Gold Bugs

The Financial Post has an excellent article on the Gold Bugs and their doom saying about the economy.

Gold Bugs along with the Austrian School of Economics are the main economic pillars behind the anarcho-capitalism of the Libertarian Right. The Gold Bug phenomena arose after Nixon took the U.S. dollar off the gold standard, and it made author Harry Browne a tidy profit as he promoted the Gold Standard.

America's No. 1 economic problem and the No. 1 issue
of the 1980 campaign is the Federal Reserve's continued expansion
of the money supply. They also know that the only cure for this is
to stop the Fed, in short to abolish it and return to a market
commodity money like gold.

As any "Freedomista, anarcho-capitalist, Austrian economist, gun nut, Federal Reserve conspiracy-theorist, gold bug, secessionist, political monkeywrencher, dope-smoking marijuana-reform activist, civil libertarian or other amateur or professional contrarian possessed of even the most rudimentary understanding of his beliefs will tell you: the fundamental human right is the right to be left alone." Indeed, the right to be left alone implies the right to form voluntary associations and oppose and repel those who forcefully prevent you from exercising that right.

Ironically Gold Bugs share a common view with Vulgar Marxists and Technocracy Inc.'s theories of Peak Oil, that capitalism as now constituted will collapse.

Gold bug

Gold bugs, in the traditional sense, believe in, fear, or even hope for another Great Depression or Armageddon, and believe that by holding gold they will survive and prosper.

Leon Trotsky was not only a Monetarist, but
a "hard" Monetarist and gold bug, who
thought that commercial calculation would
be devastated unless gold was employed as
money. He called for the Soviet Union to go
onto a gold standard, and predicted dire
consequences if it did not. (Although a gold
standard does guarantee that the money
supply cannot be increased beyond a point, it
is purely the regulation of the quantity which
matters, and gold is not essential for that).

"I don't know exactly what the Federal Reserve Board is except that Wikipedia says it has something to do with our fiat money. I must protect our fiat money at all costs. I must protect the chairman of the Federal Reserve Board at all costs. I must protect him from Marxists and Maoists and socialists and Third Worlders and especially those wild-eyed anarcho-Austrian free-market libertarian gold-bug economists. If someone picks up a gold standard and tries to strike the chairman with it, I will throw my body in front of him.

"The Daily Reckoning is a freewheeling Web site for libertarians,
gold bugs and doom enthusiasts of every stripe."

Published: June 5, 2005
The New York Times

Nor do people have any reason to think that the world's financial system is in danger. "Hasn't it always been this way?" they ask.

The answer is "no." The present international financial system is an experiment. It has only existed since 1971, when the United States cut the umbilical cord between the dollar and gold. Before that, gold almost always stood behind the dollar, and other paper currencies. Why? You might just as well ask us "Why do fools fall in love?" or "Why is there air?"

If central bankers could create "money" simply by printing paper currency on a printing press, the world would soon be full of paper currency. And everywhere and always, the price of a thing varies with its availability.

The more there is, the cheaper it is. Generally, as the volume of paper money increases, its unit price falls. Always has; always will.

This is not the first time central bankers have tried a system of purely faith-based currency. Every previous experiment ended in the predictable way: the bankers created more and more "money." And as the quantity increased, the quality decreased. Eventually, the "money" was of such poor quality that people would no longer accept it. In recent history, the Argentine currency lost 90% of its value in a single year. In less-recent history, the German currency lost 999% of its value in a matter of weeks.

Another irony is that Gold Bugs were originally Democrats.

What is a Gold Bug?

"Gold Bug" was the popular name given to Democrats who split with their party over the silver issue in 1896 and supported the gold standard as the basis of U.S. monetary policy. The Gold Bugs, or Gold Democrats, called themselves the National Democratic party, held their own convention, and nominated their own presidential candidate in 1896, John M. Palmer, a 79-year-old Kentuckian. In their platform, the Gold Democrats criticized William Jennings Bryan and the regular Democrats as being reckless radicals. "They advocate a reckless attempt to increase the price of silver by legislation to the debasement of our monetary standard, and threaten unlimited issues of paper money by Government."

