The war in Afghanistan

Obama's war

Why the Afghanistan war deserves more resources, commitment and political will

EIGHT years after the deceptively swift toppling of the Taliban, the prospects for the NATO-led mission in Afghanistan seem worse than ever. Every Western casualty, every reinforcement and every pious political homily on the “justness” and “necessity” of the war seem only to leave the mission floundering deeper and more hopelessly. Already battered by mounting casualties, Western support for the war has been further dented by an Afghan presidential election in August, wildly rigged in favour of the incumbent, Hamid Karzai. Against this gloomy backdrop, Barack Obama is faced with a request from the American and NATO commander in Afghanistan, General Stanley McChrystal, for large numbers of new troops (see article). The decision may define his presidency. Despite the difficulty—indeed, because of the difficulty—he should give the general what he needs.

The alternative is not, as some opponents of an Afghan “surge” suggest, less intensive, more surgical “counter-terrorism”, relying on unmanned air raids and assassination. Mr Obama seems, rightly, to have ruled that out. General McChrystal, a special-forces veteran, is emphatic it would not work. On its own, it is more likely to kill civilians and create new enemies than to decapitate and disable al-Qaeda. A counter-terrorist strategy is a euphemism for withdrawal—which is what plenty of Westerners think should happen.

Surge or surgical?

If the West is wearying of its Afghan adventure, it is hardly surprising. The country’s unruly tribes and mountainous landscape make the place hard to pacify. Voters thousands of miles away struggle to remember why their soldiers are dying there. Reminders that they are depriving al-Qaeda of the base from which it plots the West’s destruction stretch credulity when the terrorists do just that from Pakistan’s tribal areas.

Yet the arguments for staying remain strong. First, the West has a security interest in preventing the region from slipping into a maelstrom of conflict. Pakistan, with 170m people and nuclear weapons, is vulnerable to the Taliban’s potent mixture of ethnic-Pushtun nationalism and extremist Islam (see article). Anarchy in Afghanistan, or a Taliban restoration, would leave it prey to permanent cross-border instability. Second, defeat for the West in Afghanistan would embolden its opponents not just in Pakistan, but all around the world, leaving it open to more attacks. And, third, withdrawal would amount to a terrible betrayal of the Afghan people, some of whose troubles are the result of Western intervention.

Millions of refugees have returned and millions of children have the chance to go to school. But the West has failed to protect civilian lives, to bring the development it promised, to wean the economy off its poppy-addiction and to ensure fair elections—and failed even to agree about what it is trying to do in the country. The Western-dominated United Nations mission has fractured in a public row between its two senior officials. Locally, NATO forces have done fine and heroic work. But too often the best initiatives are dropped when the best commanders end their tours. The Afghan conflict, it is often said, has been not an eight-year war, but eight one-year wars. NATO comes off worse each time. And so to the fourth and most important reason for persisting in Afghanistan: the coalition can do much better.

General McChrystal is an impressive soldier with a coherent plan. The West’s forces have got to know their enemies: not just the Taliban but also other terrorist networks and countless local warlords and thugs. The coalition’s leaders, at least, seem to have grasped that it must behave not as an occupying army but as a partner, whose aim is to build up the local forces that will ultimately ensure Afghanistan’s security. And soldiers and civilians are beginning to understand that development aid can benefit local people rather than foreign consultants and contractors.

The coalition, however, lacks three essential components of a successful strategy. It needs a credible, legitimate government to work with, the resources to do the job and the belief that America’s president is behind this war.

Many Afghans find it bizarre that the West should devote so much money to Mr Karzai, yet be unable to hold him to account over something so basic as stuffing ballot boxes on an industrial scale. For most, however, the local and provincial leaders matter more than the distant central government.

That is where the constitution drawn up after the overthrow of the Taliban went wrong. It envisages a centralised state. Provincial governors, for example, are appointed by the president. This flawed framework needs to be replaced with one which reflects the reality of a diverse, decentralised country. Agreeing on a new constitution would also help shift the focus of political debate and get around the election debacle.

If you’re going to do it, do it properly

As for resources, it is worth remembering that in 2006, before the American surge, prospects in Iraq looked far bleaker than they do now in Afghanistan, even though the allies had many more foreign and local troops. General McChrystal is believed to have offered a range of proposals to increase the number of American forces—at present about 62,000 out of a total of some 100,000 foreign troops—by between 10,000 and 60,000 troops. Mr Obama may be tempted to compromise—to show military resolve by acceding to the commander’s request, yet appease anti-war opinion by picking the lowest number.

This would be a mistake. General McChrystal says that the core of his strategy is its first stage: to regain the initiative. To do that, a substantial surge is needed. Gordon Brown’s announcement of an extra 500 is a welcome gesture, but will make little difference. Mr Obama should send at least 40,000 more.

Most of all, Mr Obama needs to fight this war with conviction. His wobbles over the last month have done more to comfort his enemies and worry his allies than any recent losses on the ground. Only if he persuades his troops, his countrymen and the Taliban that America is there for the long haul does he have a chance of turning this war around.

Pakistan and the Taliban

On the offensive

Pakistan's assault on the Taliban in South Waziristan brings bloody retaliation

SEVERAL days into an offensive launched by the Pakistani armed forces in the tribal area of South Waziristan the consequences are being felt across the country. On Tuesday October 20th two suicide attackers struck a women’s cafeteria in an Islamic university in the Pakistani capital, Islamabad, killing four people and wounding 18 others. Hundreds of schools and colleges have been closed amid fears that militants from (or loyal to) South Waziristan could strike again.

The army is showing some determination by deploying 28,000 soldiers to the Taliban’s mountainous stronghold on the border with Afghanistan. It is attempting to tackle militant networks that are blamed for most of the terrorist attacks in Pakistan in the past two years, which all together have claimed more than 2,250 lives. In the past few weeks Pakistan has endured a series of terrorist attacks which are thought to have been orchestrated by the Taliban and are presumably timed to coincide with the long-heralded army offensive.

The army’s assault, which began on Saturday, was preceded by attacks by fighter jets on the militants’ fief in the Mehsud tribal area. The ground troops have reportedly followed up by taking several strategic heights and are now pressing on three fronts. Battles are said to have occurred in areas around Kaskai, Shisanwam and Kotkai, the hometown of the Taliban leader Hakimullah Mehsud. The army says that 15 soldiers and 90 militants have been killed so far, but such figures and even the details of the battles are impossible to confirm as journalists are being kept away from the fighting.

It is unclear exactly what might be achieved by the assault. The army says that it aims to kill or capture the Taliban’s leaders, although its operations will be limited to strongholds of Baitullah Mehsud, the former Taliban chief who was killed by an American missile on August 5th. In a time-honoured tradition in the area, and to the reported chagrin of Washington, the military commanders have apparently bought off neighbouring Afghan Taliban commanders who might otherwise join in the fight alongside their tribal brethren.

For its part the Pakistani Taliban have vowed, via a spokesman, to fight to “our last drop of blood”. The militants have had years to entrench positions that are dug into mountainous terrain of goat tracks, caves and thick forest. They have supplemented their defences with roadside bombs and have prepared suicide bombers. Yet their most effective tactic could yet be to melt away from this attack only to reform again later. For now they are able to continue orchestrating bomb attacks or commando raids on civilian targets, perhaps assisted by al-Qaeda operatives and bolstered by Uzbek and Arab mercenaries.

This assault had been long delayed as the Pakistani army complained that it lacked resources amid accusations that American funding had been slow to arrive. (However Pakistani army grumbles may have been eased by the news that America will boost its direct military aid to the country in 2010, to $700m.) It is also likely to be constrained once the heavy snow of winter arrive. This will happen within the next two months, posing new obstacles for attackers in difficult terrain. One concern is that, as with offensives in Waziristan in 2004 and 2005, this one could end with peace agreements that, according to critics, simply gave militants time and opportunities to re-arm.

In any case worries are mounting that civilians will suffer on a large scale. South Waziristan has a population of about 600,000 people and officials say more than 100,000 civilians have fled since August in advance of the latest fighting. Many Mehsud refugees have complained that the army indiscriminately hits civilian homes and infrastructure, a tactic that is likely to boost sympathies for the Taliban.

The IT business rebounds

Betting on bytes

Optimism that tech firms will help kick-start economic recovery is overdone

EVERY year, many leading lights of the internet world congregate at the Web 2.0 Summit in San Francisco. The 2009 event, which took place this week, included an evening reception thrown by a venture capital company at a swanky hotel and was dubbed “Web After Dark”. And evidence is growing to suggest that the darkness that has hung over the information technology (IT) industry for many months is lifting.

Three of the sector’s heavyweights—IBM, Intel and Google—recently reported surprisingly robust profits. Even Yahoo! did less badly than expected. On Monday October 19th Apple stunned even the most bullish investors by posting its best quarterly results ever: third-quarter revenues came in at $9.9 billion—24% higher than the same period a year earlier. Then came the news that venture capital investments in America are growing again. And Windows 7, Microsoft’s new operating system, launched on Thursday, is expected to drive demand for personal computers and related wares.

The outlook for IT firms in other countries is also brighter. The OECD detected signs of a recovery as early as August, particularly in Asia. Countries such as South Korea and Taiwan, which boast many companies specialising in chips and hardware, had been hit particularly hard by the downturn, with production in some sectors dropping by as much as 40%. But now that inventories have been depleted, manufacturers there are cranking up production again.

