Category Archives: Economics & Politics

Pearl Harbor


The video above shows the narrator speaking about Why the Japanese attack was expected.

Always seek out information that goes against what you know or think you know.

How FDR Provoked Japan into Attacking Pearl Harbor

322_Higgs    (Audio clip)   Is FDR just another meglamanic war monger?

from www.mises.org:

 

December 7, 2012

Mises Daily

How U.S. Economic Warfare Provoked Japan’s Attack on Pearl Harbor by Robert  Higgson December 7, 2012

[This talk was delivered at the 30th Anniversary Supporters Summit of the Ludwig von Mises Institute, Callaway Gardens, Georgia, on October 26, 2012. Click here to watch the video of this talk.]

Many people are misled by formalities. They assume, for example, that the United States went to war against Germany and Japan only after its declarations of war against these nations in December 1941. In truth, the United States had been at war for a long time before making these declarations. Its war making    took a variety of forms. For example, the U.S. navy conducted “shoot [Germans] on sight” convoys – convoys that might include British ships — in the North Atlantic along the greater part the shipping route from the United States to Great Britain, even though German U-boats had orders to refrain (and did    refrain) from initiating attacks on U.S. shipping.

The United States and Great Britain entered into arrangements to pool intelligence, combine weapons development, test military equipment jointly, and undertake other forms of war-related cooperation. The U.S. military actively cooperated with the British military in combat operations against the Germans, for example, by alerting the British navy of aerial or marine sightings of German submarines, which the British then attacked. The U.S. government undertook in countless ways to provide military and other supplies and assistance to the British, the French, and the Soviets, who were fighting the Germans. The U.S. government also provided military and other supplies and assistance, including warplanes and pilots, to the Chinese, who were at war with Japan.[1]

The U.S. military actively engaged in planning with the British, the British Commonwealth countries, and the Dutch East Indies for future combined combat operations against Japan. Most important, the U.S. government engaged in a series of increasingly stringent economic warfare measures that pushed the Japanese into a predicament that U.S. authorities well understood would probably provoke them to attack U.S. territories and forces in the Pacific region in a quest to secure essential raw materials that the Americans, British, and Dutch (government in exile) had embargoed.   (2]

Consider these summary statements by George Victor, by no means a Roosevelt basher, in his well documented book The Pearl Harbor Myth.

Roosevelt had already led the United States into war with Germany in the spring of 1941—into a shooting war on a small scale. From then on, he gradually increased U.S. military participation. Japan’s attack on December 7 enabled him to increase it further and to obtain a war declaration.  Pearl Harbor is more fully accounted for as the end of a long chain of events, with the U.S. contribution reflecting a strategy formulated after France fell. . . . In the eyes of Roosevelt and his advisers, the measures taken early in 1941 justified a German declaration of war on the United States—a declaration that did not come, to their disappointment. . . . Roosevelt told his ambassador to France, William Bullitt, that U.S. entry into war against Germany was certain but must wait for an “incident,” which he was “confident that the Germans would give us.” . . . Establishing a record in which the enemy fired the first shot was a theme that ran through Roosevelt’s tactics. . . . He seems [eventually] to have concluded—correctly as it turned out—that Japan would be easier to provoke into a major attack on the Unites States than Germany would be.   (3]

The claim that Japan attacked the United States without provocation was . . . typical rhetoric. It worked because the public did not know that the administration had expected Japan to respond with war to anti-Japanese measures it had taken in July 1941. . . . Expecting to lose a war with the United States—and lose it disastrously—Japan’s leaders had tried with growing desperation to negotiate. On this point, most historians have long agreed. Meanwhile, evidence has come out that Roosevelt and Hull persistently refused to negotiate. . . . Japan . . . offered compromises and concessions, which the United States countered with increasing demands. . . . It was after learning of Japan’s decision to go to war with the United States if the talks    “break down” that Roosevelt decided to break them off. . . . According to Attorney General Francis Biddle, Roosevelt said he hoped for an “incident” in the    Pacific to bring the United States into the European war.[4]

Morgenstern, George

These facts and numerous others that point in the same direction are for the most part anything but new; many of them have been available to the public    since the 1940s. As early as 1953, anyone might have read a collection of heavily documented essays on various aspects of U.S. foreign policy in the late    1930s and early 1940s, edited by Harry Elmer Barnes, that showed the numerous ways in which the U.S. government bore responsibility for the country’s    eventual engagement in World War II—showed, in short, that the Roosevelt administration wanted to get the country into the war and worked craftily along    various avenues to ensure that, sooner or later, it would get in, preferably in a way that would unite public opinion behind the war by making the United    States appear to have been the victim of an aggressor’s unprovoked attack.[5] As Secretary of War Henry Stimson testified after the war, “we needed the Japanese to commit the first overt act.”    [6]

At present, however, seventy years after these events, probably not one American in 1,000—nay, not one in 10,000—has an inkling of any of this history. So effective has been the pro-Roosevelt, pro-American, pro-World War II faction that in this country it has utterly dominated teaching and popular writing about U.S. engagement in the “Good War.”

In the late nineteenth century, Japan’s economy began to grow and to industrialize rapidly. Because Japan has few natural resources, many of its burgeoning industries had to rely on imported raw materials, such as coal, iron ore or steel scrap, tin, copper, bauxite, rubber, and petroleum. Without access to  such imports, many of which came from the United States or from European colonies in Southeast Asia, Japan’s industrial economy would have ground to a    halt. By engaging in international trade, however, the Japanese had built a moderately advanced industrial economy by 1941.

At the same time, they also built a military-industrial complex to support an increasingly powerful army and navy. These armed forces allowed Japan to    project its power into various places in the Pacific and East Asia, including Korea and northern China, much as the United States used its growing    industrial might to equip armed forces that projected U.S. power into the Caribbean, Latin America, and even as far away as the Philippine Islands.