At the Democratic Convention of 1896, William Jennings Bryan, a 36-year-old former congressman from Nebraska, electrified the convention when he gave a powerful speech attacking some members of his party for failing to rally behind the silver issue. Bryan thought the gold standard was so detrimental to the welfare of the working people of the nation that he compared the burden to the crucifixion of Christ. "You shall not press down upon the brow of labor this crown of thorns," Bryan thundered, "you shall not crucify mankind upon a cross of gold."

I am reprinting this whole article in the public interest, since it will soon disappear behind a subscription wall.

How to spoil a good party

These bears see financial Armageddon around every corner. What would happen if they are right?

Jacqueline Thorpe, Financial Post

Published: Monday, May 14, 2007

NEW YORK - On a sultry spring day in Manhattan, the contrarians -- bears and goldbugs -- are in on the prowl.

The 100 or so bankers, money managers and investors gathered at the Union League Club in New York City last week to hear how today's highly leveraged, derivatives-entangled global financial system is about to come crashing down about their ears. Organized by the Committee for Monetary Research & Education, a nonprofit organization dedicated to educating the public about markets and "sound money," the evening would not be for the faint of heart.

The theme: "A time of Financial Fragility and Latent Instability."

Some may write off such a collection of downbeats as the financial equivalent of a loopy off-the-grid movement, preparing to work the land and create their own power when the oil runs out.

Many in the dark-panelled dining room see financial Armageddon around every corner. Many believe the financial system started on the road to ruin when the world went off the gold standard once and for all in 1970s, switched to fiat-based currencies and started to inflate its way out of its problems.

They believe escalating debt will cause the U.S. dollar to crash and they probably keep gold bars under their beds. Heck, some, such as Chris Powell of the Gold Anti-Trust Action Committee, believe central banks have been actively colluding to keep the gold price down.

And yet with every tick higher in global stock markets, with every newfangled CDO, CDS or ABS that offloads risk ever further, their warnings about the folly of spiralling debt, paper money and inflation provide a sobering view.

They are certainly well-educated and experienced money men. At the risk of spoiling a perfectly good party, here's what they have to say, beginning with the official historian for the Bank of England, Forrest Capie.

FORREST CAPIE

Official historian of the Bank of England, speaking in his own capacity

Mr. Capie is currently on secondment from the bank, writing the next installment of its commissioned history. History has shown that when asset-backed money is abandoned for fiat-based money, inflation invariably follows, he says.

For close to two centuries and until the 19th century, gold was the basis of the world monetary system.

"The gold standard in its classical form provided price stability and allowed the economy to do what it could with uncertainty reduced to a minimum," Mr. Capie says.

By the 20th century, as the world abandoned the gold standard, inflation reared its ugly head. In the 1920s there were five cases of hyperinflation: Russia, Hungary, Austria, Poland, and in Germany prices rose a billion-fold across 1923-24. In the 1940s, there was hyperinflation in China, Greece and Hungary.

"Stories circulate of how in some department stores in Budapest a bell would ring and that would indicate as of that moment, prices had doubled." he says. "In all these experiences, it was unbacked paper money of the kind we now have everywhere. A vast expansion of paper money preceded or accompanied all these inflations. What's also common to these inflations is there's large and growing fiscal deficits. Deficits of these kinds ultimately require monetizing."

In the second half of the 20th century, controlling the supply of money to control inflation fell out of favour. The trendy idea became wage and price controls. Inflation soared, peaking in the U.K. at 30% in the mid-1970s.

With the current targeting of inflation, price stability does seem to prevail Mr. Capie concedes.

"But it does allow considerable discretion in monetary policy ?and the use of discretion has come unstuck in the past," he says. "The great danger then is, if inflation should begin to edge up and if inflation expectations were to change, it may be difficult to contain the new inflation and take some time to alter expectations. Surely it's better at least to keep an eye on the monetary aggregates and prepare to see them as useful indicators of underlying inflationary pressures."

JAMES TURK

Founder and chairman of GoldMoney, a payment system where gold can be used as online currency, author of The Coming Collapse of the Dollar

No explanation required as to where Mr. Turk thinks the dollar is headed.