All this is more than welcome. But the wave of good news has already restarted the hype machine, for which the IT industry is well known. Once again, the sector is being trumpeted as the saviour of the economy. Some even predict that IT will pull the economy out of recession, with investment in technology giving a swift boost to productivity and job creation.

Just how much of a boost IT can provide is a subject of some contention. Both Forrester and Gartner, the industry’s leading research firms, see the downturn bottoming out in the current quarter and predict that demand will rebound next year. But while both firms agree on the timing of a recovery, they differ on the severity of the recession in IT and, more importantly, the speed at which the industry will pull out of its slump. Forrester is both more bearish and more bullish. In late September it predicted that worldwide IT purchases will have fallen by 11.4% at the end of this year, to $1.5 trillion, but will grow by 4.9% in 2010. In a report released on Monday, Gartner put these numbers at 5.2%, 3.3% and $3.3 trillion respectively.

There are good reasons to be conservative. For a start, several statistical effects that make the latest numbers look better than they actually are. After a steep downturn, growth numbers can seem equally dramatic. The volatile dollar muddles the picture as well. As long as the currency was relatively strong it weighed heavily on the results of American IT firms by devaluing foreign revenues. Now the dollar’s increasing weakness makes their numbers look far healthier.

In addition, excellent results at Apple, Google and even Intel reflect increased demand from consumers. Apple has benefited from the boom in smart phones, Google from users clicking on more advertisements and Intel from the popularity of netbooks, or small laptops, many of which contain its chips. But companies still account for by far the biggest chunk of technology spending. IBM, which offers the entire range of corporate IT services, from powerful computers to consulting services, is therefore a much better proxy for the overall health of the IT industry. Although its profits were better than expected, its revenues fell by nearly 7% compared with the third quarter of last year.

Yet more to the point, encouraging numbers or not, the technology sector is unlikely to lead the economy out of the recession. More likely, it is the economy, supported by cheap money and stimulus programmes, that is pushing IT. Ultimately, the IT industry will stage a real rebound—it will just take some time. Perhaps it is a result of the severity of the recession, but many are reacting to the first signs of an IT recovery as if it were the latest great thing. As with many new technologies, they overestimate the short-term impact, but underestimate what will happen in the longer run.

The Demand for Money and the Time-Structure of Production

Mises Daily by Jörg Guido Hülsmann

Hans-Hermann Hoppe is famous for his ground-breaking studies on the epistemology of the social sciences, on the ethics of capitalism, and on democracy. But he also made original and important contributions in various other fields, such as monetary economics.[1] Money and banking were actually our shared research interest many years ago, when I first got in touch with him. It is therefore appropriate to offer an essay on this topic to my dear friend Hans, a great mentor and a magnificent source of inspiration.

I. Introduction

The classical economists rejected the notion that the supply of and demand for money had any systematic impact on aggregate wealth. According to Adam Smith, the true factors determining economic growth were the division of labor and capital accumulation — real, not monetary factors. Austrian economists have always cherished and held on to these central insights, yet they have nuanced them in several respects. Most notably, Menger and Böhm-Bawerk have introduced the time dimension into the theory of capital, showing among other things the classical wage fund theory to be inaccurate in important respects.[2] Similarly, Mises stressed that money is not neutral. While the supply of money and the demand for money have no systematic impact on aggregate growth, these forces do affect the distribution and allocation of resources. They shape the type and relative quantities of goods being produced. In short, they determine the structure, though not the level of production.[3]

The purpose of present paper is to analyze the impact of the demand for money on the pure rate of interest, and thus on the time structure of production. Conventional Austrian monetary theory holds that while the supply of money does have a systematic impact on the rate of interest, the demand for money does not. The latter is, so to say, "time-neutral." We will criticize this contention and proceed as follows: After a reminder of some basic concepts (section II), we will briefly restate the traditional Austrian analysis of the time dimension of the money relation (section III), and then offer a critique, stressing that the demand for money is not time neutral in the case of natural money, whereas it is in the case of fiat money (section IV). Finally we shall discuss some implications of our findings (section V).

II. The Demand for Money

Definition

The demand for money can be defined either as the demand for monetary payments (flow), or as the demand for cash balances (stock). As far as the determination of the price level is concerned, both definitions lead to the same result.[4] We will work with the second definition (money demand concerns cash balances) because it highlights the crucial fact that money renders its services not only at the moment when it is used in spending, but also during the entire period when it is being held or "hoarded." Money is the most marketable commodity. Thus cash balances, even while they are not being spent, provide liquidity services to their owners.

Cash balances are demanded for the liquidity services they provide. They are demanded for their purchasing power. The only exception is the merely nominal demand for money by collectors. The latter are not interested in the purchasing power of the bank notes and coins they collect. They are only interested in the notes and coins per se — that is why we call them collectors. But true money users do not demand mere nominal cash balances, but real cash balances. They demand a certain purchasing power.[5]

The Demand for Money and the Price Level

Standard demand and supply analysis shows that any increase of demand entails an increase of the price of the good in question. This price increase is not contingent (accidental), but systematic (necessary), which is what we mean when we assert that the increase of demand causes the price increase. Now in the case of money, its "price" can be defined as the total array of goods and services that can be exchanged for one unit of money.[6] In other words, the price of money is the purchasing power of a money unit. If the demand for money increases, therefore, the purchasing power of money tends to increase beyond the level it would otherwise have reached, which means that the general level of money prices will tend to decrease. Inversely, when the demand for money diminishes, the purchasing power of money will tend to fall below the level it would otherwise have reached, or, which is the same thing, the general level of money prices will tend to increase.

The Demand for Money and the Pure Rate of Interest

The question now is whether there is a systematic relationship between money demand, on the one hand, and the pure rate of interest (PRI) on the other. The latter can be defined as the pure return on investment as it would exist in general inter-temporal equilibrium or, equivalently, as the pure exchange rate between present goods (money and consumers' goods) and future goods (producers' goods and financial titles).[7] It follows that the demand for money could be said to affect the PRI only under one condition, namely, if it had a systematically different impact on present goods than on future goods. For example, if increases in the demand for money tended to reduce sales revenues more than cost expenditure, then there would be a negative relationship between the demand for money and interest rates (as held in standard Keynesian analysis).

III. The Time Dimension of the Money Relation in Conventional Theory

The time dimension of the "money relation"— of the demand for and supply of money — has been neglected in contemporary economic analysis. Only the Austrian economists found it worthy of any systematic consideration. Conventional Austrian monetary theory holds that while the supply of money does have a systematic impact on the rate of interest, the demand for money does not.

The Time Dimension of the Money Supply

Mises and the Austrian literature after him focused on the supply side. Mises analyzed in particular the impact of increases of the money supply on the time structure of production, distinguishing between systematic effects and non-systematic (accidental) effects. On the one hand, increases of the money supply systematically provoke artificial reductions of the interest rate — "artificial" because they do not result from a lower time preference of the market participants, but from (unanticipated) increases of the money supply. Such artificial reductions of the interest rate entail inter-temporal misallocations of resources and, therefore, business cycles.[8]

On the other hand, increases of the money supply may also affect the interest rate without entailing misallocations, namely, to the extent that they modify the distribution of income and wealth. The increased money supply benefits the early users of the new money at the expense of the later users. Thus if the early users have a lower time preference than the later ones, then the average or social time preference will fall, thus entailing a reduction of the interest rate. Similarly, if the early users of the new money have a higher time preference than the later ones, then the average time preference will rise, thus provoking a higher rate of interest

However, these distribution effects are not systematic. The early users of the new money do not necessarily have a lower or higher time preference than the later users. The increased money supply might therefore result in a lower interest rate; but it might just as well result in a higher interest rate, or not affect the interest rate at all.[9]

Analogous conceptions prevail in the case of changes of the demand for money.

The Time Dimension of the Demand for Money

Mises dealt with the time dimension of the demand for money only incidentally. Still, a clear case can be made that in his eyes changes of the demand for money do not have a systematic impact on the time structure of production. An increased demand for money (cash hoarding) merely entails a tendency for the prices of all goods to fall, but this event "does not require an adjustment of production activities" — it "merely alters the money items to be used in monetary calculation."[10] Changes in money demand can affect the interest rate only to the extent that they have an impact on the distribution of income and wealth. But, again, such distribution effects may work out one way or another — their impact "depends on the specific data of each case."[11]

Rothbard analyzes this question in much more detail and comes to the same conclusion. He states that a "man may allocate his money to consumption, investment, or addition to his cash balance" and proceeds to show that, in the light of this distinction, the demand for money is time-neutral. Changes in the demand for money do not systematically affect time preference, and thus do not determine the PRI. Let us quote him here at length.

His time preferences govern the proportion which an individual devotes to present and to future goods, i.e., to consumption and to investment. Now suppose a man's demand-for-money schedule increases, and he therefore decides to allocate a proportion of his money income to increasing his cash balance. There is no reason to suppose that this increase affects the consumption/investment proportion at all. It could, but if so, it would mean a change in his time preference schedule as well as in his demand for money. If the demand for money increases, there is no reason why a change in the demand for money should affect the interest rate one iota. There is no necessity at all for an increase in the demand for money to raise the interest rate, or a decline to lower it—no more than the opposite. In fact, there is no causal connection between the two; one is determined by the valuations for money, and the other by valuations for time preference.