Tansill, Charles Callan

When Franklin D. Roosevelt became president in 1933, the U.S. government fell under the control of a man who disliked the Japanese and harbored a romantic affection for the Chinese because, some writers have speculated, Roosevelt’s ancestors had made money in the China trade.  [7] Roosevelt also disliked the Germans in general and Adolf Hitler in particular, and he tended to favor the British in his personal relations and in world affairs. He did not pay much attention to foreign policy, however, until his New Deal began to peter out in 1937. Thereafter he relied heavily on foreign policy to fulfill his political ambitions, including his desire for reelection to an    unprecedented third term.

When Germany began to rearm and to seek Lebensraum aggressively in the late 1930s, the Roosevelt administration cooperated closely with the British and the French in measures to oppose German expansion. After World War II commenced in 1939, this U.S. assistance grew ever greater and included such measures as the so-called destroyer deal and the deceptively named Lend-Lease program. In anticipation of U.S. entry into the war, British and U.S. military staffs secretly formulated plans for joint operations. U.S. forces sought to create a war-justifying incident by cooperating with the British navy in attacks on German U-boats in the northern Atlantic, but Hitler refused to take the bait, thus denying Roosevelt the pretext he craved for making the United States a full-fledged, declared belligerent—a belligerence that the great majority of Americans opposed.

In June 1940, Henry L. Stimson, who had been secretary of war under William Howard Taft and secretary of state under Herbert Hoover, became secretary of    war again. Stimson was a lion of the Anglophile, northeastern upper crust and no friend of the Japanese. In support of the so-called Open Door Policy for China, Stimson favored the use of economic sanctions to obstruct Japan’s advance in Asia. Treasury Secretary Henry Morgenthau and Interior Secretary Harold    Ickes vigorously endorsed this policy. Roosevelt hoped that such sanctions would goad the Japanese into making a rash mistake by launching a war against the United States, which would bring in Germany because Japan and Germany were allied.

The Roosevelt administration, while curtly dismissing Japanese diplomatic overtures to harmonize relations, accordingly imposed a series of increasingly    stringent economic sanctions on Japan. In 1939, the United States terminated the 1911 commercial treaty with Japan. “On July 2, 1940, Roosevelt signed the    Export Control Act, authorizing the President to license or prohibit the export of essential defense materials.” Under this authority, “[o]n July 31, exports of aviation motor fuels and lubricants and No. 1 heavy melting iron and steel scrap were restricted.” Next, in a move aimed at Japan, Roosevelt slapped an embargo, effective October 16, “on all exports of scrap iron and steel to destinations other than Britain and the nations of the Western    Hemisphere.” Finally, on July 26, 1941, Roosevelt “froze Japanese assets in the United States, thus bringing commercial relations between the nations to an effective end. One week later Roosevelt embargoed the export of such grades of oil as still were in commercial flow to Japan.”  [8] The British and the Dutch followed suit, embargoing exports to Japan from their colonies in Southeast Asia.

Roosevelt and his subordinates knew they were putting Japan in an untenable position and that the Japanese government might well try to escape the    stranglehold by going to war. Having broken the Japanese diplomatic code, the American leaders knew, among many other things, what Foreign Minister Teijiro Toyoda had communicated to Ambassador Kichisaburo Nomura on July 31: “Commercial and economic relations between Japan and third countries, led by England and the United States, are gradually becoming so horribly strained that we cannot endure it much longer. Consequently, our Empire, to save its very life,  must take measures to secure the raw materials of the South Seas.”[9]

Greaves, Percy L. Jr.

Because American cryptographers had also broken the Japanese naval code, the leaders in Washington also knew that Japan’s “measures” would include an    attack on Pearl Harbor.[10] Yet they withheld this critical information from the    commanders in Hawaii, who might have headed off the attack or prepared themselves to defend against it. That Roosevelt and his chieftains did not ring the tocsin makes perfect sense: after all, the impending attack constituted precisely what they had been seeking for a long time. As Stimson confided to his  diary after a meeting of the War Cabinet on November 25, “The question was how we should maneuver them [the Japanese] into firing the first shot without allowing too much danger to ourselves.” After the attack, Stimson confessed that “my first feeling was of relief . . . that a crisis had come in a way which would unite all our people.”[11]

Robert Higgs is senior fellow in political economy for the Independent Institute and editor of The Independent Review. He is the 2007 recipient of the Gary G. Schlarbaum Prize for Lifetime Achievement in the Cause of Liberty. Send him mail.  See Robert  Higgs’s article archives.

Copyright © 2012 by the Ludwig von Mises Institute. Permission to reprint in whole or in part is hereby granted, provided full credit is given.

Notes

[1]            See “Flying Tigers,” Wikipedia. Available at: http://en.wikipedia.org/wiki/Flying_Tigers.

[2]            Robert Higgs, “How U.S. Economic Warfare Provoked Japan’s Attack on Pearl Harbor,” The Freeman 56 (May 2006): 36-37.

[3]            George Victor, The Pearl Harbor Myth: Rethinking the Unthinkable (Dulles, Va.: Potomac Books, 2007), pp. 179-80, 184, 185, emphasis added.

[4]Ibid            ., pp. 15, 202, 240.

[5]See Perpetual War for Perpetual Peace: A Critical Examination of the Foreign Policy of Franklin Delano Roosevelt and Its Aftermath,            edited by Harry Elmer Barnes (Caldwell, Id.: Caxton Printers, 1953).

[6]            Stimson as quoted in Victor, Pearl Harbor Myth, p. 105.

[7]Harry Elmer Barnes, “Summary and Conclusions,” in            Perpetual War for Perpetual Peace: A Critical Examination of the Foreign Policy of Franklin Delano Roosevelt and Its Aftermath, edited by            Harry Elmer Barnes (Caldwell, Idaho: Caxton Printers, 1953), 682-83.