"When we talk about money, we talk about the supply of money," he says. "What we don't talk about and what in my mind is even more important is the demand for money. Currency crises start with a collapse in demand, he says. If people lose faith in the currency for whatever reasons --either they don't trust the backing or there's not enough gold backing the currency, or they don't trust the government and its policy to maintain a stable purchasing power or to keep the currency strong so it can be used as an effective means for communicating value in everyday commerce-- they move away into other alternatives."

Mr. Turk says central banks almost daily talk about diversifying away from the dollar or creating their own currency zones. In a recent interview with a Russian journalist, the journalist said even Russians, which have long coveted greenbacks, are now beginning to question the supremacy of the U.S. dollar.

Investors, too, are beginning to shun it, with none other than Warren Buffett leading the pack.

"Look, too, at the stock market," he says. "The stock market is not going up because of economic fundamentals. People would rather own a million dollars of Exxon than have a million dollars in the bank. It's also true people would own a million dollars of copper than have a million dollars sitting in the bank. All these things cumulatively are suggesting to me we are probably on the final slippery slope for the dollar. I do think the next several months are going to be very, very tumultuous."

"We're buying from China," he says. "They're lending us back the money. It's unsustainable. It cannot go on forever because we're eroding our net worth. Just like individuals can have too much debt, companies can have too much debt, nations can have too much debt."

PETER WARBURTON

'Director of Rhombus Research, author of Debt and Delusion

"You could say the central banks, particularly the Fed, have been killing us with kindness," Mr. Warburton says. "They've wanted to prevent bad things happening to us, but in the process they have made assurances and taken steps to help us misprice the risks in the system and emboldened us to take bigger risks."

As far back as the Mexican peso crisis of 1994, an asymmetrical bias began to creep into U.S. monetary policy allowing equity rises to go uncorrected but sharp falls to be cushioned, he says.

There were powerful indications the decade-long credit cycle was close to exhaustion in 2000-01 with bond yields rising back up to their late-1990s peaks.

But it was arrested in 2002 by the U.S. Fed slashing rates and making policy statements that it had numerous tools at its disposal to fend off any deflation risk.

"The opportunity was missed for the system to correct," he says.

Instead the Fed helped create an ever-expanding risk universe, with derivatives, asset-backed instruments, insurance markets, credit protection securities and catastrophe bonds all pushing out the outer front of risk.

"This all works wonderfully well," he says. The risk universe expands by 20% per annum, credit by say 10%, the economy by 6% or 7%." But it all relies upon the credit staying good."

He sees an unwinding in any number of usual ways: a natural or man-made disaster; a spill-over of inflation from asset markets into CPI which would prevent interest rate cuts; a grass roots credit tightening due to lower collection of debt, late settlements or a postponement of capital expenditures.

Eventually, you could see foreclosures, capital losses or break in the hedge fund or derivatives market, as with LTCM in 1998.

"My concern is we have already entered the latter stages of this process," he says. "The price we may yet pay for the fix in 2002 is to have an extended period of underperformance."

HENRY C.K. LIU

Visiting professor at the University of Wisconsin and Asia Times online commentator, has provided unofficial advice to several Chinese governments

"Today, the dollar is the world's prime reserve currency. While depreciating against most assets, it continues to be really overvalued in terms of gold," he says.

To give an idea of how indebted the United States is, Mr. Liu outlines what the U.S. Treasury would require if the dollar was still backed by gold.

The U.S. treasury now owns 261 million ounces of gold. At its peak in in December, 1941, it owned 650 million ounces.

As of March 12, 2007, the price of gold required to pay back the national debt was US$33,864 per ounce. The rise in the price of gold needed to keep up with the rise in U.S. national debt would be US$8.15 per ounce per day.

To back the U.S. monetary base with gold, which was about US$800-billion in February, the price of gold would have to be US$3,763 per ounce.

Unlike many at the dinner, Mr. Liu says gold does not have enough elasticity for a modern global economy.

[With that kind of debt, there may not be enough gold in the ground!]

He believes global financial markets have become completely detached from underlying economic fundamentals. "The old concerns of industrial capitalism, which is production, employment and so on have become byproducts," he says.

With trade becoming an increasingly key engine of the global economy, other aspects such as domestic development have been overlooked.

In a recent column, he said virtual money created by structured finance has reduced central bankers to the status of mere players rather than key conductors of financial markets.