An increased demand for money, then, tends to lower prices all around without changing time preference or the pure rate of interest Thus, suppose total social income is 100, with 70 al located to investment and 30 to consumption. The demand for money increases, so that people decide to hoard a total of 20. Expenditure will now be 80 instead of 100, 20 being added to cash balances. Income in the next period will be only 80, since expenditures in one period result in the identical income to be allocated to the next period. If time preferences remain the same, then the proportion of investment to consumption in the society will remain roughly the same, i.e., 56 invested and 24 consumed. Prices and nominal money values and incomes fall all along the line, and we are left with the same capital structure, the same real income, the same interest rate, etc. The only things that have changed are nominal prices, which have fallen, and the proportion of total cash balances to money income, which has increased.[12]

He concludes:

The only necessary result, then, of a change in the demand-for-money schedule is precisely a change in the same direction of the proportion of total cash balances to total money income and in the real value of cash balances. Given the stock of money, an increased scramble for cash will simply lower money incomes until the desired increase in real cash balances has been attained.[13]

However, the conscientious Rothbard did not fail to remark that this conclusion stood on somewhat shaky grounds. In an endnote he wrote:

Strictly, the ceteris paribus condition will tend to be violated. An increased demand for money tends to lower money prices and will therefore lower money costs for gold mining. This will stimulate gold mining production until the interest return on mining is again the same as in other industries. Thus the increased demand for money will also call forth new money to meet the demand.[14]

This observation will be the starting point for our following discussion.

IV. The Time Dimension of the Demand for Money Reconsidered

The Demand for Commodity Money is Not Time-Neutral

Rothbard is correct in pointing out that changes in the demand for money do not have any systematic direct implications for the relative spending on consumers' goods and on the corresponding producers' goods. But as he admits, they do have implications for the return on investment (ROI) of money production, at any rate in the case of commodity monies such as silver or gold. An increased demand for silver will increase the ROI of silver production, because the factors of production needed to produce a given amount of silver now tend to become available at lower silver prices. This in turn will modify the spending on all other goods. In particular, capital will move from other industries into the silver industry, prompting the ROI of silver production to fall and the ROI of all other industries to rise, until the ROI of all lines of business is equal. Thus there will be a new PRI that is higher than the PRI that prevailed before the increase of the demand for money was priced into the market.

In other words, there is a positive causal relationship between the demand for commodity money and the PRI. The demand for commodity money is not time-neutral. Increases of the demand for commodity money tend to increase the PRI. Decreases of the demand for commodity money tend to decrease it.[15]

This relationship holds not only during a period of adjustment, during which more silver is being produced according to the higher demand. It also holds in final equilibrium, because the wear and tear increases along with the greater silver supply. The silver production will be increased permanently, and thus the PRI will also permanently be higher than it otherwise would have been.

The time structure of production will tend to be modified accordingly. A higher demand for money creates incentives to shorten the structure and to make it thicker than it otherwise would have been. And a lower demand for money will tend to lengthen the structure and make it thinner than otherwise. In short, the demand for money does affect the time structure of production.

The same effects hold in the case of temporary increases of the demand for money, as it is often the case at the onset and in the middle of the deflationary bust phase of the business cycle, when market participants seek to sell their non-monetary assets at a discount (thus the increase of the PRI), but a discount that is lower than the one they expect for the near future. In such cases the increase of the demand for money lasts only until the price structure has been adjusted to its new (lower) final equilibrium level.[16]

The Demand for Fiat Money Tends to Be Time-Neutral

Things are very different in the case of fiat money. The characteristic feature of fiat money is that the demand for it is at least partially determined by violations of property rights, in particular by monopoly or legal-tender laws. As a consequence, the producer of fiat money is able to choose for his product an inexpensive physical support, such as paper or electronic data.

Paper money and electronic money are fiat moneys par excellence because

their marginal cost of production is close to zero and
they need to be imposed on the market lest they would have no circulation at all, whereas other types of money such as the precious metals do not need fiat backing to be used at all.

Typically, therefore, fiat money is being produced monopolistically and the producer enjoys complete discretion in maximizing his profits through time according to his inter-temporal value scales. [17]

Now here the causal mechanism that in the case of commodity monies links up the demand for money with the PRI vanishes. An increased demand for money will have next to no impact on the costs of fiat money and thus on the profitability of producing it. It will therefore not attract additional resources and thus increase the ROI in other industries. The long-run PRI is not modified – the demand for fiat money tends to be time-neutral.

Moreover, in the case of temporary increases of the demand for money, their tendency to increase the price level can be offset, without technical or commercial limitations, by a corresponding increase of the money supply, thus preventing the necessity to sell assets at a discount. As is well known, this is not a mere theoretical possibility. Present-day fiat money producers — the central banks — pursue a policy of price level stabilization, and they vigorously fight any form of price deflation. Thus we may say that, under the present-day fiat money regimes, any increases of the demand for money are actually causing corresponding increases of the money supply. It is true that such increases of the money supply will create a tendency for the price level to increase, thus entailing sooner or later a price premium within the gross rate of interest. But the crucial point is that the PRI need not increase. It follows that, even in the case of temporary increases of the demand for money, fiat money tends to have different consequences than commodity money.

Misleading Distinction between Money and Present Goods

Thus we see that the traditional Austrian position, according to which the demand for money is time-neutral, only applies to the case of fiat money. It does not apply to the case of commodity money. Why did the Austrians, and Mises and Rothbard in particular, overlook this fact? The main reason seems to be that they define money without reference to its physical characteristics. They see money as a particular "disembodied" class of goods that is therefore not subject to the laws ruling the time market. Changes in the demand for money do not affect time preference schedules because the latter concern only non-monetary goods ("real goods"), namely, consumer goods and producer goods. By contrast, money is a good in a class of its own.

Mises follows the German economist Carl Knies in classifying all economic goods into three mutually exclusive categories: consumers' goods, producers' goods, and media of exchange.[18] The pure interest rate is the inter-temporal exchange rate between present goods (consumer goods) and future goods (producer goods). The demand for money does not affect this exchange rate at all. As we have seen, this contention is correct in the case of fiat money. Here the marginal costs of producing paper money are virtually zero, and thus investment spending on money production does not depend at all on changes of demand. It follows that changes in the demand for paper money do not have any a priori impact on the proportion between consumption and investment, and thus on inter-temporal value-scales and the interest rate. But as we have seen as well, things are different in the case of commodity money.

Astonishingly, this fact has also been overlooked by Murray Rothbard. In chapter 11 of Man, Economy, and State, he modifies the analysis of present and future goods stated in earlier chapters, to take account of the impact of money hoarding.[19] Rothbard now abandons his previous classification of all goods into exactly two classes (present and future goods). Like Knies and Mises, he now champions the three-tier distinction between consumers' goods, producers' goods, and cash balances.

Clearly, a good case can be made that money is neither a consumers' good, nor a producers' good. However, for the determination of the PRI this is beside the point. Here the only relevant distinction is between present goods and future goods. Money could be said to be time neutral only if it fell into a third class of goods that would be neither present goods nor future goods. However, Rothbard does not deliver any demonstration to this effect, but simply asserts that money falls into a class of its own — an assertion that moreover contradicts his own previous emphasis that money is "the present good par excellence."[20]

As soon as it is admitted that money is a present good, though not a consumers' good, the impact of the demand for money on relative spending between present goods and future goods is obvious. Let us recall Rothbard's argument, quoted above.

A greater proportion of funds hoarded can be drawn from three alternative sources: (a) from funds that formerly went into consumption, (b) from funds that went into investment, and (c) from a mixture of both that leaves the old consumption-investment proportion unchanged.[21]

If money is a present good, then condition a does not imply any change inter-temporal value scales, but simply a different composition of present goods in one's portfolio. It follows that hoarding (a rise in the demand for money) in this case leaves the PRI unaffected, while in all other cases — conditions b and c it implies an increased PRI.

V. Some Implications of the Time Dimension of the Demand for Money

The demand for commodity money is not time-neutral, but positively related to the pure rate of interest. By contrast, the demand for fiat money tends to be time-neutral. These results of our analysis seem to imply that fiat money, despite its manifold known shortcomings, conveys definite advantages over commodity money, in particular, in facilitating economic growth. [22] Let us therefore briefly discuss some of these implications.

First of all we should point out that our foregoing analysis of the comparative impact of the demand for money on the PRI conveys no information about its quantitative impact. Considering that the long-run demand for money represents just a small fraction of aggregate wealth, and that it varies only marginally, it is very well possible that the long-run quantitative impact of changes in the demand for money on the PRI be negligible after all. On the other hand, there is scant empirical evidence about the behavior of savers under a pure commodity-money standard. If and to the extent that saving occurs to a significant extent in the form of money hoarding, the quantitative impact on the PRI could increase accordingly.