[8]All quotations in this paragraph are from George Morgenstern, “The Actual Road to Pearl Harbor,” in Barnes, ed.,            Perpetual War for Perpetual Peace, 322-23, 327-28.

[9]            Quoted in Morgenstern, “The Actual Road to Pearl Harbor,” 329.

[10]            Robert B. Stinnett, Day of Deceit: The Truth About FDR and Pearl Harbor (New York: Free Press, 2000).

[11]            Quoted in Morgenstern, “The Actual Road to Pearl Harbor,” 343, 384.

 

Money Supply Growth and Inflation; Book Recommendations

Relative price and total return of the S&P 500 index

Inflation-Adjusted Returns: http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm

Money supply (M2) continues to accelerate. This week’s non-seasonally adjusted 13 week number shows money supply climbing at  a 9.0% annualized rate.  Here’s the acceleration in growth over recent weeks: 5.1%,  5.6%,  6.6%,  7.1%, 7.5%,  7.8%,  8.2%,  8.4%, 8.7%, 9.0%.

Ask yourself if the economy is growing at a 8% to 9% rates. No, then where is the money going?  Here comes rapid manipulated growth, with the eventual effects of rising prices at the consumer level.  Pray, protest and protect thyself.

Book Recommendations

To improve as an investor, you need to practice your profession.  The books below allow you to sharpen your financial statement skills through case studies. 

A reader suggested: What’s Behind the Numbers by John Del Vecchio, CFA and Tom Jacobs, JD.  Check out the book and the case studies: www.deljacobs.com

Classics: Quality of Earnings: The Investors’ Guide to How Much Money Is Really Making by Thorton O’glove (1987)

The Financial Numbers Game: Detecting Creative Accounting Practices by Charles W. Mulford (2002)

How to Lose Money in a Top Performing Fund.

http://financialsymmetry.com/lose-money-topperforming-fund/

 

 

 

Education to Employment

McKinsey Quarterly

Education-to-Employment_FINAL

Education to employment: Designing a system that works
Some 75 million young people around the world are unemployed, yet most employers say they cannot find enough qualified candidates for entry-level jobs. What skills will help young people find work, and what is the most effective way of delivering them?
A new McKinsey report finds that employers, education providers, and young people live in parallel universes with dramatically different perspectives and little engagement. Drawing on a survey of some 8,500 stakeholders in 9 countries, as well as an analysis of more than 100 education-to-employment approaches across 35 countries, the research also finds that three junctures are critical for taking action to address the crisis: enrolling in postsecondary education, developing skills, and seeking employment.
To explore the issue of youth unemployment and to read case studies of successful programs, visit the McKinsey on Society Web site.
Register for a live Web event on Monday, December 10, from 9:00 a.m. to 10:30 a.m. (EST), where we’ll bring together academics and government and business experts to discuss the findings of the report.

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Gresham’s Law: Coin Melt Values or Guaranteed Upside with No Downside

http://archive.mises.org/16481/utah-recognizes-gold-coins-to-be-money/

It is illegal (last time I checked) to melt money down, but under Gresham’s Law, bad (nominal) money chases out good money (market value of the metal coins above the nominal value).

COIN MELT VALUES

1946-1964 Roosevelt Dime (90% silver 10% copper) $2.3929
1932-1964 Washington Quarter (90% silver, 10% copper) $5.9824
1946-2012 Nickel (75% copper, 25% nickel) $0.0500377
1909-1982 Cent (95% copper, 5% zinc) $0.0232306

Silver dimes and quarters remain a great investment. But, don’t forget about nickels. In the early 1970s, silver dimes and quarters were circulating the way nickels are now—and look at the value of metal content in the silver coins now. In the next round of serious price inflation, the same type thing is likely to happen to nickels. Just like silver dimes were in the 1970s. Billionaire Kyle Bass has already stockpiled one million dollars worth of nickels. (Source www.economicpolicyjournal.com)

Small Cap Analysis; Buffett on Taxes and Rebuttal by Norquist

Presentation on Brick

http://greenbackd.com/2012/11/26/the-brick-ltd-up-118-percent-on-guy-gottfrieds-recommendation/

Gottfried_TheBrick_VICNY2011 (3)    (Powerpoint)

Tap dancing to work (Buffett Interview on Charlie Rose) http://www.charlierose.com/view/interview/12672

Buffett Opines on Raising Taxes (Comments in Italics)

When taxes change, would-be investors will certainly change their decisions about where to direct capital, even “though the companies’ operating economics will not have changed adversely at all.” Buffett saw this clearly in 1986, with respect to Berkshire’s own investment decisions; it’s hard to believe that Buffett no longer believes that today, with respect to private investors.

November 25, 2012

A Minimum Tax for the Wealthy By WARREN E. BUFFETT

SUPPOSE that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.”

Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.

It’s a catchy opener, attracting headlines and guffaws from the expected quarters. But I’m struck by his opener because I can think of at least one real-world example in which a rich investor nearly spiked a deal due to taxes: Warren Buffett himself, as recounted in Alice Schroeder’s terrific biography, The Snowball (pages 230-232).

Early in his career, Buffett invested heavily—almost one third of his early fund’s capital—in Sanborn Map, a company that mapped utility lines and such. But he soon grew frustrated with the company’s leadership, which “operated more like a club than a business,” and which refused to return greater dividends to investors. So Buffett amassed more and more stock, and with control of the company finally in hand he pressed the board of directors to split the company in two (one for the mapping business, and one to hold the company’s other outsized investments).

Finally, the board capitulated. But with victory finally at hand, Buffett nearly scuttled the deal because of … taxes. As Schroeder recounts, quoting Buffett, one director proposed that the company just cleanly break the company, despite the tax consequences—”let’s just swallow the tax,” he suggested.