As inflation picks up, the liquidity boom and asset inflation will draw to a close, leaving a hollowed out economy devoid of substance.

Mr. Liu says with financial crises seeming to occur in a regular 10-year pattern-- the October, 1987 crash, the Asian financial crisis starting in July, 1997 -- the world is due a slump.

KEVIN DUFFY

Principal of Bearing Asset Management, which runs the Bearing Fund, a long-short macro hedge fund currently long gold, short financial stocks and Japanese government bonds

"We had the late-1980s bubble in Japan, the biotechnology bubble in 1991, we had the first LBO bubble of '89, of course the technology bubble of 2000 and more recently the housing bubble," Mr. Duffy says. "As you get these asset bubbles, it takes greater and greater doses of credit just to keep the game going. In doing so, you invite more and more borrowers or you extend greater credit to existing borrowers. This is what happened recently with the subprime problem."

Mr. Duffy likes to look for contrarian indicators in popular culture. In June 2005, one month from the top in homebuilding stocks, Time ran a cover about the real estate bonanza.

Another great contrarian indicator is stadium names. In 2000, tech companies had 12 stadium names; 10 of those companies are now bankrupt. Today, 14 stadiums have bank names.

Beneath each bubble is a gargantuan credit bubble.

"What is making this credit cycle so terrifying is the amount of leverage that's being deployed, and Wall Street is applying a lot of that," he says.

Since 2001, the U.S. Federal Reserve's balance sheet has expanded US$300- billion, or 50%, the money supply has grown by 60% while the balance sheets of the top five banks on Wall Street have expanded 160%.

Money in venture capital peaked at US$90-billion in 2000. Some US$160- billion poured into private equity last year and that amount will probably double this year, he says.

The housing bubble has now been replaced by a professional speculator bubble: commercial real estate, hedge funds and private equity, Mr. Duffy says.

But he says the same exotic mortgages are starting to be found in commercial real estate.

"All indicators of a massive top," he says.

Quoting James Stack, editor of InvestTech Research, he says: "Never confuse an economic miracle with a liquidity bubble."

© National Post 2007

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"Are Anarchists Thugs?"

A follow up on my; " Why The Conservatives Are Not Libertarians" in this case an explanation as to why todays right wingers who call themselves Libertarians are not. Because homegrown individualist anarchism which was Libertarianism was replaced after Benjamin Tuckers death with the pro capitalist ideology and idealization of Russian reactionary Ayn Rand and later still with the rantings of the Anti-Labour Theory of Value; Austrian School of Economics.

Neither Bombs Nor Ballots: Liberty & The Strategy Of Anarchism

In an article entitled "Are Anarchists Thugs?", Tucker offered a breakdown by profession of Liberty's anarchists. The greatest part proves to be of the professional/intellectual class; the remainder includes independent manufacturers and merchants, farmers, artisans and skilled workers. We see that, although the anarchists - especially of the Liberty group - were not latter-day Jeffersonians in any deep sense, they owned some characteristics in common. The anarchists' hard-core supporters were the socio-economic equivalents of Jefferson's yeoman-farmers and craftsworkers: a freeholder - artisan - independent merchant class allied with free-thinking professionals and intellectuals. These groups - in Europe as well as America - had socio-economic independence, and through their desire to maintain and improve their relatively free positions, had also the incentive to oppose the growing encroachments of the capitalist State.

Individualist anarchism, although suffering from the repression directed against the anarchists in general, appears to have dwindled into political insignificance largely because of the erosion of its political-economic base, rather than from a simple failure of its strategy. With the impetus of the Civil War, capitalism and the State had too great a head start on the centralization of economic and political life for the anarchists to catch up. This centralization reduced the independence of the intellectual/professional and merchant artisian groups that were the mainstay of the Liberty circle.

In 1911 Tucker judged that this centralizing process had created an accumulation of wealth in the "trusts" that had superseded their need for the "four monopolies." He argued that "even the freest competition" could not presently hope to destroy the trusts, which could afford to sacrifice large sums of money to remove new competition. Tucker thought that only political or revolutionary forces could now whittle down this concentration of capital. He warned, however, that the anarchistic economic solution - "and there is no other solution" - must be taught to following generations. In the meantime, anarchists who aid the "propaganda of State Socialism or [violent] revolution make a sad mistake indeed, "hastening the advent of revolution before the people were prepared to do without the State."