It is obvious that such money-induced changes of the PRI can be highly useful, especially if we consider the reasons of a changing aggregate demand for money. Acting persons typically have an increased demand for money when they are concerned about looming deteriorations of the general economic and political environment. For example, they might expect troubles on the financial markets, or bad economic policy decisions such as tax hikes. Increased cash hoarding provides a partial protection against such events. Most importantly, the resulting increase of the PRI creates incentives to adjust the structure of production to the perceived riskier environment. More roundabout (and therefore riskier) investment projects will tend to be abandoned, while shorter investment projects will be encouraged. This helps preserving the all-important aggregate capital stock. Inversely, a reduced demand for money, which typically reflects a brighter outlook of the general economic and political environment, will induce a lengthening of the structure of production to the detriment of shorter (less physically productive) investment projects.

However, as we have seen, this mechanism for the protection of the capital stock only exists in the case of commodity money. In the case of fiat money, there are no similar incentives to adjust the structure of production, neither for switching it over to "safe mode" under the impact of an increased demand for money, nor in the opposite sense when the demand for money diminishes. It follows that fiat money regimes tend to waist more capital than commodity money regimes. Growth rates and living standards therefore would tend to be lower under fiat money than under commodity money.

Similarly, we should stress again the beneficial role of short-run variations of the PRI, resulting from increases of the demand for commodity money, in speeding up the adjustment of the structure of production after a boom phase, or in reaction to a looming crisis resulting from war, government interventionism, or natural disasters. These adjustments would not take place as quickly and automatically under a fiat money regime, as discussed above. It follows that, far from being advantageous from a macroeconomic point of view, the tendency to offset the impact of the demand for money on the PRI is actually another one of fiat money's major shortcomings.

Finally, as we have shown in a recent contribution, there is no systematic relationship between the aggregate volume of savings investment and the PRI.[23] It follows that the demand for money, too, is not related to the aggregate level of savings-investment. Given individual inter-temporal value scales, it follows by logical necessity that both the demand and the supply of present goods are exclusively determined by those value scales, and that the latter are therefore the unique cause of the PRI. A higher demand for money not only implies an increased demand for present goods on the time market, but also a reduced supply. Therefore, the only necessary consequence of higher demand for money is for the PRI to increase. But there is no systematic impact on the volume of the market (aggregate savings exchanged for aggregate future goods). Depending on the (contingent) elasticity of supply and demand on the time market, the new final equilibrium might involve a somewhat larger volume of aggregate saving, but it might just as well, and with equal likelihood, involve a somewhat reduced volume of aggregate saving. Similarly, a lowering of the demand for money has only one necessary implication, namely, a reduction of the interest rate. Yet it has no systematic impact on aggregate saving, and thus on aggregate investment.

VI. Conclusion

In the present contribution we have shown that the demand for commodity money is not time-neutral. It affects the pure rate of interest and, therefore, the time-structure of production. By contrast, the demand for fiat money tends to be time-neutral — in other words, it tends not to affect the time structure of production. We have argued that this basic difference further bolsters the traditional Austrian case for commodity money and against fiat money. Indeed, the demand for commodity money is a very basic way for the unsophisticated citizen to bring the structure of production in line with his assessment of the macroeconomic environment. Fiat money takes this power out of his hands. The consequence is a greater tendency for capital to be wasted.

An Unsustainable Path of Debt Expansion

Mises Daily by Thorsten Polleit

Debt Growth Exceeds Income Growth

In Q2 2009, total debt outstanding in the United States — financial plus nonfinancial debt — amounted to 373.4% of GDP.[1] At the start of 1952, the debt-to-GDP ratio stood at only 130%. In fact, in the last decades the rise in total debt has increasingly outpaced nominal income — a development which gained momentum after the erosion of the last vestiges of the gold standard in the early 1970s.

The current upward dynamic of the debt-to-GDP ratio is economically unsustainable. It cannot go on forever. To see this, let us assume that the total debt-to-GDP ratio does continue to grow at the average rate at which it has expanded from Q1 1971 to Q2 2009 (case 1 in the chart above). The total debt-to-GDP ratio would exceed 600% at the start of 2029 and reach more than 1000% in 2050.

If one assumes that the total debt-to-GDP ratio will expand at the average growth rate seen from Q1 1995 to Q2 2009 (case 2), a level of 600% would be reached as early as the middle of 2024, and the ratio would go up further towards 1300% by the end of 2050.

Interest payments on total debt would rise substantially as a percentage of GDP. If one assumes that the average interest rate was 4% in Q2 2009,[2] total interest payments amounted to 15% of GDP. In case 1, interest payments would double by the middle of 2038, while in case 2 this level would be reached in the middle of 2031.

Correction Scenarios

Admittedly, we do not know how much debt relative to GDP an economy can shoulder. And, of course, there might even be good reasons for the ratio to rise over time. For instance, an increase in "financial intermediation" and a decline in the societal time preference(related, for instance, to rising confidence in the protection of property rights) might justify a higher level of loaning and borrowing in the economy.

One thing is clear, though: the level of debt relative to income cannot rise without limit.[3] This insight is important, given that there is strong reason to believe that the extraordinary rise in the debt-to-GDP ratio is a result of the government-controlled, fiat-money system in which the money supply is increased through bank lending.

Let us assume, for the sake of argument, that the current debt-to-GDP ratio has exceeded its sustainable level. What are the chances that output could start expanding more strongly than debt, thereby lowering the ratio? This would be a rather favorable scenario, as the debt-to-GDP ratio would decline, while income and employment would increase. Unfortunately, however, it is a rather unlikely correction scenario.

Austrian Economics teaches that a circulation-credit-fueled boom can only be sustained by ever-greater doses of credit and money expansion, provided at ever-lower interest rates. As soon as the growth rate of credit and the money supply slows down, the illusionary upswing collapses. Malinvestment is revealed, firms cut employment, and the economy goes into recession.

Lenders can then be expected to demand higher interest rates and/or to stop extending loans — as the outlook for the possibility of borrowers repaying their debt (in real terms) deteriorates. In other words, market forces start pressing for a change in the hitherto-observed path of the total-debt-to-GDP ratio.

If commercial banks make their debtors repay their loans, the money supply declines. A drop in the money supply, in turn, would represent deflation — and the symptoms would be declining prices for goods and services of current production, and for existing assets (such as, for instance, stocks and real estate).

Deflation would lead to credit losses as a growing number of borrowers would find their incomes greatly diminished and — most importantly — falling short of expectations. Many borrowers would default on their debt.

If credit-related losses exceed their equity base, banks go bankrupt. Savers and investors in bank debentures would have to accept losses, as banks could not meet their debt service. It doesn't take much to see that such an outlook could trigger a "flight out of debt."

Investors would try to dump their bonds, causing interest rates to go up. Borrowers in need of rolling over their debt would have to accept higher refinancing rates, which would leave a growing number of investment projects unprofitable. The mere expectation of rising credit costs would therefore make possible an anticorrection scenario.

The Anticorrection Scenario

In the anticorrection scenario, central banks — seeing an unraveling debt pyramid — would decide to prevent banks from defaulting on their debt by pushing short-term interest rates to record lows and providing additional base money for bank refinancing — by monetizing banks' debentures and/or (troubled) assets.

Keeping a circulation-credit boom going requires — as Austrian economists have explained in great detail — ever-greater amounts of credit and money, provided at ever-lower interest rates. However, credit and money cannot be increased indefinitely by the central bank and commercial banks. In fact, it is money demand that would set a limit.

If inflation — that is, a rise in the money supply — does not exceed an unacceptable level, people may well continue to use money even if it loses its purchasing power. If, however, inflation exceeds an acceptable level, or if people start expecting inflation to continue to rise further, the money is doomed to fail. As Ludwig von Mises noted in 1923,

Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes.[4]

The private sector may be able to cope with deflation (and the ensuing redistribution of property rights). The institution of government, in its current size and scope, however, cannot. Inflation — the rise in the money supply — is an indispensable tool for financing government outlays for which the taxpayer would presumably not want to pay out of his current income.

Mises noted,

Inflation becomes one of the most important psychological aids to an economic policy which tries to camouflage its effects. In this sense, it may be described as a tool of antidemocratic policy. By deceiving public opinion, it permits a system of government to continue which would have no hope of receiving the approval of the people if conditions were frankly explained to them.[5]

The effort to prevent government from defaulting on its debt — and this goal would most likely be subscribed to by the ruled class as well as the ruling class, especially under deflation — is therefore the greatest danger for the value of money. And this is why an unsustainable debt-expansion path poses such a great danger to the exchange value of money.

Central banking makes it possible for the government to expand the money supply by any amount, at any time deemed necessary. And once (hyper)inflation is publicly seen as being the lesser evil of all options available for the government meeting its debt service, it cannot be dismissed out of hand that (hyper)inflation would be the consequence of an unsustainable debt-to-GDP ratio.

In 1923, Ludwig von Mises (1881–1973) published his essay, "Stabilization of the Monetary Unit – From the Viewpoint of Theory."[6] In it, he not only outlined the consequences if the government continues to increase the money supply, he also outlined a monetary reform plan. In view of today's challenges regarding worldwide monetary affairs, Mises's essay is as insightful and instructive today as it was back then.

The Wall Street Journal Defends the Predator State

Mises Daily by Robert P. Murphy

In my last article on these pages, I offered criticism of a New York Times article that had praised the Lincoln administration's property violations in pursuit of military objectives. Today I want to focus on a regular Wall Street Journal columnist who praises the Obama administration's plans to violate property rights in pursuit of socializing medical care. The conventional dichotomy between "liberal" and "conservative" newspapers is spurious: all major news organizations support the welfare-warfare state.