To which Buffett replied (as he recounted to Schroeder): And I said, ‘Wait a minute. Let’s — “Let’s” is a contraction. It means “let us.” But who is this us?  If everyone around the table wants to do it per capita, that’s fine, but if you want to do it in a ratio of shares owned, and you get ten shares’ worth of tax and I get twenty-four thousand shares’ worth, forget it.’
Buffett was willing to walk away from a deal because the taxes would have taken too much of a bite out of it.

Between 1951 and 1954, when the capital gains rate was 25 percent and marginal rates on dividends reached 91 percent in extreme cases, I sold securities and did pretty well. In the years from 1956 to 1969, the top marginal rate fell modestly, but was still a lofty 70 percent — and the tax rate on capital gains inched up to 27.5 percent. I was managing funds for investors then. Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered.

Under those burdensome rates, moreover, both employment and the gross domestic product (a measure of the nation’s economic output) increased at a rapid clip. The middle class and the rich alike gained ground.

So let’s forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if — gasp — capital gains rates and ordinary income rates are increased. The ultrarich, including me, will forever pursue investment opportunities.

That’s not the only time that taxes played a major role on Buffett’s decisions, as recounted by Schroeder. Later in the book (pp. 533-534), she recounts how Buffett chose to structure his investments under Berkshire Hathaway’s corporate umbrella, rather than as part of his hedge fund’s general portfolio, precisely because of the tax advantages.

In fact, as he explained in his 1986 letter to investors, changes in the 1986 tax reform act posed a specific threat to certain investment decisions:

If Berkshire, for example, were to be liquidated – which it most certainly won’t be — shareholders would, under the new law, receive far less from the sales of our properties than they would have if the properties  had been sold in the past, assuming identical prices in each sale. Though this outcome is theoretical in our case, the change in the law will very materially affect many companies. Therefore, it also affects our evaluations of prospective investments.  Take, for example, producing oil and gas businesses, selected media companies, real estate companies, etc. that might wish to sell out. The values that their shareholders can realize are likely to be significantly reduced simply because the General Utilities Doctrine has been repealed – though the companies’ operating economics will not have changed adversely at all.  My impression is that this important change in the law has not yet been fully comprehended by either investors or managers.

And, wow, do we have plenty to invest. The Forbes 400, the wealthiest individuals in America, hit a new group record for wealth this year: $1.7 trillion. That’s more than five times the $300 billion total in 1992. In recent years, my gang has been leaving the middle class in the dust.

A huge tail wind from tax cuts has pushed us along. In 1992, the tax paid by the 400 highest incomes in the United States (a different universe from the Forbes list) averaged 26.4 percent of adjusted gross income. In 2009, the most recent year reported, the rate was 19.9 percent. It’s nice to have friends in high places.

The group’s average income in 2009 was $202 million — which works out to a “wage” of $97,000 per hour, based on a 40-hour workweek. (I’m assuming they’re paid during lunch hours.) Yet more than a quarter of these ultrawealthy paid less than 15 percent of their take in combined federal income and payroll taxes. Half of this crew paid less than 20 percent. And — brace yourself — a few actually paid nothing.

This outrage points to the necessity for more than a simple revision in upper-end tax rates, though that’s the place to start. I support President Obama’s proposal to eliminate the Bush tax cuts for high-income taxpayers. However, I prefer a cutoff point somewhat above $250,000 — maybe $500,000 or so.

Additionally, we need Congress, right now, to enact a minimum tax on high incomes. I would suggest 30 percent of taxable income between $1 million and $10 million, and 35 percent on amounts above that. A plain and simple rule like that will block the efforts of lobbyists, lawyers and contribution-hungry legislators to keep the ultrarich paying rates well below those incurred by people with income just a tiny fraction of ours. Only a minimum tax on very high incomes will prevent the stated tax rate from being eviscerated by these warriors for the wealthy.

Above all, we should not postpone these changes in the name of “reforming” the tax code. True, changes are badly needed. We need to get rid of arrangements like “carried interest” that enable income from labor to be magically converted into capital gains. And it’s sickening that a Cayman Islands mail drop can be central to tax maneuvering by wealthy individuals and corporations.

But the reform of such complexities should not promote delay in our correcting simple and expensive inequities. We can’t let those who want to protect the privileged get away with insisting that we do nothing until we can do everything.

Our government’s goal should be to bring in revenues of 18.5 percent of G.D.P. and spend about 21 percent of G.D.P. — levels that have been attained over extended periods in the past and can clearly be reached again. As the math makes clear, this won’t stem our budget deficits; in fact, it will continue them. But assuming even conservative projections about inflation and economic growth, this ratio of revenue to spending will keep America’s debt stable in relation to the country’s economic output.

In the last fiscal year, we were far away from this fiscal balance — bringing in 15.5 percent of G.D.P. in revenue and spending 22.4 percent. Correcting our course will require major concessions by both Republicans and Democrats.

All of America is waiting for Congress to offer a realistic and concrete plan for getting back to this fiscally sound path. Nothing less is acceptable.

In the meantime, maybe you’ll run into someone with a terrific investment idea, who won’t go forward with it because of the tax he would owe when it succeeds. Send him my way. Let me unburden him.

Warren E. Buffett is the chairman and chief executive of Berkshire Hathaway.

Norquist hits back against Buffett op-ed, calls argument ‘silly’

By Daniel Strauss – 11/26/12 06:12 PM ET

Americans for Tax Reform President Grover Norquist responded to an op-ed by billionaire Warren Buffett Monday, saying Buffett’s argument was “silly.”