See:

The Era Of The Common Man

Once More On the Fourth

Keep Coulter I'll Take Paglia

New Libertarian Journal

State-less Socialism

The Right To Be Greedy

A Lesson in Mutual Aid

Political Imbalance

Libertarian Anti-Imperialism

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China Burps Greenspan Farts Dow Hiccups

File this under; loose lips sink ships.

On Monday, Greenspan said a recession was possible, though it's difficult to predict the timing, a comment blamed in part for the global market decline this week.

Greenspaned the works. He actually speculated that America may be facing a recession. But now noticing the stink in the room he is waving his hand behind his butt to clear the air.US slump possible, not probable-Greenspan quoted

Then the Chinese government which is still unfamiliar with the operations of capitalism speculated on capital gains taxes, and the Chinese stock market listened, and crashed.

One does not speculate out loud about such things when you have a stock market. The market responds as it did to Greenspan's comments. Sighs for the good old days were heard through out the Chinese hierarchy.

But why the panicked selling in China? It certainly wasn't because of anything Greenspan said. Most news reports are declaring that it was the result of rumors about potential policy initiatives that the Chinese leadership might soon enact to cool off an economy that is growing too fast. Whether Premier Wen Jiabao is about to announce interest rate hikes or a capital gains tax is impossible to say, but what we do know is that the leadership is very concerned with attempting to rein in China's reckless growth. And that's probably a good thing for everyone.

So when Shanghai sneezes, the world's markets catch the bird flu? True or not, the fact that this story is even being told is testament to how far and how fast China has come. It's instructive to think back 10 years, to the Asian financial crisis of 1997. China managed to keep itself relatively immune from the devastation that ransacked its neighbors, in part because of its iron grip on its own currency, and possibly because it was less well integrated into the global economy than the rest of the region. Ten years later, it's China that's shaking up the status quo, with a little help from the United States. From that vantage point, the fact that on Wednesday the Shanghai stock exchange, so far, is keeping its cool could well be the single most significant data point in all the market madness racing around the globe over the past 24 hours.

The reality is that in 1997 China had NO international stock market and did not yet own the ultimate capitalist safe haven; Hong Kong. So the Yaun was protected by the Chinese and their stock market, being internal, did not suffer the meltdown the rest of the world did.

In this case China came of age, and created a global meltdown on what was a local event.

Pick a stock market, any market in our globalised, homogenised, sterilised, aneasthetised, dumbed down, interconnected ever shrinking globe... and it tanked.
But the original epicentre was somewhere new...that emerging sleeping giant that even Napoleon worried fleetingly about...China. Shanghai’s A share index – ie for Chinese investors only - slumped 9%.

Today it is a different world and China owns the majority of America's debt. And its stock market is now a world market place despite being a creature of the Chinese State.

China’s stock market had three unique features that made its rapid
development unique and interesting.

First, the government used it largely as a fund raising vehicle for
funding state-owned enterprises
Second, China’s stock market developed under a repressed financial
regime. Financial repression was created through a combination
of capital controls on international capital flows and administrative
measures imposed by the central government to dampen potential
competition among different financial assets (e.g., bank deposits, enterprise
stocks, enterprise bonds, and various kinds of government
bonds) within the domestic financial sector.5 While the capital controls
helped to prevent capital from flowing out of the country, the
competition-mitigating administrative controls sought to avoid the
driving up of returns on various financial assets and thus to allow the
government to maintain a source of cheap capital for financing SOEs’
investments.
Third, China’s stock market was developed under a weak legal
framework that offered shareholders little protection. On the widely
used indicators for shareholder rights protection developed by La
Porta et al. (1998), China scored 3, compared with the average score
of 3.61 for all other transitional economies.
The actual protection for shareholders in China, however, is lower
than what the index suggests because of the weak legal enforcement
in China. The development of China’s stock market therefore
presents a puzzling case for economists and financial analysts who
hold that legal shareholder protection is a prerequisite for the development
of a functioning capital market

So the result was a crash heard around the world. The reason is three fold, China burped, Greenspan farted and America had lower than expected trade income (from durable goods) thus they owed the Chinese even more money.