Who's the Predator — the Government or Corporations?

Wall Street Journal columnist Thomas Frank starts his piece with the angle that everyone on Capitol Hill took his advice to read James K. Galbraith's book The Predator State, which concerns the capture of government agencies by corporate special interests. Frank then expresses dismay that many Republican politicians have apparently misunderstood his advice:

During a debate last week over two Democratic proposals for a healthcare bill featuring a "public option" — a government-run alternative to private health insurance — [Iowa Republican Sen. Charles Grassley] announced he opposed the idea because, as he put it, "Government is not a fair competitor.… It's a predator."

The word "predator" seems to have become something of a Republican talking point. Mr. Grassley's colleague from South Dakota, John Thune, went on the record in July to warn that, when government goes into business, it "becomes not a competitor but a predator."

Have these two august men of the right secretly become fans of Mr. Galbraith, one of our leading liberal economists?

If so, they need to go back over "The Predator State" a second time. Although they have snapped up Mr. Galbraith's catchy title, they have misunderstood his message.

Hmm, that's interesting. Even hardcore-progressive activists smell a rat in the emerging healthcare "reform" bills, and accuse Obama of being a "charming liar" by selling out to "Big Pharma" and other villains.

What we have in Washington is the worst of both worlds: the government is greatly expanding its role in healthcare, and is at the same time redistributing billions from regular Americans into the pockets of politically connected corporations.[1] (The same thing is playing out with cap-and-trade legislation, as I explained recently on Fox Business.)

Granted, Republican congressmen — with one notable exception — aren't actually proponents of a truly free market. They typically oppose only certain types of corporate welfare, while generously supporting other types (such as military contracts). Even so, Senators Grassley and Thune are perfectly correct when they claim that a "government option" in health insurance would not be true competition, but instead act as a predator on the market. Unfortunately, Thomas Frank has no grasp of even basic economics and ends up writing sentences that would embarrass USA Today, let alone the Wall Street Journal:

What makes government predatory, Mr. Grassley seems to believe, is its public-mindedness. Were government to offer health insurance to everybody without the industry's many devices for excluding risky individuals, some seem to fear, it might be able to offer consumers a price too fair for the profit-minded sector to match.

This is a curious reversal for a movement that ordinarily celebrates Darwinian struggle and the destruction of the weak by the strong. Just think of the conservative caricatures that must be inverted for this argument to work: All those soft liberal bureaucrats? Ferocious man-eaters. The welfare state? Law of the jungle.

No, Mr. Frank, what makes government predatory is that it steals its resources from unwilling taxpayers. In contrast, insurance companies (at least until Obama's mandate goes through) can't force people to send them checks. A government enterprise can put any private analog out of business if the politicians are willing to throw enough money into it.

I am not necessarily predicting that this will happen — after all, well-heeled corporations are writing the legislation behind the scenes — but the very legitimate fear is that the government will get its foot in the door with a "public option." Precisely because the bureaucrats running the plan will have no need to turn a profit, they will be able to "afford" to insure anybody, regardless of preexisting conditions, at a price that doesn't cover expected payouts. When the shortfall occurs, they will simply ask the politicians for another injection of a few billion dollars.

"The conventional dichotomy between 'liberal' and 'conservative' newspapers is spurious: all major news organizations support the welfare-warfare State."

The private competitors won't have such recourse to free taxpayer money, of course. Normally they would respond simply by insuring only people with no history of disease, in order to keep premiums low and compete with the price the government charges its customers. But alas, the legislation would make such exclusions illegal — insurance companies wouldn't be able to accept only healthy people as customers.

Hence, the fear is that the government could "innocently" offer a simple competing plan, and then — oops! — all the private insurers go out of business. I guess we need universal government coverage after all.

Think of it this way: in principle, GM (now government owned) could sell brand-new sedans at $2,500 each, with infusions of taxpayer money. That would obviously destroy the car market for private-sector manufacturers. The same principle applies to health insurance.

The Current System Is Awful

Whenever writing a column such as this, I leave myself open to the accusation that I "just don't get it." Let me be clear: the current health insurance system is awful.

My young son had a minor condition that required no treatment of any kind, and yet no matter how high a premium I offered to pay — even with a rider saying the policy wouldn't cover anything related to the condition — my insurance agent said nobody would give us coverage. I eventually had to incorporate my consulting business in order to buy a family policy (with a very high deductible) through that route.

So believe me, I understand why people think, "The government needs to do something!" Those people are right, the government does need to do something. Specifically, it needs to get out of healthcare.

How Government Screws Up Health Insurance

It's not an accident that health insurance tends to be tied to employment. During the wage-and-price controls of World War II and the Nixon era, companies competed for employees not by offering higher salaries (which was illegal) but by offering perks such as health insurance.

Currently, one of the major reasons companies offer insurance as part of compensation packages is that it is tax deductible. In other words, if a corporation pays $10,000 a year to insure you and your family, they can write it off as a business expense, and you won't pay taxes on it. But if the corporation increased your salary by $10,000 and told you to buy your own insurance, you would get taxed on that money.

Another major distortion is that there are barriers to interstate competition among health insurers. If all the Obama administration wants to do is promote options for consumers, this seems like low-hanging fruit.[2] But as this hilarious video shows, Wolf Blitzer can't get David Axelrod to comprehend the point.

Conclusion

"The predator state cannot be tamed."

I am not a medical doctor, and I don't even play one on TV. However, I am an economist, and an amateur student of history. How anyone can think that greater government involvement will reduce costs and corruption in the health insurance market is beyond me. That belief flies in the face of basic economics, and all of human history.

Galbraith was right: there is indeed a "predator state" — just ask villagers in Pakistan. And so long as a powerful state able to transfer trillions of dollars to its friends exists, the shareholders of large corporations will jockey for their cut of its loot. The solution is not to lecture politicians, as Mr. Frank does at the end of his column. The predator state cannot be tamed. Only when the public withdraws its consent will the predations come to an end.

Monopoly Through the Years

Hot Stocks: Sallie Mae Lifts Financials

Obama Goes AWOL

On Afghanistan, "voting present" would be an improvement.

JAMES TARANTO

"The United States cannot wait for problems surrounding the legitimacy of the Afghan government to be resolved before making a decision on troops, U.S. Secretary of Defense Robert Gates said," Reuters reports from aboard a U.S. military aircraft:

Gates did not say when he expected U.S. President Barack Obama to decide on whether to increase troops, a decision complicated by rising casualties and fading public support for the stalled, eight-year-old war.

But he pointed out that further high-level deliberations would need to wait for the return of cabinet members from foreign travels through part of next week.

"It's just a matter now of getting the time with the president when we can sort through these options and then tee them up for him to make a decision," Gates said.

But Agence France-Presse reports the president hasn't yet chosen whether to choose not to decide:

President Barack Obama has not yet determined whether he will make a decision on sending more troops to Afghanistan before the November 7 election runoff, a US official said Tuesday.

"The UN, NATO, the US stand ready to assist the Afghans in conducting the second round," White House spokesman Robert Gibbs told reporters.

"Whether or not the president makes a decision before that I don't think has been determined.

"I have continued to say a decision will be made in the coming weeks as the president goes through an examination of our policy," he added.

It really bolsters your confidence in the president's ability to achieve victory in what he used to call a war of necessity, doesn't it?

Podcast

James Taranto on Obama's Afghan dither.

But we suppose it's easy to sit on the sidelines and snark. Barack Obama is president of the United States, and he is juggling all kinds of urgent responsibilities. Such as this one, reported by the New York Times:

Mr. Obama will fly to New York on Tuesday for a lavish Democratic Party fund-raising dinner at the Mandarin Oriental Hotel for about 200 big donors. Each donor is paying the legal maximum of $30,400 and is allowed to take a date.

And hey, if you don't like it, grab a damn mop! As Obama said just last week at . . . uh, another lavish Democratic Party fund-raiser.

Meanwhile, the New York Times reports from Washington that "frustrations and anxiety are on the rise within the military" as the president dithers over Afghanistan:

A retired general who served in Iraq said that the military had listened, "perhaps naïvely," to Mr. Obama's campaign promises that the Afghan war was critical. "What's changed, and are we having the rug pulled out from under us?" he asked. Like many of those interviewed for this article, he spoke on the condition of anonymity because of fear of reprisals from the military's civilian leadership and the White House.

Shouldn't it be the enemy that fears reprisals?

During the presidential campaign, Obama's opponents mocked him for frequently voting "present" on difficult questions that came before the Illinois Senate. This is even worse. The commander in chief is absent without leave.

Reporters Sans Épine Dorsale
Reporters Without Borders, the French self-described press-freedom group, is out with its annual national rankings. But forget about freedom of the press--these guys just adore Barack Obama:

The United States has climbed 20 places in the rankings, from 40th to 20th, in just one year. Barack Obama's election as president and the fact that he has a less hawkish approach than his predecessor have had a lot to do with this.

But this sharp rise concerns only the state of press freedom within the United States. President Obama may have been awarded the Nobel peace prize, but his country is still fighting two wars. Despite a slight improvement, the attitude of the United States towards the media in Iraq and Afghanistan is worrying. Several journalists were injured or arrested by the US military. One, Ibrahim Jassam, is still being held in Iraq.

