18 Dec 2008

They Don’t Teach You This in Law School

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This is a very interesting story about a lawsuit between Texaco and Pennzoil, told by Carl Icahn, described by Wikipedia as a corporate raider and the 46th richest man in the world. (HT2EPJ) Incidentally, there are a few naughty words so watch yourself.

18 Dec 2008

The Great Credit Thaw

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Von Pepe passes along this 5-minute CNBC video. A small potatoes banker from Montana was just about to explain why the Fed rate cuts were devastating his business, and then the feed mysteriously gets interrupted, ruining his presentation. A random glitch, or sinister corporate censorship of anti-Bernanke sentiment? Who can say.

18 Dec 2008

Battening Down the Hatches vis-a-vis Credit Cards

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I have been telling Free Advice readers for months that the conventional old school wisdom is not necessarily correct in the present environment. Yes yes, you should cut your spending and save, but this doesn’t mean you should pay down your credit card balances.

However, there is a point of clarification that is in order. The rationale for my advice is that if and when prices go through the roof (and again, see my favorite chart below–which I often reproduce because some outside readers stumble upon an individual post through a Google search, not because they are my fans), you don’t want to hold all of your savings in the form of diminished dollar debt. On the contrary, your student loan debt, mortgage, car loan, etc., will all become smaller burdens if prices go up by 50% and (say) your paycheck goes up by 40%.

BUT, be careful. If you have huge balances on your credit cards, where the rate adjusts based on some formula involving the prime rate, then you could be screwed. You don’t want to get caught with $20,000 in credit card balances that roll over month to month at 43.9% APR. (You don’t want to have an ARM on your house, either.)

So what I just did was a balance transfer onto a Discover card at 3.99% locked in to November 2012. In a sense, it’s my way of ensuring I’m near the front of the line with all these new dollars Bernanke is handing out. Let it rain, Ben!

(Once more giving the lie to the alleged “credit crunch,” they gave me a $15,000 credit line based on my verbal statements of income, and of course on my credit history. The tightwads said if I wanted more, I’d have to provide them with documentation of my income. Oh the horrors! Where’s Steinbeck?)

In conclusion, I am saying that if you’ve got a bunch of disposable income you’ve freed up by cutting your spending (and good for you if you’ve got that discipline), I think it makes more sense for you to buy some physical gold and silver coins first, rather than paying off fixed-rate dollar-denominated debt.*

* If we have deflation for the next three years, then obviously this is some horrible advice.

18 Dec 2008

Woman Stuck on Railroad Tracks Dials 911 Instead of Running

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This is a pretty shocking story:


Police say a woman who died after her car was struck by a freight train in Anaheim was on the phone with a 911 dispatcher in the moments before the crash.

Police said Tuesday that 68-year-old Linda Kruger-Small told the dispatcher her car was stuck on the railroad tracks and she was urged to get out. The train collided with her car Monday night on the Burlington Northern Santa Fe tracks.

Anaheim police Sgt. Rick Martinez says the dispatcher heard someone trying to help her before the line went dead.


The right-wing talk radio show I listen to in the morning (when driving my son to school) was making a big deal about this, saying it was a metaphor for American society. I.e. there is an economic freight train headed for us, and nobody wants to save himself but instead wants the government to swoop in and rescue him (her).

I admit it’s hard to fathom why someone would dial 911 in that situation, but the fact that she was 68 and someone was there trying to help her are details they didn’t mention on the radio. Presumably the lady panicked and years of PSA habituation made her dial 911.

17 Dec 2008

Rebunking Five "Lies" of Economists

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They are trying to debunk the lies, so I am rebunking… Now I’m no fan of mainstream economic orthodoxy, but the critiques on this (spooky) page are childish. I must be brief–my corporate masters want output output output from me!!–but let me at least deal with two that jump out:

DELIBERATE LIE #3. People are “rational utility maximizers”.

Although even economists admit this is a lie, [7] it is still boilerplate economic theory. Economists MUST lie about this because if people are being manipulated by marketing, then the so-called “free market” obviously requires government intervention.

In a Liberal Democracy, tax payers are ultimately responsible for an individual if that individual becomes destitute or a criminal. Economists use the “rational utility maximizer” lie to prevent government intervention in markets when intervention would serve the common good.

The mistake here is so elementary that it’s comical. If people are manipulated by advertising (and they certainly are to some extent), why in the heck would liberal democracy “work”? Wouldn’t you get ridiculous (and “wasteful” in this site’s horrified sense) political campaigns that appealed to the basest of passions? In short, wouldn’t you end up with the lousy politicians we currently have?

This is the problem with any solution that relies on a benevolent government. E.g. if you think a country is horribly racist, then the last thing in the world you want to do is give the majority more power through the government. Duh.