What happened Tuesday was a confluence of events, something of a "perfect storm," each of which precipitated pent-up doubts. There was the decline overnight of 9.2 percent in the Chinese stock market, in which U.S. investors purchased $5.2 billion in equities in 2006. Then there was a decline in orders for durable goods and Mr. Greenspan's comments.

Correction or Crash is the question on everyones lips this morning on day three of the crumbling of stock markets world wide. It's a crash. Just not a 1929 crash. Heck it isn't even a 1987 crash. Nor a 1997 meltdown. It's a hiccup the stock markets world wide are a thousand times higher than 1929, and in 1987 the stock market was only at 5000. Today it is over 12,000 in North America and around the world. But a crash none the less.

That was the ultimate Perfect Storm, as the 1987 crash proved. In 1987 the crash was as severe as it was in '29 but the impact was the clearing out of junk bonds, as it had been in '29 a clearing out of Mutual Funds, and other get rich quick schemes, and companies that collapsed were quickly bought up by those cash rich, which did not occur in '29.

The 1987 market crash, which greeted Greenspan just two months into his term and drained the stock markets of nearly one-quarter of their value in a single day, was widely thought at the time to be a precursor of recession. But the Fed chairman, beginning to establish his reputation for working miracles, avoided the inevitable by guaranteeing to pump enough money into the economy to keep anyone from going broke for lack of cash.

What folks forget in bull markets and boom economies, such as we have seen for the past twenty years is that crashes become cycles, called corrections by optimists, but the business cycle of the early 20th century are no longer as damaging to capitalist society as they were in 1929. Thanks to Keynes. Notice that even an Ayn Randist like Greenspan is not adverse to priming the pump to protect the Stock Market.

There was no priming the pump for the 1929 Wall Street Crash, as Keynes noted at the time. As Galbraith writes in his history of the Great Depression.

Galbraith writes with great wit and erudition about the perilous actions of investors and the curious inaction of the government. He notes that the problem wasn't a scarcity of securities to buy and sell: "The ingenuity and zeal with which companies were devised in which securities might be sold was as remarkable as anything." Those words become strikingly relevant in light of revenue-negative start-up companies coming into the market each week in the 1990s, along with fragmented pieces of established companies, like real estate and bottling plants. Of course, the 1920s were different from the 1990s. There was no safety net below citizens, no unemployment insurance or Social Security. And today we don't have the creepy investment trusts--in which shares of companies that held some stocks and bonds were sold for several times the assets' market value.

In 1929 Joe and Jane America were invested in the stock market for the first time through Mutual Funds, which were the junk bonds of their day. Workers , small businessmen, seniors, all could afford to invest in stocks. Gone were the days of the Robber Barons dominating the sanctuary of Wall Street.

Like insurance companies of the time, Mutual Funds and other stock market options were being peddled to the working class. For the first time ever in the boom economy of the Post War 1920's workers were secure in their jobs and could afford homes, cars, and yest putting a little aside for retirement either through insurance, bank savings, saving and loans mortgages or through stocks and mutual funds.

The perfect storm was the complete collapse of market capitalism, one that had no social safety net. Workers lost homes, business collapsed and the state called for chickens in every pot but provided no jobs. The chickens came home to roost for the free marketeers,their ideology was laughed at as irrelevant in light of historical facts of the crash and empirical fact's behind it. The U.S. market never recovered until the space age.

Over the long run, a European investing on Wall Street might do fairly well. But what if he had invested in the late ’20s, when America’s promise and success seemed most inevitable? Just ask the Ghost of ‘29. If he had invested his money just before the crash, he would have had to wait until ‘56 to break even! That is, he would have had to hold on through a Great Depression…another major world war…and practically until the end of the Eisenhower administration - a period of 27 years! After that, he would have enjoyed a good 10 years of capital growth - and then another setback.

Like today many folks are invested in the Stock Market, but mainly through their retirement savings, thus the impact on real cash, real value is softened. State capitalism saves the day, meaning crashes are reduced to corrections, the business cycle levels off instead of being a desperate spiral to Depression, and all is well with the world. Thus this weeks downward spiral is a hiccup instead of a stroke.