FoxNews.com reports on the state of press freedom within the United States:

The Obama campaign's press strategy leading up to his election last November focused on "making" the media cover what the campaign wanted and on exercising absolute "control" over coverage, White House Communications Director Anita Dunn told an overseas crowd early this year.

In a video of the event, Dunn is seen describing in detail the media strategy used by then-Sen. Barack Obama's highly disciplined presidential campaign. The video is footage from a Jan. 12 forum hosted by the Global Foundation for Democracy and Development in the Dominican Republic.

"Very rarely did we communicate through the press anything that we didn't absolutely control," Dunn said, admitting that the strategy "did not always make us popular in the press."

Politico.com adds:

A White House attempt to delegitimize Fox News--which in past times would have drawn howls of censorship from the press corps--has instead been greeted by a collective shrug.

That's true even though the motivations of the White House are clear: Fire up a liberal base disillusioned with Obama by attacking the hated Fox. Try to keep a critical news outlet off-balance. Raise doubts about future Fox stories.

But most of all, get other journalists to think twice before following the network's stories in their own coverage. . . .

To some media observers, it's almost the definition of a "chilling effect"-- a governmental attempt to steer reporters away from negative coverage--but the White House press corps has barely uttered a word of complaint. . . .

The direct attacks, if leveled at another news outlet or by another White House might have aroused a torrent of criticism, but the flow of outrage from the Washington journalistic set has been more like a trickle. . . .

The Obama White House appears to have concluded that the media is now so splintered that an attack on one is no longer an attack on all.

This column is not of the opinion that the White House's verbal attacks on Fox News amount to an assault on free expression. Even Anita Dunn's boasts about controlling press coverage aren't enough to raise a real free-expression issue.

But they say something terribly damning about the media as an institution. The Obama administration, much less the campaign, does not have the legal means to "control" journalists. If it has succeeded in doing so, it is only because journalists are willing to submit to such control. And what good is freedom of the press if you aren't going to exercise it?

Civil Rights Devolves Into Partisanship
The Washington Times reports from Kinston, N.C., on a reductio ad absurdum of the Voting Rights Act:

Voters in this small city decided overwhelmingly last year to do away with the party affiliation of candidates in local elections, but the Obama administration recently overruled the electorate and decided that equal rights for black voters cannot be achieved without the Democratic Party.

The Justice Department's ruling, which affects races for City Council and mayor, went so far as to say partisan elections are needed so that black voters can elect their "candidates of choice"--identified by the department as those who are Democrats and almost exclusively black.

The department ruled that white voters in Kinston will vote for blacks only if they are Democrats and that therefore the city cannot get rid of party affiliations for local elections because that would violate black voters' right to elect the candidates they want.

This column is skeptical of nonpartisan elections, but the idea of equating civil rights with partisanship--and with partisanship on behalf of one particular party--is pernicious. One party for blacks, two parties for whites: how exactly does that promote equal rights?

The flip slide of this attitude is the notion that anyone who opposes left-wing politics must be against equal rights. In a Christian Science Monitor op-ed, Christopher J. Lee, a historian at the University of North Carolina, seems to argue that one cannot oppose socialism without being racist:

In the context of American politics, socialism has seldom been about the economy or state power alone, despite its political-economic roots. Instead, it has been a slur, synonymous with the charge of communism, but with meaning extending beyond this term as well.

Black leaders in particular have faced this accusation. In 1964, amid the momentous occasion of congressional approval for the Civil Rights Act, Senator Strom Thurmond of South Carolina declared its passage the result of "Negro agitators, spurred on by Communist enticements to promote racial strife."

Martin Luther King Jr. was not an exception to this allegation, but a direct target. Indeed, he faced immediate pressure to distance himself from close aide, intellectual mentor, and key organizer of the 1963 March on Washington, Bayard Rustin, who once had ties with the Communist Party.

Dr. King also was accused of adultery. By Lee's logic it would also be racist to believe that it is wrong to cheat on one's spouse.

One bit of good news: CNN's Rick Sanchez last Friday issued an apology to Rush Limbaugh. Sanchez had falsely attributed to Limbaugh a quote to the effect that slavery "had some merit." (Our Thursday column had the full fake quote.) Here's Sanchez:

Earlier this week we provided quotes attributed to Rush Limbaugh to illustrate why some people and players felt that Limbaugh was too divisive to be an NFL owner.

One of these quotes, which was in a column in the St. Louis Post Dispatch and in a book largely about conservatives, was refuted by Limbaugh. We have been unable to independently confirm that quote.

We should not have reported it and for that, I apologize. I feel it is important to hold folks accountable when they make mistakes, and that should include myself and my team.

This is more than just an error of fact, though. Limbaugh has said many things that depart from the politically correct orthodoxy about race. He has said some things that reasonable people may find insensitive. But he has never, so far as we know, said anything even remotely comparable to either this quote or the other phony one (praising James Earl Ray, Dr. King's assassin).

That this quote did not set off alarm bells in the minds of Sanchez and other journalists suggests that they are guilty of invidious stereotyping: of assuming that anyone who does not hold orthodox left-wing views on race must be a white supremacist.

The Doctor Fix Is In

Adding lots of 'dimes' to the deficit.

President Obama has made serial promises that he will not sign a health-care bill that "adds one dime to our deficits, either now or in the future, period." This was never plausible, but now we can begin to understand what he meant: Democrats plan to make ObamaCare "deficit-neutral" by moving nearly a quarter-trillion dollars off the books, in the fiscal deception of the century.

Later this week, or maybe next, Senate Democrats plan to vote on a stand-alone bill that strips a formula that automatically cuts Medicare physician payments out of "comprehensive" health reform. Rather than include the pricey $247 billion plan known on Capitol Hill as the "doc fix" as part of ObamaCare, they'll instead make this a separate contribution to the deficit, without compensating tax increases or spending cuts. Majority Leader Harry Reid explained at a press conference last week that "All we're doing is wiping the slate clean by adjusting the baseline to what is current policy. This is not new policy."

Wiping the slate is right.

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Getty Images

How a Fight Over a Board Game Monopolized an Economist's Life

MARY PILON

This week, game players and enthusiasts from 40 countries will descend upon Las Vegas to compete in the Monopoly World Championship, held roughly every four years. The winner of the Hasbro Inc.-sponsored tournament will take home $20,580 -- the precise sum stashed in the title's make-believe bank.

But one man who is perhaps the game's most obsessive follower won't be attending.

Ralph Anspach, an 83-year-old economics professor, spent decades locked in a real-life battle with Monopoly and its corporate owners. The campaign dented his finances, sent him on a nationwide trek for intelligence and sparked a legal case that reached the steps of the Supreme Court.

Prof. Anspach's woes began with a real-life trademark fight for the right to sell his own game, called Anti-Monopoly. Along the way, he says he helped to publicize the little-known origins of the classic American game.

The official history of Monopoly, a version of which appears on Hasbro's Web site, describes how Charles B. Darrow developed Monopoly during the Great Depression. Parker Brothers, which was later acquired by Hasbro, bought the impoverished heater salesman's patent in 1935 and registered the Monopoly trademark. Since then, the company says, an estimated 750 million copies of Monopoly have been sold worldwide.

The Monopoly "legend," as Hasbro calls it, "is a corporate fairy tale," says Prof. Anspach, who argues that the company fails to acknowledge key players in the game's genesis.

Prof. Anspach flew across the country more than a dozen times to research the game's origins. His logic: If he could prove that Monopoly was widely played as a folk game decades before the Darrow patent, then he could argue that his game didn't infringe on Parker Brothers' trademark.

WSJ's Mary Pilon gives an overview of Monopoly, the popular boardgame owned by Hasbro Inc.

AM Report: Is Business Spending Back?

PM Report: Will Galleon Help Curb Insider Trading?

Iran Agrees to Consider Deal on Nuclear Program, Diplomats Say

Associated Press

VIENNA -- Iranian negotiators on Wednesday agreed to consider a draft deal that -- if accepted by the Tehran leadership -- would delay its ability to make nuclear weapons by sending most of the material it would need to Russia for processing, diplomats said Wednesday.

Associated Press

Mohamed ElBaradei said he hoped the agreement would be finalized by Friday.

International Atomic Energy Agency chief Mohamed ElBaradei confirmed that representatives of Iran and its three interlocutors -- the U.S., Russia and France -- had accepted the draft, which still has to be finalized by the four nations' capitals. Mr. ElBaradei said he hoped that would occur by Friday.

"I have circulated a draft agreement that in my judgment reflects a balanced approach to how to move forward," Mr. ElBaradei told reporters, suggesting that all four parties had worked hard to overcome differences exacerbated by suspicions that Iran may be interested in nuclear weapons. Tehran insists its activities are peaceful and meant only to generate energy.

"Everybody who participated at the meeting was trying to look at the future not at the past, trying to heal the wounds," Mr. ElBaradei said. "I very much hope that people see the big picture, see that this agreement could open the way for a complete normalization of relations between Iran and the International community."

He gave no details of what was in the package. But diplomats told the Associated Press that it was essentially the original proposal drawn up by the IAEA that would commit Tehran to shipping 75% of its enriched uranium stockpile to Russia for further enrichment.

After that material is turned into metal fuel rods, it would then be shipped back to Iran to power its small research reactor in Tehran, according to the draft, as described earlier by diplomats.