DELIBERATE LIE #4. Money is just a “medium of exchange”.

Money is literally “created” (and backed by consumer debt) every time a bank makes a loan. At the time the loan is made, not enough money is in circulation to pay the interest on the loan, so more money must be eventually “created”, by more consumer debt, to pay back the interest on the loan.

I’m answering this one because I think someone in the comments here at Free Advice asked this a few weeks ago. Anyway, it is not true that if a bank makes a loan, then there necessarily needs to be further creation to allow for the interest repayment. This is partly because not every bit of money is due to a loan that must be paid back with interest to the bank, but more fundamentally the website is wrong because the same piece of money can change hands more than once during the year.

For example, let’s say there are two neighbors, Bill and John. John asks Bill for a loan of $100, to be repaid with $110. Bill agrees, and gives John the money. John uses the $100 to buy materials, such as a canvas and paint, from Sally. Then John combines the materials to create a nice portrait, which he sells for $120 to Sally. Then John pays the $110 back to Bill, keeping $10 for himself. It is clear that what has happened is that a net $10 went from Sally’s cash balance to Bill’s, and another $10 went from Sally to John. Everybody is happier than without the voluntary transactions. The universe didn’t blow up.

But let’s really push it to see what’s fundamentally wrong with the website’s analysis. Suppose there are just two people, and Bill starts out with all the money. (This way we can’t get the net interest payment by reducing someone else’s cash holdings.) John asks to borrow $100. Bill says, “OK, but I charge 10% interest per month.” John agrees.

Near the end of the first month, John makes his payment of $10. But then he cuts Bill’s grass for $10. Thus John’s cash balance is restored to $100.

John does this every month. When he decides to pay off the principal, he does the same thing: He pays the installment, then cuts Bill’s lawn to get the $10 right back, and then hands over the $100 to pay off the loan. Once again, the universe does not blow up.

Last way to see it: Suppose we had a society with 100%-reserve banking on a gold standard, and the mines were empty. Would the nominal interest rate necessarily be 0% in this world?

17 Dec 2008

A Tutorial on Corporations

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I’m not sure I entirely agree, but interesting. (HT2 Ian.) And make sure your sound is on.

17 Dec 2008

Commercial for My New Study Guide

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…is here. Excerpts:

Once you realize that Mises has a definite plan for the book — it is certainly not a Joycean stream-of-consciousness riff — then its 881 pages are not as daunting. You realize with each chapter, “Yes, now I see why Mises couldn’t really get on to Important Topic X until he first dealt with the material he just covered.”

Since I discovered it in high school, I have now read Human Action at least three times cover to cover, and each time it was different. I am confident that it is one of the most important books (let alone economics books) written in the 20th century. For those who have dabbled with it, I strongly encourage you — with the help of the study guide — to pick it back up and start reading from the beginning. If you would just decide to suck it up and start reading from page 1, you may find that “the boring part where I get stuck” never comes.

Human Action is so much more than an economics book. If for no other reason, modern Austrians should read the book just to appreciate the sheer might of Mises’s intellect. I can’t think of another writer who shows such competence in discussions of issues as diverse as the fall of Rome, the Heisenberg uncertainty principle, German military strategy in the First World War, the Weber-Fechner physiological law, the foundations of probability theory, and Kantian philosophy.

In closing, I would once again stress to modern Misesians who have yet to read Human Action that it really is well worth the effort. In it you’ll find that even stronger than his belief in free markets was Mises’s faith in the power of reason. The fact that we’re still talking about his ideas — and that we created a study guide to help newcomers understand them — shows that Mises hit the bull’s-eye once again.

17 Dec 2008

In Fairness to Dr. Krugman…

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…I should correct a slightly unfair post. When a CNBC story reported that the Fed promised to hold rates at low levels for an extended period, I posted that this was exactly what Krugman had called for. Well, not quite. Here is the full context of the actual Fed statement:

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

So this isn’t what Krugman (and now Mankiw) want. Here, the Fed is saying, “We will end up keeping rates low because recession will be the big danger, not inflation, for the foreseeable future.”

In contrast to that kind of declaration, what Krugman and Mankiw want is for the Fed to promise future inflation, so that the real interest rate can be pushed lower. This is necessary because the nominal rate has butted up against the 0% wall, and so the only way to provide even more “stimulus” in terms of standard monetary policy is to promise that prices will rise more quickly, making the real costs of borrowing negative. (Note that the last time this happened–see the red line in the chart below–was smack dab in the middle of the housing boom, and then before that it was the late 1970s. Seems like good examples to follow.)

Real Yr/Yr GDP Growth (blue, right)
vs. Real Effective Fed Funds Rate (red, left)