And while Rothbard would deny Keynes or Galbraiths solutions were valid, which history proved they were, his work on the Great Depression also shows that the much vaunted Free Market failed because it was dominated by criminal capitalists trying to make a fast buck. Something the right wing liberaltarians never consider in their free market mythology. But which is the reason for all such meltdowns in the marketplace as Enron showed.

The ability to now regain from a crash is part of the checks and balances of the stock markets, whether through state regulations, investor funding or computerization. And thus the need to continually keep armed, to have little wars world wide, are now part of the business cycle as well. Gone are the days when rearmament could save the market, today it is key to the well being of the market place.

The bull market effectively came to an end on September 3, 1929, immediately the shrewder operators returned from vacation and looked hard at the underlying figures. Later rises were merely hiccups in a steady downward trend. On Monday October 9, for the first time, the ticker tape could not keep pace with the news of falls and never caught up. Margin calls had begun to go out by telegram the Saturday before, and by the beginning of the week speculators began to realize they might lose their savings and even their homes. On Thursday, October 12, shares dropped vertically with no one buying, and speculators were sold out as they failed to respond to margin calls. Then came Black Tuesday, October 19, and the first selling of sound stocks to raise desperately needed liquidity.

So far all was explicable and might easily have been predicted. This particular stock market corrective was bound to be severe because of the unprecedented amount of speculation which Wall Street rules then permitted. In 1929 1,548,707 customers had accounts with America's 29 stock exchanges. In a population of 120 million, nearly 30 million families had an active association with the market, and a million investors could be called speculators. Moreover, of these nearly two-thirds, or 600,000, were trading on margin; that is, on funds they either did not possess or could not easily produce.

The danger of this growth in margin trading was compounded by the mushrooming of investment trusts which marked the last phase of the bull market. Traditionally, stocks were valued at about ten times earnings. With high margin trading, earnings on shares, only one or two percent, were far less than the eight to ten percent interest on loans used to buy them. This meant that any profits were in capital gains alone. Thus, Radio Corporation of America, which had never paid a dividend at all, went from 85 to 410 points in 1928. By 1929, some stocks were selling at 50 times earnings. A market boom based entirely on capital gains is merely a form of pyramid selling. By the end of 1928 the new investment trusts were coming onto the market at the rate of one a day, and virtually all were archetype inverted pyramids. They had "high leverage"—a new term in 1929—through their own supposedly shrewd investments, and secured phenomenal stock exchange growth on the basis of a very small plinth of real growth. United Founders Corporation, for instance, had been created by a bankruptcy with an investment of $500, and by 1929 its nominal resources, which determined its share price, were listed as $686,165,000. Another investment trust had a market value of over a billion dollars, but its chief asset was an electric company which in 1921 had been worth only $6 million. These crazy trusts, whose assets were almost entirely dubious paper, gave the boom an additional superstructure of pure speculation, and once the market broke, the "high leverage" worked in reverse.

Hence, awakening from the pipe dream was bound to be painful, and it is not surprising that by the end of the day on October 24, eleven men well-known on Wall Street had committed suicide. The immediate panic subsided on November 13, at which point the index had fallen from 452 to 224. That was indeed a severe correction but it has to be remembered that in December 1928 the index had been 245, only 21 points higher. Business and stock exchange downturns serve essential economic purposes. They have to be sharp, but they need not be long because they are self-adjusting. All they require on the part of the government, the business community, and the public is patience. The 1920 recession had adjusted itself within a year. There was no reason why the 1929 recession should have taken longer, for the American economy was fundamentally sound. If the recession had been allowed to adjust itself, as it would have done by the end of 1930 on any earlier analogy, confidence would have returned and the world slump need never have occurred.

Instead, the stock market became an engine of doom, carrying to destruction the entire nation and, in its wake, the world. By July 8, 1932, New York Times industrials had fallen from 224 at the end of the initial panic to 58. U.S. Steel, the world's biggest and most efficient steel-maker, which had been 262 points before the market broke in 1929, was now only 22. General Motors, already one of the best-run and most successful manufacturing groups in the world, had fallen from 73 to 8. These calamitous falls were gradually reflected in the real economy. Industrial production, which had been 114 in August 1929, was 54 by March 1933, a fall of more than half, while manufactured durables fell by 77 percent, nearly four-fifths. Business construction fell from $8.7 billion in 1929 to only $1.4 billion in 1933.