The diplomats spoke on condition of anonymity because the meeting was confidential.

While essentially technical, such a deal would have significant political and strategic ramifications.

It would commit Iran to turn over more than 2,600 pounds of low-enriched uranium -- as much as 75% of its declared stockpile. That would significantly ease fears about Iran's nuclear program, since 2,205 pounds is the commonly accepted amount of low-enriched uranium needed to produce weapons-grade uranium.

Based on the present Iranian stockpile, the U.S. has estimated that Tehran could produce a nuclear weapon between 2010 and 2015, an assessment that broadly matches those from Israel and other nations.

David Albright of the Washington-based Institute for Science and International Security, which has tracked Iran for signs of covert proliferation, said any deal would buy only a limited amount of time. He said Tehran could replace 2,600 pounds of low-enriched uranium "in little over a year."

Iran's chief delegate, Ali Asghar Soltanieh emphasized that -- while his side had accepted the draft -- senior Iranian officials in Tehran still had to sign off it.

"We have to thoroughly study this text and also (need) further elaboration in capitals," Mr. Soltanieh told reporters.

Tuesday, October 20, 2009

McDonnell for governor

It's time for change in Virginia

By THE WASHINGTON TIMES

The only way to support Creigh Deeds for governor of Virginia is to believe in a fairy tale - call it Three Little Governors. Once upon a time, the voters of Virginia elected a moderate Democratic problem solver to fix the state's transportation problems, but the first little governor, Mark Warner, didn't solve the problem. The voters decided to try again, but the next little governor, moderate Democratic problem solver Tim Kaine, didn't solve the problem, either.

But then along came the third little governor. Mr. Deeds promised he was a moderate Democratic problem solver just like the others, but he had something they didn't - a magic plan called a "bipartisan commission." After the fantastically powerful bipartisan commission, all of Virginia's transportation problems were supposed to be solved.

Virginia's last two Democratic governors may have marketed themselves as moderate Democratic problem solvers, but that doesn't mean they were. The facts are in. Mr. Warner and Mr. Kaine didn't solve problems. They raised taxes. Mr. Deeds, who hopes to be the third little governor and is packaged in the same deceptive garb, promises to give Virginia more of the same.

That's why the only choice for governor of Virginia is Robert F. McDonnell. Dealing with Virginia's recession requires a leader who is willing to take responsibility, not hide behind the soft and fuzzy rhetoric of bipartisanship and commissions.

Virginia's business leaders - focused on the bottom line, not ideological litmus tests - have come to the same conclusion. The Northern Virginia Technology Council, representing the future of the state's economy - IBM, Google, Microsoft, AOL and Cisco, among others - has endorsed the Republican through the organization's political action committee. The Hampton Roads Chamber of Commerce, the Fairfax County Chamber of Commerce, the National Federation of Independent Businesses, the Virginia Association of Realtors and the Virginia Farm Bureau Federation have made a united choice that Mr. McDonnell can best steer the commonwealth through troubled economic times and position Virginia for job growth.

Unlike his opponent, Mr. McDonnell has experience as a statewide elected official running the attorney general's office and as a local legislator. Instead of building his campaign on how the government can do more by stripping resources from families and private-sector job creators, Mr. McDonnell is leading with ideas on how the state can focus its efforts on the priorities that matter. For instance, if the commonwealth gets out of the booze business, there's more money to address transportation.

Mr. Deeds and his supporters have run a vapid campaign, focused more on a 20-year-old college paper written by Mr. McDonnell than anything happening today. Many of the outrages they've manufactured incite puzzlement more than anger. Purportedly, as one of the other newspapers in town editorialized, in "Mr. McDonnell's Virginia ... information about birth control would be hidden." What a strange quibble to characterize as a crisis. Only in a fairy-tale Virginia are voters more worried about condoms than about years of failed Democratic leadership.

Virginians face a simple choice this November: Keep trying the same old policies and hoping the results will be different or actually doing something different by electing Mr. McDonnell.

Democrats' hidden gas tax

Extra $1 per gallon at the pump will mean all pain, no gain

By Sen. Kay Bailey Hutchison and Sen. Christopher S. Bond

There's something the Democratic lawmakers who are pushing cap-and-trade legislation don't want the public to know. The controversial climate-change legislation winding its way through Congress will impose a massive new national gas tax on the American people. We discovered this by analyzing what the Waxman-Markey cap-and-trade bill would do to gas prices and what Americans spend on gasoline, diesel and jet fuels. We found that cap-and-trade legislation will levy a $3.6 trillion gas-tax increase that will impact every American and important segments of our economy.

The goal of this climate-change legislation is actually to increase the price of traditional forms of carbon-based energy such as coal, gas and oil so that consumers will respond by using less of it. Some lawmakers call this "setting the price on carbon." Economists refer to this kind of policy as a price signal. But the bottom line is that the price of energy will go up. Ultimately, all Americans will pay directly or indirectly for the higher fuel prices the cap-and-trade legislation will cause.

Americans travel more than 200 million vehicle miles each month, and annually we spend nearly $1.2 trillion on gasoline and oil. The average household spends 5 percent of its annual budget on fuel. For many, gasoline is a mandatory expense. And this legislation disproportionately hits middle and lower income households that tend to have longer commutes to work and must drive in order to work. These families will be hit especially hard by the projected $1 per gallon increase for the additional gas tax the cap-and-trade legislation will bring.

Further, Americans will be double-hit by the gas tax when it raises the costs of goods and services such as groceries and utilities they must continue to purchase. Energy costs are among businesses' top operational expenses already. While companies face a variety of energy expenses, ranging from heating and cooling their work space to powering equipment and lighting, operating their vehicles is the most costly. Every company, from the small-town local florist to a package delivery service with nationwide operations, will be hard hit. In order for these businesses to withstand the heavier tax burden and to remain profitable, they will be forced to pass these energy cost increases along to consumers through higher prices.

Several industries will be penalized more severely by the gas tax than others. Our nation's farmers and ranchers, who are tasked with producing high-quality goods for much of the world, will be harmed by Waxman-Markey's $2 trillion tax on gasoline and $1.3 trillion tax on diesel fuel. Gas- and diesel-powered equipment, ranging from tractors to combines to fertilizing systems, are the operational foundation of American farms and ranches. Under the climate-change legislation, they will face $550 million in higher fuel costs in 2020 and $1.65 billion in 2050.

The American trucking industry will be another target of the cap-and-trade gas tax. In 2007, 1.7 million drivers of tractor-trailers logged 145 billion vehicle miles, consuming 28.5 billion gallons of fuel. That equates to $34,560 in annual fuel costs per driver. That number will skyrocket under Waxman-Markey. And when you consider that the average self-employed truck driver earns $43,545 in net revenue, the gas tax is essentially a new tax on the middle class. Of course, truckers will not suffer these higher gas taxes alone. Their costs are shared by all consumers. At some point, nearly everything bought or sold must be shipped from a manufacturer to a retailer. Thus, the sweeping effects of the gas tax will actually harm our entire economy.

Despite all this pain for families, farmers, truckers and businesses, there is no gain for our environment. Even U.S. Environmental Protection Agency Administrator Lisa P. Jackson admits that unless China and India impose similar draconian taxes and regulations, there will be no effect on world temperatures. So what is the purpose of the increase in costs to every American, and the consequent loss of jobs, if they will not have an effect on the global environment?

Under the majority congressional leadership, trillion-dollar figures have been discussed so nonchalantly in Washington recently that, unfortunately, they're starting to lose their shock value. Americans must know that the $3.6 trillion gas tax is a very real number with consequences for all of us. That is why we will fight the Waxman-Markey and Kerry-Boxer bills. We can improve the environment and economy through American ingenuity and technological advancement, not with taxes and mandates that increase costs and burden American families and businesses.

Kay Bailey Hutchison is a Republican senator from Texas, and Christopher S. Bond is a Republican senator from Missouri.

Obama wrong to release interrogation memos

By Michael V. Hayden
Special to CNN

Editor's note: Gen. Michael V. Hayden was appointed by President Bush as CIA director in 2006 and served until February 2009. He also was director of the National Security Agency and held senior staff positions at the Pentagon.

Michael V. Hayden says the decision to release the CIA interrogation memos was political, not a legal one.

WASHINGTON (CNN) -- I know that the story has moved on, that the outline of the journalistic narrative has been set, and that the "first draft" of history has been just about finalized. Before the ink dries though, I would like to offer at least a footnote.

And this footnote has to do with President Obama's decision in April to release opinions drafted by the Department of Justice that detailed the CIA's interrogation program for high-value al Qaeda detainees.

Specifically, it has to do with the argument made publicly and privately by the administration that its hand was being forced by a pending decision in a Freedom of Information Act case by the American Civil Liberties Union before Judge Alvin Hellerstein in New York.

Indeed, when Obama visited the CIA the Monday after the release of the documents, he specifically cited this argument in his remarks to the work force.

He said that he released "... the Justice Department Office of Legal Council (OLC) memos as a consequence of a court case that was pending and to which it was very difficult for us to mount an effective legal defense. ..."

Many disagreed with that presumption.

Only a few weeks before, CIA lawyers had been hard at work with other government attorneys sorting out which of the many available FOIA exemptions they would use to continue to protect various parts of the OLC documents.