On Monday The New York Times published an op-ed by Buffett criticizing Norquist’s anti-tax pledge and urging Congress to pass legislation rolling back the Bush-era tax rates for incomes above $500,000 a year. Later on Monday Norquist appeared on Fox News and called Buffett’s argument silly, and said Buffett got rich by “gaming the system.”

“Warren Buffett has made a lot of money, some of it off of gaming the political system. He invests in insurance companies and then lobbies to raise the death tax, which drives people to buy insurance. You can get rich playing that game but it’s all corrupt,” Norquist said. “It’s not investing; it’s playing crony politics and economics. That’s a shame. He’s done the same thing with some green investing. Shame on him for gaming the system and giving money to politicians who write rules that make your assets go up.

“The real economy, the real economy, if he thinks that the government can take a dollar and then you go to an investor who doesn’t have that dollar and it doesn’t affect investment, I’m sorry that’s just silly unless he plans on going to Obama and getting money from a stimulus package and he considers that investment. When the government takes a dollar away from the American people or a trillion dollars, that’s a trillion dollars not available to be saved and invested. I’m sorry if Buffett can’t see that but that’s kind of silly on his part.”

The back-and-forth between Norquist and Buffett comes as legislators seek to come to an agreement on a deficit-reduction package to avoid the “fiscal cliff” of spending cuts and tax increases set to hit next year.

A number of Republicans have indicated that they could disregard supporting the Americans for Tax Reform pledge in order to reach a deal.

Buffett, an outspoken supporter of President Obama, published an op-ed in the Times in 2011 arguing that the tax rates on the wealthiest Americans should be higher. The Obama administration subsequently began pushing for a “Buffett Rule” that would raise the marginal tax rate for some of the wealthiest Americans. Obama has since called for increasing the tax rate on incomes above $250,000 a year. The Buffett Rule also introduces a base 30 percent tax rate for incomes between $1 million and $10 million and a 35 percent rate for incomes over $10 million.

Source: http://thehill.com/blogs/blog-briefing-room/news/269435-norquist-calls-buffet-argument-silly-

WHAT DO YOU, THE READERS, THINK?

 

 

 

Video Lectures on The Great Depression by Tom Woods

Link to the playlist for the complete ‘The Truth About American History’ seminar:

All videos are worth viewing–Lectures Five and Six Discuss the Great Depression.  http://www.youtube.com/playlist?list=PL7AA520F7F48777F9

 

Austrian Business Cycle Theory on the CFA Exam

Austrian Business Cycle Theory on the CFA Exam

Monday,November 12th,  2012

A friend informs me that the mainstream and prestigious CFA Institute now features Austrian economics in the study materials for the Level 1 CFA Exam. The section “Theories of the Business Cycle” includes several pages on Mises and Hayek (as well as Schumpeter), and they’re pretty good. “As a result of manipulating interest rates, the economy exhibits fluctuations that would not have happened otherwise. Therefore, Austrian economists advocate limited government intervention in the economy, lest the government cause a boom-and-bust cycle. The best thing to do in the recession phase is to allow the necessary market adjustment to take place as quickly as possible.” About 100,000 people take this exam each year, and now they are all being exposed to Austrian teaching.

A quick search of the CFA Institute website turns up several Austrian-friendly items, including a chapter from the 2011 book Boombustology that opens with a quote from Mises.

Just remember that Wall Street will be in a shrinkage mode for many years. The low interest rates, miniscule spreads on bonds, the tiny commissions on stocks all bode ill for employment.

Market Inefficiency:

http://www.thefreemanonline.org/features/the-virtue-of-market-inefficiency-2/

…… As marvelous as the market economy is at problem solving, in a sense the real genius of the market process is in how it brings problems to people’s attention in the first place.  Before you can solve a problem, you have to be aware that there is a problem.  This, I believe, is the great insight that Israel M. Kirzner, beginning in the 1970s, contributed to our understanding of the market—in particular, that it is a process of entrepreneurial discovery of error.

One implication of this insight is that government policies that undermine the (admittedly imperfect) reliability of money prices also make the discovery of inefficiencies profoundly problematic: Undermining prices casts doubt on the very meaning of inefficiency.

Strictly speaking, an inefficiency exists when, for a given person at a given time and place, the cost of an action outweighs the benefit.  We’ve seen that to rationally calculate costs and benefits you need money prices of inputs and outputs, of steel and bridges.  So when government erodes private property rights, interferes with trade, distorts prices, and manipulates money, it doesn’t just make it harder to be efficient; it also pulls the rug out from under anyone trying to spot inefficiencies at all.

Using the rules of arithmetic, for example, it’s easy to see that the statement 1 + 2 = 4 is wrong, but what about  _ + _ = _ ?  What’s the solution to this “problem”?  Is there even a problem here?  Money prices fill in the blanks; they “create errors”—i.e., reveal mistakes that no one could see without them—that alert entrepreneurs might then perceive and correct. If mistakes and inefficiencies remain invisible, the search for better ways of doing things could never get off the ground.

An economy without inefficiencies is either one where knowledge is so perfect that no one ever makes a mistake, or it’s one in which government policy has effectively foreclosed the very possibility of inefficiency.  In a world of surprise and discovery, of experiment and innovation, the former is impossible; the latter sort of economy, as Mises showed almost 100 years ago, is impossible as well as intolerable.

So a living economy needs to “create” inefficiencies, and lots of them, to set the stage for greater efficiency and ongoing innovation.  And that’s just what the market process does all the time—thank goodness!

Obama, What Now? From Trader to Investor

Obama Is Elected

The “progressive” vision of a populace dependent on a central government and a European-style welfare state is now at hand. We march on the road to serfdom.