Unemployment rose over the same period from a mere 3.2 percent to 24.9 percent in 1933, and 26.7 percent the following year. At one point, 34 million men, women, and children were without any income at all, and this figure excluded farm families who were also desperately hit. City revenues collapsed, schools and universities shut or went bankrupt, and malnutrition leapt to 20 percent, something that had never happened before in United States history—even in the harsh early days of settlement.

This pattern was repeated all over the industrial world. It was the worst slump in history, and the most protracted. Indeed there was no natural recovery. France, for instance, did not get back to its 1929 level of industrial production until the mid-1950s. The world economy, insofar as it was saved at all, was saved by war, or its preparations. The first major economy to revitalize itself was Germany's, which with the advent of Hitler's Nazi regime in January, 1933, embarked on an immediate rearmament program. Within a year, Germany had full employment. None of the others fared so well. Britain began to rearm in 1937, and thereafter unemployment fell gradually, though it was still at historically high levels when war broke out on September 3, 1939. That was the date on which Wall Street, anticipating lucrative arms sales and eventually U.S. participation in the war, at last returned to 1929 prices.

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Radical Capitalists Not So Radical

Louis Rosetto, the "radical capitalist" who founded Wired magazine, is not a 'libertarian" despite what the Wall Street Journal says, he is an Ayn Rand capitalist apologist as is his magazine.

Wired Magazine in the nineties predicted that high tech capitalism was booming and would do so for the next 25 years. And then the dot.com bubble burst.

And yet the article made it onto the market as a book. A self fulfilling prophecy for the pre-Enron generation in Silicon Valley.

For the most part, the book lacks historical perspective--unless you count the authors' use of ''future history.'' For much of the book, they write as if they were looking back from the 21st century, giving their arguments an undeserved aura of certainty. This conceit may confound serious readers, for it produces a bizarre blend of real and imaginary companies in the index. For example, New York Times is followed there by a listing for Nippon Nano, a fictitious Japanese nanotechnology giant supposedly operating in the middle of the next century.

And we should give credence to these dweebs who call themselves 'libertarians" when in reality they are merely apologists for the newest regime of robber baron capitalism.

Like most of the Utopian idealists of the right they believe in what Ayn Rand called; Capitalism The Unknown Ideal. And that is what it is, an unknown ideal because the historical reality of capitalism clashes with their Walt Disney notions of idealized capitalism.

There has never been a free market under capitalism, because capitalism dominates markets, it abhors freedom and demands monopoly. It was in fact capitalism that created the State, the very state these dweebs protest against. If they had their idealized free market, capitalism would again create a State to to regulate competition and allow for the powers that be to gain a monopoly, which is how real life capitalism operates.

Capitalism as a "mode of production," Marx argued, is a historically new and distinct form of human society. True, in both the ancient world and feudalism there were "capitalists." That is, there was trade and money, there were merchants profiting from buying and selling. But these, by themselves, were insufficient to establish capital as the ruling principle and regulator of society.

To understand a mode of production, Marx suggested, we must look to the very core of society, and specifically to the way that surplus is pumped out of the direct producers. In previous forms of class society, exploitation took a definite form. The characteristic dominant social relation was that between lord and peasant, with the peasant family laboring more or less under its own self-direction and compelled, by force, to hand over surplus products and surplus labor to its exploiters.

In capitalism, by contrast, the dominant class relationship is that between capitalist and worker. The worker unlike the peasant is radically "dispossessed." Where the peasant family could sustain itself on the products of its own labor, modern workers cannot, for they lack direct access to the very means to live. They cannot feed themselves from their labor on the land, nor sell the products of their own labor, for they have access to neither land nor the tools and materials required for modern production. Instead, they must hire out the one thing they own - their "labor power," their human creative capacities - to employers in return for money wages, which they can spend purchasing the means to satisfy their needs. The principles of the market, money, exchange, profit, and the like thus penetrate into the very inner fabric of capitalist society in a way that was simply not true for earlier forms of society. The key to the emergence of capitalism was something new: the creation of this radically dispossessed figure, the wage worker.

h/t to Diogenes Borealis


See:

Monopoly Capitalism in Cyberspace

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