They were confident since, in the very same ACLU FOIA case, the CIA had been in front of Hellerstein the year before on an almost identical issue.

Based on a declaration I signed, the judge had agreed in 2008 to allow us to continue to protect -- on the grounds of national security -- the specifics of waterboarding, a technique that had not actually been used since March 2003 and one the agency had not even authorized for use in years.

Despite all that, the judge agreed that to reveal the details of this technique would tie the hands of a president in a future emergency -- since, after all, laws and policies and presidents could always change.

When I pointed this out to administration officials in March, I was reminded that a report from the International Committee of the Red Cross recently had been leaked and that, since "so much was already out there," it would be impossible not to declassify almost all of the Justice Department memos.

I replied that it wasn't all out there and that there was a difference between speculation (however, informed or ill-informed it might be) and formal confirmation by the U.S. government.

Even today there are activities that are universally "known" but are still not officially confirmed by the U.S. government, and no one takes issue with the wisdom of continuing the policy of official silence.

I could not fathom how the unauthorized disclosure of the ICRC report, which was based substantially on prisoner debriefs, could possibly lead the government to conclude that it had no choice but to declassify and inventory for the world the details of the past interrogation program.

My lawyer friends remind me that nothing is certain in litigation, but a September 30 decision in the same ACLU FOIA case by Hellerstein tells me that my arguments had merit.

In this latter instance, CIA Director Leon Panetta was allowed to contest release of information on the CIA interrogation program.

As he (and his five immediate predecessors) had argued internally in the case of the OLC memos, he claimed that such a release would cause extremely grave damage to human intelligence collection and foreign liaison relationships.

He went on to add, "The release of operational details regarding implementation of the program would tend to reveal more generally the government's approach to questioning terrorist suspects, and thus must remain classified."

Hellerstein took him at his word and, as The Associated Press described it, said he believed he had an obligation to let the CIA director decide what should be released when it pertained to methods used to make uncooperative detainees divulge information.

Citing a "very harsh" post-9/11 world, the judge emphasized that "the need to keep confidential just how the CIA and other government agencies obtained their information is manifest. ..."

He went on to note that when intelligence matters are legitimately involved "... my job is to defer to the extent appropriate -- and that is substantial -- to the decision of the director of the CIA," and pointed out that "there has been a reluctance on the part of the courts to interfere with the discretion conferred by the mandate of the statutes on the CIA." And the judge said all of this even after the government's voluntary release of the detailed OLC interrogation memos five months earlier had put so much information into the public domain.

Make no mistake. The decision to release those memos in April was a political one, not a legal one -- a question of choice rather than necessity.

This was a deliberate decision and, if it is to be defended, history (and journalism) should demand that it be defended on those grounds and not on some hapless "the judge was going to make me do it" argument.

As I said, this is all now a footnote, and Hellerstein's September decision was barely remarked in the public discourse.

But the good people of CIA follow this more closely than most and, like the good operators and analysts that they are, they know what they see and they know what it means.

Who Needs a Central Bank?

By Bill Jenkins

“Recovery is here!” the Pollyannas shout. “This is the first sign. And soon all nations will be following with their rate increases.”

They talking, of course, about the Australians decision to hike their central bank index rate. And instantly the howls of recovery were on the lips of all the pundits.

But the recovery at large is still not on the horizon.

We may be facing a serious battle with deflation, and that the evidence is all around us, Australia notwithstanding. And now we have seen more than just anecdotal evidence.

A few days ago, the United Kingdom, which has been struggling with a weakening currency, released inflation numbers far below expectations. Not only was inflation lower than expected; the figures were actually negative.

What does that mean? Well, when inflation numbers turn negative, that is deflation. And England wasn’t alone.

The number one economy in the Eurozone, Germany, released numbers that said the same thing. Prices are not increasing, they are decreasing… and at a surprising rate!

That’s contrary to conventional wisdom, which says that the bloated money supply should be raising prices. But as I explained last week, that money supply isn’t natural — it’s being created on a whim by the central back and being pushed into its member banks.

From there, it is being held against the mountain of derivative losses, bad loans and investments, instead of flowing into the economy at large through lending.

That lack of lending is what’s preventing inflation. It won’t show up until the money is released to the public. Until then, the money supply has not effectively changed or expanded… and we’ll continue to see deflation.

Deflation, in turn, will lead to longer periods of extended “non-growth” and lower interest rates — at least in the places where they can be lowered. Where they cannot be lowered, “stimulus ad nauseam” will remain the protocol of the day.

But, of course, a flat-broke country can’t stimulate unless it can borrow. We are not like China with $2 trillion in reserves. Staying afloat requires borrowing unparalleled in history. The problem is, now that we aren’t buying the world’s widgets, the world is far less inclined to loan us anything. After all, that’s the way the game has been played. They lend to us — we buy from them. And everybody was happy. But you just can’t borrow forever.

So if deflation is going to be the name of the game, what happens to the currency markets?

Thomas Jefferson Fears the Federal Reserve

To answer that question, first we need to determine which currencies are going to move in which direction. That will continue to unfold over time. But it will likely lead to the currencies of the West doing a slow gyrating dance. Neither currency is better than any of the others, so they will just move back and forth until one of them gets their debt and banking situation under control.

Very possibly, the first nation to get rid of its central bank will be the first to really break out.

Because as we all should be well aware by now, central banks exist for one purpose and one purpose only: to bailout their banker buddies who, in the pursuit of greater profit, have made risky loans… to bail out large industries in order to preserve the job base… and to make sure that the taxpayers foot the bill. They will masquerade it in the best of terms, but at the end of the day, we are paying for their foolish business practices.

The sooner we do away with a central bank, the richer we all will be. This is not our first experiment with a central bank in the United States, but it has been our most costly. Our forefathers vehemently opposed the idea of a central bank for just this reason.

They believed that such a cartel would rape and pillage the public and increase poverty on a massive scale, until there is nothing left to take.

“I believe that banking institutions are more dangerous to our liberties than standing armies,” Thomas Jefferson wrote. “The issuing power of money should be taken away from the banks and restored to the people to whom it properly belongs. The modern theory of the perpetuation of debt has drenched the earth with blood and crushed its inhabitants under burdens ever accumulating.”

Amazing, isn’t it? Here’s a man who, two centuries ago, understood why central banks brought themselves into existence. The Federal Reserve in the United States has done nothing to improve our lot and has done everything it can to extort our wealth by the tax of inflation, then to export it to economies and dictators who live like massive welfare recipients off of the taxes your fathers have paid, and you continue to pay, and your children will have to pay.

And it will remain like this until the Fed is abolished again. As I mentioned, the population of the United States has closed more than one central bank. Former presidential hopefuls even lost their bids to the White House over their stand in favor of a central bank. Until such a day as we are sufficiently educated again to see them as a menace to our wealth and way of life, until we take it in hand to dismantle the Fed as it is, we will continue to suffer the expropriation of our hard-earned money to those who act as our overlords.

Problem is, I seriously doubt that will happen within our lifetimes. Look how long it’s taken us just to consider a bill that audits the Fed.

In the meantime, I recommend you take your capital to the place it’s treated best.

That specific place, however, is yet to be determined. Will it be Australia — the first ones to hike rates? Will be China – the almighty ones holding a financial nuclear option?

I can’t say for sure.

But I can say that, over the long run, it won’t be the greenback.

If you’re looking for a way out, diversifying your savings into another currency through the FOREX markets is an easy way to do it.

Regards,

Wednesday, October 21, 2009

Obama's war

Why the Afghanistan war deserves more resources, commitment and political will

Surge or surgical?

If you’re going to do it, do it properly

On the offensive

Pakistan's assault on the Taliban in South Waziristan brings bloody retaliation

Betting on bytes

Optimism that tech firms will help kick-start economic recovery is overdone

The Demand for Money and the Time-Structure of Production

I. Introduction

II. The Demand for Money

Definition

The Demand for Money and the Price Level

The Demand for Money and the Pure Rate of Interest

III. The Time Dimension of the Money Relation in Conventional Theory

The Time Dimension of the Money Supply

The Time Dimension of the Demand for Money

IV. The Time Dimension of the Demand for Money Reconsidered

The Demand for Commodity Money is Not Time-Neutral

The Demand for Fiat Money Tends to Be Time-Neutral

Misleading Distinction between Money and Present Goods

V. Some Implications of the Time Dimension of the Demand for Money

VI. Conclusion

An Unsustainable Path of Debt Expansion

Debt Growth Exceeds Income Growth

Correction Scenarios

The Anticorrection Scenario

The Wall Street Journal Defends the Predator State

Who's the Predator — the Government or Corporations?

The Current System Is Awful

How Government Screws Up Health Insurance

Conclusion

Obama Goes AWOL

On Afghanistan, "voting present" would be an improvement.

Podcast

The Doctor Fix Is In

Adding lots of 'dimes' to the deficit.

How a Fight Over a Board Game Monopolized an Economist's Life

Related Gaming Videos

More

Iran Agrees to Consider Deal on Nuclear Program, Diplomats Say

Associated Press

Tuesday, October 20, 2009

McDonnell for governor

It's time for change in Virginia

Democrats' hidden gas tax

Extra $1 per gallon at the pump will mean all pain, no gain

Obama wrong to release interrogation memos

Who Needs a Central Bank?

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