OK, so what can we learn and do? First, educate yourself in the benefits of liberty and free markets, then live your life as best you can. Be an example to others.  As an investor, note how hospital stocks were up (yesterday) overall 9%. Industry leader HCA Holdings Inc. is up nearly 10% . Tenet Healthcare Corp. is up 9% to $27.21. Health Management Associate gained 8%  and Community Health Systems rose by 6.4%.  Medicare and Medicaid insurers were also up. Centene Corp. is up 10% . WellCare climbed 4%. Molina Healthcare Inc.  also rose 3.16%.

But in the long-run (three to five years) these companies will be like the protected airlines during the era of the CAB–bureaucratic, sloppy and inefficient. You are better to look for winners in a market that is being deregulated and short the losers. When airlines became deregulated you wanted to own Southwest (low-cost operator) while shorting Eastern Airlines, American, Northwest Airlines, etc. I would rather short those companies as a hedge once they become fat and happy.

Lessons to learn

The book link: bureaucracy
Mises explains that the core choice we face is between rational economic organization by market prices or the arbitrary dictates of government bureaucrats. There is no third way. And here he explains how it is that bureaucracies can’t manage anything well or with an eye for economics at all. It is a devastating and fundamental criticism he makes, an extension of his critique of socialism. It has never been answered.

See the book: Omnipotent Government_Mises
At the close of the Second World War, Mises saw the destruction of the old world and the beginnings of a new one that did not look promising, especially for European politics. Socialism appeared to sweep all before it, and the social democratic variety in the West was not much of an improvement. Mises set out to explain and bitterly denounce the trends toward the total state, and demonstrate that Communism and Nazism were two sides of the same coin.

My Story: From Trader to Investor

At a reader’s request, I will relate my evolution from a commodity trader to a value investor. I started as a trader of physical (real) sugar to a futures trader at the MidAm. I have always been fascinated by markets or the interaction of economics with psychology which I now recognize as human action. I caught a big bull move in grains/soybeans in 1988. I learned that the money is made by riding big moves not by scalping or buying at the bid of 6.01 and selling at $6.02. I moved off the floor to trade upstairs because even then you could foresee that the trading pits would be turned into a food court or be eliminated.

Also, can you see doing this 6 hours a day? There are no old, bold traders.

 

The problem is that you need to trade big moves to make money and in trendless markets you trade against the commercial traders who have the edge. If you don’t have an edge then you are the sucker. Best to pull on the slot machines for fun. About 1988, I read about the Texaco Bankruptcy (see below) and looked at their balance sheet. Texaco bonds were trading at 70 cents on the dollar but the company had more than enough assets to pay 100 cents on the dollar.  Wow, I thought, I can buy a dollar for 70 cents. Sure enough the bonds went lower to 60 cents, but I made decent returns within a year. I wanted to go where the edge was greater or where the markets more mis-priced.  Of course, you don’t have the 10-1 leverage that you do in futures but leverage will only get you to failure faster if you don’t have a verifiable edge.

So I began to read as many books on investing that I could–only Graham, Buffett and Klarman seemed to make sense. I took time out to start an Internet company with a friend (www.art.com) and others, then returned to audit investment classes at Columbia Graduate School of Business. The real learning occurs when you apply what you have learned to the harsh reality of the markets.

I have travelled a ways but have much further to go in my learning journey.

Texaco Increases Estimate Of 1987 Loss to $4.9 Billion

By STEPHEN LABATON, Special to the New York Times Published: January 28, 1988

Texaco Inc. said today that it would report a loss of more than $4.9 billion for 1987 as a result of its restructuring and the settlement of its legal dispute with the Pennzoil Company.

In a document filed with the bankruptcy court here last month, Texaco had estimated a 1987 loss of $2.79 billion. The revised figure reflects a $2.1 billion write-down of the value of certain assets.

The company also said it faces $2.1 billion in claims from the Department of Energy, which has accused Texaco of overcharging for crude oil from 1973 to 1981, when price controls were in effect. Earlier this month, Texaco disclosed that the Internal Revenue Service might seek $6.5 billion in back taxes.

The company’s lawyers have contended that the claims by the Energy Department and the I.R.S. are highly inflated. Texaco insiders said yesterday that, even if the Government prevailed, the company had adequate financing to cover most of the claims. The claims are not expected to hold up the bankruptcy proceedings. The company hopes to emerge from bankruptcy this spring.

The stock market did not react strongly to today’s disclosures. In composite trading on the New York Stock Exchange, shares of Texaco closed at $37.875, down 87.5 cents.

The Federal claims and revised income figures appeared in a newly filed version of Texaco’s disclosure statement, a document being prepared to help shareholders decide whether to support or reject Texaco’s $5.6 billion restructuring plan. The plan must win approval by holders of two-thirds of Texaco’s shares, voting in a monthlong election.

Texaco entered bankruptcy proceedings last April after it lost a Supreme Court appeal over whether it had to post a bond of more than $10 billion to continue contesting the Pennzoil award.

A Texas jury in 1985 said Texaco’s acquisition of the Getty Oil Company had improperly interfered with a merger agreement between Pennzoil and Getty. Pennzoil was awarded $10.3 billion. As part of the reorganization, the Pennzoil claim would be settled for $3 billion.

At a hearing today in Federal Bankruptcy Court, the Securities and Exchange Commission questioned the adequacy of the proposed disclosure statement. Nathan M. Fuchs, a lawyer from the S.E.C.’s New York office, told a Federal bankruptcy judge that the statement failed to describe adequately the 16 stockholder derivative lawsuits that have been filed in New York, Delaware and Texas.

Most of the lawsuits accuse Texaco executives of mismanagement and have sought to recoup the money Texaco will lose in the Pennzoil dispute. Getty Executives Named

Several of the stockholder derivative suits also filed claims on behalf of Texaco against former executives at Getty and the J. Paul Getty and Sarah Getty trusts, both of which held large amounts of Getty stock.

