva, a stagehand whom David Lynch had discovered, died of complications of AIDS twenty years ago, in 1995. Either candidate can do a passable job.

Saturday, December 19, 2015

Bernard Iddings Bell's Crowd Culture

I picked up a copy of Bernard Iddings Bell's Crowd Culture, which the Intercollegiate Studies Institute had sent me ten years ago when I had helped a student start an ISI chapter at Brooklyn College.  I hadn't heard of Bernard Iddings Bell before.  According to Wikipedia:

Bernard Iddings Bell (1886-1958) was born in Dayton, Ohio. After studies at the University of Chicago, he was ordained to the priesthood in the Episcopal Church USA. He served as dean of St. Paul's Cathedral, Fond du Lac, Wisconsin from 1912-1919. He was warden of Bard College from 1919 to 1933.

It is a short book, 136 pocket-sized pages, but it is a worthwhile one.   Bell is not a libertarian; rather, he is a social conservative critic of Progressivism. The book is based on lectures that he gave in 1952 at Ohio Wesleyan University, and the difference between then and now is stark.  I suspect Bell would not be allowed to speak on many college campuses today.

Two important points are his criticisms of the press or media and of secular humanism, which he calls a "nontheistic and merely patriotic Secularism."   He writes (p. 48):

There are many religions in America, no one of which has a right to monopolize the schools or to appropriate all the funds provided by taxation for the schools. But in our present school system, which has a professed desire to be fair to all faiths and to teach the peculiar tenets and practices of  none, all religions except one are in practice negated, and to that one religion is given monopoly care. The religion of the public schools is a nontheistic and merely patriotic Secularism.  The public schools, without its being generally perceived by those who direct the schools, have become, because of this monopoly advocacy, the most dangerous opponents of religious liberty visible on the American horizon.

However, Bell is not a libertarian (Ibid.):

Because of this, if we desire the preservation  of real religious liberty in the schools, each major variety of religion in America (including of course Secularism and Atheism) must not only have the right but be encouraged to conduct its own schools and to run them at public expense.   Such various schools must be and can be unified by rigorous public control in all matters except religious teaching.

A more liberty-oriented solution to America's dismally failed public education system is Milton Friedman's vouchers, with the public having zero control over the content taught in schools. Voluntarism and decentralization have more in common with traditional Americanism than Bell's solution.  I would also do away with laws that require children to stay in school to age 16. For many students, doing so is a waste of time and money.  Properly run schools would by grade four teach writing at a level that today's average college student has not attained by her senior year of college. (I use the female pronoun because most college students today are female; political correctness and lack of job opportunities have driven away male students.)  Today's college students are subjected to 12 years of ignorant preaching by badly educated, half-literate teachers in America's public schools. They graduate unable to read and write at a sixth-grade level.  Bell makes this point correctly, but he nevertheless conforms--the subject of his book--to Progressive norms.

Bell is in effect a Progressive who would replace atheism and crowd culture with Mathew Arnold's sweetness and light: poetry, the classics, and philosophy. Such pursuits are, Bell rightly observes, available only to a minority.  Thus, his criticism of Dewey is this: You are right to advocate public control, but you are wrong to advocate conformity to group norms and experimentation to derive policy.

Although, as Bell rightly observes, Dewey placed the crowd ahead of the individual, collective values ahead of individualist ones, and social adjustment ahead of individual achievement, at heart Dewey was an elitist. This is evident in his book The Public and Its Problems in which Dewey claims that the public can resolve public problems by hiring social scientists and allowing journalists free rein in painting of artistic portraits of the experts' observations for public consumption. That is very much an elitist argument, although it is cloaked in collectivist and democratic rhetoric. Dewey was a master at painting authoritarianism as a function of democracy, and he is part of the twentieth century's Progressive apologia for the mass murder that occurred under Progressivism's sister ideologies, international socialism, national socialism, and fascism.

In other words, Bell and Dewey have more in common than Bell admits because Bell does not reject Dewey's state authority, and Dewey does not reject Bell's elitism.  Rather, Bell would replace Dewey's elite of expertise with an elite of religious humanism.

In contrast, libertarians reject the state altogether; religious state control is no better than secular state control.  True diversity occurs without authority.  Each can find his own faith within himself and within the institutions to which his conscience directs him.

Friday, October 30, 2015

Moderation as Vacuity

Americans sometimes claim to be moderate in their views.  "I don't believe in abolishing the Fed, for I am a moderate," is an example.  Moderation means limiting change to a moderate distance from present policy. But what if present policy is extreme?  Franklin Roosevelt might have said: "I don't believe in ending concentration camps for Japanese Americans. I believe in a more moderate course." Andrew Jackson might have said: "I don't believe in ending my policy of banishing all Native Americans east of the Mississippi. I believe in the moderate course of extending the Indian Removal Act to just one more tribe."

Is moderation as a mere increment meaningful in the context of policies whose effects are devastating or reprehensible?

There are other possible meanings, though. Perhaps moderation underlies a claim that state action is not a moral but a pragmatic question. "Only extremists hold that theft is wrong under all circumstances. We moderates hold that taxing some to redistribute to others is a pragmatic course."  Here, however, the claim is contradictory. If  morality that prohibits theft is extreme, why is the morality that motivates redistribution of wealth not an extreme? If it is wrong to say that theft is wrong, why is right to say that income inequality is wrong?