Some of the suits also name as defendants the First Boston Corporation and Goldman, Sachs & Company. The two investment banks provided advice during Texaco’s negotiations with Getty. The suits charge that the advice led to the acquisition that sparked the dispute between Texaco and Pennzoil.

As part of Texaco’s reorganization plan, the company has said it will drop all of these derivative actions and will shield all of its employees from legal liability.

But Mr. Fuchs of the S.E.C. and three shareholders’ lawyers asserted at the hearings that Texaco had not provided an adequate explanation in the statement about why the company would want to drop a potentially valuable asset such as the right to assert claims against other parties. Statement From Lawyer

”The shareholders might actually be strengthened if they recovered $3 billion,” Mr. Fuchs said. ”The biggest weakness of the disclosure statement is that it does not say how Texaco can conclude that these derivative cases are without merit.”

After the hearing, a Texaco lawyer said the company was in discussions with the S.E.C. and expected to change the disclosure statement. ”If Mr. Fuchs is not satisfied, then we will continue to work with him until he is,” said the lawyer, Francis Barron.

Melvyn I. Weiss, a lawyer repesenting shareholders in one of the derivative suits, told Federal Bankruptcy Judge Howard Schwartzberg that the sole reason Texaco executives had decided to drop the derivative cases was to protect themselves.

”Texaco’s management is involved in a conflict of interest,” he said. Seeking an End to Litigation

Harvey R. Miller, Texaco’s lead bankruptcy lawyer, said the decision to drop the derivative suits was an effort ”to finally put an end to all the litigation in the case.” Lawyers for Pennzoil and the committee of Texaco creditors said they supported Texaco’s moves to drop the derivative suits and indemnify company executives.

Judge Schwartzberg requested that the shareholders’ lawyers meet with Texaco to propose new language for the statement. Another hearing will be held on the disclosure statement on Friday.

In an important amendment to the earlier disclosure statement, Texaco reserved the right to request that the judge approve the reorganization even if the plan is rejected by shareholders.

Conspicuously absent from the new disclosure statement were any objections by Carl C. Icahn, the chairman of Trans World Airlines Inc. and Texaco’s largest shareholder. Last week, a court ruled against Mr. Icahn’s effort to present his own plan to Texaco shareholders. The Icahn plan would have stripped Texaco of its takeover defenses.

David Friedman, a lawyer for Mr. Icahn, said his client was re-evaluating his earlier position and had not yet decided his next move.

The disclosure statement also estimated that Texaco would earn $626 million in 1988, $729 million in 1989, $941 million in 1990, $1.1 billion in 1991 and $1.2 billion in 1992.

Investment vs. Speculation: Fairholme Case Studies; Ponzi Schemes; Couch Potato Nation

An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.”  Graham says “thorough analysis” means “the study of the facts in the light of established standards of safety and value” while “safety of principal” signifies “protection against loss under all normal or reasonably likely conditions or variations” and “adequate” (or “satisfactory”) return refers to “any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence.” (Security Analysis, 1934, ed., pp. 55-56)

Our Nation Today

The one aim of all such persons is to butter their own parsnips.  They have no concept of the public good that can be differentiated from their concept of their own good.  They get into office by making all sorts of fantastic promises, few of which they ever try to keep, and they maintain themselves there by fooling the people further.  They are supported in their business by the factitious importance which goes with high public position.  The great majority of folk are far too stupid to see through a politician’s tinsel.  Because he is talked of in the newspapers all the time, and applauded when he appears in public, they mistake him for a really eminent man.  But he is seldom anything of the sort.**

** This quotation is on page 67 of the 1991 collection, edited by Marion Elizabeth Rodgers, The Impossible Mencken; specifically, it’s from Mencken’s August 19, 1935 Baltimore Evening Sun essay entitled “The Constitution.”

Investment vs. Speculation

As Graham once put it, investors judge “the market price by established standards of value,” while speculators “base (their) standards of value upon the market price.” For a speculator, the incessant stream of stock quotes is like oxygen; cut it off and he dies.

Below are several case studies by Fairholme:

http://www.fairholmefunds.com/bruce-berkowitz-consuelo-mack-101212-featured-video-page#overlay-context=bruce-berkowitz-consuelo-mack-101212-featured-video-page

Try not to be swayed by stories but by facts.

You may think investing in a bank below book value is cheap and you may be correct on a grouped basis, but I don’t know how one truly can value a complex, huge financial company like Bank of America.

If you are analyzing a good company based on its normalized return on capital, you first have to identify economic capital. Financial groups (Banks, insurance companies, mutual funds) carry “third party capital” such as depositors, policyholders, and investors. This capital does not belong to shareholders, and is not provided by lenders. These are the assets deposited by the clients of these companies; bank deposits, for example.  Due to the complexity of these groups, accurately segregating only the capital financing the company’s own assets is nearly impossible, especially since most of these assets are ‘market to market’, in other words, revalued every day at their market value.

Segregating capital and identifying cash flows for financial groups is difficult because, fundamentally, these businesses do not produce profits in the same way as non-financial groups. The latter simply add some value, via a proprietary process, to a certain amount of operating costs, and sell units (goods and services) of the total cost to its clients. The former capture capital flows, often thanks to a high financial leverage (partly from debt, partly from ‘third party capital’). Transform them and clip a remuneration for this process. Even if it were possible precisely to identify cash flows and economic capital for financial groups, the difference in balance sheet leverage would demand the calculation of an expected return (‘cost of capital’) specific to them.

Investors may find that excluding financial companies from their portfolio would, at worst, not put them at a disadvantage.

It is OK to speculate and invest, just know the difference. 

Ponzi Finance

Carlo   Ponzi, Alias Uncle Sam by Gary North Reality Check(Nov. 2, 2012)Carlo “Charles” Ponzi was a con man who was the Bernie Madoff of his era. For two years, 1918 to 1920, he sold an impossible dream: a scheme to earn investors 50% profit in 45 days. He paid off old investors with money generated from new investors. The scheme has been imitated every since.Every Ponzi scheme involves five elements:1. A promise of statistically impossible high returns
2. An investment story that makes no sense economically
3. Greedy investors who want something for nothing
4. A willing suspension of disbelief by investors
5. Investors’ angry rejection of exposures by investigatorsStrangely, most Ponzi schemes involve a sixth element: the   unwillingness of the con man to quit and flee when he still can. Bernie Madoff is the supreme example. But Ponzi himself established the tradition.

The scheme, once begun, moves toward its statistically inevitable end.   From the day it is conceived, it is doomed. Yet even the con man who   conceived it believes that he can make it work one more year, or month, or day. The scheme’s designer is trapped by his own rhetoric. He becomes addicted to his own lies. He does not take the money and run.

This leads me to a set of conclusions. Because all Ponzi schemes involve   statistically impossible goals, widespread greed, suspension of disbelief,   and resistance to public exposure,

All fractional reserve banking is a Ponzi scheme.
All central banking is a Ponzi scheme.
All government retirement programs are   Ponzi schemes.
All government-funded medicine is a Ponzi scheme.
All empires are Ponzi schemes.
All Keynesian economics is a Ponzi scheme.

But there is a difference between a private Ponzi scheme and a government Ponzi scheme. The private scheme relies on deception and greed alone. A government Ponzi scheme relies on deception, greed, badges, and guns.   Read more: http://www.garynorth.com/public/10280print.cfm

Couch Potato Nation: Hooked on handouts: http://lewrockwell.com/faber/faber144.html

 

 

Einhorn on the Fed; Lecture on Cause of Financial Crises by De Soto

Einhorn on the Fed’s Insane Policy

Editor: Mr. Einhorn recognizes the dangers of the Federal Reserves Zero (manipulative) Interest Rate Policy. Where I take a different view is that the Fed’s Zero interest rate policy hurts savers and thus capital accumulation. Less capital hurts productivity and future economic growth. Regardless, no centrally planned economy has ever worked so why expect the Fed’s manipulated price control of interest rates to not end in tears? I do agree with Einhorn’s assessment of Bernanke’s theory of lowering interest rates to increase the “wealth” effect. Only a Ph.D can lack so much common sense.

Klarman ain’t happy either: http://www.businessinsider.com/seth-klarman-goes-nuts-on-the-fed-2012-10

Those guys have been reading csinvesting or von Mises.

Dr. De Soto on the Cause of the Current Financial Crises


Jesús Huerta de Soto, author of the thought-provoking book on economics ‘Money, Bank Credit and Economic Cycles’ and Professor of Political Economy at Rey Juan Carlos University, Madrid, explains the motivations behind British Prime Minister Robert Peel’s Bank Act of 1844. Prior to this Act, the free issuance of bank notes with claims on gold bullion wasn’t limited by British law, resulting in wild economic cycles that often led to bank runs and large gold flows out of the country as foreigners sought to exchange claims on gold for actual bullion.

He discusses why Robert Peel’s Bank Act of 1844 was a failure, despite its good intentions. Although the Act placed legal limits on banks’ issuance of paper notes, its failure to place the same limits on deposits allowed banks to pyramid deposits, which ultimately led to the fractional reserve banking that we have today.

The professor also explains the problem with the practice of fractional reserve banking, and why it leads to credit expansion that ultimately results in “boom and bust” economic cycles. “Virtual money” that is created easily by banks in the process of credit expansion during the boom contracts just as easily during the bust, resulting in recession.

Furthermore, he discusses the importance of capital theory and the nexus between interest rates, savings and prices. Huerta de Soto argues that Austrian Business Cycle Theory offers the best explanation of how and why economic cycles work, and the best explanation of the pay-offs between present consumption and long-term investment.

Also, he explains how artificial credit expansion leads to a temporary economic boom, and why it inevitably results in recession. Huerta de Soto uses the example of his native Spain, and how European Central Bank credit expansion distributed unevenly around the Eurozone, resulting in housing bubbles in periphery Eurozone countries like Spain, Greece and Ireland.

He lists the six microeconomic effects that result in the crack-up boom. Crucially, credit expansion leads to over-investment in capital goods. The credit expansion leads to first rising prices and then higher interest rates, and thus lower prices for capital goods. There are not enough real savings to support the demand for the increased number of capital goods, leading to recession.

The professor questions why central banks even exist, and why there is no free market in interest rates and money supply. Huerta de Soto wonders why people are happy with socialism for the banking system, and why more people are not correctly blaming central banks and fractional reserve banking for the financial crisis.

Huerta de Soto also explains why recessions are a necessary corrective to the excesses of the boom period. Huerta de Soto argues that in his native Spain, job losses in the construction and housing sector are necessary owing to over-investment in housing during the boom. He also criticises “stupid” politicians who thought that they had abolished boom-and-bust.

He criticises those who argue that currency devaluation is a cure for the recession, and argues that his native Spain is far better off with the euro than the peseta. Huerta de Soto argues that the euro is forcing politicians and the public to make honest choices about spending and is acting, beneficially, as a kind-of gold standard.

Further he argues that the European response to the financial crisis is preferable to the wildly expansionary policies chosen by the United States. Huerta de Soto argues that for this reason, he is more optimistic about the euro than the dollar.

Huerta de Soto wraps up with three key measures needed to improve our financial system. First, Peel’s Bank Act needs to be completed which means a 100% reserve is required for demand deposits. Second, central banks need to be abolished. And lastly, the issuance of money should be privatised, leading to a free gold standard.

Bank Runs

Another Ponzi Scheme: http://www.huffingtonpost.com/2012/11/04/donald-french-ponzi-scheme-youngest-actor_n_2070515.html