Since all government action involves violence, and since the elimination of violence is a prerequisite to the foundation of civilization, all government action involves moral choice.  Choice about violence,murder, or theft is inherently moral, and all government action involves violence, murder, or theft. Therefore, all government action is extreme if  extreme  is to be defined as making state decisions on the basis of morality.

A third possible meaning of moderation is that it accords with the majority.  The majority in America believe the claims made on television and in newspapers.  The writers in these sources are not well educated, and they have demonstrated a repeated capacity for advocating erroneous courses of action. One example was the Vietnam War.  Another was, in New York City, the urban renewal policies of Robert Moses.  A third was the Iraqi War and the strategy behind it. A fourth is America's monetary policy.  Ancient Athens lost the Peloponnesian War because it chose to invade Sicily, a decision that was politically popular. America's disastrous invasion of Iraq was similarly popular, and I was among the mistaken supporters.

In other words, defining moderation as incremental decision making, pragmatism, or accordance with majority rule potentially leads to policies that are extreme.  A fourth definition is mathematically certain, but it is also self-contradictory and equally vacuous.  The ancient Greeks defined sophrosyne (σωφροσύνη)  as temperance or moderation in the sense of  being well balanced.  Aristotle spoke of a range of virtues such as prudence, justice, and courage as well as sophrosyne. Moderation, in Aristotle's view, is the mean between two extremes.  Courage is the mean between rashness and cowardice, for instance.

Perhaps moderation in state action can mean the mean between two extreme courses of action.  In this sense, though, current American policies are not moderate.  An economy in which public debt is in excess of $55,000 per man, woman, and child, forty-four percent of whom have no savings, is hardly a mean between two extremes. It is an extreme. The same may be said of monetary policy. The tripling of the money supply in 2008 and 2009 can hardly be called a mean between two extremes: Historically, monetary expansion of that magnitude has led to economic collapse. Nor can we say that a nation that subsidizes one industry, banking, to the extent that the US government has is taking actions that are the midpoint between two extremes.

Moderation can be defined as a small increment over current policy, pragmatism, majority rule, or the mean between two extremes, but none of these meanings is inconsistent with policies that are genocidal, horrific, radically redistributive,  or economically destructive.  Americans' claim that their choices are moderate, like their claim that they are free or their claim that they are prosperous, is a chimera.

Thursday, September 24, 2015

The Minimum Wage Is a Vicious Policy

PO Box 130
West Shokan, NY 12494
September 24, 2015

The Honorable Kevin Cahill
One Albany Avenue
Kingston, NY 12401

Dear Mr. Cahill:

In the course of a project that I have pursued over the past few months, I have reviewed the contents of 540 academic articles in the three leading industrial relations journals: Industrial and Labor Relations Review, Industrial Relations: A Journal of Economy and Society, and Journal of Labor Research.  The field of industrial relations was established as a left-wing response to mainstream economics, and its support for the minimum wage was one of the key reasons.

Nevertheless, the majority of the studies that appeared between 2008 and 2013 found that the minimum wage is associated with increased unemployment.  That is not surprising because the majority of mainstream economists have long agreed that the minimum wage causes unemployment.   The reason is that an enforced wage floor above the market rate increases the supply of labor but reduces demand.  The reduction in demand comes about because employers leave the state; higher wages lead to higher prices and customers leave the state; moreover, employers find new production methods that reduce demand.  The reduction in demand forces unskilled labor into permanent unemployment and dependency.

Until 2014 Germany did not have a federal minimum wage.  Its youth unemployment rate has been half that of Great Britain.   Britain, which has had a lower minimum wage than France, has had a slightly lower youth unemployment rate than France.  France, with its suburbs or Banlieue overflowing with unemployed minority youth who live lives of desperation and violence, has the one of the highest minimum wages.
Until a few years ago the US minimum wage was low enough that modest increases had limited effect on unemployment. Nevertheless, Walter Wessels, an economist at North Carolina State University, realized that the minimum wage has led to a decline in training and the end of the great American tradition of working one’s way up from the bottom. That has occurred because in order to compensate for the minimum wage without layoffs, employers reduced what Wessels has called “fringe benefits”: training investments and other benefits.  They spend less on low-wage employees and they replace them with capital investment.  The result has been increasing income inequality because minimum wage employees are locked at the bottom.

At a meeting of the Labor and Employment Relations Association this past May, I asked a panel that was held concerning the minimum wage, including two of the zealots advocating the minimum wage here in New York, what the effect on business startups is.  The countries with high minimum wages are not famous for dynamic economies, innovation, or progress.  No one on the panel knew what the effects on innovation or startups will be.  Andrew Cuomo, the HUD chief who required that banks make subprime loans, may not be the best one to ask. 

The claim that the minimum wage is benevolent, progressive, liberal, altruistic, generous, or kind is false.   The minimum wage forces a section of the public into permanent unemployment and dependency.   The workers who cannot earn the $15 per hour that the minimum wage will require  are among the most vulnerable in society.  Compelling a large share of them to remain permanently unemployed and dependent on welfare because that’s what the SEIU and social democrats whose ideas have driven New York’s economy into the ground for the past century want is illiberal, reactionary, and vicious.   


Mitchell Langbert